TECUMSEH PRODUCTS CO - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

COMMISSION FILE NUMBER 0-452

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

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.

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

Certain shareholders, which, as of June 30, 2004, held an aggregate of
914,347 shares of Registrants Class A Common Stock and 2,279,044 shares of its
Class B Common Stock might be regarded as "affiliates" of Registrant as that
word is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as
amended. If such persons are "affiliates," the aggregate market value as of June
30, 2004 (based on the closing prices of $41.19 per Class A share and $42.43 per
Class B share, as reported on the Nasdaq Stock Market on such date) of
12,487,591 Class A shares and 2,798,702 Class B shares held by non-affiliates
was $633,112,799.

Numbers of shares outstanding of each of the Registrant's classes of Common
Stock at February 4, 2005:

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 2005 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, fractional horsepower electric motors and related products
for a broad range of residential and commercial applications and pumps. 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 groups its products into
four principal market segments: Compressor Products, Electrical Components,
Engine & Power Train Products and Pump Products. All of the Company's products
are sold in countries all around the world.

Compressor Products include a broad range of air conditioning and
refrigeration compressors, as well as refrigeration condensing units and
complete refrigeration systems. 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, display cases 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 mission
critical facilities, such as cell towers and data centers, where reliable power
is a necessity. The Company has uninterruptible power units undergoing internal
and 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 2004, sales to
customers outside the United States represented approximately 44% of total
consolidated net sales. In addition to North American operations, compressor
products are produced in Brazil, France, India and Malaysia, engines and
component parts are produced in Italy, the Czech Republic and Brazil and
electric motors are produced in Thailand and Australia.

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
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principally in Latin America, North America, Europe, Africa and the Middle East.
The Brazilian operation represents a significant portion of the Company's
compressor business. In 2004, total sales generated by Tecumseh do Brasil
amounted to 38% of total Compressor Products segment sales.

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 a
growing amount of exports to North America, the Middle East, the Far East and
Africa.

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
lightweight 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 that produces primarily larger engines and engine
components for export to the U.S. market and a facility in Curitiba, Brazil that
produces 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, 2004, 2003 and 2002 appear under the caption
"Business Segment Data" in Note 8 to the Consolidated Financial Statements which
appear in Part II, Item 8, of this report, "Financial Statements and
Supplementary Data," and that information is incorporated by reference into this
Item 1. 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 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, as well as
certain commercial refrigeration 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 is
developing a product offering that includes air conditioning and commercial
refrigeration.

The Compressor products segment also produces subassemblies and more
complete refrigeration systems that utilize its compressors as a component. Such
products include condensing units, complete refrigeration systems and cooling
systems that use variable speed, DC powered compressors. These products are sold
to both OEM and aftermarket distributors.

MANUFACTURING OPERATIONS

Compressor Products manufactured or assembled in the Company's North
American plants accounted for approximately 26% of 2004 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 North American, 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 North American,
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 2004, the two largest
customers for compressor products accounted for 6.0% and 5.4%, respectively, of
total segment sales, or 2.8% and 2.5%, 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
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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 110 countries. In 2004, approximately 33% of
the compressor products produced by the Company in its U.S. plants were exported
to foreign countries. Approximately 59% of these exported products were sold in
the Far and Middle East.

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. The Company believes it will introduce a new scroll product to its
customers during 2005.

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
available supply of 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,

5

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 foreign competition and the movement of OEM customer operations
outside the U.S., 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.

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. European
operations face the same competitive factors as those in North America,
including foreign competition and a shrinking local customer base. Similar to
the restructuring actions completed over the past several years in North
America, European operations will need to consolidate facilities to improve
their overall cost structure.

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, Africa 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 63%,
67% and 66% of its production being exported in 2004, 2003 and 2002,
respectively. However, during 2004 and 2003 the Brazilian Real appreciated
against the U.S. Dollar by 8% and 18%, respectively, representing a significant
departure from historical devaluation trends.

The operations in Brazil represent a significant and critical component of
the Compressor Group as a whole given its overall cost structure and the scope
of its operations. The Brazilian operations represent 38% and 35% of 2004 and
2003 sales, respectively, and a disproportionate share of the Group's operating
profit.

INDIAN OPERATIONS

Tecumseh Products India, Ltd. has two compressor manufacturing facilities
in India that sell to regional markets and increasingly to global markets,
including North America, the Middle East, the Far East and Africa. 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 2004, approximately 19% and 15% of its sales were made to its two
largest customers, respectively, and the loss of these customers 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.

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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 efficiency requirements for
unitary air conditioners were published in the U.S. in January 2001 to be
effective in January 2006. The European and Brazilian manufacturing communities
have 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 has products available to
meet known energy efficiency requirements as determined by our customers.

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 in
excess of $10 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 20-25% of the market, with its primary focus on high
value-added products and services.

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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. The Company is in the process of consolidating its facility in
St. Clair, Missouri into its other operations. 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 88% 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 18% of revenues, with the largest customer accounting for
approximately 9% of their 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 exceed 2% of FASCO's total sales. FASCO does not have
long-term contracts with the majority of its 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 or assembles engines and related components in
three 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 and in the Group's facility in Brazil. 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

8

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. 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 sales staff and by local sales representatives in certain foreign countries.
North America and Europe are the principal markets for lawn and garden products,
although engines are sold throughout the world.

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 2004, the three largest (direct ship) customers for Engine & Power Train
Products accounted for 28.7%, 16.1% and 15.6%, respectively, of segment sales,
or 7.2%, 4.0% and 3.9%, respectively, of consolidated net sales. Some of the
engines provided to these customers are incorporated into end consumer products
that are sold by a number of large retailers, including Sears and Home Depot,
that represent a significant portion of industry sales. Loss of any of this
segment's three largest customers, and/or the loss of a significant 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 Kawasaki Motors Corp., 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
9

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 has 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, if 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 are being
implemented in stages with the first stage initiated 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.

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.

During 2004, the Company was informed by a major retailer, which accounted
for approximately 17% of Little Giant's overall business or 70% of Little Giant
water gardening business, that it was switching to a China-based supplier for
the 2005 season. The Company is seeking other distribution channels for this
product, and the ultimate effect on sales will depend on the Company's ability
to sell this product through these other channels.

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.
10

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 typically are stronger in the first two quarters of the
year than in the last two quarters. However, depending on relative performance
among the groups and factors, such as foreign currency changes and global
weather, trends can vary.

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 $34.0 million, $31.5
million, and $30.8 million during 2004, 2003, and 2002, 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, 2004, the Company employed approximately 21,700 persons,
66% of whom were employed in foreign locations. Approximately 1,300 of the U.S.
employees were represented by labor unions, with approximately 1,000 persons
represented by the same union contract which expires in July 2005. 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
2004, the maximum number of persons employed was approximately 21,700 and the
minimum was approximately 20,500. 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 -- Present position since 2003.
President and Chief Executive Officer, Tecumseh Products Company 1986 to
2003. (Employed with Tecumseh Products Company since 1972.)

11

(2) Last five years of business experience -- Present position since 2004.
Corporate Controller, Tecumseh Products Company 2002 -- 2004. Partner,
PricewaterhouseCoopers, 1996 -- 2001.

(3) Last five years of business experience -- Present position since 2001.
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, 2004 the Company had 47
properties worldwide occupying approximately 10.5 million square feet with the
majority, approximately 9.4 million square feet, devoted to manufacturing.
Nineteen facilities with approximately 5.6 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 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

12

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 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 has been
voluntarily participating in a cooperative effort to investigate and cleanup PCB
contamination in the watershed of the south branch of the Manitowoc River, at
and downstream from the Company's New Holstein, Wisconsin facility. On December
29, 2004, the Company and TRC Companies and TRC Environmental Corporation
(collectively, "TRC") entered into a Consent Order with the Wisconsin Department
of Natural Resources (the "WDNR") relating to this effort known as the Hayton
Area Remediation Project ("HARP"). The Consent Order provides a framework for
the completion of the remediation and regulatory closure at HARP.

Concurrently, on December 29, 2004, the Company and two of its subsidiaries
and TRC entered into an Exit Strategy Agreement (the "Agreement"), whereby the
Company transferred to TRC substantially all of its obligations to complete the
HARP remediation pursuant to the Consent Order and in accordance with applicable
environmental laws and regulations. TRC's obligations under the Agreement
include any ongoing monitoring or maintenance requirements and certain off-site
mitigation or remediation, if required. TRC will also manage any third-party
remediation claims that might arise or otherwise be filed against the Company.

As required by the Agreement, the Company also purchased a Pollution Legal
Liability Select Cleanup Cost Cap Policy (the "Policy") from American
International Specialty Lines Company. The term of the Policy is 20 years with
an aggregate combined policy limit of $41 million. The policy lists the Company
and TRC as named insureds and includes a number of first and third party
coverages for remediation costs and bodily injury and property damage claims
associated with the HARP remediation and contamination. The Company believes
that the Policy provides additional assurance that the responsibilities,
obligations, and liabilities transferred and assigned by the Company and assumed
by TRC under the Agreement will be completed. Although the arrangements with TRC
and the WDNR do not constitute a legal discharge or release of the Company's
liabilities, the Company believes that the specific work substitution provisions
of the Consent Order and the broad coverage terms of the Policy, collectively,
are sufficient to satisfy substantially all of the Company's environmental
obligations with respect to the HARP remediation. The total cost of the exit
strategy insured remediation arrangement to Tecumseh was $16.4 million. This
amount included $350,000 that was paid to the WDNR pursuant to the Consent Order
to settle any alleged liabilities associated with natural resource damages. The
charge represented the cost of the agreements less what was previously provided
for cleanup costs to which the Company had voluntarily agreed.

The Company, in cooperation with the WDNR, also 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, 2004, the Company had
13

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.

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, 2004 and 2003, the Company had
accrued $43.3 million and $46.6 million, respectively, for environmental
remediation, including $39.7 million relating to the Sheboygan River and Harbor
Superfund Site. Additionally, as of December 31, 2004 and 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.

The Company is also the subject of, or a party to, a number of other
pending or threatened legal actions involving a variety of matters, including
class actions and asbestos-related claims, incidental to its business.

One such lawsuit filed against the Company and other defendants alleges
that the horsepower labels on the products the plaintiffs purchased were
inaccurate. The plaintiffs seek certification of a class of all persons in the
United States who, beginning January 1, 1995 through the present, purchased a
lawnmower containing a two stroke or four stroke gas combustible engine up to 20
horsepower that was manufactured by defendants. The complaint seeks an
injunction, compensatory and punitive damages, and attorneys' fees. No orders
have been entered in the case, and there has been limited discovery. The Company
intends to vigorously defend this case. Although the ultimate outcome of these
matters cannot be predicted with certainty, and some may be disposed of
unfavorably to the Company, management has no reason to believe that their
disposition will have a material 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 2004 to a vote of
security holders through the solicitation of proxies or otherwise.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

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 4, 2005 were approximately 443 for Class A common stock
and 436 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. The Company did not
repurchase any of its equity securities during 2004.

14

MARKET PRICE AND DIVIDEND INFORMATION

Range of Common Stock Prices and Dividends for 2004

Range of Common Stock Prices and Dividends for 2003

ITEM 6. SELECTED FINANCIAL DATA

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

Restructuring charges, impairments and other items includes:

2004 net income included $21.5 million ($14.0 million net of tax or
$0.77 per share) of restructuring, impairment and other charges. Of this
amount, $8.7 million ($5.6 million net of tax or $0.30 per share) was
related to restructuring programs related to the North American Compressor,
Indian Compressor and Electrical Components businesses; $14.6 million ($9.6
million net of tax or $0.53 per share) was related to environmental costs
involving the Company's New Holstein, Wisconsin facility; and $1.8 million
($1.2 million net of tax or $0.06 per share) in gain was related to the
final curtailment of medical benefits related to former hourly employees of
the Sheboygan Falls, Wisconsin Plant.

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.

2000 net income included a $33.5 million charge ($23.3 million net of
tax) related to the realignment of the Company's North American and Indian
compressor manufacturing operations.

16

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, particularly commodities, including
steel, copper and aluminum, whose cost can be subject to significant variation;
ix) actions of competitors; x) the ultimate cost of resolving environmental and
legal 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 or system implementations, the ultimate cost of those
initiatives and the amount of savings actually realized; xiii) potential
political and economic adversities that could adversely affect anticipated sales
and production in Brazil; and xiv) 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 2004 amounted to $10.1 million or $0.55 per
share compared to $0.1 million or $0.01 per share in the same period of 2003.
Included in 2004 results were $21.5 million ($14.0 million net of tax or $0.77
per share) of restructuring, impairment and other charges. Of this amount, $8.7
million ($5.6 million net of tax or $0.30 per share) was related to
restructuring programs related to the North American Compressor, Indian
Compressor and Electrical Components businesses; $14.6 million ($9.6 million net
of tax or $0.53 per share) was related to environmental costs involving the
Company's New Holstein, Wisconsin facility; and $1.8 million ($1.2 million net
of tax or $0.06 per share) in gain was related to the final curtailment of
medical benefits related to former hourly employees of the Sheboygan Falls,
Wisconsin Plant. Also, in the fourth quarter, the Company provided for an
outstanding account receivable related to a significant customer of the Engine &
Power Train business that filed for bankruptcy. This amount was $2.5 million
($1.7 million net of tax or $0.09 per share) and is included in Selling and
Administrative Expenses.

2003 results included 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, total net restructuring charges of $26.2 million
($16.8 million net of tax or $0.91 per share) related to the consolidation of
operations in the

17

Engine & Power Train business and related plant closings, and a $29.5 million
charge (before and after tax or $1.60 per share) 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.

Exclusive of restructuring charges, impairments and other items, operating
results were lower than the prior year due to weaker results in all the
Company's segments, primarily the Engine & Power Train and Electrical Components
groups. Lower net earnings were also attributable to an increase in corporate
expenses, reflecting the costs to comply with Section 404 requirements of the
Sarbanes-Oxley Act, and lower interest income.

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 new
capacities 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 110 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 2004. Lastly, commodity prices increased very rapidly during
2004. Due to purchase agreements and competitive markets, the Company was not
able to fully recover these cost increases through price increases and other
cost savings. 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 year ended December 31, 2004 amounted to
$1,911.7 million, an increase of 5.1%, compared to sales of $1,819.0 million in
2003. The effect of currency translation increased sales by $55.6 million. Sales
increased in all of the Company's business segments; however, the most
substantial increase was attributable to the Compressor business.

RESULTS OF OPERATIONS

COMPRESSOR PRODUCTS

2004 vs. 2003

Compressor business sales in 2004 increased to $880.2 million, or
approximately 10.3%, from $797.9 million for 2003. The increase from the effects
of foreign currency translation accounted for $44.9 million of the increase. In
addition, higher sales of compressors used in refrigeration and room air
conditioning due to strong global demands were partially offset by declines in
sales of compressors used in unitary air conditioning applications.

Compressor business operating income for 2004 amounted to $60.5 million
compared to $61.5 million for 2003. Despite the overall higher sales volumes,
operating income decreased slightly for 2004 versus 2003 due to the impact of
commodity price increases, an unfavorable exchange rate as the U.S. Dollar
weakened against other key currencies, and falling prices in India from lower
import duties. Cost saving activities helped to lessen the impact of these
factors. Profitability levels were consistent from year-to-year in each of the
Company's primary locations, except India where results declined due to lower
prices in the Indian market. In Brazil and Europe, volume gains were offset by
the negative effects of the weaker dollar and higher commodity costs. In North
America, the effects of production volume declines were largely offset by the
benefits of recent cost saving actions.

18

2003 vs. 2002

Compressor business sales for 2003 of $797.9 million increased $16.3
million, or approximately 2.1%, from $781.6 million for 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 2003 amounted to $61.5 million
compared to $83.8 million for 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. Results in
North America reflected the continued decrease in manufacturing volumes as
production was shifted to other locations. In Brazil, the benefits of higher
production volumes were more than offset by the effects of 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. 2003 currency remeasurement losses in Brazil were
$5.5 million in contrast to gains of $5.3 million in 2002. Tecumseh India's
results 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 also 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.

ELECTRICAL COMPONENT PRODUCTS

With the acquisition of FASCO, the Company created the "Electrical
Components" operating segment in 2003. In addition to FASCO, the segment
includes certain North American electrical component manufacturing that was
previously reported in the Compressor business. Business segment data prior to
2003, 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.

2004 vs. 2003

Electrical Components sales for 2004 amounted to $422.6 million compared to
$420.9 million in 2003. The slight increase in sales was mostly attributable to
new customers offset by changes in mix of products sold.

Segment operating income for the year was $11.3 million compared to $16.9
million for 2003. The 33% decline in operating income was mostly attributed to
commodity cost increases that were not fully recovered through pricing actions
or cost savings. The year's results were also impacted by warranty, response and
expediting costs incurred in the first half of the year as a result of a product
design change for an automotive segment customer. These costs were partially
offset by the absence in 2004 of the $4.2 million write-up of FASCO inventory,
recorded at December 31, 2002, in connection with purchase accounting, that was
subsequently recognized in cost of sales during the first quarter of 2003.

2003 vs. 2002

Electrical Components sales were $420.9 million, including $411.3 million
of sales from FASCO, compared to $8.0 million in 2002. Segment operating income
for the year was $16.9 million compared to a loss of $4.9 million for in 2002.
FASCO contributed $21.5 million in operating income to 2003. FASCO's results for
the 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

2004 vs. 2003

Engine & Power Train business 2004 sales amounted to $480.9 million
compared to $475.1 million in 2003. The net increase in sales reflected strong
relative demand for engines in North America, partially offset
19

by lower sales volumes in Europe. For the year, North American unit sales
volumes of engines used for snow throwers, walk behind rotary lawn mowers and
generators were up 4%, 6% and 21%, respectively. Weather patterns in North
America were generally favorable to the respective selling seasons, and
hurricane activity benefited the generator markets. In Europe, the Company lost
share due to a strong Euro, which put the Company's European produced product at
a disadvantage versus imported product.

For 2004, the business incurred an operating loss of $21.2 million compared
to an operating loss of $5.3 million in 2003. The decline in results reflected
numerous factors. In addition to the $2.5 million reserve related to an
outstanding account receivable from a significant customer which filed for
bankruptcy, higher commodity and freight costs, increased R&D spending, larger
losses in Europe, currency losses of $1.6 million on dollar-dominated borrowings
in Brazil, start up costs at the Curitiba, Brazil facility, and product rework
that was necessitated by defective parts received from a supplier all
contributed to the substantial decline in operating results. The declines were
partially offset by the improvement in the operating results of the North
American engine operations due to the cost reductions achieved with the closure
of the Douglas, Georgia and Sheboygan Falls, Wisconsin facilities last year.

2003 vs. 2002

Engine & Power Train business sales amounted to $475.1 million in 2003
compared to $432.3 million in 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. 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 snowfalls on the East Coast,
and the generator market was spurred by the blackout on the East Coast, as well
as hurricane and storm activity.

Excluding restructuring charges and impairments, the Engine & Power Train
business incurred an operating loss of $5.3 million for 2003 compared to income
of $1.4 million in 2002. The substantial decline in profitability of the segment
for the 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.

PUMP PRODUCTS

2004 vs. 2003

Pump business sales for the year amounted to $126.4 million in 2004
compared to $124.3 million the previous year. The 1.7% improvement in 2004 sales
reflected improved sales in the plumbing markets due to wet spring weather and
strong OEM demand in the HVAC market.

Operating income in 2004 amounted to $13.7 million compared to $14.1
million in 2003. The 2.8% decrease in operating income for 2004 compared to 2003
was primarily attributable to higher raw material costs.

During 2004, the Company was informed by a major retailer, which accounted
for approximately 17% of Little Giant overall business or 70% of Little Giant
water gardening business, that it was switching to a China-based supplier for
the 2005 season. The Company is seeking other distribution channels for this
product, and the ultimate effect on sales will depend on the Company's ability
to sell this product through these other channels.

2003 vs. 2002

Pump business sales for the year amounted to $124.3 million in 2003
compared to $120.6 million the previous year. The 3.1% improvement in 2003 sales
was due to higher volumes in the retail plumbing sector,
20

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

RESTRUCTURING CHARGES, IMPAIRMENTS AND OTHER ITEMS

2004

2004 results were adversely impacted by a total of $21.5 million ($14.0
million net of tax or $0.77 per share) of restructuring, impairment and other
charges. During the second quarter, the Company began consolidation actions
affecting several of the Company's facilities in its North American Compressor
and Electrical Components businesses.

Actions within the Compressor business included moving compressor machining
and assembly operations from the Company's Tecumseh, Michigan facility to its
existing compressor facility located in Tupelo, Mississippi. In conjunction,
aftermarket distribution operations located in Clinton, Michigan were relocated
to the Tecumseh, Michigan facility. The facility consolidation was necessitated
by the relocation of significant customer-base to overseas locations, which left
the Company's North American Compressor operations with excess compressor
manufacturing capacity.

Approximately 300 layoffs were involved at the Tecumseh and Clinton
facilities while employment increases in Tupelo were approximately one-half of
those lost in Tecumseh. Charges related to the Compressor group actions for 2004
totaled $3.0 million, including $2.4 million in asset impairment charges and
$0.6 million in equipment relocation costs. These actions were substantially
complete as of December 31, 2004. Annual savings are expected to be
approximately $6.3 million.

Actions in the Electrical Components business included the closure of the
Company's manufacturing facility in St. Clair, Missouri with gear machining
operations being consolidated into the Company's Salem, Indiana facility and
motor assembly operations being consolidated into the Company's Piedras Negras
and Juarez, Mexico facilities. While approximately 250 employees will be
affected by the shutdown at the St. Clair facility, this action will result in a
net reduction of approximately 20 employees. Charges related to the Electrical
Components group actions for 2004 totaled $4.5 million, including $2.7 million
in asset impairment charges, $0.8 million of equipment relocation costs and $1.0
million in accrued employee related severance costs. Additional restructuring
and impairment charges, estimated to be approximately $150,000 to $200,000 will
be recognized during the first quarter of 2005 as the plant closure and
consolidation action is completed. Accrued severance costs are expected to be
paid in the first quarter of 2005. Annual savings are expected to be
approximately $2.2 million.

During the third and fourth quarters of 2004, the Company executed a
program to reduce employment levels at one of the Company's Indian compressor
facilities. The action affected approximately 100 employees at a cost of $1.2
million. All of these costs were paid in 2004. Annual savings are expected to be
approximately $0.5 million.

During the fourth quarter, the Company recognized a charge of $14.6 million
related to environmental costs involving the Engine & Power Train Group's New
Holstein, Wisconsin facility (see Note 10).

2004 results also reflected a fourth quarter curtailment gain of $1.8
million associated with the cessation of medical benefits to hourly employees
who were affected by the closing in 2003 of the Engine & Power Train Group's
facility in Sheboygan Falls, Wisconsin.

2003

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
21

charge of $13.6 million related to environmental costs at the Company's
Sheboygan Falls, Wisconsin facility (see Note 10).

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. 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 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. As of December
31, 2003, substantially all of the costs of the restructuring had been paid.

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

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 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 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.

INTEREST EXPENSE, INTEREST INCOME AND INCOME TAX

Interest expense amounted to $22.7 million, $22.8 million, and $5.8 million
in 2004, 2003, and 2002, respectively.

Interest income and other, net amounted to $14.0 million, $21.1 million,
and $15.1 million in 2004, 2003, and 2002, respectively. The decrease from 2003
to 2004 was the result of lower cash balances in Brazil and the U.S., while the
increase from 2002 to 2003 was the result of higher cash balances in Brazil.

The Company's effective tax rates were 34.4%, 116.7%, and 35.4% for the
years ended December 31, 2004, 2003, and 2002, 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.

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

22

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 results of FASCO's operations are included in the Company's statement
of consolidated income for 2003 and thereafter.

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.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company's primary source of cash has been net cash
provided by operations; however, to partially finance the acquisition of FASCO,
the Company borrowed $325 million on December 30, 2002. For 2004, operating
activities generated cash flows of $5.2 million, compared to $86.0 million in
2003. This decrease resulted from the effect of commodity cost in addition to
higher planned investments in inventory and lower earnings before non-cash
charges, partially offset by lower working capital requirements in areas other
than inventory.

Capital expenditures for 2004 amounted to $84.0 million compared to $82.8
million in 2003. Approximately $35.2 million was spent on capacity enhancements,
new product capabilities and routine equipment upgrades in the Compressor
business, primarily in Brazil and India. Electrical Component capital
expenditures of approximately $3.6 million were focused primarily on new
products and routine equipment upgrades. Engine operations capital expenditures
of approximately $27.6 million were spent on facility improvements and new
products.

Approximately 72% of these expenditures related to the Brazilian facility
in Curitiba. Corporate capital expenditures amounted to $16.6 million with the
majority relating to ongoing implementation of a global ERP system.

Net cash used for financing activities amounted to $58.9 million in 2004
compared to $31.6 million in 2003. Net debt repayments in 2004 amounted to $35.3
million compared to $7.9 million in 2003. The Company paid dividends of $23.6
million in both 2004 and 2003.

PROJECTED CASH REQUIREMENTS

Capital expenditures for 2005 are projected to be significantly higher than
2004 levels. The majority of the budgeted capital spending is planned to expand
capacities and product offerings in the India, Brazil and, to a lesser extent,
North America. 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 2005 are expected to be
financed primarily through internally available funds, supplemented, if
necessary, by borrowings and other sources of external financing, including
those available on favorable terms due to governmental subsidy.

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 $100 million
revolving credit facility, which is available for general corporate purposes. As
of March 14, 2005 the Company had no

23

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 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, 2004.

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 40% of the Company's consolidated net sales for 2004 and 43%
of the Company's total assets at December 31, 2004 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 and France. When the U.S. Dollar weakens,
margins shrink in foreign locations where some sales are denominated in U.S.
Dollars. For example, in 2004 approximately one third of sales of the Company's
Brazilian compressor operation were 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 2004,
2003 or 2002. The Company does not generally hedge its net investment in its
foreign subsidiaries. During 2004, 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 $27.0
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
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.

24

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 10 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, 2004 and 2003 the Company had accrued $43.3 million and
$46.6 million, respectively for environmental remediation, including $39.7
million in both 2004 and 2003 respectively relating to the Sheboygan River and
Harbor Superfund Site. Additionally, as of December 31, 2004 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 Company does not believe it has any off-balance sheet arrangements that
have, or are reasonably likely to have, a material effect on the Company;
although, as disclosed in Note 12 to the Consolidated Financial Statements, the
Company is contingently liable with respect to some export receivables sold in
Brazil.

The Company has the following long-term contractual obligations:

The Company has minimal capital and operating 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 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
effectiveness of the Company's internal controls over financial reporting and
for the Company's independent registered public accounting firm to attest to
this report. The Company commenced actions to ensure its ability to comply with
these requirements during 2003, including the engagement of outside consultants
to assist in the evaluation and documentation of existing controls. The cost of
these services and incremental audit fees paid to the Company's independent
registered public accounting firm incurred during 2004 exceeded $5.8 million.
This amount does not include time expended by existing or newly hired Company
employees who have devoted significant effort to documenting, testing and
remediating controls. The Company is dedicated to maintaining appropriate
controls and governance practices and will likely continue to incur costs for
continuous improvement and testing activities. External costs for 2005 are
expected to be less than those incurred during this first year of adoption.

25

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, 2004, 2003 and 2002 the
Company recognized impairments of its long-lived assets of $5.1 million, $20.3
million and $8.6 million respectively, related to restructuring activities.
During these years the Company 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.

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 2002, the Company acquired FASCO for $382.5 million net, after certain
post-closing purchase price adjustments, ultimately recognizing $216.9 million
in goodwill and $83.5 million in intangibles with lives ranging from two years
to indefinite. These values were based upon estimates of the fair values of the
tangible and intangible assets and liabilities of FASCO at the date of
acquisition provided by a professional third-party.

In addition, the Company has additional amounts of goodwill and other
intangible assets recorded from other 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.

26

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. The Company's 2004 assessment did not indicate the
need for additional impairments as the Company's computation of fair value
exceeded carrying values.

At December 31, 2004, the Company had $243.5 million of goodwill recorded
in its consolidated financial statements. Of this amount, $18.6 million related
to the Compressor business, $216.9 million related to the Electrical Components
business, $2.9 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, or participating in, a cleanup effort. As of
December 31, 2004, the Company had accrued a total of $43.3 million and paid
approximately $17.9 million in connection with these sites during 2004. For
additional information on environmental liabilities, including the Sheboygan
River and Harbor Superfund and Hayton Area Remediation Project sites, see Note
10 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 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 2005 expense by $2.4 million and
$3.1 million, respectively.

Due to the significant over-funding of the majority of U.S. pension plans,
the Company recognized a net periodic benefit for pensions in its financial
statements of $14.3 million and $12.9 million in 2004 and 2003, respectively.
See Note 3 of the Notes to Consolidated Financial Statements for more
information regarding costs and assumptions for post-employment benefits.

27

NEW ACCOUNTING STANDARDS

On December 15, 2004 the FASB issued Statement No. 153 (SFAS 153),
Exchanges of Nonmonetary Assets -- Accounting Principles Board Opinion No. 29,
Accounting for Nonmonetary Transactions (APB 29). SFAS 153 is based on the
principle that nonmonetary asset exchanges should be recorded and measured at
the fair value of the assets exchanged, with certain exceptions. This standard
requires exchanges of productive assets to be accounted for at fair value,
rather than at carryover basis, unless (1) neither the asset received nor the
asset surrendered has a fair value that is determinable within reasonable limits
or (2) the transactions lack commercial substance (as defined). In addition, the
Board decided to retain the guidance in APB 29 for assessing whether the fair
value of a nonmonetary asset is determinable within reasonable limits. The new
standard is the result of the convergence project between the FASB and the
International Accounting Standards Board (IASB) and is effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005. The
Company has not yet completed its analysis of the effects of this pronouncement,
but it does not believe the effects will be material.

On November 24, 2004, the FASB issued Statement No. 151, Inventory Costs,
an amendment of ARB No. 43, Chapter 4 (FAS 151). The standard adopts the IASB
view related to inventories that abnormal amounts of idle capacity and spoilage
costs should be excluded from the cost of inventory and expensed when incurred.
Additionally, the Board made the decision to clarify the meaning of the term
"normal capacity". The provisions of FAS 151 are applicable to inventory costs
incurred during fiscal years beginning after June 15, 2005. The Company does
have operations with idle capacity; however, while the Company has not yet
calculated the effects of this pronouncement, it does not believe the effects
will be material.

FASB Staff Position No. FAS 106-2 (FSP 106-2), Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 provides guidance on the accounting for the effects of
the Act, for employers that sponsor a single-employer defined benefit
postretirement health care plan for which the employer has concluded that
prescription drug benefits available under the plan are actuarially equivalent
to the Medicare Part D benefit and the expected subsidy will offset or reduce
the employer's share of the cost of the benefit. Additionally, the FSP requires
certain disclosures addressing the effect of the federal subsidy provided by the
Act. If a company concludes that its plan provides a drug benefit that is
actuarially equivalent to the Medicare Part D benefit, the employer should
recognize the subsidy in the measurement of the accumulated post-retirement
benefit obligation (APBO) under FAS 106. The resulting reduction of the APBO
should be accounted for as an actuarial gain. The subsidy's reduction of the
employer's share of future costs under the plan should be reflected in
current-period service cost.

The provisions of the FSP are effective for the first interim or annual
period beginning after June 15, 2004 for all public companies and for all
non-public companies (as defined in SFAS 87) with plans with more than 100
participants. Tecumseh Products adopted FSP 106-2 during the third quarter of
2004 and recorded the current year affect of the actuarial gain retroactively
back to April 1, 2004. The total actuarial gain was $19.3 million and the
current year impact was $2.2 million.

OUTLOOK

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

During 2004, the Company experienced dramatic increases in the cost of
certain commodities, including steel, copper and aluminum, particularly in the
latter half of the year. The Company also experienced rapidly increasing
freights costs and, during 2004, the U.S. Dollar continued its weakening against
foreign currencies. The Company does not expect these factors to improve in
2005. Furthermore, risks, including armed conflict and rapid growth of Asian
economies, could worsen these conditions.

Results in 2005 will depend on the outcome of these and other variables,
including the Company's ability to obtain price increases from its customers to
offset the increased cost of product inputs and global weather. Subject to the
outcome of these variables, the Company expects 2005 to be improved over 2004 as
the effects of cost reduction, new product initiatives, and price increases are
realized.

28

2005 results in the Compressor segment are expected to improve from 2004.
Sales volumes are expected to grow, and the benefits of 2004 restructuring
activities in North America should be realized in 2005. Ultimately, results will
depend on overall worldwide demand, which will influence selling prices, and the
exchange rate between the U.S. Dollar and the Brazilian Real, which affects
overall profitability of the Company's Brazilian-produced product.

Results in the Electrical Components Group are expected to improve based
upon lower amortization of intangible assets, the benefits of 2004 restructuring
activities, and higher selling prices.

Results in the Engine Group are also expected to improve as production
volumes in Brazil increase and commensurate costs are removed from legacy
operations. However, like 2004, realization of these benefits is not assured, as
sustainable production volumes must be achieved before legacy capacity can be
removed.

The Pump Group experienced the loss of a significant customer in its water
gardening segment for 2005. While an improved industrial and commercial market
should soften the impact, the Company expects results in its Pump segment to
decline in comparison to 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. Fluctuations in commodity prices and foreign currency
exchange rates can be volatile, and the Company's risk management activities do
not totally eliminate these risks. Consequently, these fluctuations can have a
significant effect on results.

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 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 to four manufacturers. The
Company sells to all 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 manufacturers. During the fourth quarter of 2004, one of
these customers declared bankruptcy resulting in a charge of $2.5 million.

A portion of export accounts receivable of the Company's Brazilian
subsidiary is sold at a discount. Discounted receivables sold in the Brazilian
subsidiary at December 31, 2004 and 2003 were $101.0 million and $64.5 million,
respectively, and the discount rate was 7.3% in 2004 and 3.3% in 2003. 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, 45.3% of the Company's total
debt at December 31, 2004 was fixed-rate. While changes in interest rates impact
the fair value of the fixed rate 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
29

earnings and cash flows. A 1% increase in interest rates would increase interest
expense for the year by approximately $2.1 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 motors, electrical
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, 2004 and 2003, the Company held a
total notional value of $23.7 million and $16.1 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, 2004 and 2003, the Company held foreign
currency forward contracts with a total notional value of $53.4 million and
$16.3 million, respectively.

30

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.

31

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have completed an integrated audit of Tecumseh Products Company's 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2004 and an audit of its 2003 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.

CONSOLIDATED FINANCIAL STATEMENTS

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Tecumseh
Products Company and its subsidiaries at December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2004 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 audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of
financial statements 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
audits provide a reasonable basis for our opinion.

INTERNAL CONTROL OVER FINANCIAL REPORTING

Also, we have audited management's assessment, included in Management's
Report on Internal Control Over Financial Reporting appearing under Item 9A,
that Tecumseh Products Company did not maintain effective internal control over
financial reporting as of December 31, 2004, because the Company did not
maintain effective controls over the segregation of duties over certain system
access controls as well as security over user access rights to certain financial
application systems which could affect accounts receivable and revenue;
inventory and cost of goods sold; and accounts payable and other financial
statement accounts at a number of its locations, based on criteria established
in Internal Control -- Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit.

We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding of
internal control over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.

A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;

32

(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included in
management's assessment. As of December 31, 2004 the Company did not maintain
effective control over the segregation of duties over certain system access
controls as well as security over user access rights to certain financial
application systems which could affect accounts receivable and revenue;
inventory and cost of goods sold; and accounts payable and other financial
statement accounts at a number of its locations. Specifically, the control
deficiencies demonstrate an inadequate design of access security policies and
segregation of duties requirements as well as a lack of independent monitoring
of users having unrestricted access to financial application programs and data.
Individually these deficiencies were evaluated as representing a more than
remote likelihood that a misstatement that is more than inconsequential, but
less than material, could occur. However these deficiencies could affect the
financial statement accounts. These control deficiencies did not result in
adjustments to the 2004 annual or interim consolidated financial statements.
However, these control deficiencies when aggregated could result a misstatement
in the financial statement accounts, resulting in a material misstatement to
annual or interim consolidated financial statements that would not be prevented
or detected. Accordingly, management has determined that this condition
constitutes a material weakness. This material weakness was considered in
determining the nature, timing, and extent of audit tests applied in our audit
of the 2004 consolidated financial statements, and our opinion regarding the
effectiveness of the Company's internal control over financial reporting does
not affect our opinion on those consolidated financial statements.

In our opinion, management's assessment that Tecumseh Products Company did
not maintain effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on criteria
established in Internal Control -- Integrated Framework issued by the COSO.
Also, in our opinion, because of the effects of the material weakness described
above on the achievement of the objectives of the control criteria, Tecumseh
Products Company has not maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control -- Integrated Framework issued by the COSO.

/s/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP
Detroit, Michigan
March 14, 2005

33

REPORT OF INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of Tecumseh Products Company and
Subsidiaries for the year 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 audit.

We conducted our audit 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 audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Tecumseh Products Company and Subsidiaries, for the year 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
Certified Public Accountants
Livonia, Michigan
January 31, 2003

34

TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these Consolidated Financial
Statements.
37

TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of these Consolidated Financial
Statements.
38

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,
with the exception of certain Mexican operations which use the U.S. Dollar, 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 cost of sales and operating
expenses and amount to a net loss of $4.9 million in 2004, a net loss of $5.1
million in 2003 and a net gain of $5.2 million in 2002.

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, on
the first-in, first-out basis. 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 $94.1 million, $85.1 million, and $64.9 million in
2004, 2003 and 2002, 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 $4.7 million in 2004, $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. 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.

Other intangible assets are amortized over their estimated useful lives.
See Note 4 for additional disclosures related to goodwill and other intangible
assets.
39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, coincide with shipment of the products. For
other cases involving export sales, title transfers either when the products are
delivered to the port of embarkation or received at the port of the country of
destination.

Allowance for Uncollectible Accounts Receivable -- The Company records an
allowance for uncollectible accounts receivable based on historical loss
experience, customer payment patterns and current economic trends. The Company
reviews the adequacy of the allowance for uncollectible accounts receivable on a
quarterly basis and, if necessary, increases or decreases the balance.

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. 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 12 for discussion of adoption of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities
and its amendments.

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 2004, 2003 and 2002.

Research, Development and Testing Expenses -- Company sponsored research,
development and testing expenses related to present and future products are
expensed as incurred and were $34.0 million, $31.5 million, and $30.8 million in
2004, 2003 and 2002, respectively. Such expenses consist primarily of salary and
material costs and are included in cost of sales and operating expenses.

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.

40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following tables provide a reconciliation of the changes in the United
States based pension and postretirement plans' benefit obligations, fair value
of assets and funded status for 2004 and 2003:

The following table provides the funded status of the plans for 2004 and
2003:

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

42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The accumulated benefit obligation for all defined benefit pension plans
was $368.0 million and $353.8 million at September 30, 2004 and 2003,
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 are 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.

43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Assumed health care cost trend rates:

Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. The health care 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 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 $7.9 million (1.4% of total plan assets) and $7.0 million (1.2% of
total plan assets) at September 30, 2004 and 2003, respectively.

The Company expects to contribute $0.1 million to its pension plans in
2005.

44

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 $4.1 million and $4.0 million
in 2004 and 2003, respectively. The net liability recorded in the consolidated
balance sheet was $18.5 million and $19.3 million for 2004 and 2003,
respectively.

Defined Contribution Plans

The Company has defined contribution retirement plans that cover
substantially all domestic employees. The combined expense for these plans was
$2.8 million and $3.0 million in 2004 and 2003, 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.

45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The changes in the carrying amount of goodwill by segment follow:

Other intangible assets consisted of the following:

The aggregate amortization expense for the years ended December 31, 2004,
2003 and 2002 was $12.5 million, $12.5 million, and $0.1 million, respectively.
The estimated amortization expense is approximately $5.0 million for each year
from 2005 through 2009.

NOTE 5. INCOME TAXES

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

46

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:

47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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, 2004, the Company had federal net operating loss
carryforwards of approximately $52.9 million, which will expire in 2023 and
2024. The Company also had state net operating loss carryforwards of $74.8
million, which will expire at various dates. Additionally, the Company had
foreign net operating loss carryforwards of $25.9 million, of which $5.3 million
will expire from 2007 to 2009. The remainder of the foreign net operating loss
carryforwards has an unlimited carryforward period. Foreign tax credit and
research credit carryforwards of approximately $21.6 million will expire between
2012 through 2014. Furthermore, the Company also had various state tax credit
carryovers of $2.2 million, which expire at various dates from 2005 to 2018.

The valuation allowance for deferred tax assets relates primarily to
federal credit carryovers, 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 in the foreseeable
future. The valuation allowance increased $4.8 million in 2004. The change
results from foreign items of $5.8 million, which is reflected in the provision,
and a net decrease of $1.0 million in the balance of other deferred tax assets,
primarily from foreign currency translation, the expiration of state tax
credits, and state tax credits generated in the current year for which a
valuation allowance was provided.

Tax returns are subject to audit by various taxing authorities. In 2004 and
2003, the Company recorded benefits to income of $2.6 million and $6.8 million,
respectively, from settlements of U.S. tax issues primarily related to prior
years. Although the Company believes that adequate accruals have been made for
unsettled issues, additional gains or losses could occur in future years from
resolution of outstanding matters.

48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6. INVENTORIES

The components of inventories at December 31, were:

NOTE 7. PROPERTY, PLANT AND EQUIPMENT, NET

The components of property, plant and equipment, net are as follows:

NOTE 8. 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 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.

49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

BUSINESS SEGMENT INFORMATION

50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

GEOGRAPHIC SEGMENT INFORMATION

The Electrical Component Products had intersegment sales of $65.9 million,
$69.2 million and $56.2 million in 2004, 2003 and 2002, respectively.

51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 9. DEBT

Through December 20, 2004, the Company operated with a $125 million
three-year revolving credit facility due to expire in 2005. Under the facility,
the Company could select among various interest rate arrangements. The facility
had an applicable commitment fee rate of 22.5 basis points. On December 21,
2004, the facility was replaced with a $100 million five-year revolving credit
facility, with substantially the same interest rate arrangements as the previous
facility. The new facility has an applicable commitment fee rate of 20.0 basis
points. The Company paid facility fees of $0.3 million in 2004, $0.2 million in
2003, and $0.1 million in 2002. As of December 31, 2004, 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. One of these swaps was sold in the third quarter of
2003. At December 31, 2003, long-term debt includes a net unamortized premium
income of $3.5 million, related to the sale, and the fair value adjustment for
the active interest rate swap agreements of $0.7 million. The remaining swap
agreement was sold and replaced in the first quarter of 2004. At December 31,
2004, long-term debt includes a net unamortized premium income of $5.1 million,
related to the sale, and the fair value adjustment for the active interest rate
swap agreement of $0.7 million. The active swap agreement has 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.

52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Scheduled maturities of long-term debt for each of the five years
subsequent to December 31, 2004 are as follows:

Interest paid was $25.6 million in 2004, $15.3 million in 2003, and $4.4
million in 2002.

NOTE 10. 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.

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 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
53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 has been
voluntarily participating in a cooperative effort to investigate and cleanup PCB
contamination in the watershed of the south branch of the Manitowoc River, at
and downstream from the Company's New Holstein, Wisconsin facility. On December
29, 2004, the Company and TRC Companies and TRC Environmental Corporation
(collectively, "TRC") entered into a Consent Order with the Wisconsin Department
of Natural Resources (the "WDNR") relating to this effort known as the Hayton
Area Remediation Project ("HARP"). The Consent Order provides a framework for
the completion of the remediation and regulatory closure at HARP.

Concurrently, on December 29, 2004, the Company and two of its subsidiaries
and TRC entered into an Exit Strategy Agreement (the "Agreement"), whereby the
Company transferred to TRC substantially all of its obligations to complete the
HARP remediation pursuant to the Consent Order and in accordance with applicable
environmental laws and regulations. TRC's obligations under the Agreement
include any ongoing monitoring or maintenance requirements and certain off-site
mitigation or remediation, if required. TRC will also manage any third-party
remediation claims that might arise or otherwise be filed against the Company.

As required by the Agreement, the Company also purchased a Pollution Legal
Liability Select Cleanup Cost Cap Policy (the "Policy") from American
International Specialty Lines Company. The term of the Policy is 20 years with
an aggregate combined policy limit of $41 million. The policy lists the Company
and TRC as named insureds and includes a number of first and third party
coverages for remediation costs and bodily injury and property damage claims
associated with the HARP remediation and contamination. The Company believes
that the Policy provides additional assurance that the responsibilities,
obligations, and liabilities transferred and assigned by the Company and assumed
by TRC under the Agreement will be completed. Although the arrangements with TRC
and the WDNR do not constitute a legal discharge or release of the Company's
liabilities, the Company believes that the specific work substitution provisions
of the Consent Order and the broad coverage terms of the Policy, collectively,
are sufficient to satisfy substantially all of the Company's environmental
obligations with respect to the HARP remediation. The total cost of the exit
strategy insured remediation arrangement to Tecumseh was $16.4 million. This
amount included $350,000 that was paid to the WDNR pursuant to the Consent Order
to settle any alleged liabilities associated with natural resource damages. The
charge represented the cost of the agreements less what was previously provided
for cleanup costs to which the Company had voluntarily agreed.

The Company, in cooperation with the WDNR, also 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, 2004, 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.

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, 2004 and 2003, the Company had
accrued $43.3 million and $46.6 million, respectively, for environmental
remediation, including $39.7 million relating

54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to the Sheboygan River and Harbor Superfund Site. Additionally, as of December
31, 2004 and 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.

NOTE 11. COMMITMENTS AND CONTINGENCIES

The Company is also the subject of, or a party to, a number of other
pending or threatened legal actions involving a variety of matters, including
class actions and asbestos-related claims, incidental to its business.

One such lawsuit filed against the Company and other defendants alleges
that the horsepower labels on the products the plaintiffs purchased were
inaccurate. The plaintiffs seek certification of a class of all persons in the
United States who, beginning January 1, 1995 through the present, purchased a
lawnmower containing a two stroke or four stroke gas combustible engine up to 20
horsepower that was manufactured by defendants. The complaint seeks an
injunction, compensatory and punitive damages, and attorneys' fees. No orders
have been entered in the case, and there has been limited discovery. The Company
intends to vigorously defend this case.

Although the ultimate outcome of these matters cannot be predicted with
certainty, and some may be disposed of unfavorably to the Company, management
does not believe that the disposition will have a material adverse effect on the
consolidated financial position or results of operations of the Company.

NOTE 12. FINANCIAL INSTRUMENTS

The following table presents the carrying amounts and the estimated fair
values of financial instruments at December 31, 2004 and 2003:

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, 2004
will mature within twelve months. All such instruments held at December 31, 2003
matured in 2004.

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
55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 $16.0 million and $13.0 million at December 31, 2004
and 2003, respectively. The Brazilian subsidiaries had contracts for the sale of
$37.4 million at December 31, 2004 and none at December 31, 2003.

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.

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, 2004 and 2003 were $23.7 million and $16.1 million, respectively.

A portion of accounts receivable at the Company's Brazilian subsidiary are
sold with recourse at a discount. Sold Brazilian receivable balances at December
31, 2004 and 2003 were $101.0 million and $64.5 million, respectively, and the
discount rate was 7.3% in 2004 and 3.3% in 2003. The Company estimates the fair
value of the contingent liability related to these receivables to be $0.8
million, which is included in operating income and allowance for doubtful
accounts.

NOTE 13. GUARANTEES AND WARRANTIES

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:

56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 14. 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, 2004, 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.

NOTE 15. RESTRUCTURING CHARGES, IMPAIRMENTS AND OTHER ITEMS

2004

2004 results were adversely impacted by a total of $21.5 million ($14.0
million net of tax or $0.77 per share) of restructuring, impairment and other
charges. During the second quarter, the Company began consolidation actions
affecting several of the Company's facilities in its North American Compressor
and Electrical Components businesses.

Actions within the Compressor business included moving compressor machining
and assembly operations from the Company's Tecumseh, Michigan facility to its
existing compressor facility located in Tupelo, Mississippi. In conjunction,
aftermarket distribution operations located in Clinton, Michigan were relocated
to the Tecumseh, Michigan facility. The facility consolidation was necessitated
by the relocation of significant customer-base to overseas locations, which left
the Company's North American Compressor operations with excess compressor
manufacturing capacity.

Approximately 300 layoffs were involved at the Tecumseh and Clinton
facilities while employment increases in Tupelo were approximately one-half of
those lost in Tecumseh. Charges related to the Compressor group actions for 2004
totaled $3.0 million, including $2.4 million in asset impairment charges and
$0.6 million in equipment relocation costs. These actions were substantially
complete as of December 31, 2004. Annual savings are expected to be
approximately $6.3 million.

Actions in the Electrical Components business included the closure of the
Company's manufacturing facility in St. Clair, Missouri with gear machining
operations being consolidated into the Company's Salem, Indiana facility and
motor assembly operations being consolidated into the Company's Piedras Negras
and Juarez, Mexico facilities. While approximately 250 employees will be
affected by the shutdown at the St. Clair facility, this action will result in a
net reduction of approximately 20 employees. Charges related to the Electrical
Components group actions for 2004 totaled $4.5 million, including $2.7 million
in asset impairment charges, $0.8 million of equipment relocation costs and $1.0
million in accrued employee related severance costs. Additional restructuring
and impairment charges, estimated to be approximately $150,000 to $200,000 will
be recognized during the first quarter of 2005 as the plant closure and
consolidation action is completed. Accrued severance costs are expected to be
paid in the first quarter of 2005. Annual savings are expected to be
approximately $2.2 million.

During the third and fourth quarters of 2004, the Company executed a
program to reduce employment levels at one of the Company's Indian compressor
facilities. The action affected approximately 100 employees at a cost of $1.2
million. All of these costs were paid in 2004. Annual savings are expected to be
approximately $0.5 million.

57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During the fourth quarter, the Company recognized a charge of $14.6 million
related to environmental costs involving the Engine & Power Train Group's New
Holstein, Wisconsin facility (see Note 10).

2004 results also reflected a fourth quarter curtailment gain of $1.8
million associated with the cessation of medical benefits to hourly employees
who were affected by the closing in 2003 of the Engine & Power Train Group's
facility in Sheboygan Falls, Wisconsin.

2003

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 related to environmental costs at the Company's Sheboygan Falls,
Wisconsin facility (see Note 10).

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. 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 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. As of December
31, 2003, substantially all of the costs of the restructuring had been paid.

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

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 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 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.

NOTE 16. 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
58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

results of FASCO's operations are included in the Company's statement of
consolidated income for the 2004 and 2003 within the Electrical Components
business segment. Resulting goodwill, as adjusted, of $216.9 million is included
in the Electrical Components 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.

NOTE 17. NEW ACCOUNTING STANDARDS

On December 15, 2004 the FASB issued Statement No. 153 (SFAS 153),
Exchanges of Nonmonetary Assets -- Accounting Principles Board Opinion No. 29,
Accounting for Nonmonetary Transactions (APB 29). SFAS 153 is based on the
principle that nonmonetary asset exchanges should be recorded and measured at
the fair value of the assets exchanged, with certain exceptions. This standard
requires exchanges of productive assets to be accounted for at fair value,
rather than at carryover basis, unless (1) neither the asset received nor the
asset surrendered has a fair value that is determinable within reasonable limits
or (2) the transactions lack commercial substance (as defined). In addition, the
Board decided to retain the guidance in APB 29 for assessing whether the fair
value of a nonmonetary asset is determinable within reasonable limits. The new
standard is the result of the convergence project between the FASB and the
International Accounting Standards Board (IASB) and is effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005. The
Company has not yet completed its analysis of the effects of this pronouncement,
but it does not believe the effects will be material.

On November 24, 2004, the FASB issued Statement No. 151, Inventory Costs,
an amendment of ARB No. 43, Chapter 4 (FAS 151). The standard adopts the IASB
view related to inventories that abnormal amounts of idle capacity and spoilage
costs should be excluded from the cost of inventory and expensed when incurred.
Additionally, the Board made the decision to clarify the meaning of the term
"normal capacity'. The provisions of FAS 151 are applicable to inventory costs
incurred during fiscal years beginning after June 15, 2005. The Company does
have operations with idle capacity; however, while the Company has not yet
calculated the effects of this pronouncement, it does not believe the effects
will be material.

FASB Staff Position No. FAS 106-2 (FSP 106-2), Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 provides guidance on the accounting for the effects of
the Act, for employers that sponsor a single-employer defined benefit
postretirement health care plan for which the employer has concluded that
prescription drug benefits available under the plan are actuarially equivalent
to the Medicare Part D benefit and the expected subsidy will offset or reduce
the employer's share of the cost of the benefit. Additionally, the FSP requires
certain disclosures addressing the effect of the federal subsidy provided by the
Act. If a company concludes that its plan provides a drug benefit that is
actuarially equivalent to the Medicare Part D benefit, the employer should
recognize the subsidy in the measurement of the accumulated post-retirement
benefit obligation (APBO) under FAS 106. The resulting reduction of the APBO
should be accounted for as an actuarial gain. The subsidy's reduction of the
employer's share of future costs under the plan should be reflected in
current-period service cost.

The provisions of the FSP are effective for the first interim or annual
period beginning after June 15, 2004 for all public companies and for all
non-public companies (as defined in SFAS 87) with plans with more than 100
participants. Tecumseh Products adopted FSP 106-2 during the third quarter of
2004 and recorded the current year effect of the actuarial gain retroactively
back to April 1, 2004. The total actuarial gain was $19.3 million and the
current year impact was $2.2 million.

59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 18. QUARTERLY FINANCIAL DATA -- UNAUDITED

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(a) Second quarter 2004 data has been restated from amounts previously reported
in the Company's Quarterly Report on Form 10-Q to reflect the retroactive
treatment from the adoption of FASB Staff Position No. 106-2, Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug
Improvement and Modernization Act of 2003. Net income increased by $0.6
million in comparison to amounts previously reported.

60

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

There were no reportable disagreements with our accountants on accounting
or financial disclosure.

ITEM 9A. CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the reports that the
Company files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to the Company's management, including its President and Chief Executive Officer
and Vice President, Treasurer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure.

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 Disclosure Committee and management, including the 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 our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based
upon such evaluation, and as of December 31, 2004, 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 were not effective as of December 31, 2004 because of the material
weakness discussed below. In light of the material weakness, the Company
performed additional analysis and other post-closing procedures to ensure our
consolidated financial statements were prepared in accordance with generally
accepted accounting principles. Accordingly, management believes that the
financial statements included in this report fairly present in all material
respects our financial condition, results of operations and cash flows for the
periods presented.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. The Company's internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles.

The management of the Company has assessed the effectiveness of its
internal control over financial reporting as of December 31, 2004. In making its
assessment, management used the criteria described in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).

A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. As of December 31, 2004, the Company did not maintain effective
controls over the segregation of duties over certain system access controls as
well as security over user access rights to certain financial application
systems which could affect accounts receivable and revenue, inventory and cost
of goods sold, and accounts payable and other financial statement accounts at a
number of its locations. Specifically, the control deficiencies demonstrate an
inadequate design of access security policies and segregation of duties
requirements as well as a lack of independent monitoring of user access to
financial application programs and data. Individually, these deficiencies were
evaluated as representing a more than remote likelihood that a misstatement that
is more than inconsequential, but less than material, could occur. However,
these deficiencies could affect the financial statement accounts. These control
deficiencies did not result in adjustments to the 2004 annual or interim
consolidated financial statements. However, these control deficiencies, when
aggregated, could result in a misstatement to the financial statement accounts,
resulting in a material misstatement to annual or interim consolidated financial
statements that would not be prevented or detected. Accordingly, management has
determined that this condition constitutes a material weakness.

61

Because of the material weakness referred to above, management has
concluded that the Company did not maintain effective internal control over
financial reporting as of December 31, 2004, based on criteria in Internal
Control -- Integrated Framework issued by COSO.

Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which is included in Item 8 of this report on Form 10-K.

MATERIAL WEAKNESS REMEDIATION PLANS

The Company is highly decentralized, and its operations consist of
individual business units ranging in size from $3 million to over $400 million
in sales. For the most part, each business unit uses its own hardware and
software to conduct its operations and process transactions. Over the next two
years, the Company is implementing a common, global ERP system that will reduce
the number of data processing centers. The system implementation includes
improved controls over access to financial application programs and data,
independent monitoring of users having unrestricted access to financial
application programs and data, and provides for improved segregation of duties.
The first business went live March 1, 2005 and five additional business unit
locations are expected to go live in 2005.

During the period the system is being implemented, the Company has and will
continue to implement additional controls to remediate this material weakness.
These controls include, but are not limited to, additional levels of reviews of
transactions, additional reviews of changes to financial applications and data
by those with access to both, and reassignment of responsibilities to provide
for better segregation of duties.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

As noted above, the Company is in the process of implementing a new global
ERP system. Location implementations began in the first quarter of 2005 and will
continue every quarter over the next two years. During this time period, there
will be significant changes in internal controls over financial reporting at the
operations affected. The Company believes it has designed adequate controls into
the new system and will begin testing their application at each location shortly
after their respective go-live dates.

There have been no changes in the Company's internal controls over
financial reporting, other than those noted above, that occurred during the
fourth quarter of 2004 that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.

LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS AND PROCEDURES

Management of the Company, including the chief executive officer and chief
financial officer, does not expect that the Company's disclosure controls and
procedures or internal control over financial reporting will detect or prevent
all error and all fraud. A control system, no matter how well designed and
implemented, can provide only reasonable, not absolute, assurance that the
control system's objective will be met. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues within a company are detected.

In addition, projection of any evaluation of the effectiveness of internal
control over financial reporting to future periods is subject to the risk that
controls may become inadequate because of changes in condition, or that the
degree of compliance with policies and procedures included in such controls may
deteriorate.

62

ITEM 9B. OTHER INFORMATION

None

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 "Proposal 1: Election of Directors" and
"Audit Committee" in the Company's definitive Proxy Statement relating to its
2005 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 2005
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 2005 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 2005 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 2005 Annual Meeting of Shareholders is incorporated herein by reference.

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 2005 Annual Meeting
of Shareholders is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

See "Financial Statements"

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

(b) Exhibits
63

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* Filed herewith

(c) Financial Statement Schedules

None.

66

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

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

Date: March 15, 2005

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.

67

EXHIBIT INDEX

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

* Filed herewith

(c) Financial Statement Schedules

None