10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

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 I.D. No.)

26555 Northwestern Highway Southfield, Michigan	48034
(Address of principal executive offices)	(Zip code)

Registrant’s telephone number including area code: (248) 354-7700

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock and Rights to Purchase Preferred Shares	Over-the-counter market

Securities registered pursuant to Section 12(g) of the Act: None.

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

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

The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $28.8 million as of June 30, 2003 based on the reported last sale price as published for over-the-counter market for such date.

The Registrant had 87,141,007 shares of common stock outstanding as of March 8, 2004.

INDEX

	Page No.
Forward-Looking Statements
Part I
Item 1 – Business	3
Item 2 – Properties	18
Item 3 – Legal Proceedings	19
Item 4 – Submission of Matters to a Vote of Security Holders	23
Part II
Item 5 – Market for the Registrant’s Common Equity and Related Stockholder Matters	24
Item 6 – Selected Financial Data	25
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 7a – Qualitative and Quantitative Disclosure About Market Risk	46
Item 8 – Financial Statements and Supplemental Data	48
Consolidated Financial Statements	48
Notes to Consolidated Financial Statements	52
Report on Management’s Responsibility for Financial Reporting	105
Report of Independent Auditors	106
Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	107
Item 9a – Controls and Procedures	107
Part III
Item 10 – Directors and Executive Officers of the Registrant	107
Item 11 – Executive Compensation	110
Item 12 – Security Ownership of Certain Beneficial Owners and Management	113
Item 13 – Certain Relationships and Related Transactions	115
Item 14 – Principal Accountant Fees and Services	115
Part IV
Item 15 – Financial Statement Schedule, Exhibits, and Reports on Form 8-K	116
Separate Financial Statements:
Federal-Mogul Products, Inc.
Report of Independent Auditors	F-1
Consolidated Financial Statements	F-2
Notes to Consolidated Financial Statements	F-5
Federal-Mogul Ignition Company
Report of Independent Auditors	F-19
Consolidated Financial Statements	F-20
Notes to Consolidated Financial Statements	F-23
Federal-Mogul Powertrain, Inc.
Report of Independent Auditors	F-39
Consolidated Financial Statements	F-40
Notes to Consolidated Financial Statements	F-43
Federal-Mogul Piston Rings, Inc.
Report of Independent Auditors	F-56
Consolidated Financial Statements	F-57
Notes to Consolidated Financial Statements	F-60
Signatures	F-70
Exhibits	E-1

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FORWARD-LOOKING STATEMENTS

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

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

Any or all forward-looking statements included in this report or in any other public statements may ultimately be incorrect. Forward-looking statements 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 scheme of arrangement in the U.K.; the outcome of asbestos litigation proceedings; and the Company’s compliance with its existing debtor-in-possession credit facility

Legal and Environmental Proceedings

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

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

Business Environment and Economic Conditions

• The Company’s ability to generate cost savings or manufacturing efficiencies to offset or exceed contractually or competitively required price reductions or price reductions to obtain new business

• Variations in the financial or operational condition of the Company’s significant customers, particularly the world’s original equipment manufacturers of commercial and personal vehicles

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

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

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

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

• Changes in actuarial assumptions, interest costs and discount rates, and fluctuations in the global securities markets which directly impact the valuation of assets and liabilities associated with the Company’s pension and other post employment benefit plans

Other Factors

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

• Physical damage to or loss of significant manufacturing or distribution property, plant and equipment due to fire, weather or other factors beyond the Company’s control

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

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

• Possible terrorist attacks or acts of aggression or war, that could exacerbate other risks such as slowed vehicle production or the availability of supplies for the manufacturing of the Company’s products

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PART I

ITEM 1. BUSINESS

Proceedings under Chapter 11 and Administration of the Bankruptcy Code

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

The Restructuring Proceedings were initiated in response to a sharply increasing number of asbestos-related claims and their related demand on the Company’s cash flows and liquidity. Under the Restructuring Proceedings, the Debtors expect to continue to operate their businesses as debtors-in-possession under court protection from their creditors and claimants, while using the Restructuring Proceedings to develop and implement a plan for addressing the asbestos-related claims against them.

Business Overview

The Company is a leading global supplier of vehicular parts, components, modules and systems to customers in the automotive, small engine, heavy-duty and industrial markets. Federal-Mogul has established an expansive global presence and conducts its operations through various manufacturing, distribution and technical centers that are wholly-owned subsidiaries or partially-owned joint ventures, organized into five primary reporting segments; Powertrain, Sealing Systems and Systems Protection, Friction, Aftermarket and Other. 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.

Federal-Mogul has operations in 31 countries and, accordingly, all of the Company’s reporting segments derive sales from both domestic and international markets. 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

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regulations. The following tables set forth the Company’s net sales and net property, plant and equipment by geographic region as a percentage of total net sales and total net property, plant and equipment, respectively:

	Net sales						Net property, plant and equipment
	Year ended December 31						December 31
	2003		2002		2001		2003		2002
Net sales by geographic region:
United States	49	%	55	%	55	%	38	%	42	%
Canada	3	%	2	%	3	%	1	%	1	%
Mexico	3	%	3	%	3	%	4	%	4	%
Total North America	55	%	60	%	61	%	43	%	47	%
United Kingdom	8	%	8	%	8	%	9	%	11	%
Germany	15	%	12	%	12	%	23	%	20	%
France	8	%	7	%	7	%	9	%	8	%
Italy	3	%	3	%	3	%	4	%	4	%
Other Europe	7	%	7	%	5	%	11	%	8	%
Total Europe	41	%	37	%	35	%	56	%	51	%
Rest of World	4	%	3	%	4	%	1	%	2	%
	100	%	100	%	100	%	100	%	100	%

The following table sets forth the Company’s net sales by reporting segment as a percentage of total net sales:

	Year Ended December 31
	2003		2002		2001
Net sales by reporting segment:
Powertrain	33	%	32	%	31	%
Sealing Systems and Systems Protection	11	%	12	%	12	%
Friction	8	%	7	%	7	%
Aftermarket	47	%	48	%	49	%
Other	1	%	1	%	1	%
	100	%	100	%	100	%

As set forth in the above table, the Company maintains a balance of sales derived from the original equipment market and the aftermarket. 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.

Strategy

The Company’s strategy is designed to enhance profitability by leveraging existing and developing new sustainable competitive advantages. This strategy consists of the following primary elements:

• Focus on core business segments to provide market share, earnings and cash flow growth.

• Provide innovative, value-added components, modules and systems to customers in markets served.

• Extend the Company’s global reach to support its OEM customers, penetrate new markets and acquire new customers. The Company is particularly focused on furthering its relationships with the Asian OEMs.

• Leverage the strength of the Company’s aftermarket brand positions, product portfolio and range, marketing and selling expertise, and distribution and logistics capabilities.

• Utilize the Company’s technological resources to develop advanced and innovative products, processes and manufacturing capabilities.

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• Aggressively pursue low cost operations in all business segments by continuing to consolidate and relocate manufacturing operations to low cost countries, utilizing the Company’s strategic joint ventures and alliances, and consolidation and rationalization of business resources and infrastructure.

The Company’s strategy is designed to capitalize on certain trends occurring in the original equipment and aftermarket replacement markets. The Company assesses individual opportunities to execute its strategy based upon estimated sales and margin growth, cost reduction potential, internal investment returns, and other criteria, and makes investment decisions on a case-by-case basis. Opportunities meeting or exceeding these criteria are generally undertaken through acquisitions and investments, divestitures, restructuring activities, strategic joint ventures and alliances, and research and development activities.

Acquisitions and Investments. In connection with its strategic planning process, the Company assesses opportunities for sales and earnings growth through product line expansion, technological advancements, geographic expansion, penetration of new markets and acquisition of new customers, and other opportunities consistent with the Company’s strategy that will provide a sustainable competitive advantage.

In August 2001, the Company acquired 85% of WSK Gorzyce, S.A., a producer of pistons and other automotive components. This operation employs 2,500 employees at its manufacturing location in Gorzyce, Poland with annual sales of approximately $50 million. The Gorzyce operation was acquired to further the Company’s low cost producer strategy. Since the date of the acquisition, the Company has transferred multiple piston manufacturing lines to the Gorzyce facility from higher cost facilities in Europe. The Company expects that it will continue to utilize this operation to achieve its strategic goals in its Powertrain business.

During 2001, the Company invested approximately $50 million to construct a new piston manufacturing facility in Puebla, Mexico. The facility was constructed for the primary purpose of manufacturing and supplying pistons to an OEM customer under the terms of a new business award. Additionally, during 2001 and 2002, the Company invested $11 million to construct a new friction manufacturing operation in Tepotzatlan, Mexico to expand the manufacture of ThermoQuiet disc brake pads.

Divestitures. In connection with its strategic planning process, the Company assesses its operations for market position, product technology and capability, and profitability. Those businesses determined by management not to have a sustainable competitive advantage are considered non-core and may be considered for divestiture or other exit activities. Over the past several years, the Company has divested numerous non-core businesses. The elimination of these non-core businesses has freed up both human and capital resources, which have been devoted to the Company’s core businesses.

During 2003, the Company completed the following divestitures of non-core businesses:

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

• During September 2003, the Company divested operations located in Hampton, Virginia and Solon, Ohio.

During 2002, the Company completed the following divestitures of non-core businesses:

• In March 2002, the Company completed the divestiture of its Signal-Stat Lighting Products business (“Signal-Stat”). Signal-Stat produces exterior lighting and power distribution products primarily for the heavy-duty and commercial vehicle markets.

• In July 2002, the Company completed the divestiture of its automotive camshaft manufacturing plant in Jackson, Michigan, under the terms of a management buyout. The Company also entered into a three-year supply agreement to market and sell aftermarket camshafts produced at the Jackson facility through its aftermarket business.

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• In November 2002, the Company completed the divestiture of Federal-Mogul Camshafts de Mexico S. de R.L. de C.V. (“Camshafts de Mexico”). Camshafts de Mexico manufactures camshafts for the North American original equipment market.

During 2001, the Company completed the following divestitures of non-core businesses:

• In April 2001, the divestiture of its torque converter business (“TCI”). TCI remanufactures torque converters for high-performance automotive aftermarket applications.

• In May 2001, the divestiture of its Champion aviation ignition products division (“Aviation”). Aviation provides products for major commercial, military and general aircraft applications.

• In July 2001, the divestiture of its industrial heavy wall bearing operation in McConnelsville, Ohio.

• In August 2001, the divestiture of its subsidiary Federal-Mogul RPB Ltd. (“RPB”). RPB manufactures industrial rotating plant bearings and magnetic bearings.

• In August 2001, the divestiture of the aftermarket operations of Blazer Lighting Products (“Blazer”). Blazer manufactures exterior vehicle lighting products.

• In August 2001, the divestiture of its Pontotoc, Mississippi, operation. The operation continues to supply coil springs and metal stampings to the Company for sale to aftermarket customers under a long-term supply agreement.

• In August 2001, the Company restructured its equity positions in several large-industrial-bearing manufacturing joint ventures with its partner, Daido Metal Company Ltd. of Japan, resulting in transfer of the Company’s controlling interest to its joint venture partners.

• In September 2001, the divestiture of its Tri-Way machine tool business in Windsor, Ontario, under terms of a management buyout.

The cumulative effect of these divestitures on the Company’s net sales approximates $670 million for the three years ended December 31, 2003. These divestitures have been presented as discontinued operations for the fiscal years ended December 31, 2003, 2002, and 2001. At December 31, 2003, no assets were held for sale in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Additional financial information related to these divestitures is included in Note 6 to the consolidated financial statements, “Discontinued Operations and Acquisition” included in Item 8 of this report.

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 cost reductions. These 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 charges incurred with exit or disposal activities accounted for in accordance with SFAS No. 146, employee severance costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 88 and 112, and pension and other post employment benefit costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 87 and 106.

An overview by reporting segment of the Company’s restructuring activities completed during 2002 and 2003 is provided below.

• Powertrain restructuring efforts have resulted in two U.S. and two European plant closures with transfer of related production activities to existing facilities primarily in Mexico, Poland and Turkey.

• Sealing Systems and Systems Protection restructuring efforts have resulted in one European plant closure and transfer of related production activities to an existing facility in Hungary.

• Friction restructuring efforts have resulted in one European plant closure and transfer of production activities to other European facilities with available capacity. In the United States one friction manufacturing facility was closed and another was significantly downsized and the related production from these facilities was transferred to a newly constructed facility in Mexico.

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• Aftermarket restructuring efforts have resulted in the closure of five distribution centers in the U.S., Canada and Europe.

Various programs, which are similar in nature to those discussed above, are currently in progress and are scheduled for completion during 2004 and 2005. The Company’s restructuring activities are further discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 4 to the consolidated financial statements, “Restructuring.”

Joint Ventures and Other Strategic Alliances. Joint ventures and other strategic alliances represent an important element of the Company’s business strategy. The Company forms joint ventures and strategic alliances to gain entry into new markets, facilitate the exchange of technical information and development of new products, extend current product offerings, provide low cost manufacturing operations, and broaden its customer base. The Company believes that certain of its joint ventures have provided, and will continue to provide, opportunities to expand business relationships with Asian OEMs. The Company is currently involved in 37 joint ventures located in 14 different countries throughout the world, including China, India, Korea and Turkey. Of these joint ventures, the Company maintains a controlling interest in 14 entities and, accordingly, the financial results of these entities are included in the consolidated financial statements of the Company. The Company has a non-controlling interest in 23 of its joint ventures, of which 20 are accounted for under the equity method and three are accounted for under the cost method. Net sales for consolidated joint ventures were approximately 5% of consolidated net sales for the year ended December 31, 2003, and the Company’s investment in unconsolidated joint ventures totaled $131 million as of December 31, 2003. The Company’s equity in earnings of such affiliates amounted to $27 million, $20 million, and $15 million for the years ended December 31, 2003, 2002, and 2001, respectively.

Research and Development. The Company maintains technical centers throughout the world designed to develop advanced products, processes and provide manufacturing support for all of the Company’s manufacturing sites and to provide technological expertise in engineering and design development providing solutions for customers and bringing new, innovative products to market. Federal-Mogul’s research and development activities are conducted at the Company’s major research centers in Burscheid, Germany; Nuremberg, Germany; Wiesbaden, Germany; Bad Camberg, Germany; Plymouth, Michigan; Skokie, Illinois and Ann Arbor, Michigan. In support of its Asia Pacific operations, the Company opened a technical facility in Yokohama, Japan during 2002.

Each of the Company’s business units is engaged in various engineering, research and development efforts working closely with customers to develop custom solutions unique to their needs. Total expenditures from continuing operations for research and development activities were $123.1 million, $106.7 million and $105.7 million in 2003, 2002 and 2001, respectively.

The Company’s Products

The following provides an overview of products manufactured and distributed by the Company’s reporting segments.

Powertrain. Powertrain products are used primarily in automotive, light truck, heavy-duty, industrial, marine, agricultural, power generation and small air-cooled engine applications. The primary products of this segment include engine bearings, pistons, piston pins, rings, cylinder liners, valve train and transmission products and connecting rods. These products are offered under the Federal-Mogul, Glyco, Goetze and Nural brand names. These products are either sold as individual components or, increasingly, offered to automotive manufacturers assembled in a power cylinder system. This strategic product offering adds value to the customer by simplifying the assembly process, lowering costs and reducing vehicle development time. Powertrain operates 47 manufacturing facilities in 12 countries, serving a large number of major automotive, heavy-duty and industrial customers worldwide. Powertrain derived 29% of its 2003 sales in the Americas and 71% in Europe and the rest of world.

In North America, Powertrain products are expected to benefit from increased out-sourcing of piston machining and power cylinder systems from OEMs. Additionally, the Company is well positioned to benefit from expected growth opportunities in heavy-duty markets. In Europe, Powertrain products will continue to benefit from its existing high market share in diesel engine applications in pistons, rings, and engine bearings, and the expected continuing increase in production of diesel engines in comparison to gasoline applications.

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The following provides a description of the various products manufactured by Powertrain:

Product	Description
Pistons	The main task of the piston is to convert combustion energy into mechanical energy. In this process substantial pressures are exerted on the piston, imposing high demands on it in terms of rigidity and temperature resistance.
Rings	The three main tasks of piston rings in internal combustion engines include (1) sealing the combustion chamber, (2) supporting heat transfer from the piston to the cylinder wall, and (3) regulating oil consumption.
Cylinder Liners	Cylinder liners, or sleeves, work in tandem with the piston and ring, forming the chamber in which the thermal energy of the combustion process is converted into mechanical energy.
Piston Pins	Piston pins attach the piston to the end of the connecting rod, allowing the combustion force to be transferred to the crankshaft.
Connecting Rods	The connecting rod is the link between the piston and the crankshaft, which enables the reciprocating motion of the piston to be converted into the rotary motion of the crankshaft.
Engine Bearings	Engine bearings ensure low friction rotation and guidance between the connecting rod and the crankshaft to facilitate the transmission of full combustion power from the piston.
Valve Train and Transmission Products	Federal-Mogul designs and manufactures a wide variety of powdered metal components for engines, transmissions, general industrial applications and special materials to meet particular customer requirements.

Sealing Systems and Systems Protection. The Sealing Systems and Systems Protection reporting segment serves the complete drive train with sealing systems comprised of a wide array of seal and gasket technologies and innovative products focused primarily on protecting sensitive components from the harsh environment within engine compartments. Sealing Systems and Systems Protection products are used in automotive, light truck, heavy-duty, agricultural, off-highway, marine, railroad, high performance and industrial applications. The primary products include dynamic seals, gaskets (static seals) and element resistant systems protection sleeving products. The products within this group are marketed under the brand names of Federal-Mogul, National, Fel-Pro, Payen and Glockler. Sealing Systems and Systems Protection operates 30 manufacturing facilities in 12 countries, serving many major automotive, heavy-duty and industrial customers worldwide. Sealing Systems and Systems Protection derived 70% of its 2003 sales in the Americas and 30% in Europe and the rest of world.

OEM customers are increasingly demanding total engine sealing solutions and Federal-Mogul is poised to take advantage of these opportunities as Sealing Systems possesses the ability to supply total engine, transmission and axle sealing applications. Joint venture partnerships with Japanese automotive suppliers provide the Company commercial relationships with Honda and Toyota in the United States.

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The following provides a description of the various products manufactured by Sealing Systems and Systems Protection:

Product	Description
Dynamic Seals	Dynamic seals are used to create a barrier between a rotating and a stationary surface and function to retain or separate lubricants or fluids, keep out contamination, and contain pressure. Dynamic seals include rotary shaft seals, bonded unipistons and valve stem seals.
Cold Static Gaskets and Seals	Cold static gaskets provide a barrier between two mating surfaces, resulting in the prevention of leaks, while cold static seals provide a high integrity seal that performs over an extended life, functioning to maintain a static environment free of surprises and/or troubles. Cold static gaskets and seals must be able to maintain a seal under pressure and under relatively low temperatures. The most common applications include transmission and timing covers, intake manifolds, water pumps and oil pans.
Hot Static Gaskets and Seals	Hot static gaskets provide a barrier between two mating surfaces, resulting in the prevention of leaks, while hot static seals provide a high integrity seal that performs over an extended life, functioning to maintain a static environment free of surprises and/or troubles. Hot static gaskets and seals operate in conditions of relatively high temperatures, such as cylinder head and exhaust manifold applications.
Heat Shields	Federal-Mogul designs and manufactures a full range of metallic heat shields that are designed to provide thermal and/or acoustic optimization. These products encompass full vehicle capability, from manifold to tail pipe and include a mixture of offerings, such as plain/embossed aluminum, and proprietary specialist products.
Element Resistant Sleeving	Element resistant sleeving products provide under-hood and under-car protection of wires, hoses, sensors, and mechanical components and assemblies from heat, dirt, vibration, and moisture. Element resistant sleeving products include :
	•	Automotive wire harnesses and hoses
	•	Abrasion protection and wire management of cable assemblies
	•	Dielectric protection of electrical leads
	•	Thermal and mechanical protection of hose assemblies
	•	Acoustic insulating and sound-dampening materials

Friction. Federal-Mogul is one of the world’s largest independent suppliers of friction materials for the automotive, heavy-duty, and railway markets. The primary products of this segment include brake disc pads, brake shoes, and brake linings and blocks. Federal-Mogul offers a portfolio of world-class brand names, including Abex, Beral, Wagner and Ferodo. Federal-Mogul supplies OEM friction products to all major customers in the light vehicle, commercial vehicle and railway sectors and is also very active in the aftermarket. Friction operates 15 manufacturing facilities in 10 countries, serving many major automotive, railroad and industrial customers worldwide. Friction derived 29% of its 2003 sales in the Americas and 71% in Europe and the rest of world.

The following provides a description of the various products manufactured by Friction:

Product	Description
Light Vehicle Disc Pads	A light vehicle disc pad assembly consists of:
	•	Friction material, which dissipates forward momentum by converting energy to heat
	•	Underlayer, which is a layer of different friction material placed between the backplate and friction material to improve strength, thermal barrier, corrosion resistance, noise performance or a combination of these
	•	Backplate, to support and locate the friction material in the caliper
	•	Shim, which is a rubber/metal laminate developed to suppress noise

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Commercial Vehicle Disc Pads	Commercial vehicle disc brake pads are a growing segment of the friction market, superseding drum brake on trucks, busses, tractor units and trailers. The basic construction of a commercial vehicle disc pad is the same as a light vehicle disc pad.
Light Vehicle Drum Brake Linings	Federal-Mogul drum brake linings are friction material affixed to a brake shoe and fitted on rear service brake, rear parking brake and transmission brake applications.
Commercial Vehicle Full Length Linings	Full-length linings are the commercial vehicle equivalent of car drum brake lining.
Commercial Vehicle Half-Blocks	Half blocks are segments of friction material made to be riveted onto drum brake shoes. They are used on heavier vehicle applications where discs are not used (e.g. due to the age of the vehicle).
Railway Brake Blocks	Railway brake blocks work by acting on the circumference of the wheel. They are lighter and quieter in operation than cast iron blocks. However, friction performance is designed to replicate that of cast iron blocks.
Railway Disc Pads	Railway disc pads are produced in single pad or paired pad format. Federal-Mogul produces sintered metal pads for high duty applications.

Aftermarket. Aftermarket distributes products manufactured within the above segments, or purchased, to the independent automotive, heavy-duty and industrial aftermarkets. The segment also includes manufacturing operations for brake, chassis, ignition, lighting, fuel and wiper products. Federal-Mogul is a leader in several key aftermarket product lines. These products are marketed under various brand names, including Champion, Fel-Pro, Carter, ANCO, Moog, Wagner, Ferodo, Glyco and Sealed Power. Aftermarket operates 23 manufacturing facilities and 29 distribution centers in 19 countries, serving a diverse base of distributors and retail customers around the world. Aftermarket derived 75% of its 2003 sales in the Americas and 25% in Europe and the rest of world.

The following provides a description of the various products manufactured and/or distributed by Aftermarket:

Product	Description
Engine	Domestic – Sealed Power is Federal-Mogul’s premier brand of internal engine components, for use in automotive, light truck or heavy-duty engines. The Sealed Power product line includes pistons, piston rings, engine bearings, camshafts, oil pumps, timing components and valvetrain products. Similar products are offered to the heavy duty market, including construction, marine, agricultural, mining, gas compression, trucking and industrial customers under the Company’s FP Diesel brand. International – The Glyco brand offers a wide range of engine bearings and materials. Nüral products include pistons and cylinder liners and are fitted with Goetze rings. The Goetze brand is among the market leaders in the global automotive, agricultural, marine and industrial markets providing customers with products including pistons, piston rings, cylinder liners, oil seals, gaskets, valve stem seals and head bolts.
Gaskets	Domestic – The Company’s Fel-Pro brand is among the most recognized brands in the aftermarket. Fel-Pro gaskets are engineered to deliver a perfect seal on every engine. That’s why many NASCAR and NHRA racing teams, as well as a vast majority of professional engine rebuilders and vehicle service technicians, choose Fel-Pro over other gasket brands. International – Federal-Mogul’s Payen and Goetze brands are recognized among the industry’s leaders. These components include cylinder head gaskets, head sets, full sets, conversion sets, head bolt sets, liner sealing ring kits, manifold joints and sets, exhaust pipe joints, valve cover joints, sump joints and sets, valve stem seals, carburetor joints, timing case joints and sets, water pump joints, thermostat joints, and oil seals.

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Antifriction Bearings and Seals	Domestic – National hub assemblies include unitized bearing, seal and spindle assemblies. Our premium hub assemblies offer solutions for wheel end repair to provide safety, performance and reliability. National antifriction bearings are engineered to deliver performance and reliability in demanding applications, from automotive and heavy-duty axles, to agricultural and industrial equipment. National oil seals deliver exceptional performance and reliability in a wide variety of applications, including automotive and heavy-duty axles, gasoline and diesel crankshafts, and agricultural and industrial equipment. International – Federal-Mogul offers seals in international markets under the aforementioned Payen and Goetze brands.
Brake	Domestic – Wagner brake products include friction components (disc brake pads and linings), rotors and drums, hardware and hydraulic products, each engineered to deliver performance and reliability. Abex, among North America’s leading heavy-duty friction brands for more than 70 years, has brought exceptional braking power and durability to commercial fleets and OE customers. Abex brake blocks are used for commercial applications, from straight trucks and school and transit buses to van trailers and tankers. International – Beral is a traditional German producer of brand name brake linings used by manufacturers of commercial vehicles, axles and brakes. Beral products include disc brake pads and drum brake pads for commercial vehicles and industrial linings. The Ferodo brand of friction products includes light vehicle and commercial vehicle disc pads, linings and related accessories.
Chassis	Domestic – Moog chassis parts is among the automotive industry’s premier brands of replacement steering and suspension components. Moog products are engineered to improve on original equipment technologies, solve real OE problems and make installation easy. Precision u-joints combine advanced engineering, superior materials and manufacturing quality for performance and durability. Precision u-joints are available for automotive, light truck and a full range of heavy-duty vehicles. International – The Moog product offering includes ball joint housings, tie rods, center and drag links, forgings, idler and pitman arms, ball joints, coil springs and sway bar link kits.
Wipers	Domestic – For more than 80 years, ANCO has been among the leaders in replacement wiper blades, refills, washer pumps and wiper arms. From passenger cars, light trucks and heavy-duty fleets, ANCO has comprehensive coverage to supply all types of drivers with necessary visibility. International – Federal-Mogul offers wipers and related components under the Champion brand name. Champion wiper products are used in passenger cars, light trucks and heavy-duty fleets.
Fuel Pumps	Domestic – Carter mechanical fuel pumps, electric pump sets and modular design applications deliver original equipment appearance, fit and performance in a full range of domestic and import passenger and light truck applications, recreational vehicles, commercial and agricultural vehicles and marine engines.

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Ignition	Champion spark plugs offer a complete line of standard and premium plugs for automotive, marine and small-engine applications. PowerPath wire sets, battery cables and accessories provide electrical connections in a full range of automotive, farm, fleet and marine vehicles.
Lighting	Aftermarket lighting solutions for passenger and commercial vehicles are marketed under the Wagner brand name.

Other. The Company’s “Other” reporting segment is comprised of the Company’s Asia Pacific operations and Corporate functions. Asia Pacific encompasses the Company’s commercial activities from manufacturing, distribution and sales in this geographic region. The Company operates approximately 20 manufacturing and distribution facilities in this region, as well as an engineering technical center in Yokohama, Japan. Corporate functions is comprised of headquarters and central support costs for information technology, human resources, finance and other corporate activities as well as certain health and welfare costs for pension and other post-employment benefits for the Company’s retirees. Current period service costs for active employees are included in the results of operations for each of the Company’s reporting segments

Reporting Segment Financial Information. Approximately 53% of the Company’s net sales are to OE customers and approximately 47% are to aftermarket customers. The following tables summarize net sales, gross margin and total assets for each reporting segment for the periods indicated. Reclassifications to reporting segment information for the years ended December 31, 2002 and 2001 have been made to reflect organizational changes implemented during January 2003.

For information related to the Company’s reporting segments, refer to Note 21 to the consolidated financial statements included in Item 8 of this Form 10-K.

Net sales by reporting segment were:

	Year Ended December 31
	2003		2002		2001
	(Millions of Dollars)
Powertrain	$	1,839	$	1,652	$	1,567
Sealing Systems and Systems Protection		620		639		630
Friction		431		374		339
Aftermarket		2,576		2,455		2,485
Other		80		64		72
Total	$	5,546	$	5,184	$	5,093

Gross margin by reporting segment was:

	Year Ended December 31
	2003		2002			2001
	(Millions of Dollars)
Powertrain	$	255	$	260		$	265
Sealing Systems and Systems Protection		103		124			131
Friction		116		97			60
Aftermarket		612		548			570
Other		1		(8	)		29
Total	$	1,087	$	1,021		$	1,055

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Total assets by reporting segment were:

	December 31
	2003		2002		2001
	(Millions of Dollars)
Powertrain	$	1,957	$	1,861	$	2,283
Sealing Systems and Systems Protection		1,249		1,237		1,202
Friction		696		618		911
Aftermarket		2,912		2,718		2,661
Other		1,303		1,479		1,996
Total	$	8,117	$	7,913	$	9,053

The Company’s Industry

The automotive supply industry is comprised of two primary markets, including the OE market in which the Company’s products are used in the manufacture of new vehicles, and the aftermarket in which the Company’s products are used as replacement parts for current production and older vehicles.

The OE Market. The OE market is characterized by short-term volatility, with overall expected long-term growth of vehicle sales and production. Demand for automotive parts in the OE market is generally a function of the number of new vehicles produced, which is primarily driven by macro-economic factors such as interest rates, fuel prices, consumer confidence, employment and other trends. In 2003, the number of light vehicles produced was 15.9 million in North America, 16.1 million in Western Europe, and 26.5 million in the rest of the world. Although OE demand is tied to planned vehicle production, parts suppliers also have the opportunity to grow through increasing their product content per vehicle, by further penetrating business with existing customers, and by gaining new customers and markets. Companies with a global presence and advanced technology, engineering, manufacturing and customer support capabilities are best positioned to take advantage of these opportunities.

There are currently several significant existing and emerging trends that are impacting the OE market, including the following:

• Globalization of Automotive Industry – OEMs are increasingly designing global platforms where the basic design of the vehicle is performed in one location but is produced and sold in numerous geographic markets to realize significant economies of scale by limiting variations across products. OEMs are increasingly focused on emerging markets for growth opportunities where suppliers must be prepared to provide product and technical resources in support of their customers. Furthermore OEMs are moving their operations to lower cost geographies relative to the U.S. and European markets and, accordingly, OEMs are increasingly requiring suppliers to provide parts on a global basis. Finally, the Asian OEMs continue to expand their reach and market share in relation to traditional domestic manufacturers. As this trend is expected to continue into the foreseeable future, suppliers must be positioned to meet the needs of the Asian OEMs.

• Increased Emphasis on Systems and Modules – To simplify the vehicle assembly process, lower costs and reduce vehicle development time, OEMs are increasingly rewarding suppliers possessing the capability of providing fully-engineered systems and pre-assembled combinations of components rather than individual components.

• Focus on Fuel Economy and Emissions – Increased fuel economy and decreased vehicle emissions are of great importance to OEMs as customers and legislators continue to demand more efficient and cleaner operating vehicles. Strict corporate average fuel economy (“CAFE”) standards and Environmental Protection Agency regulations are driving OEMs to focus on new technologies including diesel applications and hybrid engines, which allow the OEMs to achieve these increasingly stringent government regulations. Suppliers offering solutions to OEMs related to these issues posses a distinct competitive advantage, which is driving accelerated new product development cycles.

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• Focus on Vehicle Safety – Vehicle safety continues to gain increased industry attention and plays a critical role in consumer purchasing decisions. Accordingly, OEMs are seeking suppliers with new technologies, capabilities and products that have the ability to advance vehicle safety. Those suppliers able to enhance vehicle safety through innovative products and technologies have a distinct competitive advantage.

• Pricing Pressures – In order to maintain sales levels of new vehicles and retain or gain market share, many OEMs continue to provide extensive pricing incentives and financing alternatives to consumers. These actions have placed pressures on the OEMs profits and, in turn, the OEMs expect certain recovery from their supply base. In order to retain current business as well as to be competitively positioned for future new business opportunities, suppliers must continually identify and implement product innovation and cost reduction activities to fund annual price concessions to their customers.

• Automotive Supply Consolidation – Consolidation within the automotive supply base is expected to continue, while the entire automotive industry matures. Suppliers will seek opportunities to achieve synergies in their operations through consolidation, while striving to acquire complementary businesses to improve global competitiveness or to strategically enhance a product offering to provide customers with a more fully integrated module or system capability.

The Aftermarket Business. Aftermarket products are sold as replacement parts for vehicles in current production and older vehicles to a wide range of wholesalers, retailers and installers. Demand for aftermarket products is driven by the quality of OE parts, the number of vehicles in operation, the average age of the vehicle fleet, and vehicle usage (measured by miles driven). Although the number of vehicles on the road and different models available continue to increase, the aftermarket has experienced weakness due to increases in average useful lives of automotive parts resulting from continued technological innovation and resulting quality and durability. Replacement demand for certain aftermarket products is also impacted by annual weather cycles. Generally, the relative severity of winter can significantly impact the short-term demand for products such as wiper blades, chassis components and fuel pumps. The aftermarket continues to experience consolidation of warehouse distributors and retailers, resulting in excess inventory that can adversely affect near-term sales to these customers.

There are currently several significant existing and emerging trends that are impacting the aftermarket business, including the following:

• Extended Automotive Part Product Life and New Car Warranties – The average useful life and quality of automotive parts, both OE and aftermarket, have been steadily increasing due to innovations in products and technologies. Longer product lives and better quality allow vehicle owners to replace parts on their vehicles less frequently. In addition, the OEMs have generally increased the extent of coverage and duration of new car warranties. Increased warranties have the effect of vehicle owners having repairs performed by the OEM dealership versus a traditional automotive installer.

• Vehicle Complexity – Today’s vehicles are more complex in design, features, and integration of mechanical and electrical components. Ever increasing complexity adversely impacts the demand for replacement parts through the traditional independent aftermarket, as vehicle owners are less capable of performing repairs on their own vehicles. Similarly, independent repair shops and installers must increasingly invest capital in diagnostic equipment and technician training to service newer vehicles. Generally, the OEM dealerships are better equipped and capitalized to service the complexity of today’s vehicles.

• Globalization of Automotive Industry – As previously discussed, OEMs are increasingly focused on emerging markets for growth. This increased OEM focus on emerging geographic regions will ultimately drive the need for replacement parts for vehicles produced and in service, and provides further growth opportunities for the Company’s aftermarket business in these regions.

The Company’s Customers

The Company supplies OE manufacturers with a wide variety of precision-engineered parts, essentially all of which are manufactured by the Company. The Company’s OE customers consist primarily of automotive and heavy-duty

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vehicle manufacturers as well as agricultural, off-highway, marine, railroad, high performance and industrial application manufacturers. The Company has well-established relationships with substantially all major North American, European and Asian automotive OE manufacturers.

Federal-Mogul’s aftermarket customers include independent warehouse distributors who redistribute products to local parts suppliers called jobbers, industrial bearing distributors, distributors of heavy-duty vehicular parts, engine rebuilders and retail parts stores. The breadth of Federal-Mogul’s product lines, the strength of its brand names, marketing expertise, and sizable sales force, and its distribution and logistics capability, are central to the Company’s aftermarket operations.

Among Federal-Mogul’s largest customers are the Aftermarket Autoparts Alliance, Autozone, BMW, CarQuest, Caterpillar, Cummins, DaimlerChrysler, Fiat, Ford/Jaguar/Volvo, General Motors, NAPA, Ozark/O’Reilly’s, PSA, Renault/Nissan and Volkswagen/Audi. This determination is based upon sales derived from these customers during the fiscal year ended December 31, 2003. Furthermore, no individual customer accounted for more than 10% of the Company’s sales during 2003.

The Company’s Competition

The global vehicular parts business is highly competitive. The Company competes with many of its customers that produce their own components as well as with independent manufacturers and distributors of component parts in the United States and abroad. In general, competition for such sales is based on price, product quality, technology, delivery, customer service and the breadth of products offered by a given supplier. The Company is meeting these competitive challenges by more efficiently integrating its manufacturing and distribution operations, expanding its product coverage within its core businesses, and utilizing its worldwide technical centers to develop and provide value-added solutions to its customers. A summary of the Company’s primary independent competitors by reporting segment is set forth below.

• Powertrain – In North America, primary competitors are Daido, Dana, GKN, Kolbenschmidt, Mahle, STI and Sumitomo. In Europe, primary competitors are Bleistahl, Dana, GKN, Kolbenschmidt, Mahle, Miba and NPR.

• Friction – In North America, primary competitors are Akebono and Honeywell. In Europe, primary competitors are Galfer, Honeywell and TMD.

• Sealing Systems and Systems Protection – In North America, primary competitors are Dana and Freudenberg NOK. In Europe, primary competitors are Elring Klinger, Freudenberg NOK and Dana/Reinz.

• Aftermarket – In North America, primary competitors are Airtex, Bosch, Dana, Honeywell and Trico. In Europe, primary competitors are AE, Bosch, Elring Klinger, Kolbenschmidt, Mahle, NGK and Valeo.

The Company’s Backlog

For OEM customers, the Company generally receives purchase orders for specific components supplied for particular vehicles. These supply relationships typically extend over the life of the related vehicle, subject to interim design and technical specification revisions, and do not require the customer to purchase a minimum quantity. In addition to customary commercial terms and conditions, purchase orders generally provide for annual price reductions based upon expected productivity improvements and other factors. Customers typically retain the right to terminate purchase orders, but the Company generally cannot terminate purchase orders. OEM order fulfillment is typically manufactured in response to customer purchase order releases, and the Company ships directly from a manufacturing location to the customer for use in vehicle production and assembly. Accordingly, the Company’s manufacturing locations do not typically maintain significant finished goods inventory, but rather produce from on-hand raw materials and work-in process inventory within relatively short manufacturing cycles. The primary risk to the Company is lower than expected vehicle production by one or more of its OEM customers or termination of the business based upon perceived or actual shortfalls in delivery, quality or value.

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For its aftermarket customers, the Company generally establishes product line arrangements that encompass all components offered within a particular product line. These are typically multi-year arrangements, although they are subject to termination by either the Company or the customer upon relatively short notice. Pricing is market responsive and subject to adjustment based upon competitive pressures and other commercial factors. Aftermarket order fulfillment is largely performed from finished goods inventory stocked in the Company’s worldwide distribution network. Inventory stocking levels in the Company’s distribution centers are established based upon historical customer demand.

Although customer programs typically extend to future periods and, although there is an expectation that the Company will supply certain levels of OE production and aftermarket shipments over such periods, firm orders are limited to specific and authorized customer purchase order releases placed with its manufacturing and distribution centers for actual production and order fulfillment. Firm orders are typically fulfilled as promptly as possible after receipt from the conversion of available raw materials and work-in-process inventory for OEM orders and from current on-hand finished goods inventory for aftermarket orders. The dollar amount of such purchase order releases on hand and not processed at any point in time is not believed to be significant based upon the timeframe involved.

The composition of the Company’s purchase orders and arrangements as measured by terms and conditions, pricing and other factors has remained largely unchanged during the last three years.

The Company’s Raw Materials and Suppliers

The Company purchases various raw materials for use in its manufacturing processes, including ferrous and non-ferrous metals, synthetic and natural rubber, graphite, fibers, stampings, castings and forgings. In addition, the Company purchases parts manufactured by other manufacturers for sale in the aftermarket. The Company has not experienced any shortages of raw materials or finished parts and normally does not carry inventories of raw materials or finished parts in excess of those reasonably required to meet its production and shipping schedules. For business and efficiency purposes, the Company has established single sourcing relationships with a small number of its suppliers. However, based upon market conditions and readily available alternative supply sources, the Company believes it could readily replace any single supply source without a material disruption to its business. In 2003, no outside supplier of the Company provided products that accounted for more than 10% of the Company’s net sales.

Seasonality of the Company’s Business

The Company’s business is moderately seasonal because many North American customers typically close assembly plants for two weeks in July for model year changeovers, and for an additional week during the December holiday season. Customers in Europe historically shut down vehicle production during a portion of August and one week in December. The aftermarket experiences seasonal fluctuations in sales due to demands caused by weather patterns. Historically, the Company’s sales and operating profits have been the strongest in the second quarter. Refer to Note 22, “Quarterly Financial Data”, to the consolidated financial statements included in Item 8 of this report.

The Company’s Employee Relations

As of December 31, 2003, the Company had approximately 44,900 full-time employees, of which approximately 18,400 were employed in the United States.

Various unions represent approximately 42% of the Company’s domestic hourly employees and approximately 58% of the Company’s international hourly employees. Most of the Company’s unionized manufacturing facilities have their own contract with its own expiration date, and as a result, no contract expiration date affects more than one facility. The Company believes its labor relations to be generally satisfactory.

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Impact of Environmental Regulations on the Company

The Company’s operations, consistent with those of the manufacturing sector in general, are subject to numerous existing and proposed laws and governmental regulations designed to protect the environment, particularly regarding plant wastes and emissions and solid waste disposal. Capital expenditures for property, plant and equipment for environmental control activities did not have a material impact on the Company’s financial position or cash flows in 2003 and are not expected to have a material impact on the Company’s financial position or cash flows in 2004 or 2005.

The Company’s Intellectual Property

The Company holds in excess of 3,800 patents and patent applications on a worldwide basis. Slightly more than 700 of these patents and patent applications have been filed in the United States. Of the 3,800 patents and patent applications, approximately 30% are in production use and/or are licensed to third parties, and the remaining 70% are being considered for future production use or provide a strategic technological benefit to the Company. These patents and patent applications expire over various periods through the year 2024.

The Company does not materially rely on any single patent, nor will the expiration of any single patent materially affect the Company’s business. Typically, new technology is introduced and patented by the Company replacing formerly patented technology before the expiration of the existing patent. In the aggregate, the Company’s worldwide patent portfolio is materially important to its business because it enables the Company to achieve technological differentiation from its competitors.

The Company also maintains more than 4,500 active trademark registrations and applications worldwide. In excess of 90% of these trademark registrations and applications are in commercial use by the Company or are licensed to third parties. All trademark registrations that are still in commercial use are routinely renewed by the Company prior to their expiration.

The Company’s Website and Access to Filed Reports

The Company maintains an internet website at www.federal-mogul.com. The Company provides access to its annual and periodic reports filed with the SEC through this website. In addition, paper copies of annual and periodic reports filed with the SEC may be obtained by contacting the Company’s headquarters at the address located within the SEC Filings or under Investor Relations on the aforementioned website.

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ITEM 2. PROPERTIES

Federal-Mogul’s world headquarters is located in Southfield, Michigan, which is a leased facility. At December 31, 2003, the Company had 200 manufacturing/technical centers, distribution and sales and administration office facilities worldwide. Approximately 35% of the facilities are leased; the majority of which are distribution, sales and administration offices. The Company owns the remainder of the facilities.

Type of Facility	North America	Europe	Rest of World	Total
Manufacturing/technical centers	56	55	35	146
Distribution centers and warehouses	12	8	8	28
Sales and administration offices	9	5	12	26
Total	77	68	55	200

The facilities range in size from approximately 1,700 square feet to 1,143,000 square feet. Management believes substantially all of the Company’s facilities are in good condition and that it has sufficient capacity to meet its current and expected manufacturing and distribution needs. No material facility is significantly underutilized, except for those being sold or closed in the normal course of business.

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ITEM 3. LEGAL PROCEEDINGS

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

The Restructuring Proceedings were made in response to a sharply increasing number of asbestos-related claims and their related demand on the Company’s cash flows and liquidity. Under the Restructuring Proceedings, the Debtors expect to continue to operate their businesses as debtors-in-possession under court protection from their creditors and claimants, while using the Restructuring Proceedings to develop and implement a plan for addressing the asbestos-related claims against them.

Material pending legal proceedings, other than the Chapter 11 and Administration proceedings above and other than ordinary, routine litigation incidental to the business, to which the Company became or was a party during the year ended December 31, 2003, or subsequent thereto but before the filing of this report, are summarized below.

T&N Companies Asbestos Litigation

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.

The Company’s recorded liability for this litigation (approximately $1.4 billion as of December 31, 2003) represented the Company’s estimate prior to the Restructuring Proceedings for claims currently pending and those which were reasonably estimated to be asserted and paid through 2012. The Company did not provide a liability for claims that may be paid subsequent to this period as it could not reasonably estimate such claims. In estimating the liability prior to the Restructuring Proceedings, the Company made assumptions regarding the total number of claims anticipated to be received in a future period, the typical cost of settlement (which is sensitive to the industry in which the plaintiff claims exposure, the alleged disease type and the jurisdiction in which the action is being brought), the rate of receipt of claims, the settlement strategy in dealing with outstanding claims and the timing of settlements. As a result of the Restructuring Proceedings, pending asbestos-related litigation against the Company in the United States and the U.K. is stayed (subject to certain exceptions in the case of governmental authorities), and no party may take action to pursue or collect on such asbestos claims absent specific authorization of the Bankruptcy Court or the High Court. Since the Restructuring Proceedings, the Company has ceased making payments with respect to asbestos-related lawsuits. An asbestos creditors’ committee has been appointed in the U.S. representing asbestos claimants with pending claims against the Company, and the Bankruptcy Court has appointed a legal representative for the interests of potential future asbestos claimants. In the U.K. a creditors committee consisting in large part of representatives of asbestos claimants has been appointed. March 3, 2003 was the bar date for the filing of all asbestos-related property damage claims.

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While the Company believes that the liability recorded as of October 1, 2001 was appropriate for anticipated losses arising from asbestos-related claims against the T&N Companies through 2012, it is the Company’s view that, as a result of the Restructuring Proceedings, there is even greater uncertainty in estimating the future asbestos liability and related insurance recovery for pending and future claims. There are significant differences in the treatment of asbestos claims in a bankruptcy proceeding as compared to the tort litigation system. Among other things, it is uncertain at this time as to the number of asbestos-related claims that will be filed in the Restructuring Proceedings, the number of future claims that will be included in a plan of reorganization, how claims for punitive damages and claims by persons with no asbestos-related physical impairment will be treated and whether such claims will be allowed, and the impact that historical settlement values for asbestos claims may have on the estimation of asbestos liability in the Restructuring Proceedings.

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

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 December 31, 2003, the recorded insurance recoverable was $636.8 million. In December 2001, one of the three reinsurers, European International Reinsurance Company Ltd. (“EIR”), filed suit in a London, England court to challenge the validity of its insurance contract with the T&N Companies. As a result of this lawsuit, a claim was made against the broker (Sedgwick) that assisted in procuring this policy for breach of its duties as a broker. This trial commenced in October 2003. Prior to the conclusion of the trial, the parties were able to reach a settlement. As a result of this settlement, the Company recorded an asbestos charge in 2003 of $38.9 million. Under the terms of the settlement, EIR would be liable for 65.5% of its one-third share of the reinsurance policy. By separate agreement, Sedgwick agreed to be liable for an additional 17.25% of the EIR share of the reinsurance policy. T&N Ltd. has also agreed to indemnify the insurer for sums paid under the policy for which the insurer is liable to T&N Ltd. for which the insurer has no recovery from the reinsurers of Sedgwick. The settlement agreements referenced above are being held in escrow pending approval by the Bankruptcy Court and the Administrators of T&N Ltd. of those portions of the above-described settlement agreements that affect the Debtors. Approval is expected in early 2004. In December 2002, the remaining two reinsurers issued separate declaratory proceedings requesting the High Court to interpret certain terms contained in the Asbestos Liability Policy. These proceedings do not request the avoidance of the Asbestos Liability Policy. The Company believes that, based on its review of the insurance policies and advice from outside legal counsel, it is probable that the T&N Companies will be entitled to receive payment from the reinsurers for the cost of the claims in excess of the trigger point of the insurance.

Abex and Wagner Asbestos Litigation

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

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

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

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

The Company’s recorded liability for this litigation (comprised of $129.5 million in Abex liabilities and $85.0 million in Wagner liabilities as of December 31, 2003) represented the Company’s estimate prior to the Restructuring Proceedings for claims currently pending and those which were reasonably estimated to be asserted and paid through 2012. The Company did not provide a liability for claims that may be brought subsequent to this period as it could not reasonably estimate such claims. In estimating the liability prior to the Restructuring Proceedings, the Company made assumptions regarding 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 as previously described for the T&N Companies.

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

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

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

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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.

Other Litigation

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

Environmental Matters

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

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

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

Recorded environmental reserves were $66.0 million and $64.6 million at December 31, 2003 and 2002, respectively. The increase in the reserves from 2002 to 2003 resulted primarily from the addition of new sites and revision of cost estimates to remediate current sites, offset by remediation payments made during the period. Management believes that such reserves will be adequate to cover the Company’s estimated liability for its exposure in respect to such matters. In the event that such liabilities were to significantly exceed the amounts recorded by the Company, the Company’s results of operations and financial condition could be materially affected. At December 31, 2003, management estimates that reasonably possible material additional losses above and beyond management’s best estimate of required remediation costs as recorded approximate $40 million. Legal proceedings are further discussed in Note 20 to the consolidated financial statements included in Item 8 of this report.

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

There were no matters submitted to a vote of security holders in 2003.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Prior to April 24, 2002, the Company’s common stock was listed on the New York Stock Exchange (“NYSE”) under the trading symbol “FMO”. On April 24, 2002, the Company’s common stock was delisted from the NYSE and began trading on the NASD over-the-counter bulletin board market under the ticker symbol “FDMLQ”.

The approximate number of shareholders of record of the Company’s common stock at March 8, 2004 was 46,000. The following table sets forth the high and low sales prices of the Company’s common stock for each calendar quarter for the last two years as reported on the NYSE-Composite Tape prior to April 24, 2002 or the over-the-counter market subsequent to and including April 24, 2002:

	2003				2002
Quarter	High		Low		High		Low
First	$	0.47	$	0.07	$	1.20	$	0.80
Second	$	0.44	$	0.12	$	1.20	$	0.43
Third	$	0.36	$	0.10	$	0.73	$	0.53
Fourth	$	0.40	$	0.07	$	0.63	$	0.21

The closing price of the Company’s common stock as reported on the over-the-counter market on March 8, 2004 was $0.42.

The Company was prohibited in 2003, 2002 and 2001, under its Senior Credit Agreement and its debtor-in-possession credit facilities, from paying dividends on its common stock, and therefore did not declare any such dividends. The Company does not expect to declare a dividend in the foreseeable future.

On March 4, 2004, the Company filed an amended plan of reorganization and related disclosure statement with the Bankruptcy Court. This amended plan of reorganization was jointly proposed by the Company along with the Unsecured Creditors Committee, the Asbestos Claimants Committee, the Future Asbestos Claimants Representative, the Agent for the Prepetition Bank Lenders and the Equity (collectively referred to as the “Co-Proponents”). The joint amended plan of reorganization is consistent with the principal terms of the plan originally filed with the Bankruptcy Court on March 6, 2003.

The amended joint plan of reorganization provides that asbestos personal injury claimants, both present and future, will be permanently channeled to a trust or series of trusts established pursuant to Section 524(g) of the Bankruptcy Code, thereby protecting Federal-Mogul and its affiliates in the Chapter 11 cases from existing and future asbestos liability. Although technical issues remain to be resolved, the amended joint plan provides that all currently outstanding stock of Federal-Mogul will be cancelled, and 50.1% of newly authorized and issued common stock of reorganized Federal-Mogul will be distributed to the asbestos trusts or trusts for the benefit of existing and future asbestos claimants, and 49.9% of the newly authorized and issued common stock will be distributed pro rata to the noteholders. Trade creditors of the Company will receive cash distributions in an amount that has yet to be determined. If the classes of holders of common and preferred stock of Federal-Mogul vote in favor of the amended joint plan, the holders of currently outstanding common and preferred stock of Federal-Mogul will receive warrants in reorganized Federal-Mogul.

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ITEM 6. SELECTED FINANCIAL DATA

The following table presents information from the Company’s consolidated financial statements for the five years ended December 31, 2003. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Financial Statements and Supplemental Data”.

	2003			2002			2001			2000			1999
	(Millions of Dollars, Except Share and Per Share Amounts)
Consolidated Statement of Operations Data
Net sales	$	5,546.0		$	5,184.3		$	5,093.0		$	5,497.1		$	5,847.7
Costs and expenses		(5,429.4	)		(5,103.0	)		(5,121.2	)		(5,197.2	)		(5,271.2	)
Amortization of intangible assets		(16.9	)		(14.1	)		(109.5	)		(115.1	)		(126.4	)
Restructuring charges, net		(34.2	)		(40.5	)		(37.4	)		(134.4	)		—
Adjustment of assets held for sale and other long-lived assets to fair value		(106.0	)		(62.9	)		(328.1	)		(66.9	)		(7.9	)
Asbestos charge		(38.9	)		—			—			(184.4	)		—
Chapter 11 and Administration related reorganization expense		(97.1	)		(107.4	)		(57.3	)		—			—
Gain (loss) on early retirement of debt		—			—			72.2			—			(36.6	)
Other income (expense), net		43.5			20.6			(19.9	)		(29.0	)		(10.9	)
Income tax expense		(52.5	)		(77.9	)		(229.6	)		(29.0	)		(157.3	)
Earnings (loss) from continuing operations before cumulative effect of change in accounting principle		(185.5	)		(200.9	)		(737.8	)		(258.9	)		237.4
Earnings (loss) from discontinued operations, net of income taxes		(4.0	)		(10.1	)		(263.7	)		(22.6	)		18.5
Cumulative effect of change in accounting principle, net of applicable income tax benefit		—			(1,417.9	)		—			—			(12.7	)
Net earnings (loss)	$	(189.5	)	$	(1,628.9	)	$	(1,001.5	)	$	(281.5	)	$	243.2
Common Share Summary (Diluted)
Average shares and equivalents outstanding (in thousands)		87,129			83,022			75,598			70,573			84,206
Earnings (loss) per share:
From continuing operations before cumulative effect of change in accounting principle	$	(2.13	)	$	(2.42	)	$	(9.78	)	$	(3.70	)	$	3.09
From discontinued operations, net of income taxes		(0.04	)		(0.12	)		(3.49	)		(0.32	)		0.22
Cumulative effect of change in accounting principle, net of applicable income tax benefit		—			(17.08	)		—			—			(0.15	)
Net earnings (loss) per share	$	(2.17	)	$	(19.62	)	$	(13.27	)	$	(4.02	)	$	3.16
Dividends declared per share	$	—		$	—		$	—		$	0.01		$	0.01
Consolidated Balance Sheet Data
Total assets	$	8,116.7		$	7,913.3		$	9,053.2		$	9,831.0		$	9,945.2
Short-term debt		14.8			346.1			24.9			147.8			190.8
Long-term debt		331.2			14.3			266.7			3,559.7			3,020.0
Liabilities subject to compromise		6,087.8			6,053.2			6,256.6			—			—
Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely convertible subordinated debentures of the Company		—			—			—			575.0			575.0
Shareholders’ (deficit) equity		(1,376.9	)		(1,403.6	)		419.0			1,550.2			2,075.2
Other Financial Information
Net cash provided from (used by) operating activities	$	319.0		$	256.5		$	35.8		$	(154.5	)	$	562.4
Expenditures for property, plant, equipment		300.9			339.1			313.8			315.5			395.2
Depreciation and amortization expense		307.1			277.1			373.7			374.4			354.9
Payments against asbestos liability		—			(2.1	)		(234.7	)		(353.7	)		(179.5	)
Receipts from asbestos insurance policies		0.6			0.6			18.8			2.2			1.3

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Federal-Mogul Corporation (“Federal-Mogul” or the “Company”) offers a broad range of vehicular parts, accessories, modules and systems to customers in both the original equipment market (“OE”) and the replacement market (“aftermarket”) on a worldwide basis. Management believes the Company’s sales of $5.5 billion are well balanced between original equipment and aftermarket as well as domestic and international. During 2003, the Company derived 53% of its sales from the OE market and 47% from the aftermarket. Prominent OE customers include the world’s largest automotive manufacturers such as General Motors, Ford/Jaguar/Volvo, DaimlerChrysler, BMW, PSA, Volkswagen/Audi and Renault/Nissan. Similarly, prominent aftermarket customers include the Aftermarket Auto Parts Alliance, Autozone, CarQuest, Advance Automotive, NAPA and Ozark/O’Reilly’s. Geographically, the Company derived 49% of its sales domestically and 51% internationally. The Company has operations in 31 countries including established markets of Germany, United Kingdom, France, Italy, Mexico and Canada, and emerging markets of China, India, Thailand and Korea.

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 cost 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.

A number of initiatives commenced in 2001 and, while certain of these initiatives have been completed as of December 31, 2003, many are still in process and ongoing:

• Strategic Direction – New leadership was installed in 2001 with the appointment of Frank E. Macher as Chairman and CEO and Charles G. McClure, Jr. (“Chip”) as President and COO. These individuals set forth clear objectives for the Company by instituting assessments of core competencies and product line positions, organizational capabilities, and technological strengths and weaknesses. The Company’s management is focused on further developing and exploiting those businesses which it believes possess a sustainable competitive advantage. During 2003, Chip McClure succeeded Frank Macher as CEO and leads the Company’s direction.

• Exit “Non-Core” Businesses – Management identified certain businesses that were not consistent with the Company’s long-term strategy or were not expected to achieve certain performance targets. These businesses were deemed non-core and, during the course of the last three years, the Company has divested substantially all of these businesses accounting for approximately $670 million in cumulative net sales for the three years ended December 31, 2003. These activities have freed up both human and financial resources that are focused on improving the Company’s core businesses.

• Global Organization – Recognizing the ever-increasing globalization of the automotive industry, the Company organized its primary business units on a global basis – Powertrain, Sealing Systems and Systems Protection, Friction and Aftermarket. This allows each business to take advantage of best practices in product development, technology and innovation, manufacturing capability and capacity. Furthermore, the Company continues to develop and implement standardized processes and centralized systems to further the direction and performance of the business.

• Productivity – Management implemented a series of initiatives targeted at leveraging the Company’s global scale and reducing total enterprise costs. These initiatives included implementation of a centralized supply chain function focused on the reduction of global material costs; headcount reduction programs to reduce selling, general and administrative costs; implementation of standard manufacturing methods across business segments to achieve operational efficiencies and decrease production costs; and modified capital expenditure processes to ensure capital funds are directed at the most strategically appropriate investments with the highest rates of return.

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• Low Cost Production – The Company has established and expanded manufacturing operations in low cost geographies to meet the cost pressures inherent in the industry. The Company has manufacturing operations and joint venture alliances in the Czech Republic, China, Korea, Thailand, Poland, Turkey, Hungary, and Mexico. During the last three years, the Company has closed nine manufacturing locations in the United States and higher cost regions of Europe, relocating production to these low cost operations as well as consolidating facilities where excess production capacity existed.

• North America Aftermarket Distribution Optimization – The Company commenced activities to streamline the North America aftermarket distribution network in order to improve both the efficiency of operations and customer order fulfillment and delivery performance. This distribution network consisted of 18 facilities at the end of 2000. Since then, the Company has completed the consolidation and closure of nine distribution centers. The Company now operates its North America aftermarket customer order processing and fulfillment from nine distribution centers. The Company has embarked upon a similar initiative for its Europe aftermarket operations.

• Aftermarket Delivery Performance – In addition to the distribution network consolidation efforts in North America, the Company upgraded many of its remaining distribution centers with state-of-the-art warehouse management systems. Furthermore, the Company renewed its focus on internal logistics and execution of inventory “pull” systems throughout its manufacturing operations and suppliers to ensure prompt and accurate replenishment of its distribution network. These efforts have resulted in significantly improved order fulfillment to the Company’s aftermarket customers in North America and Europe. The Company believes that its current customer order fulfillment levels are best in class.

• Expand Asia Pacific Presence – The Company has invested in manufacturing operations (both wholly-owned and joint venture relationships) in the Asia Pacific region and has recently opened a technical center in Yokohama, Japan to support the Company’s efforts in this region. The Company intends to use these operations and technical platform to strengthen its current, as well as to develop new, customer relationships in this important region.

• Customer Valued Technology – The Company has significant engineering and technical resources throughout its businesses focused on addressing customer issues and problems with innovative solutions for both product applications and manufacturing processes. A recent example is the development and launch of the Company’s Wagner ThermoQuiet disc brake pad technology for the aftermarket. This technology employs patented shim technology which provides a one piece insulator and backing plate and provides exceptional stopping power, quiet performance, and enhanced durability. The Company was awarded the prestigious Automotive News PACE Award in 2003 for this new technology.

• Settle Asbestos Obligation And Right Size Capital Structure – On October 1, 2001 the Company and all of its wholly-owned United States subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy. Also on October 1, 2001, certain of the Company’s United Kingdom subsidiaries filed for reorganization under Chapter 11 of the Bankruptcy Code and petitions for Administration under the United Kingdom Insolvency Act of 1986 in the High Court of Justice, Chancery division in London, England. These proceedings were initiated in response to a sharply increasing number of asbestos-related claims and their related demand on the Company’s cash flows and liquidity. Management expects the Company to emerge from the Restructuring Proceedings free from its asbestos obligation and with an appropriate capital structure necessary to achieve the Company’s future objectives.

Voluntary Reorganization under Chapter 11 and Administration

On October 1, 2001 (the “Petition Date”), the Company and all of its wholly-owned United States subsidiaries filed voluntary petitions for reorganization (the “U.S. Restructuring”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). Also on October 1, 2001, certain of the Company’s United Kingdom subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code and petitions for Administration (the “U.K. Restructuring”) under the United Kingdom Insolvency Act of 1986 (the “Act”) in the High Court of Justice, Chancery division in London, England (the “High Court”). The Company and its U.S. and U.K. subsidiaries

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included in the U.S. Restructuring or the U.K. Restructuring are herein referred to as the “Debtors”. The U.S. Restructuring and U.K. Restructuring are herein referred to as the “Restructuring Proceedings”. The Chapter 11 cases of the Debtors (collectively, the “Chapter 11 Cases”) have been consolidated for purposes of joint administration as In re: Federal-Mogul Global Inc., T&N Limited, et al (Case No. 01-10578(RTL)). Subsidiaries outside of the aforementioned U.S. and U.K. subsidiaries are not party to the Chapter 11 Cases and, therefore, are not currently provided protection from creditors by any bankruptcy court and are operating in normal course. The Chapter 11 Cases are further discussed in Note 1 to the consolidated financial statements.

The Restructuring Proceedings were initiated in response to a sharply increasing number of asbestos-related claims and their related demand on the Company’s cash flows and liquidity. Under the Restructuring Proceedings, the Debtors expect to continue to operate their businesses as debtors-in-possession under court protection from their creditors and claimants, while using the Restructuring Proceedings to develop and implement a plan for addressing the asbestos-related claims against them.

Consequences of the Restructuring Proceedings

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

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

On March 4, 2004, the Company filed an amended plan of reorganization and related disclosure statement with the Bankruptcy Court. This amended plan of reorganization was jointly proposed by the Company along with the Unsecured Creditors Committee, the Asbestos Claimants Committee, the Future Asbestos Claimants Representative, the Agent for the Prepetition Bank Lenders and the Equity (collectively referred to as the “Co-Proponents”). The joint amended plan of reorganization is consistent with the principal terms of the plan originally filed with the Bankruptcy Court on March 6, 2003.

The amended joint plan of reorganization provides that asbestos personal injury claimants, both present and future, will be permanently channeled to a trust or series of trusts established pursuant to Section 524(g) of the Bankruptcy Code, thereby protecting Federal-Mogul and its affiliates in the Chapter 11 Cases from existing and future asbestos liability. Although technical issues remain to be resolved, the amended joint plan provides that all currently outstanding stock of Federal-Mogul will be cancelled, and 50.1% of newly authorized and issued common stock of reorganized Federal-Mogul will be distributed to the asbestos trusts or trusts for the benefit of existing and future asbestos claimants, and 49.9% of the newly authorized and issued common stock will be distributed pro rata to the noteholders. Trade creditors of the Company will receive cash distributions in an amount that has yet to be determined. If the classes of holders of common and preferred stock of Federal-Mogul vote in favor of the amended joint plan, the holders of currently outstanding common and preferred stock of Federal-Mogul will receive warrants in reorganized Federal-Mogul.

There are two possible types of U.K. schemes of arrangements. The first is under Section 425 of the Companies Act of 1985, which may involve a scheme for the reconstruction of the Company. If a majority in number representing three-fourths in value of the creditors or members or any class of them agree to the compromise or arrangement, it is binding if sanctioned by the High Court. Section 425 may be invoked where there is an Administration order in

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force in relation to the Company. The other possible type of scheme arises under Section 1 of the Insolvency Act of 1986 in relation to Company Voluntary Arrangements (“CVA”). If a majority in value representing more than three-fourths of the creditors agrees to the compromise or arrangement set out in the CVA proposal, it will be approved.

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

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

Accounting Impact

Pursuant to AICPA Statement of Position 90-7 (“SOP 90-7”), “Financial Reporting by Entities in Reorganization under the Bankruptcy Code”, the Company’s pre-petition liabilities that are subject to compromise are reported separately in the consolidated balance sheet at the expected amount of the allowed claims. Note 1, “Voluntary Reorganization under Chapter 11 and Administration”, includes the detail of “Liabilities subject to compromise” as of December 31, 2003. Obligations of the Company’s subsidiaries not covered by the Restructuring Proceedings will remain classified in the consolidated balance sheet based upon maturity dates or the expected dates of payment. SOP 90-7 also requires separate reporting of certain expenses, realized gains and losses, a portion of interest income and provisions for losses related to the Restructuring Proceedings as reorganization items. Accordingly, the Debtors recorded Chapter 11 and Administration related reorganization expenses of $97.1 million, $107.4 million and $57.3 million for the years ended December 31, 2003, 2002 and 2001, respectively. See Note 1 to the consolidated financial statements in Item 8 of this report for further information concerning the Restructuring Proceedings.

Critical Accounting Policies

The accompanying consolidated financial statements in Item 8 of this report have been prepared in conformity with accounting principles generally accepted in the United States and, accordingly, the Company’s general accounting policies have been disclosed in Note 2 to the consolidated financial statements. The Company considers accounting estimates to be critical accounting policies when:

• The estimates involve matters that are highly uncertain at the time the accounting estimate is made; and

• Different estimates or changes to estimates could have a material impact on the reported financial position, changes in financial condition, or results of operations.

When more than one accounting principle, or the method of its application, is generally accepted, management selects the principle or method that it considers to be the most appropriate given the specific circumstances. Application of these accounting principles requires the Company’s management to make estimates about the future resolution of existing uncertainties. Estimates are typically based upon historical experience, current trends, contractual documentation, and other information, as appropriate. Due to the inherent uncertainty involving estimates, actual results reported in the future may differ from those estimates. In preparing these financial statements, management has made its best estimates and judgments of the amounts and disclosures included in the financial statements, giving due regard to materiality. The following summarizes the Company’s critical accounting policies.

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Reorganization Under Chapter 11 and Administration

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

Asbestos Liabilities and Asbestos-Related Insurance Recoverable

The Company’s United Kingdom subsidiary, T&N Ltd., two United States subsidiaries (“T&N Companies”), and two of the Company’s subsidiaries formerly owned by Cooper Industries, Inc., known as Abex and Wagner, are among many defendants named in numerous court actions in the United States alleging personal injury resulting from exposure to asbestos or asbestos-related products. T&N Ltd. is also subject to asbestos-disease litigation, to a lesser extent, in the United Kingdom and France. The recorded liability at December 31, 2003 represents the Company’s estimate, prior to the Restructuring Proceedings, for claims currently pending and those which were reasonably estimated to be asserted and paid through 2012. The Company did not provide a liability for claims that may be paid subsequent to this period as it could not reasonably estimate such claims. In estimating the asbestos liability prior to the Restructuring Proceedings, the Company made assumptions regarding the total number of claims anticipated to be received in a future period, the rate of receipt of claims, the typical cost of settlement, the settlement strategy in dealing with outstanding claims and the timing of settlements. While the Company believes that the liability recorded was appropriate for anticipated losses arising from asbestos-related claims through 2012, it is the Company’s view that, as a result of the Restructuring Proceedings, there is even greater uncertainty in estimating the asbestos liability for pending and future claims.

T&N Ltd. purchased for itself and its then defined global subsidiaries a £500 million layer of insurance which will be triggered should the aggregate costs of claims made or brought after June 30, 1996, where the exposure occurred prior to that date, exceed £690 million. During 2000, the Company concluded that the aggregate cost of the claims filed after June 30, 1996 would exceed the trigger point of certain asbestos policies and accordingly recorded an insurance recoverable asset.

The ultimate realization of insurance proceeds is directly related to the amount of related covered claims paid by the Company. If the ultimate asbestos claims are higher than the recorded liability, the Company expects the ultimate insurance recoverable to be higher than the recorded amount. If the ultimate asbestos claims are lower than the recorded liability, the Company expects the ultimate insurance recoverable to be lower than the recorded amount. While the Restructuring Proceedings will impact the timing and amount of the asbestos claims and the insurance recoverable, there has been no change to the recorded amounts, other than an insurance settlement described further below, and the impact of foreign currency, due to uncertainties created by the Restructuring Proceedings. Accordingly, these amounts could change significantly based upon events that occur from the Restructuring Proceedings and could materially affect the Company’s future financial statements.

In December 2001, one of the three reinsurers, European International Reinsurance Company Ltd. (“EIR”), filed suit in a London, England court to challenge the validity of its insurance contract with the T&N Companies. As a result of this lawsuit, a claim was made against the broker (Sedgwick) that assisted in procuring this policy for breach of its duties as a broker. This trial commenced in October 2003. Prior to the conclusion of the trial, the parties were able to reach a settlement. As a result of this settlement, the Company recorded an asbestos charge in 2003 of $38.9 million. Under the terms of this 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. and 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

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Administrators of T&N Ltd. of those portions of the above-described settlement agreements that affect the Debtors. Approval is expected in early 2004. In December 2002, the remaining two reinsurers issued separate declaratory proceedings requesting the High Court to interpret certain terms contained in the Asbestos Liability Policy.

These proceedings do not request the avoidance of the Asbestos Liability Policy. The Company believes that, based on its review of the insurance policies and advice from outside legal counsel, it is probable that the T&N Companies will be entitled to receive payment from the remaining reinsurers for the cost of the claims in excess of the trigger point of the insurance.

Pension Plans and Other Post-Retirement Benefit Plans

Using appropriate actuarial methods and assumptions, the Company’s defined benefit pension plans are accounted for in accordance with SFAS No. 87, “Employers’ Accounting for Pensions.” Non-pension post-retirement benefits are accounted for in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.”

Actual results that differ from assumptions used are accumulated and amortized over future periods and, accordingly, generally affect recognized expense and the recorded obligation in future periods. Therefore, assumptions used to calculate benefit obligations as of the end of a fiscal year directly impact the expense to be recognized in future periods. The primary assumptions affecting the Company’s accounting for employee benefits under SFAS Nos. 87 and 106 as of December 31, 2003 are as follows:

• Long-term rate of return on plan assets: The required use of the expected long-term rate of return on plan assets may result in recognized returns that are greater or less than the actual returns on those plan assets in any given year. Over time, however, the expected long-term rate of return on plan assets is designed to approximate actual earned long-term returns. The Company uses long-term historical actual return information, the mix of investments that comprise plan assets, and future estimates of long-term investment returns by reference to external sources to develop an assumption of the expected long-term rate of return on plan assets. The expected long term rate of return is used to calculate net periodic pension cost. In determining its pension obligations, the Company used long-term rates of return on plan assets of 8.5% and 7.0% for its United States and international pension plans, respectively.

• Discount rate: The discount rate is used to calculate future pension and post-retirement obligations. Discount rate assumptions used to account for pension and non-pension post-retirement benefit plans reflect the rates available on high-quality, fixed-income debt instruments on December 31 of each year. In determining its pension and other benefit obligations, the Company used discount rates of 6.25% and 5.5% for its United States and Other international pension plans, respectively.

• Health care cost trend: For post-retirement health care plan accounting, the Company reviews external data and Company specific historical trends for health care costs to determine the health care cost trend rate assumptions. In determining its projected benefit obligation, the Company used health care cost trend rates of 8.5% for post-retirement health care plans.

At December 31, 2003, the projected benefit obligation (“PBO”) for U.S. and international pension plans was $961.1 million and $2,530.8 million, respectively, and the minimum pension liability charged to equity was $234.5 million and $720.3 million, respectively. At December 31, 2003, the accumulated postretirement benefit obligation (“APBO”) for health care and life insurance benefits was $545.1 million. The following table illustrates the sensitivity to a change in certain assumptions for pension and non-pension benefits. The changes in these assumptions have no impact on the Company’s 2004 funding requirements.

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	United States Plans										International Plans
	Pension Benefits						Other Plans				Pension Benefits
	Impact on pension expense		Impact on PBO		Impact on equity		Impact on benefit expense		Impact on APBO		Impact on pension expense		Impact on PBO		Impact on equity
	(Millions of dollars)
25 basis point (bp) decrease in discount rate	$	+ 2.1	$	+ 24.1	$	-23.6	$	+ 1.4	$	+ 14.5	$	+ 5.6	$	+ 83.8	$	-80.3
25 bp increase in discount rate		-2.1		-22.9		+ 22.4		-1.4		-14.5		-5.9		-85.1		+ 81.3
25 bp decrease in rate of return on assets		+ 1.6		—		—		—		—		+ 4.5		—		—
25 bp increase in rate of return on assets		-1.6		—		—		—		—		-4.5		—		—

The assumed health care trend rate has a significant impact on the amounts reported for non-pension plans. The following table illustrates the sensitivity to a change in the assumed health care trend rate:

	Total Service and Interest Cost		APBO
	(Millions of Dollars)
100 bp increase in health care trend rate	$	+ 3.2	$	+ 41.9
100 bp decrease in health care trend rate		-2.8		-36.3

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.

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

Recorded environmental reserves were $66.0 million and $64.6 million at December 31, 2003 and 2002, respectively. These accruals are based upon management’s best estimates, which requires management to make assumptions regarding the costs for remediation activities, the extent to which costs may be reimbursed by other participating parties, the financial viability of such participating parties, the timeframes over which remediation activities will be completed, and other items. Although management believes its accruals will be adequate to cover the Company’s estimated liability for its exposure in respect to such environmental matters, any changes in the underlying assumptions could materially impact the Company’s future results of operations and financial condition. At December 31, 2003, management estimates that reasonably possible material additional losses above and beyond management’s best estimate of required remediation costs as recorded approximates $40 million.

Long-Lived Assets

Long-lived assets, such as property, plant and equipment and definite-lived intangible assets, are stated at cost. Depreciation and amortization is computed principally by the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes. Definite-lived assets are periodically reviewed for impairment indicators. If impairment indicators exist, the Company performs the required analysis and records an impairment charge, as required, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

Indefinite-lived intangible assets, such as goodwill and trademarks, are carried at historical value and not amortized. Indefinite-lived intangible assets are reviewed for impairment annually as of October 1, or more frequently if

32

impairment indicators exist. The impairment analysis compares the estimated fair value of these assets to the related carrying value, and an impairment charge is recorded for any excess of carrying value over estimated fair value. The estimated fair value is based upon a combination of discounted cash flows and market multiples.

Estimating fair value for both long-lived and indefinite-lived assets requires management to make assumptions regarding future sales volumes and pricing, capital expenditures, useful lives and salvage values of related property, plant and equipment, the Company’s ability to develop and implement productivity improvements, discount rates, effective tax rates, market multiples, and other items. Any differences in actual results from management’s estimates could result in fair values different from estimated fair values, which could materially impact the Company’s future results of operations and financial condition.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company records a valuation allowance on its net deferred tax assets by taxing jurisdiction when it is more likely than not that such assets will not be realized. Management judgment is required in determining the Company’s valuation allowance on net deferred tax assets. The valuation allowance would need to be adjusted in the event future taxable income is materially different than amounts estimated. The Company does not provide taxes on undistributed earnings of foreign subsidiaries that are considered to be permanently reinvested.

Results of Operations

The following discussion of the Company’s results of operations should be read in connection with Items 1 and 7A of this Form 10-K. These Items provide additional relevant information regarding the business of the Company, its strategy, and the various industry dynamics in the OE market and the aftermarket which have a direct and significant impact on the Company’s results of operations.

Consolidated Results

Sales by reporting segment were:

	Year Ended December 31
	2003		2002		2001
	(Millions of Dollars)
Powertrain	$	1,839	$	1,652	$	1,567
Sealing Systems and Systems Protection		620		639		630
Friction		431		374		339
Aftermarket		2,576		2,455		2,485
Other		80		64		72
Total	$	5,546	$	5,184	$	5,093

Gross margin by reporting segment was:

	Year Ended December 31
	2003		2002			2001
	(Millions of Dollars)
Powertrain	$	255	$	260		$	265
Sealing Systems and Systems Protection		103		124			131
Friction		116		97			60
Aftermarket		612		548			570
Other		1		(8	)		29
Total	$	1,087	$	1,021		$	1,055

Net sales from continuing operations increased $362 million, or 7%, to $5,546 million in 2003 from $5,184 million in 2002. Favorable foreign currency of $352 million and favorable sales volumes of $54 million more than offset price reductions of $44 million.

Gross margin increased by $66 million, or 6%, during 2003 and remained consistent as a percentage of sales at 20% despite customer price reductions. Gross margin was favorably impacted by foreign currency of $63 while improvements in productivity of $43 million mostly offset price reductions of $44 million.

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Net sales from continuing operations increased $91 million, or 2%, to $5,184 million in 2002 from $5,093 million in 2001. Favorable foreign currency contributed $59 million to the increase, while favorable sales volumes of $66 million were partially offset by price reductions of $34 million.

Gross margin was $1,021 million, or 20% of sales, for 2002 compared to $1,055, or 21% of sales in 2001. Gross margin was adversely impacted by price reductions of $34 million, adverse product mix of $28 million and lower volumes of $7 million. These reductions in gross margin were partially offset by net productivity gains resulting from sourcing and manufacturing improvements of $28 million and $7 million of favorable foreign currency.

Reporting Segment Results 2003 v. 2002

The following table provides changes in sales and gross margin for the year ended December 31, 2003 compared with the year ended December 31, 2002 for each of the Company’s reporting segments. “SSP” and “AM” represent Sealing Systems and Systems Protection and Aftermarket, respectively.

	Powertrain			SSP			Friction			AM			Other			Total
	(Millions of Dollars)
2002 Sales	$	1,652		$	639		$	374		$	2,455		$	64		$	5,184
Foreign currency		176			25			37			110			4			352
Sales volumes		37			(33	)		22			16			12			54
Price reductions		(26	)		(11	)		(2	)		(5	)		—			(44	)
2003 Sales	$	1,839		$	620		$	431		$	2,576		$	80		$	5,546
	Powertrain			SSP			Friction			AM			Other			Total
	(Millions of Dollars)
2002 Gross Margin	$	260		$	124		$	97		$	548		$	(8	)	$	1,021
Production volumes / mix		(1	)		(20	)		10			14			1			4
Price reductions		(26	)		(11	)		(2	)		(5	)		—			(44	)
Productivity gains, net of inflation		(8	)		5			(1	)		39			8			43
Foreign currency		30			5			12			16			—			63
2003 Gross Margin	$	255		$	103		$	116		$	612		$	1		$	1,087

Powertrain

Net sales from continuing operations increased $187 million, or 11%, to $1,839 million in 2003 from $1,652 million in 2002. Favorable foreign currency contributed $176 million to the increase. Increased sales volumes of $37 million more than offset price reductions of $26 million.

Gross margin was $255 million, or 14% of sales, for 2003 compared to $260 million, or 16% of sales in 2002. Gross margin was favorably impacted by $30 million of foreign currency, which was more than offset by contractual price reductions of approximately $26 million, inflation and other cost increases in excess of productivity of $8 million, and unfavorable net volume and mix of $1 million.

Sealing Systems and System Protection

Net sales from continuing operations decreased $19 million, or 3%, to $620 million in 2003 from $639 million in 2002. Favorable foreign currency of $25 million was more than offset by adverse sales volumes of $33 million and price reductions of $11 million.

Gross margin was $103 million, or 17% of sales, for 2003 compared to $124 million, or 19% of sales in 2002. Foreign currency of $5 million and productivity improvements of $5 million were more than offset by decreased production volumes of $20 million and price reductions of $11 million.

Friction

Net sales from continuing operations increased $57 million, or 15%, to $431 million in 2003 from $374 million in 2002. Favorable foreign currency of $37 million and increased sales volumes of $22 million more than offset price reductions of $2 million.

Gross margin was $116 million, or 27% of sales, for 2003 compared to $97 million, or 26% of sales in 2002. Foreign currency of $12 million and favorable production volumes of $10 million more than offset price reductions of $2 million and net productivity of $1 million.

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Aftermarket

Net sales from continuing operations increased $121 million, or 5%, to $2,576 million in 2003 from $2,455 million in 2002. Foreign currency of $110 million and favorable sales volumes of $16 million more than offset price reductions of $5 million.

Gross margin was $612 million, or 24% of sales, for 2003 compared to $548 million, or 22% of sales in 2002. Foreign currency of $16 million, net productivity improvements of $39 million, favorable production volumes and product mix of $14 million more than offset price reductions of $5 million.

Other

Other primarily includes Asia Pacific and Corporate functions. Net sales from continuing operations were $80 million compared to $64 million in the same period of 2002. This increase is the result of increased sales in the Asia Pacific region of $12 million, and favorable foreign currency of $4 million.

The increase in gross margin was impacted by favorable volumes of $1 million and $8 million of net productivity improvements in excess of higher pension costs recorded in Corporate.

Selling, General and Administrative Expense

Selling, general and administrative (“SG&A”) expenses were $872 million, or 16% of sales, in 2003 as compared to $817 million, or 16% of sales, in 2002. The increase in SG&A costs was due to $53 million of foreign currency and $42 million of increased pension costs, partially offset by reduced headcount and other cost reduction activities.

Interest Expense

Net interest expense decreased by $25 million in 2003 to $98 million. This decrease is due to the recognition of $17 million in interest income related to tax refunds and lower average outstanding debt. In accordance with SOP 90-7, the Company has not accrued the contractual interest of $163 million on its pre-petition debt.

Other Income and Expenses, net

Other income, net was $16 million in 2003, compared to other income, net of $1 million in 2002. Gains on sales of individual assets of $7 million, combined with reduced costs of financing arrangements of approximately $6 million account for this increase.

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Reporting Segment Results 2002 v. 2001

The following table provides changes in sales and gross margin for the year ended December 31, 2002 compared with the year ended December 31, 2001 for each of the Company’s reporting segments. “SSP” and “AM” represent Sealing Systems and Systems Protection and Aftermarket, respectively.

	Powertrain			SSP			Friction			AM			Other			Total
	(Millions of Dollars)
2001 Sales	$	1,567		$	630		$	339		$	2,485		$	72		$	5,093
Sales volumes		77			8			33			(44	)		(8	)		66
Pricing		(26	)		(5	)		(6	)		3			—			(34	)
Foreign currency		34			6			8			11			—			59
2002 Sales	$	1,652		$	639		$	374		$	2,455		$	64		$	5,184

	Powertrain			SSP			Friction			AM			Other			Total
	(Millions of Dollars)
2001 Gross Margin	$	265		$	131		$	60		$	570		$	29		$	1,055
Production volumes / mix		6			(2	)		8			(39	)		(8	)		(35	)
Pricing		(26	)		(5	)		(6	)		3			—			(34	)
Productivity gains, net of inflation		11			—			33			13			(29	)		28
Foreign currency		4			—			2			1			—			7
2002 Gross Margin	$	260		$	124		$	97		$	548		$	(8	)	$	1,021

Powertrain

Net sales from continuing operations increased $85 million, or 5%, to $1,652 million in 2002 from $1,567 million in 2001. Favorable foreign currency contributed $34 million to the increase. Favorable sales volumes of $77 million, particularly in North America, combined with a new piston program launched in Mexico and sales volume from the 2001 acquisition of Gorzyce, more than offset price reductions of $26 million.

Gross margin was $260 million, or 16% of sales, for 2002, compared to $265 million, or 17% of sales in 2001. Foreign currency of $4 million, sales volumes and product mix of $6 million, and net productivity of $11 million favorably impacted gross margin, but were more than offset by price reductions of $26 million.

Sealing Systems and System Protection

Net sales from continuing operations increased $9 million, or 1%, to $639 million in 2002 from $630 million in 2001. Favorable foreign currency of $6 million and favorable sales volumes of $8 million more than offset price reductions of $5 million.

Gross margin was $124 million, or 19% of sales, for 2002 compared to $131 million, or 21% of sales in 2001. Price reductions of $5 million and the impact of adverse product mix of $4 million caused the decrease in gross margin.

Friction

Net sales from continuing operations increased $35 million, or 10%, to $374 million in 2002 from $339 million in 2001. Favorable foreign currency of $8 million and sales volumes of $33 million more than offset price reductions of $6 million.

Gross margin was $97 million, or 26% of sales, for 2002 compared to $60 million, or 18% of sales in 2001. Foreign currency of $2 million, productivity improvements of $33 million, and favorable production volumes of $8 million more than offset price reductions of $6 million.

Aftermarket

Net sales from continuing operations decreased $30 million, or 1%, to $2,455 million in 2002 from $2,485 million in 2001. Favorable foreign currency of $11 million and favorable pricing of $3 million were more than offset by reduced sales volumes of $44 million.

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Gross margin was $548 million, or 22% of sales, for 2002 compared to $570 million, or 23% of sales in 2001. Foreign currency of $1 million, net productivity improvements of $13 million, and favorable pricing of $3 million were more than offset by unfavorable sales volumes and adverse product mix of $39 million.

Other

Other primarily includes Asia Pacific and Corporate functions. Net sales from continuing operations were $64 million compared to $72 million in the same period of 2001, reflecting reducing sales volumes.

The net unfavorable impact of $29 million from increased pension costs in excess of productivity combined with unfavorable sales volumes of $8 million caused the decrease in gross margin.

Selling, General and Administrative Expense

SG&A expenses were $817 million, or 16% of sales, in 2002 compared to $809 million, or 16% of sales, in 2001. This increase is primarily attributable to cost reduction efforts, which were more than offset by increased employee health and welfare costs, and the effect of lower actual returns on the Company’s pension plan assets.

Interest Expense

Net interest expense decreased $151 million in 2002 to $123 million. This decrease is the result of the full year effect of not accruing or paying interest on certain pre-petition debt. This reduction in interest expense was partially offset by interest on the DIP credit facility and by higher average borrowings on the Company’s credit facilities during 2002 than in 2001. In accordance with SOP 90-7, the Company has not accrued the contractual interest of $164 million on its pre-petition debt.

Other Income and Expenses, net

Other income, net was $1 million in 2002, compared to other expense, net of $35 million in 2002. This change is attributable to reduced costs of financing arrangements of approximately $11 million. In addition, distributions on the Company’s obligated mandatorily redeemable preferred securities were suspended in connection with the Restructuring Proceedings, resulting in a decrease in other expense of $30.6 million in 2002 as compared to 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 accounted for costs related to all restructuring activities initiated prior to January 1, 2003 under the requirements of EITF No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Accordingly, related employee termination benefits and other costs to exit an activity were recognized on the date when management committed the Company to an exit plan. Due to the inherent uncertainty involved in making such estimates, the Company reversed approximately $21 million of previously recorded reserves in each of 2003 and 2002. These reversals related to approximately $300 million of restructuring costs recorded during the four-year period ended December 31, 2003. Reversals result from actual costs at program completion being less than costs estimated at the commitment date. Subsequent to its filing for Chapter 11 bankruptcy protection, the Company was able to achieve more favorable resolution of leases and other contractual arrangements than estimated as of the commitment date. Additionally, the Company also experienced a higher rate of voluntary employee attrition subsequent to filing Chapter 11, resulting in lower severance costs than estimated as of the commitment date.

Effective January 1, 2003, the Company’s restructuring accounting policy changed pursuant to the requirements of SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” Currently, the Company defines restructuring expense to include costs directly associated with exit or disposal activities accounted for in accordance

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with SFAS No. 146, employee severance costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 88 and 112, and pension and other post employment benefit costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 87 and 106.

Estimates of restructuring charges are based on information available at the time such charges are recorded. In general, management anticipates that restructuring activities will be completed within a timeframe such that significant changes to the exit plan are not likely. In certain countries in which the Company operates, statutory requirements include involuntary termination benefits that extend several years into the future. Accordingly, severance payments continue well past the date of termination at many international locations. Thus, these programs appear to be ongoing when, in fact, terminations and other activities under these programs have been substantially completed. Management expects that future savings resulting from execution of its restructuring programs will generally result in full pay back within 36 to 60 months.

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

Total employee reductions for all active restructuring programs are expected to be approximately 3,000 of which approximately 2,700 have been terminated as of December 31, 2003. The following is a summary of restructuring charges by reporting segment for the years ended December 31, 2003, 2002 and 2001:

	Year Ended December 31, 2003
	Severance		Exit		Reversals			Total
	(Millions of Dollars)
Powertrain	$	26.8	$	1.2	$	(1.6	)	$	26.4
Sealing Systems and Systems Protection		2.1		3.4		(1.5	)		4.0
Friction		1.8		0.3		(10.5	)		(8.4	)
Aftermarket		16.6		0.8		(4.0	)		13.4
Other		1.5		0.5		(3.2	)		(1.2	)
Total	$	48.8	$	6.2	$	(20.8	)	$	34.2
	Year Ended December 31, 2002
	Severance		Exit		Reversals			Total
	(Millions of Dollars)
Powertrain	$	42.4	$	0.4	$	(1.2	)	$	41.6
Sealing Systems and Systems Protection		3.9		—		(0.2	)		3.7
Friction		6.3		—		(0.2	)		6.1
Aftermarket		3.6		—		(18.6	)		(15.0	)
Other		4.4		—		(0.3	)		4.1
Total	$	60.6	$	0.4	$	(20.5	)	$	40.5
	Year Ended December 31, 2001
	Severance		Exit		Reversals			Total
	(Millions of Dollars)
Powertrain	$	10.3	$	—	$	—		$	10.3
Sealing Systems and Systems Protection		2.0		0.9		—			2.9
Friction		3.0		1.1		—			4.1
Aftermarket		8.8		—		—			8.8
Other		11.3		—		—			11.3
Total	$	35.4	$	2.0	$	—		$	37.4

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The following is a summary of the Company’s consolidated restructuring reserves and related activity for 2003, 2002 and 2001:

	Severance			Exit			Total
	(Millions of Dollars)
Balance of reserves at January 1, 2001	$	67.2		$	40.7		$	107.9
2001 total provision		35.4			2.0			37.4
Payments and charges against reserves		(51.0	)		(13.2	)		(64.2	)
Balance of reserves at December 31, 2001		51.6			29.5			81.1
2002 total provision		40.1			0.4			40.5
Payments and charges against reserves		(20.6	)		(10.2	)		(30.8	)
Balance of reserves at December 31, 2002		71.1			19.7			90.8
2003 total provision		31.4			2.8			34.2
Payments and charges against reserves		(54.8	)		(12.5	)		(67.3	)
Balance of reserves at December 31, 2003	$	47.7		$	10.0		$	57.7

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

1. Closure of facilities and relocation of production – In connection with the Company’s strategy certain operations have been closed and related production relocated to low cost geographies or to other locations with available capacity.

2. Consolidation of administrative functions and standardization of manufacturing processes - 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 provides a description of restructuring programs for each reporting segment.

Powertrain

Total restructuring charges, net of reversals, were $26.4 million, $41.6 million, and $10.3 million in 2003, 2002, and 2001, respectively. These charges relate to the following primary restructuring activities:

Closure of facilities and relocation of production

• In 2003, the Company began the closure and relocation of its Bradford, United Kingdom piston operations to other existing European manufacturing facilities with available capacity or with lower cost labor. Severance charges related to this exit activity approximated $14 million and at December 31, 2003, the Company had remaining reserves of approximately $13 million related to this activity.

• During 2003, the Company recorded approximately $1 million for costs related to the exit of its non-core European large bearing operations.

• In 2002, the Company recorded approximately $10 million for severance and exit costs related to the announced closure of its Bridgwater, United Kingdom piston operation. Related production from this operation was relocated to other existing European manufacturing facilities with available capacity or with lower cost labor. At December 31, 2003 remaining reserves related to this program approximate $1 million.

• During 2002, the Company announced the relocation and closure of its piston manufacturing operations in Flowery Branch, Georgia, Orangeburg, South Carolina and Sumter, South Carolina to other existing North American manufacturing facilities with available capacity or with lower cost labor. Severance and exit costs related to such activities approximated $2 million and $9 million for the years ended December 31, 2003 and 2002. At December 31, 2003, the Company had remaining reserves of approximately $5 million related to these activities. The Company completed the relocation and closure of the Flowery Branch and Orangeburg operations during 2003.

• During 2002, the Company announced the closure and relocation of its piston ring operations in Sunderland, United Kingdom to other existing European facilities with available capacity. Severance and exit costs related to this closure approximated $8 million. At December 31, 2003, the Company had remaining reserves of approximately $5 million related to this activity.

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• During 2001, the Company’s German engine bearing operations announced restructuring programs to transfer certain low volume production with high labor content to low cost geographies, specifically Poland. Related severance costs of approximately $4 million, $2 million and $3 million were incurred in connection with this program during 2003, 2002 and 2001, respectively. At December 31, 2003, the Company had remaining reserves of approximately $7 million related to these activities.

Consolidation of administrative functions and standardization of manufacturing processes

• During 2003, the Company incurred severance charges of approximately $4 million to eliminate redundancies across its operations in France related to changes in administrative and manufacturing processes. At December 31, 2003 the Company had remaining reserves of approximately $1 million related to these activities.

• During 2002, approximately $5 million of severance costs were recorded as restructuring expense related to the Company’s piston manufacturing operations located in Nuremburg, Germany. These charges related to headcount reductions associated with administrative function and manufacturing process changes. At December 31, 2003, the Company had remaining reserves of approximately $4 million related to this activity.

• During 2002, management announced a program to streamline and automate administrative functions and manufacturing processes at Company’s piston manufacturing operation in Gorzyce, Poland. Approximately $2 million and $4 million of severance charges were recorded related to this program in 2003 and 2002, respectively.

• During 2001, the Company launched a program to consolidate administrative functions and change manufacturing processes across its German piston ring operations. Severance costs approximating $4 million were recorded for related workforce reductions.

Sealing Systems and System Protection

Total restructuring charges, net of reversals, were $4.0 million, $3.7 million, and $2.9 million in 2003, 2002, and 2001, respectively. These charges relate to the following activities:

Closure of facilities and relocation of production – In 2002, the Company announced the planned closure and began relocation of its seal operations in Cardiff, Wales to other existing European manufacturing facilities with available capacity or with lower cost labor. This relocation resulted in severance and exit charges of approximately $4 million and $2 million in 2003 and 2002, respectively. The closure of Cardiff was completed during 2003.

Consolidation of administrative functions and standardization of manufacturing – Related severance and exit charges of approximately $1 million, $2 million, and $3 million were incurred in 2003, 2002, and 2001, respectively. At December 31, 2003, the Company had remaining reserves related to this program of approximately $2 million.

Friction

Total restructuring charges, net of reversals, were $(8.4) million, $6.1 million, and $4.1 million in 2003, 2002, and 2001, respectively. These charges primarily relate to the following activities:

Closure of facilities and relocation of production

• During 2003, the Company completed its previously announced programs to consolidate its European and North American friction operations. Accordingly, the Company reevaluated its related restructuring reserves and determined that its initial cost estimates exceeded actual costs and reversed approximately $9 million in previously recorded restructuring reserves.

• During 2002, the Company relocated announced the planned closure and began relocation of its aftermarket

40

half-block operations in Marienheide, Germany to other existing European manufacturing facilities with available capacity. Related severance and exit charges of approximately $4 million were recorded and at December 31, 2002, the Company had remaining reserves of approximately $1 million related to this activity.

• In 2001, the Company closed its operations in Pont L’Eveque, France, and relocated production to other European manufacturing facilities with available capacity or with lower labor cost. Related severance and exit costs of approximately $1 million and $3 million were recorded in 2003 and 2001, respectively. Remaining reserves related to this program are approximately $1 million as of December 31, 2003.

Consolidation of administrative functions and standardization of manufacturing – Related severance charges of approximately $1 million, $1 million, and $1 million were incurred in 2003, 2002, and 2001, respectively.

Aftermarket

Total restructuring charges, net of reversals, were $13.4 million, $(15.0) million, and $8.8 million in 2003, 2002, and 2001, respectively. These charges relate to the following activities:

Closure of facilities and relocation of production (aftermarket distribution rationalization)

• In 2003, the Company began relocation of its Ignition operations from its manufacturing facility located in Aubange, Belgium to Upton, England. Related severance and exit costs approximated $10 million. At December 31, 2003, the Company had remaining reserves of approximately $3 million related to these activities.

• In 2002, the Company announced and began consolidation of certain distribution operations at its Aftermarket distribution facility located in France into its central European distribution facility in Belgium. Severance and related exit costs of approximately $3 million and $2 million were recorded during 2003 and 2002, respectively. At December 31, 2003, the Company had remaining reserves of approximately $1 million related to these activities.

• The Company completed execution of its North American distribution optimization activities during 2003. In connection with the completion of this program the Company reversed approximately $2 million and $19 million of previously recorded severance and exit costs during 2003 and 2002, respectively. These reversals were the result of actual costs incurred being less than the amounts estimated at the time of program announcement.

Consolidation of administrative functions and standardization of manufacturing – Related severance charges of approximately $7 million were incurred in 2001. At December 31, 2003, the Company had remaining reserves related to previously incurred expenses of approximately $3 million.

Other

Other restructuring charges totaled $(1.2) million, $4.1 million, and $11.3 million in 2003, 2002, and 2001, respectively.

Closure of facilities and relocation of production

• During 2002, The Company announced its intention to exit its OE lighting operations. Related severance and exit costs were recorded for approximately $2 million and $5 million during 2003 and 2002, respectively.

• During 2001, severance and exit costs of approximately $3 million were recorded pursuant to the closure of the Company’s technical center located in Cawston, England.

Consolidation of administrative functions and standardization of manufacturing

• The Company recorded corporate reversals approximating $3 million during 2003. This reversal relates to previously recorded severance costs for consolidation of corporate administrative activities and resulted from initial estimates exceeding actual costs for completed programs.

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• During 2001 severance costs of approximately $5 million were recorded in connection with the Company’s efforts to consolidate corporate administrative functions.

Adjustment of Assets Held for Sale and Other Long-Lived Assets to Fair Value

Definite-Lived Long-Lived Assets

During 2003 and 2002, the Company recorded impairment charges of $35.5 million and $62.9 million, respectively, to adjust long-lived tangible assets to their estimated fair values in accordance with SFAS No. 144. The charges by reporting segment are as follows:

	Year Ended December 31
	2003		2002
	(Millions of Dollars)
Powertrain	$	26.4	$	52.3
Sealing Systems and System Protection		0.3		5.5
Friction		3.9		—
Aftermarket		4.9		—
Other		—		5.1
Total	$	35.5	$	62.9

The total charge of $35.5 million during 2003 includes $19.9 million to write down property, plant and equipment in connection with the announcement of a closure of a Powertrain piston manufacturing facility in Europe. In addition, the Company recorded $6.5 million and $9.1 million of impairment charges on property, plant and equipment located in various manufacturing facilities in the United States and various manufacturing facilities in Europe, respectively, to be held and used in accordance with SFAS No. 144, due to an other than temporary decline in sales volumes and profitability at those facilities. The fair value of property, plant and equipment was based upon estimated discounted future cash flows and estimates of salvage value. The impairment charges represent the difference between the estimated fair values and the carrying value of the subject assets.

The total charge of $62.9 million during 2002 includes $46.7 million to write-down property, plant and equipment at five facilities that the Company has closed. The estimated fair values were determined based upon discounted future cash flows and estimates of salvage value. An additional charge of $6.6 million relates to the write down of property, plant and equipment at a European camshaft foundry related to an other than temporary decline in sales volumes at that facility. The estimated fair value of this equipment was determined based upon discounted future cash flows. The remaining charge primarily relates to the impairment of assets that the Company intends to divest. The value of these assets was estimated based upon the future discounted cash flows should the Company divest of these assets on an individual, open market basis.

Goodwill and Other Indefinite-Lived Intangible Assets

Effective January 1, 2002, the Company adopted SFAS No. 142, resulting in the discontinuance of amortization of goodwill and indefinite-lived intangible assets. The adoption of this standard also required the reclassification of various intangible asset classes according to the measurability of their useful lives. Upon the adoption of SFAS No. 142, the Company recorded a non-cash charge of $1,464.5 million to reduce the carrying value of its goodwill and indefinite-lived intangible assets to their estimated fair value as required by SFAS No. 142. The tax impact related to the charge was $46.6 million and was limited to the tax benefit derived from the impairment of certain intangible assets other than goodwill. The charge is presented as a cumulative effect of change in accounting principle in the consolidated statement of operations for the year ended December 31, 2002.

As of October 1, 2003, the Company completed its annual impairment analysis as required by SFAS No. 142 and recorded an impairment to goodwill in one Powertrain operating unit of $70.5 million to adjust the carrying value to its estimated fair value. This impairment charge is primarily attributable to a decrease in the operating unit’s

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estimated fair value based upon management’s expectation of future financial performance. The estimated fair value of intangible assets was determined based upon multiple valuation methodologies, including guideline transaction multiples, multiples of current earnings, and discounted future cash flows discounted at rates commensurate with the risk involved.

The majority of these charges relate to the impairment of goodwill associated with the acquisitions of T&N plc. and Cooper Automotive. A summary of the impairment charges for goodwill and other intangible assets by reporting segment pursuant to the provisions of SFAS No. 142 is as follows:

	Year Ended December 31
	2003		2002
	(Millions of Dollars)
Powertrain	$	70.5	$	453.8
Sealing Systems and System Protection		—		—
Friction		—		381.9
Aftermarket		—		155.3
Other, including Corporate		—		473.5
Total	$	70.5	$	1,464.5

Chapter 11 and Administration Related Reorganization Expenses

In connection with the Restructuring Proceedings, the Company recognized $97 million, $107 million, and $57 million of Chapter 11 and Administration related reorganization expenses in 2003, 2002, and 2001, respectively. These expenses consisted of legal, financial and advisory fees, including the costs of the U.K. Administrators, critical employee retention costs, and other directly related internal costs. These expenses fluctuate largely based upon the necessity for professional services by third-party advisors in connection with the Restructuring Proceedings.

Income Taxes

For 2003, the Company recorded income tax expense of $52.5 million on a loss from continuing operations before income taxes of $133.0 million, compared to income tax expense of $77.9 million on a loss from continuing operations before income taxes and cumulative effect of a change in accounting principle of $123.0 million in 2002. Income tax expense for 2003 results primarily from taxable income generated in certain international subsidiaries and an increase in deferred tax asset valuation allowances in the U.K. and France, partially offset by a United States federal income tax benefit. This U.S. income tax benefit is primarily related to the favorable outcome of refund claims filed in prior years. Income tax expense for 2002 results primarily from taxable income generated in certain international subsidiaries and an increase in deferred tax asset valuation allowances on deferred income tax assets in the U.S. and U.K.

At December 31, 2003, the Company had deferred tax assets of $769.4 million, net of a valuation allowance of $892.3 million, and deferred tax liabilities of $842.5 million. At December 31, 2002, the Company had deferred tax assets of $755.2 million, net of a valuation allowance of $722.5 million, and deferred tax liabilities of $799.0 million. The deferred tax asset valuation allowances increased by $169.8 million in 2003 due primarily to cumulative losses in the U.K. resulting in the recognition of a full valuation allowance against the net U.K. deferred tax asset and the impact of foreign currency.

During 2003, the Company reversed a valuation allowance related to a deferred tax asset associated with a net operating loss. Approximately $11 million was realized as a result of an arrangement that was entered into with a previous owner of certain subsidiaries which allowed the Company to carry-back a net operating loss and realize a portion of the associated deferred tax asset. This amount was recorded as a reduction to the 2003 income tax expense.

The Company evaluates its deferred taxes and related valuation allowances quarterly. If the Company believes that changes in current or future taxable income (loss) will impact the basis for recognizing the benefit of deferred tax assets or related valuation allowances, then adjustments will be provided accordingly.

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Liquidity and Capital Resources

Cash Flow Provided by Operating Activities

Cash flow provided by operating activities was $319.0 million in 2003. Cash flow was impacted positively by the Restructuring Proceedings as a result of staying any proceedings or payments for asbestos liabilities at the Petition Date, and not accruing or paying the contractual interest on certain pre-petition debt subsequent to the Petition Date. The primary uses of cash during 2003 include the payment of $88.1 million of Chapter 11 and Administration related expenses and $76.7 million of restructuring payments. The impact of changes in working capital were positive to cash flow, as decreased accounts receivable of $50.1 million and decreased inventories of $18.5 million were only partially offset by decreased accounts payable of $27.6 million.

Cash flow provided by operating activities was $256.5 million in 2002. Cash flow was impacted positively by the Restructuring Proceedings as a result of staying any proceedings or payments for asbestos liabilities at the Petition Date, and not accruing or paying the contractual interest on certain pre-petition debt subsequent to the Petition Date. The primary uses of cash during 2002 include the payment of $104.0 million of Chapter 11 and Administration related expenses and $53.1 million of restructuring and rationalization payments. The impact of changes in working capital were negligible, as the decrease in accounts receivable of $44.1 million and increase in accounts payable of $6.4 million, both positive to cash flow, were mostly offset by an increase in inventories of $46.8 million.

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 December 31, 2003 and 2002, such cash balances were $261 million and $153 million, respectively.

Cash Flow Used by Investing Activities

Cash flow used by investing activities was $277.3 million in 2003. Capital expenditures amounted to $300.9 million, offset by proceeds from the divestiture of various businesses.

Cash flow used by investing activities was $304.5 million in 2002. Capital expenditures amounted to $339.1 million, offset by proceeds from the divestiture of various businesses.

The Company maintains investments in 23 non-consolidated affiliates, which are located in Turkey, China, Korea, India, Japan, the United States and Mexico. The Company’s direct ownership in such affiliates ranges from approximately 5% to 50%. The aggregate investment in these affiliates approximates $131 million and $130 million as of December 31, 2003 and 2002, respectively.

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.

Pursuant to its Turkish joint venture arrangement the Company’s joint venture partner holds an option to put its shares to the Company at the higher of the current fair value or at a guaranteed minimum amount. The guaranteed minimum amount represents a contingent guarantee of the initial investment of its investment partner. The total amount of the contingent guarantee as of December 31, 2003 approximates $50 million and is substantially less than the current fair value of the guarantees’ interest in the affiliate. This put option, if exercised at the current fair value, could have a material effect on the Company’s liquidity position.

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 contingencies on the future liquidity position of the Company.

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Cash Flow Provided from Financing Activities

Cash flow used by financing activities was $14.4 million in 2003, resulting from net payments on the Company’s available credit facilities.

Cash flow provided from financing activities was $75.4 million in 2002, resulting from net borrowings on the Company’s available credit facilities.

In connection with the Restructuring Proceedings, the Company entered into a $675 million debtor-in-possession (“DIP”) credit facility to supplement liquidity and fund operations during the restructuring proceedings. In August 2003, the DIP credit facility was amended to reduce the commitment to $600 million, change the expiration date to February 2005, and reduce the interest rate to either the alternate base rate (“ABR”) plus 2 percentage points or a formula based on the London Inter-Bank Offered Rate (“LIBOR”) plus 3 percentage points. The ABR is the greatest of either the bank’s prime rate or the base CD rate plus 1 percentage point or the federal funds rate plus ½ percentage point. The $600 million commitment is mandatorily reduced by a portion of proceeds received from future asset or business divestitures.

The Company’s available borrowings under the DIP credit facility are determined by the underlying collateral at any point in time, consisting of its domestic inventories, domestic accounts receivable, and domestic property, plant, and equipment. The DIP lenders received permission from the lenders of the Senior Credit Agreements to have priority over their collateral interest. At December 31, 2003, the Company had $320.0 million of borrowings outstanding and has issued $17.9 million in letters of credit under this facility. Based upon the collateral securing the DIP credit facility, the Company had $236.6 million available for borrowings at December 31, 2003.

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

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

The Company has the following contractual debt obligations and commercial commitments outstanding at December 31, 2003:

Maturities of Contractual Obligations	Debt		Operating Leases
	(Millions of Dollars)
Less than 1 year	$	14.8	$	29.7
1-3 years		331.2		42.9
4-5 years		—		16.5
Thereafter		—		11.7
Liabilities subject to compromise		4,231.7		—
Total(1)	$	4,577.7	$	100.8

Expiration of Other Commercial Commitments	Letters of Credit
	(Millions of Dollars)
Less than 1 year	$	17.9
Liabilities subject to compromise		58.2
Total	$	76.1

⁽¹⁾ The amounts above exclude the Company’s minimum statutory or negotiated pension plan funding requirements, which are $215.3 million over the next two years, including $69.5 million in 2004. The minimum funding requirements after 2004 are dependent upon several factors. We also have payments due under other post employment benefit plans. These other plans are funded as benefits are paid, and are not required to be funded in advance.

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The Company’s ability to obtain cash adequate to fund its needs depends generally on the results of its operations, restructuring initiatives, the Bankruptcy Court’s approval of management’s plans and the availability of financing. Management believes that cash on hand, cash flow from operations, and available borrowings under its DIP credit facility, will be sufficient to fund capital expenditures and meet its post-petition operating obligations for the next fiscal year. In the longer term, the Company believes that the benefits from its announced restructuring programs and favorable resolution of its asbestos liability through Chapter 11 and Administration will provide adequate long-term cash flows. However, there can be no assurance that such initiatives are achievable in this regard or that the terms available for any future financing, if required, would be available or favorable to the Company. Also, resolutions of certain obligations, particularly asbestos obligations, are impacted by factors outside the Company’s control. Given these uncertainties, the Company’s auditors have raised substantial doubt regarding the Company’s ability to continue as a going concern.

At December 31, 2003 the Company was in compliance with all debt covenants under its existing DIP credit facility. Based on current forecasts, the Company expects to be in compliance through the expiration of the facility. Changes in the business environment, market factors, macroeconomic factors, 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.

Asbestos Liability and Legal Proceedings

Note 20 to the consolidated financial statements, entitled “Litigation and Environmental Matters”, on pages 86 through 91 hereof, are incorporated herein by reference.

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

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

Foreign Currency Risk

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

As currency exchange rates change, translation of the statements of operations of the Company’s international businesses into United States dollars affects year-over-year comparability of operating results. The Company does not generally hedge operating translation risks because cash flows from international operations are generally reinvested locally. Changes in foreign currency exchange rates are generally reported as a component of stockholders’ equity for the Company’s foreign subsidiaries reporting in local currencies and as a component of income for its foreign subsidiaries using the U.S. dollar as the functional currency. The Company’s other comprehensive loss was decreased by $355.0 million and $259.2 million in 2003 and 2002, respectively, due to cumulative translation adjustments resulting primarily from changes in the U.S. Dollar to the Euro and British Pound.

As of December 31, 2003 and 2002, the Company’s net current assets (defined as current assets less current liabilities) subject to foreign currency translation risk were $933.2 million and $709.0 million, respectively. The potential decrease in net current assets from a hypothetical 10% adverse change in quoted foreign currency exchange rates would be $93.3 million and $70.9 million, respectively. The sensitivity analysis presented assumes a parallel shift in foreign currency exchange rates. Exchange rates rarely move in the same direction. This assumption may overstate the impact of changing exchange rates on individual assets and liabilities denominated in a foreign currency.

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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 had two contracts outstanding with a combined notional value of $10.4 million at December 31, 2003, and two contracts outstanding with a combined notional value of $9.7 million at December 31, 2002.

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. The Company’s contractual interest not accrued or paid in 2003, 2002 and 2001 was $162.8 million, $164.4 million and $41.6 million, respectively. The Company continues to accrue and pay contractual interest on the Senior Credit Agreement in the month incurred, totaling $71.4 million, $81.8 million and $28.2 million in 2003, 2002 and 2001, respectively.

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 DIP credit facility expires in February 2005, and the interest rate is either the alternate base rate (“ABR”) plus 2 percentage points or a formula based on the London Inter-Bank Offered Rate (“LIBOR”) plus 3 percentage points. The ABR is the greatest of either the bank’s prime rate or the base CD rate plus 1 percentage point or the federal funds rate plus ½ percentage point. Accordingly, the Company’s variable interest expense is sensitive to changes in the general level of global market interest rates as related to the DIP facility. The amount outstanding from the DIP facility as of December 31, 2003 was approximately $338 million.

Accordingly, management believes that interest rate risk to the Company is limited 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. The primary purpose of the Company’s commodity price hedging activities is to manage the volatility associated with these forecasted purchases. The Company monitors its commodity price risk exposures 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 two contracts outstanding with a combined notional value of $9.2 million at December 31, 2003, and two contracts outstanding with a combined notional value of $2.9 million at December 31, 2002.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended December 31
	2003			2002			2001
	(Millions of Dollars, Except Per Share Amounts)
Net sales	$	5,546.0		$	5,184.3		$	5,093.0
Cost of products sold		4,459.1			4,162.9			4,037.6
Gross margin		1,086.9			1,021.4			1,055.4
Selling, general and administrative expenses		872.1			816.7			808.7
Amortization of intangible assets		16.9			14.1			109.5
Restructuring charges, net		34.2			40.5			37.4
Adjustment of assets held for sale and other long-lived assets to fair value		106.0			62.9			328.1
Asbestos charge		38.9			—			—
Interest expense, net		98.2			123.4			274.8
Chapter 11 and Administration related reorganization expenses		97.1			107.4			57.3
Gain on early retirement of debt		—			—			(72.2	)
Equity earnings of unconsolidated affiliates		(27.3	)		(19.8	)		(14.5	)
Other (income) expense, net		(16.2	)		(0.8	)		34.5
Loss from continuing operations before income taxes and cumulative effect of change in accounting principle		(133.0	)		(123.0	)		(508.2	)
Income tax expense		52.5			77.9			229.6
Loss from continuing operations before cumulative effect of change in accounting principle		(185.5	)		(200.9	)		(737.8	)
Loss from discontinued operations, net of income taxes		(4.0	)		(10.1	)		(263.7	)
Cumulative effect of change in accounting principle, net of income tax benefit		—			1,417.9			—
Net loss		(189.5	)		(1,628.9	)		(1,001.5	)
Preferred dividends, net of related tax benefit		—			—			1.9
Net Loss Available for Common Shareholders	$	(189.5	)	$	(1,628.9	)	$	(1,003.4	)
Basic and Diluted Loss Per Common Share:
Loss from continuing operations before cumulative effect of change in accounting principle	$	(2.13	)	$	(2.42	)	$	(9.78	)
Loss from discontinued operations, net of income taxes		(0.04	)		(0.12	)		(3.49	)
Cumulative effect of change in accounting principle, net of applicable income tax benefit		—			17.08			—
Net Loss Available for Common Shareholders	$	(2.17	)	$	(19.62	)	$	(13.27	)

See accompanying notes to consolidated financial statements.

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CONSOLIDATED BALANCE SHEETS

	December 31
	2003			2002
	(Millions of Dollars)
ASSETS
Cash and equivalents	$	472.4		$	395.1
Accounts receivable, net		976.5			946.6
Inventories, net		834.4			800.1
Prepaid expenses		257.5			217.3
Total Current Assets		2,540.8			2,359.1
Property, plant and equipment, net		2,404.8			2,273.0
Goodwill and indefinite-lived intangible assets		1,517.1			1,565.2
Definite-lived intangible assets, net		348.0			351.6
Asbestos-related insurance recoverable		806.1			780.6
Prepaid pension costs		309.2			361.5
Other noncurrent assets		190.7			222.3
Total Assets	$	8,116.7		$	7,913.3
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Short-term debt, including current portion of long-term debt	$	14.8		$	346.1
Accounts payable		332.3			318.9
Accrued liabilities		513.3			525.4
Other current liabilities		158.4			214.0
Total Current Liabilities		1,018.8			1,404.4
Liabilities subject to compromise		6,087.8			6,053.2
Long-term debt		331.2			14.3
Post employment benefits		1,716.6			1,541.2
Long-term portion of deferred income taxes		70.4			52.4
Other accrued liabilities		214.4			205.7
Minority interest in consolidated subsidiaries		54.4			45.7
Shareholders’ Deficit:
Series C ESOP preferred stock		28.0			28.0
Common stock		435.6			435.6
Additional paid-in capital		2,060.5			2,060.5
Accumulated deficit		(2,933.4	)		(2,743.9	)
Accumulated other comprehensive loss		(967.6	)		(1,183.8	)
Total Shareholders’ Deficit		(1,376.9	)		(1,403.6	)
Total Liabilities and Shareholders’ Deficit	$	8,116.7		$	7,913.3

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31
	2003			2002			2001
	(Millions of Dollars)
Cash Provided From (Used By) Operating Activities
Net loss	$	(189.5	)	$	(1,628.9	)	$	(1,001.5	)
Adjustments to reconcile net loss to net cash provided from (used by) operating activities
Cumulative effect of change in accounting principle		—			1,464.5			—
Depreciation and amortization		307.1			277.1			373.7
Chapter 11 and Administration related reorganization expenses		97.1			107.4			57.3
Payments for Chapter 11 and Administration related reorganization expenses		(88.1	)		(104.0	)		(46.6	)
Adjustment of assets held for sale and other long-lived assets to fair value		106.0			70.2			545.1
Restructuring charges, net		36.0			43.3			38.0
Payments against restructuring reserves		(76.7	)		(53.1	)		(62.0	)
Asbestos charge		38.9			—			—
Gain on early retirement of debt		—			—			(72.2	)
(Gain) loss on sale of businesses		7.9			(1.1	)		36.3
Change in post employment benefits, including pensions		84.6			19.7			(19.5	)
Change in deferred taxes		15.5			(31.5	)		219.2
Decrease in accounts receivable		50.1			44.1			116.4
(Increase) decrease in inventories		18.5			(46.8	)		40.2
Increase (decrease) in accounts payable		(27.6	)		6.4			82.6
Changes in other assets and liabilities		(60.8	)		89.2			(55.3	)
Payments against asbestos liability, net of insurance receipts		—			—			(215.9	)
Net Cash Provided From Operating Activities		319.0			256.5			35.8
Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment		(300.9	)		(339.1	)		(313.8	)
Net proceeds from sale of property, plant and equipment		—			—			19.0
Business acquisitions, net of cash acquired		—			—			(18.8	)
Net proceeds from sales of businesses		23.6			34.6			242.8
Net Cash Used By Investing Activities		(277.3	)		(304.5	)		(70.8	)
Cash Provided From (Used By) Financing Activities
Increase (decrease) in short-term debt		(16.6	)		6.5			(64.1	)
Proceeds from borrowings on DIP credit facility		125.5			75.0			250.0
Principal payments on DIP credit facility		(120.2	)		(10.3	)		—
Proceeds from borrowings of long-term debt		1.2			6.6			667.2
Principal payments on long-term debt		(4.3	)		(2.4	)		(171.8	)
Fees paid for debt agreements		—			—			(38.0	)
Repurchase of accounts receivable under securitization		—			—			(348.1	)
Other		—			—			(26.2	)
Net Cash (Used By) Provided From Financing Activities		(14.4	)		75.4			269.0
Effect of foreign currency exchange rate fluctuations on cash		50.0			20.8			5.7
Increase in cash and equivalents		77.3			48.2			239.7
Cash and equivalents at beginning of year		395.1			346.9			107.2
Cash and equivalents at end of year	$	472.4		$	395.1		$	346.9

See accompanying notes to consolidated financial statements.

50

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

	Series C ESOP Preferred Stock			Common Stock		Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
	(Millions of Dollars)
Balance at January 1, 2001	$	38.1		$	352.5	$	1,778.6		$	(113.5	)	$	(505.5	)	$	1,550.2
Net loss										(1,001.5	)					(1,001.5	)
Currency translation													(129.4	)		(129.4	)
Minimum pension liability													(116.9	)		(116.9	)
Other													1.3			1.3
Total Comprehensive Loss																(1,246.5	)
Issuance of stock, net					59.4		67.9									127.3
Retirement of Series C ESOP Preferred stock		(10.1	)													(10.1	)
Preferred dividends							(1.9	)								(1.9	)
Balance at December 31, 2001		28.0			411.9		1,844.6			(1,115.0	)		(750.5	)		419.0
Net loss										(1,628.9	)					(1,628.9	)
Currency translation													259.2			259.2
Minimum pension liability													(692.8	)		(692.8	)
Other													0.3			0.3
Total Comprehensive Loss																(2,062.2	)
Issuance of stock, net					23.7		215.9									239.6
Balance at December 31, 2002		28.0			435.6		2,060.5			(2,743.9	)		(1,183.8	)		(1,403.6	)
Net loss										(189.5	)					(189.5	)
Currency translation													355.0			355.0
Minimum pension liability													(138.0	)		(138.0	)
Other													(0.8	)		(0.8	)
Total Comprehensive Income																26.7
Balance at December 31, 2003	$	28.0		$	435.6	$	2,060.5		$	(2,933.4	)	$	(967.6	)	$	(1,376.9	)

See accompanying notes to consolidated financial statements.

51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Voluntary Reorganization Under Chapter 11 and Administration

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

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

Consequences of the Restructuring Proceedings

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

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

On March 4, 2004, the Company filed an amended plan of reorganization and related disclosure statement with the Bankruptcy Court. This amended plan of reorganization was jointly proposed by the Company along with 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 (collectively referred to as the “Co-Proponents”). The joint amended plan of reorganization is consistent with the principal terms of the plan originally filed with the Bankruptcy Court on March 6, 2003.

The amended joint plan of reorganization provides that asbestos personal injury claimants, both present and future, will be permanently channeled to a trust or series of trusts established pursuant to Section 524(g) of the Bankruptcy Code, thereby protecting Federal-Mogul and its affiliates in the Chapter 11 Cases from existing and future asbestos liability. Although technical issues remain to be resolved, the amended joint plan provides that all currently outstanding stock of Federal-Mogul will be cancelled, and 50.1% of newly authorized and issued common stock of reorganized Federal-Mogul will be distributed to the asbestos trusts or trusts for the benefit of existing and future

52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

asbestos claimants, and 49.9% of the newly authorized and issued common stock will be distributed pro rata to the noteholders. Trade creditors of the Company will receive cash distributions in an amount that has yet to be determined. If the classes of holders of common and preferred stock of Federal-Mogul vote in favor of the amended joint plan, the holders of currently outstanding common and preferred stock of Federal-Mogul will receive warrants in reorganized Federal-Mogul.

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

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

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

Chapter 11 Financing

In connection with the Restructuring Proceedings, the Company entered into a $675 million debtor-in-possession (“DIP”) credit facility to supplement liquidity and fund operations during the restructuring proceedings. In August 2003, the DIP credit facility was amended to reduce the commitment to $600 million, change the expiration date to February 2005, and reduce the interest rate to either the alternate base rate (“ABR”) plus 2 percentage points or a formula based on the London Inter-Bank Offered Rate (“LIBOR”) plus 3 percentage points. The ABR is the greatest of either the bank’s prime rate or the base CD rate plus 1 percentage point or the federal funds rate plus ½ percentage point. The $600 million commitment is mandatorily reduced by a portion of proceeds received from future asset or business divestitures.

The Company’s available borrowings under the DIP credit facility are determined by the underlying collateral at any point in time, consisting of its domestic inventories, domestic accounts receivable, and domestic property, plant, and equipment. The DIP lenders received permission from the lenders of the Senior Credit Agreements to have priority over their collateral interest. Amounts available and outstanding on the DIP credit facility are further discussed in Note 12 to the consolidated financial statements.

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 December 31, 2003 and 2002, such cash balances were $261 million and $153 million, respectively.

Financial Statement Presentation

The accompanying consolidated financial statements have been prepared in accordance with AICPA Statement of Position 90-7 (“SOP 90-7”), “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” and on a going concern basis, which contemplates continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Restructuring Proceedings, such realization of assets and liquidation of liabilities, without substantial adjustments and/or changes of ownership, is highly

53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

uncertain. Given this uncertainty, there is substantial doubt about the ability of the Company to continue as a going concern. While operating as debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code and Administration under the Act, and subject to approval of the Bankruptcy Court, Administrators or the High Court or otherwise as permitted in the ordinary course of business, the Debtors, or some of them, may sell or otherwise dispose of assets and liquidate or settle liabilities for some amounts other than those reflected in the consolidated financial statements. Further, a plan of reorganization or scheme of arrangement could materially change the amounts and classifications in the historical consolidated financial statements.

Virtually all of the Company’s pre-petition debt is in default. At December 31, 2003, the Debtors’ pre-petition debt is classified under the caption “Liabilities subject to compromise”. This includes debt outstanding of $1,933.3 million under the pre-petition Senior Credit Agreements and $2,118.1 million of other outstanding debt, primarily notes payable at various unsecured rates, less capitalized debt issuance fees of $30.7 million. The carrying value of the pre-petition debt will be adjusted once it has become an allowed claim by the Bankruptcy Court to the extent the related carrying value differs from the amount of the allowed claim. Such adjustment may be material to the consolidated financial statements.

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

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

Liabilities subject to compromise include the following:

	December 31
	2003		2002
	(Millions of Dollars)
Debt	$	4,020.7	$	3,982.7
Asbestos liabilities		1,568.4		1,565.1
Company-obligated mandatorily redeemable securities		211.0		211.0
Accounts payable		201.8		211.9
Interest payable		43.9		43.9
Environmental liabilities		23.8		22.9
Other accrued liabilities		18.2		15.7
Subtotal		6,087.8		6,053.2
Intercompany payables to affiliates		3,204.9		3,092.7
	$	9,292.7	$	9,145.9

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.

54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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:

	Year Ended December 31
	2003		2002		2001
	(Millions of Dollars)
Professional fees directly related to the filing	$	70.4	$	73.7	$	44.8
Critical employee retention costs		8.2		19.2		6.7
Other direct costs		18.5		14.5		5.8
Total	$	97.1	$	107.4	$	57.3

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

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

• Approximately 2,100 claims, totaling approximately $141.5 billion, which the Company believes should be disallowed by the Bankruptcy Court primarily because these claims appear to be duplicate or unsubstantiated claims.

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

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

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

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

The Company has not completed its evaluation of the approximate remaining 2,200 claims, totaling approximately $1.3 billion, alleging rights to payment for financing, environmental, trade accounts payable and other matters. The Company continues to investigate these unresolved proofs of claim, and intends to file objections to the claims that are inconsistent with its books and records. To date, the Debtors have filed objections to more than 5,100 proofs of claim, and have obtained stipulations or orders involving more than 1,000 claims, which either (i) reduce the filed claims to an amount that is consistent with the Debtors books or records, or (ii) completely disallow the claims.

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

55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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.

Debtors’ Condensed Consolidated Statements of Operations

	Year Ended December 31
	2003			2002			2001
	(Millions of Dollars)
Net sales	$	3,381.2		$	3,442.1		$	3,395.1
Cost of products sold		2,782.4			2,841.1			2,788.9
Gross margin		598.8			601.0			606.2
Selling, general and administrative expenses		565.0			517.9			534.5
Amortization of intangible assets		13.6			11.5			90.3
Restructuring charges, net		3.7			26.4			18.2
Adjustment of assets held for sale and other long-lived assets to fair value		62.3			66.8			229.9
Asbestos charge		38.9			—			—
Interest expense, net		94.8			124.9			287.2
Chapter 11 and Administration related reorganization expenses		97.1			107.4			57.3
Intercompany interest income from non-filers		(332.2	)		(310.0	)		(154.1	)
Gain on early retirement of debt		—			—			(72.2	)
Other (income) expense, net		(27.6	)		(34.9	)		41.6
Earnings (loss) from continuing operations before income taxes, equity loss of non-Debtor subsidiaries, and cumulative effect of change in accounting principle		83.2			91.0			(426.5	)
Income tax expense		22.8			51.1			195.1
Earnings (loss) from continuing operations before equity loss of non-Debtor subsidiaries and cumulative effect of change in accounting principle		60.4			39.9			(621.6	)
Equity loss from continuing operations of non-Debtor subsidiaries before cumulative effect of change in accounting principle		(245.9	)		(240.8	)		(116.2	)
Loss from continuing operations before cumulative effect of change in accounting principle		(185.5	)		(200.9	)		(737.8	)
(Loss) income from discontinued operations, net of income taxes, Debtors		(4.0	)		7.5			(172.7	)
Loss from discontinued operations, net of income taxes, non-Debtors		—			(17.6	)		(91.0	)
Cumulative effect of change in accounting principle, Debtors, net of applicable income tax benefit		—			1,100.7			—
Cumulative effect of change in accounting principle, non-Debtors, net of applicable income tax benefit		—			317.2			—
Net loss	$	(189.5	)	$	(1,628.9	)	$	(1,001.5	)

57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Debtors’ Condensed Consolidated Balance Sheets

	December 31
	2003			2002
	(Millions of Dollars)
ASSETS
Cash and equivalents	$	281.5		$	189.6
Accounts receivable, net		558.4			573.1
Accounts receivable, non-Debtors		457.7			345.4
Inventories, net		443.9			472.6
Prepaid expenses		116.2			116.7
Total Current Assets		1,857.7			1,697.4
Property, plant and equipment, net		1,127.7			1,171.5
Goodwill and indefinite-lived intangible assets		1,341.1			1,376.9
Definite-lived intangible assets, net		293.5			300.6
Asbestos-related insurance recoverable		806.1			780.6
Loans receivable from and investments in non-Debtors		4,619.1			4,337.2
Other noncurrent assets		439.5			519.2
Total Assets	$	10,484.7		$	10,183.4
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Short-term debt, including current portion of long-term debt	$	0.2		$	314.7
Accounts payable and accrued compensation		237.0			268.9
Accounts payable, non-Debtors		174.9			129.6
Other accrued liabilities		254.1			281.0
Total Current Liabilities		666.2			994.2
Long-term debt		320.0			—
Post employment benefits		1,458.8			1,336.9
Other accrued liabilities		123.9			110.0
Liabilities subject to compromise		9,292.7			9,145.9
Shareholders’ deficit		(1,376.9	)		(1,403.6	)
Total Liabilities and Shareholders’ Deficit	$	10,484.7		$	10,183.4

58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Debtors’ Condensed Consolidated Statements of Cash Flows

	Year Ended December 31
	2003			2002			2001
	(Millions of Dollars)
Net Cash Provided From (Used By) Operating Activities	$	154.0		$	76.4		$	(335.8	)
Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment		(109.8	)		(153.4	)		(149.3	)
Net proceeds from sales of businesses		20.7			34.6			241.9
Net Cash (Used By) Provided From Investing Activities		(89.1	)		(118.8	)		92.6
Cash Provided From (Used By) Financing Activities
Proceeds from issuance of long-term debt		—			—			667.2
Principal payments on long-term debt		—			—			(171.8	)
Proceeds from borrowings on DIP credit facility		125.5			75.0			250.0
Principal payments on DIP credit facility		(120.2	)		(10.3	)		—
Decrease in short-term debt		—			—			(64.1	)
Fees paid for debt issuance and other securities		—			—			(38.0	)
Repurchase of accounts receivable under securitization		—			—			(348.1	)
Net Cash Provided From Financing Activities		5.3			64.7			295.2
Effect of foreign currency exchange rate fluctuations on cash and equivalents		21.7			20.8			5.7
Increase in cash and equivalents		91.9			43.1			57.7
Cash and equivalents at beginning of year		189.6			146.5			88.8
Cash and Equivalents at End of Year	$	281.5		$	189.6		$	146.5

2. Summary of Significant Accounting Policies

Principles of Consolidation: The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries and other controlled entities. Intercompany accounts and transactions have been eliminated in consolidation. Investments in affiliates of not more than 20% are accounted for using the cost method, while investments greater than 20% and not more than 50% are accounted for using the equity method.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.

Cash and Equivalents: The Company considers all highly liquid investments with maturities of 90 days or less from the date of purchase to be cash equivalents.

Trade Accounts Receivable and Allowance for Doubtful Accounts: Trade accounts receivable are stated at historical value, which approximates fair value. The Company does not generally require collateral for its trade accounts receivable.

Accounts receivable have been reduced by an allowance for amounts that may become uncollectible in the future. This estimated allowance is based primarily on management’s evaluation of specific balances as the balances become past due, the financial condition of its customers and the Company’s historical experience of write-offs. If not reserved through specific examination procedures, the Company’s general policy for uncollectible accounts is to reserve based upon the aging categories of accounts receivable and whether amounts are due from an OE or aftermarket customer. Past due status is based upon the invoice date of the original amounts outstanding. Included in SG&A expense for the years ended December 31, 2003, 2002, and 2001 is bad debt expense of $14.4 million, $13.6 million, and $19.7 million, respectively. The allowance for doubtful accounts was $67.4 million and $74.6 million at December 31, 2003 and 2002, respectively.

59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Federal-Mogul subsidiaries in Germany, France and Italy have entered into factoring facilities. Accounts receivable factored or discounted under these facilities averaged $128 million during 2003. Losses related to receivables factored or discounted are recorded in the statement of operations as “other (income)/expense, net.”

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 53% of the inventory at December 31, 2003 and 2002, 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.

Long-Lived Assets: Long-lived assets, such as property, plant and equipment and definite-lived intangible assets, are stated at cost. Depreciation and amortization is computed principally by the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes. Definite-lived assets are periodically reviewed for impairment indicators. If impairment indicators exist, the Company performs the required analysis and records an impairment charge, as required, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144). If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.

Indefinite-lived Intangible Assets: Indefinite-lived intangible assets, such as goodwill and trademarks, are carried at historical value and not amortized. Indefinite-lived intangible assets are reviewed for impairment annually as of October 1, or more frequently if impairment indicators exist. The impairment analysis compares the estimated fair value of these assets to the related carrying value, and an impairment charge is recorded for any excess of carrying value over estimated fair value. The estimated fair value is based upon consideration of various valuation methodologies, including guideline transaction multiples, multiples of current earnings, and discounted future cash flows discounted at rates commensurate with the risk involved.

Pensions and Other Post Employment Obligations: Pension and other post employment benefit costs are dependent upon assumptions used in calculating such costs. These assumptions include discount rates, health care cost trends, benefits earned, interest cost, expected returns on plan assets, and other factors. In accordance with accounting principles generally accepted in the United States, actual results that differ from the assumptions used are accumulated and amortized over future periods and, accordingly, generally affect recognized expense and the recorded obligation in future periods.

Revenue Recognition: The Company records sales when products are shipped and title has transferred to the customer, the sales price is fixed and determinable, and the collectibility of revenue is reasonably assured. Accruals for sales returns and other allowances are provided at the time of shipment based upon past experience. Adjustments to such returns and allowances are made as new information becomes available.

Shipping and Handling Costs: The Company recognizes shipping and handling costs as a component of cost of products sold in the statement of operations.

Recoverable Customer Engineering and Tooling: Pre-production tooling and engineering costs that the Company will not own and that will be used in producing products under long-term supply arrangements are expensed as incurred unless the supply arrangement provides the Company the noncancelable right to use the tools or the reimbursement of such costs is agreed to by the customer. Pre-production tooling and engineering costs that are owned by the Company are capitalized as part of machinery and equipment, and are depreciated over the shorter of the toolings’ expected life or the duration of the related program.

Research and Development and Advertising Costs: The Company expenses research and development costs and costs associated with advertising and promotion as incurred. Research and development expense for continuing operations was $123.1 million, $106.7 million and $105.7 million for 2003, 2002 and 2001, respectively. Advertising and promotion expense for continuing operations was $46.8 million, $45.7 million and $55.6 million for 2003, 2002 and 2001, respectively.

Restructuring: The Company defines restructuring expense to include charges incurred with exit or disposal activities accounted for in accordance with SFAS No. 146, employee severance costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 88 and 112, and pension and other post employment benefit costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 87 and 106.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Rebates/Sales Incentives: The Company accrues for rebates pursuant to specific arrangements with certain of its customers, primarily in the aftermarket. Rebates generally provide for price reductions based upon the achievement of specified purchase volumes and are recorded as a reduction of sales as earned by such customers.

Incentive Stock Plans: The Company’s shareholders adopted stock option plans in 1976 and 1984 and performance incentive stock plans in 1989 and 1997. These plans generally provide for awarding restricted shares or granting options to purchase shares of the Company’s common stock. The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), and related interpretations in accounting for its employee stock awards. Accordingly, no compensation cost has been recognized for its stock option grants, as the exercise price of the Company’s employee stock options equals the underlying stock price on the date of grant. There were no options granted during 2002 or 2003. Had compensation cost for the Company’s stock-based compensation plans been determined based on the fair value at the grant dates for awards granted in 2000 and 2001 under those plans consistent with the method of SFAS No. 123 “Accounting for Stock Based Compensation”, the Company’s net loss, in millions, and loss per share would have been adjusted to the pro forma amounts indicated below:

	2003			2002			2001
	(Millions of Dollars, Except Per Share Amounts)
Net loss as reported	$	(189.5	)	$	(1,628.9	)	$	(1,001.5	)
Pro forma	$	(189.9	)	$	(1,634.0	)	$	(1,014.8	)
Basic and diluted loss per share as reported	$	(2.17	)	$	(19.62	)	$	(13.27	)
Pro forma	$	(2.17	)	$	(19.68	)	$	(13.44	)

Pro forma information regarding net loss and loss per share is required by SFAS No. 123 as if the Company had accounted for its employee stock options under the fair value method. The fair value for options is estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2001: risk-free interest rate of 5.5%; dividend yield of 0%; volatility factor of the expected market price of the Company’s common stock of 113.0% and a weighted-average expected life of the option of five years. The fair value of nonvested stock awards is equal to the market price of the stock on the date of the grant.

The weighted-average fair value and the total number (in millions) of options granted was $2.71 and 0.3 for 2001 respectively. All options and stock awards that are not vested at December 31, 2003 vest solely on employees rendering additional service.

Foreign Currency Translation: Exchange adjustments related to international currency transactions and translation adjustments for subsidiaries whose functional currency is the United States dollar (principally those located in highly inflationary economies) are reflected in the consolidated statements of operations. Translation adjustments of international subsidiaries for which the local currency is the functional currency are reflected in the consolidated financial statements as a component of accumulated other comprehensive income. Deferred taxes are not provided on translation adjustments as the earnings of the subsidiaries are considered to be permanently reinvested.

Environmental Liabilities: The Company recognizes environmental liabilities when a loss is probable and reasonably estimable. Such liabilities are generally not subject to insurance coverage. Engineering and legal specialists within the Company, based on current law and existing technologies, estimate each environmental obligation. Such estimates are based primarily upon the estimated cost of investigation and remediation required and the likelihood that other potentially responsible parties will be able to fulfill their commitments at the sites where the Company may be jointly and severally liable with such parties (refer to Note 20, “Litigation and Environmental Matters”). The Company regularly evaluates and revises its estimates for environmental obligations based on expenditures against established reserves and the availability of additional information.

Derivative Financial Instruments: The Company is exposed to market risks, such as fluctuations in foreign currency risk and commodity price risk. To manage the volatility relating to these exposures, the Company evaluates its aggregate exposures to identify natural offsets. For exposures that are not offset within its operations, the Company enters into various derivative transactions pursuant to its risk management policies. Designation is performed on a

61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

transaction basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the cash flows of the underlying exposures being hedged. The Company assesses the initial and ongoing effectiveness of its hedging relationships in accordance with its documented policy. The Company does not hold or issue derivative financial instruments for trading purposes. The Company’s objectives for holding derivatives are to minimize risks using the most effective and cost-efficient methods available.

Reclassifications: Certain items in the prior years’ financial statements have been reclassified to conform with the presentation used in 2003.

New Accounting Pronouncements

Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity: In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which provides standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The statement is effective for financial instruments entered into or modified after May 31, 2003 and for pre-existing instruments as of the beginning of the first interim period beginning after June 15, 2003. In November 2003, the FASB elected to indefinitely defer the effective date for certain provisions of SFAS No. 150 relating to investments in limited-life entities. The adoption of the provisions of SFAS No. 150 that were not deferred by the FASB did not have a material effect on the Company’s financial condition, results of operations, or cash flows.

Derivative Instruments and Hedging Activities: In April 2003, the FASB issued SFAS No. 149, “Amendments of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. The statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this standard did not have a material effect on the Company’s financial condition, results of operations, or cash flows.

Consolidation of Variable Interest Entities: In January 2003, the FASB issued FASB Interpretation Number 46 (FIN No. 46), “Consolidation of Variable Interest Entities”, an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”. FIN No. 46 provides guidance regarding the identification of, and financial reporting for, entities over which control is achieved through means other than voting rights; such entities are considered variable interest entities. FIN No. 46 requires the consolidation of variable interest entities in which an enterprise is deemed to be the primary beneficiary, which is determined by the obligation to absorb a majority of the entity’s expected losses, the right to receive a majority of an entity’s expected residual returns or both.

In December 2003, the FASB issued revised FIN No. 46, which provided an exclusion for entities meeting the definition of a “business” (as defined in the interpretation) and extending the effective date for variable interest entities entered into prior to February 1, 2003 to periods ending after March 15, 2004. Management believes that its joint ventures meet this definition of a business, however, is currently evaluating such entities to determine whether consolidation is required under FIN No. 46 and to quantify the effect that adoption of FIN No. 46 will have on its consolidated financial statements.

Accounting for Costs Associated with Exit or Disposal Activities: In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. This pronouncement addresses financial accounting and reporting for costs associated with an exit activity (including restructuring) or with the disposal of long-lived assets and supercedes Emerging Issues Task Force Issue No. 94-3 (“EITF No. 94-3”). Under SFAS No. 146, a liability is recorded for a cost associated with an exit activity when that liability is incurred and can be measured at fair value. SFAS No. 146 requires disclosure of information about exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS No. 146 is effective prospectively for exit and disposal activities initiated after December 31, 2002. SFAS No. 146 does not allow for the restatement of previously issued financial statements and continues the accounting for liabilities previously recorded under EITF No. 94-3. The Company adopted SFAS No. 146 effective January 1, 2003.

62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

3. Adjustment of Assets Held for Sale and Other Long-Lived Assets to Fair Value

Definite-Lived Long-Lived Assets

During 2003 and 2002, the Company recorded impairment charges of $35.5 million and $62.9 million, respectively, to adjust long-lived tangible assets to their estimated fair values in accordance with SFAS No. 144. The charges by reporting segment are as follows:

	Year Ended December 31
	2003		2002
	(Millions of Dollars)
Powertrain	$	26.4	$	52.3
Sealing Systems and System Protection		0.3		5.5
Friction		3.9		—
Aftermarket		4.9		—
Other, including Corporate		—		5.1
Total	$	35.5	$	62.9

The total charge of $35.5 million during 2003 includes $19.9 million to write down property, plant and equipment in connection with the announcement of a closure of a Powertrain piston manufacturing facility in Europe. In addition, the Company recorded $6.5 million and $9.1 million of impairment charges on property, plant and equipment located in various manufacturing facilities in the United States and various manufacturing facilities in Europe, respectively, to be held and used in accordance with SFAS No. 144, due to an other than temporary decline in sales volumes and profitability at those facilities. The fair value of property, plant and equipment was based upon estimated discounted future cash flows and estimates of salvage value. The impairment charges represent the difference between the estimated fair values and the carrying value of the subject assets.

The total charge of $62.9 million during 2002 includes $46.7 million to write-down property, plant and equipment at five facilities that the Company has closed. The estimated fair values were determined based upon discounted future cash flows and estimates of salvage value. An additional charge of $6.6 million relates to the write down of property, plant and equipment at a European camshaft foundry related to an other than temporary decline in sales volumes at that facility. The estimated fair value of this equipment was determined based upon discounted future cash flows. The remaining charge primarily relates to the impairment of assets that the Company intends to divest. The value of these assets was estimated based upon the future discounted cash flows should the Company divest of these assets on an individual, open market basis.

Goodwill and Other Indefinite-Lived Intangible Assets

Effective January 1, 2002, the Company adopted SFAS No. 142, resulting in the discontinuance of amortization of goodwill and indefinite-lived intangible assets. The adoption of this standard also required the reclassification of various intangible asset classes according to the measurability of their useful lives. Upon the adoption of SFAS No. 142, the Company recorded a non-cash charge of $1,464.5 million to reduce the carrying value of its goodwill and indefinite-lived intangible assets to their estimated fair value as required by SFAS No. 142. The tax impact related to the charge was $46.6 million and was limited to the benefit derived from the impairment of certain intangible assets other than goodwill. The charge is presented as a cumulative effect of change in accounting principle in the consolidated statement of operations for the year ended December 31, 2002.

As of October 1, 2003, the Company completed its annual impairment analysis as required by SFAS No. 142 and recorded an impairment charge in a Powertrain operating unit of $70.5 million to adjust the carrying value to its estimated fair value. This impairment charge is primarily attributable to a decrease in the operating unit’s estimated fair value based upon management’s expectation of future financial performance. The estimated fair value of intangible assets was determined based upon consideration of various valuation methodologies, including guideline transaction multiples, multiples of current earnings, and discounted future cash flows discounted at rates commensurate with the risk involved.

63

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The majority of these impairment charges relate to goodwill and indefinite-lived intangible assets associated with the acquisitions of T&N plc. and Cooper Automotive. A summary of the impairment charges for goodwill and other intangible assets by reporting segment pursuant to the provisions of SFAS No. 142 is as follows:

	Year Ended December 31
	2003		2002
	(Millions of Dollars)
Powertrain	$	70.5	$	453.8
Sealing Systems and System Protection		—		—
Friction		—		381.9
Aftermarket		—		155.3
Other, including Corporate		—		473.5
Total	$	70.5	$	1,464.5

At December 31, 2003 and 2002, goodwill and other intangible assets consist of the following:

	December 31, 2003							December 31, 2002
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(Millions of Dollars)
Intangible Assets
Developed technology	$	346.2	$	(82.7	)	$	263.5	$	321.4	$	(62.0	)	$	259.4
Other		60.1		(39.5	)		20.6		55.1		(34.9	)		20.2
Total	$	406.3	$	(122.2	)	$	284.1	$	376.5	$	(96.9	)	$	279.6
Unamortized Intangible Assets
Goodwill						$	1,350.3						$	1,401.0
Trademarks							166.8							164.2
Intangible Pension Asset							63.9							72.0
Total						$	1,581.0						$	1,637.2

The Company expects that amortization expense for its definite-lived intangible assets for each of the years between 2004 and 2008 will be approximately $17 million.

The following table shows the pro-forma effect of SFAS No. 142 on the Company’s earnings:

	Year Ended December 31
	2003			2002			2001
	(Millions of Dollars, Except Per Share Amounts)
Reported Net Loss	$	(189.5	)	$	(1,628.9	)	$	(1,001.5	)
Add-back: Goodwill amortization		—			—			84.9
Add-back: Indefinite-lived intangible asset amortization		—			—			13.0
Adjusted Net Loss	$	(189.5	)	$	(1,628.9	)	$	(903.6	)
Basic and diluted loss per share:
Reported Net Loss per share	$	(2.17	)	$	(19.62	)	$	(13.27	)
Add-back: Goodwill amortization		—			—			1.12
Add-back: Indefinite-lived intangible asset amortization		—			—			0.17
Adjusted basic and diluted loss per share	$	(2.17	)	$	(19.62	)	$	(11.98	)

Prior to 2002 the Company evaluated its long-lived assets in accordance with SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and Assets to be Disposed of”. During 2001, the Company determined that the undiscounted cash flows of certain of its operating units were less than the carrying value of the long-lived assets of those operating units. Accordingly, the Company adjusted the carrying value of those assets to their estimated fair value resulting in an impairment charge from continuing operations of $280.3 million. The Company also recorded an impairment charge of $37.8 million for an insolvent business unit in the United Kingdom, and $10.0 million for

64

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

operations located in Argentina as a result of economic conditions in that country. The fair value was determined by anticipated future cash flows discounted at a rate commensurate with the risk involved. The following is a summary of the aggregate 2001 impairment charges by long-lived asset (in millions):

Goodwill	$	161.8
Other intangible assets		74.3
Property, plant and equipment		92.0
	$	328.1

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 accounted for costs related to all restructuring activities initiated prior to January 1, 2003 under the requirements of EITF No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Accordingly, related employee termination benefits and other costs to exit an activity were recognized on the date when management committed the Company to an exit plan. Due to the inherent uncertainty involved in making such estimates, the Company reversed approximately $21 million of previously recorded reserves in each of 2003 and 2002. These reversals related to approximately $300 million of restructuring costs recorded during the four-year period ended December 31, 2003. Reversals result from actual costs at program completion being less than costs estimated at the commitment date. Subsequent to its filing for Chapter 11 bankruptcy protection, the Company was able to achieve more favorable resolution of leases and other contractual arrangements than estimated as of the commitment date. Additionally, the Company also experienced a higher rate of voluntary employee attrition subsequent to filing Chapter 11, resulting in lower severance costs than estimated as of the commitment date.

Effective January 1, 2003, the Company’s restructuring accounting policy changed pursuant to the requirements of SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” Currently, the Company defines restructuring expense to include costs directly associated with exit or disposal activities accounted for in accordance with SFAS No. 146, employee severance costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 88 and 112, and pension and other post employment benefit costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 87 and 106.

Estimates of restructuring charges are based on information available at the time such charges are recorded. In general, management anticipates that restructuring activities will be completed within a timeframe such that significant changes to the exit plan are not likely. In certain countries in which the Company operates, statutory requirements include involuntary termination benefits that extend several years into the future. Accordingly, severance payments continue well past the date of termination at many international locations. Thus, these programs appear to be ongoing when, in fact, terminations and other activities under these programs have been substantially completed. Management expects that future savings resulting from execution of its restructuring programs will generally result in full pay back within 36 to 60 months.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Total employee reductions for all active restructuring programs are expected to be approximately 3,000 of which approximately 2,700 have been terminated as of December 31, 2003. The following is a summary of restructuring charges by reporting segment for the years ended December 31, 2003, 2002 and 2001:

	Year Ended December 31, 2003
	Severance		Exit		Reversals			Total
	(Millions of Dollars)
Powertrain	$	26.8	$	1.2	$	(1.6	)	$	26.4
Sealing Systems and Systems Protection		2.1		3.4		(1.5	)		4.0
Friction		1.8		0.3		(10.5	)		(8.4	)
Aftermarket		16.6		0.8		(4.0	)		13.4
Other		1.5		0.5		(3.2	)		(1.2	)
Total	$	48.8	$	6.2	$	(20.8	)	$	34.2
	Year Ended December 31, 2002
	Severance		Exit		Reversals			Total
	(Millions of Dollars)
Powertrain	$	42.4	$	0.4	$	(1.2	)	$	41.6
Sealing Systems and Systems Protection		3.9		—		(0.2	)		3.7
Friction		6.3		—		(0.2	)		6.1
Aftermarket		3.6		—		(18.6	)		(15.0	)
Other		4.4		—		(0.3	)		4.1
Total	$	60.6	$	0.4	$	(20.5	)	$	40.5
	Year Ended December 31, 2001
	Severance		Exit		Reversals			Total
	(Millions of Dollars)
Powertrain	$	10.3	$	—	$	—		$	10.3
Sealing Systems and Systems Protection		2.0		0.9		—			2.9
Friction		3.0		1.1		—			4.1
Aftermarket		8.8		—		—			8.8
Other		11.3		—		—			11.3
Total	$	35.4	$	2.0	$	—		$	37.4

The following is a summary of the Company’s consolidated restructuring reserves and related activity for 2003, 2002 and 2001:

	Severance			Exit			Total
	(Millions of Dollars)
Balance of reserves at January 1, 2001	$	67.2		$	40.7		$	107.9
2001 total provision		35.4			2.0			37.4
Payments and charges against reserves		(51.0	)		(13.2	)		(64.2	)
Balance of reserves at December 31, 2001		51.6			29.5			81.1
2002 total provision		40.1			0.4			40.5
Payments and charges against reserves		(20.6	)		(10.2	)		(30.8	)
Balance of reserves at December 31, 2002		71.1			19.7			90.8
2003 total provision		31.4			2.8			34.2
Payments and charges against reserves		(54.8	)		(12.5	)		(67.3	)
Balance of reserves at December 31, 2003	$	47.7		$	10.0		$	57.7

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

1. Closure of facilities and relocation of production – In connection with the Company’s strategy certain operations have been closed and related production relocated to low cost geographies or to other locations with available capacity.

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

66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The following provides a description of restructuring programs for each reporting segment.

Powertrain

Total restructuring charges, net of reversals, were $26.4 million, $41.6 million, and $10.3 million in 2003, 2002, and 2001, respectively. These charges relate to the following primary restructuring activities:

Closure of facilities and relocation of production

• In 2003, the Company began the closure and relocation of its Bradford, United Kingdom piston operations to other existing European manufacturing facilities with available capacity or with lower cost labor. Severance charges related to this exit activity approximated $14 million and at December 31, 2003, the Company had remaining reserves of approximately $13 million related to this activity.

• During 2003, the Company recorded approximately $1 million for costs related to the exit of its non-core European large bearing operations.

• In 2002, the Company recorded approximately $10 million for severance and exit costs related to the announced closure of its Bridgwater, United Kingdom piston operation. Related production from this operation was relocated to other existing European manufacturing facilities with available capacity or with lower cost labor. At December 31, 2003 remaining reserves related to this program approximate $1 million.

• During 2002, the Company announced the relocation and closure of its piston manufacturing operations in Flowery Branch, Georgia, Orangeburg, South Carolina and Sumter, South Carolina to other existing North American manufacturing facilities with available capacity or with lower cost labor. Severance and exit costs related to such activities approximated $2 million and $9 million for the years ended December 31, 2003 and 2002. At December 31, 2003, the Company had remaining reserves of approximately $5 million related to these activities. The Company completed the relocation and closure of the Flowery Branch and Orangeburg operations during 2003.

• During 2002, the Company announced the closure and relocation of its piston ring operations in Sunderland, United Kingdom to other existing European facilities with available capacity. Severance and exit costs related to this closure approximated $8 million. At December 31, 2003, the Company had remaining reserves of approximately $5 million related to this activity.

• During 2001, the Company’s German engine bearing operations announced restructuring programs to transfer certain low volume production with high labor content to low cost geographies, specifically Poland. Related severance costs of approximately $4 million, $2 million and $3 million were incurred in connection with this program during 2003, 2002 and 2001, respectively. At December 31, 2003, the Company had remaining reserves of approximately $7 million related to these activities.

Consolidation of administrative functions and standardization of manufacturing processes

• During 2003, the Company incurred severance charges of approximately $4 million to eliminate redundancies across its operations in France related to changes in administrative and manufacturing processes. At December 31, 2003 the Company had remaining reserves of approximately $1 million related to these activities.

• During 2002, approximately $5 million of severance costs were recorded as restructuring expense related to the Company’s piston manufacturing operations located in Nuremburg, Germany. These charges related to headcount reductions associated with administrative function and manufacturing process changes. At December 31, 2003, the Company had remaining reserves of approximately $4 million related to this activity.

• During 2002, management announced a program to streamline and automate administrative functions and manufacturing processes at Company’s piston manufacturing operation in Gorzyce, Poland. Approximately $2 million and $4 million of severance charges were recorded related to this program in 2003 and 2002, respectively.

• During 2001, the Company launched a program to consolidate administrative functions and change manufacturing processes across its German piston ring operations. Severance costs approximating $4 million were recorded for related workforce reductions.

67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Sealing Systems and System Protection

Total restructuring charges, net of reversals, were $4.0 million, $3.7 million, and $2.9 million in 2003, 2002, and 2001, respectively. These charges relate to the following activities:

Closure of facilities and relocation of production – In 2002, the Company announced the planned closure and began relocation of its seal operations in Cardiff, Wales to other existing European manufacturing facilities with available capacity or with lower cost labor. This relocation resulted in severance and exit charges of approximately $4 million and $2 million in 2003 and 2002, respectively. The closure of Cardiff was completed during 2003.

Consolidation of administrative functions and standardization of manufacturing – Related severance and exit charges of approximately $1 million, $2 million, and $3 million were incurred in 2003, 2002, and 2001, respectively. At December 31, 2003, the Company had remaining reserves related to this program of approximately $2 million.

Friction

Total restructuring charges, net of reversals, were $(8.4) million, $6.1 million, and $4.1 million in 2003, 2002, and 2001, respectively. These charges primarily relate to the following activities:

Closure of facilities and relocation of production

• During 2003, the Company completed its previously announced programs to consolidate its European and North American friction operations. Accordingly, the Company reevaluated its related restructuring reserves and determined that its initial cost estimates exceeded actual costs and reversed approximately $9 million in previously recorded restructuring reserves.

• During 2002, the Company relocated announced the planned closure and began relocation of its aftermarket half-block operations in Marienheide, Germany to other existing European manufacturing facilities with available capacity. Related severance and exit charges of approximately $4 million were recorded and at December 31, 2002, the Company had remaining reserves of approximately $1 million related to this activity.

• In 2001, the Company closed its operations in Pont L’Eveque, France, and relocated production to other European manufacturing facilities with available capacity or with lower labor cost. Related severance and exit costs of approximately $1 million and $3 million were recorded in 2003 and 2001, respectively. Remaining reserves related to this program are approximately $1 million as of December 31, 2003.

Consolidation of administrative functions and standardization of manufacturing – Related severance charges of approximately $1 million, $1 million, and $1 million were incurred in 2003, 2002, and 2001, respectively.

Aftermarket

Total restructuring charges, net of reversals, were $13.4 million, $(15.0) million, and $8.8 million in 2003, 2002, and 2001, respectively. These charges relate to the following activities:

Closure of facilities and relocation of production (aftermarket distribution rationalization)

• In 2003, the Company began relocation of its Ignition operations from its manufacturing facility located in Aubange, Belgium to Upton, England. Related severance and exit costs approximated $10 million. At December 31, 2003, the Company had remaining reserves of approximately $3 million related to these activities.

• In 2002, the Company announced and began consolidation of certain distribution operations at its Aftermarket distribution facility located in France its central European distribution facility in Belgium. Severance and related exit costs of approximately $3 million and $2 million were recorded during 2003 and 2002, respectively. At December 31, 2003, the Company had remaining reserves of approximately $1 million related to these activities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

• The Company completed execution of its North American distribution optimization activities during 2003. In connection with the completion of this program the Company reversed approximately $2 million and $19 million of previously recorded severance and exit costs during 2003 and 2002, respectively. These reversals were the result of actual costs incurred being less than the amounts estimated at the time of program announcement.

Consolidation of administrative functions and standardization of manufacturing – Related severance charges of approximately $7 million were incurred in 2001. At December 31, 2003, the Company had remaining reserves related to previously incurred expenses of approximately $3 million.

Other

Other restructuring charges totaled $(1.2) million, $4.1 million, and $11.3 million in 2003, 2002, and 2001, respectively.

Closure of facilities and relocation of production

• During 2002, The Company announced its intention to exit its OE lighting operations. Related severance and exit costs were recorded for approximately $2 million and $5 million during 2003 and 2002, respectively.

• During 2001, severance and exit costs of approximately $3 million were recorded pursuant to the closure of the Company’s technical center located in Cawston, England.

Consolidation of administrative functions and standardization of manufacturing

• The Company recorded corporate reversals approximating $3 million during 2003. This reversal relates to previously recorded severance costs for consolidation of corporate administrative activities and resulted from initial estimates exceeding actual costs for completed programs.

• During 2001 severance costs of approximately $5 million were recorded in connection with the Company’s efforts to consolidate corporate administrative functions.

5. Other (Income) Expense, Net

The specific components that encompass “other (income) expense, net” are provided in the following table:

	Year Ended December 31
	2003			2002			2001
	(Millions of Dollars)
(Gain) loss on sale of assets	$	(6.5	)	$	0.5		$	(0.5	)
Discount on financing arrangements		2.7			8.9			20.2
Royalty income		(4.8	)		(2.8	)		(3.4	)
Foreign currency exchange		(2.5	)		(8.7	)		7.6
All other		(5.1	)		1.3			10.6
Total other income (expense)	$	(16.2	)	$	(0.8	)	$	34.5

6. Discontinued Operations and Acquisition

In connection with its strategic planning process, the Company assesses its operations for market position, product technology and capability, and profitability. Those businesses determined by management not to have a sustainable competitive advantage are considered non-core and may be considered for divestiture or other exit activities. Over the past several years, the Company has divested substantially all of its non-core businesses. The elimination of these non-core businesses has freed up both human and capital resources which have been devoted to the Company’s core businesses.

69

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

During 2003, the Company completed the following divestitures of non-core businesses:

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

• During September 2003, the Company divested operations located in Hampton, Virginia and Solon, Ohio.

During 2002, the Company completed the following divestitures of non-core businesses:

• In March 2002, the Company completed the divestiture of its Signal-Stat Lighting Products business (“Signal-Stat”). Signal-Stat produces exterior lighting and power distribution products primarily for the heavy-duty and commercial vehicle markets.

• In July 2002, the Company completed the divestiture of its automotive camshaft manufacturing plant in Jackson, Michigan, under the terms of a management buyout. The Company also entered into a three-year supply agreement to market and sell aftermarket camshafts produced at the Jackson facility through its aftermarket business.

• In November 2002, the Company completed the divestiture of Federal-Mogul Camshafts de Mexico S. de R.L. de C.V. (“Camshafts de Mexico”). Camshafts de Mexico manufactures camshafts for the North American original equipment market.

During 2001, the Company completed the following divestitures of non-core businesses:

• In April 2001, the divestiture of its torque converter business (“TCI”). TCI remanufactures torque converters for high-performance automotive aftermarket applications.

• In May 2001, the divestiture of its Champion aviation ignition products division (“Aviation”). Aviation provides products for major commercial, military and general aircraft applications.

• In July 2001, the divestiture of its industrial heavy wall bearing operation in McConnelsville, Ohio.

• In August 2001, the divestiture of its subsidiary Federal-Mogul RPB Ltd. (“RPB”). RPB manufactures industrial rotating plant bearings and magnetic bearings.

• In August 2001, the divestiture of the aftermarket operations of Blazer Lighting Products (“Blazer”). Blazer manufactures exterior vehicle lighting products.

• In August 2001, the divestiture of its Pontotoc, Mississippi, operation. The operation continues to supply coil springs and metal stampings to the Company for sale to aftermarket customers under a long-term supply agreement.

• In August 2001, the Company restructured its equity positions in several large-industrial-bearing manufacturing joint ventures with its partner, Daido Metal Company Ltd. of Japan. The restructuring transactions included the transfer of controlling interest in manufacturing facilities.

• In September 2001, the divestiture of its Tri-Way machine tool business in Windsor, Ontario, under terms of a management buyout.

In August 2001, the Company acquired 85% of WSK Gorzyce, S.A., a producer of pistons and other automotive components. This operation employs 2,500 employees at its manufacturing location in Gorzyce, Poland with annual sales of approximately $50 million. The Gorzyce operation was acquired to further the Company’s low cost producer strategy. Since the date of the acquisition, the Company has transferred multiple piston manufacturing lines to the Gorzyce facility from higher cost facilities in Europe. The Company expects that it will continue to utilize this operation to achieve its strategic goals in its Powertrain business.

During 2001, the Company invested approximately $50 million to construct a new piston manufacturing facility in Puebla, Mexico. The facility was constructed for the primary purpose of manufacturing and supplying pistons to an OEM customer under the terms of a new business award. Additionally during 2001 and 2002, the Company invested $11 million to construct a new friction manufacturing operation in Tepotzatlan, Mexico to expand the manufacture of ThermoQuiet disc brake pads.

70

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Further information related to the Company’s discontinued operations is as follows:

	Year Ended December 31
	2003			2002			2001
	(Millions of Dollars)
Net sales	$	67.8		$	238.1		$	364.0
Cost of products sold		59.2			217.4			344.1
Gross margin		8.6			20.7			19.9
Selling, general and administrative expenses		2.8			9.6			31.3
Restructuring charges		1.8			2.8			0.6
Adjustment of assets held for sale and other long-lived assets to fair value		—			7.3			217.0
Net (gain) loss on divestitures		6.8			(0.5	)		35.6
Other expense (income), net		0.8			(1.3	)		9.2
(Loss) income before income taxes		(3.6	)		2.8			(273.8	)
Income tax expense (benefit)		0.4			12.9			(10.1	)
Loss from discontinued operations	$	(4.0	)	$	(10.1	)	$	(263.7	)

As of December 31, 2002, the Company had assets held for sale included in its consolidated balance sheet as follows (in millions of dollars):

Accounts receivable, net	$	10.9
Inventories, net		13.9
Other current assets		4.1
Total Current Assets		28.9
Property, plant and equipment, net		26.0
Other long-term assets		5.4
Total Assets		60.3
Accounts payable		(11.2	)
Other accrued liabilities		(8.5	)
Total Liabilities	$	40.6

7. Financial Instruments

Foreign Currency Risk

Certain forecasted and recorded transactions and assets and liabilities are exposed to foreign currency risk. The Company monitors its foreign currency exposures daily to maximize the overall effectiveness of its foreign currency hedge positions. Principal currencies hedged include the Euro, British pound, Japanese yen and Canadian dollar. Options used to mitigate foreign currency risk associated with a portion of forecasted transactions, for up to twelve months in the future, are designated as cash flow hedging instruments. Options and forwards used to hedge certain booked transactions and assets and liabilities are not designated as hedging instruments under SFAS 133 as they are natural hedges. The effect of changes in the fair value of these hedges and the underlying exposures are recognized in earnings each period. These hedges were highly effective and their impact on earnings was not significant during 2003 and 2002. The Company had two contracts outstanding with a combined notional value of $10.4 million at December 31, 2003, and two contracts outstanding with a combined notional value of $9.7 million at December 31, 2002. Unrealized amounts were not material at December 31, 2003 or 2002.

Commodity Price Risk

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

71

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 two contracts outstanding with a combined notional value of $9.2 million at December 31, 2003, and two contracts outstanding with a combined notional value of $2.9 million at December 31, 2002. Unrealized amounts were not material at December 31, 2003 or 2002.

Other

For options designated either as fair value or cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness. Hedge ineffectiveness, determined in accordance with SFAS No. 133, did not have a material effect on operations for 2003 or 2002. No fair value hedges or cash flow hedges were re-designated or discontinued during 2003 or 2002.

Derivative gains and losses included in Other Comprehensive Income are reclassified into operations at the time forecasted transactions are recognized. Such amounts were not material in 2003 or 2002.

Concentrations of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of accounts receivable and cash investments. The Company’s customer base includes virtually every significant global automotive manufacturer and a large number of distributors and installers of automotive aftermarket parts. The Company’s credit evaluation process, reasonably short collection terms and the geographical dispersion of sales transactions help to mitigate credit risk concentration. The Company requires placement of cash in financial institutions evaluated as highly creditworthy.

Fair Value of Financial Instruments

At December 31, 2003 and 2002, the carrying amounts of certain financial instruments such as cash and equivalents, accounts receivable, accounts payable, and borrowings under the DIP credit facility approximate their fair values. The fair value of financial instruments included in liabilities subject to compromise are highly uncertain as a result of the Restructuring Proceedings.

8. Inventory

Cost determined by the last-in, first-out (LIFO) method was used for 46% and 53% of the inventory at December 31, 2003 and 2002, respectively. If inventories had been valued at current cost, amounts reported would have been increased by $58.1 million and $54.7 million as of December 31, 2003 and 2002, respectively. The carrying value of inventories has also been reduced for excess and obsolete inventories based on management’s review of on-hand inventories compared to historical and estimated future sales and usage.

Inventory quantity reductions resulting in liquidations of certain LIFO inventory layers decreased net loss by $2.1 million ($0.02 per diluted share) in 2003, and increased net loss by $3.5 million ($0.04 per diluted share) and $0.4 million ($0.01 per diluted share) in 2002 and 2001, respectively.

72

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Inventories consisted of the following:

	December 31
	2003			2002
	(Millions of Dollars)
Raw materials	$	167.7		$	175.0
Work-in-process		136.6			131.7
Finished products		597.9			561.5
		902.2			868.2
Valuation reserves		(67.8	)		(68.1	)
	$	834.4		$	800.1

9. Property, Plant and Equipment

Depreciation expense for continuing operations for the years ended December 31, 2003, 2002 and 2001, was $278.0 million, $249.0 million and $234.1 million, respectively.

Property, plant and equipment consisted of the following:

	Estimated Useful Life	December 31
		2003			2002
		(Millions of Dollars)
Land	—	$	118.7		$	126.2
Buildings and building improvements	24-40 years		558.0			510.0
Machinery and equipment	3-12 years		2,977.2			2,648.4
			3,653.9			3,284.6
Accumulated depreciation			(1,249.1	)		(1,011.6	)
		$	2,404.8		$	2,273.0

Future minimum payments under noncancelable operating leases with initial or remaining terms of more than one year are as follows (in millions):

2004	$	29.7
2005		25.8
2006		17.1
2007		10.3
2008		6.2
Thereafter		11.7
Total	$	100.8

Total rental expense for continuing operations under operating leases for the years ended December 31, 2003, 2002 and 2001 was $40.6 million, $45.7 million and $45.4 million, respectively, exclusive of property taxes, insurance and other occupancy costs generally payable by the Company.

10. Investments in Non-Consolidated Affiliates

The Company maintains investments in 23 non-consolidated affiliates, which are located in Turkey, China, Korea, India, Japan, the United States and Mexico. The Company’s direct ownership in such affiliates ranges from approximately 5% to 50%. The aggregate investment in these affiliates approximates $131 million and $130 million as of December 31, 2003 and 2002, respectively. These amounts are recorded in the Company’s balance sheet as “other non-current assets.” The Company’s equity in the earnings of such affiliates amounted to approximately $27 million, $20 million and $15 million for the years ended December 31, 2003, 2002 and 2001, respectively. During 2003 these entities generated sales of approximately $500 million, net income of approximately $50 million and at December 31, 2003 had total net assets of approximately $200 million.

The Company holds a variable interest in one of its Turkish affiliates. However, the affiliate does not qualify as a variable interest entity under the definition of FIN No. 46 and is therefore not consolidated. The variable interest in

73

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

the Turkish affiliate is due to the Company’s contingent guarantee of the initial investment of its investment partner. The total amount of the contingent guarantee, were all triggering events to occur, approximates $50 million. This contingent guarantee is substantially less than the current fair value of the guarantees’ interest in the affiliate. Accordingly, no amount has been recorded by the Company for the contingent guarantee.

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 contingencies on the future liquidity position of the Company.

11. Accrued Liabilities

Accrued Liabilities consisted of the following:

	December 31
	2003		2002
	(Millions of Dollars)
Accrued compensation	$	247.0	$	242.1
Accrued rebates		59.7		46.7
Restructuring reserves		57.7		90.8
Non-income taxes payable		40.0		31.1
Accrued Chapter 11 and Administration expenses		34.0		24.9
Accrued income taxes		31.4		43.1
Accrued product returns		21.0		23.0
Accrued warranty		11.4		13.6
Accrued professional services		11.1		10.1
Total current accrued liabilities	$	513.3	$	525.4

12. Debt

Long-term debt consisted of the following:

	December 31
	2003		2002
	(Millions of Dollars)
DIP Credit Facility	$	320.0	$	314.7
Other		26.0		45.7
		346.0		360.4
Less: current maturities included in short-term debt		14.8		346.1
Total long-term debt	$	331.2	$	14.3

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Due to the Restructuring Proceedings (see Note 1), pre-petition long-term debt of the Debtors has been reclassified to the caption “Liabilities subject to compromise” in the consolidated balance sheets. The following is the long-term debt included in liabilities subject to compromise:

	December 31
	2003			2002
	(Millions of Dollars)
Senior Credit Agreements:
Term loans	$	788.5		$	788.5
Multi-currency revolving credit facility		1,144.8			1,116.8
Notes due 2004 — 7.5%, issued in 1998		239.8			239.8
Notes due 2006 — 7.75%, issued in 1998		391.9			391.9
Notes due 2006 — 7.375%, issued in 1999		394.0			394.0
Notes due 2009 — 7.5%, issued in 1999		562.2			562.2
Notes due 2010 — 7.875%, issued in 1998		340.4			340.4
Medium-term notes — due between 2002 and 2005, average rate of 8.8%, issued in 1994 and 1995.		84.0			84.0
Senior notes — due in 2007, rate of 8.8%, issued in 1997		103.3			103.3
Other		2.5			2.6
		4,051.4			4,023.5
Less: debt issuance fees		(30.7	)		(40.8	)
Total debt included in liabilities subject to compromise	$	4,020.7		$	3,982.7

In connection with the Restructuring Proceedings, the Company entered into a $675 million debtor-in-possession (“DIP”) credit facility to supplement liquidity and fund operations during the restructuring proceedings. In August 2003, the DIP credit facility was amended to change the expiration date to February 2005, and the interest rate was reduced to either the alternate base rate (“ABR”) plus 2 percentage points or a formula based on the London Inter-Bank Offered Rate (“LIBOR”) plus 3 percentage points. The ABR is the greatest of either the bank’s prime rate or the base CD rate plus 1 percentage point or the federal funds rate plus ½ percentage point. The original $675 million commitment was reduced to $600 million in connection with the August 2003 facility amendment, and is mandatorily reduced by a portion of proceeds received from future asset or business divestitures.

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

	December 31
	2003		2002
	(Millions of Dollars)
Contractual commitment	$	600.0	$	675.0
Mandatory commitment reductions - divestitures		—		(27.0	)
Current commitment	$	600.0	$	648.0
Outstanding:
Current borrowings	$	320.0	$	314.7
Letters of credit		17.9		14.0
Total outstanding		337.9		328.7
Available to borrow		236.6		200.3
Total borrowing base	$	574.5	$	529.0

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, limitations on the early retirement of debt, additional borrowings, payment of dividends and the sale of assets or businesses.

In accordance with SOP 90-7, the Company ceased recording interest expense on its outstanding Notes, Medium-

75

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

term notes, and Senior notes effective October 1, 2001. The Company’s contractual interest not accrued or paid in 2003, 2002 and 2001 was $162.8 million, $164.4 million and $41.6 million, respectively. The Company continues to accrue and pay the contractual interest on the Senior Credit Agreement in the month incurred, totaling $71.4 million, $81.8 million and $28.2 million in 2003, 2002 and 2001, respectively.

Additionally, the Company has agreed to pay, with the approval of the Bankruptcy Court, adequate protection payments approximating $2.6 million per quarter to the holders of the Company’s Notes. The amount is paid quarterly in equal installments during the time in which the plan of reorganization is being developed. The Company has additionally elected to grant each quarter since the commencement of the Restructuring Proceedings an administrative claim in the amount of one percent per annum on the outstanding notes. The amount of such administrative expense claim each quarter is approximately $5.3 million. Amounts paid and administrative claims granted under this arrangement are provisional in nature and remain subject to re-characterization, credit against distributions in respect of allowed claims on a plan of reorganization, and other appropriate relief if and to the extent the Bankruptcy Court ultimately concludes that the holders were not entitled to adequate protection for any reason. Additionally, these amounts remain subject to challenge by all parties in interest to the Restructuring Proceedings.

At December 31, 2003 and 2002, the Company had $76.1 million and $89.4 million, respectively, of letters of credit outstanding under its DIP and pre-petition credit facilities. To the extent letters of credit associated with the DIP credit facility are issued, there is a corresponding decrease in borrowings available under the facility.

During 2001, the Company completed a series of debt to equity exchanges of its public notes. As a result of these exchanges, the Company issued 9.6 million shares in aggregate of its common stock to the holders of $89.5 million face value of various notes. These exchanges resulted in a gain of $72.2 million. The Company did not provide tax expense on this gain as the Company did not provide a tax benefit on its 2001 operating losses in the U.S.

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 23, “Consolidating Condensed Financial Information of Guarantor Subsidiaries”).

The weighted average interest rate for the Company’s short-term debt was approximately 4.7% and 4.9% as of December 31, 2003 and 2002, respectively. Interest paid in 2003, 2002 and 2001 was $119.5 million, $127.9 million and $328.0 million, respectively.

13. Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Convertible Subordinated Debentures of the Company

In December 1997, the Company’s wholly-owned financing trust (“Affiliate”) completed a $575 million private issue of 11.5 million shares of 7.0% Trust Convertible Preferred Securities (“TCP Securities”) with a liquidation value of $50 per convertible security. The net proceeds from the TCP Securities were used to purchase an equal amount of 7.0% Convertible Junior Subordinate Debentures (“Debentures”) of the Company. The TCP Securities represent an undivided interest in the Affiliate’s assets, with a liquidation preference of $50 per security.

The shares of the TCP Securities are convertible, at the option of the holder, into the Company’s common stock at an equivalent conversion price of $51.50 per share, subject to adjustment in certain events. The TCP Securities and the Debentures became redeemable, at the option of the Company, on or after December 6, 2000 at a redemption price, expressed as a percentage of principal, which is added to accrued and unpaid interest. The redemption price range is from 104.2% on December 6, 2000 to 100.0% after December 1, 2007. All outstanding TCP Securities and Debentures are required to be redeemed by December 1, 2027. In 2002, the holders of the TCP Securities redeemed 4,903,390 shares into 4,760,701 shares of common stock. The effect was an increase to common stock of $23.7 million and an increase to paid in capital of $215.9 million.

Distributions on the TCP Securities are cumulative and are due quarterly in arrears at an annual rate of 7.0%. 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 expense or making interest payments on the debentures. As a

76

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

result, the affiliate no longer has the funds available to pay distributions on the Company Mandatorily Redeemable Preferred Securities and ceased paying such distributions in October 2001. The affiliate is in default on the Company Mandatorily Redeemable Preferred Securities. The Company is a guarantor of its subsidiaries debentures, and has classified these debentures as liabilities subject to compromise in the December 31, 2003 and 2002 consolidated balance sheets.

14. Comprehensive Income

The Company displays comprehensive income in the consolidated statements of shareholders’ equity. At December 31, 2003 and 2002, accumulated other comprehensive loss consisted of $12.8 million and $367.0 million of foreign currency translation, respectively, and $954.8 million and $816.8 million due to additional minimum liabilities recorded for the Company’s pension plans, net of tax, respectively.

15. Capital Stock and Preferred Share Purchase Rights

The Company’s articles of incorporation authorize the issuance of 260,000,000 shares of common stock, of which 87,131,298 shares were outstanding at both December 31, 2003 and 2002. As discussed in Note 13, during 2002, holders of TCP Securities redeemed 4,903,390 preferred shares into 4,760,701 shares of common stock.

The Series C ESOP Convertible Preferred Stock Shares (the “Preferred Shares”) of stock were used to fund a portion of the Company’s matching contributions within the Salaried Employees’ Investment Program. The Preferred Shares are convertible into shares of the Company’s common stock at a rate of two shares of common stock for each share of preferred stock. The Preferred Shares have a guaranteed price of $63.75/share. There were 439,937 Preferred Shares outstanding at December 31, 2003, 2002 and 2001. The Preferred Shares were paid dividends at a rate of 7.5% until 2001. As a result of the Restructuring Proceedings, the payment of dividends was discontinued. The Company repurchased and retired 157,751 Preferred Shares valued at $10.1 million during 2001. Due to the Restructuring Proceedings, no Preferred Shares were retired in 2003 or 2002. All of the repurchases represent plan distributions or fund transfers for participants in the plan.

Also due to the Restructuring Proceedings, there was no charge recorded for the cost of the ESOP for the years ended December 31, 2003, 2002, or 2001. No cash contributions were made to the plan in 2003, 2002 or 2001. ESOP shares are released as principal and interest on the debt is paid. Compensation expense is measured based on the fair value of shares committed to be released to employees. Dividends on ESOP shares are treated as a reduction of shareholders’ equity in the period declared. The number of allocated shares held by the ESOP was 439,937 at December 31, 2003, 2002 and 2001. There were no committed-to-be-released or suspense shares at December 31, 2003 or 2002. Any repurchase of the ESOP shares is strictly at the option of the Company.

The Company’s common stock is subject to a Rights Agreement under which each share has attached to it a Right to purchase one one-thousandth of a share of a new series of preferred stock, at a price of $250 per Right. In the event an entity acquires or attempts to acquire 10% (20% in the case of an institutional investor) or more of the then outstanding shares, each Right would entitle the holder to purchase a number of shares of common stock pursuant to a formula contained in the Agreement. These Rights will expire on April 30, 2009, but may be redeemed by the Company at a price of $.01 per Right at any time prior to a public announcement that the above event has occurred. The Board may amend the Rights at any time without shareholder approval.

On April 24, 2002, the Company’s common stock was delisted from the New York Stock Exchange and began trading on the NASD over-the-counter bulletin board market under the ticker symbol “FDMLQ”.

16. Income Taxes

Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The components of loss from continuing operations before income taxes and cumulative effect of change in accounting principle due to the adoption of SFAS No. 142 consisted of the following:

	Year Ended December 31
	2003			2002			2001
	(Millions of Dollars)
Domestic	$	(2.0	)	$	(39.3	)	$	(83.5	)
International		(131.0	)		(83.7	)		(424.7	)
Total	$	(133.0	)	$	(123.0	)	$	(508.2	)

77

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Significant components of the provision for income taxes are as follows:

	Year Ended December 31
	2003			2002			2001
	(Millions of Dollars)
Current:
Federal	$	(5.0	)	$	—		$	(14.6	)
State and local		(1.0	)		1.0			6.6
International		21.3			70.3			41.4
Total current		15.3			71.3			33.4
Deferred:
Federal		(16.0	)		27.4			148.5
State and local		—			—			1.8
International		53.2			(20.8	)		45.9
Total deferred		37.2			6.6			196.2
	$	52.5		$	77.9		$	229.6

The reconciliation of income taxes computed at the United States federal statutory tax rate to income tax expense is:

	Year Ended December 31
	2003			2002			2001
	(Millions of Dollars)
Income taxes at United States statutory rate	$	(46.5	)	$	(43.0	)	$	(177.8	)
Tax effect from:
State income taxes		(1.0	)		1.0			5.5
Foreign operations		22.4			19.7			44.5
Goodwill amortization		—			—			23.9
Goodwill impairment		24.7			—			50.6
Favorable audit settlements and tax refunds		(22.9	)		—			—
Valuation allowances		72.8			100.2			285.4
Other		3.0			—			(2.5	)
	$	52.5		$	77.9		$	229.6

The following table summarizes the Company’s total provision for income taxes/(tax benefit) by component:

	Year Ended December 31
	2003			2002			2001
	(Millions of Dollars)
Income tax expense	$	52.5		$	77.9		$	229.6
Cumulative effect of change in accounting principle		—			(46.6	)		—
Discontinued operations		0.4			12.9			(10.1	)
Adjustments to goodwill		(36.2	)		(23.9	)		—
Allocated to equity:
Foreign currency translation		—			—			2.7
TCP securities conversion and other		—			82.3			36.8
Pension		(27.8	)		(216.3	)		(43.2	)
Valuation allowances		27.1			134.0			0.3

78

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Significant components of the Company’s deferred tax assets and liabilities are as follows:

	December 31
	2003			2002
	(Millions of Dollars)
Deferred tax assets
Asbestos liability	$	541.6		$	504.5
Tax credits		98.9			131.9
Post employment benefits, including pensions		385.0			335.1
Net operating loss carryforwards		500.5			312.5
Other temporary differences		135.7			193.7
Total deferred tax assets		1,661.7			1,477.7
Valuation allowances for deferred tax assets		(892.3	)		(722.5	)
Net deferred tax assets		769.4			755.2
Deferred tax liabilities
Fixed assets		(265.8	)		(276.9	)
Intangible assets		(153.4	)		(144.4	)
Asbestos insurance		(254.2	)		(250.2	)
Deferred gains		(169.1	)		(127.5	)
Total deferred tax liabilities		(842.5	)		(799.0	)
	$	(73.1	)	$	(43.8	)

Deferred tax assets and liabilities are recorded in the consolidated balance sheets as follows:

	December 31
	2003			2002
	(Millions of Dollars)
Assets:
Prepaid expenses	$	9.3		$	35.4
Other noncurrent assets		5.7			11.4
Liabilities:
Other current liabilities		(17.7	)		(38.2	)
Long-term portion of deferred income taxes		(70.4	)		(52.4	)
	$	(73.1	)	$	(43.8	)

During 2003 the Company reversed a valuation allowance related to a deferred tax asset associated with a net operating loss. Approximately $11 million was realized as a result of an arrangement that was entered into with a previous owner of certain subsidiaries which allowed the Company to carry-back a net operating loss and realize a portion of the associated deferred tax asset. This amount was recorded as a reduction to the 2003 income tax expense.

Income taxes paid, net of refunds, in 2003, 2002, and 2001 were $18.1 million, $19.8 million and $32.5 million, respectively.

The Company did not provide taxes with respect to $612.4 million of undistributed earnings at December 31, 2003, since these earnings are considered by the Company to be permanently reinvested. Upon distribution of these earnings, the Company may be subject to United States income taxes and foreign withholding taxes. Determining the unrecognized deferred tax liability on the distribution of these earnings is not practicable as such liability, if any, is dependent on circumstances existing when remittance occurs.

At December 31, 2003, the Company had a deferred tax asset of $599.4 million for tax loss carryforwards and tax credits, including $219.4 million in the United States, that expire in various amounts from 2007-2023; $236.3 million in the United Kingdom with no expiration date; and $143.7 million in other jurisdictions with various expiration dates. Included in the previous amounts are deferred tax assets for tax loss carryforwards and tax credits acquired with the purchases of T&N, Cooper Automotive and Fel-Pro. A valuation allowance was recorded on $118.2 million of these purchased deferred tax assets and, to the extent such benefits are ever realized, such benefits will be recorded as a reduction of goodwill.

79

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

17. Earnings Per Share

Basic and diluted loss from continuing operations before cumulative effect of change in accounting principle per share are calculated as follows:

	Year Ended December 31
	2003			2002			2001
	(In Millions, Except Per Share Amounts)
Loss from continuing operations before cumulative effect of change in accounting principle	$	(185.5	)	$	(200.9	)	$	(737.8	)
Less Series C preferred dividend		—			—			(1.9	)
Loss from continuing operations available for common shareholders before cumulative effect of change in accounting principle	$	(185.5	)	$	(200.9	)	$	(739.7	)
Weighted average shares outstanding, basic and diluted		87.1			83.0			75.6
Basic and diluted loss per share before cumulative effect of change in accounting principle	$	(2.13	)	$	(2.42	)	$	(9.78	)

The effect of the assumed conversion of the Preferred Stock was not considered in 2003, 2002, or 2001 as its effect was anti-dilutive to the loss per share.

For additional disclosures regarding the Series C preferred stock, the employee stock options and non-vested stock shares, refer to Note 15, “Capital Stock and Preferred Share Purchase Rights”, and Note 18, “Incentive Stock Plans”.

18. Incentive Stock Plans

The Company’s shareholders adopted stock option plans in 1976 and 1984 and performance incentive stock plans in 1989 and 1997. These plans generally provide for awarding restricted shares or granting options to purchase shares of the Company’s common stock. Restricted shares entitle employees to all the rights of common stock shareholders, subject to certain transfer restrictions and to forfeiture in the event that the conditions for their vesting are not met. Options entitle employees to purchase shares at an exercise price not less than 100% of the fair market value on the grant date and expire after a five- or ten-year period as determined by the Board of Directors.

Under the plans, awards vest from six months to five years after their date of grant, as determined by the Board of Directors at the time of grant. At December 31, 2003, there were 3,057,180 shares available for future grants under the plans.

The total compensation cost that has been charged to operations for vesting of restricted stock awards was $0.1 million, $0.3 million and $0.4 million in 2003, 2002 and 2001, respectively.

The weighted-average fair value and the total number (in millions) of options granted was $2.71 and 0.3 for 2001 respectively. There were no options granted during 2002 or 2003. All options and stock awards that are not vested at December 31, 2003 vest solely on employees rendering additional service.

80

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The following table summarizes the activity relating to the Company’s incentive stock plans:

	Number of Shares		Weighted- Average Price
	(In Millions)
Outstanding at January 1, 2001	4.3		$	35.61
Options granted	0.3			3.18
Options/stock lapsed or canceled	(0.2	)		22.33
Outstanding at December 31, 2001	4.4		$	35.61
Options granted	—			—
Options/stock lapsed or canceled	(1.2	)		38.29
Outstanding at December 31, 2002	3.2			31.99
Options granted	—			—
Options/stock lapsed or canceled	(0.8	)		49.04
Outstanding at December 31, 2003	2.4			25.93
Options exercisable at December 31, 2003	2.1		$	28.27
Options exercisable at December 31, 2002	1.9		$	32.53
Options exercisable at December 31, 2001	2.4		$	36.02

The following is a summary of the range of exercise prices for stock options that are outstanding and the amount of nonvested stock awards at December 31, 2003:

	Outstanding Awards	Options Exercisable	Weighted-Average
Range			Price		Remaining Life
	(In Millions)
Options:
$0.65-$14.56	0.6	0.3	$	5.47	2.6 years
$14.57-$26.50	1.0	1.0	$	20.77	0.7 years
$26.51-$47.25	0.8	0.8	$	46.86	0.1 years
Total	2.4	2.1

19. Pensions and Other Post Employment 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 the Pension Benefits based on the funding requirements of federal and international laws and regulations in advance of benefit payments and the Other Benefits as benefits are provided to participating employees.

Components of net periodic benefit cost for the year ended December 31:

	United States Plans																		International Plans
	Pension Benefits									Other Benefits									Pension Benefits
	2003			2002			2001			2003			2002			2001			2003			2002			2001
	(Millions of Dollars)
Service cost	$	25.2		$	22.8		$	24.9		$	2.5		$	2.9		$	2.9		$	16.0		$	23.8		$	21.3
Interest cost		58.8			58.6			56.8			33.8			35.0			35.3			124.8			119.2			116.9
Expected return on plan assets		(48.4	)		(65.5	)		(75.9	)		—			—			—			(119.4	)		(131.9	)		(151.8	)
Unrecognized (gain) / loss		32.1			10.9			(3.3	)		3.2			0.5			0.3			48.2			28.0			5.7
Unrecognized prior service cost		8.3			8.4			5.9			(0.8	)		(0.8	)		(0.2	)		—			—			—
Settlement and curtailment loss		—			—			1.5			—			—			—			—			—			—
Net periodic cost (benefit)	$	76.0		$	35.2		$	9.9		$	38.7		$	37.6		$	38.3		$	69.6		$	39.1		$	(7.9	)

81

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Change in benefit obligation:

	United States Plans												International Plans
	Pension Benefits						Other Benefits						Pension Benefits
	2003			2002			2003			2002			2003			2002
	(Millions of Dollars)
Benefit obligation at beginning of year	$	891.2		$	818.8		$	549.3		$	482.5		$	2,043.2		$	1,834.6
Service cost		25.2			22.8			2.5			2.9			16.0			23.8
Interest cost		58.8			58.6			33.8			35.0			124.8			119.2
Employee contributions		—			—			1.6			—			6.5			6.4
Benefits paid		(60.8	)		(60.0	)		(48.5	)		(43.2	)		(157.6	)		(125.3	)
Plan amendments		—			2.7			—			(8.8	)		(0.6	)		—
Actuarial (gains) and losses and changes in actuarial assumptions		46.7			48.3			6.4			80.9			256.1			(23.8	)
Currency translation adjustment		—			—			—			—			242.4			208.3
Benefit obligation at end of year	$	961.1		$	891.2		$	545.1		$	549.3		$	2,530.8		$	2,043.2

Change in plan assets:

	United States Plans												International Plans
	Pension Benefits						Other Benefits						Pension Benefits
	2003			2002			2003			2002			2003			2002
	(Millions of Dollars)
Fair value of plan assets at beginning of year	$	569.6		$	686.1		$	—		$	—		$	1,585.8		$	1,639.5
Actual return on plan assets		119.0			(83.3	)		—			—			216.5			(120.2	)
Company contributions		23.2			26.8			—			—			24.1			8.4
Benefits paid		(60.8	)		(60.0	)		—			—			(144.2	)		(115.2	)
Currency translation adjustment		—			—			—			—			172.6			173.3
Fair value of plan assets at end of year	$	651.0		$	569.6		$	—		$	—		$	1,854.8		$	1,585.8
Funded status of the plan	$	(310.1	)	$	(321.6	)	$	(545.1	)	$	(549.3	)	$	(676.0	)	$	(457.4	)
Unrecognized net actuarial loss		249.7			305.6			118.8			115.5			737.1			564.8
Unrecognized prior service cost		64.4			72.7			(4.2	)		(5.0	)		—			—
Prepaid (accrued) benefit cost	$	4.0		$	56.7		$	(430.5	)	$	(438.8	)	$	61.1		$	107.4

Amounts applicable to the Company’s pension plans with accumulated benefit obligations in excess of plan assets are as follows:

	United States Plans				International Plans
	2003		2002		2003		2002
	(Millions of Dollars)
Projected benefit obligation	$	961.1	$	891.2	$	2,530.8	$	2,043.2
Accumulated benefit obligation		945.3		876.7		2,512.8		1,999.1
Fair value of plan assets		651.0		569.6		1,854.8		1,585.8

Amounts recognized in the balance sheet at December 31 consist of:

	Pension Benefits						Other Benefits
	2003			2002			2003			2002
	(Millions of Dollars)
Net prepaid (accrued) benefit cost	$	65.1		$	164.3		$	(430.5	)	$	(438.8	)
Additional minimum liability		(1,031.3	)		(899.5	)		—			—
Intangible assets		63.9			72.0			—			—
Accumulated other comprehensive loss		954.8			816.8			—			—
Net amount recognized	$	52.5		$	153.6		$	(430.5	)	$	(438.8	)

Net prepaid (accrued) benefit cost for pension benefits is comprised of plans with $295.4 million and $352.0 million of prepaid pension costs and $230.3 million and $187.7 million of accrued pension costs as of December 31, 2003 and 2002, respectively. The accumulated benefit obligation for all defined benefit pension plans was approximately $3,458 million and $2,876 million at December 31, 2003 and 2002, respectively. In addition, increases in the minimum pension liability related to pension benefits of $138.0 million and $692.8 million are included in other comprehensive loss for the years ended December 31, 2003 and 2002, respectively.

82

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Weighted-average assumptions used to determine the benefit obligation as of December 31:

	United States Plans								International Plans
	Pension Benefits				Other Benefits				Pension Benefits
	2003		2002		2003		2002		2003	2002
Discount rate	6.25	%	6.75	%	6.25	%	6.75	%	5.5%	5.6%
Expected return on plan assets	8.5	%	9.0	%	—		—		7.0-7.5%	7.0-7.5%
Rate of compensation increase	3.0	%	3.0	%	—		—		2.5-3.3%	2.5-3.4%

Weighted-average assumptions used to net periodic benefit cost for the years ended December 31:

	United States Plans								International Plans
	Pension Benefits				Other Benefits				Pension Benefits
	2003		2002		2003		2002		2003	2002
Discount rate	6.75	%	7.5	%	6.75	%	7.5	%	5.6%	6.0%
Expected return on plan assets	9.0	%	10.0	%	—		—		7.0-7.5%	7.0-7.5%
Rate of compensation increase	3.0	%	3.0	%	—		—		2.5-3.4%	2.5%

The Company evaluates its discount rate assumption annually as of December 31 for each of its retirement-related benefit plans based upon the yield of high quality, fixed-income debt instruments.

The Company’s expected return on plan assets is evaluated annually based upon a detailed study which includes a review of anticipated future long-term performance of individual asset classes, and consideration of the appropriate asset allocation strategy to provide for the timing and amount of benefits included in the projected benefit obligation. While the study gives appropriate consideration to recent fund performance and historical returns, the assumption is primarily a long-term prospective rate.

For measurement purposes, the Company has made the following assumptions for its Other Benefits:

	Other Benefits
	2003		2002
Health care cost trend rate	8.5	%	9.0	%
Ultimate health care trend rate	5.5	%	5.5	%
Year ultimate health care trend rate reached	2009		2009

The assumed health care trend rate has a significant impact on the amounts reported for Other Benefits plans. The following table illustrates the sensitivity to a change in the assumed health care trend rate:

	Total Service and Interest Cost		APBO
	(Millions of Dollars)
100 basis point (bp) increase in health care trend rate	$	+ 3.2	$	+ 41.9
100 bp decrease in health care trend rate		-2.8		-36.3

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

83

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The following table illustrates the sensitivity to a change in certain assumptions for Pension Benefits and Other Benefits. The changes in these assumptions have no impact on the Company’s 2004 funding requirements.

	United States Plans										International Plans
	Pension Benefits						Other Plans				Pension Benefits
	Impact on pension Expense		Impact on PBO		Impact on equity		Impact on benefit expense		Impact on APBO		Impact on pension Expense		Impact on PBO		Impact on equity
	(Millions of dollars)
25 bp decrease in discount rate	$	+ 2.1	$	+ 24.1	$	- 23.6	$	+ 1.4	$	+ 14.5	$	+ 5.6	$	+ 83.8	$	- 80.3
25 bp increase in discount rate		- 2.1		- 22.9		+ 22.4		- 1.4		- 14.5		- 5.9		- 85.1		+ 81.3
25 bp decrease in rate of return on assets		+ 1.6		—		—		—		—		+ 4.5		—		—
25 bp increase in rate of return on assets		- 1.6		—		—		—		—		-4.5		—		—

The Company’s pension plan weighted-average asset allocations at the measurement dates of December 31, 2003, and 2002, by asset category are as follows:

	United States Plan Assets December 31						International Plan Assets December 31
	Actual				Target		Actual				Target
	2003		2002		2004		2003		2002		2004
Asset Category
Equity securities	71	%	68	%	75	%	44	%	40	%	40	%
Debt securities	29	%	32	%	25	%	56	%	58	%	60	%
Real estate	—		—		—		—		2	%	—
Total	100	%	100	%	100	%	100	%	100	%	100	%

The Company invests in a diversified portfolio consisting of an array of asset classes that attempts to maximize returns while minimizing volatility. These asset classes include, U.S. domestic equities, emerging market equities, global high quality and high yield fixed income and real estate. The Company expects to contribute approximately $71 million to its pension plans in 2004.

The following table benefit payments, which reflect expected future service, as appropriate, expected to be paid:

	United States Plans				International Plans
	Pension Benefits		Other Benefits		Pension Benefits
	(Millions of Dollars)
2004	$	65.3	$	46.0	$	133.5
2005		65.2		43.9		136.2
2006		65.9		41.9		140.4
2007		66.5		40.2		146.0
2008		68.6		38.5		150.0
Years 2009 - 2013		357.8		170.5		803.6

The Company also maintains a defined-contribution savings plan that is qualified under Section 401(k) of the Internal Revenue Code. Prior to October 1, 2001, the Company generally matched 50% of an employee’s first 8% of before-tax contributions. Where permitted, subsequent to October 1, 2001, the Company suspended its matching contribution in connection with the Restructuring Proceedings. The total expense attributable to the Company’s defined-contribution savings plan was $2.3 million, $4.9 million, and $11.2 million for the years ended December 31, 2003, 2002 and 2001, respectively. Commencing January 1, 2004, the Company has reinstated a matching contribution for its defined-contribution plan at 25% of an employee’s first 8% of before-tax contributions.

84

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

20. Litigation and Environmental Matters

T&N Companies Asbestos Litigation

Background

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

Recorded Liability

In 2000, the Company increased its estimate of asbestos-related liability for the T&N Companies by $751 million and recorded a related insurance recoverable asset of $577 million. The revision in the estimate of probable asbestos-related liability principally resulted from a study performed by an econometric firm that specializes in these types of matters. The liability (approximately $1.4 billion as of December 31, 2003) represented the Company’s estimate prior to the Restructuring Proceedings for claims currently pending and those which were reasonably estimated to be asserted and paid through 2012. The Company did not provide a liability for claims that may be paid subsequent to this period as it could not reasonably estimate such claims. In estimating the liability prior to the Restructuring Proceedings, the Company made assumptions regarding the total number of claims anticipated to be received in a future period, the typical cost of settlement (which is sensitive to the industry in which the plaintiff claims exposure, the alleged disease type and the jurisdiction in which the action is being brought), the rate of receipt of claims, the settlement strategy in dealing with outstanding claims and the timing of settlements. As a result of the Restructuring Proceedings, pending asbestos-related litigation against the Company in the United States and the U.K. is stayed (subject to certain exceptions in the case of governmental authorities), and no party may take action to pursue or collect on such asbestos claims absent specific authorization of the Bankruptcy Court or the High Court. Since the Restructuring Proceedings, the Company has ceased making payments with respect to asbestos-related lawsuits. An asbestos creditors’ committee has been appointed in the U.S. representing asbestos claimants with pending claims against the Company, and the Bankruptcy Court has appointed a legal representative for the interests of potential future asbestos claimants. In the U.K. a creditors committee consisting in large part of representatives of asbestos claimants has been appointed. March 3, 2003 was the bar date for the filing of all asbestos-related property damage claims. The Company’s obligations with respect to present and future claims could be determined through litigation in Bankruptcy Court, the High Court, and/or through negotiations with each of the official committees appointed.

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

85

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The Company also issued various letters of credit in connection with asbestos lawsuits that had resulted in verdicts against the Company prior to its filing for bankruptcy protection. The letters of credit were issued as security for the judgments entered against the Company to permit the Company to pursue appeals to those judgments. The Bankruptcy Court lifted the automatic stay with respect to certain cases where letters of credit were in place to allow the appeals of those cases to proceed. During 2003, the final appeal in three of these cases were denied, and draws were made upon the letters of credit of approximately $16.0 million. At December 31, 2003, there are approximately $2.1 million of additional letters of credit available. At December 31, 2003, the draws on these letters of credit are recorded as debt within liabilities subject to compromise.

Except for the effect of foreign currency, the Company has not adjusted its estimate of the asbestos liability since September 30, 2001. This liability is included in the consolidated balance sheet under the caption “Liabilities subject to compromise” as of December 31, 2003 for the Company’s U.S. and U.K. subsidiaries.

While the Company believes that the liability recorded was appropriate as of October 1, 2001 for anticipated losses arising from asbestos-related claims against the T&N Companies through 2012, it is the Company’s view that, as a result of the Restructuring Proceedings, there is even greater uncertainty in estimating the future asbestos liability and related insurance recovery for pending and future claims. There are significant differences in the treatment of asbestos claims in a bankruptcy proceeding as compared to the tort litigation system. Among other things, it is uncertain at this time as to the number of asbestos-related claims that will be filed in the Restructuring Proceedings, the number of future claims that will be included in a plan of reorganization, how claims for punitive damages and claims by persons with no asbestos-related physical impairment will be treated and whether such claims will be allowed, and the impact that historical settlement values for asbestos claims may have on the estimation of asbestos liability in the Restructuring Proceedings.

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

Insurance Recoverable

In 1996, T&N Ltd. (formerly T&N, plc) purchased for itself and its then defined global subsidiaries a £500 million layer of insurance which will be triggered should the aggregate costs of claims made or brought after June 30, 1996, where the exposure occurred prior to that date, exceed £690 million. During 2000, the Company concluded that the aggregate cost of the claims filed after June 30, 1996 would exceed the trigger point and recorded an insurance recoverable asset under the T&N policy of $577 million. As of December 31, 2003, the recorded insurance recoverable was $636.8 million. In December 2001, one of the three reinsurers, European International Reinsurance Company Ltd. (“EIR”), filed suit in a London, England court to challenge the validity of its insurance contract with the T&N Companies. As a result of this lawsuit, a claim was made against the broker (Sedgwick) that assisted in procuring this policy for breach of its duties as a broker. This trial commenced in October 2003. Prior to the conclusion of the trial, the parties were able to reach a settlement. As a result of this settlement, the Company recorded an asbestos charge in 2003 of $38.9 million. Under the terms of the settlement, EIR would be liable for 65.5% of its one-third share of the reinsurance policy. By separate agreement, Sedgwick agreed to be liable for an additional 17.25% of the EIR share of the reinsurance policy. T&N Ltd. has also agreed to indemnify the insurer for sums paid under the policy for which the insurer is liable to T&N Ltd. for which the insurer has no recovery from the reinsurers of Sedgwick. The settlement agreements referenced above are being held in escrow pending approval by the Bankruptcy Court and the Administrators of T&N Ltd. of those portions of the above-described settlement agreements that affect the Debtors. Approval is expected in early 2004. In December 2002, the remaining two reinsurers issued separate declaratory proceedings requesting the High Court to interpret certain terms contained in the Asbestos Liability Policy. These proceedings do not request the avoidance of the Asbestos Liability Policy. The Company believes that, based on its review of the insurance policies and advice from outside legal counsel, it is probable that the T&N Companies will be entitled to receive payment from the reinsurers for the cost of the claims in excess of the trigger point of the insurance.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 change significantly based upon events that occur from the Restructuring Proceedings.

The Company has reviewed the financial viability and legal obligations of the three reinsurance companies involved and has concluded that 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 December 31, 2003, the $636.8 million insurance recoverable asset includes an exchange rate premium of approximately $28.1 million.

Abex and Wagner Asbestos Litigation

Background

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

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

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

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

Recorded Liability

The liability (comprised of $129.5 million in Abex liabilities and $85.0 million in Wagner liabilities as of December 31, 2003) represented the Company’s estimate prior to the Restructuring Proceedings for claims currently pending and those which were reasonably estimated to be asserted and paid through 2012. The Company did not provide a liability for claims that may be brought subsequent to this period as it could not reasonably estimate such claims. In estimating the liability prior to the Restructuring Proceedings, the Company made assumptions regarding 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

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

Insurance Recoverable

Abex maintained product liability insurance coverage for most of the time that it manufactured products that contained asbestos. This coverage is shared with other third-party companies. The subsidiary of the Company that may be liable for certain indemnity and defense payments with respect to Abex has the benefit of that insurance up to the extent of that liability. Abex has been in litigation since 1982 with the insurance carriers of its primary layer of liability concerning coverage for asbestos claims. Abex also has substantial excess layer liability insurance coverage that is shared with other companies that, barring unforeseen insolvencies of excess carriers or other adverse events, should provide coverage for asbestos claims against Abex. The Abex insurance recoverable was $115.7 million as of December 31, 2003.

Wagner also maintained product liability insurance coverage for some of the time that it manufactured products that contained asbestos. This coverage is shared with other third-party companies. 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 $53.5 million as of December 31, 2003.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Federal-Mogul and Fel-Pro Asbestos Litigation

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

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

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

Aggregate of Asbestos Liability and Insurance Recoverable Asset

The following is a summary of the asbestos liability and the insurance recoverable asset as of December 31, 2002 and December 31, 2003:

	T&N Companies			Abex			Wagner		Other		Total
	(Millions of Dollars)
Liability:
Balance at December 31, 2002	$	1,347.9		$	129.5		$	85.0	$	2.7	$	1,565.1
Judgments rendered		(16.0	)		—			—		—		(16.0	)
Foreign exchange		19.3			—			—		—		19.3
Balance at December 31, 2003	$	1,351.2		$	129.5		$	85.0	$	2.7	$	1,568.4
Asset:
Balance at December 31, 2002	$	610.8		$	116.3		$	53.5	$	—	$	780.6
Cash receipts		—			(0.6	)		—		—		(0.6	)
Adjustment for reinsurance settlement		(38.9	)		—			—		—		(38.9	)
Foreign exchange		65.0			—			—		—		65.0
Balance at December 31, 2003	$	636.9		$	115.7		$	53.5	$	—	$	806.1

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

Other

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Company has been notified by the United States Environmental Protection Agency, other national environmental agencies, and various state agencies that it may be a potentially responsible party (“PRP”) under such laws for the cost of remediating hazardous substances pursuant to CERCLA and other national and state environmental laws. PRP designation requires the funding of site investigations and subsequent remedial activities.

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

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

Environmental reserves were $66.0 million and $64.6 million at December 31, 2003 and 2002, respectively and are included in the consolidated balance sheets as follows:

	December 31
	2003		2002
	(Millions of Dollars)
Current liabilities	$	15.1	$	14.2
Long-term accrued liabilities		27.1		27.5
Liabilities subject to compromise		23.8		22.9
	$	66.0	$	64.6

The increase in the reserves during 2003 resulted primarily from the addition of new sites and revision of cost estimates to remediate current sites, offset by remediation payments made during the period. 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 December 31, 2003, management estimates that reasonably possible material additional losses above and beyond management’s best estimate of required remediation costs as recorded approximates $40 million.

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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

21. Operations by Reporting Segment and Geographic Area

The Company’s integrated operations are included in five reporting segments generally corresponding to major product groups: Powertrain, Sealing Systems and Systems Protection, Friction, Aftermarket and Other. Segment information for the years ended December 31, 2002 and 2001 has been reclassified to reflect organizational changes implemented in January 2003.

Powertrain products are used primarily in automotive, light truck, heavy-duty, industrial, marine, agricultural, power generation and small air-cooled engine applications. The primary products of this segment include engine bearings, pistons, piston pins, rings, cylinder liners, camshafts, valve train and transmission products and connecting rods. These products are offered under the Federal-Mogul, Glyco, Goetze and Nural brand names. These products are either sold as individual components or, increasingly, offered to automotive manufacturers assembled in a power cylinder system. This strategic product offering adds value to the customer by simplifying the assembly process, lowering costs and reducing vehicle development time. Powertrain operates 47 manufacturing facilities in 12 countries, serving many major automotive, heavy-duty diesel and industrial customers worldwide.

Sealing Systems and Systems Protection products include dynamic seals, gaskets (static seals) and element resistant sleeving systems protection products. The products within this group are marketed under the brand names of Federal-Mogul, National, BCA, Fel-Pro, Payen and Glockler. Sealing Systems and Systems Protection operates 30 manufacturing facilities in 12 countries, serving many major automotive, heavy-duty diesel and industrial customers worldwide.

Friction products are used in automotive and heavy-duty applications and the primary products of this segment include brake disc pads, brake shoes, and brake linings and blocks. Federal-Mogul has a well-balanced portfolio of world-class brand names, including Abex, Beral, Wagner and Ferodo. Federal-Mogul supplies OEM friction products to all the major customers in the light vehicle, commercial vehicle and railway sectors and is also very active in the aftermarket. Friction operates 15 manufacturing facilities in 10 countries, serving many major automotive, railroad and industrial customers worldwide.

Aftermarket distributes products manufactured within the above segments, or purchased, to the independent automotive, heavy-duty and industrial aftermarkets. The segment also includes manufacturing operations for brake, chassis, ignition, lighting, fuel and wiper products. Federal-Mogul is a leader in several key aftermarket product lines. These products are marketed under the brand names Champion, Fel-Pro, Carter, ANCO, Moog, Wagner, Ferodo, Glyco and Sealed Power. Aftermarket operates 23 manufacturing facilities and 29 distribution centers in 19 countries, serving a diverse base of distributors and retail customers around the world. All product transferred into Aftermarket from other reporting segments is transferred at cost in the United States and at agreed-upon transfer prices internationally.

Other is comprised of the Company’s Asia Pacific operations and Corporate functions. Asia Pacific encompasses the Company’s commercial activities from manufacturing, distribution and sales in this geographic region. The Company operates approximately 20 manufacturing and distribution facilities in this region, as well as an engineering technical center in Yokohama, Japan. Corporate functions is comprised of headquarters and central support costs for information technology, human resources, finance and other corporate activities as well as certain health and welfare costs for pension and other post-employment benefits for the Company’s retirees. Current period service costs for active employees are included in the results of operations for each of the Company’s reporting segments.

The Company has aggregated certain individual product segments within its five reporting segments. The accounting policies of the segments are the same as that of the Company. Revenues related to Powertrain, Sealing Systems and Systems Protection, and Friction products sold to OE customers are recorded within the respective segments. Revenues from such products sold to aftermarket customers are recorded within the Aftermarket segment.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

As noted in Note 3, the Company adopted SFAS No. 142 effective January 1, 2002. Note 3 includes the pro-forma effect of SFAS No. 142 on reported results for the year ended December 31, 2001. The Operational EBIT amounts for 2001 below have not been adjusted for the pro-forma effects of the adoption of SFAS No. 142.

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

	Net Sales						Gross Margin
	Year Ended December 31						Year Ended December 31
	2003		2002		2001		2003		2002			2001
	(Millions of Dollars)
Powertrain	$	1,839	$	1,652	$	1,567	$	255	$	260		$	265
Sealing Systems and Systems Protection		620		639		630		103		124			131
Friction		431		374		339		116		97			60
Aftermarket		2,576		2,455		2,485		612		548			570
Other		80		64		72		1		(8	)		29
Total	$	5,546	$	5,184	$	5,093	$	1,087	$	1,021		$	1,055

Operational EBIT by reporting segment is as follows:

	Operational EBIT
	Year Ended December 31
	2003			2002			2001
	(Millions of Dollars)
Powertrain	$	131		$	103		$	127
Sealing Systems and Systems Protection		27			45			34
Friction		51			45			3
Aftermarket		347			293			234
Other		(305	)		(281	)		(271	)
Total Segments Operational EBIT		251			205			127
Items required to reconcile Operational EBIT to loss from continuing operations before income tax expense and cumulative effect of change in accounting principle:
Interest expense, net		(98	)		(123	)		(275	)
Restructuring charges, net		(34	)		(41	)		(37	)
Adjustment of assets held for sale and other long-lived assets to fair value		(106	)		(63	)		(328	)
Gain on extinguishment of debt		—			—			72
Chapter 11 and Administration related reorganization costs		(97	)		(107	)		(57	)
Other		(49	)		6			(10	)
Loss From Continuing Operations Before Income Tax Expense and Cumulative Effect of Change in Accounting Principle	$	(133	)	$	(123	)	$	(508	)

Total Assets, Capital Expenditures, and Depreciation and Amortization information by reporting segment is as follows:

	Total Assets				Capital Expenditures						Depreciation and Amortization
	December 31				Year Ended December 31						Year Ended December 31
	2003		2002		2003		2002		2001		2003		2002		2001
	(Millions of Dollars)
Powertrain	$	1,957	$	1,861	$	137	$	183	$	156	$	140	$	119	$	122
Sealing Systems and Systems Protection		1,249		1,237		45		42		37		50		46		57
Friction		696		618		62		69		49		45		39		47
Aftermarket		2,912		2,718		34		31		41		55		55		89
Other		1,303		1,479		21		9		14		15		13		37
Total	$	8,117	$	7,913	$	299	$	334	$	297	$	305	$	272	$	352

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The following table shows geographic information:

	Net Sales						Net Property, Plant and Equipment
	Year Ended December 31						December 31
	2003		2002		2001		2003		2002
	(Millions of Dollars)
United States	$	2,731	$	2,834	$	2,814	$	911	$	948
United Kingdom		441		427		408		225		246
Germany		804		652		627		552		464
France		457		348		343		215		182
Other		1,113		923		901		502		433
Total	$	5,546	$	5,184	$	5,093	$	2,405	$	2,273

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

22. Subsequent Event (Unaudited)

On March 5, 2004, a fire destroyed the Company’s Smithville, Tennessee distribution center. This facility was the Company’s primary source for supplying chassis parts to the North American aftermarket. The Company does not believe this incident will impact its long-term ability to supply chassis products to the North American aftermarket, and is taking appropriate measures to minimize any impact this incident may have on short-term product availability.

Sales fulfilled from this distribution center during the year ended December 31, 2003 approximated $200 million. In addition, this distribution center had inventory on-hand of approximately $46 million at December 31, 2003, and approximately $51 million at March 5, 2004. The net book value of this building at December 31, 2003 was approximately $6 million. Management believes its insurance coverage is adequate to cover its direct and indirect costs resulting from the fire, but is unable to estimate with certainty the extent to which incremental costs not directly attributable to the fire may be reimbursed under its insurance policies.

The Company has temporarily leased a facility to conduct its distribution operations while plans for permanent arrangements can be developed and implemented. To replace inventory damaged or destroyed in the fire, other Federal-Mogul facilities have increased production of chassis parts through additional production shifts or overtime production.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

23. Quarterly Financial Data (Unaudited)

The quarterly information below has been restated from the Quarterly Reports on Forms 10-Q for the impact of discontinued operations. Discontinued operations are further discussed in Note 6 to the consolidated financial statements, “Discontinued Operations and Acquisition.”

	First			Second			Third			Fourth(1)			Year
	(Amounts in millions, except per share amounts and stock prices)
Year ended December 31, 2003:
Net sales	$	1,367.2		$	1,428.3		$	1,337.6		$	1,412.9		$	5,546.0
Gross margin		272.6			294.4			250.6			269.3			1,086.9
Loss from continuing operations		(37.1	)		(0.7	)		(27.0	)		(120.7	)		(185.5	)
Net loss		(34.2	)		(5.3	)		(29.3	)		(120.7	)		(189.5	)
Diluted loss per share		(0.39	)		(0.06	)		(0.34	)		(1.38	)		(2.17	)
Stock price
High	$	0.47		$	0.44		$	0.36		$	0.40
Low	$	0.07		$	0.12		$	0.10		$	0.07
Dividend per share		—			—			—			—
	First(2)			Second			Third			Fourth			Year
Year ended December 31, 2002:
Net sales	$	1,281.2		$	1,377.1		$	1,287.1		$	1,238.9		$	5,184.3
Gross margin		258.9			284.5			242.9			235.1			1,021.4
Earnings (loss) from continuing operations		(46.3	)		14.1			(79.7	)		(89.0	)		(200.9	)
Net earnings (loss)		(1,443.5	)		0.5			(73.4	)		(112.5	)		(1,628.9	)
Diluted earnings (loss) per share		(17.81	)		0.17			(0.89	)		(1.33	)		(19.62	)
Stock price
High	$	1.20		$	1.20		$	0.73		$	0.63
Low	$	0.80		$	0.43		$	0.53		$	0.21
Dividend per share		—			—			—			—

(1) Includes a $38.9 million asbestos charge and $101.5 million in charges for adjustment of assets held for sale and other long-lived assets to fair value.

(2) Includes a $1,417.9 million charge, net of applicable income tax benefit, for the cumulative effect of the adoption of SFAS No. 142

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

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

As a result of the Restructuring Proceedings (see Note 1 “Voluntary Reorganization Under Chapter 11 and Administration”) certain of the liabilities, as shown below, were liabilities subject to compromise as of the Petition date:

	Parent		Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Consolidated
	(Millions of Dollars)
Accounts payable	$	57.5	$	115.1	$	29.2	$	201.8
Other accrued liabilities		6.9		0.8		10.5		18.2
Environmental liabilities		23.3		—		0.5		23.8
Interest payable		43.7		0.2		—		43.9
Debt		4,019.7		1.0		—		4,020.7
Asbestos liabilities		1.5		232.5		1,334.4		1,568.4
Company-obligated mandatorily redeemable preferred securities of subsidiary holding solely convertible subordinated debentures of the Company		—		—		211.0		211.0
	$	4,152.6	$	349.6	$	1,585.6	$	6,087.8

96

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

FEDERAL-MOGUL CORPORATION

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

Year Ended December 31, 2003

(Millions of Dollars)

	Unconsolidated									Eliminations						Consolidated
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Discontinued Operations			Inter- Company
Net sales	$	1,085.1		$	1,666.5		$	3,939.1		$	(67.8	)	$	(1,076.9	)	$	5,546.0
Cost of products sold		894.4			1,284.9			3,415.9			(59.2	)		(1,076.9	)		4,459.1
Gross margin		190.7			381.6			523.2			(8.6	)		—			1,086.9
Selling, general and administrative expenses		283.6			216.5			374.8			(2.8	)		—			872.1
Amortization of intangible assets		2.8			4.8			9.3			—			—			16.9
Restructuring charges, net		—			10.3			25.7			(1.8	)		—			34.2
Adjustment of assets held for sale and other long-lived assets to fair value		—			28.4			77.6			—			—			106.0
Asbestos charge		—			—			38.9			—			—			38.9
Interest expense (income), net		100.7			—			(2.7	)		0.2			—			98.2
Chapter 11 and Administration related reorganization expenses		97.1			—			—			—			—			97.1
Equity in earnings of unconsolidated subsidiaries		—			(6.7	)		(20.6	)		—			—			(27.3	)
Other (income) expense, net		(119.1	)		(9.4	)		120.1			(7.8	)		—			(16.2	)
Earnings (loss) from continuing operations before income taxes and equity in loss of subsidiaries		(174.4	)		137.7			(99.9	)		3.6			—			(133.0	)
Income tax expense		(20.9	)		4.0			69.8			(0.4	)		—			52.5
Earnings (loss) from continuing operations before equity in loss of subsidiaries		(153.5	)		133.7			(169.7	)		4.0			—			(185.5	)
Loss from discontinued operations, net of income taxes		—			—			—			(4.0	)		—			(4.0	)
Equity in loss of subsidiaries		(36.0	)		(0.8	)		—			—			36.8			—
Net Loss	$	(189.5	)	$	132.9		$	(169.7	)	$	—		$	36.8		$	(189.5	)

97

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

FEDERAL-MOGUL CORPORATION

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

Year Ended December 31, 2002

(Millions of Dollars)

	Unconsolidated									Eliminations						Consolidated
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Discontinued Operations			Inter- Company
Net sales	$	1,191.8		$	1,783.9		$	3,126.5		$	(238.1	)	$	(679.8	)	$	5,184.3
Cost of products sold		979.4			1,418.3			2,662.4			(217.4	)		(679.8	)		4,162.9
Gross margin		212.4			365.6			464.1			(20.7	)		—			1,021.4
Selling, general and administrative expenses		201.4			272.8			352.1			(9.6	)		—			816.7
Amortization of intangible assets		3.1			6.3			4.7						—			14.1
Restructuring charges, net		—			15.4			27.9			(2.8	)		—			40.5
Adjustment of assets held for sale and other long-lived assets to fair value		3.3			34.8			32.1			(7.3	)		—			62.9
Interest expense (income), net		128.3			—			(5.5	)		0.6			—			123.4
Chapter 11 and Administration related reorganization expenses		107.4			—			—						—			107.4
Equity in earnings of unconsolidated subsidiaries		—			(4.8	)		(15.0	)					—			(19.8	)
Other (income) expense, net		(123.3	)		5.8			115.5			1.2			—			(0.8	)
Earnings (loss) from continuing operations before income taxes, cumulative effect of change in accounting principle and equity in loss of subsidiaries		(107.8	)		35.3			(47.7	)		(2.8	)		—			(123.0	)
Income tax expense		3.9			33.2			53.7			(12.9	)		—			77.9
Earnings (loss) from continuing operations before cumulative effect of change in accounting principle and equity in loss of subsidiaries		(111.7	)		2.1			(101.4	)		10.1			—			(200.9	)
Cumulative effect of change in accounting principle, net of applicable tax benefits		(3.8	)		432.8			988.9			—			—			1,417.9
Loss from continuing operations before equity in loss of subsidiaries		(107.9	)		(430.7	)		(1,090.3	)		10.1			—			(1,618.8	)
Loss from discontinued operations, net of income taxes		—			—			—			(10.1	)		—			(10.1	)
Equity in loss of subsidiaries		(1,521.0	)		(686.7	)		—			—			2,207.7			—
Net Loss	$	(1,628.9	)	$	(1,117.4	)	$	(1,090.3	)	$	—		$	2,207.7		$	(1,628.9	)

98

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

FEDERAL-MOGUL CORPORATION

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

Year Ended December 31, 2001

(Millions of Dollars)

	Unconsolidated									Eliminations						Consolidated
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Discontinued Operations			Inter- Company
Net sales	$	1,252.6		$	1,826.4		$	2,925.4		$	(364.0	)	$	(547.4	)	$	5,093.0
Cost of products sold		1,050.0			1,483.0			2,396.1			(344.1	)		(547.4	)		4,037.6
Gross margin		202.6			343.4			529.3			(19.9	)		—			1,055.4
Selling, general and administrative expenses		278.6			218.3			343.1			(31.3	)		—			808.7
Amortization of intangible assets		20.1			42.8			52.4			(5.8	)		—			109.5
Restructuring charges, net		12.2			—			25.8			(0.6	)		—			37.4
Adjustment of assets held for sale and other long-lived assets to fair value		0.7			380.9			163.5			(217.0	)		—			328.1
Interest expense, net		269.8			0.2			4.8			—			—			274.8
Chapter 11 and Administration related reorganization expenses		57.3			—			—			—			—			57.3
Gain on early retirement of debt		(72.2	)		—			—			—			—			(72.2	)
Equity in earnings of unconsolidated subsidiaries		—			(5.3	)		(9.2	)		—			—			(14.5	)
Other (income) expense, net		(60.0	)		67.5			66.0			(39.0	)		—			34.5
Loss from continuing operations before income taxes		(303.9	)		(361.0	)		(117.1	)		273.8			—			(508.2	)
Income tax expense (benefit)		150.5			(8.2	)		77.2			10.1			—			229.6
Loss from continuing operations before equity in loss of subsidiaries		(454.4	)		(352.8	)		(194.3	)		263.7			—			(737.8	)
Loss from discontinued operations, net of income taxes		—			—			—			(263.7	)		—			(263.7	)
Equity in loss of subsidiaries		(547.1	)		(88.5	)		—			—			635.6			—
Net Loss	$	(1,001.5	)	$	(441.3	)	$	(194.3	)	$	—		$	635.6		$	(1,001.5	)

99

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

FEDERAL-MOGUL CORPORATION

CONSOLIDATING CONDENSED BALANCE SHEET

December 31, 2003

(Millions of Dollars)

	Unconsolidated							Eliminations			Consolidated
	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiaries
ASSETS
Cash and equivalents	$	21.7		$	—	$	450.7	$	—		$	472.4
Accounts receivable, net		180.3			290.1		506.1		—			976.5
Inventories, net		100.3			280.7		453.4		—			834.4
Prepaid expenses		65.3			29.3		162.9		—			257.5
Total Current Assets		367.6			600.1		1,573.1		—			2,540.8
Property, plant and equipment		277.9			625.0		1,501.9		—			2,404.8
Goodwill and indefinite-lived intangible assets		517.6			664.3		335.2		—			1,517.1
Definite-lived intangible assets, net		79.5			87.0		181.5		—			348.0
Investment in subsidiaries		6,461.0			2,991.0		—		(9,452.0	)		—
Intercompany accounts, net		(3,539.2	)		2,957.0		582.2		—			—
Asbestos-related insurance recoverable		—			171.3		634.8		—			806.1
Prepaid pension costs		22.9			—		286.3		—			309.2
Other noncurrent assets		21.0			29.2		140.5		—			190.7
Total Assets	$	4,208.3		$	8,124.9	$	5,235.5	$	(9,452.0	)	$	8,116.7
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Short-term debt, including current portion of long-term debt	$	0.2		$	—	$	14.6	$	—		$	14.8
Accounts payable		44.1			54.2		234.0		—			332.3
Accrued compensation		68.6			23.7		154.7		—			247.0
Accrued rebates		14.8			14.1		30.8					59.7
Restructuring and rationalization reserves		1.8			4.7		51.2		—			57.7
Accrued income taxes		2.9			—		28.5		—			31.4
Other accrued liabilities		118.9			26.6		130.4		—			275.9
Total Current Liabilities		251.3			123.3		644.2		—			1,018.8
Liabilities subject to compromise		4,152.6			349.6		1,585.6		—			6,087.8
Long-term debt		320.0			—		11.2		—			331.2
Post employment benefits		740.6			—		976.0		—			1,716.6
Long-term portion of deferred income taxes		—			—		70.4		—			70.4
Other accrued liabilities		91.3			0.1		123.0		—			214.4
Minority interest in consolidated subsidiaries		29.4			25.0		—		—			54.4
Shareholders’ Equity (Deficit)		(1,376.9	)		7,626.9		1,825.1		(9,452.0	)		(1,376.9	)
Total Liabilities and Shareholders’ Equity (Deficit)	$	4,208.3		$	8,124.9	$	5,235.5	$	(9,452.0	)	$	8,116.7

100

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

FEDERAL-MOGUL CORPORATION

CONSOLIDATING CONDENSED BALANCE SHEET

December 31, 2002

(Millions of Dollars)

	Unconsolidated							Eliminations			Consolidated
	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiaries
ASSETS
Cash and equivalents	$	31.9		$	—	$	363.2	$	—		$	395.1
Accounts receivable, net		171.8			310.0		464.8		—			946.6
Inventories, net		62.5			351.9		385.7		—			800.1
Prepaid expenses		41.1			33.0		143.2		—			217.3
Total Current Assets		307.3			694.9		1,356.9		—			2,359.1
Property, plant and equipment		244.6			687.4		1,341.0		—			2,273.0
Goodwill and indefinite-lived intangible assets		536.3			681.1		347.8		—			1,565.2
Definite-lived intangible assets, net		87.6			91.7		172.3		—			351.6
Investment in subsidiaries		6,394.2			2,977.5		—		(9,371.7	)		—
Intercompany accounts, net		(3,424.6	)		2,295.2		1,129.4		—			—
Asbestos-related insurance recoverable		—			171.9		608.7		—			780.6
Prepaid pension costs		71.2			—		290.3		—			361.5
Other noncurrent assets		43.7			36.5		142.1		—			222.3
Total Assets	$	4,260.3		$	7,636.2	$	5,388.5	$	(9,371.7	)	$	7,913.3
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Short-term debt, including current portion of long-term debt	$	314.7		$	—	$	31.4	$	—		$	346.1
Accounts payable		44.5			67.0		207.4		—			318.9
Accrued compensation		91.4			25.3		125.4		—			242.1
Accrued rebates		14.2			13.5		19.0					46.7
Restructuring and rationalization reserves		13.9			18.1		58.8		—			90.8
Accrued income taxes		9.2			—		33.9		—			43.1
Other accrued liabilities		123.9			28.1		164.7		—			316.7
Total Current Liabilities		611.8			152.0		640.6		—			1,404.4
Liabilities subject to compromise		4,111.1			363.6		1,578.5		—			6,053.2
Long-term debt		—			—		14.3		—			14.3
Post employment benefits		813.5			—		727.7		—			1,541.2
Long-term portion of deferred income taxes		2.5			—		49.9		—			52.4
Other accrued liabilities		102.7			1.4		101.6		—			205.7
Minority interest in consolidated subsidiaries		22.3			23.4		—		—			45.7
Shareholders’ Equity (Deficit)		(1,403.6	)		7,095.8		2,275.9		(9,371.7	)		(1,403.6	)
Total Liabilities and Shareholders’ Equity (Deficit)	$	4,260.3		$	7,636.2	$	5,388.5	$	(9,371.7	)	$	7,913.3

101

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

FEDERAL-MOGUL CORPORATION

CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS

Year Ended December 31, 2003

(Millions of Dollars)

	Unconsolidated
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations		Consolidated
Net Cash Provided From (Used By) Operating Activities	$	(197.6	)	$	333.4		$	183.2		$	—	$	319.0
Expenditures for property, plant and equipment		(46.1	)		(78.7	)		(176.1	)		—		(300.9	)
Net proceeds from sale of businesses		—			23.3			0.3			—		23.6
Net Cash Used By Investing Activities		(46.1	)		(55.4	)		(175.8	)		—		(277.3	)
Proceeds from issuance of long-term debt		—			—			1.2			—		1.2
Principal payments on long-term debt		—			—			(4.3	)		—		(4.3	)
Proceeds from borrowings on DIP credit facility		125.5			—			—			—		125.5
Principal payments on DIP credit facility		(120.2	)		—			—			—		(120.2	)
Increase (decrease) in short-term debt		0.2			—			(16.8	)		—		(16.6	)
Change in intercompany accounts		178.0			(278.0	)		100.0			—		—
Net Cash Provided From (Used By) Financing Activities		183.5			(278.0	)		80.1			—		(14.4	)
Effect of Foreign Currency Exchange Rate Fluctuations on Cash and equivalents		50.0			—			—			—		50.0
Net Increase (Decrease) in Cash and Equivalents	$	(10.2	)	$	—		$	87.5		$	—	$	77.3

102

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

FEDERAL-MOGUL CORPORATION

CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS

Year Ended December 31, 2002

(Millions of Dollars)

	Unconsolidated
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations		Consolidated
Net Cash Provided From (Used By) Operating Activities	$	181.8		$	118.9		$	(44.2	)	$	—	$	256.5
Expenditures for property, plant and equipment		(41.6	)		(90.9	)		(206.6	)		—		(339.1	)
Net proceeds from sale of businesses		7.5			6.0			21.1			—		34.6
Net Cash Used By Investing Activities		(34.1	)		(84.9	)		(185.5	)		—		(304.5	)
Proceeds from issuance of long-term debt		—			—			6.6			—		6.6
Principal payments on long-term debt		—			—			(2.4	)		—		(2.4	)
Proceeds from borrowings on DIP credit facility		75.0			—			—			—		75.0
Principal payments on DIP credit facility		(10.3	)		—			—			—		(10.3	)
Increase (decrease) in short-term debt		—			(0.5	)		7.0			—		6.5
Change in intercompany accounts		(275.3	)		(37.0	)		312.3			—		—
Net Cash Provided From (Used By) Financing Activities		(210.6	)		(37.5	)		323.5			—		75.4
Effect of Foreign Currency Exchange Rate Fluctuations on Cash and equivalents		20.8			—			—			—		20.8
Net Increase (Decrease) in Cash and Equivalents	$	(42.1	)	$	(3.5	)	$	93.8		$	—	$	48.2

103

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

FEDERAL-MOGUL CORPORATION

CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS

Year Ended December 31, 2001

(Millions of Dollars)

	Unconsolidated
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated
Net Cash Provided From (Used By) Operating Activities	$	105.4		$	(28.9	)	$	(40.7	)	$	—	$	35.8
Expenditures for property, plant and equipment		(28.6	)		(87.1	)		(198.1	)		—		(313.8	)
Net proceeds from sale of property, plant & equipment		—			9.4			9.6			—		19.0
Net proceeds from sale of businesses		5.2			209.0			28.6			—		242.8
Business acquisitions, net of cash acquired		—			—			(18.8	)		—		(18.8	)
Net Cash Provided From (Used By) Investing Activities		(23.4	)		131.3			(178.7	)		—		(70.8	)
Proceeds from issuance of long-term debt		667.2			—			—			—		667.2
Principal payments on long-term debt		(163.7	)		—			(8.1	)		—		(171.8	)
Proceeds from borrowings on DIP credit facility		250.0											250.0
(Decrease) increase in short-term debt		(57.6	)		(8.4	)		1.9			—		(64.1	)
Fees paid for debt agreements		(38.0	)		—			—			—		(38.0	)
Change in intercompany accounts		(445.6	)		(96.9	)		542.5			—		—
Repurchase of accounts receivable under securitization		(348.1	)		—			—			—		(348.1	)
Other		(26.2	)		—			—			—		(26.2	)
Net Cash Provided From (Used By) Financing Activities		(162.0	)		(105.3	)		536.3			—		269.0
Effect of Foreign Currency Exchange Rate Fluctuations on Cash and Equivalents		5.7			—			—			—		5.7
Net Increase (Decrease) in Cash and Equivalents	$	(74.3	)	$	(2.9	)	$	316.9		$	—	$	239.7

104

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING

To Our Shareholders:

The management of Federal-Mogul Corporation (the “Company”) has the responsibility for preparing the accompanying financial statements and for their integrity and objectivity. The financial statements were prepared in accordance with accounting principles generally accepted in the United States and include amounts based on the best estimates and judgments of management. Management also prepared the other financial information in this report and is responsible for its accuracy and consistency with the financial statements. The Company has retained independent auditors, ratified by election by the shareholders, to audit the financial statements.

The Company maintains internal accounting control systems that are adequate to provide reasonable assurance that assets are safeguarded from loss or unauthorized use and that produce records adequate for preparation of financial information. The systems controls and compliance are reviewed by a program of internal audits. There are limits inherent in all systems of internal accounting control based on the recognition that the costs of such a system not exceed the benefits derived. We believe the Company’s system provides this appropriate balance.

The Audit Committee of the Board of Directors, comprised of five outside directors, performs an oversight role related to financial reporting. The Committee periodically meets jointly and separately with the independent auditors, internal auditors and management to review their activities and reports and to take any action appropriate to their findings. At all times, the independent auditors have the opportunity to meet with the Audit Committee, without management representatives present, to discuss matters related to their audits.

/s/ Charles G. McClure, Jr.

Charles G. McClure, Jr.

Chief Executive Officer

/s/ G. Michael Lynch

G. Michael Lynch

Executive Vice President and Chief Financial Officer

105

REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Board of Directors

Federal-Mogul Corporation

We have audited the accompanying consolidated balance sheets of Federal-Mogul Corporation and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, shareholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Federal-Mogul Corporation and subsidiaries at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements, taken as a whole, represents fairly in all material respects the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming that Federal-Mogul Corporation and subsidiaries will continue as a going concern. As more fully described in the notes to the consolidated financial statements, on October 1, 2001, Federal-Mogul Corporation and its wholly-owned United States subsidiaries filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. In addition, certain Federal-Mogul subsidiaries in the United Kingdom have filed jointly for Chapter 11 and Administration under the United Kingdom Insolvency Act of 1986. Uncertainties inherent in the bankruptcy process raise substantial doubt about Federal-Mogul Corporation’s ability to continue as a going concern. Management’s intentions with respect to these matters are also described in the notes. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for goodwill and indefinite-lived intangible assets in 2002.

/S/ ERNST & YOUNG LLP

Detroit, Michigan

February 6, 2004,

except as to the fifth

paragraph of Note 1, as to

which the date is March 4, 2004

except as to the second

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

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

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

As of December 31, 2003, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2003, subject to the limitations previously described.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Executive Officers:

Gerhard Böhm – Senior Vice President, Powertrain

David A. Bozynski – Vice President and Treasurer

Thomas B. Conaghan – Senior Vice President, Sealing Systems and Systems Protection

Rene L. F. Dalleur – Senior Vice President, Global Friction Products

Joseph P. Felicelli – Senior Vice President, Worldwide Aftermarket Operations

Michael P. Gaynor – Senior Vice President and Chief Information Officer

Charles B. Grant – Vice President, Corporate Development and Strategic Planning

Ramzi Y. Hermiz – Vice President, European Aftermarket

Rainer Jueckstock – Senior Vice President, Global Operations, Powertrain

G. Michael Lynch – Executive Vice President and Chief Financial Officer

Charles G. McClure, Jr. – Chief Executive Officer and President

William G. Quigley III – Vice President and Controller

Dale R. Pilger – Senior Vice President Global OE Sales, Application Engineering, Marketing, and Asia-Pacific Operations

Richard P. Randazzo – Senior Vice President, Human Resources

Brian L. Ruddy – Vice President and Managing Director, Asia

Wilhelm A. Schmelzer – Executive Vice President, Bearings

David M. Sherbin – Vice President, Deputy General Counsel and Secretary

John L. Tobiczyk – Vice President Global Quality and Manufacturing Support

Richard F. Vitkus – Senior Vice President and General Counsel

The Company has adopted the “Federal-Mogul Corporation Financial Code of Ethics” (“Code of Ethics”), which applies to the Company’s Chief Executive Officer, Chief Financial Officer, Controller and Chief Accounting Officer, other Executive Officers and certain members of the Company’s financial functions. The Code of Ethics is publicly available on the Company’s internet website at www.federal-mogul.com. The Company intends to disclose any change to or waiver from the Code of Ethics, including any implicit waiver, on its internet website, or in a report on Form 8-K.

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Directors:

John J. Fannon Director since 1986 Age 70	Mr. Fannon has served as a director of the Company since 1986. He retired as vice chairman of Simpson Paper Company in 1998, a privately held global forest products company, a position he had held since 1993. From 1980 until 1993, Mr. Fannon served as president of Simpson Paper. Mr. Fannon is currently a business consultant.
Paul S. Lewis Director since 1998 Age 67	Mr. Lewis has served as a director of the Company since May 1998. He served as chairman of Terranova Foods plc, a European based supplier of convenience and frozen foods, from October 1998 until June 1999, when the Company was acquired by Uniq plc. He joined Tate & Lyle plc, a multi-national processor of sugar and starch products, as group finance director in 1988 and served as its deputy chairman from 1993 until 1998. He is a former non-executive director of T&N plc and is a non-executive director of Dairy Crest Group plc.
Frank E. Macher Director since 2001 Age 63	Mr. Macher served as the chairman of the board of the Company from July 2003 through January 2004. Previously he served as chairman and chief executive officer since October 2001 and served as chief executive officer from January 2001 until September 2001. Prior thereto, Mr. Macher served as president and chief executive officer of ITT Automotive, a global automotive parts supplier, from July 1997 until January 1999. Previously, he served as the vice president and general manager of the Automotive Components Division of Ford Motor Company. Mr. Macher is also a director of Decoma International and Tenneco Automotive and is a trustee of Kettering University.
Charles G. McClure, Jr. Director since 2001 Age 50	Mr. McClure is chief executive officer and president of the Company. He was appointed to this position in July 2003. Prior to this appointment, he was president and chief operating officer since January 2001. Previously, he was president, chief executive officer and a member of the board of directors of Detroit Diesel Corporation, which was acquired by Daimler-Chrysler Corporation in October 2000. Mr. McClure joined Detroit Diesel in August 1997. Previously, Mr. McClure worked at Johnson Controls, Inc. in a variety of positions. Mr. McClure is also a director of R.L. Polk & Co. and Intermet Corporation.
Robert S. Miller, Jr. Director since 1993 Age 62	Mr. Miller became chairman of the board of the Company in January 2004. He served as the chairman and chief executive officer of Bethlehem Steel Corporation, a global steel manufacturer, from September 2001 until December 2003, when Bethlehem Steel ceased to exist. Mr. Miller served as chairman of the board of the Company from September 2000 until October 2001 and was chief executive officer from September 2000 until January 2001. He served as special advisor to Aetna, Inc., a health insurer, from February 2000 until September 2000. From November 1999 until February 2000, Mr. Miller served as president and a director of Reliance Group Holdings, Inc., a property and casualty insurance company. He served as president and chief executive officer of Waste Management, Inc., a waste transporter, from August 1999 until November 1999 and as chairman of the board of Waste Management from July 1998 until May 1999. Mr. Miller serves as a director of Pope & Talbot, Inc., RJ Reynolds Tobacco Holdings, Symantec Corp., UAL and Waste Management, Inc.

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Shirley D. Peterson Director since 2002 Age 62	Ms. Peterson was president of Hood College, an independent liberal arts college, from 1995-2000. From 1989-93, she served in the U.S. government, first appointed by President Bush as assistant attorney general in the Tax Division of the Department of Justice, then as commissioner of the Internal Revenue Service. She also was a partner in the law firm of Steptoe & Johnson, where she spent a total of 22 years from 1969-89 and 1993-94. Ms. Peterson has been an independent trustee of Scudder Mutual Funds since 1995. Ms. Peterson serves as a director of AK Steel Corporation and of the Bryn Mawr College Board of Trustees.
John C. Pope Director Since 1987 Age 54	Mr. Pope has served as chairman of PFI Group, a private investment firm, since 1999. He served as chairman of the board of MotivePower Industries, Inc., a manufacturer and remanufacturer of locomotives and locomotive components from January 1996 to November 1999. Mr. Pope is also a director of Air Canada Corporation, CNF, Inc., Dollar Thrifty Automotive Group, Inc., Kraft Foods Inc., Per-Se Technologies, Inc., RR Donnelley & Sons Company, and Waste Management, Inc.
Geoffrey H. Whalen C.B.E. Director since 1998 Age 68	Sir Geoffrey retired in 1995 as managing director and deputy chairman of Peugeot Motor Company, plc, an automotive manufacturer, positions he held since 1984 and 1990, respectively. He also served as president of the Society of Motor Manufacturers & Traders, the trade association representing vehicle and component makers in the United Kingdom, from 1988-1990 and 1993-1994. Sir Geoffrey is also a director of Coventry Building Society, Camden Motors Ltd. and Novar plc.

The Board of Directors has the following four standing committees: Audit, Governance and Nominating, Compensation and Pension. The membership and chairman of each of the committees is set forth in the table below.

Board Committees

Board Member	Audit	Governance and Nominating	Compensation	Pension
John J. Fannon	X	X	X*	X
Paul S. Lewis	X	X	X	X*
Frank E. Macher
Charles G. McClure, Jr.
Robert S. Miller, Jr.		X	X	X
Shirley D. Peterson	X	X	X	X
John C. Pope	X*	X	X	X
Geoffrey H. Whalen	X	X*	X	X

* denotes Committee Chairman

The Board of Directors has determined that Paul S. Lewis and John C. Pope are audit committee financial experts. Both Mr. Lewis and Mr. Pope are independent of the Company’s management as defined in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934.

During 2003 there were 36 meetings of the Board of Directors. Each of the directors attended 75% or more of the meetings of the Board of Directors and the standing committees on which he or she serves.

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ITEM 11. EXECUTIVE COMPENSATION

		Annual Compensation					Long-Term Compensation
Name and Principal Position	Year	Salary ($)	Bonus ($)		Other Annual Compensation ($)		Securities Underlying Options/SARs (No.)	All Other Compensation ($)
Frank E. Macher(1) Former Chairman of the Board and Chief Executive Officer	2003 2002 2001	1,038,470 1,000,000 950,474	2,190,000 2,200,000 2,250,000	(3) (4) (5)	72,402 67,742 —	(6) (6)	—   —   150,000	—   —   14,100	(7)
Charles G. McClure, Jr.(2) Chief Executive Officer and President	2003 2002 2001	882,701 850,000 807,904	1,861,500 1,870,000 1,850,000	(3) (4) (5)	—   —   —		—   —   125,000	—   —   14,100	(7)
G. Michael Lynch Executive Vice President and Chief Financial Officer	2003 2002 2001	519,231 500,000 490,379	1,095,000 1,100,000 790,000	(3) (4) (5)	51,049 —   —	(6)	—   —   —	—   —   14,100	(7)
Wilhelm A. Schmelzer Executive Vice President Bearings	2003 2002 2001	519,231 500,000 490,379	965,000 1,075,000 790,000	(3) (4) (5)	—   —   —		—   —   —	—   —   14,100	(7)
Richard P. Randazzo Senior Vice President Human Resources	2003 2002 2001	399,804 385,000 385,000	958,150 962,000 592,100	(3) (4) (5)	—   —   —		—   —   —	—   —   10,806	(7)

The named executives’ 2003 base salaries did not increase from 2002 to 2003. The change in salaries reflects one additional by-weekly pay period.

(1) Mr. Macher served as Chairman and Chief Executive Officer through July 11, 2003. He served as Chairman through January 11, 2004.

(2) Mr. McClure served as President and Chief Operating Officer through July 11, 2003. He was appointed Chief Executive Officer and President, effective July 11, 2003.

(3) In 2003, Mr. Macher received a (i) $1,190,000 incentive bonus, and (ii) $1,000,000 retention payment. Mr. McClure received a (i) $1,011,500 incentive bonus, and (ii) $850,000 retention payment. Mr. Lynch received a (i) $595,000 incentive bonus, and (ii) $500,000 retention payment. Mr. Schmelzer received a (i) $565,000 incentive bonus, and (ii) $400,000 retention payment. Mr. Randazzo received a (i) $458,150 incentive bonus, and (ii) $500,000 retention payment.

(4) In 2002, Mr. Macher received a (i) $1,200,000 incentive bonus, and (ii) $1,000,000 retention payment. Mr. McClure received a (i) $1,020,000 incentive bonus, and (ii) $850,000 retention payment. Mr. Lynch received a (i) $600,000 incentive bonus, and (ii) $500,000 retention payment. Mr. Schmelzer received a (i) $575,000 incentive bonus, and (ii) $500,000 retention payment. Mr. Randazzo received a (i) $462,000 incentive bonus and (ii) $500,000 retention payment.

(5) In 2001, Mr. Macher received a (i) $1,000,000 incentive bonus; (ii) $500,000 signing bonus, and (iii) special bonus of $750,000, all in accordance with his employment agreement. Mr. McClure received a (i) $850,000 incentive bonus, (ii) $375,000 signing bonus, and (iii) special bonus of $625,000, all in accordance with his employment agreement. Messrs. Lynch and Schmelzer each received a (i) $290,000 incentive bonus, and (ii) $500,000 retention bonus. Mr. Randazzo received a (i) $192,100 incentive bonus, and (ii) $400,000 retention bonus.

(6) Includes transportation expenses for Mr. Macher of $71,032 in 2003 and $58,433 in 2002, and transportation expenses for Mr. Lynch of $43,756 in 2003.

(7) Includes contributions in 2001 of $14,100 for Messrs. Macher, McClure, Lynch and Schmelzer and $10,806 for Mr. Randazzo to the Salaried Employees’ Investment Program and Match Reinstatement Plan. Company contributions to both programs were suspended in November 2001.

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Compensation of Directors

Non-employee directors receive a retainer of $8,750 for each calendar quarter. In addition, they are paid $1,500 for each meeting of the Board of Directors they attend and $1,000 for each Committee meeting they attend. Mr. Miller receives an additional annual retainer of $100,000 for his service as Chairman of the Board. The Chairmen of the Governance and Nominating Committee and the Pension Committee receive an additional annual retainer of $5,000. The Chairman of the Compensation Committee receives an additional annual retainer of $10,000, and the Chairman of the Audit Committee receives an additional annual retainer of $20,000.

Directors’ Deferred Compensation

Prior to 2002, non-employee directors could elect to defer all or a portion of their cash compensation. Deferred amounts were hypothetically invested in either an interest bearing account, an account whose value was tied to the Company’s common stock or an account whose value was tied to the Company’s publicly traded debt, or a combination of the three. Amounts deferred in the common stock account or bond account were credited in the form of units of the Company’s common stock or bonds based on the fair market value on the date of the deferral. The Units credited to all non-employee directors’ deferred common stock accounts are included in the Share Ownership Table set forth below.

Employment Agreements

Frank E. Macher. Mr. Macher served as Chairman of the Board, Chief Executive Officer and a director of the Company pursuant to an employment agreement entered into on January 10, 2001, as amended on January 31, 2001 and July 21, 2002. The agreement, which had a three-year term, provided for Mr. Macher’s employment as Chief Executive Officer until July 11, 2003, after which date he served as Chairman of the Board through January 2004.

Under the agreement, Mr. Macher received an annual base salary of $1,000,000 and, for the 2001 fiscal year, he received a guaranteed bonus of $1,000,000, a signing bonus of $500,000 and a special bonus of $750,000. The incentive bonus payable to Mr. Macher for any fiscal year during the term of the agreement was based upon objective criteria established and approved by the Compensation Committee of the Board. Mr. Macher also received retention payments of $1,000,000 in each of 2002 and 2003 to incentivize him to remain employed with the Company during its reorganization proceedings.

In connection with the employment agreement, Mr. Macher was granted five-year non-qualified stock options to purchase 150,000 shares of common stock, which became fully exercisable in 2003. If Mr. Macher breaches certain non-competition covenants in his employment agreement, any options then outstanding will be forfeited.

Mr. Macher participated in the Company’s Personal Retirement Account Plan (PRA) and Supplemental Executive Retirement Program (SERP). He became fully vested in the SERP upon the commencement of his employment Mr. Macher also participated in the Supplemental Key Executive Pension Plan (SKEPP).

The employment agreement contains non-competition and non-solicitation covenants that survive until January 2005.

Charles G. McClure, Jr. Mr. McClure serves as Chief Executive Officer, President and a director of the Company pursuant to an employment agreement entered into on January 10, 2001, as amended on January 31, 2001, August 16, 2002 and December 9, 2003. The agreement has a five-year term and provides that Mr. McClure will serve as Chief Executive Officer and President until January 11, 2006.

Under the employment agreement, Mr. McClure currently receives an annual base salary of $1,000,000, subject to annual increases as determined by the Compensation Committee of the Board. For the 2001 fiscal year, he received a guaranteed bonus of $850,000, a signing bonus of $375,000 and a special bonus of $625,000. Mr. McClure also received retention payments of $850,000 in each of 2002 and 2003 to incentivize him to remain employed with the Company during its reorganization proceedings.

Mr. McClure’s target incentive bonus will be equal to his annual base salary in each of 2004 and 2005. The actual amount of his incentive bonus will be based upon objective criteria established and approved by the Compensation

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Committee of the Board. In addition, upon the expiration of his employment agreement, Mr. McClure will receive (i) a lump sum cash payment of $500,000, and (ii) a transitional service fee of $500,000 for services to be provided to the Company, which will be payable in three equal monthly installments over the ninety day period following the expiration or termination of his employment agreement. In the event Mr. McClure voluntarily terminates his employment agreement or the agreement to provide transitional services for the ninety day period following termination of his employment, he will not be entitled to receive any portion of the severance benefits or the transition services fees described above. If, on or before the effective date of the Company’s plan of reorganization, Mr. McClure and the Company have not entered into a long-term employment agreement appointing him as the Chief Executive Officer of the Company, Mr. McClure may terminate his employment agreement and receive the severance benefits described above.

In connection with the employment agreement, Mr. McClure was granted five year stock options to purchase 125,000 shares of common stock, which options became fully exercisable in January 2004. If Mr. McClure’s employment terminates prior to the expiration of the five year stock options and he breaches certain non-competition covenants, any options then outstanding will be forfeited.

Mr. McClure participates in the Company’s PRA and SERP. Upon the commencement of his employment, he became fully vested in the SERP. If he forfeits any amounts under the PRA as a result of the termination of his employment with the Company, he will receive an equivalent amount under the terms of the SERP. Mr. McClure also participates in the SKEPP.

Mr. McClure’s agreement contains a non-competition covenant that survives for a period equal to the period during which he receives transitional services payments as described above.

Change of Control Agreements

The Company has entered into Change of Control Agreements with each of the Named Executive Officers which provide that, if following a change of control, the Named Executive Officer is terminated by the Company without “Cause” or the Named Executive Officer terminates the agreement for “Good Reason”, he will receive the following benefits: (i) a lump-sum cash amount equal to three times his base salary and three times the Named Executive Officer’s target bonus as of the termination date or, if greater, the Named Executive Officer’s target bonus as of the date of the change of control, (ii) the excess of the actuarial equivalent of the benefit he would receive under the PRA and any supplemental retirement plan, including the SKEPP, if his employment continued for three years after the date of termination or such longer period, if any, as would have been credited to the Named Executive Officer under the change-in-control provisions of the SKEPP (assuming full vesting) over the actuarial equivalent of any amount paid or payable under the PRA or such supplemental retirement plans as of the date of termination, (iii) the continuation of benefits under the employee benefit plans, programs, practices and policies of the Company for three years, and (iv) outplacement services of up to $60,000. A “change of control” does not include events that occur during the Company’s pending bankruptcy proceeding or upon the effective date of a confirmed plan of reorganization. Subject to certain exceptions, the Named Executive Officer will also receive a “gross-up” payment as reimbursement of any federal excise taxes payable. As part of the Change of Control Agreement, the Named Executive Officer has agreed to a noncompetition covenant applicable for one year following the termination of his employment.

Severance Agreements

The Company has entered into Severance Agreements with each of the Named Executive Officers (other than Mr. Macher and Mr. McClure). Under these agreements, if a Named Executive Officer is terminated by the Company without “Cause,” he will receive the following benefits: (i) a lump-sum cash amount equal to between 15 and 24 months of base salary and to between 15 and 24 months of the Named Executive Officer’s target bonus as of the date of termination or, if greater, the Named Executive Officer’s target bonus as of the date of the agreement, and (ii) the continuation of benefits under the Company welfare benefit plans, practices, policies and programs for between 15 and 24 months. As a condition to the receipt of such benefits, each of the Named Executive Officers would be required to provide the Company with a general release and agree not to compete with the Company during the one-year period following the effective date of the required release and noncompetition agreement. A termination of the Named Executive Officer’s employment that gives rise to an obligation of the Company to make

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payments or provide benefits under a Change of Control Agreement will not also entitle the Named Executive Officer to any payments or benefits under these agreements. If the net after-tax benefit to the Named Executive Officer of all payments or distributions by the Company is not greater than the net after-tax benefit of a reduction of the benefits to prevent the imposition of any applicable federal excise tax, the benefits under the Severance Agreement will be reduced to prevent the imposition of the excise tax.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table shows the amount of common stock, stock units and Series C ESOP Stock beneficially owned by the Company’s directors, the Named Executive Officers, and the directors and officers as a group, as of January 31, 2004. The number of shares shown includes shares that are individually or jointly owned, as well as shares over which the individual has either sole or shared investment or voting authority. No one Named Executive Officer owns 1% of the Company’s outstanding stock. In the aggregate, all directors and executive officers of the Company as a group own less than 1% of the Company’s outstanding stock.

Name	Beneficial Ownership (1)		Percent of Class
John J. Fannon	32,436	(2)	*
Paul S. Lewis	19,237	(3)	*
G. Michael Lynch	135,121	(4)	*
Frank E. Macher	152,050	(5)	*
Charles G. McClure	131,861	(6)	*
Robert S. Miller, Jr.	118,537	(7)	*
Shirley D. Peterson	0		*
John C. Pope	26,891	(8)	*
Richard P. Randazzo	78,421	(9)	*
Wilhelm A. Schmelzer	142,425	(10)	*
Geoffrey H. Whalen	18,237	(11)	*
All directors and executive officers as a group	1,009,384

* Represents less than 1% of the outstanding common stock

(1) Except as otherwise noted, each beneficial owner identified in this table has sole investment power with respect to the shares shown in the table. For executive officers, the numbers include Series C ESOP shares held in the Company’s Salaried Employee Investment Plan (“SEIP”) with respect to which participants have voting power but no investment rights.

(2) Includes (i) 1,298 shares and 1,235 stock units owned directly and (ii) 29,903 options that are fully vested.

(3) Includes (i) 2,000 shares and 237 stock units owned directly and (ii) 17,000 options that are fully vested.

(4) Includes (i) 3,073 shares in the Company’s SEIP, (ii) 48 shares of the Company’s Series C ESOP Stock, and (iii) 132,000 options that are fully vested.

(5) Includes (i) 2,050 shares in the Company’s SEIP and (ii) 150,000 options that are fully vested.

(6) Includes (i) 2,861 shares in the Company’s SEIP, (ii) 4,000 shares in a trust, and (iii) 125,000 options that are fully vested.

(7) Includes (i) 2,000 shares and 1,235 stock units owned directly and (ii) 115,302 options that are fully vested.

(8) Includes (i) 5,700 shares and 1,235 stock units owned directly, (ii) 400 shares owned jointly with his wife and (iii) 19,556 options that are fully vested.

(9) Includes (i) 421 shares of the Company’s Series C ESOP stock and (ii) 78,421 options that are fully vested.

(10) Includes (i) 625 shares of the Company’s Series C ESOP stock and (ii) 141,800 options that are fully vested.

(11) Includes (i) 1,000 shares and 237 stock units owned directly and (ii) 17,000 options that are fully vested.

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Aggregated Option/SAR Exercises in 2003 and Year End Option/SAR Values

The following table shows, for the Named Executive Officers, the amount and values of unexercised stock options as of December 31, 2003. No stock appreciation rights are outstanding and no stock options were exercised by the Named Executive Officers in 2003.

Name	Number of Securities Underlying Unexercised Options/SARs at Fiscal Year End (#) Exercisable/Unexercisable	Value of Unexercised In-the-Money Options/SARs at Fiscal Year-End ($) Exercisable/Unexercisable
Frank E. Macher	150,000/0	0/0
Charles G. McClure	125,000/0	0/0
G. Michael Lynch	132,000/0	0/0
Wilhelm A. Schmelzer	141,800/0	0/0
Richard P. Randazzo	78,000/0	0/0

No stock options were granted in 2003. Each option was awarded with an exercise price equal to the average of the high and low market price of the Company’s common stock on the date of grant. All stock options expire five years after the date of grant, three years after the date of retirement or 90 days after termination of employment. All options granted by the Company vest immediately upon change in control. The Company did not grant any stock appreciation rights in 2003.

Retirement Plans

Under the Company’s Personal Retirement Account Plan (PRA), benefits are payable upon retirement to salaried employees in the form of a lump-sum or annuity, at the employee’s election. The PRA is a defined benefit pension plan. Accrued pension benefits for participants are expressed as an account balance. Annual credits as of January 1, 2004 are 1.5, 1.51, 2.0, 2.5, 3.25, 4.25, 5.5, 7.0, 8.0 or 9.0% of earnings that are made to participants’ accounts based on the employee’s age. Earnings are defined as an employee’s base pay plus overtime, commissions, incentive compensation, bonuses and other variable compensation up to a maximum permitted by law of $205,000 in 2004. Benefits are vested based on a graded five-year schedule. For those hired after January 1, 2002, benefits are vested on a five-year cliff schedule.

Estimated annual retirement benefits that may be provided by the PRA to the Named Executive Officers eligible to participate in the PRA upon retirement at age 65, which is the normal retirement age for officers, assuming conversion of the combined account balances into a single monthly life annuity, are as follows: Mr. Macher––$11,624; Mr. McClure––$53,930; Mr. Lynch—$18,545; Mr. Schmelzer—$46,553; and Mr. Randazzo—$24,431.

Supplemental Key Executive Pension Plan

In addition to the PRA, the Company maintains a Supplemental Key Executive Pension Plan (SKEPP). The SKEPP is a non-tax qualified pension plan, the purpose of which is to provide a pension benefit for a limited number of senior executives that is competitive with pension benefits provided to senior executives at peer group companies. The SKEPP targets a pension benefit equal to 50% of an executive’s average compensation for the highest consecutive three-year period of the last five years before retirement. An executive must have worked at the Company for a minimum of five years to receive a benefit under the SKEPP. In order to receive the maximum SKEPP benefit, an executive must attain a minimum of 20 years of service with the Company and be at least age 62 upon retirement. A reduced benefit will be paid to executives who have not attained these minimal levels. The target benefits are calculated taking into account benefits paid under the Company’s PRA and certain predecessor plans.

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The following table indicates estimated total annual benefits payable as a single life annuity beginning at age 65 for various compensation levels and years of service under the SKEPP, taking into account the PRA. Generally, annual compensation used for the pension formula purposes includes salary and annual incentive compensation, as reported in the Summary Compensation Table.

Supplemental Key Executive Pension Plan Table

	Years of Service (Estimated Annual Retirement Benefits For Years of Service Shown Below)
Average Pay During Final Three Years Before Retirement	10		15		20		25
$400,000	$	100,000	$	150,000	$	200,000	$	200,000
600,000		150,000		225,000		300,000		300,000
800,000		200,000		300,000		400,000		400,000
1,000,000		250,000		375,000		500,000		500,000
1,200,000		300,000		450,000		600,000		600,000
1,400,000		350,000		525,000		700,000		700,000
1,600,000		400,000		600,000		800,000		800,000
1,800,000		450,000		675,000		900,000		900,000
2,000,000		500,000		750,000		1,000,000		1,000,000
2,200,000		550,000		825,000		1,100,000		1,100,000
2,400,000		600,000		900,000		1,200,000		1,200,000

The SKEPP grants credit for all years of pension service with the Company and under certain predecessor plans. The Named Executive Officers who are eligible to participate in the SKEPP have the following years of credited pension service as of December 31, 2003: Mr. Macher –– 4.42 (including 1.50 years of service credited from his prior employer); Mr. McClure –– 6.29 years (including 3.37 years of service credited from his prior employer); Mr. Lynch — 3.5 years (including 3 years of service credited from his prior employer; Mr. Schmelzer — 34.5 years; and Mr. Randazzo — 8.99 years (including 2.08 years of service credited from his prior employer).

Ownership of Stock By Principal Owners

To the best of the Company’s knowledge and based on public reports filed with the Securities and Exchange Commission, the following table represents the beneficial owners of five percent or more of the outstanding shares of the Company’s common stock as of February 13, 2004.

Name and Address of Beneficial Owner	Number of Shares	Percent of Class
Fiduciary Counselors Inc. Ellen A. Hennessy President 601 Pennsylvania Avenue, NW Suite 900 Washington, DC 20004	7,904,085	9.1	%

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

No items to be reported.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Principal Accountant Fees and Services:

	Year Ended December 31
	2003		2002
	(Millions of Dollars)
Audit fees (1)	$	4.6	$	3.8
Audit-related fees (2)		2.9		1.7
Tax fees (3)		5.5		5.9
All other fees (4)		0.2		0.8
Total	$	13.2	$	12.2

(1) Audit Fees: Services under this caption include consolidated financial statement audit fees, domestic subsidiary financial statement audit fees and international statutory audit fees.

115

(2) Audit-related Fees: Services under this caption include accounting assistance, employee benefit plan audits and due diligence activities.

(3) Tax Fees: Services under this caption include statutory compliance, transaction structuring, bankruptcy structuring, expatriate compliance and tax advisory services.

(4) All Other Fees: Services under this caption include corporate advisory services in connection with the sale of certain businesses.

Audit Committee’s Pre-Approval Policies and Procedures:

The Company’s independent accountants are directly accountable to the audit committee pursuant to its charter. Accordingly, the audit committee’s responsibilities include pre-approving the services of the independent accountant. The audit committee’s policy is to review and pre-approve all audit and permissible non-audit services, as deemed appropriate. For the year ended December 31, 2003, all audit, audit related, tax and other fees provided by the Company’s independent accountants were pre-approved by the audit committee.

Audit committee pre-approval is granted based upon the nature of the service and the related cost to provide such service. Pre-approval for services is generally not extended for periods in excess of one year. In assessing pre-approval requests, the audit committee considers whether such services are consistent with the auditor’s independence; whether the independent accountant may provide a higher quality or more efficient service based upon their understanding and familiarity with the Company’s business; and whether performing the service would enhance the independent accountant’s audit quality. The Audit Committee Chairman may individually pre-approve such services between scheduled meetings of the Audit Committee up to a threshold of $200,000, provided that the full Audit Committee reviews and approves the service at the next scheduled meeting. Full Audit Committee pre-approval is required for proposed services in excess of $200,000.

PART IV

ITEM 15. FINANCIAL STATEMENT SCHEDULE, EXHIBITS, AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

1. Financial Statements

Financial statements filed as part of this Annual Report on Form 10-K are listed under Part II, Item 8 hereof.

2. Financial Statement Schedules

Schedule II — Valuation and Qualifying Accounts

Financial Statements and Schedules Omitted

Schedules other than the schedule listed above are omitted because they are not required or applicable under instructions contained in Regulation S-X or because the information called for is shown in the financial statements and notes thereto.

116

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES

Column A	Column B		Column C		Column D		Column E
			Additions
Description	Balance at Beginning of Period		Charged to Costs and Expenses	Charged to Other Accounts	Deductions		Balance at End of Period
	(Millions of Dollars)
Year ended December 31, 2003:
Valuation allowance for trade receivables	$	74.6	14.4	—	21.6	(1)	$	67.4
Reserve for inventory valuation		68.1	13.2	—	13.5	(2)		67.8
Valuation allowance for deferred tax assets		722.5	169.8	—	—			892.3
Year ended December 31, 2002:
Valuation allowance for trade receivables	$	61.3	13.6	—	0.3	(1)	$	74.6
Reserve for inventory valuation		49.8	20.6	—	2.3	(2)		68.1
Valuation allowance for deferred tax assets		496.8	225.7	—	—			722.5
Year ended December 31, 2001:
Valuation allowance for trade receivables	$	62.0	19.7	—	20.4	(1)		61.3
Reserve for inventory valuation		29.3	29.1	—	8.6	(2)		49.8
Valuation allowance for deferred tax assets		219.6	277.2	—	—			496.8

(1) Uncollectable accounts charged off net of recoveries.

(2) Obsolete inventory charged off.

117

3(a). Exhibits

The Company will furnish upon request any of the following exhibits upon payment of the Company’s reasonable expenses for furnishing such exhibit.

2.1	Purchase and Sale Agreement between Cooper Industries, Inc. and Federal-Mogul Corporation, dated August 17, 1998. (Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed October 26, 1998.)
3.1	The Company’s Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999. (the “1999 10-K”)
3.2	The Company’s Bylaws, as amended. (Incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. (the “2002 10-K”)
4.1	Rights Agreement dated as of February 24, 1999, between the Company and The Bank of New York, as Rights Agent. (Incorporated by reference to Exhibit 4 to the Company’s Current Report on Form 8-K filed February 25, 1999.)
4.2	Purchase Agreement for 10,000,000 Trust Convertible Preferred Securities of Federal-Mogul Financing Trust, dated as of November 24, 1997. (Incorporated by reference to Exhibit 4.6 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997. (the “1997 10-K”)
4.3	Registration Rights Agreement, dated as of December 1, 1997, by and among the Company, Federal-Mogul Financing Trust and Morgan Stanley & Co. Inc. as Initial Purchaser. (Incorporated by reference to Exhibit 4.7 to the Company’s 1997 10-K.)
4.4	Indenture between Federal-Mogul Corporation and The Bank of New York, dated as of December 1, 1997, with respect to the Subordinated Debentures. (Incorporated by reference to Exhibit 4.8 to the Company’s 1997 10-K.)
4.5	First Supplemental Indenture dated as of December 1, 1999 to the Indenture between Federal-Mogul Corporation and The Bank of New York, dated as of December 1, 1997, with respect to the Subordinated Debentures. (Incorporated by reference to Exhibit 4.9 to the Company’s 1997 10-K.)
4.6	Indenture among Federal-Mogul Corporation and The Bank of New York, dated as of January 20, 1999. (Incorporated by reference to Exhibit 4.8 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998.
4.7	First Supplemental Indenture dated as of December 29, 2000 to the Indenture dated as of January 20, 1999 among Federal-Mogul Corporation, certain subsidiaries as guarantors and The Bank of New York, as trustee. (Incorporated by reference to Exhibit 4.3 to the Company’s January 17, 2001 8-K.)
4.8	Indenture among Federal-Mogul Corporation and Continental Bank, dated as of August 12, 1994. (Incorporated by reference to Exhibit 4.14 to the Company’s Current Report on Form 8-K filed August 19, 1994.)
4.9	First Supplemental Indenture dated as of July 8, 1998 to the Indenture dated as of August 12, 1994 among Federal-Mogul Corporation, certain subsidiaries as guarantors, and U.S. Bank Trust National Association (as successor to Continental Bank), as trustee. (Incorporated by reference to Exhibit 4.9 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (the “2000 10-K”.)
4.10	Second Supplemental Indenture dated as of October 9, 1998 to the Indenture dated as of August 12, 1994 among Federal-Mogul Corporation, certain subsidiaries as guarantors, and U.S. Bank Trust National Association (as successor to Continental Bank), as trustee. (Incorporated by reference to Exhibit 4.10 to the Company’s 2000 10-K.)

118

4.11	Third Supplemental Indenture dated as of December 29, 2000 to the Indenture dated as of August 12, 1994 among Federal-Mogul Corporation, certain subsidiaries as guarantors, and U.S. Bank Trust National Association (as successor to Continental Bank), as trustee. (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed January 17, 2001 (the “January 17, 2001 8-K”).
4.12	Indenture among Federal-Mogul Corporation and The Bank of New York, dated as of June 29, 1998. (Incorporated by reference to Exhibit 4.8 to the Company’s 1999 10-K.)
4.13	First Supplemental Indenture dated as of June 30, 1998 to the Indenture dated as of June 29, 1998 among Federal-Mogul Corporation and The Bank of New York. (Incorporated by reference to Exhibit 4.9 to the Company’s 1999 10-K.)
4.14	Second Supplemental Indenture dated as of July 21, 1998 to the Indenture dated as of June 29, 1998 among Federal-Mogul Corporation and The Bank of New York. (Incorporated by reference to Exhibit 4.14 to the Company’s 2000 10-K.)
4.15	Third Supplemental Indenture dated as of October 9, 1998 to the Indenture dated as of June 29, 1998 among Federal-Mogul Corporation and The Bank of New York. (Incorporated by reference to Exhibit 4.15 to the Company’s 2000 10-K.)
4.16	Fourth Supplemental Indenture dated as of December 29, 2000 to the Indenture dated as of June 29, 1998 among Federal-Mogul Corporation, certain subsidiaries as guarantors and The Bank of New York, as trustee. (Incorporated by reference to Exhibit 4.2 to the Company’s January 17, 2001 8-K.)
10.1	Federal-Mogul Corporation 1997 Amended and Restated Long-Term Incentive Plan, as adopted by the Shareholders of the Company on May 20, 1998. (Incorporated by reference to the Company’s 1998 Definitive Proxy Statement on Form 14A.)
10.2	Amended and Restated Deferred Compensation Plan for Corporate Directors. (Incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1990 (the “1990 10-K”.)
10.3	Supplemental Executive Retirement Plan, as amended. (Incorporated by reference to Exhibit 10.10 to the Company’s 1992 10-K.)
10.4	Description of Umbrella Excess Liability Insurance for the Senior Management Team. (Incorporated by reference to Exhibit 10.11 to the Company’s 1990 10-K.)
10.5	Amended and Restated Declaration of Trust of Federal-Mogul Financing Trust, dated as of December 1, 1997. (Incorporated by reference to Exhibit 10.34 to the Company’s 1997 10-K.)
*10.6	Amended and Restated Revolving Credit, Term Loan and Guaranty Agreement dated August 7, 2003 by and among the Company and certain of its subsidiaries, Debtors and Debtors-in-Possession under Chapter 11 of the Bankruptcy Code, as Borrowers, and The Lenders Party Hereto, and JPMorgan Chase Bank, formerly known as The Chase Manhattan Bank, as Administrative Agent.

119

10.7	Fourth Amended and Restated Credit Agreement dated as of December 29, 2000 among the Company, certain foreign subsidiaries, certain banks and other financial institutions and The Chase Manhattan Bank, as administrative agent. (Incorporated by reference to Exhibit 10.1 to the Company’s January 17, 2001 8-K.)
10.8	Amended and Restated Domestic Subsidiary Guarantee dated as of December 29, 2000 by certain subsidiaries of the Company in favor of The Chase Manhattan Bank, as administrative agent. (Incorporated by reference to Exhibit 10.2 to the Company’s January 17, 2001 8-K.)
10.9	Guarantee by F-M UK Holding Limited in favor of The Chase Manhattan Bank, as administrative agent. (Incorporated by reference to Exhibit 10.3 to the Company’s January 17, 2001 8-K.)
10.10	Trust Agreement dated as of December 29, 2000 among the Company, certain subsidiaries and Wilmington Trust Company, as trustee. (Incorporated by reference to Exhibit 10.4 to the Company’s January 17, 2001 8-K.)
10.11	Second Amended and Restated Trust Agreement dated as of December 29, 2000 among the Company, certain subsidiaries and First Union National Bank, as trustee. (Incorporated by reference to Exhibit 10.5 to the Company’s January 17, 2001 8-K.)
10.12	Second Amended and Restated Trust Agreement dated as of December 29, 2000 among the Company, certain subsidiaries and ABN AMRO Trust Company (Jersey) Limited, as trustee, (Incorporated by reference to Exhibit 10.6 to the Company’s January 17, 2001 8-K.)
10.13	Second Amended and Restated Domestic Pledge Agreement among the Company and certain subsidiaries in favor of First Union National Bank, as trustee. (Incorporated by reference to Exhibit 10.7 to the Company’s January 17, 2001 8-K.)
10.14	Security Agreement dated as of December 29, 2000 by the Company and certain subsidiaries in favor of Wilmington Trust Company, as trustee. (Incorporated by reference to Exhibit 10.8 to the Company’s January 17, 2001 8-K.)
10.15	Form of Mortgage or Deed of Trust prepared for execution by the Company or any applicable subsidiaries. (Incorporated by reference to Exhibit 10.9 to the Company’s January 17, 2001 8-K.)
10.16	Contract of Indemnity dated as of December 29, 2000 by the Company and certain subsidiaries with respect to a surety bond issued by Travelers Casualty & Surety Company of America. (Incorporated by reference to Exhibit 10.10 to the Company’s January 17, 2001 8-K.)
10.17	Contract of Indemnity dated as of December 29, 2000 by the Company and certain subsidiaries with respect to a surety bond issued by Travelers Casualty & Surety Company of America. (Incorporated by reference to Exhibit 10.11 to the Company’s January 17, 2001 8-K.)
10.18	Contract of Indemnity dated as of December 29, 2000 by the Company and certain subsidiaries with respect to a surety bond issued by SAFECO Insurance Company of America. (Incorporated by reference to Exhibit 10.12 to the Company’s January 17, 2001 8-K.)
10.19	Contract of Indemnity dated as of December 29, 2000 by the Company and certain subsidiaries with respect to a surety bond issued by National Fire Insurance Company of Hartford and Continental Casualty Company. (Incorporated by reference to Exhibit 10.13 to the Company’s January 17, 2001 8-K.)
*10.20	Amended and Restated Federal-Mogul Supplemental Key Executive Pension Plan dated January 1, 1999 and Restated February 2004.
10.21	Employment Agreement dated as of January 10, 2001 and amended as of January 31, 2001, between the Company and Frank E. Macher. (Incorporated by reference to Exhibit 10.24 to the Company’s 2000 10-K.)

120

10.22	Change of Control Agreement dated January 10, 2001, between the Company and Frank E. Macher. (Incorporated by reference to Exhibit 10.25 to the Company’s 2000 10-K.)
*10.23	Amendment to the Employment Agreement between the Company and Charles G. McClure dated as of December 9, 2003.
10.24	Change of Control Agreement dated January 10, 2001, between the Company and Charles G. McClure. (Incorporated by reference to Exhibit 10.27 to the Company’s 2000 10-K.)
*14	Code of ethics.
*21	Subsidiaries of the Registrant.
*23.1	Consent of Ernst & Young LLP.
*24	Powers of Attorney.
*31.1	Certification by the Company’s Chief Executive Officer pursuant to Rule 13a-14
*31.2	Certification by the Company’s Chief Financial Officer pursuant to Rule 13a-14
*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)

* Filed Herewith

3(b). Reports on Form 8-K:

1) On October 21, 2003, the Company filed a Current Report on Form 8-K to report the issuance of a press release announcing the Company’s financial results for the three and nine month periods ended September 30, 2003.

2) On November 3, 2003, the Company filed a Current Report on Form 8-K to report the issuance of a press release announcing that the Company had reached an agreement with the Unsecured Creditors Committee, the Asbestos Committee, the Future Asbestos Claimants Representative, the Agent for the Pre-petition Bank Lenders and the Equity Committee on an amended plan of reorganization.

3) On November 17, 2003, the Company filed a Current Report on Form 8-K to announce that the letter of intent it had entered into with Honeywell International, Inc. (“Honeywell”) to acquire the Bendix friction materials business of Honeywell had expired on November 15, 2003.

3(c). Separate financial statements of affiliates whose securities are pledged as collateral.

1) Financial statements of Federal-Mogul Products, Inc. and subsidiaries including consolidated balance sheets as of December 31, 2003 and 2002, and the related statements of operations and cash flows for the three years ended December 31, 2003.

2) Financial statements of Federal-Mogul Ignition Company and subsidiaries including consolidated balance sheets as of December 31, 2003 and 2002, and the related statements of operations and comprehensive income and cash flows for the three years ended December 31, 2003.

3) Financial statements of Federal-Mogul Powertrain, Inc. and subsidiaries including consolidated balance sheets as of December 31, 2003 and 2002, and the related statements of operations and cash flows for the three years ended December 31, 2003.

4) Financial statements of Federal-Mogul Piston Rings, Inc. and subsidiaries including consolidated balance sheets as of December 31, 2003 and 2002, and the related statements of operations and cash flows for the three years ended December 31, 2003.

121

REPORT OF INDEPENDENT AUDITORS

The Board of Directors

Federal-Mogul Corporation

We have audited the accompanying consolidated balance sheets of Federal-Mogul Products, Inc. and subsidiaries, a wholly-owned subsidiary of Federal-Mogul Corporation, as of December 31, 2003 and 2002 and the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Federal-Mogul Products, Inc. and subsidiaries at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been prepared assuming that Federal-Mogul Products, Inc. and subsidiaries will continue as a going concern. As more fully described in the notes to the consolidated financial statements, on October 1, 2001, Federal-Mogul Corporation and its wholly-owned United States subsidiaries, which includes Federal-Mogul Products, Inc., filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. Uncertainties inherent in the bankruptcy process raise substantial doubt about Federal-Mogul Products, Inc.’s ability to continue as a going concern. Management’s intentions with respect to these matters are also described in the notes. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 5 to the consolidated financial statements, Federal-Mogul Products, Inc. changed its method of accounting for goodwill and indefinite-lived intangible assets in 2002.

/S/ ERNST & YOUNG LLP

Detroit, Michigan

February 6, 2004,

except as to the ninth

paragraph of Note 1, as to

which the date is March 4, 2004

F-1

FEDERAL-MOGUL PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended December 31
	2003		2002			2001
	(Millions of Dollars)
Net sales:
Third party sales	$	648.9	$	600.2		$	574.2
Affiliate sales		91.8		63.7			2.3
Total net sales		740.7		663.9			576.5
Cost of products sold		588.5		545.9			489.8
Gross margin		152.2		118.0			86.7
Selling, general and administrative expenses		103.4		87.9			105.6
Provision for bad debt from affiliate Debtors		—		—			319.0
Amortization expense		2.8		2.8			16.1
Interest expense		—		—			18.7
Other expense, net		8.3		10.1			7.8
Earnings (loss) before income taxes and cumulative effect of change in accounting principle		37.7		17.2			(380.5	)
Income tax expense (benefit)		—		15.0			(16.7	)
Earnings (loss) before cumulative effect of change in accounting principle		37.7		2.2			(363.8	)
Cumulative effect of change in accounting principle, net of applicable income tax benefit		—		437.0			—
Net Income (Loss)	$	37.7	$	(434.8	)	$	(363.8	)

See accompanying notes to consolidated financial statements.

F-2

FEDERAL-MOGUL PRODUCTS, INC.

CONSOLIDATED BALANCE SHEETS

	December 31
	2003			2002
	(Millions of Dollars)
ASSETS
Accounts receivable, net	$	120.1		$	93.1
Inventories, net		146.4			177.8
Other		12.3			11.4
Total Current Assets		278.8			282.3
Property, plant and equipment, net		258.2			250.1
Definite-lived intangible assets, net		52.6			55.4
Asbestos-related insurance recoverable		169.3			169.9
Other noncurrent assets		16.3			21.8
Total Assets	$	775.2		$	779.5
LIABILITIES AND NET PARENT INVESTMENT
Accounts payable	$	22.0		$	30.3
Accrued compensation		10.1			9.6
Accrued rebates		6.6			5.7
Restructuring reserves		—			9.7
Other accrued liabilities		17.1			17.1
Total Current Liabilities		55.8			72.4
Liabilities subject to compromise		778.2			780.1
Other long-term liabilities		3.8			3.7
Net Parent Investment		(62.6	)		(76.7	)
Total Liabilities and Net Parent Investment	$	775.2		$	779.5

See accompanying notes to consolidated financial statements.

F-3

FEDERAL-MOGUL PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31
	2003			2002			2001
	(Millions of Dollars)
Cash provided from (used by) operating activities:
Net loss	$	37.7		$	(434.8	)	$	(363.8	)
Adjustments to reconcile net loss to net cash provided from (used by) operating activities:
Cumulative effect of change in accounting principle		—			447.8			—
Provision for bad debt from affiliate Debtors		—			—			319.0
Loss on sale of assets		—			—			11.2
Depreciation and amortization		28.9			30.7			42.7
Payments against restructuring reserves		(3.8	)		(1.9	)		(3.5	)
Changes in assets and liabilities:
Accounts receivable		(27.0	)		6.2			—
Inventories		31.4			(38.0	)		(0.9	)
Accounts payable		(8.3	)		5.2			25.4
Liabilities subject to compromise		(1.9	)		(9.5	)		—
Other assets and liabilities		8.2			12.6			(59.8	)
Net cash (used by) provided from operating activities		65.2			18.3			(29.7	)
Cash provided from (used by) investing activities:
Proceeds from sale of assets		—			—			2.8
Capital expenditures		(41.6	)		(39.9	)		(37.6	)
Net cash used by investing activities		(41.6	)		(39.9	)		(34.8	)
Cash provided from (used by) financing activities:
Transfers (to) from parent		(23.6	)		21.6			64.5
Net cash (used by) provided from financing activities		(23.6	)		21.6			64.5
Net change in cash		—			—			—
Cash at beginning of year		—			—			—
Cash at end of year	$	—		$	—		$	—

See accompanying notes to consolidated financial statements.

F-4

FEDERAL-MOGUL PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying financial statements reflect the consolidated assets, liabilities and operations of Federal-Mogul Products, Inc. and subsidiaries (“Products”). Products is a wholly-owned subsidiary of Federal-Mogul Corporation (“Federal-Mogul”). Products manufactures friction products, including various brake pads and linings, and chassis products.

Products operates with financial and operational staff on a decentralized basis. Federal-Mogul provides certain centralized services for employee benefits administration, cash management, risk management, legal services, public relations, domestic tax reporting and internal and external audit. Federal-Mogul charges Products for all such direct expenses incurred on its behalf. General expenses, excluding Chapter 11 and Administration related reorganization expenses, that are not directly attributable to the operations of Products have been allocated based on management’s estimates, primarily driven by sales. Management believes that this allocation method is reasonable.

The accompanying consolidated financial statements are presented as if Products had existed as an entity separate from its parent during the periods presented and include the assets, liabilities, revenues and expenses that are directly related to Products’ operations.

Products’ separate debt and related interest expense have been included in the consolidated financial statements. Products is fully integrated into its parent’s cash management system and, as such, all cash requirements are provided by its parent and any excess cash generated by Products is transferred to its parent.

Voluntary Reorganization Under Chapter 11 and Administration

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

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

Consequences of the Restructuring Proceedings

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

F-5

FEDERAL-MOGUL PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 a creditors committee, representing both asbestos claimants and general unsecured creditors.

On March 4, 2004, Federal-Mogul filed an amended plan of reorganization and related disclosure statement with the Bankruptcy Court. This amended plan of reorganization was jointly proposed by Federal-Mogul along with 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 (collectively referred to as the “Co-Proponents”). The joint amended plan of reorganization is consistent with the principal terms of the plan originally filed with the Bankruptcy Court on March 6, 2003.

The amended joint plan of reorganization provides that asbestos personal injury claimants, both present and future, will be permanently channeled to a trust or series of trusts established pursuant to Section 524(g) of the Bankruptcy Code, thereby protecting Federal-Mogul and its affiliates in the Chapter 11 Cases from existing and future asbestos liability. Although technical issues remain to be resolved, the amended joint plan provides that all currently outstanding stock of Federal-Mogul will be cancelled, and 50.1% of newly authorized and issued common stock of reorganized Federal-Mogul will be distributed to the asbestos trusts or trusts for the benefit of existing and future asbestos claimants, and 49.9% of the newly authorized and issued common stock will be distributed pro rata to the noteholders. Trade creditors of Federal-Mogul will receive cash distributions in an amount that has yet to be determined. If the classes of holders of common and preferred stock of Federal-Mogul vote in favor of the amended joint plan, the holders of currently outstanding common and preferred stock of Federal-Mogul will receive warrants in reorganized Federal-Mogul.

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

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

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

F-6

FEDERAL-MOGUL PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Chapter 11 Financing

In connection with the Restructuring Proceedings, Federal-Mogul entered into a $675 million debtor-in-possession (“DIP”) credit facility to supplement liquidity and fund operations during the restructuring proceedings. In August 2003, the DIP credit facility was amended to reduce the commitment to $600 million, change the expiration date to February 2005, and reduce the interest rate to either the alternate base rate (“ABR”) plus 2 percentage points or a formula based on the London Inter-Bank Offered Rate (“LIBOR”) plus 3 percentage points. The ABR is the greatest of either the bank’s prime rate or the base CD rate plus 1 percentage point or the federal funds rate plus ½ percentage point. The $600 million commitment is mandatorily reduced by a portion of proceeds received from future asset or business divestitures.

Federal-Mogul’s available borrowings under the DIP credit facility are determined by the underlying collateral at any point in time, which includes Products’ domestic inventories, domestic accounts receivable, and domestic property, plant, and equipment. The DIP lenders received permission from the lenders of the Senior Credit Agreements to have priority over their collateral interest.

Financial Statement Presentation

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

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

	December 31
	2003		2002
	(Millions of Dollars)
Loans payable to affiliated companies	$	314.8	$	314.8
Asbestos liabilities		214.5		214.5
Accounts payable to affiliated companies		164.1		164.1
Accounts payable		57.3		58.9
Interest payable to affiliated companies		27.3		27.3
Environmental liabilities		0.2		0.5
Total	$	778.2	$	780.1

The Debtors, including Products, 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 and certain other pre-petition claims.

F-7

FEDERAL-MOGUL PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

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

The appropriateness of using the going concern basis for the Products’ financial statements is dependent upon, among other things: (i) Federal-Mogul’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 Federal-Mogul to maintain adequate cash on hand; (iii) the ability of Federal-Mogul to generate cash from operations; (iv) confirmation of a plan(s) of reorganization under the Bankruptcy Code; (v) confirmation of a scheme(s) of arrangement in the U.K. under Administration; and (vi) Federal-Mogul’s ability to achieve profitability following such confirmations.

2. Summary of Significant Accounting Policies

Principles of Consolidation: The consolidated financial statements include the accounts of Products and all majority-owned subsidiaries and other controlled entities. Intercompany accounts and transactions have been eliminated in consolidation. Investments in affiliates of not more than 20% are accounted for using the cost method.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 and Allowance for Doubtful Accounts: Trade accounts receivable are stated at historical value, which approximates fair value. Products does not generally require collateral for its trade accounts receivable.

Accounts receivable have been reduced by an allowance for amounts that may become uncollectible in the future. This estimated allowance is based primarily on management’s evaluation of specific balances as the balances become past due, the financial condition of its customers and the Company’s historical experience of write-offs. If not reserved through specific examination procedures, the Company’s general policy for uncollectible accounts is to reserve based upon the aging categories of accounts receivable and upon whether the amounts are due from an OE customer or Aftermarket customer. Past due status is based upon the invoice date of the original amounts outstanding. The allowance for doubtful accounts was $9.3 million and $11.3 million at December 31, 2003 and 2002, respectively.

F-8

FEDERAL-MOGUL PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Inventories: Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out method (“LIFO”). If inventories had been valued at current cost, amounts reported would have been increased by $6.9 million and $6.8 million as of December 31, 2003 and 2002, respectively. Inventories have also been reduced by an allowance for excess and obsolete inventories based on management’s review of on-hand inventories compared to estimated future sales and usage.

Long-Lived Assets: Long-lived assets, such as property, plant and equipment and definite-lived intangible assets, are stated at cost. Depreciation and amortization is computed principally by the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes. Definite-lived assets are periodically reviewed for impairment indicators. If impairment indicators exist, the Company performs the required analysis and records an impairment charge, as required, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144). If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.

Revenue Recognition: Products records sales when products are shipped and title has transferred to the customer, the sales price is fixed or determinable, and the collectibility of revenue is reasonably assured. Affiliate sales are transferred at cost. Accruals for sales returns and other allowances are provided at the time of shipment based upon past experience. Adjustments to such returns and allowances are made as new information becomes available.

Shipping and Handling Costs: Products recognizes shipping and handling costs as a component of cost of products sold in the statement of operations.

Recoverable Customer Engineering and Tooling: Pre-production tooling and engineering costs that Products will not own and that will be used in producing products under long-term supply arrangements are expensed as incurred unless the supply arrangement provides Products the non-cancelable right to use the tools or the reimbursement of such costs is agreed to by the customer. Pre-production tooling and engineering costs that are owned by Products are capitalized as part of machinery and equipment, and are depreciated over the shorter of the toolings’ expected life or the duration of the related program.

Research and Development Costs: Products expenses research and development costs as incurred. Research and development expense for 2003, 2002 and 2001 was $11.4 million, $6.2 million and $5.9 million, respectively.

Restructuring: Products defines restructuring expense to include charges incurred with exit or disposal activities accounted for in accordance with SFAS No. 146, employee severance costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 88 and 112, and pension and other post employment benefit costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 87 and 106.

Rebates/Sales Incentives: Products accrues for rebates pursuant to specific arrangements with certain of its customers, primarily in the aftermarket. Rebates generally provide for price reductions based upon the achievement of specified purchase volumes and are recorded as a reduction of sales as they are earned by such customers.

Fair Value of Financial Instruments: The carrying amounts of certain financial instruments such as accounts payable approximate their fair value.

Net Parent Investment: The Net Parent Investment account reflects the balance of Products’ historical earnings, intercompany amounts, income taxes accrued and deferred, post employment liabilities and other transactions between Products and Federal-Mogul. During 2001, Products recorded a provision for bad debt from affiliate Debtors of $319.0 million for pre-petition accounts receivable from related debtor entities outside of Products at the Petition Date. These receivables were previously recorded in Net Parent Investment.

Reclassifications: Certain items in the prior years financial statements have been reclassified to conform with the presentation used in 2003.

F-9

FEDERAL-MOGUL PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

New Accounting Pronouncements:

Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity: In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which provides standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The statement is effective for financial instruments entered into or modified after May 31, 2003 and for pre-existing instruments as of the beginning of the first interim period beginning after June 15, 2003. In November 2003, the FASB elected to indefinitely defer the effective date for certain provisions of SFAS No. 150 relating to investments in limited-life entities. The adoption of the provisions of SFAS No. 150 that were not deferred by the FASB did not have a material effect on Products’ financial condition, results of operations, or cash flows.

Derivative Instruments and Hedging Activities: In April 2003, the FASB issued SFAS No. 149, “Amendments of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. The statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this standard did not have a material effect on Products’ financial condition, results of operations, or cash flows.

Consolidation of Variable Interest Entities: In January 2003, the FASB issued FASB Interpretation Number 46 (FIN No. 46), “Consolidation of Variable Interest Entities”, an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”. FIN No. 46 provides guidance regarding the identification of, and financial reporting for entities over which control is achieved through means other than voting rights; such entities are considered variable interest entities. FIN No. 46 requires the consolidation of variable interest entities in which an enterprise is deemed to be the primary beneficiary, which is determined by the obligation to absorb a majority of the entity’s expected losses, the right to receive a majority of an entity’s expected residual returns or both.

In December 2003, the FASB issued revised FIN No. 46, which provided an exclusion for entities meeting the definition of a “business” (as defined in the interpretation) and extending the effective date for variable interest entities entered into prior to February 1, 2003 to periods ending after March 15, 2004. Management believes that its joint ventures meet this definition of a business, however, is currently evaluating such entities to determine whether consolidation is required under FIN No. 46 and to quantify the effect that adoption of FIN No. 46 will have on its consolidated financial statements.

Accounting for Costs Associated with Exit or Disposal Activities: In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. This pronouncement addresses financial accounting and reporting for costs associated with an exit activity (including restructuring) or with the disposal of long-lived assets and supercedes Emerging Issues Task Force Issue No. 94-3. Under SFAS No. 146, a liability is recorded for a cost associated with an exit activity when that liability is incurred and can be measured at fair value. SFAS No. 146 requires disclosure of information about exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS No. 146 is effective prospectively for exit and disposal activities initiated after December 31, 2002. SFAS No. 146 does not allow for the restatement of previously issued financial statements and continues the accounting for liabilities previously recorded under Emerging Issues Task Force Issue No. 94-3. Products adopted SFAS No. 146 effective January 1, 2003.

F-10

FEDERAL-MOGUL PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

3. Inventory

Inventories consisted of the following:

	December 31
	2003			2002
	(Millions of Dollars)
Raw materials	$	38.4		$	42.3
Work-in-process		18.4			26.5
Finished goods		109.4			127.3
		166.2			196.1
Valuation reserves		(19.8	)		(18.3	)
	$	146.4		$	177.8

4. Property, Plant and Equipment

Property, plant and equipment consisted of the following:

	December 31
	2003			2002
	(Millions of Dollars)
Land and land improvements	$	6.4		$	6.6
Buildings		68.3			70.7
Machinery and equipment		261.6			257.0
		336.3			334.3
Accumulated depreciation		(78.1	)		(84.2	)
	$	258.2		$	250.1

Future minimum payments under noncancelable operating leases with initial or remaining terms of more than one year are as follows, in millions:

2004	$	0.4
2005		0.4
2006		0.4
2007		0.4
2008		0.4
Thereafter		0.8

Total rental expense under operating leases for the years ended December 31, 2003, 2002 and 2001 was $7.8 million, $8.9 million and $7.4 million, respectively, exclusive of property taxes, insurance and other occupancy costs generally payable by Federal-Mogul.

5. Goodwill and Other Intangible Assets

Effective January 1, 2002, Products adopted SFAS No. 142, resulting in the discontinuance of amortization of goodwill and indefinite-lived intangible assets. The adoption of this standard also required the reclassification of various intangible asset classes according to the measurability of their useful lives. Upon the adoption of SFAS No. 142, Products recorded a non-cash charge of $437.0 million to reduce the carrying value of its goodwill and indefinite-lived intangible assets to their estimated fair value as required by SFAS No. 142. The tax impact related to the charge was $10.8 million and was limited to the benefit derived from the impairment of certain intangible assets other than goodwill. The charge is presented as a cumulative effect of change in accounting principle in the consolidated statement of operations for the year ended December 31, 2002.

F-11

FEDERAL-MOGUL PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

At December 31, 2003 and 2002, other intangible assets consists of the following:

	December 31, 2003							December 31, 2002
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(Millions of Dollars)
Definite-Lived Intangible Assets Developed technology	$	67.2	$	(14.6	)	$	52.6	$	67.2	$	(11.8	)	$	55.4

Products expects that amortization expense for its amortizable intangible assets for each of the years between 2004 and 2008 will be approximately $3 million.

The following table shows the pro-forma effect of SFAS No. 142 on Products’ earnings:

	Year Ended December 31
	2003		2002			2001
	(Millions of Dollars)
Reported Net Income (Loss)	$	37.7	$	(434.8	)	$	(363.8	)
Add-back: Goodwill amortization		—		—			12.6
Add-back: Indefinite-lived intangible asset amortization		—		—			5.3
Adjusted Net Income (Loss)	$	37.7	$	(434.8	)	$	(345.9	)

Prior to the adoption of SFAS No. 142, Products evaluated its goodwill and other intangible assets in accordance with SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and Assets to be Disposed of”. There were no impairment charges during 2001.

6. Restructuring Charges

In 2000, Products recognized a $17.8 million restructuring charge related to severance and exit costs. Employee severance costs of $13.9 million and exit costs of $3.9 million resulted primarily from the planned reorganization of the America’s friction business. Cash payments made during 2003, 2002 and 2001 against these reserves were $3.8 million, $1.9 million and $3.5 million, respectively. This reorganization was completed during 2003 and the remaining reserves of $5.9 million were reversed and are included in the income statement within “other expense, net”.

7. Commitments and Contingencies

Abex and Wagner Asbestos Litigation

Background

Two of Products’ businesses formerly owned by Cooper Industries, Inc., known as Abex and Wagner, are involved as defendants in numerous court actions in the U.S. alleging personal injury from exposure to asbestos or asbestos-containing products. These claims mainly involve friction products. As of the Petition Date, Abex and Wagner were defendants in approximately 66,000 and 33,000 pending claims, respectively. As a result of the Restructuring Proceedings, Products 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 Products with respect to claims alleging exposure to Wagner products arises from the 1998 stock purchase from Cooper Industries of the corporate successor by merger to Wagner Electric Company; the purchased entity is now a wholly-owned subsidiary of Federal-Mogul and one of the Debtors in the Restructuring Proceedings. As a consequence, all claims against the Debtors, including asbestos-related claims, have been stayed.

F-12

FEDERAL-MOGUL PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The liability of Products with respect to claims alleging exposure to Abex products arises from a contractual liability entered into in 1994 by the predecessor to Products whose stock Federal-Mogul purchased in 1998. Pursuant to that contract, prior to the Restructuring Proceedings, Products 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, Products has ceased making such payments and is currently considering whether to accept or reject the 1994 contractual liability.

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

Recorded Liability

The liability (comprised of $129.5 million in Abex liabilities and $85.0 million in Wagner liabilities as of December 31, 2003) represented Products’ estimate prior to the Restructuring Proceedings for claims currently pending and those which were reasonably estimated to be asserted and paid through 2012. Products 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, Products made assumptions regarding the total number of claims anticipated to be received in a future period, the typical cost of settlement (which is sensitive to the industry in which the plaintiff claims exposure, the alleged disease type and the jurisdiction in which the action is being brought), the rate of receipt of claims, the settlement strategy in dealing with outstanding claims and the timing of settlements.

As a result of the Restructuring Proceedings, pending asbestos-related litigation is stayed.

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

No assurance can be given that Products 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 Products or the remaining insurance coverage, Products’ 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. Products 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 $115.7 million as of December 31, 2003.

F-13

FEDERAL-MOGUL PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 Federal-Mogul’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 Products 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 Products under the policies. Products answered Dresser’s complaint and filed cross-claims against all of the defendant-insurers seeking a declaration of Products’ rights to the policies. Products may be liable for asbestos claims against Wagner and has the benefit of that insurance, subject to the rights of other potential insureds under the policies. Primary layer liability insurance coverage for asbestos claims against Wagner is the subject of an agreement with Wagner’s solvent primary carriers. The agreement provides for partial reimbursement of indemnity and defense costs for Wagner asbestos claims until exhaustion of aggregate limits. Wagner also has substantial excess layer liability insurance coverage which, barring unforeseen insolvencies of excess carriers or other adverse events, should provide coverage for asbestos claims against Wagner. The Wagner insurance recoverable was $53.5 million as of December 31, 2003.

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

Products 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.

Environmental Liabilities

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

Environmental reserves were $4.0 million and $4.2 million at December 31, 2003 and 2002, respectively and are included in the consolidated balance sheets as follows:

	December 31
	2003		2002
	(Millions of Dollars)
Current liabilities	$	—	$	—
Long-term accrued liabilities		3.8		3.7
Liabilities subject to compromise		0.2		0.5
	$	4.0	$	4.2

Management believes that such accruals will be adequate to cover Products’ estimated liability for its exposure in respect to such matters. In the event that such liabilities were to significantly exceed the amounts recorded by Products, Products’ results of operations and financial condition could be materially affected. At December 31, 2003, management estimates that reasonably possible material additional losses above and beyond management’s best estimate of required remediation costs as recorded approximates $4.0 million.

F-14

FEDERAL-MOGUL PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Environmental reserves subject to compromise include those that may be reduced in Federal Mogul’s bankruptcy proceeding because they may be determined to be “dischargeable debts” incurred prior to Federal Mogul’s filing for bankruptcy. Such liabilities generally arise at either (1) commercial waste disposal sites to which Products and other companies sent wastes for disposal, or (2) sites in relation to which Products 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 Products sold the site.

Environmental reserves determined not to be subject to compromise include those which arise from a legal obligation of Products, under an administrative or judicial order, to perform cleanup at a site. Such obligations are normally associated with sites, which a bankrupt entity such as Products 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 Products’ responsibility to make payments is stayed. Notwithstanding the stay of proceedings regarding such a site, activities such as further site investigation and/or actual cleanup work usually continue to be performed by other parties. Such activities may produce new and better information that requires Products to revise its best estimate of total site cleanup costs and its own share of such costs.

8. Long-Term Debt and Other Financing Arrangements

Products’ cash and indebtedness is managed by Federal-Mogul. The majority of the cash provided by or used by a particular division, including Products, is provided through a consolidated cash and debt management system. As a result, the amount of domestic cash or debt historically related to Products is not determinable.

Products has intercompany loans from Federal-Mogul in the amount of $270.8 million, which are included in liabilities subject to compromise at December 31, 2003 and 2002. In 2001, Federal-Mogul charged interest on the intercompany loans based on the stated rate of 7.0%. In accordance with SOP 90-7, Products has stopped recording interest expense on its intercompany debt effective October 1, 2001. Products’ contractual interest not accrued or paid in 2003, 2002 and 2001 for this note was $19.0 million, $19.0 million and $4.7 million respectively.

Products has a note payable to another subsidiary of Federal-Mogul in the amount of $44.0 million for the transfer of certain assets and liabilities,. Interest on this note is calculated at the stated rate of 6.154%. This note is included in Products’ balance sheet under the caption liabilities subject to compromise at December 31, 2003 and 2002. In accordance with SOP 90-7, Products has stopped recording interest expense on its intercompany debt effective October 1, 2001. Products contractual interest not accrued or paid for this note in 2003, 2002 and 2001 was $2.7 million, $2.7 million and $0.7 million, respectively.

Federal-Mogul has pledged 100% of Products’ capital stock and also provided collateral in the form of a pledge of inventories, property, plant and equipment, real property and intellectual properties to secure certain outstanding debt of Federal-Mogul. In addition, Products has guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under Federal-Mogul’s Senior Credit Agreement and its publicly registered debt. Such pledges and guarantees have also been made by other subsidiaries of Federal-Mogul. Federal-Mogul is in default of the terms of such debt agreements. Borrowing outstanding on such agreements aggregates $4,020.7 million and $3,982.7 million as of December 31, 2003 and 2002, respectively.

F-15

FEDERAL-MOGUL PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

9. Net Parent Investment

Changes in net parent investment were as follows:

	(Millions of Dollars)
Balance at January 1, 2001	$	719.6
Reclassification of intercompany accounts and loans payable at the Petition Date to liabilities subject to compromise		(502.1	)
Reclassification of accounts receivable from affiliates at the Petition Date		319.0
Reclassification transfer of accounts receivable from Federal-Mogul to Products		99.3
		635.8
Net loss		(363.8	)
Intercompany transactions, net		64.5
Balance at December 31, 2001		336.5
Net loss		(434.8	)
Intercompany transactions, net		21.6
Balance at December 31, 2002		(76.7	)
Net income		37.7
Intercompany transactions, net		(23.6	)
Balance at December 31, 2003	$	(62.6	)

10. Income Taxes

Products files a consolidated return with Federal-Mogul for U.S. federal income tax purposes. Federal income tax expense is calculated on a separate-return basis for financial reporting purposes.

	Year Ended December 31
	2003		2002		2001
	(Millions of Dollars)
Components of income tax expense (benefit)
Current	$	—	$	0.6	$	—
Deferred		—		14.4		(16.7	)
Income tax expense (benefit)	$	—	$	15.0	$	(16.7	)

A reconciliation between the statutory federal income tax rate and the effective tax rate is as follows:

	Year Ended December 31
	2003		2002		2001
U.S. Federal statutory rate	35	%	35	%	35	%
State and local taxes	3		2		2
Nondeductible goodwill	—		—		(2	)
Valuation allowance	(38	)	50		(31	)
Effective tax rate	—	%	87	%	4	%

F-16

FEDERAL-MOGUL PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the related amounts used for income tax purposes. Significant components of Product’s net deferred tax asset are non-deductible accruals and amortization and depreciation timing differences.

	2003			2002
	(Millions of Dollars)
Net current deferred tax assets	$	34.9		$	47.0
Net long-term deferred tax assets		55.5			73.0
Gross deferred tax assets		90.4			120.0
Valuation allowance		(90.4	)		(120.0	)
Net deferred tax assets	$	—		$	—

11. Pension Plans

Products is included in the Federal-Mogul Corporation Pension Plan. As such, the related pension liability is recorded in Net Parent Investment at December 31, 2003 and 2002.

The pension charge allocated to Products was $3.8 million, $4.0 million and $2.1 million for 2003, 2002 and 2001, respectively.

12. Postretirement Benefits Other Than Pensions

Benefits provided to employees of Products under various Federal-Mogul postretirement plans other than pensions, all of which are unfunded, include retiree medical care, dental care, prescription drugs and life insurance, with medical care accounting for approximately 45% of the total. The majority of participants under such plans are retirees. The expense related to such plans approximated $1.1 million, $2.0 million and $2.3 million for 2003, 2002 and 2001, respectively.

13. Concentrations of Credit Risk and Other

Products grants credit to their customers, which are primarily in the automotive industry. Credit risk with respect to trade receivables is generally diversified due to the large number of entities comprising Products’ customer base. Products performs periodic credit evaluations of their customers and generally does not require collateral.

Products operates in a single business segment. Products manufactures and distributes brake friction materials and other products for use by the automotive aftermarket and in automobile assemblies. In addition, Products manufactures and distributes suspension, steering drive-line and brake system components and material for the automotive aftermarket. No single customer accounted for 10% or more of revenues in 2003, 2002 or 2001. All revenues and assets of Products reside in the United States.

14. Subsequent Event (Unaudited)

On March 5, 2004, a fire destroyed the Company’s Smithville, Tennessee distribution center. This facility was the Company’s primary source for supplying chassis parts to the North American aftermarket. The Company does not believe this incident will impact its long-term ability to supply chassis products to the North American aftermarket, and is taking appropriate measures to minimize any impact this incident may have on short-term product availability.

Sales fulfilled from this distribution center during the year ended December 31, 2003 approximated $200 million. In addition, this distribution center had inventory on-hand of approximately $46 million at December 31, 2003, and

F-17

FEDERAL-MOGUL PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

approximately $51 million at March 5, 2004. The net book value of this building at December 31, 2003 was approximately $6 million. Management believes its insurance coverage is adequate to cover its direct and indirect costs resulting from the fire, but is unable to estimate with certainty the extent to which incremental costs not directly attributable to the fire may be reimbursed under its insurance policies.

The Company has temporarily leased a facility to conduct its distribution operations while plans for permanent arrangements can be developed and implemented. To replace inventory damaged or destroyed in the fire, other Federal-Mogul facilities have increased production of chassis parts through additional production shifts or overtime production.

F-18

REPORT OF INDEPENDENT AUDITORS

The Board of Directors

Federal-Mogul Corporation

We have audited the accompanying consolidated balance sheets of Federal-Mogul Ignition Company and subsidiaries, a wholly-owned subsidiary of Federal-Mogul Corporation, as of as of December 31, 2003 and 2002, and the related consolidated statements of operations and comprehensive income and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Federal-Mogul Ignition Company and subsidiaries at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been prepared assuming that Federal-Mogul Ignition Company and subsidiaries will continue as a going concern. As more fully described in the notes to the consolidated financial statements, on October 1, 2001, Federal-Mogul Corporation and its wholly-owned United States subsidiaries, which includes Federal-Mogul Ignition Company, filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. Uncertainties inherent in the bankruptcy process raise substantial doubt about Federal-Mogul Ignition Company’s ability to continue as a going concern. Management’s intentions with respect to these matters are also described in the notes. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 6 to the consolidated financial statements, Federal-Mogul Ignition Company changed its method of accounting for goodwill and indefinite-lived intangible assets in 2002.

/S/ ERNST & YOUNG LLP

Detroit, Michigan

February 6, 2004,

except as to the ninth

paragraph of Note 1, as to

which the date is March 4, 2004

F-19

FEDERAL-MOGUL IGNITION COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

	Year Ended December 31
	2003			2002			2001
	(Millions of Dollars)
Third party sales	$	714.3		$	681.1		$	697.8
Affiliate sales		126.1			136.5			121.7
Total net sales		840.4			817.6			819.5
Cost of products sold		640.6			627.7			617.5
Gross margin		199.8			189.9			202.0
Selling, general and administrative expenses		107.2			132.1			137.8
Provision for bad debt from affiliate Debtors		—			—			306.4
Amortization expense		1.9			1.9			13.5
Restructuring charges		12.0			2.8			3.5
Adjustment of assets held for sale and other long-lived assets to fair value		—			0.6			228.7
Interest (income) expense, net		(3.3	)		(5.8	)		23.7
Other expense (income), net		13.2			4.3			8.3
Earnings (loss) from continuing operations before income taxes		68.8			54.0			(519.9	)
Income tax expense		14.8			21.4			8.5
Earnings (loss) from continuing operations		54.0			32.6			(528.4	)
Loss from discontinued operations, net of income taxes		(0.3	)		(16.5	)		(23.2	)
Net earnings (loss)		53.7			16.1			(551.6	)
Components of comprehensive income (loss)
Translation adjustments		(12.2	)		5.4			(6.1	)
Comprehensive income (loss)	$	41.5		$	21.5		$	(557.7	)

See accompanying notes to consolidated financial statements

F-20

FEDERAL-MOGUL IGNITION COMPANY

CONSOLIDATED BALANCE SHEETS

	December 31
	2003			2002
	(Millions of Dollars)
ASSETS
Cash and equivalents	$	29.6		$	20.4
Accounts receivable, net		165.9			177.8
Inventories, net		145.5			154.9
Supplies inventories		20.4			19.9
Other		6.2			15.7
Total Current Assets		367.6			388.7
Property, plant and equipment, net		274.7			272.7
Goodwill and indefinite-lived intangible assets		247.4			250.4
Definite-lived intangible assets, net		34.7			36.3
Other noncurrent assets		2.0			6.9
Total Assets	$	926.4		$	955.0
LIABILITIES AND NET PARENT INVESTMENT
Short-term debt	$	2.0		$	—
Accounts payable		55.8			43.4
Accrued compensation		18.6			18.5
Restructuring reserves		4.2			1.9
Accrued rebates and customer incentives		8.6			7.2
Other accrued liabilities		17.7			27.8
Total Current Liabilities		106.9			98.8
Other long-term liabilities		17.3			15.7
Liabilities subject to compromise		798.9			806.5
Minority interest in consolidated subsidiaries		81.8			72.1
Net Parent Investment
Accumulated other comprehensive loss		(37.1	)		(49.3	)
Intercompany transactions		(41.4	)		11.2
Net Parent Investment		(78.5	)		(38.1	)
Total Liabilities and Net Parent Investment	$	926.4		$	955.0

See accompanying notes to consolidated financial statements.

F-21

FEDERAL-MOGUL IGNITION COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31
	2003			2002			2001
	(Millions of Dollars)
Cash provided from (used by) operating activities:
Net earnings (loss)	$	53.7		$	16.1		$	(551.6	)
Adjustments to reconcile net earnings (loss) to net cash provided from operating activities:
Provision for bad debt from affiliate Debtors		—			—			306.4
Gain on sale of businesses, net		(2.2	)		(2.8	)		(35.6	)
Depreciation and amortization		33.1			33.1			49.6
Restructuring charge		13.7			5.4			3.7
Adjustment of assets held for sale and other long-lived assets to fair value		—			11.2			289.1
Changes in assets and liabilities:
Accounts receivable		11.9			(5.9	)		(4.3	)
Inventories		9.4			3.1			(14.8	)
Accounts payable		12.4			3.2			8.0
Other assets and liabilities		(36.7	)		4.7			(42.0	)
Net cash provided from operating activities		95.3			68.1			8.5
Cash provided from (used by) investing activities:
Capital expenditures		(26.4	)		(52.7	)		(73.9	)
Proceeds from sale of businesses		20.2			33.0			164.8
Net cash (used by) provided from investing activities		(6.2	)		(19.7	)		90.9
Cash provided from (used by) financing activities:
Borrowings on short-term debt		2.0			—			—
Transfers to parent		(81.9	)		(60.6	)		(117.3	)
Net cash used by financing activities		(79.9	)		(60.6	)		(117.3	)
(Decrease) Increase in cash and equivalents		9.2			(12.2	)		(17.9	)
Cash and equivalents at beginning of year		20.4			32.6			50.5
Cash and equivalents at end of year	$	29.6		$	20.4		$	32.6

See accompanying notes to consolidated financial statements.

F-22

FEDERAL-MOGUL IGNITION COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying financial statements reflect the consolidated assets, liabilities and operations of Federal-Mogul Ignition Company and its subsidiaries (“Ignition”). Ignition is a wholly-owned subsidiary of Federal-Mogul Corporation (“Federal-Mogul”). Ignition manufactures wipers, spark plugs, glow plugs and ignition coils.

Ignition operates with financial and operations staff on a decentralized basis. Federal-Mogul provides certain centralized services for employee benefits administration, cash management, risk management, legal services, public relations, domestic tax reporting and internal and external audit. Federal-Mogul charges Ignition for all such direct expenses incurred on its behalf. General expenses that are not directly attributable to the operations of Ignition have been allocated based on management’s estimates, primarily driven by sales. Management believes that this allocation method is reasonable.

The accompanying consolidated financial statements are presented as if Ignition had existed as an entity separate from its parent during the periods presented, and includes the assets, liabilities, revenues and expenses that are directly related to Ignition’s operations.

Ignition’s separate debt and related interest expense have been included in the consolidated financial statements. Ignition is fully integrated into its parent’s cash management system, as such, all of their domestic cash requirements are provided by its parent and any excess cash generated by Ignition is transferred to the parent.

Voluntary Reorganization Under Chapter 11 and Administration

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

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

Consequences of the Restructuring Proceedings

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

F-23

FEDERAL-MOGUL IGNITION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 a creditors committee, representing both asbestos claimants and general unsecured creditors.

On March 4, 2004, Federal-Mogul filed an amended plan of reorganization and related disclosure statement with the Bankruptcy Court. This amended plan of reorganization was jointly proposed by Federal-Mogul along with 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 (collectively referred to as the “Co-Proponents”). The joint amended plan of reorganization is consistent with the principal terms of the plan originally filed with the Bankruptcy Court on March 6, 2003.

The amended joint plan of reorganization provides that asbestos personal injury claimants, both present and future, will be permanently channeled to a trust or series of trusts established pursuant to Section 524(g) of the Bankruptcy Code, thereby protecting Federal-Mogul and its affiliates in the Chapter 11 Cases from existing and future asbestos liability. Although technical issues remain to be resolved, the amended joint plan provides that all currently outstanding stock of Federal-Mogul will be cancelled, and 50.1% of newly authorized and issued common stock of reorganized Federal-Mogul will be distributed to the asbestos trusts or trusts for the benefit of existing and future asbestos claimants, and 49.9% of the newly authorized and issued common stock will be distributed pro rata to the noteholders. Trade creditors of Federal-Mogul will receive cash distributions in an amount that has yet to be determined. If the classes of holders of common and preferred stock of Federal-Mogul vote in favor of the amended joint plan, the holders of currently outstanding common and preferred stock of Federal-Mogul will receive warrants in reorganized Federal-Mogul.

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

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

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

F-24

FEDERAL-MOGUL IGNITION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Chapter 11 Financing

In connection with the Restructuring Proceedings, Federal-Mogul entered into a $675 million debtor-in-possession (“DIP”) credit facility to supplement liquidity and fund operations during the restructuring proceedings. In August 2003, the DIP credit facility was amended to reduce the commitment to $600 million, change the expiration date to February 2005, and reduce the interest rate to either the alternate base rate (“ABR”) plus 2 percentage points or a formula based on the London Inter-Bank Offered Rate (“LIBOR”) plus 3 percentage points. The ABR is the greatest of either the bank’s prime rate or the base CD rate plus 1 percentage point or the federal funds rate plus ½ percentage point. The $600 million commitment is mandatorily reduced by a portion of proceeds received from future asset or business divestitures.

Federal-Mogul’s available borrowings under the DIP credit facility are determined by the underlying collateral at any point in time, which includes Ignition’s domestic inventories, domestic accounts receivable, and domestic property, plant, and equipment. The DIP lenders received permission from the lenders of the Senior Credit Agreements to have priority over their collateral interest.

Financial Statement Presentation

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

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

	December 31
	2003		2002
Accounts payable	$	32.7	$	36.5
Accounts payable to affiliated companies		148.6		156.7
Loans payable to affiliated companies		447.5		447.5
Interest payable to affiliated companies		162.8		162.8
Environmental liabilities		7.3		3.0
Total	$	798.9	$	806.5

The Debtors, including Ignition, 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 and certain other pre-petition claims.

F-25

FEDERAL-MOGUL IGNITION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

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

The appropriateness of using the going concern basis for the Ignition’s financial statements is dependent upon, among other things: (i) Federal-Mogul’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 Federal-Mogul to maintain adequate cash on hand; (iii) the ability of Federal-Mogul to generate cash from operations; (iv) confirmation of a plan(s) of reorganization under the Bankruptcy Code; (v) confirmation of a scheme(s) of arrangement in the U.K. under Administration; and (vi) Federal-Mogul’s ability to achieve profitability following such confirmations.

F-26

FEDERAL-MOGUL IGNITION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Debtors’ Financial Statements

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

Debtors’ Condensed Consolidated Statement of Operations

	Year Ended December 31
	2003			2002		2001
	(Millions of Dollars)
Third party sales	$	436.8		$	426.7	$	454.7
Affiliate sales		46.5			48.4		47.0
Total net sales		483.3			475.1		501.7
Cost of products sold		351.8			361.0		385.9
Gross margin		131.5			114.1		115.8
Selling, general and administrative expenses		70.7			93.7		100.7
Provision for bad debt from affiliate Debtors		—			—		244.3
Amortization expense		1.8			1.9		12.0
Restructuring charges		0.9			2.8		1.8
Adjustment of assets held for sale and other long-lived assets to fair value		—			0.6		184.0
Interest expense, net		—			—		28.7
Other expense, net		11.0			5.3		11.3
Earnings (loss) from continuing operations before income taxes and equity loss of non-Debtor subsidiaries		47.1			9.8		(467.0	)
Income tax expense (benefit)		1.4			2.1		(8.6	)
Earnings (loss) from continuing operations before equity loss of non-Debtor subsidiaries		45.7			7.7		(458.4	)
Equity earnings (loss) from continuing operations of non-Debtor subsidiaries		8.3			24.9		(70.1	)
Earnings (loss) from continuing operations		54.0			32.6		(528.5	)
Loss (income) from discontinued operations, net of income taxes, Debtors		0.4			4.8		(2.0	)
Loss (income) from discontinued operations, net of income taxes, non-Debtors		(0.1	)		11.7		25.1
Net earnings (loss)	$	53.7		$	16.1	$	(551.6	)

F-27

FEDERAL-MOGUL IGNITION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Debtors’ Condensed Consolidated Balance Sheet

	December 31
	2003			2002
	(Millions of Dollars)
ASSETS
Accounts receivable, net	$	95.5		$	113.5
Accounts receivable – non-Debtor affiliates		10.8			10.4
Inventories, net		87.5			100.6
Other		11.1			13.7
Total Current Assets		204.9			238.2
Property, plant and equipment, net		110.5			119.2
Goodwill and indefinite-lived intangible assets		230.4			230.4
Definite-lived intangible assets, net		34.4			36.3
Investment in non-Debtor subsidiaries		175.9			171.6
Loan receivable – non-Debtor affiliates		22.2			18.5
Other noncurrent assets		0.3			3.6
Total Assets	$	778.6		$	817.8
LIABILITIES AND NET PARENT INVESTMENT
Accounts payable	$	16.1		$	13.5
Accounts payable – non-Debtors		25.0			17.7
Other accrued liabilities		14.1			15.5
Total Current Liabilities		55.2			46.7
Other long-term liabilities		1.2			1.3
Liabilities subject to compromise		798.9			806.5
Net Parent Investment		(76.7	)		(36.7	)
Total Liabilities and Net Parent Investment	$	778.6		$	817.8

F-28

FEDERAL-MOGUL IGNITION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Debtors’ Condensed Consolidated Statements of Cash Flows

	Year Ended December 31
	2003			2002			2001
	(Millions of Dollars)
Net cash provided from (used by) operating activities	$	24.3		$	22.5		$	(32.0	)
Cash provided from (used by) investing activities:
Capital expenditures		(8.2	)		(10.3	)		(15.5	)
Proceeds from sale of businesses		2.7			2.6			164.8
Net cash (used by) provided from investing activities		(5.5	)		(7.7	)		149.3
Cash provided from (used by) financing activities:
Transfers to parent		(18.8	)		(14.8	)		(117.3	)
Net cash used by financing activities		(18.8	)		(14.8	)		(117.3	)
Net change in cash		—			—			—
Cash at beginning of year		—			—			—
Cash at end of year	$	—		$	—		$	—

2. Summary of Significant Accounting Policies

Principles of Consolidation: The consolidated financial statements include the accounts of Ignition and all majority-owned subsidiaries and other controlled entities. Intercompany accounts and transactions have been eliminated in consolidation. Investments in affiliates of not more than 20% are accounted for using the cost method, while investments greater than 20% and not more than 50% are accounted for using the equity method.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.

Cash and Equivalents: The Company considers all highly liquid investments with maturities of 90 days or less from the date of purchase to be cash equivalents.

Trade Accounts Receivable and Allowance for Doubtful Accounts: Trade accounts receivable are stated at historical value, which approximates fair value. Ignition does not generally require collateral for its trade accounts receivable.

Accounts receivable have been reduced by an allowance for amounts that may become uncollectible in the future. This estimated allowance is based primarily on management’s evaluation of specific balances as the balances become past due, the financial condition of its customers and Ignition’s historical experience of write-offs. If not reserved through specific examination procedures, Ignition general policy for uncollectible accounts is to reserve based upon the aging categories of accounts receivable and upon whether the amounts are due from an OE customer or Aftermarket customer. Past due status is based upon the invoice date of the original amounts outstanding. The allowance for doubtful accounts was $10.1 million and $16.2 million at December 31, 2003 and 2002, respectively.

Inventories: Inventories are carried at cost or, if lower, net realizable value. Cost is determined using the last-in, first-out (“LIFO”) method for approximately 54% and 63% of the inventory at December 31, 2003 and 2002, respectively. The remaining inventories are recorded using the first-in, first-out method. If inventories had been valued at current cost amounts reported would have increased by $7.0 million and $8.8 million at December 31, 2003 and 2002 respectively. Inventories have also been reduced by an allowance for excess and obsolete inventories based on management’s review of on-hand inventories compared to estimated future sales and usage.

Long-Lived Assets: Long-lived assets, such as property, plant and equipment and definite-lived intangible assets, are stated at cost. Depreciation and amortization is computed principally by the straight-line method for financial

F-29

FEDERAL-MOGUL IGNITION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

reporting purposes and by accelerated methods for income tax purposes. Definite-lived assets are periodically reviewed for impairment indicators. If impairment indicators exist, the Company performs the required analysis and records an impairment charge, as required, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144). If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.

Indefinite-lived Intangible Assets: Indefinite-lived intangible assets, such as goodwill and trademarks, are carried at historical value and not amortized. Indefinite-lived intangible assets are reviewed for impairment annually as of October 1, or more frequently if impairment indicators exist. The impairment analysis compares the estimated fair value of these assets to the related carrying value, and an impairment charge is recorded for any excess of carrying value over estimated fair value. The estimated fair value is based upon consideration of various valuation methodologies, including guideline transaction multiples, multiples of current earnings, and discounted future cash flows discounted at rates commensurate with the risk involved.

Revenue Recognition: Ignition recognizes sales when products are shipped and title has transferred to the customer, the sales price is fixed or determinable, and the collectibility of revenue is reasonably assured. Affiliate sales are transferred at cost. Accruals for sales returns and other allowances are provided at the time of shipment based upon past experience. Adjustments to such returns and allowances are made as new information becomes available.

Shipping and Handling Costs: Ignition recognizes shipping and handling costs as a component of cost of products sold in the statement of operations.

Recoverable Customer Engineering and Tooling: Pre-production tooling and engineering costs that Ignition will not own and that will be used in producing products under long-term supply arrangements are expensed as incurred unless the supply arrangement provides Ignition the noncancelable right to use the tools or the reimbursement of such costs is agreed to by the customer. Pre-production tooling and engineering costs that are owned by Ignition are capitalized as part of machinery and equipment, and are depreciated over the shorter of the toolings’ expected life or the duration of the related program.

Research and Development and Advertising Costs: Ignition expenses research and development costs as incurred. Research and development expense for 2003, 2002 and 2001 was $14.5 million, $14.5 million and $17.3 million, respectively. Advertising and promotion expense was $3.0 million, $3.0 million and $3.4 million for 2003, 2002 and 2001, respectively.

Restructuring: Ignition defines restructuring expense to include charges incurred with exit or disposal activities accounted for in accordance with SFAS No. 146, employee severance costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 88 and 112, and pension and other post employment benefit costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 87 and 106.

Rebates/Sales Incentives: Ignition accrues for rebates pursuant to specific arrangements with certain of its customers, primarily in the aftermarket. Rebates generally provide for price reductions based upon the achievement of specified purchase volumes and are recorded as a reduction of sales as they are earned by such customers.

Currency Translation: Exchange adjustments related to international currency transactions and translation adjustments for subsidiaries whose functional currency is the United States dollar (principally those located in highly inflationary economies) are reflected in the consolidated statements of operations. Translation adjustments of foreign subsidiaries for which the United States dollar is not the functional currency are reflected in the consolidated financial statements as a component of accumulated other comprehensive loss.

Net Parent Investment: The Net Parent Investment account reflects the balance of Ignition’s historical earnings, intercompany amounts, income taxes accrued and deferred, post employment liabilities, other transactions between Ignition and Federal-Mogul, foreign currency translations and equity pension adjustments. During 2001, Ignition recorded a provision for bad debt from affiliated Debtors of $306.4 million for pre-petition intercompany accounts receivable from related Debtors outside of Ignition at the Petition Date. These receivables were previously recorded in Net Parent Investment.

F-30

FEDERAL-MOGUL IGNITION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Reclassifications: Certain items in the prior years financial statements have been reclassified to conform with the presentation used in 2003.

New Accounting Pronouncements:

Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity: In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which provides standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The statement is effective for financial instruments entered into or modified after May 31, 2003 and for pre-existing instruments as of the beginning of the first interim period beginning after June 15, 2003. In November 2003, the FASB elected to indefinitely defer the effective date for certain provisions of SFAS No. 150 relating to investments in limited-life entities. The adoption of the provisions of SFAS No. 150 that were not deferred by the FASB did not have a material effect on Ignition’s financial condition, results of operations, or cash flows.

Derivative Instruments and Hedging Activities: In April 2003, the FASB issued SFAS No. 149, “Amendments of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. The statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this standard did not have a material effect on Ignition’s financial condition, results of operations, or cash flows.

Consolidation of Variable Interest Entities: In January 2003, the FASB issued FASB Interpretation Number 46 (FIN No. 46), “Consolidation of Variable Interest Entities”, an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”. FIN No. 46 provides guidance regarding the identification of, and financial reporting for entities over which control is achieved through means other than voting rights; such entities are considered variable interest entities. FIN No. 46 requires the consolidation of variable interest entities in which an enterprise is deemed to be the primary beneficiary, which is determined by the obligation to absorb a majority of the entity’s expected losses, the right to receive a majority of an entity’s expected residual returns or both.

In December 2003, the FASB issued revised FIN No. 46, which provided an exclusion for entities meeting the definition of a “business” (as defined in the interpretation) and extending the effective date for variable interest entities entered into prior to February 1, 2003 to periods ending after March 15, 2004. Management believes that its joint ventures meet this definition of a business, however, is currently evaluating such entities to determine whether consolidation is required under FIN No. 46 and to quantify the effect that adoption of FIN No. 46 will have on its consolidated financial statements.

Accounting for Costs Associated with Exit or Disposal Activities: In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. This pronouncement addresses financial accounting and reporting for costs associated with an exit activity (including restructuring) or with the disposal of long-lived assets and supercedes Emerging Issues Task Force Issue No. 94-3. Under SFAS No. 146, a liability is recorded for a cost associated with an exit activity when that liability is incurred and can be measured at fair value. SFAS No. 146 requires disclosure of information about exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS No. 146 is effective prospectively for exit and disposal activities initiated after December 31, 2002. SFAS No. 146 does not allow for the restatement of previously issued financial statements and continues the accounting for liabilities previously recorded under Emerging Issues Task Force Issue No. 94-3. Ignition adopted SFAS No. 146 effective January 1, 2003.

F-31

FEDERAL-MOGUL IGNITION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

3. Discontinued Operations

In connection with its strategic planning process, Federal-Mogul assesses its operations for market position, product technology and capability, and profitability. Those businesses determined by management not to have a sustainable competitive advantage are considered non-core and may be considered for divestiture or other exit activities. Over the past several years, Ignition has divested numerous non-core businesses. The elimination of these non-core businesses has freed up both human and capital resources which have been devoted to Federal-Mogul’s core businesses.

During 2003, Ignition completed the following divestitures of non-core businesses:

• During April 2003, Ignition completed the divestitures of substantially all of its original equipment lighting operations. The original equipment lighting divestitures include operations in Matamoros, Mexico; Brownsville, Texas; and Toledo, Ohio.

During 2002, Ignition completed two divestitures of non-core businesses as follows:

• During the first quarter of 2002 Ignition completed the divestiture of its Signal-Stat Lighting Products business (“Signal-Stat”) to Truck-Lite Co., Inc. Signal-Stat produces exterior lighting and power distribution products primarily for heavy-duty and commercial vehicle markets.

• In November 2002, Ignition completed the divestiture of Federal-Mogul Camshafts de Mexico S. de R.L. de C.V. (“Camshafts de Mexico”), to Linamar Corporation. Camshafts de Mexico manufactures camshafts for the North American original equipment market.

During 2001, Ignition completed divestitures of non-core businesses including:

• In May 2001, the divestiture of its Champion aviation ignition products division (“Aviation”) to TransDigm Inc. Aviation provides products for all major commercial, military and general aircraft applications.

• In August 2001, the divestiture of the aftermarket operations of Blazer Lighting Products (“Blazer”) to Clean-Rite Products LLC, an automotive aftermarket supplier. Blazer manufactures exterior vehicle lighting products.

Further information related to Ignition’s discontinued operations is as follows:

	Year Ended December 31
	2003			2002			2001
	(Millions of Dollars)
Net sales	$	46.8		$	140.2		$	170.0
Cost of products sold		39.8			124.9			154.8
Gross margin		7.0			15.3			15.2
Selling, general and administrative expenses		2.8			9.1			21.2
Restructuring charges		1.7			2.6			0.2
Adjustment of assets held for sale and other long-lived assets to fair value		—			10.6			60.4
Net (gain) loss on divestitures		2.1			(2.8	)		(36.1	)
Other expenses, net		0.7			(0.6	)		4.4
(Loss) income before income taxes		(0.3	)		(3.6	)		(34.9	)
Income tax expense (benefit)		—			12.9			(11.7	)
Loss from discontinued operations	$	(0.3	)	$	(16.5	)	$	(23.2	)

F-32

FEDERAL-MOGUL IGNITION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

At December 31, 2002, Ignition had assets held for sale included in its consolidated balance sheet as follows (in millions of dollars):

Accounts receivable, net	$	9.3
Inventories, net		9.2
Other current assets		3.6
Total Current Assets		22.1
Property, plant and equipment, net		4.9
Other long-term assets		0.3
Total Assets		27.3
Accounts payable		(7.8	)
Other accrued liabilities		(2.1	)
Total Liabilities	$	(9.9	)

4. Inventories

Inventories consisted of the following:

	December 31
	2003			2002
	(Millions of Dollars)
Raw materials.	$	36.4		$	42.1
Work-in-process		43.0			40.9
Finished goods		87.7			84.9
		167.1			167.9
Valuation reserves		(21.6	)		(13.0	)
	$	145.5		$	154.9

5. Property, Plant and Equipment

Property, plant and equipment consisted of the following:

	December 31
	2003			2002
	(Millions of Dollars)
Land and land improvements	$	6.1		$	7.5
Buildings		62.7			60.5
Machinery and equipment		312.7			350.8
		381.5			418.8
Accumulated depreciation		(106.8	)		(146.1	)
	$	274.7		$	272.7

Total rental expense under operating leases for the years ended December 31, 2003, 2002 and 2001 was $9.8 million, $8.3 million and $8.8 million, respectively, exclusive of property taxes, insurance and other occupancy costs generally payable by Federal-Mogul.

F-33

FEDERAL-MOGUL IGNITION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Future minimum payments under noncancelable operating leases with initial or remaining terms of more than one year are as follows, in millions:

2004	$	3.0
2005		2.7
2006		2.6
2007		1.7
2008		1.0
Thereafter		0.1

6. Goodwill and Other Indefinite-Lived Intangible Assets

Effective January 1, 2002, Ignition adopted SFAS No. 142, resulting in the discontinuance of amortization of goodwill and indefinite-lived intangible assets. The adoption of this standard also required the reclassification of various intangible asset classes according to the measurability of their useful lives. Ignition’s initial impairment test indicated that its carrying value did not exceed the corresponding fair values, which were determined by using discounted cash flows and market multiples. Therefore, no impairment charge was required. Ignition completed its required annual impairment analysis as of October 1, 2003 and, based upon this analysis, no impairment charge was required.

At December 31, 2003 and 2002, goodwill and other intangible assets consists of the following:

	December 31, 2003							December 31, 2002
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(Millions of Dollars)
Definite-Lived Intangible Assets
Developed technology	$	44.3	$	(9.6	)	$	34.7	$	44.3	$	(8.0	)	$	36.3
Indefinite-Lived Intangible Assets
Goodwill						$	137.2						$	140.2
Trademarks							110.2							110.2
Total Indefinite-Lived Intangible Assets						$	247.4						$	250.4

Ignition expects that amortization expense for its amortizable intangible assets for each of the years between 2003 and 2007 will be approximately $2 million.

The following table shows the pro-forma effect of SFAS No. 142 on Ignition’s earnings:

	Year Ended December 31
	2003		2002		2001
	(Millions of Dollars)
Reported Net Earnings (Loss)	$	53.7	$	16.1	$	(551.6	)
Add-back: Goodwill amortization		—		—		7.5
Add-back: Indefinite-lived intangible asset amortization		—		—		5.2
Adjusted Net Earnings (Loss)	$	53.7	$	16.1	$	(538.9	)

F-34

FEDERAL-MOGUL IGNITION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

7. Restructuring Charges

Ignition recorded $12.0 million, $2.8 million, and $3.5 million in 2003, 2002, and 2001, respectively, of restructuring charges from continuing operations primarily related to severance costs resulting from salaried employee reductions in North America and Europe. Cash payments made during 2003 and 2002 were $9.7 million and $6.7 million, respectively.

8. Commitments and Contingencies

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

Environmental reserves were $8.8 million and $5.5 million at December 31, 2003 and 2002, respectively and are included in the consolidated balance sheets as follows:

	December 31
	2003		2002
	(Millions of Dollars)
Current liabilities	$	0.4	$	1.4
Long-term accrued liabilities		1.1		1.1
Liabilities subject to compromise		7.3		3.0
	$	8.8	$	5.5

Management believes that such accruals will be adequate to cover Ignition’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 Ignition, Ignition’ results of operations and financial condition could be materially affected. At December 31, 2003, management estimates that reasonably possible material additional losses above and beyond management’s best estimate of required remediation costs as recorded approximates $0.2 million.

Environmental reserves subject to compromise include those that may be reduced in Federal-Mogul’s bankruptcy proceeding because they may be determined to be “dischargeable debts” incurred prior to Federal-Mogul’s filing for bankruptcy. Such liabilities generally arise at either (1) commercial waste disposal sites to which Ignition and other companies sent wastes for disposal, or (2) sites in relation to which Ignition 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 Ignition sold the site.

Environmental reserves determined not to be subject to compromise include those which arise from a legal obligation of Ignition, under an administrative or judicial order, to perform cleanup at a site. Such obligations are normally associated with sites, which a bankrupt entity such as Ignition 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 Ignition’s responsibility to make payments is stayed. Notwithstanding the stay of proceedings regarding such a site, activities such as further site investigation and/or actual cleanup work usually continue to be performed by other parties. Such activities may produce new and better information that requires Ignition to revise its best estimate of total site cleanup costs and its own share of such costs.

F-35

FEDERAL-MOGUL IGNITION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

9. Long-Term Debt and Other Financing Arrangements

Ignition’s cash and indebtedness is managed by Federal-Mogul. The majority of the cash provided by or used by a particular division, including Ignition, is provided through a consolidated cash and debt management system. As a result, the amount of cash or debt historically related to Ignition is not determinable.

Ignition has an intercompany loan, including accrued interest, from Federal-Mogul in the amount of $610.3 million, which is included in liabilities subject to compromise at December 31, 2003 and 2002. In 2002 and 2001, Federal-Mogul charged interest on the intercompany loans based on the stated rate of 6.8%. In accordance with SOP 90-7, Ignition stopped recording interest expense on its outstanding notes effective October 1, 2001. As a result, Ignition was relieved of $32.4 million, $32.4 million, and $8.1 million for the years ended December 31, 2003, 2002, and 2001 respectively.

Federal-Mogul has pledged 100% of Ignition’s capital stock and also provided collateral in the form of a pledge of inventories, property, plant and equipment, real property and intellectual properties to secure certain outstanding debt of Federal-Mogul. In addition, Ignition has guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under Federal-Mogul’s Senior Credit Agreement and its publicly registered debt. Such pledges and guarantees have also been made by other subsidiaries of Federal-Mogul. Federal-Mogul is in default of the terms of such debt agreements. Borrowings under such agreements aggregated $4,020.7 million and $3,982.7 million as of December 31, 2003 and 2002, respectively.

10. Net Parent Investment

Changes in net parent investment were as follows:

	(Millions of Dollars)
Balance at January 1, 2001	$	1,004.7
Reclassification of intercompany accounts and loans payable at the Petition Date to Liabilities subject to compromise		(758.7	)
Reclassification of accounts receivable from affiliates at the Petition Date		306.4
Reclassification transfer of accounts receivable from Federal-Mogul to Ignition		43.0
		595.4
Comprehensive loss		(557.7	)
Intercompany transactions, net		(36.7	)
Balance at December 31, 2001		1.0
Comprehensive income		21.5
Intercompany transactions, net		(60.6	)
Balance at December 31, 2002		(38.1	)
Comprehensive income		41.5
Intercompany transactions, net		(81.9	)
Balance at December 31, 2003	$	(78.5	)

Ignition includes accumulated other comprehensive loss in Net Parent Investment. At December 31, 2003 accumulated other comprehensive loss included $41.2 million of foreign currency translation adjustments and $(4.1) million of minimum pension funding. At December 31, 2002 accumulated other comprehensive loss included $53.4 million of foreign currency translation adjustments and $(4.1) million of minimum pension funding.

F-36

FEDERAL-MOGUL IGNITION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

11. Income Taxes

Ignition files a consolidated return with its parent for U.S. federal income tax purposes. Federal income tax expense is calculated on a separate-return basis for financial reporting purposes.

	Year Ended December 31
	2003			2002		2001
	(Millions of Dollars)
Components of income tax expense (benefit)
Current	$	(0.2	)	$	14.4	$	58.3
Deferred		15.0			7.0		(49.8	)
Income tax expense	$	14.8		$	21.4	$	8.5

A reconciliation between the statutory federal income tax rate and the effective tax rate is as follows:

	Year Ended December 31
	2003		2002		2001
Effective tax rate reconciliation:
U.S. Federal statutory rate	35	%	35	%	35	%
State and local taxes	1		1		2
Foreign operations	1		(7	)	(3	)
Goodwill amortization and other	8		3		(8	)
Valuation allowance	(24	)	4		(28	)
Effective tax rate	21	%	36	%	(2	)%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the related amounts used for income tax purposes. Significant components of the Ignition net deferred tax asset are non-deductible accruals and amortization and depreciation timing differences.

	December 31
	2003			2002
	(Millions of Dollars)
Net current deferred tax assets	$	9.3		$	29.1
Net long-term deferred tax assets		97.7			96.2
Net deferred tax assets		107.0			125.3
Valuation allowance		(115.8	)		(123.1	)
Net deferred tax assets (liabilities)	$	(8.8	)	$	2.2

As Ignition files a consolidated tax return with Federal-Mogul, the net deferred tax liability at December 31, 2003 and the net deferred tax asset at December 31, 2002 is a component of the net parent investment.

12. Pension Plans

Ignition is included in the Federal-Mogul Corporation Pension Plan. As such, the related pension liability is recorded in Net Parent Investment at December 31, 2003 and 2002.

The pension charge allocated to Ignition for the years ended December 31, 2003 and 2002 was $2.6 million and $2.7 million, respectively. For the year ended December 31, 2000, a pension credit was allocated to Ignition of approximately $0.3 million.

F-.37

FEDERAL-MOGUL IGNITION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

13. Postretirement Benefits Other Than Pensions

Benefits provided to employees of Ignition under various Federal-Mogul postretirement plans other than pensions, all of which are unfunded, include retiree medical care, dental care, prescription drugs and life insurance, with medical care accounting for approximately 45% of the total. The majority of participants under such plans are retirees. The expense related to such plans approximated $13.3 million, $12.5 million and $14.4 million, for 2003, 2002 and 2001, respectively.

14. Concentrations of Credit Risk and Other

Financial instruments, which potentially subject Ignition to concentrations of credit risk, consist primarily of accounts receivable and cash investments. Ignition’s customer base is primarily in the automotive industry. Ignition’s credit evaluation process, reasonably short collection terms and the geographical dispersion of sales transactions help to mitigate any concentration of credit risk. Ignition requires placement of cash in financial institutions evaluated as highly creditworthy. Ignition performs periodic credit evaluations of their customers and generally does not require collateral.

Ignition operates in a single business segment. Ignition manufactures and distributes spark plugs, wiper blades, lamps, and other products for use by the automotive aftermarket and in automobile assemblies. No single customer accounted for 10% or more of revenues in 2003, 2002 or 2001. The following table shows geographic information as of December 31:

	Third Party Sales						Net Property, Plant and Equipment
	2003		2002		2001		2003		2002
	(Millions of Dollars)
United States	$	426.6	$	438.9	$	455.9	$	110.6	$	119.2
Mexico		167.1		142.2		142.2		102.7		97.5
Europe		99.7		82.9		82.9		60.4		55.3
Other		20.9		17.1		16.8		1.0		0.7
Total	$	714.3	$	681.1	$	697.8	$	274.7	$	272.7

F-38

REPORT OF INDEPENDENT AUDITORS

The Board of Directors

Federal-Mogul Corporation

We have audited the accompanying consolidated balance sheets of Federal-Mogul Powertrain, Inc. and subsidiaries, a wholly-owned subsidiary of Federal-Mogul Corporation, as of December 31, 2003 and 2002 and the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Federal-Mogul Powertrain, Inc. and subsidiaries at December 31, 2003 and 2002 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been prepared assuming that Federal-Mogul Powertrain, Inc. and subsidiaries will continue as a going concern. As more fully described in the notes to the consolidated financial statements, on October 1, 2001, Federal-Mogul Corporation and its wholly-owned United States subsidiaries, which includes Federal-Mogul Powertrain, Inc. filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. Uncertainties inherent in the bankruptcy process raise substantial doubt about Federal-Mogul Powertrain, Inc.’s ability to continue as a going concern. Management’s intentions with respect to these matters are also described in the notes. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 6 to the consolidated financial statements, Federal-Mogul Powertrain, Inc. changed its method of accounting for goodwill and indefinite-lived intangible assets in 2002.

/S/ ERNST & YOUNG LLP

Detroit, Michigan

February 6, 2004,

except as to the ninth

paragraph of Note 1, as to

which the date is March 4, 2004

F-39

FEDERAL-MOGUL POWERTRAIN, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended December 31
	2003			2002			2001
	(Millions of Dollars)
Third party sales	$	531.6		$	583.2		$	560.5
Affiliate sales		35.5			41.5			29.7
Total net sales		567.1			624.7			590.2
Cost of products sold		480.3			516.9			487.1
Gross margin		86.8			107.8			103.1
Selling, general and administrative expenses		61.3			74.4			67.8
Provision for bad debt from affiliate Debtors		—			—			1,088.4
Amortization expense		—			—			8.4
Restructuring charges		1.8			11.0			—
Adjustment of assets held for sale and other long-lived assets to fair value		7.4			25.3			—
Interest expense, net		—			—			30.2
Other expense, net		2.0			1.2			5.8
Earnings (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle		14.3			(4.1	)		(1,097.5	)
Income tax expense		0.1			3.7			22.8
Earnings (loss) from continuing operations before cumulative effect of change in accounting principle		14.2			(7.8	)		(1,120.3	)
Earnings (loss) from discontinued operations, net of income taxes		(2.7	)		3.7			(89.3	)
Cumulative effect of change in accounting principle		—			202.2			—
Net Earnings (Loss)	$	11.5		$	(206.3	)	$	(1,209.6	)

See accompanying notes to consolidated financial statements.

F-40

FEDERAL-MOGUL POWERTRAIN, INC.

CONSOLIDATED BALANCE SHEETS

	December 31
	2003			2002
	(Millions of Dollars)
ASSETS
Accounts receivable, net	$	59.1		$	80.7
Inventories, net		30.2			36.9
Other		9.4			12.5
Total Current Assets		98.7			130.1
Property, plant and equipment, net		255.8			301.7
Goodwill and indefinite-lived intangible assets		103.1			103.1
Other noncurrent assets		16.7			29.9
Total Assets	$	474.3		$	564.8
LIABILITIES AND NET PARENT INVESTMENT
Accounts payable	$	19.1		$	24.9
Accrued compensation		13.8			14.6
Restructuring reserves		4.6			7.7
Other accrued liabilities		16.5			16.4
Total Current Liabilities		54.0			63.6
Other long-term liabilities		2.4			3.1
Liabilities subject to compromise		650.0			651.7
Minority interest in consolidated subsidiaries		20.4			20.4
Net Parent Investment		(252.5	)		(174.0	)
Total Liabilities and Net Parent Investment	$	474.3		$	564.8

See accompanying notes to consolidated financial statements.

F-41

FEDERAL-MOGUL POWERTRAIN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31
	2003			2002			2001
	(Millions of Dollars)
Cash provided from (used by) operating activities:
Net earnings (loss)	$	11.5		$	(206.3	)	$	(1,209.6	)
Adjustments to reconcile net earnings (loss) to net cash provided from (used by) operating activities:
Cumulative effect of change in accounting principle		—			202.2			—
Provision for bad debt from affiliate Debtors		—			—			1,088.4
Depreciation and amortization		33.6			59.5			49.9
Restructuring charges		1.8			11.2			—
Adjustment of assets held for sale and other long-lived assets to fair value		7.4			25.3			133.7
Payments against restructuring reserves		(4.9	)		—			—
Changes in assets and liabilities:
Accounts receivable		21.6			(1.5	)		8.0
Inventories		2.0			(3.3	)		4.7
Accounts payable and accrued liabilities		(2.0	)		4.0			(0.9	)
Other assets and liabilities, net		33.4			(30.0	)		51.4
Net cash provided from operating activities		104.4			61.1			125.6
Cash provided from (used by) investing activities:
Capital expenditures		(29.1	)		(41.1	)		(37.2	)
Proceeds from sale of businesses		14.7			1.6			45.4
Net cash (used by) provided from investing activities		(14.4	)		(39.5	)		8.2
Cash provided from (used by) financing activities:
Repayments of long-term debt		—			—			(4.7	)
Transfers (to) from parent		(90.0	)		(21.6	)		(129.1	)
Net cash (used by) provided from financing activities		(90.0	)		(21.6	)		(133.8	)
Net change in cash		—			—			—
Cash at beginning of year		—			—			—
Cash at end of year	$	—		$	—		$	—

See accompanying notes to consolidated financial statements.

F-42

FEDERAL-MOGUL POWERTRAIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying financial statements reflect the consolidated assets, liabilities and operations of Federal-Mogul Powertrain, Inc. and its subsidiaries (“Powertrain”). Powertrain is a wholly-owned subsidiary of T&N Industries Inc., which is a wholly-owned subsidiary of Federal-Mogul Corporation (“Federal-Mogul”). Powertrain manufactures pistons, rings and liners.

Powertrain operates with financial and operational staff on a decentralized basis. Federal-Mogul provides certain centralized services for employee benefits administration, cash management, risk management, legal services, public relations, domestic tax reporting and internal and external audit. Federal-Mogul charges Powertrain for all such direct expenses incurred on its behalf. General expenses, excluding Chapter 11 and Administration related organization expenses, that are not directly attributable to the operations of Powertrain have been allocated based on management’s estimates, primarily driven by sales. Management believes that this allocation method is reasonable.

The accompanying consolidated financial statements are presented as if Powertrain had existed as an entity separate from its parent during the periods presented and include the assets, liabilities, revenues and expenses that are directly related to Powertrain’s operations.

Powertrain’s separate debt and related interest expense have been included in the consolidated financial statements. Powertrain is fully integrated into its parent’s cash management system, as such, all cash requirements are provided by its parent and any excess cash generated by Powertrain is transferred to its parent.

Voluntary Reorganization Under Chapter 11 and Administration

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

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

Consequences of the Restructuring Proceedings

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

F-43

FEDERAL-MOGUL POWERTRAIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 a creditors committee, representing both asbestos claimants and general unsecured creditors.

On March 4, 2004, Federal-Mogul filed an amended plan of reorganization and related disclosure statement with the Bankruptcy Court. This amended plan of reorganization was jointly proposed by Federal-Mogul along with 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 (collectively referred to as the “Co-Proponents”). The joint amended plan of reorganization is consistent with the principal terms of the plan originally filed with the Bankruptcy Court on March 6, 2003.

The amended joint plan of reorganization provides that asbestos personal injury claimants, both present and future, will be permanently channeled to a trust or series of trusts established pursuant to Section 524(g) of the Bankruptcy Code, thereby protecting Federal-Mogul and its affiliates in the Chapter 11 Cases from existing and future asbestos liability. Although technical issues remain to be resolved, the amended joint plan provides that all currently outstanding stock of Federal-Mogul will be cancelled, and 50.1% of newly authorized and issued common stock of reorganized Federal-Mogul will be distributed to the asbestos trusts or trusts for the benefit of existing and future asbestos claimants, and 49.9% of the newly authorized and issued common stock will be distributed pro rata to the noteholders. Trade creditors of Federal-Mogul will receive cash distributions in an amount that has yet to be determined. If the classes of holders of common and preferred stock of Federal-Mogul vote in favor of the amended joint plan, the holders of currently outstanding common and preferred stock of Federal-Mogul will receive warrants in reorganized Federal-Mogul.

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

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

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

Chapter 11 Financing

In connection with the Restructuring Proceedings, Federal-Mogul entered into a $675 million debtor-in-possession (“DIP”) credit facility to supplement liquidity and fund operations during the restructuring proceedings. In August

F-44

FEDERAL-MOGUL POWERTRAIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

2003, the DIP credit facility was amended to reduce the commitment to $600 million, change the expiration date to February 2005, and reduce the interest rate to either the alternate base rate (“ABR”) plus 2 percentage points or a formula based on the London Inter-Bank Offered Rate (“LIBOR”) plus 3 percentage points. The ABR is the greatest of either the bank’s prime rate or the base CD rate plus 1 percentage point or the federal funds rate plus ½ percentage point. The $600 million commitment is mandatorily reduced by a portion of proceeds received from future asset or business divestitures.

Federal-Mogul’s available borrowings under the DIP credit facility are determined by the underlying collateral at any point in time, which includes Powertrain’s domestic inventories, domestic accounts receivable, and domestic property, plant, and equipment. The DIP lenders received permission from the lenders of the Senior Credit Agreements to have priority over their collateral interest.

Financial Statement Presentation

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

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

	December 31
	2003		2002
Accounts payable to affiliated companies	$	618.1	$	618.1
Accounts payable		26.5		28.0
Environmental liabilities		3.5		3.2
Other accrued liabilities		0.9		1.4
Debt		1.0		1.0
Total	$	650.0	$	651.7

The Debtors, including Powertrain, 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 and certain other pre-petition claims.

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

F-45

FEDERAL-MOGUL POWERTRAIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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.

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

The appropriateness of using the going concern basis for the Powertrain’s financial statements is dependent upon, among other things: (i) Federal-Mogul’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 Federal-Mogul to maintain adequate cash on hand; (iii) the ability of Federal-Mogul to generate cash from operations; (iv) confirmation of a plan(s) of reorganization under the Bankruptcy Code; (v) confirmation of a scheme(s) of arrangement in the U.K. under Administration; and (vi) Federal-Mogul’s ability to achieve profitability following such confirmations.

2. Summary of Significant Accounting Policies

Principles of Consolidation: The consolidated financial statements include the accounts of Powertrain and all majority-owned subsidiaries and other controlled entities. Intercompany accounts and transactions have been eliminated in consolidation. Investments in affiliates of greater than 20% and not more than 50% are accounted for using the equity method.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 and Allowance for Doubtful Accounts: Trade accounts receivable are stated at historical value, which approximates fair value. Powertrain does not generally require collateral for its trade accounts receivable.

Accounts receivable have been reduced by an allowance for amounts that may become uncollectible in the future. This estimated allowance is based primarily on management’s evaluation of specific balances as the balances become past due, the financial condition of its customers and Powertrain’s historical experience of write-offs. If not reserved through specific examination procedures, Powertrain’s general policy for uncollectible accounts is to reserve based upon the aging categories of accounts receivable and upon whether the amounts are due from an OE customer or Aftermarket customer. Past due status is based upon the invoice date of the original amounts outstanding. The allowance for doubtful accounts was $9.3 million and $9.7 million at December 31, 2003 and 2002, respectively.

Inventories: Inventories are stated at the lower of cost or market. Cost determined by the last-in, first-out (LIFO) method was used for 14% and 20% of the inventory at December 31, 2003 and 2002, respectively. The remaining inventories are recorded using the first-in, first out (FIFO) method. LIFO approximated FIFO cost at December 31, 2003 and 2002.

F-46

FEDERAL-MOGUL POWERTRAIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Investments in non-consolidated entities: Equity investments that comprise more than 20% but less than 50% of the outstanding equity of the investee are accounted for by the equity investment method and are not consolidated. Such investments aggregated $15.7 million and $29.1 million at December 31, 2003 and 2002, respectively, and are included in the consolidated balance sheets as “other non current assets”. Net income from non-consolidated equity investments was $6.6 million, $4.5 million and $5.3 million for 2003, 2002 and 2001, respectively, and is included in the statements of operations as “other expense, net”.

Long-Lived Assets: Long-lived assets, such as property, plant and equipment and definite-lived intangible assets, are stated at cost. Depreciation and amortization is computed principally by the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes. Definite-lived assets are periodically reviewed for impairment indicators. If impairment indicators exist, the Company performs the required analysis and records an impairment charge, as required, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144). If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.

Indefinite-lived Intangible Assets: Indefinite-lived intangible assets, such as goodwill and trademarks, are carried at historical value and not amortized. Indefinite-lived intangible assets are reviewed for impairment annually as of October 1, or more frequently if impairment indicators exist. The impairment analysis compares the estimated fair value of these assets to the related carrying value, and an impairment charge is recorded for any excess of carrying value over estimated fair value. The estimated fair value is based upon consideration of various valuation methodologies, including guideline transaction multiples, multiples of current earnings, and discounted future cash flows discounted at rates commensurate with the risk involved.

Revenue Recognition: Powertrain records sales when products are shipped and title has transferred to the customer, the sales price is fixed or determinable and the collectibility of revenue is reasonably assured. Affiliate sales are transferred at cost. Accruals for sales returns and other allowances are provided at the time of shipment based upon past experience. Adjustments to such returns and allowances are made as new information becomes available.

Shipping and Handling Costs: Powertrain recognizes shipping and handling costs as a component of cost of products sold in the statement of operations.

Recoverable Customer Engineering and Tooling: Costs of pre-production tooling and engineering that Powertrain will not own and that will be used in producing products under long-term supply arrangements are expensed as incurred unless the supply arrangement provides Powertrain the noncancelable right to use the tools or the reimbursement of such costs is agreed to by the customer. Pre-production tooling and engineering costs that are owned by Powertrain are capitalized as part of machinery and equipment, and are depreciated over the shorter of the toolings’ expected life or the duration of the related program.

Research and Development Costs: Powertrain expenses research and development costs as incurred. Research and development expense was $2.5 million, $3.0 million and $2.8 million for 2003, 2002 and 2001, respectively.

Restructuring: Powertrain defines restructuring expense to include charges incurred with exit or disposal activities accounted for in accordance with SFAS No. 146, employee severance costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 88 and 112, and pension and other post employment benefit costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 87 and 106.

Fair Value of Financial Instruments: The carrying amounts of certain financial instruments such as accounts receivable and accounts payable approximate their fair value.

Net Parent Investment: The Net Parent Investment account reflects the balance of Powertrain historical earnings, intercompany debt, income taxes accrued and deferred, post employment liabilities and other transactions between Powertrain and Federal-Mogul. During 2001, Powertrain recorded a provision for bad debt from affiliated Debtors of $1,088.4 million for pre-petition accounts receivable from related debtor entities outside of Powertrain at the Petition Date. These receivables were previously recorded in net parent investment.

F-47

FEDERAL-MOGUL POWERTRAIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Reclassifications: Certain items in the prior year financial statements have been reclassified to conform to the presentation used in 2003.

New Accounting Pronouncements:

Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity: In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which provides standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The statement is effective for financial instruments entered into or modified after May 31, 2003 and for pre-existing instruments as of the beginning of the first interim period beginning after June 15, 2003. In November 2003, the FASB elected to indefinitely defer the effective date for certain provisions of SFAS No. 150 relating to investments in limited-life entities. The adoption of the provisions of SFAS No. 150 that were not deferred by the FASB did not have a material effect on Powertrain’s financial condition, results of operations, or cash flows.

Derivative Instruments and Hedging Activities: In April 2003, the FASB issued SFAS No. 149, “Amendments of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. The statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this standard did not have a material effect on Powertrain’s financial condition, results of operations, or cash flows.

Consolidation of Variable Interest Entities: In January 2003, the FASB issued FASB Interpretation Number 46 (FIN No. 46), “Consolidation of Variable Interest Entities”, an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”. FIN No. 46 provides guidance regarding the identification of, and financial reporting for entities over which control is achieved through means other than voting rights; such entities are considered variable interest entities. FIN No. 46 requires the consolidation of variable interest entities in which an enterprise is deemed to be the primary beneficiary, which is determined by the obligation to absorb a majority of the entity’s expected losses, the right to receive a majority of an entity’s expected residual returns or both.

In December 2003, the FASB issued revised FIN No. 46, which provided an exclusion for entities meeting the definition of a “business” (as defined in the interpretation) and extending the effective date for variable interest entities entered into prior to February 1, 2003 to periods ending after March 15, 2004. Management believes that its joint ventures meet this definition of a business, however, is currently evaluating such entities to determine whether consolidation is required under FIN No. 46 and to quantify the effect that adoption of FIN No. 46 will have on its consolidated financial statements.

Accounting for Costs Associated with Exit or Disposal Activities: In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. This pronouncement addresses financial accounting and reporting for costs associated with an exit activity (including restructuring) or with the disposal of long-lived assets and supercedes Emerging Issues Task Force Issue No. 94-3. Under SFAS No. 146, a liability is recorded for a cost associated with an exit activity when that liability is incurred and can be measured at fair value. SFAS No. 146 requires disclosure of information about exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS No. 146 is effective prospectively for exit and disposal activities initiated after December 31, 2002. SFAS No. 146 does not allow for the restatement of previously issued financial statements and continues the accounting for liabilities previously recorded under Emerging Issues Task Force Issue No. 94-3. Powertrain adopted SFAS No. 146 effective January 1, 2003.

F-48

FEDERAL-MOGUL POWERTRAIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

3. Discontinued Operations

In connection with its strategic planning process, Federal-Mogul assesses its operations for market position, product technology and capability, and profitability. Those businesses determined by management not to have a sustainable competitive advantage are considered non-core and may be considered for divestiture or other exit activities. Over the past several years, Powertrain has divested numerous non-core businesses. The elimination of these non-core businesses has freed up both human and capital resources which have been devoted to Federal-Mogul’s core businesses.

During April 2003, Powertrain completed the divestitures of its U.S. camshaft operations, which include manufacturing operations in Grand Haven, Michigan and Orland, Indiana, as well as the Company’s share of an assembled camshaft joint venture operation in Grand Haven.

In July 2002, Powertrain completed the divestiture of its automotive camshaft manufacturing plant in Jackson, Michigan, to Camshaft Machine Company, a new company formed by the facility’s management. Powertrain also entered into a three-year supply agreement with Camshaft Machine Company, under which Powertrain will continue to market and sell aftermarket camshafts produced at the Jackson facility through its aftermarket business. This business employed approximately 90 employees and had 2001 net sales of $5.9 million. Powertrain received aggregate proceeds of $1.6 million. The sale did not result in a material gain or loss.

In July 2001, Powertrain completed the divestiture of its industrial heavy wall bearing operation in McConnelsville, Ohio, to Miba-Bearings – US, LLC, a subsidiary of Miba AG, a major Austrian industrial bearing manufacturer. Powertrain received aggregated proceeds of $45.4 million and recognized a pre-tax loss of $17.2 million. The loss is included in “other expense, net” in the accompanying consolidated statements of operations.

Further information related to Powertrain’s discontinued operations is as follows:

	Year Ended December 31
	2003			2002		2001
	(Millions of Dollars)
Net sales	$	21.0		$	86.5	$	109.2
Cost of products sold		19.3			80.0		104.5
Gross margin		1.7			6.5		4.7
Selling, general and administrative expenses		—			—		0.7
Restructuring charges		0.1			0.2		0.2
Adjustment of assets held for sale and other long-lived assets to fair value		—			—		133.7
Net loss on divestitures		5.0			1.7		17.2
Other (income) expense, net		(0.7	)		0.7		5.0
(Loss) income before income taxes		(2.7	)		3.9		(152.1	)
Income tax expense (benefit)		—			0.2		(62.8	)
(Loss) income from discontinued operations	$	(2.7	)	$	3.7	$	(89.3	)

F-49

FEDERAL-MOGUL POWERTRAIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

As of December 31, 2002, Powertrain had assets held for sale included in its consolidated balance sheet as follows (in millions of dollars):

Accounts receivable, net	$	1.6
Inventories, net		4.9
Other current assets		0.5
Total Current Assets		7.0
Property, plant and equipment, net		18.1
Other long-term assets		—
Total Assets		25.1
Accounts payable		(3.3	)
Other accrued liabilities		(3.3	)
Total Liabilities	$	(6.6	)

4. Inventories

Inventories consisted of the following:

	December 31
	2003			2002
	(Millions of Dollars)
Raw materials	$	9.1		$	12.8
Work-in-process		9.9			9.8
Finished goods		13.6			16.6
		32.6			39.2
Valuation reserves		(2.4	)		(2.3	)
	$	30.2		$	36.9

5. Property, Plant and Equipment

Property, plant and equipment consisted of the following:

	December 31
	2003			2002
	(Millions of Dollars)
Land and land improvements	$	3.9		$	4.2
Buildings		65.5			79.5
Machinery and equipment		349.5			373.6
		418.9			457.3
Accumulated depreciation		(163.1	)		(155.6	)
	$	255.8		$	301.7

Future minimum payments under noncancelable operating leases with initial or remaining terms of more than one year are as follows, in millions:

2004	$	1.4
2005		1.2
2006		1.2
2007		1.2
2008		1.1
Thereafter		2.1

F-50

FEDERAL-MOGUL POWERTRAIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Total rental expense under operating leases for the years ended December 31, 2003, 2002 and 2001 was $2.3 million, $2.5 million and $2.3 million, respectively, exclusive of property taxes, insurance and other occupancy costs generally payable by Federal-Mogul.

6. Adjustment of Assets Held for Sale and Other Long-Lived Assets to Fair Value

Definite-Lived Long-Lived Assets

During 2003 and 2002, Powertrain recorded impairment charges of $7.4 million and $25.3, respectively, to adjust long-lived tangible assets to their estimated fair values in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144). The charges was recorded to write-down property, plant and equipment at three facilities that the Company is closing or consolidating into other facilities. The fair value of property, plant and equipment was based upon estimated discounted future cash flows and estimates of salvage value. The impairment charges represent the difference between the estimated fair values and the carrying value of the subject assets.

Goodwill and Other Indefinite-Lived Intangible Assets

Effective January 1, 2002, Powertrain adopted SFAS No. 142, resulting in the discontinuance of amortization of goodwill and indefinite-lived intangible assets. The adoption of this standard also required the reclassification of various intangible asset classes according to the measurability of their useful lives. Upon the adoption of SFAS No. 142, Powertrain recorded a non-cash charge of $202.2 million to reduce the carrying value of its goodwill and indefinite-lived intangible assets to their estimated fair value as required by SFAS No. 142. The charge is presented as a cumulative effect of change in accounting principle in the consolidated statement of operations for the year ended December 31, 2002. Powertrain completed its required annual impairment analysis as of October 1, 2003 and, based upon this analysis, no impairment charge was required.

At December 31, 2002 and 2001, Powertrain did not have any amortized intangible assets. A summary of the changes in Powertrain’s goodwill and indefinite-lived intangible assets is as follows:

	Balance at December 31, 2002		Impairments		Balance at December 31, 2003
	(Millions of Dollars)
Goodwill	$	103.1	$	—	$	103.1
Other Intangible Assets		—		—		—
Total Indefinite-Lived Intangible Assets	$	103.1	$	—	$	103.1

The following table shows the pro-forma effect of SFAS No. 142 on Powertrain’s earnings:

	Year Ended December 31
	2003		2002			2001
	(Millions of Dollars)
Reported Net Earnings (Loss)	$	11.5	$	(206.3	)	$	(1,209.6	)
Add-back: Goodwill amortization		—		—			11.9
Add-back: Indefinite-lived intangible asset amortization		—		—			0.1
Adjusted Net Earnings (Loss)	$	11.5	$	(206.3	)	$	(1,197.6	)

7. Restructuring Charges

Powertrain recognized $1.8 million and $11.2 million of restructuring charges in 2003 and 2002, respectively, primarily related to severance costs associated with the continuing consolidation of operations to maximize production efficiencies and achieve economies of scale. Cash payments against these restructuring reserves during 2003 were $4.9 million. There were no cash payments for restructuring charges in 2002 or 2001.

F-51

FEDERAL-MOGUL POWERTRAIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

8. Commitments and Contingencies

Environmental Liabilities

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

Environmental reserves were $6.4 million and $7.3 million at December 31, 2003 and 2002, respectively and are included in the consolidated balance sheets as follows:

	December 31
	2003		2002
	(Millions of Dollars)
Current liabilities	$	1.9	$	1.5
Long-term accrued liabilities		1.0		2.6
Liabilities subject to compromise		3.5		3.2
	$	6.4	$	7.3

Management believes that such accruals will be adequate to cover Powertrain’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 Powertrain, Powertrain’ results of operations and financial condition could be materially affected. At December 31, 2003, management estimates that reasonably possible material additional losses above and beyond management’s best estimate of required remediation costs as recorded approximates $4.9 million.

Environmental reserves subject to compromise include those that may be reduced in Federal-Mogul’s bankruptcy proceeding because they may be determined to be “dischargeable debts” incurred prior to Federal-Mogul’s filing for bankruptcy. Such liabilities generally arise at either (1) commercial waste disposal sites to which Powertrain and other companies sent wastes for disposal, or (2) sites in relation to which Powertrain 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 Powertrain sold the site.

Environmental reserves determined not to be subject to compromise include those which arise from a legal obligation of Powertrain, under an administrative or judicial order, to perform cleanup at a site. Such obligations are normally associated with sites, which a bankrupt entity such as Powertrain 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 Powertrain’s responsibility to make payments is stayed. Notwithstanding the stay of proceedings regarding such a site, activities such as further site investigation and/or actual cleanup work usually continue to be performed by other parties. Such activities may produce new and better information that requires Powertrain to revise its best estimate of total site cleanup costs and its own share of such costs.

9. Redeemable Stock

Federal-Mogul Piston Rings Inc., which is a wholly-owned subsidiary of Powertrain, issued 862 shares of class B common stock, redeemable at the option of the holder, to a minority investor in 1994. The shares of class B stock are redeemable for $23,201.85 per share plus accrued dividends. This redeemable stock is included in “minority interest in consolidated subsidiaries” in the consolidated balance sheet at December 31, 2003 and 2002.

F-52

FEDERAL-MOGUL POWERTRAIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

10. Long-Term Debt and Other Financing Arrangements

Powertrain’s cash and indebtedness is managed on a worldwide basis by Federal-Mogul. The majority of the cash provided by or used by a particular division, including Powertrain, is provided through this consolidated cash and debt management system. As a result, the amount of cash or debt historically related to Powertrain is not determinable.

Federal-Mogul allocated Powertrain $29.8 million of the interest it incurred on the financing of T&N, plc. in 2001. Interest was calculated by allocating a portion of the amount Federal-Mogul borrowed to purchase T&N plc. Federal-Mogul allocated $666.1 million of the debt to Powertrain and calculated interest at a rate of 6% to the Petition date. In accordance with SOP 90-7, Powertrain stopped recording interest expense on its outstanding notes effective October 1, 2001. Powertrain’s contractual interest not accrued or paid for this note in 2003, 2002 and 2001 was $40.0 million, $40.0 million and $10.0 million, respectively.

Federal-Mogul has pledged 100% of Powertrain’s capital stock and also provided collateral in the form of a pledge of inventories, property, plant and equipment, real property and intellectual properties to secure certain outstanding debt of Federal-Mogul. In addition, Powertrain has guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under Federal-Mogul’s Senior Credit Agreement and its publicly registered debt. Such pledges and guarantees have also been made by other subsidiaries of Federal-Mogul. Federal-Mogul is in default of the terms of such debt agreements. Borrowing outstanding on such agreements aggregated $4,020.7 million and $3,982.7 million as of December 31, 2003 and 2002, respectively.

11. Net Parent Investment

Changes in net parent investment were as follows (in millions of dollars):

Balance at January 1, 2001	$	835.0
Reclassification of intercompany accounts and loans payable at the Petition Date to Liabilities subject to compromise		(610.5	)
Reclassification of accounts receivable from affiliates at the Petition Date		1,088.4
Reclassification transfer of accounts receivable from Federal-Mogul to Ignition		79.7
		1,392.6
Net loss		(1,209.6	)
Intercompany transactions, net		(129.1	)
Balance at December 31, 2001		53.9
Net loss		(206.3	)
Intercompany transactions, net		(21.6	)
Balance at December 31, 2002	$	(174.0	)
Net earnings		11.5
Intercompany transactions, net		(90.0	)
Balance at December 31, 2003	$	(252.5	)

F-53

FEDERAL-MOGUL POWERTRAIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

12. Income Taxes

Powertrain files a consolidated return with Federal-Mogul for U.S. federal income tax purposes. Federal income tax expense is calculated on a separate-return basis for financial reporting purposes.

	Year Ended December 31
	2003		2002		2001
	(Millions of Dollars)
Components of income tax expense (benefit)
Current	$	0.1	$	1.5	$	65.7
Deferred		—		2.2		(42.9	)
Income tax expense (benefit)	$	0.1	$	3.7	$	22.8

A reconciliation between the statutory federal income tax rate and the effective tax rate is as follows:

	Year Ended December 31
	2003		2002		2001
U.S. Federal statutory rate	35	%	35	%	35	%
State and local taxes	5		(39	)	2
Nondeductible goodwill and other	(5	)	34		(4	)
Valuation allowance	(34	)	(120	)	(35	)
Effective tax rate	1	%	(90	)%	(2	)%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the related amounts used for income tax purposes. Significant components of the Company’s net deferred tax asset are non-deductible accruals, intangible assets and depreciation timing differences.

	December 31
	2003			2002
	(Millions of Dollars)
Net current deferred tax liabilities	$	9.5		$	(5.6	)
Net long-term deferred tax assets		386.0			388.1
Gross deferred tax assets		395.5			382.5
Valuation allowance		(395.5	)		(382.5	)
Net deferred tax assets	$	—		$	—

13. Pension Plans

Powertrain is included in the Federal-Mogul Corporation Pension Plan. As such the related pension liability is included in Net Parent Investment at December 31, 2003 and 2002. The pension charge allocated to Powertrain, was $5.9 million, $6.5 million and $3.9 million for 2003, 2002 and 2001, respectively.

14. Postretirement Benefits Other Than Pensions

Benefits provided to employees of Powertrain under various Federal-Mogul postretirement plans other than pensions, all of which are unfunded, include retiree medical care, dental care, prescriptions and life insurance, with medical care accounting for approximately 36% of the total. The majority of participants under such plans are retirees. The expense related to such plans approximated $4.8 million, $4.9 million and $5.3 million for 2003, 2002 and 2001, respectively.

F-54

FEDERAL-MOGUL POWERTRAIN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

15. Concentrations of Credit Risk and Other

Powertrain grants credit to their customers, which are primarily in the automotive industry. Credit risk with respect to trade receivables is generally diversified due to the large number of entities comprising Powertrain customer base and their dispersion across many different countries. Powertrain performs periodic credit evaluations of their customers and generally does not require collateral.

Powertrain operates in a single business segment. Powertrain manufactures and distributes pistons, piston pins, rings, cylinder liners, engine bearings, valve train and transmission products and sealing systems. Powertrain’s largest customers are Ford Motor Co. and General Motors Corporation, which accounted for 34%, 34%, and 35% of Powertrain’s net sales in 2003, 2002, and 2001, respectively. All revenues and assets of Powertrain reside in the United States.

F-55

REPORT OF INDEPENDENT AUDITORS

The Board of Directors

Federal-Mogul Corporation

We have audited the accompanying consolidated balance sheets of Federal-Mogul Piston Rings, Inc., a wholly-owned subsidiary of Federal-Mogul Corporation, as of December 31, 2003 and 2002, and the related statements of operations and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Federal-Mogul Piston Rings, Inc. at December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that Federal-Mogul Piston Rings, Inc. will continue as a going concern. As more fully described in the notes to the financial statements, on October 1, 2001, Federal-Mogul Corporation and its wholly-owned United States subsidiaries, which includes Federal-Mogul Piston Rings, Inc., filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. Uncertainties inherent in the bankruptcy process raise substantial doubt about Federal-Mogul Piston Ring, Inc.’s ability to continue as a going concern. Management’s intentions with respect to these matters are also described in the notes. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 6 to the consolidated financial statements, Federal-Mogul Piston Rings, Inc. changed its method of accounting for goodwill and indefinite-lived intangible assets in 2002.

/S/ ERNST & YOUNG LLP

Detroit, Michigan

February 6, 2004,

except as to the ninth

paragraph of Note 1, as to

which the date is March 4, 2004

F-56

FEDERAL-MOGUL PISTON RINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended December 31
	2003		2002			2001
	(Millions of Dollars)
Net sales:
Third party sales	$	91.8	$	93.6		$	96.2
Affiliate sales		12.2		11.5			10.7
Total net sales		104.0		105.1			106.9
Cost of products sold		93.1		93.8			92.9
Gross margin		10.9		11.3			14.0
Selling, general and administrative expenses		7.9		7.8			8.0
Amortization expense		—		—			1.5
Provision for bad debt from affiliate Debtors		—		—			147.3
Interest expense, net		—		—			5.0
Other expense, net		1.9		2.1			3.1
Earnings (loss) before income taxes and cumulative effect of change in accounting principle		1.1		1.4			(150.9	)
Income tax expense		0.1		0.7			4.7
Earnings (loss) before cumulative effect of change in accounting principle		1.0		0.7			(155.6	)
Cumulative effect of change in accounting principle		—		47.3			—
Net Earnings (Loss)	$	1.0	$	(46.6	)	$	(155.6	)

See accompanying notes to consolidated financial statements.

F-57

FEDERAL-MOGUL PISTON RINGS, INC.

CONSOLIDATED BALANCE SHEETS

	December 31
	2003			2002
	(Millions of Dollars)
ASSETS
Accounts receivable	$	12.1		$	7.7
Inventories, net		6.1			8.1
Other		0.7			0.7
Total Current Assets		18.9			16.5
Property, plant and equipment, net		62.9			66.0
Total Assets	$	81.8		$	82.5
LIABILITIES AND NET PARENT INVESTMENT
Accounts payable	$	2.9		$	2.9
Other accrued liabilities		7.9			5.4
Total Current Liabilities		10.8			8.3
Liabilities subject to compromise		152.2			152.2
Other long-term liabilities		0.6			1.2
Redeemable stock		20.0			20.0
Net Parent Investment		(101.8	)		(99.2	)
Total Liabilities and Net Parent Investment	$	81.8		$	82.5

See accompanying notes to consolidated financial statements.

F-58

FEDERAL-MOGUL PISTON RINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31
	2003			2002			2001
	(Millions of Dollars)
Cash provided from (used by) operating activities:
Net earnings (loss)	$	1.0		$	(46.6	)	$	(155.6	)
Adjustments to reconcile net earnings (loss) to net cash provided from operating activities:
Cumulative effect of change in accounting principle		—			47.3			—
Provision for bad debt from affiliate Debtors		—			—			147.3
Depreciation and amortization		8.2			9.8			8.5
Changes in assets and liabilities:
Accounts receivable		(4.4	)		1.6			—
Inventories		2.0			(3.4	)		1.1
Accounts payable		—			0.7			1.1
Other assets and liabilities		2.0			(5.5	)		(1.7	)
Net cash provided from operating activities		8.8			3.9			0.7
Cash provided from (used by) investing activities:
Capital expenditures		(5.2	)		(9.1	)		(3.3	)
Net cash used by investing activities		(5.2	)		(9.1	)		(3.3	)
Cash provided from (used by) financing activities:
Transfers from (to) parent		(3.6	)		5.2			2.6
Net cash provided from (used by) financing activities		(3.6	)		5.2			2.6
Net change in cash		—			—			—
Cash at beginning of year		—			—			—
Cash at end of year	$	—		$	—		$	—

See accompanying notes to consolidated financial statements.

59

FEDERAL-MOGUL PISTON RINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying financial statements reflect the consolidated assets, liabilities and operations of Federal-Mogul Piston Rings, Inc. (“Piston Rings”). Piston Rings is an indirect subsidiary of Federal-Mogul Corporation (“Federal-Mogul”). Piston Rings manufactures pistons, rings and liners.

Piston Rings operates with financial and operational staff on a decentralized basis. Federal-Mogul provides certain centralized services for employee benefits administration, cash management, risk management, legal services, public relations, tax reporting and internal and external audit. Federal-Mogul charges Piston Rings for all such direct expenses incurred on its behalf. General expenses that are not directly attributable to the operations of Piston Rings have been allocated based on management’s estimates, primarily driven by sales. Management believes that this allocation method is reasonable.

The accompanying consolidated financial statements are presented as if Piston Rings had existed as an entity separate from its parent during the period presented and include the assets, liabilities, revenues and expenses that are directly related to Piston Rings’ operations.

Piston Rings’ separate debt and related interest expense have been included in the consolidated financial statements. Piston Rings is fully integrated into its parent’s cash management system. As such, all cash requirements are provided by its parent and any excess cash generated by Piston Rings is transferred to its parent.

Voluntary Reorganization Under Chapter 11 and Administration

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

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

Consequences of the Restructuring Proceedings

The U.S. Debtors, including Piston Rings, are operating their businesses as debtors-in-possession subject to the provisions of the Bankruptcy Code. The U.K. Debtors are continuing to manage their operations under the supervision of Administrators approved by the High Court. All vendors will be paid for all goods furnished and services provided after the Petition Date. However, as a consequence of the Restructuring Proceedings, pending litigation against the Debtors as of the Petition Date is stayed (subject to certain exceptions in the case of

F-60

FEDERAL-MOGUL PISTON RINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

governmental authorities), and no party may take any action to pursue or collect pre-petition claims except pursuant to an order of the Bankruptcy Court or the High Court as applicable. It is the Debtors’ intention to address all pending and future asbestos-related claims and all other pre-petition claims through a unified plan of reorganization under the Bankruptcy Code or scheme of arrangement under the Act.

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

On March 4, 2004, Federal-Mogul filed an amended plan of reorganization and related disclosure statement with the Bankruptcy Court. This amended plan of reorganization was jointly proposed by Federal-Mogul along with 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 (collectively referred to as the “Co-Proponents”). The joint amended plan of reorganization is consistent with the principal terms of the plan originally filed with the Bankruptcy Court on March 6, 2003.

The amended joint plan of reorganization provides that asbestos personal injury claimants, both present and future, will be permanently channeled to a trust or series of trusts established pursuant to Section 524(g) of the Bankruptcy Code, thereby protecting Federal-Mogul and its affiliates in the Chapter 11 Cases from existing and future asbestos liability. Although technical issues remain to be resolved, the amended joint plan provides that all currently outstanding stock of Federal-Mogul will be cancelled, and 50.1% of newly authorized and issued common stock of reorganized Federal-Mogul will be distributed to the asbestos trusts or trusts for the benefit of existing and future asbestos claimants, and 49.9% of the newly authorized and issued common stock will be distributed pro rata to the noteholders. Trade creditors of Federal-Mogul will receive cash distributions in an amount that has yet to be determined. If the classes of holders of common and preferred stock of Federal-Mogul vote in favor of the amended joint plan, the holders of currently outstanding common and preferred stock of Federal-Mogul will receive warrants in reorganized Federal-Mogul.

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

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

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

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FEDERAL-MOGUL PISTON RINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Chapter 11 Financing

In connection with the Restructuring Proceedings, Federal-Mogul entered into a $675 million debtor-in-possession (“DIP”) credit facility to supplement liquidity and fund operations during the restructuring proceedings. In August 2003, the DIP credit facility was amended to reduce the commitment to $600 million, change the expiration date to February 2005, and reduce the interest rate to either the alternate base rate (“ABR”) plus 2 percentage points or a formula based on the London Inter-Bank Offered Rate (“LIBOR”) plus 3 percentage points. The ABR is the greatest of either the bank’s prime rate or the base CD rate plus 1 percentage point or the federal funds rate plus ½ percentage point. The $600 million commitment is mandatorily reduced by a portion of proceeds received from future asset or business divestitures.

Federal-Mogul’s available borrowings under the DIP credit facility are determined by the underlying collateral at any point in time, which includes Piston Rings’ domestic inventories, domestic accounts receivable, and domestic property, plant, and equipment. The DIP lenders received permission from the lenders of the Senior Credit Agreements to have priority over their collateral interest.

Financial Statement Presentation

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

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

	December 31
	2003		2002
	(Millions of Dollars)
Accounts payable	$	4.4	$	4.4
Accounts payable to affiliated companies		146.5		146.5
Environmental liabilities		1.3		1.3
Total	$	152.2	$	152.2

The Debtors, including Piston Rings, 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 and certain other pre-petition claims.

F-62

FEDERAL-MOGUL PISTON RINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

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

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

The appropriateness of using the going concern basis for the Piston Rings’ financial statements is dependent upon, among other things: (i) Federal-Mogul’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 Federal-Mogul to maintain adequate cash on hand; (iii) the ability of Federal-Mogul to generate cash from operations; (iv) confirmation of a plan(s) of reorganization under the Bankruptcy Code; (v) confirmation of a scheme(s) of arrangement in the U.K. under Administration; and (vi) Federal-Mogul’s ability to achieve profitability following such confirmations.

2. Summary of Significant Accounting Policies

Principles of Consolidation: The consolidated financial statements include the accounts of Piston Rings and all majority-owned subsidiaries and other controlled entities. Intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 and Allowance for Doubtful Accounts: Trade accounts receivable are stated at historical value, which approximates fair value. Piston Rings does not generally require collateral for its trade accounts receivable.

Accounts receivable have been reduced by an allowance for amounts that may become uncollectible in the future. This estimated allowance is based primarily on management’s evaluation of specific balances as the balances become past due, the financial condition of its customers and Piston Rings’ historical experience of write-offs. If not reserved through specific examination procedures, Piston Rings’ general policy for uncollectible accounts is to reserve based upon the aging categories of accounts receivable and upon whether the amounts are due from an OE customer or Aftermarket customer. Past due status is based upon the invoice date of the original amounts outstanding. The allowance for doubtful accounts was $0.8 million and $0.6 million at December 31, 2003 and 2002, respectively.

Inventories: Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method (“FIFO”).

F-63

FEDERAL-MOGUL PISTON RINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Long-Lived Assets: Long-lived assets, such as property, plant and equipment and definite-lived intangible assets, are stated at cost. Depreciation and amortization is computed principally by the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes. Definite-lived assets are periodically reviewed for impairment indicators. If impairment indicators exist, the Company performs the required analysis and records an impairment charge, as required, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144). If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.

Revenue Recognition: Piston Rings records sales when products are shipped and title has transferred to the customer, the sales price is fixed or determinable and the collectibility of revenue is reasonably assured. Affiliate sales are transferred at cost. Accruals for sales returns and other allowances are provided at the time of shipment based upon past experience. Adjustments to such returns and allowances are made as new information becomes available.

Shipping and Handling Costs: Piston Rings recognizes shipping and handling costs as a component of cost of Piston Rings sold in the statement of operations.

Recoverable Customer Engineering and Tooling: Pre-production tooling and engineering costs that Piston Rings will not own and that will be used in producing Piston Rings under long-term supply arrangements are expensed as incurred unless the supply arrangement provides Piston Rings the non-cancelable right to use the tools or the reimbursement of such costs is agreed to by the customer. Pre-production tooling and engineering costs that are owned by Piston Rings are capitalized as part of machinery and equipment, and are depreciated over the shorter of the toolings’ expected life or the duration of the related program.

Restructuring: Piston Rings defines restructuring expense to include charges incurred with exit or disposal activities accounted for in accordance with SFAS No. 146, employee severance costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 88 and 112, and pension and other post employment benefit costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 87 and 106.

Fair Value of Financial Instruments: The carrying amounts of certain financial instruments such as accounts payable approximate their fair value.

Net Parent Investment: The net parent investment account reflects the balance of Piston Rings’ historical earnings, intercompany amounts, income taxes accrued and deferred, post-employment liabilities and other transactions between Piston Rings and Federal-Mogul. During 2001, Piston Rings recorded a provision for bad debt from affiliated Debtors of $147.3 million for pre-petition accounts receivable from related debtor entities outside of Piston Rings at the Petition Date. These receivables were previously recorded in net parent investment.

Reclassifications: Certain items in the prior years financial statements have been reclassified to conform with the presentation used in 2003.

New Accounting Pronouncements:

Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity: In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which provides standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The statement is effective for financial instruments entered into or modified after May 31, 2003 and for pre-existing instruments as of the beginning of the first interim period beginning after June 15, 2003. In November 2003, the FASB elected to indefinitely defer the effective date for certain provisions of SFAS No. 150 relating to investments in limited-life entities. The adoption of the provisions of SFAS No. 150 that were not deferred by the FASB did not have a material effect on Piston Rings’ financial condition, results of operations, or cash flows.

F-64

FEDERAL-MOGUL PISTON RINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Derivative Instruments and Hedging Activities: In April 2003, the FASB issued SFAS No. 149, “Amendments of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. The statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this standard did not have a material effect on Piston Rings’ financial condition, results of operations, or cash flows.

Consolidation of Variable Interest Entities: In January 2003, the FASB issued FASB Interpretation Number 46 (FIN No. 46), “Consolidation of Variable Interest Entities”, an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”. FIN No. 46 provides guidance regarding the identification of, and financial reporting for entities over which control is achieved through means other than voting rights; such entities are considered variable interest entities. FIN No. 46 requires the consolidation of variable interest entities in which an enterprise is deemed to be the primary beneficiary, which is determined by the obligation to absorb a majority of the entity’s expected losses, the right to receive a majority of an entity’s expected residual returns or both.

In December 2003, the FASB issued revised FIN No. 46, which provided an exclusion for entities meeting the definition of a “business” (as defined in the interpretation) and extending the effective date for variable interest entities entered into prior to February 1, 2003 to periods ending after March 15, 2004. Management believes that its joint ventures meet this definition of a business, however, is currently evaluating such entities to determine whether consolidation is required under FIN No. 46 and to quantify the effect that adoption of FIN No. 46 will have on its consolidated financial statements.

Accounting for Costs Associated with Exit or Disposal Activities: In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. This pronouncement addresses financial accounting and reporting for costs associated with an exit activity (including restructuring) or with the disposal of long-lived assets and supercedes Emerging Issues Task Force Issue No. 94-3. Under SFAS No. 146, a liability is recorded for a cost associated with an exit activity when that liability is incurred and can be measured at fair value. SFAS No. 146 requires disclosure of information about exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS No. 146 is effective prospectively for exit and disposal activities initiated after December 31, 2002. SFAS No. 146 does not allow for the restatement of previously issued financial statements and continues the accounting for liabilities previously recorded under Emerging Issues Task Force Issue No. 94-3. Piston Rings adopted SFAS No. 146 effective January 1, 2003.

3. Commitments and Contingencies

Environmental Liabilities

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

Environmental reserves were $2.3 million and $2.3 million at December 31, 2003 and 2002, respectively and are included in the consolidated balance sheets as follows:

	December 31
	2003		2002
	(Millions of Dollars)
Current liabilities	$	0.5	$	0.4
Long-term accrued liabilities		0.5		0.6
Liabilities subject to compromise		1.3		1.3
	$	2.3	$	2.3

F-65

FEDERAL-MOGUL PISTON RINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Management believes that such accruals will be adequate to cover Piston Rings’ estimated liability for its exposure in respect to such matters. In the event that such liabilities were to significantly exceed the amounts recorded by Piston Rings, Piston Rings’ results of operations and financial condition could be materially affected. At December 31, 2003, management estimates that reasonably possible material additional losses above and beyond management’s best estimate of required remediation costs as recorded approximates $2.7 million.

Environmental reserves subject to compromise include those that may be reduced in Federal Mogul’s bankruptcy proceeding because they may be determined to be “dischargeable debts” incurred prior to Federal Mogul’s filing for bankruptcy. Such liabilities generally arise at either (1) commercial waste disposal sites to which Piston Rings and other companies sent wastes for disposal, or (2) sites in relation to which Piston Rings 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 Piston Rings sold the site.

Environmental reserves determined not to be subject to compromise include those which arise from a legal obligation of Piston Rings, under an administrative or judicial order, to perform cleanup at a site. Such obligations are normally associated with sites, which a bankrupt entity such as Piston Rings 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 Piston Rings’ responsibility to make payments is stayed. Notwithstanding the stay of proceedings regarding such a site, activities such as further site investigation and/or actual cleanup work usually continue to be performed by other parties. Such activities may produce new and better information that requires Piston Rings to revise its best estimate of total site cleanup costs and its own share of such costs.

4. Inventories

Inventories consisted of the following:

	December 31
	2003			2002
	(Millions of Dollars)
Raw materials.	$	0.5		$	0.9
Work-in-process		3.1			2.8
Finished goods		2.7			4.7
		6.3			8.4
Valuation reserves		(0.2	)		(0.3	)
	$	6.1		$	8.1

5. Property, Plant and Equipment

Property, plant and equipment consisted of the following:

	December 31
	2003			2002
	(Millions of Dollars)
Land and land improvements	$	0.4		$	0.3
Buildings		13.7			13.5
Machinery and equipment		89.2			84.6
		103.3			98.4
Accumulated depreciation		(40.4	)		(32.4	)
	$	62.9		$	66.0

F-66

FEDERAL-MOGUL PISTON RINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Future minimum payments under noncancelable operating leases with initial or remaining terms of more than one year are as follows, in millions:

2004	$	0.2
2005		0.1
2006		0.1
2007		0.1
2008		0.1
Thereafter		—

Total rental expense under operating leases for the years ended December 31, 2003, 2002 and 2001 was $0.2 million, $0.3 million and $0.2 million, respectively, exclusive of property taxes, insurance and other occupancy costs generally payable by Federal-Mogul.

6. Goodwill and Other Intangible Assets

Effective January 1, 2002, Piston Rings adopted SFAS No. 142, resulting in the discontinuance of amortization of goodwill and indefinite-lived intangible assets. The adoption of this standard also required the reclassification of various intangible asset classes according to the measurability of their useful lives. Upon the adoption of SFAS No. 142, Piston Rings recorded a non-cash charge of $47.3 million to reduce the carrying value of its goodwill and indefinite-lived intangible assets to their estimated fair value as required by SFAS No. 142. The charge is presented as a cumulative effect of change in accounting principle in the consolidated statement of operations for the year ended December 31, 2002.

At December 31, 2003 and 2002, Piston Rings did not have any amortized or unamortized intangible assets.

The following table shows the pro-forma effect of SFAS No. 142 on Piston Rings’ earnings:

	Year Ended December 31
	2003		2002			2001
	(Millions of Dollars)
Reported Net Earnings (Loss)	$	1.0	$	(46.6	)	$	(155.6	)
Add-back: Goodwill amortization		—		—			1.5
Adjusted Net Earnings (Loss)	$	1.0	$	(46.6	)	$	(154.1	)

7. Redeemable Stock

Piston Rings issued 862 shares of Class B common stock, redeemable at the option of the holder, to a minority investor in 1994. The shares of Class B stock are redeemable for $23,201.85 per share plus accrued dividends.

8. Long-Term Debt and Other Financing Arrangements

Piston Rings’ cash and indebtedness is managed on a worldwide basis by Federal-Mogul. The majority of the cash provided by or used by a particular division, including Piston Rings, is provided through a consolidated cash and debt management system. As a result, the amount of domestic cash or debt historically related to Piston Rings is not determinable.

Federal-Mogul allocated Piston Rings a portion of the interest it incurred on the financing of T&N, plc. Federal-Mogul allocated $5.0 million of interest in 2001. Interest was calculated by allocating a portion of the amount Federal-Mogul borrowed to purchase T&N plc. Federal-Mogul allocated $110.8 million of the debt to Piston Rings and calculated interest at a rate of 6% to the Petition date. In accordance with

F-67

FEDERAL-MOGUL PISTON RINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

SOP 90-7, Piston Rings stopped recording interest expense on its outstanding notes effective October 1, 2001. Piston Rings’ contractual interest not accrued or paid for this note was $6.6 million in 2003 and 2002, respectively, and $1.7 million in 2001.

Federal-Mogul has pledged 100% of Piston Rings’ capital stock and also provided collateral in the form of a pledge of inventories, property, plant and equipment, real property and intellectual properties to secure certain outstanding debt of Federal-Mogul. In addition, Piston Rings has guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under Federal-Mogul’s Senior Credit Agreement and its publicly registered debt. Such pledges and guarantees have also been made by other subsidiaries of Federal-Mogul. Federal-Mogul is in default of the terms of such debt agreements. Borrowings outstanding on such agreements aggregated $4,020.7 million and $3,982.7 million as of December 31, 2003 and 2002, respectively.

9. Net Parent Investment

Changes in net parent investment were as follows:

	(Millions of Dollars)
Balance at January 1, 2001	$	85.2
Reclassification of intercompany accounts and loans payable at the Petition Date to Liabilities Subject to Compromise		(146.6	)
Reclassification of accounts receivable from affiliates at the Petition Date		147.3
Reclassification transfer of accounts receivable from Federal-Mogul to Products		9.3
		95.2
Net loss		(155.6	)
Intercompany transactions, net		2.6
Balance at December 31, 2001		(57.8	)
Net loss		(46.6	)
Intercompany transactions, net		5.2
Balance at December 31, 2002		(99.2	)
Net income		1.0
Intercompany transactions, net		(3.6	)
Balance at December 31, 2003	$	(101.8	)

10. Income Taxes

Piston Rings files a consolidated return with Federal-Mogul for U.S. federal income tax purposes. Federal income tax expense is calculated on a separate-return basis for financial reporting purposes.

	Year Ended December 31
	2003		2002		2001
	(Millions of Dollars)
Components of income tax expense
Current	$	0.1	$	0.1	$	—
Deferred		—		0.6		4.7
Income tax expense	$	0.1	$	0.7	$	4.7

F-68

FEDERAL-MOGUL PISTON RINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

A reconciliation between the statutory federal income tax rate and the effective tax rate is as follows:

	Year Ended December 31
	2003		2002		2001
Effective tax rate reconciliation:
U.S. Federal statutory rate	35	%	35	%	35	%
State and local taxes	9		5		2
Nondeductible goodwill	—		—		(1	)
Valuation allowance	(35	)	10		(39	)
Effective tax rate	9	%	50	%	(3	)%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the related amounts used for income tax purposes. Significant components of the Company’s net deferred tax asset are non-deductible accruals and amortization and depreciation timing differences.

	December 31
	2003			2002
	(Millions of Dollars)
Net current deferred tax assets	$	1.5		$	0.7
Net long-term deferred tax assets		60.3			59.0
Gross deferred tax assets		61.8			59.7
Valuation allowance		(61.8	)		(59.7	)
Net deferred tax assets	$	—		$	—

11. Pension Plans

Piston Rings is included in the Federal-Mogul Corporation Pension Plan. As such, the related pension liability is included in Net Parent Investment at December 31, 2003 and 2002.

The pension charge allocated to Piston Rings was $0.8 million for 2003 and 2002, respectively, and $0.7 million for 2001.

12. Postretirement Benefits Other Than Pensions

As part of T&N plc. and subsequently Federal-Mogul, benefits provided to employees of Piston Rings under various postretirement plans other than pensions, all of which are unfunded, include retiree medical care, dental care, prescriptions and life insurance, with medical care accounting for approximately 95% of the total. The majority of participants under such plans are retirees. The expense related to such plans approximated $4.8 million, $4.9 million and $5.3 million for 2003, 2002 and 2001, respectively.

13. Concentrations of Credit Risk and Other

Piston Rings grants credit to their customers, which are primarily in the automotive industry. Credit risk with respect to trade receivables is generally diversified due to the large number of entities comprising Piston Rings’ customer base. Piston Rings performs periodic credit evaluations of their customers and generally does not require collateral.

Piston Rings operates in a single business segment. Piston Rings manufactures and distributes piston rings for use in many engine markets including automotive, heavy-duty, diesel, locomotive and compressors. In addition, Piston Rings manufactures and distributes liners to automotive and heavy-duty engine assemblers. Five customers accounted for a combined 60%, 55% and 60% of total revenues in 2003, 2002 and 2001, respectively. All revenues and assets of Piston Rings reside in North America, principally in the United States.

F-69

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 CORPORATION
By:	/s/ G. Michael Lynch
	G. Michael Lynch
	Executive Vice President and Chief Financial Officer,
	Principal Financial Officer
By:	/s/ William G. Quigley III
	William G. Quigley III
	Vice President and Controller,
	Chief Accounting Officer

Date:    March 15, 2004

F-70

EXHIBIT INDEX

The Company will furnish upon request any of the following exhibits upon payment of the Company’s reasonable expenses for furnishing such exhibit.

2.1	Purchase and Sale Agreement between Cooper Industries, Inc. and Federal-Mogul Corporation, dated August 17, 1998. (Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed October 26, 1998.)
3.1	The Company’s Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999. (the “1999 10-K”)
3.2	The Company’s Bylaws, as amended. (Incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. (the “2002 10-K”)
4.1	Rights Agreement dated as of February 24, 1999, between the Company and The Bank of New York, as Rights Agent. (Incorporated by reference to Exhibit 4 to the Company’s Current Report on Form 8-K filed February 25, 1999.)
4.2	Purchase Agreement for 10,000,000 Trust Convertible Preferred Securities of Federal-Mogul Financing Trust, dated as of November 24, 1997. (Incorporated by reference to Exhibit 4.6 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997. (the “1997 10-K”)
4.3	Registration Rights Agreement, dated as of December 1, 1997, by and among the Company, Federal-Mogul Financing Trust and Morgan Stanley & Co. Inc. as Initial Purchaser. (Incorporated by reference to Exhibit 4.7 to the Company’s 1997 10-K.)
4.4	Indenture between Federal-Mogul Corporation and The Bank of New York, dated as of December 1, 1997, with respect to the Subordinated Debentures. (Incorporated by reference to Exhibit 4.8 to the Company’s 1997 10-K.)
4.5	First Supplemental Indenture dated as of December 1, 1999 to the Indenture between Federal-Mogul Corporation and The Bank of New York, dated as of December 1, 1997, with respect to the Subordinated Debentures. (Incorporated by reference to Exhibit 4.9 to the Company’s 1997 10-K.)
4.6	Indenture among Federal-Mogul Corporation and The Bank of New York, dated as of January 20, 1999. (Incorporated by reference to Exhibit 4.8 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998.
4.7	First Supplemental Indenture dated as of December 29, 2000 to the Indenture dated as of January 20, 1999 among Federal-Mogul Corporation, certain subsidiaries as guarantors and The Bank of New York, as trustee. (Incorporated by reference to Exhibit 4.3 to the Company’s January 17, 2001 8-K.)
4.8	Indenture among Federal-Mogul Corporation and Continental Bank, dated as of August 12, 1994. (Incorporated by reference to Exhibit 4.14 to the Company’s Current Report on Form 8-K filed August 19, 1994.)
4.9	First Supplemental Indenture dated as of July 8, 1998 to the Indenture dated as of August 12, 1994 among Federal-Mogul Corporation, certain subsidiaries as guarantors, and U.S. Bank Trust National Association (as successor to Continental Bank), as trustee. (Incorporated by reference to Exhibit 4.9 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (the “2000 10-K”.)
4.10	Second Supplemental Indenture dated as of October 9, 1998 to the Indenture dated as of August 12, 1994 among Federal-Mogul Corporation, certain subsidiaries as guarantors, and U.S. Bank Trust National Association (as successor to Continental Bank), as trustee. (Incorporated by reference to Exhibit 4.10 to the Company’s 2000 10-K.)
4.11	Third Supplemental Indenture dated as of December 29, 2000 to the Indenture dated as of August 12, 1994 among Federal-Mogul Corporation, certain subsidiaries as guarantors, and U.S. Bank Trust National Association (as successor to Continental Bank), as trustee. (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed January 17, 2001. (the “January 17, 2001 8-K”)
4.12	Indenture among Federal-Mogul Corporation and The Bank of New York, dated as of June 29, 1998. (Incorporated by reference to Exhibit 4.8 to the Company’s 1999 10-K.)
4.13	First Supplemental Indenture dated as of June 30, 1998 to the Indenture dated as of June 29, 1998 among Federal-Mogul Corporation and The Bank of New York. (Incorporated by reference to Exhibit 4.9 to the Company’s 1999 10-K.)

E-1

4.14	Second Supplemental Indenture dated as of July 21, 1998 to the Indenture dated as of June 29, 1998 among Federal-Mogul Corporation and The Bank of New York. (Incorporated by reference to Exhibit 4.14 to the Company’s 2000 10-K.)
4.15	Third Supplemental Indenture dated as of October 9, 1998 to the Indenture dated as of June 29, 1998 among Federal-Mogul Corporation and The Bank of New York. (Incorporated by reference to Exhibit 4.15 to the Company’s 2000 10-K.)
4.16	Fourth Supplemental Indenture dated as of December 29, 2000 to the Indenture dated as of June 29, 1998 among Federal-Mogul Corporation, certain subsidiaries as guarantors and The Bank of New York, as trustee. (Incorporated by reference to Exhibit 4.2 to the Company’s January 17, 2001 8-K.)
10.1	Federal-Mogul Corporation 1997 Amended and Restated Long-Term Incentive Plan, as adopted by the Shareholders of the Company on May 20, 1998. (Incorporated by reference to the Company’s 1998 Definitive Proxy Statement on Form 14A.)
10.2	Amended and Restated Deferred Compensation Plan for Corporate Directors. (Incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1990 (the “1990 10-K”.)
10.3	Supplemental Executive Retirement Plan, as amended. (Incorporated by reference to Exhibit 10.10 to the Company’s 1992 10-K.)
10.4	Description of Umbrella Excess Liability Insurance for the Senior Management Team. (Incorporated by reference to Exhibit 10.11 to the Company’s 1990 10-K.)
10.5	Amended and Restated Declaration of Trust of Federal-Mogul Financing Trust, dated as of December 1, 1997. (Incorporated by reference to Exhibit 10.34 to the Company’s 1997 10-K.)
*10.6	Amended and Restated Revolving Credit, Term Loan and Guaranty Agreement dated August 7, 2003 by and among the Company and certain of its subsidiaries, Debtors and Debtors-in-Possession under Chapter 11 of the Bankruptcy Code, as Borrowers, and The Lenders Party Hereto, and JPMorgan Chase Bank, formerly known as The Chase Manhattan Bank, as Administrative Agent.
10.7	Fourth Amended and Restated Credit Agreement dated as of December 29, 2000 among the Company, certain foreign subsidiaries, certain banks and other financial institutions and The Chase Manhattan Bank, as administrative agent. (Incorporated by reference to Exhibit 10.1 to the Company’s January 17, 2001 8-K.)
10.8	Amended and Restated Domestic Subsidiary Guarantee dated as of December 29, 2000 by certain subsidiaries of the Company in favor of The Chase Manhattan Bank, as administrative agent. (Incorporated by reference to Exhibit 10.2 to the Company’s January 17, 2001 8-K.)
10.9	Guarantee by F-M UK Holding Limited in favor of The Chase Manhattan Bank, as administrative agent. (Incorporated by reference to Exhibit 10.3 to the Company’s January 17, 2001 8-K.)
10.10	Trust Agreement dated as of December 29, 2000 among the Company, certain subsidiaries and Wilmington Trust Company, as trustee. (Incorporated by reference to Exhibit 10.4 to the Company’s January 17, 2001 8-K.)
10.11	Second Amended and Restated Trust Agreement dated as of December 29, 2000 among the Company, certain subsidiaries and First Union National Bank, as trustee. (Incorporated by reference to Exhibit 10.5 to the Company’s January 17, 2001 8-K.)
10.12	Second Amended and Restated Trust Agreement dated as of December 29, 2000 among the Company, certain subsidiaries and ABN AMRO Trust Company (Jersey) Limited, as trustee, (Incorporated by reference to Exhibit 10.6 to the Company’s January 17, 2001 8-K.)
10.13	Second Amended and Restated Domestic Pledge Agreement among the Company and certain subsidiaries in favor of First Union National Bank, as trustee. (Incorporated by reference to Exhibit 10.7 to the Company’s January 17, 2001 8-K.)
10.14	Security Agreement dated as of December 29, 2000 by the Company and certain subsidiaries in favor of Wilmington Trust Company, as trustee. (Incorporated by reference to Exhibit 10.8 to the Company’s January 17, 2001 8-K.)
10.15	Form of Mortgage or Deed of Trust prepared for execution by the Company or any applicable subsidiaries. (Incorporated by reference to Exhibit 10.9 to the Company’s January 17, 2001 8-K.)
10.16	Contract of Indemnity dated as of December 29, 2000 by the Company and certain subsidiaries with respect to a surety bond issued by Travelers Casualty & Surety Company of America. (Incorporated by reference to Exhibit 10.10 to the Company’s January 17, 2001 8-K.)

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10.17	Contract of Indemnity dated as of December 29, 2000 by the Company and certain subsidiaries with respect to a surety bond issued by Travelers Casualty & Surety Company of America. (Incorporated by reference to Exhibit 10.11 to the Company’s January 17, 2001 8-K.)
10.18	Contract of Indemnity dated as of December 29, 2000 by the Company and certain subsidiaries with respect to a surety bond issued by SAFECO Insurance Company of America. (Incorporated by reference to Exhibit 10.12 to the Company’s January 17, 2001 8-K.)
10.19	Contract of Indemnity dated as of December 29, 2000 by the Company and certain subsidiaries with respect to a surety bond issued by National Fire Insurance Company of Hartford and Continental Casualty Company. (Incorporated by reference to Exhibit 10.13 to the Company’s January 17, 2001 8-K.)
*10.20	Amended and Restated Federal-Mogul Supplemental Key Executive Pension Plan dated January 1, 1999.
10.21	Employment Agreement dated as of January 10, 2001 and amended as of January 31, 2001, between the Company and Frank Macher. (Incorporated by reference to Exhibit 10.24 to the Company’s 2000 10-K.)
10.22	Change of Control Agreement dated January 10, 2001, between the Company and Frank Macher. (Incorporated by reference to Exhibit 10.25 to the Company’s 2000 10-K.)
*10.23	Employment Agreement dated as of January 10, 2001 and amended as of January 31, 2001, August 16, 2002 and December 9, 2003 between the Company and Charles McClure.
10.24	Change of Control Agreement dated January 10, 2001, between the Company and Charles McClure. (Incorporated by reference to Exhibit 10.27 to the Company’s 2000 10-K.)
*14	Code of ethics.
*21	Subsidiaries of the Registrant.
*23.1	Consent of Ernst & Young LLP.
*24	Powers of Attorney.
*31.1	Certification by the Company’s Chief Executive Officer pursuant to Rule 13a-14
*31.2	Certification by the Company’s Chief Executive Officer pursuant to Rule 13a-14
*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)

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EX-10.6

EXHIBIT 10.6

AMENDED AND RESTATED

REVOLVING CREDIT, TERM LOAN AND GUARANTY AGREEMENT

Among

FEDERAL-MOGUL CORPORATION AND CERTAIN OF ITS SUBSIDIARIES,

Debtors and Debtors-in-Possession under Chapter 11 of the Bankruptcy Code,

as Borrowers,

and

THE LENDERS PARTY HERETO,

and

JPMORGAN CHASE BANK,

formerly known as THE CHASE MANHATTAN BANK,

as Administrative Agent

Dated as of August 7, 2003

AMENDED AND RESTATED

REVOLVING CREDIT, TERM LOAN AND GUARANTY AGREEMENT

TABLE OF CONTENTS

	Page No.
SECTION 1. DEFINITIONS	3
SECTION 1.1 Defined Terms	3
SECTION 1.2 Terms Generally	27
SECTION 2. AMOUNT AND TERMS OF CREDIT	28
SECTION 2.1 Commitment of the Lenders	28
SECTION 2.2 Borrowing Base	29
SECTION 2.3 Letters of Credit	29
SECTION 2.4 Issuance	31
SECTION 2.5 Nature of Letter of Credit Obligations Absolute	31
SECTION 2.6 Making of Loans	32
SECTION 2.7 Repayment of Loans and Unreimbursed Draws; Evidence of Debt	33
SECTION 2.8 Interest on Loans	34
SECTION 2.9 Default Interest	34
SECTION 2.10 Optional Termination or Reduction of Commitment	34
SECTION 2.11 Alternate Rate of Interest	35
SECTION 2.12 Refinancing of Loans	35
SECTION 2.13 Mandatory Prepayment; Commitment Termination	36
SECTION 2.14 Optional Prepayment of Loans; Reimbursement of Lenders	37
SECTION 2.15 Reserve Requirements; Change in Circumstances	39
SECTION 2.16 Change in Legality	40
SECTION 2.17 Pro Rata Treatment, etc	40
SECTION 2.18 Taxes	41
SECTION 2.19 Certain Fees	43
SECTION 2.20 Commitment Fee	43
SECTION 2.21 Letter of Credit Fees	44
SECTION 2.22 Nature of Fees	44
SECTION 2.23 Priority and Liens	44
SECTION 2.24 Use of Cash Collateral	46
SECTION 2.25 Right of Set-Off	46
SECTION 2.26 Security Interest in Letter of Credit Account	46
SECTION 2.27 Payment of Obligations	47
SECTION 2.28 No Discharge; Survival of Claims	47
SECTION 2.29 Replacement of Certain Lenders	47
SECTION 3. REPRESENTATIONS AND WARRANTIES	48
SECTION 3.1 Organization and Authority	48
SECTION 3.2 Due Execution	48
SECTION 3.3 Statements Made	49
SECTION 3.4 Financial Statements	49
SECTION 3.5 Ownership	49
SECTION 3.6 Liens	49
SECTION 3.7 Compliance with Law	50

i

SECTION 3.8 Insurance	50
SECTION 3.9 The Orders	50
SECTION 3.10 Use of Proceeds	50
SECTION 3.11 Litigation	51
SECTION 3.12 Intellectual Property	51
SECTION 3.13 Intercompany Loans to Foreign Subsidiaries	51
SECTION 4. CONDITIONS OF LENDING	51
SECTION 4.1 Conditions to the Restatement Effectiveness Date	51
SECTION 4.2 Conditions Precedent to Each Loan and Each Letter of Credit	52
SECTION 5. AFFIRMATIVE COVENANTS	53
SECTION 5.1 Financial Statements, Reports, etc	54
SECTION 5.2 Existence	58
SECTION 5.3 Insurance	58
SECTION 5.4 Obligations and Taxes	58
SECTION 5.5 Notice of Event of Default, etc	59
SECTION 5.6 Access to Books and Records	59
SECTION 5.7 Maintenance of Concentration Account	60
SECTION 5.8 Borrowing Base Certificate	60
SECTION 5.9 Business Plan	60
SECTION 5.10	60
SECTION 5.11 Collateralization of Intercompany Loans	60
SECTION 6. NEGATIVE COVENANTS	61
SECTION 6.1 Liens	61
SECTION 6.2 Merger, etc	61
SECTION 6.3 Indebtedness	62
SECTION 6.4 Capital Expenditures	62
SECTION 6.5 EBITDA	63
SECTION 6.6 Guarantees and Other Liabilities	64
SECTION 6.7 Chapter 11 Claims	64
SECTION 6.8 Dividends; Capital Stock	64
SECTION 6.9 Transactions with Affiliates	65
SECTION 6.10 Investments, Loans and Advances	65
SECTION 6.11 Disposition of Assets	66
SECTION 6.12 Nature of Business	67
SECTION 6.13 Transactions among Borrowers	67
SECTION 6.14 Right of Subrogation among Borrowers	67
SECTION 7. EVENTS OF DEFAULT	67
SECTION 7.1 Events of Default	67
SECTION 8. THE ADMINISTRATIVE AGENT	72
SECTION 8.1 Administration by Administrative Agent	72
SECTION 8.2 Advances and Payments	72
SECTION 8.3 Sharing of Setoffs	72
SECTION 8.4 Agreement of Required Lenders	73

ii

SECTION 8.5 Liability of Administrative Agent	73
SECTION 8.6 Reimbursement and Indemnification	74
SECTION 8.7 Rights of Administrative Agent	74
SECTION 8.8 Independent Lenders	74
SECTION 8.9 Notice of Transfer	74
SECTION 8.10 Successor Administrative Agent	74
SECTION 9. GUARANTY	75
SECTION 9.1 Guaranty	75
SECTION 9.2 No Impairment of Guaranty	76
SECTION 9.3 Subrogation	76
SECTION 10. MISCELLANEOUS	77
SECTION 10.1 Notices	77
SECTION 10.2 Survival of Agreement, Representations and Warranties, etc.	77
SECTION 10.3 Successors and Assigns	77
SECTION 10.4 Confidentiality	80
SECTION 10.5 Expenses	80
SECTION 10.6 Indemnity	81
SECTION 10.7 Choice of Law	81
SECTION 10.8 No Waiver	81
SECTION 10.9 Extension of Maturity	81
SECTION 10.10 Amendments, etc.	81
SECTION 10.11 Severability	83
SECTION 10.12 Headings	83
SECTION 10.13 Execution in Counterparts	83
SECTION 10.14 Prior Agreements	83
SECTION 10.15 Further Assurances	83
SECTION 10.16 Waiver of Jury Trial	83
SECTION 10.17 Subordination of Intercompany Indebtedness	83
SECTION 10.18 Foreign Subsidiaries	84
SECTION 10.19 Effectiveness	85

iii

Annex A–1 – Tranche A Commitment Amounts

Annex A–2 – Tranche B Commitment Amounts

Exhibit A–1 – Final Order

Exhibit A–2 – Form of Amendment Order

Exhibit B – Form of Amended and Restated Security and Pledge Agreement

Exhibit C – Form of Borrowing Base Certificate

Exhibit D – Form of Opinion of Counsel

Exhibit E – Form of Assignment and Acceptance

Schedule 1.1 – Existing Letters of Credit

Schedule 3.5 – Subsidiaries

Schedule 3.6 – Liens

Schedule 3.12 – Intellectual Property

Schedule 3.13 – Intercompany Loans to Foreign Subsidiaries

Schedule 6.3 – Existing Indebtedness of Foreign Subsidiaries

Schedule 6.10 – Existing Joint Venture Investments

Schedule 6.10(a) – Permitted Equity Investments in Existing Customers

Schedule 6.11 – Surplus Real Estate Assets Eligible for Sale

Schedule 6.11(a) – Other Surplus Assets Eligible for Sale and Corresponding EBITDA Adjustments

Schedule 6.13 – Borrower Transaction Restrictions

iv

AMENDED AND RESTATED REVOLVING CREDIT, TERM LOAN AND GUARANTY

AGREEMENT

Dated as of August 7, 2003

AMENDED AND RESTATED REVOLVING CREDIT, TERM LOAN AND GUARANTY AGREEMENT, dated as of August 7, 2003, among FEDERAL-MOGUL CORPORATION, a Michigan corporation (“Parent”), each of the direct and indirect Domestic Subsidiaries of the Parent party to this Agreement (each individually a “Borrower” and collectively the “Borrowers”), each of which is a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code (the cases of the Borrowers, each a “Case” and collectively, the “Cases”), JPMORGAN CHASE BANK, formerly known as The Chase Manhattan Bank, a New York banking corporation (“JPMCB”), and each of the other commercial banks, finance companies, insurance companies or other financial institutions or funds from time to time party hereto (together with JPMCB, the “Lenders”), J.P. MORGAN SECURITIES INC. (“JPMorgan”), as lead arranger and sole book runner, and JPMORGAN CHASE BANK, as administrative agent (in such capacity, the “Administrative Agent”) for the Lenders

INTRODUCTORY STATEMENT

WHEREAS, on October 1, 2001, the Borrowers filed voluntary petitions with the Bankruptcy Court initiating the Cases and have continued in the possession of their assets and in the management of their businesses pursuant to Sections 1107 and 1108 of the Bankruptcy Code; and

WHEREAS, the Borrowers and the Lenders entered into a Revolving Credit, Term Loan and Guaranty Agreement dated as of October 1, 2001 (as amended to date, the “Existing Credit Agreement”), pursuant to which the Lenders made available to the Borrowers a revolving credit, letter of credit, and term loan facility in an aggregate principal amount not to exceed $675,000,000 (subject to the terms and conditions of the Existing Credit Agreement), composed of two separate tranches as follows: (i) Tranche A being a revolving credit commitment of $475,000,000 with a sublimit of $75,000,000 for standby and documentary Letters of Credit to be issued for purposes satisfactory to the Administrative Agent, and (ii) Tranche B being a term loan commitment of $200,000,000; and

WHEREAS, in accordance with the Existing Credit Agreement, the proceeds of the Revolving Loans and the Term Loans were used for (i) working capital; (ii) other general corporate purposes of the Borrowers; (iii) the repurchase of accounts receivable in connection with the termination of the Prepetition Securitization Facilities; and (iv) payment of any related transaction costs, fees and expenses; and

WHEREAS, in accordance with the Existing Credit Agreement, to provide for the repayment of the Loans, the reimbursement of any draft drawn under a Letter of Credit and the payment of the other obligations of the Borrowers hereunder and under the other Loan Documents (including, without limitation, the Obligations of the Borrowers under Section 6.3(v)), the Borrowers have provided to the Administrative Agent and the Lenders the following (each as more fully described herein):

(a) an allowed Superpriority Claim;

(b) a perfected first priority Lien, pursuant to Section 364(c)(2) of the Bankruptcy Code, upon all unencumbered property of the Borrowers and on all cash and cash equivalents in the Letter of Credit Account, provided that following the Termination Date, amounts in the Letter of Credit Account shall not be subject to the Carve-Out hereinafter referred to;

(c) a perfected Lien, pursuant to Section 364(c)(3) of the Bankruptcy Code, upon all property of the Borrowers that is subject to valid and perfected Permitted Liens in existence on the Filing Date (including the perfected liens on the stock of certain subsidiaries of the Parent (“Stock Liens”) in favor of (x) the trustee for the holders of Indebtedness of the Parent under the Indentures, and (y) the holders of obligations of the Borrowers under the Prepetition Agreements) or that is subject to valid Permitted Liens in existence on the Filing Date that are perfected subsequent to the Filing Date as permitted by Section 546(b) of the Bankruptcy Code;

(d) a perfected first priority priming Lien, pursuant to Section 364(d)(1) of the Bankruptcy Code, upon all property of the Borrowers (including, without limitation, inventory, accounts receivable, rights under license agreements, property, plant and equipment, interests in leaseholds), that is subject to the existing Liens (the “Primed Liens”, it being understood that the Stock Liens shall not be primed or constitute part of the Primed Liens) which secure (i) on a pari passu basis the obligations of the Borrowers to the lenders party to the Prepetition Credit Agreement and the obligations of the Borrowers in connection with the Surety Bonds, and (ii) other obligations or indebtedness of the Borrowers pursuant to the Prepetition Agreements other than the Prepetition Credit Agreement and the Surety Bonds, which first priority priming Liens in favor of the Administrative Agent and the Lenders shall be senior in all respects to all of the Primed Liens; and

(e) a guaranty from the Borrowers of the due and punctual payment and performance of the obligations of any Foreign Subsidiaries in respect of any letters of credit issued hereunder for the account thereof; and

WHEREAS, the Borrowers have requested that the Lenders amend the Existing Credit Agreement to extend the term of the Existing Credit Agreement and to make certain other modifications to the Existing Credit Agreement, including reducing the Total Tranche A Commitment to $350,000,000 and increasing the Total Tranche B Commitment to $250,000,000; and

WHEREAS, the Borrowers and the Lenders desire to amend and restate the Existing Credit Agreement and to reflect the modifications requested by the Borrowers; and

WHEREAS, all of the claims granted hereunder in the Cases to the Administrative Agent and the Lenders shall be subject to the Carve-Out to the extent provided in Section 2.23.

Accordingly, the parties hereto hereby agree as follows:

2

DEFINITIONS

SECTION 1.1 Defined Terms.

As used in this Agreement, the following terms shall have the meanings specified below.

“ABR Loan” shall mean any Loan bearing interest at a rate determined by reference to the Alternate Base Rate in accordance with the provisions of Section 2.

“Account” shall mean any right to payment for goods sold in the ordinary course of business, regardless of how such right is evidenced and whether or not it has been earned by performance.

“Account Debtor” means, with respect to any Account, the obligor with respect to such Account.

“Adjusted Eligible Accounts Receivable” shall mean Eligible Accounts Receivable, minus the Dilution Reserve.

“Adjustment Date” shall have the meaning set forth in Section 6.5(a).

“Adjusted LIBOR Rate” shall mean, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the quotient of (a) the LIBOR Rate in effect for such Interest Period divided by (b) a percentage (expressed as a decimal) equal to 100% minus Statutory Reserves. For purposes hereof, the term “LIBOR Rate” shall mean the rate (rounded upwards, if necessary, to the next 1/16 of 1%) at which dollar deposits approximately equal in principal amount to such Eurodollar Borrowing and for a maturity comparable to such Interest Period are offered to the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two (2) Business Days prior to the commencement of such Interest Period.

“Administrative Agent” shall have the meaning set forth in the Introduction.

“Affected Lender” shall have the meaning given such term in Section 2.29.

“Affiliate” shall mean, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, a Person (a “Controlled Person”) shall be deemed to be “controlled by” another Person (a “Controlling Person”) if the Controlling Person possesses, directly or indirectly, power to direct or cause the direction of the management and policies of the Controlled Person whether by contract or otherwise.

“Agreement” shall mean this Amended and Restated Revolving Credit, Term Loan and Guaranty Agreement, as the same may from time to time be amended, restated, modified or supplemented.

3

“Alternate Base Rate” shall mean, for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. For purposes hereof, “Prime Rate” shall mean the rate of interest per annum publicly announced from time to time by the Administrative Agent as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective on the date such change is publicly announced. “Base CD Rate” shall mean the sum of (a) the quotient of (i) the Three-Month Secondary CD Rate divided by (ii) a percentage expressed as a decimal equal to 100% minus Statutory Reserves and (b) the Assessment Rate. “Three-Month Secondary CD Rate” shall mean, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day shall not be a Business Day, the next preceding Business Day) by the Board through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day), or, if such rate shall not be so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., New York City time, on such day (or, if such day shall not be a Business Day, on the next preceding Business Day) by the Administrative Agent from three New York City negotiable certificate of deposit dealers of recognized standing selected by it. “Federal Funds Effective Rate” shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Base CD Rate or the Federal Funds Effective Rate or both for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms hereof, the Alternate Base Rate shall be determined without regard to clause (b) or (c), or both, of the first sentence of this definition, as appropriate, until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate, respectively.

“AM Finished Goods” shall mean Finished Goods, manufactured by Borrowers for sale to an Account Debtor that is an after-market retailer or distributor of goods of that kind, as determined by the Administrative Agent in its sole discretion.

“Amendment Order” shall have the meaning given such term in Section 4.1(b).

“Amounts” shall have the meaning given such term in Section 2.18(a).

“Approved Fund” means, with respect to any Lender that is a fund that invests m bank loans and similar commercial extensions of credit, any other fund that invests in bank

4

loans and similar commercial extensions of credit and is managed by the same investment advisor as such Lender or by a Lender Affiliate of such investment advisor.

“Assessment Rate” shall mean for any date the annual rate (rounded upwards, if necessary, to the next 1/100 of 1%) most recently estimated by the Administrative Agent as the then current net annual assessment rate that will be employed in determining amounts payable by the Administrative Agent to the Federal Deposit Insurance Corporation (or any successor) for insurance by such Corporation (or any successor) of time deposits made in dollars at the Administrative Agent’s domestic offices.

“Asset Sale” shall mean a sale, lease or sub-lease (as lessor or sublessor), sale and leaseback, assignment, conveyance, transfer or other disposition to, or any exchange of property with, any Person (other than a Borrower), in one transaction or series of transactions, of all or any part of (i) the Borrowers’ or any of their Subsidiaries’ businesses, assets or properties of any kind, whether real, personal, or mixed and whether tangible or intangible, whether now owned or hereafter acquired, including, without limitation, the capital stock of any of the Borrowers (other than Parent) or their Subsidiaries in each case other than (x) Inventory, including scrap or obsolete Inventory, sold in the ordinary course of business and (y) sales of assets for aggregate consideration of less than $1,000,000 with respect to any transaction or series of related transactions.

“Assignment and Acceptance” shall mean an assignment and acceptance entered into by a Lender and an Eligible Assignee, and accepted by the Administrative Agent, substantially in the form of Exhibit E.

“Available AM Finished Goods” at any date of determination shall be equal to the lesser of (i) an amount equal to 60% of Eligible AM Finished Goods and (ii) 85% of the product of (x) the Net Orderly Liquidation Rate in effect (based on the then most recent independent inventory appraisal) on such date of determination multiplied by (y) the aggregate amount of gross domestic AM Finished Goods (as reported in accordance with the Borrowers’ perpetual inventory system at such date of determination) as set forth in the most recent Borrowing Base Certificate.

“Available OE Finished Goods” at any date of determination shall be equal to the lesser of (i) an amount equal to 65% of Eligible OE Finished Goods and (ii) 85% of the product of (x) the Net Orderly Liquidation Rate in effect (based on the then most recent independent inventory appraisal) on such date of determination multiplied by (y) the aggregate amount of gross domestic OE Finished Goods (as reported in accordance with the Borrowers’ perpetual inventory system at such date of determination) as set forth in the most recent Borrowing Base Certificate.

“Available Raw Materials” at any date of determination shall be equal to the lesser of (i) an amount equal to 25% of Eligible Raw Materials and (ii) 85% of the product of (x) the Net Orderly Liquidation Rate in effect (based on the then most recent independent inventory appraisal) on such date of determination multiplied by (y) the aggregate amount of gross domestic Raw Materials (as reported in accordance with the Borrowers’ perpetual

5

inventory system at such date of determination) as set forth in the most recent Borrowing Base Certificate.

“Bankruptcy Code” shall mean The Bankruptcy Reform Act of 1978, as heretofore and hereafter amended, and codified as 11 U.S.C. Section 101 et seq.

“Bankruptcy Court” shall mean the United States Bankruptcy Court for the District of Delaware or any other court having jurisdiction over the Cases from time to time.

“Board” shall mean the Board of Governors of the Federal Reserve System of the United States.

“Borrower” and “Borrowers” shall have the respective meanings set forth in the Introduction.

“Borrowing” shall mean the incurrence of Revolving or Term Loans of a single Type made from all the Tranche A or Tranche B Lenders, as applicable, on a single date and having, in the case of Eurodollar Loans, a single Interest Period (with any ABR Loan made pursuant to Section 2.16 being considered a part of the related Borrowing of Eurodollar Loans).

“Borrowing Base” shall mean, at the time of any determination, an amount equal to the sum, without duplication, of (a) 85% of Adjusted Eligible Accounts Receivable plus (b) Available Raw Materials, plus (c) Available OE Finished Goods, plus (d) Available AM Finished Goods, plus (e) the PP&E Component, minus the Carve-Out. The Borrowing Base at any time shall be determined by reference to the most recent Borrowing Base Certificate delivered to the Administrative Agent pursuant to Section 5.8 of the Agreement. Subject to the limitations and requirements set forth in Section 10.10(a) of the Agreement, standards of eligibility and reserves and advance rates of the Borrowing Base may be revised and adjusted from time to time by the Administrative Agent in its sole discretion, with any changes in such standards to be effective three (3) Business Days after delivery of notice thereof to the Borrowers.

“Borrowing Base Certificate” shall mean a certificate substantially in the form of Exhibit C hereto (with such changes therein as may be required by the Administrative Agent from time to time to reflect the components of and reserves against the Borrowing Base as provided for hereunder from time to time), executed and certified as accurate and complete by a Financial Officer of the Parent, which shall include appropriate exhibits, schedules and supporting documentation, and additional reports as (i) outlined in Exhibit C, (ii) as requested by the Administrative Agent, and (iii) as provided in Section 5.8.

“Business Day” shall mean any day other than a Saturday, Sunday or other day on which banks in the State of New York are required or permitted to close (and, for a Letter of Credit, other than a day on which the Fronting Bank issuing such Letter of Credit is closed); provided, however, that when used in connection with a Eurodollar Loan, the term “Business Day” shall also exclude any day on which banks are not open for dealings in dollar deposits on the London interbank market.

“Canadian Dollars” shall mean lawful currency of the Dominion of Canada.

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“Capital Expenditures” shall mean, for any period, the aggregate of all expenditures (whether paid in cash and not theretofore accrued subsequent to the date of this Agreement or accrued as liabilities during such period and including that portion of Capitalized Leases which is capitalized on the consolidated balance sheet of the Borrowers and their Subsidiaries) by the Borrowers and their Subsidiaries during such period that, in conformity with GAAP, are required to be included in or reflected by the property, plant, equipment or intangibles or similar fixed asset accounts reflected in the consolidated balance sheet of the Borrowers and their Subsidiaries (including equipment which is purchased simultaneously with the trade-in of existing equipment owned by any of the Borrowers or their Subsidiaries to the extent of the gross amount of such purchase price less the book value of the equipment being traded in at such time), but excluding expenditures made in connection with the replacement or restoration of assets, to the extent reimbursed or financed from insurance proceeds paid on account of the loss of or the damage to the assets being replaced or restored, or from awards of compensation arising from the taking by condemnation or eminent domain of such assets being replaced.

“Capitalized Lease” shall mean, as applied to any Person, any lease of property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with GAAP.

“Carve-Out” shall have the meaning set forth in Section 2.23.

“Cases” shall mean the Chapter 11 Cases of each of the Borrowers pending in the Bankruptcy Court.

“Change of Control” shall mean: (i) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof), of shares representing more than 25% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of Parent; or (ii) the occupation of a majority of the seats (other than vacant seats) on the board of directors of Parent, after the Filing Date, by Persons who were neither (A) nominated by the board of directors of Parent nor (B) appointed by the directors so nominated.

“Code” shall mean the Internal Revenue Code of 1986, as amended.

“Collateral” shall mean the Collateral described in the Security and Pledge Agreement.

“Commitment” shall mean, collectively, the Tranche A Commitments and the Tranche B Commitments, and, with respect to each Tranche A or Tranche B Lender, as applicable, the Commitment of each such Lender hereunder in the amount set forth opposite its name on Annex A-l or Annex A-2 hereto or as may subsequently be set forth in the Register from time to time, and as the same may be reduced from time to time pursuant to this Agreement.

“Commitment Fee” shall have the meaning set forth in Section 2.20.

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“Commitment Letter” shall mean that certain Commitment Letter dated September 21, 2001 among the Administrative Agent, JPMorgan and the Borrowers.

“Commitment Percentage” shall mean at any time, with respect to each Lender, the percentage obtained by dividing its Tranche A Commitment or its Tranche B Commitment, as applicable, at such time by the Total Tranche A Commitment or Total Tranche B Commitment, as applicable, at such time.

“Confidential Information Memorandum” shall mean the Confidential Information Memorandum dated July 2003 and furnished to certain Lenders.

“Consolidated EBITDA” shall mean, for any period, all as determined in accordance with GAAP, the consolidated net income (or net loss) of the Borrowers and their Subsidiaries for such period, plus (a) the sum of (i) depreciation expense, (ii) amortization expense, (iii) other non-cash charges, (iv) provision for LIFO adjustment for inventory valuation, (v) net total Federal, state and local income tax expense, (vi) gross interest expense for such period less gross interest income for such period, (vii) extraordinary losses, (viii) any non-recurring charge or restructuring charge which in accordance with GAAP is excluded from operating income, (ix) the cumulative effect of any change in accounting principles, and “Chapter 11 and U.K. Administration expenses” (or “administrative costs reflecting Chapter 11 and U.K. Administration expenses”) as shown on the Borrowers’ consolidated statement of income for such period and (x) costs under employee retention programs approved by the Bankruptcy Court (after notice and a hearing) less (b) extraordinary gains minus (c) the credit, if any, attributable to Minority Interests plus or minus (d) the amount of cash received or expended in such period in respect of any amount which, under clause (viii) above, was taken into account in determining Consolidated EBITDA for such or any prior period.

“Consummation Date” shall mean the date of the substantial consummation (as defined in Section 1101 of the Bankruptcy Code and which for purposes of this Agreement shall be no later than the effective date) of a Reorganization Plan of the Borrowers that is confirmed pursuant to an order of the Bankruptcy Court in the Cases.

“Contra Reserve” shall mean, at any date, a reserve determined in the Administrative Agent’s sole discretion, based upon the estimated amount of Accounts wherein the Account Debtor (i) is a creditor of a Borrower, (ii) has, may assert, has asserted or is reasonably expected to assert a right of set-off against a Borrower or (iii) has disputed or is reasonably expected to dispute its liability (whether by chargeback or otherwise) or made, may make or is reasonably expected to make any claim with respect to the Account or any other Account of a Borrower which has not been resolved, in each case, without duplication, to the extent of the amount owed by such Borrower to the Account Debtor, the amount of such actual or asserted right of set-off, or the amount of such dispute or claim, as the case may be.

“Converted Term Loans” shall have the meaning set forth in Section 2.1(b).

“Critical Trade Vendors” shall mean those vendors that provide materials or goods that are either actually or practically available only from such vendor, as described in more detail in the Motion of the Debtors For Entry of an Order Authorizing, but not Requiring,

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Payment of Certain Critical Prepetition Trade Vendor Claims, filed with the Bankruptcy Court on October 1, 2001.

“Dilution Factors” shall mean, without duplication, with respect to any period, the aggregate amount of all deductions, credit memos, returns, adjustments, allowances, bad debt write-offs and other non-cash credits which are recorded to reduce accounts receivable in a manner consistent with current and historical accounting practices of the Borrowers.

“Dilution Ratio” shall mean, at any date, the amount (expressed as a percentage) equal to (a) the aggregate amount of the applicable Dilution Factors for the twelve (12) most recently ended fiscal months divided by (b) total gross sales for the twelve (12) most recently ended fiscal months or such other amount as may be determined by the Administrative Agent in its reasonable discretion in the event the Borrowers are unable to calculate dilution effectively in the manner contemplated.

“Dilution Reserve” shall mean, at any date, the applicable Dilution Ratio multiplied by the Eligible Accounts Receivable on such date.

“Dollars” and “$” shall mean lawful money of the United States of America.

“Domestic EBITDA” shall mean, for any period, all as determined in accordance with GAAP, the consolidated net income (or net loss) of the Parent and its Domestic Subsidiaries only (expressly excluding the income and expenses of all Foreign Subsidiaries of the Borrowers) for such period plus (a) the sum of (i) depreciation expense, (ii) amortization expense, (iii) other non-cash charges, (iv) provisions for LIFO adjustment for inventory valuation, (v) net total Federal, state and local income tax expense, (vi) gross interest expense for such period less gross interest income for such period, (vii) extraordinary losses, (viii) any non-recurring charge or restructuring charge which in accordance with GAAP is excluded from operating income, (ix) the cumulative effect of any change in accounting principles, and “Chapter 11 and U.K. Administration expenses” (or “administrative costs reflecting Chapter 11 and U.K. Administration expenses”) as shown on the Borrowers’ consolidated statement of income for such period and (x) costs under employee retention programs approved by the Bankruptcy Court (after notice and a hearing) less (b) extraordinary gains minus (c) the credit, if any, attributable to Minority Interest in Domestic Subsidiaries plus or minus (d) the amount of cash received or expended in such period in respect of any amount which, under clause (viii) above, was taken into account in determining Domestic EBITDA for such or any prior period.

“Domestic Subsidiary” shall mean any Subsidiary incorporated, organized or formed under the laws of any jurisdiction of the United States.

“Eligible Accounts Receivable” means, at the time of any determination thereof, each Account that satisfies the following criteria at the time of creation and continues to meet the same at the time of such determination: such Account (i) has been invoiced to, and represents the bona fide amounts due to the Borrowers from, the purchaser of goods or services, in each case originated in the ordinary course of business of the Borrowers and (ii) in each case is subject to the Borrowers’ corporate accounts receivable credit and collection policies, procedures and practices and (iii) is not ineligible for inclusion in the calculation of the Borrowing Base

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pursuant to any of clauses (a) through (r) below or otherwise deemed by the Administrative Agent in good faith to be ineligible for inclusion in the calculation of the Borrowing Base as described below. Eligible Accounts Receivable shall exclude the Contra Reserve, the Rebate Reserve and Non-Core Accounts Receivable. Without limiting the foregoing, to qualify as Eligible Accounts Receivable, an Account shall indicate no person other than a Borrower as payee or remittance party. In determining the amount to be so included, the face amount of an Account shall be reduced by, without duplication, to the extent not reflected in such face amount, (i) the amount of all accrued and actual discounts, claims, credits or credits pending, promotional program allowances, price adjustments, finance charges or other allowances (including any amount that the Borrowers, as applicable, may be obligated to rebate to a customer pursuant to the terms of any agreement or understanding (written or oral)), (ii) the aggregate amount of all limits and deductions provided for in this definition and elsewhere in this Agreement and (iii) the aggregate amount of all cash received in respect of such Account but not yet applied by the Borrowers to reduce the amount of such Account. Unless otherwise approved from time to time in writing by the Administrative Agent (subject to the limitations and requirements set forth in Section 10.10(a)), no Account shall be an Eligible Account Receivable if, without duplication:

(a) the relevant Borrower does not have sole lawful and absolute title to such Account; or

(b) except for Accounts subject to the Extended Terms Reserve, (i) it is unpaid more than ninety (90) days from the original date of invoice or sixty (60) days from the original due date or (ii) it has been written off the books of the Borrowers or has been otherwise designated on such books as uncollectible; or

(c) more than 50% in face amount of all Accounts of the same Account Debtor are ineligible pursuant to clause (b) above; or

(d) the Account Debtor is insolvent or the subject of any bankruptcy case or insolvency proceeding of any kind or is of uncertain credit quality, as determined by the Administrative Agent in its sole discretion; or

(e) the Account is not payable in Dollars or Canadian Dollars or the Account Debtor is either not organized under the laws of the United States of America or Canada, any State or Province thereof, or the District of Columbia or is located outside or has its principal place of business or substantially all of its assets outside the United States or Canada, except to the extent the Account is supported by an irrevocable letter of credit satisfactory to the Administrative Agent (as to form, substance and issuer) and assigned to and directly drawable by the Administrative Agent; or

(f) the Account Debtor is the United States of America or any department, agency or instrumentality thereof, unless the relevant Borrower duly assigns its rights to payment of such Account to the Administrative Agent pursuant to the Assignment of Claims Act of 1940, as amended, which assignment and related documents and filings shall be in form, and substance satisfactory to the Administrative Agent; or

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(g) the Account is supported by a security deposit (to the extent received from the applicable Account Debtor), progress payment, retainage or other similar advance made by or for the benefit of the applicable Account Debtor, in each case to the extent thereof; or

(h) (i) it is not subject to a valid and perfected first priority Lien in favor of the Administrative Agent for the benefit of the Secured Parties, subject to no other Liens other than Liens (if any) permitted by the Loan Documents or (ii) it does not otherwise conform in all material respects to the representations and warranties contained in the Loan Documents relating to Accounts; or

(i) such Account was invoiced (i) in advance of goods or services provided, or (ii) twice, or (iii) the associated income has not been earned; or

(j) such Account is classified as a note receivable by the Borrowers in accordance with the Borrowers’ current and historical practices; or

(k) the sale to the Account Debtor is on a bill-and-hold, guaranteed sale, sale-and-return, ship-and-return, sale on approval or consignment or other similar basis or made pursuant to any other written agreement providing for repurchase or return of any merchandise which has been claimed to be defective or otherwise unsatisfactory; or

(l) the Account represents a progress-billing or otherwise does not represent a completed sale; or

(m) the Account Debtor is an Affiliate of the Borrowers; or

(n) such Account was not paid in full, and the Borrower created a new receivable for the unpaid portion of the Account, without the agreement of the customer, and other Accounts constituting chargebacks, debit memos and other adjustments for unauthorized deductions; or

(o) the Account is due and payable more than one hundred eighty (180) days from the original date of invoice;

(p) the Account is created on cash on delivery terms;

(q) the Account does not comply in all material respects with the requirements of all applicable laws and regulations, whether Federal, state or local; or

(r) as to all or any part of such Account, a check, promissory note, draft, trade acceptance of other instrument for the payment of money has been received, presented for payment and returned uncollected for any reason.

Notwithstanding the foregoing, all Accounts of any single Account Debtor and its Affiliates which, in the aggregate exceed (i) 20% in respect of Account Debtors whose securities are rated Investment Grade by any of Moody’s or S&P or (ii) 5% in respect of all other Account Debtors, of the total amount of all Eligible Accounts Receivable at the time of any determination shall be deemed not to be Eligible Accounts Receivable to the extent of such excess. In

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determining the aggregate amount of Accounts from the same Account Debtor that are unpaid more than ninety (90) days from the date of invoice or more than sixty (60) days from the due date pursuant to clause (b) above, there shall be excluded the amount of any net credit balances relating to Accounts with invoice dates more than ninety (90) days prior to the date of determination or more than sixty (60) days from the due date. Furthermore, no Account shall be an Eligible Account Receivable if it is for goods that have been sold under a purchase order or pursuant to the terms of a contract or other agreement or understanding (written or oral) that indicates that any Person other than a Borrower has or has had or has purported to have or have had an ownership interest in such goods.

“Eligible AM Finished Goods” shall mean, on any date, Eligible Inventory composed of AM Finished Goods on such date as shown on the Borrowers’ perpetual inventory records in accordance with their current and historical accounting practices, minus Inventory Reserves.

“Eligible Assignee” shall mean (i) a commercial bank having total assets in excess of $1,000,000,000; (ii) a finance company, insurance company or other financial institution or fund, in each case acceptable to the Administrative Agent, which in the ordinary course of business extends credit of the type contemplated herein and has total assets in excess of $200,000,000 and whose becoming an assignee would not constitute a prohibited transaction under Section 4975 of ERISA; (iii) an Approved Fund; (iv) a Lender Affiliate; and (v) any other financial institution satisfactory to the Borrowers and the Administrative Agent, provided, however, that the Borrowers’ consent shall not be required if an Event of Default shall have occurred and be continuing.

“Eligible Inventory” shall mean, on any date, the Inventory Value of the Borrowers on such date deemed by the Administrative Agent in good faith to be eligible for inclusion in the calculation of the Borrowing Base. Without limiting the foregoing, to qualify as “Eligible Inventory”, no Person other than the Borrowers shall have any direct or indirect ownership interest or title to such Inventory. Eligible Inventory shall exclude remanufactured parts and Inventory referred to as cores inventory. Unless otherwise from time to time approved in writing by the Administrative Agent (subject to the limitations and requirements set forth in Section 10.10(a)), no Inventory shall be deemed Eligible Inventory if (and without duplication):

(a) it is not owned solely by the Borrowers or the Borrowers do not have sole and good, valid and unencumbered title thereto; or

(b) it is not located in the United States; or

(c) it is not located on property owned or leased by the Borrowers or in a contract warehouse specified on a schedule attached to the Security and Pledge Agreement and segregated or otherwise separately identifiable from goods of all others, if any, stored on the premises: or

(d) it is not subject to a valid and perfected first priority Lien in favor of the Administrative Agent, except, with respect to Inventory stored at sites described in clause (c)

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above, for Liens for unpaid rent or normal and customary warehousing charges, in each case, not yet paid, to the extent of such unpaid rent or charges; or

(e) it is goods returned or rejected due to quality issues by the Borrowers’ customers or goods in transit to third parties (other than to warehouse sites described in clause (c) above); or

(f) it is not in good condition, does not meet all material standards imposed by any Governmental Authority having regulatory authority over it, is defective, is seconds or thirds or stale, or is obsolete or slow moving or unmerchantable, or does not otherwise conform to the representations and warranties contained in the Loan Documents; or

(g) it is located at any operating facility that the Borrowers plan to close, or at any operating facility that is closed, within thirty (30) days from the date of determination of the most recent Borrowing Base; or

(h) it is comprised of film, pallets, and/or other shipping materials or supplies, repair parts, fuel, cartons used in production or other containers, and any other such material not considered used for sale by the Administrative Agent from time to time, in the Administrative Agent’s sole discretion; or

(i) the Borrowers classify such item as a sample item on their perpetual inventory records, or the Borrowers use such item for display; or

(j) it is a discontinued product or component thereof; or

(k) any portion of the Inventory Value thereof is attributable to intercompany profit among the Borrowers or their Affiliates; or

(l) any Inventory that is damaged or marked for return to vendor;

(m) any Inventory that is Work-In-Process; or

(n) it is consigned but still accounted for in the Borrowers’ perpetual inventory records.

“Eligible OE Finished Goods” shall mean, on any date, Eligible Inventory composed of OE Finished Goods on such date as shown on the Borrowers’ perpetual inventory records in accordance with their current and historical accounting practices, minus Inventory Reserves

“Eligible Raw Materials” shall mean, on any date, Eligible Inventory composed of Raw Materials to be used in the production of finished goods inventory for sale, as determined by the Administrative Agent in its sole discretion, on such date as shown on the Borrowers’ perpetual inventory records in accordance with current and historical accounting practices, minus Inventory Reserves.

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“Environmental Lien” shall mean a Lien in favor of any Governmental Authority for (i) any liability under federal or state environmental laws or regulations, or (ii) damages arising from or costs incurred by such Governmental Authority in response to a release or threatened release of a hazardous or toxic waste, substance or constituent, or other substance into the environment.

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder.

“ERISA Affiliate” shall mean any trade or business (whether or not incorporated) which is a member of a group of which any of the Borrowers is a member and which is under common control within the meaning of Section 414(b) or (c) of the Code and the regulations promulgated and rulings issued thereunder.

“Eurocurrency Liabilities” shall have the meaning assigned thereto in Regulation D issued by the Board, as in effect from time to time.

“Eurodollar Borrowing” shall mean a Borrowing comprised of Eurodollar Loans.

“Eurodollar Loan” shall mean any Loan bearing interest at a rate determined by reference to the Adjusted LIBOR Rate in accordance with the provisions of Section 2.

“Event of Default” shall have the meaning given such term in Section 7.

“Existing Credit Agreement” shall have the meaning assigned thereto in the Introductory Statement.

“Existing Letters of Credit” shall mean the letters of credit listed on Schedule 1.1.

“Existing Term Loans” shall mean Term Loans outstanding under the Existing Credit Agreement that shall not have been repaid on or prior to the Restatement Effectiveness Date.

“Extended Terms Amount” shall mean, on any date, for each Extended Terms Customer. Accounts which are otherwise Eligible Accounts Receivable, arising as a result of the sale of goods with payment terms in excess of ninety (90) days and not greater than one hundred eighty (180) days.

“Extended Terms Customer” shall mean, on any date, Account Debtors which (i) have terms of sales greater than ninety (90) days, but not greater than one hundred eighty (180) days, and (ii) which are not rated Investment Grade.

“Extended Terms Reserve” shall mean, on any date, 25% of the Extended Terms Amount.

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“Fees” shall collectively mean the Commitment Fees, Letter of Credit Fees and other fees referred to in Sections 2.19, 2.20 and 2.21.

“Filing Date” shall mean October 1, 2001.

“Final Order” shall mean the Final Order (I) Authorizing Debtors to Obtain Post-Petition Financing Pursuant to 11 U.S.C. §§105, 361, 362, 363, 364(c)(1), 364(c)(2), 364(c)(3) and 364(d), (II) Authorizing use of Cash Collateral Pursuant to 11 U.S.C. §363 and Granting Adequate Protection to the Holders of the Existing Obligations Referred to Below entered by the Bankruptcy Court on November 21, 2001, a copy of which Final Order is attached hereto as Exhibit A-1.

“Financial Officer” shall mean the Chief Financial Officer, Controller, Treasurer or Assistant Treasurer of a Borrower.

“Finished Goods” shall mean goods to be sold by the Borrowers in the ordinary course of business.

“Foreign Subsidiary” shall mean a Subsidiary which is incorporated or organized under the laws of a jurisdiction outside of the United States.

“Fronting Bank” shall mean JPMCB, or such other commercial bank as may agree with JPMCB to act in such capacity for the Tranche A Lenders.

“GAAP” shall mean accounting principles generally accepted in the United States and applied in accordance with Section 1.2.

“Governmental Authority” shall mean any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality or any court, in each case whether of the United States or foreign.

“Guaranteed Obligations” shall have the meaning set forth in Section 9.1(a).

“Indebtedness” shall mean, at any time and with respect to any Person, (i) all indebtedness of such Person for borrowed money, (ii) all indebtedness of such Person for the deferred purchase price of property or services (other than property, including inventory, and services purchased, and expense accruals and deferred compensation items arising, in the ordinary course of business), (iii) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments (other than performance, surety and appeal bonds arising in the ordinary course of business), (iv) all indebtedness of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (v) all obligations of such Person under leases which have been or should be, in accordance with GAAP, recorded as capital leases, to the extent required to be so recorded, (vi) all reimbursement, payment or similar obligations of such Person, contingent or otherwise, under acceptance, letter of credit or similar facilities and all obligations of such Person in respect of (x) currency swap agreements, currency future or option contracts and other similar agreements designed to hedge against fluctuations in

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foreign currency exchange rates and (y) interest rate swap, cap or collar agreements and interest rate future or option contracts and other similar agreements designed to hedge against fluctuations in interest rates; (vii) all indebtedness referred to in clauses (i) through (vi) above guaranteed directly or indirectly by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement (A) to pay or purchase such indebtedness or to advance or supply funds for the payment or purchase of such indebtedness, (B) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such indebtedness or to assure the holder of such indebtedness against loss in respect of such indebtedness, (C) to supply funds to or in any other manner invest in the debtor (including any agreement to pay for property or services irrespective of whether such property is received or such services are rendered) or (D) otherwise to assure a creditor against loss in respect of such indebtedness, and (viii) all indebtedness referred to in clauses (i) through (vii) above secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such indebtedness.

“Indemnified Party” shall have the meaning given such term in Section 10.6.

“Indentures” shall mean, collectively, (i) the Indenture, dated as of August 12, 1994, between Parent and U.S. Bank Trust National Association (as successor to Continental Bank), as trustee, together with the First Supplemental Indenture thereto, dated as of July 8, 1998, the Second Supplemental Indenture thereto, dated as of October 9, 1998, and the Third Supplemental Indenture thereto, dated as of December 29, 2000, (ii) the Indenture, dated as of June 29, 1998, between Parent and The Bank of New York, as trustee, together with the First Supplemental Indenture thereto, dated as of June 30, 1998, the Second Supplemental Indenture thereto, dated as of July 21, 1998, the Third Supplemental Indenture thereto, dated as of October 9, 1998, and the Fourth Supplemental Indenture thereto, dated as of December 29, 2000, and (iii) the Indenture, dated as of January 20, 1999, among Parent, the guarantors and The Bank of New York, as trustee, together with the First Supplemental Indenture thereto, dated as of December 29, 2000. each as subsequently amended in accordance with the terms hereof and thereof.

“Insufficiency” shall mean, with respect to any Plan, the amount, if any, of its unfunded benefit liabilities within the meaning of Section 4001(a)(18) of ERISA.

“Intercompany Indebtedness” shall mean any claim of an Affiliate of Parent against any other Affiliate of Parent, any claim of Parent against any of its Affiliates, and any claim of any Affiliate of Parent against Parent.

“Intercompany Loans” shall mean Intercompany Indebtedness for borrowed money.

“Interest Payment Date” shall mean (i) as to any Eurodollar Loan, the last day of the applicable Interest Period, provided that with respect to Interest Periods exceeding three months, interest shall be payable on the three-month anniversary of the first day of the Interest Period and on the last day of the Interest Period, and (ii) as to all ABR Loans, the last calendar

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day of each month and the date on which any ABR Loans are refinanced with Eurodollar Loans pursuant to Section 2.12.

“Interest Period” shall mean, as to any Borrowing of Eurodollar Loans, the period commencing on the date of such Borrowing (including as a result of a refinancing of ABR Loans) or on the last day of the preceding Interest Period applicable to such Borrowing and ending on the numerically corresponding day (or if there is no corresponding day, the last day) in the calendar month that is one, three or six months thereafter, as the Borrowers may elect in the related notice delivered pursuant to Section 2.6(b) or 2.12; provided, however, that (i) if any Interest Period would end on a day which shall not be a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day, and (ii) no Interest Period shall end later than the Termination Date.

“Inventory” shall mean all Raw Materials, Work-in-Process, and Finished Goods held by the Borrowers in the normal course of business.

“Inventory Reserves” means the following, each as determined by the Administrative Agent from time to time:

(a) a reserve for shrink, or discrepancies that arise pertaining to inventory quantities on hand between the Borrowers perpetual accounting system, and physical counts of the Inventory, but not less than 2% of the Eligible Inventory; or

(b) a reserve for slow move, obsolete or excess Inventory; or

(c) a reserve for favorable standard cost variances; or

(d) a reserve for amounts owing to landlords or warehousemen for Inventory stored at leased facilities or public warehouses which are not the subject of an access agreement acceptable to the Administrative Agent, in the amount of (i) to the extent Borrowers’ are able to determine the Borrowers’ average rental expense for such facility, three (3) times the Borrower’s average monthly rental expense for such facility plus (ii) in all other events, the Inventory Value of the Inventory stored at such leased facilities or public warehouses; or

(e) a reserve for Inventory located at contractors’ or vendors’ facilities in the amount of the Inventory Value of such Inventory; or

(f) any other reserve as deemed appropriate by the Administrative Agent in its sole discretion, from time to time; or

(g) a reserve for vendor rebates.

“Inventory Value” shall mean a dollar amount equal to the lesser of (i) the actual cost of Inventory determined on a basis consistent with GAAP and with the Borrowers’ current and historical accounting practice or (ii) the market value of such Inventory.

“Investments” shall have the meaning given such term in Section 6.10.

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“Investment Grade” shall mean either (i) at least Baa3 by Moody’s (or the then equivalent) or (ii) at least BBB- by S&P (or the then equivalent).

“JPMCB” shall have the meaning set forth in the Introduction.

“JPMorgan” shall have the meaning set forth in the Introduction.

“Lenders” shall have the meaning set forth in the Introduction.

“Lender Affiliate” shall mean, (a) with respect to any Lender, (i) an Affiliate of such Lender or (ii) any entity (whether a corporation, partnership, trust or otherwise) that is engaged in making, purchasing, holding or otherwise investing in loans and similar extensions of credit in the ordinary course of its business and is administered or managed by a Lender or an Affiliate of such Lender and (b) with respect to any Lender that is a fund which invests in loans and similar extensions of credit, any other fund that invests in loans and similar extensions of credit and is managed by the same investment advisor as such Lender or by an Affiliate of such investment advisor.

“Letter of Credit” shall mean any irrevocable letter of credit issued under Tranche A pursuant to Section 2.3, which letter of credit shall be (i) a standby or import documentary letter of credit, (ii) issued for purposes that are consistent with the ordinary course of business of the Borrowers or for such other purposes as are reasonably acceptable to the Administrative Agent, (iii) denominated in Dollars and (iv) otherwise in such form as may be reasonably approved from time to time by the Administrative Agent and the applicable Fronting Bank.

“Letter of Credit Account” shall mean the account established by the Borrowers under the sole and exclusive control of the Administrative Agent maintained at the office of the Administrative Agent at 270 Park Avenue, New York, New York 10017 designated as the “Federal-Mogul Corporation Letter of Credit Account” that shall be used solely for the purposes set forth in Sections 2.3(a) and 2.13.

“Letter of Credit Fees” shall mean the fees payable in respect of Letters of Credit pursuant to Section 2.21.

“Letter of Credit Outstandings” shall mean, at any time, the sum of (i) the aggregate undrawn stated amount of all Letters of Credit then outstanding plus (ii) all amounts theretofore drawn under Letters of Credit and not then reimbursed.

“Lien” shall mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind whatsoever (including any conditional sale or other title retention agreement or any lease in the nature thereof).

“Loan” and “Loans” shall mean, as applicable, the Revolving Loans and the Term Loans.

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“Loan Documents” shall mean this Agreement, the Letters of Credit, the Security and Pledge Agreement and any other instrument or agreement executed and delivered in connection herewith.

“Maturity Date” shall mean February 6, 2005.

“Minority Interests” shall mean any shares of stock of any class of a Subsidiary of the Borrowers (other than directors’ qualifying shares if required by law) that are not owned by Borrowers or one of their Subsidiaries; Minority Interest shall be valued in accordance with GAAP.

“Minority Lenders” shall have the meaning given such term in Section 10.10(b).

“Moody’s” shall mean Moody’s Investors Service, Inc. or any successor to the rating agency business thereof.

“Multiemployer Plan” shall mean a “multiemployer plan” as defined in Section 4001(a)(3) of ERISA to which any Borrower or any ERISA Affiliate is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions.

“Multiple Employer Plan” shall mean a Single Employer Plan, which (i) is maintained for employees of a Borrower or an ERISA Affiliate and at least one Person other than such Borrower and its ERISA Affiliates or (ii) was so maintained and in respect of which a Borrower or an ERISA Affiliate could have liability under Section 4064 or 4069 of ERISA in the event such Plan has been or were to be terminated.

“Net Orderly Liquidation Rate” means, at any time with respect to any domestic Inventory, the quotient (expressed as a percentage) of (i) the Net Orderly Liquidation Value of such Inventory divided by (ii) the gross inventory cost of such Inventory, determined on the basis of the then most recently conducted inventory appraisal performed by an independent inventory appraisal firm satisfactory to the Administrative Agent.

“Net Orderly Liquidation Value” means, at any time, with respect to any domestic Inventory, the net liquidation value of such Inventory as then most recently determined, based on the then most recently conducted inventory appraisal performed by an independent inventory appraisal firm satisfactory to the Administrative Agent.

“Net Proceeds” shall mean, in respect of any sale of assets, the proceeds of such sale after the payment of or reservation for expenses that are directly related to the sale, including, but not limited to, related severance costs, taxes payable, brokerage commissions, professional expenses, other similar costs that are directly related to the sale and the amount secured by valid and perfected Liens, if any, that are senior to the Liens on such assets held by the Administrative Agent on behalf of the Lenders.

“New Subsidiary” shall have the meaning given such term in Section 6.10(xv).

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“Non-Core Accounts Receivable” shall mean, at the time of any determination, without duplication, (i) receivables arising from transactions that are not in the ordinary course of business, including equipment and equipment parts sales, (ii) Accounts arising from transactions other than sales to customers who are not Affiliates of any of the Borrowers of automobile, truck, aviation, farm or construction vehicle parts manufactured by the Borrowers, on usual and customary terms, in a manner consistent with historical sales practices, (iii) non-trade receivables and (iv) miscellaneous and sundry receivables.

“Non-Debtor Foreign Subsidiary” shall mean the Foreign Subsidiaries of the Borrowers other than the U.K. Subsidiaries, as set forth on Schedule 3.5.

“Obligations” shall mean (a) the due and punctual payment of principal of and interest on the Loans and the reimbursement of all amounts drawn under Letters of Credit (whether such Letters of Credit are issued for the account of the Borrowers of the Non-Debtor Foreign Subsidiaries and including, without limitation, the Guaranteed Obligations), and (b) the due and punctual payment of the Fees and all other present and future, fixed or contingent, monetary obligations of the Borrowers to the Lenders and the Administrative Agent under the Loan Documents.

“OE Finished Goods” shall mean Finished Goods, manufactured by Borrowers pursuant to an order by an Account Debtor, for use in such Account Debtor’s (original equipment) manufacturing processes, as determined by the Administrative Agent in its sole discretion.

“Orders” shall mean the Final Order and the Amendment Order of the Bankruptcy Court.

“Organizational Documents” shall mean (i) with respect to any corporation, its certificate or articles of incorporation, as amended, and its by-laws, as amended, (ii) with respect to any limited partnership, its certificate of limited partnership or formation, as amended, and its partnership agreement, as amended, (iii) with respect to any general partnership, its partnership agreement, as amended, (iv) with respect to any limited liability company, its certificate of formation or articles of organization, as amended, and its operating agreement, as amended, and (v) with respect to any unlimited liability company, its certificate of formation, as amended, and its memorandum and articles of association, as amended. In the event any term or condition of this Agreement or any other Loan Document requires any Organizational Document to be certified by a secretary of state of similar governmental official, the reference to any such “Organizational Document” shall only be to a document of a type customarily certified by such governmental official.

“Other Taxes” shall have the meaning given such term in Section 2.18.

“Parent” shall mean have the meaning set forth in the Introduction.

“PBGC” shall mean the Pension Benefit Guaranty Corporation, or any successor agency or entity performing substantially the same functions.

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“Pension Plan” shall mean a defined benefit pension or retirement plan which meets and is subject to the requirements of Section 401(a) of the Code.

“Permitted Investments” shall mean:

(a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within twelve months from the date of acquisition thereof;

(b) without limiting the provisions of paragraph (d) below, investments in commercial paper maturing within six months from the date of acquisition thereof and having, at such date of acquisition, a rating of at least “A-2” or the equivalent thereof from Standard & Poor’s Rating Group or of at least “P-2” or the equivalent thereof from Moody’s Investors Service, Inc.;

(c) investments in certificates of deposit, banker’s acceptances and time deposits (including Eurodollar time deposits) maturing within six months from the date of acquisition thereof issued or guaranteed by or placed with (i) any domestic office of the Administrative Agent or the bank with whom the Borrowers maintain their cash management system, provided, that if such bank is not a Lender hereunder, such bank shall have entered into an agreement with the Administrative Agent pursuant to which such bank shall have waived all rights of setoff and confirmed that such bank does not have, nor shall it claim, a security interest therein or (ii) any domestic office of any other commercial bank of recognized standing organized under the laws of the United States of America or any State thereof that has a combined capital and surplus and undivided profits of not less than $250,000,000 and is the principal banking Subsidiary of a bank holding company having a long-term unsecured debt rating of at least “A-2” or the equivalent thereof from Standard & Poor’s Rating Group or at least “P-2” or the equivalent thereof from Moody’s Investors Service, Inc.;

(d) investments in commercial paper maturing within six months from the date of acquisition thereof and issued by (i) the holding company of the Administrative Agent or (ii) the holding company of any other commercial bank of recognized standing organized under the laws of the United States of America or any State thereof that has (A) a combined capital and surplus in excess of $250,000,000 and (B) commercial paper rated at least “A-2” or the equivalent thereof from Standard & Poor’s Rating Group or of at least “P-2” or the equivalent thereof from Moody’s Investors Service, Inc.;

(e) investments in repurchase obligations with a term of not more than seven (7) days for underlying securities of the types described in clause (a) above entered into with any office of a bank or trust company meeting the qualifications specified in clause (c) above;

(f) investments in money market funds substantially all the assets of which are comprised of securities of the types described in clauses (a) through (e) above;

(g) to the extent owned on the Filing Date, investments in the capital stock of any direct or indirect Subsidiary of the Borrowers as disclosed in Schedule 3.5; and

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(h) to the extent owned on the Filing Date, investments in joint ventures as disclosed in Schedule 6.10;

(i) additional investments in joint ventures disclosed in Schedule 6.10 during each fiscal year listed below in an aggregate amount not to exceed the amount specified opposite such fiscal year; provided that each such additional investment shall, for purposes of this Agreement, constitute a Capital Expenditure and shall be subject to the limitations on Capital Expenditures set forth in Section 6.4; and

Fiscal Year Ending	Maximum Additional Investment in Joint Ventures
	(Millions)
12/31/2003	$20.0
12/31/2004	$12.0

(j) subject to the limitations of Section 6.4, a Capital Expenditure in the form of an equity investment in either a new-formed Domestic Subsidiary organized as a limited liability company and wholly-owned by Federal-Mogul World Wide, Inc., which would register to do business in Japan as a U.S. branch, or, directly or indirectly, in an existing Non-Debtor Foreign Subsidiary organized in Japan, not to exceed $13,000,000 in the aggregate, in connection with the establishment of a technical center in Yokohama, Japan.

“Permitted Liens” shall mean (i) Liens in favor of the Administrative Agent on behalf of the Lenders; (ii) Liens imposed by law (other than Environmental Liens and any Lien imposed under ERISA) for taxes, assessments or charges of any Governmental Authority for claims not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with GAAP; (iii) Liens of landlords and Liens of statutory carriers, warehousemen, mechanics, materialmen and other Liens (other than Environmental Liens and any Lien imposed under ERISA) in existence on the Filing Date or thereafter imposed by law and created in the ordinary course of business; (iv) Liens (other than any Lien imposed under ERISA) incurred or deposits made (including, without limitation, surety bonds and appeal bonds) in connection with workers’ compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, leases, contracts (other than for the repayment of Indebtedness), statutory obligations and other similar obligations incurred in the ordinary course of business; (v) easements (including, without limitation, reciprocal easement agreements and utility agreements), rights-of-way, covenants, consents, reservations, encroachments, variations and zoning and other restrictions, charges or encumbrances (whether or not recorded) and interest of ground lessors, which do not interfere with the ordinary conduct of the business of any Borrower, and which do not detract from the value of the property to which they attach or materially impair the use thereof to any Borrower; (vi) purchase money Liens (including Capitalized Leases) upon or in any property acquired or held in the ordinary course of business to secure the purchase price of such property or to secure Indebtedness permitted by Section 6.3(iii) solely for the purpose of financing the acquisition of such property; (vii) Liens set forth on Schedule 3.6; (viii) Liens on the assets of Non-Debtor Foreign Subsidiaries (excluding the U.K. Subsidiaries) granted to secure Intercompany Loans from the Borrowers permitted by

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Sections 6.10(iv) and (v); (ix) Liens on the assets of the U.K. Subsidiaries granted to secure Intercompany Loans from the Borrowers permitted by Section 6.10(vi); (x) Liens consisting of deposits with derivatives traders as may be required pursuant to the terms of the International Swap Dealers Association Master Agreement(s) executed in the ordinary course of business in connection with the Borrowers’ foreign exchange, commodities and interest hedging programs in an aggregate amount not to exceed at any time $15,000,000; (xi) Liens junior to the senior liens contemplated hereby that are granted by the Final Order or the Amendment Order as adequate protection to the Primed Parties, provided that the Final Order and the Amendment Order provide that the holders of such junior liens shall not be permitted to take any action to enforce their rights with respect to such junior liens as long as any amounts are outstanding under the Agreement or the Lenders have any Commitment thereunder, and (xii) Liens created in connection with extensions, renewals or replacements, including replacement Liens granted by the Bankruptcy Court, of any Lien referred to in clauses (i) through (x) above, provided that the principal amount of the obligation secured thereby is not increased and that any such extension, renewal or replacement is limited to the property originally encumbered thereby.

“Person” shall mean any natural person, corporation, division of a corporation, partnership, trust, joint venture, association, company, estate, unincorporated organization or government or any agency or political subdivision thereof.

“Plan” shall mean a Single Employer Plan or a Multiemployer Plan.

“PP&E Component” shall mean, at the time of any determination, an amount equal to the lesser of (i) 80% of the liquidation value in place of certain machinery and equipment owned by the Borrowers, all as determined in the Administrative Agent’s sole discretion from time to time, (ii) $125,000,000, or (iii) 20% of the Borrowing Base inclusive of the PP&E Component.

“Prepetition Agreements” shall mean the Prepetition Credit Agreement, the Surety Bonds and agreements relating to other obligations or indebtedness of the Borrowers in an aggregate amount in excess of $20,000,000.

“Prepetition Credit Agreement” shall mean that certain Fourth Amended and Restated Credit Agreement dated as of December 29, 2000, as amended, among Parent, each Foreign Subsidiary Borrower (as defined therein), the banks and other financial institutions from time to time parties thereto, and JPMCB, as lead arranger, book manager and administrative agent.

“Prepetition Payment” shall mean a payment (by way of adequate protection or otherwise) of principal or interest or otherwise on account of any prepetition Indebtedness or trade payables or other prepetition claims against the Borrowers, including, without limitation, reclamation claims, materialmen’s liens and prepetition claims of Critical Trade Vendors.

“Prepetition Securitization Facilities” shall mean, collectively, (i) the Eighth Amended and Restated Receivable Interest Purchase Agreement, dated as of June 13, 2001, among Federal-Mogul Funding Corporation, a Michigan corporation, as the seller, the Parent, as the servicer, Blue Ridge Asset Funding Corporation and Falcon Asset Securitization

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Corporation, as purchasers, the financial institutions from time to time party thereto, as investors, Bank One. NA, as the administrative agent and as agent for Falcon Asset Securitization Corporation, and Wachovia Bank, N.A., as agent for Blue Ridge Asset Funding Corporation; (ii) the Seventh Amended and Restated Receivables Sale and Contribution Agreement dated as of June 13, 2001, between Federal-Mogul Funding Corporation, a Michigan corporation, as the purchaser, and the Parent, as the seller; (iii) the Fourth Amended and Restated Receivables Purchase Agreement dated as of June 13, 2001, among the Parent, as purchaser, and certain of its affiliates, each as a seller; and (iv) all other documents entered into in connection with any of the foregoing, as each of the foregoing are amended, restated, supplemented, renewed, refinanced or otherwise modified from time to time.

“Primed Liens” shall have the meaning set forth in Section 2.23.

“Quarterly Adjustment Date” shall have the meaning set forth in Section 6.5(b).

“Raw Materials” shall mean any raw materials or Supplies used or consumed in the manufacture, packing or shipping of goods to be sold by the Borrowers in the ordinary course of business.

“Rebate Reserve” shall mean, at any time of determination, an amount owing or payable to Account Debtors pursuant to incentive marketing programs or similar programs, as determined by the Administrative Agent in its sole discretion from time to time.

“Register” shall have the meaning set forth in Section 10.3(d).

“Reorganization Plan” shall mean a plan of reorganization in any of the Cases.

“Replacement Lender” shall have the meaning given such term in Section 2.29.

“Required Lenders” shall mean, at any time, Lenders holding in excess of 50% of the Total Commitment.

“Restatement Effectiveness Date” shall have the meaning given such term in Section 10.19.

“Revolving Loans” shall have the meaning given such term in Section 2.1.

“S&P” shall mean Standard & Poor’s Rating Services, a division of The McGraw-Hill Companies, Inc., or any successor to the rating agency business thereof.

“Security and Pledge Agreement” shall have the meaning given such term in Section 4.1(c).

“Single Employer Plan” shall mean a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (i) is maintained for employees of a Borrower or an ERISA Affiliate or (ii) was so maintained and in respect of which a Borrower could have liability under Section 4069 of ERISA in the event such Plan has been or were to be terminated.

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“Statutory Reserves” shall mean on any date the percentage (expressed as a decimal) established by the Board and any other banking authority which is (i) for purposes of the definition of Base CD Rate, the then stated maximum rate of all reserves (including, but not limited to, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City, for new three month negotiable nonpersonal time deposits in dollars of $100,000 or more or (ii) for purposes of the definition of Adjusted LIBOR Rate, the then stated maximum rate for all reserves (including but not limited to any emergency, supplemental or other marginal reserve requirements) applicable to any member bank of the Federal Reserve System in respect of Eurocurrency Liabilities (or any successor category of liabilities under Regulation D issued by the Board, as in effect from time to time). Such reserve percentages shall include, without limitation, those imposed pursuant to said Regulation. The Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in such percentage.

“Stock Liens” shall mean the perfected liens on the stock of certain Subsidiaries of the Parent in favor of (x) the trustees for the holders of Indebtedness of the Parent under the Indentures, and (y) the holders of obligations under the Prepetition Credit Agreement and the Surety Bonds.

“Subsidiary” shall mean, with respect to any Person (herein referred to as the “parent”), any corporation, association or other business entity (whether now existing or hereafter organized) of which at least a majority of the securities or other ownership interests having ordinary voting power for the election of directors is, at the time as of which any determination is being made, owned or controlled by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent.

“Super-majority Lenders” shall have the meaning given such term in Section 10.10(b).

“Superpriority Claim” shall mean a claim against any Borrower in any of the Cases which is a superpriority administrative expense claim having priority over any or all administrative expenses of the kind specified in Sections 503(b) or 507(b) of the Bankruptcy Code.

“Supplies” shall mean film, packaging and/or shipping supplies or materials not otherwise directly used in the production of Finished Goods.

“Surety Bonds” shall mean, collectively, the Contracts of Indemnity, each dated December 29, 2000, entered into by the Parent and certain of its Subsidiaries with (i) Travelers Casualty & Surety Company of America with respect to Performance Bond Number 103529126 and Performance Bond Number 103529229REL, each in the original maximum amount of $50,000,000, (ii) SAFECO Insurance Company of America with respect to Performance Bond Number 6066092 in the original maximum amount of $75,000,000, and (iii) National Fire Insurance Company of Hartford and Continental Casualty Company with respect to Performance Bond Number 929182983 in the original maximum amount of $75,000,000.

“Taxes” shall have the meaning given such term in Section 2.18.

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“Termination Date” shall mean the earliest to occur of (i) the Maturity Date, (ii) the Consummation Date and (iii) the acceleration of the Loans and the termination of the Total Commitment in accordance with the terms hereof.

“Termination Event” shall mean (i) a “reportable event”, as such term is described in Section 4043 of ERISA and the regulations issued thereunder (other than a “reportable event” not subject to the provision for 30-day notice to the PBGC under Section 4043 of ERISA or such regulations) or an event described in Section 4068 of ERISA excluding events described in Section 4043(c)(9) of ERISA or 29 CFR §§ 2615.21 or 2615.23, or (ii) the withdrawal of any Borrower or any ERISA Affiliate from a Multiple Employer Plan during a plan year in which it was a “substantial employer”, as such term is defined in Section 4001(c) of ERISA, or the incurrence of liability by any Borrower or any ERISA Affiliate under Section 4064 of ERISA upon the termination of a Multiple Employer Plan, or (iii) providing notice of intent to terminate a Plan pursuant to Section 4041(c) of ERISA or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, or (iv) the institution of proceedings to terminate a Plan by the PBGC under Section 4042 of ERISA, or (v) any other event or condition (other than the commencement of the Cases and the failure to have made any contribution accrued as of the Filing Date but not paid) which would reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the imposition of any liability under Title IV of ERISA (other than for the payment of premiums to the PBGC).

“Term Loans” shall have the meaning given such term in Section 2.1.

“Third Party Dividend” shall have the meaning set forth in Section 6.8.

“Total Commitment” shall mean, at any time, the sum of the Commitments at such time.

“Total Tranche A Commitment” shall mean, at any time, the sum of the Tranche A Commitments at such time.

“Total Tranche B Commitment” shall mean, at any time, the sum of the Tranche B Commitments at such time.

“Total Usage” shall mean, at any time, the sum of the outstanding aggregate principal amount of the Revolving Loans and the Term Loans plus the aggregate Letter of Credit Outstandings.

“Tranche A Commitment” shall mean the Commitment of each Tranche A Lender hereunder to make Revolving Loans and to issue and/or participate in Letters of Credit in the amount set forth opposite its name on Annex A-1 hereto or as may subsequently be set forth in the Register from time to time, as the same may be reduced from time to time pursuant to the terms of this Agreement.

“Tranche A Lender” shall mean each Lender having a Tranche A Commitment.

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“Tranche B Commitment” shall mean the Commitment of each Tranche B Lender hereunder to make a Term Loan in the amount set forth opposite its name on Annex A-2 hereto or as may subsequently be set forth in the Register from time to time, as the same may be reduced from time to time pursuant to this Agreement.

“Tranche B Lender” shall mean each Lender having a Tranche B Commitment.

“Transferee” shall have the meaning given such term in Section 2.18.

“Type” when used in respect of any Loan or Borrowing shall refer to the Rate of interest by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. For purposes hereof, “Rate” shall mean the Adjusted LIBOR Rate and the Alternate Base Rate.

“U.K. Subsidiaries” shall mean those Subsidiaries of the Borrowers which are organized under the laws of any jurisdiction in the United Kingdom and which are the subject of administration petitions under the U.K. Insolvency Act of 1986 (collectively, and including upon the grant of such petitions, the “U.K. Administration”) and are debtors in cases pending under Chapter 11 of the Bankruptcy Code.

“U.K. Subsidiary Proceedings” shall mean the proceedings of the U.K. Subsidiaries under Chapter 11 of the Bankruptcy Code commenced on the Filing Date.

“Unused Total Commitment” shall mean, at any time, (i) the Total Commitment less (ii) the sum of (x) the aggregate outstanding principal amount of all Loans and (y) the aggregate Letter of Credit Outstandings.

“Unused Total Tranche A Commitment” shall mean, at any time, (i) the Total Tranche A Commitment less (ii) the sum of (x) the aggregate outstanding principal amount of all Revolving Loans made under Tranche A and (y) the aggregate Letter of Credit Outstandings under Tranche A.

“Withdrawal Liability” shall have the meaning given such term under Part I of Subtitle E of Title IV of ERISA.

“Work-in-Process” shall mean goods to be sold by the Borrowers in the ordinary course of business, which are currently in the process of being manufactured.

SECTION 1.2 Terms Generally. The definitions in Section 1.1 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. All references herein to Sections, Exhibits and Schedules shall be deemed references to Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided, however, that for purposes of determining compliance with any covenant set forth in Section 6, such terms shall be construed in accordance with GAAP as in effect on the date of this Agreement applied on a basis

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consistent with the application used in the Borrowers’ audited financial statements referred to in Section 3.4.

SECTION 2. AMOUNT AND TERMS OF CREDIT.

SECTION 2.1 Commitment of the Lenders.

(a) Each Tranche A Lender severally and not jointly with the other Tranche A Lenders agrees, upon the terms and subject to the conditions herein set forth, to make revolving credit loans (each a “Revolving Loan” and collectively, the “Revolving Loans”) to the Borrowers at any time and from time to time during the period commencing on the date hereof and ending on the Termination Date (or the earlier date of termination of the Total Tranche A Commitment) in an aggregate principal amount not to exceed, when added to such Tranche A Lender’s Tranche A Commitment Percentage of the then aggregate Letter of Credit Outstandings, the Tranche A Commitment of such Tranche A Lender, which Revolving Loans may be repaid and reborrowed in accordance with the provisions of this Agreement. At no time shall the sum of the then outstanding aggregate principal amount of the Revolving Loans plus the then aggregate Letter of Credit Outstandings exceed the Total Tranche A Commitment of $350,000,000, as the same may be reduced from time to time pursuant the terms of this Agreement.

(b) (i) Each Tranche B Lender severally and not jointly with the other Tranche B Lenders agrees, upon the terms and subject to the conditions herein set forth, to make (or, pursuant to clause (ii) below, elect to convert all or a portion of such Lender’s Existing Term Loans into) term loans (each a “Term Loan” and collectively, the “Term Loans”) to the Borrowers on the Restatement Effectiveness Date, in an aggregate principal amount not to exceed the Tranche B Commitment of such Tranche B Lender. At no time shall the sum of the then outstanding aggregate principal amount of the Term Loans exceed the Total Tranche B Commitment of $250,000,000.

(ii) In connection with the making of the Term Loans pursuant to clause (i) above, by delivering written notice to the Administrative Agent at least two (2) Business Days prior to the Restatement Effectiveness Date, any Lender of Existing Term Loans may elect to make all or any portion of such Lender’s Tranche B Commitment percentage of the Term Loans requested by the Borrowers to be made on the Restatement Effectiveness Date by converting all or a portion of the outstanding principal amount of the Existing Term Loans held by such Lender into Term Loans in a principal amount equal to the amount of Existing Term Loans so converted (each such Existing Term Loan to the extent it is to be converted a “Converted Term Loan”). On the Restatement Effectiveness Date, the Converted Term Loans shall be converted for all purposes of this Agreement into Term Loans, and the Administrative Agent shall record in the Register the aggregate amounts of Converted Term Loans converted into Term Loans. Any written notice to the Administrative Agent delivered by an applicable Lender pursuant to this Section 2.1(b) shall specify the amount of such Lender’s Tranche B Commitment and the principal amount of Existing Term Loans held by such Lender that are to be converted into Term Loans.

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(c) Each Borrowing shall be made by the Lenders pro rata in accordance with their respective Commitments; provided, however, that the failure of any Lender to make any Loan shall not in itself relieve the other Lenders of their obligations to lend.

(d) Notwithstanding anything to the contrary herein, the Administrative Agent shall have the right to determine a reallocation of the Commitments in Tranche A and Tranche B (and the sublimits therein), provided that such reallocation by the Administrative Agent shall not increase the amount of the Total Commitment.

SECTION 2.2 Borrowing Base. Notwithstanding any other provision of this Agreement to the contrary, the Total Usage shall not at any time exceed the lesser of (i) the Total Commitment and (ii) the Borrowing Base, and no Loan shall be made or Letter of Credit issued in violation of the foregoing.

SECTION 2.3 Letters of Credit.

(a) Upon the terms and subject to the conditions herein set forth, the Borrowers may request the Fronting Bank, at any time and from time to time after the date hereof and prior to the Termination Date, to issue, and, subject to the terms and conditions contained herein, the Fronting Bank shall issue, for the account of the Borrowers one or more Letters of Credit in support of obligations of the Borrowers or one or more Foreign Subsidiaries that are acceptable to the Administrative Agent, provided that no Letter of Credit shall be issued if after giving effect to such issuance (i) the aggregate Letter of Credit Outstandings would exceed $75,000,000, and (ii) the Total Usage would exceed the lesser of (x) the Total Commitment and (y) the Borrowing Base, and, provided further that no Letter of Credit shall be issued if the Fronting Bank shall have received notice from the Administrative Agent or the Required Lenders that the conditions to such issuance have not been met. On the Restatement Effectiveness Date, all Existing Letters of Credit shall be deemed to have been issued under this Agreement and shall for all purposes constitute “Letters of Credit” hereunder.

(b) No Letter of Credit shall expire later than the earlier of (i) one year from the issuance thereof, and (ii) five (5) days before the Maturity Date, provided that if the Termination Date shall occur prior to the expiration of any Letter of Credit, the Borrowers shall, at or prior to the Termination Date, except as the Administrative Agent may otherwise agree in writing, (i) cause all Letters of Credit which expire after the Termination Date to be returned to the Fronting Bank undrawn and marked “canceled” or (ii) if the Borrowers are unable to do so in whole or in part, either (x) provide a “back-to-back” letter of credit to one or more Fronting Banks in a form satisfactory to such Fronting Bank and the Administrative Agent (in their sole discretion), issued by a bank satisfactory to such Fronting Bank and the Administrative Agent (in their sole discretion), in an amount equal to the greater of (A) an amount, as determined by the Fronting Bank and the Administrative Agent, equal to the face amount of all outstanding Letters of Credit plus the sum of all projected contractual obligations to the Administrative Agent, the Fronting Bank and the Lenders of the Borrowers thereunder through the expiration date(s) of such Letters of Credit, and (B) 105% of the then undrawn stated amount of all outstanding Letters of Credit issued by the Fronting Bank and/or (y) deposit cash in the Letter of Credit Account in an amount which, together with any amounts then held in the Letter of Credit Account, is equal to the greater of (A) an amount, as determined by the Fronting Bank and the

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Administrative Agent, equal to the face amount of all outstanding Letters of Credit plus the sum of all projected contractual obligations to the Administrative Agent, the Fronting Bank and the Lenders of the Borrowers thereunder and (B) 105% of the then undrawn stated amount of all Letter of Credit Outstandings as collateral security for the Borrowers’ reimbursement obligations in connection therewith, such cash to be remitted to the Borrowers upon the expiration, cancellation or other termination or satisfaction of such reimbursement obligations.

(c) The Borrowers shall pay to each Fronting Bank, in addition to such other fees and charges as are specifically provided for in Section 2.21 hereof, such fees and charges in connection with the issuance and processing of the Letters of Credit issued by the Fronting Bank as are customarily imposed by the Fronting Bank from time to time in connection with letter of credit transactions.

(d) Drafts drawn under each Letter of Credit shall be reimbursed by the Borrowers in Dollars not later than the first Business Day following the date of draw and shall bear interest from the date of draw until the first Business Day following the date of draw at a rate per annum equal to the Alternate Base Rate plus 2.00% and thereafter until reimbursed in full at a rate per annum equal to the Alternate Base Rate plus 4.00% (computed on the basis of the actual number of days elapsed over a year of 360 days). The Borrowers shall effect such reimbursement (x) if such draw occurs prior to the Termination Date (or the earlier date of termination of the Total Tranche A Commitment), in cash or through a Borrowing of Revolving Loans without the satisfaction of the conditions precedent set forth in Section 4.2 or (y) if such draw occurs on or after the Termination Date (or the earlier date of termination of the Total Tranche A Commitment), in cash. Each Lender agrees to make the Loans described in clause (x) of the preceding sentence notwithstanding a failure to satisfy the applicable lending conditions thereto or the provisions of Sections 2.2 or 2.29.

(e) Immediately upon the issuance of any Letter of Credit by the Fronting Bank, the Fronting Bank shall be deemed to have sold to each Tranche A Lender other than the Fronting Bank and each such other Tranche A Lender shall be deemed unconditionally and irrevocably to have purchased from such Fronting Bank, without recourse or warranty, an undivided interest and participation, to the extent of such Tranche A Lender’s Commitment Percentage, in such Letter of Credit, each drawing thereunder and the obligations of the Borrowers under this Agreement with respect thereto. Upon any change in the Commitments pursuant to Section 10.3, it is hereby agreed that with respect to all Letter of Credit Outstandings, there shall be an automatic adjustment to the participations hereby created to reflect the new Commitment Percentages of the assigning and assignee Tranche A Lenders. Any action taken or omitted by the Fronting Bank under or in connection with a Letter of Credit, if taken or omitted in the absence of gross negligence or willful misconduct, shall not create for the Fronting Bank any resulting liability to any other Tranche A Lender.

(f) In the event that the Fronting Bank makes any payment under any Letter of Credit and the Borrowers shall not have reimbursed such amount in full to the Fronting Bank pursuant to this Section, the Fronting Bank shall promptly notify the Administrative Agent, which shall promptly notify each Tranche A Lender of such failure, and each Tranche A Lender shall promptly and unconditionally pay to the Administrative Agent for the account of the Fronting Bank the amount of such Tranche A Lender’s Commitment Percentage of such

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unreimbursed payment in Dollars and in same day funds. If the Fronting Bank so notifies the Administrative Agent, and the Administrative Agent so notifies the Tranche A Lenders prior to 11:00 a.m. (New York City time) on any Business Day, such Tranche A Lenders shall make available to the Fronting Bank such Tranche A Lender’s Commitment Percentage of the amount of such payment on such Business Day in same day funds. If and to the extent such Tranche A Lender shall not have so made its Commitment Percentage of the amount of such payment available to the Fronting Bank, such Tranche A Lender agrees to pay to the Fronting Bank, forthwith on demand such amount, together with interest thereon, for each day from such date until the date such amount is paid to the Administrative Agent for the account of the Fronting Bank at the Federal Funds Effective Rate. The failure of any Tranche A Lender to make available to the Fronting Bank its Commitment Percentage of any payment under any Letter of Credit shall not relieve any other Tranche A Lender of its obligation hereunder to make available to the Fronting Bank its Commitment Percentage of any payment under any Letter of Credit on the date required, as specified above, but no Tranche A Lender shall be responsible for the failure of any other Tranche A Lender to make available to the Fronting Bank such other Tranche A Lender’s Commitment Percentage of any such payment. Whenever the Fronting Bank receives a payment of a reimbursement obligation as to which it has received any payments from the Tranche A Lenders pursuant to this paragraph, the Fronting Bank shall pay to each Tranche A Lender which has paid its Commitment Percentage thereof, in Dollars and in same day funds, an amount equal to such Tranche A Lender’s Commitment Percentage thereof.

(g) Letters of Credit may be issued for the account of Non-Debtor Foreign Subsidiaries (subject to availability under Tranche A and the $75,000,000 sub-limit). The face amount of Letters of Credit issued for the account of Non-Debtor Foreign Subsidiaries shall constitute a use of the amount of Intercompany Loans permitted to be made by the Borrowers pursuant to Sections 6.10(iv) and (v).

(h) Letters of Credit may be issued for the account of the U.K. Subsidiaries (subject to availability under Tranche A and the $75,000,000 sub-limit). The face amount of Letters of Credit issued for the account of U.K. Subsidiaries shall constitute a use of the amount of Intercompany Loans permitted to be made by the Borrowers pursuant to Section 6.10(vi).

SECTION 2.4 Issuance. Whenever the Borrowers desire the Fronting Bank to issue a Letter of Credit, they shall give to the Fronting Bank and the Administrative Agent at least two (2) Business Days’ prior written (including telegraphic, telex, facsimile or cable communication) notice (or such shorter period as may be agreed upon by the Administrative Agent, the Borrowers and the Fronting Bank) specifying the date on which the proposed Letter of Credit is to be issued (which shall be a Business Day), the stated amount of the Letter of Credit so requested, the expiration date of such Letter of Credit and the name and address of the beneficiary thereof.

SECTION 2.5 Nature of Letter of Credit Obligations Absolute. The obligations of the Borrowers to reimburse the Lenders for drawings made under any Letter of Credit shall be joint and several, unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation: (i) any lack of validity or enforceability of any Letter of Credit; (ii) the existence of any claim, setoff, defense or other right which any Borrower may have at any time against a beneficiary of any Letter of Credit or

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against any of the Lenders, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction; (iii) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) payment by the Fronting Bank of any Letter of Credit against presentation of a demand, draft or certificate or other document which does not comply with the terms of such Letter of Credit; (v) any other circumstance or happening whatsoever, which is similar to any of the foregoing; or (vi) the fact that any Event of Default shall have occurred and be continuing.

SECTION 2.6 Making of Loans.

(a) Except as contemplated by Section 2.11, Loans shall be either ABR Loans or Eurodollar Loans as the Borrowers may request subject to and in accordance with this Section, provided that all Loans made pursuant to the same Borrowing shall, unless otherwise specifically provided herein, be Loans of the same Type. Each Lender may fulfill its Commitment with respect to any Eurodollar Loan or ABR Loan by causing any lending office of such Lender to make such Loan; provided that any such use of a lending office shall not affect the obligation of the Borrowers to repay such Loan in accordance with the terms of this Agreement. Each Lender shall, subject to its overall policy considerations, use reasonable efforts (but shall not be obligated) to select a lending office which will not result in the payment of increased costs by the Borrowers pursuant to Sections 2.15 or 2.18. Subject to the other provisions of this Section and the provisions of Section 2.12, Borrowings of Loans of more than one Type may be incurred at the same time, provided that no more than fifteen (15) Borrowings of Eurodollar Loans may be outstanding at any time.

(b) The Borrowers shall give the Administrative Agent prior written, telex, facsimile or telephonic (confirmed promptly in writing) notice of each Borrowing of Revolving Loans hereunder of at least three (3) Business Days for Eurodollar Loans and one (1) Business Day for ABR Loans; such notice shall be irrevocable and shall specify the amount of the proposed Borrowing (which shall not be less than $5,000,000 or any integral multiple of $1,000,000 in excess thereof) and the date thereof (which shall be a Business Day) and shall contain disbursement instructions. Such notice, to be effective, must be received by the Administrative Agent not later than 12:00 noon, New York City time, on the third Business Day in the case of Eurodollar Loans and the first Business Day in the case of ABR Loans, preceding the date on which such Borrowing is to be made. Such notice shall specify whether the Borrowing then being requested is to be a Borrowing of ABR Loans or Eurodollar Loans. If no election is made as to the Type of Loan, such notice shall be deemed a request for Borrowing of ABR Loans. The Administrative Agent shall promptly notify each Tranche A Lender of its proportionate share of such Borrowing, the date of such Borrowing, the Type of Borrowing or Loans being requested and the Interest Period or Interest Periods applicable thereto, as appropriate. On the Borrowing date specified in such notice, each Tranche A Lender shall make its share of the Borrowing available at the office of the Administrative Agent at 270 Park Avenue, New York, New York 10017, no later than 12:00 noon, New York City time, in immediately available funds. Upon receipt of the funds made available by the Tranche A Lenders to fund any Borrowing hereunder, the Administrative Agent shall disburse such funds in the manner specified in the notice of Borrowing delivered by the Borrowers.

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(c) The Borrowers shall give the Administrative Agent prior notice of the making of the Term Loans of at least three (3) Business Days if the Term Loans or a portion thereof are to be made as Eurodollar Loans and one (1) Business Day if the Term Loans are to be made as ABR Loans; such notice shall be irrevocable and shall specify the amount of the proposed Borrowing that is to be made as a Eurodollar Loan (which shall not be less than $5,000,000 or any integral multiple of $1,000,000 in excess thereof) and the date thereof (which shall be a Business Day) and shall contain disbursement instructions. Such notice, to be effective, must be received by the Administrative Agent not later than 12:00 noon, New York City time, on the third Business Day in the case of Eurodollar Loans and the first Business Day in the case of ABR Loans, preceding the date on which such Borrowing is to be made. Such notice shall specify whether the Borrowing then being requested is to be a Borrowing of ABR Loans or Eurodollar Loans. If no election is made as to the Type of Loan, such notice shall be deemed a request for Borrowing of ABR Loans. The Administrative Agent shall promptly notify each Tranche B Lender of its proportionate share of such Borrowing, the date of such Borrowing, the Type of Borrowing or Loans being requested and the Interest Period or Interest Periods applicable thereto, as appropriate. On the Borrowing date specified in such notice, each Tranche B Lender shall make its share of the Borrowing available at the office of the Administrative Agent at 270 Park Avenue, New York, New York 10017, no later than 12:00 noon, New York City time, in immediately available funds, except to the extent such Lender elects to convert the Existing Term Loans into Term Loans pursuant to Section 2.1(b). Upon receipt of the funds made available by the Tranche B Lenders to fund any Borrowing hereunder, the Administrative Agent shall disburse such funds in the manner specified in the notice of Borrowing delivered by the Borrowers.

SECTION 2.7 Repayment of Loans and Unreimbursed Draws; Evidence of Debt.

(a) The Borrowers hereby jointly and severally unconditionally promise to pay to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Loan and each unreimbursed draw under all Letters of Credit as set forth herein.

(b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the Indebtedness of the Borrowers to such Lender resulting from each Loan made by such Lender or participation in each Letter of Credit in which such Lender is participating, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder.

(c) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrowers to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Lenders and each Lender’s share thereof.

(d) The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein; provided that the failure of any Lender or the Administrative Agent to maintain

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such accounts or any error therein shall not in any manner affect the obligation of the Borrowers to repay the Loans in accordance with the terms of this Agreement.

(e) Any Lender may request that Loans made by it be evidenced by a promissory note. In such event, the Borrowers shall execute and deliver to such Lender a promissory note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) in a form furnished by the Administrative Agent. Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 10.3) be represented by one or more promissory notes in such form payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns).

SECTION 2.8 Interest on Loans.

(a) Subject to the provisions of Section 2.9, each ABR Loan shall bear interest (computed, for ABR Loans wherein the Alternate Base Rate is determined by reference to the Base CD Rate or the Federal Funds Effective Rate, on the basis of the actual number of days elapsed over a year of 360 days, and otherwise computed on the basis of the actual number of days elapsed over a year of 365 days) at a rate per annum equal to the Alternate Base Rate plus 2.00%.

(b) Subject to the provisions of Section 2.9, each Eurodollar Loan shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal, during each Interest Period applicable thereto, to the Adjusted LIBOR Rate for such Interest Period in effect for such Borrowing plus 3.00%.

(c) Accrued interest on all Loans shall be payable in arrears on each Interest Payment Date applicable thereto, at maturity (whether by acceleration or otherwise), after such maturity on demand and (with respect to Eurodollar Loans) upon any repayment or prepayment thereof (on the amount prepaid).

SECTION 2.9 Default Interest. If any Borrower shall default in the payment of the principal of or interest on any Loan or in the payment of any other amount becoming due hereunder (including, without limitation, the reimbursement pursuant to Section 2.3(d) of any draft drawn under a Letter of Credit), whether at stated maturity, by acceleration or otherwise, such Borrower shall on demand from time to time pay interest, to the extent permitted by law, on such defaulted amount up to (but not including) the date of actual payment (after as well as before judgment) at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to 2% above the then applicable rate.

SECTION 2.10 Optional Termination or Reduction of Commitment. Upon at least two (2) Business Days’ prior written notice to the Administrative Agent, the Borrowers may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Unused Total Tranche A Commitment. Each such reduction or termination, as applicable, of the Unused Total Tranche A Commitment shall be in the principal amount of $5,000,000 or any integral multiple of $1,000,000 in excess thereof. Any reduction or termination, as applicable, pursuant to this Section shall be deemed to be a reduction or termination, as applicable, in the

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amount of such reduction or termination of the Total Tranche A Commitment and shall be applied pro rata to reduce the applicable Tranche A Commitment of each Tranche A Lender. Simultaneously with each reduction or termination, as applicable, of the Unused Total Tranche A Commitment, the Borrowers shall pay to the Administrative Agent for the account of each Tranche A Lender the Commitment Fee accrued on the amount of the Tranche A Commitment of such Lender so terminated or reduced through the date thereof.

SECTION 2.11 Alternate Rate of Interest. In the event, and on each occasion, that on the day two (2) Business Days prior to the commencement of any Interest Period for a Eurodollar Loan, the Administrative Agent shall have determined (which determination shall be conclusive and binding upon the Borrowers absent manifest error) that reasonable means do not exist for ascertaining the applicable Adjusted LIBOR Rate, the Administrative Agent shall, as soon as practicable thereafter, give written or telegraphic notice of such determination to the Borrowers and the Lenders, and any request by the Borrowers for a Borrowing of Eurodollar Loans (including pursuant to a refinancing with Eurodollar Loans) pursuant to Section 2.6 or 2.12 shall be deemed a request for a Borrowing of ABR Loans. After such notice shall have been given and until the circumstances giving rise to such notice no longer exist, each request for a Borrowing of Eurodollar Loans shall be deemed to be a request for a Borrowing of ABR Loans.

SECTION 2.12 Refinancing of Loans. The Borrowers shall have the right, at any time, on three (3) Business Days’ prior irrevocable notice to the Administrative Agent (which notice, to be effective, must be received by the Administrative Agent not later than 1:00 p.m., New York City time, on the third Business Day preceding the date of any refinancing), (x) to refinance (without the satisfaction of the conditions set forth in Section 4.2 as a condition to such refinancing) any outstanding Borrowing or Borrowings of Loans of one Type (or a portion thereof) with a Borrowing of Loans of the other Type or (y) to continue an outstanding Borrowing of Eurodollar Loans for an additional Interest Period, subject to the following:

(a) as a condition to the refinancing of ABR Loans with Eurodollar Loans and to the continuation of Eurodollar Loans for an additional Interest Period, no Event of Default shall have occurred and be continuing at the time of such refinancing;

(b) if less than a full Borrowing of Loans shall be refinanced, such refinancing shall be made pro rata among the Lenders in accordance with the respective principal amounts of the Loans comprising such Borrowing held by the Lenders immediately prior to such refinancing;

(c) the aggregate principal amount of Loans being refinanced shall be at least $5,000,000 or any integral multiple of $1,000,000 in excess thereof, provided that no partial refinancing of a Borrowing of Eurodollar Loans shall result in the Eurodollar Loans remaining outstanding pursuant to such Borrowing being less than $5,000,000 in aggregate principal amount;

(d) each Lender shall effect each refinancing by applying the proceeds of its new Eurodollar Loan or ABR Loan, as the case may be, to its Loan being refinanced;

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(e) the Interest Period with respect to a Borrowing of Eurodollar Loans effected by a refinancing or in respect to the Borrowing of Eurodollar Loans being continued as Eurodollar Loans shall commence on the date of refinancing or the expiration of the current Interest Period applicable to such continuing Borrowing, as the case may be;

(f) a Borrowing of Eurodollar Loans may be refinanced only on the last day of an Interest Period applicable thereto; and

(g) each request for a refinancing with a Borrowing of Eurodollar Loans which fails to state an applicable Interest Period shall be deemed to be a request for an Interest Period of one month.

In the event that the Borrowers shall not give notice to refinance any Borrowing of Eurodollar Loans, or to continue such Borrowing as Eurodollar Loans, or shall not be entitled to refinance or continue such Borrowing as Eurodollar Loans, in each case as provided above, such Borrowing shall automatically be refinanced with a Borrowing of ABR Loans at the expiration of the then-current Interest Period. The Administrative Agent shall, after it receives notice from the Borrowers, promptly give each Lender notice of any refinancing, in whole or part, of any Loan made by such Lender.

SECTION 2.13 Mandatory Prepayment; Commitment Termination.

(a) If at any time the aggregate principal amount of the outstanding Loans plus the aggregate Letter of Credit Outstandings exceeds the lesser of (x) the Total Commitment or (y) the Borrowing Base, the Borrowers will within one (1) Business Day (i) prepay the Loans in an amount necessary to cause the aggregate principal amount of the outstanding Loans plus the aggregate Letter of Credit Outstandings, including unreimbursed draws, to be equal to or less than the lesser of (x) the Total Commitment and (y) the Borrowing Base, and (ii) if, after giving effect to the prepayment in full of the Loans, the aggregate Letter of Credit Outstandings in excess of the amount of cash held in the Letter of Credit Account exceeds the lesser of (x) the Total Commitment or (y) the Borrowing Base, deposit into the Letter of Credit Account an amount equal to 105% of the amount by which the aggregate Letter of Credit Outstandings in excess of the amount of cash held in the Letter of Credit Account so exceeds the lesser of (x) the Total Commitment or (y) the Borrowing Base.

(b) The Borrowers shall, upon the receipt of the Net Proceeds by any of the Borrowers from any Asset Sales by any Borrower, jointly and severally, apply such Net Proceeds as follows: first, to repay the then outstanding Loans; second, if an Event of Default or an event which upon notice or lapse of time or both would constitute an Event of Default shall have occurred and be continuing or if no Loans are then outstanding, deposit an amount in the Letter of Credit Account up to 105% of the then Letter of Credit Outstandings; and thereafter, such Net Proceeds may be retained by the Borrowers and invested in Permitted Investments or used for expenditures in the ordinary course of business (subject to compliance with the terms and conditions of this Agreement). Prepayments of the Loans pursuant to the foregoing shall be effected as follows: the Tranche A Commitments and Tranche B Commitments shall be reduced on a pro rata basis by an aggregate amount equal to the Net Proceeds of the subject Asset Sale; the Revolving Loans shall be prepaid in a proportionate amount equal to the percentage decrease

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in the Total Tranche A Commitments; and the Tranche B Loans shall be prepaid in an amount equal to the decrease in the Total Tranche B Commitments. Net Proceeds from any Asset Sales by a Non-Debtor Foreign Subsidiary, net of the amount of any repayment obligations of such Non-Debtor Foreign Subsidiary with respect to third party financing arrangements, shall (i) reduce, on a dollar for dollar basis, the amount of postpetition Intercompany Loans which may be made to the Non-Debtor Foreign Subsidiaries, provided, however, that in no event shall the permitted amount of postpetition Intercompany Loans to the Non-Debtor Foreign Subsidiaries be less than $100,000,000 (without regard to deductions in respect of third party financing arrangements made available to the Non-Debtor Foreign Subsidiaries pursuant to clause (iv) of Section 6.10), and (ii) reduce the Tranche A and Tranche B Commitments on a pro rata basis and the Borrowers shall prepay Revolving Loans in a proportionate amount equal to the percentage decrease in the Total Tranche A Commitments and shall prepay Term Loans in an amount equal to the decrease in the Total Tranche B Commitments. Net Proceeds from any Asset Sales by a U.K. Subsidiary, net of the amount of any repayment obligations of such U.K. Subsidiary with respect to third party financing arrangements, shall (i) reduce, on a dollar for dollar basis, the amount of postpetition Intercompany Loans which may be made to the U.K. Subsidiaries, and (ii) reduce the Tranche A and Tranche B Commitments on a pro rata basis and the Borrowers shall prepay Revolving Loans in a proportionate amount equal to the percentage decrease in the Total Tranche A Commitments and shall prepay Term Loans in an amount equal to the decrease in the Total Tranche B Commitments.

(c) Upon the Termination Date, the Total Commitment shall be terminated in full and the Borrowers shall pay the Loans in full and, if any Letter of Credit remains outstanding, comply with Section 2.3(b).

SECTION 2.14 Optional Prepayment of Loans; Reimbursement of Lenders.

(a) The Borrowers shall have the right at any time and from time to time to prepay any Loans without penalty (except for any breakage costs associated with Eurodollar Loans), in whole or in part, (x) with respect to Eurodollar Loans, upon at least three (3) Business Days’ prior written, telex, facsimile or telephonic (confirmed promptly in writing) notice to the Administrative Agent and (y) with respect to ABR Loans on the same Business Day if written, telex, facsimile or telephonic (confirmed promptly in writing) notice is received by the Administrative Agent prior to 1:00 p.m., New York City time, and thereafter upon at least one Business Day’s prior written, telex, facsimile or telephonic (confirmed promptly in writing) notice to the Administrative Agent; provided, however, that (i) each such partial prepayment shall be in integral multiples of $1,000,000, (ii) no prepayment of Eurodollar Loans shall be permitted pursuant to this Section 2.14(a) other than on the last day of an Interest Period applicable thereto unless such prepayment is accompanied by the payment of the amounts described in clause (i) of the first sentence of Section 2.14(b), and (iii) no partial prepayment of a Borrowing of Eurodollar Loans shall result in the aggregate principal amount of the Eurodollar Loans remaining outstanding pursuant to such Borrowing being less than $5,000,000. Each notice of prepayment shall specify the prepayment date, the principal amount of the Loans to be prepaid and in the case of Eurodollar Loans, the Borrowing or Borrowings pursuant to which made, shall be irrevocable and shall commit the Borrowers to prepay such Loan by the amount and on the date stated therein. The Administrative Agent shall, promptly after receiving notice from the Borrowers hereunder, notify each Lender of the principal amount of the Loans held by

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such Lender which are to be prepaid, the prepayment date and the manner of application of the prepayment.

(b) The Borrowers shall reimburse each Lender on demand for any loss incurred or to be incurred by it in the reemployment of the funds released (i) resulting from any prepayment (for any reason whatsoever, including, without limitation, refinancing with ABR Loans) of any Eurodollar Loan required or permitted under this Agreement, if such Loan is prepaid other than on the last day of the Interest Period for such Loan (including, without limitation, any such prepayment in connection with the syndication of the credit facility evidenced by this Agreement) or (ii) in the event that after the Borrowers deliver a notice of Borrowing under Section 2.6 in respect of Eurodollar Loans, such Loans are not made on the first day of the Interest Period specified in such notice of Borrowing for any reason other than a breach by such Lender of its obligations hereunder. Such loss shall be the amount as reasonably determined by such Lender as the excess, if any, of (A) the amount of interest which would have accrued to such Lender on the amount so paid or not borrowed at a rate of interest equal to the Adjusted LIBOR Rate for such Loan, for the period from the date of such payment or failure to borrow to the last day (x) in the case of a payment or refinancing with ABR Loans other than on the last day of the Interest Period for such Loan, of the then current Interest Period for such Loan, or (y) in the case of such failure to borrow, of the Interest Period for such Loan which would have commenced on the date of such failure to borrow, over (B) the amount of interest which would have accrued to such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the London interbank market. Each Lender shall deliver to the Borrowers from time to time one or more certificates setting forth the amount of such loss as determined by such Lender.

(c) In the event the Borrowers fail to prepay any Loan on the date specified in any prepayment notice delivered pursuant to Section 2.14(a), the Borrowers on demand by any Lender shall pay to the Administrative Agent for the account of such Lender any amounts required to compensate such Lender for any loss incurred by such Lender as a result of such failure to prepay, including, without limitation, any loss, cost or expenses incurred by reason of the acquisition of deposits or other funds by such Lender to fulfill deposit obligations incurred in anticipation of such prepayment, but without duplication of any amounts paid under Section 2.14(b). Each Lender shall deliver to the Borrowers from time to time one or more certificates setting forth the amount of such loss as determined by such Lender.

(d) Any partial prepayment of the Loans by the Borrowers pursuant to Sections 2.13 or 2.14 shall be applied as specified by the Borrowers or, in the absence of such specification, as determined by the Administrative Agent, provided that in the latter case no Eurodollar Loans shall be prepaid pursuant to Section 2.13 to the extent that such Loan has an Interest Period ending after the required date of prepayment unless and until all outstanding ABR Loans and Eurodollar Loans with Interest Periods ending on such date have been repaid in full.

(e) Once prepaid, Term Loans may not be reborrowed.

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SECTION 2.15 Reserve Requirements; Change in Circumstances.

(a) Notwithstanding any other provision herein, if after the date of this Agreement any change in applicable law or regulation or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) shall change the basis of taxation of payments to any Lender of the principal of or interest on any Eurodollar Loan made by such Lender or any fees or other amounts payable hereunder (other than changes in respect of Taxes, Other Taxes and taxes imposed on, or measured by, the net income or overall gross receipts or franchise taxes of such Lender by the jurisdiction in which such Lender has its principal office or in which the applicable lending office for such Eurodollar Loan is located or by any political subdivision or taxing authority therein, or by any other jurisdiction or by any political subdivision or taxing authority therein other than a jurisdiction in which such Lender would not be subject to tax but for the execution and performance of this Agreement), or shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of or credit extended by such Lender (except any such reserve requirement which is reflected in the Adjusted LIBOR Rate) or shall impose on such Lender or the London interbank market any other condition affecting this Agreement or the Eurodollar Loans made by such Lender, and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise) by an amount deemed by such Lender to be material, then the Borrowers will pay to such Lender in accordance with paragraph (c) below such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered.

(b) If any Lender shall have determined that the adoption or effectiveness after the date hereof of any law, rule, regulation or guideline regarding capital adequacy, or any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or any lending office of such Lender) or any Lender’s holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender’s capital or on the capital of such Lender’s holding company, if any, as a consequence of this Agreement, the Loans made by such Lender pursuant hereto, such Lender’s Commitment hereunder or the issuance of, or participation in, any Letter of Credit by such Lender to a level below that which such Lender or such Lender’s holding company could have achieved but for such adoption, change or compliance (taking into account Lender’s policies and the policies of such Lender’s holding company with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time the Borrowers shall pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender’s holding company for any such reduction suffered.

(c) A certificate of each Lender setting forth such amount or amounts as shall be necessary to compensate such Lender or its holding company as specified in paragraph (a) or (b) above, as the case may be, shall be delivered to the Borrowers and shall be conclusive absent manifest error. The Borrowers shall pay each Lender the amount shown as due on any such

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certificate delivered to it within ten (10) days after its receipt of the same. Any Lender receiving any such payment shall promptly make a refund thereof to the Borrowers if the law, regulation, guideline or change in circumstances giving rise to such payment is subsequently deemed or held to be invalid or inapplicable.

(d) Failure on the part of any Lender to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital with respect to any period shall not constitute a waiver of such Lender’s right to demand compensation with respect to such period or any other period. The protection of this Section shall be available to each Lender regardless of any possible contention of the invalidity or inapplicability of the law, rule, regulation, guideline or other change or condition which shall have occurred or been imposed.

SECTION 2.16 Change in Legality.

(a) Notwithstanding anything to the contrary contained elsewhere in this Agreement, if (x) any change after the date of this Agreement in any law or regulation or in the interpretation thereof by any Governmental Authority charged with the administration thereof shall make it unlawful for a Lender to make or maintain a Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to a Eurodollar Loan or (y) at any time any Lender determines that the making or continuance of any of its Eurodollar Loans has become impracticable as a result of a contingency occurring after the date hereof which adversely affects the London interbank market or the position of such Lender in such market, then, by written notice to the Borrowers, such Lender may (i) declare that Eurodollar Loans will not thereafter be made by such Lender hereunder, whereupon any request by the Borrowers for a Eurodollar Borrowing shall, as to such Lender only, be deemed a request for an ABR Loan unless such declaration shall be subsequently withdrawn; and (ii) require that all outstanding Eurodollar Loans made by it be converted to ABR Loans, in which event all such Eurodollar Loans shall be automatically converted to ABR Loans as of the effective date of such notice as provided in paragraph (b) below. In the event any Lender shall exercise its rights under clause (i) or (ii) of this paragraph (a), all payments and prepayments of principal which would otherwise have been applied to repay the Eurodollar Loans that would have been made by such Lender or the converted Eurodollar Loans of such Lender shall instead be applied to repay the ABR Loans made by such Lender in lieu of, or resulting from the conversion of, such Eurodollar Loans.

(b) For purposes of this Section 2.16, a notice to the Borrowers by any Lender pursuant to paragraph (a) above shall be effective, if lawful, and if any Eurodollar Loans shall then be outstanding, on the last day of the then-current Interest Period, otherwise, such notice shall be effective on the date of receipt by the Borrowers.

SECTION 2.17 Pro Rata Treatment, etc. All payments and repayments of principal and interest in respect of the Loans (except as provided in Sections 2.15 and 2.16) shall be made pro rata among the Lenders in accordance with the then outstanding principal amount of the Loans and/or participations in Letter of Credit Outstandings and all outstanding undrawn Letters of Credit (and the unreimbursed amount of drawn Letters of Credit) hereunder and all payments of Commitment Fees and Letter of Credit Fees (other than those payable to a Fronting Bank) shall be made pro rata among the Lenders in accordance with their Commitments. All payments

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by the Borrowers hereunder shall be (i) except as otherwise provided in Section 2.18, net of any tax applicable to the Borrowers and (ii) made in Dollars in immediately available funds, without defense, setoff or counterclaim and free of any restriction or condition, at the office of the Administrative Agent by 12:00 noon, New York City time, on the date on which such payment shall be due. Interest in respect of any Loan hereunder shall accrue from and including the date of such Loan to but excluding the date on which such Loan is paid in full or converted to a Loan of a different Type.

SECTION 2.18 Taxes.

(a) Except as otherwise provided in this Section 2.18, any and all payments by the Borrowers hereunder shall be made free and clear of and without deduction for any and all current or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding (i) taxes imposed on or measured by the net income, net profit or overall gross receipts of the Administrative Agent or any Lender (or any transferee or assignee thereof, including a participation holder (any such entity being called a “Transferee”)) and franchise taxes imposed on the Administrative Agent or any Lender (or Transferee) by the United States or any jurisdiction under the laws of which the Administrative Agent or any such Lender (or Transferee) is organized or in which the applicable lending office of any such Lender (or Transferee) or applicable office of the Administrative Agent, is located or any political subdivision thereof or by any other jurisdiction or by any political subdivision or taxing authority therein other than a jurisdiction in which the Administrative Agent or such Lender (or Transferee) would not be subject to tax but for the execution and performance of this Agreement and (ii) taxes, levies, imposts, deductions, charges or withholdings (“Amounts”) with respect to payments hereunder to a Lender (or Transferee) or the Administrative Agent in accordance with laws in effect on the later of the date of this Agreement and the date such Lender (or Transferee) or the Administrative Agent becomes a Lender (or Transferee or Administrative Agent, as the case may be) but not excluding, with respect to such Lender (or Transferee) or the Administrative Agent, any increase in such Amounts solely as a result of any change in such laws occurring after such later date or any Amounts that would not have been imposed but for actions (other than actions contemplated by this Agreement) taken by the Borrowers after such later date (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as “Taxes”). If the Borrowers shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to the Lenders (or any Transferee) or the Administrative Agent, (i) the sum payable shall be increased by the amount necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) such Lender (or Transferee) or the Administrative Agent (as the case may be) shall receive an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrowers shall make such deductions and (iii) the Borrowers shall pay the full amount deducted to the relevant taxing authority or other Governmental Authority in accordance with applicable law.

(b) In addition, the Borrowers agree to pay any current or future stamp or documentary taxes or any other excise or property taxes, charges, assessments or similar levies that arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Document (hereinafter referred to as “Other Taxes”).

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(c) The Borrowers will indemnify each Lender (or Transferee) and the Administrative Agent for the full amount of Taxes and Other Taxes paid by such Lender (or Transferee) or the Administrative Agent, as the case may be, and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted by the relevant taxing authority or other Governmental Authority. Such indemnification shall be made within thirty (30) days after the date any Lender (or Transferee) or the Administrative Agent, as the case may be, makes written demand therefor. If a Lender (or Transferee) or the Administrative Agent shall become aware that it is entitled to receive a refund in respect of Taxes or Other Taxes as to which it has been indemnified by the Borrowers pursuant to this Section, it shall promptly notify the Borrowers of the availability of such refund and shall, within thirty (30) days after receipt of a request by the Borrowers, apply for such refund at the Borrowers’ expense. If any Lender (or Transferee) or the Administrative Agent receives a refund in respect of any Taxes or Other Taxes as to which it has been indemnified by the Borrowers pursuant to this Section, it shall promptly notify the Borrowers of such refund and shall, within thirty (30) days after receipt of a request by the Borrowers (or promptly upon receipt, if the Borrowers have requested application for such refund pursuant hereto), repay such refund to the Borrowers (to the extent of amounts that have been paid by the Borrowers under this Section with respect to such refund plus interest that is received by the Lender (or Transferee) or the Administrative Agent as part of the refund), net of all out-of-pocket expenses of such Lender (or Transferee) or the Administrative Agent and without additional interest thereon; provided that the Borrowers, upon the request of such Lender (or Transferee) or the Administrative Agent, agree to return such refund (plus penalties, interest or other charges) to such Lender (or Transferee) or the Administrative Agent in the event such Lender (or Transferee) or the Administrative Agent is required to repay such refund. Nothing contained in this sub-Section (c) shall require any Lender (or Transferee) or the Administrative Agent to make available any of its tax returns (or any other information relating to its taxes that it deems to be confidential).

(d) Within thirty (30) days after the date of any payment of Taxes or Other Taxes withheld by the Borrowers in respect of any payment to any Lender (or Transferee) or the Administrative Agent, the Borrowers will furnish to the Administrative Agent, at its address referred to on the signature pages hereof, the original or a certified copy of a receipt evidencing payment thereof.

(e) Without prejudice to the survival of any other agreement contained herein, the agreements and obligations contained in this Section shall survive the payment in full of the principal of and interest on all Loans made hereunder.

(f) Each Lender (and Transferee) and the Administrative Agent shall, if not a United States Person (as such term is defined in Section 7701(a)(30) of the Code), on or prior to the Restatement Effective Date (in the case of each Lender listed on the signature pages hereof on the Restatement Effective Date) or on or prior to the date of the Assignment and Acceptance pursuant to which it becomes a Lender (in the case of each other Lender), deliver to the Borrowers and the Administrative Agent such certificates, documents and other evidence, as required by the Code or Treasury Regulations issued pursuant thereto, including two original copies of (A) Internal Revenue Service Form W-9 (unless such Lender (or Transferee) or the Administrative Agent is an “exempt recipient” as defined in Treasury Regulations Section

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1.6049-4(c) for which no withholding is required) and two original copies of (B) Internal Revenue Service Forms 1001, 4224, W-8BEN or W-8ECI and any other certificate or statement of exemption required by Treasury Regulation Section 1.1441-1, 1.1441-4 or 1.1441-6(c) or any subsequent version thereof or successors thereto, properly completed and duly executed by such Lender (or Transferee) or the Administrative Agent to establish that such payment is (i) not subject to United States Federal withholding tax under the Code because such payment is effectively connected with the conduct by such Lender (or Transferee) or the Administrative Agent of a trade or business in the United States or (ii) totally exempt from United States Federal withholding tax or subject to a reduced rate of such tax under a provision of an applicable tax treaty. Unless the Borrowers and the Administrative Agent have received forms or other documents satisfactory to them indicating that such payments hereunder are not subject to United States Federal withholding tax or are subject to such tax at a rate reduced by an applicable tax treaty, the Borrowers or the Administrative Agent shall withhold taxes from such payments at the applicable statutory rate.

(g) The Borrowers shall not be required to pay any additional amounts to any Lender (or Transferee) or the Administrative Agent in respect of United States Federal withholding tax pursuant to sub-Section (a) above if the obligation to pay such additional amounts would not have arisen but for a failure by such Lender (or Transferee) or the Administrative Agent to comply with the provisions of sub-Section (f) above.

(h) Any Lender (or Transferee) or the Administrative Agent claiming any additional amounts payable pursuant to this Section 2.18 shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document requested by the Borrowers or to change the jurisdiction of its applicable lending office if the making of such a filing or change would avoid the need for or reduce the amount of any such additional amounts that may thereafter accrue and would not, in the sole determination of such Lender (or Transferee) or the Administrative Agent, be otherwise materially disadvantageous to such Lender (or Transferee) or the Administrative Agent.

SECTION 2.19 Certain Fees. The Borrowers shall pay to the Administrative Agent, for the respective accounts of the Administrative Agent and the Lenders, (i) the fees set forth in that certain fee letter dated September 21, 2001 among the Administrative Agent, JPMorgan and the Borrowers at the times set forth therein and (ii) the fees set forth in that certain engagement and fee letter dated July 7, 2003 among JPMCB, JPMorgan and the Borrowers at the times set forth therein.

SECTION 2.20 Commitment Fee. The Borrowers shall pay to the Lenders a commitment fee (the “Commitment Fee”) for the period commencing on the Restatement Effectiveness Date to the Termination Date or the earlier date of termination of the Commitment calculated (on the basis of the actual number of days elapsed over a year of 360 days) at a rate equal to 0.50% on the average daily Unused Total Commitment during the preceding quarter. The issuance of Letters of Credit shall be treated as usage of the Commitment. Such Commitment Fee, to the extent then accrued, shall be payable (x) monthly, in arrears, on the last calendar day of each month, (y) on the Termination Date and (z) as provided in Section 2.10 hereof, upon any reduction or termination in whole or in part of the Total Commitment.

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SECTION 2.21 Letter of Credit Fees. The Borrowers shall pay with respect to each Letter of Credit (i) to the Administrative Agent on behalf of the Lenders a fee calculated (on the basis of the actual number of days elapsed over a year of 360 days) at a rate equal to 3.00% per annum on the undrawn stated amount thereof, and (ii) to the Fronting Bank such Fronting Bank’s customary fees for issuance, amendments and processing referred to in Section 2.3. In addition, the Borrowers agree to pay the Fronting Bank for its account a fronting fee in respect of each Letter of Credit issued by the Fronting Bank, for the period from and including the date of issuance of such Letter of Credit to and including the date of termination of such Letter of Credit, computed at the rate set forth in that certain fee letter dated September 21, 2001 among the Administrative Agent, JPMorgan and the Borrowers, and payable at times to be determined by the Fronting Bank, the Borrowers and the Administrative Agent. Accrued fees described in clause (i) of the first sentence of this paragraph in respect of each Letter of Credit shall be due and payable monthly in arrears on the last calendar day of each month and on the Termination Date, or such earlier date as the Total Commitment is terminated. Accrued fees described in clause (ii) of the first sentence of this paragraph in respect of each Letter of Credit shall be payable at times to be determined by the Fronting Bank, the Borrowers and the Administrative Agent.

SECTION 2.22 Nature of Fees. All Fees shall be paid on the dates due, in immediately available funds, to the Administrative Agent for the respective accounts of the Administrative Agent and the Lenders, as provided herein and in the letter described in Section 2.19. Once paid, none of the Fees shall be refundable under any circumstances.

SECTION 2.23 Priority and Liens.

(a) The Borrowers hereby covenant, represent and warrant that the Obligations of the Borrowers hereunder and under the Loan Documents and in respect of Indebtedness permitted by Section 6.3(v): (i) pursuant to Section 364(c)(1) of the Bankruptcy Code, shall at all times constitute an allowed Superpriority Claim; (ii) pursuant to Section 364(c)(2) of the Bankruptcy Code, shall at all times be secured by a perfected first priority Lien on all unencumbered property of the Borrowers and on all cash maintained in the Letter of Credit Account and any direct investments of the funds contained therein, provided that amounts in the Letter of Credit Account shall not be subject to the Carve-Out; (iii) pursuant to Section 364(c)(3) of the Bankruptcy Code, shall be secured by a perfected Lien upon all property of the Borrowers that is subject to valid and perfected Liens in existence on the Filing Date (including the perfected liens on the stock of certain Subsidiaries of the Parent (“Stock Liens”) in favor of (x) the trustee for the holders of Indebtedness of the Parent under the Indentures, and (y) the holders of obligations under the Prepetition Credit Agreement and the Surety Bonds) or that is subject to valid Liens in existence on the Filing Date that are perfected subsequent to the Filing Date as permitted by Section 546(b) of the Bankruptcy Code (other than certain property that is subject to the existing Liens that secure obligations under the Prepetition Agreements, which liens shall be primed by the liens to be granted to the Administrative Agent described in the following clause (iv); and in addition, (iv) pursuant to Section 364(d)(l) of the Bankruptcy Code, be secured by a perfected first priority, senior priming Lien on all of the property of the Borrowers (including, without limitation, inventory, receivables, rights under license agreements, property, plant and equipment and interests in leaseholds) that is subject to the existing liens (the “Primed Liens”, it being understood that the Stock Liens shall not be primed or constitute part of the

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Primed Liens) which secure (x) on a pari passu basis, the obligations of the Borrowers to the lenders party to the Prepetition Credit Agreement and the obligations of the Borrowers in connection with the Surety Bonds, and (y) other obligations or Indebtedness of the Borrowers pursuant to the other Prepetition Agreements, all of which Primed Liens shall be primed by and made subject and subordinate to the perfected first priority senior Liens to be granted to the Administrative Agent, which senior priming Liens in favor of the Administrative Agent shall also prime any Liens granted after the commencement of the Cases to provide adequate protection Liens in respect of any of the Primed Liens but shall not prime Liens, if any, to the extent such Liens secure obligations (other than obligations under the Prepetition Agreements) in an aggregate amount less than or equal to $20,000,000, subject in each case only to (x) in the event of the occurrence and during the continuance of an Event of Default or an event that would constitute an Event of Default with the giving of notice or lapse of time or both, the payment of allowed and unpaid professional fees and disbursements incurred by the Borrowers and any statutory committees appointed in the Cases in an aggregate amount not in excess of $5,000,000 and (y) the payment of fees pursuant to 28 U.S.C. § 1930 and to the Clerk of the Bankruptcy Court (collectively, the “Carve-Out”), provided that no portion of the Carve-Out shall be utilized for the payment of professional fees and disbursements incurred in connection with any challenge to the amount, extent, priority, validity, perfection or enforcement of the Indebtedness of the Borrowers owed with respect to the parties primed by the priming Liens or to the collateral securing such Indebtedness or any other action against such parties. Amounts in the Letter of Credit Account shall not be subject to the Carve-Out. By execution hereof, the Borrowers hereby consent to the priming Liens referenced in clause (iv) above. Amounts in the Letter of Credit Account shall not be subject to the Carve-Out. Notwithstanding the foregoing, so long as no Event of Default or event which with the giving of notice or lapse of time or both would constitute an Event of Default shall have occurred and be continuing, the Borrowers shall be permitted to pay compensation and reimbursement of expenses allowed and payable under 11 U.S.C. § 330 and 11 U.S.C. § 331, as the same may be due and payable, and any compensation and expenses previously paid, or accrued but unpaid, prior to the occurrence of such Event of Default shall not reduce the Carve-Out.

(b) To the extent a prepetition creditor has a lien on any prepetition intercompany unsecured claims between and among the Borrowers and no liens on any other assets of the Borrowers other than the stock of Restricted Subsidiaries (as defined in the Indentures), such liens shall not be primed, provided, however, that no payments may be made on account of such prepetition claims and the liens of the prepetition creditors shall not extend to the collateral securing the Indebtedness created by this Agreement.

(c) As to all real property the title to which is held by a Borrower or the possession of which is held by a Borrower pursuant to leasehold interest, the Borrowers hereby assign and convey as security, grant a security interest in, hypothecate, mortgage, pledge and set over unto the Administrative Agent on behalf of the Lenders all of the right, title and interest of the Borrowers in all of such owned real property and in all such leasehold interests, together in each case with all of the right, title and interest of the Borrowers in and to all buildings, improvements, and fixtures related thereto, any lease or sublease thereof, all general intangibles relating thereto and all proceeds thereof. The Borrowers acknowledge that, pursuant to the Final Order (as amended by the Amendment Order), the Liens in favor of the Administrative Agent on behalf of the Lenders in all of such real property and leasehold instruments of the Borrowers

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shall be perfected without the recordation of any instruments of mortgage or assignment. The Borrowers further agree that, upon the request of the Administrative Agent, in the exercise of its business judgment, the Borrowers shall enter into separate fee and leasehold mortgages in recordable form with respect to such properties on terms satisfactory to the Administrative Agent.

(d) To the extent any Borrower makes aggregate payments to the Lenders in excess of the aggregate amount of all Loans received by such Borrower from the Lenders after the commencement of the Cases, then such Borrower, after the payment in full of all obligations of the Borrowers in respect of the Commitment and the termination of the Commitment, shall be entitled to a claim under Section 364(c)(1) of the Bankruptcy Code against each other Borrower, in such amount as may be determined by the Bankruptcy Court taking into account the relative benefits received by each such person, and such claims shall be deemed to be subordinate and junior in all respects to the superpriority claims of the Lenders and the superpriority claims granted as adequate protection to the Primed Parties.

SECTION 2.24 Use of Cash Collateral. Notwithstanding anything to the contrary contained herein, the Borrowers shall not be permitted to request a Borrowing under Section 2.6 unless the Borrowers shall at that time have the use of all cash collateral subject to the Orders for the purposes described in Section 3.10.

SECTION 2.25 Right of Set-Off. Subject to the provisions of Section 7.1, upon the occurrence and during the continuance of any Event of Default, the Administrative Agent and each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law and without further order of or application to the Bankruptcy Court, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other Indebtedness at any time owing by the Administrative Agent and each such Lender to or for the credit or the account of any Borrower against any and all of the obligations of such Borrower now or hereafter existing under the Loan Documents, irrespective of whether or not such Lender shall have made any demand under any Loan Document and although such obligations may not have been accelerated. Each Lender and the Administrative Agent agrees promptly to notify the Borrowers after any such set-off and application made by such Lender or by the Administrative Agent, as the case may be, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender and the Administrative Agent under this Section are in addition to other rights and remedies which such Lender and the Administrative Agent may have upon the occurrence and during the continuance of any Event of Default.

SECTION 2.26 Security Interest in Letter of Credit Account. Pursuant to Section 364(c)(2) of the Bankruptcy Code, the Borrowers hereby assign and pledge to the Administrative Agent, for its benefit and for the ratable benefit of the Lenders, and hereby grant to the Administrative Agent, for its benefit and for the ratable benefit of the Lenders, a first priority security interest, senior to all other Liens, if any, in all of the Borrowers’ right, title and interest in and to the Letter of Credit Account and any direct investment of the funds contained therein. Cash held in the Letter of Credit Account shall not be available for use by the Borrowers, whether pursuant to Section 363 of the Bankruptcy Code or otherwise.

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SECTION 2.27 Payment of Obligations. Subject to the provisions of Section 7.1, upon the maturity (whether by acceleration or otherwise) of any of the Obligations under this Agreement or any of the other Loan Documents of the Borrowers, the Lenders shall be entitled to immediate payment of such Obligations without further application to or order of the Bankruptcy Court.

SECTION 2.28 No Discharge; Survival of Claims. Each of the Borrowers agrees that (i) its obligations hereunder shall not be discharged by the entry of an order confirming a Reorganization Plan (and each of the Borrowers, pursuant to Section 1141(d)(4) of the Bankruptcy Code, hereby waives any such discharge) and (ii) the Superpriority Claim granted to the Administrative Agent and the Lenders pursuant to the Order and described in Section 2.23 shall not be affected in any manner by the entry of an order confirming a Plan of Reorganization.

SECTION 2.29 Replacement of Certain Lenders. In the event a Lender (“Affected Lender”) shall have: (i) failed to fund its Commitment Percentage of any Loan requested by the Borrowers or to fund its Commitment Percentage of any unreimbursed payment made by the Fronting Bank, which such Lender is obligated to fund under the terms of this Agreement and which failure has not been cured, (ii) requested compensation from the Borrowers under Section 2.15 with respect to increased costs or capital or under Section 2.18 to recover Taxes, Other Taxes or other additional costs incurred by such Lender which, in any case, are not being incurred generally by the other Lenders, or (iii) delivered a notice pursuant to Section 2.16 claiming that such Lender is unable to extend Eurodollar Loans to the Borrowers for reasons not generally applicable to the other Lenders, then, in any case, the Borrowers or the Administrative Agent may make written demand on such Affected Lender (with a copy to the Administrative Agent in the case of a demand by the Borrowers and a copy to the Borrowers in the case of a demand by the Administrative Agent) for the Affected Lender to assign, and such Affected Lender shall use commercially reasonable efforts to assign pursuant to one or more duly executed Assignments and Acceptances five (5) Business Days after the date of such demand, to one or more financial institutions that comply with the provisions of Section 10.3 which the Borrowers or the Administrative Agent, as the case may be, shall have engaged for such purpose (“Replacement Lender”), all of such Affected Lender’s rights and obligations under this Agreement and the other Loan Documents (including, without limitation, its Commitment, all Loans owing to it, all of its participation interests in existing Letters of Credit, and its obligation to participate in additional Letters of Credit hereunder) in accordance with Section 10.3. The Administrative Agent agrees, upon the occurrence of such events with respect to an Affected Lender and upon the written request of the Borrowers, to use its reasonable efforts to obtain the Commitments from one or more financial institutions to act as a Replacement Lender. The Administrative Agent is authorized to execute one or more of such Assignments and Acceptances as attorney-in-fact for any Affected Lender failing to execute and deliver the same within five (5) Business Days after the date of such demand. Further, with respect to such assignment the Affected Lender shall have concurrently received, in cash, all amounts due and owing to the Affected Lender hereunder or under any other Loan Document, including, without limitation, the aggregate outstanding principal amount of the Loans owed to such Lender, together with accrued interest thereon through the date of such assignment, amounts payable under Section 2.15 with respect to such Affected Lender and compensation payable under Section 2.20 in the event of any replacement of any Affected Lender under clause (ii) or clause (iii) of this Section 2.29; provided that upon such Affected Lender’s replacement, such Affected

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Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.15, 10.5 and 10.6, as well as to any fees accrued for its account hereunder and not yet paid, and shall continue to be obligated under Section 8.6 with respect to losses, obligations, liabilities, damages, penalties, actions, judgments, costs, expenses or disbursements for matters which occurred prior to the date the Affected Lender is replaced.

SECTION 3. REPRESENTATIONS AND WARRANTIES

In order to induce the Lenders to make Loans and issue and/or participate in Letters of Credit hereunder, each of the Borrowers, jointly and severally, represent and warrant as follows:

SECTION 3.1 Organization and Authority. Each of the Borrowers (i) is duly organized, validly existing and in good standing under the law of its jurisdiction of organization; (ii) is duly qualified to do business and in good standing in each jurisdiction in which the failure to so qualify would have a material adverse effect on the financial condition, operations, business, properties or assets of the Borrowers taken as a whole; (iii) subject to the entry by the Bankruptcy Court of the Amendment Order, has the requisite power and authority to effect the transactions contemplated hereby, and by the other Loan Documents to which it is a party, and (iv) subject to the entry by the Bankruptcy Court of the Amendment Order, has all requisite power and authority and the legal right to own and operate its properties, and to conduct its business as now or currently proposed to be conducted.

SECTION 3.2 Due Execution. Upon the entry by the Bankruptcy Court of the Amendment Order, the execution, delivery and performance by each of the Borrowers of each of the Loan Documents to which it is a party, including, without limitation, the grant and pledge by the Borrowers of the security interests granted by the Security and Pledge Agreement, (i) are within the respective powers of each of the Borrowers, have been duly authorized by all necessary action, including the consent of shareholders, partners or members, where required, and do not (A) contravene the Organizational Documents of any of the Borrowers, (B) violate any law (including, without limitation, the Securities Exchange Act of 1934) or regulation (including, without limitation, Regulations T, U or X of the Board), or any order or decree of any court or Governmental Authority, (C) conflict with or result in a breach of, or constitute a default under, any indenture, mortgage or deed of trust entered into after the Filing Date or any lease, agreement or other instrument entered into after the Filing Date binding on the Borrowers or any of their respective properties, or (D) result in or require the creation or imposition of any Lien upon any of the property of any of the Borrowers other than Liens granted pursuant to this Agreement; and (ii) do not require the consent, authorization by or approval of or notice to or filing or registration with any Governmental Authority other than the entry of the Final Order and the Amendment Order. Except for the entry of the Amendment Order, no authorization, approval or other action by, and no notice to or filing with, any Governmental Authority or regulatory body is required for the perfection of the security interests or the exercise by the Administrative Agent or the Lenders of their respective rights and remedies under the Loan Documents. Upon the entry by the Bankruptcy Court of the Amendment Order, this Agreement shall have been duly executed and delivered by each of the Borrowers. Upon the entry by the Bankruptcy Court of the Amendment Order, this Agreement, and each of the other Loan Documents to which the Borrowers are or will be a party, when delivered hereunder or

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thereunder, will be, a legal, valid and binding obligation of each Borrower, enforceable against the Borrowers in accordance with its terms and the Orders.

SECTION 3.3 Statements Made. The information that has been delivered in writing by any of the Borrowers to the Administrative Agent or to the Bankruptcy Court in connection with any Loan Document, and any financial statement delivered pursuant hereto or thereto (other than to the extent that any such statements constitute projections), taken as a whole and in light of the circumstances in which made, contains no untrue statement of a material fact and does not omit to state a material fact necessary to make such statements not misleading; and, to the extent that any such information constitutes projections, such projections were prepared in good faith on the basis of assumptions, methods, data, tests and information believed by the Borrowers to be reasonable at the time such projections were furnished.

SECTION 3.4 Financial Statements. The Borrowers have furnished the Lenders with copies of (i) the audited consolidated financial statements and schedules of the Borrowers and their Subsidiaries for the fiscal year ended December 31, 2002 and (ii) the unaudited consolidated financial statements and schedules of the Borrowers and their Subsidiaries for the fiscal quarters ended on March 31, 2003 and June 30, 2003. Such financial statements present fairly the financial condition and results of operations of the Borrowers and their Subsidiaries on a consolidated basis as of such dates and for such periods; such balance sheets and the notes thereto disclose all liabilities, direct or contingent, of the Borrowers and their Subsidiaries as of the dates thereof required to be disclosed by GAAP and such financial statements were prepared in a manner consistent with GAAP, subject (in the case of each fiscal quarter statement) to normal year end adjustments and the absence of footnotes. No material adverse change in the operations, businesses, properties, assets, prospects or condition (financial or otherwise) of the Borrowers and their Subsidiaries, taken as a whole, has occurred from that set forth in the Borrowers’ consolidated financial statements for the fiscal year ended December 31, 2002 and the fiscal quarter ended March 31, 2003 or otherwise disclosed to the Lenders in the Confidential Information Memorandum.

SECTION 3.5 Ownership. Each of the Persons listed on Schedule 3.5 is a direct or indirect Subsidiary of the Borrowers and Schedule 3.5 correctly sets forth the ownership interest of each of the Borrowers in their respective Subsidiaries, in each case as of the Restatement Effectiveness Date. None of the Borrowers owns any other Subsidiaries, whether directly or indirectly, other than as set forth on Schedule 3.5. After the formation of any New Subsidiary permitted under Section 6.10, the Borrowers shall provide a supplement to Schedule 3.5 to this Agreement reflecting the addition of such New Subsidiary.

SECTION 3.6 Liens. There are no Liens of any nature whatsoever on any assets of any of the Borrowers or their Subsidiaries other than (i) Permitted Liens, and (ii) Liens in favor of the Administrative Agent and the Lenders. Neither the Borrowers nor their Subsidiaries are parties to any contract, agreement, lease or instrument the performance of which, either unconditionally or upon the happening of an event, will result in or require the creation of a Lien on any assets of any Borrower or any of their Subsidiaries or otherwise result in a violation of this Agreement other than the Liens granted to the Administrative Agent and the Lenders as provided for in this Agreement.

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SECTION 3.7 Compliance with Law.

(a) (i) The operations of the Borrowers and their Subsidiaries comply in all material respects with all applicable environmental, health and safety statutes and regulations, including, without limitation, regulations promulgated under the Resource Conservation and Recovery Act (42 U.S.C. §§ 6901 et seq.); (ii) none of the operations of the Borrowers or their Subsidiaries is the subject of any Federal or state investigation evaluating whether any remedial action involving a material expenditure by the Borrowers is needed to respond to a release of any Hazardous Waste or Hazardous Substance (as such terms are defined in any applicable state or Federal environmental law or regulations) into the environment; and (iii) the Borrowers and their Subsidiaries do not have any material contingent liability in connection with any release of any Hazardous Waste or Hazardous Substance into the environment.

(b) None of the Borrowers or their Subsidiaries is in violation of any law, rule or regulation, or in default with respect to any judgment, writ, injunction or decree of any Governmental Authority the violation of which, or a default with respect to which, would have a material adverse effect on the financial condition, operations, businesses, properties or assets of the Borrowers and their Subsidiaries taken as a whole.

SECTION 3.8 Insurance. All policies of insurance of any kind or nature owned by or issued to the Borrowers and their Subsidiaries, including, without limitation, policies of life, fire, theft, product liability, public liability, property damage, other casualty, employee fidelity, workers’ compensation, employee health and welfare, title, property and liability insurance, are in full force and effect and are of a nature and provide such coverage as is customarily carried by companies of the size and character of the Borrowers and their Subsidiaries, it being understood that the Borrowers and their Subsidiaries are not making any representation as to insurance coverage for asbestos claims.

SECTION 3.9 The Orders. On the date of the making of any Loan or the issuance of any Letter of Credit, the Final Order and the Amendment Order shall have been entered and shall not have been amended, stayed, vacated or rescinded except as approved by the Administrative Agent, in its sole discretion. Upon the maturity (whether by the acceleration or otherwise) of any of the obligations of the Borrowers hereunder and under the other Loan Documents, the Lenders shall, subject to the provisions of Section 7.1, be entitled to immediate payment of such obligations, and to enforce the remedies provided for hereunder, without further application to or order by the Bankruptcy Court.

SECTION 3.10 Use of Proceeds. The proceeds of the Loans shall be used for (i) working capital; (ii) other general corporate purposes of the Borrowers; (iii) refinancing the Existing Credit Agreement; and (iv) payment of any related transaction costs, fees and expenses, all in accordance with the Borrowers’ financial projections included in the Confidential Information Memorandum. The Letters of Credit shall be issued in support of obligations of the Borrowers or the Foreign Subsidiaries that are consistent with past practices of the Borrowers or the Foreign Subsidiaries, as the case may be, as disclosed to the Administrative Agent, and that are acceptable to the Administrative Agent.

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SECTION 3.11 Litigation. There are no unstayed actions, suits or proceedings pending or, to the best knowledge of the Borrowers, threatened against or affecting the Borrowers or their Subsidiaries or any of their respective properties, before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, that are reasonably likely to have a material adverse effect on the operations, businesses, properties, assets, prospects or financial condition of the Borrowers and their Subsidiaries taken as a whole.

SECTION 3.12 Intellectual Property. Set forth on Schedule 3.12 hereto is a complete and accurate list of all patents, trademarks, trade names, service marks and copyrights, and all applications therefor and licenses thereof, of each Borrower or any of its Subsidiaries, showing as of the date hereof the jurisdiction in which registered, the registration number, the date of registration and the expiration date.

SECTION 3.13 Intercompany Loans to Foreign Subsidiaries. Set forth on Schedule 3.13 hereto is a complete and accurate list, as of the Restatement Effectiveness Date, of all Intercompany Loans made to any Foreign Subsidiary subsequent to the Filing Date. To the extent required by Section 5.11, each such Intercompany Loan is secured by liens and/or charges on assets of the applicable Foreign Subsidiary (and/or its undisclosed agents) having a liquidation value sufficient to repay such Intercompany Loan.

SECTION 4. CONDITIONS OF LENDING

SECTION 4.1 Conditions to the Restatement Effectiveness Date. The effectiveness of this Agreement and the occurrence of the Restatement Effectiveness Date is subject to the following conditions precedent:

(a) Supporting Documents. The Administrative Agent shall have received for each of the Borrowers:

(i) bring-down certificates delivered by each Borrower (x) certifying that there were no changes, or providing the text of changes, to the Organizational Documents of such Borrowers as delivered pursuant to Section 4.1(a) of the Existing Credit Agreement and (y) to the effect that each Borrower is in good standing in its jurisdiction of incorporation, organization or formation and in each jurisdiction in which it is qualified as a foreign corporation or other entity to do business;

(ii) signature and incumbency certificates of the officers of such Person executing the Loan Documents to which it is a party, dated as of the Restatement Effectiveness Date;

(iii) duly adopted resolutions of the board of directors or similar governing body of each Borrower approving and authorizing the execution, delivery and performance of this Agreement and the other Loan Documents to which it is a party or by which it or its assets may be bound as of the Restatement Effectiveness Date, certified as of the Restatement Effectiveness Date by its secretary or assistant secretary as being in full force and effect without modification or amendment; and

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(iv) such other documents as the Administrative Agent may reasonably request.

(b) Amendment Order. Not later than September 15, 2003, the Administrative Agent and the Lenders shall have received a certified copy of an order of the Bankruptcy Court in substantially the form of Exhibit A-2 to this Agreement (the “Amendment Order”) approving the amendment and restatement of the Existing Credit Agreement as contemplated hereby and which Amendment Order shall (i) be in full force and effect, (ii) not have been stayed, reversed, modified or amended in any respect, except as approved by the Administrative Agent, in its sole discretion, (iii) approve or otherwise reaffirm the payment by the Borrowers of all of the Fees set forth in Sections 2.19, 2.20 and 2.21 and (iv) be entered with the consent or non-objection of a preponderance (as determined by the Administrative Agent in its sole discretion) of the secured creditors of any of the Borrowers under the Prepetition Agreements; and, if the Amendment Order is the subject of a pending appeal in any respect, neither the making of a Loan nor the issuance of a Letter of Credit nor the performance by any of the Borrowers of any of their obligations hereunder or under the Loan Documents or under any other instrument or agreement referred to herein shall be the subject of a presently effective stay pending appeal.

(c) Security and Pledge Agreement. The Borrowers shall have duly executed and delivered to the Administrative Agent an Amended and Restated Security and Pledge Agreement in substantially the form of Exhibit B (the “Security and Pledge Agreement”).

(d) Opinion of Counsel. The Administrative Agent and the Lenders shall have received the favorable written opinion of counsel to the Borrowers, acceptable to the Administrative Agent, substantially in the form of Exhibit D.

(e) Payment of Fees. The Borrowers shall have paid to the Administrative Agent the then unpaid balance of all accrued and unpaid Fees due under and pursuant to this Agreement and the letters referred to in Section 2.19.

(f) Closing Documents. The Administrative Agent shall have received all documents required by this Agreement satisfactory in form and substance to the Administrative Agent.

(g) Budget. The Administrative Agent and the Lenders shall have received from the Borrowers, as necessary, an update to the Borrowers’ financial projections included in the Confidential Information Memorandum detailing the Borrowers’ anticipated cash receipts and disbursements for the period ending on the Maturity Date, and setting forth the anticipated uses of the Commitment which shall be satisfactory in form and substance to the Administrative Agent.

SECTION 4.2 Conditions Precedent to Each Loan and Each Letter of Credit. The obligation of the Lenders to make each Loan and of the Fronting Bank to issue each Letter of Credit is subject to the following conditions precedent:

(a) Notice. The Administrative Agent shall have received a notice with respect to each Borrowing or the issuance of each Letter of Credit, as the case may be, as required by Section 2.

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(b) Representations and Warranties. All representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct in all material respects on and as of the date of each Borrowing or the issuance of each Letter of Credit hereunder with the same effect as if made on and as of such date except to the extent such representations and warranties expressly relate to an earlier date.

(c) No Default. On the date of each Borrowing or the issuance of each Letter of Credit hereunder, no Event of Default or event which upon notice or lapse of time or both would constitute an Event of Default shall have occurred and be continuing.

(d) Orders. The Final Order or the Amendment Order, as the case may be, shall be in full force and effect and shall not have been stayed, reversed, modified or amended in any respect without the prior written consent of the Administrative Agent; and, if either the Final Order or the Amendment Order is the subject of a pending appeal in any respect, neither the making of the Loans nor the issuance of any Letter of Credit nor the performance by any of the Borrowers of any of their obligations under any of the Loan Documents or under any other instrument or agreement referred to herein shall be the subject of a presently effective stay pending appeal.

(e) Payment of Fees. The Borrowers shall have paid to the Administrative Agent the then unpaid balance of all accrued and unpaid Fees then due and payable under and pursuant to this Agreement and the letters referred to in Section 2.19.

(f) Borrowing Base Certificate. The Administrative Agent shall have received a Borrowing Base Certificate dated no more than seven (7) days prior to each Borrowing or the issuance of each Letter of Credit, which Borrowing Base Certificate shall include supporting schedules as required by the Administrative Agent.

(g) Usage. The uses of such Borrowing or such Letter of Credit shall be substantially consistent with the Borrowers’ financial projections included in the Confidential Information Memorandum, as updated from time to time.

Each Borrowing shall be deemed to constitute a representation and warranty by the Borrowers on the date thereof as to the matters specified in paragraphs (b) and (c) of this Section.

SECTION 5. AFFIRMATIVE COVENANTS

From the date hereof and for so long as any Commitment shall be in effect or any Letter of Credit shall remain outstanding (in a face amount in excess of the amount of cash then held in the Letter of Credit Account, or in excess of the face amount of back-to-back letters of credit delivered, in each case pursuant to Section 2.3(b)), or any amount shall remain outstanding or unpaid under this Agreement, each of the Borrowers and their respective Subsidiaries agree

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that, unless the Required Lenders shall otherwise consent in writing, the Borrowers and the Subsidiaries will:

SECTION 5.1 Financial Statements, Reports, etc. Furnish to the Administrative Agent and each of the Lenders:

(a) within ninety (90) days after the end of each fiscal year, the Borrowers’: (i) consolidated and, with respect to the Parent and the Domestic Subsidiaries only, consolidating, balance sheets and related statements of income; (ii) consolidated statement of stockholders’ equity; and (iii) consolidated and, with respect to the Parent and the Domestic Subsidiaries only, combined, statements of cash flows, showing the financial condition of the Borrowers and their respective Subsidiaries on a consolidated basis (except as otherwise specified) as of the close of such fiscal year and the results of their respective operations during such year, the consolidated statements to be audited for the Borrowers and their respective Subsidiaries by their current independent auditors or other independent public accountants of recognized national standing acceptable to the Required Lenders and accompanied by an opinion of such accountants (which shall not be qualified other than with respect to the Cases or a going concern qualification) and to be certified by a Financial Officer of Parent to the effect that such consolidated financial statements fairly present the financial condition and results of operations of the Borrowers and their respective Subsidiaries on a consolidated basis in accordance with GAAP;

(b) within forty-five (45) days after the end of each of the first three fiscal quarters and within ninety (90) days after the end of the fourth fiscal quarter of each fiscal year, the Borrowers’: (i) consolidated and, with respect to the Parent and the Domestic Subsidiaries only, consolidating, balance sheets and related statements of income; (ii) consolidated statement of stockholders’ equity; and (iii) consolidated and, with respect to the Parent and the Domestic Subsidiaries only, combined, statements of cash flows, showing the financial condition of the Borrowers and their respective Subsidiaries on a consolidated basis (except as otherwise specified) as of the close of such fiscal quarter and the results of their operations during such fiscal quarter and the then elapsed portion of the fiscal year, each certified by a Financial Officer of Parent as fairly presenting the financial condition and results of operations of the Borrowers and their respective Subsidiaries on a consolidated basis in accordance with GAAP, subject to normal year-end audit adjustments;

(c) concurrently with any delivery of financial statements under (a) or (b) above as applicable, (i) a certificate of a Financial Officer of each of the Borrowers (A) certifying that no Event of Default or event which upon notice or lapse of time or both would constitute an Event of Default has occurred, or, if such an Event of Default or event has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto and (B) setting forth computations in reasonable detail satisfactory to the Administrative Agent demonstrating compliance with the provisions of Sections 6.3, 6.4, 6.5 and 6.10 and (ii) a certificate of such accountants accompanying the audited consolidated financial statements delivered under (a) above certifying that, in the course of the regular audit of the business of the Borrowers and their respective Subsidiaries, such accountants have obtained no knowledge that an Event of Default has occurred and is continuing, or if, in the opinion of

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such accountants, an Event of Default has occurred and is continuing, specifying the nature thereof and all relevant facts with respect thereto;

(d) as soon as available, but no more than forty-five (45) days after the end of each month: (i) the unaudited monthly balance sheets and related statements of income and, commencing with the fiscal month ending June 30, 2003, cash flows, showing the financial condition of the Borrowers and their respective Subsidiaries on a consolidated basis as of the close of such fiscal month and the results of their operations during such fiscal period and the then elapsed portion of the fiscal year, each certified by a Financial Officer of Parent as fairly presenting the financial condition and results of operations of the Borrowers and their respective Subsidiaries on a consolidated basis in accordance with GAAP, subject to normal year-end audit adjustments, together with a certificate of a Financial Officer of each of the Borrowers setting forth computations in reasonable detail satisfactory to the Administrative Agent demonstrating compliance with the provisions of Section 6.5; (ii) statements of operating income and major cash flow drivers (Consolidated and Domestic EBITDA, working capital and Capital Expenditures) showing the financial condition of the Borrowers and their respective Subsidiaries on a major product group basis, including calculations of Consolidated EBITDA and Domestic EBITDA by major product group, Capital Expenditures by major product group, and depreciation and amortization by major product group; and (iii) balance sheets and related statements of income and, commencing with the fiscal month ending June 30, 2003, cash flows, showing the financial condition of the Borrowers and their respective Subsidiaries on the basis of (x) the Parent and the Domestic Subsidiaries only, (y) the U.K. Subsidiaries only, and (z) the Non-Debtor Foreign Subsidiaries only, including calculations of Consolidated EBITDA and Domestic EBITDA, as applicable;

(e) no later than December 15 of each fiscal year, commencing with December 15, 2003, the strategic plan of the Borrowers and their respective Subsidiaries for the following five fiscal years, which strategic plan shall be satisfactory in form and substance to the Administrative Agent;

(f) no later than February 28 of each fiscal year, commencing with February 28, 2004, an operating plan showing financial projections for such fiscal year regarding the operations, business affairs and financial condition of the Borrowers and their respective Subsidiaries and anticipated uses of the Commitment, which operating plan shall be satisfactory in form and substance to the Administrative Agent, with updated forecasts, to the extent available, provided within thirty (30) days after the start of each of the three succeeding fiscal quarters thereafter;

(g) no later than forty-five (45) days after the end of each month, a summary of the results of the Borrowers’ business operations for the preceding month as compared to the corresponding period in the Borrowers’ operating plan, including a discussion of significant variances, which summary shall describe results on the basis of (i) the Borrowers and their respective Subsidiaries on a consolidated basis, (ii) the Parent and its Domestic Subsidiaries only, (iii) the U.K. Subsidiaries only, (v) the Non-Debtor Foreign Subsidiaries only, and (v) product lines;

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(h) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by it with the Securities and Exchange Commission, or any governmental authority succeeding to any of or all the functions of said commission, or with any national securities exchange, as the case may be;

(i) as soon as available and in any event (A) within thirty (30) days after any Borrower, any or any of their ERISA Affiliates knows or has reason to know that any Termination Event described in clause (i) of the definition of Termination Event with respect to any Single Employer Plan of any of the Borrowers or such ERISA Affiliate has occurred and (B) within ten (10) days after any of the Borrowers or any of their ERISA Affiliates knows or has reason to know that any other Termination Event with respect to any such Plan has occurred, a statement of a Financial Officer of such Borrower describing such Termination Event and the action, if any, which such Borrower or such ERISA Affiliate proposes to take with respect thereto;

(j) promptly and in any event within ten (10) days after receipt thereof by any of the Borrowers or any of their ERISA Affiliates from the PBGC copies of each notice received by such Borrower or any such ERISA Affiliate of the PBGC’s intention to terminate any Single Employer Plan of such Borrower or such ERISA Affiliate or to have a trustee appointed to administer any such Plan;

(k) if requested by the Administrative Agent, promptly and in any event within thirty (30) days after the filing thereof with the Internal Revenue Service, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Single Employer Plan of any of the Borrowers or any of their ERISA Affiliates;

(l) within ten (10) days after notice is given or required to be given to the PBGC under Section 302(f)(4)(A) of ERISA of the failure of any of the Borrowers or any of their ERISA Affiliates to make timely payments to a Plan, a copy of any such notice filed and a statement of a Financial Officer of such Borrower setting forth (A) sufficient information necessary to determine the amount of the Lien under Section 302(f)(3), (B) the reason for the failure to make the required payments and (C) the action, if any, which the Borrowers or any of their ERISA Affiliates proposed to take with respect thereto;

(m) promptly and in any event within ten (10) days after receipt thereof by any of the Borrowers or any ERISA Affiliate from a Multiemployer Plan sponsor, a copy of each notice received by such Borrower or any ERISA Affiliate concerning (A) the imposition of Withdrawal Liability by a Multiemployer Plan, (B) the determination that a Multiemployer Plan is. or is expected to be, in reorganization within the meaning of Title IV of ERISA, (C) the termination of a Multiemployer Plan within the meaning of Title IV of ERISA, or (D) the amount of liability incurred, or which may be incurred, by the Borrowers or any ERISA Affiliate in connection with any event described in clause (A), (B) or (C) above;

(n) promptly, from time to time, such other information (including, without limitation, projections) regarding the operations, business affairs and financial condition of any Borrower or any of its Subsidiaries, or compliance with the terms of any material loan or

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financing agreements as the Administrative Agent, at the request of any Lender, may reasonably request;

(o) promptly after the same is available, copies of all pleadings, motions, applications, judicial information, financial information and other documents filed by or on behalf of any of the Borrowers with the Bankruptcy Court in the Cases or filed by or on behalf of the U.K. Subsidiaries with the Bankruptcy Court, or distributed by or on behalf of any of the Borrowers or the U.K. Subsidiaries to any official committee appointed in any of the Cases, or the U.K. Subsidiary Proceedings, providing copies of same to counsel for the Administrative Agent;

(p) from and after the date which is forty-five (45) days after the date hereof, during such times as any Intercompany Loans made after the date hereof by one or more of the Borrowers to one or more of the U.K. Subsidiaries are outstanding, within eleven (11) Business Days after the end of each fiscal month of the Borrowers, financial information and other documents from the Borrowers sufficient to demonstrate that each such outstanding Intercompany Loan from one or more of the Borrowers to a U.K. Subsidiary is secured by fixed and/or floating charges on assets of the applicable U.K. Subsidiary (and, as applicable, its undisclosed agents) having a liquidation value sufficient to repay such Intercompany Loan to the extent required by Section 5.11;

(q) from and after the date on which a Non-Debtor Foreign Subsidiary shall have granted liens or charges on all or a portion of its assets in connection with an Intercompany Loan made after the date hereof by one or more of the Borrowers, at such time or times as the Administrative Agent may reasonably request, financial information and other documents from the Borrowers sufficient to demonstrate that such Intercompany Loan is secured by liens or charges on assets of the applicable Non-Debtor Foreign Subsidiary having a liquidation value sufficient to repay such Intercompany Loan to the extent required by Section 5.11;

(r) concurrently with the making of any deposit by any of the Borrowers or any of their Subsidiaries in accordance with clause (x) of the definition of Permitted Liens with any non-Lender derivatives trader, written notice of such deposit setting forth (i) the identity of such non-Lender derivatives trader, (ii) a detailed description of the terms of the transaction and the reason for such deposit, (iii) the amount of such deposit and (iv) as of the date of such notice, the then aggregate amount of all deposits made pursuant to clause (x) of the definition of Permitted Liens with non-Lenders;

(s) concurrently with each Asset Sale in respect of any of the surplus assets listed on Schedule 6.11(a), a certificate of a Financial Officer of Parent, in form and substance satisfactory to the Administrative Agent, identifying, in accordance with Schedule 6.11(a), the assets to be sold and the corresponding adjustments to be made to the applicable monthly Consolidated EBITDA covenant levels set forth in Section 6.5 as a result of such Asset Sale, and certifying that (i) no Event of Default or event which upon notice or lapse of time or both would constitute an Event of Default has occurred, or, if such an Event of Default or event has occurred, specifying the nature and extent thereof and any corrective action to be taken or proposed to be taken with respect thereto, and (ii) after giving effect to the receipt by any of the

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Borrowers of the Net Proceeds from such Asset Sale, the Borrowers are in compliance with the provisions of Section 2.13(b); and

(t) as soon as available, but no more than forty-five (45) days after the end of each month, a certificate of a Financial Officer of Parent, in form and substance satisfactory to the Administrative Agent, certifying as to (i) the outstanding amount of Intercompany Loans from one or more of the Borrowers to one or more Non-Debtor Foreign Subsidiaries made subsequent to the Filing Date and (ii) the aggregate available commitments and aggregate principal balance outstanding under third party financing arrangements provided to Non-Debtor Foreign Subsidiaries, in each case as of the end of such month.

SECTION 5.2 Existence. Preserve and maintain in full force and effect all governmental rights, privileges, qualifications, permits, licenses and franchises necessary or desirable in the normal conduct of its businesses except (i) (A) if in the reasonable business judgment of such Borrower it is in its best economic interest not to preserve and maintain such rights, privileges, qualifications, permits, licenses and franchises, and (B) such failure to preserve the same could not, in the aggregate, reasonably be expected to have a material adverse effect on the operations, business, properties, assets, prospects or condition (financial or otherwise) of the Borrowers, taken as a whole, and (ii) as otherwise permitted in connection with sales of assets permitted by Section 6.11.

SECTION 5.3 Insurance. (a) Keep its insurable properties insured at all times, against such risks, including fire and other risks insured against by extended coverage, as is customary with companies of the same or similar size in the same or similar businesses; and maintain in full force and effect public liability insurance against claims for personal injury or death or property damage occurring upon, in, about or in connection with the use of any properties owned, occupied or controlled by any Borrower in such amounts and with such deductibles as are customary with companies of the same or similar size in the same or similar businesses and in the same geographic area; and (b) maintain such other insurance or self insurance as may be required by law.

SECTION 5.4 Obligations and Taxes. With respect to each Borrower, pay all its material obligations arising after the Filing Date promptly and in accordance with their terms and pay and discharge promptly all material taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property arising after the Filing Date, before the same shall become in default, as well as all material lawful claims for labor, materials and supplies or otherwise arising after the Filing Date which, if unpaid, would become a Lien or charge upon such properties or any part thereof; provided, however, that no Borrower shall be required to pay and discharge or to cause to be paid and discharged any such tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings (if the Borrowers shall have set aside on their books adequate reserves therefor).

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SECTION 5.5 Notice of Event of Default, etc. Promptly give to the Administrative Agent notice in writing of:

(a) any Event of Default or the occurrence of any event or circumstance which with the passage of time or giving of notice or both would constitute an Event of Default; and

(b) any litigation, proceedings or material investigations which may exist at any time between any Borrower and any Governmental Authority.

SECTION 5.6 Access to Books and Records.

(a) Maintain or cause to be maintained at all times true and complete books and records in accordance with GAAP of the financial operations of the Borrowers and their respective Subsidiaries; and provide the Administrative Agent and its representatives access to all such books and records during regular business hours, in order that the Administrative Agent may examine and make abstracts from such books, accounts, records and other papers for the purpose of verifying the accuracy of the various reports delivered by the Borrowers to the Administrative Agent or the Lenders pursuant to this Agreement or for otherwise ascertaining compliance with this Agreement. The Borrowers will permit (and will cause their Subsidiaries to permit) any representatives designated by the Administrative Agent to discuss its affairs, finances and condition with its officers and independent accountants, all at such reasonable times and as often as reasonably requested.

(b) The Borrowers will permit any representatives designated by the Administrative Agent (including any consultants, accountants, lawyers and appraisers retained by the Administrative Agent) to conduct evaluations and appraisals of the Borrowers’ computation of the Borrowing Base and the assets included in the Borrowing Base and such other assets and properties of the Borrowers or their Subsidiaries as the Administrative Agent or Required Lenders may require, all at such reasonable times and as often as reasonably requested. The Borrowers shall pay the reasonable fees (including reasonable and customary internally allocated fees of employees of the Administrative Agent as to which invoices have been furnished) and expenses of any such representatives retained by the Administrative Agent as to which invoices have been furnished to conduct any such evaluation or appraisal, including the reasonable fees and expenses associated with collateral monitoring services performed by the Collateral Agent Services Group of the Administrative Agent. To the extent required by the Administrative Agent as a result of any such evaluation, appraisal or monitoring, the Borrowers also agree to modify or adjust the computation of the Borrowing Base (which may include maintaining additional reserves, modifying the advance rates or modifying the eligibility criteria for the components of the Borrowing Base).

(c) In the event that historical accounting practices, systems or reserves relating to the components of the Borrowing Base are modified in a manner that is adverse to the Lenders in any material respect, the Borrowers will agree to maintain such additional reserves (for purposes of computing the Borrowing Base) in respect to the components of the Borrowing Base and make such other adjustments to its parameters for including the components of the Borrowing Base as the Administrative Agent shall reasonably require based upon such modifications.

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(d) The Borrowers will grant the Administrative Agent access to and the right to inspect all reports, audits and other internal information of the Borrowers relating to environmental matters upon reasonable notice, and obtain any third party verification of matters relating to compliance with environmental laws and regulations requested by the Administrative Agent at any time and from time to time.

SECTION 5.7 Maintenance of Concentration Account. Maintain with the Administrative Agent an account or accounts to be used by the Borrowers as their principal domestic concentration or sweep account(s) into which shall be deposited the available balances from the Borrowers’ operating accounts at the end of each Business Day, net of disbursements paid in the ordinary course of business during such Business Day.

SECTION 5.8 Borrowing Base Certificate. Furnish to the Administrative Agent, no later than (i) four (4) Business Days after each of the weeks ended, a completed Borrowing Base Certificate as of the last day of the immediately preceding one week period, (ii) eleven (11) Business Days following the immediately preceding fiscal month ended, a completed Borrowing Base Certificate showing the Borrowing Base as of the close of business on the last day of such fiscal month, and (iii) if requested by the Administrative Agent, at any other time when the Administrative Agent reasonably believes that the then existing Borrowing Base Certificate is materially inaccurate, as soon as reasonably available but in no event later than eleven (11) Business Days after such request, a completed Borrowing Base Certificate showing the Borrowing Base as of the date so requested, in each case with supporting documentation and additional reports with respect to the Borrowing Base as the Administrative Agent may reasonably request. The PP&E Component of the Borrowing Base shall be updated (i) from time to time upon receipt of periodic valuation updates received from the Administrative Agent’s asset valuation experts, (ii) concurrent with the sale of any assets constituting part of the PP&E Component, (iii) in the event such assets are idled for any reason other than routine maintenance or repairs for a period in excess of ten (10) consecutive days, or (iv) the value of such assets is otherwise impaired, in the Administrative Agent’s sole discretion. The components of the Borrowing Base consisting of inventory shall be updated monthly as of the close of business on the last Business Day of each fiscal month.

SECTION 5.9 Business Plan. The Borrowers shall be available to discuss its then current financial projections with the Administrative Agent upon the Administrative Agent’s reasonable request.

SECTION 5.10

Intentionally omitted.

SECTION 5.11 Collateralization of Intercompany Loans.

(a) The Borrowers shall use their best efforts to cause all Intercompany Loans made subsequent to the date hereof by any Borrower to any U.K. Subsidiary to be secured by fixed and floating charges on assets of such U.K. Subsidiary (or its undisclosed agents) having a liquidation value sufficient to repay such Intercompany Loan. The documentation effecting the creation of such charges shall be satisfactory in form and substance to the Administrative Agent.

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All actions necessary to grant and perfect intercompany charges in connection with any such Intercompany Loan shall be effected by a date not more than forty-five (45) days from the date of such loan, or by such later date as may be reasonably necessary, as determined by the Administrative Agent, to grant and perfect such liens or charges in accordance with customary commercial lending practices in England.

(b) The Borrowers shall use their best efforts to cause all Intercompany Loans made subsequent to the date hereof by any Borrower to any Non-Debtor Foreign Subsidiary to be secured by liens or charges on assets of such Non-Debtor Foreign Subsidiary having a liquidation value sufficient to repay such Intercompany Loan. The documentation effecting the creation of such liens or charges shall be satisfactory in form and substance to the Administrative Agent. All actions necessary to grant and perfect intercompany liens or charges in connection with any such Intercompany Loan shall be effected by a date not more than forty-five (45) days from the date of such loan, or by such later date as may be reasonably necessary, as determined by the Administrative Agent, to grant and perfect such liens or charges in accordance with customary commercial lending practices in the jurisdiction in which such Non-Debtor Foreign Subsidiary is incorporated, organized or formed or where the subject collateral is otherwise located.

(c) To the extent that the Borrowers shall have determined that the establishment of the liens or charges described in (a) or (b) above in respect of an Intercompany Loan cannot be effected despite the Borrowers’ employment of best efforts to do so, the Borrowers shall provide to the Administrative Agent detailed information satisfactory to the Administrative Agent, in its discretion, describing the Borrowers’ undertakings relating to the establishment of such liens and charges and the basis for the Borrowers’ conclusions with regard to the inability to establish same.

SECTION 6. NEGATIVE COVENANTS

From the date hereof and for so long as any Commitment shall be in effect or any Letter of Credit shall remain outstanding (in a face amount in excess of the amount of cash then held in the Letter of Credit Account, or in excess of the face amount of back-to-back letters of credit delivered, in each case pursuant to Section 2.3(b)) or any amount shall remain outstanding or unpaid under this Agreement, unless the Required Lenders shall otherwise consent in writing, each of the Borrowers will not (and will not apply to the Bankruptcy Court for authority to), and will cause each of their respective Subsidiaries not to:

SECTION 6.1 Liens. Incur, create, assume or suffer to exist any Lien on any asset of the Borrowers now owned or hereafter acquired by any Borrower other than Permitted Liens.

SECTION 6.2 Merger, etc. Consolidate or merge with or into another Person, except that Non-Debtor Foreign Subsidiaries of the Borrowers shall be permitted to merge with or into other Non-Debtor Foreign Subsidiaries of the Borrowers and U.K. Subsidiaries of the Borrowers shall be permitted to merge with or into other U.K. Subsidiaries of the Borrowers, and except that Federal-Mogul Deutschland Holdings GmbH shall be permitted to reorganize into a KG (partnership), which partnership shall (x) be named “Federal-Mogul Holding Deutschland GmbH and Co. KG” or such other name of which the Borrowers shall have given written notice to the

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Administrative Agent; (y) be owned by the Parent (99.99%) and Federal-Mogul World Wide, Inc. (0.01%) or such other ownership structure of which the Borrowers shall have given written notice to the Administrative Agent; and (z) constitute a Non-Debtor Foreign Subsidiary for all purposes of this Agreement.

SECTION 6.3 Indebtedness. Contract, create, incur, assume or suffer to exist any Indebtedness, except for (i) Indebtedness under this Agreement; (ii) Indebtedness (inclusive of Intercompany Indebtedness) incurred prior to the Filing Date (including existing Capitalized Leases) of the Borrowers and their U.K. Subsidiaries and, with respect to the Foreign Subsidiaries of the Borrowers, listed on Schedule 6.3; (iii) Indebtedness incurred subsequent to the Filing Date (x) secured by purchase money Liens (exclusive of Capitalized Leases) in an aggregate amount not in excess of $15,000,000 to the extent permitted by Section 6.4 and (y) consisting of Capitalized Leases of computer equipment in an aggregate amount (based on the portion thereof which is capitalized on the consolidated balance sheet of the Borrowers and their Subsidiaries) not to exceed $10,000,000; (iv) Indebtedness allowed under Sections 6.6 and 6.10 (without duplication); (v) Indebtedness owed to (x) JPMCB or (y) as long as Bank One, NA is a Tranche A Lender or a Tranche B Lender, Bank One, NA, or any of their respective banking Affiliates in respect of any overdrafts and related liabilities arising from treasury, depository and cash management services or in connection with any automated clearing house transfers of funds; (vi) Indebtedness for borrowed money of Non-Debtor Foreign Subsidiaries in an aggregate amount (being the sum of Indebtedness in existence on the Filing Date (exclusive of Intercompany Loans incurred prior to the Filing Date) and any Indebtedness incurred thereafter), including, without limitation, Intercompany Loans made after the Filing Date, not in excess of $300,000,000; and (vii) obligations in respect of (x) currency swap agreements, currency future or option contracts and other similar agreements designed to hedge against fluctuations in foreign currency exchange rates, (y) interest rate swap, cap or collar agreements and interest rate future or option contracts and other similar agreements designed to hedge against fluctuations in interest rates or (z) swap agreements, future or option contracts and other similar agreements designed to hedge against fluctuations in commodities prices, in each case entered into in the ordinary course of the Borrowers’ business and not for speculative purposes.

SECTION 6.4 Capital Expenditures. Make Capital Expenditures during each fiscal quarter listed below in an aggregate amount in excess of the amount specified opposite such fiscal quarter; provided that if the amount of Capital Expenditures that are made during any fiscal quarter is less than the amount thereof that is permitted to be made during such fiscal quarter, the unused portion thereof may be carried forward to and made during the immediately following two fiscal quarters:

Fiscal Quarter Ending	Maximum Capital Expenditures
	(Millions)
06/30/2003	$90
09/30/2003	75
12/31/2003	75
03/31/2004	80
06/30/2004	80
09/30/2004	75
12/31/2004	70

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For purposes of calculating compliance with this Section 6.4, (i) to the extent the Borrowers or their Subsidiaries shall have made an equity contribution in or loan to a joint venture entity (to the extent permitted by Section 6.10) and such contribution or loan constitutes a Capital Expenditure hereunder and shall have been included by the Borrowers in calculating compliance with this Section 6.4, the Borrowers shall exclude from subsequent calculations of Capital Expenditures the expenditure of the proceeds of such contribution or loan by the joint venture entity in a manner which would otherwise constitute a Capital Expenditure, and (ii) to the extent the Borrowers or their Subsidiaries shall have entered into Capitalized Leases of computer equipment in an aggregate amount (based upon the portion thereof which is capitalized on the consolidated balance sheet of the Borrowers and their Subsidiaries) not to exceed $10,000,000, such Capitalized Leases of computer equipment shall be excluded by the Borrowers in calculating compliance with this Section 6.4.

SECTION 6.5 EBITDA.

(a) As of the end of each fiscal month of the Borrowers, commencing with the fiscal month ending July 31, 2003 and ending with the fiscal month ending December 31, 2003, permit either Consolidated EBITDA or Domestic EBITDA for the most recent 12-month period to be less than the respective amounts specified opposite such fiscal month, provided, however, that effective as of the first day of the fiscal month (the “Adjustment Date”) following the month in which the Borrowers shall have consummated an Asset Sale in respect of any of the surplus assets listed on Schedule 6.11(a) and as to which the Borrowers shall have delivered to the Administrative Agent and the Lenders the certificate described in Section 5.1(s), the monthly Consolidated EBITDA amounts set forth in this Section 6.5(a) for the fiscal month in which the Adjustment Date occurs and for each fiscal month thereafter shall be reduced by the amount specified opposite the description of the asset sold as set forth on Schedule 6.11(a).

Fiscal Month	Consolidated EBITDA	Domestic EBITDA
	(Millions)	(Millions)
7/2003	$525	$200
8/2003	510	200
9/2003	510	200
10/2003	510	200
11/2003	510	200
12/2003	485	200

(b) As of the end of each fiscal quarter of the Borrowers, commencing with the fiscal quarter ending March 31, 2004, permit either Consolidated EBITDA or Domestic EBITDA for the most recent four fiscal quarter period to be less than the respective amounts specified opposite such fiscal quarter, provided, however, that effective as of the first day of the fiscal quarter (the “Quarterly Adjustment Date”) following the quarter in which the Borrowers shall have consummated an Asset Sale in respect of any of the surplus assets listed on Schedule 6.11(a) and as to which the Borrowers shall have delivered to the Administrative Agent and the Lenders the certificate described in Section 5.1(s), the quarterly Consolidated EBITDA amounts set forth in this Section 6.5(b) for the fiscal quarter in which the Quarterly Adjustment Date

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occurs and for each fiscal quarter thereafter shall be reduced by the amount specified opposite the description of the asset sold as set forth on Schedule 6.11(a).

Fiscal Quarter Ending	Consolidated EBITDA	Domestic EBITDA
	(Millions)	(Millions)
03/31/2004	$485	$200
06/30/2004	485	200
09/30/2004	510	200
12/31/2004	560	200

SECTION 6.6 Guarantees and Other Liabilities. Purchase or repurchase (or agree, contingently or otherwise, so to do) the Indebtedness of, or assume, guarantee (directly or indirectly or by an instrument having the effect of assuring another’s payment or performance of any obligation or capability of so doing, or otherwise), endorse or otherwise become liable, directly or indirectly, for the obligations, stock or dividends of any Person, except (i) for any guaranty of Indebtedness or other obligations (or otherwise becoming liable for any of the obligations) of any of the Borrowers in the ordinary course of business and consistent with the past business practices with trade vendors if such Indebtedness or the obligations are permitted by this Agreement, (ii) by endorsement of negotiable instruments for deposit or collection in the ordinary course of business; and (iii) as otherwise agreed in writing by the Administrative Agent. Notwithstanding anything in this Section 6.6 to the contrary, the Non-Debtor Foreign Subsidiaries shall be permitted to purchase or repurchase (or agree, contingently or otherwise, so to do) the Indebtedness of, or assume, guarantee (directly or indirectly or by an instrument having the effect of assuring another’s payment or performance of any obligation or capability of so doing, or otherwise), endorse or otherwise become liable, directly or indirectly, for the obligations, stock or dividends of another Non-Debtor Foreign Subsidiary, in an aggregate amount not in excess of $50,000,000 at any time outstanding. Such guaranties shall be provided in connection with third party financing needs or for such other purposes as may be consistent with past practice.

SECTION 6.7 Chapter 11 Claims. Incur, create, assume, suffer to exist or permit any other Superpriority Claim which is pari passu with or senior to the claims of the Administrative Agent and the Lenders against the Borrowers hereunder, except for the Carve-Out.

SECTION 6.8 Dividends; Capital Stock. Except for distributions or payments (i) from one Borrower to another Borrower, (ii) from one U.K. Subsidiary to another U.K. Subsidiary, (iii) from one Non-Debtor Foreign Subsidiary to another Non-Debtor Foreign Subsidiary, (iv) from a U.K Subsidiary or a Non-Debtor Foreign Subsidiary to a Borrower, or (v) to Persons directly owning Minority Interests in an aggregate amount not to exceed $1,000,000 per annum, declare or pay, directly or indirectly, any dividends or make any other distribution or payment, whether in cash, property, securities or a combination thereof, with respect to (whether by reduction of capital or otherwise) any shares of capital stock (or any options, warrants, rights or other equity securities or agreements relating to any capital stock), or set apart any sum for the aforesaid purposes on anything other than an arm’s-length basis. Notwithstanding the provisions of clause (v) above, no dividend, distribution or payment to Persons directly owning Minority

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Interests may be made unless with respect to each such anticipated dividend, distribution or payment (each, a “Third Party Dividend”), such distributing Borrower or Subsidiary shall first have remitted a dividend, distribution or payment to a Borrower in an amount not less than the recipient Borrower’s proportionate share (based upon such Borrower’s percentage ownership interest in the Person making such dividend, distribution or payment) of the total dividend, distribution or payment to be made by the distributing Borrower or Subsidiary.

SECTION 6.9 Transactions with Affiliates. Sell or transfer any property or assets to, or otherwise engage in or permit to exist any other material transactions with, any of its non-Borrower Affiliates other than in the ordinary course of the Borrowers’ businesses in good faith and at commercially reasonable prices and on commercially reasonable terms and conditions not less favorable to the Borrowers than could be obtained on an arm’s-length basis from a non-Affiliate.

SECTION 6.10 Investments, Loans and Advances. Purchase, hold or acquire any capital stock, evidences of Indebtedness or other securities of, make or permit to exist any loans or advances to, or make or permit to exist any investment in, any other Person (all of the foregoing, “Investments”), except for (i) Permitted Investments; (ii) Intercompany Indebtedness owing from a Borrower to another Borrower incurred in the ordinary course of business consistent with past practice; (iii) existing Intercompany Indebtedness listed on Schedule 6.3 (which describes all Intercompany Loans from the Borrowers to the Foreign Subsidiaries as of the date hereof); (iv) additional Intercompany Loans from one or more of the Borrowers to one or more Non-Debtor Foreign Subsidiaries in an aggregate amount not to exceed the difference between $300,000,000 (subject to reduction pursuant to Section 2.13) and the from time to time aggregate available commitments and aggregate principal balance outstanding under third party financing arrangements provided to the Non-Debtor Foreign Subsidiaries (including, without limitation, receivables securitizations and other third party credit facilities); (v) additional Intercompany Loans from one or more of the Borrowers to one or more of the Non-Debtor Foreign Subsidiaries in an aggregate amount not to exceed at any time the aggregate amount of cash dividends paid to or loans (which have not been repaid) made to the Borrowers after the Filing Date; (vi) additional Intercompany Loans from one or more of the Borrowers to one or more of the U.K. Subsidiaries in an aggregate amount not to exceed $25,000,000; (vii) Intercompany Loans from one or more of the Foreign Subsidiaries to one or more of the Borrowers; (viii) (y) loans by the Borrowers to existing or potential customers from whom the Borrowers reasonably expect to obtain a material commercial benefit in a manner consistent with historical practices of the Borrowers and in an aggregate amount not to exceed $25,000,000 at any one time, and (z) equity investments made by the Borrowers in existing customers as set forth on Schedule 6.10(a); (ix) up to C$15,000,000 note payable to Federal-Mogul Tri-Way Ltd. in connection with the sale of the assets of Federal-Mogul Tri-Way Ltd.; (x) Intercompany Indebtedness owing from a Non-Debtor Foreign Subsidiary to another Non-Debtor Foreign Subsidiary incurred in the ordinary course of business consistent with past practice; (xi) capital contributions advanced from the Borrowers to Federal-Mogul, S.A. - France in an aggregate amount not to exceed $60,000,000 (the initial $20,000,000 of such contributions shall be made only substantially contemporaneously with the making of an Intercompany Loan in an aggregate amount equal to $20,000,000 to one or more of the Borrowers); (xii) the conversion to equity interests, in an aggregate amount not to exceed $70,200,000 of certain pre-petition Intercompany Loans listed on Schedule 6.3 made by the Parent to Federal-Mogul do Brazil, Federal-Mogul

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Automotive PTY LTD, Federal-Mogul Holding Deutschland GmbH and Co. KG and Federal-Mogul PTY LTD and made by FM Investments BV to Federal-Mogul of South Africa (Pty.) Ltd., to the extent, but solely to the extent required under applicable laws or regulations to maintain the legal solvency of each such entity in its respective jurisdiction of incorporation; (xiii) up to $460,000 note payable to Federal-Mogul Powertrain, Inc. in connection with the sale of the assets of the Federal-Mogul Powertrain, Inc. Jackson, Michigan camshaft business to Camshaft Machine Company; (xiv) up to $2,500,000 note payable to Federal-Mogul Powertrain, Inc. in connection with the sale of the assets of the Federal-Mogul Powertrain, Inc. camshaft business (other than Jackson, Michigan) to Asimco International, Inc.; (xv) additional investments in a joint venture between Federal Mogul Sealing Systems and Taiho, which joint venture shall be named “TFGG LLC” or such other name of which the Borrowers shall have given the Administrative Agent written notice, and other new joint ventures of the Borrowers and their Subsidiaries or any new wholly-owned Subsidiary (each, a “New Subsidiary”) of the Borrowers or their Subsidiaries formed after the Restatement Effectiveness Date (the creation of New Subsidiaries shall only be permitted if (a) no Event of Default shall have occurred and be continuing or would result therefrom; and (b) after such creation all of the representations and warranties contained herein shall be true and correct), provided, however, that such additional investments in joint ventures and New Subsidiaries shall not exceed $10,000,000 in the aggregate in any calendar year; (xvi) as part of the consideration received in connection with each Asset Sale permitted under this Agreement, one or more notes payable to a Borrower or Subsidiary as the seller of such assets, in an aggregate amount not to exceed 10% of the total consideration for the assets sold in such Asset Sale; and (xvii) up to £260,000 note payable to Engineering Components Limited, an indirect wholly-owned subsidiary of T & N Limited, in connection with the sale of its interest in Pars Washer Manufacturing & Industrial Private Company Limited, an Iranian corporation. The Borrowers may neither (a) make any additional Investments in their Foreign Subsidiaries except as permitted hereunder nor (b) transfer any assets or the proceeds of any Loans to any jurisdiction outside of the United States of America except as permitted hereunder. Any principal payments made by the Borrowers in respect of the Intercompany Loan from Federal-Mogul, S.A. - France made pursuant to clause (xi) above shall reduce, on a Dollar for Dollar basis, the amount of postpetition Intercompany Loans which may be made to the Non-Debtor Foreign Subsidiaries. Notwithstanding the foregoing sentence or the provisions of clause (iv) above, (x) neither the Borrowers nor any of their Subsidiaries may make, or with respect to Intercompany Loans made after the Filing Date, permit to exist, an Intercompany Loan to a Non-Debtor Foreign Subsidiary during such time as such Non-Debtor Foreign Subsidiary shall not have borrowed all amounts available to such Non-Debtor Foreign Subsidiary pursuant to commitments under third party financing arrangements then provided to such Non-Debtor Foreign Subsidiary and (y) in no event shall the permitted amount of postpetition Intercompany Loans to the Non-Debtor Foreign Subsidiaries be less than $100,000,000.

SECTION 6.11 Disposition of Assets. Sell or otherwise dispose of any assets (including, without limitation, the capital stock of any Subsidiary of the Borrowers) except for (i) sales of Inventory in the ordinary course of business, (ii) sales of scrap and obsolete Inventory in the ordinary course of business, (iii) sales of the surplus real estate assets of the Borrowers set forth on Schedule 6.11, (iv) sales of other surplus assets of the Borrowers set forth on Schedule 6.11(a), (v) sales of other surplus assets no longer used in the Borrowers’ business operations for which total consideration shall not exceed $25,000,000 in the aggregate during any period of

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twelve (12) consecutive months and (vi) sales of accounts receivable by Non-Debtor Foreign Subsidiaries in connection with factoring arrangements entered into in the ordinary course of the Non-Debtor Foreign Subsidiaries’ businesses, which arrangements shall be deemed to constitute third party financing arrangements.

SECTION 6.12 Nature of Business. Modify or alter in any material manner the nature and type of its business as conducted at or prior to the Filing Date or the manner in which such business is conducted (except as required by the Bankruptcy Code).

SECTION 6.13 Transactions among Borrowers. Except to the extent existing on the date the Cases were filed and disclosed on Schedule 6.13, permit, place or agree to permit or place any restrictions on the payment of dividends or other distributions among the Borrowers or their Subsidiaries or Affiliates or the making of advances or any other cash payments among the Borrowers or their Subsidiaries or Affiliates except such restrictions as may arise directly as a result of the U.K. Administration.

SECTION 6.14 Right of Subrogation among Borrowers. Assert any right of subrogation against any other Borrower until all Borrowings and all Letters of Credit are paid in full and the Total Commitment is terminated.

SECTION 7. EVENTS OF DEFAULT

SECTION 7.1 Events of Default. In the case of the happening of any of the following events and the continuance thereof beyond the applicable period of grace (if any) set forth below (each, an “Event of Default”):

(a) any representation or warranty made by any Borrower in this Agreement or in any Loan Document or in connection with this Agreement or the credit extensions hereunder or any statement or representation made in any report, financial statement, certificate or other document furnished by any Borrower to the Lenders under or in connection with this Agreement, shall prove to have been false or misleading in any material respect when made or delivered; or

(b) default shall be made in the payment of any fees or interest on the Loans, principal of the Loans or other amounts payable by the Borrowers hereunder (including, without limitation, reimbursement obligations or cash collateralization in respect of Letters of Credit), when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise; or

(c) default shall be made by any Borrower or any of their respective Subsidiaries in the due observance or performance of any covenants, conditions or agreements contained in Section 6 hereof; or

(d) default shall be made by any Borrower or any of their respective Subsidiaries in the due observance or performance of any covenant, condition or agreement (other than the covenants, conditions or agreements contained in Section 6 hereof) to be observed or performed pursuant to the terms of this Agreement or any of the other Loan Documents and such default shall continue unremedied for more than ten (10) days; or

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(e) any of the Cases shall be dismissed or converted to a case under Chapter 7 of the Bankruptcy Code or any Borrower shall file a motion or other pleading seeking the dismissal of any of the Cases or the U.K. Subsidiary Proceedings under Section 1112 of the Bankruptcy Code or otherwise; a trustee under Chapter 7 or Chapter 11 of the Bankruptcy Code, a responsible officer or an examiner with enlarged powers relating to the operation of the business (powers beyond those set forth in Section 1106(a)(3) and (4) of the Bankruptcy Code) under Section 1106(b) of the Bankruptcy Code shall be appointed in any of the Cases or the U.K. Subsidiary Proceedings and the order appointing such trustee, responsible officer or examiner shall not be reversed or vacated within thirty (30) days after the entry thereof; an application shall be filed by any Borrower for the approval of any other Superpriority Claim (other than the Carve-Out) in any of the Cases or the U.K. Subsidiary Proceedings which is pari passu with or senior to the claims of the Administrative Agent and the Lenders against any Borrower hereunder, or there shall arise or be granted any such pari passu or senior Superpriority Claim; or the Bankruptcy Code shall enter an order terminating the use of cash collateral for the purposes described in Section 3.10; or

(f) the Bankruptcy Court shall enter an order or orders granting relief from the automatic stay applicable under Section 362 of the Bankruptcy Code to the holder or holders of any security interest to permit foreclosure (or the granting of a deed in lieu of foreclosure or the like) on any assets of any of the Borrowers which have a value in excess of $1,000,000 in the aggregate; or

(g) a Change of Control shall occur; or

(h) the Borrowers shall fail to deliver a certified Borrowing Base Certificate when due and such default shall continue unremedied for more than three (3) Business Days; or

(i) any provision of any Loan Document shall, for any reason, cease to be valid and binding on any of the Borrowers, or any of the Borrowers shall so assert in any pleading filed in any court; or

(j) an order of the Bankruptcy Court shall be entered reversing, amending, supplementing, staying for a period in excess of ten (10) days, vacating or otherwise modifying either of the Orders; or

(k) any judgment or order as to a post-petition liability or debt for the payment of money in excess of $1,000,000 shall be rendered against any of the Borrowers or any of their Subsidiaries and the enforcement thereof shall not have been stayed (by court-ordered stay or by consent of the party litigants), it being understood that Federal Rule of Civil Procedure 62(a) provides for a ten-day stay of enforcement of money judgments; or

(l) any non-monetary judgment or order with respect to a post-petition event shall be rendered against any Borrower or any of their Subsidiaries which does or would reasonably be expected to (i) cause a material adverse change in the financial condition, business, prospects, operations or assets of the Borrowers and their Subsidiaries taken as a whole on a consolidated basis, (ii) have a material adverse effect on the ability of any of the Borrowers to perform their respective obligations under any Loan Document, or (iii) have a material

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adverse effect on the rights and remedies of the Administrative Agent or any Lender under any Loan Document, and there shall be any period of ten (10) consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or

(m) the Borrowers or any of the Subsidiaries shall make any Prepetition Payment (whether by way of adequate protection or otherwise) of principal or interest or otherwise on account of any prepetition Indebtedness or payables (including, without limitation, reclamation claims) other than Prepetition Payments authorized by the Bankruptcy Court in respect of: (i) accrued payroll and related employee benefit expenses as of the Filing Date, (ii) the assumption of executory contracts and unexpired leases, (iii) materialmen’s liens and prepetition claims of Critical Trade Vendors (or advances or deposits or other credit support in lieu thereof), all as described in the Borrowers’ Motion of the Debtors for Entry of an Order Authorizing, but not Requiring, Payment of Certain Critical Prepetition Trade Vendor Claims to be filed in the cases and the U.K. Subsidiary Proceedings, in an aggregate amount not to exceed $50,000,000, subject to the Administrative Agent’s satisfaction with the Borrowers’ Critical Trade Vendor program, (iv) payments in respect of prepetition claims of customers or advances or deposits or other credit support in lieu thereof (pursuant to a payment program for such items acceptable to the Administrative Agent, in its discretion), all as described in the Borrowers’ Motion for Order Authorizing the Debtors to Honor Certain Prepetition Obligations to Customers and to Continue Customer Accommodation Programs and Practices in the Ordinary Course of Business to be filed in the Cases, in an aggregate amount not to exceed $40,000,000, (v) payments in respect of prepetition claims of freight carriers or advances or deposits or other credit in lieu thereof all as described in the Borrowers’ Motion of the Debtors for an Order (I) Authorizing, But Not Directing, Payment of Certain Prepetition Shipping Charges, Import Obligations, and Related Possessory Liens and (II) Confirming Administrative Expense Status of Obligations Arising from Post-Petition Delivery of Goods, to be filed in the Cases and the U.K. Subsidiary Proceedings in an aggregate amount not to exceed $7,000,000, (vi) payments in respect of prepetition claims of taxing authorities or advances or deposits or other credit support in lieu thereof, all as described in the Borrowers’ Motion for Order Authorizing Payment of Prepetition Payroll Sales, Use, Property and Franchise Taxes to be filed in the Cases and the U.K. Subsidiary Proceedings, in an aggregate amount not to exceed $7,000,000 (exclusive of payroll taxes), (vii) payments in respect of prepetition claims of non-affiliated foreign creditors of the Parent relating to the Kontich, Belgium warehouse, or advances or deposits or other credit support in lieu thereof, all as described in the Borrowers’ Motion for Order Authorizing Debtors to Pay Prepetition Claims at the Kontich Facility to be filed in the Cases and in the U.K. Subsidiary Proceedings, in an aggregate amount not to exceed $800,000, (viii) payments in respect of prepetition claims of creditors in connection with the Borrowers’ procurement card program or advances or deposits or other credit support in lieu thereof, all as described in the Borrowers’ Motion for Order Authorizing Debtors to Pay Certain Prepetition Obligations Involving Bank One Credit Card Program to be filed in the Cases, in an aggregate amount not to exceed $500,000, (ix) retention of title payments, required by statute, to trade vendors in the United Kingdom made by U.K. Subsidiaries estimated to be up to $12,000,000, (x) any underfunded pension obligation (contingent, liquidated or unliquidated) existing on the Filing Date under pension plans in existence on the Filing Date, which payment must be authorized by separate order of the Bankruptcy Court, upon notice and a hearing, (xi) the monthly payment of current interest and letter of credit fees (and the payment of all interest and fees that are accrued

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and unpaid as of the commencement of the Cases) at the applicable non-default rates (including LIBOR pricing options) provided for pursuant to the Prepetition Credit Agreement, all as described in the Borrowers’ Motion of Debtors and Debtors in Possession for an Order (I) Authorizing PostPetition Financing on a Secured and Superpriority Basis Pursuant to 11 U.S.C. § 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Adequate Protection Pursuant to 11 U.S.C. §§ 363 and 364; and (IV) Scheduling A Final Hearing Pursuant to Federal Rule of Bankruptcy Procedure 4001, (xii) the regularly scheduled payment of premiums, if any, payable to the Surety Bond providers at the applicable non-default rates set forth in the agreements with respect thereto, all as described in the Borrowers’ Motion of Debtors and Debtors in Possession for an Order (I) Authorizing PostPetition Financing on a Secured and Superpriority Basis Pursuant to 11 U.S.C. § 364; (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363; (III) Granting Adequate Protection Pursuant to 11 U.S.C. §§ 363 and 364; and (IV) Scheduling A Final Hearing Pursuant to Federal Rule of Bankruptcy Procedure 4001; (xiii) the adequate protection payments payable to the collateral trustee for the benefit of the holders under the Indentures, all as described in the Final Order; or (xiv) payments in respect of certain U.K. pension contributions solely to the extent required under the Schedule of Contributions for the relevant U.K. pension scheme; provided, however, that payments to be made by the Borrowers or their Subsidiaries in respect of such U.K. pension contributions shall not, in any event, exceed £1,100,000 for any fiscal month of the Borrowers or, except that in connection with the transfer of the assets and liabilities of the STS Pension and Life Assurance Scheme and the STS Executive Pension Scheme to the T&N Retirement Benefits Scheme (1989), the Borrowers or their Subsidiaries may make an additional one-time required contribution to the relevant U.K. pension scheme in an amount not to exceed £1,100,000; or

(n) any Termination Event described in clauses (iii) or (iv) of the definition of such term shall have occurred and shall continue unremedied for more than ten (10) days and the sum (determined as of the date of occurrence of such Termination Event) of the Insufficiency of the Plan in respect of which such Termination Event shall have occurred and be continuing and the Insufficiency of any and all other Plans with respect to which such a Termination Event (described in such clauses (iii) or (iv)) shall have occurred and then exist is equal to or greater than $1,000,000; or

(o) (i) any Borrower or any ERISA Affiliate thereof shall have been notified by the sponsor of a Multiemployer Plan that it has incurred Withdrawal Liability to such Multiemployer Plan, (ii) such Borrower or such ERISA Affiliate does not have reasonable grounds to contest such Withdrawal Liability and is not in fact contesting such Withdrawal Liability in a timely and appropriate manner, and (iii) the amount of such Withdrawal Liability specified in such notice, when aggregated with all other amounts required to be paid to Multiemployer Plans in connection with Withdrawal Liabilities (determined as of the date of such notification), exceeds $1,000,000 allocable to post-petition obligations or requires payments exceeding $1,000,000 per annum in excess of the annual payments made with respect to such Multiemployer Plans by such Borrower or such ERISA Affiliate for the plan year immediately preceding the plan year in which such notification is received; or

(p) any Borrower or any ERISA Affiliate thereof shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or is being terminated, within the meaning of Title IV of ERISA, if as a result of such reorganization

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or termination the aggregate annual contributions of such Borrower and its ERISA Affiliates to all Multiemployer Plans that are then in reorganization or being terminated have been or will be increased over the amounts contributed to such Multiemployer Plans for the plan years that include the date hereof by an amount exceeding $1,000,000; or

(q) any Borrower or any ERISA Affiliate thereof shall have committed a failure described in Section 302(f)(l) of ERISA (other than the failure to make any contribution accrued and unpaid as of the Filing Date) and the amount determined under Section 302(f)(3) of ERISA is equal to or greater than $1,000,000; or

(r) it shall be determined (whether by the Bankruptcy Court or by any other judicial or administrative forum) that any Borrower is liable for the payment of claims arising out of any failure to comply (or to have complied) with applicable environmental laws or regulations the payment of which will have a material adverse effect on the financial condition, business, properties, operations or assets of the Borrowers, taken as a whole, and the enforcement thereof shall not have been stayed; or

(s) the Court in the United Kingdom having jurisdiction over the U.K. Administration shall make an order granting leave pursuant to sections 10(1)(b) or 10(1)(c) of the U.K. Insolvency Act whereby any encumbrance or claim of a third party in excess of $1,000,000 may be enforced or there shall be rendered against the U.K. Subsidiaries a non-monetary judgment with respect to a post-Filing Date event which causes or would reasonably be expected to cause a material adverse change or a material adverse effect on the U.K. Subsidiaries;

then, and in every such event and at any time thereafter during the continuance of such event, and without further order of or application to the Bankruptcy Court, the Administrative Agent may, and at the request of the Required Lenders, shall, take one or more of the following actions without further order of or application to the Court, provided that with respect to item (iv) below and the enforcement of liens or other remedies with respect to collateral referred to in item (v) below, the Administrative Agent shall provide the Borrowers (with a copy to counsel for the Official Creditors’ Committee appointed in any of the Cases and to the United States Trustee for the Bankruptcy Court’s District) with five (5) business days’ prior written notice (the “Default Notice”): (i) terminate forthwith the Total Commitment; (ii) declare the Loans then outstanding to be forthwith due and payable, whereupon the principal of the Loans together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrowers accrued hereunder and under any other Loan Document, shall become forthwith due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrowers, anything contained herein or in any other Loan Document to the contrary notwithstanding; (iii) require the Borrowers upon demand to forthwith deposit in the Letter of Credit Account cash in an amount which, together with any amounts then held in the Letter of Credit Account, is equal to the sum of 105% of the then Letter of Credit Outstandings (and to the extent the Borrowers shall fail to furnish such funds as demanded by the Administrative Agent, the Administrative Agent shall be authorized to debit the accounts of the Borrowers maintained with the Administrative Agent in such amount five (5) Business Days after the giving of the notice referred to above (the “Default Notice Period”)); (iv) set-off amounts in the Letter of Credit Account or any other accounts maintained with the

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Administrative Agent or any other Lender or their affiliates and apply such amounts to the obligations of the Borrowers hereunder and in the other Loan Documents; and/or (v) exercise any and all remedies under the Loan Documents and under applicable law available to the Administrative Agent and the Lenders.

SECTION 8. THE ADMINISTRATIVE AGENT

SECTION 8.1 Administration by Administrative Agent. The general administration of the Loan Documents shall be performed by the Administrative Agent. Each Lender hereby irrevocably authorizes the Administrative Agent, at its discretion, to take or refrain from taking such actions as agent on its behalf and to exercise or refrain from exercising such powers under the Loan Documents as are delegated by the terms hereof or thereof, as appropriate, together with all powers reasonably incidental thereto (including the release of Collateral in connection with any transaction that is expressly permitted by the Loan Documents). The Administrative Agent shall have no duties or responsibilities except as set forth in this Agreement and the remaining Loan Documents.

SECTION 8.2 Advances and Payments.

(a) On the date of each Loan, the Administrative Agent shall be authorized (but not obligated) to advance, for the account of each of the Lenders, the amount of the Loan to be made by it in accordance with its Commitment hereunder. Should the Administrative Agent do so, each of the Lenders agrees forthwith to reimburse the Administrative Agent in immediately available funds for the amount so advanced on its behalf by the Administrative Agent, together with interest at the Federal Funds Effective Rate if not so reimbursed on the date due from and including such date but not including the date of reimbursement.

(b) Any amounts received by the Administrative Agent in connection with this Agreement (other than amounts to which the Administrative Agent is entitled pursuant to Sections 2.19, 8.6, 10.5 and 10.6), the application of which is not otherwise provided for in this Agreement, shall be applied, first, in accordance with each Lender’s Commitment Percentage to pay accrued but unpaid Commitment Fees or Letter of Credit Fees, and second, in accordance with each Lender’s Commitment Percentage to pay accrued but unpaid interest and the principal balance outstanding and all unreimbursed Letter of Credit drawings. All amounts to be paid to a Lender by the Administrative Agent shall be credited to that Lender, after collection by the Administrative Agent, in immediately available funds either by wire transfer or deposit in that Lender’s correspondent account with the Administrative Agent, as such Lender and the Administrative Agent shall from time to time agree.

SECTION 8.3 Sharing of Setoffs. Each Lender agrees that if it shall, through the exercise of a right of banker’s lien, setoff or counterclaim against the Borrowers, including, but not limited to, a secured claim or other security or interest arising from, or in lieu of, such secured claim and received by such Lender under any applicable bankruptcy, insolvency or other similar law. or otherwise, obtain payment in respect of its Loans as a result of which the unpaid portion of its Loans is proportionately less than the unpaid portion of the Loans of any other Lender (a) it shall promptly purchase at par (and shall be deemed to have thereupon purchased) from such other Lender a participation in the Loans of such other Lender, so that the aggregate

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unpaid principal amount of each Lender’s Loans and its participation in Loans of the other Lenders shall be in the same proportion to the aggregate unpaid principal amount of all Loans then outstanding as the principal amount of its Loans prior to the obtaining of such payment was to the principal amount of all Loans outstanding prior to the obtaining of such payment and (b) such other adjustments shall be made from time to time as shall be equitable to ensure that the Lenders share such payment pro-rata, provided that if any such non-pro-rata payment is thereafter recovered or otherwise set aside such purchase of participations shall be rescinded (without interest). Each of the Borrowers expressly consents to the foregoing-arrangements and agrees that any Lender holding (or deemed to be holding) a participation in a Loan may exercise any and all rights of banker’s lien, setoff (in each case, subject to the same notice requirements as pertain to clause (iv) of the remedial provisions of Section 7.1) or counterclaim with respect to any and all moneys owing by the Borrowers to such Lender as fully as if such Lender held a Note and was the original obligee thereon, in the amount of such participation.

SECTION 8.4 Agreement of Required Lenders. Upon any occasion requiring or permitting an approval, consent, waiver, election or other action on the part of the Required Lenders, action shall be taken by the Administrative Agent for and on behalf or for the benefit of all Lenders upon the direction of the Required Lenders, and any such action shall be binding on all Lenders. No amendment, modification, consent, or waiver shall be effective except in accordance with the provisions of Section 10.10.

SECTION 8.5 Liability of Administrative Agent.

(a) The Administrative Agent, when acting on behalf of the Lenders, may execute any of its respective duties under this Agreement by or through any of its respective officers, agents, and employees, and neither the Administrative Agent nor its directors, officers, agents, employees or Affiliates shall be liable to the Lenders or any of them for any action taken or omitted to be taken in good faith, or be responsible to the Lenders or to any of them for the consequences of any oversight or error of judgment, or for any loss, unless the same shall happen through its gross negligence or willful misconduct. The Administrative Agent and its respective directors, officers, agents, employees and Affiliates shall in no event be liable to the Lenders or to any of them for any action taken or omitted to be taken by them pursuant to instructions received by them from the Required Lenders or in reliance upon the advice of counsel selected by it. Without limiting the foregoing, neither the Administrative Agent, nor any of its respective directors, officers, employees, agents or Affiliates shall be responsible to any Lender for the due execution, validity, genuineness, effectiveness, sufficiency, or enforceability of, or for any statement, warranty, or representation in, this Agreement, any Loan Document or any related agreement, document or order, or shall be required to ascertain or to make any inquiry concerning the performance or observance by the Borrowers of any of the terms, conditions, covenants, or agreements of this Agreement or any of the Loan Documents.

(b) Neither the Administrative Agent nor any of its respective directors, officers, employees, agents or Affiliates shall have any responsibility to the Borrowers on account of the failure or delay in performance or breach by any Lender or by the Borrowers of any of their obligations under this Agreement or any of the Loan Documents or in connection herewith or therewith.

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(c) The Administrative Agent, in its capacity as Administrative Agent hereunder, shall be entitled to rely on any communication, instrument, or document reasonably believed by such person to be genuine or correct and to have been signed or sent by a person or persons believed by such person to be the proper person or persons, and such person shall be entitled to rely on advice of legal counsel, independent public accountants, and other professional advisers and experts selected by such person.

SECTION 8.6 Reimbursement and Indemnification. Each Lender agrees (i) to reimburse (x) the Administrative Agent for such Lender’s Commitment Percentage of any expenses and fees incurred for the benefit of the Lenders under this Agreement and any of the Loan Documents, including, without limitation, counsel fees and compensation of agents and employees paid for services rendered on behalf of the Lenders, and any other expense incurred in connection with the operations or enforcement thereof not reimbursed by the Borrowers and (y) the Administrative Agent for such Lender’s Commitment Percentage of any expenses of the Administrative Agent incurred for the benefit of the Lenders that the Borrowers have agreed to reimburse pursuant to Section 10.5 and has failed to so reimburse and (ii) to indemnify and hold harmless the Administrative Agent and any of its directors, officers, employees, agents or Affiliates, on demand, in the amount of its proportionate share, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against it or any of them in any way relating to or arising out of this Agreement or any of the Loan Documents or any action taken or omitted by it or any of them under this Agreement or any of the Loan Documents to the extent not reimbursed by the Borrowers (except such as shall result from their respective gross negligence or willful misconduct).

SECTION 8.7 Rights of Administrative Agent. It is understood and agreed that JPMCB shall have the same rights and powers hereunder (including the right to give such instructions) as the other Lenders and may exercise such rights and powers, as well as its rights and powers under other agreements and instruments to which it is or may be party, and engage in other transactions with any Borrower, as though it were not the Administrative Agent of the Lenders under this Agreement.

SECTION 8.8 Independent Lenders. Each Lender acknowledges that it has decided to enter into this Agreement and to make the Loans hereunder based on its own analysis of the transactions contemplated hereby and of the creditworthiness of the Borrowers and agrees that the Administrative Agent shall bear no responsibility therefor.

SECTION 8.9 Notice of Transfer. The Administrative Agent may deem and treat a Lender party to this Agreement as the owner of such Lender’s portion of the Loans for all purposes, unless and until a written notice of the assignment or transfer thereof executed by such Lender shall have been received by the Administrative Agent.

SECTION 8.10 Successor Administrative Agent. The Administrative Agent may resign at any time by giving written notice thereof to the Lenders and the Borrowers. Upon any such resignation, the Required Lenders shall have the right to appoint a successor Administrative Agent, which shall be reasonably satisfactory to the Borrowers. If no successor Administrative Agent shall have been so appointed by the Required Lenders and shall have accepted such

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appointment, within thirty (30) days after the retiring Administrative Agent’s giving of notice of resignation, the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of a least $100,000,000, which shall be reasonably satisfactory to the Borrowers. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Administrative Agent’s resignation hereunder as Administrative Agent, the provisions of this Section 8 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement.

SECTION 9. GUARANTY

SECTION 9.1 Guaranty.

(a) Each of the Borrowers unconditionally and irrevocably guarantees the due and punctual payment and performance by the Foreign Subsidiaries under any Letters of Credit issued for the account thereof (collectively the “Guaranteed Obligations”). The Borrowers further agree that the Guaranteed Obligations may be extended or renewed, in whole or in part, without notice to or further assent from them, and they will remain bound upon this guaranty notwithstanding any extension or renewal of any of the Guaranteed Obligations.

(b) Each of the Borrowers waives presentation to, demand for payment from and protest to the Foreign Subsidiaries or the Borrowers, and also waives notice of protest for nonpayment. The Obligations of the Borrowers, as guarantors of the Guaranteed Obligations hereunder, shall not be affected by (i) the failure of the Administrative Agent or a Lender to assert any claim or demand or to enforce any right or remedy against the Foreign Subsidiaries or the Borrowers under the provisions of this Agreement or any other Loan Document or otherwise; (ii) any extension or renewal of any provision hereof or thereof; (iii) any rescission, waiver, compromise, acceleration, amendment or modification of any of the terms or provisions of any of the Loan Documents; (iv) the release, exchange, waiver or foreclosure of any security held by the Administrative Agent for the Guaranteed Obligations or any of them; (v) the failure of the Administrative Agent or a Lender to exercise any right or remedy against any other guarantor of the Guaranteed Obligations; or (vi) the release or substitution of any other guarantor of the Guaranteed Obligations.

(c) The Borrowers further agree that this guaranty constitutes a guaranty of performance and of payment when due and not just of collection, and waives any right to require that any resort be had by the Administrative Agent or a Lender to any security held for payment of the Guaranteed Obligations or to any balance of any deposit, account or credit on the books of the Administrative Agent or a Lender in favor of any Foreign Subsidiary or the Borrowers, or to any other Person.

(d) The Borrowers hereby waive any defense that they might have based on a failure to remain informed of the financial condition of the Foreign Subsidiaries and any of the

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other Borrowers and any circumstances affecting the ability of the Foreign Subsidiaries or the Borrowers to perform under this Agreement.

(e) The Borrowers’ guaranty shall not be affected by the genuineness, validity, regularity or enforceability of the Guaranteed Obligations or any other instrument evidencing any Obligations, or by the existence, validity, enforceability, perfection, or extent of any collateral therefor or by any other circumstance relating to the Guaranteed Obligations which might otherwise constitute a defense to this guaranty. Neither the Administrative Agent nor any of the Lenders makes any representation or warranty in respect to any such circumstances or shall have any duty or responsibility whatsoever to the Borrowers in respect of the management and maintenance of the Guaranteed Obligations.

(f) Subject to the provisions of Section 7.1, upon any of the Guaranteed Obligations becoming due and payable (by acceleration or otherwise), the Lenders shall be entitled to immediate payment of such Guaranteed Obligations by the Borrowers upon written demand by the Administrative Agent, without further application to or order of the Bankruptcy Court.

SECTION 9.2 No Impairment of Guaranty. The obligations of the Borrowers, as guarantors of the Guaranteed Obligations hereunder, shall not be subject to any reduction, limitation, impairment or termination for any reason, including, without limitation, any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense or set-off, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Guaranteed Obligations. Without limiting the generality of the foregoing, the obligations of the Borrowers hereunder shall not be discharged or impaired or otherwise affected by the failure of the Administrative Agent or a Lender to assert any claim or demand or to enforce any remedy under this Agreement or any other agreement, by any waiver or modification of any provision thereof, by any default, failure or delay, willful or otherwise, in the performance of the Guaranteed Obligations, or by any other act or thing or omission or delay to do any other act or thing which may or might in any manner or to any extent vary the risk of the Borrowers, as guarantors of the Guaranteed Obligations, or would otherwise operate as a discharge of the Borrowers, as guarantors of the Guaranteed Obligations, as a matter of law, unless and until the Guaranteed Obligations are paid in full.

SECTION 9.3 Subrogation. Upon payment by the Borrowers, as guarantors of the Guaranteed Obligations, of any sums to the Administrative Agent or a Lender hereunder, all rights of the Borrowers against any of the Non-Debtor Foreign Subsidiaries or any other Borrower or guarantor arising as a result thereof by way of right of subrogation or otherwise, shall in all respects be subordinate and junior in right of payment to the prior final and indefeasible payment in full of all the Guaranteed Obligations. If any amount shall be paid to the Borrowers, as guarantors of the Guaranteed Obligations, for the account of any of Non-Debtor Foreign Subsidiaries or any other Borrower, such amount shall be held in trust for the benefit of the Administrative Agent and the Lenders and shall forthwith be paid to the Administrative Agent and the Lenders to be credited and applied to the Guaranteed Obligations, whether matured or unmatured.

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SECTION 10. MISCELLANEOUS

SECTION 10.1 Notices. Notices and other communications provided for herein shall be in writing (including telegraphic, telex, facsimile or cable communication) and shall be mailed, telegraphed, telexed, transmitted, cabled or delivered to any Borrower at c/o Federal-Mogul Corporation, World Headquarters, 26555 Northwestern Highway, Southfield, Michigan 48034, Attention: James Keller, Telephone: (248) 354-7700 and Telecopy: (248) 354-6746, and to a Lender or the Administrative Agent to it at its address set forth on Annex A-1 or A-2, or such other address as such party may from time to time designate by giving written notice to the other parties hereunder. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the fifth Business Day after the date when sent by registered or certified mail, postage prepaid, return receipt requested, if by mail; or when delivered to the telegraph company, charges prepaid, if by telegram; or when receipt is acknowledged, if by any telegraphic communications or facsimile equipment of the sender; in each case addressed to such party as provided in this Section 10.1 or in accordance with the latest unrevoked written direction from such party; provided, however, that in the case of notices to the Administrative Agent notices pursuant to the preceding sentence with respect to change of address and pursuant to Section 2 shall be effective only when received by the Administrative Agent.

SECTION 10.2 Survival of Agreement, Representations and Warranties, etc. All warranties, representations and covenants made by any Borrower herein or in any certificate or other instrument delivered by it or on its behalf in connection with this Agreement shall be considered to have been relied upon by the Lenders and shall survive the making of the Loans herein contemplated regardless of any investigation made by any Lender or on its behalf and shall continue in full force and effect so long as any amount due or to become due hereunder is outstanding and unpaid and so long as the Commitments have not been terminated. All statements in any such certificate or other instrument shall constitute representations and warranties by the Borrowers hereunder with respect to the Borrowers.

SECTION 10.3 Successors and Assigns.

(a) This Agreement shall be binding upon and inure to the benefit of the Borrowers, the Administrative Agent and the Lenders and their respective successors and assigns. The Borrowers may neither assign nor transfer any of their rights or obligations hereunder without the prior written consent of all of the Lenders. Each Lender may sell participations to any Person in all or part of any Loan, or all or part of its Commitment, in which event, without limiting the foregoing, the provisions of Section 2.15 shall inure to the benefit of each purchaser of a participation (provided that such participant shall look solely to the seller of such participation for such benefits and the Borrowers’ liability, if any, under Sections 2.15 and 2.18 shall not be increased as a result of the sale of any such participation) and the pro rata treatment of payments, as described in Section 2.17, shall be determined as if such Lender had not sold such participation. In the event any Lender shall sell any participation, such Lender shall retain the sole right and responsibility to enforce the obligations of each of the Borrowers relating to the Loans, including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement (provided that such Lender may grant its participant the right to consent to such Lender’s execution of amendments, modifications or

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waivers which (i) reduce any Fees payable hereunder to the Lenders, (ii) reduce the amount of any scheduled principal payment on any Loan or reduce the principal amount of any Loan or the rate of interest payable hereunder or (iii) extend the maturity of the Borrowers’ obligations hereunder). The sale of any such participation shall not alter the rights and obligations of the Lender selling such participation hereunder with respect to the Borrowers.

(b) Each Lender may assign to one or more Lenders or Eligible Assignees all or a portion of its interests, rights and obligations under this Agreement (including, without limitation, all or a portion of its separate Commitments and the same portion of the related Loans at the time owing to it), provided, however, that (i) in the case of an assignment of all or a portion of a Tranche A Lender’s interests, rights and obligations under this Agreement in respect of such Tranche A Lender’s Tranche A Commitment to any Person other than a then Tranche A Lender, the Administrative Agent must give its prior written consent to such assignment, which consent will not be unreasonably withheld, (ii) other than in the case of an assignment to any Lender Affiliate or to an Approved Fund of a Lender or to a Person at least 50% owned by the assignor Lender, or by a common parent of both, or to another Lender, the Administrative Agent and the Fronting Bank must give their respective prior written consent to such assignment, which consent will not be unreasonably withheld, (iii) other than in the case of an assignment to any Lender Affiliate or to an Approved Fund of a Lender or to a Person at least 50% owned by the assignor Lender, or by a common parent of both, or to another Lender, the aggregate amount of the Commitment and/or Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall, unless otherwise agreed to in writing by the Borrowers and the Administrative Agent, in no event be less than $1,000,000 or the remaining portion of such Lender’s Commitment and/or Loans, if less and (iv) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register (as defined below), an Assignment and Acceptance with blanks appropriately completed, together with a processing and recordation fee of $3,500 (for which the Borrowers shall have no liability). Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be within ten (10) Business Days after the execution thereof (unless otherwise agreed to in writing by the Administrative Agent), (A) the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (B) the Lender thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto).

(c) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, such Lender assignor makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or any of the other Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any of the other Loan

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Documents; (ii) such Lender assignor makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrowers or the performance or observance by the Borrowers of any of its obligations under this Agreement or any of the other Loan Documents or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement and the other Loan Documents, together with copies of the financial statements referred to in Section 3.4 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Administrative Agent, such Lender assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms thereto, together with such powers as are reasonably incidental hereof; and (vi) such assignee agrees that it will perform in accordance with their terms all obligations that by the terms of this Agreement are required to be performed by it as a Lender.

(d) The Administrative Agent shall maintain at its office a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders and the Commitments of, and principal amount of the Loans owing to, each Lender from time to time (the “Register”). The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrowers, the Administrative Agent and the Lenders shall treat each Person the name of which is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrowers or any Lender at any reasonable time and from time to time upon reasonable prior notice.

(e) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and the assignee thereunder together with the fee payable in respect thereto, the Administrative Agent shall, if such Assignment and Acceptance has been completed with blanks appropriately filled and consented to by the Administrative Agent and the Fronting Bank (to the extent such consent is required hereunder), (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt written notice thereof to the Borrowers (together with a copy thereof). No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph.

(f) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 10.3, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrowers furnished to such Lender by or on behalf of any of the Borrowers; provided that prior to any such disclosure, each such assignee or participant or proposed assignee or participant shall agree in writing to be bound by the provisions of Section 10.4.

(g) Each of the Borrowers hereby agrees to actively assist and cooperate with the Administrative Agent in the Administrative Agent’s efforts to sell participations herein (as described in Section 10.3(a)) and assign to one or more Lenders or Eligible Assignees a portion of its interests, rights and obligations under this Agreement (as set forth in Section 10.3(b)).

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(h) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any pledge or assignment of a security interest, provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

SECTION 10.4 Confidentiality. Each Lender agrees to keep any information delivered or made available by any of the Borrowers to it confidential from anyone other than persons employed or retained by such Lender who are or are expected to become engaged in evaluating, approving, structuring or administering the Loans; provided that nothing herein shall prevent any Lender from disclosing such information (i) to any of its Affiliates or to any other Lender, provided such Affiliate agrees to keep such information confidential to the same extent required by the Lenders hereunder, (ii) upon the order of any court or administrative agency, (iii) upon the request or demand of any regulatory agency or authority, (iv) which has been publicly disclosed other than as a result of a disclosure by the Administrative Agent or any Lender which is not permitted by this Agreement, (v) in connection with any litigation to which the Administrative Agent, any Lender, or their respective Affiliates may be a party to the extent reasonably required, (vi) to the extent reasonably required in connection with the exercise of any remedy hereunder, (vii) to such Lender’s legal counsel and independent auditors, and (viii) to any actual or proposed participant or assignee of all or part of its rights hereunder subject to the proviso in Section 10.3(f). Each Lender shall notify the Borrowers of any required disclosure under clause (ii) of this Section; provided, however, that the failure of any such Lender to provide such notification shall not limit, alter or otherwise affect any of the Borrowers’ obligations under this Agreement.

Notwithstanding anything herein to the contrary, any party subject to confidentiality obligations hereunder (and any employee, representative, or other agent of such party) may disclose to any and all persons, without limitation of any kind, such party’s U.S. federal income tax treatment and the U.S. federal income tax structure of the transactions contemplated by this Agreement relating to such party and all materials of any kind (including opinions or other tax analyses) that are provided to it relating to such tax treatment and tax structure, provided, however, no such party shall disclose any information relating to such tax treatment or tax structure to the extent nondisclosure is reasonably necessary in order to comply with applicable securities laws.

SECTION 10.5 Expenses. Whether or not the transactions hereby contemplated shall be consummated, the Borrowers agree to pay all reasonable expenses incurred by the Administrative Agent and JPMorgan (including, without limitation, the reasonable fees and disbursements of Bryan Cave LLP, counsel for the Administrative Agent, any other counsel that the Administrative Agent shall retain and any internal or third-party appraisers, consultants and auditors advising the Administrative Agent and JPMorgan and their counsel) in connection with the preparation, execution, delivery and administration of this Agreement and the other Loan Documents, the making of the Loans and the issuance of the Letters of Credit, the perfection of the Liens contemplated hereby, the syndication of the transactions contemplated hereby, the costs, fees and expenses of the Administrative Agent and JPMorgan in connection with monthly and other periodic field audits, monitoring of assets (including reasonable and customary internal collateral monitoring fees) and publicity expenses, and, following the occurrence of an Event of

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Default, all expenses incurred by the Lenders and the Administrative Agent in the enforcement or protection of the rights of any one or more of the Lenders or the Administrative Agent in connection with this Agreement or the other Loan Documents, including but not limited to the fees and disbursements of any counsel for the Lenders or the Administrative Agent. Such payments by the Borrowers shall be made upon delivery of a statement setting forth such costs and expenses. Whether or not the transactions hereby contemplated shall be consummated, the Borrowers agree to reimburse the Administrative Agent and JPMorgan for the expenses set forth in the Commitment Letter and the reimbursement provisions thereof are hereby incorporated herein by reference. The obligations of the Borrowers under this Section shall survive the termination of this Agreement and/or the payment of the Loans.

SECTION 10.6 Indemnity. Each of the Borrowers agrees to indemnify and hold harmless the Administrative Agent, JPMorgan and the Lenders and their directors, officers, employees, trustees, advisors, agents and Affiliates (each an “Indemnified Party”) from and against any and all expenses, losses, claims, damages and liabilities incurred by such Indemnified Party arising out of claims made by any Person in any way relating to the transactions contemplated hereby, but excluding therefrom all expenses, losses, claims, damages, and liabilities to the extent that they are determined by the final judgment of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Indemnified Party. The obligations of the Borrowers under this Section shall survive the termination of this Agreement and/or the payment of the Loans.

SECTION 10.7 Choice of Law. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL IN ALL RESPECTS BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN SUCH STATE AND THE BANKRUPTCY CODE.

SECTION 10.8 No Waiver. No failure on the part of the Administrative Agent or any of the Lenders to exercise, and no delay in exercising, any right, power or remedy hereunder or any of the other Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law.

SECTION 10.9 Extension of Maturity. Should any payment of principal of or interest or any other amount due hereunder become due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day and, in the case of principal, interest shall be payable thereon at the rate herein specified during such extension.

SECTION 10.10 Amendments, etc.

(a) No modification, amendment or waiver of any provision of this Agreement or the Security and Pledge Agreement, and no consent to any departure by the Borrowers therefrom, shall in any event be effective unless the same shall be in writing and signed by the Required Lenders, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given; provided, however, that no such

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modification or amendment shall without the written consent of the Lender affected thereby (x) increase the Commitment of a Lender (it being understood that a waiver of an Event of Default shall not constitute an increase in the Commitment of a Lender), or (y) reduce the principal amount of any Loan (or any unreimbursed Letter of Credit) or the rate of interest payable thereon, or extend any date for the payment of interest, principal or fees hereunder or reduce any Fees payable hereunder or extend the final maturity of the Borrowers’ obligations hereunder; and, provided, further, that no such modification or amendment shall without the written consent of (A) all of the Lenders (i) amend or modify any provision of this Agreement which provides for the unanimous consent or approval of the Lenders, (ii) amend this Section 10.10 or the definition of Required Lenders or (iii) amend or modify the Superpriority Claim status of the Lenders contemplated by Section 2.23 or (B) the Super-Majority Lenders (i) release any material portion of the Collateral from the Liens created under the Security and Pledge Agreement, (ii) release any Borrower, in its capacity as a Guarantor under Section 9 or from its joint and several obligations under Section 2.7, (iii) alter the eligibility standards used in determining the Borrowing Base in a manner which would increase the amount of the Borrowing Base, (iv) increase the Total Commitment to an amount in excess of $600,000,000, or (v) increase the advance rates in calculation of the Borrowing Base. No such amendment or modification may adversely affect the rights and obligations of the Administrative Agent or any Fronting Bank hereunder or any Lender in the capacity referred to in Section 6.3(v) without its prior written consent. No notice to or demand on any Borrower shall entitle any Borrower to any other or further notice or demand in the same, similar or other circumstances. Each assignee under Section 10.3(b) shall be bound by any amendment, modification, waiver, or consent authorized as provided herein, and any consent by a Lender shall bind any Person subsequently acquiring an interest on the Loans held by such Lender. No amendment to this Agreement shall be effective against any Borrower unless in writing and signed by such Borrower.

(b) Notwithstanding anything to the contrary contained in Section 10.10(a), in the event that any Borrower requests that this Agreement be modified or amended in a manner which would require the unanimous consent of all of the Lenders (or the consent described in clause (B) of the first sentence in Section 10.10(a)) and such modification or amendment is agreed to by the Super-majority Lenders (as hereinafter defined), then with the consent of the Borrowers and the Super-majority Lenders, the Borrowers and the Super-majority Lenders shall be permitted to amend the Agreement without the consent of the Lender or Lenders which did not agree to the modification or amendment requested by such Borrower (such Lender or Lenders, collectively the “Minority Lenders”) to provide for (w) the termination of the Commitment of each of the Minority Lenders, (x) the addition to this Agreement of one or more other financial institutions (each of which shall be an Eligible Assignee), or an increase in the Commitment of one or more of the Super-majority Lenders, so that the Total Commitment after giving effect to such amendment shall be in the same amount as the Total Commitment immediately before giving effect to such amendment, (y) if any Loans are outstanding at the time of such amendment, the making of such additional Loans by such new financial institutions or Super-majority Lender or Lenders, as the case may be, as may be necessary to repay in full the outstanding Loans of the Minority Lenders immediately before giving effect to such amendment and (z) such other modifications to this Agreement as may be appropriate. As used herein, the term “Super-majority Lenders” shall mean, at any time, Lenders including JPMCB holding Loans representing at least 66-2/3% of the aggregate principal amount of the Loans outstanding,

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or if no Loans are outstanding, Lenders having Tranche A and Tranche B Commitments representing at least 66-2/3% of the Total Commitment.

SECTION 10.11 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

SECTION 10.12 Headings. Section headings used herein are for convenience only and are not to affect the construction of or be taken into consideration in interpreting this Agreement.

SECTION 10.13 Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute an original, but all of which taken together shall constitute one and the same instrument.

SECTION 10.14 Prior Agreements. This Agreement represents the entire agreement of the parties with regard to the subject matter hereof and the terms of any letters and other documentation entered into between any Borrower and any Lender or the Administrative Agent prior to the execution of this Agreement which relate to Loans to be made hereunder shall be replaced by the terms of this Agreement (except as otherwise expressly provided herein with respect to the Commitment Letter, the fee letter dated September 21, 2001 among the Administrative Agent, JPMorgan and the Borrowers referred to therein, and that certain engagement and fee letter dated July 7, 2003 among JPMCB, JPMorgan and the Borrowers, including without limitation the Borrowers’ agreement to actively assist the Administrative Agent in the syndication of the transactions contemplated hereby referred to in Section 10.3(g) and including also the provisions of Section 2.19).

SECTION 10.15 Further Assurances. Whenever and so often as reasonably requested by the Administrative Agent, the Borrowers will promptly execute and deliver or cause to be executed and delivered all such other and further instruments, documents or assurances, and promptly do or cause to be done all such other and further things as may be necessary and reasonably required in order to further and more fully vest in the Administrative Agent all rights, interests, powers, benefits, privileges and advantages conferred or intended to be conferred by this Agreement and the other Loan Documents.

SECTION 10.16 Waiver of Jury Trial. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY.

SECTION 10.17 Subordination of Intercompany Indebtedness. Each of the Borrowers agrees that any and all Intercompany Indebtedness owed to an y Borrower shall be subordinate and subject in right of payment to the prior payment, in full and in cash, of all Obligations. Notwithstanding any right of any Borrower to ask, demand, sue for, take or receive any payment in respect of any Intercompany Indebtedness owed to any Borrower, any and all rights, liens and security interests of any Borrower, whether now or hereafter arising and howsoever existing, in

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any assets of any other Subsidiary of Parent (whether constituting part of Collateral given to the Administrative Agent for the benefit of the Lenders to secure payment of all or any part of the Obligations or otherwise) shall be and are subordinated to the rights of the Administrative Agent and the Lenders in those assets. No Borrower shall have any right to possession of any such asset or to foreclose upon any such asset, whether by judicial action or otherwise, unless and until all of the Obligations (other than contingent indemnity obligations) shall have been fully paid and satisfied and all financing arrangements among the Borrowers and the Lenders have been terminated. So long as any Event of Default shall have occurred and be continuing, then, any payment or distribution of any kind or character, either in cash, securities or other property, which shall be payable or deliverable upon or with respect to any Intercompany Indebtedness owed by any Borrower shall be paid or delivered directly to the Administrative Agent for application on any of the Obligations, due or to become due, until such Obligations (other than contingent indemnity obligations) shall have first been fully paid and satisfied. Each of the Borrowers irrevocably authorizes and empowers the Administrative Agent to demand, sue for, collect and receive every such payment or distribution and give acquittance therefor and to make and present for and on behalf of any Borrower such proofs of claim and take such other action, in the Administrative Agent’s own name or in the name of the applicable Borrower or otherwise, as the Administrative Agent may deem necessary or advisable for the enforcement of this Section 10.17. The Administrative Agent may vote such proofs of claim in any such proceeding, receive and collect any and all dividends or other payments or disbursements made thereon in whatever form the same may be paid or issued and apply the same on account of any of the Obligations. Should any payment, distribution, security or instrument or proceeds thereof be received by any Borrower upon or with respect to the Intercompany Indebtedness at any time an Event of Default shall have occurred and be continuing and prior to the satisfaction of all of the Obligations and the termination of all financing arrangements among the Borrowers and the Lenders, the applicable Borrower shall receive and hold the same in trust, as trustee, for the benefit of the Lenders and shall so long as any Event of Default shall have occurred and be continuing promptly deliver the same to the Administrative Agent, for the benefit of the Lenders, in precisely the form received (except for the endorsement or assignment of the applicable Borrower where necessary), for application to any of the Obligations, due or not due, and, until so delivered, the same shall be held in trust by the applicable Borrower as the property of the Lenders. If any Borrower fails to make any such endorsement or assignment to the Administrative Agent, the Administrative Agent or any of its officers or employees are irrevocably authorized to make the same. So long as any Event of Default shall have occurred and be continuing, the Borrowers agree that until the Obligations have been paid in full (in cash) and satisfied and all financing arrangements among the Borrowers and the Lenders have been terminated, the Borrowers will neither assign nor transfer to any Person (other than the Administrative Agent) any claim the Borrowers have or may have against any other Subsidiary of Parent.

SECTION 10.18 Foreign Subsidiaries. Notwithstanding any provision of any Loan Document or the Orders to the contrary, no more than 66% of the capital stock (or comparable equity interests) in or of (x) F-M International, LLC or (y) any Foreign Subsidiary other than Federal-Mogul, S.A. - France which is a “controlled foreign corporation” within the meaning of Section 957(a) of the Code, shall be pledged or similarly hypothecated to guaranty or support any Obligations of any Borrower. The parties agree that any pledge, guaranty or security or similar interest made or granted in contravention of this Section 10.19 shall be void ab initio.

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SECTION 10.19 Effectiveness. This Agreement shall become effective on the date (the “Restatement Effectiveness Date”) on which (i) each Borrower, each Lender and the Administrative Agent shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered the same to the Administrative Agent in accordance with Section 10.1 and (ii) the conditions contained in Section 4.1 are met to the satisfaction of the Administrative Agent. Upon the satisfaction of the condition described in clause (i) of the immediately preceding sentence and upon the Administrative Agent’s determination that the conditions described in clause (ii) of the immediately preceding sentence have been met, then the Restatement Effectiveness Date shall have been deemed to have occurred. The Administrative Agent will give the Borrowers and each Lender written notice of the occurrence of the Restatement Effectiveness Date.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and the year first written.

BORROWERS:
FEDERAL-MOGUL CORPORATION
By:	/S/    DAVID A. BOZYNSKI
Name:	David A. Bozynski
Title:	Vice President and Treasurer

J.W.J. HOLDINGS INC.
By:	/S/    DAVID A. BOZYNSKI
Name:	David A. Bozynski
Title:	Vice President and Treasurer

FEDERAL-MOGUL MACHINE TOOL, INC.
By:	/S/    DAVID A. BOZYNSKI
Name:	David A. Bozynski
Title:	Vice President and Treasurer

CARTER AUTOMOTIVE COMPANY, INC.
By:	/S/    DAVID A. BOZYNSKI
Name:	David A. Bozynski
Title:	Vice President and Treasurer

FEDERAL-MOGUL VENTURE CORPORATION
By:	/S/    DAVID A. BOZYNSKI
Name:	David A. Bozynski
Title:	Vice President and Treasurer

FEDERAL-MOGUL GLOBAL PROPERTIES INC.
By:	/S/    DAVID A. BOZYNSKI
Name:	David A. Bozynski
Title:	Vice President and Treasurer

FEDERAL-MOGUL WORLD WIDE, INC.
By:	/S/    DAVID A. BOZYNSKI
Name:	David A. Bozynski
Title:	Vice President and Treasurer

FELT PRODUCTS MFG. CO.
By:	/S/    DAVID A. BOZYNSKI
Name:	David A. Bozynski
Title:	Vice President and Treasurer

FM INTERNATIONAL, LLC
By:	/S/    DAVID A. BOZYNSKI
Name:	David A. Bozynski
Title:	Vice President and Treasurer

FEDERAL-MOGUL U.K. HOLDINGS INC.
By:	/S/    DAVID A. BOZYNSKI
Name:	David A. Bozynski
Title:	Vice President and Treasurer

FEDERAL-MOGUL GLOBAL INC.
By:	/S/    DAVID A. BOZYNSKI
Name:	David A. Bozynski
Title:	Vice President and Treasurer

T&N INDUSTRIES INC.
By:	/S/    DAVID A. BOZYNSKI
Name:	David A. Bozynski
Title:	Vice President and Treasurer

FERODO AMERICA, INC.
By:	/S/    DAVID A. BOZYNSKI
Name:	David A. Bozynski
Title:	Vice President and Treasurer

GASKET HOLDINGS, INC.
By:	/S/    DAVID A. BOZYNSKI
Name:	David A. Bozynski
Title:	Vice President and Treasurer

FEDERAL-MOGUL MYSTIC, INC.
By:	/S/    DAVID A. BOZYNSKI
Name:	David A. Bozynski
Title:	Vice President and Treasurer

FEDERAL-MOGUL PRODUCTS INC.
By:	/S/    DAVID A. BOZYNSKI
Name:	David A. Bozynski
Title:	Vice President and Treasurer

FEDERAL-MOGUL FX, INC.
By:	/S/    DAVID A. BOZYNSKI
Name:	David A. Bozynski
Title:	Vice President and Treasurer

LENDERS:
JPMORGAN CHASE BANK, Individually and as Administrative Agent
By:	/S/    KAREN MAY SHARF
Name:	Karen May Sharf
Title:	Vice President

BANK OF SCOTLAND, as a Lender
By:	/S/    JOSEPH FRATUS
Name:	Joseph Fratus
Title:	First Vice President

Bank One, NA (Main Office Chicago), as a Lender
By:	/S/    JOSEPH R. HESKETT
Name:	Joseph R. Heskett
Title:	Associate

Bank of America, N.A., as a Lender
By:	/S/    DANIEL R. PETRIK
Name:	Daniel R. Petrik
Title:	Vice President

The CIT Group/Business Credit, Inc., as a Lender
By:	/S/    RENEE M. SINGER
Name:	Renee M. Singer
Title:	Vice President

Congress Financial Corporation (Central), as a Lender
By:	/S/    KEITH C. CHAPMAN
Name:	Keith C. Chapman
Title:	First Vice President

Fleet National Bank
as a lender under the amended and restated revolving credit, term loan and guaranty agreement with Federal Mogul Corporation and certain of its subsidiaries
By:	/S/    JAMES J. O’BRIEN
	James J. O’Brien
	Authorized Officer

GE CAPITAL COMMERCIAL FINANCE INC. as a Lender
By:	/S/    DWAYNE COKER
Name:	Dwayne Coker
Title:	Duly Authorized Signor

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GMAC Commercial Finance LLC, as a Lender
By:	/S/    JOEL RICHARDS
Name:	Joel Richards
Title:	Director

BAYERISCHE HYPO-und VEREINSBANK AG NEW YORK BRANCH, as a Lender
By:	/S/    WARREN SEIDEL
Name:	Warren Seidel
Title:	Managing Director

BAYERISCHE HYPO-und VEREINSBANK AG NEW YORK BRANCH, as a Lender
By:	/S/    JOHN W. SWEENEY
Name:	John W. Sweeney
Title:	Director

Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., as a Lender
By:	/S/    RICHARD HOLSTON
Name:	Richard Holston
Title:	Vice President

THE PROVIDENT BANK, as a Lender
By:	/S/    MARSHALL M. STUART
Name:	Marshall M. Stuart
Title:	Vice President

THE BANK OF NOVA SCOTIA, as a Lender
By:	/S/    MARIA SOCORRO SEVILLA
Name:	Maria Socorro Sevilla
Title:	Director

SUMITOMO MITSUI BANKING CORPORATION as a Lender
By:	/S/    WILLIAM M. GINN
Name:	William M. Ginn
Title:	General Manager

Transamerica Business Capital Corporation, as a Lender
By:	/S/    A. D. KAPLAN
Name:	A. D. Kaplan
Title:	Vice President

UBS AG, Stamford Branch, as a Lender
By:	/S/    WILFRED V. SAINT
Name:	Wilfred V. Saint
Title:	Associate Director Banking Products Services, US
By:	/S/    GARY L. LEMBO
Name:	Gary L. Lembo
Title:	Director Loan Portfolio Risk Management

Wells Fargo Foothill, LLC, fka Foothill Capital Corporation, as a Lender
By:	/S/    BRAD ENGEL
Name:	Brad Engel
Title:	Assistant Vice President

Whitehall Business Credit Corporation as a Lender
By:	/S/    PATRICK M. WALLACE
Name:	Patrick M. Wallace
Title:	Senior Vice President

Federal Mogul DIP – Signature pages to August 7, 2003 Amended and Restated Credit Agreement

STANWICH LOAN FUNDING LLC, as a Lender
By:	/S/    DIANA M. HIMES
Name:	Diana M. Himes
Title:	Assistant Vice President

EAST WEST BANK
By:	/S/    NANCY A. MOORE
Name:	Nancy A. Moore
Title:	Senior Vice President

RIVIERA FUNDING LLC, as a Lender
By:	/S/    DIANA M. HIMES
Name:	Diana M. Himes
Title:	Assistant Vice President

Protective Life Insurance Company, as a Lender
By:	/S/    RICHARD J. BIELEN
Name:	Richard J. Bielen
Title:	SVP, CIO & Treasurer

EX-10.20

Exhibit 10.20

FEDERAL-MOGUL CORPORATION

SUPPLEMENTAL KEY EXECUTIVE PENSION PLAN

(SKEPP)

EFFECTIVE JANUARY 1, 1999

RESTATED FEBRUARY 2004

FEDERAL-MOGUL CORPORATION

SUPPLEMENTAL KEY EXECUTIVE PENSION PLAN

TABLE OF CONTENTS

		PAGE
ARTICLE
I	Definitions	4
II	Eligibility and Participation	7
III	Retirement Benefits	8
IV	Vesting	10
V	Payment of Benefits	11
VI	Change of Control	13
VII	Administration	16
VIII	Miscellaneous	17
APPENDIX
A	Participation Date and service	19
B	Description of Compensation and Benefits	20
C	Optional Forms of Benefit Payment	22
D	Conversion Formulas	23

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FEDERAL-MOGUL CORPORATION

SUPPLEMENTAL KEY EXECUTIVE PENSION PLAN

This is the Federal-Mogul Corporation Supplemental Key Executive Pension Plan (the “Plan”), as adopted effective January 1, 1999. The Plan is intended to provide selected executives of Federal-Mogul Corporation (the “Corporation”) with target retirement benefits based upon the executive’s:

(1) average earnings for the three consecutive years in his last five years of service during which his Compensation was the highest, and

(2) number of years of service with the Corporation (not in excess of 20) and, if benefits under a qualified or non-qualified defined benefit plan maintained by a predecessor employer are taken into account under this Plan, with the predecessor employer.

The target benefit is to be offset by other retirement benefits provided by the Corporation, including the Corporation’s qualified and non-qualified defined benefit retirement plans, and, if applicable, benefits provided by a predecessor employer under a qualified or non-qualified defined benefit plan.

This Plan is intended to qualify as an unfunded plan maintained by the Corporation primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees as described in sections 201(2), 301(3), and 401(1) of the Employee Retirement Income Security Act of 1974, as amended.

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FEDERAL-MOGUL CORPORATION

SUPPLEMENTAL KEY EXECUTIVE PENSION PLAN

ARTICLE I.

DEFINITIONS

The following terms shall have the following meanings when used in this Plan, unless the context clearly requires otherwise:

1.1 “Accrued Benefit” means the accrued benefit of the Participant expressed in terms of an annual single life annuity payable at his Normal Retirement Date, determined under Section 3.1 based upon his Years of Service and Final Average Compensation, reduced by certain retirement benefits to which he is entitled.

1.2 “Actuarial Equivalent” means the equivalent actuarial value calculated using the interest and mortality assumptions in use by the Cash Balance Plan at the time actuarial equivalence is determined, and such additional actuarial assumptions as the Committee may establish in its discretion.

1.3 “Annuity Starting Date” means the first day of the first month for which an amount is payable as an annuity or any other form of benefit payment.

1.4 “Beneficiary” means the Participant’s Lawful Spouse as designated by the Participant in the manner prescribed by the Committee to receive a Participant’s benefits under the Plan in the event of his death prior to full payment of the benefits due him.

1.5 “Board” means the board of directors of the Corporation.

1.6 “Cash Balance Plan” means the Federal-Mogul Corporation Personal Retirement Account Plan, a qualified plan under section 401(a) of the Code.

1.7 “Change of Control” shall have the meaning set forth in Section 6.2.1.

1.8 “Code” means the Internal Revenue Code of 1986, as amended.

1.9 “Committee” means the Compensation Committee of the Board of Directors.

1.10 “Compensation” means the amount of the Employee’s annual rate of base salary payable by the Corporation as of January 1 of the Plan Year (or if the Employee was not employed by the Corporation on January 1 of such Plan Year, on the first day in such Plan Year on which the Employee was so employed, including any amounts that would be paid to the Employee but for the Employee’s election under a qualified cash or deferred arrangement under section 401(k) of the Code, a cafeteria plan under section 125 of the Code, or any non-qualified deferred compensation plan maintained by the Corporation, plus any declared bonus payable to the Employee under the Corporation’s annual incentive plan for services performed during the Plan Year, regardless of whether paid to the Employee during such Plan Year or during a subsequent Plan Year. Except as otherwise provided in the preceding sentence, Compensation shall not include any allocations or contributions by the Corporation under this Plan or any other plan or plans for the benefit of its employees, including

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any severance plan or agreement, incentive payments (other than declared bonus amounts paid or payable under the annual incentive plan), fringe benefits (whether or not a fringe benefit within the meaning of the Code), or any amounts identified by the Corporation as expense allowances or reimbursements, regardless of whether such amounts are treated as wages under the Code. In no event shall Compensation include any amounts received by an Employee from a Predecessor Employer.

1.11 “Corporation” means the Federal-Mogul Corporation, a Michigan corporation, and its successors.

1.12 “Early Retirement Date” means the date a Participant reaches age 55, provided that he has completed at least five Years of Service, or any date thereafter on which a Participant who has completed at least five Years of Service elects to retire before he reaches his Normal Retirement Date.

1.13 “Effective Date” means January 1, 1999.

1.14 “Employee” means an officer or other executive employee of the Corporation.

1.15 “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

1.16 “Excess SERP” means the Federal-Mogul Corporation Supplemental Executive Retirement Agreement, a non-qualified deferred compensation plan maintained by the Corporation effective as of January 1, 1989.

1.17 “Final Average Compensation” means the Participant’s average Compensation during the three consecutive Plan Years (or his total period of employment, if shorter) during which he has earned the highest Compensation in his last five Years of Service (or his total period of employment, if shorter). If the Participant has been employed for fewer than three full Plan Years, the Participant’s Compensation for each partial year shall include his target bonus under the Corporation’s annual incentive plan, provided that a bonus under such plan was not otherwise declared for such Plan Year.

1.18 “Good Cause” means the commission of any of the following acts by an Employee: (1) fraud in connection with the Employee’s service; (2) embezzlement or theft of Corporation funds or property; or (3) other criminal activity in connection with the Employee’s service.

1.19 “Good Reason” shall have the meaning set forth in Section 6.2.2.

1.20 “Lawful Spouse” of a Participant means the person to whom the Participant (i) is legally married as of the Participant’s Annuity Starting Date and (ii) has been legally married for at least twelve months prior to the Annuity Starting Date.

1.21 “Normal Retirement Date” means the date a Participant reaches age 62.

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1.22 “Participant” means an Employee who becomes a Participant as provided in Section 2.1.

1.23 “Plan” means this Federal-Mogul Corporation Supplemental Key Executive Pension Plan, as it may be amended from time to time.

1.24 “Plan Year” means the calendar year. The initial Plan Year is the 1999 calendar year.

1.25 “Predecessor Employer” means an entity that employed a Participant prior to such Participant’s employment with the Corporation, provided that either (i) substantially all of the stock or assets of such entity were acquired by the Corporation or (ii) such entity is otherwise designated by the Board as a Predecessor Employer, as set forth on Appendix A.

1.26 “Predecessor Employer Plan” means a qualified or non-qualified defined benefit plan or retirement agreement maintained by a Predecessor Employer.

1.27 “Severance Plan” means the Federal-Mogul Corporation Severance Plan for Salaried Employees, an employee welfare benefit plan as defined in section 3(1) of ERISA, or any other severance arrangement maintained by the Corporation for the benefit of the Employee.

1.28 “Total and Permanent Disability” means a physical or mental disability that entitles the Participant to receive benefits under a long-term disability plan or other arrangement maintained by the Corporation.

1.29 “Year of Service” means:

a) each Plan Year or, for years before the Effective Date, each calendar year, during which an Employee is employed for at least one hour in each month of that year by the Corporation;

b) each full Plan Year during which the Participant is deemed pursuant to Section 6.1.1 to have been employed by the Corporation; and

c) each calendar year during which the Employee was employed by a Predecessor Employer, as set forth on Appendix A, provided, however, that, except as otherwise set forth on Appendix A, such years shall not be taken into account for purposes of the vesting of the Participant’s Accrued Benefit in accordance with Section 4.1.

Notwithstanding the foregoing, no Years of Service shall be taken into account more than once. Credit for one-twelfth (1/12) of one Year of Service shall be given for each month of service during which the Employee is employed for at least one hour in any year for which the Employee does not receive credit for a full Year of Service.

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ARTICLE II

ELIGIBILITY AND PARTICIPATION

2.1 Participation. An Employee shall become a Participant upon his nomination by the Chief Executive Officer of the Corporation and his approval for participation by the Committee. An Employee shall begin to participate in the Plan as of the latest of the following dates: (a) the Effective Date; (b) the first day of the month following his date of hire; or (c) the date approved by the Committee for his participation. Employees who have been approved as Participants are listed on Appendix A.

2.2 Cessation of Participation. A Participant shall cease to be a Participant on the earlier of the date of his termination of employment for any reason or the date the Committee determines that he shall no longer be a Participant. No such determination shall be made by the Board following a Change of Control. A Participant whose participation is terminated shall nevertheless continue to vest in his Accrued Benefit under Article IV and to remain entitled to receive the vested portion of his Accrued Benefit in accordance with Article V.

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ARTICLE III

RETIREMENT BENEFITS

3.1 Normal Retirement Benefit. Upon retirement at his Normal Retirement Date, a Participant shall be entitled to an Accrued Benefit equal to:

3.1.1 Fifty percent (50%) of his Final Average Compensation, multiplied by a fraction (not to exceed 1.0 in decimal form), the numerator of which is the number of his Years of Service, and the denominator of which is twenty (20), reduced by:

3.1.2 the sum of “A” plus “B” plus “C”, where:

“A” equals the Actuarial Equivalent of the Participant’s accrued benefit under the Cash Balance Plan, expressed in terms of an annual single life annuity as of his Normal Retirement Date;

“B” equals the Actuarial Equivalent of the Participant’s account balance under the Excess SERP, expressed in terms of an annual single life annuity as of his Normal Retirement Date; and

“C” equals the Actuarial Equivalent of the Participant’s accrued benefit under a Predecessor Employer Plan, expressed in terms of an annual single life annuity as of his Normal Retirement Date.

3.2 Early Retirement Benefit. A Participant voluntarily retiring with the consent of the Chief Executive Officer of the Corporation on or after his Early Retirement Date, or involuntarily terminating on or after his Early Retirement Date (except for termination for cause), shall be entitled to receive a benefit equal to his Accrued Benefit, based upon his Years of Service and Final Average Compensation determined as of his actual retirement date, reduced by one-half percent (0.5%) for each month by which his Annuity Starting Date precedes his Normal Retirement Date. The consent of the Chief Executive Officer of the Corporation to such retirement shall not be required with respect to (i) a retirement by the Chief Executive Officer of the Corporation or (ii) a retirement by any Participant after a Change of Control.

3.3 Late Retirement Benefit. If a Participant retires after his Normal Retirement Date, he shall be entitled to receive his Accrued Benefit determined under Section 3.1, based upon his Years of Service and Final Average Compensation determined as of his actual retirement date. The amounts to be offset under Section 3.1.2 shall be the dollar amounts determined as of his Normal Retirement Date.

3.4 Disability Benefit. If the Participant incurs a Total and Permanent Disability, he shall be entitled to receive a benefit equal to his Accrued Benefit, based upon his Years of Service and Final Average Compensation determined as of the date he terminates employment due to such disability, reduced as described in Section 3.2, and, if distribution is made before the Participant attains age 55, further reduced using the assumptions described in Section 1.2. In no case will the benefit be reduced by greater than 50%.

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3.5 Death Benefit. If the Participant dies while employed by the Corporation, his Beneficiary shall be entitled to receive a benefit equal to his Accrued Benefit, based upon his Years of Service and Final Average Compensation determined as of his date of death, reduced as described in Section 3.2 and, if distribution is made before the Participant would have attained age 55, further reduced using the assumptions described in Section 1.2.

3.6 Vested Termination Benefit. If a Participant’s employment terminates with the consent of the Chief Executive Officer of the Corporation for any reason other than termination due to retirement on or after his Early or Normal Retirement Date, termination due to death, termination due to Total and Permanent Disability, or termination by the Corporation for Good Cause, and such Participant’s Accrued Benefit is vested on the date of such termination of employment pursuant to Section 4.1 or 6.1, he shall be entitled to receive a benefit equal to his Accrued Benefit, based upon his Years of Service and Final Average Compensation as of the date of his termination of employment, reduced as described in Section 3.2. The consent of the Chief Executive Officer of the Corporation to such termination shall not be required with respect to (i) a termination of employment by the Chief Executive Officer of the Corporation or (ii) a termination of employment by any participant after a Change of Control.

3.7 Other Termination of Employment. Notwithstanding anything else in this Article III to the contrary, if the Participant’s employment terminates for any reason other than retirement on or after his Early or Normal Retirement Date, death or Total and Permanent Disability prior to the vesting of his Accrued Benefit under Article IV or VI, or if the Participant’s employment is terminated by the Corporation for Good Cause, his Accrued Benefit shall be forfeited.

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ARTICLE IV

VESTING

4.1 Vesting at Normal Retirement Date or Based on Age and Years of Service. Subject to Sections 4.3 and 6.1, a Participant’s interest in his Accrued Benefit shall become 100% vested when the Participant reaches his Normal Retirement Date while employed by the Corporation, or, in the alternative, when the Participant has completed at least five Years of Service with the Corporation and reached age 55. For purposes of vesting, years of employment with a previous employer do not count, except as otherwise set forth on Appendix A.

4.2 Vesting Based on Total and Permanent Disability or Death. A Participant’s interest in his Accrued Benefit shall in any case become 100% vested if, while employed by the Corporation, he sustains a Total and Permanent Disability or he dies.

4.3 Forfeitures. Notwithstanding Section 4.1, if a Participant’s employment is terminated by the Corporation for Good Cause, he shall forfeit his Accrued Benefit. In addition, subject to Section 6.1, if a Participant’s employment terminates other than on account of death or Total and Permanent Disability before he has completed five Years of Service and reached age 55 or reached his Normal Retirement Date, he shall forfeit his Accrued Benefit.

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ARTICLE V

PAYMENT OF BENEFITS

5.1 Payment of Accrued Benefit upon Retirement. Upon retirement on or after his Early or Normal Retirement Date, a Participant shall be entitled to receive his Accrued Benefit, as adjusted under Section 3.2, if applicable. Such benefit shall begin to be paid as soon as administratively practicable following the Participant’s retirement, unless, if the Participant elects to retire before his Normal Retirement Date, he makes an election in writing to defer payment until his Normal Retirement Date at the same time that he elects a form of benefit payment under Section 5.2.

5.2 Election of Benefit Form. A Participant shall receive his Accrued Benefit in the form of a single life annuity unless, not later than six months before the Participant’s anticipated Annuity Starting Date, the Participant selects a form of payment for his Accrued Benefit (as adjusted under Section 3.2, if applicable) in any Actuarial Equivalent annuity form from among the Actuarial Equivalent annuity forms made available by the Committee. The election shall be in writing and made on the form prescribed by the Committee. Payment shall be made in accordance with the Participant’s election or as otherwise provided in this Section. Such election shall be irrevocable.

5.3 Disability Benefit. As soon as administratively practicable following the Committee’s determination that the Participant has suffered a Total and Permanent Disability, the Participant shall receive the disability benefit described in Section 3.4 in the form of a single life annuity.

5.4 Death Benefit. Unless an alternative annuity form was elected under Section 5.2, in the event of a Participant’s death while he is employed by the Corporation, the Participant’s Beneficiary shall receive the death benefit described in Section 3.5 in the form of a single life annuity. If a Participant dies after his Annuity Starting Date and the Participant had elected, pursuant to Section 5.2, an annuity providing for a survivor benefit, his Beneficiary shall receive such survivor benefit in accordance with such election. Payment shall be made as soon as administratively practicable following the death of the Participant.

In no event shall any beneficiary other than a Lawful Spouse receive any payment under the Plan. In the event of the death of a Participant’s Lawful Spouse on or after a Participant’s Annuity Starting Date, no alternate or contingent beneficiary shall receive a benefit under the Plan. In the event of the divorce of a Participant and his Lawful Spouse on or after the Annuity Starting Date, such Lawful Spouse shall retain any right to receive any future beneficiary payments pursuant to the Participant’s benefit payment election in effect as of the Annuity Starting Date. In the event a Participant marries or remarries after the Participant’s Annuity Starting Date, the new spouse will have no right to any benefits or payments under the Plan.

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5.5 Deferred Vested Benefit. If a Participant’s employment terminates for any reason other than termination due to retirement on or after his Early or Normal Retirement Date, termination due to death, termination due to Total and Permanent Disability or termination by the Corporation for Good Cause, and such Participant’s Accrued Benefit is vested on the date of such termination of employment pursuant to Section 4.1 or 6.1, he shall receive the vested termination benefit described in Section 3.6 in the form of a single life annuity as soon as administratively practicable following his termination of employment. Notwithstanding the preceding sentence, in the event the Participant’s employment is terminated by the Corporation other than for Good Cause, he shall be entitled to receive the termination benefit described in Section 3.6 in the form of a single life annuity as soon as administratively practicable following the date payments to him under the Severance Plan terminate or, if he has elected to receive payment from the Severance Plan in the form of a single lump sum, the date payments from the Severance Plan would have terminated had they been made in an installment form. The Participant may elect to defer the payment of such benefit pursuant to Section 5.1 and may elect an optional form of payment pursuant to Section 5.2.

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ARTICLE VI

CHANGE OF CONTROL

6.1 Change of Control Benefit. If, in connection with, simultaneously with or following a Change in Control, including without limitation the effectiveness of a plan of reorganization confirmed in the jointly-administered Chapter 11 cases pending in the District of Delaware and docketed as Case No. 01-10578, the Participant’s employment is terminated by the Corporation other than for Good Cause or by the Participant for Good Reason, then the provisions of this Section 6.1 shall apply.

6.1.1 Deemed Employment. If the Participant has been employed by the Corporation for fewer than five full Plan Years as of the date of such termination of employment, the Participant will be deemed for all purposes of this Plan, including the calculation of his Accrued Benefit, his eligibility for an early retirement benefit pursuant to Section 3.2 and the vesting of his Accrued Benefit pursuant to Section 4.1, to have been employed by the Corporation for five full Plan Years and thus to have completed five Years of Service as an employee of the Corporation, in addition to any Years of Service attributable to his employment by a Predecessor Employer, as set forth on Appendix A.

6.1.2 Deemed Attainment of Age 55 for Vesting Purposes. If the Participant has not attained 55 years of age as of the date of such termination of employment, the Participant will be deemed for purposes of the vesting of his Accrued Benefit pursuant to Section 4.1 to have attained age 55. The payment of such Participant’s Accrued Benefit will commence as soon as administratively practicable following the date on which the Participant actually attains age 55, and will be subject to adjustment in accordance with Section 3.2 to reflect payment prior to the date the Participant attains age 62, unless the Participant makes an election in writing to defer payment until his Normal Retirement Date at the same time that he elects a form of benefit payment under Section 5.2.

6.2 Definitions.

6.2.1 “Change of Control.” For purposes of this Plan, “Change of Control” means:

a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Corporation (the “Outstanding Company Common Stock”) or (ii) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Corporation, (ii) any acquisition by the Corporation, (iii) any acquisition by

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any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any corporation controlled by the Corporation or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 6.2.1; or

b) Individuals who, as of the Effective Date, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Corporation’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Corporation (a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Corporation or all or substantially all of the Corporation’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Corporation or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of

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directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

d) Approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation.

6.2.2 “Good Reason.” For purposes of this Plan, “Good Reason” means:

a) the assignment to the Participant of any duties inconsistent in any material respect with the Participant’s position (including status, offices, titles and reporting requirements), authority, duties or responsibilities held, exercised or assigned at any time during the 120-day period immediately prior to a Change of Control, or any other action by the Corporation which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Participant;

b) any failure by the Corporation to provide the Participant with the compensation and benefits described in Appendix B hereto, other than an isolated, insubstantial or inadvertent failure not occurring in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Participant;

c) the Corporation’s requiring the Participant to be based at any office or location other than (i) the office or location where the Participant was based immediately prior to the Change of Control or (ii) any office or location less than 35 miles from such location, or the Corporation’s requiring the Participant to travel on Corporation business to a substantially greater extent than required immediately prior to the Change of Control;

d) any purported termination by the Corporation of the Participant’s employment otherwise than as expressly permitted by the employment agreement, if any, between the Participant and the Corporation; or

e) any failure by the Corporation to comply with and satisfy Section 8.10 of this Plan.

For purposes of this Section 6.2.2, any good faith determination of “Good Reason” made by the Participant shall be conclusive.

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ARTICLE VII

ADMINISTRATION

7.1 Plan Interpretation. The Committee shall have the authority to interpret the Plan and to determine the amount, time, and form of payment of benefits and other issues arising in the administration of the Plan. Any construction or interpretation of the Plan and any determination of fact in administering the Plan made in good faith by the Committee shall be final and conclusive for all Plan purposes.

7.2 Claims Procedure.

7.2.1 Initial Determination. Upon presentation to the Committee of a claim for benefits under the Plan within 180 days after the date the claimant believes payment should have commenced, the Committee shall make a determination of the validity thereof. If the determination is adverse to the claimant, the Committee shall furnish to the claimant within 90 days after the receipt of the claim a written notice setting forth the following:

a) the specific reason or reasons for the denial;

b) specific references to pertinent provisions of the Plan on which the denial is based;

c) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and

d) appropriate information as to the steps to be taken if the claimant wishes to submit his claim for review.

7.2.2 Appeal Procedure. In the event of a denial of a claim, the claimant or his duly authorized representative may appeal such denial to the Committee for a full and fair review of the adverse determination. The claimant’s request for review must be in writing and made to the Committee within 90 days after receipt by the claimant of the written notification described in Section 7.2.1; provided, however, that such 90-day period shall be extended if circumstances so warrant. The claimant or his duly authorized representative may submit issues and comments in writing which shall be given full consideration by the Committee in its review. The Committee may, in its sole discretion, conduct a hearing. A request for a hearing made by the claimant will be given full consideration. At such hearing, the claimant shall be entitled to appear and present evidence and be represented by counsel.

7.2.3 Decision on Appeal. A decision on a request for review shall be made by the Committee not later than 60 days after receipt of the request; provided, however, in the event of a hearing or other special circumstances, such decision shall be made not later than 120 days after receipt of such request. If it is necessary to extend the period of time for making a decision beyond 60 days after the receipt of the request, the claimant shall be notified in writing of the extension of time prior to the beginning of such extension. The Committee’s decision on review shall state in writing the specific reasons and references to the Plan provisions on which it is based. Such decision shall be promptly provided to the claimant.

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ARTICLE VIII

MISCELLANEOUS

8.1 No Effect on Employment Rights. Nothing contained herein will confer upon any Participant the right to be retained in the service of the Corporation nor limit the right of the Corporation to discharge any Participant.

8.2 Funding. The Corporation may establish a grantor trust for the purpose of funding benefits under this Plan. Any trust so created shall conform to the terms of the model trust provided by the Internal Revenue Service as described in Revenue Procedure 92-64. Notwithstanding the establishment of such trust, it is the intention of the Corporation and the Participants that the Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA. The Plan constitutes a mere promise by the Corporation to make payments in the future. To the extent that any Participant or any other person acquires a right to receive a payment under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Corporation.

8.3 Spendthrift Provisions. No benefit payable under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, domestic relations order or charge prior to actual receipt thereof by the payee; and any attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge prior to such receipt shall be void; and the Corporation shall not be liable in any manner for or subject to the debts, contracts, liabilities, engagements or torts of any person entitled to any benefit under the Plan.

8.4 Governing Law. The Plan is established under and will be construed according to the law of the State of Michigan, without regard to its conflict of laws provisions, to the extent that such laws are not preempted by ERISA and valid regulations promulgated thereunder.

8.5 Integrated Agreement. This Plan constitutes the entire agreement and understanding between the Corporation and the Participants with respect to the provision of non-qualified retirement benefits to the Participants in excess of those available to the Participants under the Excess SERP or any other written agreement between the Participant and the Corporation as to retirement benefits that preceded the Participant’s participation in the Plan.

8.6 Incapacity of Recipient. In the event a Participant is declared incompetent and a conservator or other person legally charged with the care of the person or the estate of such Participant is appointed, any benefits under the Plan to which the Participant is entitled shall be paid to the conservator or other person legally charged with the care of such Participant. Except as provided in the preceding sentence, should the Committee, in its discretion, determine that a Participant is unable to manage his personal affairs, the Committee may make distributions to any person for the benefit of the Participant, provided the Committee makes a reasonable good faith judgment that such person shall expend the funds so distributed for the benefit of the Participant. Any such payment shall constitute a discharge of the Plan’s obligation to the Participant to the extent of such payment.

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8.7 Taxes. Any taxes imposed upon a Participant shall be the sole responsibility of the Participant. The Corporation shall have the right to deduct from the Participant’s Compensation or any payment made pursuant to this Plan any federal, state, local or other taxes required to be deducted or withheld from such Compensation or payment, as the Committee may determine in its sole discretion.

8.8 Severability. In the event any provision of this Plan is invalid, in whole or in part, the remaining provisions of this Plan are unaffected and will remain in full force and effect.

8.9 Amendment or Termination. The Board reserves the right to amend or terminate this Plan by or pursuant to action of the Board or the Committee when, in the sole opinion of the Board, or the Committee, an amendment or termination is advisable. Any amendment or termination shall be made pursuant to a resolution of the Board and shall be effective as of the date of the resolution. No amendment or termination (i) shall directly or indirectly deprive the Participant of all or any portion of the Participant’s Accrued Benefit considered to be accrued under the Plan before the date of such amendment or termination, or (ii) shall be effected following a Change of Control to the extent that such amendment or termination would adversely affect any rights to which a Participant may become entitled under Section 6.1 if such Participant’s employment were thereafter terminated.

8.10 Successors. This Plan shall be binding upon the Corporation and its successors and assigns. The Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation to assume expressly and agree to perform the Corporation’s obligations set forth in this Plan in the same manner and to the same extent as the Corporation would be required to perform such obligations if no such succession had taken place.

8.11 Construction. The masculine shall indicate the feminine and the singular the plural, unless the context clearly requires otherwise.

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WHEREFORE, the Company has executed this Plan on the 23^rd day of February, 2004.

FEDERAL.MOGUL CORPORATION

By:

David M. Sherbin

Vice President, Deputy General Council and Secretary

ATTEST:

By:

Joseph T. Breitenbeck

Director, Compensation and Benefits

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Appendix A

Participant	Participation Date	Years of Service for Purposes of Vesting as of Participation Date	Years of Service for Purposes of Benefit Calculation as of Participation Date
Alan C. Johnson TN	01/01/1999	28.67	28.67
G. Michael Lynch A	06/12/2000	0.00	3.40
Frank Macher A, T	05/15/2002	2.92	2.92
Charles McClure A	05/15/2002	4.79	4.79
Richard P. Randazzo A	01/01/1999	4.08	4.08
Thomas W. Ryan TN	01/01/1999	—
Wilhelm A. Schmelzer	01/01/1999	29.58	29.58
Richard A. Snell A, T	01/01/1999	11.08	11.08
Gordon A. Ulsh TN	01/01/1999	—
James J. Zamoyski T	01/01/1999	22.50	22.50

^TN Terminated employment with the Company with no benefit under this plan.

^T Terminated employment with the Company with a benefit under this plan.

^A Years of Service include service with a Predecessor Employer as follows:

Participant	Predecessor Employer	Years of Service with Predecessor Employer for Purposes of Vesting	Years of Service with Predecessor Employer for Purposes of Benefit Calculation
G. Michael Lynch	Dow	0.00	3.40
Frank Macher	ITT Automotive	1.50	1.50
Charles McClure	Detroit Diesel	3.37	3.37
Richard P. Randazzo	Nextel	2.08	2.08
Richard A. Snell	Tenneco Automotive	9.00	9.00

20

FEDERAL-MOGUL CORPORATION

SUPPLEMENTAL KEY EXECUTIVE PENSION PLAN

Appendix B

DESCRIPTION OF COMPENSATION AND BENEFITS

SOLELY FOR PURPOSES OF DETERMINING GOOD REASON

(i) Base Salary. Annual base salary (“Annual Base Salary”) paid at a monthly rate at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Participant by the Corporation and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Change of Control occurs, as such Annual Base Salary may be increased following the Change of Control.

(ii) Annual Bonus. For each fiscal year ending after the Change of Control, an annual bonus (the “Annual Bonus”) in cash at least equal to the Participant’s highest bonus, including any bonus or portion thereof which has been earned but deferred, under the Corporation’s 1977 Supplemental Compensation Plan, as amended and restated, or any comparable bonus under any predecessor or successor plan, for the last three full fiscal years prior to the Change of Control (annualized in the event that the Participant was not employed by the Corporation for the whole of such fiscal year); provided, that if the Participant’s highest bonus for one or more of such fiscal years is determined pursuant to the terms of the Corporation’s Economic Value Added (EVA) Plan (the “EVA Plan”), and the Participant’s bonus declared pursuant to the EVA Plan for such fiscal year is higher than the Participant’s bonus paid pursuant to the EVA Plan for such fiscal year, the Participant’s highest bonus for such fiscal year shall be the Participant’s bonus declared for such fiscal year; and, provided further, that each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Participant shall elect to defer the receipt of such Annual Bonus.

(iii) Incentive, Savings and Retirement Plans. Participation in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer Participants of the Corporation and its affiliated companies, which plans, practices, policies and programs provide the Participant with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, no less favorable, in the aggregate, than the most favorable of those provided by the Corporation and its affiliated companies for the Participant under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Change of Control or if more favorable to the Participant, those provided generally at any time after the Change of Control to other peer executives of the Corporation and its affiliated companies.

21

FEDERAL-MOGUL CORPORATION

SUPPLEMENTAL KEY EXECUTIVE PENSION PLAN

(iv) Welfare Benefit Plans. Participation by the Participant and/or the Participant’s family, as the case may be, in, and receipt of, all benefits under welfare benefit plans, practices, policies and programs provided by the Corporation and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Corporation and its affiliated companies, which plans, practices, policies and programs provide the Participant with benefits which are no less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Participant at any time during the 120-day period immediately preceding the Change of Control or, if more favorable to the Participant, those provided generally at any time after the Change of Control to other peer executives of the Corporation and its affiliated companies.

(v) Expenses. Prompt reimbursement for all reasonable expenses incurred by the Participant in accordance with the most favorable policies, practices and procedures of the Corporation and its affiliated companies in effect for the Participant at any time during the 120-day period immediately preceding the Change of Control or, if more favorable to the Participant, as in effect generally at any time thereafter with respect to other peer executives of the Corporation and its affiliated companies.

(vi) Fringe Benefits. Fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Corporation and its affiliated companies in effect for the Participant at any time during the 120-day period immediately preceding the Change of Control or, if more favorable to the Participant, as in effect generally at any time thereafter with respect to other peer executives of the Corporation and its affiliated companies.

(vii) Office and Support Staff. An office or offices of a size and with furnishings and other appointments, and exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Participant by the Corporation and its affiliated companies at any time during the 120-day period immediately preceding the Change of Control or, if more favorable to the Participant, as provided generally at any time thereafter with respect to other peer executives of the Corporation and its affiliated companies.

(viii) Vacation. Paid vacation in accordance with the most favorable plans, policies, programs and practices of the Corporation and its affiliated companies as in effect for the Participant at any time during the 120-day period immediately preceding the Change of Control or, if more favorable to the Participant, as in effect generally at any time thereafter with respect to other peer executives of the Corporation and its affiliated companies.

22

FEDERAL-MOGUL CORPORATION

SUPPLEMENTAL KEY EXECUTIVE PENSION PLAN

Appendix C

DESCRIPTION OF FORMS OF PAYMENT

Normal Form of Payment

If you are not married, your normal form of payment is the Life-Only Annuity. If you are married, your normal form of payment is the 50% Joint and Survivor Annuity. Your spouse at the time you choose your form of payment is automatically deemed to be your beneficiary. If you want to either elect an optional form of benefit other than your normal form of benefit, you must obtain your spouse’s consent to this election. This spousal consent must be in writing, must acknowledge your election of an optional form of benefit, and must be witnessed by a Notary Public.

Life-Only Annuity Option

This option provides monthly payments for your lifetime. When you die, payments stop and your spouse, heirs and your estate receive nothing. This method of payment will provide the greatest lifetime monthly payment from the Plan. If you are married and elect this method, your spouse must consent to this election; witnessed by a Notary Public.

Joint and Survivor Annuity Option

This method of payment is a monthly income payable for your lifetime. If you pre-decease your spouse, your spouse will receive a reduced benefit in accordance with your election (50%, 75% or 100%).

If you are married, your normal form of payment is the 50% Joint and Survivor Annuity. This option provides reduced monthly payments for your lifetime, and when you die, your spouse will receive monthly payments for her or his lifetime, which are equal to 50% of the monthly amount you were receiving.

If you are married and want to elect either the 75% or 100% Joint and Survivor Annuity optional forms of payment, you must obtain your spouse’s consent to this election. This spousal consent must be in writing, must acknowledge your election of an optional form of benefit, and must be witnessed by a Notary Public.

Payments stop at your death if your spouse predeceases you. If you die first, payments will stop after the death of your spouse.

23

FEDERAL-MOGUL CORPORATION

SUPPLEMENTAL KEY EXECUTIVE PENSION PLAN

Life Certain and Continuous

This method of payment is a monthly income payable for your lifetime. If you die before receiving the Certain (either 5, 10 or 15 years) payments, the remaining guaranteed payments will be paid to your spouse.

If you are married and want to elect either the 5,10, or 15 year Life Certain and Continuous optional form of payment, you must obtain your spouse’s consent to this election. This spousal consent must be in writing, must acknowledge your election of an optional form of benefit, and must be witnessed by a Notary Public.

Payments stop at your death if your spouse predeceases you. If you die first, payments will stop after the death of your spouse.

10 Year Certain

This method of payment is a monthly income payable for 10 years. If you die before receiving all guaranteed payments, the remaining payments will be paid to your spouse.

If you are married and want to elect the 10-Year Certain optional form of payment, you must obtain your spouse’s consent to this election. This spousal consent must be in writing, must acknowledge your election of an optional form of benefit, and must be witnessed by a Notary Public.

Payments stop at your death if your spouse predeceases you. If you die first, payments will stop after the death of your spouse.

24

FEDERAL-MOGUL CORPORATION

SUPPLEMENTAL KEY EXECUTIVE PENSION PLAN

Appendix D

CONVERSION FORMULAS USED TO CONVERT A

LIFE-ONLY ANNUITY TO AN OPTIONAL FORM OF PAYMENT

50% Joint and Survivor:

Life-only Annuity multiplied by 93%,

Plus, whole years of before age 65 multiplied by 0.30%,

Minus, whole years retiree age exceeds spouse’s age multiplied by 0.30%

75% Joint and Survivor:

Life-only Annuity multiplied by 90%,

Plus, whole years of before age 65 multiplied by 0.40%,

Minus, whole years retiree age exceeds spouse’s age multiplied by 0.40%

100% Joint and Survivor:

Life-only Annuity multiplied by 87%,

Plus, whole years of before age 65 multiplied by 0.50%,

Minus, whole years retiree age exceeds spouse’s age multiplied by 0.50%

5 Year Certain and Life:

Life-only Annuity multiplied by 98%,

Plus, whole years of before age 65 multiplied by 0.10%

10 Year Certain and Life:

Life-only Annuity multiplied by 95%,

Plus, whole years of before age 65 multiplied by 0.30%

15 Year Certain and Life:

Life-only Annuity multiplied by 90%,

Plus, whole years of before age 65 multiplied by 0.60%

10 Year Certain

Life-only Annuity multiplied by 1.35%,

Plus, whole years of before age 65 multiplied by 0.25%

25

EX-10.23

Exhibit 10.23

AMENDMENT TO EMPLOYMENT AGREEMENT

This Amendment, dated as of December 9, 2003 (this “Amendment”), to the Employment Agreement, dated as of January 10, 2001 and amended as of January 31, 2001 and August 16, 2002 (the “Agreement”), is entered into between Federal-Mogul Corporation, a Michigan corporation (the “Company”), and Charles McClure (the “Executive”).

WHEREAS, the term of Executive’s employment by the Company pursuant to the Agreement, under its current terms, will end on January 11, 2004;

WHEREAS, the Company is in the process of evaluating who will serve in the capacity of Chief Executive Officer of the Company following the effective date of a plan of reorganization that is confirmed by the Bankruptcy Court for the District of Delaware in the Chapter 11 cases before such court docketed as Case No. 01-10578 (the “Effective Date of a Plan of Reorganization”);

WHEREAS, the Company and the Executive contemplate that should Executive be selected to serve as the Chief Executive Officer following the Effective Date of a Plan of Reorganization, Executive’s employment will be governed by the terms of a newly negotiated, long-term contract;

WHEREAS, the Company and the Executive have agreed that for the interim period between January 1, 2004 and the Effective Date of a Plan of Reorganization, they desire to amend the Agreement to provide for the terms and conditions of Executive’s employment during such interim period.

NOW, THEREFORE, in consideration of the mutual promises contained herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Executive hereby agree as follows:

1. The second sentence of Section 1 of the Agreement is deleted and replaced by the following:

1. The term of employment of the Executive by the Company pursuant to this Agreement shall commence on January 11, 2001 (the “Effective Date”) and shall end on the the fifth anniversary of the Effective Date (the “Employment Period”), unless earlier terminated pursuant to Section 4 hereof.

2. Section 3(a) is amended to read in its entirety as follows:

(a) Base Salary. During the portion of the Employment Period prior to January 1, 2004, the Company shall pay to the Executive a base salary at the rate of $850,000 per annum. During the portion of the Employment Period commencing on January 1, 2004, the Company shall pay to the Executive a base salary at the rate of $1,000,000 per annum. Such base salary shall be payable in accordance with the Company’s executive payroll policy. Such base salary in effect on and after January 1, 2004 shall be reviewed annually, and shall be subject to such increase, if any, as determined by the Compensation Committee of the Board. The base salary payable pursuant to this Section 3(a) shall be referred to herein as the “Base Salary.”

3. Section 3(b) is amended by adding the following at the end thereof:

For the 2004 and 2005 fiscal years, the Executive’s Target Annual Bonus (the “Target Annual Bonus”) shall be equal to the Executive’s Base Salary as of the last day of employment of the Executive by the Company during such fiscal year, payable at the time other executives generally receive an annual bonus for such fiscal year in accordance with the Company’s policies.

4. The term “Guaranteed Annual Bonus” shall be deleted and replaced by the term “Target Annual Bonus” in Sections 4(a)(ii), 4(b)(ii) and 4(f)(i)(B).

5. Section 4(d)(ii) and (iii) are amended to read as follows:

(ii) a lump sum cash payment of $500,000 payable upon expiration or earlier termination of the Transition Period;

(iii) the continuation by the Company of health and welfare benefits for a period ending 3 months following expiration or following earlier termination by the Executive pursuant to Section 4A(c) of the Transition Period on the same basis as such benefits were provided to the Executive immediately prior to his termination of employment;

6. Section 4(e) shall be amended to provide in its entirety as follows:

(e) Voluntary Termination.

(i) The Executive may voluntarily terminate the Executive’s employment with the Company for any reason upon written notice to the Company. If the Executive voluntarily terminates the Executive’s employment pursuant to this Section 4(e)(i), all obligations of the Company hereunder shall cease immediately, except that the Executive shall be entitled to the payments and benefits specified in Sections 4(b)(i) and 4(b)(iii) hereof.

(ii) The Executive may voluntarily terminate the Executive’s employment with the Company if the Company and the Executive have not entered into a newly negotiated, long-term employment agreement appointing Executive as the Chief Executive Officer of the Company on or before the Effective Date of a Plan of Reorganization. If the Executive voluntarily terminates this Agreement pursuant to this Section 4(e)(ii), all obligations of the Company and the Executive hereunder shall cease, except that the Executive shall be entitled to receive benefits and payments specified in Sections 4(d)(i) through 4(d)(iii), inclusive.

7. Section 4(f)(i)(B) and 4(f)(i)(C) are amended to read as follows:

(B) a lump sum cash payment of $500,000 payable upon expiration or earlier termination of the Transition Period;

2

(C) the continuation by the Company of health and welfare benefits for a period ending 3 months following expiration or following earlier termination by the Executive pursuant to Section 4A(c) of the Transition Period on the same basis as such benefits were provided to the Executive immediately prior to his termination of employment;

8. A new Section 4A shall be inserted into the Agreement, which Section 4A shall provide as follows:

4A. Transition Services.

(a) Transition Services. For a period of ninety days (the “Transition Period”) from the effective date of a termination of the Executive’s employment with the Company pursuant to Sections 4(d), 4(e)(ii) or 4(f) or from the expiration of the Employment Period, the Executive shall make himself available to the Company on a limited, not full-time basis, at such times and places as he and any successor chief executive officer may reasonably agree, to provide such reasonable assistance in the process of transitioning the Company to the successor chief executive officer as such successor chief executive officer and the Executive may reasonably deem appropriate (the “Transition Services”).

(b) Transition Services Fee. In consideration of making himself available to provide such Transition Services, the Executive shall receive the sum of $500,000 (the “Transition Services Fee”), payable in three equal installments commencing on the thirtieth (30^th) day after the effective date of any expiration or termination of the Employment Period pursuant to Sections 4(d), 4(e)(ii) or 4(f) and on the sixtieth (60^th) and ninetieth (90^th) days thereafter. In addition, the Company shall reimburse Executive for all expenses reasonably incurred by him in the performance of the Transition Services.

(c) Termination of Transition Period. Either the Executive or any successor chief executive officer may terminate the Transition Period at any time by written notice to the other. In the event of the termination of the Transition Period by the Executive, all obligations of the Company hereunder shall cease immediately, and the Executive shall not be entitled to any unpaid portion of the Transition Services Fee. In the event of the termination of the Transition Period by the Company or any successor chief executive officer, the Executive shall be entitled to the immediate payment of the full amount of any unpaid portion of the Transition Services Fee.

(d) Employment Search. The Company acknowledges and agrees that Executive may, during the Transition Period, contact and interview with prospective employers.

3

(e) Nature of Relationship. The relationship of the Company and Executive established by this Section 4A is that of independent contractor, and nothing contained in this Section 4A shall be construed to (a) give either party the power to direct or control the day-to-day activities of the other, or (b) constitute the parties as employer/employee, partners, joint venturers or co-owners. Accordingly, Executive shall be responsible for the payment of all fees and taxes, including federal, state and local taxes, arising out of Executive’s provision of the Transition Services activities in accordance with this Section 4A.

9. Section 6(b) is amended to provide in its entirety as follows:

(b) The Executive agrees that during the period of the Executive’s employment with the Company and during the Transition Period (if applicable) (the “Noncompetition Period”), the Executive shall not in any manner, directly or indirectly, through any person, firm or corporation, alone or as a member of a partnership or as an officer, director, stockholder, investor or employee of or consultant to any other corporation or enterprise or otherwise, engage or be engaged, or assist any other person, firm, corporation or enterprise in engaging or being engaged, in any business being conducted by, or contemplated by, the Company or any of its subsidiaries. Executive’s obligations under this non-compete provision shall cease upon expiration of the Noncompetition Period following termination of Executive’s employment with the Company or expiration of the Employment Period, as applicable.

10. In all other respects, the Agreement shall not be amended and shall remain in full force and effect; provided, however, that in the event of any conflict between the terms of this Amendment and the Agreement, the terms of this Amendment shall control; and provided, further, that notwithstanding any of the terms or conditions of this Amendment to the contrary, this Amendment shall not be deemed to amend, alter or modify any other agreements, plans or programs governing the terms and conditions of Executive’s employment or the benefits to which he is entitled.

11. The Amendment to the Agreement shall become effective as of January 1, 2004, subject to approval by the Bankruptcy Court for the District of Delaware in the Chapter 11 cases before such court docketed as Case No. 01-10578

IN WITNESS WHEREOF, the Company and the Executive have executed this Amendment as of the date first above written.

FEDERAL-MOGUL CORPORATION
	John J. Fannon, Chairman, Compensation Committee
EXECUTIVE
	Charles McClure

4

EX-14

Exhibit 14

Federal-Mogul Corporation

Financial Code of Ethics

2003

Federal-Mogul Corporation (the “Company”) has adopted the following Financial Code of Ethics, which applies to all Company Financial Professionals worldwide, to ensure the continuing integrity of financial reporting and transactions. “Financial Professional” means any professional employee in the area of finance or outside of the area of finance with a significant impact on the financial accounting and reporting of the Company. Specifically, a Financial Professional includes any professional employee in corporate or operations finance, accounting, financial reporting, internal audit, risk management, corporate tax, investor relations, treasury, and also includes the Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), Controller, the Operating Head of each of the Company’s product groups and any member of Executive Management who has similar operating or oversight responsibilities regardless of such person’s designated title.

The Company’s Integrity Policy sets forth the fundamental principles and key policies and procedures that govern the conduct of all of the Company’s directors, officers and employees. Financial Professionals are required to conduct their personal and professional affairs in a manner that is consistent with the ethical and professional standards set forth in the Integrity Policy, as well as this supplemental Financial Code of Ethics.

All Financial Professionals must:

1. Act in an honest and ethical manner and comply with all of the provisions of the Company’s Integrity Policy, including the ethical handling of actual or apparent conflicts of interest in personal and professional relationships;

2. Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing one’s independent judgment to be subordinated;

3. Promptly bring to the attention of the Company’s Financial Disclosure Review Committee and to senior management any information concerning (i) significant or material deficiencies or weaknesses in the design or operation of the Company’s internal controls, (ii) any fraud, whether or not material, or any actual or apparent conflict of interest between personal and professional relationships, involving any member of management or other employee who has a significant role in the Company’s financial reporting, disclosures or internal controls, or (iii) any other matters which could have a material adverse effect on the Company’s ability to record, process, summarize and report financial data;

4. Produce full, fair, accurate, timely and understandable information, including such information that may be used for disclosure, in compliance with applicable accounting standards, in reports and documents that the Company or any subsidiary files with, or submits to, the U.S. Securities and Exchange Commission or any applicable regulatory body and in other public communications made by the Company or any subsidiary;

5. Respect the confidentiality of information by taking all reasonable measures to protect the confidentiality of non-public information about the Company or any subsidiary and to prevent the unauthorized disclosure of such information unless required by applicable law or regulation or legal or regulatory process;

6. Comply with rules and regulations of federal, state, provincial and local governments, and other relevant private and public regulatory agencies.

7. Facilitate the work of the Company’s independent public auditors and must not, directly or indirectly, take any action to fraudulently influence, coerce, manipulate or mislead the Company’s independent public auditors.

Each Financial Professional is accountable for his or her adherence to this Financial Code of Ethics and the Company’s policies. Any violation of this Financial Code of Ethics may result in disciplinary action, including immediate dismissal.

Any Financial Professional who believes, in the exercise of reasonable judgment after a review of the facts, that a violation of this Financial Code of Ethics has occurred shall promptly report such violation to the Vice President; Deputy General Counsel and Corporate Secretary and to the Director of Internal Audit. Alternatively, reports of violations of this Financial Code of Ethics and auditing or accounting related concerns may be made confidentially and anonymously through the Company’s Helpline as set forth in the Company’s Integrity Policy.

Federal-Mogul Corporation policy prohibits retaliation against an employee who reports a violation of this Financial Code of Ethics in good faith. As provided by law, Federal-Mogul Corporation is not permitted to fire, demote, suspend, harass or discriminate against an employee in retaliation for such employee providing information to, or otherwise assisting or participating in, any investigation or proceeding by a regulatory or law enforcement agency, any member of the U.S. Congress or a Congressional committee, or by the Company, relating to what the employee reasonably believes is a violation of the securities laws, an act of fraud or a violation of any wage or discrimination laws. No Federal-Mogul Corporation director, officer, employee or representative is permitted to take any such retaliatory action.

I have read and understand the provisions of this Financial Code of Ethics and agree to comply with all of its related provisions.

(Signature)                                                 (Date)

EX-21

Exhibit 21

FEDERAL-MOGUL CORPORATION SUBSIDIARIES

The direct and indirect subsidiaries of the Company and their respective States or other jurisdictions of incorporation as of December 31, 2003 are as follows:

Name of Subsidiary	Jurisdiction of Incorporation	Percentage of voting stock owned directly and indirectly by Federal-Mogul
Federal-Mogul Canada Limited	Canada	100%
Federal-Mogul, S.A.	France	100%
Federal-Mogul Holdings Deutschland GmbH	Germany	100%
Federal-Mogul Weisbaden GmbH	Germany	100%
Federal-Mogul Burscheid GmbH	Germany	100%
Federal-Mogul Ignition S.r.l.	Italy	100%
Federal-Mogul Holding Italy S.P.A.	Italy	100%
Federal-Mogul Operations Italy S.r.l.	Italy	100%
Federal-Mogul de Mexico S.A. de C.V.	Mexico	94%
Servicios de Componentes Automotrices, S.A.	Mexico	100%
Servicios Administrativos Industriales, S.A.	Mexico	100%
Federal-Mogul Netherlands B.V.	Netherlands	100%
Federal-Mogul Growth B.V.	Netherlands	100%
Federal-Mogul Holdings B.V.	Netherlands	100%
Federal-Mogul Investments B.V.	Netherlands	100%
T & N Holdings Ltd.	South Africa	100%
Federal-Mogul, SARL	Switzerland	100%
Federal-Mogul Acquisition Company Limited	United Kingdom	100%
Federal-Mogul Global Growth Limited	United Kingdom	100%
F-M UK Holding Ltd.	United Kingdom	100%
T & N Limited	United Kingdom	100%
T & N Trademarks Ltd.	United Kingdom	100%
Federal-Mogul World Wide, Inc.	Michigan	100%
Federal-Mogul Ignition Company	Delaware	100%
Federal-Mogul Products, Inc.	Missouri	100%
Federal-Mogul UK Holdings Inc.	Delaware	100%
Federal-Mogul Global Inc.	Delaware	100%
Federal-Mogul Dutch Holdings Inc.	Delaware	100%
FM International, LLC	Delaware	100%
Felt Products Manufacturing Co	Delaware	100%
T & N Industries Inc.	Delaware	100%
Federal-Mogul Piston Rings, Inc.	Delaware	100%
Ferodo America, Inc.	Delaware	100%
Federal-Mogul Powertrain, Inc.	Michigan	100%

1

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements (33-55135, 33-54717, 333-56725, 333-53853, 333-67805 and 333-74661) on Form S-3, the Registration Statement (333-81943) on Form S-4, and the Registration Statements (333-38961, 33-54301, 33-51403, 33-32429, 33-32323, 33-30171, 2-93179 and 333-50370) on Form S-8 of our report dated February 6, 2004, except as to the fifth paragraph of Note 1, as to which the date is March 4, 2004 with respect to the consolidated financial statements and schedule of Federal-Mogul Corporation, and our reports dated February 6, 2004, except as to the ninth paragraph of Note 1, as to which the date is March 4, 2004 with respect to the consolidated financial statements of Federal-Mogul Powertrain, Inc., Federal-Mogul Products, Inc., Federal-Mogul Ignition Company and Federal-Mogul Piston Rings, Inc.. all of which are included in Federal-Mogul Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003.

/S/ ERNST & YOUNG LLP

Detroit, Michigan

March 11, 2004

EX-24

EXHIBIT 24

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each one of the undersigned directors of FEDERAL-MOGUL CORPORATION, a Michigan corporation, which is about to file with the Securities and Exchange Commission, Washington D.C. under the provisions of the Securities Exchange Act of 1934, as amended, the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003, hereby nominates, constitutes and appoints David M. Sherbin as his/her true and lawful attorney-in-fact, with full power to act and with full power of substitution, for him/her and in his/her name, place and stead, to sign such Report and any and all amendments thereto, and to file said Report and each Amendment so signed, with all Exhibits thereto, with the Securities and Exchange Commission.

IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney this 17^th day of February, 2004.

/S/    ROBERT S. MILLER, JR.        

Robert S. Miller, Jr.

Chairman of the Board

/S/    JOHN J. FANNON	/S/    PAUL S. LEWIS
John J. Fannon Director	Paul S. Lewis Director

/S/    FRANK E. MACHER	/S/    SHIRLEY D. PETERSON
Frank E. Macher Director	Shirley D. Peterson Director

/S/    CHARLES G. MCCLURE	/S/    JOHN C. POPE
Charles G. McClure Director	John C. Pope Director

/S/    GEOFFREY H. WHALEN        

Geoffrey H. Whalen

Director

POWERS OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each one of the undersigned directors of FEDERAL-MOGUL CORPORATION, a Michigan corporation, which is about to file with the Securities and Exchange Commission, Washington D.C. under the provisions of the Securities Exchange Act of 1934, as amended, the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003, hereby nominates, constitutes and appoints David M. Sherbin as his/her true and lawful attorney-in-fact, with full power to act and with full power of substitution, for him/her and in his/her name, place and stead, to sign such Report and any and all amendments thereto, and to file said Report and each Amendment so signed, with all Exhibits thereto, with the Securities and Exchange Commission.

IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney this 17^th day of February, 2004.

/s/ ROBERT S. MILLER, JR.

Robert S. Miller, Jr.

Chairman of the Board

/s/ JOHN J. FANNON	/s/ PAUL S. LEWIS
John J. Fannon	Paul S. Lewis
Director	Director
/s/ FRANK E. MACHER	/s/ SHIRLEY D. PETERSON
Frank E. Macher	Shirley D. Peterson
Director	Director
/s/ CHARLES G. MCCLURE, JR.	/s/ JOHN C. POPE
Charles G. McClure, Jr.	John C. Pope
Director	Director

/S/ GEOFFREY H. WHALEN

Geoffrey H. Whalen

Director

2

EX-31.1

Exhibit 31.1

CERTIFICATION

Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

I, Charles G. McClure, the Chief Executive Officer of Federal-Mogul Corporation (the “Company”), certify that:

1. I have reviewed this annual report on Form 10-K of Federal-Mogul Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 15, 2004

By:	/s/ Charles G. McClure, Jr.
	Charles G. McClure, Jr.
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

I, G. Michael Lynch, the Chief Financial Officer of Federal-Mogul Corporation (the “Company”), certify that:

1. I have reviewed this annual report on Form 10-K of Federal-Mogul Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 15, 2004

By:	/s/ G. Michael Lynch
	G. Michael Lynch
	Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION

Pursuant to 18 United States Code § 1350 and

Rule 13a-14(b) of the Securities Exchange Act of 1934

The Undersigned hereby certifies that to his knowledge the annual report on Form 10-K of Federal-Mogul Corporation (the “Company”) filed with the Securities and Exchange Commission on the date hereof fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such annual report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement, or other document authenticating, acknowledging, or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Date: March 15, 2004

By:	/s/ Charles G. McClure, Jr.
	Charles G. McClure, Jr.
	Chief Executive Officer
By:	/s/ G. Michael Lynch
	G. Michael Lynch
	Chief Financial Officer