TECUMSEH PRODUCTS CO - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

COMMISSION FILE NUMBER 0-452
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TECUMSEH PRODUCTS COMPANY
(Exact Name of Registrant as Specified in its Charter)

MICHIGAN 38-1093240
(State of Incorporation) (I.R.S. Employer
Identification No.)

100 EAST PATTERSON STREET 49286
TECUMSEH, MICHIGAN (Zip Code)
(Address of Principal Executive Offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(517) 423-8411

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. [X]

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

Registrant disclaims the existence of control and, accordingly, believes
that as of February 6, 2004 all of the 5,077,746 shares of its Class B Common
Stock, $1.00 par value, then issued and outstanding, were held by non-
affiliates of Registrant. Certain shareholders, which, as of February 6, 2004,
held an aggregate of 2,279,094 shares of Class B Common Stock might be regarded
as "affiliates" of Registrant as that word is defined in Rule 405 under the
Securities Exchange Act of 1934, as amended. If such persons are "affiliates,"
the aggregate market value as of February 6, 2004 (based on the closing price of
$43.60 per share, as reported on the Nasdaq Stock Market on such date) of
2,798,652 shares then issued and outstanding held by non-affiliates was
approximately $122,021,227.

Numbers of shares outstanding of each of the Registrant's classes of Common
Stock at February 6, 2004:

CLASS B COMMON STOCK, $1.00 PAR VALUE: 5,077,746

CLASS A COMMON STOCK, $1.00 PAR VALUE: 13,401,938

Certain information in the definitive proxy statement to be used in
connection with the Registrant's 2004 Annual Meeting of Shareholders has been
incorporated herein by reference in Part III hereof.
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TABLE OF CONTENTS

1

PART I

ITEM 1. BUSINESS

GENERAL

Tecumseh Products Company (the "Company") is a full-line, independent,
global manufacturer of hermetic compressors for air conditioning and
refrigeration products, gasoline engines and power train components for lawn and
garden applications, and pumps. In addition, as of December 30, 2002, due to the
acquisition of the FASCO Motors Group ("FASCO"), the Company also manufactures
fractional horsepower electric motors and related products for a broad range of
residential and commercial applications. The Company believes it is one of the
largest independent producers of hermetically sealed compressors in the world,
one of the world's leading manufacturers of small gasoline engines and power
train products used in lawn and garden applications, and one of the leading
manufacturers of fractional horsepower motors for the United States market. The
Company also produces a variety of pump products with a wide range of
applications. The Company's products are sold in countries all around the world.
With the acquisition of FASCO, the Company groups its products into four
principal market segments: Compressor Products, Electrical Components, Engine &
Power Train Products and Pump Products.

Compressor Products include a broad range of air conditioning and
refrigeration compressors, as well as refrigeration condensing units. The
Company's compressor products range from fractional horsepower models used in
small refrigerators and dehumidifiers to large compressors used in unitary air
conditioning applications. The Company sells compressors in all four compressor
market segments: (i) household refrigerators and freezers; (ii) room air
conditioners; (iii) commercial and residential unitary central air conditioning
systems; and (iv) commercial refrigeration applications including freezers,
dehumidifiers, water coolers and vending machines. The Company sells compressors
to original equipment manufacturers ("OEMs") and aftermarket distributors.

Electrical Component Products include AC and DC electric motors, blowers,
gear motors and linear actuators for a broad and diverse set of applications
across many industries. These markets include automotive, appliance and consumer
durables, heating and cooling equipment, computer and office equipment,
industrial machinery, commercial equipment, aerospace and healthcare. In
addition to motors, the Company also manufactures other electrical components
that work in tandem with electric and electronic devices to manage and regulate
their operation and provide connectivity and other motor parts for sale to
external customers. These products include overloads, relays, thermostats,
terminals, laminations and electronic circuit boards. In addition, the Company
has developed an uninterruptible alternative power system for use in commercial
structures requiring reliable backup electrical power sources, such as cell
towers, that is undergoing customer testing.

Engine & Power Train Products consist of (i) two- and four-cycle gasoline
engines for use in a wide variety of lawn and garden applications and other
consumer and light commercial applications and (ii) transmissions, transaxles
and related parts for use principally in lawn and garden tractors and riding
lawn mowers. The Company sells engine and power train products to OEMs and
aftermarket distributors.

Pump Products include (i) small submersible pumps used in a wide variety of
industrial, commercial, and consumer applications and (ii) heavy-duty
centrifugal type pumps used in the construction, mining, agricultural, marine,
and transportation industries. The Company sells pump products to distributors,
mass merchants and OEMs.

FOREIGN OPERATIONS AND SALES

In recent years, international sales and manufacturing have become
increasingly important to the Company's business as a whole. In 2003, sales to
customers outside the United States represented approximately 41% of total
consolidated net sales. In addition to North American operations, compressor
products are produced in Brazil, France and India, engines and component parts
are produced in Italy, the Czech Republic and Brazil and electric motors are
produced in Thailand.

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Products sold outside the United States are manufactured at both U.S. and
foreign plants. Tecumseh do Brasil, Ltda. ("Tecumseh do Brasil"), the Company's
Brazilian compressor subsidiary, sells its products principally in Latin
America, North America, Europe and the Middle East. The Brazilian operation
represents a significant portion of the Company's compressor business. In 2003,
total sales generated by Tecumseh do Brasil amounted to 35% of total Compressor
Products segment sales. Brazilian operating income amounted to approximately 75%
of total Compressor Products segment operating income.

The Company's European compressor subsidiary, Tecumseh Europe, S.A.
("Tecumseh Europe"), generally sells the compressor products it manufactures in
Europe, the Middle East, Africa, Latin America and Asia. The Company also has
two manufacturing facilities in India that produce air conditioning and
refrigeration compressors primarily for the Indian appliance market with some
exports to North America.

The primary market for Electrical Component products is North America with
some sales of fractional horsepower motors in Australia, Europe and Asia. Motor
manufacturing operations outside the United States are located in Mexico and
Thailand with some final assembly in Australia. Mexican operations are used to
supply the North American market, while the Thai operations supply Asia,
Australia and North America.

In the engine business, the Company has two principal markets. The North
American market is primarily served by the Company's U.S. manufacturing
operations. The European market is served by the manufacturing operations of the
Company's Italian engine subsidiary, Tecumseh Europa, S.p.A. ("Tecumseh
Europa"), and to a lesser extent, by U.S. export sales. Tecumseh Europa produces
light-weight engines primarily for lawn and garden applications along with some
utility applications. In addition, the engine business has a manufacturing
facility in the Czech Republic acquired in May, 2001, that produces primarily
larger engines and engine components for export to the U.S. market. During the
fourth quarter of 2003, a facility in Curitiba, Brazil began producing engine
components and sub-assemblies for export to the U.S. and European markets.

The Company's dependence on sales in foreign countries entails certain
commercial and political risks, including currency fluctuations, unstable
economic or political conditions in some areas and the possibility of U.S.
government embargoes on sales to certain countries. The Company's foreign
manufacturing operations are subject to other risks as well, including
governmental expropriation, governmental regulations that may be disadvantageous
to businesses owned by foreign nationals and instabilities in the workforce due
to changing political and social conditions. These considerations are especially
significant in the context of the Company's Brazilian operations given the
importance of Tecumseh do Brasil's performance to the Company's total operating
results.

INDUSTRY SEGMENT AND GEOGRAPHIC LOCATION INFORMATION

The results of operations and other financial information by industry
segment and geographic location (including the footnotes thereto) for each of
the years ended December 31, 2003, 2002 and 2001 appear under the caption
"Business Segment Data" in Note 7 to the Consolidated Financial Statements which
appear in Part II, Item 8, of this report, "Financial Statements and
Supplementary Data." Our segments share similar economic characteristics and are
similar in terms of products offered, production processes, types of customers
served and methods of distribution. Information prior to 2003 has been
reclassified to reflect the addition of the Company's new Electrical Components
segment which was created on December 30, 2002 in conjunction with the
acquisition of FASCO. The information contained under the caption "Business
Segment Data," along with the written discussion in the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" under the caption
"Results of Operations" in this report should be read in conjunction with the
business segment information presented in the following sections entitled:
Compressor Products, Electrical Component Products, Engine & Power Train
Products and Pump Products.

COMPRESSOR PRODUCTS

The Compressor Products segment is the Company's largest business segment.
A compressor is a device that compresses a refrigerant gas. When the gas is
later permitted to expand, it absorbs and transfers heat, producing a cooling
effect, which forms the basis for a wide variety of refrigeration and air
conditioning products. All of the compressors produced by the Company are
hermetically sealed. The Company's current

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compressor line consists primarily of reciprocating and rotary designs with a
very limited number of scroll models.

PRODUCT LINE

The Company manufactures and sells a variety of traditional, reciprocating
piston compressors suitable for use in all four compressor market segments.
These lines of compressors range in size from approximately 12 horsepower models
used in unitary air conditioning applications to small fractional horsepower
models used in refrigerators, dehumidifiers and vending machines.

Rotary compressors ranging from 5,000 to 18,000 BTU/hour are produced by
the Company for room and mobile air conditioning applications. These compressors
generally provide increased operating efficiency, lower equipment space
requirements, and reduced sound levels when compared to reciprocating piston
models.

Scroll compressors generally offer improved energy efficiency and reduced
noise levels compared to traditional reciprocating designs and are generally
preferred by OEMs for certain products, including unitary central air
conditioning systems and certain commercial applications. The Company has a
scroll compressor product line for the unitary air conditioning market that is
sold in very limited quantities.

MANUFACTURING OPERATIONS

Compressor Products manufactured in the Company's U.S. plants accounted for
approximately 34% of 2003 compressor sales. The balance was produced at the
Company's manufacturing facilities in Brazil, France and India. The compressor
operations are substantially vertically integrated, and the Company manufactures
a significant portion of its component needs internally, including electric
motors, metal stampings and glass terminals. Raw materials are purchased from a
variety of non-affiliated suppliers. The Company utilizes multiple sources of
supply, and the required raw materials and components are generally available in
sufficient quantities.

SALES AND MARKETING

The Company markets its U.S., Brazilian and Indian built compressors under
the "Tecumseh" brand and French built compressors under the "Tecumseh
Europe-L'Unite Hermetique" brand. The Company sells its compressor products in
North America primarily through its own sales staff. Major original equipment
manufacturer (OEM) customers are assigned to sales staff on an account basis.
Other customers (smaller commercial OEMs) are served by sales personnel assigned
to specified geographic regions, and sales to aftermarket customers are made
through independent sales representatives. The Company's U.S., Brazilian, French
and Indian operations each have their own sales staff. In certain foreign
markets, the Company also uses local independent sales representatives and
distributors.

Substantially all of the Company's sales of compressor products for room
air conditioners and for household refrigerators and freezers are to OEMs. Sales
of compressor products for unitary central air conditioning systems and
commercial applications include substantial sales to both OEM and distributor
customers.

The Company has over 1,200 customers for compressor products, the most
significant of which are commercial customers. In 2003, the two largest
customers for compressor products accounted for 7.9% and 6.3%, respectively, of
total segment sales, or 3.5% and 2.8%, respectively, of consolidated net sales.
Loss of either of these customers could have a material adverse effect on the
results of operations of the Compressor Products segment and, at least
temporarily, on the Company's business as a whole. Generally, the Company does
not enter into long-term contracts with its customers in this segment. However,
the Company does pursue long-term agreements with selected major customers where
a business relationship has existed for a substantial period of time.

The Company exports to over 60 countries. In 2003, approximately 32% of the
compressor products produced by the Company in its U.S. plants were exported to
foreign countries. Approximately 68% of these exported products were sold in the
Far and Middle East.

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COMPETITION

All of the compressor market segments in which the Company operates are
highly competitive. Participants compete on the basis of delivery, efficiency,
noise level, price and reliability. The Company competes not only with other
independent compressor producers but also with manufacturers of end products
that have internal compressor manufacturing operations.

NORTH AMERICAN OPERATIONS

The domestic unitary air conditioning compressor market consists of OEMs
and a significant compressor aftermarket. The Company competes primarily with
two U.S. manufacturers, Copeland Corporation, a subsidiary of Emerson Electric,
Inc., and Bristol Compressors, Inc., a subsidiary of York International
Corporation. Copeland Corporation enjoys a larger share of the domestic unitary
air conditioning compressor business than either Bristol Compressors, Inc. or
the Company.

Over the last several years there has been an industry trend toward the use
of scroll compressors in the high efficiency segment of the unitary air
conditioning market. Copeland Corporation and other compressor manufacturers
have had scroll compressors as part of their product offerings for some time.
Along with its own manufacturing capabilities, Copeland Corporation is also a
member of the Alliance Scroll manufacturing joint venture with two major U.S.
central air conditioning manufacturers, American Standard's Trane air
conditioning division and Lennox International, Inc. Carrier Corporation, a
subsidiary of United Technologies and a major original equipment manufacturer,
has a joint venture to produce scroll compressors with Bristol Compressors, Inc.

As discussed in the product line section, the Company offers only a limited
line of scroll compressor models for sale through the Company's Cool Products
aftermarket division. The Company continues to believe that the scroll
compressor is important to maintaining a position in the unitary air
conditioning and commercial refrigeration markets, and it continues to pursue
development of the scroll compressor in a manner that limits financial risk to
the Company.

In the domestic room air conditioning compressor market, the Company
competes primarily with foreign companies, as a majority of room air
conditioners are now manufactured outside the United States. The Company also
competes to a lesser extent with U.S. manufacturers. Competitors include
Matsushita Electric Industrial Corporation, Rotorex, Inc., Sanyo Electric
Trading Company, L.G. Electronics, Inc., Mitsubishi, Daikin, and others. The
Company has increasingly struggled with price competition from foreign companies
during the last several years. Downward pressure on prices, particularly in the
room air conditioning market, has continued due to world over-capacity and a
market flooded by inexpensive Asian products both in North America and in
Europe.

In the domestic markets for water coolers, dehumidifiers, vending machines,
refrigerated display cases and other commercial refrigeration products, the
Company competes primarily with compressor manufacturers from the Far East,
Europe and South America, and to a lesser extent, the United States. Competitors
include Matsushita Electric Industrial Corporation, Danfoss, Inc., Embraco,
S.A., Copeland Corporation and others.

The household refrigerator and freezer market is vertically integrated with
many appliance producers manufacturing a substantial portion of their compressor
needs. The Company's competitors include ACC Group (formerly the compressor
operations of AB Electrolux), Matsushita Electric Industrial Corporation,
Embraco, S.A., Danfoss, Inc., and others. The Company has an extensive product
line in this market that includes both reciprocating piston and rotary type
compressors with a reputation for reliable field performance.

In light of the domestic competition and world over-capacity situation, the
Company has been undertaking actions since 1999 to consolidate North American
compressor manufacturing capacity and shift the production mix to higher
value-added products. The objective is not only to reduce the cost structure of
the Company's domestically produced compressor models, but also to improve
performance by producing products that offer a better value proposition to our
customers.

5

EUROPEAN OPERATIONS

Tecumseh Europe sells the major portion of its manufactured compressors in
Western Europe and competes in those markets primarily with several large
European manufacturers, some of which are captive suppliers, and to a lesser but
increasing extent, with manufacturers from the Far East and Brazil. Competitors
include ACC Group, Embraco, S.A., Danfoss, Inc. and others. Tecumseh Europe
produces compressors primarily for the commercial refrigeration market.

BRAZILIAN OPERATIONS

Tecumseh do Brasil competes directly with Embraco, S.A. in Brazil and with
Embraco and several other foreign manufacturers in Latin America. Historically,
Tecumseh do Brasil has sold the major portion of its manufactured compressors in
Latin America, North America, Europe and the Middle East. Significant
devaluations of the Brazilian Real in 1999 and 2002 set the stage for Tecumseh
do Brasil to better compete in foreign markets, resulting in approximately 67%,
66% and 64% of its production being exported in 2003, 2002 and 2001,
respectively. However, during 2003 the Brazilian Real appreciated against the
U.S. Dollar by 18%, representing a significant departure from consistent
historical devaluations.

INDIAN OPERATIONS

Tecumseh Products India, Ltd. has two compressor manufacturing facilities
in India that sell to regional markets. Major competitors include the Indian
manufacturers Kirloskar Copeland Ltd., Carrier Aircon Ltd., Godrej, Videocon,
BPL and others. Tecumseh Products India, Ltd. produces compressors for the air
conditioning and refrigerator and freezer markets. In 2003, approximately 28% of
its sales were made to a single customer, and the loss of this customer would
have a significant impact on the results of operations of this facility, and to
a lesser extent, on the consolidated results of the Company as a whole.

RESEARCH

Ongoing research and development is another method in which the Company
strives to exceed its competition. The ability to successfully bring new
products to market in a timely manner has rapidly become a critical factor in
competing in the compressor products business as a result of, among other
things, the imposition of energy efficiency standards and environmental
regulations including those related to refrigerant requirements. These factors
are discussed below.

REGULATORY REQUIREMENTS

Hydrochlorofluorocarbon compounds ("HCFCs") are used as a refrigerant in
air conditioning systems. Under a 1992 international agreement, HCFCs will be
banned from new equipment beginning in 2010. Some European countries began HCFC
phase-outs as early as 1998, and some have fully eliminated the use of HCFCs.
Within the last several years, the Company has approved and released a number of
compressor models utilizing U.S. government approved hydrofluorocarbons ("HFC")
refrigerants, which are considered more environmentally safe than the preceding
refrigeration compounds. HFCs are also currently under global scrutiny and
subject to possible future restrictions.

In the last few years, there has been an even greater political and
consumer movement, particularly from northern European countries, toward the use
of hydrocarbons ("HCs") as alternative refrigerants, moving further away from
the use of chlorine (which depletes the ozone layer of the atmosphere) and the
use of fluorine (which contributes to the "green-house" effect). Both Tecumseh
do Brasil and Tecumseh Europe have compressor products available for sale that
utilize hydrocarbon refrigerants. Hydrocarbons are flammable compounds and have
not been approved by the U.S. government for air conditioning or household
refrigerator and freezer applications. It is not presently possible to estimate
the level of expenditures that will be required to meet future industry
requirements or the effect on the Company's competitive position.

The U.S. National Appliance Energy Conservation Act of 1987 (the "NAECA")
requires specified energy efficiency ratings on room air conditioners and
household refrigerator/freezers. Proposed energy

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efficiency requirements for unitary air conditioners were published in the U.S.
in January 2001 to be effective in the year 2006. The European manufacturing
community has issued energy efficiency directives that specify the acceptable
level of energy consumption for refrigerators and freezers. These efficiency
ratings apply to the overall performance of the specific appliance, of which the
compressor is one component. The Company has ongoing projects aimed at improving
the efficiency levels of its compressor products and plans to have products
available to meet known energy efficiency requirements as determined by our
customers. Some of the Company's compressor products already meet or exceed the
new energy efficiency standards. It is not presently possible to estimate the
level of expenditures that will be required to meet the new standards or the
effect on the Company's competitive position.

ELECTRICAL COMPONENT PRODUCTS

On December 30, 2002, the Company acquired the stock of the companies that
comprise the FASCO Motors Group from Invensys Plc. Headquartered in Eaton
Rapids, Michigan, FASCO is a leading manufacturer in the U.S. fractional
horsepower ("FHP") motors industry. FASCO has been combined with certain other
legacy electrical component businesses which were previously included in the
Compressor segment. FASCO is the largest single operation of the group. The
majority of the sales of the other electrical component businesses historically
have been inter-company.

The FHP motors industry is large and diverse with an estimated size of
$10.4 billion. The market is generally stable as many different manufacturers
use FHP motors as components of their applications. The pervasiveness of motors
has been due, in part, to rising disposable income, spending on appliance
"necessities" for remodeling and new construction, increased heating efficiency
standards, increased use of power options in vehicles, growth in applications
for motors in healthcare, leisure, exercise and home maintenance products, a
wide variety of industrial applications, decreases in motor size and
improvements in motor efficiency.

PRODUCT LINE

FASCO manufactures AC motors, DC motors, blowers, gearmotors and linear
actuators. Its products are used in a wide variety of applications in markets
that include automotive, appliance and consumer durables, heating and cooling
equipment, computer and office equipment, industrial machinery, commercial
equipment, aerospace and healthcare. Tecumseh believes that FASCO has products
to serve approximately 23% of the market, with its primary focus on high
value-added products and services.

MANUFACTURING OPERATIONS

Currently, FASCO operates 10 manufacturing or assembly facilities located
as follows: 5 in the United States, 2 in Mexico and 1 each in Canada, Thailand
and Australia. FASCO's facilities are to a large extent vertically integrated,
however, some component parts are purchased from outside suppliers. FASCO
utilizes multiple sources of supply, and the required raw materials, including
copper wire, steel, aluminum, zinc and components are generally available in
sufficient quantities.

SALES AND MARKETING

FASCO markets its products principally under the "FASCO" brand. The FASCO
brand name is well-known and nearly a century old. FASCO sells its products
primarily through its own direct sales force supplemented by third party sales
representatives in certain markets. Approximately 90% of FASCO's sales are to
OEM customers. Sales professionals are assigned to accounts based upon type of
account and geographic region.

FASCO has over 2,500 customers for its products, the largest of which are
in the automotive sector. Historically, the top three customers have accounted
for less than 20% of revenues, with the largest customer accounting for
approximately 11% of the Electrical Components segment's revenues. Loss of the
largest customer could have a material adverse effect on the results of FASCO.
In addition, certain of FASCO's customers are competitors of Tecumseh's other
business segments. Individually, none of these customers

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exceed 1% of FASCO's total sales. Generally, FASCO does not have long-term
contracts with its customers, with the exception of select major customers.

COMPETITION

All of the application markets in which FASCO competes are highly
competitive. Different competitors are present within each of the application
markets. Key competitors in the automotive market segment include Daewoo, Bosch
and Johnson Electric. Key competitors in residential and commercial market
segments include General Electric, Emerson and A.O. Smith. In the linear
actuator and gearmotor market segments, key competitors include Merkle-Koff,
Bison and Hubbell. Participants compete on various levels, including motor
design and application, customer service and price. Motor design and application
is critical because OEMs are constantly improving their product lines, which
often require new motor specifications. In general, end-use markets today are
looking for smaller, more efficient, faster, cooler-operating and lighter
motors. In addition to competing with other independent motor manufactures,
FASCO also competes to a lesser extent with manufacturers of end products that
have internal motor manufacturing operations.

ENGINE & POWER TRAIN PRODUCTS

Small gasoline engines account for a majority of the net sales of the
Company's Engine & Power Train Products segment. These are used in a broad
variety of consumer products, including lawn mowers (both riding and walk-behind
types), snow throwers, small lawn and garden tractors, small power devices used
in outdoor chore products, generators, pumps and certain self-propelled
vehicles. The Company manufactures gasoline engines, both two- and four-cycle
types, with aluminum die-cast bodies ranging in size from 2 through 25
horsepower. The Company's power train products include transmissions, transaxles
and related parts used principally in lawn and garden tractors and riding lawn
mowers.

MANUFACTURING OPERATIONS

The Company manufactures engines and related components in two plants in
the United States, one plant in Italy, one plant in the Czech Republic and, as
of the fourth quarter of 2003, one plant in Brazil. All of the Company's power
train products are currently manufactured in one facility in the United States.
Operations of the Company in this segment are partially vertically integrated as
the Company produces most of its plastic parts and carburetors. During 2003, the
Company closed its die-casting facility in the United States, and it is
currently purchasing the aluminum die-castings used in its engines and power
train products. The Company utilizes multiple sources of supply, and the
required raw materials and components are generally available in sufficient
quantities.

Significant declines in unit volumes since 1999 left the Engine & Power
Train operations with over-capacity. During the last three years, beginning in
2001 through 2003 the Company recognized restructuring charges of $6.1 million,
$4.1 million and $26.2 million related primarily to the closure of production
facilities resulting in write-downs of fixed assets and the relocation of
certain engine and component part production from domestic facilities to the
Company's facilities in the Czech Republic and Brazil. As a result of these
actions, manufacturing activities ceased at the Company's facilities in Grafton,
Wisconsin, Douglas, Georgia and Sheboygan Falls, Wisconsin during 2003.

SALES AND MARKETING

The Company markets its Engine & Power Train Products worldwide under the
"Tecumseh" and "Peerless" brands. A substantial portion of the Company's engines
are incorporated into lawn and garden and other consumer products under brand
labels owned by OEMs and sold through "do-it-yourself" home centers, mass
merchandisers, department stores and lawn and garden specialty retailers.

The majority of the Company's Engine & Power Train Products are sold
directly to OEMs. The Company also sells engines and parts to its authorized
dealers and distributors, who service its engines both in the United States and
abroad. Marketing of Engine & Power Train Products is handled by the Company's
own

8

sales staff and by local sales representatives in certain foreign countries.
North America and Europe are the principal markets for lawn and garden products.

Sales in this segment can be significantly affected by environmental
factors affecting the respective selling seasons for the various types of
equipment. For example, snow thrower sales, and therefore the demand for the
Company's applicable engines, show a strong correlation with the amount of
snowfall received. Similarly, the frequency of weather-related and other
interruptions to power supplies, or the perceived threat of interruptions,
affect the demand for generators. Factors such as these are largely
unpredictable, yet greatly influence the year-to-year demand for engine
products. In 2003, the three largest (direct ship) customers for Engine & Power
Train Products accounted for 25.1%, 15.5% and 11.9%, respectively, of segment
sales, or 6.6%, 4.0% and 3.1%, respectively, of consolidated net sales. Some of
the engines provided to these customers are incorporated into end consumer
products that are sold by Sears. Total sales to Sears and Sears affiliated
suppliers in 2003 and 2002 amounted to 20.4% and 16.8%, respectively, of segment
sales, or 5.3% and 5.4%, respectively, of consolidated net sales. Loss of any of
this segment's three largest customers, and/or the loss of Sears as a retail
distributor, would have a material adverse effect on the results of operations
of this segment and, at least temporarily, on the Company and its business as a
whole.

COMPETITION

The Company believes it is one of the largest consolidated producers of
engines and transmissions for the outdoor power equipment industry in North
America and Europe. However, it is only the third largest producer in these
markets of small gasoline engines for the lawn and garden applications. The
largest such producer, with a broader product range, is Briggs & Stratton
Corporation. Other producers of small gasoline engines include Honda
Corporation, Kohler Corporation and Toro Company, among others.

Competition in the Company's engine business is based principally on price,
service, product performance and features and brand recognition. As mass
merchandisers have captured a larger portion of the sales of lawn and garden
products in the United States, price competition and the ability to offer
customized styling and feature choices have become even more important. The
Company believes that it competes effectively on these bases.

ENVIRONMENTAL STANDARDS

The U.S. Environmental Protection Agency ("EPA") has developed national
emission standards covering the engines produced by the Company under a
two-phased approach. The Company currently produces competitively priced engines
that comply with the EPA's Phase I engine emission standards. The Phase II
standards, which are more stringent, are being phased in between the 2005 and
2008 model years, depending on the size of the engine. A broad range of the
Company's engines have been certified to comply with these emissions standards.

In addition to the U.S. EPA regulations, the California Air Resources Board
("CARB") has proposed Tier III regulations requiring additional reductions in
exhaust emissions and new controls on evaporative emissions. The CARB proposal,
which has yet to be finalized, would be phased in between 2006 and 2008
depending on the size of the engine and the type of control utilized. While the
additional requirements are expected to add cost to the engines sold in the
State of California, it is not possible at this time to determine the amount of
such costs nor the impact on the competitive position of the Company. The State
of California enforces the CARB Emission Standards.

The European Community has implemented noise standards for some categories
of engine-powered equipment. These standards take effect in two stages: Stage I
began January 3, 2002 and Stage II is scheduled to take affect January 3, 2006.
They regulate the sound level of the complete product delivered to the end user.
The Company currently supplies engines to and works with equipment manufacturers
to assure that their products comply with these standards. The European
community has also adopted exhaust emission regulations that will affect the
engines sold into the European community. These regulations will be implemented
in stages with the initial stage taking affect in August 2004. These regulations
are similar to the U.S. EPA regulations and as a result are not expected to
impact the competitive position of the Company.

9

PUMP PRODUCTS

The Company manufactures and sells submersible pumps, centrifugal pumps and
related products through its two subsidiaries, Little Giant Pump Company
("Little Giant") and MP Pumps, Inc. ("MP Pumps"). Little Giant pumps are used in
a broad range of commercial, industrial, and consumer products, including
heating, ventilating and cooling, parts washers, machine tools, evaporative
coolers, sump pumps, statuary fountains, water gardening, and waste management.
Little Giant's products are sold worldwide to OEMs, distributors and mass
retailers. Sales and marketing is executed through Little Giant's own sales
management and through manufacturers' representatives under the "Little Giant"
and "Interon" brand names.

The pump industry is highly fragmented, with many relatively small
producers competing for sales. Little Giant has been particularly successful in
competing in the pump industry by targeting specific market niches where
opportunities exist and then designing and marketing corresponding products. In
the last three years, the "Little Giant" brand name has become more associated
with consumer products due to the success of the subsidiary's water-gardening
product line. However, the focus of this pump manufacturer has long been in the
commercial and industrial market channels of the pump industry, and Little Giant
is pursuing these markets through the development of complete pump systems
utilizing larger pump models.

MP Pumps manufactures and sells a variety of centrifugal pumps ranging in
capacity from 15 to 1,500 gallons per minute, that are used in the agricultural,
marine and transportation industries, and in a variety of commercial and
industrial applications and end products. MP Pumps sells both to OEMs, which
incorporate its pumps into their end products, and through an extensive network
of market segmented distributors located throughout the United States. The
distributors within the network both engineer and sell pump products to end
users and small OEMs. A limited number of pumps are also sold to departments and
agencies of the U.S. government. MP Pumps markets both custom and standard
catalog product through its own sales staff. Pumps sold through distribution
channels are branded under the "MP" and "Flomax" registered trade names. Some
pumps are privately labeled for specific customer use.

BACKLOG AND SEASONAL VARIATIONS

Most of the Company's production is against short-term purchase orders, and
backlog is not significant.

Compressor Products, Engine & Power Train Products and Electrical
Components are subject to some seasonal variation. Overall, the Company's sales
and operating profit are stronger in the first two quarters of the year than in
the last two quarters.

PATENTS, LICENSES AND TRADEMARKS

The Company owns a substantial number of patents, licenses and trademarks
and deems them to be important to certain lines of its business; however, the
success of the Company's overall business is not considered primarily dependent
on them. In the conduct of its business, the Company owns and uses a variety of
registered trademarks, the most familiar of which is the trademark consisting of
the word "Tecumseh" in combination with a Native American Indian head symbol.

RESEARCH AND DEVELOPMENT

The Company must continually develop new and improved products in order to
compete effectively and to meet evolving regulatory standards in all of its
major lines of business. The Company spent approximately $31.5 million, $30.8
million, and $27.6 million during 2003, 2002, and 2001, respectively, on
research activities relating to the development of new products and the
development of improvements to existing products. None of this research was
customer sponsored.

EMPLOYEES

On December 31, 2003, the Company employed approximately 20,700 persons,
68% of whom were employed in foreign locations. Approximately 1,500 of the U.S.
employees were represented by labor unions,

10

with less than approximately 900 persons represented by the same union contract.
The majority of foreign location personnel are represented by national trade
unions. The number of the Company's employees is subject to some seasonal
variation. During 2003, the maximum number of persons employed was approximately
22,600 and the minimum was approximately 20,700. Overall, the Company believes
it generally has a good relationship with its employees.

AVAILABLE INFORMATION

The Company provides public access to its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
these reports filed with the Securities and Exchange Commission (SEC) under the
1934 Act. These documents may be accessed free of charge through the Company's
website at the following address: http://www.tecumseh.com/investor.htm. These
documents are provided as soon as practicable after filing with the SEC,
although not generally on the same day. These documents may also be found at the
SEC's website at http://www.sec.gov.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following are the executive officers of the Company.

- ---------------

(1) Last five years of business experience -- President and Chief Executive
Officer, Tecumseh Products Company 1986 to 2003. (Employed with Tecumseh
Products Company since 1972.)

(2) Last five years of business experience -- Corporate Controller, Tecumseh
Products Company 1999 to 2001. Corporate Controller, RTI International
Metals, Inc. (formerly RMI Titanium Company) 1986 to 1999. (Employed with
Tecumseh Products Company since 1999.)

(3) Last five years of business experience -- Assistant Director of Corporate
Human Resources, Tecumseh Products Company 1990 to 2001. (Employed with
Tecumseh Products Company since 1990.)

ITEM 2. PROPERTIES

The Company's headquarters are located in Tecumseh, Michigan, approximately
50 miles southwest of Detroit. At December 31, 2003 the Company had 51
properties worldwide occupying approximately 11.2 million square feet with the
majority, approximately 9.8 million square feet, devoted to manufacturing.
Nineteen facilities with approximately 5.2 million square feet were located in
nine countries outside the United States. The following table shows the
approximate amount of space devoted to each of the Company's four principal
business segments.

Five domestic facilities, including land, building and certain machinery
and equipment are financed and leased through industrial revenue bonds. All
owned and leased properties are suitable, well maintained and

11

equipped for the purposes for which they are used. The Company considers that
its facilities are suitable and adequate for the operations involved.

ITEM 3. LEGAL PROCEEDINGS

The Company has been named by the U.S. Environmental Protection Agency
("EPA") as a potentially responsible party ("PRP") in connection with the
Sheboygan River and Harbor Superfund Site in Wisconsin. In May 2000, the EPA
issued a Record of Decision ("ROD") selecting the remedy for the Site. The
Company is one of several named PRP's in the proposed cleanup action. The EPA
has estimated the cost of cleanup at $40.9 million. Additionally, the Wisconsin
Department of Natural Resources ("WDNR"), as a Natural Resource Trustee, is
investigating what additional requirements, if any, the state may have beyond
those specified under the ROD.

The EPA has indicated its intent to address the site in two phases, with
the Company's Sheboygan Falls plant site and the upper river constituting the
first phase ("Phase I") and the middle and lower river and harbor being the
second phase ("Phase II"). In March 2003, the Company entered into a Consent
Decree with the EPA concerning the performance of remedial design and remedial
action for Phase I. The Consent Decree has also been approved by the U.S.
Department of Justice, but it has yet to become a final judgment pending
approval by the pertinent federal district court. Negotiation of a Consent
Decree regarding Phase II has yet to commence.

On March 25, 2003, with the cooperation of the EPA, the Company and
Pollution Risk Services, LLC ("PRS") entered into a Liability Transfer and
Assumption Agreement (the "Liability Transfer Agreement"). Under the terms of
the Liability Transfer Agreement, PRS assumed all of the Company's
responsibilities, obligations and liabilities for remediation of the entire Site
and the associated costs, except for certain specifically enumerated
liabilities. Also, as required by the Liability Transfer Agreement, the Company
has purchased Remediation Cost Cap insurance, with a 30 year term, in the amount
of $100.0 million and Environmental Site Liability insurance in the amount of
$20.0 million. The Company believes such insurance coverage will provide
sufficient assurance for completion of the responsibilities, obligations and
liabilities assumed by PRS under the Liability Transfer Agreement. On October
10, 2003, in conjunction with the Liability Transfer Agreement, the Company
completed the transfer of title to the Sheboygan Falls, Wisconsin property to
PRS.

The total cost of the Liability Transfer Agreement to the Company,
including the cost of the insurance policies, was $39.2 million. The Company
recognized a nonrecurring charge of $13.6 million ($8.7 million net of tax ) in
the first quarter of 2003. The charge consisted of the difference between the
cost of the Liability Transfer Agreement and amounts previously accrued for the
cleanup. The Company continues to maintain an additional reserve of $0.5 million
to reflect its potential environmental liability arising from operations at the
Site, including potential residual liabilities not assumed by PRS pursuant to
the Liability Transfer Agreement.

It is the intent of the Company, PRS and the EPA to negotiate provisions
that would add PRS as a PRP by amendment to the Consent Decree, which requires
the approval of the U.S. Department of Justice. Until such approval is received,
U.S. GAAP requires that the Company continue to record the full amount of the
estimated remediation liability of $39.7 million and a corresponding asset of
$39.2 million included in Other Assets in the balance sheet. While the Company
believes the arrangements with PRS are sufficient to satisfy substantially all
of the Company's environmental responsibilities with respect to the Site, these
arrangements do not constitute a legal discharge or release of the Company's
liabilities with respect to the Site. The actual cost of this obligation will be
governed by numerous factors, including, without limitation, the requirements of
the WDNR, and may be greater or lower than the amount accrued.

With respect to other environmental matters, the Company, in cooperation
with the WDNR, conducted an investigation of soil and groundwater contamination
at the Company's Grafton, Wisconsin plant. It was determined that contamination
from petroleum and degreasing products used at the plant were contributing to an
off-site groundwater plume. The Company began remediation of soils in 2001 on
the east side of the facility. Additional remediation of soils began in the fall
of 2002 in two other areas on the plant site. At December 31, 2003, the Company
had accrued $2.7 million for the total estimated cost associated with the

12

investigation and remediation of the on-site contamination. Investigation
efforts related to the potential off-site groundwater contamination have to date
been limited in their nature and scope. The extent, timing and cost of off-site
remediation requirements, if any, are not presently determinable.

The WDNR requested that the Company join it in a cooperative effort to
investigate and cleanup PCB contamination in the watershed of the south branch
of the Manitowoc River, downstream of the Company's New Holstein, Wisconsin
facility. Despite the fact that the WDNR's investigation does not establish the
parties responsible for the PCB contamination, the WDNR has indicated that it
believes the Company is a source and that it expects the Company to participate
in the cleanup. The Company has participated in the first phase of a cooperative
cleanup, consisting of joint funding of the removal of soils and sediments in
the source area near its facility. The next phase of the cooperative effort is
scheduled to occur mid-2004 involving a stream segment downstream of the source
area. The Company has provided approximately $2.5 million for these costs.
Although participation in a cooperative remedial effort after this phase for the
balance of the watershed is under consideration, it is not possible to
reasonably estimate the cost of any such participation at this time.

In addition to the above-mentioned sites, the Company is also currently
participating with the EPA and various state agencies at certain other sites to
determine the nature and extent of any remedial action that may be necessary
with regard to such other sites. At December 31, 2003 and 2002, the Company had
accrued $46.6 million and $36.3 million, respectively, for environmental
remediation, including $39.7 million and $29.2 million, respectively relating to
the Sheboygan River and Harbor Superfund Site. Additionally, as of December 31,
2003 the Company had recorded a corresponding asset of $39.2 million relating to
the Sheboygan River and Harbor Superfund Site in connection with its agreement
with PRS. As these matters continue toward final resolution, amounts in excess
of those already provided may be necessary to discharge the Company from its
obligations for these sites. Such amounts, depending on their amount and timing,
could be material to reported net income in the particular quarter or period
that they are recorded. In addition, the ultimate resolution of these matters,
either individually or in the aggregate, could be material to the consolidated
financial statements.

Various lawsuits and claims, including those involving ordinary routine
litigation incidental to its business, to which the Company is a party, are
pending, or have been asserted, against the Company. Although the outcome of
these matters cannot be predicted with certainty, and some of them may be
disposed of unfavorably to the Company, management has no reason to believe that
their disposition will have a materially adverse effect on the consolidated
financial position or results of operations of the Company.

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

No matter was submitted during the fourth quarter of 2003 to a vote of
security holders through the solicitation of proxies or otherwise.

PART II

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

The Company's Class A and Class B common stock trades on the Nasdaq Stock
Market under the symbols TECUA and TECUB, respectively. Total shareholders of
record as of February 6, 2004 were approximately 490 for Class A common stock
and 479 for Class B common stock. There were no equity securities sold by the
Company during the period covered by this report. The Company has no equity
securities authorized for issuance under compensation plans.

13

MARKET PRICE AND DIVIDEND INFORMATION

RANGE OF COMMON STOCK PRICES AND DIVIDENDS FOR 2003

RANGE OF COMMON STOCK PRICES AND DIVIDENDS FOR 2002

ITEM 6. SELECTED FINANCIAL DATA

The following is a summary of certain financial information of the Company.

2003 income statement data and 2002 and 2003 balance sheet data reflect the
acquisition of FASCO on December 30, 2002.

Restructuring charges, impairments and other items includes:

2003 net income included $69.3 million ($55.0 million net of tax or $2.98
per share) of restructuring, impairment and other charges. Of this amount, $13.6
million ($8.7 million net of tax or $0.47 per share) was related to
environmental costs at the Company's Sheboygan Falls, Wisconsin facility; $32.0
million in charges and $5.8 million in gains equaling a net charge of $26.2
million ($16.8 million net of tax or $0.91 per share) related to restructuring
actions involving the Engine & Power Train business. Additionally, $29.5 million
before and after tax (or $1.60 per share) related to an impairment of goodwill
associated with the Company's European Compressor operations.

2002 net income included $10.3 million ($6.6 million net of tax or $0.36
per share) in restructuring charges. Of this amount, the Engine & Power Train
business had a charge of $5.8 million ($3.7 million net of tax or $0.20 per
share) which included $4.1 million for costs, mostly write-downs of fixed
assets, associated with the relocation of engine component manufacturing, and
the discontinuation of production activities at its Grafton, Wisconsin facility
and $1.7 million for additional environmental cleanup costs, primarily
additional past response costs levied by the EPA for its Sheboygan, Wisconsin
facility. Additionally, the Compressor business had a charge of $4.5 million
($2.8 million net of tax or $0.15 per share) for costs related to the relocation
of additional rotary compressor lines from the U.S. to Brazil, primarily the
write-off of certain unusable equipment.

2001 net income included $29.3 million ($18.9 million net of tax) related
to the cost of an early retirement incentive program and an asset impairment
charge of $6.1 million ($3.9 million net of tax) for unusable equipment due to
the transfer of certain engine and component part production from domestic
facilities to the Company's facilities in the Czech Republic.

During 2000 the Company recorded a $33.5 million charge ($23.3 million net
of tax) related to the realignment of its North American and Indian compressor
manufacturing operations.

The 1999 results included credits of $14.1 million ($9.0 million net of
tax) comprised of a $4.6 million gain on the curtailment of employee benefit
plans at a closed plant, a $4.0 million gain on an insurance settlement. These
gains were partially offset by charges for plant closing and environmental costs
totaling $3.1 million. The Company also recognized an $8.6 million gain from
currency hedging at the Company's Brazilian subsidiary.

15

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

CAUTIONARY STATEMENTS RELATING TO FORWARD LOOKING STATEMENTS

The following report should be read in connection with the information
contained in the Consolidated Financial Statements and Notes to Consolidated
Financial Statements.

This discussion contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act that are subject to the safe harbor
provisions created by that Act. In addition, forward-looking statements may be
made orally in the future by or on behalf of the Company. Forward-looking
statements can be identified by the use of terms such as "expects," "should,"
"may," "believes," "anticipates," "will," and other future tense and
forward-looking terminology, or by the fact that they appear under the caption
"Outlook."

Readers are cautioned that actual results may differ materially from those
projected as a result of certain risks and uncertainties, including, but not
limited to, i) changes in business conditions and the economy in general in both
foreign and domestic markets; ii) the effect of terrorist activity and armed
conflict; iii) weather conditions affecting demand for air conditioners, lawn
and garden products, portable power generators and snow throwers; iv) the
success of the Company's ongoing effort to bring costs in line with projected
production levels and product mix; v) financial market changes, including
fluctuations in interest rates and foreign currency exchange rates; vi) economic
trend factors such as housing starts; vii) emerging governmental regulations;
viii) availability and cost of materials; ix) actions of competitors; x) the
ultimate cost of resolving environmental matters; xi) the Company's ability to
profitably develop, manufacture and sell both new and existing products; xii)
the extent of any business disruption that may result from the restructuring and
realignment of the Company's manufacturing operations, the ultimate cost of
those initiatives and the amount of savings actually realized; xiii) the full
integration of the FASCO Motors business into the Company and the ultimate cost
associated therewith; xiv) potential political and economic adversities that
could adversely affect anticipated sales and production in Brazil; and xv)
potential political and economic adversities that could adversely affect
anticipated sales and production in India, including potential military conflict
with neighboring countries. These forward-looking statements are made only as of
the date hereof, and the Company undertakes no obligation to update or revise
the forward-looking statements, whether as a result of new information, future
events or otherwise.

OVERVIEW

Tecumseh Products Company is a full line, independent global manufacturer
of hermetic compressors for air conditioning and refrigeration products,
fractional horsepower electric motors and related products for a broad range of
residential and commercial applications, gasoline engines and power train
components for lawn and garden applications, and pumps. The Company's products
are sold in countries all around the world.

Consolidated net income for the full year 2003 amounted to $0.1 million or
$0.01 per share compared to $51.0 million or $2.76 per share in the same period
of 2002. Included in full year 2003 results were several charges including a
charge of $13.6 million ($8.7 million net of tax or $0.47 per share) recorded in
the first quarter related to environmental costs at the Company's Sheboygan
Falls, Wisconsin facility, total net restructuring charges of $26.2 million
($16.8 million net of tax or $0.91 per share) recorded in the second through
fourth quarters related to the consolidation of operations in the Engine & Power
Train business and related plant closings, and a $29.5 million charge (before
and after tax or $1.60 per share) recorded in the fourth quarter for the
impairment of goodwill associated with the Company's European compressor
operations. In addition, taxes were favorably impacted by adjustments to
deferred taxes pertaining to unremitted earnings of foreign subsidiaries,
utilization of foreign tax credits, and the resolution of prior year tax audits.
Full year 2003 results include the income of the FASCO Motors Group, which was
acquired on December 30, 2002. FASCO's operating income for the year was $21.5
million.

Full year 2002 reported results also included several special charges
including a restructuring charge of $10.3 million ($6.6 million net of tax or
$0.36 per share) related to the relocation of component manufacturing in the
Compressor and Engine & Power Train businesses and the cumulative effect of an

16

accounting change for goodwill ($3.1 million net of tax or $0.17 per share)
related to the adoption of Statement of Financial Accounting Standards ("SFAS")
No. 142 "Goodwill and Other Intangible Assets."

Exclusive of restructuring charges, impairments and other items, full year
operating results were lower than the prior year due to weaker results in the
Company's Compressor and Engine & Power Train segments, higher interest costs
and higher corporate expenses, partially offset by the additional earnings of
FASCO. The increase in corporate expenses is attributable to integration costs
associated with the FASCO acquisition, higher professional fees and higher
corporate liability insurance costs.

For the Company as a whole, these results are indicative of the environment
that manufacturers face in today's global economy. The addition of new
productive capacities in low-cost locations, like China, has resulted in
over-capacity and deflationary pricing in many of the market segments in which
the Company operates. To remain cost competitive, the Company, like many of its
customers, as well as competitors, has restructured older operations, including
the movement of productive capacities to low-cost locations or nearer to
customer facilities. These restructurings involve significant costs, in both
financial and human terms. In addition to cost competitiveness, the Company must
also continually spend to improve its products, in terms of functionality,
performance and quality, in order to maintain or grow its share. The cost of
product development is significant and does not always affect earnings
positively. As a global manufacturer with production in 11 countries and sales
in over 120 countries throughout the world, results are affected by changes in
foreign currency exchange rates. In total, those movements were not favorable to
the Company during 2003. Lastly, employee benefit costs in the United States
have been rising significantly. While the Company currently recognizes period
income, rather than expense, due to pension plan over-funding, these credits
decreased by $15.5 in 2003 compared to 2002. To more fully understand the change
in the Company's results, refer to the following discussion and analysis by
business segment.

Consolidated net sales for the full year 2003 were $1,819.0 million
compared to sales of $1,343.8 million in the full year 2002. The net increase of
$475.2 million for the full year 2003 primarily consisted of FASCO sales of
$411.3 million, as well as moderate increases in all other business segments.
The effect of currency translation increased sales by $60.5 million for the full
year.

RESULTS OF OPERATIONS

COMPRESSOR PRODUCTS

2003 vs. 2002

Compressor business sales for the full year 2003 of $797.9 million
increased $16.3 million, or approximately 2.1%, from $781.6 million for the full
year 2002. The slight increase was attributable to the effects of currency
translation, which amounted to $49.1 million, and a 34% increase in sales of
compressors utilized in refrigeration applications, which was more than offset
by declines in sales of compressors used in air conditioning applications.

Compressor business operating income for the full year 2003 amounted to
$61.5 million compared to $83.8 million for the full year 2002. The decrease in
operating income of 27% reflected several factors, including unfavorable foreign
exchange rates, unfavorable sales mix, and lower product margins. Weaker results
were experienced in each of the Company's Compressor business locations. The
continued decline in overall U.S. manufactured volumes reduced profitability of
the segment's U.S. operations by $8.9 million. Despite a 28% increase in sales,
results in Brazil were lower by $5.4 million due to the weak U.S. Dollar that
narrowed margins on U.S. Dollar-denominated sales, unfavorable product sales
mix, material and labor cost increases, and lower average sales prices in
certain product categories. In addition, full year 2003 currency remeasurement
losses in Brazil were $5.5 million in contrast to gains of $5.3 million in 2002.
Tecumseh India's results, which declined by $1.4 million, were affected by lower
average selling prices in the Indian market and higher material costs. Results
at the Company's European operation in France declined by $6.6 million due to
the weak U.S. Dollar that narrowed margins on U.S. Dollar-denominated sales and
lower volumes caused by a slow European economy.

17

Despite the lower profitability levels in 2003 compared to 2002, Brazilian
operations remained a key to the overall competitiveness of the Compressor
business. The Brazilian operations contributed 75% of the Compressor business's
operating profit for the year compared to 61% in 2002.

2002 vs. 2001

Sales for the year ended December 31, 2002 amounted to $781.6 million
compared to $801.7 million in 2001. Excluding the $8.5 million reduction in
sales resulting from currency translation, full year sales declined less than
1%. Increases in sales of compressors used in household refrigeration and
commercial applications nearly offset losses of share in the unitary and room
air conditioning markets. Sales of compressors manufactured in North America
were down 19.3% as productive capacities for the residential refrigeration and
room air conditioning markets were moved to Brazil and India where favorable
cost structures enable the Company to more effectively compete. Correspondingly,
sales of compressors manufactured in Brazil and India increased 35.4% over prior
year levels.

Compressor Group operating income, exclusive of restructuring charges, for
the years ended December 31, 2002 and 2001 amounted to $83.8 million and $58.2
million, respectively. The improvement in operating margins was attributable to
greater coverage of fixed costs, the positive effects of restructuring actions
implemented over the last 18 months, and the favorable effects from devaluation
of the Brazilian Real. This improvement in operating margins was partially
offset by declining margins on high-volume, commodity-type compressors and
accelerated spending on new products. The Company's Brazilian operations
contributed approximately 61% of the compressor business's operating income in
2002, compared to 72% in 2001. While Brazilian operating income improved year
over year, the decline in the overall percentage was a result of improved
profitability in North America where prior restructuring actions reduced fixed
costs. Indian operations were also profitable for the full year 2002 compared to
a loss in 2001.

ELECTRICAL COMPONENT PRODUCTS

2003 vs. 2002

With the acquisition of FASCO, the Company created the "Electrical
Components" operating segment. In addition to FASCO, the segment includes
certain North American electrical component manufacturing that was previously
reported in the Compressor business. Prior year business segment data, as
presented in the "Notes to Consolidated Statements" and within "Management's
Discussion and Analysis" have been reclassified to conform to the Company's
current presentations.

Electrical Components sales were $420.9 million, including $411.3 million
of sales from FASCO, compared to $8.0 million in full year 2002. Segment
operating income for the full year was $16.9 million compared to a loss of $4.9
million for the same period in 2002. FASCO contributed $21.5 million in
operating income to the full year 2003. FASCO's results for the full year
included $7.5 million ($4.8 million net of tax or $0.26 per share) of
amortization for a non-compete agreement arising from the acquisition. The
non-compete agreement is being amortized over a two-year period. In addition,
FASCO's results included $4.2 million ($2.7 million net of tax or $0.15 per
share) of additional expense related to the sale of inventory written up as part
of our purchase accounting for FASCO.

ENGINE & POWER TRAIN PRODUCTS

2003 vs. 2002

Engine & Power Train business sales amounted to $475.1 million in the full
year 2003 compared to $432.3 million in the full year 2002. The 10% improvement
in sales for the year reflected 6% higher U.S. shipment volumes and the effects
of currency translation from a weaker U.S. Dollar, partially offset by 18% lower
volumes in Europe where the dry, hot summer reduced overall sales. Full year
2003 volumes of engines used for snow throwers and generators were up 38% and
43%, respectively over 2002. The snow season was helped by early and heavy snow
falls on the East Coast, and the generator market was spurred by the blackout on
the East Coast, as well as hurricane and storm activity.

18

Excluding restructuring charges and impairments, the Engine & Power Train
business incurred an operating loss of $5.3 million for the full year 2003
compared to income of $1.4 million in 2002. The substantial decline in
profitability of the segment for the full year was attributable to numerous
factors, including lower average selling prices, higher costs of purchased
parts, excess capacity and production inefficiency costs, rising health care
expenses, higher engineering costs associated with new product development,
startup expenses associated with the new facility in Curitiba, Brazil and weak
sales volumes in Europe. The latter half of the year was helped by lower fixed
costs due to the closure of the Douglas, Georgia and Sheboygan Falls, Wisconsin
facilities and sales of engines for snow throwers and generators.

2002 vs. 2001

Engine & Power Train sales and operating income declined for the third
consecutive year. Sales for the year ended December 31, 2002 amounted to $432.3
million compared to $480.9 million in 2001. Operating income, exclusive of
restructuring items, for the year ended December 31, 2002 was $1.4 million
compared to $20.0 million in 2001. For the full year 2002, domestic engine unit
volume decreased 8% over the prior year, including a 36% decline in engines for
snow throwers. 2001 was a record year for snow thrower engine sales as a result
of low inventories at retail at the beginning of that season. However, low
snowfall in the winter of 2002 left above average inventories at retail at the
end of the 2002 season and as a result, sales of engines for snow throwers was
below average for the calendar year as fewer were required for the winter of
2003. Declines in volume, less profitable mix and declining contribution margins
were responsible for the substantial deterioration in full year profitability.

PUMP PRODUCTS

2003 vs. 2002

Pump business sales for the full year amounted to $124.3 million in 2003
compared to $120.6 million the previous year. The 3.1% improvement in the full
year 2003 sales was due to higher volumes in the retail plumbing sector, spurred
by the inclement weather in the eastern United States, in condensate products
sold to the HVAC and plumbing markets and in industrial products sold through
the aftermarket distribution channel, offset by lower volumes in the heavy
industrial market.

Operating income in the full year 2003 amounted to $14.1 million compared
to $14.8 million in 2002. The 4.7% decrease in operating income for the full
year 2003 compared to 2002 was primarily attributable to increased labor and
administrative costs and unfavorable sales mix.

2002 vs. 2001

Pump business sales for the year ended December 31, 2002 increased 6.3% to
$120.6 million compared to $113.4 million in 2001. Full year operating income
amounted to $14.8 million in 2002 compared to $11.6 million in 2001.
Improvements in sales were primarily in pumps used in consumer applications,
such as water gardening, where the overall market continued to grow, and
condensate pumps used in HVAC applications where the Company has gained share in
that market.

RESTRUCTURING CHARGES, IMPAIRMENTS AND OTHER ITEMS

Full year 2003 results were adversely impacted by a total of $69.3 million
($55.0 million net of tax or $2.98 per share) of restructuring, impairment and
other charges. During the first quarter the Company recognized a charge of $13.6
million ($8.7 million net of tax or $0.47 per share) related to environmental
costs at the Company's Sheboygan Falls, Wisconsin facility. On March 25, 2003,
with the cooperation of the Environmental Protection Agency, the Company entered
into a liability transfer agreement with Pollution Risk Services, LLC ("PRS"),
whereby PRS assumed substantially all of the Company's responsibilities,
obligations and liabilities for remediation of the Sheboygan River and Harbor
Superfund Site (the "Site"). While the Company believes the arrangements with
PRS are sufficient to satisfy substantially all of the Company's environmental
responsibilities with respect to the Site, these arrangements do not constitute
a legal discharge or release of the Company's liabilities with respect to the
Site. The cost of the liability transfer

19

arrangement was $39.2 million. The charge consists of the difference between the
cost of the arrangement and amounts previously accrued for the cleanup. The
Company also maintains a reserve of $0.5 million to reflect its potential
environmental liability arising from operations at the Site, including potential
liabilities not assumed by PRS pursuant to the arrangement. Additional
information is available in the Company's Form 8-K filed on April 9, 2003. Also,
pursuant to the overall arrangement, the Company transferred the title of the
property to PRS in October 2003.

During the second quarter of 2003 the Company announced restructuring
actions involving the Engine & Power Train business. These actions included the
closure of the Company's Douglas, Georgia and Sheboygan Falls, Wisconsin
production facilities and the relocation of certain production to the new
Curitiba, Brazil facility and other existing U.S. locations. As a result of
these actions, the Company incurred both charges and gains, which were
recognized over the second, third and fourth quarters of 2003 in accordance with
Statement of Financial Accounting Standard No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets," SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities," and SFAS No. 88 "Employer's
Accounting for Settlements & Curtailments of Defined Benefit Pension Plans and
Termination Benefits." As of December 31, 2003, the Company had recognized $32.0
million in charges and $5.8 million in gains equaling a net charge of $26.2
million ($16.8 million net of tax or $0.91 per share) with respect to these
restructuring actions. Included in the charges were approximately $7.5 million
in earned severance pay and future benefit costs relating to manpower
reductions, $4.2 million in plant closing and exit costs incurred through
December 31, 2003, and $20.3 million in asset impairment charges for idled
equipment and facilities. The amount of severance pay and future benefit costs
mentioned above included $0.8 million in curtailment losses related to the
pension plan at the Sheboygan Falls, Wisconsin facility. The gains represented
curtailment gains associated with other post-employment benefits. Under U.S.
GAAP, such gains are not recognizable until the affected employees have been
severed and, accordingly, were recorded in the third quarter of 2003. Under SFAS
No. 146, certain costs are only recognized to the extent a liability has been
actually incurred. Accordingly, $28.5 million, $2.5 million and $1.0 million of
the charges were recognized in the second, third and fourth quarters,
respectively. As of December 31, 2003 substantially all of the costs of the
restructuring had been incurred.

During the fourth quarter of 2003 the Company recognized a charge for the
impairment of goodwill associated with the Company's European compressor
operations. The charge, which was determined as part of the Company's annual
evaluation of goodwill as specified by SFAS No. 142, amounts to $29.5 million
before and after taxes (or $1.60 per share). The impairment was primarily the
result of the approximately 17% decline in the value of the U.S. Dollar versus
the Euro. The change in currency value increased the Company's net investment in
the European subsidiary in U.S. Dollar terms and reduced margins on U.S.
Dollar-denominated sales.

Full year 2002 results were adversely impacted by $10.3 million ($6.6
million net of tax or $0.36 per share) in restructuring, impairment and other
charges. During the first quarter of 2002, a charge of $4.5 million ($2.8
million net of tax or $0.15 per share) was recorded in the Compressor business.
This charge was for costs, primarily the write-off of certain unusable
equipment, related to the relocation of additional rotary compressor lines from
the U.S. to Brazil.

During the fourth quarter of 2002, a charge of $5.8 million ($3.7 million
net of tax or $0.20 per share) was recorded in the Engine & Power Train
business. Included in the charge was $4.1 million for costs, mostly write-downs
of fixed assets, associated with the relocation of engine component
manufacturing, and the discontinuation of production activities at the Grafton,
Wisconsin facility. Also included in the charge was $1.7 million for additional
environmental cleanup costs, primarily additional past response costs levied by
the EPA for its Sheboygan, Wisconsin facility.

The 2001 results were adversely impacted by $35.4 million ($22.8 million
net of tax, or $1.23 per share) in restructuring and other charges. During the
third quarter of 2001, the Company offered an early retirement incentive plan to
eligible Corporate, North American Compressor Group and Engine & Power Train
Group employees. Two hundred fifty employees, representing approximately 78% of
those eligible, or approximately 20% of the total salaried workforce in the
eligible groups, elected early retirement. The cost of providing the

20

pension and healthcare benefits associated with this plan amounted to $29.3
million ($18.9 million net of tax, or $1.02 per share) and was recorded as a
restructuring charge in the third quarter.

During the fourth quarter of 2001, the Company recorded a charge of $6.1
million ($3.9 million net of tax, or $0.21 per share) in the Engine & Power
Train business related primarily to the transfer of certain engine and component
part production from domestic facilities to the Company's facilities in the
Czech Republic.

INTEREST EXPENSE, INTEREST INCOME AND INCOME TAX

Interest expense amounted to $22.8 million, $5.8 million, and $4.1 million
in 2003, 2002, and 2001, respectively. The increase from 2002 to 2003 was due to
the Company's long-term borrowings associated with the acquisition of FASCO.

Interest income and other, net amounted to $21.1 million, $15.1 million,
and $20.3 million in 2003, 2002, and 2001, respectively. The increase from 2002
to 2003 was the result of higher cash balances in Brazil, while the decline from
2001 to 2002 was the result of declining average interest rates over the period.

The Company's effective tax rates were 116.7%, 35.4%, and 29.1% for the
years ended December 31, 2003, 2002, and 2001, respectively. The Company's
statutory federal income tax rate is 35%. The difference in 2003 was
attributable to the non-deductibility of the $29.5 million goodwill impairment
charge offset by adjustments to deferred taxes pertaining to unremitted earnings
of foreign subsidiaries, utilization of foreign tax credits and the resolution
of prior years' U.S. federal income tax audits. The difference in 2001 was
attributable to a $5.2 million refund of prior years' U.S. federal income taxes
and a $1.3 million charge from the resolution of an income tax issue in Italy.

ACQUISITIONS

On December 30, 2002, the Company acquired FASCO from Invensys Plc for an
initial cash price of $396.6 million and the assumption of approximately $14.5
million in debt. During 2003, the Company subsequently received $14.1 million in
cash for post-closing adjustments to the purchase price. FASCO is a leading
manufacturer in the U.S. of fractional horsepower motors. FASCO manufactures AC
motors, DC motors, blowers, gear motors and linear actuators, all of which are
used in a wide variety of applications within the HVAC, automotive, healthcare
and appliance industries. The Company believes that the addition of FASCO will
allow it to reach new customers and markets and enable it to deliver higher
valued-added products and complete customer solutions in all of its business
segments.

The acquisition was financed with proceeds from $325.0 million in new bank
borrowings and internal cash flows. Of the $325.0 million in new borrowings,
$250.0 million was from a six-month bridge loan and $75.0 million was from a new
three-year $125 million revolving credit facility. On March 5, 2003, the Company
completed a private placement of $300 million Senior Guaranteed Notes maturing
2008 through 2011. Proceeds from the private placement were used to repay the
bridge loan and pay down borrowings under the revolving credit facility.

The final purchase price allocation, reflecting professional asset
valuations, post-closing purchase price adjustments and other refinements, is
presented below.

The results of FASCO's operations are included in the Company's statement
of consolidated income for the full year 2003.

The Company also expended $4.0 million in April 2002 for the acquisition of
Manufacturing Data Systems, Inc., a supplier of Internet-enabled,
open-architecture software motion control applications that increase
manufacturing flexibility and enable agile manufacturing for the Computer
Numerical Control (CNC) and General Motion Control (GMC) markets. The results of
operations for this facility since the acquisition are included in the Company's
statement of consolidated income.

In May 2001, the Company acquired an engine manufacturing facility in the
Czech Republic for $14.9 million. This transaction was accounted for as an asset
purchase. The results of operations for this facility since the acquisition are
included in the Company's statement of consolidated income.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company's primary source of cash has been net cash
provided by operations; however, as noted above, to partially finance the
acquisition of FASCO, the Company borrowed $325 million on December 30, 2002.
For the year ended 2003, operating activities generated cash flows of $86.0
million, compared to $131.5 million in 2002. This decrease resulted from lower
net income and the $39.2 million payment to PRS for the Liability Transfer
Agreement pertaining to the Sheboygan River and Harbor Superfund Site. (See Item
3 "Legal Proceedings" and Note 9 to the Consolidated Financial Statements.)

Capital expenditures for 2003 amounted to $82.8 million compared to $73.9
million in 2002. Approximately $48.9 million was spent on capacity enhancements,
new product capabilities and routine equipment upgrades in the Compressor
business, primarily in Brazil, France and India. Electrical Component capital
expenditures of approximately $5.0 million were focused primarily on new
products and routine equipment upgrades. Engine operations capital expenditures
were approximately $23.7 million, $18.5 million of which were spent on
facilities, capacity expansion and new product capabilities in Brazil. Net cash
used for financing activities amounted to $31.6 million in 2003 compared to net
cash provided of $353.8 million in 2002. Net debt repayments in 2003 amounted to
$7.9 million compared to net proceeds of $377.5 million in 2002 when the Company
borrowed in connection with the FASCO acquisition. The Company paid dividends of
$23.6 million in both 2003 and 2002. During 2001 the Company repurchased 8,500
shares of Class A stock at a cost of $0.4 million and 392,400 shares of Class B
stock at a cost of $17.7 million. There were no stock repurchases during 2003 or
2002.

PROJECTED CASH REQUIREMENTS

Capital expenditures for 2004 are projected to be slightly below 2003
levels. Approximately three-fourths of the budgeted capital spending is planned
for foreign operations to expand product offerings. Additional spending may be
required for acquisitions or investments in joint ventures or partnering
arrangements should such opportunities be pursued.

Working capital requirements, planned capital investment, capacity
consolidation, and restructuring costs, if any, for 2004 are expected to be
financed primarily through internally available funds, supplemented, if
necessary, by borrowings and other sources of external financing.

22

LONG-TERM LIQUIDITY

The Company anticipates that it will be able to continue to fund its
long-term liquidity requirements, including capital expenditures and working
capital needs, from internally generated funds, supplemented by borrowings and
other financing arrangements as required. The Company maintains a $125 million
revolving credit facility, which is available for general corporate purposes. As
of February 26, 2004 the Company had no outstanding borrowings against this line
of credit, but $18.1 million was committed to outstanding letters of credit for
overseas operations.

The Senior Guaranteed Notes and the revolving credit facility contain
various operating and financial covenants. The more restrictive of these
covenants require the Company to adhere to strict leverage and interest coverage
ratios and limit aggregate new debt. Additionally, the revolving credit facility
limits additional acquisitions to $150 million or less in any twelve-month
period. The Company was in compliance with these covenants at December 31, 2003.

Other available financing sources include long-term financing arrangements
in connection with state sponsored investment incentive programs, short-term
borrowing and various other forms of financial instruments to finance foreign
working capital requirements and hedge exposure to foreign currency exchange
risks.

The Company regularly considers various strategic business opportunities
including acquisitions. Tecumseh evaluates such potential acquisitions on the
basis of their ability to enhance the Company's existing products, operations,
or capabilities, as well as provide access to new products, markets and
customers. Although no assurances can be given that any acquisition will be
consummated, the Company may finance such acquisitions through a number of
sources including internally available cash resources, new debt financing, the
issuance of equity securities or any combination of the above.

INTERNATIONAL OPERATIONS

Approximately 35% of the Company's consolidated net sales for 2003 and 37%
of the Company's total assets at December 31, 2003 were outside of North
America, primarily in Brazil, France, Italy, India, the Czech Republic, Thailand
and Australia. Management believes that international operations have been, and
will continue to be, a significant benefit to overall Company performance.
However, the Company's international operations are subject to a number of risks
inherent with operating abroad, including, but not limited to, world economic
conditions, political instability and currency rate fluctuations. There can be
no assurance that these risks will not have a material adverse impact on the
Company's foreign or consolidated net sales, or on its results of operations,
cash flows, or financial condition. For further information, see Item 7A,
"Quantitative and Qualitative Disclosure About Market Risk" below.

IMPACT OF FOREIGN CURRENCIES

Changes in the value of foreign currencies in relation to the U.S. Dollar
can affect both reported results and the competitiveness of goods produced for
export in countries like Brazil. When the U.S. Dollar weakens, margins shrink in
foreign locations where some sales are denominated in U.S. Dollars. For example,
approximately one third of sales of the Company's Brazilian compressor operation
are denominated in U.S. Dollars. While the Company does hedge some of its
short-term forecasted transactions denominated in foreign currencies, the
effects of these contracts were not significant in 2003, 2002 or 2001. The
Company does not generally hedge its net investment in its foreign subsidiaries.
During 2003, the U.S. Dollar weakened against all currencies where the Company
has operations. As a result, the Company's investments in its foreign net assets
increased in U.S. Dollar value by $48.5 million. Under applicable accounting
standards, translation adjustments relating to the Company's investments in
foreign affiliates are reflected in other comprehensive income (part of
stockholders' equity) in the period in which they arise.

ENVIRONMENTAL

As discussed under "Business -- Engine & Power Train
Products -- Environmental Standards," the Company's engines are subject to
increasingly stringent emission and noise standards. In addition, as discussed

23

under "Business -- Compressor Products -- Regulatory Requirements," the Company
is subject to evolving and sometimes conflicting environmental regulations and
regulatory requirements governing the types of refrigerants used in
refrigeration and air conditioning products.

It is not presently possible to estimate the level of expenditures that
will be required to meet any future industry or governmental regulatory
requirements, or the effect on the Company's competitive position.

The Company is subject to various federal, state and local laws relating to
the protection of the environment, and is actively involved in various stages of
investigation or remediation for sites where contamination has been alleged.
(See Item 3 "Legal Proceedings" and Note 9 to the Consolidated Financial
Statements.) Liabilities, relating to probable remediation activities, are
recorded when the costs of such activities can be reasonably estimated based on
the facts and circumstances currently known. Difficulties exist estimating the
future timing and ultimate costs to be incurred due to uncertainties regarding
the status of laws, regulations, levels of required remediation, changes in
remediation technology and information available.

At December 31, 2003 and 2002 the Company had accrued $46.6 million and
$36.3 million, respectively for environmental remediation, including $39.7
million and $29.2 million, respectively relating to the Sheboygan River and
Harbor Superfund Site. Additionally, as of December 31, 2003 the Company has
recorded a corresponding asset of $39.2 million relating to the Sheboygan River
and Harbor Superfund Site in connection with its agreement with PRS as more
fully discussed under Item 3, "Legal Proceedings." As these matters continue
toward final resolution, amounts in excess of those already provided may be
necessary to discharge the Company from its obligations for these sites. Such
amounts, depending on their amount and timing, could be material to reported net
income in the particular quarter or period that they are recorded. In addition,
the ultimate resolution of these matters, either individually or in the
aggregate, could be material to the consolidated financial statements. For
further information on environmental matters, see Item 3, "Legal Proceedings."

OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS

The SEC has adopted rules requiring disclosure of off-balance sheet
arrangements that may have a material future effect on the Company. Off-balance
sheet arrangements are defined as any transaction, agreement or other
contractual arrangement to which an entity that is not consolidated with the
registrant is a party, under which the registrant, whether or not a party to the
arrangement, has, or in the future may have:

- Any obligation under a direct or indirect guarantee or similar
arrangement;

- A retained or contingent interest in assets transferred to an
unconsolidated entity or similar arrangement;

- Derivatives, to the extent that the fair value thereof is not fully
reflected as a liability or asset in the financial statements; or

- Any obligation or liability, including a contingent obligation or
liability, to the extent that it is not fully reflected in the financial
statements (excluding the footnotes thereto).

The Company does not believe it has any such arrangements that could have a
material future effect on the Company; although, as disclosed in Note 12 to the
Consolidated Financial Statements, the Company has provided some guarantees with
respect to export receivables sold in Brazil.

The Company has the following long-term contractual obligations:

The SEC rule also requires disclosure of contractual obligations for
capital leases, operating leases and purchase obligations with respect to
capital expenditures. The Company has minimal capital and operating

24

leases, as substantially all employed facilities and equipment are owned.
Currently, the Company has no multi-year purchase commitments for capital items.
Purchases of equipment are typically procured within a year and are subject to
annual management approval.

REGULATORY DEVELOPMENTS

The Sarbanes-Oxley Act of 2002 has introduced many new requirements
applicable to the Company regarding corporate governance and financial
reporting. Among many other requirements is the requirement under Section 404 of
the Act, beginning with the 2004 Annual Report, for management to report on the
Company's internal controls over financial reporting and for the Company's
registered public accountant to attest to this report. During 2003, the Company
commenced actions to ensure its ability to comply with these requirements,
including but not limited to, the engaging of outside experts to assist in the
evaluation and documentation of existing controls. The cost of these services
incurred during 2003, not including substantial time expended by Company
employees, has exceeded $0.3 million. In addition, the Company expects to
continue to devote substantial time and incur substantial costs during 2004 to
ensure compliance. The Company estimates total costs to be incurred in 2004 to
be $3 million to $5 million, including incremental fees to be paid to the
Company's registered public accountants for the cost of certification, currently
estimated to be 100-120% of the fees for the consolidated financial statement
audit. In addition, the Company expects to engage other experts to assist in
management's testing of its controls.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements requires that management make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and revenues and expenses
during the period. Management bases its estimates on historical experience and
other assumptions that it believes to be reasonable under the circumstances, the
results of which form the basis for making judgments about carrying values of
assets and liabilities that are not readily apparent from other sources.
Management continually evaluates the information used to make these estimates as
the Company's business and the economic environment change. The use of estimates
is pervasive throughout the Company's financial statements, but the accounting
policies and estimates management considers most critical are as follows:

IMPAIRMENT OF LONG-LIVED ASSETS

It is the Company's policy to review its long-lived assets for possible
impairment whenever events and circumstances indicate that the carrying value of
an asset may not be recoverable. Such events could include loss of a significant
customer or market share, the decision to relocate production to other locations
within the Company, or the decision to cease production of specific models of
product.

The Company recognizes losses relating to the impairment of long-lived
assets when the future undiscounted cash flows are less than the asset's
carrying value or when the assets become permanently idle. Assumptions and
estimates used in the evaluation of impairment, including current and future
economic trends, the effects of new technologies and foreign currency movements
are subject to a high degree of judgment and complexity. All of these variables
ultimately affect management's estimate of the expected future cash flows to be
derived from the asset or group of assets under evaluation, as well as the
estimate of their fair value. Changes in the assumptions and estimates may
affect the carrying value of long-lived assets and could result in additional
impairment charges in future periods.

As disclosed in the section entitled, "Restructuring Charges, Impairments
and Other Items," during the years ended December 31, 2003, 2002 and 2001 the
Company recognized impairments of its long-lived assets of $20.3 million, $8.6
million and $6.1 million, respectively, related to restructuring activities.
During these years the Company has also recognized impairments for assets idled
by the discontinuation of specific product models. Such impairments are included
in cost of sales and are considered to be part of the normal business cycle.

25

GOODWILL AND OTHER INTANGIBLE ASSETS

Purchase accounting requires accounting estimates and judgments to allocate
the purchase price to the fair value of the assets and liabilities purchased. In
December 2003, the Company acquired FASCO for $382.5 million net, after certain
post-closing purchase price adjustments, ultimately recognizing $217.7 million
in goodwill and $83.5 million in intangibles with lives ranging from two years
to indefinite. These values were based upon professional third-party estimates
of the fair values of the tangible and intangible assets and liabilities of
FASCO at the date of acquisition.

In addition, the Company has additional amounts of goodwill and other
intangible assets recorded from previous acquisitions. These assets, and those
recorded in conjunction with the FASCO acquisition, are subject to periodic
evaluation for impairment when circumstances warrant, or at least once per year.
With respect to goodwill, impairment is tested in accordance with SFAS No. 142,
"Goodwill and Other Intangibles" by comparison of the carrying value of the
reporting unit to its fair value. As there are not quoted prices for the
Company's reporting units, fair value is estimated based upon a present value
technique using estimated discounted future cash flows. Assumptions in
estimating future cash flows are subject to a high degree of judgment and
complexity. Changes in the assumptions and estimates may affect the carrying
value of goodwill and could result in additional impairment charges in future
periods. Intangible assets other than goodwill are also subject to periodic
evaluation for impairment and are equally sensitive to changes in the underlying
assumptions and estimates.

The Company conducts its annual assessment of impairment in the fourth
quarter. In 2003, the Company's assessment indicated a partial impairment
amounting to $29.5 million of the total $40.1 million goodwill associated with
the Company's European Compressor business. Had the estimated value of the
European Compressor business been lower by 10%, the full amount of goodwill
would have been impaired. The impairment was primarily the result of the
approximate 17% decline in the value of the U.S. Dollar versus the Euro during
2003. The change in currency value increased the Company's net investment in the
European subsidiary in U.S. Dollar terms and reduced margins on U.S.
Dollar-denominated sales.

At December 31, 2003, the Company had $242.7 million of goodwill recorded
in its consolidated financial statements. Of this amount, $17.4 million related
to the Compressor business, $217.7 million related to the Electrical Components
business, $2.5 million related to the Engine & Power Train business and $5.1
million related to the Pump business.

ACCRUED AND CONTINGENT LIABILITIES

The Company has established reserves for environmental and legal
contingencies in accordance with SFAS No. 5. A significant amount of judgment
and use of estimates is required to quantify the Company's ultimate exposure in
these matters. The valuation of reserves for contingencies is reviewed on a
quarterly basis at the operating and corporate levels to assure that the Company
is properly reserved. Reserve balances are adjusted to account for changes in
circumstances for ongoing issues and the establishment of additional reserves
for emerging issues. While management believes that the current level of
reserves is adequate, changes in the future could impact these determinations.

The Company is involved in a number of environmental sites where the
Company is either responsible for participating in a cleanup effort. As of
December 31, 2003, the Company had accrued a total of $46.6 million in
connection with these sites. During 2003, the Company accrued an additional
$14.0 million and paid approximately $3.6 million. The majority of these amounts
related to the actions taken in connection with the Sheboygan River and Harbor
Superfund Site. For additional information on environmental liabilities,
including the Sheboygan River and Harbor Superfund Site, see Note 9 to the
Financial Statements.

EMPLOYEE RELATED BENEFITS

The measurement of post-employment obligations and costs is dependent on a
variety of assumptions. These assumptions include, but are not limited to, the
expected rates of return on plan assets, determination of discount rates for
remeasuring plan obligations, determination of inflation rates regarding
compensation levels

26

and health care cost projections. The assumptions used vary from year-to-year,
which will affect future results of operations. Any differences among these
assumptions and the Company's actual return on assets, financial market-based
discount rates, and the level of cost sharing provisions will also impact future
results of operations.

The Company develops its demographics and utilizes the work of actuaries to
assist with the measurement of employee related obligations. The discount rate
assumption is based on investment yields available at year-end on corporate
long-term bonds rated AA by Moody's. The expected return on plan assets reflects
asset allocations, investment strategy and the views of investment managers and
other large pension plan sponsors. The inflation rate for compensation levels
reflects the Company's actual long-term experience. The inflation rate for
health care costs is based on an evaluation of external market conditions and
the Company's actual experience in relation to those market trends. Assuming no
changes in any other assumptions, a 0.5% decrease in the discount rate and the
rate of return on plan assets would increase 2004 expense by $3.0 million and
$3.1 million, respectively.

See Note 3 of the Notes to Consolidated Financial Statements for more
information regarding costs and assumptions for post-employment benefits.

NEW ACCOUNTING STANDARDS

On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Under SFAS
No. 142 goodwill is no longer amortized, but is subject to impairment testing on
at least an annual basis. As of December 31, 2001, the net book value of the
Company's goodwill was $45.1 million. However, as required by the Statement, the
Company tested for impairment at the date of adoption and found that the
goodwill associated with the Engine & Power Train European operations had been
impaired. Accordingly, goodwill amounting to $4.8 million was written-off and
recognized as a cumulative effect from an accounting change. In addition, during
the Company's annual test for impairment conducted in the fourth quarter of
2003, it was determined that goodwill amounting to $29.5 million associated with
the Company's European compressor business had been impaired. The book value of
the Company's goodwill at December 31, 2003, was $242.7 million, and included
$217.7 million of goodwill recorded in connection with the FASCO acquisition.
Amortization of goodwill amounted to approximately $1.5 million for the twelve
months ended December 31, 2001.

On January 1, 2002, the Company also adopted SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-lived Assets." This statement, which
superseded SFAS No. 121, addresses accounting and financial reporting for the
impairment or disposal of long-lived assets. There was no material effect on the
results of operations, cash flows, or financial position as a result of adopting
this standard. The impairment charges recorded in 2003 and 2002 were determined
in accordance with the provisions of SFAS No. 144.

In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The
standard nullifies EITF Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit." In particular, the standard
applies to involuntary work force reductions and the costs to consolidate
facilities. The statement mostly addresses when such costs can be accrued and
generally delays recognition versus prior practice by providing that liabilities
must be actually incurred and not just planned. The standard was effective for
actions occurring after December 31, 2002. The restructuring charges relating to
the Company's Engine & Power Train business during 2003 were determined in
accordance with the provisions of SFAS No. 146.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements. The Company has provided the required disclosures in Note 12 to
Consolidated Financial Statements.

In December 2003, the FASB reissued a revised version of SFAS No. 132,
"Employers' Disclosure about Pensions and Other Postretirement Benefits. The
Standard revises the required disclosures to include more

27

details with respect to plan assets, benefit obligations, cash flows, benefit
costs and other relevant information. The Company has included the required
disclosures in the "Notes to Consolidated Financial Statements."

OUTLOOK

Information in this "Outlook" section should be read in conjunction with
the cautionary language and discussion of risks included above.

The Company does not expect 2004 worldwide market conditions in its major
segments to be much improved over 2003. Significant competition, worldwide
overcapacity and deflationary pricing are expected to be a repetitive refrain.
In addition, foreseeable weakness in the U.S. Dollar will have a negative effect
on comparable year-over-year earnings during the near term, and potentially
could have unfavorable implications to market share in the long-term. Despite
the unfavorable markets, some business aspects could improve in the second half
of 2004 as the effects of cost reduction and new product initiatives are
realized.

Full year 2004 results in the Compressor segment are expected to be similar
to 2003, but are largely unpredictable. Weakness in the first half, largely due
to differences in year-over-year exchange rates, could be overcome in the second
half if economic activity increases and the U.S Dollar recovers. Overall
worldwide overcapacity will continue to put pressure on selling prices, and
recent increases in raw material costs could squeeze margins if such costs
cannot be reflected in product pricing and such costs continue to rise. Results
in Brazil will depend heavily on the direction of currency movements and
economic activity in the South American market. Results in India will be
dependent on the success of new product offerings to compete with new low cost
imports into India that are now subject to lower duties and growth in export
volumes.

Results in the Electrical Components Group are expected to improve, as
difficulties experienced in 2003 with the relocation of productive capacities
are now remedied. In addition, cost reduction activities in the non-FASCO
operations should show benefits in 2004.

Results in the Engine Group are also expected to improve as the benefit of
the restructuring actions of 2002 and 2003 take effect. The new operation in
Brazil should reach normal production levels and yield cost savings, while sales
volumes should remain stable in comparison to 2003. Realization of these
benefits is not assured, however, as products produced in Brazil must be
re-qualified at the Company's customers before normal production volumes can be
achieved.

Recently, the Company has seen dramatic increases in pricing for certain
commodity products, primarily steel and aluminum, used in all of its major
manufacturing operations. Some suppliers have started to charge for raw material
surcharges in addition to raising selling prices. While the Company buys these
commodities, either at fixed forward contract prices or under long-term
contracts, it is not sure that the terms and conditions of these agreements will
be fully honored. Additionally, there can be no assurance that the Company will
be able to recover these increased costs through increased selling prices.

The extent and duration of these increased raw material costs cannot be
determined with any degree of accuracy, but in the short-term, operating margins
will be negatively impacted. If these trends continue for any extended period of
time, and to the extent these increased costs cannot be passed through to
customers, there could be a significant negative impact on results for 2004.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk during the normal course of business
from credit risk associated with accounts receivable and from changes in
interest rates, commodity prices and foreign currency exchange rates. The
exposure to these risks is managed through a combination of normal operating and
financing activities, which include the use of derivative financial instruments
in the form of foreign currency forward exchange contracts and commodity forward
purchasing contracts.

Credit Risk -- Financial instruments which potentially subject the Company
to concentrations of credit risk are primarily cash investments and accounts
receivable. The Company places its cash investments in bank

28

deposits and investment grade, short-term debt instruments (predominately
commercial paper) with reputable credit-worthy counterparties and, by policy,
limits the amount of credit exposure to any one counterparty.

The Company uses contemporary credit review procedures to approve customer
credit. Customer accounts are actively monitored, and collection efforts are
pursued within normal industry practice. Management believes that concentrations
of credit risk with respect to receivables are somewhat limited due to the large
number of customers in the Company's customer base and their dispersion across
different industries and geographic areas. However, in the Engine & Power Train
Group, the manufacture of small gasoline engine-powered lawn and garden
equipment is dominated, to a large extent, by three manufacturers. The Company
sells to all three of these manufacturers and, as a result, a significant
portion of the Group's open accounts receivable at any time is comprised of
amounts due from these three manufacturers.

A portion of export accounts receivable of the Company's Brazilian
subsidiary is sold at a discount. Discounted receivable balances in the
Brazilian subsidiary at December 31, 2003 and 2002 were $64.5 million and $41.2
million, respectively, and the discount rate was 3.3% in 2003 and 4.9% in 2002.
The Company maintains an allowance for losses based upon the expected
collectability of all accounts receivable, including receivables sold.

Interest Rate Risk -- The Company is subject to interest rate risk,
primarily associated with its borrowings. The Company's $300 million Senior
Guaranteed Notes are fixed-rate debt. The Company has entered into fixed to
variable interest rate swaps with notional amounts totaling $125.0 million. The
Company's remaining borrowings, which consist of bank borrowings by its foreign
subsidiaries and Industrial Development Revenue Bonds, are variable-rate debt.
Including the effect of the interest rate swaps, 43% of the Company's total debt
at December 31, 2003 is fixed-rate. While changes in interest rates impact the
fair value of this debt, there is no impact to earnings and cash flow because
the Company intends to hold these obligations to maturity unless refinancing
conditions are favorable. Alternatively, while changes in interest rates do not
affect the fair value of the Company's variable-interest rate debt, they do
affect future earnings and cash flows. A 1% increase in interest rates would
increase interest expense for the year by approximately $2.4 million.

Commodity Price Risk -- The Company uses commodity forward purchasing
contracts to help control the cost of traded commodities, primarily copper and
aluminum, used as raw material in the production of compressor motors and
components and engines. Company policy allows local management to contract
commodity forwards for a limited percentage of projected raw material
requirements up to one year in advance. Commodity contracts at most of the
Company's divisions and subsidiaries are essentially purchase contracts designed
to fix the price of the commodities during the operating cycle. The Company's
practice has been to accept delivery of the commodities and consume them in
manufacturing activities. At December 31, 2003 and 2002, the Company held a
total notional value of $16.1 million and $14.6 million, respectively, in
commodity forward purchasing contracts. The majority of these contracts were not
recorded on the balance sheet as they did not require an initial cash outlay and
do not represent a liability until delivery of the commodities is accepted.
However, commodity contracts at the Company's French compressor subsidiary are
essentially derivative financial instruments designed to hedge the fluctuation
in commodity pricing and, as such, are subject to the provisions of SFAS No.
133, as amended by SFAS 149.

Foreign Currency Exchange Risk -- The Company is subject to foreign
currency exchange exposure for operations whose assets and liabilities are
denominated in currencies other than U.S. Dollars. On a normal basis, the
Company does not attempt to hedge the foreign currency translation fluctuations
in the net investments in its foreign subsidiaries. The Company does, from time
to time, enter into short-term forward exchange contracts to sell or purchase
foreign currencies at specified rates based on estimated foreign currency cash
flows. Company policy allows local management to hedge known receivables or
payables and forecasted cash flows up to a year in advance. It is the policy of
the Company not to purchase financial and/or derivative instruments for
speculative purposes. At December 31, 2003 and 2002, the Company held foreign
currency forward contracts with a total notional value of $16.3 million and $4.9
million, respectively.

29

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.

30

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of Tecumseh Products Company:

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of stockholders' equity
present fairly, in all material respects, the financial position of Tecumseh
Products Company and it subsidiaries at December 31, 2003, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

/S/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP
Bloomfield Hills, Michigan
February 26, 2004

31

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of Tecumseh Products Company:

We have audited the accompanying consolidated balance sheet of Tecumseh
Products Company and Subsidiaries as of December 31, 2002 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the two years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tecumseh
Products Company and Subsidiaries at December 31, 2002 and the consolidated
results of operations and cash flows for each of the two years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets", and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-lived Assets", effective
January 1, 2002.

/s/ CIULLA, SMITH & DALE, LLP
--------------------------------------
Ciulla, Smith & Dale, LLP

Livonia, Michigan
February 26, 2004

32

TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

The accompanying notes are an integral part of these Consolidated Financial
Statements.
33

TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these Consolidated Financial
Statements.
34

TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these Consolidated Financial
Statements.
35

TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of these Consolidated Financial
Statements.
36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)

NOTE 1. ACCOUNTING POLICIES

Business Description -- Tecumseh Products Company (the "Company") is a full
line, independent global manufacturer of hermetic compressors for residential
and commercial refrigerators, freezers, water coolers, dehumidifiers, window air
conditioning units and residential and commercial central system air
conditioners and heat pumps; electric motors; gasoline engines and power trains
for lawn mowers, lawn and garden tractors, garden tillers, string trimmers, snow
throwers, industrial and agricultural applications and recreational vehicles;
and centrifugal pumps, sump pumps and small submersible pumps for industrial,
commercial marine and agricultural applications.

On December 30, 2002, the Company acquired FASCO Motors Group ("FASCO"), a
leading manufacturer of electric motors and components, including AC and DC
motors, blowers, gear motors and linear actuators, for a wide variety of
industrial and consumer applications across a broad range of industries.

Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany transactions and balances have been eliminated.

Foreign Currency Translation -- All of the Company's foreign subsidiaries
use the local currency of the country of operation as the functional currency.
Assets and liabilities are translated into U.S. Dollars at year-end exchange
rates while revenues and expenses are translated at average monthly exchange
rates. The resulting translation adjustments are recorded in other comprehensive
income or loss, a component of stockholders' equity. Realized foreign currency
transaction gains and losses are included in current income and amount to a net
loss of $5.1 million in 2003 and a net gain of $5.2 million in 2002. Amounts
realized in 2001 were not significant.

Cash Equivalents -- Cash equivalents consist of commercial paper and other
short-term investments that are readily convertible into cash with original
maturities of three months or less.

Inventories -- Inventories are valued at the lower of cost or market, with
approximately 86% on the first-in, first-out basis with the remainder on
weighted average. Cost in inventory includes purchased parts and materials,
direct labor and applied manufacturing overhead.

Property, Plant and Equipment -- Expenditures for additions, major renewals
and betterments are capitalized and expenditures for maintenance and repairs are
charged to expense as incurred. For financial statement purposes, depreciation
is determined using the straight-line method at rates based upon the estimated
useful lives of the assets which generally range from 15 to 40 years for
buildings and from 2 to 12 years for machinery, equipment and tooling.
Depreciation expense was $85.1 million, $64.9 million, and $70.5 million in
2003, 2002 and 2001, respectively.

On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets." This statement, which supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," addresses accounting and financial
reporting for the impairment or disposal of long-lived assets. The charges for
the impairment of unusable assets, determined in accordance with the provisions
of SFAS No. 144, include $17.8 million in 2003 and $7.2 million in 2002.

Goodwill and Intangible Assets -- In accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets," goodwill and intangible assets deemed to
have indefinite lives are no longer amortized but are subject to impairment
testing on at least an annual basis. The Company performs its impairment testing
during the fourth quarter each year. For the purposes of this test, the Company
defined the reporting units as standalone operating companies that are one level
below an operating segment. The impairment test compares the fair value of the
reporting unit to its carrying value to determine if there is any potential
impairment. If the fair value is less than the carrying value, an impairment
loss is recognized to the extent that the fair value of the goodwill within the
reporting unit is less than the carrying value.

37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's accounting policy for goodwill prior to January 1, 2002 was
to amortize goodwill over its estimated useful life, principally over the
forty-year period. Net income adjusted to exclude goodwill amortization for the
year ended December 31, 2001 would have been $43.8 million or $2.37 per share.

Other intangible assets are amortized over their estimated useful lives.
See Note 4 for additional disclosures related to goodwill and other intangible
assets.

Revenue Recognition -- Revenues from the sale of the Company's products are
recognized once the risk and rewards of ownership have transferred to the
customers, which, in most cases, coincides with shipment of the products. Other
cases involving export sales, where title transfers either when the products are
delivered to the port of embarkation or received at the port of the country of
destination.

Shipping and Handling -- Shipping and handling fee revenue is not
significant. Shipping and handling costs are included in cost of goods sold.

Income Taxes -- Income taxes are accounted for using the liability method
under which deferred income taxes are determined based upon the estimated future
tax effects of differences between the financial statement and tax basis of
assets and liabilities, as measured by the currently enacted tax rates.

Derivative Financial Instruments -- Derivative financial instruments are
occasionally utilized by the Company to manage risk exposure to movements in
foreign exchange rates. The Company, from time to time, enters into forward
exchange contracts to obtain foreign currencies at specified rates based on
expected future cash flows for each currency. The premium or discount on the
contracts is amortized over the life of the contract. Changes in the value of
derivative financial instruments are measured at the balance sheet date and
recognized in current earnings or other comprehensive income depending on
whether the derivative is designated as part of a hedge transaction and, if it
is, the type of transaction. The Company does not hold derivative financial
instruments for trading purposes. See Note 11 for discussion of adoption of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" and its amendments.

Advertising Costs -- Advertising costs are expensed as incurred and
included in selling and administrative expense. Additionally, the Company
provides consideration to its customers for cooperative advertising and other
incentives. Such payments are reported as reductions to net sales.

Product Warranty -- Provision is made for the estimated cost of maintaining
product warranties at the time the product is sold based upon historical claims
experience by product line.

Self-Insured Risks -- Provision is made for the estimated costs of known
and anticipated claims under the deductible portions of the Company's health,
liability and workers' compensation insurance programs. In addition, provision
is made for the estimated cost of post-employment benefits.

Environmental Expenditures -- Expenditures for environmental remediation
are expensed or capitalized, as appropriate. Costs associated with remediation
activities are expensed. Liabilities relating to probable remedial activities
are recorded when the costs of such activities can be reasonably estimated and
are not discounted or reduced for possible recoveries from insurance carriers.

Earnings Per Share -- Basic and diluted earnings per share are equivalent.
Earnings per share are computed based on the weighted average number of common
shares outstanding for the periods reported. The weighted average number of
common shares used in the computations was 18,479,684 in 2003 and 2002, and
18,607,249 in 2001.

Research, Development and Testing Expenses -- Company sponsored research,
development and testing expenses related to present and future products are
expensed as incurred and were $31.5 million, $30.8 million, and $27.6 million in
2003, 2002 and 2001, respectively. Such expenses consist primarily of salary and
material costs.

38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Estimates -- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
during the reporting period and at the date of the financial statements.
Significant estimates include accruals for product warranty, self-insured risks,
pension and postretirement benefit obligations and environmental matters, as
well as the evaluation of goodwill and long-lived asset impairment. Actual
results could differ materially from those estimates.

Reclassifications -- Certain prior year amounts have been reclassified to
confirm with the current year presentation.

NOTE 2. COMPREHENSIVE INCOME

Accumulated other comprehensive income or loss is shown in the Consolidated
Statements of Stockholders' Equity and includes the following:

NOTE 3. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

The Company has defined benefit retirement plans that cover substantially
all domestic employees. Plans covering salaried employees generally provide
pension benefits that are based on average earnings and years of credited
service. Plans covering hourly employees generally provide pension benefits of
stated amounts for each year of service. The Company sponsors a retiree health
care benefit plan, including retiree life insurance, for eligible salaried
employees and their eligible dependents. At certain divisions, the Company also
sponsors retiree health care benefit plans for hourly retirees and their
eligible dependents. The retiree health care plans, which are unfunded, provide
for coordination of benefits with Medicare and any other insurance plan covering
a participating retiree or dependent, and have lifetime maximum benefit
restrictions. Some of the retiree health care plans are contributory, with some
retiree contributions adjusted annually. The Company has reserved the right to
interpret, change or eliminate these health care benefit plans.

The Company acquired FASCO on December 30, 2002, including its pension
plans and other postretirement benefit plans.

The Company uses September 30 as the measurement date (the date upon which
plan assets and obligations is measured) to facilitate the preparation and
reporting of pension and postretirement plan data. Information regarding the
funded status and net periodic benefit costs are reconciled to or stated as of
the fiscal year end of December 31.

39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following tables provide a reconciliation of the changes in the pension
and postretirement plans' benefit obligations, fair value of assets and funded
status for 2003 and 2002:

The following table provides the funded status of the plans for 2003 and
2002:

Amounts recognized in the consolidated balance sheets as of December 31
consist of:

40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The accumulated benefit obligation for all defined benefit pension plans
was $353.8 million and $297.6 million at September 30, 2003 and 2002,
respectively.

Information for pension plans with an accumulated benefit obligation in
excess of plan assets:

Components of net periodic benefit (income) cost during the year:

ADDITIONAL INFORMATION

Assumptions

Weighted-average assumptions used to determine benefit obligations at
September 30,

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

The expected long-term return, variance, and correlation of return with
other asset classes is determined for each class of assets in which the plan is
invested. That information is combined with the target asset allocation to
create a distribution of expected returns. The selected assumption falls within
the best estimate range, which is the range in which it is reasonably
anticipated that the actual results are more likely to fall than not.

41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Assumed health care cost trend rates at September 30:

Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. The healthcare cost trend rates are
based on an evaluation of external market conditions and adjusted to reflect the
Company's actual experience in relation to those market trends. The following
table provides the effects of a one-percentage-point change in assumed health
care cost trend rates:

Plan Assets

The following table provides pension plan weighted-average asset
allocations:

The Company's investment objective is to provide pension payments for the
next ten years. This is accomplished by investing the estimated payment
obligations into fixed income portfolio where maturities match the expended
benefit payments. This portfolio consists of investments rated "A" or better by
Moody's or Standard & Poor's. Funds in excess of the estimated ten-year payment
obligations are invested in equal proportions in a separate bond portfolio and
an equity portfolio.

Equity securities include Tecumseh Products Company common stock in the
amounts of $7.0 million (1.2% of total plan assets) and $7.8 million (1.4% of
total plan assets) at September 30, 2003 and 2002, respectively.

The impact of the Medicare Drug, Improvement, and Modernization Act of 2003
(the Act) has not been reflected in the Company's accounting for postretirement
health care benefits or in the above disclosures since the Act was signed into
law subsequent to the measurement date of September 30, 2003.

The Company expects to contribute $0.2 million to its pension plans in
2004.

42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid.

Foreign Pension Plans

The Company's foreign subsidiaries provide for defined benefits that are
generally based on earnings at retirement date and years of credited service.
The combined expense for these unfunded plans was $4.0 million and $2.6 million
in 2003 and 2002, respectively. The net liability recorded in the consolidated
balance sheet was $19.3 million and $17.7 million for 2003 and 2002,
respectively.

The Company has defined contribution retirement plans that cover
substantially all domestic employees. The combined expense for these plans was
$3.0 million and $2.5 million in 2003 and 2002, respectively.

NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS

Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." Under SFAS No. 142, goodwill and other intangible
assets deemed to have indefinite lives are no longer amortized, but are subject
to impairment testing on at least an annual basis. Other intangible assets
continue to be amortized over their estimated useful lives.

At the date of adoption, the Company tested goodwill for impairment and
found that the goodwill associated with the Engine & Power Train European
operations had been impaired. Accordingly, goodwill amounting to $4.8 million
($3.1 million net of tax) was written-off and recognized as a cumulative effect
from an accounting change. Additionally, during the Company's annual test for
impairment conducted during the fourth quarter of 2003, it was determined that
goodwill amounting to $29.5 million associated with the Company's European
compressor business had been impaired. Accordingly, $29.5 million was recorded
in restructuring charges, impairments and other items in the fourth quarter of
2003. The changes in the carrying amount of goodwill by segment follow:

43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Other intangible assets consisted of the following:

The aggregate amortization expense for the years ended December 31, 2003,
2002 and 2001 was $12.5 million, $0.1 million and zero, respectively. The
estimated amortization expense is $12.5 million for 2004 and approximately $5.0
million for each year from 2005 through 2008.

NOTE 5. INCOME TAXES

Consolidated income before taxes (including effect of 2002 accounting
change) consists of the following:

44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Provision (benefit) for income taxes consists of the following:

A reconciliation between the actual income tax expense provided and the
income tax expense computed by applying the statutory federal income tax rate of
35% to income before tax is as follows:

The Company calculates deferred taxes from temporary differences between
the tax basis of an asset or liability and its reported amount in the financial
statements. Furthermore, the Company provides United

45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

States taxes on unremitted foreign earnings. Significant components of the
Company's deferred tax assets and liabilities as of December 31 were as follows:

At December 31, 2003, the Company had federal net operating loss
carryforwards of approximately $39.5 million, which will expire in 2023. The
Company also had state net operating loss carryforwards of $48.8 million which
will expire at various dates. Additionally, the Company had foreign net
operating loss carryforwards of $6.1 million, of which $0.7 million will expire
from 2007 to 2008. The remainder of the foreign net operating loss carryforwards
have an unlimited carryforward period. Foreign tax credit carryforwards of
approximately $20.5 million will expire between 2006 through 2008, with
approximately $3.7 million expiring in 2006, $3.5 million expiring in 2007, and
the remainder expiring in 2008. Furthermore, the Company also had various state
tax credit carryovers of $7.5 million which expire at various dates from 2004 to
2017.

The valuation allowance for deferred tax assets relates primarily to state
net operating losses, state tax credits and certain tax assets arising in
foreign tax jurisdictions, and in the judgment of management, these tax assets
are not likely to be realized. The valuation allowance increased $3.1 million in
2003, the change primarily offset the change in certain deferred tax assets. Any
subsequent reductions of the valuation allowance will be reported as reductions
of tax expense assuming no offsetting change in the deferred tax asset.

Tax returns are subject to audit by various taxing authorities. In 2003 and
2001, the Company recorded benefits to income of $6.8 million and $5.2 million,
respectively, from settlements of U.S. tax issues primarily related to prior
years.

46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6. INVENTORIES

The components of inventories at December 31, were:

NOTE 7. BUSINESS SEGMENTS

In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company has identified four reportable
operating segments. With the acquisition of FASCO on December 30, 2002, the
Company created the Electrical Components operating segment. In addition to
FASCO, the segment includes certain North American electrical component
manufacturing that was previously reported in the Compressor Products operating
segment. Business segment information for 2002 and 2001 has been reclassified to
conform to the current year presentation. Operating segments are defined as
components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision maker(s)
in deciding how to allocate resources and in assessing performance. The
Company's segments share similar economic characteristics and are similar in
terms of products offered, production processes, types of customers served and
methods of distribution.

The Company's four reportable operating segments are defined as follows:

Compressor Products -- Manufacturing and marketing of a full line of
hermetic compressors for residential and commercial air conditioning and
refrigeration products.

Electrical Component Products -- Manufacturing and marketing of AC and DC
electric motors, blowers, gear motors and linear actuators for a broad and
diverse set of applications across many industries.

Engine & Power Train Products -- Manufacturing and marketing of gasoline
engines and power train components for lawn and garden and utility applications.

Pump Products -- Manufacturing and marketing centrifugal, sump and small
submersible pumps for industrial, commercial, marine and agricultural
applications.

The accounting policies of the reportable segments are the same as those
described in Note 1 of Notes to the Consolidated Financial Statements.

External customer sales by geographic area are based upon the destination
of products sold. The Company has no single customer that accounts for 10% or
more of consolidated net sales. Long-lived assets by geographic area are based
upon the physical location of the assets.

47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

BUSINESS SEGMENT INFORMATION

48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

GEOGRAPHIC SEGMENT INFORMATION

The Electrical Component Products had intersegment sales of $69.2 million,
$56.2 million and $65.1 million in 2003, 2002 and 2001, respectively.

49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8. DEBT

On December 30, 2002, the Company acquired FASCO. The acquisition was
financed with proceeds from $325.0 million in new bank borrowings and internal
cash flows. Of $325.0 million in new borrowings, $250.0 million was from a
six-month bridge loan and $75.0 million was from a new $125.0 million revolving
credit facility. On March 5, 2003, the Company completed a private placement of
$300 million Senior Guaranteed Notes due March 5, 2011. These notes bear
interest at a fixed rate of 4.66%. Proceeds from the private placement were used
to repay the $250 million bridge loan and pay down borrowings under the
Company's revolving credit facility. On March 31, 2003, the remaining $25.0
million outstanding under the revolver was repaid from available cash resources.

Under the $125 million revolving credit facility, the Company may select
among various interest rate arrangements. The facility has a three-year term,
which may be extended annually with the consent of the participating banks. The
facility had an applicable commitment fee rate of 17.5 basis points. The Company
paid facility fees of $0.2 million in 2003, $0.1 million in 2002, and $0.1
million in 2001. As of December 31, 2003, the Company has $18.1 million of the
facility committed to support letters of credit.

The Senior Guaranteed Notes and the revolving credit facility contain
various operating and financial covenants. The more restrictive of these
covenants require the Company to adhere to leverage and interest coverage ratios
and limit aggregate new debt.

In addition, during the third quarter 2003, the Company entered into two
pay variable, receive fixed interest rate swap agreements to lower the Company's
overall borrowing costs. At December 31, 2003, long-

50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

term debt includes a net unamortized premium of $3.5 million, and the fair value
adjustment for the active interest rate swap agreements of $0.7 million. The
active swap agreements have a total notional principal amount of $125.0 million
with maturity terms that match the Company's Senior Guaranteed Notes. The
variable interest payments are based upon 60 day LIBOR.

Scheduled maturities of long-term debt for each of the five years
subsequent to December 31, 2003 are as follows:

Interest paid was $15.3 million in 2003, $4.4 million in 2002, and $3.3
million in 2001.

NOTE 9. ENVIRONMENTAL MATTERS

The Company has been named by the U.S. Environmental Protection Agency
("EPA") as a potentially responsible party ("PRP") in connection with the
Sheboygan River and Harbor Superfund Site in Wisconsin. In May 2000, the EPA
issued a Record of Decision ("ROD") selecting the remedy for the Site. The
Company is one of several named PRP's in the proposed cleanup action. The EPA
has estimated the cost of cleanup at $40.9 million. Additionally, the Wisconsin
Department of Natural Resources ("WDNR"), as a Natural Resource Trustee, is
investigating what additional requirements, if any, the state may have beyond
those specified under the ROD.

The EPA has indicated its intent to address the site in two phases, with
the Company's Sheboygan Falls plant site and the upper river constituting the
first phase ("Phase I") and the middle and lower river and harbor being the
second phase ("Phase II"). In March 2003, the Company entered into a Consent
Decree with the EPA concerning the performance of remedial design and remedial
action for Phase I. The Consent Decree has also been approved by the U.S.
Department of Justice, but it has yet to become a final judgment pending
approval by the pertinent federal district court. Negotiation of a Consent
Decree regarding Phase II has yet to commence.

On March 25, 2003, with the cooperation of the EPA, the Company and
Pollution Risk Services, LLC ("PRS") entered into a Liability Transfer and
Assumption Agreement (the "Liability Transfer Agreement"). Under the terms of
the Liability Transfer Agreement, PRS assumed all of the Company's
responsibilities, obligations and liabilities for remediation of the entire Site
and the associated costs, except for certain specifically enumerated
liabilities. Also, as required by the Liability Transfer Agreement, the Company
has purchased Remediation Cost Cap insurance, with a 30 year term, in the amount
of $100.0 million and Environmental Site Liability insurance in the amount of
$20.0 million. The Company believes such insurance coverage will provide
sufficient assurance for completion of the responsibilities, obligations and
liabilities assumed by PRS under the Liability Transfer Agreement. On October
10, 2003, in conjunction with the Liability Transfer Agreement, the Company
completed the transfer of title to the Sheboygan Falls, Wisconsin property to
PRS.

In connection with the Liability Transfer Agreement, the Company has
received an opinion from outside tax counsel that substantially all of the
payment made to PRS should be currently deductible for federal income tax
purposes.

51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The total cost of the Liability Transfer Agreement to the Company,
including the cost of the insurance policies, was $39.2 million. The Company
recognized a nonrecurring charge of $13.6 million ($8.7 million net of tax ) in
the first quarter of 2003. The charge consisted of the difference between the
cost of the Liability Transfer Agreement and amounts previously accrued for the
cleanup. The Company continues to maintain an additional reserve of $0.5 million
to reflect its potential environmental liability arising from operations at the
Site, including potential residual liabilities not assumed by PRS pursuant to
the Liability Transfer Agreement.

It is the intent of the Company, PRS and the EPA to negotiate provisions
that would add PRS as a PRP by amendment to the Consent Decree, which requires
the approval of the U.S. Department of Justice. Until such approval is received,
U.S. GAAP requires that the Company continue to record the full amount of the
estimated remediation liability of $39.7 million and a corresponding asset of
$39.2 million included in Other Assets in the balance sheet. While the Company
believes the arrangements with PRS are sufficient to satisfy substantially all
of the Company's environmental responsibilities with respect to the Site, these
arrangements do not constitute a legal discharge or release of the Company's
liabilities with respect to the Site. The actual cost of this obligation will be
governed by numerous factors, including, without limitation, the requirements of
the WDNR, and may be greater or lower than the amount accrued.

With respect to other environmental matters, the Company, in cooperation
with the WDNR, conducted an investigation of soil and groundwater contamination
at the Company's Grafton, Wisconsin plant. It was determined that contamination
from petroleum and degreasing products used at the plant were contributing to an
off-site groundwater plume. The Company began remediation of soils in 2001 on
the east side of the facility. Additional remediation of soils began in the fall
of 2002 in two other areas on the plant site. At December 31, 2003, the Company
had accrued $2.7 million for the total estimated cost associated with the
investigation and remediation of the on-site contamination. Investigation
efforts related to the potential off-site groundwater contamination have to date
been limited in their nature and scope. The extent, timing and cost of off-site
remediation requirements, if any, are not presently determinable.

The WDNR requested that the Company join it in a cooperative effort to
investigate and cleanup PCB contamination in the watershed of the south branch
of the Manitowoc River, downstream of the Company's New Holstein, Wisconsin
facility. Despite the fact that the WDNR's investigation does not establish the
parties responsible for the PCB contamination, the WDNR has indicated that it
believes the Company is a source and that it expects the Company to participate
in the cleanup. The Company has participated in the first phase of a cooperative
cleanup, consisting of joint funding of the removal of soils and sediments in
the source area near its facility. The next phase of the cooperative effort is
scheduled to occur mid-2004 involving a stream segment downstream of the source
area. The Company has provided approximately $2.5 million for these costs.
Although participation in a cooperative remedial effort after this phase for the
balance of the watershed is under consideration, it is not possible to
reasonably estimate the cost of any such participation at this time.

In addition to the above-mentioned sites, the Company is also currently
participating with the EPA and various state agencies at certain other sites to
determine the nature and extent of any remedial action that may be necessary
with regard to such other sites. At December 31, 2003 and 2002, the Company had
accrued $46.6 million and $36.3 million, respectively, for environmental
remediation, including $39.7 and $29.2 million, respectively relating to the
Sheboygan River and Harbor Superfund Site. Additionally, as of December 31,
2003, the Company had recorded a corresponding asset of $39.2 million relating
to the Sheboygan River and Harbor Superfund Site in connection with its
agreement with PRS. As these matters continue toward final resolution, amounts
in excess of those already provided may be necessary to discharge the Company
from its obligations for these sites. Such amounts, depending on their amount
and timing, could be material to reported net income in the particular quarter
or period that they are recorded. In addition, the ultimate resolution of these
matters, either individually or in the aggregate, could be material to the
consolidated financial statements.

52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10. COMMITMENTS AND CONTINGENCIES

Various lawsuits and claims, including those involving ordinary routine
litigation incidental to its business, to which the Company is a party, are
pending, or have been asserted, against the Company. Although the outcome of
these matters cannot be predicted with certainty, and some of them may be
disposed of unfavorably to the Company, management has no reason to believe that
their disposition will have a materially adverse effect on the consolidated
financial position or results of operations of the Company.

NOTE 11. FINANCIAL INSTRUMENTS

The following table presents the carrying amounts and the estimated fair
values of financial instruments at December 31, 2003 and 2002:

The carrying amount of cash equivalents approximates fair value due to
their liquidity and short-term maturities. The fair value of the Company's fixed
interest rate debt reflects the difference between the contract rate and the
prevailing rates as of the balance sheet date. The carrying value of the
Company's variable interest rate debt approximates fair value. The fair values
of foreign currency and commodity contracts reflect the differences between the
contract prices and the forward prices available on the balance sheet date.

The Company does not utilize financial instruments for trading or other
speculative purposes. The Company generally does not hedge the net investment in
its subsidiaries. All derivative financial instruments held at December 31, 2003
will mature within six months. All such instruments held at December 31, 2002
matured in 2003.

The Company's derivative financial instruments consist of foreign currency
forward exchange contracts. These contracts are recognized on the balance sheet
at their fair value, which is the estimated amount at which they could be
settled based on forward market exchange rates. The Company's foreign
subsidiaries use forward exchange contracts to hedge foreign currency
receivables, payables, and other known and forecasted transactional exposures
for periods consistent with the expected cash flow of the underlying
transactions. The contracts generally mature within one year and are designed to
limit exposure to exchange rate fluctuations. On the date a forward exchange
contract is entered into, it is designated as a foreign currency cash flow
hedge. Subsequent changes in the fair value of the contract that is highly
effective and qualifies as a foreign currency cash flow hedge are recorded in
other comprehensive income. The Company's European subsidiaries had contracts
for the sale of $13.0 million and $0.2 million at December 31, 2003 and 2002,
respectively. The European subsidiaries had contracts for the purchase of $3.2
million and $4.7 million at December 31, 2003 and 2002, respectively.

The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as foreign currency hedges to
specific forecasted transactions. The Company formally assesses, both at the
hedge's inception and on an ongoing basis, whether the derivatives that are used
in hedging transactions are highly effective in offsetting changes in cash flows
of hedged items. When it is determined that a derivative is not highly effective
as a hedge or that it has ceased to be a highly effective hedge, the Company
discontinues hedge accounting prospectively, as discussed below.

53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company discontinues hedge accounting prospectively when the derivative
is (1) determined to be no longer effective in offsetting the fair value of the
cash flows of a hedged item; (2) sold, terminated, or exercised; (3)
undesignated as a hedge instrument, because it is unlikely that a forecasted
transaction will occur. When hedge accounting is discontinued, the derivative
will be carried at its fair value on the balance sheet, with changes in its fair
value recognized in current period earnings. Any related gains or losses that
were accumulated in other comprehensive income will be recognized immediately in
cost of sales.

The Company uses commodity forward purchasing contracts to help control the
cost of commodities (copper and aluminum) used in the production of compressor
motors and components and engines. Company policy allows local managers to
contract commodity forwards for a limited percentage of raw material
requirements up to one year in advance. These contracts are not recorded in the
balance sheet as they do not require an initial cash outlay and do not represent
a liability until delivery of the commodity. Commodity forwards outstanding at
December 31, 2003 and 2002 were $16.1 million and $14.6 million, respectively.

A portion of export accounts receivable at the Company's Brazilian
subsidiary are sold without recourse at a discount. Sold Brazilian receivable
balances at December 31, 2003 and 2002 were $64.5 million and $41.2 million,
respectively, and the discount rate was 3.3% in 2003 and 4.9% in 2002. The
Company estimates the fair value of the contingent liability related to these
receivables to be $0.1 million, which is included in operating income and
allowance for doubtful accounts.

NOTE 12. GUARANTEES AND WARRANTIES

A portion of export accounts receivable at the Company's Brazilian
subsidiary are sold with recourse. Brazilian export receivables sold at December
31, 2003 and December 31, 2002 were $64.5 million and $41.2 million,
respectively. The Company estimates the fair value of the contingent liability
related to these receivables to be $0.1 million, which is included in operating
income and allowance for doubtful accounts.

A provision for estimated future warranty costs is recorded when products
are sold and revenue recognized. Changes in the Company's product warranty
liability are as follows:

NOTE 13. STOCKHOLDERS' EQUITY

The shares of Class A common stock and Class B common stock are
substantially identical except as to voting rights. Class A common stock has no
voting rights except the right to i) vote on any amendments that could adversely
affect the Class A Protection Provision in the articles of incorporation and ii)
vote in other limited circumstances, primarily involving mergers and
acquisitions, as required by law.

A Shareholders' Rights Plan is in effect for each class of stock. These
plans protect shareholders against unsolicited attempts to acquire control of
the Company that do not offer an adequate price to all shareholders. The rights
are not currently exercisable, but would become exercisable at an exercise price
of $180 per share, subject to adjustment, if certain events occurred relating to
a person or group acquiring or attempting to acquire 10% or more of the
outstanding shares of Class B common stock. The rights have no voting or
dividend privileges and are attached to, and do not trade separately from, the
Class A and Class B common stock. The rights expire on August 25, 2009. As of
December 31, 2003, 13,401,938 shares of Class A common stock and 5,077,746
shares of Class B common stock were reserved for future exercise under the
plans.

54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 14. RESTRUCTURING CHARGES, IMPAIRMENTS AND OTHER ITEMS

2003

Full year 2003 results were adversely impacted by a total of $69.3 million
($55.0 million net of tax or $2.98 per share) of restructuring, impairment and
other charges. During the first quarter, the Company recognized a charge of
$13.6 million ($8.7 million net of tax or $0.47 per share) related to
environmental costs at the Company's Sheboygan Falls, Wisconsin facility (see
Note 9).

During the second quarter of 2003, the Company announced restructuring
actions involving the Engine & Power Train business. These actions included the
closure of the Company's Douglas, Georgia and Sheboygan Falls, Wisconsin
production facilities and the relocation of certain production to the new
Curitiba, Brazil facility and other existing U.S. locations. As a result of
these actions, the Company incurred both charges and gains, which were
recognized over the second, third and fourth quarters of 2003 in accordance with
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets,"
SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities,"
and SFAS No. 88 "Employer's Accounting for Settlements & Curtailments of Defined
Benefit Pension Plans and Termination Benefits." As of December 31, 2003, the
Company had recognized $32.0 million in charges and $5.8 million in gains
equaling a net charge of $26.2 million ($16.8 million net of tax or $0.91 per
share) with respect to these restructuring actions. Included in the charges were
approximately $7.5 million in earned severance pay and future benefit costs
relating to manpower reductions, $4.2 million in plant closing and exit costs
incurred through December 31, 2003, and $20.3 million in asset impairment
charges for idled equipment and facilities. The amount of severance pay and
future benefit costs mentioned above included $0.8 million in curtailment losses
related to the pension plan at the Sheboygan Falls, Wisconsin facility. The
gains represented curtailment gains associated with other post-employment
benefits. Under U.S. GAAP, such gains are not recognizable until the affected
employees have been severed and, accordingly, were recorded in the third quarter
of 2003. Under SFAS No. 146, certain costs are only recognized to the extent a
liability has been actually incurred. Accordingly, $28.5 million, $2.5 million
and $1.0 million of the charges were recognized in the second, third and fourth
quarters, respectively. As of December 31, 2003, substantially all of the costs
of the restructuring had been incurred.

During the fourth quarter of 2003, the Company recognized a charge for the
impairment of goodwill associated with the Company's European compressor
operations. The charge, which was determined as part of the Company's annual
evaluation of goodwill as specified by SFAS No. 142, amounts to $29.5 million
before and after taxes (or $1.60 per share). The impairment was primarily the
result of the approximately 17% decline in the value of the U.S. Dollar versus
the Euro. The change in currency value increased the Company's net investment in
the European subsidiary in U.S. Dollar terms and reduced margins on U.S.
Dollar-denominated sales.

2002

Full year 2002 results were adversely impacted by $10.3 million ($6.6
million net of tax or $0.36 per share) in restructuring charges and impairment.
During the fourth quarter, a charge of $5.8 million ($3.7 million net of tax or
$0.20 per share) was recorded in the Engine & Power Train business. Included in
the charge is $4.1 million for costs, mostly write-downs of fixed assets,
associated with the relocation of engine component manufacturing, and the
discontinuation of production activities at the Grafton, Wisconsin facility.
Also included in the charge is $1.7 million for additional environmental cleanup
costs, primarily additional past response costs levied by the EPA for its
Sheboygan, Wisconsin facility. During the first quarter, a charge of $4.5
million ($2.8 million net of tax or $0.15 per share) was recorded in the
Compressor business. This charge was for costs, primarily the write-off of
certain unusable equipment, related to the relocation of additional rotary
compressor lines from the U.S. to Brazil.

55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2001

The 2001 results were adversely impacted by $35.4 million ($22.8 million
net of tax, or $1.23 per share) in restructuring charges. During the third
quarter of 2001, the Company offered an early retirement incentive plan to
eligible Corporate, North American Compressor Group and Engine & Power Train
Group employees. Two hundred fifty employees, representing approximately 78% of
those eligible, or approximately 20% of the total salaried workforce in the
eligible groups, elected early retirement. The cost of providing the pension and
healthcare benefits associated with this plan amounted to $29.3 million ($18.9
million net of tax) and has been recorded as a nonrecurring charge in the third
quarter.

During the fourth quarter of 2001, the charge of $6.1 million ($3.9 million
net of tax, or $0.21 per share) in the Engine & Power Train business related
primarily to the transfer of certain engine and component part production from
domestic facilities to the Company's facilities in the Czech Republic.

NOTE 15. BUSINESS ACQUISITIONS

On December 30, 2002, the Company acquired FASCO from Invensys Plc for cash
of $396.6 million and the assumption of approximately $14.5 million in debt.
During 2003, the Company received $14.1 million in cash for post-closing
purchase price adjustments related to working capital and employee benefits.
These proceeds are reflected in the Statement of Cash Flows under "Business
acquisition, net of cash acquired." The results of FASCO's operations are
included in the Company's statement of consolidated income for the full year
2003 within the Electrical Components business segment.

FASCO manufactures AC motors, DC motors, blowers, gear motors and linear
actuators, all of which are used in a wide variety of applications within the
HVAC, automotive, healthcare and appliance industries. The Company believes that
the addition of FASCO will allow it to reach new customers and markets and
enable it to deliver higher valued-added products and complete customer
solutions in all of its business segments.

The acquisition was financed with proceeds from $325.0 million in new bank
borrowings and internal cash flows. Of the $325.0 million in new borrowings,
$250.0 million was from a six-month bridge loan and $75.0 million was from a new
three-year $125 million revolving credit facility. On March 5, 2003, the Company
completed a private placement of $300 million Senior Guaranteed Notes maturing
2008 through 2011. Proceeds from the private placement were used to repay the
bridge loan and pay down borrowings under the revolving credit facility.

During the year, the Company completed the final purchase price allocation
reflecting professional asset valuations completed during the second quarter,
post-closing purchase price adjustments and other refinements. The original and
final purchase price allocations were as follows:

56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The preliminary and final values of intangible assets are summarized as
follows:

The goodwill of $217.7 million is included in the Electrical Components
segment. None of the goodwill from the FASCO acquisition is deductible for tax
purposes.

The following unaudited pro forma financial information presents the
results of operations as though the acquisition had been completed at the
beginning of the respective periods.

The Company also expended $4.0 million in April 2002 for the acquisition of
Manufacturing Data Systems, Inc., a supplier of Internet-enabled,
open-architecture software motion control applications that increase
manufacturing flexibility and enable agile manufacturing for the Computer
Numerical Control (CNC) and General Motion Control (GMC) markets.

In May 2001, the Company acquired an engine manufacturing facility in the
Czech Republic for $14.9 million. This transaction was accounted for as an asset
purchase. The results of operations for this facility since the acquisition are
included in the Company's statement of consolidated income.

NOTE 16. NEW ACCOUNTING STANDARDS

On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Under SFAS
No. 142 goodwill is no longer amortized, but is subject to impairment testing on
at least an annual basis. As of December 31, 2001, the net book value of the
Company's goodwill was $45.1 million. However, as required by the Statement, the
Company tested for impairment at the date of adoption and found that the
goodwill associated with the Engine & Power Train European operations had been
impaired. Accordingly, goodwill amounting to $4.8 million was written-off and
recognized as a cumulative effect from an accounting change. In addition, during
the Company's annual test for impairment conducted in the fourth quarter of
2003, it was determined that goodwill amounting to $29.5 million associated with
the Company's European compressor business had been impaired. The book value of
the Company's goodwill at December 31, 2003, was $242.7 million, and included
$217.7 million of goodwill recorded in connection with the FASCO acquisition.
Amortization of goodwill amounted to approximately $1.5 million for the twelve
months ended December 31, 2001.

57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On January 1, 2002, the Company also adopted SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-lived Assets." This statement, which
superseded SFAS No. 121, addresses accounting and financial reporting for the
impairment or disposal of long-lived assets. There was no material effect on the
results of operations, cash flows, or financial position as a result of adopting
this standard. The impairment charges recorded in 2003 and 2002 were determined
in accordance with the provisions of SFAS No. 144.

In June 2002 the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The
standard nullifies EITF Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit." In particular, the new standard
applies to involuntary work force reductions and the costs to consolidate
facilities. The statement mostly addresses when such costs can be accrued and
generally delays recognition versus prior practice by providing that liabilities
must be actually incurred and not just planned. The standard was effective for
actions occurring after December 31, 2002. The restructuring charges relating to
the Company's Engine & Power Train business during 2003 were determined in
accordance with the provisions of SFAS No. 146.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements. The Company has provided the required disclosures in Note 12 to the
Consolidated Financial Statements.

In April 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The standard amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities. The standard has had no effect on the Company's
accounting given the limited nature of the Company's current hedging activities.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liability and Equity." The
standard establishes how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. The Company has
not issued securities meeting the definition of these types of financial
instruments.

In December 2003, the FASB reissued a revised version of SFAS No. 132,
"Employers' Disclosure about Pensions and Other Postretirement Benefits. The
Standard revises the required disclosures to include more details with respect
to plan assets, benefit obligations, cash flows, benefit costs and other
relevant information. The Company has included the required disclosures in the
"Notes to Consolidated Financial Statements."

Also in December 2003, the FASB released a revised version of FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities
("VIE's") -- an interpretation of ARB No. 51," which had originally been issued
in January 2003. The interpretation introduces a new consolidation model that
goes beyond Special Purpose Entities ("SPE's") and is applicable to virtually
all legal entities. The model focuses on identifying entities for which a
controlling financial interest is achieved through means other than voting
rights. Such entities are referred to as VIE's and the enterprise that is the
primary beneficiary of a VIE would be required to consolidate it. The revised
interpretation is required to be adopted during the first quarter of 2004,
however, the Company does not believe it has any unconsolidated entities that
would be required to be consolidated under this Interpretation.

58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 17. QUARTERLY FINANCIAL DATA -- UNAUDITED

59

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

Information about the April 11, 2003 change in our independent accountants
was previously reported on a Form 8-K filed April 17, 2003, as amended by a Form
8-K/A filed April 22, 2003. There were no reportable disagreements with our
accountants on accounting or financial disclosure.

ITEM 9A. CONTROLS AND PROCEDURES

As of the end of the fiscal year covered by this report, the Company
carried out an evaluation under the supervision and with the participation of
the Company's management, including the Company's President and Chief Executive
Officer and the Company's Vice President, Treasurer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Company's President and Chief Executive Officer along with the
Company's Vice President, Treasurer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective. There were no
changes in the Company's internal control over financial reporting during the
quarter ended December 31, 2003 that have materially affected, or are reasonably
likely to materially affect, its internal controls over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The information pertaining to directors required by Item 401 of Regulation
S-K will be set forth under the captions "Election of Directors" and "Audit
Committee" in the Company's definitive Proxy Statement relating to its 2004
Annual Meeting of Shareholders and is incorporated herein by reference.
Information regarding executive officers required by Item 401 of Regulation S-K
is furnished in Part I of this report. The information required to be reported
pursuant to Item 405 of Regulation S-K will be set forth under the caption
"Appendix A -- Share Ownership -- Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive Proxy Statement relating to its 2004
Annual Meeting of Shareholders and is incorporated herein by reference.

The Company has adopted a Code of Ethics for Financial Managers, which
applies to the Company's Chief Executive Officer, Chief Financial Officer,
Corporate Controller, and Manager of Financial Reporting, and the controller or
principal accounting manager of each business unit, as well as a Code of Conduct
for All Directors, Officers, and Employees and an Ethics Reporting Policy.
Current copies of both codes and the reporting policy are posted at the Investor
Relations section of the Company's website at www.tecumseh.com.

ITEM 11. EXECUTIVE COMPENSATION

The information under the captions "Appendix B -- Executive Compensation,"
"Compensation Committee Interlocks and Insider Participation" and "Election of
Directors -- Director Compensation" in the Company's definitive Proxy Statement
relating to its 2004 Annual Meeting of Shareholders is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information under the caption "Appendix A -- Share Ownership" in the
Company's definitive Proxy Statement relating to its 2004 Annual Meeting of
Shareholders is incorporated herein by reference. No information is required to
be reported pursuant to Item 201(d) of Regulation S-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information under the caption "Compensation Committee Interlocks and
Insider Participation" in the Company's definitive Proxy Statement relating to
its 2004 Annual Meeting of Shareholders is incorporated herein by reference.

60

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information under the caption "Appendix D -- Audit and Non-Audit Fees"
in the Company's definitive Proxy Statement relating to its 2004 Annual Meeting
of Shareholders is incorporated herein by reference.

PART IV

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

(a) (1) and (2) Financial Statements

See "Financial Statements"

(3) See Index to Exhibits (See Item 15 (c), below)

(b) Reports on Form 8-K filed in the fourth quarter of 2003

On October 30, 2003, the Company filed a report on Form 8-K reporting
under Item 5, "Other Events and Regulation FD Disclosure," the issuance of
a press release regarding the appointment of Virginia A. Kamsky as Director
of the Company.

On October 31, 2003, the Company filed a report on Form 8-K reporting
under Item 9, "Regulation FD Disclosure," and Item 12. "Results of
Operations and Financial Condition," the issuance of a press release
regarding its third quarter 2003 earnings press release and Investor
Presentation.

On November 26, 2003, the Company filed a report on Form 8-K reporting
under Item 5, "Other Events and Regulation FD Disclosure," the issuance of
a press release regarding the retirement of Ralph W. Babb, Jr. as Director
of the Company.

(c) Exhibits

- ---------------

* Filed herewith

(d) Financial Statement Schedules

None.

64

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

TECUMSEH PRODUCTS COMPANY

Date: March 1, 2004 By: /s/ TODD W. HERRICK
---------------------------------------------
Todd W. Herrick
Chairman of the Board of Directors,
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

65

INDEX TO EXHIBITS

- ---------------

* Filed herewith