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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

Commission File Number: 1-1511

FEDERAL-MOGUL CORPORATION

(Exact name of Registrant as specified in its charter)

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

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

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

None.

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

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

The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $58.8 million as of June 30, 2002 based on the reported last sale price as published for the over-the-counter market for such date.

The Registrant had 87,131,298 shares of common stock outstanding as of February 26, 2003.

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INDEX

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FORWARD-LOOKING STATEMENTS

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

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

Legal and Environmental Proceedings

Business Environment and Economic Conditions

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International and Other Factors

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PART I

Item 1. Business

Federal-Mogul Corporation, founded in 1899 and incorporated in Michigan in 1924 (referred to herein as “Federal-Mogul” or the “Company”), is a vehicular parts manufacturer providing innovative solutions and systems to global customers in the automotive, small engine, heavy duty and industrial markets. The Company manufactures engine bearings, pistons, piston pins, rings, cylinder liners, camshafts, sintered products, connecting rods, sealing systems, systems protection sleeving products, fuel systems, wipers, lighting, ignition, brake, friction and chassis products. The Company’s principal customers include many of the world’s original equipment (“OE”) manufacturers of such vehicles and industrial products. The Company also distributes its products to the aftermarket.

Proceedings Under Chapter 11 and Administration of the Bankruptcy Code

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

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

Overview

The Company has pursued a growth strategy focusing on its core competencies of manufacturing and engineering by concentrating efforts and resources on core business segments that will provide long-term growth. Federal-Mogul has made a commitment to expand its manufactured products to offer OE customers systems and modules. The Company also intends to expand the global reach of its manufacturing operations to follow the expansion of OE manufacturers into South America, Eastern Europe and the Asian markets. The Company intends to couple its expansion of OE business in new geographic markets with follow-on aftermarket sales. The Company intends to continue to provide value added, differentiated products and services to the aftermarket, leveraging its existing strong product brand portfolio.

Federal-Mogul maintains technical centers in Europe, North America and Asia to develop and provide advanced materials, products and manufacturing processes for all of its manufacturing units.

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The following table sets forth the Company’s net sales by reportable segment and geographic region as a percentage of total net sales:

Reporting Segments

The Company’s integrated operations are included in six reportable segments generally corresponding to major product groups: Powertrain, Sealing Systems and System Protection, Friction, Aftermarket, Other and Divested Operations. Segment information for the years ended December 31, 2001 and 2000 has been reclassified to reflect organizational changes implemented in July 2002.

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

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

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

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

Other includes OE lighting operations, Asia Pacific and other Corporate functions.

Divested Operations include the historical operating results of the Company’s divestitures as discussed in Note 5 to the consolidated financial statements.

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Customers

The Company markets its products to many of the world’s major OE manufacturers. Federal-Mogul also manufactures and distributes its products and related parts to aftermarket customers. Among Federal-Mogul’s largest customers are the Aftermarket Autoparts Alliance, Autozone, BMW, CarQuest, Caterpillar, Cummins, DaimlerChrysler, Fiat, Ford/Jaguar/Volvo, General Motors, NAPA, Ozark, Peugeot/PSA, Renault and Volkswagen/Audi. In 2002, no individual customer accounted for more than 10% of the Company’s net sales.

Original Equipment

The Company supplies OE manufacturers with a wide variety of precision engineered parts including engine bearings, large bearings, pistons, piston pins, rings, cylinder liners, connecting rods, camshafts, sintered products sealing systems, systems protection sleeving products, fuel systems, wipers, lighting, ignition, brake, friction and chassis products. The Company manufactures essentially all of the products that it sells to OE customers.

The Company’s OE customers consist primarily of automotive and heavy duty vehicle manufacturers as well as agricultural, off-highway, marine, railroad, high performance and industrial applications manufacturers. The Company has well-established relationships with substantially all major North American, European and Asian automotive OE manufacturers.

Aftermarket

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

Research and Development

The Company’s expertise in engineering, research and development ensures that the latest technologies, processes and materials are considered in providing solutions for customers and bringing new, innovative products to market. Federal-Mogul provides its customers with real-time engineering capabilities and design development in their home countries. Technological activities are conducted at the Company’s major research centers in Burscheid, Germany; Nuremberg, Germany; Yokohama, Japan; Plymouth, Michigan; Skokie, Illinois; Ann Arbor, Michigan; Toledo, Ohio; Bad Camberg, Germany and Wiesbaden, Germany. Each of the Company’s operating units is engaged in various engineering, research and development efforts working closely with customers to develop custom solutions unique to their needs. Total expenditures for research and development activities were $110.6 million, $115.1 million and $127.8 million in 2002, 2001 and 2000, respectively.

Acquisition and Divestitures

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

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Collectively these businesses employed approximately 975 employees and had 2002, 2001 and 2000 combined net sales of $22.8 million, $70.9 million and $88.6 million, respectively. The Company received aggregate proceeds of $34.6 million for these divestitures. The Company recognized an aggregate pre-tax gain of $1.1 million, which is included in “other (income) expense, net” in the accompanying consolidated statements of operations.

In addition to the 2002 divestitures, the Company also announced its intent to sell certain United States camshaft operations and practically all of its original equipment lighting operations. At December 31, 2002, the intent to sell these assets does not meet the plan of sale criteria in SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets” (SFAS No. 144). Therefore, the Company has continued to depreciate these assets and the assets continue to be valued in accordance with SFAS No. 144 as assets to be “held and used”.

In August 2001, the Company acquired 85% of WSK Gorzyce, S.A., a leading Polish producer of pistons and other automotive components. WSK employs 2,500 employees at its manufacturing location in Gorzyce, Poland with annual sales of approximately $50 million.

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

In aggregate these businesses had 2001 and 2000 net sales of $92.6 million and $216.0 million, respectively, and 1,370 employees. The Company received aggregate proceeds of $242.8 million and recognized an aggregate pre-tax loss of $36.3 million on these divestitures. Such losses are included in “other (income) expense, net” in the accompanying consolidated statements of operations.

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Raw Materials and Suppliers

The Company purchases various raw materials for use in its manufacturing processes. The principal raw materials purchased include ferrous and non-ferrous metals, synthetic and natural rubber, graphite, fibers, stampings, castings and forgings. In addition, the Company purchases parts manufactured by other manufacturers for sale in the aftermarket. The Company has not experienced any shortages of raw materials or finished parts and normally does not carry inventories of raw materials or finished parts in excess of those reasonably required to meet its production and shipping schedules. In 2002, no outside supplier of the Company provided products that accounted for more than 10% of the Company’s net sales.

Employee Relations

As of December 31, 2002, the Company had approximately 47,700 full-time employees, of which approximately 20,100 were employed in the United States.

Various unions represent approximately 40% of the Company’s United States hourly employees and approximately 60% of the Company’s foreign hourly employees. Most of the Company’s unionized manufacturing facilities have their own contract with its own expiration date, and as a result, no contract expiration date affects more than one facility. The Company believes its labor relations to be good.

Environmental Regulations

The Company’s operations, in common with those of industry generally, are subject to numerous existing and proposed laws and governmental regulations designed to protect the environment, particularly regarding plant wastes and emissions and solid waste disposal. Capital expenditures for property, plant and equipment for environmental control activities did not have a material impact on the Company’s financial position or results of operations in 2002 and are not expected to have a material impact on the Company’s financial position or results of operations in 2003 or 2004.

Backlog

The majority of the Company’s products are not on a backlog status, are produced from readily available materials, and have a relatively short manufacturing cycle. For products purchased from outside suppliers, the Company generally utilizes more than one source. The Company expects to be capable of meeting anticipated 2003 sales volumes.

Intellectual Property

The Company is committed to protecting its technology investments and market share through an active and growing international patent portfolio. The international patent portfolio is composed of a large number of U.S. and foreign patents and pending patent applications that relate to a wide variety of products and processes. In the aggregate, the Company’s international patent portfolio is of material importance to its business. However, the Company does not consider any international patent or group of international patents relating to a particular product or process to be of material importance when judged from the standpoint of the business as a whole.

Competition

The global vehicular parts business is highly competitive. The Company competes with many of its customers that produce their own components as well as with independent manufacturers and distributors of component parts in the United States and abroad. In general, competition for such sales is based on price, product quality, technology, delivery, customer service and the breadth of products offered by a given supplier. The Company is meeting these competitive challenges by more efficiently integrating its manufacturing and distribution operations, expanding its

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product coverage within its core businesses, and utilizing its worldwide technical centers to develop and provide value-added solutions to its customers.

Company Website and Access to Filed Reports

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

Item 2. Properties

Federal-Mogul’s world headquarters is located in Southfield, Michigan, which is leased. The principal manufacturing and other physical properties of the Company at December 31, 2002 are listed below.

At December 31, 2002, the Company had 220 manufacturing/technical centers, distribution and sales and administration office facilities worldwide. Approximately 24% of the facilities are leased, the majority of which are distribution, sales and administration offices. The Company owns the remainder of the facilities in fee simple.

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

Item 3. Legal Proceedings

Note 17 to the consolidated financial statements, entitled “Litigation and Environmental Matters” is incorporated herein by reference.

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

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

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PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

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

The approximate number of shareholders of record of the Company’s common stock at February 26, 2003 was 50,000. The following table sets forth the high and low sales prices of the Company’s common stock for each calendar quarter for the last two years as reported on the New York Stock Exchange-Composite Tape prior to April 24, 2002 or the over-the-counter market subsequent to and including April 24, 2002:

The closing price of the Company’s common stock as reported on the over-the-counter market on February 26, 2003 was $0.16.

The Company was prohibited in 2002 and 2001, under its Senior Credit Agreement and its debtor-in-possession credit facility, from paying dividends on its common stock, and therefore did not declare any such dividends in 2002 or 2001. Quarterly dividends of $.0025 per common share were declared during each quarter of 2000. The Company does not expect to declare a dividend in the foreseeable future.

On January 31, 2003, the Company announced that it had reached an agreement in principle with its major U.S. creditor constituencies as to the terms of a consensual plan of reorganization. Although a number of issues remain to be resolved, the consensual plan of reorganization is expected to be filed by March 6, 2003. The agreement in principle provides that the noteholders and asbestos claimants, present and future, will convert all of their claims into equity of the reorganized Company. Specifically, 49.9% of newly authorized and issued conversion stock will be distributed to the noteholders, and 50.1% of newly authorized and issued conversion stock will be distributed to a trust established pursuant to Section 524(g) of the Bankruptcy Code for the benefit of existing and future asbestos claimants. United States trade creditors are expected to receive one or more cash distributions under the consensual plan. Subject to negotiation, the Plan of Reorganization currently provides for the cancellation of pre-petition equity interests. The filing of the Plan of Reorganization will be followed by various critical documents, specifically, the Plan Disclosure Statement detailing the reorganization transaction and the U.K scheme of arrangement.

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Item 6. Selected Financial Data

The following table presents information from the Company’s consolidated financial statements for the five years ended December 31, 2002. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and “Financial Statements and Supplemental Data”.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

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

Voluntary Reorganization Under Chapter 11 and Administration

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

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

Background of the Restructuring Proceedings

In December 2000, the Company increased its estimate of asbestos-related liability by $625.3 million and recorded a related insurance recoverable asset of $440.9 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.

In January 2001, the Company implemented a new strategy for dealing with its asbestos issue. The strategy had two features. First, the Company adopted a trial list strategy, avoiding wherever possible mass settlements and only paying individuals that were sick and where the Company or its subsidiaries’ products were the cause of the illness. The second aspect of the Company’s strategy was to pursue a legislative solution. The Company continues to work with a coalition group to advance federal legislation that will: establish medical criteria which will be used to differentiate the sick from the non-sick; establish criteria to limit the consolidation of cases; and establish venue requirements that provide that an individual’s claim must be brought where the individual lived or where they worked.

In the year preceding the Company’s U.S. and U.K. Restructuring, five major companies filed for Chapter 11 bankruptcy protection, most of which were major defendants in many asbestos-related cases in which some of the Company’s U.S. and U.K. subsidiaries were also named. In the second quarter of 2001 the Company disclosed that without a satisfactory legislative solution to the asbestos litigation in the near term, the Company would need to consider alternative ways to manage its asbestos issue. These adverse developments continued during the third quarter of 2001. The Company’s Board of Directors concluded that a satisfactory legislative solution to the asbestos litigation was not probable in the near term and that a federal court-supervised Chapter 11 filing and Administration

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would provide the best available forum to achieve predictability and fairness in the claims settlement process. By filing under Chapter 11 and Administration, the Company expects to be able to both obtain a comprehensive resolution of the claims against it and preserve the inherent value of its businesses.

Consequences of the Restructuring Proceedings

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

In the U.S., three committees, representing asbestos claimants, unsecured creditors and equity security holders 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 appointed committees, together with the legal representative for the future asbestos claimants, play important roles in the Restructuring Proceedings. In the U.K., the Administrator has appointed a creditors committee, representing both asbestos claimants and general unsecured creditors.

As provided by the Bankruptcy Code, the Debtors initially had the exclusive right to propose a plan of reorganization within 120 days following the Petition Date with the Bankruptcy Court. The Debtors requested the Bankruptcy Court to extend the period of exclusivity to November 1, 2002, and the request was granted. On October 30, 2002, the Bankruptcy Court granted an additional extension of the period of exclusivity to March 3, 2003. This date was further extended by Federal District Court order until March 6, 2003. If the Debtors fail to file a plan of reorganization during such period or any extension thereof, or if such plan of reorganization is not accepted by the requisite numbers of creditors and equity holders entitled to vote on the plan, other parties in interest in the Chapter 11 Cases may be permitted to propose their own plan(s) of reorganization for the Debtors. As provided by the Act, the Administrator will propose a scheme of arrangement to the High Court.

On January 31, 2003, the Company announced that it had reached an agreement in principle with its major U.S. creditor constituencies as to the terms of a consensual plan of reorganization. Although a number of issues remain to be resolved, the consensual plan of reorganization is expected to be filed by March 6, 2003. The agreement in principle provides that the noteholders and asbestos claimants, present and future, will convert all of their claims into equity of the reorganized Company. Specifically, 49.9% of newly authorized and issued conversion stock will be distributed to the noteholders, and 50.1% of newly authorized and issued conversion stock will be distributed to a trust established pursuant to Section 524(g) of the Bankruptcy Code for the benefit of existing and future asbestos claimants. United States trade creditors are expected to receive one or more cash distributions under the consensual plan. Subject to negotiation, the Plan of Reorganization currently provides for the cancellation of pre-petition equity interests. The filing of the Plan of Reorganization will be followed by various critical documents, specifically, the Plan Disclosure Statement detailing the reorganization transaction and the U.K scheme of arrangement.

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

The Company is unable to predict with a high degree of certainty at this time what treatment will be accorded under any such plan of reorganization to intercompany indebtedness, licenses, executory contracts, transfers of goods and services, and other intercompany arrangements, transactions and relationships that were entered into prior

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to the Petition Date. Various parties in the Chapter 11 cases may challenge these arrangements, transactions, and relationships, and the outcome of those challenges, if any, may have an impact on the treatment of various claims under such plan of reorganization. The Bankruptcy Court has set March 3, 2003 as a bar date for asbestos property damage claims and for general and commercial claims.

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

Accounting Impact

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

Critical Accounting Policies

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or the method of its application, is generally accepted, management selects the principle or method that is appropriate in the specific circumstances. Application of these accounting principles requires the Company’s management to make estimates about the future resolution of existing uncertainties. As a result, actual results could differ from those estimates. In preparing these financial statements, management has made its best estimates and judgments of the amounts and disclosures included in the financial statements, giving due regard to materiality.

Revenue Recognition

The Company recognizes revenue, estimated returns from product sales and related incentives when there is evidence of a sales agreement, the delivery of goods has occurred, the sales price is fixed or determinable and the collectibility of revenue is reasonably assured. The Company records sales upon shipment of product to customers and transfer of title under standard commercial terms. The SEC’s Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition” provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. The Company has concluded its revenue recognition policy is appropriate and in accordance with accounting principles generally accepted in the United States and SAB No. 101.

Allowance for Uncollectible Accounts Receivable

Accounts receivable have been reduced by an allowance for amounts that may become uncollectible in the future. This estimated allowance is based primarily on management’s evaluation of specific balances as the balances become past due, the financial condition of its customers and the Company’s historical experience of write-offs. If not reserved through specific examination procedures, the Company’s general policy for uncollectible accounts is to reserve based upon the aging categories of accounts receivable and upon whether the amounts are due from an OE customer or Aftermarket customer. Past due status is based upon the invoice date of the original amounts outstanding.

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Inventories and Related Allowance for Obsolete and Excess Inventory

Inventories are valued at the lower of cost or market value and have been reduced by an allowance for excess and obsolete inventories. Cost determined by the last-in, first-out (LIFO) method was used for 53% of the inventory at December 31, 2002 and 2001, respectively. The remaining inventories are recorded using the first-in, first-out (FIFO) method. The estimated allowance is based on management’s estimate of inventories on hand in excess of estimated future usage and sales, taking into account the channel of distribution, OE and aftermarket, and geographic demand.

Long-lived assets

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

Indefinite-lived intangible assets, such as goodwill and trademarks, are carried at historical value and not amortized. Indefinite-lived intangible assets are reviewed for impairment annually as of October 1, or more frequently if impairment indicators exist. The impairment analysis compares the estimated fair value of these assets to the related carrying value, and an impairment charge is recorded for any excess of carrying value over estimated fair value. The estimated fair value is based upon a combination of discounted cash flows and market multiples. External valuation consultants assist the Company with this analysis.

Pension Plans and Other Post-Retirement Benefit Plans

The measurement of liabilities related to pension plans and other post-retirement benefit plans is based on management’s assumptions related to future events including interest rates, long-term returns on pension plan assets, rate of compensation increases, and health care cost trend rates. Actual pension plan asset performance will either reduce or increase unamortized pension losses which ultimately affect net income.

Asbestos Liabilities and Asbestos-Related Insurance Recoverable

The Company’s United Kingdom subsidiary, T&N Ltd., two United States subsidiaries (“T&N Companies”), and two of the Company’s subsidiaries formerly owned by Cooper Industries, Inc., known as Abex and Wagner, are among many defendants named in numerous court actions in the United States alleging personal injury resulting from exposure to asbestos or asbestos-related products. T&N Ltd. is also subject to asbestos-disease litigation, to a lesser extent, in the United Kingdom and France. The recorded liability at December 31, 2002 represents the Company’s estimate, prior to the Restructuring Proceedings, for claims currently pending and those which were reasonably estimated to be asserted and paid through 2012. The Company did not provide a liability for claims that may be paid subsequent to this period as it could not reasonably estimate such claims. In estimating the asbestos liability prior to the Restructuring Proceedings, the Company made assumptions regarding the total number of claims anticipated to be received in a future period, the typical cost of settlement, 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 for anticipated losses arising from asbestos-related claims through 2012, it is the Company’s view that, as a result of the Restructuring Proceedings, there is even greater uncertainty in estimating the future asbestos liability for pending and future claims.

T&N Ltd. purchased for itself and its then defined global subsidiaries a £500.0 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 £690.0 million. During 2000, the Company concluded that the aggregate cost of the claims filed after June 30, 1996 would exceed the trigger point of certain asbestos policies and accordingly recorded an insurance recoverable asset. The Company believes that, based upon its review of the insurance policies and advice from outside counsel, it is probable that the T&N Companies will be entitled to receive payment from the reinsurers for the cost of the claims in excess of the trigger point of the insurance.

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

Environmental Liabilities

The Company records environmental liabilities when a loss is probable and reasonably estimable. Such liabilities are generally not subject to insurance coverage. Engineering and legal specialists within the Company, based on current law and existing technologies, estimate each environmental obligation. Such estimates are based primarily upon the estimated cost of investigation and remediation required and the likelihood that other potentially responsible parties will be able to fulfill their commitments at the sites where the Company may be jointly and

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severally liable with such parties. The Company regularly evaluates and revises its estimates for environmental obligations based on expenditures against established reserves and the availability of additional information.

Income Taxes

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

Reorganization Under Chapter 11 and Administration

The 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, realization of assets, and liquidation of liabilities in the ordinary course of business.

Results of Operations

Net Sales

Sales by reporting segment were:

Powertrain

Net sales increased 5.3% to $1,735.4 million in 2002 versus $1,648.0 million in 2001. Favorable OE sales volumes, particularly in North America, combined with a new piston program launched in Mexico, accounted for approximately $60 million of this increase. Foreign currency exchange of approximately $33 million more than offset the impact of customer price reductions. Sales volume from the third quarter 2001 acquisition of WSK Gorzyce, S.A., a Polish piston manufacturer, principally accounted for the remainder of the increase in sales.

Net sales decreased 4.0% to $1,648.0 million in 2001 versus $1,716.7 million in 2000. The decrease was the result of declining sales in both the automotive and heavy duty OE markets. Additionally, sales were negatively impacted by price pressure from customers as well as foreign currency exchange primarily on the British Pound and European Euro.

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Sealing Systems and System Protection

Net sales increased 1.4% to $639.2 million in 2002 versus $630.5 million in 2001. Favorable OE sales volumes accounted for approximately $7 million of the increase. Foreign currency exchange more than offset customer price reductions to account for the remainder of the increase in net sales.

Sales decreased 14.6% to $630.5 million in 2001 versus $738.1 million in 2000. The decrease was the result of declining sales in the automotive and heavy duty OE markets, price reductions, and the impact of certain European customer programs that ended and were not replaced with new programs.

Friction

Net sales increased 10.4% to $374.0 million in 2002 versus $338.9 million in 2001. Favorable OE sales volumes, combined with new program launches, accounted for approximately $33 million of this increase. Foreign currency exchange more than offset the impact of customer price reductions to account for the remainder of the increase.

Net sales decreased 12.5% to $338.9 million in 2001 versus $387.5 million in 2000. The decrease is due to lower sales volumes in the automotive and heavy duty OE markets and price reductions to OE customers. The decrease was offset slightly by net new business in Europe.

Aftermarket

Net sales decreased 1.6% to $2,417.5 million in 2002 versus $2,455.7 million in 2001. The decline in component replacement trends was offset by improved product availability in North America and Europe, the full-year effect of a new North American friction product introduced in 2001, and the impact of foreign currency exchange.

Net sales decreased 6.1% to $2,455.7 million in 2001 versus $2,616.4 million in 2000. The decrease was driven by increased customer consolidation, improved quality of OE parts and general weakness in the aftermarket.

Other

Other primarily includes the OE lighting operations, Asia Pacific, and other Corporate functions.

Divested Operations

Divested operations include the partial year impact of sales recognized by businesses divested in a particular year. Refer to Note 5 to the consolidated financial statements for descriptions of businesses divested in the current year.

Gross Margin

Gross margin by reporting segment was:

Gross margin was $1,042.1 million, or 19.2% of sales, for 2002 compared to $1,075.3, or 19.7% of sales in 2001. Favorable OE sales volumes provided additional gross margin of approximately $11 million. Adverse product mix in the North America Aftermarket resulted in a decline in gross margin of approximately $35 million. Productivity gains of approximately $100 million, resulting from supplier sourcing and manufacturing production improvements, were partially offset by customer price reductions. The increase in Friction gross margin is primarily related to significant improvements in North America production efficiency as a result of significant restructuring efforts completed during 2001.

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Approximately $33 million of the 2002 decrease is attributable to increased employee health and welfare costs and the effects of lower than expected returns on the Company’s pension plan assets included in Corporate functions. Divested operations accounted for an additional decline in gross margin of approximately $29 million.

Gross margin was $1,075.3 million, or 19.7% of net sales, for 2001 compared to $1,405.5 million, or 23.4% of net sales in 2000. The decrease is attributed to lower sales volumes, increased pension costs due to lower returns on the Company’s pension assets, and increased employee health and welfare costs. Gross margin was also impacted by the Company’s cost reduction activities not keeping pace with the lower sales volumes and inflation, customer price reductions, and an increase in provisions for excess and obsolete inventory.

Selling, General and Administrative Expense

Selling, general and administrative (“SG&A”) expenses were $826.3 million, or 15.2% of sales, in 2002 as compared to $840.0 million, or 15.4% of sales, in 2001. This decrease is primarily attributable to cost reduction efforts, partially offset by increased employee health and welfare costs, and the effect of lower actual returns on the Company’s pension plan assets on year over year pension expense.

SG&A expenses were $840.0 million, or 15.4% of sales, in 2001 compared to $832.8 million, or 13.8% of sales in 2000. This increase is primarily attributable to increased employee health and welfare costs, certain employee compensation programs, the effect of lower actual returns on the Company’s pension plan assets on year over year pension expense, and professional fees associated with its financing activities and investment strategy.

Restructuring Charges

During 2002, the Company recognized $43.3 million of restructuring charges, net of reversals of $20.5 million, related to severance and exit costs. These costs primarily include costs related to the continuing consolidation of operations to maximize production efficiencies and achieve economies of scale. Total employee reductions are expected to be 2,700 of which approximately 2,000 have been terminated as of December 31, 2002. Cash payments against restructuring reserves during 2002 were $53.1 million. The impact of foreign currency exchange and other charges against the reserves amounted to $19.5 million in 2002.

During 2001, the Company recognized $38.0 million of restructuring charges related to severance and exit costs. Severance costs of $36.0 million primarily included the planned consolidation of the European friction business and the January 2001 salaried employee reductions in North America and Europe. Total employee reductions related to 2001 activities were approximately 1,000. Exit costs of $2.0 million are primarily comprised of planned consolidation of the European friction business.

In 2000, the Company recognized $135.7 million of restructuring charges related to severance and exit costs. Employee severance costs of $105.8 million and exit costs of $29.9 million resulted from the planned closure of certain North American aftermarket branch warehouses and distribution centers; consolidation of the Company’s heavy-wall bearings business; the closure of certain Australian and Taiwanese sales, administrative and distribution facilities; the consolidation of certain administrative and human resource functions in Europe; reorganization of the America’s friction business; closure of one of the Company’s European R&D centers, consolidation of an administrative facility at the Company’s Ohio ignition facility and various other programs in North America, South America and Europe. As part of the 2000 restructuring plan approximately 1,400 employees were terminated and 30 facilities were closed or consolidated.

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The following is a summary of restructuring and rationalization charges and related activity for 2002, 2001 and 2000:

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

During 2002, the Company recorded an impairment charge of $70.2 million to adjust long-lived tangible assets to their estimated fair values in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144). The charge includes $46.7 million to write-down property, plant and equipment at four facilities that the Company is closing or consolidating into other facilities. The estimated fair values were determined by discounted cash flows or by independent third party appraisals. An additional charge of $6.6 million relates to the write down of property, plant and equipment at a European camshaft foundry related to a decline in sales volumes at that facility. The estimated fair value of this equipment was determined based upon discounted future cash flows. In connection with the signing of a new license agreement, the Company impaired the remaining intangible asset of $3.9 million pertaining to the prior agreement. The remaining impairment charge primarily relates to the impairment of assets that the Company intends to divest. The value of these assets was estimated based upon the future cash flows should the Company divest of these assets on an individual, open market basis.

On July 20, 2001, the FASB issued SFAS No. 141, “Business Combinations” and SFAS No. 142 “Goodwill and Other Intangible Assets”. These pronouncements significantly change the accounting for business combinations, goodwill, and intangible assets. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations and further clarifies the criteria to recognize intangible assets separately from goodwill. The requirements of SFAS No. 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. Under SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed for impairment annually (or more frequently if impairment indicators arise).

Effective January 1, 2002, the Company adopted these new standards, resulting in the discontinuance of amortization of goodwill and indefinite-lived intangible assets. The adoption of SFAS No. 142 also resulted in the reclassification of various intangible asset classes according to the measurability of their useful lives. During the second quarter of 2002, the Company, along with the assistance of an outside valuation firm, performed the impairment tests of its goodwill and indefinite-lived intangible assets required by SFAS No. 142. The Company’s initial impairment test indicated that the carrying value of certain of its operating segments exceeded the corresponding fair values, which were determined by using discounted cash flows and market multiples. The implied fair value of goodwill in these operating segments was then determined through the allocation of the fair value to the underlying assets and liabilities.

To reduce the carrying value of its goodwill and indefinite-lived intangible assets to their estimated fair value as required by SFAS No. 142, the Company recorded a non-cash charge of $1,417.9 million, net of applicable income tax benefit. The majority of this charge relates to the impairment of goodwill associated with the acquisitions of T&N plc. and Cooper Automotive.The tax impact related to the charge was $46.6 million and was primarily limited to the benefit derived from the impairment of certain intangible assets other than goodwill. The charge is presented as a cumulative effect of change in accounting principle in the consolidated statement of operations for the year ended December 31, 2002. The Company completed its required annual impairment analysis as of October 1, 2002, and based upon this analysis, no additional impairment charge was required.

Prior to 2002, the Company evaluated its long-lived assets, including goodwill and other intangible assets, in accordance with SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and Assets to be Disposed

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of”. During the third quarter of 2001, the Company determined that the undiscounted cash flows of certain of its non-core operating units were less than the carrying value of the long-lived assets of those operating units. Accordingly, the Company adjusted the carrying value of those assets to their estimated fair value resulting in an impairment charge of $497.3 million. Additionally, in the fourth quarter of 2001, the Company recorded an impairment charge of $37.8 million for an insolvent business unit in the United Kingdom, and $10.0 million for operations located in Argentina as a result of economic conditions in that country. The fair value was determined by anticipated future cash flows discounted at a rate commensurate with the risk involved. The following is a summary of the aggregate 2001 impairment charges by long-lived asset (in millions):

Under SFAS No. 121, the Company recorded a $75.4 million impairment charge in 2000 primarily associated with a write-down of assets to their estimated fair value for the closure of aftermarket branch warehouses and distribution centers, the Company’s Ohio administrative facility, a European research and development center and certain manufacturing and technical facilities associated with the reorganization of the Americas friction business.

Asbestos Charge

In 2000, the Company recorded a $184.4 million charge consisting of a $625.3 million increase in the Company’s asbestos liability, which was partially offset by a $440.9 million increase in the Company’s asbestos-related insurance recoverable. These charges and insurance recoveries were primarily based on an econometric study the Company commissioned during 2000 as discussed further in Note 17 to the consolidated financial statements.

Interest Expense

Net interest expense decreased by $152.0 million in 2002 to $122.8 million. This decrease is the result of the full-year effect of not accruing or paying interest on certain pre-petition debt, partially offset by increased interest expense related to the DIP credit facility. The effect of not accruing the contractual interest on the pre-petition debt was $164.4 million.

Net interest expense decreased $10.2 million in 2001 to $274.8 million. This decrease is the result of not accruing or paying interest on certain pre-petition debt. The effect of not accruing the contractual interest on the pre-petition debt was $41.6 million. This reduction in interest expense was partially offset by interest on the DIP credit facility and by higher average borrowings on the Company’s credit facilities during 2001 than in 2000.

Interest expense increased $16.1 million in 2000 to $285.0 million. The increase is primarily attributable to the full-year effect of the 1999 bond issue and higher amounts outstanding on the Company’s multi-currency revolver during 2000.

Chapter 11 and Administration Related Reorganization Expenses

In connection with the Restructuring Proceedings, the Company recognized $107.4 million and $57.3 million of Chapter 11 and Administration related reorganization expenses in 2002 and 2001, respectively. These expenses consisted of legal, financial and advisory fees, employee retention costs, and other directly related internal costs. The increase in Chapter 11 and Administration related reorganization expenses over 2001 is a direct result of the full-year effect of the Restructuring Proceedings. These expenses fluctuate largely based upon the necessity for professional services by third-party advisors in connection with the Restructuring Proceedings.

Other Income and Expenses, net

Other income, net was $21.8 million in 2002, compared to other expense, net of $59.0 million in 2001. This change is attributable to an aggregate net loss on the divestiture of several businesses of $36.3 million recognized in 2001, compared with an aggregate pre-tax gain on the divestiture of businesses of $1.1 million recognized in 2002. In addition, distributions on the Company obligated mandatorily redeemable preferred securities have been

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suspended in connection with the Restructuring Proceedings, resulting in a decrease in other expense of $30.6 million in 2002 as compared to 2001. Other income and expense also includes foreign currency exchange transactions and the equity in earnings of unconsolidated subsidiaries.

Other expense, net increased from 2000 to 2001 by $28.1 million to $59.0 million. This increase is primarily attributable to losses on the divestitures of several businesses in 2001 of $36.3 million.

Income Taxes

For 2002, the Company recorded income tax expense of $90.8 million on a loss before income taxes and cumulative effect of change in accounting principle of $120.2 million, compared to income tax expense of $219.5 million on a loss before income taxes of $782.0 million in 2001. Income tax expense for 2002 results primarily from an increase in the valuation allowance on deferred income tax assets in the U.S. and U.K. Income tax expense in 2001 resulted from the effects of the permanent difference between book and tax goodwill related to divestitures and impairment charges, an increase in the valuation allowance on deferred income tax assets in the U.S. and U.K., and non-deductible goodwill amortization.

At December 31, 2002, the Company had deferred tax assets of $755.2 million, net of a valuation allowance of $701.6 million, and deferred tax liabilities of $799.0 million. At December 31, 2001, the Company had deferred tax assets of $800.4 million, net of a valuation allowance of $496.8 million, and deferred tax liabilities of $867.8 million. The valuation allowance on deferred tax assets increased by $204.8 million in 2002 primarily due to losses in the U.S. and an increase in deferred income tax assets in the U.K. related to the Company’s recording of an additional minimum pension liability in comprehensive income. As a result of the Company’s Restructuring Proceedings limiting the implementation of certain tax planning strategies, current adverse market conditions and recent taxable losses in the U.S., the Company established a full valuation allowance reserve in 2001 against the net U.S. deferred income tax assets to the extent that the losses could not be carried back and continued to reserve losses in the U.S. in 2002. In addition, based on current taxable income projections for the U.K., the Company did not increase its deferred income tax asset position in the U.K.

Through the Petition Date, tax expense had historically differed from income taxes currently payable due to timing differences most significantly related to asbestos payments. As a result of the Restructuring Proceedings, the Company does not expect to make payments for the settlement of asbestos claims in the near term and as such, income taxes payable in the U.K. may increase. The Company does not expect the effect of suspended asbestos payments to have a significant effect on income taxes payable in the U.S. in the near term.

The Company evaluates its deferred taxes and related valuation allowance quarterly. If the Company believes that changes in current or future taxable income will not support the basis for recognizing the benefit of the deferred tax assets, valuation allowances will be provided accordingly.

Liquidity and Capital Resources

Cash Flow Provided by Operating Activities

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

Cash flow provided by operating activities was $35.8 million in 2001. Cash flow was impacted positively by the Restructuring Proceedings due to the staying of trade accounts payable and asbestos claims outstanding at the Petition Date, and not accruing or paying the contractual interest on certain pre-petition debt subsequent to the Petition Date. The primary uses of cash during 2001 were the $215.9 million of asbestos payments, net of insurance receipts, and $62 million of restructuring and rationalization payments. Changes in working capital provided $239.2

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million of positive cash flow as a result of a decrease in inventories of $40.2 million, a decrease in accounts receivable of $116.4 million, and an increase in accounts payable of $82.6 million.

Cash Flow Used by Investing Activities

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

Cash flow used by investing activities was $70.8 million in 2001. Capital expenditures amounted to $313.8 million and business acquisitions, net of cash acquired, used $18.8 million. These outflows were offset by proceeds from the divestiture of various businesses amounting to $242.8 million and proceeds from the sale of fixed assets of $19.0 million.

Cash Flow Provided from Financing Activities

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

Cash flow provided from financing activities was $269.0 million in 2001. Cash flow provided primarily resulted from net borrowings in the amount of $643.3 million, offset by the repurchase of accounts receivable under securitization in the amount of $348.1 million in conjunction with the termination of the facility.

To meet its liquidity needs, the Company entered into a debtor-in-possession credit facility (the “DIP credit facility”) in the aggregate amount of $675 million. At December 31, 2002, the Company had $314.7 million of borrowings outstanding and has issued $14.0 million in letters of credit under this facility. Based upon the collateral securing the DIP credit facility, the Company had $200.3 million available for borrowings at December 31, 2002. The DIP credit facility has been approved by the Bankruptcy court as well as the various creditors’ committees. The DIP credit facility expires in October 2003 and bears interest at either alternate base rate (“ABR”) plus 2.5 percentage points or a formula based on the London Inter-Bank Offered Rate (“LIBOR”) plus 3.5 percentage points. The ABR is the greatest of either the bank’s prime rate or the base CD rate plus 1 percentage point or the federal funds rate plus ½ percentage point. The Company intends on renegotiating its DIP credit facility prior to its expiration, if necessary.

The Company provided collateral in the form of a pledge of its domestic inventories, domestic accounts receivable, domestic plant, and its equipment and real property to the DIP lenders. The borrowing base available to the Company is calculated weekly based upon the value of this underlying collateral. As a result, the borrowing base available to the Company at any point in time may be less than the total commitment on the DIP facility. The DIP lenders received permission from the lenders of the Senior Credit Agreements to have priority over their collateral interest.

The DIP credit facility contains restrictive covenants. The more significant requirements of these covenants include the maintenance of certain consolidated and domestic earnings before interest, taxes, depreciation and amortization, and limitations on: capital expenditures; early retirement of debt; additional borrowings; payment of dividends; and the sale of assets or businesses. The DIP credit facility is specified for borrowings in the United States. Investments in non-Debtor international subsidiaries are limited by the DIP credit facility.

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

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The Company has the following contractual obligations and commercial commitments outstanding at December 31, 2002:

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

At December 31, 2002 the Company was in compliance with all debt covenants under its existing DIP credit facility. Based on current forecasts, the Company expects to be in compliance through the expiration of the facility. Changes in the business environment, market factors, macroeconomic factors, or the Company’s ability to achieve its forecasts and other factors outside of the Company’s control, could adversely impact its ability to remain in compliance with debt covenants. If the Company were to not be in compliance at a measurement date, the Company would be required to renegotiate its facility. No assurance can be provided as to the impact of such actions.

Asbestos Liability and Legal Proceedings

Note 17 to the consolidated financial statements, entitled “Litigation and Environmental Matters”, on pages 56 through 61 hereof, are incorporated herein by reference.

Item 7a. Qualitative and Quantitative Disclosures About Market Risk

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

Foreign Currency Risk

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

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distributes its products. The Company’s operating results are primarily exposed to changes in exchange rates between the U.S. dollar and European currencies.

As currency exchange rates change, translation of the statements of operations of the Company’s international businesses into United States dollars affects year-over-year comparability of operating results. The Company does not generally hedge operating translation risks because cash flows from international operations are generally reinvested locally. Changes in foreign currency exchange rates are generally reported as a component of stockholders’ equity for the Company’s foreign subsidiaries reporting in local currencies and as a component of income for its foreign subsidiaries using the U.S. dollar as the functional currency. The Company’s other comprehensive loss was decreased by $408.9 million in 2002 and was increased by $129.4 million in 2001 due to cumulative translation adjustments resulting from changes in the U.S. Dollar to the Euro, British Pound and Argentine Peso.

As of December 31, 2002 and 2001, the Company’s net current assets (defined as current assets less current liabilities) subject to foreign currency translation risk were $705.3 million and $612.0 million, respectively. The potential decrease in net current assets from a hypothetical 10% adverse change in quoted foreign currency exchange rates would be $70.5 million and $61.2 million, respectively. The sensitivity analysis presented assumes a parallel shift in foreign currency exchange rates. Exchange rates rarely move in the same direction. This assumption may overstate the impact of changing exchange rates on individual assets and liabilities denominated in a foreign currency.

The Company manages certain aspects of its foreign currency activities and larger transactions through the use of foreign currency options or forward contracts. The Company generally tries to utilize natural hedges within its foreign currency activities, including the matching of revenues and costs. At December 31, 2002, the Company had two contracts outstanding with a combined notional value of $9.7 million. No options or contracts were outstanding at December 31, 2001.

Interest Rate Risk

The Company’s variable interest expense is sensitive to changes in the general level of global market interest rates.

Commodity Price Risk

The Company is dependent upon the supply of certain raw materials in the production process and has from time to time entered into firm purchase commitments for copper, aluminum alloy, high-grade aluminum, lead and nickel. The Company uses swaps and forward contracts to hedge against the changes in certain specific commodity prices of the purchase commitments outstanding. At December 31, 2002, the Company had two contracts outstanding with a combined notional value of $2.9 million. No swaps or contracts were outstanding at December 31, 2001.

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Item 8. Financial Statements and Supplemental Data

CONSOLIDATED STATEMENTS OF OPERATIONS