TENNECO AUTOMOTIVE INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

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

COMMISSION FILE NUMBER 1-12387

TENNECO AUTOMOTIVE INC.
(Exact name of registrant as specified in its charter)

DELAWARE 76-0515284
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

500 NORTH FIELD DRIVE 60045
LAKE FOREST, IL (Zip Code)
(Address of principal executive offices)

Registrant's telephone number, including area code: (847) 482-5000

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

Securities registered pursuant to Section 12(g) of the Act: None

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

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

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

State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity,
as of the last business day of the registrant's most recently completed second
fiscal quarter.

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* Based upon the closing sale price on the New York Stock Exchange Composite
Tape for the Common Stock on June 28, 2002.

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. Common Stock, par
value $.01 per share, 40,217,929 shares outstanding as of March 11, 2003.

DOCUMENTS INCORPORATED BY REFERENCE:

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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

This Annual Report contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 concerning, among other
things, the prospects and developments of the Company (as defined) and business
strategies for our operations, all of which are subject to risks and
uncertainties. These forward-looking statements are included in various sections
of this report, including the section entitled "Outlook" appearing in Item 7 of
this report. These statements are identified as "forward-looking statements" or
by their use of terms (and variations thereof) such as "will," "may," "can,"
"anticipate," "intend," "continue," "estimate," "expect," "plan," "should,"
"outlook," "believe," and "seek" and similar terms (and variations thereof) and
phrases.

When a forward-looking statement includes a statement of the assumptions or
bases underlying the forward-looking statement, we caution that, while we
believe such assumptions or bases to be reasonable and make them in good faith,
assumed facts or bases almost always vary from actual results, and the
differences between assumed facts or bases and actual results can be material,
depending upon the circumstances. Where, in any forward-looking statement, we or
our management expresses an expectation or belief as to future results, we
express that expectation or belief in good faith and believe it has a reasonable
basis, but we can give no assurance that the statement of expectation or belief
will result or be achieved or accomplished.

Our actual results may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include the following:

Changes in consumer demand and prices could adversely impact our
results. Demand for and pricing of our products are subject to economic
conditions and other factors present in the various domestic and international
markets where the products are sold. Demand for our original equipment ("OE")
products is subject to the level of consumer demand for new vehicles that are
equipped with our parts. The level of new car purchases is cyclical, affected by
such factors as interest rates, consumer confidence, patterns of consumer
spending and the automobile replacement cycle. Demand for our aftermarket, or
replacement, products varies based upon such factors as the level of new vehicle
purchases, which initially displaces demand for aftermarket products, the
severity of winter weather, which increases the demand for certain aftermarket
products, and other factors, including the average useful life of parts and
number of miles driven.

We may be unable to realize sales represented by our awarded business. The
realization of future sales from awarded business is inherently subject to a
number of important risks and uncertainties, including the number of vehicles
that our OE customers will actually produce, the timing of that production and
the mix of options that our OE customers and consumers may choose. For example,
substantially all of our North American vehicle manufacturer customers slowed
new vehicle production in 2001, with a slight increase in 2002. Given current
economic conditions, we expect the North American light vehicle build to be
approximately 16 million units in 2003, which is a slight decrease from 2002
levels. We also expect the European light vehicle production to decrease in
2003. In addition, our customers generally have the right to replace us with
another supplier at any time for a variety of reasons and have increasingly
demanded price decreases over the life of awarded business. Accordingly, we
cannot assure you that we will in fact realize any or all of the future sales
represented by our awarded business.

In many cases, we must commit substantial resources in preparation for
production under awarded OE business well in advance of the customer's
production start date. In certain instances, the terms of our OE customer
arrangements permit us to recover these pre-production costs if the customer
cancels the business through no fault of our company. Although we have been
successful in recovering these costs under appropriate circumstances in the
past, we can give no assurance that our results of operations will not be
materially impacted in the future if we are unable to recover these types of
pre-production costs related to OE cancellation of awarded business. See Note 11
to the consolidated financial statements included in Item 8 and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Environmental and Other Matters" included in Item 7 for a
discussion of recent cost recovery discussions with one of our OE customers.

i

The cyclicality of automotive production and sales could cause a decline in
our financial condition and results. A decline in automotive sales and
production would likely cause a decline in our sales to vehicle manufacturers,
and could result in a decline in our results of operations and financial
condition. The automotive industry has been characterized historically by
periodic fluctuations in overall demand for vehicles due to, among other things,
changes in general economic conditions and consumer preferences. These
fluctuations generally result in corresponding fluctuations in demand for our
products. The highly cyclical nature of the automotive industry presents a risk
that is outside our control and that cannot be accurately predicted.

Longer product lives of automotive parts are adversely affecting
aftermarket demand for some of our products. The average useful life of
automotive parts has steadily increased in recent years due to innovations in
products and technologies. The longer product lives allow vehicle owners to
replace parts of their vehicles less often. As a result, a portion of sales in
the aftermarket has been displaced. Additional increases in the average useful
lives of automotive parts are likely to adversely affect the demand for our
aftermarket products. Aftermarket sales represented approximately 26 percent of
our net sales for 2002.

We may incur material product warranty costs. From time to time, we receive
product warranty claims from our customers, pursuant to which we may be required
to bear costs of repair or replacement of certain of our products. Vehicle
manufacturers are increasingly requiring their outside suppliers to guarantee or
warrant their products and to be responsible for the operation of these
component products in new vehicles under warranties offered to consumers.
Warranty claims may range from individual customer claims to full recalls of all
products in the field. For example, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations- Environmental and Other Matters,"
included in Item 7 for a description of some warranty reserves established in
2002. We cannot assure you that costs associated with providing product
warranties will not be material, or that those costs will not exceed any amounts
reserved for them in our financial statements. For a description of our
accounting policies regarding warranty reserves, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Critical
Accounting Policies" included in Item 7.

The hourly workforce in the automotive industry is highly unionized and our
business could be adversely affected by labor disruptions. Substantially all of
the hourly employees of North American vehicle manufacturers are represented by
the United Automobile, Aerospace and Agricultural Implement Workers of America
under collective bargaining agreements. In addition, vehicle manufacturers and
their employees in other countries are also subject to labor agreements. A work
stoppage or strike at the production facilities of a significant customer, at
our facilities or at a significant supplier could have an adverse impact on us
by disrupting demand for our products and/or our ability to manufacture our
products.

Consolidation among automotive parts customers and suppliers could make it
more difficult for us to compete favorably. Our financial condition and results
of operations could be adversely affected because the customer base for
automotive parts is consolidating in both the original equipment market and
aftermarket. As a result, we are competing for business from fewer customers.
Due to the cost focus of these major customers, we have been, and expect to
continue to be, required to reduce prices. We cannot be certain that we will be
able to generate cost savings and operational improvements in the future that
are sufficient to offset price reductions required by existing customers and
necessary to win additional business.

Furthermore, the trend toward consolidation among automotive parts
suppliers is resulting in fewer, larger suppliers who benefit from purchasing
and distribution economies of scale. If we cannot achieve cost savings and
operational improvements sufficient to allow us to compete favorably in the
future with these larger companies, our financial condition and results of
operations could be adversely affected due to a reduction of, or inability to
increase, sales.

We are dependent on large customers for future revenues. We depend on major
vehicle manufacturers for a substantial portion of our net sales. For example,
during 2002, General Motors, Ford, Volkswagen, and DaimlerChrysler accounted for
19.8 percent, 13.3 percent, 10.1 percent, and 10.1 percent of our net

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sales, respectively. The loss of all or a substantial portion of our sales to
any of our large-volume customers could have a material adverse effect on our
financial condition and results of operations by reducing cash flows and our
ability to spread costs over a larger revenue base. We may make fewer sales to
these customers for a variety of reasons, including: (1) loss of awarded
business; (2) reduced or delayed customer requirements; or (3) strikes or other
work stoppages affecting production by the customers.

We may not be able to successfully respond to the changing distribution
channels for aftermarket products. Major automotive aftermarket retailers, such
as AutoZone and Advance Auto Parts, are attempting to increase their commercial
sales by selling directly to automotive parts installers in addition to
individual consumers. These installers have historically purchased from their
local warehouse distributors and jobbers, who are our more traditional
customers. We cannot assure you that we will be able to maintain or increase
aftermarket sales through increasing our sales to retailers. Furthermore,
because of the cost focus of major retailers, we have occasionally been required
to offer price concessions. Our failure to maintain or increase aftermarket
sales, or to offset the impact of any reduced sales or pricing through cost
improvements, could have an adverse impact on our business and operating
results.

We may be unable to compete favorably in the highly competitive automotive
parts industry. The automotive parts industry is highly competitive. Although
the overall number of competitors has decreased due to ongoing industry
consolidation, we face significant competition within each of our major product
areas. The principal competitive factors are price, quality, service, product
performance, design and engineering capabilities, new product innovation, global
presence and timely delivery. We cannot assure you that we will be able to
continue to compete favorably in this competitive market or that increased
competition will not have a material adverse effect on our business by reducing
our ability to increase or maintain sales or profit margins.

We may be unable to realize our business strategy of improving operating
performance. We have either implemented or plan to implement strategic
initiatives designed to improve our operating performance. The failure to
achieve the goals of these initiatives could have a material adverse effect on
our business, particularly since we rely on these initiatives to offset pricing
pressures from our customers, as described above. We cannot assure you that we
will be able to successfully implement or realize the expected benefits of any
of these initiatives or that we will be able to sustain improvements made to
date.

We are subject to risks related to our international operations. We have
manufacturing and distribution facilities in many regions and countries,
including Australia, China, India, North America, Europe and South America, and
sell our products worldwide. For 2002, about 45 percent of our net sales were
derived from operations outside North America. International operations are
subject to various risks which could have a material adverse effect on those
operations or our business as a whole, including:

- exposure to local economic conditions;

- exposure to local political conditions, including the risk of seizure of
assets by foreign government;

- currency exchange rate fluctuations;

- hyperinflation in certain foreign countries;

- controls on the repatriation of cash, including imposition or increase of
withholding and other taxes on remittances and other payments by foreign
subsidiaries; and

- export and import restrictions.

Exchange rate fluctuations could cause a decline in our financial condition
and results of operations. As a result of our international operations, we
generate a significant portion of our net sales and incur a significant portion
of our expenses in currencies other than the U.S. dollar. To the extent we are
unable to match revenues received in foreign currencies with costs paid in the
same currency, exchange rate fluctuations in that currency could have a material
adverse effect on our business. For example, where we have significantly more
costs than revenues generated in a foreign currency, we are subject to risk if
that foreign currency appreciates against the U.S. dollar because the
appreciation

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effectively increases our cost in that country. From time to time, as and when
we determine it is appropriate and advisable to do so, we will seek to mitigate
the effect of exchange rate fluctuations through the use of derivative financial
instruments. We cannot assure you, however, that we will continue this practice
or be successful in these efforts.

The financial condition and results of operations of some of our operating
entities are reported in foreign currencies and then translated into U.S.
dollars at the applicable exchange rate for inclusion in our consolidated
financial statements. As a result, appreciation of the U.S. dollar against these
foreign currencies will have a negative impact on our reported revenues and
operating profit while depreciation of the U.S. dollar against these foreign
currencies will have a positive effect on reported revenues and operating
profit. For example, our European operations were positively impacted in 2002
due to the strengthening of the Euro against the U.S. dollar. Our South American
operations were negatively impacted by the devaluation in 2000 of the Brazilian
currency as well as by the devaluation of the Argentine currency in 2002. We do
not generally seek to mitigate this translation effect through the use of
derivative financial instruments.

Changes in Prices of Raw Materials. Significant increases in the cost of
certain raw materials used in our products, to the extent they are not timely
reflected in the price we charge our customers or mitigated through long-term
supply contracts, could adversely impact our results.

Other Factors. In addition to the factors described above, we may be
impacted by a number of other matters and uncertainties, including: (i)
potential legislation, regulatory changes and other governmental actions,
including the ability to receive regulatory approvals and the timing of such
approvals; (ii) new technologies that reduce the demand for certain of our
products or otherwise render them obsolete; (iii) our ability to integrate
operations of acquired businesses quickly and in a cost effective manner; (iv)
changes in distribution channels or competitive conditions in the markets and
countries where we operate; (v) capital availability or costs, including changes
in interest rates, market perceptions of the industries in which we operate or
ratings of securities; (vi) increases in the cost of compliance with
regulations, including environmental regulations, and environmental liabilities
in excess of the amount reserved; (vii) changes by the Financial Accounting
Standards Board or the Securities and Exchange Commission of authoritative
accounting principles generally accepted in the United States of America or
policies; (viii) acts of war or terrorism and the impact of these acts on
economic, financial and social conditions in the countries where we operate; and
(ix) the timing and occurrence (or non-occurrence) of transactions and events
which may be subject to circumstances beyond our control.

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TABLE OF CONTENTS

PART I
Item 1. Business.................................................... 1
Tenneco Automotive Inc.................................... 1
Contributions of Major Businesses......................... 2
Description of Our Business............................... 3
Environmental Matters..................................... 20
Item 2. Properties.................................................. 20
Item 3. Legal Proceedings........................................... 20
Item 4. Submission of Matters to a Vote of Security Holders......... 21
Item 4.1. Executive Officers of the Registrant........................ 22
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 25
Item 6. Selected Financial Data..................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 29
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 51
Item 8. Financial Statements and Supplementary Data................. 52
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 101
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 102
Item 11. Executive Compensation...................................... 102
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 102
Item 13. Certain Relationships and Related Transactions.............. 102
Item 14. Controls and Procedures..................................... 102
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 103

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PART I

ITEM 1. BUSINESS.

TENNECO AUTOMOTIVE INC.

Our company, Tenneco Automotive Inc., is one of the world's leading
manufacturers of automotive emissions control and ride control products and
systems for both the original equipment market and the replacement market, or
aftermarket. As used herein, the term "Tenneco", "we", "us", "our", or the
"Company" refers to Tenneco Automotive Inc. and its consolidated subsidiaries.

Tenneco was incorporated in Delaware in 1996 under the name "New Tenneco
Inc." ("New Tenneco") as a wholly owned subsidiary of the company then known as
Tenneco Inc. ("Old Tenneco"). At that time, Old Tenneco's major businesses were
shipbuilding, energy, automotive and packaging. On December 11, 1996, Old
Tenneco completed the transfer of its automotive and packaging businesses to us,
and spun off our company to its public stockholders (the "1996 Spin-off"). In
connection with the 1996 Spin-off, Old Tenneco also spun off its shipbuilding
division to its public stockholders, the remaining energy company was acquired
by El Paso Natural Gas Company and we changed our name from New Tenneco to
Tenneco Inc. Unless the context otherwise requires, for periods prior to
December 11, 1996, references to "Tenneco", "we", "us", "our" or the "Company"
also refer to Old Tenneco.

In a series of transactions commencing in January 1999 and culminating with
the November 4, 1999 spin off to our shareholders of the common stock of Tenneco
Packaging Inc., now known as Pactiv Corporation (the "1999 Spin-off"), we
separated our packaging businesses from our automotive business. As a result of
these 1999 transactions, our former specialty and paperboard packaging operating
segments are presented as discontinued operations in certain of the accompanying
financial statements.

In March 2002, we amended our senior credit facility to revise the
financial covenant ratios for 2002 through 2004, exclude from the calculation of
our financial covenant ratios up to $60 million (before taxes) of charges and
expenses related to cost reduction initiatives and allow us to enter into sale
and leaseback transactions covering up to $200 million of our assets with the
proceeds used to reduce senior debt and allowed us to exchange certain debt
securities for common equity (to the extent we determine to pursue such actions
in the future). Note 4 to the consolidated financial statements included in Item
8 and "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included in Item 7 have more information about our debt and the
amendments to the senior credit facility.

Our Internet address is www.tenneco-automotive.com. We make our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to those reports, as filed with or furnished to the Securities
and Exchange Commission ("SEC"), available free of charge on our Internet
website as soon as reasonably practicable after submission to the SEC. The
contents of our website are not, however, a part of this report.

Under the Sarbanes-Oxley Act of 2002, and rules recently adopted
thereunder, we will be required to disclose in future annual reports on Form
10-K (i) whether the Audit Committee of our Board of Directors includes a
"financial expert" who is "independent" for purposes of those provisions, (ii)
specified information, beyond what is currently required to be disclosed,
regarding fees paid to our independent public accountants and (iii) specified
information regarding whether we maintain a code of ethics applicable to our
chief executive officer and senior financial management. For information
regarding the matters described in clauses (i) and (ii), above, see the section
entitled "Report of Audit Committee" in our definitive Proxy Statement for the
Annual Meeting of Stockholders to be held May 13, 2003. For information
regarding the matter described in clause (iii), above, see "Directors and
Executive Officers of the Registrant" included under Item 10 in this annual
report on Form 10-K.

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CONTRIBUTIONS OF MAJOR BUSINESSES

For information concerning our operating segments, geographic areas and
major products or groups of products, see Note 10 to the consolidated financial
statements of Tenneco Automotive Inc. and Consolidated Subsidiaries included in
Item 8. The following tables summarize for each of our operating segments for
the periods indicated: (i) net sales and operating revenues; (ii) earnings
before interest expense, income taxes and minority interest ("EBIT"); and (iii)
capital expenditures. You should also read "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in Item 7 for
information about certain costs and charges included in our results.

NET SALES AND OPERATING REVENUES:

EBIT:

CAPITAL EXPENDITURES:

Interest expense, income taxes, and minority interest that were not
allocated to our operating segments are:

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DESCRIPTION OF OUR BUSINESS

With 2002 revenues of over $3.4 billion, we are one of the world's largest
producers of automotive emissions control and ride control systems and products.
We serve both original equipment manufacturers and replacement markets worldwide
through leading brands, including Monroe(R), Rancho(R) and Fric Rot(TM) ride
control products and Walker(R) and Gillet(TM) emissions control products.

As an automotive parts supplier, we design, market and sell individual
component parts for vehicles as well as groups of components that are combined
as modules or systems within vehicles. These parts, modules and systems are sold
globally to the vast majority of vehicle manufacturers and throughout all
aftermarket distribution channels.

OVERVIEW OF AUTOMOTIVE PARTS INDUSTRY

The automotive parts industry is generally separated into two categories:
(1) "original equipment" or "OE" sales, in which parts are sold in large
quantities directly for use by original equipment vehicle manufacturers
("OEMs"); and (2) "aftermarket" sales, in which parts are sold as replacement
parts in varying quantities to a wide range of wholesalers, retailers and
installers. In the OE market, parts suppliers are generally divided into
tiers -- "Tier 1" suppliers, who provide their products directly to OEMs, and
"Tier 2" or "Tier 3" suppliers, who sell their products principally to other
suppliers for combinations into the other suppliers' own product offerings.

Demand for automotive parts in the OE market is generally a function of the
number of new vehicles produced, which in turn is a function of prevailing
economic conditions and consumer preferences. In 2002, the number of light
vehicles produced was 16.4 million in North America, and 19.3 million in Europe
and 20.7 million in the rest of the world. Worldwide new light vehicle
production is forecasted to increase to over 61.0 million in 2005 from
approximately 56.4 million in 2002. Although OE demand is tied to planned
vehicle production, parts suppliers also have the opportunity to grow through
increasing their product content per vehicle, by further penetrating business
with existing customers and by gaining new customers and markets. Companies with
global presence and advanced technology, engineering, manufacturing and support
capabilities, such as our company, are, we believe, well positioned to take
advantage of these opportunities.

Demand for aftermarket products is driven by the quality of OE parts, the
number of vehicles in operation, the average age of the vehicle fleet, vehicle
usage and the average useful life of vehicle parts. Although more vehicles are
on the road than ever before, the aftermarket has experienced weakness due to
improved quality of OE parts and increases in average useful lives of automotive
parts as a result of technological innovation. In addition, the decline from
1995 to 2000 of the number of vehicles in the six to ten year-old vehicle
segment (from 63.7 million to 56.8 million) -- when cars generally need
first-line replacement parts such as those offered by us -- is also driving
aftermarket softness. While we believe some opportunity exists for aftermarket
replacements to increase as the newer vehicles recently put on the road increase
into the six to ten year category, suppliers are increasingly being required to
deliver innovative aftermarket products that upgrade the performance or safety
of a vehicle's original components to drive aftermarket demand.

INDUSTRY TRENDS

Currently, we believe several significant existing and emerging trends are
dramatically impacting the automotive industry. As the dynamics of the
automotive industry change, so do the roles, responsibilities and relationships
of its participants. Key trends that we believe are affecting automotive parts
suppliers include:

OUTSOURCING AND DEMAND FOR SYSTEMS AND MODULES

OE manufacturers are increasingly moving towards outsourcing automotive
parts and systems to simplify the vehicle assembly process, lower costs and
reduce vehicle development time. Outsourcing

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allows OE manufacturers to take advantage of the lower cost structure of the
automotive parts suppliers and to benefit from multiple suppliers engaging in
simultaneous development efforts. Furthermore, development of advanced
electronics has enabled formerly independent vehicle components to become
"interactive," leading to a shift in demand from individual parts to fully
integrated systems. As a result, automotive parts suppliers offer OE
manufacturers component products individually, as well as in a variety of
integrated forms such as modules and systems:

- "Modules" are groups of component parts arranged in close physical
proximity to each other within a vehicle. Modules are often assembled by
the supplier and shipped to the original equipment manufacturer for
installation in a vehicle as a unit. Seats, instrument panels, axles and
door panels are examples.

- "Systems" are groups of component parts located throughout a vehicle
which operate together to provide a specific vehicle function. Anti-lock
braking systems, safety restraint systems, roll control systems,
emissions control and powertrain systems are examples.

This shift in demand towards fully integrated systems has created the role
of the Tier 1 systems integrator. These systems integrators will increasingly
have the responsibility to execute a number of activities, such as design,
product development, engineering, testing of component systems and purchasing
from Tier 2 suppliers. We are an established Tier 1 supplier with more than ten
years of product integration experience. We have modules or systems for 42
vehicle platforms in production worldwide and modules or systems for three
additional platforms under development. For example, we supply ride control
modules for the Chrysler JR/Sebring/Stratus and the exhaust emissions control
system for the Porsche Boxster.

GLOBAL CONSOLIDATION OF OE CUSTOMERS

Given the trend in business combinations among vehicle
manufacturers -- such as the DaimlerChrysler merger and Ford's acquisition of
Volvo -- as well as the global OE expansion over the last decade, OEMs are
increasingly requiring suppliers to provide parts on a global basis. As the
customer base of OEMs has consolidated and emerging markets have become more
important to achieving growth, suppliers must be prepared to provide products
any place in the world.

- Growing Importance of Emerging Markets. Because the North American and
Western European automotive markets are relatively mature, OE
manufacturers are increasingly focusing on emerging markets for growth
opportunities, particularly China, Eastern Europe, India and Latin
America. This increased OE focus has, in turn, increased the growth
opportunities in the aftermarkets in these regions.

- Governmental Tariffs and Local Parts Requirements. Many governments
around the world require that vehicles sold within their country contain
specified percentages of locally produced parts. Additionally, some
governments place high tariffs on imported parts.

- Location of Production Closer to End Markets. OE manufacturers and parts
suppliers have relocated production globally on an "onsite" basis that is
closer to end markets. This international expansion allows suppliers to
pursue sales in developing markets and take advantage of relatively lower
labor costs.

With facilities around the world, including the key regions of North
America, South America, Europe and Asia, we can supply our customers on a global
basis.

GLOBAL RATIONALIZATION OF OE VEHICLE PLATFORMS

OE manufacturers are increasingly designing "global platforms". A global
platform is a basic mechanical structure of a vehicle that can accommodate
different features and is in production and/or development in more than one
region. Thus, OE manufacturers can design one platform for a number of similar
vehicle models. This allows manufacturers to realize significant economies of
scale through limiting variations across items such as steering columns, brake
systems, transmissions, axles, exhaust systems,
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support structures and power window and door lock mechanisms. We believe that
this shift towards standardization will have a large impact on automotive parts
suppliers, who should experience a reduction in production costs as OE
manufacturers reduce variations in components. We also expect parts suppliers to
experience higher production volumes per unit and greater economies of scale, as
well as reduced total investment costs for molds, dies and prototype
development. Light vehicle platforms of over one million units are expected to
grow from 14 percent to 39 percent of global OE production from 1999 to 2006.

INCREASING TECHNOLOGICALLY SOPHISTICATED CONTENT

As consumers continue to demand competitively priced vehicles with
increased performance and functionality, the number of sophisticated components
utilized in vehicles is increasing. By replacing mechanical functions with
electronics and by integrating mechanical and electronic functions within a
vehicle, OE manufacturers are achieving improved emissions control, improved
safety and more sophisticated features at lower costs.

Automotive parts customers are increasingly demanding technological
innovation from suppliers to address more stringent emissions and other
regulatory standards and to improve vehicle performance. To develop innovative
products, systems and modules, we have invested $202 million over the past three
years into engineering, research and development and we continuously seek to
take advantage of our technology investments and brand strength by extending our
products into new markets and categories. For example, we have developed several
adaptive damping systems, which reduce undesirable vehicle motion. Also, we have
developed the self-lubricating elastomer, which has the additional ability to
reduce friction between moving components in a suspension system, thereby
reducing noise and vibration. We plan to introduce our Tubular Integrated
(catalytic) Converter (TIC) to major vehicle manufacturers in North America. We
have also introduced new exhaust-valve technology for cylinder-deactivated
engines.

INCREASING ENVIRONMENTAL STANDARDS

Automotive parts suppliers and OE manufacturers are designing products and
developing materials to comply with increasingly stringent environmental
requirements. Government regulations adopted over the past decade require
substantial reductions in automobile tailpipe emissions, longer warranties on
parts of an automobile's pollution control equipment and additional equipment to
control fuel vapor emissions. Some of these regulations also mandate more
frequent emissions and safety inspections for the existing fleet of vehicles.
Manufacturers have responded by focusing their efforts towards technological
development to minimize pollution. As a leading supplier of emissions control
systems with strong technical capabilities, we believe we are well positioned to
benefit from more rigorous environmental standards. For example, we have
recently developed the diesel particulate filter which is designed to meet
stricter air quality regulations in Europe. In our ride control product line, we
have invested both in North America and Europe in new water-based paint systems
to replace older solvent-based technology. These new water-based systems
significantly reduce the amount of VOC's (volatile organic compounds) that are
evaporated from the paint during the drying process.

EXTENDED PRODUCT LIFE OF AUTOMOTIVE PARTS; DECLINING VEHICLE FLEET AGE

The average useful life of automotive parts -- both OE and
replacement -- has been steadily increasing in recent years due to innovations
in products and technologies. The longer product lives allow vehicle owners to
replace parts of their vehicles less often. As a result, although more vehicles
are on the road than ever before, the aftermarket has experienced weakness. In
addition, the average age of the vehicle fleet on the road has been declining in
the last several years, further contributing to softness in the aftermarket.
Accordingly, a supplier's future viability in the aftermarket will depend, in
part, on its ability to reduce costs and leverage its advanced technology and
recognized brand names to maintain or achieve additional sales. As a Tier 1 OE
supplier, we believe we are well positioned to leverage our products and
technology into the aftermarket. Furthermore, we continue to believe some
opportunity exists for replacement of certain parts to increase as the newer
vehicles that have recently been put on the road increase in age to the six to
ten year category.
5

CHANGING AFTERMARKET DISTRIBUTION CHANNELS

In North America, during the last decade, the number of retail automotive
parts chains, such as AutoZone and Advance Auto Parts, has been growing while
the number of traditional automotive parts stores ("jobbers") that sell to
installers has been declining. From 1991 to 2001, the number of retail
automotive parts stores increased from approximately 10,000 to approximately
15,000, while the number of jobbers has decreased from approximately 25,000 to
approximately 19,000. As a result, the traditional three-step distribution
channel (full-line warehouse, jobber, installer) is redefining itself through
two-step distribution and continued formation of buying groups. In addition,
since retailers are attempting to grow their commercial sales to automotive
parts installers, they are increasingly adding premium brands to their product
portfolios. This enables them to offer the option of a premium brand, which is
often preferred by their commercial customers, or a standard product, which is
often preferred by their retail customers. We believe we are well positioned to
respond to this continuing aftermarket situation because of our focus on cost
reduction and high-quality, premium brands.

SUPPLIER CONSOLIDATION

Over the past few years, automotive suppliers have been consolidating in an
effort to become more global, have a broader, more integrated product offering
and gain scale economies in order to remain competitive amidst growing pricing
pressures and increased outsourcing demands from the OEMs. Industry forecasters
estimate that consolidation will drive the number of Tier 1 automotive parts
suppliers from around 2,000 in the year 2000 to 150 by 2008 and the number of
Tier 2/3 suppliers from around 6,000 in the year 2000 to around 800 Tier 2
suppliers by 2008. A supplier's viability in this consolidating market will
depend, in part, on its ability to maintain and increase operating efficiencies
and provide value-added services.

SAFETY

Vehicle safety continues to gain increased industry attention and play a
critical role in consumer purchasing decisions. As such, OEMs are seeking out
suppliers with new technologies, capabilities and products that have the ability
to advance vehicle safety. Continued research and development by select
automotive suppliers in rollover protection systems, smart airbag systems,
braking electronics and safer, more durable materials has dramatically advanced
the market for safety products and its evolving functional demands. Those
suppliers able to enhance vehicle safety through innovative products and
technologies have a distinct competitive advantage with the consumer, and thus
their OEM customers.

On the aftermarket side of our business, we launched in 2002 a global
marketing campaign to educate consumers on the critical role shock absorbers and
struts play in vehicle safety. This campaign concentrates on how these products
affect the Safety Triangle -- steering, stopping and stability -- and emphasizes
the need to replace worn shocks and struts for safe driving. We plan on
expanding our marketing efforts in 2003 to educate both installers and consumers
in North America and Europe.

6

ANALYSIS OF REVENUES

The following table provides, for each of the years 2000 through 2002,
information relating to our net sales, by primary product lines and customer
categories.

BRANDS

In each of our operating segments, we manufacture and market leading brand
names. Monroe(R) ride control products and Walker(R) exhaust products are two of
the most recognized brand names in the automotive parts industry. We emphasize
product value differentiation with these and other key brands such as Monroe
Sensa-Trac(R) and Reflex(R) (shock absorbers and struts), Quiet-Flow(R)
(mufflers), DynoMax(R) (performance exhaust products), Rancho(R) (ride control
products for the high performance light truck market) and Clevite(R)
(elastomeric vibration control components).

CUSTOMERS

We have developed long-standing business relationships with our customers
around the world. In each of our operating segments, we work together with our
customers in all stages of production, including design, development, component
sourcing, quality assurance, manufacturing and delivery. With a balanced mix of
OE and aftermarket products and facilities in major markets worldwide, we
believe we are well-positioned to meet customer needs. We believe we have a
strong, established reputation with customers for providing high-quality
products at competitive prices, as well as for timely delivery and customer
service.

7

Worldwide we serve more than 25 different original equipment manufacturers,
and our products or systems are included on five of the top 10 passenger car
models produced in North America and Western Europe and nine of the top 10 light
truck models produced in North America for 2002. During 2002, our OE customers
included:

NORTH AMERICA EUROPE ASIA
CAMI BMW First Auto Works
ClubCar DaimlerChrysler DaimlerChrysler
DaimlerChrysler Ford Ford
Ford General Motors/Opel General Motors
Freightliner Mitsubishi Isuzu
General Motors Nissan Nissan
Harley-Davidson Paccar PSA-Peugeot/Citroen
Honda PSA-Peugeot/Citroen Telco
Isuzu Porsche Toyota
Navistar/International Renault TVS Motor Co.
Nissan Scania Volkswagen
Paccar Toyota
Volkswagen Volkswagen
Volvo Truck/Mack Volvo Truck
E-Z Go Car
AUSTRALIA
SOUTH AMERICA Ford
DaimlerChrysler General Motors/Holden
Ford Mazda
General Motors Mitsubishi
Honda Navistar/International
Mitsubishi Toyota
PSA Peugeot/Citroen Club Car
Renault Volvo Truck
Scania
Volkswagen

During 2002, our aftermarket customers were comprised of full-line and
specialty warehouse distributors, retailers, jobbers, installer chains and car
dealers. These customers included such wholesalers and retailers as National
Auto Parts Association (NAPA), Sears and Advance Auto Parts in North America and
Temot and Auto Distribution International in Europe. We believe we have a
balanced mix of aftermarket customers, with our top 10 aftermarket customers
accounting for 33.9 percent of our total net aftermarket sales and only 8.9
percent of our total net sales for 2002.

General Motors accounted for approximately 19.8 percent, 19.6 percent, and
16.6 percent of our net sales in 2002, 2001, and 2000, respectively, Ford
accounted for approximately 13.3 percent, 10.6 percent and 13.5 percent of our
net sales in 2002, 2001, and 2000, respectively, DaimlerChrysler accounted for
approximately 10.1 percent, 10.4 percent, and 11.5 percent of our net sales in
2002, 2001, and 2000, respectively and Volkswagen accounted for approximately
10.9 percent and 10.1 percent of our net sales in 2002 and 2001, respectively.
No other customer accounted for more than 10 percent of our net sales for those
years.

COMPETITION

In North America, Europe and the rest of the world, we operate in highly
competitive markets. Customer loyalty is a key element of competition in these
markets and is developed through long-standing relationships, customer service,
value-added products and timely delivery. Product pricing and services provided
are other important competitive factors.

8

In both the OE market and aftermarket, we compete with the vehicle
manufacturers, some of which are also customers of ours, and numerous
independent suppliers. In the OE market, we believe that we are among the top
four suppliers in the world for both emissions control and ride control products
and systems. In the aftermarket, we believe that we are the market share leader
in the supply of both emissions control and ride control products in the markets
we serve throughout world.

SEASONALITY

Our business is somewhat seasonal. OE manufacturers' production
requirements are generally higher in the first three quarters of the year as
compared to the fourth quarter. Last year, for example, this seasonality
adversely affected our fourth quarter results of operations as compared to the
first three quarters. We believe this seasonality is due, in part, to consumer
demand for new vehicles softening during the holiday season and as a result of
the winter months in North America and Europe. Also, the major North American OE
manufacturers generally close their production facilities for the last two weeks
of the year. Our aftermarket business also experiences seasonality. Demand for
aftermarket products increases during the spring as drivers prepare for the
summer driving season.

EMISSIONS CONTROL SYSTEMS

Vehicle emissions control products and systems play a critical role in
safely conveying noxious exhaust gases away from the passenger compartment and
reducing the level of pollutants and engine exhaust noise to an acceptable
level. Precise engineering of the exhaust system -- from the manifold that
connects an engine's exhaust ports to an exhaust pipe, to the catalytic
converter that eliminates pollutants from the exhaust, to the muffler -- leads
to a pleasant, tuned engine sound, reduced pollutants and optimized engine
performance.

We design, manufacture and distribute a variety of products and systems
designed to optimize engine performance, acoustic tuning and weight, including
the following:

- Mufflers and resonators -- Devices to provide noise elimination and
acoustic tuning;

- Catalytic converters -- Devices used to convert harmful gaseous
emissions, such as carbon monoxide, from a vehicle's exhaust system into
harmless components such as water vapor and carbon dioxide;

- Exhaust manifolds -- Components that collect gases from individual
cylinders of a vehicle's engine and direct them into a single exhaust
pipe;

- Pipes -- Utilized to connect various parts of both the hot and cold ends
of an exhaust system;

- Hydroformed tubing -- Forms into various geometric shapes, such as
Y-pipes or T-pipes, which provides optimization in both design and
installation as compared to conventional pipes; and

- Hangers and isolators -- Used for system installation and noise
elimination.

We entered this product line in 1967 with the acquisition of Walker
Manufacturing Company, which was founded in 1888. When the term "Walker" is used
in this document, it refers to our subsidiaries and affiliates that produce
emissions control products and systems.

We supply our emissions control offerings to over 15 auto-makers for use on
over 100 vehicle models, including four of the top 10 passenger cars produced in
North America and Western Europe and six of the top 10 light trucks produced in
North America in 2002. With the acquisition of Heinrich Gillet GmbH & Co. in
1994, we also became one of Europe's leading OE emissions control systems
suppliers.

In the aftermarket, we manufacture, market and distribute replacement
mufflers for virtually all North American, European, and Asian makes of light
vehicles under brand names including Quiet-Flow(R), TruFit(R) and Aluminox(TM),
in addition to offering a variety of other related products such as pipes and
catalytic converters (Walker Perfection(R)). We also serve the specialty exhaust
aftermarket, where our key

9

offerings include Mega-Flow(TM) exhaust products for heavy-duty vehicle
applications and DynoMax(R) high performance exhaust products.

The following table provides, for each of the years 2000 through 2002,
information relating to our sales of emissions control products and systems for
certain geographic areas:

- ---------------
(a) See Note 10 to the consolidated financial statements included under Item 8
for information about our foreign and domestic operations.

RIDE CONTROL SYSTEMS

Superior ride control is governed by a vehicle's suspension system,
including its shock absorbers and struts. Shock absorbers and struts help
maintain vertical loads placed on a vehicle's tires to help keep the tires in
contact with the road. A vehicle's ability to steer, brake and accelerate
depends on the contact between the vehicle's tires and the road. Worn shocks and
struts can allow excess weight transfer from side to side, which is called
"roll," from front to rear, which is called "pitch," and up and down, which is
called "bounce." Variations in tire-to-road contact can affect a vehicle's
handling and braking performance and the safe operation of a vehicle. Shock
absorbers are designed to control vertical loads placed on tires by providing
resistance to vehicle roll, pitch and bounce. Thus, by maintaining the tire to
road contact, ride control products are designed to function as safety
components of a vehicle, in addition to providing a comfortable ride.

We design, manufacture and distribute a variety of ride control products
and systems. Our ride control offerings include:

- Shock absorbers -- A broad range of mechanical shock absorbers and
related components for light-and heavy-duty vehicles. We supply both
twin-tube and monotube shock absorbers to vehicle manufacturers and the
aftermarket;

- Struts -- A complete line of struts and strut assemblies for light
vehicles;

- Vibration control components (Clevite(R)) -- Generally rubber-to-metal
bushings and mountings to reduce vibration between metal parts of a
vehicle. Our offerings include a broad range of suspension arms, rods and
links for light- and heavy-duty vehicles;

- Kinetic(R) roll control -- A suite of roll control, near equal wheel
loading systems ranging from simple mechanical systems to complex
hydraulic systems featuring proprietary and patented

10

technology. The Kinetic technology was incorporated on the Citroen World
Rally Car that is featured in the World Rally Championship 2003;

- Advanced suspension systems -- Electronically adjustable shock absorbers
and suspension systems that change performance based on vehicle inputs
such as steering and braking; and

- Other -- We also offer other ride control products such as load assist
products, springs, steering stabilizers, adjustable suspension systems,
suspension kits and modular assemblies.

We supply our ride control offerings to over 25 vehicle-makers for use on
over 150 vehicle models, including nine of the top 10 light truck models
produced in North America for 2002. We also supply OE ride control products and
systems to a range of heavy-duty and specialty vehicle manufacturers including
Volvo, Mack Truck, Caterpillar, International Truck and Engine (Navistar),
Freightliner, PACCAR and E-Z Go Car (golf carts).

In the ride control aftermarket, we manufacture, market and distribute
replacement shock absorbers for virtually all North American, European and Asian
makes of light vehicles under several brand names including Gas Matic(R),
Sensa-Trac(R), Monroe Reflex(R) and Monroe Adventure(R), as well as Clevite(R)
for elastomeric vibration control components. We also sell ride control
offerings for the heavy duty, off-road and specialty aftermarket, such as our
Gas-Magnum(R) shock absorbers for the North American heavy-duty category.

We entered the ride control product line in 1977 with the acquisition of
Monroe Auto Equipment Company, which was founded in 1916 and introduced the
world's first modern tubular shock absorber in 1930. When the term "Monroe" is
used in this document it refers to our subsidiaries and affiliates that produce
ride control products and systems.

The following table provides, for each of the years 2000 through 2002,
information relating to our sales of ride control equipment for certain
geographic areas:

- ---------------
(a) See Note 10 to the consolidated financial statements included under Item 8
for information about our foreign and domestic operations.

11

SALES, MARKETING AND DISTRIBUTION

We have separate and distinct sales and marketing efforts for our OE and
aftermarket businesses.

For OE sales, our sales and marketing team is an integrated group of
professionals, including skilled engineers and program managers, that are
organized by customer and product type (e.g. ride control and emissions
control). Our sales and marketing team provides the appropriate mix of
operational and technical expertise needed to interface successfully with the
OEMs. Our new business "capture process" involves working closely with the OEM
platform engineering and purchasing team. Bidding on OE automotive platforms
typically encompasses many months of engineering and business development
activity. Throughout the process, our sales team, program managers and product
engineers assist the OE customer in defining the project's technical and
business requirements. A normal part of the process includes our engineering and
sales personnel working on customers' integrated product teams, and assisting
with the development of component/system specifications and test procedures.
Given that the OE business involves long-term production contracts awarded on a
platform-by-platform basis, our strategy is to leverage our engineering
expertise and strong customer relationships to obtain platform awards and
increase operating margins.

For aftermarket sales and marketing, since 1996 we maintained a common team
for both ride control and emissions control products that has been organized
primarily by customer. Beginning in the first quarter 2001, the North American
sales force was reorganized into brand-specific teams, with a separate group for
Monroe(R), Rancho(R) and Walker(R). We sell aftermarket products through five
primary channels of distribution: (1) the traditional three-step distribution
system: full line warehouse distributors, jobbers and installers; (2) the
specialty two-step distribution system: specialty warehouse distributors that
carry only specified automotive product groups and installers; (3) direct sales
to retailers; (4) direct sales to installer chains; and (5) direct sales to car
dealers. Our aftermarket sales and marketing representatives cover all levels of
the distribution channel, stimulating interest in our products and helping our
products move through the distribution system. Also, to generate demand for our
products from end-users, we run print and television advertisements and offer
pricing promotions. We were one of the first parts manufacturers to offer
business to business services to customers with TA-Direct, an on-line order
entry and customer service tool. In addition, we maintain detailed web sites for
each of the Walker(R), Monroe(R), Rancho(R) and DynoMax(R) brands and our heavy
duty products.

MANUFACTURING AND ENGINEERING

We focus on achieving superior product quality at the lowest operating
costs possible and generally use state-of-the-art manufacturing processes to
achieve that goal. Our manufacturing strategy centers on a lean production
system designed to reduce overall costs -- especially indirect costs -- while
maintaining quality standards and reducing manufacturing cycle time. We deploy
new technology where it makes sense to differentiate our processes from our
competitors' or to achieve balance in one-piece flowthrough production lines.

EMISSIONS CONTROL

Our consolidated businesses operate 9 emissions control manufacturing
facilities in the U.S. and 27 emissions control manufacturing facilities outside
of the U.S. We operate 4 of these international facilities through joint
ventures in which we own a controlling interest. We also operate 4 additional
manufacturing facilities outside of the U.S. through 4 joint ventures in which
we hold a noncontrolling interest. We operate 4 emissions control engineering
and technical facilities worldwide and share 2 other such facilities with our
ride control operations.

Within each of our emissions control manufacturing facilities, operations
are organized by component (muffler, catalytic converter, pipe, resonator, and
manifold). Our manufacturing systems incorporate cell-based designs, allowing
work-in-process to move through the operation with greater speed and
flexibility. We continue to invest in plant and equipment to stay on top of the
industry. For instance, in our

12

Harrisonburg, Virginia, aftermarket manufacturing facility, we have developed a
completely automated production process that handles all facets of pipe
production from tube milling to pipe bending.

In an effort to further improve our OE customer service and position
ourselves as a Tier-1 OE systems supplier, we have been developing our emissions
control manufacturing operations into "just-in-time" or "JIT" systems. In this
system, a JIT facility located close to our OE customer's manufacturing plant
receives product components from both our manufacturing operations and
independent suppliers, handles the module assembly and then ships products to
the OEMs on an as-needed basis. To manage the JIT functions and material flow,
we have advanced computerized material requirements planning systems linked with
our customers' and supplier partners' resource management systems. We have 2
emissions control JIT assembly facilities in the United States and 12 in the
rest of the world, including 3 that are operated through non-controlled joint
ventures.

During the 1990's, we expanded our converter and emission system design,
development, test and manufacturing capabilities. Our engineering capabilities
now include advanced predictive design tools, advanced prototyping processes and
state-of-the-art testing equipment. This expanded technological capability makes
us a "full system" integrator, supplying complete emissions control systems from
the manifold to the tailpipe, to provide full emission and noise control. It
also allows us to provide JIT delivery and, when feasible, sequence delivery of
emissions control systems to meet customer production requirements. For 2003, we
plan to introduce our new Tubular Integrated (catalytic) Converter (TIC) to
major vehicle manufacturers in North America. We have also introduced new
exhaust-valve technology for cylinder-deactivated engines.

RIDE CONTROL

Our consolidated businesses operate 9 ride control manufacturing facilities
in the U.S. and 20 ride control manufacturing facilities outside the U.S. We
operate 5 of these international facilities through joint ventures in which we
own a controlling interest. We operate 4 engineering and technical facilities
worldwide and share 2 other such facilities with Walker.

Within each of our ride control manufacturing facilities, operations are
organized by product (shocks, struts, vibration control products) and include
computer numerically controlled, numerically controlled and conventional machine
centers; tube milling and drawn-over-mandrel manufacturing equipment; metal
inert gas and resistance welding; powdered metal pressing and sintering; chrome
plating; stamping; and assembly/test capabilities. Our manufacturing systems
incorporate cell-based designs, allowing work-in-process to move through the
operation with greater speed and flexibility.

As in the emissions control business, in an effort to further improve our
OE customer service and position us as a Tier 1 OE module supplier, we have been
developing our manufacturing operations into JIT systems. We have 2 JIT ride
control assembly facilities in the United States and 3 additional JIT ride
control facilities in the rest of the world.

In designing our shock absorbers and struts, we use advanced engineering
and test capabilities to provide product reliability, endurance and performance.
Our engineering capabilities feature advanced computer aided design equipment
and testing facilities. Our dedication to innovative solutions has led to such
technological advances as:

- Adaptive damping systems -- adapts to the vehicle's motion to better
control undesirable vehicle motions;

- Electronically adjustable suspensions -- changes suspension performance
based on a variety of inputs such as steering, braking, vehicle height,
and velocity; and

- Air leveling systems -- manually or automatically adjust the height of
the vehicle.

Conventional shock absorbers and struts generally compromise either ride
comfort or vehicle control. Our innovative grooved-tube, gas-charged shock
absorbers and struts provide both ride comfort and vehicle control, resulting in
improved handling, less roll, reduced vibration and a wider range of vehicle
control.
13

This technology can be found in our premium quality Sensa-Trac(R) shock
absorbers. In late 1997, we further enhanced this technology by adding the
SafeTech(TM) fluon banded piston, which improves shock absorber performance and
durability. In 1999, we introduced the Monroe Reflex(R) shock absorber, which
incorporates our Impact Sensor(TM) device. This technology permits the shock
absorber to automatically switch in milliseconds between firm and soft
compression damping when the vehicle encounters rough road conditions, thus
maintaining better tire-to-road contact and improving handling and safety.

QUALITY CONTROL

Quality control is an important part of our production process. Our quality
engineers establish performance and reliability standards in the product's
design stage, and use prototypes to confirm the component/system can be
manufactured to specifications. Quality control is also integrated into the
manufacturing process, with shop operators being responsible for quality control
of their specific work product. In addition, our inspectors test
work-in-progress at various stages to ensure components are being fabricated to
meet customers' requirements.

We believe our commitment to quality control and sound management practices
and policies is demonstrated by our successful participation in the
International Standards Organization/Quality Systems certification process
(ISO/QS). ISO/QS certifications are yearly audits that certify that a company's
facilities meet stringent quality and business systems requirements. Without
either ISO or QS certification, we would not be able to supply OEMs locally or
globally. Of those manufacturing facilities where we have determined that ISO
9000 certification is required or would provide us with an advantage in securing
additional business, approximately 95 percent have achieved ISO 9000
certification and we are pursuing certification of the remaining five percent.
Of those manufacturing facilities where we have determined that QS certification
is required to service our customers or would provide us with an advantage in
securing additional business, approximately 91 percent have achieved QS-9000
certification, and we are pursuing certification of the remaining nine percent.

BUSINESS STRATEGY

Our objective is to enhance profitability by leveraging our global position
in the manufacture of emissions control and ride control products and systems.
We intend to apply our competitive strengths and balanced mix of products,
markets, customers and distribution channels to capitalize on many of the
significant existing and emerging trends in the automotive industry. The key
components of our business strategy are described below.

ENHANCE GLOBAL ENGINEERING AND ADVANCED SYSTEM CAPABILITIES

We focus on the development of highly engineered systems and complex
assemblies and modules, which are designed to provide value-added solutions to
customers and generally increase vehicle content and carry higher profit margins
than individualized components. In addition, we have developed integrated,
electronically linked global engineering and manufacturing facilities, which we
believe help us to maintain our presence on top-selling vehicles. We have more
than 10 years of experience in integrating systems and modules.

"OWN" THE PRODUCT LIFE CYCLE

We seek to leverage our aftermarket expertise, which provides us with
valuable consumer demand information, to strengthen our competitive position
with OEMs. Our market knowledge, coupled with our leading aftermarket presence,
strengthens our ties with our OE customer base and drives OE acceptance of our
aftermarket products and technologies for use in original vehicle manufacturing.

COMMERCIALIZE INNOVATIVE, VALUE-ADDED PRODUCTS

To differentiate our offerings from those of our competitors, we focus on
commercializing innovative, value-added products, both on our own and through
strategic alliances, with emphasis on highly engineered
14

systems and complex assemblies and modules. We seek to continually identify and
target new, fast-growing niche markets and commercialize our new technologies
for these markets, as well as our existing markets.

For example, in late 1998, we reached an agreement with Ohlins Racing A.B.
to jointly develop advanced, electronically controlled suspension damping
systems which decrease spring movement, and in 2001 Volvo selected a system
designed pursuant to our agreement with Ohlins for use in Volvo's P202R model.
In February 2002, we entered into an agreement with Vibracoustic GmbH & Co. to
develop a pneumatic spring shock absorber (or "Luft Feder Dampfer") system for
automotive vehicle and other applications.

LEVERAGE AFTERMARKET BRAND NAMES

We manufacture and market leading brand name products. Monroe(R) ride
control products and Walker(R) emissions control products, which have been
offered to consumers for over 50 years, are two of the most recognized brand
name products in the automotive parts industry. We continue to emphasize product
value differentiation with these brands and our other primary brands, including:

- The Monroe Reflex(R) shock absorber which features an Impact Sensor(TM)
device to maintain better tire-to-road contact and improve handling and
safety under rough road conditions;

- The Monroe Sensa-Trac(R) line of shock absorbers, that has been enhanced
by the SafeTec(TM) system technology which incorporates a fluon banded
piston to improve performance and durability;

- Walker's Quiet-Flow(R) muffler, which features an open flow design that
increases exhaust flow, improves sound quality and significantly reduces
exhaust back pressure when compared to other replacement mufflers;

- Rancho(R) ride control products for the high-performance light truck
market;

- DynoMax(R) high-performance emissions control systems;

- Walker Perfection(TM) catalytic converters;

- Clevite(R) elastomeric vibration control components, which are primarily
rubber products used to reduce vibration through "cushioning" a
connection or contact point; and

- In European markets, Walker(TM) and Aluminox(TM) mufflers.

We are capitalizing on our brand strength by incorporating newly acquired
product lines within existing product families. We believe brand equity is a key
asset in a time of customer consolidation and merging channels of distribution.

ACHIEVE GREATER CONTENT PER VEHICLE

With increasingly stricter emissions regulations forecasted, we believe
that available emissions control content per light vehicle for all parts
suppliers will rise over the next several years as a result of the introduction
of multiple catalytic converters per vehicle and heat exchangers. Further, we
believe that consumers' greater emphasis on automotive safety could also allow
available ride control content per light vehicle for all parts suppliers to rise
over the next several years for luxury and performance vehicles featuring
state-of-the-art ride control technologies, and that modular ride control
assemblies also represent an opportunity to increase vehicle content. We plan to
take advantage of these trends by leveraging our existing position on many
top-selling vehicle platforms and by continuing to enhance our modular/systems
capabilities.

DIVERSIFY END MARKETS

One of our goals is to apply our existing design, marketing and
manufacturing capabilities to penetrate a variety of adjacent markets. We
believe that our capabilities could be used for heavy-duty vehicle and
industrial applications, various recreational vehicles, scooters and bicycles.
We expect that expanding into

15

markets other than automotive parts will allow us to capitalize on our advanced
technical and manufacturing infrastructure to achieve growth in higher-margin
businesses.

IMPLEMENT ADVANCED MANAGEMENT INITIATIVES: BOS, SIX SIGMA AND EVA(R)

We have adopted Business Operating System (BOS) as a disciplined system to
promote and manage continuous improvement. BOS focuses on the assembly and
analysis of data for quick and effective problem resolution to create more
efficient and profitable operations. We are also implementing Six Sigma(TM), a
methodology and approach designed to minimize product defects and improve
operational efficiencies.

In late 1999, we engaged Stern Stewart & Co. to assist us in implementing
Economic Value Added (EVA)(1), a financial tool that more effectively measures
how well we employ our capital resources. We have linked the successful
application of this management discipline to our incentive compensation program.

MAINTAIN OPERATING COST LEADERSHIP

In addition to implementing BOS, Six Sigma and EVA(R), we intend to
continue to reduce costs by:

- standardizing products and processes throughout our operations;

- further developing our global supply chain management capabilities;

- improving our information technology;

- increasing efficiency through employee training;

- investing in more efficient machinery; and

- enhancing the global coordination of costing and quoting procedures.

Beginning in the fourth quarter of 1998, we commenced a series of steps
designed to reduce administrative and operational costs and improve cost
management as follows:

- In the fourth quarter of 1998, we began an operational and administrative
restructuring which resulted in the closing of two plant locations and
five distribution centers, and the elimination of a total of
approximately 752 positions. This restructuring was completed in
mid-2000.

- In December 1999, we implemented a supplemental restructuring plan which
involved: the closure in Europe of a ride control manufacturing facility
and an exhaust just-in-time plant and the closure or downsizing of four
aftermarket distribution centers; the closure in North America of an
exhaust manufacturing facility; and the elimination of a total of
approximately 780 positions worldwide. This restructuring was completed
in 2002.

- In October 2000, we put in place an additional restructuring plan, which
called for the consolidation of our North American aftermarket exhaust
production at one plant and a salaried workforce reduction of 700
positions worldwide. This restructuring was completed in 2002. We have
executed the plan more efficiently than initially anticipated and as a
result have reversed $2 million of the original charge to income in the
fourth quarter of 2002.

- In December 2000, we realigned our North American original equipment
business around its two major product areas--ride control and emissions
control--and consolidated our program management resources to original
equipment manufacturers under a single global team. We also realigned our
Japanese original equipment business operations by integrating it with
our former international vehicle and emerging market units into a single
international group.

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

(1) EVA(R) is a registered trademark of Stern Stewart & Co.
16

- In January 2001, we undertook a separate initiative to eliminate an
additional 405 salaried positions worldwide, 215 of which were taken
immediately. This cost-reduction plan was completed in 2002. We executed
the plan more efficiently than initially anticipated and as a result
reversed $1 million of the original charge to income in the fourth
quarter of 2002.

- In December 2001, we began implementing Project Genesis, an initiative
designed to optimize our global manufacturing, distribution and logistics
footprint. Pursuant to the first phase of this initiative, we closed
eight facilities, consolidated or rearranged 20 others to improve work
flow and moved production assets among some of our plants. We also
reduced our total workforce by 17 percent. We have executed the plan more
efficiently than initially anticipated and as a result have reversed $6
million of the original charge to income in the fourth quarter of 2002.
We expect to complete the first phase of this initiative in the first
half of 2003. Future phases of this initiative, which have not yet been
finalized, will require approval by our Board of Directors and, depending
upon the costs of the plans, could require approval by our senior
lenders.

For additional information concerning our restructuring efforts, see Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 2 to the financial statements of Tenneco Automotive Inc.
and Consolidated Subsidiaries included under Item 8.

TAKE ADVANTAGE OF OPPORTUNITIES OFFERED BY THE INTERNET

As part of our overall effort to reduce costs, increase efficiencies and
improve customer service, we are seeking to take advantage of the opportunities
offered by the Internet.

Our initiatives in this area include:

- In January 2000, we launched our TAsupplier.com website which provides
our North American vendors with on-line access to our supplier and
quality manuals. Multi-language versions of our supplier manuals were put
on-line for our European and South American vendors in July 2000. In
2000, we also upgraded our South American website to allow our vendors to
view forecasts, shipment releases and report cards online.

- In May 2000, we launched one of the industry's first on-line aftermarket
customer order management systems -- www.ta-direct.com -- that allows
customers to place and track orders 24 hours a day. The site streamlines
purchasing by providing immediate order placement, pricing, stock and
order status, and shipment tracking. We currently have over 800 customers
registered to use the system, which generates almost 2,500 inquiries per
month. During 2002, we extended ta-direct to ride control, enabling all
of our North American aftermarket customers to place orders on line.

- In September 2000, we acquired a minority interest in TecCom GmbH, a
German e-commerce company founded by a consortium of 20 automotive parts
suppliers. TecCom was formed to provide an on-line aftermarket customer
order management system for the European market. We currently have 117
customers connected through TecCom.

- In August 2001, we launched a website which permits engineers from our
company and General Motors to view and update data required to create new
elastomer products.

EXECUTE FOCUSED TRANSACTIONS

In the past, we have been successful in identifying and capitalizing on
strategic acquisitions and alliances to achieve growth. Through these
acquisitions and alliances, we have: (1) expanded our product portfolio; (2)
realized incremental business with existing customers; (3) gained access to new
customers; and (4) achieved leadership positions within new geographic markets.

Where appropriate, we intend to continue to pursue strategic alliances and
transactions that complement our existing technology and systems development
efforts and/or enhance our global presence. This focused strategy should assist
us in aligning with strong local partners to penetrate international

17

markets and with companies that have proven proprietary technology and
recognized research capabilities necessary to help develop further leadership in
systems integration.

STRATEGIC ACQUISITIONS AND ALLIANCES

Strategic acquisitions, joint ventures and alliances have been an important
part of our growth. Through this strategy, we have expanded to meet customers'
global requirements. This strategy has also allowed us to acquire or align with
companies that possess proven technology and research capabilities, furthering,
we believe, our leadership in systems integration.

EMISSIONS CONTROL

- In 1997, we acquired Autocan, a Mexican catalytic converter and exhaust
pipe assembly manufacturer. We also acquired the manufacturing operations
of MICHEL, a privately owned, Polish-based manufacturer of replacement
market emissions control systems for passenger cars in Eastern Europe.

- In 1998, we established a joint venture in Shanghai, China to supply
emissions control systems to the Central and Southern Chinese automotive
markets. We also established a joint venture in Pune, India to supply
emissions control systems to OE customers and the aftermarket.

- In 2000, we entered into a strategic alliance agreement with Futaba
Industrial Co., Ltd., a leading Japanese emissions control manufacturer
through which the companies are to jointly evaluate, bid on and obtain
awards for OE supply of certain emissions control products and systems
for use on "global platforms" requiring significant Japan-based
engineering and/or manufacturing support. The goal of the alliance is to
bring together our global manufacturing footprint and customer
relationships with Futaba's expertise and customer relationships with
Japanese OEMs. In connection with the alliance, the two companies also
formed a joint venture to develop and produce emission control components
and stamped products at our former manufacturing facility in Burnley,
England.

- In July 2001, we formed a joint venture with Yarnapund Ltd., a Thai
emissions control system manufacturer, to produce emissions control
systems for the Isuzu I-190 vehicle platform to be assembled in Thailand
by Isuzu Motors Co. (Thailand) Ltd.

RIDE CONTROL

- In 1997, we entered into a joint venture which resulted in our
acquisition of majority ownership of Armstrong, a leading South African
manufacturer of ride control products. In 2000, we increased our
ownership interest in this joint venture to 74.9 percent.

- In early 1998, we entered into an agreement with Ohlins Racing AB, a
Swedish ride control system manufacturer to jointly develop advanced,
electronically controlled suspension dampening systems which decrease
spring movement.

- In early 1999, we completed the acquisition of Kinetic Ltd., an
Australian suspension engineering company with advanced roll control
technology.

- In July 2001, we entered into a strategic alliance with Tokico Ltd., a
leading Japanese ride control supplier, through which the companies are
to jointly evaluate, bid on and obtain awards for OE supply of certain
ride control products for use on "global" platforms requiring significant
Japan-based engineering and/or manufacturing support. The goal of the
alliance is to bring together our global manufacturing footprint and
customer relationships with Tokico's expertise and customer relationships
with Japanese OEs.

- In February 2002, we entered into a cooperation agreement with
Vibracoustic GmbH & Co. KG, a German manufacturer of pneumatic spring and
related systems, pursuant to which the companies

18

plan to work together to develop a pneumatic spring shock absorber or
"Luft-Feder-Dampfer" system for automotive vehicle and other technical
applications.

OTHER

As of December 31, 2002, we had approximately 20,000 employees,
approximately 54 percent of which are covered by collective bargaining
agreements and approximately 28 percent of which are governed by European works
councils. Several of our existing labor agreements, including those covering
plants in Spain, Belgium, France, the United Kingdom and the United States, are
scheduled for renegotiation in 2003. We regard our employee relations as
generally satisfactory.

The principal raw material utilized by us is steel. We obtain steel from a
number of sources pursuant to various contractual and other arrangements. We
believe that an adequate supply of steel can presently be obtained from a number
of different domestic and foreign suppliers.

We hold a number of domestic and foreign patents and trademarks relating to
our products and businesses. We manufacture and distribute our products
primarily under the Walker(R) and Monroe(R) brand names, which are
well-recognized in the marketplace and are registered trademarks. The patents,
trademarks and other intellectual property owned by or licensed to us are
important in the manufacturing, marketing and distribution of our products.

19

ENVIRONMENTAL MATTERS

We estimate that we and our subsidiaries will make capital expenditures for
environmental matters of approximately $3 million in 2003 and approximately $2
million in 2004.

For additional information regarding environmental matters, see Item 3,
"Legal Proceedings," Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and Note 11 to the financial statements of
Tenneco Automotive Inc. and Consolidated Subsidiaries included under Item 8.

ITEM 2. PROPERTIES.

We lease our principal executive offices, which are located at 500 North
Field Drive, Lake Forest, Illinois, 60045.

Walker's consolidated businesses operate 9 manufacturing facilities in the
U.S. and 27 manufacturing facilities outside of the U.S., operate 4 engineering
and technical facilities worldwide and share 2 other such facilities with
Monroe. Eleven of these manufacturing plants are JIT facilities. Walker operates
four additional manufacturing facilities outside of the U.S. through four
non-controlled joint ventures, 3 of which are JIT facilities.

Monroe's consolidated businesses operate 9 manufacturing facilities in the
U.S. and 20 manufacturing facilities outside the U.S., operate 4 engineering and
technical facilities worldwide and share 2 other such facilities with Walker.
Five of these manufacturing plants are JIT facilities.

The above described manufacturing locations outside of the U.S. are located
in Canada, Mexico, Belgium, Spain, the United Kingdom, the Czech Republic, South
Africa, France, Sweden, Germany, Poland, Portugal, Argentina, Brazil, Australia,
New Zealand, China, Thailand, and India. We also have sales offices located in
Australia, Argentina, Brazil, Canada, India, Italy, Japan, Poland, Russia,
Singapore, Thailand and Sweden.

We own approximately one half of the properties described above and lease
the other half. We hold nine of the above-described international manufacturing
facilities through eight joint ventures in which we own a controlling interest.
In addition, we hold four others through four joint ventures in which we own a
non-controlling interest. We also have distribution facilities at our
manufacturing sites and at a few offsite locations, substantially all of which
we lease.

We believe that substantially all of our plants and equipment are, in
general, well maintained and in good operating condition. They are considered
adequate for present needs and, as supplemented by planned construction, are
expected to remain adequate for the near future.

We also believe that we have generally satisfactory title to the properties
owned and used in our respective businesses.

ITEM 3. LEGAL PROCEEDINGS.

As of December 31, 2002, we are designated as a potentially responsible
party in three Superfund sites. We have estimated our share of the remediation
costs for these sites to be less than $1 million in the aggregate. In addition
to the Superfund sites, we may have the obligation to remediate current or
former facilities, and we estimate our share of remediation costs at these
facilities to be approximately $14 million. For both the Superfund sites and the
current and former facilities, we have established reserves that we believe are
adequate for these costs. Although we believe our estimates of remediation costs
are reasonable and are based on the latest available information, the cleanup
costs are estimates and are subject to revision, as more information becomes
available about the extent of remediation required. At some sites, we expect
that other parties will contribute to the remediation costs. In addition, at the
Superfund sites, the Comprehensive Environmental Response, Compensation and
Liability Act provides that our liability could be joint and several, meaning
that we could be required to pay in excess of our share of remediation costs.
Our understanding of the financial strength of other potentially responsible
20

parties at the Superfund sites, and of other liable parties at our current and
former facilities, has been considered, where appropriate, in our determination
of our estimated liability.

We undertook a third-party evaluation of estimated environmental
remediation costs at one of our facilities beginning in 2000. The evaluation was
initiated as a result of testing that indicated the potential underground
migration of some contaminants beyond our facility property. We completed and
analyzed the results of our evaluation of contamination and migration from that
facility. We initially increased the reserve by $3 million in the fourth quarter
of 2000 related to on-site remediation activities and $5 million in the first
quarter of 2001 following evaluation of needed off-site remediation activities.
However, after further investigation of alternative remediation technologies, we
were able to identify a more efficient technology and therefore reduced the
reserve by $4 million in the fourth quarter of 2001. There have been no
significant changes in the reserve for 2002.

We believe that any potential costs associated with our current status as a
potentially responsible party in the Superfund sites, or as a liable party at
our current or former facilities, will not be material to our results of
operations or consolidated financial position.

As previously discussed, from time to time we are subject to product
warranty claims whereby we are required to bear costs of repair or replacement
of certain of our products. Warranty claims may range from individual customer
claims to full recalls of all products in the field. In the second quarter 2002,
based on available facts and data at the time, we increased our warranty reserve
in the amount of $1 million for recently identified warranty issues. Based on
our investigations and achievement of other commercial resolutions of these
issues since that time, we presently believe that future costs or charges, if
any, related to these issues will not be material to our consolidated financial
position or results of operations.

We also from time to time are involved in legal proceedings or claims that
are incidental to the conduct of our business. Some of these proceedings allege
damages against us relating to environmental liabilities (including toxic tort,
property damage and remediation), intellectual property matters (including
patent, trademark and copyright infringement, and licensing disputes), personal
injury claims (including injuries due to product failure, design or warnings
issues, and other product liability related matters), employment matters, and
commercial or contractual disputes, sometimes related to acquisitions or
divestitures. We will continue to vigorously defend ourselves against all of
these claims. Although the ultimate outcome of any legal matter cannot be
predicted with certainty, based on present information, including our assessment
of the merits of the particular claim, we do not expect that these legal
proceedings or claims will have any material adverse impact on our future
consolidated financial position or results of operations. In addition, we are
subject to a number of lawsuits initiated by a significant number of claimants
alleging health problems as a result of exposure to asbestos. Many of these
cases involve significant numbers of individual claimants. However, only a small
percentage of these claimants allege that they were automobile mechanics who
were allegedly exposed to our former muffler products and a significant number
appear to involve workers in other industries or otherwise do not include
sufficient information to determine whether there is any basis for a claim
against us. We believe, based on scientific and other evidence, it is unlikely
that mechanics were exposed to asbestos by our former muffler products and that,
in any event, they would not be at increased risk of asbestos-related disease
based on their work with these products. Further, many of these cases involve
numerous defendants, with the number of each in some cases exceeding 200
defendants from a variety of industries. Additionally, the plaintiffs either do
not specify any, or specify the jurisdictional minimum, dollar amount for
damages. On the other hand, we are experiencing an increasing number of these
claims, likely due to bankruptcies of major asbestos manufacturers. We
vigorously defend ourselves against these claims as part of our ordinary course
of business. To date, with respect to claims that have proceeded sufficiently
through the judicial process, we have regularly achieved favorable resolution in
the form of a dismissal of the claim or a judgment in our favor. Accordingly, we
presently believe that these asbestos-related claims will not have a material
adverse impact on our future financial condition or results of operations.

21

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

No matters were submitted to the vote of security holders during the fourth
quarter of 2002.

ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT.

The following provides information concerning the persons who serve as our
executive officers as of March 1, 2003. Each of these individuals, other than
Kenneth Trammell, Hari Nair, Brent Bauer, Neal Yanos, and Paul Schultz were
named as executive officers of our company effective November 4, 1999, the day
of the 1999 Spin-off, at which time our then-existing executive officers
resigned. Mr. Trammell was made an executive officer in December 1999. Mr. Yanos
became an executive officer in December 2000, Mr. Nair was made an executive
officer in January 2001, Mr. Bauer became an executive officer in July 2001, and
Mr. Shultz became an executive officer in April 2002. Prior to becoming our
executive officers, many of these individuals had served in our automotive
operations. Accordingly, for periods prior to November 4, 1999, references to
service to "us" or "our company" reflect services to Old Tenneco's automotive
operations.

MARK P. FRISSORA -- Mr. Frissora became our Chief Executive Officer in
connection with the 1999 Spin-off and has been serving as President of the
automotive operations since April 1999. In March 2000, he was also named our
Chairman. From 1996 to April 1999, he held various positions within our
automotive operations, including Senior Vice President and General Manager of
the worldwide original equipment business. Mr. Frissora joined our company in
1996 from AeroquipVickers Corporation, where he served since 1991 as a Vice
President. In the 15 years prior to joining AeroquipVickers, he spent 10 years
with General Electric and 5 years with Philips Lighting Company in management
roles focusing on product development and marketing. He is a member of The
Business Roundtable and the World Economic Forum's Automotive Board of
Governors. He is also a director of NCR Corporation.

TIMOTHY R. DONOVAN -- Mr. Donovan was named Managing Director of our
International Group in May 2001 with responsibility for all operations in Asia
and South America, as well as our Japanese OE business worldwide. He was named
Senior Vice President and General Counsel of our company in August 1999. He was
promoted to Executive Vice President in December 2001. Mr. Donovan also is in
charge of our worldwide Environmental, Health and Safety Program. Mr. Donovan
was a partner in the law firm of Jenner & Block from 1989 until his resignation
in September 1999, and most recently served as the Chairman of Jenner & Block's
Corporate and Securities Department and as a member of its Executive Committee.
He is also a director of John B. Sanfilippo & Son, Inc. and is a member of its
compensation committee and is the Chairman of its Audit Committee.

22

HARI N. NAIR -- Mr. Nair was named our Executive Vice President and
Managing Director -- Europe effective June 2001. Previously he was Senior Vice
President and Managing Director -- International. Prior to December 2000, Mr.
Nair was the Vice President and Managing Director -- Emerging Markets.
Previously, Mr. Nair was the Managing Director for Tenneco Automotive Asia,
based in Singapore and responsible for all operations and development projects
in Asia. He began his career with Tenneco Inc. in 1987, holding various
positions in strategic planning, marketing, business development, quality and
finance. Prior to joining Tenneco, Mr. Nair was a senior financial analyst at
General Motors Corp. focusing on European operations.

MARK A. MCCOLLUM -- Mr. McCollum joined our automotive operations in April
1998. Prior to that he served as Tenneco Inc.'s Vice President, Corporate
Development and was responsible for executing strategic transactions in both the
automotive and packaging businesses. From January 1995 to April 1998, he served
in various capacities for Tenneco Inc., including Vice President, Financial
Analysis and Planning and Corporate Controller. Before that, Mr. McCollum spent
14 years with the international public accounting firm of Arthur Andersen LLP,
serving as an audit and business advisory partner of the company's worldwide
partnership from 1991 to December 1994. He is also a director of Butler
Manufacturing Company.

RICHARD P. SCHNEIDER -- Mr. Schnieder was named as our Senior Vice
President -- Global Administration in connection with the 1999 Spin-Off and is
responsible for the development and implementation of human resources programs
and policies and employee communications activities for our worldwide
operations. Prior to the 1999 Spin-Off, Mr. Schneider served as our Vice
President -- Human Resources. He joined us in 1994 from International Paper
Company where, during his 20 year tenure, he held key positions in labor
relations, management development, personnel administration and equal employment
opportunity.

TIMOTHY E. JACKSON -- Mr. Jackson joined us as Senior Vice President and
General Manager -- North American Original Equipment and Worldwide Program
Management in June 1999. He served in this position until August 2000, at which
time he was named Senior Vice President -- Global Technology. Mr. Jackson joined
us from ITT Industries where he was President of that company's Fluid Handling
Systems Division. With over 20 years of management experience, 14 within the
automotive industry, he was also Chief Executive Officer for HiSAN, a joint
venture between ITT Industries and Sanoh Industrial Company. Mr. Jackson has
also served in senior management positions at BF Goodrich Aerospace and General
Motors Corporation.

PAUL SCHULTZ -- Mr. Schultz was named our Senior Vice President -- Global
Supply Chain Management in April 2002. Prior to joining the company, Mr. Schultz
was the Vice President, Supply Chain Management at Ingersoll-Rand Company. Mr.
Schultz joined Ingersoll-Rand in 1998 as Vice President, Strategic Sourcing for
their joint venture company, Ingersoll Dresser Pump. He was later promoted to
Vice President, Manufacturing Operations, where he successfully introduced and
led the Six Sigma initiative. Prior to joining Ingersoll-Rand, Mr. Schultz was
with AlliedSignal (now Honeywell International) where he served for 25 years in
staff and management positions. Most recently, he was Corporate Director, Global
Commodity Management.

DAVID G. GABRIEL -- Mr. Gabriel was named our Senior Vice President and
General Manager -- North American Aftermarket in August 1999. From March to
August 1999, Mr. Gabriel was the Vice President of Operations for our North
American aftermarket business. From March 1997 to March 1999, he served as Vice
President of Manufacturing for our North American aftermarket business. From
February 1995 to March 1997, he served as Executive Director of Supplier
Development for Tenneco Business Services. Before joining Tenneco Business
Services in February 1995, Mr. Gabriel spent 15 years in various operating
positions of increasing responsibility with the Pepsi Cola Company and Johnson &
Johnson.

BRENT BAUER -- Mr. Bauer joined Tenneco Automotive in August 1996 as a
Plant Manager and was named Vice President and General Manager -- European
Original Equipment Emission Control in September 1999. Mr. Bauer was named Vice
President and General Manager -- European and North

23

American Original Equipment Emission Control in July 2001. Currently, Mr. Bauer
serves as the Vice President and General Manager -- North American Original
Equipment Emission Control. Prior to joining Tenneco, he was employed at
AeroquipVickers Corporation for 10 years in positions of increasing
responsibility serving most recently as Director of Operations.

NEAL YANOS -- Mr. Yanos was named our Vice President and General
Manager -- North American Original Equipment Ride Control in December 2000. He
joined our Monroe ride control division as a process engineer in 1988 and since
that time has served in a broad range of assignments including product
engineering, strategic planning, business development, finance, program
management and marketing, including most recently Director of our North American
original equipment GM/VW business unit. Before joining our company, Mr. Yanos
was employed in various engineering positions by Sheller Globe Inc. (now part of
Lear Corporation) from 1985 to 1988.

KENNETH R. TRAMMELL -- Mr. Trammell was named our Vice President and
Controller in September 1999. From April 1997 to November 1999 he served as
Corporate Controller of Tenneco Inc. He joined Tenneco Inc. in May 1996 as
Assistant Controller. Before joining Tenneco Inc., Mr. Trammell spent 12 years
with the international public accounting firm of Arthur Andersen LLP, last
serving as a senior manager.

24

PART II

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

Our outstanding shares of common stock, par value $.01 per share, are
listed on the New York, Chicago, Pacific and London Stock Exchanges. The
following table sets forth, for the periods indicated, the high and low sales
prices of our common stock on the New York Stock Exchange Composite Transactions
Tape.

As of March 11, 2003, there were approximately 54,776 holders of record of
our common stock, including brokers and other nominees.

The declaration of dividends on our common stock is at the discretion of
our Board of Directors. The Board has not adopted a dividend policy as such;
subject to legal and contractual restrictions, its decisions regarding dividends
are based on all considerations that in its business judgment are relevant at
the time. These considerations may include past and projected earnings, cash
flows, economic, business and securities market conditions and anticipated
developments concerning our business and operations.

We are highly leveraged and restricted with respect to the payment of
dividends under the terms of our financing arrangements. On January 10, 2001, we
announced that our Board of Directors eliminated the regular quarterly dividend
on the Company's common stock. The Board took this action in response to
then-current industry conditions, primarily greater than anticipated production
volume reductions by original equipment manufacturers in North America and
continued softness in the global aftermarket. We have not paid dividends on our
common stock since the fourth quarter of 2000. There are no current plans to
reinstate a dividend on our common stock, as management intends to retain any
earnings for use in our business for the forseeable future. For additional
information concerning our payment of dividends, see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

25

ITEM 6. SELECTED FINANCIAL DATA.

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA

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

NOTE: Our financial statements for the three years ended December 31, 2002,
which are discussed in the following notes, are included in this Form 10-K under
Item 8.

(a) For a discussion of the significant items affecting comparability of the
financial information for the years ended 2002, 2001 and 2000, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." We have reduced revenues for 2000, 1999 and 1998 by $21
million, $19 million, and $18 million, respectively, to reflect the
reclassification of certain sales incentives that were previously shown in
selling, general and administrative expense. You should read Note 1 to the
financial statements, appearing in Item 8, for further information about
this required accounting change.

(b) Debt amounts for 1998 and for 1999 through November 4, 1999 are net of
allocations of corporate debt to the net assets of our discontinued
specialty packaging and paperboard packaging segments. Interest expense for
periods presented is net of interest expense allocated to income from
discontinued operations. These allocations of debt and related interest
expense are based on the ratio of our investment in the specialty packaging
and paperboard packaging segments' respective net assets to our consolidated
net assets plus debt.

(c) Discontinued operations reflected in the above periods consist of our (1)
specialty packaging segment, which was discontinued in August 1999 and (2)
paperboard packaging segment, which was discontinued in June 1999.

(d) Represents our costs related to prepayment of debt, the 1999 loss recognized
in connection with the contribution of the containerboard assets to a new
joint venture, and in 2000 the 1999 loss recognized in the spin-off of
Tenneco Packaging Inc.

(e) In 2002, we adopted Statement of Financial Accounting Standards No. 142
which changes the accounting for purchased goodwill from an amortization
method to an impairment-only approach. In 1999, we implemented the American
Institute of Certified Public Accountants Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities." In addition, effective
January 1, 1999, we changed our method of accounting for customer
acquisition costs from a deferred method to an expense-as-incurred method.
You should also read the notes to the financial statements of Tenneco
Automotive Inc. and Consolidated Subsidiaries, appearing in Item 8, for
additional information.

(f) EBITDA represents income before extraordinary item, cumulative effect of
change in accounting principle, interest expense, income taxes, minority
interest and depreciation and amortization. EBITDA is not a calculation
based upon generally accepted accounting principles. The amounts included in
the EBITDA calculation, however, are derived from amounts included in the
historical statements of income data. In addition, EBITDA should not be
considered as an alternative to net income or operating income as an
indicator of our operating performance, or as an alternative to operating
cash flows as a measure of liquidity. We have reported EBITDA because we
regularly review EBITDA as a measure of our company's ability to incur and
service debt. In addition, we believe our debt holders utilize and analyze
our EBITDA for similar purposes. We also believe EBITDA assists investors in
comparing a company's performance on a consistent basis without regard to
depreciation and amortization, which can vary significantly depending upon
many factors. However, the EBITDA measure presented in this

27

document may not always be comparable to similarly titled measures reported
by other companies due to differences in the components of the calculation.
EBITDA is derived from the statements of income as follows:

(g) For purposes of computing this ratio, earnings generally consist of income
from continuing operations before income taxes and fixed charges excluding
capitalized interest. Fixed charges consist of interest expense, the portion
of rental expense considered representative of the interest factor and
capitalized interest. For the years ended December 31, 2001 and 2000,
earnings were insufficient by $80 million and $74 million, respectively, to
cover fixed charges. See Exhibit 12 to this Form 10-K for the calculation of
this ratio.

(h) The amounts included in the cash flow calculation are the sum of cash
provided before financing activities, cash paid during the year for
interest, and cash paid during the year for taxes as shown in the historical
statements of cash flow. We have reported cash flow because we regularly
review cash flow as a measure of cash generated by our business to meet our
debt and tax obligations. In addition, we believe our debt holders and
others analyze our cash flow for similar purposes. We also believe that cash
flow assists investors in understanding our ability to meet our obligations.
Cash flow is derived from the statements of cash flows as follows:

28

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

As you read the following review of our financial condition and results of
operations, you should also read our financial statements and related notes
beginning on page 55.

BACKGROUND

Tenneco Automotive Inc. is one of the world's leading manufacturers of
automotive emissions control and ride control products for both the original
equipment ("OE") market and aftermarket. We completed the separation of our
packaging business in a series of transactions during 1999, culminating in the
spin-off to our shareholders of the common stock of Pactiv Corporation (formerly
known as Tenneco Packaging Inc.) on November 4, 1999.

YEARS 2002 AND 2001

OPERATING UNITS RESULTS

Net Sales and Operating Revenues

Revenues from our North American operations increased $108 million in 2002
compared to the same period last year. Higher sales from the original equipment
business were partially offset by aftermarket volume softness in both product
lines, primarily in the fourth quarter. Total North American OE revenues
increased 10 percent to $1,407 million in 2002 due to higher volumes and
increased catalytic converter sales that are passed through to our customers. OE
exhaust revenues were up 11 percent in 2002 primarily due to increased volumes
and higher pass-through sales. These "pass-through" catalytic converter sales
occur when, at the direction of our OE customers, we purchase catalytic
converters or components from suppliers, use them in our manufacturing process,
and sell them as part of the completed system. OE ride control revenues for 2002
increased 10 percent, driven by increased volumes in both the light vehicle and
heavy-duty market. Total OE revenues, excluding $323 million of pass-through
sales, increased 8 percent in 2002, while North American light vehicle
production increased approximately 6 percent over 2001. Our revenue increase was
greater than the build rate increase as a result of the introduction of new
platforms, on which we are a supplier, ramping up and outpacing the overall
build rate. Aftermarket revenues for North America were $491 million for 2002,
representing a decrease of 5 percent compared to the prior year. Aftermarket
ride control revenues increased one percent in 2002, as a result of new customer
additions in the second half of 2001 and the first quarter of 2002 offsetting
overall softness in the ride control aftermarket, particularly in the second
half of 2002. Aftermarket exhaust revenues declined 14 percent in 2002
reflecting an overall market decline in the exhaust business. Partially
offsetting the volume decreases were price increases in both product lines and a
shift toward premium products which positively impacted revenues by $8 million
in 2002.

Our European segment's revenues decreased $45 million or 4 percent in 2002
compared to the prior year. Total OE revenues were $910 million for 2002. OE
exhaust revenues declined 8 percent to $723 million from $786 million the prior
year. Excluding a $59 million decrease in pass-through sales and a $39 million
net increase due to strengthening currency, OE exhaust revenues declined 8
percent. OE ride control revenues increased to $187 million or 6 percent, from
$176 million for 2002. Excluding a $12 million net benefit from currency
appreciation, OE ride control revenues declined one percent. Light vehicle
production by European OE manufacturers was down about 2 percent in 2002 versus
2001. Our

29

OE exhaust decline was greater than the decline in the European light vehicle
build rate primarily due to timing issues experienced in the second and third
quarters of 2002 between retiring platforms and the launch of new platforms on
which we are the supplier. Nearly all of the platforms planned for launch during
this period have commenced production and most are now at or near expected
volumes. Our OE ride control revenue decline was less than the decline in the
European light vehicle build rate as a result of stronger sales on our existing
platforms. European aftermarket sales were $311 million in 2002 compared to $304
million in the prior year. Excluding $18 million attributable to currency
appreciation, aftermarket revenues declined 4 percent due primarily to the
continued decline in exhaust replacement rates as a result of the increasing use
of stainless steel new vehicles. This decline was partially offset by the launch
of Monroe Reflex(R) shocks and struts, our premium ride control product, in the
second quarter of 2002.

Revenues from our operations in the rest of the world increased $32 million
to $340 million in 2002 as compared to $308 million in the prior year. Higher
volumes and increased pass-through sales drove increased revenues of $45 million
at our Asian operations. Stronger volumes and strengthening currency also
increased Australian revenues by $19 million. These increases were partially
offset by the effects of the weakened South American economy, where revenues
declined by $29 million.

Income Before Interest Expense, Income Taxes, and Minority Interest ("EBIT")

The EBIT results shown in the preceding table include the following items,
discussed below, which have an effect on the comparability of EBIT results
between periods:

EBIT for North American operations increased to $129 million in 2002 from
$52 million one year ago as higher sales volumes in our OE segment improved our
earnings for the year. Stronger volumes and volume-related manufacturing
efficiencies contributed $37 million to OE profitability. The elimination of

30

goodwill amortization, discussed later in this Management's Discussion and
Analysis under the section "Changes in Accounting Principles," contributed $12
million to the EBIT increase. Partially offsetting these increases were
increased selling, general and administrative costs, $3 million in
restructuring-related expenses that could not be accrued related to our Project
Genesis restructuring efforts (net of a $2 million favorable adjustment to the
reserve for the costs to complete the first phase of Project Genesis) and $1
million in costs associated with amending our senior credit facility. In the
North American aftermarket, price increases instituted in 2002 and a shift
toward premium products increased EBIT by $8 million and lower changeover costs
and manufacturing efficiencies and distribution increased EBIT by $6 million.
Partially offsetting these increases were lower volumes in the aftermarket
emission control product line which reduced EBIT by $9 million. Included in
North America's prior year results were charges related to our 2001
restructuring efforts and the establishment of an environmental reserve that
reduced EBIT by $27 million in the aggregate.

Our European segment's EBIT declined to $18 million in 2002 from $23
million the previous year. Volume decreases and related operating inefficiencies
in both the OE and aftermarket operations negatively impacted EBIT by $36
million. In the current year, we also incurred approximately $6 million in
restructuring-related expenses that could not be accrued related to our Project
Genesis restructuring efforts and $1 million in costs associated with amending
our senior credit facility. European EBIT in 2002 was also reduced by $1 million
due to an increase in reserves for warranty issues. See "Environmental and Other
Matters" later in this Management's Discussion and Analysis for a more detailed
discussion of these warranty issues. Partially offsetting these decreases was
the gain on the sale of our York, U.K. facility, which increased EBIT by $11
million. A favorable adjustment in the reserve for our costs to complete our
restructuring efforts also increased EBIT by $6 million. Additionally, the
elimination of goodwill amortization and lower selling, general and
administrative overhead costs offset some of the decrease. Included in Europe's
prior year results were charges related to our 2001 restructuring efforts, the
establishment of an environmental reserve and costs associated with amending our
senior credit facility that reduced EBIT by $24 million in the aggregate.

EBIT for our operations in the rest of the world increased by $5 million in
2002 compared to the previous year. Stronger volumes in Asia and Australia were
offset by manufacturing inefficiencies and a weakened South American economy.
Included in our 2002 results was a favorable adjustment in the reserve for our
costs to complete the first phase of Project Genesis, which increased EBIT by $1
million. Included in the rest of the world's prior year's results were charges
related to our restructuring efforts and costs associated with amending our
senior credit facility that reduced EBIT by $4 million, in the aggregate.

EBIT as a Percentage of Revenue

In North America, EBIT as a percentage of revenue increased by 4 percent
for 2002. Stronger OE volumes drove the increase. Additionally, volume-related
manufacturing efficiencies and the elimination of goodwill amortization
contributed to the increase. North American EBIT margins in 2001, on the other
hand, were significantly impacted by our restructuring activities. In Europe,
EBIT margins declined in 2002 due to significant decreases in both OE and
aftermarket volumes. Also contributing to the decline were volume-related
manufacturing inefficiencies. Partially offsetting these decreases was the gain
on the sale of our York, U.K. facility. EBIT as a percentage of revenue for the
rest of the world remained flat year over year as improved operating performance
was offset by manufacturing inefficiencies and a weakened South American
economy.
31

Restructuring and Other Charges

Over the past several years we have adopted plans to restructure portions
of our operations. These plans were approved by the Board of Directors and were
designed to reduce operational and administrative overhead costs throughout the
business. Prior to the change in accounting required for exit or disposal
activities described under "Changes in Accounting Principles" below, we recorded
charges to income related to these plans for costs that do not benefit future
activities in the period in which the plans were finalized and approved, while
actions necessary to affect these restructuring plans occurred over future
periods in accordance with established plans. We are conducting all workforce
reductions in compliance with all legal and contractual requirements including
obligations to consult with worker's councils, union representatives and others.

In the fourth quarter of 2000, our Board of Directors approved a
restructuring plan to reduce administrative and operational overhead costs. We
recorded, in the fourth quarter of 2000, a pre-tax charge related to the plan of
$46 million, $32 million after tax, or $.92 per diluted common share. Within the
statement of income, $13 million of the pre-tax charge is reflected in cost of
sales, while $33 million is included in selling, general and administrative
expenses. The charge is comprised of $24 million of severance and related costs
for salaried employment reductions worldwide and $22 million for the reduction
of manufacturing and distribution capacity in response to long-term market
trends. The 2000 plan involved closing a North American aftermarket exhaust
distribution facility and a ride control manufacturing plant in our Asian
market, as well as the consolidation of some exhaust manufacturing facilities in
Europe. In addition, the plan involved the elimination of 700 positions,
including temporary employees. We wrote down the assets at the locations to be
closed to their estimated fair value, less costs to sell. We estimated the
market value of buildings using external real estate appraisals. As a result of
the single purpose nature of the machinery and equipment to be disposed of, fair
value was estimated to be scrap value less costs to dispose in most cases. We do
not expect that cash proceeds on the sale of these assets will be significant.
As of December 31, 2002, 637 employees have been terminated under the 2000 plan
primarily in North America and Europe. Additionally, 57 temporary employees have
been terminated. All restructuring actions related to this plan have been
completed. We executed the plan more efficiently than initially anticipated and
as a result in the fourth quarter of 2002 we reversed $2 million of the charge
to the statement of income, of which $1 million is recorded in cost of sales and
$1 million is recorded in selling, general and administrative expenses.

Also in the fourth quarter of 2000, we recorded other charges of $15
million, $10 million after tax, or $.29 per diluted common share. These charges
related to a strategic decision to reduce some of the aftermarket parts we offer
and to relocation expenses incurred associated with the restructuring plans. The
aftermarket parts were written down to their estimated scrap value less costs to
sell.

In the first quarter of 2001, our Board of Directors approved a
restructuring plan in response to increasingly difficult industry conditions. On
January 31, 2001, we announced plans to eliminate 405 salaried positions
worldwide. We recorded pre-tax charges related to this restructuring of $11
million, $8 million after tax, or $.21 per diluted common share. Within the
statement of income, $2 million of the pre-tax charge is reflected in cost of
sales, while $9 million is included in selling, general and administrative
expenses. These charges are comprised of $8 million for severance and related
costs for salaried employment reductions worldwide and $3 million for costs
related to closing a testing facility in North America. As of December 31, 2002,
we have eliminated 329 positions in connection with the first quarter 2001 plan.
We have completed all restructuring activities related to this plan. We executed
the plan more efficiently than initially anticipated and as a result in the
fourth quarter of 2002 reversed $1 million in reserves related to this
restructuring activity. All of the reversal was recorded in selling, general and
administrative expenses.

In the second quarter of 2001, our Board of Directors approved a separate
restructuring plan related to closing a North American ride control production
line. We recorded pre-tax charges related to the plan of $8 million, $6 million
after tax, or $.16 per diluted common share. Within the statement of income, the
$8 million charge is included in cost of sales. We wrote down the assets to
their fair market value, less

32

costs to sell. As a result of the single purpose nature of the machinery and
equipment to be disposed of, fair value was estimated to be scrap value less
costs to dispose. Cash proceeds from the sale of these assets were not
significant. All restructuring activities related to this plan have been
completed.

In the fourth quarter of 2001, our Board of Directors approved a
restructuring plan, the first phase of a project known as Project Genesis,
designed to lower our fixed costs, improve efficiency and utilization, and
better optimize our global footprint. The first phase of Project Genesis
involved closing eight facilities, improving the process flow and efficiency
through value mapping and plant arrangement at 20 facilities, relocating
production among facilities, and centralizing some functional areas. The closed
facilities include an emissions control aftermarket plant and an aftermarket
distribution operation in Europe, a ride control plant in Europe, an engineering
center in Europe, one building at an emissions control plant complex in North
America, a technology facility in North America, an exhaust manufacturing
facility in North America, and our London-based treasury office. In the fourth
quarter of 2001, we recorded pre-tax charges related to Project Genesis of $27
million. Within the statement of income, $23 million of the pre-tax charge is
reflected in cost of sales, while $4 million is included in selling, general and
administrative expenses. These charges are comprised of $18 million in severance
and $9 million for equipment lease cancellation, asset impairment and other
restructuring costs to close the eight facilities. We wrote down the assets at
locations to be closed to their estimated fair value, less costs to sell. We
estimated the market value of buildings using external real estate appraisals.
As a result of the single purpose nature of the machinery and equipment to be
disposed of, fair value was estimated to be scrap value less costs to dispose in
most cases. We also recorded a pre-tax charge of $4 million in cost of sales
related to a strategic decision to adjust some product offerings and our
customer supply strategy in the European aftermarket. The aftermarket parts were
written down to their estimated scrap value, less costs to sell. Finally, we
also incurred $1 million in other restructuring related costs during the fourth
quarter for the value mapping and rearrangement of one of our emissions control
plants in North America. Since these costs relate to ongoing operations, they
could not be accrued as part of the restructuring charge. The total of all these
restructuring and other costs recorded in the fourth quarter of 2001 was $32
million before tax, $31 million after tax, or $.81 per diluted common share. As
of December 31, 2002, we have eliminated 945 positions in connection with the
first phase of Project Genesis. Additionally, we are executing this plan more
efficiently than originally anticipated and as a result in the fourth quarter of
2002 reduced our reserves related to this restructuring activity by $6 million
which is recorded in cost of sales. We expect to complete all remaining
restructuring activities related to the first phase of Project Genesis in the
first half of 2003.

In addition to the fourth quarter 2001 charges, we incurred other costs
during 2002 of $11 million for moving and rearrangement activities related to
Project Genesis that could not be accrued as part of the restructuring charge.

During 2002 we generated about $12 million of savings from Project Genesis.
About $2 million of savings was related to closing the eight facilities, about
$6 million of savings was related to value mapping and plant arrangement and
about $4 million of savings was related to relocating production among
facilities and centralizing some functional areas. To date, there have been no
significant deviations from planned savings. When complete, we expect that the
series of restructuring actions initiated in the fourth quarter of 2001 will
generate annualized savings of $30 million. About $7 million of the expected
savings should be generated by closing the eight facilities, about $13 million
of the expected savings should be generated by improving process flow and
efficiency through value mapping and plant arrangement and about $10 million of
the expected savings will be generated by relocating production among facilities
and centralizing some functional areas.

33

Amounts related to activities that are part of all the restructuring plans
discussed above are as follows:

In the second quarter of 2002, we sold a manufacturing facility in the U.K.
that we closed in an earlier restructuring plan. Included in Charged to Asset
Accounts in the preceding table is an adjustment to the assumptions made in the
recording of the U.K. facility's restructuring reserve. The proceeds of $17
million exceeded our original estimates of the market value of the property.
Consequently, after the adjustment, we recorded a pre-tax gain of $11 million on
the sale in the second quarter of 2002. This gain is shown in the statement of
income as a gain on sale of assets.

Under the terms of an amendment to our senior credit agreement that took
effect on March 13, 2002, we are allowed to exclude up to $60 million of cash
charges and expenses, before taxes, related to potential future cost reduction
initiatives over the 2002-2004 period from the calculation of the financial
covenant ratios we are required to maintain under our senior credit agreement.
In addition to the announced actions, we continue to evaluate additional
opportunities, including additional phases of Project Genesis, to initiate
actions that will reduce our costs through implementing the most appropriate and
efficient logistics, distribution, and manufacturing footprint for the future.
There can be no assurances however, that we will undertake additional phases of
Project Genesis or other additional restructuring actions. Actions that we take,
if any, will require the approval of our Board of Directors and, if the costs of
the plans exceed the amount previously approved by our senior lenders, could
require approval by our senior lenders. We plan to conduct any workforce
reductions that result in compliance with all legal and contractual requirements
including obligations to consult with workers' councils, union representatives
and others.

Interest Expense, Net of Interest Capitalized

We reported interest expense of $141 million in 2002, compared to $170
million in the prior year. The decrease in total interest expense is due to
lower interest rates on our variable rate debt and overall lower debt balances.
Capitalized interest was $4 million in 2002 and $3 million in 2001. See
"Liquidity and Capital Resources -- Capitalization" later in this Management's
Discussion and Analysis for a more detailed description of our borrowings.

Included in our current interest expense is the financial impact of the
three-year floating-to-fixed rate swaps we put in place in early 2000 on $300
million of our senior term loans, as required by our senior credit agreement.
Based on then-current short-term interest rates, these swaps added approximately
$16 million to our interest expense for 2002. These swaps expired on February 4,
2003.

Income Taxes

We recorded a tax benefit of $7 million in 2002. The current year benefit
included a $4 million tax benefit related to lower-than-expected costs for
withholding taxes related to our foreign operations. The lower cost of tax
withholding for the first half of 2002 tax repatriation transaction resulted
from an amendment to our bank agreement allowing a more tax efficient
transaction to be completed. We also recorded an $11 million benefit in the
current year related to accrual-to-return adjustments in foreign jurisdictions
and a $4 million benefit related to a decrease in the corporate tax rate in
Belgium from 40 percent to 34 percent. Including all these items, the effective
tax rate was a negative 24 percent for 2002. Excluding these items our effective
tax rate was 40 percent for 2002.

We recorded tax expense in 2001 of $51 million. Tax expense for 2001
included a $66 million expense for repatriation of earnings from some of our
foreign subsidiaries. We took this action to better facilitate movement of cash
balances among our overseas subsidiaries while minimizing cash tax payments in
foreign

34

jurisdictions. Including this item, our effective tax rate was an expense of 67
percent for 2001. Excluding this adjustment our effective tax rate was a 19
percent benefit on our pre-tax loss. The primary reason that this differed from
our statutory tax rate of 35 percent was the non-deductible portion of our
restructuring charges. See Note 6 to the consolidated financial statements
included in Item 8 for a reconciliation of our tax expense to the statutory
rate.

Earnings Per Share

We reported earnings per diluted common share (before extraordinary items
and cumulative effect of change in accounting principle) of $.74 for the year
ended December 31, 2002, compared to a loss of $3.43 for the same period in
2001. Included in 2002 results are the negative impacts from expenses related to
our restructuring plans and the costs related to the amendment of certain terms
of the senior credit facility, offset by the gain on the sale of our York, U.K.
facility, tax benefits related to lower-than-expected costs for withholding
taxes and an accrual-to-return adjustment in a foreign jurisdiction and
favorable adjustments to our reserves for restructuring activities. The net
impact of these items improved earnings per diluted common share by $.53. In
addition, in 2002 we recorded the cumulative effect of a change in accounting
principle of $5.48 per diluted share to record the impact of the new accounting
standard for goodwill. See "Changes in Accounting Principles" below for more
information about this charge. Included in results for 2001 are the impacts from
charges and expenses related to our restructuring plans, the tax charge for
repatriation of foreign earnings, environmental remediation activities and the
costs related to the amendment of certain terms of the senior credit facility.
These items reduced earnings per diluted common share by $2.95. You should also
read Note 6 to the financial statements included in Item 8 for more detailed
information on earnings per share.

CRITICAL ACCOUNTING POLICIES

We prepare our financial statements in accordance with accounting
principles generally accepted in the United States of America. Preparing our
financial statements in accordance with generally accepted accounting principles
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The following paragraphs include a
discussion of some critical areas where estimates are required.

We recognize revenue for sales to our original equipment and aftermarket
customers under the terms of our arrangements with those customers, generally at
the time of shipment from our plants or distribution centers. For our
aftermarket customers, we provide for promotional incentives and returns at the
time of sale. Estimates are based upon the terms of the incentives and
historical experience with returns. Where we have offered product warranty, we
also provide for warranty costs. Those estimates are based upon historical
experience and upon specific warranty issues as they arise. While we have not
experienced any material differences between these estimates and our actual
costs, it is reasonably possible that future warranty issues could arise that
could have a significant impact on our financial statements.

We expense pre-production design and development costs incurred for our
original equipment customers unless we have a contractual guarantee for
reimbursement of those costs from the customer. At December 31, 2002, we had $8
million recorded as a long-term receivable from original equipment customers for
guaranteed pre-production design and development arrangements. While we believe
that the vehicle programs behind these arrangements will enter production, these
arrangements allow us to recover our pre-production design and development costs
in the event that the programs are cancelled or do not reach expected production
levels. We have not experienced any material losses on arrangements where we
have a contractual guarantee of reimbursement from our customers.

We have a U.S. Federal tax net operating loss ("NOL") carryforward at
December 31, 2002, of $488 million, which will expire in varying amounts from
2012 to 2022. The federal tax effect of that NOL is $171 million, and is
recorded as an asset on our balance sheet at December 31, 2002. We estimate,
based on available evidence, that it is more likely than not that we will
utilize the NOL within the prescribed carryforward period. That estimate is
based upon our expectations regarding future taxable

35

income of our U.S. operations and upon strategies available to accelerate usage
of the NOL. Circumstances that could change that estimate include future U.S.
earnings at lower than expected levels or a majority ownership change as defined
in the rules of the U.S. tax law. If that estimate changed, we would be required
to cease recognizing an income tax benefit for any new NOL and could be required
to record a reserve for some or all of the asset currently recorded on our
balance sheet. As of December 31, 2002, we believe that there has been a
significant change in our ownership, but not a majority change, since the 1999
spin-off of Pactiv.

We utilize the intrinsic value method to account for our stock-based
compensation plans in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." If our compensation costs for
our stock-based compensation plans were determined using the fair value method
of accounting as provided in Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," we estimate that
our pro-forma net income and earnings per share for the full year 2002 would be
lower by $2 million or $.04 per diluted share.

CHANGES IN ACCOUNTING PRINCIPLES

In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001. SFAS No.
142 changes the accounting for purchased goodwill from an amortization method to
an impairment-only approach. Therefore amortization of all purchased goodwill,
including amortization of goodwill recorded in past business combinations,
ceased upon adoption of SFAS No. 142 in January 2002. Goodwill was amortized at
the rate of $16 million in 2001 and $17 million in 2000, prior to adopting the
new standard. Under the provisions of SFAS No. 142, we were required to perform
an impairment analysis on the balance of goodwill at January 1, 2002. The fair
value of our reporting units used in determining the goodwill impairment was
computed using the present value of expected future cash flows. As a result of
this analysis, we determined that goodwill associated with our North American
ride control and European aftermarket operations was impaired. As a result, a
charge of $218 million, net of taxes of $6 million, was recorded in the first
quarter of 2002 as a cumulative effect of a change in accounting principle. The
balance of unamortized goodwill was $185 million at December 31, 2002. We are
required to test this balance for impairment on an annual basis.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. We will be required to adopt the new standard by January 1,
2003. We do not believe that the effect of adopting this statement will have a
material impact on our financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
recognition, presentation and disclosure of impairment or disposal of long-lived
assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Assets to be Disposed of," and Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations -- Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions, for the Disposal of a Segment of
a Business." SFAS No. 144 was effective for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. The adoption
of SFAS No. 144 did not have a material impact on our financial position or
results of operations.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 changes the
definition of the date at which a liability exists for exit or disposal
activities also referred to as restructuring activities. Previously, we
recognized a liability for restructuring activities when we committed to a plan
of restructuring and announced this plan to the

36

employees. We will be required to apply the new standard prospectively to new
exit or disposal activities initiated after December 31, 2002. The new statement
will generally require that these costs be recognized at a later date and over
time, rather than in a single charge.

In November 2002, the FASB issued Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"), which expands previously
issued accounting guidance and disclosure requirements for certain guarantees.
FIN 45 provides that issuing a guarantee imposes a noncontingent obligation to
stand ready to perform in the event that the conditions specified in the
guarantee occur, and that a liability representing the fair value of such a
guarantee must be recognized when the guarantee is issued. We will be required
to apply these initial recognition and measurement provisions to guarantees
issued or modified after December 31, 2002. We do not expect the adoption of FIN
45 to have a material impact on our financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation and amends the disclosure requirements to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. See "Stock Options" included in Note 1 to our
consolidated financial statements included in Item 8 for our compliance with the
new transition and disclosure requirements of SFAS No. 148.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires that the assets,
liabilities and results of the activity of variable interest entities be
consolidated into the financial statements of the entity that has the
controlling financial interest. FIN 46 also provides the framework for
determining whether a variable interest entity should be consolidated based on
voting interest or significant financial support provided to it. This
interpretation is effective immediately for variable interest entities created
after January 31, 2003 and effective July 1, 2003 for variable interest entities
created before February 1, 2003. We do not expect the adoption of FIN 46 to have
any impact on our consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

Capitalization

The year-to-date decrease in shareholders' equity primarily results from
our recorded net loss of $187 million, which resulted from the charge of $218
million related to the cumulative effect of a change in accounting principle for
goodwill. Stockholders' equity also decreased due to an adjustment to the
additional minimum pension liability of $38 million as a result of a decrease in
the fair value of the plan assets. These declines were partially offset by a $13
million increase in the fair market value of our interest rate swaps and $43
million related to the translation of foreign balances into U.S. dollars.
Although our book equity balance was negative at December 31, 2002, it should
not affect our business operations. We have no debt covenant ratios that are
based upon our book equity and there are no other agreements that are adversely
impacted by our negative book equity.

37

Short-term debt, which includes the current portion of long-term
obligations and borrowings by foreign subsidiaries, as well as our revolving
credit facility, increased by $37 million during 2002. This increase resulted
from an increase in borrowings of $53 million during 2002 under our revolving
credit facility. A $5 million decrease in our foreign subsidiaries' borrowings
and a $10 million decrease in the current portion of long-term debt partially
offset this increase. The borrowings outstanding under our revolving credit
facility as of December 31, 2002 were $121 million and were $68 million as of
December 31, 2001. The decline in long-term debt represents amounts due during
2003. We did not issue any long-term debt during 2002.

Our financing arrangements are primarily provided by a committed senior
secured financing arrangement with a syndicate of banks and other financial
institutions, which was $1.239 billion at December 31, 2002. We entered into an
agreement to amend this facility on October 20, 2000 to (i) relax the financial
covenant ratios beginning in the fourth quarter of 2000, (ii) exclude up to $80
million of cash charges and expenses related to cost reduction initiatives from
the calculation of consolidated earnings before interest, taxes, depreciation
and amortization ("EBITDA") used in our financial covenant ratios through 2001
and (iii) make certain other technical changes. In exchange for these
amendments, we agreed to certain interest rate increases, lowered our capital
expenditure limits and paid an aggregate fee of about $3 million.

As a result of significant reductions in North American vehicle production
levels announced in 2000 by our original equipment customers, as well as an
accelerated weakening of the global aftermarket, we entered into a second
amendment of our senior credit facility on March 22, 2001. The second amendment
revised the financial covenant ratios we were required to maintain as of the end
of each of the quarters ending in 2001. The second amendment also reduced the
limitation on 2001 capital expenditures from $225 million to $150 million, and
required that net cash proceeds from all significant, non-ordinary course asset
sales be used to prepay the senior term loans. In exchange for these amendments,
we agreed to a 25 basis point increase in interest rates on the senior term
loans and borrowings under our revolving credit facility and paid an aggregate
fee of $3 million to consenting lenders. We incurred legal, advisory and other
costs related to the amendment process of $2 million.

At the time of the second amendment, we expected that we would meet with
the senior lenders during the first quarter of 2002 to negotiate further
amendments to the senior credit facility. Consequently, we amended the senior
credit facility for a third time on March 13, 2002. The third amendment revised
the financial covenant ratios we are required to maintain as of the end of each
of the quarters ending in 2002, 2003 and 2004. It also extends the limitation on
annual capital expenditures of $150 million through this three-year period. The
amendment further provides us with the option to enter into sale and leaseback
arrangements on up to $200 million of our assets. The proceeds from these
arrangements must be used to reduce senior debt. These senior debt prepayments
would reduce the next scheduled principal amortization payments. Because the
payments on senior debt from sale and leaseback transactions would be made on a
pro-rata basis based on the remaining principal amounts outstanding on our
Tranche A, B, and C senior term loans, but principal amortization payments are
not pro-rata, about 29 percent of any sale and leaseback transactions we enter
into during 2003 would reduce our scheduled principal amortization. The
amendment also allows us to exclude up to $60 million of cash charges and
expenses, before taxes, related to any cost reduction initiatives over the
2002-2004 period from the calculation of the financial covenant ratios we are
required to maintain under our senior credit agreement. It also permits us to
execute exchanges of our senior subordinated bonds for shares of common stock.
We do not have any current plans to enter into any debt-for-stock exchanges. Any
significant debt-for-stock exchange would require approval of our stockholders.
In exchange for these amendments, we agreed to a $50 million reduction in our
revolving credit facility, a 25 basis point increase in interest rates on the
senior term loans and borrowings under our revolving credit facility, and paid
an aggregate fee of $3 million to consenting lenders. We also incurred legal,
advisory, and other costs related to the amendment process of $2 million.

The senior secured credit facility, as amended on March 13, 2002, consists
of: (i) a $450 million revolving credit facility with a final maturity date of
November 4, 2005; (ii) a $288 million term loan with a final maturity date of
November 4, 2005; (iii) a $262 million term loan with a final maturity date of
38

November 4, 2007; and (iv) a $262 million term loan with a final maturity date
of May 4, 2008. Quarterly principal repayment installments on each term loan
began October 1, 2001. Borrowings under the facility bear interest at an annual
rate equal to, at our option, either (i) the London Interbank Offering Rate plus
a margin of 325 basis points for the revolving credit facility and the term loan
maturing November 4, 2005, 400 basis points for the term loan maturing November
4, 2007 and 425 basis points for the term loan maturing May 4, 2008; or (ii) a
rate consisting of the greater of the JP Morgan Chase prime rate or the Federal
Funds rate plus 75 basis points, plus a margin of 225 basis points for the
revolving credit facility and the term loan maturing November 4, 2005, 300 basis
points for the term loan maturing November 4, 2007 and 325 basis points for the
term loan maturing May 4, 2008. We also pay a commitment fee of 50 basis points
on the unused portion of the revolving credit facility. Under the provisions of
the senior credit facility agreement, the interest margins for borrowings under
the revolving credit facility and the term loan maturing November 4, 2005 and
fees paid on letters of credit issued under our revolving credit facility are
subject to adjustment based on the consolidated leverage ratio (consolidated
indebtedness divided by consolidated EBITDA as defined in the senior credit
facility agreement) measured at the end of each quarter. Our consolidated
leverage ratio fell below 4.50 as of June 30, 2002; therefore, the interest
margins for borrowings under our revolving credit facility and on our term loan
maturing November 4, 2005, and fees paid on letters of credit issued under our
revolving credit facility, were reduced by 25 basis points beginning in the
third quarter of 2002. Our consolidated leverage ratio remained below 4.50 as of
December 31, 2002. Our senior secured credit facility does not contain any terms
that could accelerate the payment of the facility as a result of a credit rating
agency downgrade.

The amended senior credit facility requires that we maintain financial
ratios equal to or better than the following consolidated leverage ratios
(consolidated indebtedness divided by consolidated EBITDA), consolidated
interest coverage ratios (consolidated EBITDA divided by consolidated cash
interest paid), and fixed charge coverage ratios (consolidated EBITDA less
consolidated capital expenditures, divided by consolidated cash interest paid)
at the end of each period indicated. The financial ratios required under the
amended senior credit facility and, in the case of 2002, the actual ratios we
achieved are shown in the following tables:

The senior credit facility agreement also contains restrictions on our
operations that are customary for similar facilities, including limitations on:
(i) incurring additional liens; (ii) sale and leaseback transactions (except for
the permitted transactions described above); (iii) liquidations and
dissolutions; (iv) incurring additional indebtedness or guarantees; (v) capital
expenditures; (vi) dividends; (vii) mergers and consolidations; and (viii)
prepayments and modifications of subordinated and other debt instruments.

39

Compliance with these requirements and restrictions is a condition for any
incremental borrowings under the senior credit facility agreement and failure to
meet these requirements enables the lenders to require repayment of any
outstanding loans. As of December 31, 2002, we were in compliance with both the
financial covenants (as indicated above) and operational restrictions of the
facility.

Our outstanding debt also includes $500 million of 11 5/8 percent Senior
Subordinated Notes due October 15, 2009. The senior subordinated debt indenture
requires that we, as a condition to incurring certain types of indebtedness not
otherwise permitted, maintain an interest coverage ratio of not less than 2.25.
We have not incurred any of the types of indebtedness not otherwise permitted by
this indenture. The indenture also contains restrictions on our operations,
including limitations on: (i) incurring additional indebtedness or liens; (ii)
dividends; (iii) distributions and stock repurchases; (iv) investments; and (v)
mergers and consolidations. All of our existing and future material domestic
wholly owned subsidiaries fully and unconditionally guarantee these notes on a
joint and several basis. There are no significant restrictions on the ability of
the subsidiaries that have guaranteed these notes to make distributions to us.
As of December 31, 2002, we were in compliance with the covenants and
restrictions of this indenture.

In addition to our senior credit facility and senior subordinated notes, we
also sell some of our accounts receivable. In North America, we have an accounts
receivable securitization program with a commercial bank. We sell original
equipment and aftermarket receivables on a daily basis under this program. We
had sold accounts receivable under this program of $46 million and $68 million
at December 31, 2002 and 2001, respectively. This program is subject to
cancellation prior to its maturity date if we were to (i) fail to pay interest
or principal payments on an amount of indebtedness exceeding $50 million, (ii)
default on the financial covenant ratios under the senior credit facility, or
(iii) fail to maintain certain financial ratios in connection with the accounts
receivable securitization program. In January 2003, this program was amended to
extend its term to January 31, 2005 and reduce the size of the program to $50
million. The reduced program size will lower commitment fees payable on the
available and unused portion of the committed facility amount. We also sell some
receivables in our European operations to regional banks in Europe. At December
31, 2002, we had sold $55 million of accounts receivable in Europe. The
arrangements to sell receivables in Europe are not committed and can be
cancelled at any time. If we were not able to sell receivables under either the
North American or European securitization programs, our borrowings under our
revolving credit agreement would increase. These accounts receivable
securitization programs provide us with access to cash at costs that are
generally favorable to alternative sources of financing, and allow us to reduce
borrowings under our revolving credit agreement.

We believe that cash flows from operations, combined with available
borrowing capacity described above, assuming that we maintain compliance with
the financial covenants and other requirements of our loan agreement, will be
sufficient to meet our future capital requirements for the following year,
including scheduled debt principal amortization payments. Our ability to meet
the financial covenants depends upon a number of operational and economic
factors, many of which are beyond our control. Factors that could impact our
ability to comply with the financial covenants include the rate at which
consumers continue to buy new vehicles and the rate at which they continue to
repair vehicles already in service, as well as our ability to successfully
implement our restructuring plans. Lower North American vehicle production
levels, weakening in the global aftermarket, or a reduction in vehicle
production levels in Europe, beyond our expectations, could impact our ability
to meet our financial covenant ratios. In the event that we are unable to meet
these financial covenants, we would consider several options to meet our cash
flow needs. These options could include further renegotiations with our senior
credit lenders, additional cost reduction or restructuring initiatives, sales of
assets or common stock, or other alternatives to enhance our financial and
operating position. Should we be required to implement any of these actions to
meet our cash flow needs, we believe we can do so in a reasonable time frame.

40

Contractual Obligations

Our remaining required debt principal amortization and payment obligations
under lease and certain other financial commitments are shown in the following
table:

We principally use a revolving credit facility to finance our short-term
capital requirements. As a result, we classify the outstanding balance of the
revolving credit facility within our short-term debt. The revolving credit
facility balance included in short-term debt is $121 million and $68 million at
December 31, 2002 and 2001, respectively.

If we do not maintain compliance with the terms of our senior credit
facility and senior subordinated debt indenture described above, all amounts
under those arrangements could, automatically or at the option of the lenders or
other debt holders, become due. Additionally, each of those facilities contains
provisions that certain events of default under one facility will constitute a
default under the other facility, allowing the acceleration of all amounts due.
We currently expect to maintain compliance with terms of all of our various
credit agreements for the foreseeable future.

We have also guaranteed payment and performance obligations of
approximately $4 million and $6 million at December 31, 2002 and 2001,
respectively. These guarantees are primarily related to performance of lease
obligations by a former affiliate.

Dividends on Common Stock

During 2000, we paid a quarterly dividend of $.05 per share of common
stock. Dividend payments totaled $7 million in 2000. On January 10, 2001, we
announced that our Board of Directors eliminated the quarterly dividend on our
common stock. The Board took the action in response to industry conditions,
primarily greater than anticipated production volume reductions by original
equipment manufacturers and continued softness in the global light vehicle
aftermarket. There are no current plans to reinstate a dividend on our common
stock.

Cash Flows

41

Operating Activities

For the year ended December 31, 2002, cash flows provided by operating
activities were $188 million compared to $141 million in the prior year. Higher
earnings in the current year were a key driver to the increased cash provided.
In addition, we generated $67 million in cash flow from working capital during
2002, compared to $90 million in the prior year. In 2002, we generated $102
million in cash flow through better management of our payables. At the end of
2001, we reduced payable balances by taking advantage of early payment discounts
in Europe. During 2002 we returned to our customary payment schedule, which
increased payables balances and improved working capital. Additionally, in June
of 2002, we received a payment from an OE customer for the reimbursement of
expenses related to a cancelled platform. Of the total cash payment, $11 million
was recorded in operating activities and the remaining balance was recorded in
investing activities. Primarily offsetting these increases were increases in
receivables as a result of lowered factoring levels and increases in inventories
in anticipation of platform launches in 2003. See "Capitalization" above for a
description of our accounts receivable factoring program.

In June 2001, we entered into arrangements with two major OE customers in
North America under which, in exchange for a discount that is less than our
marginal borrowing cost, payments for product sales are made earlier than
otherwise required under existing payment terms. These arrangements reduced
accounts receivable by $40 million and $34 million as of December 31, 2002 and
2001, respectively. These arrangements can be cancelled at any time.

On January 28, 2003 we signed a two-year extension to our accounts
receivable securitization program in the U.S. The two-year program will next be
subject to renewal on January 31, 2005. With the two-year extension, the size of
the program has been reduced from $65 million to $50 million.

Investing Activities

Cash used for investing activities was $19 million lower in 2002 compared
to the prior year, due primarily to $17 million in net proceeds from the sale of
our York, U.K. facility and a $19 million settlement from an OE customer for
reimbursement of expenses related to a cancelled platform. Capital expenditures
were $138 million in 2002, up $11 million from $127 million in the prior year.
The increase is partially attributable to capital spending for Project Genesis,
which was $11 million in 2002.

Financing Activities

Cash used for financing activities was $73 million in 2002, compared to
cash provided of $3 million in the prior year. We made senior debt principal
payments of $111 million on our senior credit facility in 2002. Included in
these payments was a pre-payment on the senior term loans of $16 million in
September using the net cash proceeds we received in the second quarter from the
sale of our York, U.K. facility. Partially offsetting these payments was an
estimated increase in our revolving credit facility borrowings of $53 million.

OUTLOOK

North America light vehicle production continued at a relatively strong
pace in 2002. Manufacturer incentives kept consumer purchases higher than
estimates at the beginning of the year. Consequently, the 2002 North America
light vehicle build rate was an estimated 16.4 million units. However, we remain
cautious regarding 2003 volumes due to continuing uncertain economic conditions
in the U.S. and uncertainty about the willingness of the original equipment
manufacturers to continue to support consumer automobile sales through
incentives. Additionally, we believe that there could be a negative impact on
consumer confidence and buying due to the threat of a war, or an actual war, in
the Middle East, which could result in lower OE production levels and reduced
aftermarket sales in 2003. Production of heavy-duty trucks was also strong
during 2002. We believe, however, that the implementation of new emissions
standards in October 2002 caused operators to pull forward their truck purchases
into the first three quarters of 2002. We believe these advance purchases will
reduce sales of heavy-duty trucks into 2003. In Europe, uncertain economic
conditions have contributed to declining car sales, reducing light vehicle
42

production. Additionally, several platforms for which we provide parts have
reached the end of their production, and replacement platforms have been slow to
launch. These issues, combined, significantly reduced our volumes in Europe in
2002, particularly in the emissions control business. While we expect that
platform launches will ramp up, offsetting part of this decline, we expect OE
production to be below last year in Europe. Further, the economic problems in
Argentina and uncertainty in Brazil are likely to result in lower sales in that
region of the world in 2003.

ENVIRONMENTAL AND OTHER MATTERS

We are subject to a variety of environmental and pollution control laws and
regulations in all jurisdictions in which we operate. We expense or capitalize,
as appropriate, expenditures for ongoing compliance with environmental
regulations that relate to current operations. We record expenditures that
relate to an existing condition caused by past operations and that do not
contribute to current or future revenue generation. We record liabilities when
environmental assessments indicate that remedial efforts are probable and the
costs can be reasonably estimated. Estimates of the liability are based upon
currently available facts, existing technology, and presently enacted laws and
regulations taking into consideration the likely effects of inflation and other
societal and economic factors. We consider all available evidence including
prior experience in remediation of contaminated sites, other companies' cleanup
experiences and data released by the United States Environmental Protection
Agency or other organizations. These estimated liabilities are subject to
revision in future periods based on actual costs or new information. Where
future cash flows are fixed or reliably determinable, we have discounted the
liabilities. All other environmental liabilities are recorded at their
undiscounted amounts. We evaluate recoveries separately from the liability and,
when they are assured, recoveries are recorded and reported separately from the
associated liability in our financial statements.

As of December 31, 2002, we are designated as a potentially responsible
party in three Superfund sites. We have estimated our share of the remediation
costs for these sites to be less than $1 million in the aggregate. In addition
to the Superfund sites, we may have the obligation to remediate current or
former facilities, and we estimate our share of remediation costs at these
facilities to be approximately $14 million. For both the Superfund sites and the
current and former facilities, we have established reserves that we believe are
adequate for these costs. Although we believe our estimates of remediation costs
are reasonable and are based on the latest available information, the cleanup
costs are estimates and are subject to revision, as more information becomes
available about the extent of remediation required. At some sites, we expect
that other parties will contribute to the remediation costs. In addition, at the
Superfund sites, the Comprehensive Environmental Response, Compensation and
Liability Act provides that our liability could be joint and several, meaning
that we could be required to pay in excess of our share of remediation costs.
Our understanding of the financial strength of other potentially responsible
parties at the Superfund sites, and of other liable parties at our current and
former facilities, has been considered, where appropriate, in our determination
of our estimated liability.

We undertook a third-party evaluation of estimated environmental
remediation costs at one of our facilities beginning in 2000. The evaluation was
initiated as a result of testing that indicated the potential underground
migration of some contaminants beyond our facility property. We completed and
analyzed the results of our evaluation of contamination and migration from that
facility. We initially increased the reserve by $3 million in the fourth quarter
of 2000 related to on-site remediation activities and $5 million in the first
quarter of 2001 following evaluation of needed off-site remediation activities.
However, after further investigation of alternative remediation technologies, we
were able to identify a more efficient technology and therefore reduced the
reserve by $4 million in the fourth quarter of 2001. There have been no
significant changes in the reserve for 2002.

We believe that any potential costs associated with our current status as a
potentially responsible party in the Superfund sites, or as a liable party at
our current or former facilities, will not be material to our results of
operations or consolidated financial position.

43

As previously discussed, from time to time we are subject to product
warranty claims whereby we are required to bear costs of repair or replacement
of certain of our products. Warranty claims may range from individual customer
claims to full recalls of all products in the field. In the second quarter 2002,
based on available facts and data at the time, we increased our warranty reserve
in the amount of $1 million for recently identified warranty issues. Based on
our investigations and achievement of other commercial resolutions of these
issues since that time, we presently believe that future costs or charges, if
any, related to these issues will not be material to our consolidated financial
position or results of operations.

We also from time to time are involved in legal proceedings or claims that
are incidental to the conduct of our business. Some of these proceedings allege
damages against us relating to environmental liabilities (including toxic tort,
property damage and remediation), intellectual property matters (including
patent, trademark and copyright infringement, and licensing disputes), personal
injury claims (including injuries due to product failure, design or warnings
issues, and other product liability related matters), employment matters, and
commercial or contractual disputes, sometimes related to acquisitions or
divestitures. We will continue to vigorously defend ourselves against all of
these claims. Although the ultimate outcome of any legal matter cannot be
predicted with certainty, based on present information, including our assessment
of the merits of the particular claim, we do not expect that these legal
proceedings or claims will have any material adverse impact on our future
consolidated financial position or results of operations. In addition, we are
subject to a number of lawsuits initiated by a significant number of claimants
alleging health problems as a result of exposure to asbestos. Many of these
cases involve significant numbers of individual claimants. However, only a small
percentage of these claimants allege that they were automobile mechanics who
were allegedly exposed to our former muffler products and a significant number
appear to involve workers in other industries or otherwise do not include
sufficient information to determine whether there is any basis for a claim
against us. We believe, based on scientific and other evidence, it is unlikely
that mechanics were exposed to asbestos by our former muffler products and that,
in any event, they would not be at increased risk of asbestos-related disease
based on their work with these products. Further, many of these cases involve
numerous defendants, with the number of each in some cases exceeding 200
defendants from a variety of industries. Additionally, the plaintiffs either do
not specify any, or specify the jurisdictional minimum, dollar amount for
damages. On the other hand, we are experiencing an increasing number of these
claims, likely due to bankruptcies of major asbestos manufacturers. We
vigorously defend ourselves against these claims as part of our ordinary course
of business. To date, with respect to claims that have proceeded sufficiently
through the judicial process, we have regularly achieved favorable resolution in
the form of a dismissal of the claim or a judgment in our favor. Accordingly, we
presently believe that these asbestos-related claims will not have a material
adverse impact on our future financial condition or results of operations.

During the second quarter of 2002, we reached an agreement with an OE
customer to recover our investment in development costs and related equipment,
as well as amounts owed to some of our suppliers, for a platform cancelled by
the customer. We collected $30 million, net of the amounts we owed to suppliers,
during the second quarter pursuant to this agreement. The agreement had no
effect on our results of operations.

EMPLOYEE STOCK OWNERSHIP PLANS

We have established Employee Stock Ownership Plans for the benefit of our
employees. Under the plans, participants may elect to defer up to 16 percent of
their salary through contributions to the plan, which are invested in selected
mutual funds or used to buy our common stock. Through December 31, 2001, we
matched qualified contributions with a contribution of 75 percent of each
employee's contribution up to 8 percent of the employee's salary. Beginning
January 1, 2002, this match was reduced to 50 percent of each employee's
contribution up to 8 percent of the employee's salary. These matching
contributions were made in common stock through December 31, 2001 and in cash
starting January 1, 2002. We recorded expense for these matching contributions
of approximately $7 million and $10 million for the years ended December 31,
2002 and 2001, respectively. All contributions vest immediately.

44

DERIVATIVE FINANCIAL INSTRUMENTS

Foreign Currency Exchange Rate Risk

We use derivative financial instruments, principally foreign currency
forward purchase and sale contracts with terms of less than one year, to hedge
our exposure to changes in foreign currency exchange rates. Our primary exposure
to changes in foreign currency rates results from intercompany loans made
between affiliates to minimize the need for borrowings from third parties.
Additionally, we enter into foreign currency forward purchase and sale contracts
to mitigate our exposure to changes in exchange rates on certain intercompany
and third-party trade receivables and payables. We manage counter-party credit
risk by entering into derivative financial instruments with major financial
institutions that can be expected to fully perform under the terms of such
agreements. We have from time to time also entered into forward contracts to
hedge our net investment in foreign subsidiaries. We do not currently enter into
derivative financial instruments for speculative purposes.

In managing our foreign currency exposures, we identify and aggregate
existing offsetting positions and then hedge residual exposures through
third-party derivative contracts. The following table summarizes by major
currency the notional amounts, weighted average settlement rates, and fair value
for foreign currency forward purchase and sale contracts as of December 31,
2002. All contracts in the following table mature in 2003.

Interest Rate Risk

Our financial instruments that are sensitive to market risk for changes in
interest rates are our debt securities. We primarily use a revolving credit
facility to finance our short-term capital requirements. We pay a current market
rate of interest on these borrowings. We have financed our long-term capital
requirements with long-term debt with original maturity dates ranging from six
to ten years.

45

Under the terms of our senior credit facility agreement, we were required
to hedge our exposure to floating interest rates by April 2000 so that at least
50 percent of our long-term debt was fixed for a period of at least three years.
In February 2000, we hedged $250 million of our floating rate long-term debt
with three-year, floating to fixed interest rate swaps. In April 2000, we hedged
an additional $50 million of our floating rate long-term debt with three-year,
floating to fixed interest rate swaps. The hedges that we executed fully
satisfied the interest rate hedging requirement of the senior credit facility
agreement. The swaps expired in February 2003 and we are not required to renew
them. On December 31, 2002, we had $508 million in long-term debt obligations
that have fixed interest rates. Of that amount, $500 million is fixed through
October 2009, while the remainder is fixed over periods of 2003 and 2025. There
is also $709 million in long-term debt obligations that have variable interest
rates based on a current market rate of interest.

We estimate that the fair value of our long-term debt at December 31, 2002
was about 82 percent of its book value. A one percentage point increase or
decrease in interest rates would increase or decrease the annual interest
expense we recognize in the income statement and the cash we pay for interest
expense by about $6 million after tax.

The statements and other information (including the tables) in this
"Derivative Financial Instruments" section constitute "forward-looking
statements."

YEARS 2001 AND 2000

OPERATING UNITS RESULTS

Net Sales and Operating Revenues

Results for 2000 have been reclassified for comparability to reflect a
change in how we record certain sales incentives. Effective January 1, 2001, we
changed the way we classify some sales incentives in accordance with the May
2000 consensus reached by the Financial Accounting Standards Board's Emerging
Issues Task Force on Issue No. 00-14, "Accounting for Certain Sales Incentives."
The impact of this reclassification on 2000 results was a reduction in net sales
of $21 million with an offsetting reduction in selling, general and
administrative expense.

Our North American revenues decreased $156 million in 2001 compared to 2000
reflecting lower sales generated from both our original equipment and
aftermarket businesses. OE revenues declined 8 percent to $1,275 million in 2001
due mostly to significant OE production cutbacks in both the light and
heavy-duty vehicle segments as vehicle manufacturers adjusted production levels
in the face of a slowing economy. OE emissions control revenues declined 5
percent; however, excluding a $68 million increase in catalytic converter
revenues due to increased cost of precious metals that are passed through to our
customers, OE emissions control revenues declined 16 percent. OE ride control
revenues were down 15 percent for the year. Lower ride control volumes,
especially in our heavy-duty elastomer business, contributed to the decline in
OE ride control revenues. Contributing to the volume reduction was a decrease in
the North American light vehicle build rate from 17.3 million units in 2000 to
15.5 million units in 2001, and a decline in the heavy duty vehicle build rate
from 358,000 units in 2000 to 233,000 units in 2001. OE price reductions in both
ride control and emissions control also contributed $11 million to the North
America revenue decrease. Aftermarket revenues were $515 million in 2001,
representing a decline of 7 percent from the previous year. Lower industry
volumes continued to impact our North American aftermarket business. Aftermarket
emissions control revenues decreased 10 percent in 2001, while our aftermarket
ride control revenues declined 4 percent compared to 2000. Lower volumes
accounted for $57 million of the
46

reduction in aftermarket revenues. This was partially offset by revenues from a
new large ride control customer beginning in the third quarter of 2001. Price
increases implemented on some products in North America in the first and second
quarters of 2001 took hold and more than offset negative price adjustments that
were initiated during 2000.

Our European segment's revenues increased $19 million in 2001 compared to
2000. OE revenues increased 9 percent to $962 million in the year. Contributing
to the OE revenue increase were stronger exhaust volumes, which added $144
million of additional revenue, in both our new and existing programs. Rising
precious metal prices that we have passed through to our OE exhaust customers
were $82 million of the increase. Excluding the impact of these pass-through
sales, OE exhaust revenues would have increased 3 percent. Offsetting the volume
increase was the devaluation of currency which reduced exhaust revenues by $32
million. Ride control revenues were down 8 percent year over year. Lower volumes
reduced revenues by $14 million. Also the devaluation of European currencies
resulted in a reduction in OE ride control revenues of $9 million in 2001.
Excluding these currency impacts, overall European OE revenues would have
increased 14 percent in 2001 compared to the prior year. The overall European
build rate was 19.5 million units compared to 19.9 million units in 2000. The
primary reason that our European OE revenues exceeded the build rate decrease
was a higher level of pass-through sales in our exhaust business. European
aftermarket revenues were $304 million in 2001 compared to $367 million in the
prior year. This 17 percent decline resulted from the continued softness of the
aftermarket industry combined with declining exhaust replacement rates due
primarily to the increasing original equipment use of longer lasting stainless
steel. Price increases that related to our global aftermarket pricing strategy
provided favorable results in 2001, contributing some positive revenue growth
and helping to partially offset the impact from lower volumes. Negatively
impacting European aftermarket revenue was the devaluation of European
currencies, which reduced revenues by $10 million.

Revenues from our operations in the rest of the world, specifically South
America, Australia and Asia, decreased $27 million in 2001 primarily due to the
$38 million impact of foreign currency translation. Excluding these currency
impacts, total revenues for the rest of the world would have increased 3 percent
compared to the same period in 2000. The impact of foreign currency was $24
million in South America and $14 million in Australia. This was partially offset
by strong volume growth in South America and Asia. The South America volume
growth is attributable to several new OE programs. In Asia, OE volumes increased
due to new platforms in production at our exhaust manufacturing facility in
Shanghai.

Income Before Interest Expense, Income Taxes, and Minority Interest
("EBIT")

47

The EBIT results shown in the preceding table include the following items,
discussed below, which have an effect on the comparability of EBIT results
between periods:

EBIT for North American operations decreased to $52 million in 2001 from
$68 million in 2000. Included in these results were charges for environmental,
restructuring and restructuring-related activities of $27 million and $44
million in 2001 and 2000, respectively. A drop in both light and heavy-duty
vehicle production volumes and a decline in the higher margin elastomer business
combined to reduce 2001 EBIT for the North American OE business by $24 million.
Also, unfavorable pricing impacts were $13 million and we incurred $7 million in
higher costs primarily related to engineering for new vehicle launches. Foreign
currency losses, mostly attributable to declines in the Canadian dollar, were $5
million. Our restructuring actions saved $7 million. This was, however, more
than offset by higher overhead costs. Lower selling, general and administrative
overhead expenses and cost savings generated from our restructuring efforts
improved 2001 EBIT in our North American aftermarket business by $42 million.
Also contributing $6 million to the aftermarket EBIT increase were price
increases implemented in the first and second quarters of 2001, which more than
offset negative price adjustments implemented during 2000. Lower volumes
resulted in a $17 million decrease in aftermarket EBIT. Additionally, we
incurred increased customer changeover costs of $7 million compared to 2000,
primarily associated with a new ride control customer.

Our European segment's EBIT decreased $17 million to $23 million in 2001
versus the prior year. Included in these results were charges for renegotiation
of our senior credit facility, environmental remediation, restructuring and
restructuring-related activities of $24 million and $13 million in 2001 and
2000, respectively. Foreign currency movements negatively impacted OE EBIT by $4
million in the period. Lower volumes and negative pricing also contributed to
the reduction. In our European aftermarket, improved pricing contributed $13
million to EBIT in 2001, and lower selling, general and administrative expenses
also generated $18 million. Offsetting these increases were lower volumes which
decreased aftermarket EBIT by $27 million.

EBIT for our operations in the rest of the world increased by $1 million in
2001 compared with the prior year. Included in these results were charges for
renegotiation of our senior credit facility,

48

restructuring and restructuring-related activities of $4 million in both 2001
and 2000. EBIT for our Asia operations improved due to stronger volumes in our
OE exhaust operations in Shanghai. This increase was partially offset by the
impact of foreign currency devaluation of $2 million.

Other in the year 2000, includes a $13 million charge related to a stock
option buyback and a $9 million reversal of a reserve for the transaction cost
related to the November 1999 spin-off of Pactiv. These items were also included
in Other in Note 10 to the consolidated financial statements included in item 8.

EBIT as a Percentage of Revenue

In North America, EBIT as a percentage of revenue remained flat. Production
cuts by vehicle manufacturers, declines in higher-margin elastomer sales,
pricing pressure from vehicle manufacturers and the increase in pass-through
converter sales contributed to lower margins in our OE business. In the North
America aftermarket, EBIT as a percentage of revenue improved due to lower
selling, general and administrative expenses and increased prices. In addition,
North American EBIT margins were significantly impacted by our restructuring
activities in both 2001 and 2000. In Europe, EBIT margins decreased one percent
on a 2 percent increase in revenues. This is due to the pass-through sales,
which generally have a very low margin, becoming a greater percentage of total
revenues. Significant improvements in OE exhaust operations were offset by costs
associated with the Polish ride control plant start-up, reserves for bad debt,
currency impacts and lower aftermarket volumes. Additionally, our European
restructuring activities have also had a significant impact on EBIT margins.
EBIT as a percentage of revenue for the rest of the world increased one percent
year over year despite the impact of foreign currency devaluation. Stronger
volumes and improved mix offset the foreign currency devaluation.

Interest Expense, Net of Interest Capitalized

We reported interest expense of $170 million during 2001, compared to $186
million during 2000. The decrease in our total interest expense is primarily due
to lower interest rates on our variable rate debt. See more detailed
explanations on our debt structure in "Liquidity and Capital
Resources -- Capitalization" earlier in this Management's Discussion and
Analysis.

Income Taxes

We recorded a tax expense during 2001 of $51 million. Tax expense for 2001
included a $66 million expense for repatriation of earnings from some of our
foreign subsidiaries. We took this action to better facilitate movement of cash
balances among our overseas subsidiaries while minimizing cash tax payments in
foreign jurisdictions. Our effective tax rate before this charge was a 19
percent benefit on our pre-tax loss. The primary reason that this differs from
our statutory tax rate of 35 percent is the non-deductible portion of our
restructuring charges. See Note 6 to the financial statements for a
reconciliation of our tax expense to the statutory rate.

We recorded a tax benefit during 2000 of $27 million, for an effective tax
rate of 41 percent. This benefit was higher than the statutory rate due to the
consolidation of our Mexican entities into one tax entity, allowing us to
recognize some previously unbenefitted tax loss carryforwards in Mexico, and due
to the adjustment of tax liabilities in some foreign jurisdictions based on tax
returns filed in the third quarter.

49

Earnings Per Share

Losses per diluted common share were $3.43 for the year ended December 31,
2001 compared to $1.18 per diluted common share in the prior period. Included in
the results for 2001 are the impacts from charges related to our restructuring
plans, the tax charge for repatriation of foreign earnings, environmental
remediation activities and the costs related to the amendment of certain terms
of the senior credit facility in early 2001. The cumulative negative effect of
these items on earnings per diluted common share was $2.95 in 2001. The
significant pieces of this impact were comprised of the repatriation of foreign
earnings of $1.73 per share and the restructuring charges taken in the first,
second and fourth quarters which were $1.14 per share. Included in the results
for 2000 are impacts from charges related to our restructuring plans, stock
option buyback program, and the reversal of the reserve for transaction costs
related to the November 1999 spin-off of Pactiv. The cumulative negative effect
of these items on earnings per diluted common share was $1.28. In addition, for
the year ended December 31, 2000, we recorded an extraordinary loss of $.02 per
diluted common share due to the early retirement of debt.

Dividends on Common Stock

During 2000, we paid a quarterly dividend of $.05 per share of common
stock. Dividend payments totaled $7 million in 2000. On January 10, 2001, we
announced that our Board of Directors eliminated the quarterly dividend on our
common stock. The Board took the action in response to current industry
conditions, primarily greater than anticipated production volume reductions by
original equipment manufacturers and continued softness in the global light
vehicle aftermarket. There are no current plans to reinstate a dividend on our
common stock.

Cash Flows

Operating Activities

Cash provided from operating activities decreased to $141 million in 2001
as compared to $234 million in 2000. Lower earnings in 2001 was a key driver to
the decrease in cash provided. This was partially offset by our continued focus
on working capital. Reduced accounts receivable and inventory made a favorable
impact on cash flows in the current period compared to the prior year. That
allowed us to use $85 million less cash on working capital before the impact of
sales of accounts receivable during 2001 compared with the prior year. Working
capital, adjusted for $110 million of receivables that were sold, was $162
million lower than it was at the end of 2000. During 2001, we increased the size
of our European receivables securitization program by $1 million while we saw
our U.S. receivables securitization program decline by $29 million. In the same
period in the prior year our receivables sales programs in Europe and North
America provided $123 million of cash. We have also entered into arrangements
with two major OE customers in North America under which, in exchange for a
discount that is less than our marginal borrowing cost, payments for product
sales are made earlier than otherwise required under existing payment terms.
These arrangements reduced accounts receivable by $34 million as of December 31,
2001. Included in our 2001 results is a $7 million pension plan contribution. No
contribution was made in the prior year.

50

Investing Activities

Cash used by investing activities for continuing operations was $31 million
lower in the year ended December 31, 2001 compared to the same period in 2000.
Capital expenditures were $19 million lower at $127 million in 2001 compared to
$146 million in 2000. In 2000, we increased our ownership percentage in a South
African joint venture for $4 million. We also received cash proceeds of $26
million during 2000, primarily related to the sale of an interest in our
Burnley, U.K. exhaust facility to Futaba. We also invested $10 million in the
new joint venture.

Financing Activities

Cash provided by financing activities was $3 million in 2001. The increase
in 2001 was attributable to a prepayment of long-term debt in 2000. Also 2000
includes a $16 million decrease in short-term debt and $7 million of dividend
payments to our common shareholders.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The section entitled "Derivative Financial Instruments" in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is incorporated herein by reference.

51

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO FINANCIAL STATEMENTS OF TENNECO AUTOMOTIVE INC.
AND CONSOLIDATED SUBSIDIARIES

52

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of Tenneco Automotive Inc.

We have audited the accompanying consolidated balance sheet of Tenneco
Automotive Inc. and consolidated subsidiaries ("the Company") as of December 31,
2002, and the related consolidated statements of income (loss), cash flows,
changes in shareholders' equity and comprehensive income (loss) for the year
ended December 31, 2002. Our audit also included the financial statement
schedule listed in the Index at Item 8. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The consolidated financial statements of the Company as of December
31, 2001 and for each of the two years then ended, prior to the addition of the
transitional disclosures discussed in Note 3, were audited by other auditors who
have ceased operations. Those auditors expressed an unqualified opinion on those
financial statements in their report dated January 28, 2002.

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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
2002 and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.

As discussed in Note 3, effective January 1, 2002, the Company changed its
method of accounting for goodwill and intangible assets upon adoption of
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets.

As discussed above, the consolidated financial statements of the Company as
of and for the years ended December 31, 2001 and 2000 were audited by other
auditors who have ceased operations. As described in Note 3, these consolidated
financial statements have been revised to include the transitional disclosures
required by SFAS No. 142. We audited the transitional disclosures in Note 3. In
our opinion, the transitional disclosures for 2001 and 2000 in Note 3 are
appropriate. However, we were not engaged to audit, review, or apply any
procedures to the 2001 or 2000 consolidated financial statements of the Company
other than with respect to such transitional disclosures and, accordingly, we do
not express an opinion or any other form of assurance on the 2001 or 2000
consolidated financial statements taken as a whole.

DELOITTE & TOUCHE LLP
Chicago, Illinois
February 3, 2003

53

The following report is a copy of the report previously issued by Arthur
Andersen LLP ("Andersen") in connection with the filing of our Form 10-K for the
year ended December 31, 2001. The inclusion of this previously issued Andersen
report is pursuant to the "Temporary and Final Rule and Final Rule Requirements
for Arthur Andersen LLP Auditing Clients," issued by the SEC in March 2002. Note
that this previously issued Andersen report includes references to fiscal year
1999, which is not required to be presented in the accompanying consolidated
financial statements for the period ended December 31, 2002. This audit report
has not been reissued by Andersen in connection with the filing of this Form
10-K.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Tenneco Automotive Inc.:

We have audited the accompanying balance sheets of Tenneco Automotive Inc.
(a Delaware corporation) and consolidated subsidiaries (see Note 1) as of
December 31, 2001 and 2000, and the related statements of income, cash flows,
changes in shareholders' equity and comprehensive income for each of the three
years in the period ended December 31, 2001. These financial statements and
schedule referred to below are the responsibility of Tenneco Automotive Inc.'s
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the 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 includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Tenneco Automotive Inc. and
consolidated subsidiaries as of December 31, 2001 and 2000, and the results of
their operations and cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

As discussed in Note 1 to the financial statements, in 1999 Tenneco
Automotive Inc. changed its methods of accounting for the costs of start-up
activities and for customer acquisition costs.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule of Tenneco
Automotive Inc. and consolidated subsidiaries is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. The supplemental schedule has been subjected to
the auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
of Tenneco Automotive Inc. and consolidated subsidiaries taken as a whole.

ARTHUR ANDERSEN LLP
Chicago, Illinois
January 28, 2002

54

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF INCOME (LOSS)

The accompanying notes to financial statements are an integral part of these
statements of income (loss).

55

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

BALANCE SHEETS

The accompanying notes to financial statements are an integral part of these
balance sheets.
56

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF CASH FLOWS

- -------------------------
Note: Cash and cash equivalents include highly liquid investments with a
maturity of three months or less at the date of purchase.

The accompanying notes to financial statements are an integral part of these
statements of cash flows.

57

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

The accompanying notes to financial statements are an integral part of these
statements of changes in shareholders' equity.

58

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

The accompanying notes to financial statements are an integral part
of these statements of comprehensive income (loss).

59

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF ACCOUNTING POLICIES

Consolidation and Presentation

Our financial statements include all majority-owned subsidiaries. We carry
investments in 20 percent to 50 percent owned companies at cost plus equity in
undistributed earnings since the date of acquisition and cumulative translation
adjustments. We have eliminated all significant intercompany transactions.

Sales of Accounts Receivable

We entered into an agreement during the third quarter of 2000 to sell an
interest in some of our U.S. trade accounts receivable to a third party.
Receivables become eligible for the program on a daily basis, at which time the
receivables are sold to the third party, net of a factoring discount, through a
wholly-owned subsidiary. Under this agreement, as well as individual agreements
with third parties in Europe, we have sold accounts receivable of $101 million,
$110 million, and $138 million at December 31, 2002, 2001, and 2000,
respectively. We recognized a loss of $2 million, $5 million, and $1 million
during 2002, 2001, and 2000, respectively, on these sales of trade accounts,
representing the discount from book values at which these receivables were sold
to the third party. The discount rate varies based on funding cost incurred by
the third party, and it averaged 3.3 percent during the time period in 2002 when
we sold receivables. We retained ownership of the remaining interest in the pool
of receivables not sold to the third party. The retained interest represents a
credit enhancement for the program. We value the retained interest based upon
the amount we expect to collect from our customers, which approximates book
value.

Inventories

At December 31, 2002 and 2001, inventory by major classification was as
follows:

Our inventories are stated at the lower of cost or market value. A portion
of total inventories (23 percent and 25 percent at December 31, 2002 and 2001,
respectively) is valued using the last-in, first-out method. If we had used the
first-in, first-out ("FIFO") method of accounting for these inventories, they
would have been $13 million and $18 million higher at December 31, 2002 and
2001, respectively. We value all other inventories using the FIFO or average
cost methods at the lower of cost or market value.

Goodwill and Intangibles, net

At December 31, 2002 and 2001, goodwill and intangibles, net of
amortization, by major category were as follows:

60

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Through the end of 2001 goodwill was being amortized on a straight-line
basis over periods ranging from 15 to 40 years. Goodwill amortization amounted
to $16 million in 2001 and $17 million in 2000, and is shown separately in the
statements of income caption "Amortization of goodwill." The overall decrease in
goodwill resulted from an impairment charge of $218 million, net of taxes of $6
million, related to a change in accounting principle and fluctuations in
exchange rates applied to remaining goodwill balances. The changes in the
carrying amount of goodwill for the twelve months ended December 31, 2002, are
as follows:

You should read "Changes in Accounting Principles" below for information
about the new goodwill accounting requirement and the charge we recorded in 2002
to recognize the cumulative effect of this change in accounting principle. You
should also read Note 3 to the financial statements for additional information
related to the charge recorded.

We have capitalized certain intangible assets, primarily trademarks and
patents, based on their estimated fair value at the date we acquired them. We
amortize these intangible assets on a straight-line basis over periods ranging
from five to 30 years. Amortization of intangibles amounted to $1 million in
2002, $2 million in 2001, and $3 million in 2000, and is included in the
statements of income caption "Depreciation and amortization." The carrying
amount and accumulated amortization are as follows:

Non-amortized intangible assets include $17 million for the company's
intangible pension assets.

Estimated amortization of intangibles assets over the next five years is
expected to be less than $1 million each year.

61

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Plant, Property, and Equipment, at Cost

At December 31, 2002 and 2001, plant, property, and equipment, at cost, by
major category were as follows:

We depreciate these properties on a straight-line basis over the estimated
useful lives of the assets. Useful lives range from 10 to 40 years for buildings
and improvements and from three to 25 years for machinery and equipment.

Notes Receivable and Allowance for Doubtful Accounts

Short and long-term notes receivable outstanding were $19 million and $50
million at December 31, 2002 and 2001, respectively. The allowance for doubtful
accounts on short- and long-term notes receivable was less than $1 million and
$7 million at December 31, 2002 and 2001, respectively.

At both December 31, 2002 and 2001, the allowance for doubtful accounts on
short- and long-term accounts receivable was $22 million.

Other Long-Term Assets

We expense pre-production design and development costs as incurred unless
we have a contractual guarantee for reimbursement from the original equipment
customer. We had long-term receivables of $8 million and $19 million on the
balance sheet at December 31, 2002 and 2001, respectively, for guaranteed
pre-production design and development reimbursement arrangements with our
customers. In addition, property, plant and equipment includes $50 million and
$35 million at December 31, 2002 and 2001, respectively, for original equipment
tools and dies that we own, and prepayments and other includes $27 million and
$32 million at December 31, 2002 and 2001, respectively, for in-process tools
and dies that we are building for our original equipment customers.

We capitalize certain costs related to the purchase and development of
software that we use in our business operations. We amortize the costs
attributable to these software systems over their estimated useful lives,
ranging from three to 12 years, based on various factors such as the effects of
obsolescence, technology, and other economic factors. Capitalized software
development costs, net of amortization, were $89 million at each of December 31,
2002 and 2001, respectively.

Income Taxes

We utilize the liability method of accounting for income taxes whereby we
recognize deferred tax assets and liabilities for the future tax consequences of
temporary differences between the tax basis of assets and liabilities and their
reported amounts in our financial statements. We reduce deferred tax assets by a
valuation allowance when, based upon our estimates, it is more likely than not
that we will not realize a portion of the deferred tax assets in a future
period. The estimates utilized in the recognition of deferred tax assets are
subject to revision in future periods based on new facts or circumstances.

62

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Revenue Recognition

We recognize revenue for sales to our original equipment and aftermarket
customers under the terms of our arrangements with those customers, generally at
the time of shipment from our plants or distribution centers. For our
aftermarket customers, we provide for promotional incentives and estimated
returns at the time of sale, which are deducted from revenues. Where we have
offered product warranty, we also provide for estimated warranty costs, based
upon historical experience and specific warranty issues. For our OE customers,
we recognize "pass-through" sales. These pass-through sales occur when, at the
direction of our OE customers, we purchase components from suppliers, use them
in our manufacturing process, and sell them as part of the completed system.

Earnings Per Share

We compute basic earnings per share by dividing income available to common
shareholders by the weighted-average number of common shares outstanding. The
computation of diluted earnings per share is similar to the computation of basic
earnings per share, except that we adjust the weighted-average number of shares
outstanding to include estimates of additional shares that would be issued if
potentially dilutive common shares had been issued. In addition, we adjust
income available to common shareholders to include any changes in income or loss
that would result from the assumed issuance of the dilutive common shares.

Engineering, Research and Development

We expense engineering, research, and development costs as they are
incurred. Engineering, research and development expenses were $67 million for
both 2002 and 2001, and $68 million in 2000, and are included in the income
statement caption of the same name. Of these amounts, $6 million for both 2002
and 2001, and $5 million in 2000 relate to research and development, which
includes the search, design, and development of a new unproven product or
process. Additionally, $36 million, $37 million, and $40 million of engineering,
research, and development expense for 2002, 2001, and 2000, respectively,
relates to improvements and enhancements to existing products and processes. The
remainder of the expenses in each year relate to engineering costs we incurred
for application of existing products and processes to vehicle platforms.
Further, our customers reimburse us for engineering, research, and development
costs on some platforms when we prepare prototypes and incur costs before
platform awards. Our engineering research and development expense for 2002,
2001, and 2000 has been reduced by $13 million, $16 million, and $14 million,
respectively, for these reimbursements.

Foreign Currency Translation

We translate the financial statements of foreign subsidiaries into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and a weighted-average exchange rate for revenues and expenses in
each period. We record translation adjustments for those subsidiaries whose
local currency is their functional currency as a component of accumulated other
comprehensive loss in shareholders' equity. We recognize transaction gains and
losses arising from fluctuations in currency exchange rates on transactions
denominated in currencies other than the functional currency in earnings as
incurred, except for those transactions which hedge purchase commitments and for
those intercompany balances which are designated as long-term investments. Net
income (loss) included foreign currency transaction losses of $9 million in 2002
and $2 million in both 2001 and 2000.

Risk Management Activities

We use derivative financial instruments, principally foreign currency
forward purchase and sale contracts with terms of less than one year, to hedge
our exposure to changes in foreign currency exchange
63

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

rates, and interest rate swaps to hedge our exposure to changes in interest
rates. Our primary exposure to changes in foreign currency rates results from
intercompany loans made between affiliates to minimize the need for borrowings
from third parties. Net gains or losses on these foreign currency exchange
contracts that are designated as hedges are recognized in the income statement
to offset the foreign currency gain or loss on the underlying transaction.
Additionally, we enter into foreign currency forward purchase and sale contracts
to mitigate our exposure to changes in exchange rates on some intercompany and
third party trade receivables and payables. Since these anticipated transactions
are not firm commitments, we mark these forward contracts to market each period
and record any gain or loss in the income statement. From time to time we have
also entered into forward contracts to hedge our net investment in foreign
subsidiaries. We recognize the after-tax net gains or losses on these contracts
on the accrual basis in the balance sheet caption "Accumulated other
comprehensive income (loss)." In the statement of cash flows, cash receipts or
payments related to these exchange contracts are classified consistent with the
cash flows from the transaction being hedged.

We do not currently enter into derivative financial instruments for
speculative purposes.

Stock Options

We account for our stock-based employee compensation plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Our stock-based employee compensation plans are
described more fully in Note 7. No stock-based employee compensation cost is
reflected in net income (loss), as all options granted under those plans had an
exercise price equal to the market value of the stock at date of grant. As
permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," and
amended by SFAS No. 148, "Accounting for Stock-based Compensation -- Transition
and Disclosure, an amendment of FASB Statement No. 123," we follow the
disclosure requirements only of SFAS No. 123. The following table illustrates
the effect on net income (loss) and earnings (loss) per share if we had applied
the fair value recognition provisions of SFAS No. 123:

The fair value of each option granted during 2002, 2001, and 2000 is
estimated on the date of grant using the Black-Scholes option pricing model
using the following weighted-average assumptions for grants in 2002, 2001, and
2000, respectively: (i) risk-free interest rates of 5.09 percent, 4.9 percent,
and 6.3 percent,; (ii) expected lives of 10.0, 10.0, and 10.0 years; (iii)
expected volatility 39.56 percent, 43.8 percent, and 40.7 percent; and (iv)
dividend yield of 0.0 percentage, 0.0 percentage, and 0.0 percentage.

64

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Changes in Accounting Principles

In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS No. 142 changes the accounting
for purchased goodwill from an amortization method to an impairment-only
approach. Therefore amortization of all purchased goodwill, including
amortization of goodwill recorded in past business combinations, ceased upon
adoption of SFAS No. 142 in January 2002. Goodwill was amortized at the rate of
$16 million in 2001 and $17 million in 2000, prior to adopting the new standard.
Under the provisions of SFAS No. 142, we were required to perform an impairment
analysis on the balance of goodwill at January 1, 2002. The fair value of our
reporting units used in determining the goodwill impairment was computed using
the present value of expected future cash flows. As a result of this analysis,
we determined that goodwill associated with our North American ride control and
European aftermarket operations was impaired. As a result, a charge of $218
million, net of taxes of $6 million, was recorded in the first quarter of 2002
as a cumulative effect of a change in accounting principle. The balance of
unamortized goodwill was $185 million at December 31, 2002. We are required to
test this balance for impairment on an annual basis.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. We will be required to adopt the new standard by January 1,
2003. We do not believe that the effect of adopting this statement will have a
material impact on our financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
recognition, presentation and disclosure of impairment or disposal of long-lived
assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Assets to be Disposed of," and Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations -- Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions, for the Disposal of a Segment of
a Business." SFAS No. 144 was effective for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. The adoption
of SFAS No. 144 did not have a material impact on our financial position or
results of operations.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 changes the
definition of the date at which a liability exists for exit or disposal
activities also referred to as restructuring activities. Previously, we
recognized a liability for restructuring activities when we committed to a plan
of restructuring and announced this plan to the employees. We will be required
to apply the new standard prospectively to new exit or disposal activities
initiated after December 31, 2002. The new statement will generally require that
these costs be recognized at a later date and over time, rather than in a single
charge.

In November 2002, the FASB issued Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"), which expands previously
issued accounting guidance and disclosure requirements for certain guarantees.
FIN 45 provides that issuing a guarantee imposes a noncontingent obligation to
stand ready to perform in the event that the conditions specified in the
guarantee occur, and that a liability representing the fair value of such a
guarantee must be recognized when the guarantee is issued. We will be required
to apply these initial recognition and measurement provisions to guarantees
issued or modified after December 31,
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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2002. We do not expect the adoption of FIN 45 to have a material impact on our
financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148 which provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation and amends the disclosure
requirements to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. See "Stock
Options" earlier in this Note 1 for our compliance with new transition and
disclosure requirements of SFAS No. 148.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires that the assets,
liabilities and results of the activity of variable interest entities be
consolidated into the financial statements of the entity that has the
controlling financial interest. FIN 46 also provides the framework for
determining whether a variable interest entity should be consolidated based on
voting interest or significant financial support provided to it. This
interpretation is effective immediately for variable interest entities created
after January 31, 2003 and effective July 1, 2003 for variable interest entities
created before February 1, 2003. We do not expect the adoption of FIN 46 to have
any impact on our consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. These estimates include allowances for doubtful
receivables, promotional and product returns, pension and post-retirement
benefit plans, income taxes, and contingencies. These items are covered in more
detail in Note 1, Note 6, Note 9, and Note 11. Actual results could differ from
those estimates.

Reclassifications

Prior years' financial statements have been reclassified where appropriate
to conform to 2002 presentations.

2. RESTRUCTURING CHARGES

Over the past several years we have adopted plans to restructure portions
of our operations. These plans were approved by the Board of Directors and were
designed to reduce operational and administrative overhead costs throughout the
business. Prior to the change in accounting required for exit or disposal
activities described under "Changes in Accounting Principles" in Note 1 above,
we recorded charges to income related to these plans for costs that do not
benefit future activities in the period in which the plans were finalized and
approved, while actions necessary to affect these restructuring plans occurred
over future periods in accordance with established plans. We are conducting all
workforce reductions in compliance with all legal and contractual requirements
including obligations to consult with worker's councils, union representatives
and others.

In the fourth quarter of 2000, our Board of Directors approved a
restructuring plan to reduce administrative and operational overhead costs. We
recorded, in the fourth quarter of 2000, a pre-tax charge related to the plan of
$46 million, $32 million after tax, or $.92 per diluted common share. Within the
statement of income, $13 million of the pre-tax charge is reflected in cost of
sales, while $33 million is included in selling, general and administrative
expenses. The charge is comprised of $24 million of severance and related costs
for salaried employment reductions worldwide and $22 million for the

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

reduction of manufacturing and distribution capacity in response to long-term
market trends. The 2000 plan involved closing a North American aftermarket
exhaust distribution facility and a ride control manufacturing plant in our
Asian market, as well as the consolidation of some exhaust manufacturing
facilities in Europe. In addition, the plan involved the elimination of 700
positions, including temporary employees. We wrote down the assets at the
locations to be closed to their estimated fair value, less costs to sell. We
estimated the market value of buildings using external real estate appraisals.
As a result of the single purpose nature of the machinery and equipment to be
disposed of, fair value was estimated to be scrap value less costs to dispose in
most cases. We do not expect that cash proceeds on the sale of these assets will
be significant. As of December 31, 2002, 637 employees have been terminated
under the 2000 plan primarily in North America and Europe. Additionally, 57
temporary employees have been terminated. All restructuring actions related to
this plan have been completed. We executed the plan more efficiently than
initially anticipated and as a result in the fourth quarter of 2002 we reversed
$2 million of the charge to the statement of income, of which $1 million is
recorded in cost of sales and $1 million is recorded in selling, general and
administrative expenses.

Also in the fourth quarter of 2000, we recorded other charges of $15
million, $10 million after tax, or $.29 per diluted common share. These charges
related to a strategic decision to reduce some of the aftermarket parts we offer
and to relocation expenses incurred associated with the restructuring plans. The
aftermarket parts were written down to their estimated scrap value less costs to
sell.

In the first quarter of 2001, our Board of Directors approved a
restructuring plan in response to increasingly difficult industry conditions. On
January 31, 2001, we announced plans to eliminate 405 salaried positions
worldwide. We recorded pre-tax charges related to this restructuring of $11
million, $8 million after tax, or $.21 per diluted common share. Within the
statement of income, $2 million of the pre-tax charge is reflected in cost of
sales, while $9 million is included in selling, general and administrative
expenses. These charges are comprised of $8 million for severance and related
costs for salaried employment reductions worldwide and $3 million for costs
related to closing a testing facility in North America. As of December 31, 2002,
we have eliminated 329 positions in connection with the first quarter 2001 plan.
We have completed all restructuring activities related to this plan. We executed
the plan more efficiently than initially anticipated and as a result in the
fourth quarter of 2002 reversed $1 million in reserves related to this
restructuring activity. All of the reversal was recorded in selling, general and
administrative expenses.

In the second quarter of 2001, our Board of Directors approved a separate
restructuring plan related to closing a North American ride control production
line. We recorded pre-tax charges related to the plan of $8 million, $6 million
after tax, or $.16 per diluted common share. Within the statement of income, the
$8 million charge is included in cost of sales. We wrote down the assets to
their fair market value, less costs to sell. As a result of the single purpose
nature of the machinery and equipment to be disposed of, fair value was
estimated to be scrap value less costs to dispose. Cash proceeds from the sale
of these assets were not significant. All restructuring activities related to
this plan have been completed.

In the fourth quarter of 2001, our Board of Directors approved a
restructuring plan, the first phase of a project known as Project Genesis,
designed to lower our fixed costs, improve efficiency and utilization, and
better optimize our global footprint. The first phase of Project Genesis
involved closing eight facilities, improving the process flow and efficiency
through value mapping and plant arrangement at 20 facilities, relocating
production among facilities, and centralizing some functional areas. The closed
facilities include an emissions control aftermarket plant and an aftermarket
distribution operation in Europe, a ride control plant in Europe, an engineering
center in Europe, one building at an emissions control plant complex in North
America, a technology facility in North America, an exhaust manufacturing
facility in North America, and our London-based treasury office. In the fourth
quarter of 2001, we recorded pre-tax charges related to Project Genesis of $27
million. Within the statement of income, $23 million of the pre-tax

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

charge is reflected in cost of sales, while $4 million is included in selling,
general and administrative expenses. These charges are comprised of $18 million
in severance and $9 million for equipment lease cancellation, asset impairment
and other restructuring costs to close the eight facilities. We wrote down the
assets at locations to be closed to their estimated fair value, less costs to
sell. We estimated the market value of buildings using external real estate
appraisals. As a result of the single purpose nature of the machinery and
equipment to be disposed of, fair value was estimated to be scrap value less
costs to dispose in most cases. We also recorded a pre-tax charge of $4 million
in cost of sales related to a strategic decision to adjust some product
offerings and our customer supply strategy in the European aftermarket. The
aftermarket parts were written down to their estimated scrap value, less costs
to sell. Finally, we also incurred $1 million in other restructuring related
costs during the fourth quarter for the value mapping and rearrangement of one
of our emissions control plants in North America. Since these costs relate to
ongoing operations, they could not be accrued as part of the restructuring
charge. The total of all these restructuring and other costs recorded in the
fourth quarter of 2001 was $32 million before tax, $31 million after tax, or
$.81 per diluted common share. As of December 31, 2002, we have eliminated 945
positions in connection with the first phase of Project Genesis. Additionally,
we are executing this plan more efficiently than originally anticipated and as a
result in the fourth quarter of 2002 reduced our reserves related to this
restructuring activity by $6 million which is recorded in cost of sales. We
expect to complete all remaining restructuring activities related to the first
phase of Project Genesis in the first half of 2003.

In addition to the fourth quarter 2001 charges, we incurred other costs
during 2002 of $11 million for moving and rearrangement activities related to
Project Genesis that could not be accrued as part of the restructuring charge.

Amounts related to activities that are part of all the restructuring plans
discussed above are as follows:

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. LONG-TERM DEBT, SHORT-TERM DEBT, AND FINANCING ARRANGEMENTS

Long-Term Debt

A summary of our long-term debt obligations at December 31, 2002 and 2001,
is set forth in the following table:

The aggregate maturities and sinking fund requirements applicable to the
issues outstanding at December 31, 2002, are $97 million, $97 million, $98
million, $9 million, and $256 million for 2003, 2004, 2005, 2006 and 2007,
respectively.

Short-Term Debt

We principally use a revolving credit facility to finance our short-term
capital requirements. As a result, we classify the outstanding balance of the
revolving credit facility within our short-term debt. The revolving credit
facility balance included in short-term debt is $121 million and $68 million at
December 31, 2002 and 2001, respectively. Information regarding our short-term
debt as of and for the years ended December 31, 2002 and 2001, is as follows:

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

- -------------------------
* Includes borrowings under both committed credit facilities and uncommitted
lines of credit and similar arrangements.

Financing Arrangements

- -------------------------
(a) We generally are required to pay commitment fees on the unused portion of
the total commitment.

(b) Letters of credit reduce the available borrowings under the revolving credit
agreement.

Our financing arrangements are primarily provided by a committed senior
secured financing arrangement with a syndicate of banks and other financial
institutions, which was $1.239 billion at December 31, 2002. We entered into an
agreement to amend this facility on October 20, 2000 to (i) relax the financial
covenant ratios beginning in the fourth quarter of 2000, (ii) exclude up to $80
million of cash charges and expenses related to cost reduction initiatives from
the calculation of consolidated earnings before interest, taxes, depreciation
and amortization ("EBITDA") used in our financial covenant ratios through 2001
and (iii) make certain other technical changes. In exchange for these
amendments, we agreed to certain interest rate increases, lowered our capital
expenditure limits and paid an aggregate fee of about $3 million.

As a result of significant reductions in North American vehicle production
levels announced in 2000 by our original equipment customers, as well as an
accelerated weakening of the global aftermarket, we entered into a second
amendment of our senior credit facility on March 22, 2001. The second amendment
revised the financial covenant ratios we were required to maintain as of the end
of each of the quarters ending in 2001. The second amendment also reduced the
limitation on 2001 capital expenditures from $225 million to $150 million, and
required that net cash proceeds from all significant, non-ordinary course asset
sales be used to prepay the senior term loans. In exchange for these amendments,
we agreed to a 25 basis point increase in interest rates on the senior term
loans and borrowings under our revolving credit facility and paid an aggregate
fee of $3 million to consenting lenders. We incurred legal, advisory and other
costs related to the amendment process of $2 million.

At the time of the second amendment, we expected that we would meet with
the senior lenders during the first quarter of 2002 to negotiate further
amendments to the senior credit facility. Consequently,

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

we amended the senior credit facility for a third time on March 13, 2002. The
third amendment revised the financial covenant ratios we are required to
maintain as of the end of each of the quarters ending in 2002, 2003 and 2004. It
also extends the limitation on annual capital expenditures of $150 million
through this three-year period. The amendment further provides us with the
option to enter into sale and leaseback arrangements on up to $200 million of
our assets. The proceeds from these arrangements must be used to reduce senior
debt. These senior debt prepayments would reduce the next scheduled principal
amortization payments. Because the payments on senior debt from sale and
leaseback transactions would be made on a pro-rata basis based on the remaining
principal amounts outstanding on our Tranche A, B, and C senior term loans, but
principal amortization payments are not pro-rata, about 29 percent of any sale
and leaseback transactions we enter into during 2003 would reduce our scheduled
principal amortization. The amendment also allows us to exclude up to $60
million of cash charges and expenses, before taxes, related to any cost
reduction initiatives over the 2002-2004 period from the calculation of the
financial covenant ratios we are required to maintain under our senior credit
agreement. It also permits us to execute exchanges of our senior subordinated
bonds for shares of common stock. We do not have any current plans to enter into
any debt-for-stock exchanges. Any significant debt-for-stock exchange would
require approval of our stockholders. In exchange for these amendments, we
agreed to a $50 million reduction in our revolving credit facility, a 25 basis
point increase in interest rates on the senior term loans and borrowings under
our revolving credit facility, and paid an aggregate fee of $3 million to
consenting lenders. We also incurred legal, advisory, and other costs related to
the amendment process of $2 million.

The senior secured credit facility, as amended on March 13, 2002, consists
of: (i) a $450 million revolving credit facility with a final maturity date of
November 4, 2005; (ii) a $288 million term loan with a final maturity date of
November 4, 2005; (iii) a $262 million term loan with a final maturity date of
November 4, 2007; and (iv) a $262 million term loan with a final maturity date
of May 4, 2008. Quarterly principal repayment installments on each term loan
began October 1, 2001. Borrowings under the facility bear interest at an annual
rate equal to, at our option, either (i) the London Interbank Offering Rate plus
a margin of 325 basis points for the revolving credit facility and the term loan
maturing November 4, 2005, 400 basis points for the term loan maturing November
4, 2007 and 425 basis points for the term loan maturing May 4, 2008; or (ii) a
rate consisting of the greater of the JP Morgan Chase prime rate or the Federal
Funds rate plus 75 basis points, plus a margin of 225 basis points for the
revolving credit facility and the term loan maturing November 4, 2005, 300 basis
points for the term loan maturing November 4, 2007 and 325 basis points for the
term loan maturing May 4, 2008. We also pay a commitment fee of 50 basis points
on the unused portion of the revolving credit facility. Under the provisions of
the senior credit facility agreement, the interest margins for borrowings under
the revolving credit facility and the term loan maturing November 4, 2005 and
fees paid on letters of credit issued under our revolving credit facility are
subject to adjustment based on the consolidated leverage ratio (consolidated
indebtedness divided by consolidated EBITDA as defined in the senior credit
facility agreement) measured at the end of each quarter. Our consolidated
leverage ratio fell below 4.50 as of June 30, 2002; therefore, the interest
margins for borrowings under our revolving credit facility and on our term loan
maturing November 4, 2005, and fees paid on letters of credit issued under our
revolving credit facility, were reduced by 25 basis points beginning in the
third quarter of 2002. Our consolidated leverage ratio remained below 4.50 as of
December 31, 2002. Our senior secured credit facility does not contain any terms
that could accelerate the payment of the facility as a result of a credit rating
agency downgrade.

The amended senior credit facility requires that we maintain financial
ratios equal to or better than the following consolidated leverage ratios
(consolidated indebtedness divided by consolidated EBITDA), consolidated
interest coverage ratios (consolidated EBITDA divided by consolidated cash
interest paid), and fixed charge coverage ratios (consolidated EBITDA less
consolidated capital expenditures, divided by consolidated cash interest paid)
at the end of each period indicated. The financial ratios required under the

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

amended senior credit facility and, in the case of 2002, the actual ratios we
achieved are shown in the following tables:

The senior credit facility agreement also contains restrictions on our
operations that are customary for similar facilities, including limitations on:
(i) incurring additional liens; (ii) sale and leaseback transactions (except for
the permitted transactions described above); (iii) liquidations and
dissolutions; (iv) incurring additional indebtedness or guarantees; (v) capital
expenditures; (vi) dividends; (vii) mergers and consolidations; and (viii)
prepayments and modifications of subordinated and other debt instruments.
Compliance with these requirements and restrictions is a condition for any
incremental borrowings under the senior credit facility agreement and failure to
meet these requirements enables the lenders to require repayment of any
outstanding loans. As of December 31, 2002, we were in compliance with both the
financial covenants (as indicated above) and operational restrictions of the
facility.

Our outstanding debt also includes $500 million of 11 5/8 percent Senior
Subordinated Notes due October 15, 2009. The senior subordinated debt indenture
requires that we, as a condition to incurring certain types of indebtedness not
otherwise permitted, maintain an interest coverage ratio of not less than 2.25.
We have not incurred any of the types of indebtedness not otherwise permitted by
this indenture. The indenture also contains restrictions on our operations,
including limitations on: (i) incurring additional indebtedness or liens; (ii)
dividends; (iii) distributions and stock repurchases; (iv) investments; and (v)
mergers and consolidations. All of our existing and future material domestic
wholly owned subsidiaries fully and unconditionally guarantee these notes on a
joint and several basis. There are no significant restrictions on the ability of
the subsidiaries that have guaranteed these notes to make distributions to us.
As of December 31, 2002, we were in compliance with the covenants and
restrictions of this indenture.

In addition to our senior credit facility and senior subordinated notes, we
also sell some of our accounts receivable. In North America, we have an accounts
receivable securitization program with a commercial bank. We sell original
equipment and aftermarket receivables on a daily basis under this program. We
had sold accounts receivable under this program of $46 million and $68 million
at December 31, 2002 and 2001, respectively. This program is subject to
cancellation prior to its maturity

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

date if we were to (i) fail to pay interest or principal payments on an amount
of indebtedness exceeding $50 million, (ii) default on the financial covenant
ratios under the senior credit facility, or (iii) fail to maintain certain
financial ratios in connection with the accounts receivable securitization
program. In January 2003, this program was amended to extend its term to January
31, 2005 and reduce the size of the program to $50 million. The reduced program
size will lower commitment fees payable on the available and unused portion of
the committed facility amount. We also sell some receivables in our European
operations to regional banks in Europe. At December 31, 2002, we had sold $55
million of accounts receivable in Europe. The arrangements to sell receivables
in Europe are not committed and can be cancelled at any time. If we were not
able to sell receivables under either the North American or European
securitization programs, our borrowings under our revolving credit agreement
would increase.

We believe that cash flows from operations, combined with available
borrowing capacity described above, assuming that we maintain compliance with
the financial covenants and other requirements of our loan agreement, will be
sufficient to meet our future capital requirements for the following year,
including scheduled debt principal amortization payments. Our ability to meet
the financial covenants depends upon a number of operational and economic
factors, many of which are beyond our control. Factors that could impact our
ability to comply with the financial covenants include the rate at which
consumers continue to buy new vehicles and the rate at which they continue to
repair vehicles already in service, as well as our ability to successfully
implement our restructuring plans. Lower North American vehicle production
levels, weakening in the global aftermarket, or a reduction in vehicle
production levels in Europe, beyond our expectations, could impact our ability
to meet our financial covenant ratios. In the event that we are unable to meet
these financial covenants, we would consider several options to meet our cash
flow needs. These options could include further renegotiations with our senior
credit lenders, additional cost reduction or restructuring initiatives, sales of
assets or common stock, or other alternatives to enhance our financial and
operating position. Should we be required to implement any of these actions to
meet our cash flow needs, we believe we can do so in a reasonable time frame.

5. FINANCIAL INSTRUMENTS

The carrying and estimated fair values of our financial instruments by
class at December 31, 2002 and 2001, were as follows:

Asset and Liability Instruments

The fair value of cash and temporary cash investments, short and long-term
receivables, accounts payable, and short-term debt was considered to be the same
as or was not determined to be materially different from the carrying amount.

Long-term debt -- The fair value of fixed rate long-term debt was based on
the market value of debt with similar maturities and interest rates.

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Instruments With Off-Balance-Sheet Risk

Foreign Currency Contracts -- Note 1, "Summary of Accounting
Policies -- Risk Management Activities" describes our use of and accounting for
foreign currency exchange contracts. The following table summarizes by major
currency the contractual amounts of foreign currency contracts we utilize:

We manage counter-party credit risk by entering into derivative financial
instruments with major financial institutions that can be expected to fully
perform under the terms of such agreements. Based on exchange rates at December
31, 2002 and 2001, the cost of replacing these contracts in the event of non-
performance by the counterparties would not have been material.

Guarantees -- We occasionally provide guarantees that could require us to
make future payments in the event that the primary obligor does not make its
required payments. We have not recorded a liability for any of these guarantees.
The only third party guarantee we have made is the performance of lease
obligations by a former affiliate. Our maximum liability under this guarantee
was of approximately $4 million and $6 million at December 31, 2002 and 2001,
respectively. We have no recourse in the event of default by the former
affiliate. However, we have not been required to make any payments under this
guarantee.

Additionally, we have from time to time issued guarantees for the
performance of obligations by some of our subsidiaries, and some of our
subsidiaries have guaranteed our debt. All of our then existing and future
material domestic wholly-owned subsidiaries fully and unconditionally guarantee
the $1.239 billion senior secured credit facility and the $500 million senior
subordinated notes on a joint and several basis. You should also read Note 12
where we present the Supplemental Guarantor Condensed Consolidating Financial
Statements.

We have issued guarantees through letters of credit in connection with some
obligations of our affiliates. We have guaranteed through letters of credit
support for local credit facilities, travel and procurement card programs, and
cash management requirements for some of our subsidiaries totaling $45 million.
We have also issued $13 million in letters of credit to support some of our
subsidiaries' insurance arrangements. In addition, we have issued $3 million in
guarantees through letters of credit to guarantee other obligations of
subsidiaries primarily related to environmental remediation activities.

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Interest Rate Swaps -- Under the terms of our senior credit facility
agreement, we hedged our exposure to floating interest rates by entering into
floating to fixed interest rate swaps covering $300 million of our floating rate
debt. The cost of replacing these contracts in the event of non-performance by
the counterparties would not be material. These hedges are effective, so we have
not recognized in earnings any amounts related to the ineffectiveness of the
interest rate swaps. No amounts were excluded from the assessment of hedge
effectiveness. The amount reported in other comprehensive income for these
interest rate swaps will be recognized in income over the remaining period of
the swaps. The swaps expired in February 2003.

6. INCOME TAXES

The domestic and foreign components of our income before income taxes and
minority interest are as follows:

Following is a comparative analysis of the components of income tax
expense:

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Following is a reconciliation of income taxes computed at the statutory
U.S. federal income tax rate (35 percent for all years presented) to the income
tax expense reflected in the statements of income:

The components of our net deferred tax liability were as follows:

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Following is a reconciliation of deferred taxes to the deferred taxes shown
in the balance sheet:

As shown by the valuation allowance in the table above, we had potential
tax benefits of $45 million and $25 million at December 31, 2002 and 2001,
respectively, that we did not recognize in the statements of income (loss) when
they were generated. These unrecognized tax benefits resulted primarily from
foreign tax loss carryforwards that are available to reduce future foreign tax
liabilities.

We have a U.S. Federal tax net operating loss carryforward ("NOL") at
December 31, 2002, of $488 million, which will expire in varying amounts from
2018 to 2022. The federal tax effect of that NOL is $171 million, and is
recorded as an asset on our balance sheet at December 31, 2002. We estimate,
based on available evidence, that it is more likely than not that we will
utilize the NOL within the prescribed carryforward period. That estimate is
based upon our expectations regarding future taxable income of our US operations
and upon strategies available to accelerate usage of the NOL. Circumstances that
could change that estimate include future U.S. earnings at lower than expected
levels or a majority ownership change as defined in the rules of the U.S. tax
law. If that estimate changed, we would be required to cease recognizing an
income tax benefit for any new NOL and could be required to record a reserve for
some or all of the asset currently recorded on our balance sheet. As of December
31, 2002, we believe that there has been a significant change in our ownership,
but not a majority change, since the 1999 spin-off of Pactiv.

As of December 31, 2002, for foreign income tax purposes, we have $42
million of foreign tax NOLs. Of the $42 million of foreign tax NOLs, $22 million
does not expire and the remainder will expire in varying amounts from 2003 to
2010.

We do not provide for U.S. income taxes on unremitted earnings of foreign
subsidiaries as our present intention is to reinvest the unremitted earnings in
our foreign operations. Unremitted earnings of foreign subsidiaries are
approximately $418 million at December 31, 2002. We estimated that the amount of
U.S. income taxes that would be accrued upon remittance of the assets that
represent those unremitted earnings is $96 million. In 2001, we provided current
tax of $66 million related to the repatriation of certain foreign earnings.

We have tax sharing agreements with our former affiliates that allocate tax
liabilities for prior periods.

7. COMMON STOCK

We have authorized 135 million shares ($.01 par value) of common stock, of
which 41,347,340 shares and 41,355,074 shares were issued at December 31, 2002
and 2001, respectively. We held 1,294,692 shares of treasury stock at both
December 31, 2002 and 2001.

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Reserved

The total number of shares of our common stock reserved at December 31,
2002 and 2001, were as follows:

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

* These plans expired as to new awards on December 31, 2001.

Stock Plans

Tenneco Automotive Inc. 2002 Long-Term Incentive Plan and Other Equity
Plans -- In December 1996, we adopted the 1996 Stock Ownership Plan, which
permitted the granting of a variety of awards, including common stock,
restricted stock, performance units, stock appreciation rights ("SARs"), and
stock options to our directors, officers, and employees. The plan, which
terminated as to new awards on December 31, 2001, was renamed the "Tenneco
Automotive Inc. Stock Ownership Plan." In December 1999, we adopted the Tenneco
Automotive Inc. Supplemental Stock Ownership Plan, which permitted the granting
of a variety of similar awards to our directors, officers and employees. We can
issue up to about 1.1 million treasury shares of common stock under the
Supplemental Stock Ownership Plan, which also terminated as to new awards on
December 31, 2001. In March 2002, we adopted the Tenneco Automotive Inc. 2002
Long-Term Incentive Plan which permits the granting of a variety of similar
awards to our officers, directors and employees. We can deliver up to 2 million
shares of our common stock under the 2002 Long-Term Incentive Plan. At our 2003
annual meeting of stockholders, we will ask for stockholder approval of an
additional 2 million shares to be available for delivery under this plan.

Restricted Stock/Units, Performance Units, and Stock Equivalent Units -- We
have granted restricted stock and restricted units to certain key employees.
These awards generally require, among other things, that the employee remains
our employee during the restriction period. We have also granted performance
units to certain key employees that are payable in common stock at the end of a
three year performance period after the date of grant based on the attainment of
specified performance goals for the three years. We have also granted stock
equivalent units to certain key employees that are payable in cash annually at
the then current market price of our common stock based on the attainment of
specified performance goals. During 2002, 2001, and 2000, we granted 285,822,
360,710, and 274,719 shares and units, respectively, with a weighted average
fair value based on the price of our common stock on the grant date of $3.20,
$3.37, and $7.70 per share, respectively. At December 31, 2002, 10,000
restricted shares at an average price of $7.47 per share, 477,172 performance
units at an average price of $7.90 per share, and 652,513 stock equivalent units
at an average price of $5.19 per unit were outstanding.

We have granted performance units to certain members of the Board of
Directors who are not also an employee of the company. We also granted
restricted stock to certain directors in satisfaction of residual obligations
under the discontinued retirement plan for directors. During 2002, 1,000
performance units per non-employee director were issued under this program at
the weighted average fair value of our stock on

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

the grant date of $3.90 per share. During 2002, 2001 and 2000, 7,000, 8,000 and
1,000 performance units, respectively, were issued under this program at a
weighted average fair value of our stock on the grant date of $3.90, $3.66 and
$5.75 per share, respectively. During 2002, 3,949 restricted shares were issued
under this program to a non-employee director at the weighted average fair value
of our stock on the grant date of $3.90 per share. During 2001, 9,656 restricted
shares were issued under this program at a weighted average fair value of our
stock on the grant date of $3.19. At December 31, 2002, 10,577 restricted shares
and 20,000 performance units at an average price of $4.37 and $4.83,
respectively, per unit were outstanding under this program.

We recognized after-tax stock based compensation expense in 2002 of $4
million, in 2001 of $2 million, and in 2000 of $10 million.

Employee Stock Ownership Plans (401(k) Plans) -- We have established
Employee Stock Ownership Plans for the benefit of our employees. Under the
plans, participants may elect to defer up to 16 percent of their salary through
contributions to the plan, which are invested in selected mutual funds or used
to buy our common stock. Through December 31, 2001, we matched qualified
contributions with a contribution of 75 percent of each employee's contribution
up to 8 percent of the employee's salary. Beginning January 1, 2002, this match
was reduced to 50 percent of each employee's contribution up to 8 percent of the
employee's salary. These matching contributions were made in company stock and
approximated $10 million and $16 million (representing 3.7 million and 1.6
million common shares, respectively) for the years ended December 31, 2001 and
2000, respectively. These matching contributions were made in cash starting
January 1, 2002 and approximated $7 million for the year ended December 31,
2002. All contributions vest immediately.

Employee Stock Purchase Plan -- Effective April 1, 1997, we adopted an
Employee Stock Purchase Plan ("ESPP") that allowed U.S. and Canadian employees
to purchase our common stock at a 15 percent discount. Each year employees
participating in the ESPP were to able purchase shares with a discounted value
not to exceed $21,250. Under the ESPP, we sold 281,056 shares to employees in
1999. The weighted average fair value of the employee purchase right, which was
estimated using the Black-Scholes option pricing model and the assumptions
described below except that the average life of each purchase right was assumed
to be 90 days, was $4.29 in 1999. The ESPP was suspended in June 1999 and
terminated during 2000.

Stock Options -- The following table reflects the status and activity for
all options to purchase common stock we have issued for the periods indicated:

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The following table reflects summarized information about stock options
outstanding at December 31, 2002:

Rights Plan

On September 9, 1998, we adopted a Rights Plan and established an
independent Board committee to review it every three years. The Rights Plan was
adopted to deter coercive takeover tactics and to prevent a potential acquirer
from gaining control of us in a transaction that is not in the best interests of
our shareholders. Generally, under the Rights Plan, as it has been amended, if a
person becomes the beneficial owner of 15 percent or more of our outstanding
common stock, each right will entitle its holder to purchase, at the right's
exercise price, a number of shares of our common stock or, under certain
circumstances, of the acquiring person's common stock, having a market value of
twice the right's exercise price. Rights held by the 15 percent or more holders
will become void and will not be exercisable.

In March 2000, we amended the Rights Plan to (i) reduce from 20 percent to
15 percent the level of beneficial ownership at which the rights became
exercisable, as described above, and (ii) eliminate the "qualified offer" terms
of the plan. These terms provided that the rights would not become exercisable
in connection with a "qualified offer," which was defined as an all-cash tender
offer for all outstanding common stock that was fully financed, remained open
for a period of at least 60 business days, resulted in the offeror owning at
least 85 percent of our common stock after consummation of the offer, assured a
prompt second-step acquisition of shares not purchased in the initial offer, at
the same price as the initial offer, and met certain other requirements.

In connection with the adoption of the Rights Plan, our Board of Directors
also adopted a three-year independent director evaluation ("TIDE") mechanism.
Under the TIDE mechanism, an independent Board committee will review, on an
ongoing basis, the Rights Plan and developments in rights plans generally, and,
if it deems appropriate, recommend modification or termination of the Rights
Plan. The independent committee will report to our Board at least every three
years as to whether the Rights Plan continues to be in the best interests of our
shareholders.

Dividend Reinvestment and Stock Purchase Plan

Under the Tenneco Automotive Inc. Dividend Reinvestment and Stock Purchase
Plan, holders of our common stock may apply cash dividends, if any, and optional
cash investments to the purchase of additional shares of our common stock. We
have not paid dividends on our common stock since fourth quarter of 2000.

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Earnings Per Share

Earnings (loss) per share of common stock outstanding were computed as
follows:

8. PREFERRED STOCK

We had 50 million shares of preferred stock ($.01 par value) authorized at
December 31, 2002 and 2001. No shares of preferred stock were outstanding at
those dates. We have designated and reserved 2 million shares of the preferred
stock as junior preferred stock for the Rights Plan.

9. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

We have various defined benefit pension plans that cover substantially all
of our employees. Benefits are based on years of service and, for most salaried
employees, on final average compensation. Our funding policy is to contribute to
the plans amounts necessary to satisfy the funding requirement of applicable
federal or foreign laws and regulations. Plan assets consist principally of
listed equity and fixed income securities.

We have postretirement health care and life insurance plans that cover a
majority of our domestic employees. For salaried employees, the plans cover our
employees retiring on or after attaining age 55 who have had at least 10 years
of service with us after attaining age 45. For hourly employees, the
postretirement benefit plans generally cover employees who retire according to
one of our hourly employee retirement plans. All of these benefits may be
subject to deductibles, copayment provisions, and other limitations, and we have
reserved the right to change these benefits. Our postretirement healthcare and
life insurance plans are not funded.

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the change in benefit obligation, the change in plan assets,
the development of net amount recognized, and the amounts recognized in the
balance sheets for the pension plans and postretirement benefit plans follows:

- -------------------------
Notes: Assets of one plan may not be utilized to pay benefits of other plans.
Additionally, the prepaid (accrued) pension cost has been recorded based
upon certain actuarial estimates as described below. Those estimates are
subject to revision in future periods given new facts or circumstances.

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Net periodic pension costs (income) for the years 2002, 2001, and 2000,
consist of the following components:

The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for all pension plans with accumulated benefit obligations
in excess of plan assets were $383 million, $341 million, and $194 million,
respectively, as of September 30, 2002, $319 million, $286 million, and $200
million, respectively, as of September 30, 2001, and $44 million, $40 million,
and $7 million, respectively, as of September 30, 2000.

The weighted average discount rates (which are based on long-term market
rates) used in determining the 2002, 2001, and 2000 actuarial present value of
the benefit obligations were 6.5 percent, 6.9 percent, and 7.3 percent,
respectively. The rate of increase in future compensation was 4.2 percent for
2002 and 4.3 percent for each of 2001 and 2000. The weighted average expected
long-term rate of return on plan assets for 2002 was 8.4 percent and 9.4 percent
for each of 2001 and 2000.

We made contributions of $21 million to these pension plans during 2002.
Based on current actuarial estimates, we believe we will be required to make
contributions of about $20 million to these plans during 2003. Pension
contributions beyond 2003 will be required, but those amounts will vary based
upon many factors, including the performance of our pension fund investments
during 2003.

Net periodic postretirement benefit cost for the years 2002, 2001, and
2000, consist of the following components:

The weighted average assumed health care cost trend rate used in
determining the 2002 accumulated postretirement benefit obligation was 10
percent, declining by 1 percent each year through 2007. In 2001 and 2000 the
health care cost trend rate was 10 percent and 5 percent, respectively.

Increasing the assumed health care cost trend rate by one percentage point
in each year would increase the 2002, 2001, and 2000, accumulated postretirement
benefit obligations by approximately $17 million, $15 million, and $11 million,
respectively, and would increase the aggregate of the service cost

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

and interest cost components of the net periodic postretirement benefit cost by
approximately $2 million each year for 2002, 2001 and 2000.

Decreasing the assumed health care cost trend rate by one percentage point
in each year would decrease the 2002 accumulated postretirement benefit
obligation by approximately $15 million and would decrease the aggregate of the
service cost and interest cost components of the net periodic postretirement
benefit cost by approximately $2 million.

The discount rates (which are based on long-term market rates) used in
determining the 2002, 2001, and 2000 accumulated postretirement benefit
obligations were 7.00 percent, 7.25 percent, and 8.0 percent respectively.

10. SEGMENT AND GEOGRAPHIC AREA INFORMATION

We are a global manufacturer with two geographic reportable segments: North
America and Europe. Each segment manufactures and distributes ride control and
emission control products primarily for the automotive industry. We have not
aggregated individual operating segments within these reportable segments. The
accounting policies of the segments are the same as described in Note 1,
"Summary of Accounting Policies." We evaluate segment performance based
primarily on income before interest expense, income taxes, and minority
interest. Products are transferred between segments and geographic areas on a
basis intended to reflect as nearly as possible the "market value" of the
products. Segment results for 2002, 2001, and 2000 are as follows:

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The following table shows information relating to our external customer
revenues for each product or each group of similar products:

During 2002, sales to four major customers comprised approximately 19.8
percent, 13.3 percent, 10.1 percent, and 10.1 percent of consolidated net sales
and operating revenues. During 2001, sales to four major customers comprised
approximately 19.6 percent, 10.9 percent, 10.6 percent, and 10.4 percent of
consolidated net sales and operating revenues. During 2000, sales to four major
customers comprised approximately 16.6 percent, 13.5 percent, 11.5 percent, and
9.7 percent of consolidated net sales and operating revenues.

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

- -------------------------
Notes: (a) Revenues from external customers and long-lived assets for individual
foreign countries other than Germany are not material.
(b) Revenues are attributed to countries based on location of the seller.
(c) Revenues have been adjusted for the change in accounting for certain
sales incentives
(d) Long-lived assets include all long-term assets except goodwill,
intangibles, and deferred tax assets.

11. COMMITMENTS AND CONTINGENCIES

Capital Commitments

We estimate that expenditures aggregating approximately $63 million will be
required after December 31, 2002 to complete facilities and projects authorized
at such date, and we have made substantial commitments in connection with these
facilities and projects.

Lease Commitments

We have long-term leases for certain facilities, equipment, and other
assets. The minimum lease payments under non-cancelable leases with lease terms
in excess of one year are:

Total rental expense for the year 2002, 2001, and 2000 was $33 million, $30
million, and $36 million respectively.

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Contingencies

During the second quarter of 2002, we reached an agreement with an OE
customer to recover our investment in development costs and related equipment,
as well as amounts owed to some of our suppliers, for a platform cancelled by
the customer. We collected $30 million, net of the amounts we owed to suppliers,
during the second quarter pursuant to this agreement. The agreement had no
effect on our results of operations.

Litigation

We also from time to time are involved in legal proceedings or claims that
are incidental to the conduct of our business. Some of these proceedings allege
damages against us relating to environmental liabilities (including toxic tort,
property damage and remediation), intellectual property matters (including
patent, trademark and copyright infringement, and licensing disputes), personal
injury claims (including injuries due to product failure, design or warnings
issues, and other product liability related matters), employment matters, and
commercial or contractual disputes, sometimes related to acquisitions or
divestitures. We will continue to vigorously defend ourselves against all of
these claims. Although the ultimate outcome of any legal matter cannot be
predicted with certainty, based on present information, including our assessment
of the merits of the particular claim, we do not expect that these legal
proceedings or claims will have any material adverse impact on our future
consolidated financial position or results of operations. In addition, we are
subject to a number of lawsuits initiated by a significant number of claimants
alleging health problems as a result of exposure to asbestos. Many of these
cases involve significant numbers of individual claimants. However, only a small
percentage of these claimants allege that they were automobile mechanics who
were allegedly exposed to our former muffler products and a significant number
appear to involve workers in other industries or otherwise do not include
sufficient information to determine whether there is any basis for a claim
against us. We believe, based on scientific and other evidence, it is unlikely
that mechanics were exposed to asbestos by our former muffler products and that,
in any event, they would not be at increased risk of asbestos-related disease
based on their work with these products. Further, many of these cases involve
numerous defendants, with the number of each in some cases exceeding 200
defendants from a variety of industries. Additionally, the plaintiffs either do
not specify any, or specify the jurisdictional minimum, dollar amount for
damages. On the other hand, we are experiencing an increasing number of these
claims, likely due to bankruptcies of major asbestos manufacturers. We
vigorously defend ourselves against these claims as part of our ordinary course
of business. To date, with respect to claims that have proceeded sufficiently
through the judicial process, we have regularly achieved favorable resolution in
the form of a dismissal of the claim or a judgment in our favor. Accordingly, we
presently believe that these asbestos-related claims will not have a material
adverse impact on our future financial condition or results of operations.

Product Warranties

We provide warranties on some of our products. The warranty terms vary but
range from one year up to limited lifetime warranties on some of our premium
aftermarket products. Provisions for estimated expenses related to product
warranty are made at the time products are sold or when specific warranty issues
are identified on OE products. These estimates are established using historical
information about the nature, frequency, and average cost of warranty claims. We
actively study trends of warranty claims and take action to improve product
quality and minimize warranty claims. We believe that the warranty reserve is
appropriate; however, actual claims incurred could differ from the original
estimates, requiring adjustments to the reserve. The reserve is included in both
long-term and short-term liabilities on the balance sheet.

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Below is a table that shows the activity in the warranty accrual accounts:

Environmental Matters

We are subject to a variety of environmental and pollution control laws and
regulations in all jurisdictions in which we operate. We expense or capitalize,
as appropriate, expenditures for ongoing compliance with environmental
regulations that relate to current operations. We record expenditures that
relate to an existing condition caused by past operations and that do not
contribute to current or future revenue generation. We record liabilities when
environmental assessments indicate that remedial efforts are probable and the
costs can be reasonably estimated. Estimates of the liability are based upon
currently available facts, existing technology, and presently enacted laws and
regulations taking into consideration the likely effects of inflation and other
societal and economic factors. We consider all available evidence including
prior experience in remediation of contaminated sites, other companies' cleanup
experiences and data released by the United States Environmental Protection
Agency or other organizations. These estimated liabilities are subject to
revision in future periods based on actual costs or new information. Where
future cash flows are fixed or reliably determinable, we have discounted the
liabilities. All other environmental liabilities are recorded at their
undiscounted amounts. We evaluate recoveries separately from the liability and,
when they are assured, recoveries are recorded and reported separately from the
associated liability in our financial statements.

As of December 31, 2002, we are designated as a potentially responsible
party in three Superfund sites. We have estimated our share of the remediation
costs for these sites to be less than $1 million in the aggregate. In addition
to the Superfund sites, we may have the obligation to remediate current or
former facilities, and we estimate our share of remediation costs at these
facilities to be approximately $14 million. For both the Superfund sites and the
current and former facilities, we have established reserves that we believe are
adequate for these costs. Although we believe our estimates of remediation costs
are reasonable and are based on the latest available information, the cleanup
costs are estimates and are subject to revision, as more information becomes
available about the extent of remediation required. At some sites, we expect
that other parties will contribute to the remediation costs. In addition, at the
Superfund sites, the Comprehensive Environmental Response, Compensation and
Liability Act provides that our liability could be joint and several, meaning
that we could be required to pay in excess of our share of remediation costs.
Our understanding of the financial strength of other potentially responsible
parties at the Superfund sites, and of other liable parties at our current and
former facilities, has been considered, where appropriate, in our determination
of our estimated liability.

We undertook a third-party evaluation of estimated environmental
remediation costs at one of our facilities beginning in 2000. The evaluation was
initiated as a result of testing that indicated the potential underground
migration of some contaminants beyond our facility property. We completed and
analyzed the results of our evaluation of contamination and migration from that
facility. We initially increased the reserve by $3 million in the fourth quarter
of 2000 related to on-site remediation activities and $5 million in the first
quarter of 2001 following evaluation of needed off-site remediation activities.
However, after

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

further investigation of alternative remediation technologies, we were able to
identify a more efficient technology and therefore reduced the reserve by $4
million in the fourth quarter of 2001. There have been no significant changes in
the reserve for 2002.

We believe that any potential costs associated with our current status as a
potentially responsible party in the Superfund sites, or as a liable party at
our current or former facilities, will not be material to our results of
operations or consolidated financial position.

12. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

Basis of Presentation

We issued senior subordinated notes due 2009 as a component of a plan to
realign our debt. You should also read Note 5, "Financial Instruments" for
further discussion of the notes and related guarantee. All of our existing and
future material domestic wholly owned subsidiaries (which comprise the Guarantor
Subsidiaries) fully and unconditionally guarantee the notes on a joint and
several basis. We have not presented separate financial statements and other
disclosures concerning each of the Guarantor Subsidiaries because management has
determined that such information is not material to the holders of the notes.
Therefore, the Guarantor Subsidiaries are combined in the presentation below.

These condensed consolidating financial statements are presented on the
equity method. Under this method, our investments are recorded at cost and
adjusted for our ownership share of a subsidiary's cumulative results of
operations, capital contributions and distributions, and other equity changes.
You should read the condensed consolidating financial statements of the
Guarantor Subsidiaries in connection with our consolidated financial statements
and related notes of which this note is an integral part.

Distributions

There are no significant restrictions on the ability of the Guarantor
Subsidiaries to make distributions to us.

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

STATEMENT OF INCOME (LOSS)

91

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

STATEMENT OF INCOME (LOSS)

92

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

STATEMENT OF INCOME (LOSS)

93

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

BALANCE SHEET

94

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

BALANCE SHEET

95

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

STATEMENT OF CASH FLOWS

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

Note: Cash and cash equivalents include highly liquid investments with a
maturity of three months or less at the date of purchase.

96

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

STATEMENT OF CASH FLOWS

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

Note: Cash and cash equivalents include highly liquid investments with a
maturity of three months or less at the date of purchase.

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

STATEMENT OF CASH FLOWS

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

Note: Cash and cash equivalents include highly liquid investments with a
maturity of three months at the date of purchase.

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

13. QUARTERLY FINANCIAL DATA (UNAUDITED)

- -------------------------
Note: The sum of the quarters may not equal the total of the respective year's
earnings per share on either a basic or diluted basis due to changes in
the weighted average shares outstanding throughout the year.
(The preceding notes are an integral part of the foregoing financial
statements.)

99

SCHEDULE II

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

100

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

None.

101

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The section entitled "Election of Directors" in our definitive Proxy
Statement for the Annual Meeting of Stockholders to be held May 13, 2003 is
incorporated herein by reference. In addition, Item 4.1 of this Annual Report on
Form 10-K, which appears at the end of Part I, is incorporated herein by
reference.

We have long maintained codes of conduct, business principles and ethical
behavior applicable to our directors, officers and other employees. A copy of
our Code of Ethical Conduct for Financial Managers, which applies to our
principal executive officer, principal financial officer, controller and various
other financial managers, is filed as an exhibit to this Form 10-K. We continue
to review our corporate policies in light of the provisions of the
Sarbanes-Oxley Act of 2002, the rules recently adopted thereunder and the
pending corporate governance proposals of the New York Stock Exchange regarding
codes of conduct and ethics. We plan to make any necessary or appropriate
revisions to our existing codes of conduct, business principles and ethical
behavior as these rules are finalized. We further plan to post a copy of the
Code of Ethical Conduct for Financial Managers on our Internet website
(www.tenneco-automotive.com) in the near future. After this code is posted to
our website, we will make a copy of it available to any person, without charge,
upon written request to Tenneco Automotive Inc., 500 North Field Drive, Lake
Forest, Illinois 60045, Attn: General Counsel. Once applicable to us, we intend
to satisfy the disclosure requirement under Item 10 of Form 8-K regarding
amendments to or waivers of this code by posting this information on our
Internet website (www.tenneco-automotive.com).

ITEM 11. EXECUTIVE COMPENSATION.

The sections entitled "Executive Compensation" and "Election of
Directors -- Compensation of Directors" in our definitive Proxy Statement for
the Annual Meeting of Stockholders to be held May 13, 2003 are incorporated
herein by reference.

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

The section entitled "Ownership of Common Stock" and "Approval of
Amendments to the Tenneco Automotive Inc. 2002 Long-Term Incentive
Plan -- Outstanding Awards," in our definitive Proxy Statement for the Annual
Meeting of Stockholders to be held May 13, 2003 are incorporated herein by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The section entitled "Election of Directors -- Transactions with Management
and Others" in our definitive Proxy Statement for the Annual Meeting of
Stockholders to be held May 13, 2003 is incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES.

Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of our disclosure controls and procedures (as defined in
Rule 13a-14(c) under the Securities Exchange Act of 1934). Based on their
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by our company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms. Subsequent to the date of their evaluation, there were no
significant changes in our internal controls or in other factors that could
significantly affect these controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.

102

PART IV

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

FINANCIAL STATEMENTS INCLUDED IN ITEM 8

See "Index to Financial Statements of Tenneco Automotive Inc. and
Consolidated Subsidiaries" set forth in Item 8, "Financial Statements and
Supplementary Data" for a list of financial statements filed as part of this
Report.

INDEX TO SCHEDULE INCLUDED IN ITEM 8

SCHEDULES OMITTED AS NOT REQUIRED OR INAPPLICABLE

Schedule I -- Condensed financial information of registrant
Schedule III -- Real estate and accumulated depreciation
Schedule IV -- Mortgage loans on real estate
Schedule V -- Supplemental information concerning property -- casualty insurance
operations

REPORTS ON FORM 8-K

We filed the following Current Report on Form 8-K during the quarter ended
December 31, 2002:

- Current Report on Form 8-K dated October 22, 2002, including pursuant to
Item 5 certain information regarding our results of operations for the
third quarter of 2002.

103

EXHIBITS

The following exhibits are filed with this Annual Report on Form 10-K for
the fiscal year ended December 31, 2002, or incorporated herein by reference
(exhibits designated by an asterisk are filed with the report; all other
exhibits are incorporated by reference):

INDEX TO EXHIBITS

104

105

106

107

108

- ---------------
(1) Indicates a management contract or compensatory plan or arrangement.

* Filed herewith.

109

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.

TENNECO AUTOMOTIVE INC.

By /s/ MARK P. FRISSORA*
------------------------------------
Mark P. Frissora
Chairman and Chief Executive Officer

Date: March 18, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed by the following persons in the capacities indicated on
March 18, 2003.

110

CERTIFICATIONS

I, Mark P. Frissora, Chairman and Chief Executive Officer of Tenneco Automotive
Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Tenneco
Automotive Inc.;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;

4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

/s/ MARK P. FRISSORA
--------------------------------------

Dated: March 18, 2003

111

I, Mark A. McCollum, Senior Vice President and Chief Financial Officer of
Tenneco Automotive Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Tenneco
Automotive Inc.;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;

4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

/s/ MARK A. MCCOLLUM
--------------------------------------

Dated: March 18, 2003

112