UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~March~~June 3130, ~~2006~~2007

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

For the transition period from to

Commission File Number: 1-1511

FEDERAL-MOGUL CORPORATION

(Exact name of Registrant as specified in its charter)

Michigan		38-0533580
(State or other jurisdiction of incorporation or organization)		(IRS employer identification number)
26555 Northwestern Highway, Southfield, Michigan		~~48034~~48033-2146
(Address of principal executive offices)		(Zip Code)

(248) 354-7700

(Registrant’s telephone number, including area code)

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

~~Yes x No ¨~~Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

~~Indicate~~Large ~~by check mark whether the registrant is an~~ accelerated filer ¨ Accelerated ~~(as defined in Rule 12b~~filer ¨ Non-2accelerated offiler x ~~the Exchange Act).~~

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes x ¨ No ¨ x

~~Indicate~~As byof ~~check~~July 25, ~~mark~~2007, ~~whether~~there ~~the~~were ~~registrant~~89,861,480 isoutstanding ashares ~~shell~~of ~~company~~the ~~(as~~registrant’s ~~defined~~$5.00 instated ~~Rule~~value ~~12b-2 of the Exchange Act)~~common stock.

Yes ¨ No x

As of April 28, 2006, there were 94,482,470 outstanding shares of the registrant’s $5.00 stated value common stock.

FEDERAL-MOGUL CORPORATION

Form 10-Q

For the ~~Quarter~~Quarterly Period Ended ~~March~~June 3130, ~~2006~~2007

INDEX

		Page No.
Forward-Looking Statements		2
Part I – Financial Information
Item 1 – Financial Statements
Consolidated Statements of Operations		4
Consolidated Balance Sheets		5
Consolidated Statements of Cash Flows		6
Notes to the Consolidated Financial Statements		7
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		4045
Item 3 – Qualitative and Quantitative Disclosures about Market Risk		52
Item 3 – Quantitative and Qualitative Disclosures about Market Risk		67
Item 4 – Controls and Procedures		5468
Part II – Other Information
Item 1 – Legal Proceedings		5569
Item 3 – Defaults Upon Senior Securities		5569
Item 6 – Exhibits		5569
Signatures		5670
Exhibits		71

FORWARD-LOOKING STATEMENTS

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

Forward-looking statements give current expectations or forecasts of future events. Words such as “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, “seek” and other words and terms of similar meaning in connection with discussions of future operating or financial performance signify forward-looking statements. ~~From time to time,~~ Federal-Mogul Corporation (the “Company”) also, from time to time, 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 company voluntary arrangements (“CVAs”) in the U.K.~~; the outcome of asbestos litigation proceedings; and the Company’s compliance with its debtor-in-possession credit facility.

Legal and Environmental Proceedings

•

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

•

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

Business Environment and Economic Conditions

•

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

•

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

•

Fluctuations in the price and availability of raw materials and other supplies used in the manufacturing and distribution of the Company’s products.

•

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

•

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

•

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

• 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, all of which directly impact the valuation of assets and liabilities associated with the Company’s pension and other postemployment benefit plans.

Other Factors

•

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

•

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

• New or expanded litigation activity regarding alleged asbestos claims against subsidiaries of the Company not included in ~~either~~ the U.S. Chapter 11 ~~or the U.K. Administration~~ Proceedings. ~~Legislative activities of governments, agencies, and similar organizations, both in the United States and in other countries, that may affect the operations of the Company.~~

•

Legislative activities of governments, agencies, and similar organizations, both in the United States and in other 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.

• The Company is currently transitioning its information ~~systems~~system ~~(“IS”)~~ infrastructure and functions to newer generation systems. If the new systems cannot be properly implemented, the Company would expect to incur additional expenses to upgrade and improve our legacy systems.

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FEDERAL-MOGUL CORPORATION

Consolidated Statements of Operations ~~(Unaudited)~~

	Three Months EndedMarch 31
	2006			2005
	(Millions of Dollars,Except Per Share Amounts)
Net sales	$	1,600.3		$	1,633.2
Cost of products sold		1,315.3			1,358.3
Gross margin		285.0			274.9
Selling, general and administrative expenses		227.5			249.7
Adjustment of assets to fair value		20.1			3.0
Interest expense, net		39.0			28.8
Chapter 11 and Administration related reorganization expenses		21.1			30.0
Equity earnings of unconsolidated affiliates		(9.4	)		(9.3	)
Restructuring expense, net		25.8			2.8
Other income, net		(0.3	)		(8.4	)
Loss before income tax expense		(38.8	)		(21.7	)
Income tax expense		29.6			26.6
Net loss	$	(68.4	)	$	(48.3	)
Basic and diluted loss per common share:
Net loss per common share	$	(0.77	)	$	(0.54	)

(Unaudited)

See accompanying notes to consolidated financial statements


	Three Months Ended June 30						Six Months Ended June 30
	2007			2006			2007			2006
	(Millions of Dollars, Except Per Share Amounts)

Net sales	$	1,763.4		$	1,631.6		$	3,479.9		$	3,231.9
Cost of products sold		1,441.0			1,327.4			2,849.7			2,642.7


Gross margin		322.4			304.2			630.2			589.2

Selling, general and administrative expenses		212.7			218.4			419.6			445.9
Adjustment of assets to fair value		3.2			1.1			3.5			21.2
Interest expense, net		51.9			44.3			101.9			83.3
Chapter 11 and U.K. Administration related reorganization expenses		27.6			20.8			41.2			41.9
Equity earnings of unconsolidated affiliates		(10.1	)		(7.7	)		(18.0	)		(17.1	)
Restructuring expense, net		13.5			16.5			29.6			42.3
Other income, net		(1.5	)		(1.0	)		(8.3	)		(1.3	)


Income (loss) before income tax expense		25.1			11.8			60.7			(27.0	)
Income tax expense		21.2			28.6			52.2			58.2


Net income (loss)	$	3.9		$	(16.8	)	$	8.5		$	(85.2	)


Basic and diluted income (loss) per common share:
Basic net income (loss) per common share	$	0.04		$	(0.19	)	$	0.10		$	(0.96	)


Diluted net income (loss) per common share	$	0.04		$	(0.19	)	$	0.09		$	(0.96	)

See accompanying notes to unaudited consolidated financial statements.

FEDERAL-MOGUL CORPORATION

Consolidated Balance Sheets

	(Unaudited) March 31 2006			December 31 2005
	(Unaudited) June 30 2007			December 31 2006
	(Millions of dollars)
	(Millions of Dollars)
ASSETS
Current assets:
Cash and equivalents	$	~~395~~378.61		$	~~387~~359.23
Restricted cash		699.9			700.9
Accounts receivable, net		1,167.7			992.6
Accounts receivable, net		1,095.4			1,011.1
Inventories, net		905.8			892.6
Inventories, net		839.3			808.1
Prepaid expenses and other current assets		291.4			248.2
Prepaid expenses		206.0			220.7
Total current assets		2,743.0			2,492.7
Total current assets		3,236.2			3,128.0
Property, plant and equipment, net		2,055.5			2,078.6
Property, plant and equipment, net		1,940.7			2,003.1
Goodwill and indefinite-lived intangible assets		1,219.7			1,205.3
Goodwill and indefinite-lived intangible assets		1,189.3			1,189.5
Definite-lived intangible assets, net		254.1			254.3
Definite-lived intangible assets, net		286.6			289.6
Asbestos-related insurance recoverable		873.7			859.0
Asbestos-related insurance recoverable		779.9			777.4
Prepaid pension costs and other noncurrent assets		262.5			289.2
Prepaid pension costs		79.2			112.2
	$	7,408.5		$	7,179.1
Other noncurrent assets		254.4			235.3
	$	7,766.3		$	7,735.1
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Short-term debt, including current portion of long-term debt	$	~~578~~820.02		$	~~606~~482.71
Accounts payable		~~464~~618.94			~~405~~488.0
Accrued liabilities		~~563~~514.42			~~536~~435.0
Other current liabilities		124.3			116.9
Current portion of postemployment benefit liability		67.0			67.9
Total current liabilities		1,730.6			1,664.6
Other current liabilities		147.1			181.7
Liabilities subject to compromise		5,994.5			5,988.8
Total current liabilities		2,166.9			1,654.7
Long-term debt		7.6			8.1
Liabilities subject to compromise		5,455.5			5,813.4
Postemployment benefits		2,244.4			2,230.8
Long-term debt		22.8			26.7
Long-term portion of deferred income taxes		65.6			62.4
Postemployment benefits		1,094.6			1,111.1
Other accrued liabilities		186.0			181.4
Long-term portion of deferred income taxes		84.2			81.8
Minority interest in consolidated subsidiaries		31.9			32.0
Other accrued liabilities		159.6			185.1
Minority interest in consolidated subsidiaries		40.1			54.2
Shareholders’ deficit:
Series C ESOP preferred stock		28.0			28.0
Common stock		~~445~~449.3			445.3
Additional paid-in capital		2,~~156~~199.14			2,~~154~~160.62
Accumulated deficit		(34,~~670~~129.54	)		(34,~~602~~151.17	)
Accumulated other comprehensive loss		(~~1,453~~162.25	)		(~~1,458~~229.87	)
Total shareholders’ deficit		(21,~~494~~615.32	)		(21,~~433~~747.09	)
	$	7,~~766~~408.35		$	7,~~735~~179.1

See accompanying notes to unaudited consolidated financial statements.

FEDERAL-MOGUL CORPORATION

Consolidated Statements of Cash Flows (Unaudited)

	Three Months EndedMarch 31
	Six Months EndedJune 30
	2006			2005
	2007			2006
	(Millions of Dollars)
Cash Provided From (Used By) Operating Activities
Net loss	$	(68.4	)	$	(48.3	)
Net income (loss)	$	8.5		$	(85.2	)
Adjustments to reconcile net loss to net cash provided from (used by) operating activities:
Adjustments to reconcile net income (loss) to net cash provided from operating activities:
Depreciation and amortization		78172.81			93159.04
Adjustment of assets to fair value		203.15			321.02
Change in postemployment benefits, including pensions		34(27.91	)		3067.34
Change in deferred taxes		~~(6.~~3.8	)		8(7.94	)
Changes in operating assets and liabilities:
Increase in accounts receivable		(81.0	)		(91.1	)
Accounts receivable		(157.8	)		(80.7	)
Increase in inventories		(29.5	)		(19.9	)
Inventories		0.9			(58.6	)
Increase in accounts payable		57.4			17.6
Accounts payable		106.5			72.3
Changes in other assets and liabilities		47.6			(4.5	)
Other assets and liabilities		75.5			46.3
Net Cash Provided From (Used By) Operating Activities		53.6			(11.0	)
Net Cash Provided From Operating Activities		185.9			134.7
Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment		(29132.60	)		(3980.6	)
Net proceeds from the sale of property, plant and equipment		218.71			52.37
Net proceeds from the sale of business		~~4.0~~—			—4.0
Net Cash Used By Investing Activities		(22.9	)		(34.3	)
Proceeds from sale of investment		13.8			—
Payments to acquire minority interests		(6.8	)		—
Payments to acquire business		—			(30.5	)
Net Cash Used By Investing Activities		(106.9	)		(104.4	)
Cash Provided From (Used By) Financing Activities
Proceeds from borrowings on DIP credit facility		~~124~~550.70			95164.83
Principal payments on DIP credit facility		(~~153~~228.01	)		(20198.0	)
Increase (decrease) in short-term debt		(0.7	)		3.9
Increase in short-term debt		8.7			0.3
Decrease in other long-term debt		(05.68	)		(01.90	)
Net change in restricted cash		~~(1.0~~—	)		—(26.9	)
Net Cash (Used By) Provided From Financing Activities		(30.6	)		78.8
Payments on factoring arrangements		(58.9	)		—
Effect of foreign currency exchange rate fluctuations on cash		8.3			(13.7	)
Repayment of pre-petition Tranche C debt		(330.4	)		—
Increase in cash and equivalents		8.4			19.8
Debt refinance fees		(0.3	)		—
Cash and equivalents at beginning of period		387.2			700.6
Net Cash Used By Financing Activities		(64.8	)		(61.3	)
Cash and equivalents at end of period	$	395.6		$	720.4
Effect of foreign currency exchange rate fluctuations on cash		4.6			47.9
Increase in cash and equivalents		18.8			16.9
Cash and equivalents at beginning of period		359.3			387.2
Cash and equivalents at end of period	$	378.1		$	404.1

See accompanying notes to unaudited consolidated financial statements.

FEDERAL-MOGUL CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

~~March~~June 3130, ~~2006~~2007

1.	Basis of Presentation

Interim Financial Statements: The unaudited consolidated financial statements of Federal-Mogul Corporation (“Federal-Mogul” or the “Company”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (~~the~~ “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. These statements include all adjustments (consisting of normal recurring adjustments) that management believes are necessary to present fair statements of the results of operations, financial position and cash flows. The Company’s management believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2005~~2006, as filed with the Securities and Exchange Commission.

Operating results for the three and six month ~~period~~periods ended ~~March~~June 3130, ~~2006~~2007 are not necessarily indicative of the results that may be expected for the year ~~ended~~ending December 31, ~~2006~~2007.

Financial Statement Presentation: OnThe ~~October 1, 2001 (the “Petition Date”), the~~ Company and all of its wholly-owned United States (“U.S.”) subsidiaries filed voluntary petitions on October 1, 2001 (the “Petition Date”) for reorganization (the “U.S. Restructuring” or the “Restructuring Proceedings”) 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 (“U.K.”) subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court, and filed petitions for Administration ~~(the “U.K. Restructuring”)~~ under the United Kingdom Insolvency Act of 1986 (the “Act”) in the High Court of Justice, Chancery division in London, England (the “High Court”). The ~~Company~~High ~~and~~Court, ~~its U.S. and U.K. subsidiaries included~~ in ~~the~~November ~~U.S.~~2006, approved ~~Restructuring or~~ the ~~U.K.~~discharge ~~Restructuring~~of ~~are herein referred to as~~ the ~~“Debtors”.~~Administration ~~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~~those ~~of joint administration as In re: Federal-Mogul Global Inc., T&N Limited, et al (Case No. 01-10578(JKF)). Subsidiaries outside of the aforementioned~~ U.~~S. and U.~~K. subsidiaries ~~are~~that ~~not~~entered ~~party~~into toCompany ~~any~~Voluntary ~~insolvency proceeding and, therefore, are not currently provided protection from creditors by any insolvency court and are operating in the normal course~~Arrangements. The Chapter 11 Cases are further discussed in Note 2 to the consolidated financial statements.

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

The appropriateness of using the going concern basis for the Company’s financial statements is dependent upon, among other things: (i) the Company’s ability to comply with the terms of its 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 athe plan~~(s)~~ of reorganization under the Bankruptcy Code; ~~(v) confirmation of a company voluntary arrangement(s) in the U.K. under Administration;~~ and (viv) the Company’s ability to achieve profitability following such ~~confirmations~~confirmation.

Principles of Consolidation: The consolidated financial statements include the accounts of the Company and all domestic and international subsidiaries that are more than 50% owned. Investments in affiliates of 50% or less but greater than 20% are accounted for using the equity method, while investments in affiliates of 20% or less are accounted for under the cost method. The Company does not hold a controlling interest in an entity based on exposure to economic risks and potential rewards (variable interest) for which it is the primary beneficiary. Further,

~~NOTES~~ the TOCompany’s ~~CONSOLIDATED~~joint ~~FINANCIAL~~ventures ~~STATEMENTS~~are -businesses ~~Continued~~established and maintained in connection with its operating strategy and are not special purpose entities.

~~Principles~~Use of ~~Consolidation~~Estimates: The ~~consolidated~~preparation of financial statements ~~include~~in ~~the~~conformity ~~accounts~~with ~~of the Company and all domestic and international subsidiaries that are more than 50% owned~~U.S. ~~Investments~~GAAP inrequires ~~affiliates~~management ofto ~~50%~~make orestimates ~~less~~and ~~but~~assumptions ~~greater~~that affect ~~than 20% are accounted for using~~ the ~~equity~~amounts ~~method,~~reported ~~while~~therein. ~~investments~~Due into ~~affiliates of 20% or less are accounted for under~~ the ~~cost~~inherent ~~method.~~uncertainty ~~The~~involved ~~Company does not hold a controlling interest~~ in ~~any~~making ~~entity based on exposure to economic risks and potential rewards (variable interests) for which it is the primary beneficiary. Further~~estimates, ~~the~~actual ~~Company’s joint~~results ~~ventures~~reported ~~are businesses established and maintained~~ in ~~connection~~future ~~with~~periods ~~its~~may ~~operating~~be ~~strategy~~based ~~and~~upon ~~are~~amounts ~~not~~that ~~special~~differ ~~purpose~~from ~~entities~~these estimates.

~~Use~~Trade ofAccounts ~~Estimates~~Receivable: ~~The~~Federal-Mogul ~~preparation~~subsidiaries ofin ~~financial~~Brazil, ~~statements~~France, inGermany, ~~conformity~~Italy ~~with~~and ~~accounting~~Spain ~~principles~~are ~~generally~~party ~~accepted~~to inaccounts ~~the~~receivable ~~United~~factoring ~~States~~and ~~requires~~discounting arrangements. ~~management~~Gross toaccounts ~~make~~receivable ~~estimates~~factored or discounted under these facilities was $324 million and ~~assumptions~~$272 ~~that~~million ~~affect~~as ~~the~~of June 30, 2007 and December 31, 2006, respectively. Of those gross amounts, ~~reported~~$294 million and $252 million, ~~therein~~respectively, were factored without recourse and treated as a sale under Statement of Financial Accounting Standards (“SFAS”) No. 140, ~~Due~~Accounting tofor ~~the~~Transfers ~~inherent~~and ~~uncertainty~~Servicing ~~involved~~of inFinancial ~~making~~Assets ~~estimates~~and Extinguishments of Liabilities. Under terms of these factoring arrangements, ~~actual~~the ~~results~~Company ~~reported~~is innot ~~future~~obligated ~~periods~~to ~~may~~draw becash ~~based~~immediately upon the factoring of accounts receivable. Thus, as of June 30, 2007 and December 31, 2006, the Company had outstanding factored amounts ~~that~~of ~~differ~~$13 ~~from~~million ~~these~~and ~~estimates~~$9 million, respectively, for which cash had not yet been drawn. Expenses associated with receivables factored or discounted are recorded in the statements of operations within “other income, net.”

~~Trade Accounts Receivable~~Reclassifications: ~~Federal-Mogul~~Certain ~~subsidiaries~~items in ~~Germany,~~the ~~France,~~2006 ~~Italy,~~consolidated ~~Brazil~~financial ~~and~~statements ~~Spain~~have ~~are~~been ~~party~~reclassified to ~~accounts~~conform receivable factoring arrangements. Accounts receivable factored or discounted under these facilities was $196 million and $177 million as of March 31, 2006 and December 31, 2005, respectively, of which $174 million and $159 million, respectively, was factored without recourse. Expenses associated with ~~receivables~~ ~~factored~~the orpresentation ~~discounted~~used ~~are recorded~~ in the ~~statements of operations within “other income, net.” Under terms of these factoring arrangements, the Company is not obligated to draw cash immediately upon the factoring of accounts~~ ~~receivable.~~current ~~Thus, as of March 31, 2006 and December 31, 2005, the Company has outstanding factoring amounts of $18 million and $23 million, respectively, for which cash has not yet been drawn~~period.

~~New Accounting Pronouncement: On June 29, 2005, the Emerging Issues Task Force (“EITF”) issued EITF No~~2. ~~05-5,~~ ~~Accounting for~~Voluntary ~~Early~~Reorganization ~~Retirement~~under orChapter ~~Postemployment~~11 ~~Programs~~and ~~with Specific Features~~U. ~~EITF No~~K. ~~05-5~~ requires reclassifications of certain restructuring reserves related to German early retirement (“ATZ”) programs from restructuring reserves to post-employment benefits. The Company adopted EITF No. 05-5 effective January 1, 2006 and for the quarter ended March 31, 2006, the Company is in compliance with the requirements. Administration

~~Reclassifications:~~Federal-Mogul ~~Certain~~and ~~items~~all of its wholly-owned United States subsidiaries filed voluntary petitions on October 1, 2001 for reorganization under Chapter 11 of the United States Bankruptcy Code in the ~~2005~~Bankruptcy ~~consolidated~~Court. ~~financial~~Also ~~statements~~on October 1, ~~have~~2001, ~~been~~certain ~~reclassified~~of tothe ~~conform~~Company’s United Kingdom subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code with the ~~presentation~~Bankruptcy ~~used~~Court, inand filed petitions for Administration under the ~~current~~United ~~period~~Kingdom Insolvency Act of 1986 in the High Court. The High Court, in November 2006, approved the discharge of the Administration Proceedings for those U.K. subsidiaries that entered into Company Voluntary Arrangements.

The Company and its U.S. and U.K. subsidiaries included in the U.S. Restructuring are herein referred to as the “Debtors.” 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(JKF)). Subsidiaries outside of the aforementioned U.S. and U.K. subsidiaries were or are not party to any insolvency proceeding and, therefore, are not currently provided protection from creditors by any insolvency court and are operating in the normal course.

The Restructuring Proceedings were initiated in response to a sharply increasing number of asbestos-related claims and their demand on the Company’s cash flows and liquidity. Under the Restructuring Proceedings, the Debtors have submitted and have requested the Bankruptcy Court to approve and implement a plan for addressing the asbestos-related claims against them, as discussed below.

Consequences of the Restructuring Proceedings

The Debtors are operating their businesses as debtors-in-possession subject to the provisions of the Bankruptcy Code. All vendors are being paid for goods furnished and services provided after the Petition Date. However, as a consequence of the Restructuring Proceedings, pending litigation against the Debtors as of the Petition Date is stayed (subject to certain exceptions in the case of governmental authorities), and no party may take any action to pursue or collect pre-petition claims except pursuant to an order of the Bankruptcy Court. It is the Debtors’ intention to address pending and future asbestos-related claims and other pre-petition claims through their plan of reorganization under the Bankruptcy.

~~NOTES~~In TOthe ~~CONSOLIDATED~~U.S., ~~FINANCIAL~~four ~~STATEMENTS~~committees, -representing ~~Continued~~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.

2.Solicitation ~~Voluntary~~packages containing the Third Amended Plan of Reorganization ~~under~~and ~~Chapter~~Disclosure 11Statement (the “Third Amended Plan”), various supporting documents and ~~Administration~~a ballot, if appropriate, were mailed on July 12, 2004 to known creditors of the Company and to holders of common and preferred stock interests in the Company. The overwhelming majority of the classes of claims and interests voted to accept the Third Amended Plan. For the few classes of claims that voted to reject the Third Amended Plan, the Unsecured Creditors Committee, the Asbestos Claimants Committee, the Future Asbestos Claimants Representative, the Agent for the Pre-petition Bank Lenders and the Equity Security Holders Committee (collectively referred to as the “Plan Proponents”) intended to either amend the Third Amended Plan so as to obtain such classes’ accepting votes or seek to confirm the Third Amended Plan over the objection of such classes.

OnThe ~~October 1,~~Fourth ~~2001,~~Amended ~~Federal-Mogul~~Joint ~~and~~Plan ~~all~~ of ~~its~~Reorganization ~~wholly-owned~~(the ~~United~~“Plan”) ~~States~~for ~~subsidiaries~~the ~~filed~~Company ~~voluntary~~and ~~petitions~~the ~~for~~other ~~reorganization~~U.S. ~~under~~and ~~Chapter 11~~U.K. ofDebtors ~~the~~was ~~United~~filed ~~States~~with ~~Bankruptcy Code in~~ the Bankruptcy Court. ~~Also~~ on ~~October~~November 121, ~~2001,~~2006. ~~certain~~The ofPlan ~~the~~was ~~Company’s~~jointly ~~United~~proposed ~~Kingdom~~by ~~subsidiaries~~the ~~filed~~Company ~~voluntary~~and ~~petitions~~the ~~for~~Plan ~~reorganization~~Proponents. ~~under~~On ~~Chapter~~February 112, of2007, the ~~Bankruptcy~~supplemental ~~Code~~Disclosure ~~with~~Statement was approved by the Bankruptcy Court, ~~and~~to ~~filed petitions~~be ~~for~~used ~~Administration~~in ~~under~~soliciting votes to accept or reject the ~~United~~Plan ~~Kingdom~~from ~~Insolvency~~those ~~Act~~classes of ~~1986~~creditors inwhose ~~the~~treatment ~~High~~under ~~Court.~~the ~~Subsidiaries~~Plan ~~outside~~has ofchanged since the ~~aforementioned~~solicitation ~~U.S.~~under ~~and~~the ~~U.K.~~Third ~~subsidiaries~~Amended ~~are~~Plan. ~~not~~Voting ~~party~~on to the ~~Chapter~~Plan 11concluded ~~Cases~~in ~~and,~~May ~~therefore~~2007, ~~are~~with ~~not~~all ~~currently~~classes ~~provided protection~~of ~~from~~ creditors byand ~~any~~interest ~~insolvency~~holders ~~court~~entitled ~~and~~to vote ~~are~~on ~~operating~~the inPlan ~~the~~voting ~~normal~~to ~~course~~accept the Plan.

The ~~Restructuring~~confirmation ~~Proceedings~~hearing ~~were~~relating ~~initiated~~to inthe Plan began on June 18, 2007. Although all major constituencies ~~response~~in tothe aChapter ~~sharply~~11 ~~increasing~~Cases ~~number~~support confirmation of ~~asbestos-related~~the ~~claims~~Plan, and ~~their~~the ~~demand~~Plan onhas ~~the~~been ~~Company’s~~accepted ~~cash~~by ~~flows~~all classes of creditors and ~~liquidity~~interest holders, certain parties have objected to confirmation of the Plan, and those objections were addressed as part of the confirmation hearing. ~~Under~~After six days of hearings before the ~~Restructuring~~Bankruptcy ~~Proceedings~~Court, the ~~Debtors~~presentation ~~expect~~of evidence in connection with the confirmation hearing ended on July 10, 2007. The Bankruptcy Court has asked for additional briefing relating to the ~~develop~~confirmation hearing to be submitted by August 30, 2007, and ~~implement~~has ascheduled ~~plan~~closing arguments for ~~addressing~~the confirmation hearing on October 1, 2007. While the outcome of the confirmation hearing and the timetable for confirmation of the Plan ~~asbestos-related~~reside ~~claims~~with ~~against~~the ~~them~~Bankruptcy Court, the Company anticipates that the Plan will be confirmed reasonably promptly after completion of the closing arguments.

~~Consequences~~The Plan provides that asbestos personal injury claimants, both present and future, will be permanently channeled to a trust or series of trusts established pursuant to Section 524(g) of the ~~Restructuring~~Bankruptcy ~~Proceedings~~Code, thereby protecting the Company and its affiliates in the Chapter 11 Cases from existing and future asbestos liability. The Plan provides that all currently outstanding stock of the Company will be cancelled, 50.1% of newly issued common stock of reorganized Federal-Mogul will be distributed to the asbestos trust, and 49.9% of the newly issued common stock of reorganized Federal-Mogul will be distributed pro rata to the noteholders and holders of unsecured claims against the U.S. Debtors that elected to have their claims satisfied by receiving shares of common stock of reorganized Federal-Mogul rather than cash. The holders of currently outstanding common and preferred stock of the Company, at the time those shares are cancelled, will receive warrants that may be used to purchase shares of common stock of reorganized Federal-Mogul at a predetermined exercise price. These warrants will only be of value if the market price of the shares of common stock of reorganized Federal-Mogul exceeds the predetermined exercise price during the 7-year term during which the warrants will be saleable or exercisable.

The ~~Debtors~~Plan ~~are~~also ~~operating~~provides ~~their~~that: ~~businesses~~i) ~~as debtors-in-possession subject to~~ the ~~provisions of the Bankruptcy Code. The~~ U.KS. ~~Debtors~~ asbestos ~~are~~trust ~~continuing to~~will ~~manage~~make ~~their~~a ~~operations~~payment ~~under~~to the ~~supervision~~reorganized ofCompany ~~Administrators~~(or ~~approved~~pay bya ~~the~~portion ~~High~~of ~~Court.~~the ~~All~~common ~~vendors~~stock ~~are~~of ~~being~~reorganized ~~paid~~Federal-Mogul ~~for~~to ~~goods~~be ~~furnished~~issued ~~and~~to ~~services provided after~~ the ~~Petition~~U. ~~Date~~S. ~~However,~~asbestos astrust ain ~~consequence~~lieu ofthereof) for the ~~Restructuring~~agreed ~~Proceedings, pending~~amounts ~~litigation~~that ~~against~~will ~~the~~be ~~Debtors~~used asby of the ~~Petition~~U.K. Administrators ~~Date~~to isprovide ~~stayed~~distributions ~~(subject~~on toaccount ~~certain~~of ~~exceptions~~U.K. inasbestos ~~the~~personal ~~case~~injury ofclaims; ~~governmental authorities~~ii), ~~and~~the noU.S. ~~party~~asbestos ~~may~~trust ~~take~~will ~~any~~provide ~~action~~an option to ~~pursue~~an oraffiliate ~~collect~~of ~~pre-petition~~Mr. Carl ~~claims~~Icahn ~~except~~for ~~pursuant~~the topurchase ~~an order~~ of the ~~Bankruptcy~~remaining ~~Court~~shares orof ~~the~~common ~~High~~stock ~~Court,~~of reorganized asFederal-Mogul ~~applicable.~~held Itby issuch ~~the~~trust; ~~Debtors’~~and ~~intention~~(iii) if tosuch ~~address~~affiliate ~~pending~~of ~~and~~Mr. Carl ~~future~~Icahn ~~asbestos-related~~does ~~claims~~not ~~and~~exercise ~~other~~such ~~pre-petition~~option, ~~claims~~an ~~through~~affiliate ~~plans~~ of ~~reorganization~~Mr. Carl ~~under~~Icahn ~~the~~will ~~Bankruptcy~~provide ~~Code~~certain ~~and/or~~financing ~~company voluntary~~to ~~arrangements under~~ the ~~Insolvency~~U.S. ~~Act~~asbestos ~~of 1986 (“CVAs”)~~trust.

InUnsecured ~~the U.S.~~creditors, ~~four~~including ~~committees,~~trade ~~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,~~U.S. Debtors have the ~~right~~option to beeither ~~heard~~receive onshares ~~all~~of ~~matters~~reorganized ~~that~~Federal-Mogul ~~come~~or ~~before~~receive ~~the~~cash ~~Bankruptcy~~distributions under ~~Court. The Committees, together with~~ the ~~legal~~Plan ~~representative~~equal ~~for~~to ~~the~~35% ~~future~~of ~~asbestos~~their ~~claimants,~~allowed ~~play important roles in the Restructuring Proceedings. In the U.K.~~claims, ~~the Administrators have appointed creditors committees, representing both asbestos claimants and general unsecured creditors.~~

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

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

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

~~NOTES~~ payable TOin ~~CONSOLIDATED~~three ~~FINANCIAL~~annual ~~STATEMENTS~~installments, -provided ~~Continued~~that the aggregate payout of all allowed unsecured claims against the U.S. Debtors does not exceed $258 million. Any excess above this amount could result in a reduction in the percentage distribution that the unsecured creditors of the U.S. Debtors ultimately receive.

The Administrators of the U.K. Debtors and the Plan Proponents, on September 26, 2005, entered into an agreement outlining the terms and conditions of distributions to the creditors of the U.K. Debtors (“U.K. Settlement Agreement”). Prior to this ~~amount~~agreement, ~~could~~the ~~result~~Administrators had agreed to sell certain long-term intercompany notes held by T&N Limited (“Loan Notes”) to Deutsche Bank as a means to fund expected distributions to creditors. In December 2005, in accordance with terms of the U.K. Settlement Agreement, the Company elected to retain the Loan Notes. Concurrently, the Loan Notes were transferred from the U.K. Debtors to a ~~reduction~~newly created non-debtor wholly-owned subsidiary of the Company and to Federal-Mogul Corporation, as provided in the ~~percentage~~Loan ~~distribution~~Note ~~that~~Sale Agreement filed with the ~~unsecured~~SEC ~~creditors~~on Form 8-K on December 15, 2005. A copy of the U.SK. ~~Debtors~~Settlement ~~ultimately~~Agreement ~~receive~~was filed with the SEC on Form 8-K on September 30, 2005.

OnThe ~~July~~Company Voluntary Arrangements (“CVAs”) became effective on October 1211, ~~2004~~2006, ~~solicitation~~resolving ~~packages~~claims ~~containing~~(other than those that are to be dealt with by the Plan) ~~and~~against ~~Disclosure~~the ~~Statement,~~principal ~~various~~U.K. ~~supporting~~Debtors. ~~documents~~The ~~and~~discharge aof ~~ballot,~~administration iforders ~~appropriate~~for the principal U.K. Debtors became effective on November 30, ~~were~~ ~~mailed~~2006. toThe ~~known~~CVAs ~~creditors~~divide ofasbestos claims against the ~~Company~~principal U.K. ~~and~~Debtors ~~holders~~into oftwo ~~common~~categories: ~~and~~CVA ~~preferred~~Asbestos ~~stock~~Claims ~~interests~~and inChapter ~~the~~11 ~~Company~~Asbestos Claims. ~~All~~CVA ~~votes~~Asbestos ~~were~~Claims ~~due~~are dealt with by the ~~close~~CVAs ofand ~~business~~it onis ~~November 3,~~intended ~~2004.~~that ~~The~~Chapter ~~overwhelming~~11 ~~majority~~Asbestos ofClaims will be dealt with by the ~~classes~~Plan. ofThe ~~claims~~CVAs compromise and ~~interests~~protect ~~have~~the ~~voted~~CVA tocompanies ~~accept~~from the ~~Plan~~CVA Asbestos Claims. ~~For~~The trustees of the ~~few~~U.K. ~~classes~~asbestos oftrust ~~claims~~will ~~that~~pay ~~voted~~dividends to ~~reject~~CVA Asbestos claimants from the U.K. asbestos trust. Upon the effective date of the Plan, the ~~Plan~~Chapter ~~Proponents~~11 ~~intend~~Asbestos toClaims ~~either~~will ~~amend~~be compromised. Accordingly, the Plan socontemplates asthat tothe ~~obtain~~U.S. ~~such~~asbestos ~~classes’~~trustees ~~accepting~~look ~~votes~~exclusively orto ~~seek~~the toU.S. ~~confirm~~asbestos ~~the~~trust ~~Plan~~to ~~over~~pay ~~the~~dividends ~~objection~~to ofChapter ~~such classes~~11 Asbestos claimants.

OnThe ~~February 2,~~Bankruptcy ~~2005,~~Court ~~the~~may ~~Company~~confirm ~~entered~~a ~~into~~plan anof ~~employment~~reorganization ~~agreement~~only ~~with~~upon ~~José~~making ~~Maria~~certain ~~Alapont~~findings ~~under~~required ~~which Mr. Alapont~~by ~~became~~the Bankruptcy Code, and a plan may be confirmed over the ~~Company’s~~dissent ~~president~~of non-accepting creditors and ~~chief~~equity ~~executive~~security holders ~~officer~~if certain requirements of the Bankruptcy Code are met. AsThe ~~part~~payment rights and other entitlements of ~~this~~pre-petition ~~employment~~creditors ~~agreement,~~and ~~the~~equity ~~Plan~~security ~~Proponents~~holders ~~have~~may ~~agreed~~be tosubstantially ~~amend~~altered ~~the~~by ~~Plan~~any toplan ~~provide~~of ~~Mr.~~reorganization confirmed in the Chapter ~~Alapont~~11 ~~with~~Cases. ~~non~~The pre-~~qualified~~petition ~~stock~~creditors ~~options~~of tosome ~~purchase~~Debtors ~~common stock~~may be treated differently than those of ~~the~~other ~~reorganized~~Debtors ~~Company.~~under ~~Significant~~the ~~terms~~proposed Plan and ~~conditions~~CVAs. ofWhile the ~~contemplated~~outcome ~~stock~~of ~~options~~the ~~are~~confirmation ~~outlined~~hearing inand the ~~employment~~timetable ~~agreement~~for ~~previously~~confirmation ~~filed~~of the Plan reside with the ~~SEC~~Bankruptcy onCourt, ~~Form~~the ~~8-K~~Company ~~dated~~anticipates ~~February 2,~~that ~~2005~~the Plan will be confirmed reasonably promptly after completion of the closing arguments.

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

OnIn ~~September 26,~~connection ~~2005,~~with the ~~Administrators~~Restructuring ofProceedings, the ~~U.K.~~Company ~~Debtors and the Plan Proponents~~ entered into ana ~~agreement~~debtor-in-possession (“DIP”) ~~outlining~~credit ~~the~~facility ~~terms~~to ~~and~~supplement ~~conditions of~~liquidity ~~distributions~~and tofund ~~the~~operations ~~creditors~~during of the ~~U.K.~~Restructuring ~~Debtors (“U~~Proceedings.K. ~~Settlement~~In ~~Agreement”).~~May ~~Prior to this agreement~~2007, the Company ~~had~~amended ~~agreed~~its toDIP ~~sell~~facility, modifying certain ~~long-term~~terms ~~intercompany~~of ~~notes~~the ~~held~~agreement byand ~~T&N~~extending ~~Limited~~the ~~(“Loan~~term ~~Notes”)~~of ~~to Deutsche~~the ~~Bank~~post-petition asfinancing athrough ~~means~~December 31, to2007. ~~fund~~The ~~expected~~amended ~~distributions~~DIP tofacility ~~creditors.~~consists Inof ~~December~~a ~~2005,~~$500 inmillion ~~accordance~~revolving ~~with~~credit ~~terms~~facility of(“Revolving ~~the~~Credit ~~U.K.~~Facility”) ~~Settlement~~and ~~Agreement,~~a ~~the~~$605 ~~Company~~million ~~elected~~term toloan ~~retain~~facility ~~the~~(“Term Loan ~~Notes~~Facility”). ~~Concurrently,~~The proceeds of the Term Loan ~~Notes~~Facility were ~~transferred~~used ~~from~~primarily ~~the U.K. Debtors~~ to arefinance ~~combination~~approximately of$330 amillion ~~newly created non-debtor wholly-owned subsidiary of the Company and the U.S. parent, as provided~~ in ~~the~~loans ~~Loan~~under ~~Note Sale Agreement filed with~~ the ~~SEC~~Senior onCredit ~~Form~~Facility ~~8-K~~and onfor ~~December 15,~~general ~~2005~~corporate purposes.

~~Under~~The ~~the~~Revolving ~~terms~~Credit ofAgreement ~~the~~has ~~U.K.~~an ~~Settlement~~interest ~~Agreement,~~rate ~~certain~~of ~~amounts~~either ofthe ~~cash~~alternative ~~within~~base ~~the~~rate ~~U.K.~~(“ABR”) ~~Debtor~~plus 1/2 ~~entities,~~percentage ~~including~~points ~~cash~~or ~~contributed~~a ~~related~~formula tobased on the ~~transfer~~ ofLondon ~~the~~Inter-Bank ~~Loan~~Offered ~~Notes~~Rate ~~above,~~(“LIBOR”) ~~are~~plus ~~restricted~~1 1/2 topercentage ~~settle~~points. ~~specifically~~Interest ~~identified~~on ~~claims~~the ~~and~~Term ~~liabilities~~Loan accrues at a rate of either the ~~U.K.~~ABR ~~Debtors.~~plus 3/4 ~~Restricted~~percentage ~~cash~~point ator ~~March 31,~~a ~~2006~~formula ~~and~~based ~~December 31,~~on ~~2005~~the ~~was~~London ~~$700~~Inter-Bank ~~million~~Offered ~~and~~Rate ~~$701~~(“LIBOR”) ~~million,~~plus ~~respectively.~~1 3/4 ~~In addition,~~percentage ~~remaining~~points. ~~cash~~ABR ofis the ~~U.K.~~greater ~~Debtor~~of ~~entities~~either isthe ~~limited~~bank’s ~~for~~prime rate or the ~~general~~federal ~~operating~~funds ~~use~~rate ofplus 1/2 ~~those~~percentage ~~entities,~~point ~~amounting~~or 3/4 topercentage ~~$40~~point ~~million~~on ~~and~~the ~~$42~~Revolving ~~million~~Credit atFacility ~~March 31,~~or ~~2006~~Term ~~and~~Loan ~~December 31~~Facility, ~~2005~~ respectively.

The ~~U.K.~~amended ~~Settlement~~DIP ~~Agreement~~facility ~~sets~~is ~~forth~~secured by the ~~terms~~Company’s ofdomestic ~~various~~assets ~~amendments~~and to the ~~Plan~~DIP ~~and~~lenders received permission from the ~~CVAs~~lenders ~~that~~of ~~will~~the beSenior ~~used~~Credit Agreements to ~~reorganize~~have ~~the~~a Upriority over their collateral interest.K. ~~Debtors,~~The ~~including~~Term aLoan ~~delineation~~Facility ofhas ~~distributions~~a tofirst ~~U.K.~~priority ~~and~~lien ~~U.S.~~in ~~domiciled~~the ~~creditors.~~domestic Afixed ~~copy~~assets of the UCompany and a second priority lien in the Company’s domestic current assets.K. ~~Settlement~~The ~~Agreement~~Revolving ~~was~~Credit ~~filed~~Facility ~~with~~has a first priority lien in the ~~SEC~~Company’s ondomestic current ~~Form~~assets ~~8-K~~and ona ~~September 30,~~second ~~2005~~priority lien in its domestic fixed assets. Availability under the Company’s

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

~~NOTES~~ Revolving TOCredit ~~CONSOLIDATED~~Facility ~~FINANCIAL~~is ~~STATEMENTS~~determined -by ~~Continued~~the underlying collateral borrowing base at any point in time, consisting of the Company’s domestic inventories and domestic accounts receivable. The borrowing base available to the Company is calculated weekly based on the value of this underlying collateral. Commitments available under the amended DIP facility are mandatorily reduced by a portion of proceeds from certain future asset or business divestitures. Amounts available and outstanding on the amended DIP credit facility are further discussed in Note 11 to the consolidated financial statements, “Debt.”

OnAs ~~April 12,~~a ~~2006,~~condition ~~the~~of ~~High~~granting ~~Court~~the ~~provided~~amended ~~the~~DIP ~~Administrators~~credit ~~with~~facility ~~guidance~~priority onover the ~~appropriate timeline~~collateral ~~and~~interest ~~mechanics~~of ~~for~~the Senior Credit Agreements, the ~~solicitation~~Bankruptcy ofCourt ~~votes~~ordered onthat the noteholders ~~CVAs~~receive, ~~providing~~in ~~for~~cash, aadequate 42protection payments equal to one-~~day~~half ~~solicitation~~of one percent (0.5%) of ~~votes~~the ~~process~~outstanding notes per year. ~~The~~These ~~Company~~cash ~~anticipates~~payments, ~~that~~which inapproximate ~~the~~$2.6 ~~near~~million ~~future~~per ~~the~~quarter, ~~Administrators~~are ~~will~~recorded beas ~~distributing~~interest expense in the ~~CVAs~~statement of operations. All cash adequate protection payments made to the ~~creditors~~noteholders ofare ~~the~~provisional ~~U.K. Debtors~~in nature and are subject to recharacterization, ~~along~~credit ~~with~~against anallowed ~~accompanying~~claims, ~~explanatory~~or ~~statement~~other ~~and~~relief ~~notice~~if ofthe ~~creditors~~Bankruptcy ~~meeting~~Court were to ~~vote~~ultimately onconclude ~~approval~~that of the noteholders ~~CVAs~~were not entitled to such payments.

The ~~Company~~Bankruptcy Court further ordered additional adequate protection to the noteholders in the form of ~~cannot~~either ~~predict~~cash atpayment ~~this~~of ~~time~~one-half ~~whether~~of one percent (0.5%) of the ~~Plan~~outstanding ~~and~~notes ~~CVAs~~per ~~that~~year ~~will~~or bethe ~~proposed~~granting of an administrative expense claim pursuant to Section 507(b) of the ~~terms~~Bankruptcy Code in the amount of one percent (1.0%) of the outstanding Unotes per year.K The Company has elected to grant an administrative expense claim in favor of the noteholders for this additional adequate protection. ~~Settlement~~All ~~Agreement~~adequate protection administrative expense claims inured in favor of the noteholders are provisional in nature and subject to challenge by all parties-in-interest to the ~~other~~Restructuring ~~agreed~~Proceedings. ~~Plan~~Thus, ~~amendments~~the ultimate amount and related payment terms, if any, for these administrative expense claims will be ~~confirmed~~established orin connection ~~approved~~with the Restructuring Proceedings. Accordingly, such additional administrative expense claims, approximating $118 million as of June 30, 2007, have not been recorded in the accompanying financial statements.

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

~~Chapter~~Virtually all of the Company’s pre-petition debt is in default. At June 1130, ~~Financing~~2007, the Debtors’ pre-petition debt is classified under the caption “Liabilities subject to compromise.” This includes debt outstanding of $1,635.8 million under the pre-petition Senior Credit Agreements and $2,117.4 million of other outstanding debt, primarily notes payable at various unsecured rates, less capitalized debt issuance fees of $29.1 million. The carrying value of the pre-petition debt will be adjusted once it has become an allowed claim by the Bankruptcy Court to the extent the related carrying value differs from the amount of the allowed claim. Such adjustment may be material to the consolidated financial statements.

~~In connection~~As ~~with~~a result of the Restructuring Proceedings, the Company ~~entered~~is ~~into a debtor-~~in~~-possession~~ ~~(“DIP”)~~default ~~credit facility~~ to ~~supplement~~its ~~liquidity~~affiliate ~~and~~holder ~~fund~~of ~~operations~~its ~~during~~convertible ~~the~~junior ~~restructuring~~subordinated ~~proceedings.~~debentures Inand ~~November~~is ~~2005,~~no ~~the Company amended~~longer ~~and~~accruing ~~restated~~interest ~~its~~expense ~~existing~~or ~~DIP~~making ~~Facility,~~interest ~~increasing~~payments on the ~~overall~~debentures. ~~size~~As ofa result, the ~~financing~~affiliate ~~facility~~no ~~from~~longer ~~$500~~has ~~million~~the tofunds ~~$775~~available ~~million~~to ~~and~~pay ~~extending~~distributions on the ~~term~~Company-Obligated ofMandatorily ~~the~~Redeemable ~~post-petition~~Preferred ~~financing~~Securities ~~through~~and ~~December 9,~~stopped ~~2006~~accruing ~~(“Amended~~and paying ~~DIP~~such ~~Facility”)~~distributions on October 1, 2001. The ~~Amended~~affiliate ~~DIP~~is ~~Facility~~in ~~consists~~default ofon athe ~~$500~~Company-Obligated ~~million~~Mandatorily ~~revolving~~Redeemable ~~credit~~Preferred ~~facility~~Securities. ~~(“Revolving~~The ~~Credit~~Company ~~Facility”)~~is ~~and~~ a ~~$275~~guarantor ~~million~~on ~~term~~the ~~loan~~outstanding ~~facility~~debentures ~~(“New~~and, ~~Term~~as ~~Loan~~a ~~Facility”).~~result ~~The~~of ~~proceeds~~the ofdefault, the Company ~~Term~~has ~~Loan~~become ~~Facility~~a ~~were~~debtor ~~used primarily~~directly to ~~supplement~~ the ~~funding~~holders ~~necessary~~of ~~for~~ the ~~Company~~debentures. ~~and~~This ~~one~~liability ofis ~~its~~a ~~subsidiaries~~pre-petition toliability ~~purchase~~and ~~certain~~has ~~Loan~~been ~~Notes~~classified ~~pursuant~~as to“Liabilities ~~the~~subject ~~U.K.~~to ~~Settlement~~compromise” ~~Agreement~~in ~~and~~the ~~for~~accompanying ~~general~~balance ~~corporate purposes~~sheets.

~~The~~As ~~Revolving~~reflected ~~Credit~~in ~~Agreement~~the ~~has~~consolidated anfinancial ~~interest~~statements, ~~rate~~“Liabilities ofsubject ~~either~~to ~~the~~compromise” ~~ABR~~refers ~~plus~~to ~~1 1/4~~Debtors’ ~~percentage~~liabilities ~~points~~incurred orprior ato ~~formula~~the commencement ~~based~~of onthe Restructuring Proceedings. The amounts of the ~~London~~various ~~Inter-Bank~~liabilities ~~Offered~~that ~~Rate~~are ~~(“LIBOR”)~~subject ~~plus~~to ~~2 1/4~~compromise ~~percentage~~are ~~points~~set forth below. ~~Interest~~These onamounts represent the ~~New~~Company’s ~~Term~~estimate ~~Loan~~of ~~accrues~~known ator apotential ~~rate~~pre-petition ofclaims ~~either~~to be resolved in connection with the ~~ABR~~Restructuring ~~plus~~Proceedings. 1Such ~~percentage~~claims ~~point~~remain orsubject ato ~~formula~~future ~~based~~adjustments, onwhich may result from: (i) negotiations; (ii) actions of the ~~London~~Bankruptcy ~~Inter-Bank~~Court; ~~Offered~~(iii) further ~~Rate~~developments with respect to disputed claims; (~~“LIBOR”~~iv) rejection ~~plus~~of 2executory ~~percentage~~contracts ~~points.~~and ~~ABR~~unexpired isleases; (v) the ~~greater~~determination ofas ~~either~~to the ~~bank’s~~value ~~prime~~of ~~rate~~any collateral securing claims; (vi) proofs of claim; or ~~the~~(vii) other ~~federal~~events. ~~funds~~Payment ~~rate~~terms ~~plus 1/2~~for ~~percentage~~these ~~point~~claims will be established in connection with the Restructuring Proceedings.

The Amended DIP facility is secured by the Company’s domestic assets and the Amended DIP lenders received permission from the lenders of the Senior Credit Agreements to have a priority over their collateral interest. The New Term Loan Facility has a first priority lien in the domestic fixed assets of the Company and a second priority lien in the Company’s domestic current assets and the Revolving Credit Facility has a first priority lien in the Company’s domestic current assets and a second priority lien in its domestic fixed assets. Availability under the Company’s Revolving Credit Facility is determined by the underlying collateral borrowing base at any point in time, consisting of the Company’s domestic inventories and domestic accounts receivable. The borrowing base available to the Company is calculated weekly based on the value of this underlying collateral. Commitments available under the Amended DIP facility is mandatorily reduced by a portion of proceeds from certain future assets or business divestitures. Amounts available and outstanding on the Amended DIP credit facility are further discussed in Note 9 to the consolidated financial statements, “Debt.”

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

The Bankruptcy Court further ordered additional adequate protection to the noteholders in the form of either cash payment of one-half of one percent (0.5%) of the outstanding notes per year or the granting of an administrative

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

expense claim pursuant to Section 507(b) of the Bankruptcy Code in the amount of one percent (1.0%) of the outstanding notes per year. The Company has elected to grant an administrative expense claim in favor of the noteholders for this additional adequate protection. All adequate protection administrative expense claims inured in favor of the noteholders are provisional in nature and subject to challenge by all parties-in-interest to the Restructuring Proceedings. Thus, the ultimate amount and related payment terms, if any, for these administrative expense claims will be established in connection with the Restructuring Proceedings. Accordingly, such additional administrative expense claims, approximating $94 million as of March 31, 2006, have not been recorded in the accompanying financial statements.

Financial Statement Presentation

Virtually all of the Company’s pre-petition debt is in default. At March 31, 2006, the Debtors’ pre-petition debt is classified under the caption “Liabilities subject to compromise.” This includes debt outstanding of $1,962.0 million under the pre-petition Senior Credit Agreements and $2,117.4 million of other outstanding debt, primarily notes payable at various unsecured rates, less capitalized debt issuance fees of $29.1 million. The carrying value of the pre-petition debt will be adjusted once it has become an allowed claim by the Bankruptcy Court to the extent the related carrying value differs from the amount of the allowed claim. Such adjustment may be material to the consolidated financial statements.

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

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

Liabilities subject to compromise include the following:

	March 312006		December 312005
	June 302007		December 312006
	(Millions of Dollars)
Debt	$	43,~~050~~724.31	$	4,~~049~~053.85
Asbestos liabilities		1,~~533~~392.89		1,~~532~~391.47
Accounts payable		~~202~~175.95		~~202~~175.64
Company-obligated mandatorily redeemable securities		~~114~~74.63		114.6
Interest payable		44.02		44.02
Environmental liabilities		27.10		2426.7
Other accrued liabilities		2117.85		~~20.~~7.3
Subtotal		5,~~994~~455.5		5,~~988~~813.84
Intercompany payables to affiliates		~~3,177~~408.18		~~3,169~~408.68
	$	95,~~171~~864.63	$	96,~~158~~222.42

The reduction in liabilities subject to compromise reflects the conversion of Trust Convertible Preferred Securities into the Company’s common stock, and the repayments of approximately $330 million of the Senior Credit Facility (see note 11).

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

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


	Three Months Ended June 30				Six Months Ended June 30
	2007		2006		2007		2006
	(Millions of Dollars)

Professional fees directly related to the filing	$	25.1	$	15.7	$	36.8	$	33.0
Critical employee retention costs		2.5		4.6		4.4		8.4
Other direct costs		—		0.5		—		0.5

	$	27.6	$	20.8	$	41.2	$	41.9

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

Approximately 10,800 proofs of claim, totaling approximately $171.1 billion in alleged claims against various Debtors, were filed in connection with the March 3, 2003 bar date.

~~NOTES~~• TOTo ~~CONSOLIDATED~~date, ~~FINANCIAL~~the ~~STATEMENTS~~Debtors -have ~~Continued~~obtained orders allowing and disallowing more than 5,000 claims and stipulations or withdrawals of more than 1,700 claims, effectively reducing claims filed by approximately $9.8 billion and allowing claims of approximately $120 million.

• The Debtors have ~~received~~completed ~~approval from~~ the ~~Bankruptcy~~review ~~Court to pay or otherwise honor certain~~ of ~~their~~ ~~pre-petition~~approximately ~~obligations~~2,000 ~~including employee wages, salaries, benefits and other employee obligations and from limited available funds, pre-petition~~ claims oftotaling ~~certain~~approximately ~~critical~~$40.0 ~~vendors,~~million ~~certain~~for ~~customer~~which ~~programs~~no ~~and~~reduction ~~warranty~~is ~~claims,~~to ~~adequate protection~~be ~~payments on the Company’s notes, and certain other pre-petition claims~~sought.

~~Chapter~~• 11Approximately ~~and~~260 ~~Administration~~claims, ~~related reorganization~~totaling ~~expenses~~approximately in$2.1 ~~the~~billion, ~~consolidated~~are ~~statements~~associated ofwith ~~operations~~asbestos-related ~~consist~~contribution, ~~of legal~~indemnity, ~~financial~~or ~~and~~reimbursement ~~advisory~~claims. ~~fees,~~These ~~including~~claims ~~fees~~will ofbe ~~the~~handled ~~U.K.~~and ~~Administrators,~~resolved ~~critical~~by ~~employee~~the ~~retention~~Asbestos ~~costs,~~Trust ~~and~~in ~~other~~accordance ~~directly~~with ~~related~~the ~~internal~~Trust ~~costs~~Distribution asProcedures ~~follows:~~ detailed in the Plan.

	Three Months EndedMarch 31
	2006		2005
	(Millions of Dollars)
Professional fees directly related to the filing	$	17.3	$	26.9
Critical employee retention costs		3.8		3.1
Other direct costs		—		—
	$	21.1	$	30.0

•

The Debtors have identified approximately 70 contribution and indemnity claims, totaling approximately $12.0 billion, which will be resolved through a settlement that is embodied in the Plan.

~~Pursuant~~• toApproximately ~~the~~900 ~~Bankruptcy Code~~claims, ~~the~~totaling ~~Debtors have filed schedules with the Bankruptcy Court setting forth the assets and liabilities of the Debtors as of the Petition Date~~$27.0 Onmillion ~~October 4,~~in ~~2002,~~liquidated ~~the Debtors issued approximately 100,000 proof of claim forms to its current~~ and ~~prior~~an ~~employees,~~unspecified ~~known~~amount ~~creditors,~~in ~~vendors~~unliquidated ~~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~~represent ~~recipient~~asbestos ~~may~~property ~~file~~damage ~~discrepancies with the Bankruptcy Court. Differences between amounts recorded by the Debtors and~~ claims ~~filed~~for bywhich ~~creditors~~settlements ~~will~~have bebeen ~~investigated~~documented and ~~resolved~~have aseither ~~part~~been ofapproved by the ~~Restructuring Proceedings. The~~ Bankruptcy Court ~~ultimately~~or ~~will~~are ~~determine~~embodied ~~liability amounts that will be allowed for these claims~~ in the ~~Chapter~~Plan ~~11 Cases. A March 3, 2003 bar date was set~~ for ~~the~~resolution ~~filing~~when ~~of proofs of claim against~~ the ~~Debtors.~~Plan ~~The~~is ~~ultimate~~confirmed ~~number~~ and ~~allowed~~becomes ~~amount of such claims are not presently known~~effective. ~~The resolution of such claims could result in a material adjustment to the Company’s financial statements.~~

~~Approximately~~Of ~~10,620 proofs of claim totaling approximately $158.7 billion in claims against various Debtors were filed in connection with~~ the ~~March 3,~~remaining ~~2003~~870 ~~bar date as follows~~claims:

• ~~Approximately~~The ~~2,200~~Debtors have completed the review of approximately 320 claims, totaling approximately $~~142~~139.1 billion, which the ~~Company~~Debtors ~~believes~~believe should be disallowed by the Bankruptcy Court primarily because these claims appear to be duplicative or unsubstantiated ~~claims~~.

• Approximately ~~400~~10 claims, totaling approximately $87.13 billion, ~~are~~represent ~~associated~~bank ~~with~~and ~~asbestos-related~~noteholder ~~contribution,~~debt ~~indemnity,~~claims. orThe ~~reimbursement~~Debtors ~~claims.~~have ~~Based~~previously ~~upon~~recorded ~~its~~approximately ~~preliminary~~$4.3 ~~review~~billion for these claims, which is included in the ~~Company~~financial ~~believes~~statement ~~that~~caption a“Liability ~~large~~subject ~~number~~to compromise”. The Debtors believe the amount in excess of ~~these~~their ~~claims~~books ~~should~~and records are duplicative and will be ~~disallowed~~filing aspleadings ~~contingent~~to ~~contribution~~have orthe ~~reimbursement~~duplicative ~~claims~~amounts disallowed.

• Approximately ~~120~~270 claims, totaling approximately $74.30 ~~billion~~million, represent ~~bank~~employee ~~and~~benefit ~~note-holder debt~~ claims. The ~~Company~~Plan ~~has~~provides ~~previously~~that ~~recorded~~nearly ~~approximately~~all ~~$4.3~~employee ~~billion~~benefit ~~for these~~ claims, ~~which~~involving ~~is included in~~ the ~~financial statement caption “Liabilities subject to compromise~~U.”S. ~~The~~Debtors ~~Company~~will ~~believes~~be ~~amounts~~unimpaired ~~in excess of its books~~ and ~~records~~honored ~~are~~in ~~duplicative~~the ~~and~~ordinary ~~will~~course ~~ultimately~~of bethe ~~resolved~~operations inof the ~~consensual~~reorganized ~~plan of reorganization~~Federal-Mogul.

•The Debtors ~~Approximately~~have ~~3,800~~not completed their evaluation of the approximately 270 remaining claims, totaling approximately $0609.20 ~~billion~~million, ~~are~~ alleging ~~asbestos-related~~rights ~~property~~to ~~damage.~~payment ~~Based~~for onfinancing, ~~its~~environmental, ~~review~~litigation, ~~the~~executory ~~Company~~contracts, ~~believes~~taxes, ~~most~~trade ofaccounts ~~these~~payable ~~claims~~and other ~~are~~matters. ~~duplicative~~The orDebtors ~~unsubstantiated.~~continue ~~The~~to ~~Company~~investigate ~~has~~these ~~filed~~unresolved ~~objections~~proofs of claim, and intend to ~~many~~file ofobjections ~~these~~to the claims, ~~entered~~that ~~into~~are ~~stipulations~~inconsistent ~~for~~with their books and records. Accordingly, the ~~withdrawal~~ultimate ofnumber ~~many~~and allowed amount of ~~these~~such claims, are ornot ~~otherwise~~presently ~~induced~~known ~~the~~and ~~voluntary~~cannot ~~withdrawal~~be ofreasonably ~~may~~estimated ofat ~~these~~this ~~claims~~time. AsThe aresolution ~~result,~~of ~~the~~such ~~remaining~~claims ~~number~~could ofresult ~~asbestos~~in ~~personal~~a ~~injury~~material ~~claims~~adjustment isto ~~approximately~~the ~~1,600~~Debtors’ financial statements.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The Company has not completed its evaluation of the approximate remaining 2,100 claims, totaling approximately $1.0 billion, alleging rights to payment for financing, environmental, trade accounts payable and other matters. The Company continues to investigate these unresolved proofs of claim, and intends to file objections to the claims that are inconsistent with its books and records. As of March 31, 2006, the Debtors have filed objections to more than 5,200 proofs of claim, and have obtained stipulations or orders involving approximately 4,100 claims, which (i) reduce the filed claims to an amount that is consistent with the Debtors books or records, (ii) completely disallow the claims, (iii) withdraw the claims, or (iv) represent a fair compromise in light of the cost and risk of litigation.

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.

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.

FEDERAL-MOGUL CORPORATION

Debtors’ Condensed Consolidated Statements of Operations (Unaudited)

	Three Months EndedMarch 31
	Three Months EndedJune 30						Six Months EndedJune 30
	2006			2005
	2007			2006			2007			2006
	(Millions of Dollars)
Net sales	$	~~941~~925.95		$	~~971~~930.27		$	1,823.1		$	1,872.6
Cost of products sold		~~810~~754.46			~~839~~786.91			1,512.4			1,596.5
Gross margin		~~131~~170.59			~~131~~144.36			310.7			276.1
Selling, general and administrative expenses		~~151~~130.97			~~167~~148.47			260.3			300.6
Adjustment of assets to fair value		~~11.6~~—			0.58			—			12.4
Interest expense, net		3948.0			2742.97			95.3			81.7
Chapter 11 and Administration related reorganization expenses		21.1			30.0
Chapter 11 and U.K. Administration related reorganization expenses		27.6			20.8			41.2			41.9
Interest income from non-filers		(7418.18	)		(8275.97	)		(46.3	)		(149.8	)
Restructuring expense, net		106.41			19.38			14.2			20.2
Other income, net		(722.82	)		(166.50	)		(56.4	)		(13.8	)
Earnings (loss) before income taxes and equity loss of non-Debtor subsidiaries		(20.6	)		3.6
Income (loss) before income taxes and equity income (loss) of non-Debtor subsidiaries		(0.5	)		3.5			2.4			(17.1	)
Income tax expense		20.24			72.2			4.4			4.4
Loss before equity loss of non-Debtor subsidiaries		(22.8	)		(3.6	)
Income (loss) before equity income (loss) of non-Debtor subsidiaries		(0.9	)		1.3			(2.0	)		(21.5	)
Equity loss from non-Debtor subsidiaries		(45.6	)		(44.7	)
Equity income (loss) of non-Debtor subsidiaries		4.8			(18.1	)		10.5			(63.7	)
Net loss	$	(68.4	)	$	(48.3	)
Net income (loss)	$	3.9		$	(16.8	)	$	8.5		$	(85.2	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

FEDERAL-MOGUL CORPORATION

Debtors’ Condensed Consolidated Balance Sheets

	(Unaudited)March 31 2006			December 31 2005
	(Unaudited) June 30 2007			December 31 2006
	(Millions of Dollars)
ASSETS
Current assets:
Cash and equivalents	$	5579.68		$	5350.8
Restricted cash		699.9			700.9
Accounts receivable, net		651.1			543.3
Accounts receivable, net		623.4			596.0
Accounts receivable from non-Debtor affiliates		518.4			524.7
Accounts receivable, non-Debtors		495.9			489.9
Inventories, net		401.4			420.3
Inventories, net		444.5			438.5
Prepaid expenses and other current assets		103.4			97.2
Prepaid expenses		91.4			89.6
Total current assets		1,754.1			1,636.3
Total current assets		2,410.7			2,368.7
Property, plant and equipment, net		776.6			830.3
Property, plant and equipment, net		864.1			919.0
Goodwill and indefinite-lived intangible assets		1,092.8			1,128.8
Goodwill and indefinite-lived intangible assets		1,109.7			1,109.3
Definite-lived intangible assets, net		179.0			183.9
Definite-lived intangible assets, net		241.3			244.1
Asbestos-related insurance recoverable		873.7			859.0
Asbestos-related insurance recoverable		779.9			777.4
Loans receivable from and investments in non-Debtors, net		1,806.6			1,695.4
Loans receivable from and investments in non-Debtors		4,408.9			4,382.8
Prepaid pension costs and other noncurrent assets		242.3			247.2
Other noncurrent assets		332.9			366.6
	$	6,725.1		$	6,580.9
	$	10,147.5		$	10,167.9
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Short-term debt, including current portion of long-term debt	$	~~542~~693.40		$	~~570~~371.71
Accounts payable and accrued compensation		~~295~~316.75			~~262~~267.65
Accounts payable, non-Debtors		344.1			334.4
Accounts payable to non-Debtor affiliates		350.4			339.5
Other accrued liabilities		268.1			270.7
Current portion of postemployment benefit liability		52.6			52.6
Total current liabilities		1,450.3			1,438.4
Other current liabilities		231.1			185.9
Postemployment benefits		1,896.7			1,890.1
Total current liabilities		1,643.6			1,216.6
Other accrued liabilities		123.2			114.0
Postemployment benefits		734.5			769.1
Liabilities subject to compromise		9,171.6			9,158.4
Other accrued liabilities		97.9			120.9
Shareholders’ deficit		(2,494.3	)		(2,433.0	)
Liabilities subject to compromise		5,864.3			6,222.2
	$	10,147.5		$	10,167.9
Shareholders’ deficit		(1,615.2	)		(1,747.9	)
	$	6,725.1		$	6,580.9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

FEDERAL-MOGUL CORPORATION

Debtors’ Condensed Consolidated Statements of Cash Flows (Unaudited)

	Three Months EndedMarch 31
	Six Months EndedJune 30
	2006			2005
	2007			2006
	(Millions of Dollars)
Net Cash Provided From (Used By) Operating Activities	$	3750.90		$	~~(67~~89.50	)
Cash Provided From (Used By) Investing Activities
Expenditures for property, plant and equipment		(1534.5	)		(1742.63	)
Net proceeds from the sale of businesses		3.6			—
Net proceeds from the sale of property, plant and equipment		14.2			—
Net Cash Used By Investing Activities		(11.9	)		(17.6	)
Net proceeds from the sale of businesses		—			3.6
Net proceeds from the sale of investment		13.8			—
Payments to acquire minority interest		(6.8	)		—
Net Cash Used By Investing Activities		(13.3	)		(38.7	)
Cash Provided From (Used By) Financing Activities
Proceeds from borrowings on DIP credit facility		~~124~~550.70			95164.83
Principal payments on DIP credit facility		(~~153~~228.01	)		(20198.0	)
Net change in restricted cash		(1.0	)		—
Principal payments on pre-petition Tranche C debt		(330.4	)		—
Net Cash (Used By) Provided From Financing Activities		(29.3	)		75.8
Net change in restricted cash		—			(26.9	)
Effect of foreign currency exchange rate fluctuations on cash and equivalents		5.1			(10.0	)
Debt refinance fees		(0.3	)		—
Increase (decrease) in cash and equivalents		1.8			(19.3	)
Net Cash Used By Financing Activities		(8.8	)		(60.6	)
Cash and equivalents at beginning of period		53.8			433.5
Effect of foreign currency exchange rate fluctuations on cash		1.1			41.3
Cash and equivalents at end of period	$	55.6		$	414.2
Increase in cash and equivalents		29.0			31.0
Cash and equivalents at beginning of period		50.8			53.8
Cash and equivalents at end of period	$	79.8		$	84.8

3.	Acquisitions

The Company, during May 2006, invested approximately $32 million for the acquisition of a controlling interest in Federal-Mogul Goetze India Limited (“FMG”), a piston and piston ring manufacturer headquartered in Delhi, India. FMG has three main operations in India, located in Patiala, Bangalore, and Bhiwadi, which supply major Indian original equipment manufacturers (“OEM”) in the automotive, heavy-duty, motorcycle, industrial and agricultural markets and a variety of aftermarket and export customers.

Prior to this acquisition, the Company owned 25.47% of the outstanding shares of FMG and had accounted for its investment using the equity method of accounting. As a result of this acquisition, the Company owns 50.11% of the outstanding shares, has effective control of FMG, and consolidates its results of operations. During the quarter ended June 30, 2007, the Company finalized its purchase price allocation in accordance with SFAS No. 141, Business Combinations. Changes from the initial purchase price allocation completed during 2006 and the final purchase price allocation were not material.

~~NOTES~~4. TOAdjustment ~~CONSOLIDATED~~of ~~FINANCIAL~~Long-Lived ~~STATEMENTS~~Assets -to ~~Continued~~Fair Value

During the six month periods ended June 30, 2007 and 2006, the Company recorded charges of $3.5 ~~Adjustment~~million and $21.2 million, respectively, to adjust property, plant and equipment to their estimated fair values in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. toThe ~~Fair~~fair ~~Value~~value of property, plant and equipment is based upon estimated discounted future cash flows and estimates of salvage value. The impairment charge represents the difference between the estimated fair values and the carrying value of the subject assets.

During the three month period ended March 31, 2006, the Company recorded charges of $20.1 million to adjust property, plant and equipment to their estimated fair values in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The fair value of property, plant and equipment is based upon estimated discounted future cash flows and estimates of salvage value. The impairment charge represents the difference between the estimated fair values and the carrying value of the subject assets.

Impairment charges by reporting segment are as follows:

	March 31
	Three Months EndedJune 30					Six Months EndedJune 30
	2006		2005
	2007		2006			2007		2006
	Millions of Dollars
	(Millions of Dollars)
Powertrain	$	13.6	$	—
Powertrain Energy	$	—	$	0.5		$	—	$	10.7
Sealing Systems		6.5		—
Powertrain Sealing and Bearings		—		3.9			—		13.4
Vehicle Safety and Performance		—		—
Vehicle Safety and Protection		—		—			—		—
Aftermarket Products and Services		—		3.0
Automotive Products		3.2		(0.1	)		3.5		0.3
Corporate		—		—
Global Aftermarket		—		—			—		—
	$	20.1	$	3.0
Other		—		(3.2	)		—		(3.2	)
	$	3.2	$	1.1		$	3.5	$	21.2

~~In February 2006, the Company announced the closure of its Malden, Missouri facility, a piston manufacturing location~~5. ~~As a result of this closure, the value associated with buildings and production equipment has been reduced by approximately $7.1 million to reflect estimated realizable values.~~ Restructuring

The Company also recorded impairment charges of $6.5 million related to its Powertrain bearing and pistons businesses due to reduced volumes resulting in a revaluation of the expected future cash flows of these facilities as compared to the current carrying value of property, plant and equipment.

During the quarter, the Company recorded impairment charges of $6.5 million related to assets as certain Sealing System operating locations. Continued manufacturing inefficiencies and changes in shift patterns rendering equipment obsolete resulted in a revaluation of the expected future cash flows of these facilities as compared to the current carrying value of property, plant and equipment.

4. Restructuring

The Company defines restructuring expense to include costs directly associated with exit or disposal activities accounted for in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, employee severance costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 88 and 112, and pension and other postemployment benefit costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 87 and 106.

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

Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts paid for such activities may differ from amounts initially estimated. Accordingly, the Company may from time to time record reversals of these reserves. Such reversals are recorded consistent with SEC Staff Accounting Bulletin No. 100, Restructuring and Impairment Charges, and result from actual costs at program completion being less than costs estimated at the commitment date. In most instances where final costs are lower than original estimates, the Company experienced a higher rate of voluntary employee attrition than estimated as of the commitment dates resulting in lower severance costs.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

these reserves. Such reversals are recorded consistent with SEC Staff Accounting Bulletin No. 100, Restructuring and Impairment Charges and result from actual costs at program completion being less than costs estimated at the commitment date.

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

The Company’s restructuring activities are undertaken as necessary to execute management’s strategy and streamline 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, 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.

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

The following is a summary of the Company’s consolidated restructuring reserves and related activity as of and for the ~~three~~six months ended ~~March~~ June 3130, ~~2006~~2007. “PTE”, “SSPTSB”, “VSP”, “AP”, and “~~APS~~GA” represent Powertrain Energy, Powertrain Sealing ~~Systems~~and Bearings, Vehicle Safety and ~~Performance~~Protection, ~~and~~Automotive ~~Aftermarket~~ Products, and ~~Services~~Global Aftermarket, respectively.

	Powertrain			SS			VSP			APS			Corporate			Total
	PTE			PTSB			VSP			AP			GA			Corporate			Total
	(Millions of dollars)
Balance of reserves at December 31, 2005	$	10.6		$	0.9		$	0.9		$	13.3		$	0.6		$	26.3
Balance of reserves at December 31, 2006	$	15.6		$	16.5		$	0.4		$	5.1		$	2.5		$	—		$	40.1
Provisions		102.94			67.10			01.73			71.65			04.80			260.1			16.3
Reversals		(0.31	)		—(0.1	)		—			—			—			~~(0.3~~—	)		(0.2	)
Payments		(24.19	)		(09.49	)		(0.57	)		(31.93	)		(1.0.9	)		~~(7.9~~—	)		(17.7	)
Foreign currency		(0.21	)		—0.1			—			~~0.1~~—			~~(0.1~~—	)		~~(0.2~~—	)		0.2
Balance of reserves at March 31, 2006	$	18.9		$	6.6		$	1.1		$	17.1		$	0.3		$	44.0
Balance of reserves at March 31, 2007		13.1			13.6			1.0			5.3			5.6			0.1			38.7
Provisions		6.7			5.4			1.3			0.7			—			—			14.1
Reversals		—			(0.3	)		(0.3	)		—			—			—			(0.6	)
Payments		(5.1	)		(9.8	)		(0.5	)		(0.9	)		(1.7	)		—			(18.0	)
Foreign currency		0.1			0.1			0.1			—			—			—			0.3
Balance of reserves at June 30, 2007	$	14.8		$	9.0		$	1.6		$	5.1		$	3.9		$	0.1		$	34.5

~~Significant~~In January 2006 the Company announced a global restructuring ~~activities~~plan ~~for~~(“Restructuring ~~the~~2006”), ~~quarter~~as ~~ended~~part of its ~~March 31~~global profitable growth strategy. This plan will affect approximately 25 facilities and reduce the Company’s workforce by approximately 10% by the end of 2008. The Company continues to solidify the individual components of this plan, ~~2006~~and will announce those components as plans are finalized.

InAs ~~addition~~of ~~to previously initiated restructuring activities~~June 30, 2007 the Company ~~announced~~has arecorded ~~global~~cumulative restructuring ~~plan, herein~~charges ~~referred to as “Restructuring 2006”, as part~~ of ~~its~~$107 ~~global profitable growth strategy. This plan will affect approximately 25 facilities and reduce the Company’s workforce by approximately 10% by the end of 2008. The Company~~million ~~continues~~related to ~~solidify~~previously ~~the~~announced ~~individual~~closures ~~components of this plan,~~ and ~~will~~projects ~~announce those components as plans are finalized. In addition to the two plant closures~~ associated with ~~this~~Restructuring ~~plan announced during December 2005, additional announcements were made during the quarter ended March 31,~~ 2006. ~~related~~The ~~to the closure of the~~ Company’s ~~facilities~~expects ~~located in Malden, Missouri, Pontoise, France and Rochdale, United Kingdom. In addition~~ to ~~these~~incur ~~announcements, the Company has entered into negotiations with the local Works Councils at three~~ additional ~~European~~charges ~~facilities related to the potential closure~~ of ~~those~~approximately sites. The Company has recorded the amount of severance associated with these announced closures that is probable and estimable as of March 31, 2006, and that is not attributable to future service from the current employees. The Company has recorded $~~42.5~~50 million in ~~restructuring~~connection ~~charges associated~~ with Restructuring 2006, and expects to ~~incur additional restructuring charges up to $105 million through 2008. The Company expects to~~ achieve annual cost savings of $~~155~~130 million subsequent to the completion of this restructuring program.

~~NOTES~~During TOthe ~~CONSOLIDATED~~quarter ~~FINANCIAL~~ended ~~STATEMENTS~~March 31, 2007, the Company announced the closure of its facility located in Gif-sur-Yvette, ~~Continued~~France. As of March 31, 2007, the Company has recorded cumulative restructuring charges of $95 million related to this and other previously announced closures and projects associated with Restructuring 2006. Included in the summary table above, the payment activity and remaining reserves associated with activities executed under Restructuring 2006 are as follows:

Included in the summary table above the payment activity and remaining reserves associated with activities executed under Restructuring 2006 are as follows:


	PTE			PTSB			VSP			AP			GA			Corporate		Total
	(Millions of dollars)

Balance of reserves at December 31, 2006	$	10.8		$	15.9		$	0.4		$	4.6		$	1.1		$	—	$	32.8
Provisions		2.4			7.0			0.8			1.5			3.2			—		14.9
Reversals		(0.1	)		(0.1	)		—			—			—			—		(0.2	)
Payments		(4.6	)		(9.9	)		(0.2	)		(1.3	)		(0.6	)		—		(16.6	)
Foreign currency		0.1			0.1			—			—			—			—		0.2

Balance of reserves at March 31, 2007		8.6			13.0			1.0			4.8			3.7			—		31.1
Provisions		6.5			5.4			0.1			0.7			—			—		12.7
Reversals		—			(0.3	)		(0.3	)		—			—			—		(0.6	)
Payments		(4.9	)		(9.8	)		(0.3	)		(0.8	)		(1.3	)		—		(17.1	)
Foreign currency		—			0.1			—			—			—			—		0.1

Balance of reserves at June 30, 2007	$	10.2		$	8.4		$	0.5		$	4.7		$	2.4		$	—	$	26.2

	Powertrain			SS		VSP			APS			Corporate		Total
	(Millions of dollars)
Balance of reserves at December 31, 2005	$	4.5		$	—	$	0.7		$	11.6		$	—	$	16.8
Provisions		10.4			6.1		—			7.5			—		24.0
Payments		(1.0	)		—		(0.4	)		(3.6	)		—		(5.0	)
Foreign currency		(0.3	)		—		—			(0.1	)		—		(0.4	)
Balance of reserves at March 31, 2006	$	13.6		$	6.1	$	0.3		$	15.4		$	—	$	35.4

Significant components of charges related to Restructuring 2006 are as follows:

Significant components of charges recorded in 2006 related to Restructuring 2006 are as follows:


	Total Expected Costs		Incurred Prior to April 1, 2007		Incurred During the Quarter			Estimated Charges Not Yet Incurred
	(Millions of dollars)

Powertrain Energy	$	33.7	$	20.2	$	6.5		$	7.0
Powertrain Sealing and Bearings		57.3		39.2		5.1			13.0
Vehicle Safety and Protection		24.5		3.7		(0.2	)		21.0
Automotive Products		25.0		20.3		0.7			4.0
Global Aftermarket		15.7		11.7		—			4.0
Corporate		1.1		0.1		—			1.0

	$	157.3	$	95.2	$	12.1		$	50.0

	Expected Costs		Previously Incurred		Incurred During the Quarter		Estimated Additional Charges
	(Millions of dollars)
Powertrain	$	45.6	$	4.2	$	10.4	$	31.0
Sealing Systems		32.1		—		6.1		26.0
Vehicle Safety and Performance		32.3		1.3		—		31.0
Aftermarket Products and Services		36.5		13.0		7.5		16.0
Corporate		1.0		—		—		1.0
Total as at March 31, 2006	$	147.5	$	18.5	$	24.0	$	105.0

6.	Other Income, Net

In April 2006, the Company announced the closure of their powertrain facility in St. Johns, MI. Restructuring expenses associated with this closure are estimated to be approximately $12.6 million and are expected to continue into 2007. Substantially all of the expenses relating to this closure will be incurred by the end of 2006. Expected cost savings associated with this project are estimated to be approximately $11.7 million per year. Also in April 2006, the Company entered into negotiations with the local works council at one additional European facility related to the potential closure of this site.

5. Other Income, Net

The specific components of “Other income, net” are as follows:

	Three Months EndedMarch 31
	Three Months EndedJune 30						Six Months EndedJune 30
	2006			2005
	2007			2006			2007			2006
	(Millions of Dollars)
Amortization of intangible assets	$	4.38		$	4.54		$	9.3		$	8.7
Foreign currency exchange		~~(4.~~0.1	)		1(5.23	)		0.5			(9.3	)
Minority interest earnings in consolidated subsidiaries		0.9			0.8
Minority interest in consolidated subsidiaries		(3.4	)		1.2			(2.7	)		2.1
Royalty income		(0.38	)		~~(0.2~~—	)		(0.7	)		(0.3	)
Accounts receivable discount expense		1.29			0.97			3.6			2.0
(Gain) loss on sale of assets		0.2			(6.8	)
Gain on sale of assets		(7.5	)		(0.4	)		(10.5	)		(0.2	)
Gain on sale of businesses		(0.3	)		—
(Gain) loss on sale of businesses		0.4			—			0.4			(0.3	)
Adjustment of 2004 goodwill impairment charge		—			(7.7	)
Unrealized (gain) loss on commodity forward contracts		3.3			—			(6.5	)		—
Other		(20.3	)		(1.16	)		(1.7	)		(4.0	)
	$	(01.35	)	$	(81.40	)	$	(8.3	)	$	(1.3	)

~~NOTES~~7. ~~TO CONSOLIDATED FINANCIAL STATEMENTS - Continued~~ Inventories

6Inventories are stated at the lower of cost or market. Cost determined by the last-in, first-out (LIFO) method was used for 43% and 45% of inventories at June 30, 2007 and December 31, 2006, respectively. The remaining inventories are recorded using the first-in, first-out (FIFO) method. Inventories are reduced by an allowance for excess and obsolete inventories based on management’s review of on-hand inventories compared to historical and estimated future sales and usage. A summary of inventories is provided in the table below:

Inventories are stated at the lower of cost or market. Cost determined by the last-in, first-out (LIFO) method was used for 50% of inventories at both March 31, 2006 and December 31, 2005. The remaining inventories are recorded using the first-in, first-out (FIFO) method. Inventories are reduced by an allowance for excess and obsolete inventories based on management’s review of on-hand inventories compared to historical and estimated future sales and usage. A summary of inventories is provided in the table below:


	June 30 2007			December 31 2006
	(Millions of Dollars)

Raw materials	$	176.0		$	170.4
Work-in-process		163.3			164.0
Finished products		636.6			624.5

		975.9			958.9
Valuation reserves		(70.1	)		(66.3	)

	$	905.8		$	892.6

	March 312006			December 312005
	(Millions of Dollars)
Raw materials	$	157.2		$	155.6
Work-in-process		152.7			141.7
Finished products		603.5			574.6
		913.4			871.9
Valuation reserves		(74.1	)		(63.8	)
	$	839.3		$	808.1

8.	Investments in Non-Consolidated Affiliates

7.The ~~Investments~~Company maintains investments in ~~Non~~various non-~~Consolidated~~consolidated ~~Affiliates~~affiliates, which are located in Turkey, China, Korea, India, Japan, the United States and Mexico. The Company’s direct ownership in such affiliates ranges from approximately 5% to 50%. The aggregate investment in these affiliates approximated $170 million and $187 million at June 30, 2007 and December 31, 2006, respectively, and is included in the consolidated balance sheets as “other noncurrent assets.” The investment balance decreased during the six months ended June 30, 2007 resulting from dividends paid by the joint venture affiliates of approximately $35 million. Decreases in the investment balance were offset by the Company’s equity in the earnings of such affiliates amounting to approximately $18 million and $17 million for the six month periods ended June 30, 2007 and 2006, respectively. During the six months ended June 30, 2007, these entities generated sales of approximately $356 million, net income of approximately $40 million, and had total net assets at June 30, 2007 of approximately $374 million. The Company does not hold a controlling interest in any entity based on exposure to economic risks and potential rewards (variable interests) for which it is the primary beneficiary. Further, the Company’s joint ventures are businesses established and maintained in connection with its operating strategy and are not special purpose entities.

The Company ~~maintains~~holds ~~investments~~a in50% ~~various~~ non-~~consolidated~~controlling ~~affiliates,~~interest ~~which are located~~ in ~~Turkey,~~a ~~China,~~joint ~~Korea,~~venture ~~India,~~located ~~Japan,~~in ~~the United States and Mexico~~Turkey. ~~The~~This ~~Company’s~~joint ~~direct~~venture ~~ownership~~was inestablished ~~such affiliates ranges from approximately 5% to 50%. The aggregate investment~~ in ~~these~~1995 ~~affiliates~~for ~~approximates~~the ~~$160~~purpose ~~million~~of manufacturing and marketing ~~$159~~automotive ~~million at March 31~~parts, ~~2006~~including ~~and December 31~~pistons, ~~2005~~pins, ~~respectively~~piston rings, and iscylinder ~~included~~liners, into ~~the~~original ~~consolidated~~equipment ~~balance sheets as~~ (“~~other noncurrent assets.~~OE”) ~~The~~and ~~Company’s~~aftermarket ~~equity~~customers. ~~earnings~~Pursuant ~~of such affiliates amounted~~ to ~~approximately $9 million for both~~ the ~~three~~joint ~~month~~venture ~~periods ended March 31~~agreement, ~~2006~~the ~~and~~Company’s ~~2005.~~partner ~~During~~holds ~~the~~an ~~three~~option ~~months~~to ~~ended~~put ~~March 31, 2006,~~its ~~these~~shares ~~entities~~to ~~generated~~a ~~sales~~subsidiary of ~~approximately~~the ~~$195~~Company ~~million,~~at ~~net~~the ~~income~~higher of ~~approximately~~the ~~$21~~current ~~million,~~fair ~~and~~value ~~had~~or ~~total net assets~~ at ~~March 31,~~a ~~2006~~guaranteed ofminimum ~~approximately $381 million~~amount. The ~~Company~~term ~~does~~of ~~not~~the ~~hold~~contingent aguarantee ~~controlling~~is ~~interest~~indefinite, inconsistent anwith ~~entity~~the ~~based on~~terms ~~exposure~~of ~~to economic risks and potential rewards (variable interests) for which it is~~ the ~~primary~~joint ~~beneficiary~~venture agreement. ~~Further~~However, the ~~Company’s~~contingent guarantee ~~joint~~would ~~ventures~~not ~~are~~survive ~~businesses~~termination ~~established~~of ~~and~~the ~~maintained~~joint inventure ~~connection with its operating strategy and are not special purpose entities~~agreement.

The Company holds a 50% non-controlling interest in a joint venture located in Turkey. This joint venture was established for the purpose of manufacturing and marketing automotive parts, including pistons, pins, piston rings, and cylinder liners, to original equipment (“OE”) and aftermarket customers. Pursuant to the joint venture agreement, the Company’s partner holds an option to put its shares to a subsidiary of the Company at the higher of the current fair value or at a guaranteed minimum amount. ~~The guaranteed minimum amount~~ represents a contingent guarantee of the initial investment of the joint venture partner and can be exercised at the discretion of the partner. The term of the contingent guarantee is indefinite, consistent with the terms of the joint venture agreement. However, the contingent guarantee would not survive termination of the joint venture agreement. As of ~~March~~June 3130, ~~2006~~2007, the total amount of the contingent guarantee, were all triggering events to occur, approximated $5255 million. Management believes that this contingent guarantee is substantially less than the estimated current fair value of the guarantees’ interest in the affiliate. ~~Management~~As ~~also~~such, ~~believes that exercise of~~ the ~~put~~contingent ~~option~~guarantee isdoes not ~~reasonably~~give ~~likely~~rise ~~within~~to ~~the~~a ~~foreseeable~~contingent ~~future.~~liability ~~However~~and, ifas ~~this~~a ~~put option were exercised at its estimated current fair value~~result, ~~such~~no ~~exercise~~amount is ~~would~~recorded ~~have~~for athis ~~material effect on the Company’s liquidity~~guarantee. ~~Any~~If ~~value~~this input ~~excess~~option ofwere exercised, the ~~minimum~~consideration ~~guaranteed~~paid ~~amount~~and ofnet ~~the~~assets ~~put~~acquired ~~option~~ would be ~~the~~accounted ~~subject~~for ofin ~~negotiation~~accordance ~~between~~with ~~the Company~~SFAS ~~and~~No. 141, ~~its~~Business ~~investment partner~~Combinations.

If this put option were exercised at its estimated current fair value, such exercise would have a material effect on the Company’s liquidity. Any value in excess of the minimum guaranteed amount of the put option would be the subject of negotiation between the Company and its joint venture partner.

~~NOTES~~In TOaccordance ~~CONSOLIDATED~~with ~~FINANCIAL~~SFAS ~~STATEMENTS~~No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, the Company has determined that its investments in Chinese joint venture arrangements are considered to be “limited-lived” ~~Continued~~as such entities have specified durations ranging from 30 to 50 years pursuant to regional statutory regulations. In general, these arrangements call for extension, renewal or liquidation at the discretion of the parties to the arrangement at the end of the contractual agreement. Accordingly, a reasonable assessment cannot be made as to the impact of such arrangements on the future liquidity position of the Company.

~~In accordance with SFAS No~~9. ~~150,~~ ~~the~~Forward 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. Contracts

8The 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. ~~Accrued~~The ~~Liabilities~~Company enters into commodity price forward contracts 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, including exposures related to natural gas, copper, nickel, lead, high-grade aluminum and aluminum alloy. Forward contracts are used to mitigate commodity price risk associated with raw materials, generally related to purchases forecasted for up to fifteen months in the future.

The Company had 185 contracts outstanding with a combined notional value of $106.7 million at June 30, 2007. Such contracts are recorded on the balance sheet at fair value. Effective April 1, 2007, the Company completed the required evaluation and documentation to designate the majority of such contracts as cash flow hedges. As a result, after April 1, 2007 the effective portion of changes in fair value of contracts designated as cash flow hedges are recorded in accumulated other comprehensive income and reclassified into earnings in the same period or periods during which the underlying hedged item affected earnings. At June 30, 2007, an unrecognized gain of $3.4 million related to forward contracts was included in accumulated other comprehensive income. The ineffectiveness, as defined by SFAS 133, related to those forward contracts for the three months ended June 30, 2007 was not material.

10.

Accrued Liabilities

Accrued liabilities consisted of the following:

	March 312006		December 312005
	June 302007		December 312006
	(Millions of Dollars)
Accrued compensation	$	~~223~~233.5	$	~~228~~215.01
Accrued income taxes		110.0		90.1
Accrued rebates		86.3		82.1
Accrued rebates		72.5		81.5
Accrued income taxes		54.9		5.1
Restructuring reserves		4434.05		2640.31
Accrued Chapter 11 and Administration expenses		33.5		41.7
Accrued Chapter 11 and U.K. Administration expenses		31.9		29.3
Non-income taxes payable		29.1		21.4
Accrued product returns		20.1		20.4
Accrued product returns		19.2		19.3
Accrued professional services		19.5		17.7
Accrued professional services		17.1		16.3
Non-income taxes payable		17.5		7.9
Accrued warranty		1416.50		1117.43
	$	~~563~~514.42	$	~~536~~435.0

9. Debt

Long-term debt consisted of the following:

	March 312006			December 312005
	(Millions of Dollars)
DIP credit facility	$	542.4		$	570.7
Other		43.3			44.1
		585.7			614.8
Less: current maturities included in short-term debt		(578.1	)		(606.7	)
	$	7.6		$	8.1

In November 2005, the Company amended and restated its existing DIP Facility, increasing the overall size of the financing facility from $500 million to $775 million and extending the term of the post-petition financing through December 9, 2006 (“Amended DIP Facility”). The Amended DIP Facility consists of a $500 million revolving credit facility (“Revolving Credit Facility”) and a new $275 million term loan facility (“New Term Loan Facility”). The proceeds of the New Term Loan Facility were used primarily to supplement the funding necessary for the Company and one of its subsidiaries to purchase certain Loan Notes pursuant to the U.K. Settlement Agreement and for general corporate purposes.

~~NOTES~~11. ~~TO CONSOLIDATED FINANCIAL STATEMENTS - Continued~~ Debt

~~The~~Long-term ~~Amended~~debt ~~DIP~~consisted ~~facility is secured by the Company’s domestic assets and the Amended DIP lenders received permission from the lenders~~ of the Senior Credit Agreements to have a priority over their collateral interest. The New Term Loan Facility has a first priority lien in the domestic fixed assets of the Company and a second priority lien in the Company’s domestic current assets and the Revolving Credit Facility has a first priority lien in the Company’s domestic current assets and a second priority lien in its domestic fixed assets. Availability under the Company’s Revolving Credit Facility is determined by the underlying collateral borrowing base at any point in time, consisting of the Company’s domestic inventories and domestic accounts receivable. The borrowing base available to the Company is calculated weekly based on the value of this underlying collateral. Commitments available under the Amended DIP facility is mandatorily reduced by a portion of proceeds from certain future assets or business divestitures. The commitment and amounts outstanding on the DIP credit facilities are as followsfollowing:

	March 312006			December 312005
	June 302007				December 312006
	(Millions of Dollars)
Contractual commitment:
DIP credit facility	$	693.0			$	371.1
Revolving credit facility	$	500.0		$	500.0
Other .		150.0				137.7
Term loan facility		275.0			275.0
		843.0				508.8
Mandatory commitment reductions		—			—
Less: current maturities included in short-term debt		(820.2	)			(482.1	)
Current commitment	$	775.0		$	775.0
	$	22.8			$	26.7
Outstanding:
Revolving credit facility	$	267.4		$	295.7
Term loan facility		275.0			275.0
Letters of credit		26.3			24.2
Total outstanding	$	568.7		$	594.9
Borrowing Base on Revolving credit facility
Current borrowings	$	267.4			295.7
Letters of credit		26.3			24.2
Available to borrow		206.3			174.2
Total borrowing base	$	500.0		$	494.1

~~The~~In connection with the Restructuring Proceedings, the Company entered into a debtor-in-possession (“DIP”) credit facility ~~contains~~to ~~restrictive~~supplement ~~covenants.~~liquidity ~~The~~and ~~more~~fund ~~significant~~operations ofduring ~~these~~the ~~covenants include~~Restructuring Proceedings. In May 2007, the ~~maintenance~~Company ofamended its DIP facility, modifying certain ~~levels~~terms of ~~earnings~~the ~~before~~agreement ~~interest,~~and ~~taxes~~extending the term of the post-petition financing through December 31, ~~depreciation~~2007. ~~and~~The ~~amortization~~amended ~~and~~DIP ~~limitations~~facility onconsists ~~quarterly~~of ~~capital~~a ~~expenditures.~~$500 ~~Additional~~million ~~covenants~~revolving ~~include,~~credit ~~but~~facility ~~are~~(“Revolving ~~not~~Credit ~~limited~~Facility”) ~~to,~~and ~~restrictions~~a on$605 ~~the~~million ~~early~~term ~~retirement~~loan facility (“Term Loan Facility”). The proceeds of ~~debt,~~the ~~additional~~Term ~~borrowings,~~Loan ~~payment~~Facility ofwere ~~dividends~~used ~~and~~primarily to refinance approximately $330 million in loans under the ~~sale~~Senior ofCredit ~~assets~~Facility orand ~~businesses~~for general corporate purposes.

10The amended DIP facility is secured by the Company’s domestic assets and the DIP lenders received permission from the lenders of the Senior Credit Agreements to have priority over their collateral interest. ~~Other~~The Term ~~Comprehensive~~Loan ~~Loss~~Facility has a first priority lien in the domestic fixed assets of the Company and a second priority lien in the Company’s domestic current assets. The Revolving Credit Facility has a first priority lien in the Company’s domestic current assets and a second priority lien in its domestic fixed assets. Availability under the Company’s Revolving Credit Facility is determined by the underlying collateral borrowing base at any point in time, consisting of the Company’s domestic inventories and domestic accounts receivable. The borrowing base available to the Company is calculated weekly based on the value of this underlying collateral. Commitments available under the amended DIP facility are mandatorily reduced by a portion of proceeds from certain future assets or business divestitures. The commitment and amounts outstanding on the DIP credit facilities are as follows:

The Company’s comprehensive loss consists of the following:


	June 30 2007		December 31 2006
	(Millions of Dollars)

Contractual commitment:
Revolving credit facility	$	500.0	$	500.0
Term loan facility		605.0		275.0
Mandatory commitment reductions		—		—

Current commitment	$	1,105.0	$	775.0


Outstanding:
Revolving credit facility	$	88.0	$	96.1
Term loan facility		605.0		275.0
Letters of credit		34.9		24.5

Total outstanding	$	727.9	$	395.6


Borrowing Base on Revolving credit facility
Current borrowings	$	88.0		96.1
Letters of credit		34.9		24.5
Available to borrow		377.1		353.6

Total borrowing base	$	500.0	$	474.2

	Three Months EndedMarch 31
	2006			2005
	(Millions of Dollars)
Net loss	$	(68.4	)	$	(48.3	)
Foreign currency translation adjustments and other		5.6			(73.9	)
	$	(62.8	)	$	(122.2	)

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

~~NOTES~~ quarterly TOcapital ~~CONSOLIDATED~~expenditures. ~~FINANCIAL~~Additional ~~STATEMENTS~~covenants -include, ~~Continued~~but are not limited to, restrictions on the early retirement of debt, additional borrowings, payment of dividends and the sale of assets or businesses.

1112. Other Comprehensive Income ~~Taxes~~(Loss)

~~For~~The ~~the three~~Company’s ~~months~~comprehensive ~~ended March 31, 2006, the Company recorded~~ income ~~tax expense of $29.6 million on a~~ (loss) ~~before~~consists ~~income taxes~~ of ~~$38.8 million. This compares to income tax expense of $26.6 million on a loss before income taxes of $21.7 million in~~ the ~~same~~ ~~period~~following: of 2005. Income tax expense for the three month period ended March 31, 2006 resulted primarily from taxable income generated by certain international subsidiaries, non-recognition of income tax benefits on certain operating losses, primarily in the U.S. and U.K., and certain non-deductible items in various jurisdictions.

12. Loss Per Common Share


	Three Months Ended June 30					Six Months Ended June 30
	2007		2006			2007		2006
	(Millions of Dollars)

Net income (loss)	$	3.9	$	(16.8	)	$	8.5	$	(85.2	)
Foreign currency translation adjustments and other		29.9		8.7			46.8		14.3
Forward contracts		3.4		—			3.4		—
Postemployment benefits		6.9		—			17.0		—

	$	44.1	$	(8.1	)	$	75.7	$	(70.9	)

~~The following~~13. ~~table~~Income ~~sets forth the computation of basic and diluted loss per common share:~~ Taxes

	Three Months EndedMarch 31
	2006			2005
	(Millions of Dollars, ExceptPer Share Amounts)
Numerator:
Numerator for basic and diluted loss per common share	$	(68.4	)	$	(48.3	)
Denominator:
Weighted average shares outstanding, basic and diluted (in millions)	$	89.1		$	89.1
Basic and diluted loss per common share	$	(0.77	)	$	(0.54	)

For the six months ended June 30, 2007, the Company recorded income tax expense of $52.2 million on earnings before income taxes of $60.7 million. This compares to income tax expense of $58.2 million on a loss before income taxes of $27.0 million in the same period of 2006. Income tax expense for the six month periods ended June 30, 2007 and 2006 differs from statutory rates due to non-recognition of income tax benefits on certain operating losses, primarily in the U.S. and U.K., and non-deductible items in various jurisdictions.

The Company adopted Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”) as of January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in companies’ financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. As a result, the Company applies a more-likely-than-not recognition threshold for all tax uncertainties. FIN 48 only allows the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the taxing authorities. As a result of implementing FIN 48, the Company recognized a $13.8 million decrease in the reserve for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 total shareholders’ deficit.

Including the cumulative effect decrease at the beginning of 2007, the Company had $168.4 million of total unrecognized tax benefits. Of this total, $38.6 million represents the amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate. The total unrecognized tax benefits differ from the amount which would affect the effective tax rate primarily due to the impact of valuation allowances. As of June 30, 2007, there has been no material change in the unrecognized tax benefits or tax-related net interest and penalties.

The Company classifies tax-related penalties and net interest as income tax expense. As of January 1, 2007, the Company has recorded $11.4 million in liabilities for tax-related net interest and penalties on its consolidated balance sheet.

If tax audit settlements are effected in accordance with expectations, it is reasonably possible that the Company could recognize up to $30.8 million of tax benefits within the next 12 months. Because of valuation allowances that currently exist, the potential settlements would not result in a material change to the Company’s results of operations, financial condition, or liquidity.

The Company, or one of its subsidiaries, files income tax returns in the United States and other foreign jurisdictions. As of the beginning of 2007, the Company is no longer subject to U.S. federal tax examinations for years before 2004 or state and local examinations for years before 2001, with limited exceptions. The Company is no longer subject to income tax examinations in major foreign tax jurisdictions for years prior to 1998.

The Internal Revenue Service has completed an examination of the Company’s U.S. income tax returns for 2001 through 2003, with a tentative settlement at the appellate level for all issues. The tentative settlement would not result in a material change to the Company’s results of operations, financial condition, or liquidity. The Company is also under income tax examination in Germany and in several other state and foreign jurisdictions.

14.

Income Per Common Share

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


	Three Months Ended June 30					Six Months Ended June 30
	2007		2006			2007		2006
	(Millions of Dollars, Except Share and Per Share Amounts)

Net income (loss)	$	3.9	$	(16.8	)	$	8.5	$	(85.2	)

Weighted average shares outstanding, basic (in millions)		89.7		89.1			89.4		89.1

Basic income (loss) per common share	$	0.04	$	(0.19	)	$	0.10	$	(0.96	)


Weighted average shares outstanding, diluted (in millions)		91.2		89.1			90.9		89.1

Diluted income (loss) per common share	$	0.04	$	(0.19	)	$	0.09	$	(0.96	)

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

1315. Pensions and Other Postretirement Benefits

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

Components of net periodic benefit cost for the three- month periods ended ~~March~~June 3130 are as follows:

	Pension Benefits												Other Benefits
	United States						International						~~Other Benefits~~
	2006			2005			2006			2005			2006			2005
	2007			2006			2007			2006			2007			2006
	(Millions of Dollars)
Service cost	$	76.5		$	7.74		$	1.94		$	21.69		$	20.75		$	1.3
Interest cost		1415.51			14.35			373.27			4238.27			89.70			8.5
Expected return on plan assets		(1517.69	)		(1415.76	)		(290.14	)		(3130.42	)		—			—
Unrecognized transition obligation		—			2.4			—			—			—			—
Amortization of actuarial loss		4.6			6.4			0.6			28.7			3.8			3.2
Amortization of actuarial loss		6.4			6.6			27.6			27.1			3.2			3.0
Amortization of prior service cost (benefit)		1.6			1.6			—			—			(1.0	)		(1.0	)
Amortization of prior service cost		1.6			1.9			—			—			(1.0	)		(1.0	)
Net periodic benefit cost	$	9.9		$	14.3		$	5.3		$	39.1		$	12.3		$	12.0
Net periodic benefit cost	$	14.4		$	18.2		$	37.6		$	40.5		$	13.6		$	11.8

2324

~~NOTES~~Components TOof ~~CONSOLIDATED~~net ~~FINANCIAL~~periodic ~~STATEMENTS~~benefit -cost ~~Continued~~for the six month periods ended June 30 are as follows:

14. Litigation and Environmental Matters


	Pension Benefits												Other Benefits
	United States						International						Other Benefits
	2007			2006			2007			2006			2007			2006
	(Millions of Dollars)
Service cost	$	13.1		$	14.9		$	2.6		$	3.8		$	1.0		$	4.0
Interest cost		30.2			29.0			7.1			75.9			18.0			17.2
Expected return on plan assets		(35.8	)		(31.2	)		(0.6	)		(59.3	)		—			—
Amortization of actuarial loss		9.2			12.8			1.2			56.3			7.7			6.4
Amortization of prior service cost (benefit)		3.2			3.2			—			—			(2.1	)		(2.0	)
Settlement gain		—			—			(0.3	)		—			—			—

Net periodic benefit cost	$	19.9		$	28.7		$	10.0		$	76.7		$	24.6		$	25.6

In October 2006, as part of the discharge of U.K. Administration, the Company settled its U.K. pension liabilities and was relieved of responsibility for all U.K. pension benefit obligations. Prior to settlement, the Company was incurring pension expense for the related employees of approximately $11 million per month; $8 million recorded as cost of goods sold, and $3 million recorded as selling, general and administrative expense. Once the pension was settled, the Company no longer recorded any charges relating to its U.K. pension plans.

16.

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. isand certain of its French subsidiaries are also subject to asbestos-disease litigation, to a lesser extent, in the ~~United~~U.K. ~~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~~U.S. ~~States~~ subsidiaries were defendants in approximately 199,000 pending personal injury claims. 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~~after the Petition Date and are in violation of the automatic stay.

Recorded Liability

InThe ~~2000~~Company, during the ~~Company~~ year ended December 31, 2000, 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 $1.32 billion as of ~~March~~June 3130, ~~2006~~2007) 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.KS. 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. The Company’s obligations with respect to present and future claims could be determined through litigation in the Bankruptcy Court, the High Court, and/or through negotiations with each of the official committees appointed.

~~In December~~25 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 Restructuring Proceedings, the Company has sought declaratory and injunctive relief in an adversary proceeding filed in the Bankruptcy Court, in order to enjoin any post-petition payments to asbestos claimants by the CCR and any post-petition draw by the CCR on $225 million in face amount of the surety bonds. The CCR sought to draw on the surety bonds to fund past and future payments although the basis of such draw, the validity of such claims under the pre-petition bond terms, and whether such draw may be utilized to pay obligations of other CCR members were all disputed. On March 28, 2003, the Federal District Court Judge held that, with respect to phase one, the CCR had the right to draw upon the bonds to the extent that a settlement between an individual and the CCR member was consummated as of the Petition Date, i.e., a release had been obtained from such individual. The CCR moved for reconsideration and the ruling was modified to require a state-by-state analysis of what steps were required for the settlement to be binding. The litigation did not progress beyond this stage.

~~NOTES~~In TODecember ~~CONSOLIDATED~~of ~~FINANCIAL~~2000, ~~STATEMENTS~~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 Restructuring Proceedings, the Company has sought declaratory and injunctive relief in an adversary proceeding filed in the Bankruptcy Court, in order to enjoin any post-petition ~~Continued~~payments to asbestos claimants by the CCR and any post-petition draw by the CCR on $225 million in face amount of the surety bonds. The CCR sought to draw on the surety bonds to fund past and future payments although the basis of such draw, the validity of such claims under the pre-petition bond terms, and whether such draw may be utilized to pay obligations of other CCR members were all disputed.

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

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

While the Company believes that the liability recorded for the U.S. asbestos claims was appropriate as of October 1, 2001 for anticipated losses arising from asbestos-related claims against the T&N Companies through 2012, it is the Company’s view that, as a result of the Restructuring Proceedings, there is even greater uncertainty in estimating the timing and amount of future asbestos liability and related insurance recovery for pending and future claims. There are significant differences in the treatment of asbestos claims in a bankruptcy proceeding as compared to the tort litigation system. Among other things, it is uncertain at this time as to the number of asbestos-related claims that will be filed in the Restructuring Proceedings, the number of current and future claims that will be included in athe 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~~No ~~the~~assurance ~~Restructuring~~can ~~Proceedings~~be ~~will~~given ~~impact~~ that the ~~timing~~T&N ~~and~~Companies ~~amount~~will ofnot ~~the~~be ~~asbestos~~subject ~~claims~~to ~~and~~material ~~related~~additional ~~insurance~~liabilities ~~recoverable~~and ~~amounts,~~significant ~~there~~additional ~~has~~litigation ~~been~~relating ~~no change, other than~~ to ~~reflect~~asbestos ~~an insurance~~matters ~~settlement~~for ~~and~~the ~~foreign~~U.S. ~~exchange~~asbestos ~~translation,~~claims tothrough ~~the~~2012 ~~recorded~~or ~~amounts~~thereafter. ~~since~~In the ~~Company~~event ~~initiated~~that ~~the~~such ~~Restructuring~~liabilities ~~Proceedings.~~exceed ~~Accordingly,~~ the amounts recorded ~~amounts~~by ~~for~~ the ~~asbestos~~Company ~~claims~~or ~~and~~the ~~related~~remaining insurance ~~recoverable~~coverage, ~~asset~~the ~~could~~Company’s ~~change significantly~~results ~~based~~of ~~upon~~operations ~~events~~and ~~that~~financial ~~occur~~condition ~~from~~could ~~the~~be ~~Restructuring~~materially ~~Proceedings~~affected.

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), during the year ended December 31, 1996, 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~~The ~~2000~~Company, during the ~~Company~~year ended December 31, 2000, 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. AsThe ~~of March 31, 2006, the~~ recorded insurance recoverable was $~~620~~714 million. ~~In December~~as of June ~~2001~~30, ~~one~~2007. One of the three reinsurers, European International Reinsurance Company Ltd. (“EIR”), in December 2001, filed suit in a London, England court to challenge the validity of its insurance contract with the T&N Companies. As a result of this lawsuit, a claim was made against the broker (Sedgwick) that assisted in procuring this policy for breach of its duties as a broker. ~~This trial commenced in October 2003. Prior to the conclusion of the trial, the parties were able to reach a~~ settlement. As a result of this settlement, the Company recorded a $38.9 million asbestos charge during 2003. Under the terms of the settlement, EIR would be liable for 65.5% of its one-third share of the reinsurance policy. By separate agreement, Sedgwick agreed to be liable for an additional 17.25% of the EIR share of the reinsurance policy. T&N Ltd. has also agreed to indemnify the insurer for sums paid under the policy for which the insurer is liable to T&N Ltd. for which the insurer has no recovery from the reinsurers or Sedgwick. The settlement agreements referenced above are being held in escrow pending approval by the Bankruptcy Court and the Administrators of T&N Ltd. of those portions of the above-described settlement agreements that affect the Debtors. A motion seeking the Bankruptcy Court’s approval of the settlement was filed on March 1, 2004.

2526

~~NOTES~~ This TOtrial ~~CONSOLIDATED~~commenced ~~FINANCIAL~~in ~~STATEMENTS~~October 2003. The parties were able to reach a settlement prior to the conclusion of the trial. As a result of this settlement, the Company recorded a $38.9 million asbestos charge during 2003. Under the terms of the settlement, EIR would be liable for 65.5% of its one-third ~~Continued~~share of the reinsurance policy. By separate agreement, Sedgwick agreed to be liable for an additional 17.25% of the EIR share of the reinsurance policy. T&N Ltd. has also agreed to indemnify the insurer for sums paid under the policy for which the insurer is liable to T&N Ltd. for which the insurer has no recovery from the reinsurers or Sedgwick. The settlement agreements referenced above are being held in escrow pending approval by the Bankruptcy Court and the Administrators of T&N Ltd. of those portions of the above-described settlement agreements that affect the Debtors. A motion seeking the Bankruptcy Court’s approval of the settlement was filed on March 1, 2004.

Subsequent to this motion, the other two reinsurers, Munchener Ruckversicherungs-Gesellschaft AG (“Munich Re”) and Centre Reinsurance International Co. (“CRIC”), a subsidiary of the Zurich Financial Services Group, notified the Company of their belief that the settlements with EIR and Sedgwick may breach one or more provisions of the reinsurance agreement. The ~~hearing to review the March 1, 2004 motion has been adjourned without date as the~~ parties ~~attempt~~were unable to resolve the issues raised by the two reinsurers. ~~However,~~and ~~these~~this ~~efforts~~prompted ~~were unsuccessful, prompting~~ the U.K. Administrators to file an action in the ~~London~~ High Court seeking a declaration that the settlements with EIR and Sedgwick do not breach provisions of the reinsurance agreement. A hearing was conducted during July 2005 and ~~judgement~~ judgment was handed down on December 21, 2005. The ~~court~~High Court held that the settlements did not breach the reinsurance agreement. Munich Re and CRIC have not appealed the ~~judgement~~judgment. As a result, the motion seeking the Bankruptcy Court’s approval was renoticed and the Bankruptcy Court approved the settlement in November 2006.

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

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

The Company has reviewed the financial viability and legal obligations of the three reinsurance companies involved and has concluded that there is little risk that the reinsurers will not be able to meet their obligations under the policy 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 or less than $1.69/£, the Company will effectively have a premium or discount on claims paid. As of ~~March~~June 3130, ~~2006~~2007, the $~~620~~714 million insurance recoverable asset includes an exchange rate premium of approximately $1499 million.

Abex and Wagner Asbestos Litigation

Background

Two of the Company’s businesses formerly owned by Cooper Industries, ~~Inc.~~LLC (“Cooper”), historically known as Abex and Wagner, are involved as defendants in numerous court actions in the U.S. alleging personal injury from exposure to asbestos or asbestos-containing products. These claims mainly involve vehicle safety and ~~performance~~protection products. As of the Petition Date, Abex and Wagner were defendants in approximately 66,000 and 33,000 pending claims, respectively. 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~~27 liability of the Company with respect to claims alleging exposure to Wagner products arises from the 1998 stock purchase from Cooper Industries, Inc. of the corporate successor by merger to Wagner Electric Company; the purchased entity is now a wholly-owned subsidiary of the Company and one of the Debtors in the Restructuring Proceedings.

~~NOTES~~The TOliability ~~CONSOLIDATED~~of ~~FINANCIAL~~the ~~STATEMENTS~~Company with respect to claims alleging exposure to Wagner products arises from the 1998 stock purchase from Cooper of the corporate successor by merger to Wagner Electric Company; the purchased entity is now a wholly-owned ~~Continued~~subsidiary of the Company and one of the Debtors in the Restructuring Proceedings.

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

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

Recorded Liability

The liability (comprised of $129.5 million in Abex liabilities and $84.1 million in Wagner liabilities as of ~~March~~June 3130, ~~2006~~2007) 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.

The Company issued various letters of credit in connection with asbestos lawsuits that had resulted in verdicts against the Company prior to its filing for bankruptcy protection. The letters of credit were issued as security for judgments entered against the Company to permit the Company to pursue appeals to these judgments. ~~During~~The ~~2004, the~~ final appeal in one case was denied during 2004, the Bankruptcy Court lifted the automatic stay related to one letter of credit associated with this appeal, and a net draw was made upon this letter of credit of approximately $1 million.

While the Company believes that the liability recorded was appropriate as of October 1, 2001 for anticipated losses arising from asbestos-related claims related to Abex and Wagner through 2012, it is the Company’s view that, as a result of the Restructuring Proceedings, there is even greater uncertainty in estimating the timing and amount of future asbestos liability and related insurance recovery for pending and future claims. There are significant differences in the treatment of asbestos claims in a bankruptcy proceeding as compared to the tort litigation system. Among other things, it is uncertain at this time as to the number of asbestos-related claims that will be filed in the proceeding, the number of current and 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.

~~In December of 2005,~~ Cooper ~~Industries~~, ~~Inc.~~Pneumo, ~~Pneumo~~the ~~Abex Corporation~~Company, the ~~Asbestos~~asbestos ~~Committee~~claimants committee, the ~~Asbestos~~representative ~~Futures~~for ~~Representative,~~future ~~the~~asbestos ~~Company~~claimants, and various other relevant parties, ~~entered~~signed ~~into~~ a nonbinding term sheet to ~~resolve~~in ~~all~~July of ~~Cooper Industries~~2006, ~~Inc.~~reflecting ~~and~~a ~~Pnuemo~~global ~~Abex~~settlement ~~Corporation~~that will provide two alternative means of resolving all of Cooper’s and Pneumo’s claims against the Company arising out of the Abex asbestos litigation and the related alleged indemnity obligations. AOne ~~condition~~of ~~precedent~~these toalternatives ~~that~~will ~~term~~be ~~sheet~~accomplished ~~was~~as ~~that~~part of the ~~Bankruptcy~~ ~~Court~~Plan ~~issue~~and its confirmation. Under one alternative, Cooper will contribute $756 million to a ~~preliminary~~trust ~~injunction~~to ~~staying~~be established pursuant to Section 524(g) of the ~~asbestos~~Bankruptcy Code, ~~litigation~~consisting ~~against~~of ~~Cooper~~$256 ~~Industries~~million in cash and a $500 million promissory note, ~~Inc.~~in consideration for Cooper and Pneumo ~~Abex~~being ~~Corporation~~protected ~~pending~~from ~~consummation~~current ofand future Abex asbestos claims by the ~~term~~Plan’s ~~sheet~~channeling injunction which ~~would~~will ~~have~~channel ~~occurred~~all ~~through~~ the ~~confirmation~~Abex asbestos ofclaims to the ~~Company’s~~ ~~Plan~~trust. ~~The~~This ~~Bankruptcy~~alternative ~~Court~~settlement ~~denied~~has ~~the~~been ~~motion~~documented ~~for~~as ~~preliminary~~part ~~injunction~~of onthe ~~January 20~~Plan, ~~2006.~~and ~~Consequently,~~affected ~~the~~creditors ~~parties~~voted ~~have~~in ~~resumed~~favor ~~discussions~~of ~~regarding~~this ~~settlement~~alternative as part of the ~~outstanding~~solicitation ~~issues.~~of votes on the Plan which was completed in May 2007.

No28 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.

The other alternative settlement will only be utilized if the first alternative cannot be successfully implemented. Under the second settlement structure, Cooper will receive $138 million and Pneumo will receive $2 million in exchange for completely releasing all their claims against the Company and all its affiliates. The terms of this alternative settlement are set forth in the Plan B Settlement Agreement executed as of September 18, 2006, by the same parties that signed the term sheet in July of 2006. This alternative has been documented as part of the Plan. Under both of the foregoing alternatives, Cooper has agreed to permit the Company to: (i) negotiate certain lump-sum or installment settlements involving the Wagner insurance (described below); and (ii) retain 88% of the proceeds from such insurance settlements in the case of the first alternative settlement structure and 80% of the proceeds in the case of the second alternative settlement structure. Cooper, Pneumo, the Company, the asbestos claimants committee, the representative for future asbestos claimants, and various other relevant parties, have entered a Plan Support Agreement which was approved by the Bankruptcy Court on February 2, 2007, binding the parties to the alternative settlements.

Neither of the foregoing settlement alternatives will be consummated until the Plan has been confirmed. Accordingly, the Company will not be relieved of material additional liabilities and significant additional litigation relating to Abex and Wagner asbestos matters until the Plan becomes effective. The Company’s results of operations and financial condition could be materially affected in the event that such liabilities cannot be resolved and end up exceeding the amounts recorded by the Company or the remaining insurance coverage.

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 $111.9 million as of June 30, 2007.

27Wagner 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 in federal court against the Debtors and a number of insurance carriers in the Company’s Restructuring Proceedings (the “Adversary Proceeding”). 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 sought, 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 $47.6 million as of June 30, 2007. On November 4, 2004, FMP, Dresser and Cooper Industries, LLC. (“Cooper”) and certain of the insurers (“Parties”) entered into a partitioning agreement, by which the Parties agreed as to the manner in which the limits of liability, self-insured retentions, deductibles and any other self-insurance features, and the erosion thereof, are to be partitioned among FMP, Dresser and Cooper. The partitioning agreement effectively disposes of Dresser’s claims in the Adversary Proceeding. However, FMP’s cross claim against the defendant-insurers remains. In a separate agreement, FMP, Cooper, and Pneumo have agreed, among other things, to a method for dividing the FMP-Cooper portion of the partitioned limits among those three entities. The agreement among FMP, Cooper, and Pneumo is subject to bankruptcy court approval and is set forth in detail in the Fourth Amended Plan of Reorganization.

~~NOTES~~Because TOthe ~~CONSOLIDATED~~legal ~~FINANCIAL~~issues ~~STATEMENTS~~raised in the Adversary Proceeding generally involve state rather than federal law, on September 19, 2006, FMP filed a complaint in the Superior Court of New Jersey (the “New Jersey Complaint”) against all of the defendant insurers in the Adversary Proceeding. On March 28, 2007, the federal court in the Adversary Proceeding entered an order abstaining from the Adversary Proceeding. The New Jersey Complaint generally tracks the cross-claims ~~Continued~~previously asserted by FMP against the defendant insurers in the Adversary Proceeding, and seeks a declaration as to FMP’s coverage rights under the policies as well as damages for breach of contract and bad faith. Several defendant insurers have stated that they believe that the New York Supreme Court rather than the New Jersey Superior Court is the more appropriate forum for the litigation. On or about May 8, 2007, those insurers sued FMP, Federal-Mogul Corporation and certain other parties in New York Supreme Court, seeking a declaration that they do not have any obligation to cover Wagner asbestos claims.

The ultimate realization of insurance proceeds is directly related to the ~~extent~~amount of ~~that~~related ~~liability~~covered valid claims against the Company. ~~Abex~~If the ~~has~~ultimate ~~been~~asbestos inclaims ~~litigation~~are ~~since~~higher ~~1982~~than ~~with~~the recorded liability, the Company expects the ultimate insurance ~~carriers~~recoverable ofto ~~its~~be ~~primary~~higher ~~layer~~than ofthe ~~liability~~recorded ~~concerning~~amount. ~~coverage~~If ~~for~~ the ultimate asbestos claims. ~~Abex~~are ~~also~~lower ~~has~~than ~~substantial~~the ~~excess~~recorded ~~layer~~ liability, the Company expects the ultimate insurance ~~coverage~~recoverable ~~that~~to isbe ~~shared~~lower than the recorded amount. While the Restructuring Proceedings and the proposed settlement with ~~other~~Cooper ~~companies~~will ~~that~~impact the timing and amount of the asbestos claims and the insurance recoverable, there ~~barring~~has ~~unforeseen~~been ~~insolvencies~~no change to the recorded amounts since the initiation of ~~excess~~the ~~carriers~~Restructuring orProceedings, other ~~adverse~~than ~~events~~to reflect cash received under this policy, ~~should~~due ~~provide~~to ~~coverage~~the ~~for~~uncertainties ~~asbestos~~created ~~claims against~~by ~~Abex~~the Restructuring Proceedings. ~~The~~Accordingly, ~~Abex~~the recorded amounts for this insurance recoverable ~~was~~asset ~~$112.6~~could ~~million~~change asmaterially ofbased ~~March 31,~~upon ~~2006~~events that occur from the Restructuring Proceedings.

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 $47.8 million as of March 31, 2006. On November 4, 2004, FMP, Dresser and Cooper Industries, Inc. (“Cooper”) and certain of the insurers (“Parties”) entered into a partitioning agreement, by which the Parties agreed as to the manner in which the limits of liability, self-insured retentions, deductibles and any other self-insurance features, and the erosion thereof, are to be partitioned among FMP, Dresser and Cooper. The partitioning agreement effectively disposes of Dresser’s claims in the Dresser adversary proceeding. However, FMP’s cross claim against the defendant-insurers remains.

The ultimate realization of insurance proceeds is directly related to the amount of related covered valid claims against 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 to reflect cash received under this policy, due to the uncertainties created by the Restructuring Proceedings. Accordingly, the recorded amounts for this insurance recoverable asset could change materially based upon events that occur from the Restructuring Proceedings.

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

Federal-Mogul and Fel-Pro Asbestos Litigation

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

Prior to the Restructuring Proceedings, the Company’s Fel-Pro subsidiary also was named as a defendant in a number of product liability cases involving asbestos, primarily involving gasket or packing products. Fel-Pro was a defendant inwith ~~approximately~~respect 34to nearly 2,000 pending claims as of the Petition Date. ~~Over~~Fel-Pro had been named in a further 32,000 ~~of these~~ claims ~~were~~that ~~transferred~~had tobeen adismissed ~~federal~~without ~~court, where,~~prejudice prior to the ~~Restructuring~~Petition ~~Proceedings, they were pending~~Date. 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 products of the Company and of Fel-Pro have been stayed as a result of the Restructuring Proceedings.

2830

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

Aggregate of Asbestos Liability and Insurance Recoverable Asset

The following is a summary of the asbestos liability subject to compromise and the insurance recoverable asset as of ~~March~~June 3130, ~~2006~~2007 and December 31, ~~2005~~2006:

	T&N Companies		Abex			~~Wagner~~	Wagner		Other		Total
	(Millions of Dollars)
Liability:
Balance at December 31, 2005	$	1,316.1	$	129.5		$	84.1		$	2.7	$	1,532.4
Balance at December 31, 2006	$	1,175.4	$	129.5			$	84.1	$	2.7	$	1,391.7
Foreign exchange		1.42		—			—	—		—		1.42
Balance at March 31, 2006	$	1,317.5	$	129.5		$	84.1		$	2.7	$	1,533.8
Balance at June 30, 2007	$	1,176.6	$	129.5			$	84.1	$	2.7	$	1,392.9
Asset:
Balance at December 31, 2005	$	615.4	$	112.6		$	49.4		$	—	$	777.4
Balance at December 31, 2006	$	698.8	$	112.6			$	47.6	$	—	$	859.0
Cash receipts		—		—(0.7	)		~~(1.6~~	)—		—		(10.67	)
Foreign exchange		415.14		—			—	—		—		415.14
Balance at March 31, 2006	$	619.5	$	112.6		$	47.8		$	—	$	779.9
Balance at June 30, 2007	$	714.2	$	111.9			$	47.6	$	—	$	873.7

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 Matters

The Company is involved in other legal actions and claims, directly and through its subsidiaries. After taking into consideration legal counsel’s evaluation of such actions, management believes 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 and Asset Retirement Obligations

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, provincial 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, by prior owners or occupants of their property, 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 provincial and 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 or provincial environmental laws. PRP designation typically 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~~wastes, 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 sent to these sites has generally been small. The other companies, ~~which~~that ~~also~~ sent ~~waste~~ wastes to these sites, 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 also identified certain other 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~~actual and potential statutory, regulatory and contractual obligations. Although difficult to quantify based on the complexity of the issues, the Company has accrued amounts corresponding to its

2931

~~NOTES~~ best TOestimate ~~CONSOLIDATED~~of ~~FINANCIAL~~the ~~STATEMENTS~~costs -associated ~~Continued~~with such regulatory and contractual obligations on the basis of factors such as available information from site investigations and consultants.

~~Although~~The ~~difficult~~Company torecords ~~quantify~~asset ~~based~~retirement onobligations ~~the~~in ~~complexity~~accordance ofwith ~~the~~SFAS ~~issues~~No. 143, Accounting for Asset Retirement Obligations and Financial Interpretation No. 47 (“FIN 47”), Accounting for Conditional Asset Retirement Obligations, when the amount can be reasonably estimated, typically upon decision to close or sell an operating site. The Company has ~~accrued~~identified ~~amounts corresponding~~sites with contractual obligations and several sites that are closed or expected to ~~its~~be ~~best~~closed ~~estimate~~and ofsold ~~the~~in ~~costs~~connection ~~associated~~with Restructuring 2006. In connection with ~~such~~these ~~regulatory~~sites, ~~and~~the ~~contractual~~Company ~~matters~~has ~~based~~accrued ~~upon~~$25.7 ~~current~~million ~~available~~and ~~information~~$25.3 million ~~from~~as ~~site~~of ~~investigations~~June 30, 2007 and ~~consultants~~December 31, 2006, respectively, for conditional asset retirement obligations, primarily related to anticipated costs of asbestos removal.

~~Environmental~~The ~~reserves~~Company ~~were~~has ~~$59.8~~additional ~~million~~asset ~~and~~retirement ~~$57.3~~obligations, ~~million~~also atprimarily ~~March 31,~~related ~~2006~~to ~~and~~asbestos ~~December 31,~~removal ~~2005~~costs, ~~respectively,~~for ~~and~~which ~~are~~it ~~included~~believes inreasonable cost estimates cannot be made at this time because the ~~consolidated~~Company ~~balance~~does ~~sheets~~not believe asit ~~follows:~~has a reasonable basis to assign probabilities to a range of potential settlement dates for these retirement obligations. Accordingly, the Company is currently unable to determine amounts to accrue for conditional asset retirement obligations at such sites.

	March 312006		December 312005
	(Millions of Dollars)
Current liabilities	$	9.7	$	10.7
Long-term accrued liabilities		23.0		21.9
Liabilities subject to compromise		27.1		24.7
	$	59.8	$	57.3

For those sites that the Company identifies in the future for closure or sale, or for which it otherwise believes it has a reasonable basis to assign probabilities to a range of potential settlement dates, the Company will review these sites for both impairment issues in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and for conditional asset retirement obligations in accordance with SFAS No. 143 or FIN 47.

~~Management~~Total ~~believes~~environmental ~~that~~reserves, ~~such accruals will be adequate to cover the Company’s estimated~~including ~~liability~~reserves for ~~its~~conditional ~~exposure~~asset inretirement ~~respect~~obligations, towere ~~such matters~~$82.6 Inmillion ~~the~~and ~~event~~$82.1 ~~that~~million ~~such~~at ~~liabilities were to significantly exceed the amounts recorded by the Company~~June 30, ~~the~~2007 ~~Company’s results of operations~~ and ~~financial condition could be materially affected. At March~~December 31, 2006, ~~management~~respectively, ~~estimates that reasonably possible material additional losses above~~ and ~~beyond~~are ~~management’s~~included ~~best~~in ~~estimate~~the ofconsolidated ~~required~~balance ~~remediation~~sheets ~~costs~~ as ~~recorded~~follows: ~~approximates $65 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 waste 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.


	June 30 2007		December 31 2006
	(Millions of Dollars)

Current liabilities:
Environmental liabilities	$	6.3	$	6.6
Asset retirement obligations		9.0		8.6
Long-term accrued liabilities:
Environmental liabilities		23.6		23.5
Asset retirement obligations		16.7		16.7
Liabilities subject to compromise - Environmental		27.0		26.7

	$	82.6	$	82.1

~~Environmental~~Management ~~reserves~~believes ~~determined~~that ~~not~~recorded toenvironmental liabilities will be ~~subject~~adequate to ~~compromise~~cover ~~include~~the ~~those~~Company’s ~~which~~estimated liability ~~arise~~for ~~from~~its aexposure ~~legal~~in ~~obligation~~respect ofto such matters. In the event that such liabilities were to significantly exceed the amounts recorded by the Company, ~~under~~the ~~an administrative~~Company’s orresults ~~judicial~~of ~~order~~operations toand ~~perform~~financial ~~cleanup~~condition atcould abe ~~site~~materially affected. ~~Such~~At ~~obligations~~June 30, ~~are~~2007, ~~normally~~management ~~associated~~estimates ~~with~~that ~~sites~~reasonably ~~which~~possible ~~the~~material ~~Company~~additional ~~owns~~losses above and ~~either~~beyond ~~operates~~management’s orbest ~~formerly~~estimate ~~operated~~of required remediation costs as recorded approximates $77 million.

~~The~~Environmental ~~best~~liabilities ~~estimate~~subject ofto ~~environmental~~compromise ~~liability~~include atthose arelated ~~site~~to ~~may~~claims ~~change~~that ~~from~~may ~~time~~be toreduced ~~time~~in ~~during~~the aCompany’s bankruptcy proceeding ~~even~~because ~~though~~obligations underlying ~~the~~such ~~liability~~claims ~~relating~~may tobe ~~that~~determined ~~site~~to isbe ~~subject~~“dischargeable todebts” ~~compromise~~incurred ~~and~~prior to the Company’s ~~responsibility~~filing tofor ~~make payments is stayed~~bankruptcy. ~~Notwithstanding~~Such ~~the~~liabilities ~~stay~~generally ofarise ~~legal~~at ~~proceedings~~either: ~~against~~(1) commercial ~~the~~waste ~~Company~~disposal ~~regarding~~sites ~~such~~to awhich ~~site,~~the ~~activities~~Company ~~such~~and other ascompanies ~~further~~sent ~~site~~wastes ~~investigation~~for ~~and/~~disposal; or ~~actual~~(2) sites ~~cleanup~~in ~~work~~relation ~~often continue~~ to ~~be performed,~~which ~~generally by parties other than~~ the Company. ~~Such~~has ~~activities~~a ~~may~~contractual ~~produce~~obligation ~~new~~to ~~and~~indemnify ~~better~~the ~~information~~current ~~that~~owner ~~requires~~of ~~the~~a ~~Company~~site tofor ~~revise~~the ~~its~~costs ~~best~~of ~~estimate~~cleanup of ~~total~~contamination ~~site~~that ~~cleanup~~was ~~costs~~released ~~and~~into ~~its~~the ~~own~~environment before ~~share~~the ofCompany ~~such~~sold ~~costs~~the site.

15Environmental liabilities 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. ~~Operations~~Such byobligations ~~Reporting~~are ~~Segment~~normally associated with sites which the Company owns and/or operates.

~~The~~32 Company’s integrated operations are organized in five reporting segments generally corresponding to major product groups; Powertrain, Sealing Systems, Vehicle Safety and Performance, Aftermarket Products and Services and Corporate. Segment information for the three month period ended March 31, 2005 has been reclassified to reflect organizational changes implemented in the second quarter of 2005.

The Company has aggregated certain individual operating units within its five reporting segments. The accounting policies of the segments are the same as those of the Company. Revenues related to Powertrain, Sealing Systems, and Vehicle Safety and Performance products sold to OE customers are recorded within the respective segments. Revenues from such products sold to Aftermarket customers are recorded within the Aftermarket Products and Services segment.

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

~~The Company evaluates segment performance principally on an Operational EBITDA basis~~17. ~~Operational EBITDA~~Operations isby ~~defined~~Reporting as earnings before interest, income taxes, depreciation and amortization, and certain items such as restructuring and impairment charges, Chapter 11 and Administration related reorganization expenses, and gains or losses on the sales of assets. Operational EBITDA for each segment is shown below, as it is most consistent with the corresponding consolidated financial statements. Segment

The Company’s integrated operations are organized into six reporting segments generally corresponding to major product groups; Powertrain Energy, Powertrain Sealing and Bearings, Vehicle Safety and Protection, Automotive Products, Global Aftermarket and Corporate. Segment information for the three and six month periods ended June 30, 2006 has been reclassified to reflect organizational changes implemented in the second quarter of 2007.

The accounting policies of the segments are the same as those of the Company. Revenues related to products sold by Powertrain Energy, Powertrain Sealing and Bearings, Vehicle Safety and Protection, and Automotive Products to OE customers are recorded within the respective segments. Revenues from such products sold to Aftermarket customers are recorded within the Global Aftermarket segment.

The Company evaluates segment performance principally on an Operational EBITDA basis. Operational EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, and certain items such as restructuring and impairment charges, Chapter 11 and U.K. Administration related reorganization expenses, and gains or losses on the sales of assets.

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

	Net Sales				~~Gross Margin~~
	Three Months EndedMarch 31				Three Months EndedMarch 31
	Three Months EndedJune 30				Six Months EndedJune 30
	2006		2005		2006				2005
	2007		2006		2007			2006
	(Millions of Dollars)
Powertrain	$	568	$	582	$	83			$	84
Powertrain Energy	$	510	$	468	$	1,023		$	916
Sealing Systems		124		127		12				4
Powertrain Sealing and Bearings		271		251		538			496
Vehicle Safety and Performance		192		193		48				45
Vehicle Safety and Protection		205		191		403			375
Aftermarket Products and Services		716		731		163				165
Automotive Products		83		72		161			148
Corporate		—		—		(21	)			(23	)
Global Aftermarket		694		650		1,355			1,297
	$	1,~~600~~763	$	1,~~633~~632	$	~~285~~3,480		$	$3,232	~~275~~

Operational EBITDA by reporting segment and the reconciliation of Operational EBITDA to loss before income tax expense is as follows:


	Gross Margin
	Three Months Ended June 30					Six Months Ended June 30
	2007		2006			2007			2006
	(Millions of Dollars)

Powertrain Energy	$	68	$	73		$	138		$	142
Powertrain Sealing and Bearings		16		30			33			56
Vehicle Safety and Protection		53		47			103			93
Automotive Products		21		16			39			28
Global Aftermarket		164		162			318			315
Corporate		—		(24	)		(1	)		(45	)

	$	322	$	304		$	630		$	589

	Three Months EndedMarch 31
	2006			2005
	(Millions of Dollars)
Powertrain	$	92		$	96
Sealing Systems		12			2
Vehicle Safety and Performance		42			41
Aftermarket Products and Services		112			107
Corporate		(112	)		(119	)
Total Operational EBITDA		146			127
Interest expense, net		(39	)		(29	)
Depreciation and amortization		(79	)		(93	)
Restructuring charges, net		(26	)		(3	)
Adjustment of assets to fair value		(20	)		(3	)
Chapter 11 and Administration related reorganization expenses		(21	)		(30	)
Finalization of 2004 Goodwill Impairment Charge		—			8
Other		—			1
Loss before income tax expense	$	(39	)	$	(22	)

~~NOTES~~Operational TOEBITDA ~~CONSOLIDATED~~by ~~FINANCIAL~~reporting ~~STATEMENTS~~segment -and ~~Continued~~the reconciliation of Operational EBITDA to income (loss) before income tax expense is as follows:

Total assets by reporting segment are as follows:


	Three Months Ended June 30						Six Months Ended June 30
	2007			2006			2007			2006
	(Millions of Dollars)

Powertrain Energy	$	88		$	85		$	174		$	164
Powertrain Sealing and Bearings		18			30			35			55
Vehicle Safety and Protection		50			42			96			83
Automotive Products		20			17			36			29
Global Aftermarket		116			117			224			218
Corporate		(80	)		(117	)		(153	)		(229	)

Total Operational EBITDA		212			174			412			320

Interest expense, net		(52	)		(44	)		(102	)		(83	)
Depreciation and amortization		(88	)		(80	)		(172	)		(159	)
Restructuring charges, net		(14	)		(17	)		(30	)		(42	)
Adjustment of assets to fair value		(3	)		(1	)		(4	)		(21	)
Chapter 11 and U.K. Administration related reorganization expenses		(28	)		(21	)		(41	)		(42	)
Other		(2	)		1			(2	)		—

Income (loss) before income tax expense	$	25		$	12		$	61		$	(27	)

	March 312006		December 312005
	(Millions of Dollars)
Powertrain	$	1,765	$	1,746
Sealing Systems		770		765
Vehicle Safety and Performance		1,020		1,008
Aftermarket Products and Services		2,940		2,875
Corporate		1,271		1,341
	$	7,766	$	7,735

Total assets by reportable segment are as follows:

16. Stock-Based Compensation


	June 30 2007		December 31 2006
	(Millions of Dollars)

Powertrain Energy	$	1,496	$	1,474
Powertrain Sealing and Bearings		1,187		1,195
Vehicle Safety and Protection		1,013		983
Automotive Products		959		1,007
Global Aftermarket		1,946		1,828
Corporate		808		692

	$	7,409	$	7,179

18.

Stock-Based Compensation

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

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

In34 accordance with Financial Accounting Standards Board (“SFAS”) No. 123(R), Shared Based Payments, the Company has determined the amount of compensation expense associated with these stock options on the fair value of such options as of March 31, 2006. Key assumptions and related option-pricing models used by the Company are summarized in the following table.

	Plain VanillaOptions	Options withExchange
Valuation model	Black-Scholes	Modified Binomial
Expected volatility	43%	43%
Expected dividend yield	0%	0%
Risk-free rate over the estimated expected life of option	4.69 – 4.81%	4.69 – 4.81%
Expected term (in years)	4.29	5.27

Until the date of grant, the Company is required to reassess the value of the Options quarterly and adjust the aggregate compensation expense recognized to reflect any change in the value of the Options. During the three months ended March 31, 2006 and March 31, 2005, the Company recorded compensation expense of $1.5 million and $0.6 million, respectively. As of March 31, 2006, there was approximately $29 million of total unrecognized compensation cost related to non-vested stock-options under the employment agreement, which is expected to be recognized ratably over the remaining term of the employment agreement.

~~NOTES~~ options TOfor ~~CONSOLIDATED~~one ~~FINANCIAL~~Class A ~~STATEMENTS~~share -of ~~Continued~~common stock. The options without the exchange feature are referred to herein as “plain vanilla options” and those options with the exchange feature are referred to as “options with exchange.”

17In accordance with SFAS No. 123(R), ~~Consolidating~~Share ~~Condensed~~Based Payments, ~~Financial~~the ~~Information~~Company has determined the amount of ~~Guarantor~~compensation ~~Subsidiaries~~expense associated with these stock options upon the fair value of such options as of June 30, 2007. Key assumptions and related option-pricing models used by the Company are summarized in the following table.


	Plain Vanilla Options		Options with Exchange

Valuation model	Black-Scholes		Modified Binomial
Expected volatility	35	%	35	%
Expected dividend yield	0	%	0	%
Risk-free rate over the estimated expected life of option	4.87 – 5.16	%	4.87 – 5.16	%
Expected term (in years)	3.92		4.78

Until the date of grant, the Company is required to reassess the value of the Options quarterly and adjust the aggregate compensation expense recognized to reflect any change in the value of the Options. During the six month periods ended June 30, 2007 and June 30, 2006, the Company recorded compensation expense of $2.8 million and $3.4 million, respectively. As of June 30, 2007 and December 31, 2006, there was approximately $17.1 million and $21.1 million, respectively, of total unrecognized compensation cost related to non-vested stock-options under the employment agreement, which is expected to be recognized ratably over the remaining term of the employment agreement.

Because of recent changes in the U.S. tax code, the Company has proposed changes to Mr. Alapont’s non-qualified stock option grant from the reorganized Company. The proposed changes are detailed in the Fourth Amended Joint Plan of Reorganization filed with the U.S. Bankruptcy Court. The proposed changes eliminate the use of “options with exchange” and provide that all the granted options will be “plain vanilla” options as described above. Mr. Alapont also would enter into a deferred compensation arrangement that replaces the benefits which he would have had under the options with exchange provided for in his employment agreement. An actuarial calculation has estimated the value of this future option grant to be $33 million.

19.

Consolidating Condensed Financial Information of Guarantor Subsidiaries

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


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

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

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

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

As a result of the Restructuring Proceedings (see Note 2 “Voluntary Reorganization Under Chapter 11 and U.K. Administration”) certain of the liabilities at ~~March~~June 3130, ~~2006~~2007, as shown below, were liabilities subject to compromise as of the Petition date:

	Parent		GuarantorSubsidiaries		Non –-GuarantorSubsidiaries		Consolidated
	(Millions of Dollars)
Debt	$	43,~~050~~723.19	$	0.2	$	—	$	43,~~050~~724.31
Asbestos liabilities		1.45		236.3		1,~~296~~155.1		1,~~533~~392.89
Accounts payable		59.0		116.65		~~27.3~~—		~~202~~175.95
Company-obligated mandatorily redeemable preferred securities of subsidiaryholding solely convertible subordinated debentures of the Company		—		—		114.6		114.6
Company-obligated mandatorily redeemable preferred securities of subsidiary holding solely convertible subordinated debentures of the Company		—		—		74.3		74.3
Interest payable		4344.80		0.2		—		44.02
Environmental liabilities		27.10		—		—		27.10
Other accrued liabilities		1013.87		0.1		103.97		2117.85
	$	43,~~192~~869.21	$	353.43	$	1,~~448~~233.91	$	5,~~994~~455.5

3336

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Three Months Ended ~~March~~June 3130, ~~2006~~2007

	Unconsolidated									Eliminations			Consolidated
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			~~Eliminations~~			~~Consolidated~~
	(Millions of Dollars)
Net sales	$	~~301~~310.97		$	~~431~~417.29		$	1,~~305~~482.74		$	(~~438~~447.56	)	$	1,~~600~~763.34
Cost of products sold		~~258~~254.07			~~333~~317.49			1,~~162~~316.40			(~~438~~447.56	)		1,~~315~~441.30
Gross margin		4356.90			97100.80			~~143~~166.34			—			~~285~~322.04
Selling, general and administrative expenses		7361.63			5354.98			~~100~~96.06			—			~~227~~212.57
Adjustment of assets to fair value		~~8.4~~—			~~0.2~~—			113.52			—			203.12
Interest expense (income), net		47.0			—			(8.0	)		—			39.0
Interest expense, net		48.4			—			3.5			—			51.9
Chapter 11 and Administration related reorganization expenses		21.1			—			—			—			21.1
Chapter 11 and U.K. Administration related reorganization expenses		27.6			—			—			—			27.6
Equity earnings of unconsolidated affiliates		—			(1.6	)		(7.8	)		—			(9.4	)
Equity earnings (loss) of unconsolidated affiliates		—			(0.8	)		(9.3	)		—			(10.1	)
Restructuring expense, net		32.35			0.1.9			229.41			—			2513.85
Other (income) expense, net		(25.67	)		(3212.05	)		3416.37			—			(01.35	)
Earnings (loss) before income taxes and equityearnings (loss) of subsidiaries		(106.9	)		77.2			(9.1	)		—			(38.8	)
Earnings (loss) before income taxes and equity earnings (loss) of subsidiaries		(78.1	)		56.6			46.6			—			25.1
Income tax expense		1.0.5			~~1.1~~—			2720.57			—			2921.62
Earnings (loss) before equity earnings (loss) of subsidiaries		(~~107~~78.96	)		7656.16			~~(36~~25.69	)		—			~~(68~~3.49	)
Equity earnings (loss) of subsidiaries		3982.5			1341.52			—			(53123.07	)		—
Net earnings (loss)	$	~~(68~~3.49	)	$	8997.68		$	~~(36~~25.69	)	$	(53123.07	)	$	~~(68~~3.49	)

3437

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

~~Three~~Six Months Ended ~~March~~June 3130, ~~2005~~2007

	Unconsolidated									Eliminations			Consolidated
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			~~Eliminations~~			~~Consolidated~~
	(Millions of Dollars)
Net sales	$	~~310~~596.96		$	~~433~~832.93		$	12,~~356~~951.51		$	(~~468~~900.1	)	$	13,~~633~~479.29
Cost of products sold		~~285~~506.03			~~333~~637.10			12,~~208~~606.35			(~~468~~900.1	)		12,~~358~~849.37
Gross margin		2590.93			~~100~~195.83			~~148~~344.26			—			~~274~~630.92
Selling, general and administrative expenses		73122.52			63110.10			~~113~~187.14			—			~~249~~419.76
Adjustment of assets to fair value		—			~~0.5~~—			23.5			—			3.05
Interest expense (income), net		32.5			—			(3.7	)		—			28.8
Interest expense, net		96.4			—			5.5			—			101.9
Chapter 11 and Administration relatedreorganization expenses		30.0			—			—			—			30.0
Chapter 11 and U.K. Administration related reorganization expenses		41.2			—			—			—			41.2
Equity earnings of unconsolidated affiliates		—			(1.5	)		(7.8	)		—			(9.3	)
Equity earnings (loss) of unconsolidated affiliates		—			(2.1	)		(15.9	)		—			(18.0	)
Restructuring expense, net		07.42			13.19			118.35			—			229.86
Other (income) expense, net		(1624.16	)		(3533.42	)		4349.15			—			(8.43	)
Earnings (loss) before income taxes and equityearnings (loss) of subsidiaries		(94.4	)		73.0			(0.3	)		—			(21.7	)
Earnings (loss) before income taxes and equity earnings (loss) of subsidiaries		(152.1	)		116.7			96.1			—			60.7
Income tax expense		14.23			~~1.1~~—			2447.39			—			2652.62
Earnings (loss) before equity earnings (loss) ofsubsidiaries		(95.6	)		71.9			(24.6	)		—			(48.3	)
Earnings (loss) before equity earnings (loss) of subsidiaries		(156.4	)		116.7			48.2			—			8.5
Equity earnings (loss) of subsidiaries		47164.39			24130.8			—			(72295.17	)		—
Net earnings (loss)	$	~~(48~~8.35	)	$	96247.75		$	~~(24~~48.62	)	$	(72295.17	)	$	~~(48~~8.35	)

3538

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Three Months Ended June 30, 2006


	Unconsolidated									Eliminations			Consolidated
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
	(Millions of Dollars)

Net sales	$	304.7		$	419.4		$	1,362.1		$	(454.6	)	$	1,631.6
Cost of products sold		242.8			322.9			1,216.3			(454.6	)		1,327.4


Gross margin		61.9			96.5			145.8			—			304.2

Selling, general and administrative expenses		71.3			52.8			94.3			—			218.4
Adjustment of assets to fair value		0.8			0.3			—			—			1.1
Interest expense (income), net		51.3			—			(7.0	)		—			44.3
Chapter 11 and U.K. Administration related reorganization expenses		20.8			—			—			—			20.8
Equity earnings (loss) of unconsolidated affiliates		0.1			(1.4	)		(6.4	)		—			(7.7	)
Restructuring expense, net		5.3			—			11.2			—			16.5
Other (income) expense, net		(13.7	)		(33.8	)		46.5			—			(1.0	)


Earnings (loss) before income taxes and equity earnings (loss) of subsidiaries		(74.0	)		78.6			7.2			—			11.8
Income tax expense		1.0			1.1			26.5			—			28.6


Earnings (loss) before equity earnings (loss) of subsidiaries		(75.0	)		77.5			(19.3	)		—			(16.8	)
Equity earnings (loss) of subsidiaries		58.2			(21.9	)		—			(36.3	)		—


Net earnings (loss)	$	(16.8	)	$	55.6		$	(19.3	)	$	(36.3	)	$	(16.8	)

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Operations

Six Months Ended June 30, 2006


	Unconsolidated									Eliminations			Consolidated
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
	(Millions of Dollars)

Net sales	$	606.6		$	850.6		$	2,667.8		$	(893.1	)	$	3,231.9
Cost of products sold		500.8			656.3			2,378.7			(893.1	)		2,642.7


Gross margin		105.8			194.3			289.1			—			589.2

Selling, general and administrative expenses		144.9			106.7			194.3			—			445.9
Adjustment of assets to fair value		9.2			0.5			11.5			—			21.2
Interest expense (income), net		98.3			—			(15.0	)		—			83.3
Chapter 11 and U.K. Administration related reorganization expenses		41.9			—			—			—			41.9
Equity earnings (loss) of unconsolidated affiliates		0.1			(3.0	)		(14.2	)		—			(17.1	)
Restructuring expense, net		9.7			0.1			32.5			—			42.3
Other (income) expense, net		(16.3	)		(65.8	)		80.8			—			(1.3	)


Earnings (loss) before income taxes and equity earnings (loss) of subsidiaries		(182.0	)		155.8			(0.8	)		—			(27.0	)
Income tax expense		2.0			2.2			54.0			—			58.2


Earnings (loss) before equity earnings (loss) of subsidiaries		(184.0	)		153.6			(54.8	)		—			(85.2	)
Equity earnings (loss) of subsidiaries		98.8			(8.4	)		—			(90.4	)		—


Net earnings (loss)	$	(85.2	)	$	145.2		$	(54.8	)	$	(90.4	)	$	(85.2	)

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Balance Sheet

~~March~~June 3130, ~~2006~~2007

	Unconsolidated							Eliminations			Consolidated
	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		~~Eliminations~~			~~Consolidated~~
	(Millions of Dollars)
ASSETS
Current Assets:
Current assets:
Cash and equivalents	$	1526.93		$	—	$	~~379~~351.78	$	—		$	~~395~~378.61
Restricted cash		699.9			—		—		—			699.9
Accounts receivable, net		238.7			318.3		610.7		—			1,167.7
Accounts receivable, net		201.3			323.1		571.0		—			1,095.4
Inventories, net		90.3			276.1		539.4		—			905.8
Inventories, net		95.6			302.0		441.7		—			839.3
Prepaid expenses and other current assets		54.9			38.4		198.1					291.4
Prepaid expenses		47.2			31.1		127.7		—			206.0
Total current assets		410.2			632.8		1,700.0		—			2,743.0
Total Current Assets		1,059.9			656.2		1,520.1		—			3,236.2
Property, plant and equipment, net		213.9			461.4		1,380.2		—			2,055.5
Property, plant and equipment, net		234.3			511.7		1,194.7		—			1,940.7
Goodwill and indefinite-lived intangible assets		482.3			577.8		159.6		—			1,219.7
Goodwill and indefinite-lived intangible assets		482.3			577.5		129.5		—			1,189.3
Definite-lived intangible assets, net		14.2			70.8		169.1		—			254.1
Definite-lived intangible assets, net		56.1			76.6		153.9		—			286.6
Investment in subsidiaries		7,275.4			3,398.9		—		(10,674.3	)		—
Investment in subsidiaries		6,495.8			3,042.7		—		(9,538.5	)		—
Intercompany accounts, net		(4,317.4	)		3,341.3		976.1		—			—
Intercompany accounts, net		(5,061.4	)		3,596.7		1,464.7		—			—
Asbestos-related insurance recoverable		—			159.5		714.2		—			873.7
Asbestos-related insurance recoverable		—			160.4		619.5		—			779.9
Prepaid pension costs and other noncurrent assets		48.0			19.0		195.5		—			262.5
Prepaid pension costs		2.8			—		76.4		—			79.2
	$	4,126.6		$	8,661.5	$	5,294.7	$	(10,674.3	)	$	7,408.5
Other noncurrent assets		43.7			19.0		191.7		—			254.4
	$	3,313.5		$	8,640.8	$	5,350.5	$	(9,538.5	)	$	7,766.3
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Current liabilities:
Short-term debt, including current portion oflong-term debt	$	542.4		$	—	$	35.6	$	—		$	578.0
Short-term debt, including current portion of long-term debt	$	693.0		$	—	$	127.2	$	—		$	820.2
Accounts payable		8898.25			~~103~~121.38		~~273~~398.41		—			~~464~~618.94
Accrued liabilities		~~101~~125.59			5963.28		~~402~~324.75		—			~~563~~514.42
Other current liabilities		35.4			10.2		78.7		—			124.3
Current portion of postemployment benefit liability		52.6			—		14.4		—			67.0
Total Current Liabilities		767.5			172.7		790.4		—			1,730.6
Other current liabilities		58.4			13.0		75.7		—			147.1
Liabilities subject to compromise		4,192.2			353.4		1,448.9		—			5,994.5
Total current liabilities		1,028.4			198.6		939.9		—			2,166.9
Long-term debt		—			—		7.6		—			7.6
Liabilities subject to compromise		3,869.1			353.3		1,233.1		—			5,455.5
Postemployment benefits		717.3			—		1,527.1		—			2,244.4
Long-term debt		—			—		22.8		—			22.8
Long-term portion of deferred income taxes		—			—		65.6		—			65.6
Postemployment benefits		734.5			—		360.1		—			1,094.6
Other accrued liabilities		105.0			0.4		80.6		—			186.0
Long-term portion of deferred income taxes		—			—		84.2		—			84.2
Minority interest in consolidated subsidiaries		25.8			6.1		—		—			31.9
Other accrued liabilities		69.7			7.6		82.3		—			159.6
Shareholders’ Equity (Deficit)		(2,494.3	)		8,108.2		1,430.3		(9,538.5	)		(2,494.3	)
Minority interest in consolidated subsidiaries		40.1			—		—		—			40.1
	$	3,315.5		$	8,640.8	$	5,350.5	$	(9,538.5	)	$	7,766.3
Shareholders’ equity (deficit)		(1,615.2	)		8,102.0		2,572.3		(10,674.3	)		(1,615.2	)
	$	4,126.6		$	8,661.5	$	5,294.7	$	(10,674.3	)	$	7,408.5

3641

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Consolidating Condensed Balance Sheet

December 31, ~~2005~~2006

	Unconsolidated									Eliminations				Consolidated
	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			~~Eliminations~~				~~Consolidated~~
ASSETS
	(Millions of Dollars)
Current Assets:
ASSETS
Cash and equivalents	$	4.5		$	—	$	382.7		$	—			$	387.2
Current assets:
Restricted cash		700.9			—		—			—				700.9
Cash and equivalents	$	9.2		$	—	$	350.1			$	—			$	359.3
Accounts receivable, net		~~203~~188.9			~~302~~268.52		~~504~~535.75			—	—			~~1,011.1~~	992.6
Inventories, net		9498.86			~~294~~282.35		~~419~~511.05			—	—			~~808.1~~	892.6
Prepaid expenses		47.2			31.0		142.5							220.7
Prepaid expenses and other current assets		50.6			33.3		164.3								248.2
Total Current Assets		1,051.3			627.8		1,448.9			—				3,128.0
Total current assets		347.3			584.0		1,561.4				—				2,492.7
Property, plant and equipment, net		~~253~~227.41			~~522~~474.31		1,~~227~~377.4			—	—			~~2,003.1~~	2,078.6
Goodwill and indefinite-lived intangible assets		482.3			577.7		~~129~~145.53			—	—			~~1,189.5~~	1,205.3
Definite-lived intangible assets, net		5615.85			7773.81		~~155~~165.07			—	—			~~289.6~~	254.3
Investment in subsidiaries		67,~~398~~264.68			3,~~035~~006.14		—			~~(9,433.7~~	)(10,271.2	)		—	—
Intercompany accounts, net		(4,~~901~~369.74	)		3,~~488~~471.0		~~1,413~~898.74			—	—			—	—
Asbestos-related insurance recoverable		—			~~162~~160.02		~~615~~698.48			—	—			~~777.4~~	859.0
Prepaid pension costs		2.9			—		109.3			—				112.2
Prepaid pension costs and other noncurrent assets		48.0			19.3		221.9				—				289.2
Other noncurrent assets		46.3			19.5		169.5			—				235.3
	$	4,015.6		$	8,365.8	$	5,068.9			$	(10,271.2	)		$	7,179.1
	$	3,389.9		$	8,510.2	$	5,268.7		$	(9,433.7	)		$	7,735.1
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Current Liabilities:
Short-term debt, including current portion of long-term debt	$	371.1		$	—	$	111.0			$	—			$	482.1
Short-term debt, including current portion oflong-term debt	$	570.7		$	—	$	36.0		$	—			$	606.7
Accounts payable		78.8			82.4		326.8				—				488.0
Accounts payable		66.0			83.8		255.2			—				405.0
Accrued liabilities		103.1			59.0		272.9				—				435.0
Accrued liabilities		106.9			58.8		370.3			—				536.0
Current portion of postemployment benefit liability		52.6			—		15.3				—				67.9
Other current liabilities		3949.73			10.63		66122.61			—	—			~~116.9~~	181.7
Total Current Liabilities		783.3			153.2		728.1			—				1,664.6
Total current liabilities		654.9			151.7		848.1				—				1,654.7
Liabilities subject to compromise		4,~~188~~198.32			353.2		1,~~447~~262.30			—	—			~~5,988.8~~	5,813.4
Long-term debt		—			—		826.17			—	—			~~8.1~~	26.7
Postemployment benefits		~~725~~769.30			—0.1		~~1,505~~342.50			—	—			~~2,230.8~~	1,111.1
Long-term portion of deferred income taxes		—			—		6281.48			—	—			~~62.4~~	81.8
Other accrued liabilities		~~100~~92.24			~~0.3~~—		8092.97			—	—			~~181.4~~	185.1
Minority interest in consolidated subsidiaries		2549.80			6.23		—(1.1	)		—	—			~~32.0~~	54.2
Shareholders’ Equity (Deficit)		(2,433.0	)		7,997.3		1,436.4			(9,433.7	)			(2,433.0	)
Shareholders’ equity (deficit)		(1,747.9	)		7,854.5		2,416.7				(10,271.2	)			(1,747.9	)
	$	34,~~389~~015.96		$	8,~~510~~365.28	$	5,~~268~~068.79		$	~~(9,433.7~~$	)(10,271.2	)	$	~~7,735.1~~$	7,179.1

3742

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Cash Flows

~~Three~~Six Months Ended ~~March~~June 3130, ~~2006~~2007

	(Unconsolidated)									Eliminations		Consolidated
	Parent			GuarantorSubsidiaries			Non-GuarantorSubsidiaries			~~Eliminations~~		~~Consolidated~~
	(Millions of Dollars)
Net Cash Provided From (Used By)Operating Activities	$	(30.4	)	$	97.1		$	(13.1	)	$	—	$	53.6
Net Cash Provided From (Used By) Operating Activities	$	(36.2	)	$	148.4		$	73.7		$	—	$	185.9
Expenditures for property, plant and equipment		(614.81	)		(1516.34	)		(7101.5	)		—		(29132.60	)
Net proceeds from sale of property, plant andequipment		—			—			2.7			—		2.7
Net proceeds from sale of property, plant and equipment		1.2			—			16.9			—		18.1
Net proceeds from sale of business		—			—			4.0			—		4.0
Net proceeds from sale of investment		13.8			—			—			—		13.8
Net Cash Used By Investing Activities		(6.8	)		(15.3	)		(0.8	)		—		(22.9	)
Payments to acquire minority interests		(1.7	)		—			(5.1	)		—		(6.8	)
Proceeds from borrowings on DIP credit facility		124.7			—			—			—		124.7
Net Cash Used By Investing Activities		(0.8	)		(16.4	)		(89.7	)		—		(106.9	)
Principal payments on DIP credit facility		(153.0	)		—			—			—		(153.0	)
Proceeds from borrowings on DIP credit facility		550.0			—			—			—		550.0
Decrease in short-term debt		—			—			(0.7	)		—		(0.7	)
Principal payments on DIP credit facility		(228.1	)		—			—			—		(228.1	)
Decrease in long-term debt		—			—			(0.6	)		—		(0.6	)
Increase in short-term debt		—			—			8.7			—		8.7
Net change in restricted cash		(1.0	)		—			—			—		(1.0	)
Decrease in long-term debt		—			—			(5.8	)		—		(5.8	)
Change in intercompany accounts		69.6			(81.8	)		12.2			—		—
Payments on factoring arrangements		—			—			(58.9	)		—		(58.9	)
Net Cash Provided From (Used By) FinancingActivities		40.3			(81.8	)		10.9			—		(30.6	)
Repayment of pre-petition Tranche C debt		(330.4	)		—			—			—		(330.4	)
Effect of foreign currency exchange ratefluctuations on cash and equivalents		8.3			—			—			—		8.3
Debt refinance fees		(0.3	)		—			—			—		(0.3	)
Increase (decrease) in cash and equivalents	$	11.4		$	—		$	(3.0	)	$	—	$	8.4
Change in intercompany accounts		58.3			(132.0	)		73.7			—		—
Net Cash Provided From (Used By) Financing Activities		49.5			(132.0	)		17.7			—		(64.8	)
Effect of foreign currency exchange rate fluctuations on cash		4.6			—			—			—		4.6
Increase in cash and equivalents	$	17.1		$	—		$	1.7		$	—	$	18.8

3843

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Federal-Mogul Corporation

Notes to Condensed Consolidated Financial Statements

Unaudited Consolidating Condensed Statement of Cash Flows

~~Three~~Six Months Ended ~~March~~June 3130, ~~2005~~2006

	(Unconsolidated)									Eliminations		Consolidated
	Parent			GuarantorSubsidiaries			Non-GuarantorSubsidiaries			~~Eliminations~~		~~Consolidated~~
	(Millions of Dollars)
Net Cash Provided From (Used By)Operating Activities	$	(23.2	)	$	141.2		$	(129.0	)	$	—	$	(11.0	)
Net Cash Provided From (Used By) Operating Activities	$	34.9		$	122.9		$	(23.1	)	$	—	$	134.7
Expenditures for property, plant and equipment		(6.8	)		(915.03	)		(2358.85	)		—		(3980.6	)
Net proceeds from sale of property, plant andequipment		—			—			5.3			—		5.3
Net proceeds from sale of property, plant and equipment		—			—			2.7			—		2.7
Net Cash Used By Investing Activities		(6.8	)		(9.0	)		(18.5	)		—		(34.3	)
Net proceeds from sale of business		—			—			4.0			—		4.0
Proceeds from borrowings on DIP credit facility		95.8			—			—			—		95.8
Payments to acquire business		(30.5	)		—			—			—		(30.5	)
Principal payments on DIP credit facility		(20.0	)		—			—			—		(20.0	)
Net Cash Used By Investing Activities		(37.3	)		(15.3	)		(51.8	)		—		(104.4	)
Increase in short-term debt		—			—			3.9			—		3.9
Proceeds from borrowings on DIP credit facility		164.3			—			—			—		164.3
Decrease in long-term debt		—			—			(0.9	)		—		(0.9	)
Principal payments on DIP credit facility		(198.0	)		—			—			—		(198.0	)
Change in intercompany accounts		(36.9	)		(132.2	)		169.1			—		—
Increase in short-term debt		—			—			0.3			—		0.3
Net Cash Provided From (Used By) FinancingActivities		38.9			(132.2	)		172.1			—		78.8
Decrease in long-term debt		—			—			(1.0	)		—		(1.0	)
Effect of foreign currency exchange ratefluctuations on cash and equivalents		(13.7	)		—			—			—		(13.7	)
Net change in restricted cash		(26.9	)		—			—			—		(26.9	)
Increase (decrease) in cash and equivalents	$	(4.8	)	$	—		$	24.6		$	—	$	19.8
Change in intercompany accounts		36.0			(107.2	)		71.2			—		—
Net Cash Provided From (Used By) Financing Activities		(24.6	)		(107.2	)		70.5			—		(61.3	)
Effect of foreign currency exchange rate fluctuations on cash		47.9			—			—			—		47.9
Net increase (decrease) in cash and equivalents	$	20.9		$	0.4		$	(4.4	)	$	—	$	16.9

3944

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

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

Federal-Mogul offers its customers a diverse array of market-leading products for ~~original equipment (“~~OE”) and ~~parts replacement (“~~aftermarket”) applications, including engine bearings, pistons, piston pins, rings, cylinder liners, valve train and transmission products, connecting rods, sealing systems, element resistant systems protection sleeving products, electrical connectors and sockets, disc pads and brake shoes, and ignition, lighting, fuel, wiper and chassis products. The Company’s principal customers include many of the world’s original equipment manufacturers (“OEM”) of vehicles and industrial products and aftermarket retailers and wholesalers. The Company seeks to participate in both of these markets by leveraging its original equipment product engineering and development capability, manufacturing know-how, and expertise in managing a broad and deep range of replacement parts to service the aftermarket. The Company believes that it is uniquely positioned to effectively manage the life cycle of a broad range of products to a diverse customer base. The Company’s principal customers include many of the world’s original equipment manufacturers (“OEM”) of vehicles and industrial products and aftermarket retailers and wholesalers.

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

For a more detailed description of the Company’s business, products, industry, operating strategy and associated risks, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2005~~2006.

Voluntary reorganization under Chapter 11 and U.K. Administration

OnThe ~~October 1, 2001 (the “Petition Date”), the~~ Company and all of its wholly-owned United States subsidiaries filed voluntary petitions ~~for~~on ~~reorganization~~October 1, ~~(the~~2001 ~~“U.S.~~for ~~Restructuring”)~~reorganization under Chapter 11 of the United States Bankruptcy Code ~~(the “Bankruptcy Code”)~~ in the ~~United States~~ Bankruptcy Court ~~for the District of Delaware (the “Bankruptcy Court”)~~. Also on October 1, 2001, certain of the Company’s United Kingdom subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court, and filed petitions for Administration ~~(the “U.K. Restructuring”)~~ under the United Kingdom Insolvency Act of 1986 ~~(the “Act”)~~ in the High Court. ofThe ~~Justice, Chancery division in London, England (the “~~High Court~~”).~~, ~~The Company and its U.S. and U.K. subsidiaries included~~ in ~~the~~November ~~U.S.~~2006, ~~Restructuring~~approved or the ~~U.K.~~discharge ~~Restructuring~~of ~~are herein referred to as~~ the ~~“Debtors”.~~Administration ~~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~~those ~~of joint administration as In re: Federal-Mogul Global Inc., T&N Limited, et. al (Case No. 01-10578(JKF)). Subsidiaries outside of the aforementioned~~ U.~~S. and U.~~K. subsidiaries ~~are~~that ~~not~~entered ~~party~~into toCompany ~~any~~Voluntary ~~insolvency proceeding and, therefore, are not currently provided protection from creditors by any insolvency court and are operating in the normal course~~Arrangements.

40The Company and its U.S. and U.K. subsidiaries included in the U.S. Restructuring are herein referred to as the “Debtors.” 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(JKF)). Subsidiaries outside of the aforementioned U.S. and U.K. subsidiaries were or are not party to any insolvency proceeding and, therefore, are not currently provided protection from creditors by any insolvency court and are operating in the normal course.

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

Consequences of the Restructuring Proceedings

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

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

OnSolicitation ~~June 4,~~packages ~~2004,~~containing the Third Amended ~~Joint~~ Plan of Reorganization and Disclosure Statement (the “Third Amended Plan”), ~~for~~various supporting documents and a ballot, if appropriate, were mailed on July 12, 2004 to known creditors of the Company and ~~the~~to ~~other~~holders ~~U.S.~~of common and Upreferred stock interests in the Company.K. ~~Debtors~~The ~~was~~overwhelming ~~filed~~majority ~~with~~of the ~~Bankruptcy~~classes ~~Court.~~of ~~The~~claims and interests voted to accept the Third Amended Plan. ~~was~~For ~~jointly~~the ~~proposed~~few byclasses of claims that voted to reject the ~~Company~~Third Amended Plan, the Unsecured Creditors Committee, the Asbestos Claimants Committee, the Future Asbestos Claimants Representative, the Agent for the ~~Prepetition~~Pre-petition Bank Lenders and the Equity Security Holders Committee (collectively referred to as the “Plan Proponents”). ~~Also~~intended ~~on June 4, 2004, a Disclosure Statement~~ to beeither ~~used~~amend inthe ~~soliciting votes~~Third toAmended ~~accept or reject the~~ Plan ~~(the~~so ~~“Disclosure~~as ~~Statement”)~~to ~~was~~obtain ~~approved~~such byclasses’ ~~the~~accepting ~~Bankruptcy~~votes ~~Court~~or ~~and~~seek ~~a December 2004 hearing was scheduled~~ to ~~determine~~confirm ~~whether~~ the ~~Bankruptcy~~Third ~~Court~~Amended ~~should approve the~~ Plan. Onover ~~December 7, 2004,~~ the ~~Bankruptcy~~ ~~Court~~objection ~~delayed~~of ~~this~~such ~~confirmation hearing pending a hearing to estimate asbestos personal injury claims against the U~~classes.K. ~~Debtors.~~

The ~~Plan~~Fourth ~~provides~~Amended ~~that~~Joint ~~asbestos~~Plan ~~personal~~of ~~injury~~Reorganization ~~claimants,~~(the ~~both~~“Plan”) ~~present~~for ~~and~~the ~~future,~~Company ~~will~~and bethe ~~permanently~~other ~~channeled~~U.S. toand aU.K. ~~trust~~Debtors orwas ~~series~~filed ofwith ~~trusts~~the ~~established~~Bankruptcy ~~pursuant~~Court ~~to Section~~on November ~~524(g)~~21, of2006. ~~the~~The ~~Bankruptcy~~Plan ~~Code,~~was ~~thereby~~jointly ~~protecting~~proposed by the Company and ~~its~~the ~~affiliates~~Plan inProponents. ~~the~~On ~~Chapter~~February 2, 112007, ~~Cases~~the ~~from~~supplemental ~~existing~~Disclosure ~~and~~Statement ~~future~~was ~~asbestos~~approved ~~liability.~~by ~~Although~~the ~~certain~~Bankruptcy ~~issues~~Court ~~remain~~ to be ~~resolved,~~used ~~the~~in ~~Plan~~soliciting ~~provides~~votes ~~that~~to ~~all~~accept ~~currently~~or ~~outstanding~~reject ~~stock of~~ the Plan ~~Company~~from ~~will~~those beclasses ~~cancelled, 50.1%~~ of ~~newly issued~~creditors ~~common~~whose ~~stock~~treatment ofunder ~~reorganized~~the ~~Federal-Mogul~~Plan ~~will~~has bechanged ~~distributed~~since to the ~~asbestos~~solicitation ~~trust,~~under ~~and 49.9% of~~ the ~~newly~~Third ~~issued~~Amended ~~common~~Plan. ~~stock~~Voting ~~will~~on bethe ~~distributed~~Plan ~~pro~~concluded ~~rata~~in toMay ~~the~~2007, ~~noteholders.~~with ~~The~~all ~~holders~~classes of ~~currently~~creditors ~~outstanding common~~ and ~~preferred~~interest ~~stock of~~holders ~~the~~entitled ~~Company~~to ~~will~~vote ~~receive~~on ~~warrants~~the Plan ~~that~~voting ~~may be used~~ to ~~purchase~~accept ~~shares~~the ~~of reorganized Federal-Mogul at a predetermined exercise price~~Plan.

~~Unsecured~~The ~~creditors~~confirmation hearing relating to the Plan began on June 18, ~~including~~2007. ~~trade~~Although all major constituencies in the Chapter 11 Cases support confirmation of the Plan, and the Plan has been accepted by all classes of creditors and interest holders, certain parties have objected to confirmation of the ~~U.S.~~Plan, ~~Debtors~~and ~~are~~those ~~projected~~objections towere ~~receive~~addressed ~~cash~~as ~~distributions~~part ~~under~~of the confirmation ~~Plan~~hearing. ~~equal~~After tosix ~~35%~~days of ~~their~~hearings ~~allowed~~before ~~claims~~the Bankruptcy Court, ~~payable~~the presentation of evidence in ~~three~~connection ~~annual~~with ~~installments~~the confirmation hearing ended on July 10, ~~provided~~2007. ~~that~~The ~~the~~Bankruptcy ~~aggregate~~Court ~~payout~~has ofasked for additional briefing relating to ~~all~~the ~~allowed~~confirmation ~~unsecured~~hearing ~~claims~~to ~~against~~be submitted by August 30, 2007, and has scheduled closing arguments for the Uconfirmation hearing on October 1, 2007.S. ~~Debtors~~While ~~does~~the ~~not~~outcome ~~exceed~~of ~~$258~~the ~~million.~~confirmation ~~Any~~hearing ~~excess~~and ~~above~~the ~~this~~timetable ~~amount~~for ~~could~~confirmation ~~result~~of inthe aPlan resides ~~reduction~~with inthe Bankruptcy Court, the ~~percentage~~Company ~~distribution~~anticipates that the ~~unsecured~~Plan ~~creditors~~will ofbe ~~the~~confirmed ~~U.S.~~reasonably ~~Debtors~~promptly ~~ultimately~~after ~~receive~~completion of the closing arguments.

OnThe ~~July 12,~~Plan ~~2004,~~provides ~~solicitation~~that ~~packages~~asbestos ~~containing~~personal ~~the~~injury ~~Plan~~claimants, ~~and~~both ~~Disclosure~~present ~~Statement~~and future, ~~various~~will ~~supporting~~be ~~documents~~permanently ~~and~~channeled to a ~~ballot,~~trust ~~if appropriate,~~or ~~were~~series ~~mailed~~of totrusts ~~known~~established ~~creditors~~pursuant to Section 524(g) of the ~~Company~~Bankruptcy ~~and~~Code, ~~holders~~thereby ofprotecting ~~common~~the Company and ~~preferred~~its ~~stock~~affiliates ~~interests~~ in the ~~Company.~~Chapter ~~All~~11 ~~votes~~Cases ~~were~~from ~~due~~existing byand ~~the~~future ~~close~~asbestos ~~of business on November 3, 2004~~liability. The ~~overwhelming~~Plan ~~majority~~provides ofthat ~~the~~all ~~classes~~currently ofoutstanding ~~claims and~~stock ~~interests~~of ~~have~~the ~~voted~~Company towill ~~accept~~be ~~the~~cancelled, ~~Plan~~50.1% ~~For~~of ~~the~~newly ~~few~~issued ~~classes~~common stock of ~~claims~~reorganized ~~that~~Federal-Mogul will ~~voted~~be distributed to ~~reject~~ the ~~Plan~~asbestos trust, ~~the~~and ~~Plan~~49.9% ~~Proponents~~of ~~intend~~the tonewly ~~either~~issued ~~amend~~common ~~the~~stock ~~Plan~~of soreorganized asFederal-Mogul towill ~~obtain~~be ~~such~~distributed ~~classes’~~pro ~~accepting~~rata ~~votes~~to orthe ~~seek~~noteholders toand ~~confirm~~holders ~~the~~of ~~Plan~~unsecured ~~over~~claims against the ~~objection~~ ofU.S. ~~such~~Debtors ~~classes.~~that elected

4146

On to ~~February 2,~~have ~~2005,~~their ~~the~~claims ~~Company~~satisfied ~~entered~~by ~~into~~receiving anshares ~~employment~~of ~~agreement~~common ~~with~~stock ~~José~~of ~~Maria~~reorganized ~~Alapont under~~Federal-Mogul ~~which~~rather Mrthan cash. ~~Alapont~~ ~~became~~The ~~the~~holders ~~Company’s~~of ~~president~~currently outstanding common and ~~chief~~preferred ~~executive~~stock ~~officer. As part~~ of ~~this~~the ~~employment agreement~~Company, at the ~~Plan~~time ~~Proponents~~those ~~have~~shares ~~agreed~~are tocancelled, ~~amend~~will ~~the~~receive ~~Plan~~warrants tothat ~~provide~~may ~~Mr. Alapont~~be ~~with~~used ~~non-qualified~~to ~~stock~~purchase ~~options~~shares ~~to purchase~~of common stock of ~~the~~ reorganized ~~Company~~Federal-Mogul at a predetermined exercise price. ~~Significant~~These ~~terms~~warrants ~~and~~will ~~conditions~~only be of value if the ~~contemplated~~market ~~stock~~price ~~options~~of ~~are~~the ~~outlined~~shares inof ~~the~~common ~~employment~~stock ~~agreement~~of ~~previously~~reorganized ~~filed~~Federal-Mogul ~~with~~exceeds the ~~SEC~~predetermined onexercise ~~Form~~price 8during the 7-Kyear ~~dated~~term ~~February 2,~~during ~~2005~~which the warrants will be saleable or exercisable.

OnThe ~~June 14,~~Plan ~~2005,~~also ~~the~~provides ~~District~~that: ~~Court~~i) ~~overseeing~~ the ~~Chapter~~U.S. 11asbestos ~~Cases~~trust ~~commenced~~will ~~its~~make ~~hearing~~a payment to ~~estimate~~ the ~~aggregate~~reorganized ~~present~~Company ~~value~~(or ofpay ~~pending~~a ~~and future~~portion ~~asbestos~~of ~~personal~~the ~~injury~~common ~~and~~stock ~~wrongful~~of ~~death~~reorganized ~~claims~~Federal-Mogul to ~~against~~be issued to the U.KS. ~~Debtors.~~asbestos ~~Closing~~trust ~~arguments~~in ~~were~~lieu ~~completed~~thereof) onfor ~~July 14,~~the ~~2005,~~agreed ~~after~~amounts ~~which~~that ~~the~~will ~~District~~be ~~Court~~used ~~estimated~~by the ~~total~~U.K. ~~liability~~Administrators ~~for~~to ~~such~~provide ~~claims~~distributions aton $9account ~~billion~~of inU.K. ~~the~~asbestos ~~United States~~personal ~~and~~injury ~~$500~~claims; ~~million~~ii) in the ~~United Kingdom~~U.S. ~~The~~asbestos ~~objective~~trust ofwill ~~the~~provide ~~estimation~~an option ~~hearing was~~ to ~~determine~~ an ~~aggregate~~affiliate ~~claims~~of ~~value~~Mr. Carl Icahn for ~~purposes~~the purchase of ~~formulating~~the ~~and~~remaining ~~confirming~~shares ~~the~~of ~~reorganization~~common ~~plan~~stock ~~and~~of ~~not~~reorganized toFederal-Mogul ~~determine~~held ~~the~~by ~~liability~~such ~~for~~trust; ~~U.S.~~and ~~GAAP purposes.~~(iii) if ~~The~~such ~~Company~~affiliate ~~has~~of ~~evaluated~~Mr. Carl ~~its~~Icahn ~~currently~~does ~~recorded~~not ~~liability~~exercise ~~for~~ such ~~claims and~~option, ~~given~~an affiliate ~~the~~of ~~settlement~~Mr. Carl ~~terms~~Icahn ~~and~~will ~~value~~provide ascertain ~~proposed~~financing into the ~~Plan,~~U.S. ~~determined~~asbestos ~~that the amount recorded is appropriate~~trust.

OnUnsecured ~~September 26~~creditors, ~~2005,~~including ~~the~~trade ~~Administrators~~creditors, of the U.KS. Debtors ~~and~~have the ~~Plan~~option ~~Proponents~~to ~~entered~~either ~~into~~receive anshares ~~agreement outlining the terms and conditions~~ of ~~distributions~~common tostock ~~the creditors~~ of ~~the~~reorganized ~~U.K.~~Federal-Mogul ~~Debtors~~or ~~(“U.K.~~receive ~~Settlement~~cash ~~Agreement”).~~distributions ~~Prior~~under ~~to this agreement,~~ the ~~Company~~Plan ~~had~~equal ~~agreed~~ to ~~sell~~35% ~~certain~~of ~~long-term~~their ~~intercompany~~allowed ~~notes~~claims, ~~held~~payable byin ~~T&N~~three ~~Limited~~annual ~~(“Loan~~installments, ~~Notes”)~~provided tothat ~~Deutsche Bank~~the asaggregate apayout of ~~means~~all toallowed ~~fund~~unsecured ~~expected~~claims ~~distributions~~against ~~to creditors. In December 2005, in accordance with terms of~~ the U.KS. ~~Settlement~~Debtors ~~Agreement,~~does ~~the~~not ~~Company~~exceed ~~elected~~$258 ~~to retain the Loan Notes~~million. ~~Concurrently,~~Any ~~the~~excess ~~Loan~~above ~~Notes~~this ~~were~~amount ~~transferred~~could ~~from~~result ~~the~~in ~~U.K. Debtors to~~ a ~~combination~~reduction ofin athe ~~newly~~percentage ~~created~~distribution ~~non-debtor~~that ~~wholly-owned~~the ~~subsidiary~~unsecured creditors of the ~~Company and the~~ U.S. ~~parent,~~Debtors asultimately ~~provided in the Loan Note Sale Agreement was filed with the SEC on Form 8-K on December 15, 2005~~receive.

~~Under~~The Administrators of the ~~terms~~U.K. ofDebtors and the ~~Settlement~~Plan ~~Agreement~~Proponents, ~~certain~~on ~~amounts~~September 26, 2005, entered into an agreement outlining the terms and conditions of ~~cash~~distributions ~~within~~to the creditors of the U.K. ~~Debtor~~Debtors ~~entities~~(“U.K. Settlement Agreement”). Prior to this agreement, ~~including~~the ~~cash~~Administrators ~~contributed~~had ~~related~~agreed to ~~the~~sell ~~transfer of~~certain ~~the~~long-term intercompany notes held by T&N Limited (“Loan Notes”) ~~above,~~to Deutsche isBank ~~restricted~~as a means to ~~settle~~fund ~~specifically~~expected ~~identified~~distributions ~~claims~~to ~~and~~creditors. ~~liabilities~~In accordance with terms of the U.K. ~~Debtors.~~Settlement ~~Restricted~~Agreement, ~~cash~~the atCompany ~~March 31,~~elected ~~2006~~in ~~was~~December ~~$700~~2005 ~~million.~~to Inretain ~~addition,~~the ~~remaining~~Loan ~~cash~~Notes. ofConcurrently, the Loan Notes were transferred from the U.K. ~~Debtor~~Debtors ~~entities~~to isa ~~limited~~newly ~~for~~created ~~the general~~non-debtor ~~operating~~wholly-owned ~~use~~subsidiary of ~~those~~the ~~entities,~~Company ~~amounting~~and to ~~$40~~Federal-Mogul ~~million~~Corporation, ~~and~~as ~~$42~~provided ~~million~~in atthe ~~March 31,~~Loan ~~2006~~Note ~~and~~Sale ~~December~~Agreement. A copy of the U.K. Settlement Agreement was filed with the SEC on Form 8-K on September 3130, 2005~~, respectively~~.

The company voluntary arrangements (“CVAs”) became effective on October 11, 2006, resolving claims (other than those that are to be dealt with by the Plan) against the principal U.K. ~~Settlement~~Debtors. ~~Agreement~~The ~~sets~~discharge ~~forth~~of administration orders for the ~~terms~~principal ofU.K. ~~various~~Debtors ~~amendments~~became toeffective on November 30, 2006. The CVAs divide asbestos claims against the ~~Plan~~principal U.K. Debtors into two categories: CVA Asbestos Claims and Chapter 11 Asbestos Claims. CVA Asbestos Claims are dealt with by the CVAs and it is intended that Chapter 11 Asbestos Claims will be ~~used~~dealt towith ~~reorganize~~by the UPlan.K. ~~Debtors,~~The ~~including~~CVAs acompromise ~~delineation~~and ofprotect the ~~distributions~~CVA tocompanies from the CVA Asbestos Claims. The trustees of the U.K. ~~and~~asbestos trust will pay dividends to CVA Asbestos claimants from the U.SK. ~~domiciled~~asbestos ~~creditors~~trust. AUpon ~~copy~~the effective date of the Plan, the Chapter 11 Asbestos Claims will be compromised. Accordingly, the Plan contemplates that the U.KS. ~~Settlement~~asbestos ~~Agreement~~trustees ~~was~~look ~~filed~~exclusively ~~with~~to the ~~SEC~~U.S. onasbestos ~~Form~~trust ~~8-K~~to onpay ~~September 30,~~dividends ~~2005~~to Chapter 11 Asbestos claimants.

~~Also,~~The onBankruptcy ~~September 26,~~Court ~~2005,~~may ~~the~~confirm ~~Plan Proponents~~a ~~and~~plan ~~High~~of ~~River~~reorganization ~~Limited~~only ~~Partnership~~upon ~~agreed~~making ~~to make~~ certain ~~amendments~~findings torequired by the ~~Plan~~Bankruptcy ~~whereby~~Code, i)and ~~the~~a ~~U.S.~~plan ~~asbestos~~may ~~trust~~be ~~will~~confirmed ~~make~~over athe ~~payment~~dissent toof ~~the~~non-accepting ~~reorganized~~creditors ~~Company~~and ~~(or~~equity ~~pay~~security holders aif ~~portion~~certain requirements of the ~~stock~~Bankruptcy inCode ~~reorganized~~are ~~Company~~met. toThe bepayment ~~issued~~rights toand ~~the asbestos~~other ~~trust~~entitlements inof ~~lieu~~pre-petition ~~thereof)~~creditors ~~for~~and ~~the~~equity ~~agreed~~security ~~amounts~~holders ~~that~~may ~~will~~ be ~~used~~substantially altered by ~~the~~any ~~Administrators~~plan toof ~~provide~~reorganization ~~distributions~~confirmed onin ~~account~~the Chapter 11 ~~of U~~Cases.K. ~~asbestos~~The ~~personal~~pre-petition ~~injury~~creditors ~~claims~~of ~~under~~some ~~the~~Debtors ~~terms~~may ofbe ~~the~~treated ~~U.K.~~differently ~~Settlement~~than ~~Agreement;~~those ~~ii)~~of ~~the~~other ~~U.S.~~Debtors ~~asbestos~~under ~~trust will~~the ~~provide~~proposed anPlan ~~option~~and ~~to Mr~~CVAs. ~~Carl~~ ~~Icahn~~While ~~for~~ the ~~purchase~~outcome of the ~~remaining~~confirmation ~~shares~~hearing ofand the ~~reorganized~~timetable ~~Company~~for ~~held~~confirmation byof ~~such~~the ~~trust;~~Plan reside ~~and~~with ~~(iii) if~~the ~~Mr. Carl~~Bankruptcy ~~Icahn does not exercise such option~~Court, hethe orCompany ~~one~~anticipates ofthat ~~his~~the ~~entities~~Plan will ~~provide~~be ~~certain financing~~confirmed toreasonably ~~the~~promptly ~~U.S.~~after ~~asbestos~~completion ~~trust. Terms~~ of ~~these Plan amendments were filed with~~ the ~~SEC~~closing ~~on Form 8-K on September 30, 2005~~arguments.

~~On April 12,~~The ~~2006,~~accompanying ~~upon~~consolidated ~~ordinary~~financial ~~application~~statements byhave ~~the~~been ~~Administrators~~prepared in accordance with AICPA Statement of ~~the~~Position ~~U.K.~~90-7 ~~Debtors~~(“SOP 90-7”), ~~the~~Financial ~~High~~Reporting ~~Court~~by ~~provided~~Entities in Reorganization under the ~~Administrators~~Bankruptcy ~~with~~Code, ~~guidance~~and on ~~the~~a going ~~appropriate~~concern ~~timeline~~basis, ~~and~~which ~~mechanics~~contemplates ~~for~~continuity ~~the~~of ~~solicitation~~operations and realization of ~~votes~~assets onand ~~the~~liquidation ~~CVAs,~~of ~~providing~~liabilities ~~for~~in ~~a 42-day~~the ~~solicitation~~ordinary course of ~~votes process~~business. ~~The~~However, ~~Company~~as ~~anticipates~~a ~~that~~result of the ~~Administrators~~Restructuring ~~will~~Proceedings, besuch ~~distributing~~realization ~~the~~of ~~CVAs,~~assets ~~along~~and liquidation ~~with~~of anliabilities, ~~accompanying~~without ~~explanatory~~substantial ~~statement~~adjustments and/or ~~notice~~changes of ~~creditors~~ownership, ~~meeting~~is tohighly ~~vote~~uncertain. onWhile ~~approval~~operating ofas ~~the~~debtors-in-possession ~~CVAs,~~(“DIP”) tounder ~~creditors of~~ the ~~U.K.~~protection ~~Debtors~~of inChapter 11 of the ~~near~~Bankruptcy ~~future.~~

~~The~~47 Company cannot predict at this time whether the Plan or CVAs that will be proposed pursuant to the terms of the U.K. Settlement Agreement and the other agreed Plan amendments will be confirmed or approved.

The Bankruptcy Court may confirm a plan of reorganization only upon making certain findings required by the Bankruptcy Code, and a plan may be confirmed over the dissent of non-accepting creditors and equity security

~~holders~~Code ifand ~~certain~~subject ~~requirements~~to approval of the Bankruptcy ~~Code~~Court, ~~are~~or ~~met.~~otherwise ~~The~~as ~~payment~~permitted ~~rights~~in ~~and~~the ~~other~~ordinary ~~entitlements~~course of ~~pre-petition~~business, ~~creditors~~the ~~and~~Debtors, ~~equity~~or ~~security holders~~some of them, may besell ~~substantially~~or otherwise ~~altered~~dispose byof ~~any~~assets ~~plan~~and ofliquidate ~~reorganization~~or ~~confirmed~~settle inliabilities ~~the~~for ~~Chapter 11~~some ~~Cases.~~amounts ~~The~~other ~~pre-petition~~than ~~creditors~~those ofreflected ~~some~~in ~~Debtors~~the ~~may~~consolidated befinancial ~~treated~~statements. ~~differently~~Further, ~~than~~the ~~those~~plan of ~~other~~reorganization ~~Debtors~~could ~~under~~materially change the ~~proposed~~amounts ~~Plan~~ and ~~CVAs.~~classifications in the historical consolidated financial statements.

The ~~accompanying~~appropriateness ~~consolidated financial statements have been prepared in accordance with AICPA Statement~~ of ~~Position~~using ~~90-7 (“SOP 90-7”), Financial Reporting by Entities in Reorganization under~~ the ~~Bankruptcy Code and on a~~ going concern basis, ~~which~~for ~~contemplates~~the ~~continuity~~Company’s offinancial ~~operations~~statements ~~and realization of assets and liquidation of liabilities in the ordinary course~~is ofdependent ~~business. However~~upon, asamong aother ~~result~~things: of (i) the ~~Restructuring~~Company’s ~~Proceedings,~~ability ~~such~~to ~~realization~~comply ofwith ~~assets~~the ~~and~~terms ~~liquidation~~ of ~~liabilities,~~its ~~without~~DIP ~~substantial~~credit ~~adjustments~~facility ~~to amounts~~ and~~/or~~ ~~changes~~any ofcash ~~ownership,~~management isorder ~~highly~~entered ~~uncertain.~~by ~~While~~the ~~operating~~Bankruptcy ~~as debtors-~~Court in~~-possession~~ ~~(“DIP”)~~connection ~~under~~with the ~~protection of~~ Chapter 11 ofCases; (ii) the ability ~~Bankruptcy~~of ~~Code and Administration under~~ the ~~Act,~~Company ~~and subject~~ to ~~approval~~maintain ofadequate ~~the~~cash ~~Bankruptcy~~on ~~Court,~~hand; ~~Administrators or~~ (iii) the ~~High~~ability ~~Court or otherwise as permitted in the ordinary course~~ of ~~business,~~ the ~~Debtors,~~Company orto ~~some~~generate ofcash ~~them,~~from ~~may~~operations; ~~sell~~(iv) confirmation ~~or otherwise dispose~~ of ~~assets and liquidate or settle liabilities for amounts other than those reflected in~~ the ~~consolidated financial statements. Further, a~~ plan of reorganization or ~~company~~under ~~voluntary~~the ~~arrangement~~Bankruptcy ~~could~~Code; ~~materially~~and ~~change~~ (v) the ~~amounts~~Company’s ~~and~~ability to ~~classifications~~achieve inprofitability ~~the~~following ~~historical~~such ~~consolidated financial statements~~confirmations.

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

Asbestos Liabilities and Related Insurance Recoverable

InThe ~~1996~~Company’s U.K. subsidiary, T&N Ltd. ~~(formerly T&N~~, ~~plc) purchased for itself~~ and ~~its~~two 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 millionU. ~~During 2000, the Company concluded that the aggregate cost of the claims filed after June~~S. ~~30,~~subsidiaries ~~1996 would exceed~~ (the ~~trigger point and recorded an insurance recoverable asset under the~~ “T&N ~~policy~~Companies”) ofare ~~$577~~among ~~million.~~many Asdefendants ofnamed ~~March 31,~~in ~~2006,~~numerous court ~~the~~actions ~~recorded~~in ~~insurance~~the ~~recoverable was $620 million~~U. ~~In December~~S. ~~2001,~~alleging ~~one~~personal ofinjury ~~the~~resulting ~~three~~from ~~reinsurers,~~exposure ~~European International Reinsurance Company Ltd. (“EIR”), filed suit in a London, England court~~ to ~~challenge~~asbestos ~~the~~or ~~validity~~asbestos-containing ofproducts. ~~its insurance contract with the~~ T&N ~~Companies~~Ltd. Asand acertain ~~result~~ of ~~this lawsuit, a claim was made against the broker (Sedgwick) that assisted in procuring this policy for breach of~~ its ~~duties~~French assubsidiaries aare ~~broker.~~also ~~This~~subject ~~trial commenced in October 2003. Prior~~ to ~~the~~asbestos-disease ~~conclusion of the trial~~litigation, ~~the parties were able~~ to ~~reach~~ a ~~settlement.~~lesser ~~As a result of this settlement~~extent, ~~the~~in ~~Company~~the ~~recorded a $38~~U.~~9 million asbestos charge during 2003~~K. ~~Under~~and ~~the terms of the settlement, EIR would be liable for 65~~France.5% ofAs ~~its one-third share~~ of the ~~reinsurance~~Petition ~~policy. By separate agreement~~Date, ~~Sedgwick agreed to be liable for an additional 17.25% of the EIR share of the reinsurance policy.~~ T&N Ltd. ~~has~~was ~~also~~a ~~agreed~~defendant toin ~~indemnify~~approximately ~~the~~115,000 ~~insurer~~pending ~~for~~personal ~~sums~~injury ~~paid~~claims. ~~under~~The ~~the~~two ~~policy for which the insurer is liable to T&N Ltd~~U.S. ~~for~~subsidiaries ~~which~~were ~~the~~defendants ~~insurer~~in ~~has~~approximately no199,000 ~~recovery~~pending ~~from~~personal ~~the~~injury ~~reinsurers or Sedgwick~~claims. The ~~settlement~~Company includes ~~agreements~~as ~~referenced~~a ~~above~~pending ~~are~~claim ~~being~~open ~~held~~served inclaims, ~~escrow~~settled ~~pending~~but ~~approval~~not bydocumented ~~the~~claims ~~Bankruptcy Court~~ and ~~the~~settled ~~Administrators~~but ofnot ~~T&N~~paid ~~Ltd~~claims. ofNotice ~~those portions~~ of ~~the~~complaints ~~above-described~~continue ~~settlement~~to ~~agreements~~be ~~that~~received ~~affect~~after the ~~Debtors.~~Petition ~~A motion~~Date ~~seeking~~and ~~the~~are ~~Bankruptcy~~in ~~Court’s~~violation ~~approval~~ of the ~~settlement~~automatic ~~was filed on March 1, 2004~~stay.

~~Subsequent~~The ~~to this motion~~Company, during the ~~other~~ ~~two~~year ~~reinsurers~~ended December 31, ~~Munchener~~2000, ~~Ruckversicherungs~~increased its estimate of asbestos-~~Gesellschaft~~related AGliability ~~(“Munich~~for ~~Re”)~~the T&N Companies by $751 million and ~~Centre~~recorded ~~Reinsurance~~a related ~~International~~insurance Corecoverable asset of $577 million. ~~(“CRIC”),~~The revision in the estimate of probable asbestos-related liability principally resulted from a ~~subsidiary~~study performed by an econometric firm that specializes in these types of ~~the~~matters. ~~Zurich~~The ~~Financial~~liability (approximately ~~Services~~$1.2 ~~Group~~billion as of June 30, ~~notified~~2007) represented the Company’s ofestimate ~~their~~prior ~~belief~~to ~~that~~ the ~~settlements~~ ~~with~~Restructuring ~~EIR~~Proceedings for claims currently pending and ~~Sedgwick~~those ~~may~~which ~~breach~~were ~~one~~reasonably orestimated ~~more~~to ~~provisions~~be ofasserted ~~the~~and ~~reinsurance~~paid ~~agreement~~through 2012. The Company ~~hearing~~did tonot ~~review~~provide ~~the~~a ~~March 1,~~liability ~~2004~~for ~~motion~~claims ~~has~~that ~~been~~may ~~adjourned~~be ~~without~~paid ~~date~~subsequent to this period as it could not reasonably estimate such claims. In estimating the ~~parties~~liability ~~attempt~~prior to ~~resolve~~the Restructuring Proceedings, the ~~issues~~Company ~~raised~~made byassumptions ~~the~~regarding ~~two~~the ~~reinsurers.~~total ~~However,~~number ~~these~~of ~~efforts~~claims ~~were~~anticipated ~~unsuccessful,~~to ~~prompting~~be received in a future period, the ~~Administrators~~typical cost of settlement (which is sensitive to ~~file~~the anindustry ~~action~~in which the plaintiff claims exposure, the alleged disease type and the jurisdiction in which the ~~London~~action ~~High~~is being ~~Court~~brought), ~~seeking~~the arate ~~declaration~~of ~~that~~receipt of claims, the ~~settlements~~settlement strategy in dealing with ~~EIR~~outstanding claims and ~~Sedgwick~~the dotiming ~~not~~of ~~breach~~settlements. ~~provisions~~As a result of the ~~reinsurance~~Restructuring ~~agreement.~~Proceedings, ~~A hearing~~pending ~~was~~asbestos-related ~~conducted~~litigation ~~during~~against ~~July~~the ~~2005~~Company in the United States is stayed , and ~~judgement~~no ~~was~~party ~~handed~~may ~~down~~take action to pursue or collect on ~~December 21,~~such ~~2005.~~asbestos ~~The~~claims ~~court~~absent ~~held~~specific ~~that~~authorization of the ~~settlements~~Bankruptcy ~~did~~Court. ~~not~~Since ~~breach~~the Restructuring Proceedings, the ~~reinsurance~~Company ~~agreement~~has ceased making payments with respect to asbestos-related lawsuits. ~~Munich~~An Reasbestos creditors’ committee has been appointed in the U.S. representing asbestos claimants with pending claims against the Company, and ~~CRIC~~the ~~have~~Bankruptcy ~~not~~Court ~~appealed~~has appointed a legal representative for the interests ~~judgement~~of potential future asbestos claimants.

43While the Company believes that the liability recorded for the U.S. Asbestos Claims was appropriate as of October 1, 2001 for anticipated losses arising from asbestos-related claims against the T&N Companies through 2012, it is the Company’s view that, as a result of the Restructuring Proceedings, there is even greater uncertainty in estimating the timing and amount of future asbestos liability and related insurance recovery for pending and future claims. There are significant differences in the treatment of asbestos claims in a bankruptcy proceeding as compared to the tort litigation system. Among other things, it is uncertain at this time as to the number of asbestos-related claims that will be filed in the Restructuring Proceedings, the number of current and future claims that will be included in the 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 for the U.S. Asbestos Claims 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.

T&N Ltd. (formerly T&N, plc), during the year ended December 31, 1996, 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. The Company, during the year ended December 31, 2000, 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. The recorded insurance recoverable was $714 million as of June 30, 2007. One of the three reinsurers, European International Reinsurance Company Ltd. (“EIR”), in December 2001, 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. The parties were able to reach a settlement prior to the conclusion of the trial. As a result of this settlement, the Company recorded a $38.9 million asbestos charge during 2003. Under the terms of the settlement, EIR would be liable for 65.5% of its one-third share of the reinsurance policy. By separate agreement, Sedgwick agreed to be liable for an additional 17.25% of the EIR share of the reinsurance policy. T&N Ltd. has also agreed to indemnify the insurer for sums paid under the policy for which the insurer is liable to T&N Ltd. for which the insurer has no recovery from the reinsurers or Sedgwick. The settlement agreements referenced above are being held in escrow pending approval by the Bankruptcy Court and the Administrators of T&N Ltd. of those portions of the above-described settlement agreements that affect the Debtors. A motion seeking the Bankruptcy Court’s approval of the settlement was filed on March 1, 2004.

Subsequent to this motion, the other two reinsurers, Munchener Ruckversicherungs-Gesellschaft AG (“Munich Re”) and Centre Reinsurance International Co. (“CRIC”), a subsidiary of the Zurich Financial Services Group, notified the Company of their belief that the settlements with EIR and Sedgwick may breach one or more provisions of the reinsurance agreement. The parties were unable to resolve the issues raised by the two reinsurers and this prompted the U.K. Administrators to file an action in the High Court seeking a declaration that the settlements with EIR and Sedgwick do not breach provisions of the reinsurance agreement. A hearing was conducted during July 2005 and judgment was handed down on December 21, 2005. The High Court held that the settlements did not breach the reinsurance agreement. Munich Re and CRIC have not appealed the judgment. As a result, the motion seeking the Bankruptcy Court’s approval was renoticed and the Bankruptcy Court approved the settlement in November 2006.

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

4449

Two of the Company’s businesses formerly owned by Cooper Industries, LLC (“Cooper”), historically known as Abex and Wagner, are involved as defendants in numerous court actions in the U.S. alleging personal injury from exposure to asbestos or asbestos-containing products. These claims mainly involve vehicle safety and performance products. As of the Petition Date, Abex and Wagner were defendants in approximately 66,000 and 33,000 pending claims, respectively. 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.

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

The liability (comprised of $129.5 million in Abex liabilities and $84.1 million in Wagner liabilities as of June 30, 2007) 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.

While the Company believes that the liability recorded was appropriate as of October 1, 2001 for anticipated losses arising from asbestos-related claims related to Abex and Wagner through 2012, it is the Company’s view that, as a result of the Restructuring Proceedings, there is even greater uncertainty in estimating the timing and amount of future asbestos liability and related insurance recovery for pending and future claims. There are significant differences in the treatment of asbestos claims in a bankruptcy proceeding as compared to the tort litigation system. Among other things, it is uncertain at this time as to the number of asbestos-related claims that will be filed in the proceeding, the number of current and future claims that will be included in the 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.

Cooper, Pneumo, the Company, the asbestos claimants committee, the representative for future asbestos claimants, and various other relevant parties, signed a nonbinding term sheet in July of 2006, reflecting a global settlement that will provide two alternative means of resolving all of Cooper’s and Pneumo’s claims against the Company arising out of the Abex asbestos litigation and the related alleged indemnity obligations. One of these alternatives will be accomplished as part of the Plan and its confirmation. Under one alternative, Cooper will contribute $756 million to a trust to be established pursuant to Section 524(g) of the Bankruptcy Code, consisting of $256 million in cash and a $500 million promissory note, in consideration for Cooper and Pneumo being protected from current and future Abex asbestos claims by the Plan’s channeling injunction which will channel all the Abex asbestos claims to the trust. This alternative settlement has been documented as part of the Plan, and affected creditors voted in favor of this alternative as part of the solicitation of votes on the Plan which was completed in May 2007.

The other alternative settlement will only be utilized if the first alternative cannot be successfully implemented. Under the second settlement structure, Cooper will receive $138 million and Pneumo will receive $2 million in exchange for completely releasing all their claims against the Company and all its affiliates. The terms of this alternative settlement are set forth in the Plan B Settlement Agreement, executed as of September 18, 2006, by the same parties that signed the term sheet in July of 2006. This alternative has been documented as part of the Plan. Under both of the foregoing alternatives, Cooper has agreed to permit the Company to (i) negotiate certain lump-sum or installment settlements involving the Wagner insurance (described below), and (ii) retain 88% of the proceeds from such insurance settlements in the case of the first alternative settlement structure and 80% of the proceeds in the case of the second alternative settlement structure. Cooper, Pneumo, the Company, the asbestos claimants committee, the representative for future asbestos claimants, and various other relevant parties, have entered a Plan Support Agreement which was approved by the Bankruptcy Court on February 2, 2007, binding the parties to the alternative settlements.

Both Abex and Wagner maintained separate product liability insurance coverage for most of the time that each manufactured products that contained asbestos. This coverage is shared with other third-party companies. The ultimate realization of insurance proceeds is directly related to the amount of related covered valid claims against 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 and the proposed settlement with Cooper will impact the timing and amount of the asbestos claims and the insurance recoverable, there has been no change to the recorded amounts since the initiation of the Restructuring Proceedings, other than to reflect cash received under this policy, due to the uncertainties created by the Restructuring Proceedings. Accordingly, the recorded amounts for this insurance recoverable asset could change materially based upon events that occur from the Restructuring Proceedings.

Results of Operations

The following Management’s Discussion and Analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with the MD&A included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2005~~2006.

Consolidated Results

Net sales by reporting segment were:

	Three Months Ended March 31
	Three Months Ended June 30
	2006		2005
	2007		2006		Change
	(Millions of Dollars)
Powertrain	$	568	$	582
Powertrain Energy	$	510	$	468	$	42
Sealing Systems		124		127
Powertrain Sealing & Bearings		271		251		20
Vehicle Safety and Performance		192		193
Vehicle Safety and Protection		205		191		14
Aftermarket Products and Services		716		731
Automotive Products		83		72		11
Corporate		—		—
Global Aftermarket		694		650		44
	$	1,~~600~~763	$	1,~~633~~632	$	131

The percentage of net sales by group and region are listed below. “SSPTE”, “~~VSP~~PTSB”, “VSP”, “AP”, and “~~APS~~GA” represent Powertrain Energy, Powertrain Sealing ~~Systems~~and Bearings, Vehicle Safety and ~~Performance~~Protection, ~~and~~Automotive ~~Aftermarket~~ Products, and ~~Services~~Global Aftermarket, respectively.

	Three Months Ended March 31
	Three Months Ended June 30
	Powertrain		SS		VSP		APS		Total
	PTE		PTSB		VSP		AP		GA		Total
2006
2007
Americas	2917	%	6950	%	4842	%	7467	%	5574	%	50	%
Europe	6973	%	3150	%	5155	%	2427	%	4324	%	46	%
Asia	210	%	0*	%	13	%	26	%	2	%	4	%
2005
2006
Americas	2824	%	6653	%	4446	%	7470	%	5375	%	53	%
Europe	70	%	3347	%	5453	%	2425	%	4523	%	44	%
Asia	26	%	1*	%	21	%	25	%	2	%	3	%

*less than 1%

Gross margin by reporting segment was:

	Three Months EndedMarch 31
	Three Months Ended June 30
	2006				2005
	2007			2006				Change
	(Millions of Dollars)
Powertrain	$	83			$	84
Powertrain Energy	$	68		$	73			$	(5	)
Sealing Systems		12				4
Powertrain Sealing and Bearings		16			30				(14	)
Vehicle Safety and Performance		48				45
Vehicle Safety and Protection		53			47				6
Aftermarket Products and Services		163				165
Automotive Products		21			16				5
Corporate		(21	)			(23	)
Global Aftermarket		164			162				2
	$	285			$	275
Corporate		—			(24	)			24
	$	322		$	304			$	18

45Net sales increased by $131 million, or 8%, to $1,763 million for the second quarter of 2007 from $1,632 million in the same period of 2006. Roughly half of the Company’s revenue is generated in Europe. The weakening of the U.S. dollar against the euro, compared to the same period in 2006, increased revenues reported by the Company’s European operations by $49 million, or 3%, in addition to $7 million from favorable movements in other currencies.

~~Net sales decreased by $33 million, or 2%, to $1,600 million for the first quarter of 2006 from $1,633~~ ~~million~~New inprogram ~~the~~launches ~~same~~combined ~~period~~with ofnet ~~2005.~~increases ~~Production volumes~~ in ~~existing~~global ~~markets~~OEM production and ~~customers~~the ~~served remained largely flat year over year, with increased~~ demand for ~~existing European Powertrain applications being offset by a reduction in global demand for~~ replacement ~~engine~~ parts. ~~The~~increased ~~impact~~sales ~~of the U.S. dollar strengthening against the Euro reduced revenues reported~~ by ~~the Company’s European operations by~~ $5674 million, ~~partially~~or ~~offset by $~~5% ~~million~~year over inyear. ~~favorable~~Customer ~~movements~~price inreductions ~~other~~reduced ~~foreign currencies.~~revenues ~~New~~by ~~program launches~~1%, ~~primarily~~year inover ~~VSP Americas~~year, ~~generated~~largely ~~$13~~offsetting ~~million~~the incarry-over ~~additional~~impact ~~sales~~of ~~and~~the ~~customer~~May ~~price~~2006 ~~increases~~acquisition ~~generated~~of a ~~further~~controlling $5interest ~~million, with price increases~~ in ~~APS more than offsetting continued price reductions to the OEMs~~FMG.

~~Gross~~In ~~margin~~October ~~increased~~2006, byas ~~$10~~part ~~million~~of tothe ~~$285~~discharge ~~million, or 18%~~ of ~~sales~~U.K. ~~for~~Administration, the ~~first~~Company ~~quarter~~settled ofits ~~2006~~U.K. ~~from~~pension ~~$275~~liabilities ~~million,~~and orwas ~~17%~~relieved of ~~sales~~ inresponsibility ~~the~~for ~~same~~all ~~period of 2005~~U.K. ~~Reductions~~pension inbenefit ~~margin~~obligations. ~~due~~Prior to ~~volume~~settlement, ~~and~~the Company ~~product~~was ~~mix~~incurring ofpension ~~$11~~expense ~~million~~for ~~and~~the ~~foreign~~related ~~currency~~employees of approximately $911 million ~~were~~per ~~more~~month; ~~than~~$8 ~~offset~~million byrecorded ~~customer~~as ~~price~~cost ~~increases~~ of goods sold, and $53 million ~~and~~recorded ~~improved~~as ~~manufacturing~~selling, ~~productivity~~general and ~~operational~~ ~~efficiency~~administrative ofexpense ~~$25~~(“SG&A”). ~~million~~Once the pension was settled, ~~including~~the ~~reduced~~Company ~~raw~~no ~~material~~longer ~~costs~~recorded ofany $8charges ~~million~~relating to its U.K. pension plans.

~~Reporting~~Gross ~~Segment~~margin ~~Results~~increased –by ~~Three~~$18 million, to $322 ~~Months~~million, ~~Ended~~or ~~March 31~~18.3% of sales, for the second quarter of 2007 from $304 million, or 18.6% of sales, in the same period of 2006. ~~compared~~The toreduction ~~March 31~~in U.K. pension expense accounted for $22 million in additional gross margin. Customer price reductions and increases in raw material costs reduced margins by $16 million and $12 million respectively. These adverse impacts were partially offset by productivity in excess of labor and benefits inflation of $14 million, ~~2005~~reductions in the cost of bought-in finished product for resale through the aftermarket of $7 million, and the impact of increased volumes, net of product mix, of $5 million.

~~The following table provides a reconciliation of changes in sales~~Reporting ~~and~~Segment ~~gross~~Results ~~margin~~– ~~for~~Three ~~the~~Months ~~three~~Ended ~~months ended March~~June 3130, ~~2006~~2007 compared ~~with~~to ~~the three months ended March~~June 3130, ~~2005~~2006 ~~for each of the Company’s reporting segments. “SS”, “VSP” and “APS” represent Sealing Systems, Vehicle Safety and Performance and Aftermarket Products and Services, respectively.~~

	Powertrain			SS			VSP			APS			Corporate			Total
	(Millions of Dollars)
Sales
Three-months ended March 31, 2005	$	582		$	127		$	193		$	731		$	—		$	1,633
Sales volumes		22			1			8			(18	)		—			13
Customer pricing		(6	)		(1	)		—			12			—			5
Foreign currency		(30	)		(3	)		(9	)		(9	)		—			(51	)
Three-months ended March 31, 2006	$	568		$	124		$	192		$	716		$	—		$	1,600
Gross Margin
Three-months ended March 31, 2005	$	84		$	4		$	45		$	165		$	(23	)	$	275
Sales volumes / mix		1			1			4			(17	)		—			(11	)
Customer pricing		(6	)		(1	)		—			12			—			5
Productivity, net of inflation		10			8			3			3			1			25
Foreign currency		(6	)		—			(4	)		—			1			(9	)
Three-months ended March 31, 2006	$	83		$	12		$	48		$	163		$	(21	)	$	285

The following table provides a reconciliation of changes in sales and gross margin for the three months ended June 30, 2007 compared with the three months ended June 30, 2006 for each of the Company’s reporting segments.

Powertrain


	PTE			PTSB			VSP			AP			GA			Corporate			Total
	(Millions of Dollars)
Sales
Three months ended June 30, 2006	$	468		$	251		$	191		$	72		$	650		$	—		$	1,632
Sales volumes		7			10			9			9			39			—			74
Customer pricing		(8	)		1			(3	)		—			(6	)		—			(16	)
Acquisition		17			—			—			—			—			—			17
Foreign currency		26			9			8			2			11			—			56

Three months ended June 30, 2007	$	510		$	271		$	205		$	83		$	694		$	—		$	1,763


	PTE			PTSB			VSP			AP			GA			Corporate			Total
	(Millions of Dollars)
Gross Margin
Three months ended June 30, 2006	$	73		$	30		$	47		$	16		$	162		$	(24	)	$	304
Sales volumes / mix		(4	)		—			7			(2	)		4			—			5
Customer pricing		(8	)		1			(3	)		—			(6	)		—			(16	)
Productivity, net of inflation		8			(7	)		1			7			—			3			12
Raw material cost inflation		(4	)		(8	)		(1	)		(1	)		7			—			(7	)
Settlement of U.K. pensions		—			—			—			1			—			21			22
Acquisition		3			—			—			—			—			—			3
Depreciation		(4	)		—			—			—			—			—			(4	)
Other, including new customer incentives		2			—			—			—			(6	)		—			(4	)
Foreign currency		2			—			2			—			3			—			7

Three months ended June 30, 2007	$	68		$	16		$	53		$	21		$	164		$	—		$	322

~~Sales decreased by $14 million to $568 million for the first quarter of 2006 from $582 million in the same period of 2005. The~~ Powertrain ~~group~~Energy generates about 70% of its revenue in Europe where the strengthening of the U.S. dollar against the Euro reduced reported sales by $30 million. These foreign currency movements were partially offset by $22 million of additional sales volumes due to increased production, mainly from the European OEM’s. Continued customer pricing pressure, concentrated in Europe, reduced sales by a further $6 million.

~~Gross~~Sales ~~margin~~increased ~~decreased~~ by $142 million to $83510 million, orfor ~~15%~~the second quarter of ~~sales,~~2007 ~~for~~from $468 million in the ~~first~~same ~~quarter~~period of 2006. ~~compared~~PTE togenerates ~~$84~~73% ~~million,~~of orits ~~14%~~revenue ofin ~~sales~~Europe ~~for~~where the ~~first~~weakening ~~quarter~~ of ~~2005~~the U.S. ~~Improvements~~dollar inprimarily ~~year~~against ~~over~~the ~~year manufacturing~~euro ~~productivity~~increased ~~produced~~reported sales by $1026 million. The acquisition of ~~additional~~FMG ~~margin~~in ~~which~~May ~~was~~2006 ~~more~~contributed ~~than~~additional ~~offset~~sales byof $617 million, ofand ~~adverse~~sales ~~foreign~~volumes ~~currency~~increased ~~movements~~by ~~and~~ $67 million ofoffset by customer price reductions of $8 million.

~~Sealing~~Although ~~Systems~~sales volumes increased by $7 million globally, there was weaker market demand in North America from both light vehicle and heavy duty OEMs of $20 million, with the greatest impact in the heavy duty market due to the non-recurrence of 2006 pre-builds in advance of emissions regulations changes that took effect at the end of 2006. The overall decline in North American volumes was more than offset by increased demand from both light and commercial vehicle OEMs in Europe of $27 million.

~~Sales~~53 decreased by $3 million, or 2%, to $124 million for the first quarter of 2006 from $127 million in the same period of 2005. Approximately 30% of Sealing Systems’ revenues are generated in Europe and the resulting foreign

~~currency~~Gross ~~movements~~margin ~~were~~decreased ~~the~~by ~~cause~~$5 million to $68 million, or 13% of sales, for the ~~sales~~second ~~decline.~~quarter ~~Reduced~~of ~~market~~2007 ~~demand~~compared to $73 million, or 16% of sales for ~~existing~~the ~~applications~~second quarter of 2006. Operational productivity, in ~~Europe~~excess ~~was~~of labor and benefits inflation, combined with the impact of the FMG acquisition mostly offset bycustomer ~~new~~price ~~European~~reductions ~~program~~and adverse product mix. The most ~~launches,~~significant ~~otherwise~~external ~~sales~~driver ~~remained~~of ~~flat~~the ~~year~~reduced ~~over~~margin ~~year~~was the increased cost of raw materials.

~~Gross~~Powertrain ~~margin~~Sealing increased by $8 million, to $12 million, or 10% of sales, for the first quarter of 2006 compared to $4 million, or 3% of sales for the first quarter of 2005. This increase was due to improved efficiency in the manufacturing operations and aBearings ~~slight reduction in raw material costs.~~

~~Vehicle~~Sales ~~Safety~~increased by $20 million to $271 million for the second quarter of 2007 from $251 million in the same period of 2006. Sales volumes increased $10 million with reduced market demand in North America being offset by new program launches in North America and ~~Performance~~increased market demand in Europe. PTSB generates 50% of its sales in Europe where the relative weakness of the U.S. dollar against the euro increased sales reported by the European operations by $7 million, in addition to $2 million from movements in other currencies.

~~Sales~~Gross margin decreased by $1 14 million to $~~192~~16 million, or 6% of sales, for the ~~first~~second quarter of ~~2006~~2007 from $~~193~~30 million, inor ~~the same period of 2005. Approximately 50~~12% of ~~VSP~~ sales ~~are~~for inthe ~~Europe,~~second ~~where~~quarter ~~foreign~~of ~~currency~~2006. ~~movements~~This ~~reduced~~decrease ~~sales~~was ~~by $9~~a ~~million.~~combination ~~Sales~~of ~~volumes~~ increased bycost $8of ~~million~~raw materials, ~~mostly~~primarily ~~due to new program launches~~ in ~~the~~Europe, ~~Americas.~~and ~~With~~ the ~~exception~~one-time cost of ~~foreign~~production ~~currency~~transfers ~~movements~~within ~~European~~the ~~volumes~~North ~~remained~~American ~~flat~~bearings ~~year over year~~operations.

~~Gross~~Vehicle ~~margin~~Safety ~~was $48 million, or 25% of sales, for the first quarter of 2006 compared to $45 million, or 23% of sales, for the first quarter of 2005. Increased sales volumes contributed $4 million of the increase,~~ and ~~reduced~~Protection ~~depreciation a further $3 million. These increases were partially offset by unfavorable foreign currency movements of $4 million.~~

~~Aftermarket~~Sales ~~Products~~increased by $14 million to $205 million for the second quarter of 2007 from $191 million in the same period of 2006. Sales volumes increased $9 million with reduced market demand in North America being offset by new program launches in North America and ~~Services~~increased market demand in Europe. VSP generates 55% of its sales in Europe where the relative weakness of the U.S. dollar against the euro increased sales reported by the European operations by $6 million, in addition to $2 million from movements in other currencies.

~~Sales~~Gross ~~decreased~~margin increased by $156 million to $53 million, or 226%, toof ~~$716~~sales, ~~million~~ for the ~~first~~second quarter of ~~2006,~~2007 ~~from~~compared to $~~731~~47 million, inor ~~the~~25% ~~same period~~ of ~~2005.~~sales, ~~This decrease was driven by reduced global demand~~ for ~~replacement~~the ~~engine~~second ~~parts~~quarter of ~~$18 million~~2006, ~~and~~with ~~unfavorable~~the ~~foreign~~impact ~~currency movements~~ of $9increased ~~million.~~sales ~~These~~volumes ~~adverse~~more ~~factors~~than ~~were~~offsetting ~~partially offset by $12 million in~~ customer price ~~increases, primarily in North America~~reductions.

~~Gross~~Automotive ~~margin~~Products was $163 million, or 23% of sales, for the first quarter of 2006 compared to $165 million, or 23% of sales, in the same period of 2005. The impact of reduced sales volumes and unfavorable product mix of $17 million was partially offset by $12 million of customer price increases and $3 million of productivity improvements.

Sales increased by $11 million, or 15%, to $83 million for the second quarter of 2007, from $72 million in the same period of 2006. This increase was primarily due to increased sales volumes of $9 million. New program launches in both North America and Europe more than offset the impact of reduced North American market demand.

Gross margin increased by $5 million to $21 million, or 25% of sales, for the second quarter of 2007 compared to $16 million, or 22% of sales, in the same period of 2007. Productivity accounted for $7 million of this increase, which was partially offset by sales adverse product mix of $2 million.

Global Aftermarket

Sales increased by $44 million, or 7%, to $694 million for the second quarter of 2007, from $650 million in the same period of 2006. This increase was driven by increased sales volumes and foreign currency of $39 million and $11 million, respectively. These increases were offset by $6 million in customer price increases, primarily in North America.

Gross margin increased by $2 million to $164 million, or 24% of sales, for the second quarter of 2006 compared to $162 million, or 25% of sales, in the same period of 2007. Savings in the cost of bought-in components for resale of $7 million was partially offset by $6 million of customer price increase. The impact of increased sales volumes was partially offset by adverse changes in product mix, as the market shifted away slightly from premium to entry-level products, combined with the one-time cost of new customer acquisitions.

Corporate

Corporate expenses are comprised primarily of certain minor central headquarters functions as well as employee post-retirement benefits and other general insurance coverages, which improved by $24 million. This improvement is primarily the benefit of pension expense decreases due to the settlement of the U.K. pension plans in the fourth quarter of 2006.

Selling, General and Administrative Expenses

~~Selling, general and administrative (“~~SG&A”) expenses were $~~228~~213 million, or 1412% of net sales, for the ~~first~~second quarter of ~~2006~~2007 as compared to $~~250~~218 million, or 1513% of net sales, for the same quarter of ~~2005~~2006. ~~Selling,~~Adverse ~~general~~exchange ~~and~~impacts ~~administrative~~of $6 million partially offset $8 million in U.K. pension cost reductions. The remaining SG&A expenses decreased primarily due to cost ~~savings~~saving measures, over and ~~favorable~~above ~~foreign~~labor ~~currency~~and ~~movements.~~benefits inflation.

~~Research~~Included in SG&A expenses were research and development (“R&D”) costs, ~~included~~including ~~in SG&A~~product ~~expenses~~engineering ~~were~~and ~~$41~~validation costs, of $45 million for the quarter ended ~~March~~June 3130, ~~2006~~2007 compared with $4442 million for the same period in ~~2005~~2006. As a percentage of OE sales, ~~research~~R&D ~~and development~~ was 5% for the quarters ended ~~March~~June 3130, ~~2006~~2007 and ~~2005~~2006. The Company maintains technical centers throughout the world designed to integrate the Company’s leading technologies into advanced products and processes, to provide engineering 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; Chapel, ~~U.K.~~United Kingdom; Plymouth, Michigan; Skokie, Illinois,; Ann Arbor, Michigan and Yokohama, Japan.

~~Interest~~Adjustment ~~Expense,~~of ~~net~~Assets to Fair Value

~~Interest~~During ~~expense,~~the ~~net~~three ~~was~~month ~~$39~~periods ~~million~~ended inJune 30, 2007 and 2006, the ~~first~~Company recorded ~~quarter~~charges of ~~2006~~$3.2 ~~compared~~million toand $291.1 million, ~~for~~respectively, ~~the~~to ~~same~~adjust ~~quarter~~property, ofplant ~~2005~~and equipment to their estimated fair values in accordance with SFAS No. 144. The ~~increase~~fair value of property, plant and equipment is ~~due~~based toupon ~~higher~~estimated discounted ~~average~~future ~~outstanding~~cash ~~borrowings~~flows onand estimates of salvage value. The impairment charge represents the ~~DIP~~difference ~~credit~~between ~~facility~~the estimated fair values and ~~higher~~ ~~average~~the ~~interest~~carrying ~~rates~~value onof ~~all~~the ~~debt~~subject assets.

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


	Three Months Ended June 30
	2007		2006
	(Millions of Dollars)
Powertrain Energy	$	—	$	0.5
Powertrain Sealing and Bearings		—		3.9
Vehicle Safety and Protection		—		—
Automotive Products		3.2		(0.1	)
Global Aftermarket		—		—
Other		—		(3.2	)

	$	3.2	$	1.1

Interest Expense, Net

Interest expense, net was $52 million in the second quarter of 2007 compared to $44 million for the same quarter of 2006. The increase is due to higher average interest rates on all debt, and the loss of three months of interest income of $7 million on the restricted U.K. cash balance of approximately $700 million held during 2006.

As a condition of granting the amended DIP credit facility priority over the collateral interest of the Senior Credit Agreements, the Bankruptcy Court ordered that the noteholders receive, in cash, adequate protection payments equal to one-half of one percent (0.5%) of the outstanding notes per year. These cash payments, which approximate

$2.6 million per quarter, are recorded as interest expense in the statement of operations. All cash adequate protection payments made to the noteholders are provisional in nature and are subject to recharacterization, credit against allowed claims or other relief if the Bankruptcy Court were to ultimately conclude that the noteholders were not entitled to such payments.

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.

Chapter 11 and U.K. Administration Related Reorganization Expenses

During the three months ended June 30, 2007 and 2006, the Company recorded Chapter 11 and U.K. Administration related reorganization expenses of $27.6 million and $20.8 million, respectively. These expenses fluctuate largely based upon the necessity for professional services by third-party advisors in connection with the Restructuring Proceedings.


	Three Months Ended June 30
	2007		2006
	(Millions of Dollars)

Professional fees directly related to the filing	$	25.1	$	15.7
Critical employee retention costs		2.5		4.6
Other directly related costs		—		0.5

	$	27.6	$	20.8

Cash payments for Chapter 11 and U.K. Administration related reorganization expenses totaled $23.8 million and $20.0 million for the three months ended June 30, 2007 and 2006, respectively.

Restructuring Activities

The Company defines restructuring expense to include costs directly associated with exit or disposal activities accounted for in accordance with SFAS No. 146, ~~Accounting for Costs Associated with Exit or Disposal Activities,~~ employee severance costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 88 and 112, and pension and other postemployment benefit costs incurred as a result of an exit or disposal activity accounted for in accordance with SFAS Nos. 87 and 106.

~~The~~56 following is a summary of the Company’s consolidated restructuring reserves and related activity as of and for the three months ended March 31, 2006. “SS”, “VSP” and “APS” represent Sealing Systems, Vehicle Safety and Performance and Aftermarket Products and Services, respectively.

	Powertrain			SS			VSP			APS			Corporate			Total
	(Millions of dollars)
Balance of reserves at December 31, 2005	$	10.6		$	0.9		$	0.9		$	13.3		$	0.6		$	26.3
Provisions		10.9			6.1			0.7			7.6			0.8			26.1
Reversals		(0.3	)		—			—			—			—			(0.3	)
Payments		(2.1	)		(0.4	)		(0.5	)		(3.9	)		(1.0	)		(7.9	)
Foreign currency		(0.2	)		—			—			0.1			(0.1	)		(0.2	)
Balance of reserves at March 31, 2006	$	18.9		$	6.6		$	1.1		$	17.1		$	0.3		$	44.0

The following is a summary of the Company’s consolidated restructuring reserves and related activity as of and for the six months ended June 30, 2007. “PTE”, “PTSB”, “VSP”,”AP”, and “GA” represent Powertrain Energy, Powertrain Sealing and Bearings, Vehicle Safety and Protection, Automotive Products, and Global Aftermarket, respectively.


	PTE			PTSB			VSP			AP			GA			Corporate		Total
	(Millions of dollars)

Balance of reserves at December 31, 2006	$	15.6		$	16.5		$	0.4		$	5.1		$	2.5		$	—	$	40.1
Provisions		2.4			7.0			1.3			1.5			4.0			0.1		16.3
Reversals		(0.1	)		(0.1	)		—			—			—			—		(0.2	)
Payments		(4.9	)		(9.9	)		(0.7	)		(1.3	)		(0.9	)		—		(17.7	)
Foreign currency		0.1			0.1			—			—			—			—		0.2

Balance of reserves at March 31, 2007		13.1			13.6			1.0			5.3			5.6			0.1		38.7
Provisions		6.7			5.4			1.3			0.7			—			—		14.1
Reversals		—			(0.3	)		(0.3	)		—			—			—		(0.6	)
Payments		(5.1	)		(9.8	)		(0.5	)		(0.9	)		(1.7	)		—		(18.0	)
Foreign currency		0.1			0.1			0.1			—			—			—		0.3

Balance of reserves at June 30, 2007	$	14.8		$	9.0		$	1.6		$	5.1		$	3.9		$	0.1	$	34.5

The Company’s restructuring reserve balances are principally comprised of severance and employee-related costs.

Income Tax Expense

For the three months ended June 30, 2007, the Company recorded income tax expense of $21.2 million on income before income taxes of $25.1 million. This compares to income tax expense of $28.6 million on income before income taxes of $11.8 million in the same period of 2006. Income tax expense for the three month periods ended June 30, 2007 and 2006 differs from statutory rates due to non-recognition of income tax benefits on certain operating losses, primarily in the U.S. and U.K., and non-deductible items in various jurisdictions.

Consolidated Results – Six Months Ended June 30, 2007 compared to June 30, 2006

Net sales by reporting segment were:


	Six Months Ended June 30
	2007		2006		Change
	(Millions of Dollars)

Powertrain Energy	$	1,023	$	916	$	107
Powertrain Sealing & Bearings		538		496		42
Vehicle Safety and Protection		403		375		28
Automotive Products		161		148		13
Global Aftermarket		1,355		1,297		58

	$	3,480	$	3,232	$	248

The percentage of net sales by group and region are listed below. “PTE”, “PTSB”, “VSP”,”AP”, and “GA” represent Powertrain Energy, Powertrain Sealing and Bearings, Vehicle Safety and Protection, Automotive Products, and Global Aftermarket, respectively.


	Six Months Ended June 30
	PTE		PTSB		VSP		AP		GA		Total
2007
Americas	17	%	50	%	43	%	68	%	74	%	50	%
Europe	73	%	50	%	55	%	26	%	24	%	46	%
Asia	10	%	*		2	%	6	%	2	%	4	%

2006
Americas	25	%	53	%	46	%	69	%	75	%	54	%
Europe	71	%	47	%	53	%	25	%	23	%	44	%
Asia	4	%	*		1	%	6	%	2	%	2	%

* less than 1%

Gross margin by reporting segment was:


	Six Months Ended June 30
	2007			2006			Change
	(Millions of Dollars)

Powertrain Energy	$	138		$	142		$	(4	)
Powertrain Sealing and Bearings		33			56			(23	)
Vehicle Safety and Protection		103			93			10
Automotive Products		39			28			11
Global Aftermarket		318			315			3
Corporate		(1	)		(45	)		44

	$	630		$	589		$	41

Net sales increased by $248 million, or 8%, to $3,480 million for the six months ended June 30, 2007 from $3,232 million in the same period of 2006. Roughly half of the Company’s revenue is generated in Europe. The weakening of the U.S. dollar against the euro, compared to the same period in 2006, increased revenues reported by the Company’s European operations by $107 million, or 3%, in addition to $9 million from favorable movements in other currencies. New program launches combined with net increases in global OEM production and the demand for replacement parts increased sales by $115 million, or 4% year over year. Customer price reductions reduced revenues by 1%, year over year, largely offsetting the carry-over impact of the May 2006 acquisition of a controlling interest in Federal-Mogul Goetze (“FMG”).

In October 2006, as part of the discharge of U.K. Administration, the Company settled its U.K. pension liabilities and was relieved of responsibility for all U.K. pension benefit obligations. Prior to settlement, the Company was incurring pension expense for the related employees of approximately $11 million per month; $8 million recorded as cost of goods sold, and $3 million recorded as selling, general and administrative expense (“SG&A”). Once the pension was settled, the Company no longer recorded any charges relating to its U.K. pension plans.

Gross margin increased by $41 million, to $630 million, or 18.1% of sales for the six months ended June 30, 2007 from $589 million, or 18.2% of sales, in the same period of 2006. The reduction in U.K. pension plans accounted for an increase of $47 million. Customer price reductions and increases in raw material costs each reduced margins by $30 million. This adverse $60 million impact was partially offset by productivity, in excess of labor and benefits inflation, of $22 million, reductions in the cost of bought-in finished product for resale through the aftermarket of $8 million, and the impact of volume increases, net of product mix, of $12 million. Favorable foreign currency movements increased gross margin by $16 million.

Reporting Segment Results – Six Months Ended June 30, 2007 compared to June 30, 2006

The following table provides a reconciliation of changes in net sales and gross margin for the six months ended June 30, 2007 compared with the six months ended June 30, 2006 for each of the Company’s reporting segments. “PTE”, “PTSB”, “VSP”,”AP”, and “GA” represent Powertrain Energy, Powertrain Sealing and Bearings, Vehicle Safety and Protection, Automotive Products, and Global Aftermarket, respectively.


	PTE			PTSB			VSP			AP		GA			Corporate		Total
	(Millions of Dollars)
Sales
Six months ended June 30, 2006	$	916		$	496		$	375		$	148	$	1,297		$	—	$	3,232
Sales volumes		21			23			16			9		46			—		115
Customer pricing		(16	)		(1	)		(6	)		—		(7	)		—		(30	)
Acquisition		47			—			—			—		—			—

Filing Compare · FEDERAL MOGUL CORP/MI/