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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

ENPRO INDUSTRIES, INC.
(Exact name of registrant, as specified in its charter)

(704) 731-1500
(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 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 [   ]

As of November 12, 2002, there were 20,416,302 shares of common stock of the registrant outstanding. There is only one class of common stock.

PART I, ITEM 1.

PART I. FINANCIAL INFORMATION
ENPRO INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollars in millions)

See Notes to Condensed Consolidated Financial Statements.

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ENPRO INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(dollars in millions, except per share data)

See Notes to Condensed Consolidated Financial Statements.

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ENPRO INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in millions)

See Notes to Condensed Consolidated Financial Statements.

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ENPRO INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

A. Overview, Basis of Presentation and Critical Accounting Policies

     Overview

     EnPro Industries, Inc. (“EnPro” or the “Company”) is a leader in the design, development, manufacturing and marketing of well recognized, proprietary engineered industrial products that include sealing products, metal polymer bearings, air compressors and heavy-duty diesel and natural gas engines.

     In May 2002, Goodrich Corporation (“Goodrich”) completed the tax-free spin-off of its Engineered Industrial Products (“EIP”) business to its shareholders (the “Distribution”). EnPro was incorporated in North Carolina in January 2002 in anticipation of the proposed Distribution. Prior to the Distribution, Coltec Industries Inc (“Coltec”) was a wholly owned subsidiary of Goodrich and owned the EIP business and an aerospace business (“Coltec Aerospace”). During May 2002, Coltec transferred to Goodrich, by way of a dividend, all of the assets, liabilities and operations of Coltec Aerospace (the “Aerospace Dividend”).

     Upon the Distribution, Coltec became a wholly owned subsidiary of EnPro. The Distribution was effected through a tax-free distribution to Goodrich shareholders of all of the capital stock of EnPro. Each Goodrich shareholder received one share of EnPro common stock, as well as an associated EnPro preferred stock purchase right, for every five shares of Goodrich common stock owned.

     Basis of Presentation

     These financial statements present Coltec’s condensed consolidated financial condition, results of operations and cash flows as it operated as a wholly owned subsidiary of Goodrich prior to the Distribution on May 31, 2002 including certain adjustments and allocations necessary for a fair presentation of the business, and EnPro’s condensed consolidated financial condition, results of operations and cash flows after the Distribution. As noted above, Coltec transferred Coltec Aerospace to Goodrich prior to the Distribution. The transfer of Coltec Aerospace to Goodrich represented the disposal of a segment under APB Opinion No. 30. Accordingly, Coltec Aerospace has been accounted for as a discontinued operation and its revenues, costs and expenses, assets and liabilities, and cash flows have been segregated in the Company’s Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows. Unless otherwise noted, disclosures herein pertain to the Company’s continuing operations. There are no operations shown as discontinued operations other than Coltec Aerospace.

     As a result of the Aerospace Dividend, Goodrich retained the net assets of Coltec Aerospace, which are reflected as Assets and Liabilities of Discontinued Operations in the Company’s Condensed Consolidated Balance Sheets. Coltec Aerospace also retained certain other assets and liabilities, including assumed intercompany balances and other assets and liabilities relating primarily to pensions, postretirement benefits other than pensions and income taxes.

     Pending resolution of certain items related to the post closing adjustment procedure with Goodrich, a final cash settlement will be made between EnPro and Goodrich. At May 31, 2002, $9.0 million of cash was deposited into an escrow account in connection with the pending cash settlement, which has been classified as restricted cash in the accompanying Condensed Consolidated Balance Sheet as of September 30, 2002. An estimated payment by EnPro has been recorded as a liability

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in the Condensed Consolidated Balance Sheet as of September 30, 2002. To the extent that the final cash settlement differs from the estimate, an adjustment will be made to the Company’s equity. On October 25, 2002, $8.5 million was distributed to Goodrich from the escrow account as partial payment of the post closing cash settlement. The final amount of the cash settlement has not been determined.

     Prior to the Distribution, Coltec had certain outstanding debts, the most significant of which were Coltec’s 7-1/2% Senior Notes due 2008 (the “Coltec Senior Notes”) and the 5-1/4% Convertible Preferred Securities – Term Income Deferred Equity Securities (the “TIDES”). The TIDES continue to be obligations of Coltec after the Distribution. However, because the TIDES are convertible into the common stock of another registrant (i.e. Goodrich), the TIDES are no longer deemed to be a convertible preferred security and are classified as long-term debt. In April 2002, Goodrich made an offer to exchange the Coltec Senior Notes for debt securities of Goodrich having similar terms. Goodrich exchanged new Goodrich securities for $296.9 million of the $300.0 million outstanding Coltec Senior Notes, which were tendered at the time of the exchange. On May 21, 2002, Coltec purchased all of these notes from Goodrich, including accrued interest thereon, in exchange for a $201.9 million debenture and $97.2 million in cash. As a result of the transaction, all Coltec Senior Notes purchased by Coltec were cancelled. The cash portion of the purchase price was financed through an intercompany loan from Goodrich that was assumed by Coltec Aerospace. The debenture was contributed by Goodrich to EnPro and will remain an outstanding obligation of Coltec to EnPro, which, for accounting purposes, is eliminated upon consolidation in EnPro’s financial statements. The $3.1 million of Coltec Senior Notes that are outstanding following the exchange offer remain obligations of Coltec.

     All significant transactions among the Company’s operations have been eliminated.

     Certain prior year amounts have been reclassified to conform to the current year presentation.

     Management believes that the assumptions underlying the condensed consolidated financial statements are reasonable. However, the financial information in these financial statements does not necessarily include all of the expenses that would have been incurred by Coltec had it been a separate, stand-alone entity prior to the Distribution and may not necessarily reflect what Coltec’s consolidated financial condition, results of operations and cash flows would have been had Coltec been a stand-alone entity prior to the Distribution or what the Company’s consolidated financial condition, results of operations and cash flows may be in the future.

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the consolidated financial statements and footnotes for the year ended December 31, 2001, included in the Company’s Information Statement dated May 24, 2002 included in Amendment No. 4 to its Form 10 registration statement filed with the Securities and Exchange Commission on May 24, 2002.

     Critical Accounting Policies

     EnPro believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of its condensed consolidated financial statements.

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     Revenue Recognition - Revenue is recognized at the time products are shipped or services are rendered.

     Asbestos - An accrual is recorded for asbestos-related matters that are deemed probable and can be reasonably estimated, which consist of settled claims and actions in advanced stages of processing. An asset is recorded equal to the amount of this liability that is expected to be recovered from insurance.

     In accordance with internal procedures for the processing of asbestos product liability actions and due to the proximity to trial or settlement, certain outstanding actions progress to a stage where the cost to dispose of these actions can be reasonably estimated. These actions are classified as actions in advanced stages. With respect to outstanding actions that are in preliminary procedural stages, as well as any actions that may be filed in the future, the Company believes that insufficient information exists upon which judgments can be made as to the validity or ultimate disposition of such actions. Therefore, the Company believes that it is impossible to estimate with any degree of accuracy or reasonableness what, if any, potential liability or costs may be incurred. Accordingly, no estimate of future liability has been included for such claims.

     Derivative Instruments – Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, requires that all derivative instruments be reported in the balance sheets at fair value and that changes in a derivative’s fair value be recognized currently in earnings unless specific hedge criteria are met. Coltec purchased call options in March 2002 to mitigate its financial exposure created by the conversion feature of the TIDES. The call options are derivative instruments and are carried at fair value with changes reflected in income. The Company also has a program in place to manage foreign currency risk. As part of that program, the Company has entered into a limited number of foreign currency forward exchange contracts to hedge forecasted transactions denominated in foreign currencies. These forward exchange contracts are accounted for as cash flow hedges. As cash flow hedges, the effective portion of the gain or loss on the forward exchange contracts is reported in other comprehensive income/loss and the ineffective portion is reported currently in earnings. Amounts in accumulated other comprehensive income/loss are reclassified into earnings in the period that the hedged transactions affect earnings.

B. Non-Operating Expenses

     During the third quarter and nine months ended September 30, 2002, the Company recorded pre-tax charges of a non-operating nature totaling $11.1 million and $41.4 million, respectively. These charges, which reduced net income for the quarter and nine months by $6.9 million and $25.9 million, or $0.34 and $1.28 per share, respectively, consisted of three primary components.

     First, in connection with the Distribution, the Company conducted a review of its policy and strategies for managing and estimating environmental liabilities. As a result of changes in the Company’s strategies growing out of this review and the Company’s policy for estimating environmental liabilities, and in light of recent developments at a number of environmental sites associated with previously divested businesses, the Company increased its environmental reserves by $12.0 million during the quarter ended June 30, 2002 to reflect an increase in the estimated costs to remediate these sites.

     Second, based on new information in the quarter ended June 30, 2002, the Company revised the estimated costs associated with an adverse court ruling related to the closing of a plant in 1982. The Company increased its reserve for this case by $11.0 million during the quarter ended June 30, 2002. The claim is expected to be paid either in the fourth quarter of 2002 or in early 2003.

     Third, in March 2002, the Company purchased call options on Goodrich common stock to provide protection against the risk that the cash required to finance conversion of its TIDES into Goodrich common stock could exceed the $150 million liquidation value of the TIDES. The call options are

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derivative instruments and are carried at fair value in the Company’s balance sheet. Changes in fair value are reflected in income. The fair value of the call options declined by $10.7 million and $15.8 million during the quarter and nine months ended September 30, 2002, respectively, and corresponding non-cash charges to earnings were recorded to reflect these declines in value.

C. Goodwill and Other Intangible Assets

     Effective July 1, 2001, the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) applicable to business combinations completed after June 30, 2001 were adopted. Effective January 1, 2002, additional provisions of SFAS 142, relating to business combinations completed prior to June 30, 2001 became effective and were adopted. Under the provisions of this standard, goodwill and intangible assets deemed to have indefinite lives are not subject to amortization. All other intangible assets are amortized over their estimated useful lives. Indefinite lived intangible assets and goodwill are subject to annual impairment testing using the guidance and criteria described in the standard. This testing requires comparison of carrying values to fair values, and when appropriate, the carrying value of impaired assets is reduced to fair value. In the second quarter of 2002, the first of the required impairment tests of goodwill and indefinite lived intangible assets was completed. Based on the results of the first test, it is likely that goodwill related to certain reporting units in the sealing products segment has been impaired. The measurement of the potential goodwill impairment will be completed no later than the end of 2002 as required by SFAS 142. The impairment will not exceed approximately $24 million, which represents the total goodwill of the certain reporting units. An impairment charge resulting from these impairment tests will be reflected as a cumulative effect of a change in accounting principle.

     Income (loss) from continuing operations for the quarters and nine months ended September 30, 2002 and 2001, adjusted to exclude amounts no longer being amortized, is as follows:

     The changes in the net carrying value of goodwill by reportable segments for the nine months ended September 30, 2002 are as follows:

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     The gross carrying amount and accumulated amortization of identifiable intangible assets is as follows:

     Amortization expense for the nine months ended September 30, 2002 was $3.2 million. Amortization expense for these intangible assets for 2002 through 2006 is estimated to be approximately $4 million per year.

D. Acquisition

     In September 2001, the Company acquired the Glacier metal polymer bearings business (“GIB”). The results of GIB’s operations have been included in the consolidated financial statements of the Company since that date. The business manufactures and distributes industrial metal polymer bearings and was integrated with the Company’s Garlock Bearings business, which is included in the engineered products segment. The integrated business is referred to as Glacier Garlock Bearings. The acquisition extends the Company’s reach geographically and results in a global position in the metal polymer bearings market; broadens its current product offerings; is expected to result in economies of scale relating to raw material purchases; and, includes the use of the Glacier brand name trademarks and intellectual property. The acquisition was recorded using the purchase method of accounting.

     The following pro forma information assumes that the acquisition occurred as of January 1, 2001.

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E. Restructuring Costs

     The Company incurred $3.1 million of restructuring costs in the first nine months of 2002. The restructuring costs included $1.2 million for equipment relocations, $1.7 million for building modifications, and $0.2 million for termination benefits. Restructuring reserves at September 30, 2002, as well as activity during the nine months ended September 30, 2002, consisted of:

F. Inventories

     Inventories consisted of the following:

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G. Comprehensive Income (Loss)

     Total comprehensive income (loss) consisted of the following:

H. Earnings Per Share

     Basic and diluted earnings per share in 2002 were computed based on net income (loss) divided by the average common shares outstanding during each period (20.2 million shares). Because EnPro’s results were consolidated into the results of Goodrich in 2001, per share numbers do not apply to prior periods. As of September 30, 2002, there are no dilutive common stock equivalents that would cause diluted earnings per share to differ from basic earnings per share.

I. Discontinued Operations

     Prior to the Distribution, Coltec transferred Coltec Aerospace to Goodrich by way of a dividend. The transfer of Coltec Aerospace to Goodrich represented the disposal of a segment under APB Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” Accordingly, Coltec Aerospace was accounted for as a discontinued operation through the Distribution date and its revenues, costs and expenses, assets and liabilities, and cash flows have been segregated in the Company’s Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows.

     The following summarizes the results of discontinued operations, which consist solely of the results of Coltec Aerospace:

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J. Business Segment Information

     The Company has two reportable segments. The sealing products segment manufactures sealing and PTFE products. The engineered products segment manufactures metal polymer bearings, air compressors, engines and specialized tooling. The Company’s reportable segments are managed separately based on differences in their products and services. In the third quarter of 2002, operating responsibility for a business in the sealing products segment was transferred to the engineered products segment. Historical segment information has been reclassified to conform with this internal organization change. Segment profit is total segment revenue reduced by operating expenses and restructuring costs identifiable with the segment. Corporate expenses include general corporate administrative costs. Segment profit was formerly referred to as segment operating income. The accounting policies of the reportable segments are the same as those for the Company.

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K. Contingencies

     General

     There are pending or threatened against the Company or its subsidiaries various claims, lawsuits and administrative proceedings, all arising in the ordinary course of business with respect to commercial, product liability, asbestos and environmental matters, which seek remedies or damages. The Company believes that any liability that may finally be determined with respect to commercial and non-asbestos product liability claims should not have a material effect on the Company’s consolidated financial condition or results of operations. From time to time, the Company and its subsidiaries are also involved in legal proceedings as plaintiffs involving contract, patent protection, environmental and other matters. Gain contingencies, if any, are recognized when they are realized.

     Environmental

     The Company and its subsidiaries are generators of both hazardous wastes and non-hazardous wastes, the treatment, storage, transportation and disposal of which are subject to various laws and governmental regulations. Although past operations were in substantial compliance with the then applicable regulations, the Company has been designated as a potentially responsible party (“PRP”) by the U.S. Environmental Protection Agency, or similar state agencies, in connection with several sites.

     The Company initiates corrective and/or preventive environmental projects of its own to ensure safe and lawful activities at its current operations. It also conducts a compliance and management systems audit program. The Company believes that compliance with current laws and governmental regulations concerning the environment will not have a material adverse effect on its capital expenditures or results of operations.

     The Company’s environmental engineers and consultants review and monitor environmental issues at past and existing operating sites, as well as off-site disposal sites at which the Company has been identified as a PRP. This process includes investigation and remedial selection and implementation, as well as negotiations with other PRPs and governmental agencies.

     As of September 30, 2002 and December 31, 2001, EnPro had an accrued liability of $38.0 million and $27.0 million, respectively, for probable future expenditures relating to environmental contingencies. In connection with the Distribution, the Company conducted a review of its policy and strategies for managing and estimating environmental liabilities. As a result of changes in the Company’s strategies growing out of this review and the Company’s policy for estimating environmental liabilities, and in light of recent developments at a number of environmental sites associated with previously divested businesses, the accrued liability was increased in the second quarter of 2002 by $12.0 million to reflect an increase in the estimated costs to remediate these sites.

     The amounts recorded in the financial statements have been recorded on an undiscounted basis. The Company believes that its reserves are adequate based on currently available information. Management believes that it is reasonably possible that additional costs may be incurred beyond the amounts accrued as a result of new information that may become available in the future. However, the amounts, if any, cannot be estimated and management believes that they would not be material to the Company’s consolidated financial condition or cash flows, but could be material to the Company’s consolidated results of operations in a given period.

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     Other Contingent Liability Matters

     The Company has contingent liabilities related to discontinued operations of its predecessors for which it retained liability or is obligated under indemnity agreements. These contingent liabilities include, but are not limited to, potential product liability and associated claims related to the Company’s former Colt Firearms subsidiary for firearms manufactured prior to 1990 and the Company’s former Central Maloney subsidiary for electrical transformers manufactured prior to 1994. No material claims of that nature are currently pending against the Company related to Central Maloney. However, such claims could arise in the future. Colt Firearms has been named as a defendant in approximately 30 cases filed by municipalities seeking to recover costs arising from gun related injuries. Many of these cases have been dismissed. Colt Firearms is seeking indemnification from Coltec for claims involving firearms manufactured prior to March 1990. The Company has rejected Colt Firearms’ claims in all instances on various legal grounds. The Company also has ongoing obligations with regard to workers compensation, retiree medical and other retiree benefit matters associated with discontinued operations that relate to the Company’s periods of ownership of those operations. In the second quarter of 2002, Coltec paid approximately $8 million to satisfy a judgment relating to these obligations. In addition, as a result of an adverse court ruling in a case related to the closure of a plant in Pennsylvania in 1982, the Company increased the liability for this case by $11.0 million in the second quarter of 2002. The claim is expected to be paid either in the fourth quarter of 2002 or in early 2003.

     Asbestos

     History. Certain of the Company’s subsidiaries, primarily Garlock Sealing Technologies, LLC (“Garlock”) and The Anchor Packing Company (“Anchor”), have been among a number of defendants (typically 15 to 40 and often more than 100) in actions filed in various states by plaintiffs alleging injury or death as a result of exposure to asbestos fibers. Except for claims against Garlock and Anchor, the number of claims to date has not been significant. Among the products at issue in those actions are industrial sealing products, predominantly gaskets and packing products, manufactured and/or sold by Garlock or Anchor. The damages claimed vary from action to action and in some cases plaintiffs seek both compensatory and punitive damages. To date, neither Garlock nor Anchor has been required to pay any punitive damage awards, although there can be no assurance that they will not be required to do so in the future. Liability for compensatory damages has historically been allocated among all responsible defendants, thus limiting the potential monetary impact of a particular judgment or settlement on any individual defendant. Since the first asbestos-related lawsuits were filed against Garlock in 1975, Garlock and Anchor have processed approximately 500,000 asbestos claims to conclusion and, together with their insurers, have paid approximately $780 million in settlements and judgments at a cost in fees and expenses of approximately $265 million.

     Claims Mix. Of those claims resolved, approximately 2% have been claims of plaintiffs alleging the disease mesothelioma, approximately 6% have been claims of plaintiffs with lung or other cancers, and approximately 92% have been claims of plaintiffs alleging asbestosis, pleural plaques or other impairment of the respiratory system of varying degree. Because the more serious disease cases tend to work through the system more quickly than the non-malignancy cases and the cases filed by those who are not impaired, we believe that the disease mix in our current open caseload, on a percentage basis, is even more skewed toward pleural plaques and includes a large number of claims made by plaintiffs who have suffered no disease and have no measurable impairment of any kind. In fact, while there are many cases in our current open caseload about which we have no disease information, we only are aware of approximately 7,000 that involve a claimant with mesothelioma, lung cancer or some other cancer.

     Product Defenses. The Company believes that Garlock and Anchor are in a favorable position compared to many other asbestos defendants because, among other things, the asbestos-containing products formerly sold by Garlock and Anchor were encapsulated, which means the asbestos fibers were

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incorporated into the product during the manufacturing process and sealed in a binder. They are also nonfriable, which means they cannot be crumbled by hand pressure. The Occupational Safety and Health Administration, which began generally requiring warnings on asbestos-containing products in 1972, has never required that a warning be placed on products such as Garlock’s gaskets. Notwithstanding that no warning label has been required, Garlock included one on all of its asbestos-containing products beginning in 1978. Further, gaskets such as those previously manufactured and sold by Garlock are one of the few asbestos-containing products still permitted to be manufactured under regulations of the Environmental Protection Agency. Since the mid-1980s, U.S. sales of asbestos-containing industrial sealing products have not been a material part of Garlock’s sales and those sales have been predominantly to sophisticated purchasers such as the U.S. Navy and large petrochemical facilities. These purchasers generally have extensive health and safety procedures and are familiar with the risks associated with the use and handling of industrial sealing products that contain asbestos. Garlock discontinued distributing asbestos-containing products in the U.S. during 2000 and worldwide in mid-2001.

     Settlements. Garlock settles and disposes of actions on a regular basis. In addition, some actions are disposed of at trial. Garlock’s historical settlement strategy has been to try to match the timing of payments with recoveries received from insurance which, as described later, are currently limited to $80 million per year. However, in 1999 and 2000, Garlock implemented a short-term aggressive settlement strategy. The purpose of this short-term strategy was to achieve a permanent reduction in the number of overall asbestos claims through the settlement of a larger than normal number of claims, including some claims not yet filed as lawsuits. Mainly due to this short-term aggressive settlement strategy, but also because of a significant overall increase in claims filings, the settlement amounts paid in 2001, 2000 and 1999 increased over prior periods. In 2001, Garlock resumed its historical settlement strategy. In fact, Garlock reduced new settlement commitments from $180 million in 2000 to $94 million in 2001 and is on pace to reduce new commitments further in 2002. However, because of commitments made in 1999 and 2000 that will be paid over a number of years, the settlement amounts that Garlock will pay in 2002 through 2005 will continue to include amounts for settlements made during 1999, 2000 and early 2001, when the short-term strategy was employed.

     Settlements are made without any admission of liability and are generally made on a group basis with payments made to individual claimants over a period of one to four years. Settlement amounts vary depending upon a number of factors, including the jurisdiction where the action was brought, the nature of the disease alleged and the associated medical evidence, the occupation of the plaintiff, the presence or absence of other possible causes of the plaintiff’s alleged illness, the availability of legal defenses, such as the statute of limitations, and whether the action is an individual one or part of a group. Garlock’s allocable portion of the total settlement amount for an action typically ranges from 1% to 2% of the total amount paid by all defendants in the action.

     Before any payment on a settled claim is made, the claimant is required to submit a medical report acceptable to Garlock substantiating the asbestos-related illness and meeting specific criteria of disability. In addition, sworn testimony that the claimant worked with or around Garlock asbestos-containing products is required. Generally, the claimant is also required to sign a full and unconditional release of Garlock, its subsidiaries, parent, officers, directors, affiliates and related parties from any liability for asbestos-related injuries or claims.

     When a settlement demand is not reasonable given the totality of the circumstances, Garlock generally will try the case. Garlock has been successful in winning a substantial majority of the cases it has tried to verdict. Garlock’s share of adverse verdicts in these cases in the first nine months of 2002, together with the years 2001 and 2000 totaled approximately $5 million in the aggregate, and some of those verdicts are on appeal.

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     Status of Anchor. Anchor is an inactive and insolvent subsidiary of Coltec. The insurance coverage available to Anchor of approximately $9 million as of September 30, 2002, is fully committed. Anchor continues to pay settlement amounts covered by its insurance but has not committed to settle any further actions since 1998. As cases reach the trial stage, Anchor is typically dismissed without payment.

     Insurance Coverage. The insurance coverage available to Garlock is substantial. As of September 30, 2002, Garlock had available $938 million of insurance coverage from carriers that it believes to be solvent. Garlock classifies $61 million of otherwise available insurance as insolvent. Of the solvent insurance, $690 million (74%) is with US-based carriers whose credit rating by S&P is investment grade (BBB) or better, $115 million (12%) is with other solvent US carriers and $133 million (14%) is with various solvent London market carriers. Of the $938 million, $147 million is allocated to claims that have been paid by Garlock and submitted to its insurance companies for reimbursement and $122 million has been committed to claim settlements not yet paid by Garlock. Thus, at September 30, 2002, $669 million remained available for future asbestos-related payments.

     Arrangements with Garlock’s insurance carriers limit the amount that can be received by it in any one year. The amount of insurance available to cover asbestos-related payments by Garlock currently is limited to $80 million per year. This limit automatically increases by 8% every three years, and the next scheduled increase is in 2003. Amounts paid by Garlock in excess of this annual limit that would otherwise be recoverable from insurance may be collected from the insurance companies in subsequent years so long as insurance is available, subject to the annual limit available in each subsequent year. As a result, Garlock is required to pay out of its own cash any amounts paid to settle or dispose of asbestos-related claims in excess of the annual limit and collect these amounts from its insurance carriers in subsequent years. Garlock is pursuing various options, such as raising the annual limit and commuting policies at discounted values, to ensure as close a match as possible between payments by Garlock and recoveries received from insurance carriers. There can be no assurance that Garlock will be successful as to any or all of these options.

     Insurance coverage for asbestos claims is not available to cover exposures initially occurring on and after July 1, 1984. Garlock and Anchor continue to be named as defendants in new actions, a few of which allege initial exposure after July 1, 1984. To date, no payments with respect to these claims, pursuant to a settlement or otherwise, have been made. In addition, Garlock and Anchor believe that they have substantial defenses to these claims and therefore automatically reject them for settlement. However, there can be no assurance that any or all of these defenses will be successful in the future.

     Quantitative Claims Information. In accordance with internal procedures for the processing of asbestos product liability actions and due to the proximity to trial or settlement, certain outstanding actions against Garlock and Anchor have progressed to a stage where the cost to dispose of these actions can reasonably be estimated. These actions are classified as actions in advanced stages and are included in the table as such below. With respect to outstanding actions against Garlock and Anchor that are in preliminary procedural stages, as well as any actions that may be filed in the future, the Company believes that insufficient information exists upon which judgments can be made as to the validity or ultimate disposition of such actions. Therefore, the Company believes that it is impossible to estimate with any degree of accuracy or reasonableness what, if any, potential liability or costs may be incurred. Accordingly, no estimate of future liability has been included in the table below for such claims.

     The Company records an accrual for liabilities related to Garlock and Anchor asbestos-related matters that are deemed probable and can be reasonably estimated, which consist of settled claims and actions in advanced stages of processing. The Company also records an asset equal to the amount of those liabilities that is expected to be recovered from insurance. A table is provided below depicting quantitatively the items discussed above.

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     Garlock and Anchor recorded charges to operations amounting to approximately $7 million and $6 million during the first nine months of 2002 and 2001, respectively, representing payments and related expenditures made during the periods which are not recoverable at all under insurance, whether in the present period or in future periods.

     Garlock and Anchor paid $37.0 million and $65.6 million during the first nine months of 2002 and 2001, respectively, for the defense and disposition of asbestos-related actions, net of amounts received from insurance carriers.

     Strategy. Garlock’s current strategy is to focus on trial-listed cases and other cases in advanced stages of processing, to make settlement commitments in each year that are less than or equal to insurance payments available under the insurance cap for that year, and to proactively support legislative and other efforts aimed at asbestos reform. Garlock believes that this strategy should continue to result in the reduction of the negative annual cash flow impact from asbestos claims (as it has in 2002 compared to 2001), as previous settlements work their way through the payment process. Garlock’s goal is to continue to decrease new settlement commitments while it works to raise the insurance cap, thereby eventually reducing negative cash flow to an amount equal to the fees and expenses incurred and expensed in each year. Garlock believes that, as predicted in various epidemiological studies that are publicly available, the incidence of asbestos-related disease should decline steadily over the next decade and thereafter, so that the level of claims activity against Garlock will eventually decline to a level that can be paid from the

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cash flow expected from Garlock’s operations even if Garlock exhausts its insurance coverage. There can be no assurance that epidemiological predictions about incidence of asbestos-related disease will prove to be accurate, or that, even if they are, there will be a commensurate decline in the number of asbestos-related claims filings. In fact, such studies indicate that asbestos-related disease should be in decline already, yet asbestos-related claims filings continue to increase.

     Considering the foregoing, as well as the experience of Coltec’s subsidiaries and other defendants in asbestos litigation, the likely sharing of judgments among multiple responsible defendants, recent bankruptcies of other defendants, and legislative efforts, and given the substantial amount of insurance coverage that Garlock expects to be available from its solvent carriers, the Company believes that pending actions against Garlock and Anchor are not likely to have a material adverse effect on its financial condition, but could be material to its results of operations or cash flows in a given period. The Company anticipates that asbestos disease actions will continue to be filed against Garlock. Because of the uncertainty as to the number and timing of potential future actions, as well as the amount that will have to be paid to settle or satisfy any such actions in the future, there can be no assurance that those future actions will not have a material adverse effect on the Company’s financial condition, results of operations and cash flows.

L. Adjusted Financial Information

     As mentioned in Note A, the Company was spun off from Goodrich effective May 31, 2002. Accordingly, the results of operations for the period up through the Distribution date include various income and expenses, as well as charges and allocations from Goodrich that would not be representative of the Company’s ongoing results as an independent entity.

     The following information (labeled “Adjusted”) attempts to portray the results of operations for the quarters and nine month periods ended September 30, 2002 and 2001 as if the Company were a stand-alone entity during those periods. In addition to adjusting various expenses to approximate what they would be on a stand-alone basis, certain other items contained in the historical financial statements have been eliminated because they were considered to be of a non-operating nature. The following adjustments have been made to the historical results of operations:

•		Corporate administrative costs and interest expense have been adjusted to reflect the costs the Company expects to incur as a stand-alone entity. The corporate administrative costs and interest expense for the respective periods in both 2002 and 2001 have been assumed to be the same. The distributions related to the TIDES have been classified as interest expense.
•		The net operating results of discontinued operations have been eliminated. These results pertain to Coltec Aerospace, which was transferred to Goodrich, by way of a dividend, prior to the Distribution date.
•		The non-operating expenses discussed in Note B have been eliminated.
•		The effective tax rate is 37.5% in all periods.
•		Earnings per share were calculated using average outstanding common shares of 20.2 million.

     The “Adjusted” results of operations do not purport to represent what the results of operations actually would have been had the spin-off occurred at the beginning of the periods presented, or to project financial performance for any future period. Rather, as noted above, they are an attempt to estimate the results of operations as if the Company were a stand-alone entity for the periods presented.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AS ADJUSTED
(UNAUDITED)

For the Quarters Ended September 30, 2002 and 2001
(dollars in millions, except per share data)