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, 2003

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 30, 2003.

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, 41,388,967 shares outstanding as of March 8, 2004.

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 materially and adversely impact
our financial condition and results of operations. 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. For example, weakened
economic conditions in the United States over the last several years resulted in
most of the customers of our North American OE operations slowing new vehicle
production in 2001, 2002 and 2003 compared to 1999 and 2000. Further decreases
in demand for automobiles and automotive products generally, or in the demand
for our products in particular, could materially and adversely impact our
financial condition and results of operations.

We may be unable to realize sales represented by our awarded business,
which could materially and adversely impact our financial condition and results
of operations. 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. Production rates for 2003 were down three percent from 2002,
and we remain cautious regarding production volumes for 2004. Given current
economic conditions, we expect the North American light vehicle build to be
approximately 16 million units in 2004, which is a slight increase from 2003
levels. We also expect the European light vehicle production to slightly
increase in 2004. 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. Any failure to realize these
sales could have a material adverse effect on our financial condition and
results of operations.

i

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.

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 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
requested to offer price concessions to them. 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 realize our business strategy of improving operating
performance and generating savings and improvements to help offset pricing
pressures from our customers. 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.

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. This has adversely impacted, and will likely
continue to adversely impact, our aftermarket sales. Also, any additional
increases in the average useful lives of automotive parts would further
adversely affect the demand for our aftermarket products. Aftermarket sales
represented approximately 25 percent of our net sales for 2003, as compared to
26 percent of our net sales for 2002.

ii

We may incur material costs related to product warranties, environmental
and regulatory matters and other claims, which could have a material adverse
impact on our financial condition and results of operations. 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. 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.

Further, we are subject to a variety of environmental and pollution control
laws and regulations in all jurisdictions in which we operate. Soil and
groundwater remediation activities are being conducted at six of our real
properties.

We also from time to time are involved in legal proceedings, claims or
investigations that are incidental to the conduct of our business. Some of these
proceedings allege damages against us relating to environmental liabilities,
intellectual property matters, personal injury claims, employment matters or
commercial or contractual disputes. For example, we are involved in litigation
with the minority owner of one of our Indian joint ventures over various
operational issues. This dispute involves a court-mandated bidding process,
which could result in a non-cash charge to earnings if we are required to sell
our interest in the joint venture on unfavorable terms. As another example, we
recently identified our failure to file certain reports under an automotive
industry regulation, and, although we have now made the required filings, this
failure could subject us to a response, including fines and penalties, from the
applicable agency. We are also 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. Many of these cases also involve numerous defendants, with the number
of each in some cases exceeding 200 defendants from a variety of industries. We
are experiencing an increasing number of these claims, likely due to
bankruptcies of major asbestos manufacturers.

We vigorously defend ourselves in connection with all of the matters
described above. We cannot, however, assure you that the costs, charges and
liabilities associated with these matters will not be material, or that those
costs, charges and liabilities will not exceed any amounts reserved for them in
our financial statements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Environmental and Other Matters,"
included in Item 7 for further description.

The hourly workforce in the automotive industry is highly unionized and our
business could be adversely affected by labor disruptions. Although we consider
our current relations with our employees to be good, if major work disruptions
were to occur, our business could be adversely affected by, for instance, a loss
of revenues, increased costs or reduced profitability. We have not experienced a
material labor disruption in our workforce in the last ten years, but there can
be no assurance that we will not experience a major labor disruption at one of
our facilities in the future in the course of renegotiation of our labor
arrangements or otherwise. In addition, 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 and 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. For
example, a General Motors strike in 1998 reduced second and third quarter
revenue and income growth of our OE business in that year.

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

iii

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, requested 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 requested 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 2003, General Motors, Ford, Volkswagen, and DaimlerChrysler accounted for
18.9 percent, 13.9 percent, 11.0 percent, and 8.8 percent of our net 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 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 2003, about 50 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;

- exposure to local social unrest, including any resultant acts of war,
terrorism or similar events;

- exposure to local public health issues, and the resultant impact on
economic and political conditions;

- 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 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

iv

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 and 2003 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.

Further significant changes in our stockholder composition may jeopardize
our ability to use some or all of our net operating loss carryforwards. As of
December 31, 2003, we had federal net operating loss ("NOL") carryforwards of
$516 million available to reduce taxable income in future years, and these NOL
carryforwards expire in various years through 2023. The federal tax effect of
these NOL's is $181 million and is recorded as an asset on our balance sheet as
of December 31, 2003. Our ability to utilize our NOL carryforwards could become
subject to significant limitations under Section 382 of the Internal Revenue
Code ("Section 382") if we undergo a majority ownership change. We would undergo
a majority ownership change if, among other things, the stockholders who own or
have owned, directly or indirectly, five percent or more of our common stock or
are otherwise treated as five percent stockholders under Section 382 and the
regulations promulgated thereunder, increase their aggregate ownership of our
stock by more than 50 percentage points over the lowest percentage of stock
owned by these stockholders at any time during the testing period, which is
generally the three-year period preceding the potential ownership change. In the
event of a majority ownership change, Section 382 imposes an annual limitation
on the amount of taxable income a corporation may offset with the NOL
carryforwards. Any unused annual limitation may be carried over to later years
until the applicable expiration of the respective NOL carryforwards. If we were
to undergo a majority ownership change, we would be required to record a reserve
for some or all of the asset currently recorded on our balance sheet. As of
December 31, 2003, we believe that there had been a significant change, but not
a majority change, in our ownership during the prior three years. We cannot
assure you that we will not undergo a majority ownership change in the future.
Further, because an ownership change for federal tax purposes can occur based on
trades among our existing stockholders, whether we undergo a majority ownership
change may be a matter beyond our control.

The prices of raw materials may change, which could have a material adverse
impact on us. 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) general
economic, business and market conditions; (ii) potential legislation, regulatory
changes and other governmental actions, including the ability to receive
regulatory approvals and the timing of such approvals; (iii) new technologies
that reduce the demand for certain of our products or otherwise render them
obsolete; (iv) our ability to integrate operations of acquired businesses
quickly and in a cost effective manner; (v) changes in distribution channels or
competitive conditions in the markets and countries where we operate; (vi)
capital availability or costs, including changes in interest rates, market
perceptions of the industries in which we operate or ratings of securities;
(vii) increases in the cost of compliance with regulations, including
environmental regulations, and environmental liabilities in excess of the amount
reserved; (viii) changes by the Financial Accounting Standards Board, Public
Company Accounting Oversight Board or the Securities and Exchange Commission of
authoritative accounting principles generally accepted in the United States of
America or policies; (ix) acts of war, riots or terrorism, including but not
limited to the events taking place in the Middle East, the current military
action in Iraq and the continuing war on terrorism, as well as actions taken or
to be taken by the United States and other governments as a result of further
acts or threats of terrorism, and the impact of these acts on economic,
financial and social conditions in the countries where we operate; and (x) 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......................... 3
Description of Our Business............................... 5
Item 2. Properties.................................................. 19
Item 3. Legal Proceedings........................................... 20
Item 4. Submission of Matters to a Vote of Security Holders......... 22
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................................... 30
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 60
Item 8. Financial Statements and Supplementary Data................. 61
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 113
Item 9A. Controls and Procedures..................................... 113
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 114
Item 11. Executive Compensation...................................... 114
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 114
Item 13. Certain Relationships and Related Transactions.............. 115
Item 14. Principal Accountant Fees and Services...................... 115
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 116

vi

PART I

ITEM 1. BUSINESS.

TENNECO AUTOMOTIVE INC.

GENERAL

Our company, Tenneco Automotive Inc., is one of the world's leading
manufacturers of automotive emission control and ride control products and
systems. Our company serves both original equipment vehicle manufacturers
("OEMs") and the repair and replacement markets, or aftermarket, worldwide. 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
selected financial data.

During 2003, we completed a series of transactions pursuant to which we
refinanced, in its entirety, our then-existing senior credit facility. These
transactions involved (1) the sale of an aggregate of $475 million of senior
secured notes due 2013 in June and December, and (2) entering into an amended
and restated credit agreement with JPMorgan Chase Bank, as administrative agent,
and a group of other lenders in December. These transactions had a substantial
impact on the nature of our outstanding debt, as well as our liquidity, debt
amortization requirements and interest expense. See the section entitled
"Liquidity and Capital Resources" included elsewhere in this report under Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations," for a description of these transactions.

CORPORATE GOVERNANCE AND AVAILABLE INFORMATION

We have established a comprehensive corporate governance plan for the
purpose of defining responsibilities, setting high standards of professional and
personal conduct and assuring compliance with such responsibilities and
standards. As part of its annual review process, the Board of Directors monitors
developments in the area of corporate governance. In late 2003, the Securities
and Exchange Commission ("SEC") approved changes proposed by the New York Stock
Exchange ("NYSE") to its corporate governance and listing requirements. Although
many of these changes are not effective as of the date of this report, the Board
of Directors determined to voluntarily implement these changes on an accelerated
basis, to the extent our practices were not already in compliance. Listed below
are some of the key elements of our corporate governance plan. For more
information about these matters, see our definitive Proxy Statement for the
Annual Meeting of Stockholders to be held May 11, 2004.

1

INDEPENDENCE OF DIRECTORS

- Eight of our ten directors are independent under the revised NYSE listing
standards. One of our independent directors is retiring at our 2004
annual stockholders' meeting, after which (assuming the other directors
are reelected) seven of our nine directors will be independent.

- Non-management directors are scheduled to meet separately in executive
session after every regularly scheduled Board of Directors meeting.

- The Board of Directors has a lead director, Mr. Paul T. Stecko.

AUDIT COMMITTEE

- All members meet the independence standards for audit committee
membership under the revised NYSE listing standards and applicable SEC
rules.

- One member of the Audit Committee, Mr. Charles Cramb, qualifies as an
"audit committee financial expert," as defined in the SEC rules, and the
remaining members of the Audit Committee satisfy the NYSE's financial
literacy requirements.

- The Audit Committee operates under a written charter which governs its
duties and responsibilities, including its sole authority to appoint,
review, evaluate and replace the Company's independent auditors.

- The Audit Committee has adopted policies and procedures governing the
pre-approval of all audit, audit-related, tax and other services provided
by the Company's independent auditors.

COMPENSATION/NOMINATING/GOVERNANCE COMMITTEE

- All members meet the independence standards for compensation and
nominating committee membership under the revised NYSE listing standards.

- The Compensation/Nominating/Governance Committee operates under a written
charter that governs its duties and responsibilities, including the
responsibility for executive compensation.

CORPORATE GOVERNANCE PRINCIPLES

- The Company has adopted Corporate Governance Principles, including
qualification and independence standards for directors.

COMMUNICATION WITH DIRECTORS

- The Audit Committee has established a process for confidential and
anonymous submission by employees of the Company, as well as submissions
by other interested parties, regarding questionable accounting or
auditing matters.

- Additionally, the Board of Directors has established a process for
stockholders to communicate with the Board of Directors, as a whole, or
any non-management director.

CODES OF BUSINESS CONDUCT AND ETHICS

- Management has adopted a Code of Ethical Conduct for Financial Managers,
which applies to our Chief Executive Officer, Chief Financial Officer,
Controller and other key financial managers. This code is filed as
Exhibit 14.1 to this report.

- In addition, our company has operated under an omnibus Statement of
Business Principles that applies to all directors, officers and employees
and includes provisions ranging from restrictions on gifts to conflicts
of interests. All employees are required to affirm in writing their
acceptance of these principles.

2

PERSONAL LOANS TO EXECUTIVE OFFICERS AND DIRECTORS

- Our company complies with and will operate in a manner consistent with
the recently-enacted legislation outlawing extensions of credit in the
form of a personal loan to or for its directors or executive officers.

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 SEC,
available free of charge on our Internet website as soon as reasonably
practicable after submission to the SEC. Securities ownership reports on Forms
3, 4, and 5 are also available free of charge on our website as soon as
reasonably practicable after submission to the SEC. The contents of our website
are not, however, a part of this report.

Our Audit Committee Charter, Compensation/Nominating/Governance Committee
Charter, Corporate Governance Principles, Audit Committee policy regarding
accounting complaints, Code of Ethical Conduct for Financial Managers, Statement
of Business Principles, policy for communicating with the Board of Directors and
Audit Committee policy regarding the pre-approval of audit, non-audit, tax and
other services will be available on our website at www.tenneco-automotive.com on
or before April 1, 2004. In addition, we will make a copy of any of these
documents available to any person, without charge, upon written request to
Tenneco Automotive Inc., 500 North Field Drive, Lake Forest, Illinois 60045,
Attn: General Counsel. We intend to satisfy the disclosure requirements under
Item 10 of Form 8-K and applicable NYSE rules regarding amendments to or waivers
of our Code of Ethical Conduct for Financial Managers and Statement of Business
Principles by posting this information on our website at
www.tenneco-automotive.com.

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:

3

CAPITAL EXPENDITURES:

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

4

DESCRIPTION OF OUR BUSINESS

With 2003 revenues of over $3.7 billion, we are one of the world's largest
producers of automotive emission 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), Clevite(R) Elastomers,
and Fric Rot(TM) ride control products and Walker(R), Fonos(TM), and Gillet(TM)
emission control products.

As an automotive parts supplier, we design, engineer, manufacture, 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 most leading OEMs 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 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 2003, the number of light
vehicles produced was 15.9 million in North America, 19.4 million in Europe and
22.5 million in the rest of the world. Worldwide new light vehicle production is
forecasted to increase to over 63.0 million units in 2006 from approximately
57.8 million units in 2003. 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 2003 of the number of vehicles in the six to ten year-old vehicle
segment (from 63.7 million to 62.1 million) -- when cars generally need
first-line replacement parts such as those offered by us -- is also driving
aftermarket softness. 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 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

5

"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 OEM 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, emission
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 40
vehicle platforms in production worldwide and modules or systems for 15
additional platforms under development. For example, we supply ride control
modules for the DaimlerChrysler Caravan, the VW Golf and the Audi A6 and the
exhaust emission control system for the Porsche Boxster, Nissan Xterra, Ford
Transit, and Jaguar XJ Type.

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 requesting 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, 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

6

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 12 percent to 25 percent of global OE production from 2002 to 2007.

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 emission control, improved
safety and more sophisticated features at lower costs.

Automotive parts customers are increasingly demanding technological
innovation from suppliers to address more stringent emission and other
regulatory standards and to improve vehicle performance. To develop innovative
products, systems and modules, we have invested $201 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 were the first
supplier to develop and commercialize a diesel particulate filter that can
virtually eliminate carbon and hydrocarbon emissions with minimal impact on
engine performance, and we recently began supplying Volvo with a computerized
electronic suspension system that we co-developed with Ohlins Racing AB. As
another example, in 2002 we extended our acceleration sensitive damping
technology to Europe by launching our Monroe Reflex(R) premium aftermarket
shock, which was originally launched in North America in 1999.

INCREASING ENVIRONMENTAL STANDARDS

Automotive parts suppliers and OE manufacturers are designing products and
developing materials to respond to increasingly stringent environmental
requirements, a growing diesel market, the demand for better fuel economy and
safety concerns. Government regulations adopted over the past decade require
substantial reductions in automobile tailpipe emission, longer warranties on
parts of an automobile's pollution control equipment and additional equipment to
control fuel vapor emission. Some of these regulations also mandate more
frequent emission 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 emission control
systems with strong technical capabilities, we believe we are well positioned to
benefit from more rigorous environmental standards. For example, we developed
the diesel particulate filter to meet stricter air quality regulations in
Europe. We also have development contracts with a European heavy duty truck
manufacturer for our combined particulate filter and De-NOx, which can reduce
particulate emissions by up to 90 percent and nitrogen oxide emissions by up to
70 percent. 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.

7

CHANGING AFTERMARKET DISTRIBUTION CHANNELS

From 1992 to 2002, the number of retail automotive parts stores increased
50 percent while the number of jobber stores declined more than 20 percent.
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. This enables the retailers
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 trend in
the aftermarket 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 and Tier 2
automotive parts suppliers globally from more than 10,000 in 2002 to around 800
in 2010. 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 are able to enhance vehicle safety through innovative products and
technologies and have a distinct competitive advantage with the consumer, and
thus their OEM customers.

ANALYSIS OF REVENUES

The following table provides, for each of the years 2003 through 2001,
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

8

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) Elastomers (elastomeric vibration control components),
and DNX(TM) (ride control and exhaust brand for the sport tuner market). In
Europe, our Gillet(TM) brand is recognized as a leader in developing highly
engineered exhaust systems for OE customers.

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.

Worldwide we serve more than 30 different OE manufacturers, and our
products or systems are included on six of the top 10 passenger car models
produced in North America and Western Europe and all of the top 10 light truck
models produced in North America for 2003. During 2003, our OE customers
included:

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

During 2003, 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), O'Reilly Automotive and Advance Auto Parts

9

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 33.7 percent of our total net aftermarket
sales and only 8.3 percent of our total net sales for 2003.

General Motors accounted for approximately 18.9 percent, 19.8 percent, and
19.6 percent of our net sales in 2003, 2002, and 2001, respectively, Ford
accounted for approximately 13.9 percent, 13.3 percent and 10.6 percent of our
net sales in 2003, 2002, and 2001, respectively, DaimlerChrysler accounted for
approximately 8.8 percent, 10.1 percent, and 10.4 percent of our net sales in
2003, 2002, and 2001, respectively and Volkswagen accounted for approximately
11.0 percent, 10.1 percent, and 10.9 percent of our net sales in 2003, 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.

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
three suppliers in the world for both emission control and ride control products
and systems. In the aftermarket, we believe that we are the market share leader
in the supply of both emission control and ride control products in the markets
we serve throughout the world.

SEASONALITY

Our business is somewhat seasonal. OE manufacturers' production
requirements have historically been higher in the first two quarters of the year
as compared to the last two quarters. Production requirements tend to decrease
in the third quarter due to plant shutdowns for model changeovers. In addition,
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. Although seasonality does impact our business, actual results may vary
from the above trends due to timing of platform launches and other production
related events.

EMISSION CONTROL SYSTEMS

Vehicle emission 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 emission,
such as carbon monoxide, from a vehicle's exhaust system into harmless
components such as water vapor and carbon dioxide;

10

- 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;

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

- Diesel Particulate Filters -- Devices to eliminate particulate matter
emitted from diesel engines.

We entered this product line in 1967 with the acquisition of Walker
Manufacturing Company, which was founded in 1888. With the acquisition of
Heinrich Gillet GmbH & Co. in 1994, we also became one of Europe's leading OE
emission control systems suppliers. When the term "Walker" is used in this
document, it refers to our subsidiaries and affiliates that produce emission
control products and systems.

We supply our emission control offerings to over 20 automakers for use on
over 130 vehicle models, including six of the top 10 passenger cars produced in
North America and Western Europe and seven of the top 10 light trucks produced
in North America in 2003.

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 offerings include Mega-Flow(TM) exhaust products for
heavy-duty vehicle applications and DynoMax(R) high performance exhaust
products. We continue to emphasize product value differentiation with other
aftermarket brands such as Thrush(R) and Fonos(TM).

The following table provides, for each of the years 2003 through 2001,
information relating to our sales of emission 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.

11

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) Elastomers) -- 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 technology. The
Kinetic technology was incorporated on the Citroen World Rally Car that
was 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 30 vehicle-makers for use on
over 190 vehicle models, including all of the top 10 light truck models produced
in North America for 2003. We also supply OE ride control products and systems
to a range of heavy-duty and specialty vehicle manufacturers including Volvo
Truck, Scania, 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)
Elastomers 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.

12

The following table provides, for each of the years 2003 through 2001,
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.

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 emission
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, in North America our sales force is
organized into brand-specific teams, with a separate group for Monroe(R),
Rancho(R) and Walker(R). Our sales forces in Europe and the rest of the world
are generally organized by customer and cover both ride and emission control
products. 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

13

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. In
addition, we have implemented Six Sigma in our processes to minimize product
defects and improve operational efficiencies. We deploy new technology where it
makes sense to differentiate our processes from our competitors' or to achieve
balance in one-piece flow through production lines.

EMISSION CONTROL

Our consolidated businesses operate nine emission control manufacturing
facilities in the U.S. and 33 emission control manufacturing facilities outside
of the U.S. We operate five of these international facilities through joint
ventures in which we own a controlling interest. We also operate four additional
manufacturing facilities outside of the U.S. through four joint ventures in
which we hold a noncontrolling interest. We operate five emission control
engineering and technical facilities worldwide and share two other such
facilities with our ride control operations.

Within each of our emission 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 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 some of our
emission 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, assembles 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 two emission control
JIT assembly facilities in the United States and 16 in the rest of the world,
including three 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 emission 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
emission control systems to meet customer production requirements. For 2003, we
introduced our new Tubular Integrated (catalytic) Converter ("TIC") to major
vehicle manufacturers in North America. The TIC shortens production time,
reduces manufacturing cost by up to 25 percent and reduces weight by up to 20
percent using a new cold-formed, weld-free production process.

RIDE CONTROL

Our consolidated businesses operate nine ride control manufacturing
facilities in the U.S. and 21 ride control manufacturing facilities outside the
U.S. We operate four of these international facilities through

14

joint ventures in which we own a controlling interest. We operate seven
engineering and technical facilities worldwide and share two other such
facilities with Walker.

Within each of our ride control manufacturing facilities, operations are
organized by product (shocks, struts and vibration control products) and include
computer 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 emission 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 some of our manufacturing operations into JIT systems. We have two
JIT ride control assembly facilities in the United States and three 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. 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. We
recently began supplying Volvo with an innovative computerized electronic
suspension system, which features dampers developed by Tenneco and electronic
valves designed by Ohlins Racing AB. The computerized electronic suspension
("CES") ride control system is currently or will soon be featured on Volvo's new
560R, V70R, and 580R passenger cars.

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

15

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.
We are in the process of certifying our plants and design centers to the new
Quality System Standards TS16949 and plan to have most of our plants certified
to the new standard by the end of 2005.

BUSINESS STRATEGY

Our objective is to enhance profitability by leveraging our global position
in the manufacture of emission 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.

LEVERAGE GLOBAL ENGINEERING AND ADVANCED SYSTEM CAPABILITIES

We continue to 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. In addition, our JIT and in-line sequencing manufacturing and
distribution capabilities will enable us to better respond to our customers
needs.

"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 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 AB 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 S60/V70 and XC70
models. We continue to win new business at Ford for our Gripper(TM) stabilizer
bar system, which combines a pressurized elastomeric, mechanically bonded
bushing with a multi-stabilizer bar that eliminates noise while improving
vehicle ride and handling. In addition, our exclusive Kinetic(R) Dynamic
Suspension System, a version of the Kinetic(R) Reversible Function Stabilizer
Technology, is featured as an option on the 2004 Lexus GX470 sports utility
vehicle through a licensing arrangement between us and Lexus.

EXPAND OUR AFTERMARKET BUSINESS

We manufacture and market leading brand name products. Monroe(R) ride
control products and Walker(R) emission control products, which have been
offered to consumers for over 50 years, are two of the

16

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 emission control systems;

- Walker Perfection(TM) catalytic converters;

- Clevite(R) Elastomers 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.

Our plans to expand our aftermarket business are focused on three key
marketing initiatives: new product introductions; building customer and industry
awareness of the maintenance, performance and other benefits of ensuring that a
vehicle's ride control systems are in good working condition; and extending our
brands and aftermarket penetration to new product segments. For example, this
year we introduced our new DNX(TM) brand in the United States, that sport tunes
cars with performance exhaust and adjustable suspension systems. We plan to
introduce this brand in Europe in early 2004. We are exploring a number of
opportunities to extend our existing well-known brands, such as Monroe(R), and
our product line generally to aftermarket product segments not previously
served. For example, in 2003 we entered into an agreement with DuPont to
develop, manufacture and market DuPont(TM)-branded car appearance products in
North America. Another example is our Safety Triangle(TM) marketing campaign,
which focuses on the impact of replacing worn shock absorbers and struts on
vehicle safety. We believe that, when combined with our expansive customer
service network, these initiatives will yield incremental aftermarket revenues.

ACHIEVE GREATER CONTENT PER VEHICLE

As a result of increasing emissions standards and the introduction of
multiple catalytic converters and heat exchangers per vehicle, we believe that
available emission control content per light vehicle will rise over the next
several years. We believe that consumers' greater emphasis on automotive safety
could also allow available ride control content per light vehicle to rise. In
addition, advanced technologies and modular assemblies represent an opportunity
to increase vehicle content. For example, our innovative CES system, which we
recently debuted on several Volvo passenger cars, increases our content revenues
five-fold compared to a standard shock offering. 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.

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.
17

We have developed a strategic alliance with Futaba, a leading exhaust
manufacturer in Japan that also includes a joint venture operation in Burnley,
England. We also have an alliance with Tokico, a leading Japanese ride control
manufacturer. These alliances help us grow our business with Japan-based OEMs by
leveraging the geographical presence of each partner to serve Japan-based global
platforms. We have established a presence in Thailand through a joint venture
that supplies exhaust components for GMIsuzu. Our joint venture operations in
Dalian and Shanghai, China have established us as one of the leading exhaust
suppliers in the rapidly growing Chinese automotive market. We continue to
expand our Chinese presence and, in November 2003, entered into two agreements
to form new joint ventures in China. The first is with Eberspacher International
GmbH to supply emission control products and systems for luxury cars produced by
BMW and Audi in China, and the second is with Chengdu Lingchuan Mechanical Plant
to supply emission control products and systems for various Ford platforms
produced in China.

Where appropriate, we intend to continue to pursue strategic alliances,
joint ventures, acquisitions and other transactions that complement or enhance
our existing products, technology, systems development efforts, customer base
and/or domestic or international presence. We strive to align with strong local
partners to help us further develop our leadership in systems integration and to
penetrate international markets and with companies that have proven products,
proprietary technology, research capabilities and/or market penetration to help
us achieve further leadership in product offerings, customer relationships, and
systems integration and overall presence.

GROWTH IN ADJACENT MARKETS

One of our goals is to apply our existing design, engineering and
manufacturing capabilities to penetrate a variety of adjacent markets and to
achieve growth in higher-margin businesses. For example, we are aggressively
leveraging our technology and engineering leadership in emission and ride
control into adjacent markets, such as the heavy-duty market for trucks, buses,
agricultural equipment, construction machinery and other commercial vehicles. As
an established leading supplier of heavy-duty ride control and elastomer
products, we are already serving customers like Volvo Truck, Mack, Navistar
International, Freightliner and Scania. We also see tremendous opportunity to
expand our presence in the heavy-duty market with our emission control products
and systems, having recently entered this market in Europe with diesel
technologies that will help customers meet Euro 4, Euro 5 and Kyoto
requirements.

IMPROVE EFFICIENCY AND REDUCE COSTS

We are a process-oriented company and have implemented and are continuing
to implement several programs designed to improve efficiency and reduce costs,
including:

- We are successfully completing Project Genesis, our primary initiative
for improving global manufacturing and distribution efficiency. Since
launching Project Genesis in December 2001, we have reduced excess
manufacturing capacity and costs. We have closed eight facilities and
improved workflow at 21 plants worldwide.

- We anticipate long-term savings through our Six Sigma program, a
methodology and approach designed to minimize product defects and improve
operational efficiencies.

- We have implemented a Lean manufacturing program to reduce costs,
inventories and customer lead times while improving delivery.

- We have adopted the Business Operating System ("BOS"), 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 using Economic Value Added ("EVA(R)"), a financial tool that more
effectively measures how efficiently we employ our capital resources, and
have linked the successful application of this management discipline to
our incentive compensation program.

18

In addition, we continue to work 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, along with
other steps to reduce administrative and operational costs and improve cost
management.

REDUCE BORROWINGS AND IMPROVE CASH FLOW

We are focused on a core set of goals designed to reduce borrowings and
improve cash flow: (i) keeping selling, general and administrative expenses plus
engineering, research and development costs ("SGA&E") level as a percentage of
sales, while continuing to invest in sales and engineering; (ii) extracting
significant cash flow from working capital initiatives; (iii) maintaining
overall gross margins in a challenging economic environment; and (iv)
strengthening existing customer relationships and winning new long-term OE
business.

ENVIRONMENTAL MATTERS

We estimate that we and our subsidiaries will make capital expenditures for
environmental matters of approximately $7 million in 2004 and approximately $2
million in 2005.

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 -- Environmental and Other Matters," and
Note 11 to the financial statements of Tenneco Automotive Inc. and Consolidated
Subsidiaries included under Item 8.

EMPLOYEES

As of December 31, 2003, we had approximately 19,139 employees,
approximately 53.3 percent of which are covered by collective bargaining
agreements and approximately 29.7 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 2004. We regard our employee
relations as generally satisfactory.

OTHER

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.

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 nine manufacturing facilities in
the U.S. and 33 manufacturing facilities outside of the U.S., operate five
engineering and technical facilities worldwide and share two other such
facilities with Monroe. Fifteen of these manufacturing plants are JIT
facilities. Walker operates four additional manufacturing facilities outside of
the U.S. through four non-controlled joint ventures, three of which are JIT
facilities.

19

Monroe's consolidated businesses operate nine manufacturing facilities in
the U.S. and 21 manufacturing facilities outside the U.S., operate seven
engineering and technical facilities worldwide and share two 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, Russia 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 10 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, 2003, 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 $12 million. For each of 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.

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.

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. See Note 11 to our consolidated financial statements
included under Item 8 for information regarding our warranty reserves.
20

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. For example, we are involved in litigation with the minority owner
of one of our Indian joint ventures over various operational issues. This
dispute involves a court-mandated bidding process, which could result in a
non-cash charge to earnings if we are required to sell our interest in the joint
venture on unfavorable terms. As another example, we recently identified our
failure to file certain reports under an automotive industry regulation and,
although we have now made the required filings, this failure could subject us to
a response, including fines or penalties, from the appropriate agency. 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.

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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 2003.

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, 2004. For periods prior to November 4, 1999,
the date of the 1999 Pactiv spin-off, 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 of the Board of Directors. 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,
where he serves on its Compensation Committee, and the FMC Corporation, where he
serves on its Audit Committee.

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. On March 9,
2004, Mr. Donovan was elected to our company's Board of Directors.

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.

22

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.

RICHARD P. SCHNEIDER -- Mr. Schneider 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.

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 American Original Equipment
Emission Control in July 2001. Currently, Mr. Bauer serves as the Senior 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.

KENNETH R. TRAMMELL -- Mr. Trammell was named our Senior Vice President and
Chief Financial Officer in September 2003, having served as our Vice President
and Controller from 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.

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.

NEAL YANOS -- Mr. Yanos was named our Senior Vice President and General
Manager -- North American Original Equipment Ride Control in December 2000. In
addition, he became Senior Vice President and General Manager of our North
American Aftermarket on May 8, 2003. 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.

23

JAMES A. PERKINS, JR. -- Mr. Perkins joined us as Vice President and
Controller in February of 2004. Prior to joining the company, Mr. Perkins spent
fifteen years with General Electric in various management positions in
acquisitions integration, finance and corporate audit. Most recently, from 2001
to 2003, he was Director, Commercial Operations for GE Medical Systems
Information Technology, a provider of products and services for the medical
industry. Prior to that, he served as Chief Financial Officer and Vice President
for GE-Fanuc Corporation from 1999 to 2000 (manufacturing related products) and
for GE-Medical Systems Ultrasound from 1998 to 1999 (medical-related devices and
services).

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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 February 23, 2004, there were approximately 48,841 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 the Board of Directors intends to
retain any earnings for use in our business for the foreseeable 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, 2003,
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 2003, 2002, and 2001, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." We have reduced revenues for 2000 and 1999 by $21 million and
$19 million, respectively, to reflect the reclassification of certain sales
incentives that were previously shown in selling, general and administrative
expense.

(b) In 1999, we contributed the assets of our former paperboard packaging
operations to a new joint venture and spun off our former specialty
packaging operations (including the interest in the containerboard joint
venture) to our stockholders. Debt amounts 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) In accordance with Statement of Financial Accounting Standards ("SFAS") No.
145, the losses on prepayments of debt in 1999 and 2000 of $28 million and
$2 million, respectively, were reclassified to interest expense.

(e) In 2002, we adopted SFAS No. 142 which changed 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 performance. 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 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:

27

(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, 2000 and 1999
earnings were insufficient by $80 million, $76 million and $22 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

(i) For purposes of computing working capital as a percentage of sales, we
exclude cash and the current portion of long term debt from the calculation.
We exclude these items because we manage our working capital activity
through cash and short term debt. To include these items in the calculation
would distort actual working capital changes. Our calculation of working
capital as a percentage of sales is as follows:

29

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 64.

EXECUTIVE SUMMARY

We are one of the world's leading manufacturers of automotive emission
control and ride control products and systems. 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. We serve both
original equipment vehicle manufacturers and the repair and replacement markets,
or aftermarket, globally through leading brands, including Monroe(R), Rancho(R),
Clevite(R) Elastomers and Fric Rot(TM) ride control products and Walker(R),
Fonos(TM), and Gillet(TM) emission control products. Worldwide we serve more
than 30 different original equipment manufacturers, and our products or systems
are included on six of the top 10 passenger car models produced in North
American and Western Europe and all of the top 10 light truck models produced in
North America for 2003. During 2003, our aftermarket customers were comprised of
full-line and specialty warehouse distributors, retailers, jobbers, installer
chains and car dealers. We operate more than 70 manufacturing facilities
worldwide and employ more than 19,100 people to service our customer's demands.

Factors that are critical to our success include managing our overall
global manufacturing footprint to ensure proper placement and workforce levels
in line with business needs, maintaining competitive wages and benefits,
maximizing efficiencies in manufacturing processes, fixing or eliminating
unprofitable businesses and reducing overall costs. In addition, our ability to
adapt to key industry trends, such as the consolidation of OE customers,
changing aftermarket distribution channels, increasing environmental standards
and extended product life of automotive parts, also plays a critical role in our
success.

We have a substantial amount of indebtedness, with total debt, net of cash
balances, of $1.285 billion as of December 31, 2003. As such, our ability to
generate cash -- both to fund operations and service our debt -- is also a
significant area of focus for our company. See "Liquidity and Capital Resources"
below for further discussion of cash flows.

Total revenues for 2003 were more than $3.7 billion, a nine percent
increase over 2002. Higher OE volumes in certain areas of our operations and
strengthening currencies drove this increase. Gross margin for 2003 was 20.5
percent of revenues compared to 20.9 percent of revenues for 2002. The decline
was driven by a lower percentage of revenues generated by the higher margin
aftermarket business. We reported selling, general, administrative and
engineering expenses for 2003 of 11. 4 percent of revenues, as compared to 12.1
percent of revenues for 2002. Higher revenues and improved cost management via
tighter discretionary spending and expanding our shared-services strategies
drove the reduction. EBIT was $176 million for 2003 up from the $169 million
reported in 2002. The increase was driven by stronger operational performances
in North America and the rest of the world, which includes South America,
Australia and Asia. See below for a more detailed discussion of operating
performances for the last three years.

30

YEARS 2003 AND 2002

NET SALES AND OPERATING REVENUES

The following tables reflect our revenues for the years of 2003 and 2002.
We present these reconciliations of revenues in order to reflect the trend in
our sales in various product lines and geographic regions separately from the
effects of doing business in currencies other than the U.S. dollar.
Additionally, "pass-through" catalytic converter sales include precious metals
pricing, which may be volatile. 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. While our original equipment
customers assume the risk of this volatility, it impacts our reported revenue.
Excluding pass-through catalytic converter sales removes this impact. We have
not reflected any currency impact in the 2002 table since this is the base
period for measuring the effects of currency during 2003 on our operations. We
use this information to analyze the trend in our revenues before these factors.
We believe investors find this information useful in understanding period to
period comparisons in our revenues.

Revenues from our North American operations decreased $18 million in 2003
compared to the same period last year reflecting lower sales from the
aftermarket business. Total North American OE revenues were up $7 million at
$1,414 million in 2003 as higher ride control volumes were partially offset by
lower emission control volumes. OE emission control revenues were down $25
million to $972 million from $997 million in the prior year. Adjusted for
pass-through sales, which declined five percent, and currency, OE emission
control sales were down four percent from the prior year. OE ride control
revenues for 2003 increased eight percent from the prior year. Total OE
revenues, excluding pass-through sales and currency, increased one percent in
2003, while North American light vehicle production decreased approximately
three percent from one year ago. We experienced this improvement despite the
build rate decline primarily due to our strong position on top-selling platforms
with General Motors, Ford, Honda and Nissan. Aftermarket revenues for North
America were $466 million in 2003, representing a decrease of five percent
compared to the same period in the prior year. Aftermarket ride control revenues
decreased $9 million or three percent in 2003, as a result of a weak economy and
lower initial orders related to new customer additions in 2003 compared to the
prior year. Aftermarket emission control revenues declined nine percent in 2003
compared to 2002 reflecting the continued overall market decline in the emission
control business and the longer lives of exhaust components due to the OE's use
of stainless steel, which reduces aftermarket replacement rates.

32

Our European segment's revenues increased $222 million or 18 percent in
2003 compared to last year. Total OE revenues were $1,097 million, up 21 percent
from last year. OE emission control revenues increased 15 percent to $832
million from $723 million in the prior year. Excluding a $2 million decrease in
pass-through sales and a $132 million increase due to strengthening currency, OE
emission control revenues decreased four percent over 2002. This was greater
than the change in European production levels, which decreased approximately one
percent from one year ago. Our decrease was greater than the market decline as a
result of several older PSA, Volkswagen and Peugeot models where lower volumes
are not yet being offset by the launch or ramp up of the replacement models. OE
ride control revenues increased to $265 million in 2003 or up 42 percent from
$187 million a year ago. Excluding a $40 million benefit from currency
appreciation, OE ride control revenues increased 20 percent. We experienced this
revenue increase despite the decline in the European build rate due to stronger
sales on new platforms with Volkswagen and Ford. European aftermarket sales were
$346 million in 2003 compared to $311 million last year. Excluding $60 million
attributable to currency appreciation, European aftermarket revenues declined
eight percent in 2003 compared to last year. Ride control aftermarket revenues,
excluding the impact of currency, were down one percent compared to the prior
year, reflecting the continued overall weakness in the European aftermarket,
partially offset by the continued positive impact of the Monroe Reflex(R)
introduction in the second quarter of last year. Additionally, aftermarket
emission control revenues were lower as a result of the now standard use of
longer lasting stainless steel by OE manufacturers. Excluding the impact of
currency, European aftermarket emission control revenues declined 14 percent
from the prior year.

Revenues from our Other operations, which include South America, Australia
and Asia, increased $103 million to $443 million in 2003 as compared to $340
million in the prior year. Higher volumes and increased pass-through sales drove
increased revenues of $45 million at our Asian operations. In Australia,
stronger OE volumes and strengthening currency increased revenues by 34 percent.
Excluding the impact of currency, Australian revenues increased eight percent.
South American revenues were up $16 million primarily as a result of increased
OE volumes and a stabilizing currency.

EARNINGS BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST ("EBIT")

33

The EBIT results shown in the preceding table include the following items,
discussed below under "Restructuring and Other Charges" and "Liquidity and
Capital Resources -- Capitalization", which have an effect on the comparability
of EBIT results between periods:

EBIT for North American operations increased to $131 million in 2003 from
$129 million one year ago. Higher volumes in our OE ride control segment
increased EBIT by $8 million, and OE manufacturing efficiencies added $8 million
to EBIT in 2003 compared to the prior year. The North American aftermarket
volume decreases in both product lines and related manufacturing inefficiencies
reduced EBIT by $16 million, but were partially offset by $4 million in lower
selling, general and administrative costs including lower year over year
changeover expenses. North American EBIT was also reduced by $1 million as a
result of our inventory reduction programs. This EBIT decrease was the result of
inventory absorption costs--fixed manufacturing costs that the company continued
to incur in spite of the lower production levels necessary to drive inventory
down. Because of the lower production levels, a greater portion of fixed
manufacturing costs were recognized in the income statement rather than
allocated to inventory balances. Included in North America's 2003 EBIT was $4
million in restructuring and restructuring-related expenses. Included in 2002's
EBIT were $3 million in restructuring-related expenses and $1 million related to
amending the senior credit facility.

Our European segment's EBIT was $14 million for 2003, down $4 million from
$18 million in 2002. However, included in 2002's EBIT was an $11 million gain on
the sale of our York, U.K. facility and $1 million related to amending the
senior credit facility. Included in 2003's EBIT were $4 million of
restructuring-related expenses. Higher OE volumes primarily in ride control
contributed $7 million to EBIT. Also contributing to EBIT were manufacturing
efficiencies of $14 million primarily in OE emission control and currency
appreciation of $11 million. Additionally, benefits we are realizing from
Project Genesis, which is described further in "Restructuring and Other Charges"
in this Management's Discussion and Analysis, added to EBIT. These increases
were partially offset by lower aftermarket volumes that reduced EBIT by $11
million. In addition, as a result of our inventory reduction programs, EBIT was
reduced by $6 million due to higher absorption costs. Also reducing EBIT were
higher selling general and administrative costs.

EBIT for our Other operations increased $9 million to $31 million in 2003
compared to $22 million one year ago. Higher OE revenues in all regions drove
this improvement. Additionally, favorable currency exchange rates in Australia
increased EBIT by $4 million. Included in 2002's EBIT was a favorable adjustment
in the reserve for our costs to complete Project Genesis, which increased EBIT
by $1 million.

34

EBIT AS A PERCENTAGE OF REVENUE

In North America, EBIT as a percentage of revenue for 2003 remained flat to
the prior year. Higher OE ride control volumes and manufacturing efficiencies
were offset by lower aftermarket volumes and related manufacturing
inefficiencies. In Europe, EBIT margins for 2003 also remained flat compared to
the prior year. OE volume increases, manufacturing efficiencies, restructuring
savings and currency appreciation were offset by the impact of a gain on a
facility sale in the prior year, lower aftermarket volumes, and higher
absorption costs. EBIT as a percentage of revenue for our Other operations
increased one percent from the prior year. Higher OE volumes in all regions and
currency appreciation in Australia drove the increase.

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.

In the fourth quarter of 2001, our Board of Directors approved a
restructuring plan, a project known as Project Genesis, designed to lower our
fixed costs, improve efficiency and utilization, and better optimize our global
footprint. 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 emission 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 emission 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 (loss), $23
million of the pre-tax charge was reflected in cost of sales, while $4 million
was included in selling, general and administrative expenses. These charges were
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 emission 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 $0.81 per diluted common share. As
of December 31, 2003, we have eliminated 974 positions in connection with
Project Genesis. Additionally, we are executing this plan more efficiently than
originally

35

anticipated and as a result in the fourth quarter of 2002 reduced our reserves
related to this restructuring activity by $6 million which was recorded in cost
of sales. In the fourth quarter of 2003 we reclassified $2 million of severance
reserve to the asset impairment reserve. This reclassification became necessary
as actual asset impairments along with the sale of our closed facilities were
different than the original estimates. We expect to complete all remaining
restructuring activities related to Project Genesis in the second quarter of
2004.

We incurred other costs in 2003 of $7 million for moving and rearrangement
activities related to our restructuring actions initiated in prior periods that
could not be accrued as part of the restructuring charges for those actions.

Including the costs incurred in 2002 of $11 million, we have incurred a
total of $18 million for moving and rearrangement activities related to our
restructuring actions initiated in prior periods that could not be accrued as
part of the restructuring charges for these actions.

In the first quarter of 2003, we incurred severance costs of $1 million
associated with eliminating 17 salaried positions through selective layoffs and
an early retirement program. Additionally, 93 hourly positions were eliminated
through selective layoffs in the quarter. These reductions were done to reduce
ongoing labor costs in North America. This charge was primarily recorded in cost
of sales.

To date we have generated about $29 million of savings from Project
Genesis. About $7 million of savings was related to closing the eight
facilities, about $14 million of savings was related to value mapping and plant
arrangement and about $8 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.

Amounts related to the reserves we have established regarding activities
that are part of our restructuring plans are as follows:

Under the terms of our amended and restated senior credit agreement that
took effect on December 12, 2003, 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 2002-2006 period from the calculation of the
financial covenant ratios we are required to maintain under our senior credit
agreement. As of December 31, 2003, we have excluded $19 million of the $60
million available under the terms of the senior credit facility. In addition to
the announced actions, we continue to evaluate additional opportunities 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 restructuring actions. Actions that we take, if any, will require the
approval of our Board of Directors, or its authorized committee, 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.

36

In October of 2003 we announced the closure of an emission control
manufacturing facility in Birmingham, U.K. Approximately 130 employees will be
eligible for severance benefits in accordance with union contracts and U.K.
legal requirements. Charges related to this closing are not expected to exceed
$5 million and will be recorded in the first half of 2004. This action is in
addition to the plant closures announced in Project Genesis in the fourth
quarter of 2001.

INTEREST EXPENSE, NET OF INTEREST CAPITALIZED

We reported interest expense of $149 million in 2003 compared to $141
million in 2002. The current year's interest expense includes $12 million for
the write-off of senior debt issuance costs that were deferred on the senior
debt that we partially paid with the proceeds of our $350 million bond offering
in June of 2003 and fully refinanced in December of 2003. Additionally, we
incurred approximately $10 million in higher interest costs related to the bond
offering and senior debt refinancing. Offsetting this increase was lower
interest rates on our variable rate debt and the termination of our three-year
floating to fixed interest rate swap agreement that expired on February 3, 2003.
See more detailed explanations on our debt structure, including the $350 million
bond offering in June 2003, the $125 million bond offering in December 2003 and
the senior debt refinancing in December 2003 and their anticipated impact on our
interest expense, in "Liquidity and Capital Resources--Capitalization" later in
this Management's Discussion and Analysis.

INCOME TAXES

Income taxes were a benefit of $6 million in 2003, compared to a benefit of
$7 million in 2002. Included in 2003 were benefits of $17 million, including
book to return adjustments, settlements of prior year tax issues on a more
favorable basis than originally anticipated and a foreign tax adjustment. The
effective tax rate for 2003 including the $17 million benefit was a negative 21
percent. Excluding the $17 million benefit our effective tax rate was 37
percent. Included in 2002 were benefits of $19 million related to
lower-than-expected costs for withholding taxes related to foreign operations,
book to return adjustments and a change in the effective tax rate in Belgium.
The effective tax rate for 2002 including the $19 million benefit was a negative
24 percent. Excluding the $19 million benefit our effective tax rate was 40
percent.

EARNINGS PER SHARE

We reported earnings, before cumulative effect of change in accounting
principle, per diluted common share of $0.65 for 2003, compared to $0.74 per
diluted share for 2002. Included in the results for 2003 are the negative
impacts from expenses related to our restructuring activities, the write-off of
debt issuance costs relating to the bond transactions in June and December of
2003, the senior debt refinancing in December of 2003 and tax benefits for the
resolution of several audit issues. The net impact of these items increased
earnings per diluted share by $0.10. Included in the results for 2002 are the
negative impacts from expenses related to our restructuring activities, costs
related to amending the senior credit facility, a tax benefit for lower
withholding on foreign repatriation of earnings, a tax benefit for accrual to
return adjustments, a tax benefit for a change in the effective tax rate in
Belgium and the gain on the sale of our York, U.K. facility. In total, these
items improved earnings per diluted common share by $0.53. You should also read
Note 7 to the consolidated 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.
37

Revenue Recognition

We recognize revenue for sales to our OE 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.

Long-term Receivables

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, 2003, we had $15
million recorded as a long-term receivable from OE 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.

Income Taxes

We have a U.S. Federal tax NOL carryforward at December 31, 2003, of $516
million, which will expire in varying amounts from 2018 to 2023. The federal tax
effect of that NOL is $181 million, and is recorded as an asset on our balance
sheet at December 31, 2003. 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 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, 2003, we believe
that there has been a significant change in our ownership, but not a majority
change, in the last three years.

Stock-based Compensation

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 SFAS No. 123, "Accounting for Stock-Based
Compensation," we estimate that our pro-forma net income and earnings per share
for the full year 2003 would be lower by $1 million or $0.03 per diluted share.

Goodwill and Other Intangible Assets

We utilize an impairment-only approach to value our purchased goodwill in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." Each year
in the fourth quarter, we perform an impairment analysis on the balance of
goodwill. Inherent in this calculation is the use of estimates as the fair value
of our designated reporting units is based upon the present value of our
expected future cash flows. In addition, our calculation includes our best
estimate of our weighted average cost of capital and growth rate. If the
calculation results in a fair value of goodwill which is less than the book
value of goodwill, an impairment charge would be recorded in the operating
results of the impaired reporting unit.

38

Pension and Other Postretirement Benefits

We have various defined benefit pension plans that cover substantially all
of our employees. We also have postretirement health care and life insurance
plans that cover a majority of our domestic employees. Our pension and
postretirement health care and life insurance expenses and valuations are
dependent on management's assumptions used by our actuaries in calculating such
amounts. These assumptions include discount rates, health care cost trend rates,
long-term return on plan assets, retirement rates, mortality rates and other
factors. Health care cost trend rate assumptions are developed based on
historical cost data and an assessment of likely long-term trends. Retirement
and mortality rates are based primarily on actual plan experience.

Our approach to establishing the discount rate assumption starts with the
Moody's AA Corporate Bond Index adjusted for an incremental yield based on
actual historical performance. This incremental yield adjustment is the result
of selecting securities whose yields are higher than the "normal" bonds that
comprise the index. Based on this approach, at September 30, 2003 we lowered the
discount rate for pension plans to 6.1 percent from 6.5 percent at September 30,
2002. The discount rate for postretirement benefits was lowered from 7.0 percent
at September 30, 2002 to 6.5 percent at September 30, 2003.

Our approach to determining expected return on plan asset assumptions
evaluates both historical returns as well as estimates of future returns, and is
adjusted for any expected changes in the long-term outlook for the equity and
fixed income markets. As a result, we revised our estimate of the long-term rate
of return on plan assets for our pension plans to 8.4 percent for 2003 and 2002,
and 9.4 percent for 2001. See Note 9 to the financial statements for more
information regarding costs and assumptions for employee retirement benefits.

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 changed 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. 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 original equipment 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 $193 million at December 31, 2003. 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 was effective for fiscal years beginning
after June 15, 2002. The adoption of SFAS No. 143 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 changed 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 are required to
apply the new standard prospectively to new exit or disposal activities
initiated after December 31, 2002. SFAS No. 146 generally requires that these
costs be recognized at a

39

later date and over time, rather than in a single charge. The adoption of SFAS
No. 146 did not have a material impact on our financial position or results of
operations.

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 expanded previously
issued accounting guidance and disclosure requirements for certain guarantees.
FIN 45 provides that issuing a guarantee imposes a non-contingent 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 are required to
apply these initial recognition and measurement provisions to guarantees issued
or modified after December 31, 2002. The adoption of FIN 45 has not had a
material impact on our financial position or results of operations. You should
also read Note 5 to the financial statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure, an amendment of FASB Statement No.
123," which provided alternative methods of transition for a voluntary change to
the fair value method of accounting for stock-based employee compensation and
amended 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 Note 1 to our financial statements for this information.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which was revised in December 2003. 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 as revised is effective January 1, 2004. We do not believe the
adoption of FIN 46 will have a material impact on our consolidated financial
statements.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amended and
clarified financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did
not have a material impact on our financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 established standards for classification of certain financial
instruments that have characteristics of both liabilities and equity but have
been presented entirely as equity or between the liabilities and equity section
of the statement of financial position. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003. The adoption of SFAS
No. 150 did not have a material impact on our financial position.

In December 2003, the FASB revised SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits." The revised SFAS No. 132
changes employers' disclosures about pension plans and other postretirement
benefits and requires additional disclosures about assets, obligations, cash
flows and net periodic benefit cost. The revised statement is effective for
annual and interim periods ended after December 15, 2003. We adopted the revised
SFAS No. 132 as of December 31, 2003, resulting in additional disclosures in our
consolidated financial statements.

In January 2004, the FASB issued FASB Staff Position ("FSP") No. 106-1,
"Accounting Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003." FSP No. 106-1 permits a sponsor to
make a one-time election to defer accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2002 (the "Act"). The
Act, signed into law in December 2003, establishes a prescription drug benefit
under Medicare ("Medicare Part D") and a federal subsidy to sponsors of retiree
health care benefit plans that provide a benefit that is at least

40

actuarially equivalent to Medicare Part D. FSP No. 106-1 does not provide
specific guidance as to whether a sponsor should recognize the effects of the
Act in its financial statements. The Act introduces two new features to Medicare
that must be considered when measuring accumulated postretirement benefit costs.
The new features include a subsidy to the plan sponsors that is based on 28
percent of an individual beneficiary's annual prescription drug costs between
$250 and $5,000, and an opportunity for a retiree to obtain a prescription drug
benefit under Medicare.

We have elected to defer the adoption of FSP No. 106-1 due to lack of
specific guidance. Therefore, the net postretirement benefit costs disclosed in
the consolidated financial statements do not reflect the impact of the Act on
the plans. Our deferral will continue until specific authoritative accounting
guidance for the federal subsidy is issued. Authoritative guidance on the
accounting for the federal subsidy is pending and, when issued, could require
information previously reported in our consolidated financial statements to
change. We are currently investigating the impacts of FSP No. 106-1's initial
recognition, measurement and disclosure provisions on our consolidated financial
statements.

LIQUIDITY AND CAPITAL RESOURCES

Capitalization

General. The year-to-date increase in shareholders' equity primarily
results from a $4 million increase in the fair market value of our interest rate
swaps, which expired in February 2003, and $130 million related to the
translation of foreign balances into U.S. dollars. In addition, net income,
premium on common stock issued pursuant to benefit plans and other transactions
contributed $36 million to the increase in shareholders' equity. The increase in
shareholders' equity was partially offset by an adjustment to additional minimum
pension liability of $18 million as a result of a decrease in the fair market
value of the plan assets. Although our book equity balance was small at December
31, 2003, it should not affect our business operations. We have no debt
covenants that are based upon our book equity, and there are no other agreements
that are adversely impacted by our relatively low book equity.

Short-term debt, which includes the current portion of long-term
obligations and borrowings by foreign subsidiaries, as well as our revolving
credit facility, decreased by $208 million during 2003. The decrease is the
result of an $89 million decrease in the current portion of long-term
obligations primarily resulting from the June 2003 repayment of some of our
long-term obligations offset by a $2 million increase in short-term debt on
foreign subsidiaries. In addition, we decreased our borrowings by approximately
$121 million during 2003 under our revolving credit facility. There were no
borrowings outstanding under our revolving credit facility as of December 31,
2003. Borrowings outstanding under our revolving credit facility were $121
million as of December 31, 2002. The overall increase in long-term debt resulted
from the issuance of new long-term debt as described below, partially offset by
payments made on outstanding long-term debt.

Senior Credit Facility. Our financing arrangements are primarily provided
by a committed senior secured financing arrangement with a syndicate of banks
and other financial institutions, which was $800 million at December 31, 2003.
The arrangement is secured by substantially all our domestic assets

41

and pledges of 66 percent of the stock of certain first-tier foreign
subsidiaries, as well as guarantees by our material domestic subsidiaries. We
originally entered into this facility in 1999 and since that time have
periodically requested and received amendments to the facility for various
purposes. In 2003, we engaged in a series of transactions that resulted in the
full refinancing of the facility, through an amendment and restatement, in
December. The following describes our activities with respect to the senior
credit facility over the last several years.

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 OE 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 extended the limitation
on annual capital expenditures of $150 million through this three-year period.
The amendment further provided us with the option to enter into sale and
leaseback arrangements on up to $200 million of our assets. The proceeds from
these arrangements would have to be used to prepay the term loans under the
senior credit agreement. 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 2002-2006 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.

In June 2003, we issued $350 million of 10 1/4 percent senior secured notes
in a private placement. The notes have a final maturity date of July 15, 2013.
The notes accrue interest from June 19, 2003 with a first interest payment date
of January 15, 2004. In October 2003, we completed an offer to exchange all of
the notes issued in the June 2003 private placement for a like amount of the
10 1/4 percent senior secured notes, with substantially identical terms, which
had been registered under the Securities Act of 1933. These notes are described
in more detail below under "--Senior and Subordinated Notes."

We received net proceeds in the second quarter from the offering of the
notes, after deducting underwriting discounts and commissions and our expenses,
of $338 million. We used the net proceeds of the offering to repay outstanding
amounts under our senior credit facility as follows: (i) first, to prepay $199
million on the term loan A due November 4, 2005, (ii) second, to prepay $52
million on the term

42

loans B and C due November 4, 2007 and May 4, 2008, respectively, and (iii)
third, to prepay outstanding borrowings of $87 million under the revolving
credit portion of our senior credit facility.

In connection with issuing $350 million of 10 1/4 percent senior secured
notes due July 15, 2013, we amended the senior credit facility for the fourth
time effective May 29, 2003. The fourth amendment allowed us to incur debt
secured by a second lien on our U.S. assets and to have that debt guaranteed by
our major U.S. subsidiaries. The amendment also allowed us to use a portion of
the proceeds from the new senior secured notes to repay outstanding borrowings
under the revolving credit facility, without having to reduce the $450 million
size of the revolving credit facility, and to prepay the term loans under the
senior credit facility on a non pro-rata basis with the remaining net proceeds
from the notes. In exchange for these amendments, we agreed to pay an aggregate
sum of $1 million to consenting lenders. We also incurred legal, advisory and
other costs related to the amendment process of $1 million. These costs were
included in the capitalized debt issuance costs.

In December 2003, we amended and restated our senior credit facility and in
connection therewith, we issued an additional $125 million of 10 1/4 percent
senior secured notes in a private placement. We received $136 million of net
proceeds from the offering of the additional $125 million of 10 1/4 percent
senior secured notes, after deducting underwriting discounts and commissions and
other expenses and including a 13 percent price premium over par. We also
received $391 million in net proceeds from the new term loan B borrowings under
the amended and restated senior credit facility, after deducting fees and other
expenses. We used the combined net proceeds of $527 million to prepay the $514
million outstanding under term loans A, B and C under the senior credit facility
immediately prior to the completion of the transaction. The remaining $13
million of net proceeds were used for general corporate purposes. In addition,
we received $6 million of accrued interest on the new notes for the period from
June 19 through December 12, 2003 that investors paid us and that we
subsequently used to pay, on January 15, 2004, accrued interest on the notes
from June 19, 2003.

We incurred $27 million in fees associated with the issuance of the
aggregate $475 million of 10 1/4 percent senior secured notes and the amendment
and restatement of our senior credit facility which will be amortized over the
term of the senior secured notes and the amended and restated senior credit
facility.

After giving effect to the use of the net proceeds from both the June and
December transactions, we expect our annual interest expense will increase by
approximately $20 million. In addition, we expensed approximately $12 million of
existing deferred debt issuance costs as a result of retiring the term loans
under the senior credit facility.

Our amended and restated senior credit facility consists of a seven-year,
$400 million term loan B facility maturing in December 2010; a five-year, $220
million revolving credit facility maturing in December 2008; and a seven-year,
$180 million tranche B letter of credit/revolving loan facility maturing in
December 2010. Although the term loan facility and the tranche B letter of
credit/revolving loan facility mature in 2010, the two facilities are subject to
mandatory prepayment in full, and any letters of credit issued under the term
loan B/revolving loan facility are subject to full cash collateralization, (a)
on April 15, 2009, if by that date our senior subordinated notes are not
refinanced or extended with a maturity not earlier than April 15, 2011, and (b)
on the date which is six months prior to the date to which the senior
subordinated notes have been refinanced or had their maturity extended, if our
senior subordinated notes have been refinanced or had their maturity extended to
a date prior to April 15, 2011. Quarterly principal repayment installments of $1
million on the term loan B facility will begin on March 31, 2004 and continue
until December 31, 2009, then rise to $94 million each on March 31, June 30, and
September 30 of 2010, with the remaining $94 million final principal repayment
due on December 12, 2010. As of December 31, 2003, borrowings under the term
loan B facility and the revolving credit 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; or (ii) a rate consisting of the greater of the JP
Morgan Chase prime rate or the Federal Funds rate plus 50 basis points, plus a
margin of 225 basis points. 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

43

revolving credit facility 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 beginning with the fourth quarter of 2004. The interest margins for
borrowings under the term loan B facility will reduce by 25 basis points
following the end of each fiscal quarter for which the consolidated leverage
ratio is less than 4.0. 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 new $180 million tranche B letter of credit/revolving loan facility is
available for borrowings of revolving loans and to support letters of credit
issued from time to time under the senior credit facility. On December 12, 2003,
the tranche B letter of credit/revolving loan facility lenders deposited $180
million with the administrative agent, who will invest that amount in time
deposits. Revolving loans can be drawn, repaid and reborrowed thereunder. Such
revolving loans will be funded from such deposits and such repayments will be
redeposited with the administrative agent. If a letter of credit is paid under
this facility and not reimbursed in full by us, each participating lender's
ratable share of the deposit will be applied automatically in satisfaction of
the reimbursement obligation. We will not have an interest in any such funds on
deposit, and we will not account for such funds as our indebtedness when
deposited with the administrative agent until drawn by us as described below.
Revolving loans borrowed under such facility will be funded with the funds on
deposit in such accounts and accrue interest at a rate per annum equal to LIBOR
plus 325 basis points. Letters of credit issued thereunder will accrue a letter
of credit fee at a per annum rate of 325 basis points for the pro rata account
of the lenders under such facility and a fronting fee for the ratable account of
the issuers thereof at a per annum rate in an amount to be agreed upon payable
monthly in arrears. The administrative agent will pay on a monthly basis to the
lenders under the facility a return on their funds actually on deposit in such
accounts in an amount equal to a per annum rate of monthly LIBOR (reset every
business day during such monthly period) minus 10 basis points. We will be
obligated to pay such lenders on a monthly basis a fee equal to the excess of
(x) a per annum rate equal to monthly LIBOR (reset at the start of the
applicable month) plus 325 basis points on the size of such facility (i.e., $180
million initially) over (y) the sum of (1) the amount of such return for such
month, (2) the amount of interest accrued on such loans under such facility for
such month and (3) the letter of credit fees (but not the fronting fees) accrued
on such letters of credit under such facility for such month; provided, that
except in certain circumstances, the aggregate amount of such interest and fees
shall not exceed the amount determined pursuant to clause (x) above minus such
return. The interest margins paid on revolving loans and the fees paid on
letters of credit issued under the tranche B letter of credit/revolving loan
facility will reduce by 25 basis points following the end of each fiscal quarter
for which the consolidated leverage ratio is less than 4.0.

The tranche B letter of credit/revolving loan facility will be reflected as
debt on our balance sheet only if we have outstanding thereunder revolving loans
or payments by the facility in respect of letters of credit. We will not be
liable for any losses to or misappropriation of any (i) return due to the
administrative agent's failure to achieve the return described above or to pay
all or any portion of such return to any lender under such facility or (ii)
funds on deposit in such account by such lender (other than the obligation to
repay funds released from such accounts and provided to us as revolving loans
under such facility).

The amended and restated 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

44

ratios required under the amended senior credit facility and, in the case of the
year ended December 31, 2003, the actual ratios we achieved are shown in the
following tables:

As part of the amendment and restatement, the terms of our senior credit
facility were also revised to: (i) extend the period of time during which we can
exclude up to $60 million of cash charges and expenses, before taxes, related to
any cost reduction initiatives from the calculation of the financial covenant
ratios by another two years through 2006; (ii) permit the refinancing of our
senior subordinated notes and/or our 10 1/4 percent senior secured notes using
the net cash proceeds from the issuance of similarly structured debt; (iii)
permit the repurchase of our senior subordinated notes and/or our 10 1/4 percent
senior secured notes using the net cash proceeds form the issuance of shares of
common stock of Tenneco Automotive Inc.; and (iv) delete the mandatory
prepayment of term loans from excess cash flow in 2003 and reduced the
percentage of excess cash flow that must be used to prepay term loans in
subsequent years from 75 percent to 50 percent.

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, 2003, we were in compliance with both the
financial covenants (as indicated above) and operational restrictions of the
facility.

Senior and Subordinated Notes. Our outstanding debt also includes $500
million of 11 5/8 percent senior subordinated notes due October 15, 2009 in
addition to the $475 million of 10 1/4 percent senior secured notes due July 15,
2013 described above. We can redeem some or all of the notes at any time after
July 15, 2008, in the case of the senior secured notes, and October 15, 2004, in
the case of the senior subordinated notes. If we sell certain of our assets or
experience specified kinds of changes in control, we must offer to repurchase
the notes. We are permitted to redeem up to 35 percent of the senior secured
notes with the proceeds of certain equity offerings completed before July 15,
2006.

From time to time, we evaluate opportunities to refinance our senior and
subordinated notes. For example, the 11 5/8 percent senior subordinated notes
are callable beginning in October 2004. We could refinance the senior
subordinated notes with the cash proceeds of sales of new debt, debt securities
or preferred stock convertible into common equity, or common stock, or through
any combination thereof. The existing terms of our financing arrangements
contemplate these types of refinancings and, accordingly, we could effect
appropriate transactions without any further consent of our lenders. Any
decision to

45

refinance our current debt will be based upon the current economic conditions
and the benefits to our company.

The senior subordinated debt and senior secured debt indentures both
require 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
the indentures. The indentures also contain 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. Subject to limited exceptions, all of our existing
and future material domestic wholly owned subsidiaries fully and unconditionally
guarantee these notes on a joint and several basis. In addition, the senior
secured notes and related guarantees are secured by second priority liens,
subject to specified exceptions, on all of our and our subsidiary guarantors'
assets that secure obligations under our senior credit facility, except that
only a portion of the capital stock of our and our subsidiary guarantor's
domestic subsidiaries is provided as collateral and no assets or capital stock
of our direct or indirect foreign subsidiaries secure the notes or guarantees.
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,
2003, we were in compliance with the covenants and restrictions of these
indentures.

Accounts Receivable Securitization. In addition to our senior credit
facility, senior secured notes 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 $36 million and $46 million at
December 31, 2003 and 2002, 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 program has since been amended to increase its size to $75 million
with its termination date unchanged at January 31, 2005. We also sell some
receivables in our European operations to regional banks in Europe. At December
31, 2003 we had sold $87 million of accounts receivable in Europe up from $55
million at December 31, 2002. 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 agreements 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 agreements.

Capital Requirements. 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.

46

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 our revolving credit facilities to finance our
short-term capital requirements. As a result, we classify the outstanding
balances of the revolving credit facilities within our short-term debt even
though the revolving credit facility has a termination date of December 13, 2008
and the tranche B letter of credit facility/revolving loan facility has a
termination date of December 13, 2010. The revolving credit facilities balances
included in short-term debt are zero and $121 million at December 31, 2003 and
2002, respectively.

If we do not maintain compliance with the terms of our senior credit
facility, senior secured notes indenture 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.

Included in our contractual obligations is the amount of interest to be
paid on our long-term debt. As our debt structure contains both fixed and
variable rate interest debt, we have made assumptions in calculating the amount
of the future interest payments. Interest on our senior secured notes and senior
subordinated notes is calculated using the fixed rates of 10 1/4 percent and
11 5/8 percent, respectively. Interest on our variable rate debt is calculated
as 350 basis point plus LIBOR of 1.5 percent which is the current rate at
December 31, 2003. We have assumed that LIBOR will remain unchanged for the
outlying years.

We have not included purchase obligations as part of our contractual
obligations as we generally do not enter into long-term agreements with our
suppliers. In addition, the agreements we currently have do not specify the
volumes we are required to purchase. If any commitment is provided, in many
cases the agreements state only the minimum percentage of our purchase
requirements we must buy from the supplier. As a result, these purchase
obligations fluctuate from year to year and we are not able to quantify the
amount of our future obligation.

We have also not included material cash requirements for taxes and funding
requirements for pension and postretirement benefits. We have not included cash
requirements for taxes as we are a taxpayer in certain foreign jurisdictions but
not in domestic locations. Additionally, it is difficult to estimate taxes to be

47

paid as shifts in where we generate income can have a significant impact on
future tax payments. We have not included cash requirements for funding pension
and postretirement costs, as based upon current estimates we believe we will be
required to make contributions between $34 million to $41 million to those plans
in 2004. Pension and postretirement contributions beyond 2004 will be required
but those amounts will vary based upon many factors, including the performance
of our pension fund investments during 2004.

We occasionally provide guarantees that could require us to make future
payments in the event that the third party 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 approximately $4 million at both December 31, 2003 and 2002, 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 $800 million senior secured credit facility, the $475 million senior secured
notes and the $500 million senior subordinated notes on a joint and several
basis. The arrangement for the senior secured credit facility is also secured by
substantially all our domestic assets and pledges of 66 percent of the stock of
certain first-tier foreign subsidiaries. The arrangement for the $475 million
senior secured notes is secured by second priority liens, subject to specified
exceptions, on all of our domestic assets that secure obligations under our
senior credit facility, except that only a portion of the capital stock of our
domestic subsidiaries is provided as collateral. No assets or capital stock of
our direct or indirect foreign subsidiaries secure these notes. 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 $41 million.
We have also issued $17 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.

Dividends on Common Stock

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

48

Operating Activities

For the year ended December 31, 2003, cash flows provided from operating
activities was $281 million as compared to $188 million in the prior year. For
2003 cash flow provided from working capital was $78 million as compared to $67
million for 2002. The primary driver was the inventory reduction program, which
generated $55 million in cash flow during 2003. This was partially offset by
higher cash tax payments and the timing of accruals versus payments in the
current year as compared to the prior year. Also included in operating cash
flows were $12 million in positive cash flows from the write off of debt
issuance costs as a result of the bond issuances in June and December of 2003
and the refinancing of the senior debt in December of 2003. Additionally, we
generated positive operating cash flows due to higher minority interest income
and non-cash restructuring adjustments taken against the reserve in 2003.

In June 2001, we entered into arrangements with two major OE customers in
North America under which, in exchange for a discount, payments for product
sales are made earlier than otherwise required under existing payment terms.
These arrangements reduced accounts receivable by $83 million and $40 million as
of December 31, 2003 and 2002, respectively. In June 2003, we entered into a
similar arrangement with a third major OE customer in North America. This
arrangement further reduced accounts receivable by $16 million at December 31,
2003. These arrangements can be cancelled at any time.

Investing Activities

Cash used for investing activities was $20 million higher in 2003 compared
to the same period a year ago. In 2002, we received $17 million in cash from the
sale of our York, U.K. facility and also recorded $19 million from a settlement
with an OE customer for reimbursement of expenses related to a cancelled
platform. Capital expenditures were $130 million in 2003, down $8 million from
the $138 million in the prior year.

Financing Activities

Cash flow from financing activities was a $49 million outflow in 2003
compared to an outflow of $73 million in the same period of 2002. The primary
reason for the change is attributable to the $350 million bond offering in June
2003, the $125 million bond offering in December 2003 and the senior debt
refinancing in December of 2003.

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. Production rates
for 2003 weakened slightly to an annualized rate of 15.9 million units or a
three percent decline from the prior year. Additionally, North American
heavy-duty truck production was down three percent from the previous year. We
expect North American OE light vehicle production to increase to approximately
16 million units in 2004, however we remain cautious regarding 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. We expect that the heavy-duty
truck market could increase between 15 to 25 percent in 2004. In Europe, new
vehicle yearly production rates appear to be down one percent from last year.
Expectations for 2004 European vehicle production are an increase of
approximately two percent as compared to 2003. We plan to build on the OE ride
control business launched in 2003 and the ramp up of OE exhaust replacement
programs in 2004 along with new OE exhaust business expected to launch in 2004.
In the global aftermarket, issues that have impacted volumes over the last
twelve months will continue to challenge us for 2004. Customer consolidation,
longer product replacement cycles, a weaker economy and competition from
short-liners in the exhaust business will continue to impact our volumes. We saw
some signs of improvement in the North American aftermarket in the fourth
quarter of 2003 and are optimistic that these improvements will continue in
2004.

49

Based on anticipated vehicle production levels our global original
equipment customer book of business is currently $2,911 million and $3,152
million for 2004 and 2005 respectively. Adjusted for pass-through sales our
global original equipment customer book of business is $2,230 million and $2,455
million for 2004 and 2005 respectively. When we refer to our book of business,
we mean revenues for original equipment manufacturer programs that have been
formally awarded to us as well as programs which we are highly confident will
result in revenues based on either informal customer indications consistent with
past practices and/or our status as supplier for the existing program and
relationship with the customer. This book of business is subject to increase or
decrease due to changes in customer requirements, customer and consumer
preferences, and the number of vehicles actually produced by our customers. We
do not intend, however, to update the amounts shown above due to these changes.
In addition, our book of business is based on our anticipated pricing for each
applicable program over its life. However, we are under continuing pricing
pressures from our OE customers. We do not intend to update the amounts shown
above for any price changes. Finally, for our foreign operations the book of
business assumes a fixed foreign currency value. This value is used to translate
foreign business to the US dollar. Currency in our foreign operations is subject
to fluctuation based on the economic conditions in each of our foreign
operations. We do not intend to update the amounts shown above due to these
fluctuations. See "Cautionary Statement for Purposes of the 'Safe Harbor'
Provisions of the Private Securities Litigation Reform Act of 1995."

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 expense 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, 2003, 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 $12 million. For each of 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

50

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.

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.

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. See Note 11 to our consolidated financial statements
included under Item 8 for information regarding our warranty reserves.

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. For example, we are involved in litigation with the minority owner
of one of our Indian joint ventures over various operational issues. This
dispute involves a court-mandated bidding process, which could result in a
non-cash charge to earnings if we are required to sell our interest in the joint
venture on unfavorable terms. As another example, we recently identified our
failure to file certain reports under an automotive industry regulation and,
although we have now made the required filings, this failure could subject us to
a response, including fines or penalties, from the appropriate agency. 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.
51

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 50 percent of
their salary through contributions to the plan, which are invested in selected
mutual funds or used to buy our common stock. We currently match in cash 50
percent of each employee's contribution up to 8 percent of the employee's
salary. We recorded expense for these matching contributions of approximately $6
million and $7 million for the years ended December 31, 2003 and 2002. All
contributions vest immediately.

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,
2003. All contracts in the following table mature in 2004.

52

Interest Rate Risk

Our financial instruments that are sensitive to market risk for changes in
interest rates are our debt securities. We primarily use our revolving credit
facilities 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.

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, 2003, we had $995 million in long-term debt obligations
that have fixed interest rates. Of that amount, $500 million is fixed through
October 2009 and $487 million through July 2013, while the remainder is fixed
over periods of 2004 through 2025. There is also $415 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, 2003
was about 108 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 $3 million after tax.

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

53

YEARS 2002 AND 2001

NET SALES AND OPERATING REVENUES

The following tables reflect our revenues for the years of 2002 and 2001.
See "-Years 2003 and 2002-Net Sales and Operating Revenues" for a description of
why we present these reconciliations of revenues.

Revenues from our North American operations increased $108 million in 2002
compared to the prior year. Higher sales from the OE 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

55

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 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 Other operations 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 $15 million. These increases were partially offset by the
effects of the weakened South American economy, where revenues declined by $28
million.

EBIT

56

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 the prior year 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
goodwill amortization, discussed 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 prior year. Volume decreases and related operating inefficiencies in
both the OE and aftermarket operations negatively impacted EBIT by $36 million.
In 2002, 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"
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 Other operations increased by $5 million in 2002 compared to
the prior 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

57

complete the first phase of Project Genesis, which increased EBIT by $1 million.
Included in our Other operations' 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 our
Other operations remained flat year over year as improved operating performance
was offset by manufacturing inefficiencies and a weakened South American
economy.

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" in this Management's
Discussion and Analysis for a more detailed description of our borrowings.

Included in our 2002 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 2002 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 2002
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 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

58

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" 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 7 to the financial statements included in Item 8 for more detailed
information on earnings per share.

DIVIDENDS ON COMMON STOCK

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

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 2002 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.

59

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.

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.

60

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

61

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheets of Tenneco
Automotive Inc. and consolidated subsidiaries ("the Company") as of December 31,
2003 and 2002, and the related consolidated statements of income (loss), cash
flows, changes in shareholders' equity and comprehensive income (loss) for the
years then ended. 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 audits. The consolidated financial statements of the Company as of December
31, 2001 and for the year 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 audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
2003 and 2002, and the results of its operations and its cash flows for the
years 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 year ended December 31, 2001 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 in Note 3 are appropriate. However, we
were not engaged to audit, review, or apply any procedures to the 2001
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 consolidated financial statements taken as a
whole.

DELOITTE & TOUCHE LLP
Chicago, Illinois
March 9, 2004

62

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 years
2000 and 1999, which is not required to be presented in the accompanying
consolidated financial statements for the period ended December 31, 2003. 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

63

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).

64

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

BALANCE SHEETS

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

65

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.

66

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.

67

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).

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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 $123 million,
$101 million, and $110 million at December 31, 2003, 2002, and 2001,
respectively. We recognized a loss of $2 million, $2 million, and $5 million
during 2003, 2002, and 2001, 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 three percent during the time period in 2003
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, 2003 and 2002, inventory by major classification was as
follows:

Our inventories are stated at the lower of cost or market value. A portion
of total inventories (19 percent and 23 percent at December 31, 2003 and 2002,
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 $11 million and $13 million higher at December 31, 2003 and
2002, 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, 2003 and 2002, goodwill and intangibles, net of
amortization, by major category were as follows:

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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 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, 2003, 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 less than $1
million in both 2003 and 2002, and $2 million in 2001, 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 $22 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.

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Plant, Property, and Equipment, at Cost

At December 31, 2003 and 2002, 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 $28 million and $19
million at December 31, 2003 and 2002, respectively. There was no allowance for
doubtful accounts on short- and long-term notes receivable at December 31, 2003
and the allowance was less than $1 million at December 31, 2002.

At December 31, 2003 and 2002, the allowance for doubtful accounts on
short- and long-term accounts receivable was $23 million and $22 million,
respectively.

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 $15 million and $8 million on the
balance sheet at December 31, 2003 and 2002, respectively, for guaranteed
pre-production design and development reimbursement arrangements with our
customers. In addition, property, plant and equipment includes $49 million and
$50 million at December 31, 2003 and 2002, respectively, for original equipment
tools and dies that we own, and prepayments and other includes $34 million and
$27 million at December 31, 2003 and 2002, 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 both December 31,
2003 and 2002, respectively, and is recorded in other long-term assets.

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.

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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
2003, 2002 and 2001, and are included in the income statement caption of the
same name. Of these amounts, $9 million in 2003, and $6 million for both 2002
and 2001 relate to research and development, which includes the search, design,
and development of a new unproven product or process. Additionally, $35 million,
$36 million, and $37 million of engineering, research, and development expense
for 2003, 2002, and 2001, 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 2003, 2002, and 2001 has been reduced by $11 million,
$13 million, and $16 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 $3 million in
2003, $9 million in 2002, and $2 million in 2001.

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
72

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. 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 2003, 2002, and 2001 is
estimated on the date of grant using the Black-Scholes option pricing model
using the following weighted-average assumptions for grants in 2003, 2002, and
2001, respectively: (i) risk-free interest rates of 4.01 percent, 5.09 percent,
and 4.9 percent; (ii) expected lives of 10.0, 10.0, and 10.0 years; (iii)
expected volatility 40.45 percent,

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

39.56 percent, and 43.80 percent; and (iv) dividend yield of 0.0 percentage, 0.0
percentage, and 0.0 percentage.

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 changed 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. 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 original equipment 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 $193
million at December 31, 2003. 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 was effective for fiscal years beginning
after June 15, 2002. The adoption of SFAS No. 143 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 changed 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 are required to
apply the new standard prospectively to new exit or disposal activities
initiated after December 31, 2002. SFAS No. 146 generally requires that these
costs be recognized at a later date and over time, rather than in a single
charge. The adoption of SFAS No. 146 did not have a material impact on our
financial position or results of operations.

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 expanded previously
issued accounting guidance and disclosure requirements for certain guarantees.
FIN 45 provides that issuing a guarantee imposes a non-contingent 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 are required to
apply these initial recognition and measurement provisions to guarantees issued
or modified after December 31, 2002. The adoption of FIN 45 has not had a
material impact on our financial position or results of operations. See Note 5
to the financial statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure, an amendment of FASB No. 123," which
provided alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation and amended the
disclosure requirements to require prominent disclosures in both annual

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which was revised in December 2003. 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 as revised is effective January 1, 2004. We do not believe the
adoption of FIN 46 will have a material impact on our consolidated financial
statements.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amended and
clarified financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did
not have a material impact on our financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 established standards for classification of certain financial
instruments that have characteristics of both liabilities and equity but have
been presented entirely as equity or between the liabilities and equity section
of the statement of financial position. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003. The adoption of SFAS
No. 150 did not have a material impact on our financial position.

In December 2003, the FASB revised SFAS No. 132, "Employer's Disclosures
About Pensions and Other Postretirement Benefits." The revised SFAS No. 132
changes employers' disclosures about pension plans and other postretirement
benefits and requires additional disclosures about assets, obligations, cash
flows and net periodic benefit cost. The revised statement is effective for
annual and interim periods ended after December 15, 2003. We adopted the revised
SFAS No. 132 as of December 31, 2003, resulting in additional disclosures in our
consolidated financial statements.

In January 2004, the FASB issued FASB Staff Position ("FSP") No. 106-1,
"Accounting Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003." FSP No. 106-1 permits a sponsor to
make a one-time election to defer accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2002 (the "Act"). The
Act, signed into law in December 2003, establishes a prescription drug benefit
under Medicare ("Medicare Part D") and a federal subsidy to sponsors of retiree
health care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. FSP No. 106-1 does not provide specific guidance
as to whether a sponsor should recognize the effects of the Act in its financial
statements. The Act introduces two new features to Medicare that must be
considered when measuring accumulated postretirement benefit costs. The new
features include a subsidy to the plan sponsors that is based on 28 percent of
an individual beneficiary's annual prescription drug costs between $250 and
$5,000, and an opportunity for a retiree to obtain a prescription drug benefit
under Medicare.

We have elected to defer the adoption of FSP No. 106-1 due to lack of
specific guidance. Therefore, the net postretirement benefit costs disclosed in
the consolidated financial statements do not reflect the impact of the Act on
the plans. Our deferral will continue until specific authoritative accounting
guidance for the federal subsidy is issued. Authoritative guidance on the
accounting for the federal subsidy is pending and, when issued, could require
information previously reported in our consolidated financial statements to
change. We are currently investigating the impacts of FSP No. 106-1's initial
recognition, measurement and disclosure provisions on our consolidated financial
statements.

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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 2003 presentations.

2. 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 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.

In the fourth quarter of 2001, our Board of Directors approved a
restructuring plan, a project known as Project Genesis, designed to lower our
fixed costs, improve efficiency and utilization, and better optimize our global
footprint. 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 emission 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 emission 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 (loss), $23
million of the pre-tax charge was reflected in cost of sales, while $4 million
was included in selling, general and administrative expenses. These charges were
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 emission 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 $0.81 per diluted common share. As
of December 31, 2003, we have eliminated 974 positions in connection with
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

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

activity by $6 million which was recorded in cost of sales. In the fourth
quarter of 2003 we reclassified $2 million of severance reserve to the asset
impairment reserve. This reclassification became necessary as actual asset
impairments along with the sale of our closed facilities were different than the
original estimates. We expect to complete all remaining restructuring activities
related to Project Genesis in the second quarter of 2004.

We incurred other costs in 2003 of $7 million for moving and rearrangement
activities related to our restructuring actions initiated in prior periods that
could not be accrued as part of the restructuring charges for those actions.

Including the costs incurred in 2002 of $11 million, we have incurred a
total of $18 million for moving and rearrangement activities related to our
restructuring actions initiated in prior periods that could not be accrued as
part of the restructuring charges for these actions.

In the first quarter of 2003, we incurred severance costs of $1 million
associated with eliminating 17 salaried positions through selective layoffs and
an early retirement program. Additionally, 93 hourly positions were eliminated
through selective layoffs in the quarter. These reductions were done to reduce
ongoing labor costs in North America. This charge was primarily recorded in cost
of sales.

Amounts related to the reserves we have established regarding activities
that are part of our restructuring plans are as follows:

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

Long-Term Debt

A summary of our long-term debt obligations at December 31, 2003 and 2002,
is set forth in the following table:

The aggregate maturities and sinking fund requirements applicable to the
issues outstanding at December 31, 2003, are $8 million, $9 million, $7 million,
$8 million, and $7 million for 2004, 2005, 2006, 2007, and 2008, respectively.

Short-Term Debt

We principally use revolving credit facilities to finance our short-term
capital requirements. As a result, we classify the outstanding balance of
borrowings under the revolving credit facilities within our short-term debt. The
revolving credit facility balance included in short-term debt is zero at
December 31, 2003 and $121 million at December 31, 2002. Information regarding
our short-term debt as of and for the years ended December 31, 2003 and 2002, is
as follows:

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- -------------------------
(a) Includes borrowings under both committed credit facilities and uncommitted
lines of credit and similar arrangements.

(b) This calculation does not include the commitment fees to be paid on the
unused revolving credit facilities balances which are recorded as interest
expense for accounting purposes.

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.

(c) Letter of credit/revolving loan agreement is subject to termination in April
2009 if the $500 million of 11 5/8 percent senior subordinated notes are not
refinanced by that time. See below for further discussion.

Senior Credit Facility. Our financing arrangements are primarily provided
by a committed senior secured financing arrangement with a syndicate of banks
and other financial institutions, which was $800 million at December 31, 2003.
The arrangement is secured by substantially all our domestic assets and pledges
of 66 percent of the stock of certain first-tier foreign subsidiaries, as well
as guarantees by our material domestic subsidiaries. We originally entered into
this facility in 1999 and since that time have periodically requested and
received amendments to the facility for various purposes. In 2003, we engaged in
a series of transactions that resulted in the full refinancing of the facility,
through an amendment and restatement, in December. The following describes our
activities with respect to the senior credit facility over the last several
years.

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

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(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 OE 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 extended the limitation
on annual capital expenditures of $150 million through this three-year period.
The amendment further provided us with the option to enter into sale and
leaseback arrangements on up to $200 million of our assets. The proceeds from
these arrangements would have to be used to prepay the term loans under the
senior credit agreement. 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 2002-2006 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.

In June 2003, we issued $350 million of 10 1/4 percent senior secured notes
in a private placement. The notes have a final maturity date of July 15, 2013.
The notes accrue interest from June 19, 2003 with a first interest payment date
of January 15, 2004. In October 2003, we completed an offer to exchange all of
the notes issued in the June 2003 private placement for a like amount of the
10 1/4 percent senior secured notes, with substantially identical terms, which
had been registered under the Securities Act of 1933. These notes are described
in more detail below under "--Senior and Subordinated Notes."

We received net proceeds in the second quarter from the offering of the
notes, after deducting underwriting discounts and commissions and our expenses,
of $338 million. We used the net proceeds of the offering to repay outstanding
amounts under our senior credit facility as follows: (i) first, to prepay $199
million on the term loan A due November 4, 2005, (ii) second, to prepay $52
million on the term loans B and C due November 4, 2007 and May 4, 2008,
respectively, and (iii) third, to prepay outstanding borrowings of $87 million
under the revolving credit portion of our senior credit facility.

In connection with issuing $350 million of 10 1/4 percent senior secured
notes due July 15, 2013, we amended the senior credit facility for the fourth
time effective May 29, 2003. The fourth amendment allowed us to incur debt
secured by a second lien on our U.S. assets and to have that debt guaranteed by
our major U.S. subsidiaries. The amendment also allowed us to use a portion of
the proceeds from the new senior secured notes to repay outstanding borrowings
under the revolving credit facility, without
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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

having to reduce the $450 million size of the revolving credit facility, and to
prepay the term loans under the senior credit facility on a non pro-rata basis
with the remaining net proceeds from the notes. In exchange for these
amendments, we agreed to pay an aggregate sum of $1 million to consenting
lenders. We also incurred legal, advisory and other costs related to the
amendment process of $1 million. These costs were included in the capitalized
debt issuance costs.

In December 2003, we amended and restated our senior credit facility and in
connection therewith, we issued an additional $125 million of 10 1/4 percent
senior secured notes in a private placement. We received $136 million of net
proceeds from the offering of the additional $125 million of 10 1/4 percent
senior secured notes, after deducting underwriting discounts and commissions and
other expenses and including a 13 percent price premium over par. We also
received $391 million in net proceeds from the new term loan B borrowings under
the amended and restated senior credit facility, after deducting fees and other
expenses. We used the combined net proceeds of $527 million to prepay the $514
million outstanding under term loans A, B and C under the senior credit facility
immediately prior to the completion of the transaction. The remaining $13
million of net proceeds were used for general corporate purposes. In addition,
we received $6 million of accrued interest on the new notes for the period from
June 19 through December 12, 2003 that investors paid us and that we
subsequently used to pay, on January 15, 2004, accrued interest on the notes
from June 19, 2003.

We incurred $27 million in fees associated with the issuance of the
aggregate $475 million of 10 1/4 percent senior secured notes and the amendment
and restatement of our senior credit facility which will be amortized over the
term of the senior secured notes and the amended and restated senior credit
facility.

After giving effect to the use of the net proceeds from both the June and
December transactions, we expect our annual interest expense will increase by
approximately $20 million. In addition, we expensed approximately $12 million of
existing deferred debt issuance costs as a result of retiring the term loans
under the senior credit facility.

Our amended and restated senior credit facility consists of a seven-year,
$400 million term loan B facility maturing in December 2010; a five-year, $220
million revolving credit facility maturing in December 2008; and a seven-year,
$180 million tranche B letter of credit/revolving loan facility maturing in
December 2010. Although the term loan facility and the tranche B letter of
credit/revolving loan facility mature in 2010, the two facilities are subject to
mandatory prepayment in full, and any letters of credit issued under the term
loan B/revolving loan facility are subject to full cash collateralization, (a)
on April 15, 2009, if by that date our senior subordinated notes are not
refinanced or extended with a maturity not earlier than April 15, 2011, and (b)
on the date which is six months prior to the date to which the senior
subordinated notes have been refinanced or had their maturity extended, if our
senior subordinated notes have been refinanced or had their maturity extended to
a date prior to April 15, 2011. Quarterly principal repayment installments of $1
million on the term loan B facility will begin on March 31, 2004 and continue
until December 31, 2009, then rise to $94 million each on March 31, June 30, and
September 30 of 2010, with the remaining $94 million final principal repayment
due on December 12, 2010. As of December 31, 2003, borrowings under the term
loan B facility and the revolving credit 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; or (ii) a rate consisting of the greater of the JP
Morgan Chase prime rate or the Federal Funds rate plus 50 basis points, plus a
margin of 225 basis points. 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 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 beginning with the fourth quarter of 2004. The interest margins for
borrowings under the term

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

loan B facility will reduce by 25 basis points following the end of each fiscal
quarter for which the consolidated leverage ratio is less than 4.0. 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 new $180 million tranche B letter of credit/revolving loan facility is
available for borrowings of revolving loans and to support letters of credit
issued from time to time under the senior credit facility. On December 12, 2003,
the tranche B letter of credit/revolving loan facility lenders deposited $180
million with the administrative agent, who will invest that amount in time
deposits. Revolving loans can be drawn, repaid and reborrowed thereunder. Such
revolving loans will be funded from such deposits and such repayments will be
redeposited with the administrative agent. If a letter of credit is paid under
this facility and not reimbursed in full by us, each participating lender's
ratable share of the deposit will be applied automatically in satisfaction of
the reimbursement obligation. We will not have an interest in any such funds on
deposit, and we will not account for such funds as our indebtedness when
deposited with the administrative agent until drawn by us as described below.
Revolving loans borrowed under such facility will be funded with the funds on
deposit in such accounts and accrue interest at a rate per annum equal to LIBOR
plus 325 basis points. Letters of credit issued thereunder will accrue a letter
of credit fee at a per annum rate of 325 basis points for the pro rata account
of the lenders under such facility and a fronting fee for the ratable account of
the issuers thereof at a per annum rate in an amount to be agreed upon payable
monthly in arrears. The administrative agent will pay on a monthly basis to the
lenders under the facility a return on their funds actually on deposit in such
accounts in an amount equal to a per annum rate of monthly LIBOR (reset every
business day during such monthly period) minus 10 basis points. We will be
obligated to pay such lenders on a monthly basis a fee equal to the excess of
(x) a per annum rate equal to monthly LIBOR (reset at the start of the
applicable month) plus 325 basis points on the size of such facility (i.e., $180
million initially) over (y) the sum of (1) the amount of such return for such
month, (2) the amount of interest accrued on such loans under such facility for
such month and (3) the letter of credit fees (but not the fronting fees) accrued
on such letters of credit under such facility for such month; provided, that
except in certain circumstances, the aggregate amount of such interest and fees
shall not exceed the amount determined pursuant to clause (x) above minus such
return. The interest margins paid on revolving loans and the fees paid on
letters of credit issued under the tranche B letter of credit/revolving loan
facility will reduce by 25 basis points following the end of each fiscal quarter
for which the consolidated leverage ratio is less than 4.0.

The tranche B letter of credit/revolving loan facility will be reflected as
debt on our balance sheet only if we have outstanding thereunder revolving loans
or payments by the facility in respect of letters of credit. We will not be
liable for any losses to or misappropriation of any (i) return due to the
administrative agent's failure to achieve the return described above or to pay
all or any portion of such return to any lender under such facility or (ii)
funds on deposit in such account by such lender (other than the obligation to
repay funds released from such accounts and provided to us as revolving loans
under such facility).

The amended and restated 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

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

ratios required under the amended senior credit facility and, in the case of the
year ended December 31, 2003, the actual ratios we achieved are shown in the
following tables:

As part of the amendment and restatement, the terms of our senior credit
facility were also revised to: (i) extend the period of time during which we can
exclude up to $60 million of cash charges and expenses, before taxes, related to
any cost reduction initiatives from the calculation of the financial covenant
ratios by another two years through 2006; (ii) permit the refinancing of our
senior subordinated notes and/or our 10 1/4 percent senior secured notes using
the net cash proceeds from the issuance of similarly structured debt; (iii)
permit the repurchase of our senior subordinated notes and/or our 10 1/4 percent
senior secured notes using the net cash proceeds form the issuance of shares of
common stock of Tenneco Automotive Inc.; and (iv) delete the mandatory
prepayment of term loans from excess cash flow in 2003 and reduced the
percentage of excess cash flow that must be used to prepay term loans in
subsequent years from 75 percent to 50 percent.

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, 2003, we were in compliance with both the
financial covenants (as indicated above) and operational restrictions of the
facility.

Senior and Subordinated Notes. Our outstanding debt also includes $500
million of 11 5/8 percent senior subordinated notes due October 15, 2009 in
addition to the $475 million of 10 1/4 percent senior secured notes due July 15,
2013 described above. We can redeem some or all of the notes at any time after
July 15, 2008, in the case of the senior secured notes, and October 15, 2004, in
the case of the senior subordinated notes. If we sell certain of our assets or
experience specified kinds of changes in control, we must offer to repurchase
the notes. We are permitted to redeem up to 35 percent of the senior secured
notes with the proceeds of certain equity offerings completed before July 15,
2006.

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

From time to time, we evaluate opportunities to refinance our senior and
subordinated notes. For example, the 11 5/8 percent senior subordinated notes
are callable beginning in October 2004. We could refinance the senior
subordinated notes with the cash proceeds of sales of new debt, debt securities
or preferred stock convertible into common equity, or common stock, or through
any combination thereof. The existing terms of our financing arrangements
contemplate these types of refinancings and, accordingly, we could effect
appropriate transactions without any further consent of our lenders. Any
decision to refinance our current debt will be based upon the current economic
conditions and the benefits to our company.

The senior subordinated debt and senior secured debt indentures both
require 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
the indentures. The indentures also contain 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. Subject to limited exceptions, all of our existing
and future material domestic wholly owned subsidiaries fully and unconditionally
guarantee these notes on a joint and several basis. In addition, the senior
secured notes and related guarantees are secured by second priority liens,
subject to specified exceptions, on all of our and our subsidiary guarantors'
assets that secure obligations under our senior credit facility, except that
only a portion of the capital stock of our and our subsidiary guarantor's
domestic subsidiaries is provided as collateral and no assets or capital stock
of our direct or indirect foreign subsidiaries will secure the notes or
guarantees. 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, 2003, we were in compliance with the covenants and restrictions of
these indentures.

Accounts Receivable Securitization. In addition to our senior credit
facility, senior secured notes 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 $36 million and $46 million at
December 31, 2003 and 2002, 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 program has since been amended to increase its size to $75 million
with its termination date unchanged at January 31, 2005. We also sell some
receivables in our European operations to regional banks in Europe. At December
31, 2003 we had sold $87 million of accounts receivable in Europe up from $55
million at December 31, 2002. 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 agreements 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 agreements.

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

5. FINANCIAL INSTRUMENTS

The carrying and estimated fair values of our financial instruments by
class at December 31, 2003 and 2002, 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.

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

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exchange rates at December 31, 2003 and 2002, 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 third party 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 approximately $4 million at both December 31, 2003 and 2002,
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 $800 million senior secured credit facility, the $475 million senior secured
notes and the $500 million senior subordinated notes on a joint and several
basis. The arrangement for the senior secured credit facility is also secured by
first-priority liens on substantially all our domestic assets and pledges of 66
percent of the stock of certain first-tier foreign subsidiaries. The arrangement
for the $475 million senior secured notes is also secured by second-priority
liens on substantially all our domestic assets, excluding some of the stock of
our domestic subsidiaries. This arrangement is not secured by any pledges of
stock or assets of our foreign subsidiaries. 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 $41 million.
We have also issued $17 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.

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 were not 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:

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

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:

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

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 $53 million and $45 million at December 31, 2003 and 2002,
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, 2003, of $516 million, which will expire in varying amounts from
2018 to 2023. The federal tax effect of that NOL is $181 million, and is
recorded as an asset on our balance sheet at December 31, 2003. We estimate,

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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 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, 2003, we believe that there has been a significant
change in our ownership, but not a majority change, in the last three years.

As of December 31, 2003, for foreign income tax purposes, we have $61
million of foreign tax NOLs. Of the $61 million of foreign tax NOLs, $34 million
does not expire and the remainder will expire in varying amounts from 2004 to
2011.

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 $337 million at December 31, 2003. 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 $118 million.

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 42,167,296 shares and 41,347,340 shares were issued at December 31, 2003
and 2002, respectively. We held 1,294,692 shares of treasury stock at both
December 31, 2003 and 2002.

Reserved

The total number of shares of our common stock reserved at December 31,
2003 and 2002, 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

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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 were
authorized to deliver 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. Up to 4 million shares
of our common stock have been authorized for delivery under the 2002 Long-Term
Incentive Plan, of which 172,744 has been delivered.

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 2003, 2002, and 2001, we granted 1,111,543,
285,822, and 360,710 shares and units, respectively, with a weighted average
fair value based on the price of our common stock on the grant date of $3.79,
$3.20, and $3.37 per share, respectively. At December 31, 2003, 132,000
restricted shares at an average price of $3.74 per share, and 862,461 stock
equivalent units at an average price of $3.80 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 2003, no
performance units for non-employee directors were issued under this program.
During 2002 and 2001, 7,000 and 8,000 performance units, respectively, were
issued under this program at a weighted average fair value of our stock on the
grant date of $3.90 and $3.66 per share, respectively. During 2003, 4,164
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 $3.77 per
share. During 2002, 3,949 restricted shares were issued under this program at a
weighted average fair value of our stock on the grant date of $3.90. At December
31, 2003, 14,741 restricted shares and 15,000 performance units at an average
price of $4.20 and $3.77, respectively, per unit were outstanding under this
program.

We recognized after-tax stock based compensation expense in 2003 of $4
million, in 2002 of $4 million, and in 2001 of $2 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 50 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 (representing 3.7 million common shares) for the year
ended December 31, 2001. These matching contributions were made in cash starting
January 1, 2002 and approximated $6 million and $7 million for the years ended
December 31, 2003 and 2002, respectively. All contributions vest immediately.

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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

The following table reflects summarized information about stock options
outstanding at December 31, 2003:

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.

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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.

Earnings Per Share

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

Options to purchase 2,367,094, 2,551,872, and 3,322,083 shares of common
stock were outstanding at December 31, 2003, 2002, and 2001, respectively, but
were not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the common shares
on such dates.

8. PREFERRED STOCK

We had 50 million shares of preferred stock ($.01 par value) authorized at
December 31, 2003 and 2002. 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.

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

9. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

We have various defined benefit pension plans that cover substantially all
of our employees. The measurement date used to determine measurement of the
majority of our pension plan assets and benefit obligations is September 30th.
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. Domestic pension plan assets were invested in the
following classes of securities:

Our investment policy is to invest more heavily in equity securities rather
than debt securities.

Targeted pension plan allocations are 70 percent in equity securities and
30 percent in debt securities, with acceptable tolerance levels of plus or minus
five percent within each category.

Our approach to determining expected return on plan asset assumptions
evaluates both historical returns as well as estimates of future returns, and
adjusts for any expected changes in the long term outlook for the equity and
fixed income markets.

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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:

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

- -------------------------
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.

Net periodic pension costs (income) for the years 2003, 2002, and 2001,
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 at September 30, 2003 and 2002 were as follows:

The following assumptions were used in the accounting for the plans for the
years of 2003, 2002, and 2001:

We made contributions of $26 million to these pension plans during 2003.
Based on current actuarial estimates, we believe we will be required to make
contributions of $28 million to $35 million to those plans during 2004. Pension
contributions beyond 2004 will be required, but those amounts will vary based
upon many factors, including the performance of our pension fund investments
during 2004.

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

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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. The measurement date used to determine
postretirement benefit obligations is September 30th.

Net periodic postretirement benefit cost for the years 2003, 2002, and
2001, consists of the following components:

The weighted average assumed health care cost trend rate used in
determining the 2003 accumulated postretirement benefit obligation was 10
percent, declining to 5 percent by 2009. In 2002 and 2001 the health care cost
trend rate was 9 percent and 10 percent, respectively.

The following assumptions were used in the accounting for postretirement
cost for the years of 2003, 2002 and 2001:

The effect of a one-percentage-point increase or decrease in the assumed
health care cost trend rates on total service cost and interest and the post
retirement benefit obligation are as follows:

Based on current actuarial estimates, we believe we will be required to
make postretirement contributions of approximately $6 million during 2004.

On September 1, 2003, we changed our retiree medical benefits program to
provide participating retirees with continued access to group health coverage
while reducing our subsidization of the program. This negative plan amendment
will be amortized over the average remaining service life to retirement
eligibility of active plan participants as a reduction of service cost beginning
September 1, 2003.

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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 2003, 2002, and 2001 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 2003, sales to four major customers comprised approximately 18.9
percent, 13.9 percent, 11.0 percent and 8.8 percent of consolidated net sales
and operating revenues. 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.

- -------------------------
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) Long-lived assets include all long-term assets except goodwill,
intangibles, and deferred tax assets.

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

11. COMMITMENTS AND CONTINGENCIES

Capital Commitments

We estimate that expenditures aggregating approximately $60 million will be
required after December 31, 2003 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 2003, 2002, and 2001 was $33 million, $33
million, and $30 million respectively.

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. For example, we are involved in litigation with the minority owner
of one of our Indian joint ventures over various operational issues. This
dispute involves a court-mandated bidding process, which could result in a
non-cash charge to earnings if we are required to sell our interest in the joint
venture on unfavorable terms. As another example, we recently identified our
failure to file certain reports under an automotive industry regulation and,
although we have now made the required filings, this failure could subject us to
a response, including fines or penalties, from the appropriate agency. 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

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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.

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 expense 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
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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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, 2003, 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 $12 million. For each of 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.

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

Subject to limited exceptions, all of our existing and future material
domestic wholly owned subsidiaries (which are referred to as the Guarantor
Subsidiaries) fully and unconditionally guarantee our senior subordinated notes
due in 2009 and our senior secured notes due 2013 on a joint and several basis.
You should also read Note 5, "Financial Instruments" for further discussion of
the notes and related guarantee. 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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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

STATEMENT OF INCOME (LOSS)

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

STATEMENT OF INCOME (LOSS)

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

STATEMENT OF INCOME (LOSS)

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TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

BALANCE SHEET

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

BALANCE SHEET

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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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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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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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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.)

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SCHEDULE II

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

112

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

None.

ITEM 9A. CONTROLS AND PROCEDURES.

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-15(e) and Rule 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the year covered by this report. Based on
this evaluation, our Chief Executive Officer and the Chief Financial Officer
have concluded that the Company's 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. There were no changes in our internal
control over financial reporting that occurred during the fourth quarter of 2003
that have materially affected, or are likely to materially affect, our internal
control over financial reporting.

113

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The sections entitled "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in our definitive Proxy Statement for the Annual
Meeting of Stockholders to be held May 11, 2004 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.

A copy of our Code of Ethical Conduct for Financial Managers, which applies
to our Chief Executive Officer, Chief Financial Officer, Controller and other
key financial managers, is filed as Exhibit 14.1 to this Form 10-K. We further
plan to post a copy of the Code of Ethical Conduct for Financial Managers on our
Internet website at www.tenneco-automotive.com on or before April 1, 2004. We
will make a copy of this code available to any person, without charge, upon
written request to Tenneco Automotive Inc., 500 North Field Drive, Lake Forest,
Illinois 60045, Attn: General Counsel. We intend to satisfy the disclosure
requirement under Item 10 of Form 8-K and applicable NYSE rules regarding
amendments to or waivers of our Code of Ethical Conduct by posting this
information on our Internet website at 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 11, 2004 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" in our definitive Proxy
Statement for the Annual Meeting of Stockholders to be held May 11, 2004 is
incorporated herein by reference.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table shows, as of December 31, 2003, information regarding
outstanding awards available under our compensation plans (including individual
compensation arrangements) under which our equity securities may be delivered:

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

(1) Reflects the number of shares of the Company's common stock. Does not
include 237,315 shares that may be issued in settlement of common stock
equivalent units that were credited to outside directors as payment for
their retainer fee. In general, these units are settled in cash. At the
option of the Company, however, the units may be settled in shares of the
Company's common stock.

114

(2) This plan terminated as to new awards on December 31, 2001 (except awards
pursuant to commitments outstanding at that date). Does not include 14,628
shares subject to outstanding restricted stock (vest over time) and
stock-settled performance share awards (vest based on the achievement of
performance goals over a specified period) outstanding as of December 31,
2003 that were issued at a weighted-average issue price of $4.11 per share.

(3) Does not include 445,387 shares subject to outstanding restricted stock
(vest over time) and stock-settled performance share awards (vest based on
the achievement of performance goals over a specified period) outstanding as
of December 31, 2003 that were issued at a weighted-average issue price of
$7.05 per share.

(4) Under this plan, as of December 31, 2003, a maximum of 820,506 shares
remained available for delivery under full value awards (i.e., bonus stock,
stock equivalent units, performance units, restricted stock and restricted
stock units). At February 29, 2004, the Company had outstanding awards
granted under this plan covering the delivery of up to a total of 2,445,963
shares of common stock. Accordingly, at February 29, 2004, 1,554,037 shares
remained available under the plan, all of which could be delivered as full
value awards.

(5) The plan described in the table above as not having been approved by
security holders is the Tenneco Automotive Inc. Supplemental Stock Ownership
Plan. This plan, which terminated on December 31, 2001 as to new awards
(except awards pursuant to commitments outstanding at that date), originally
covered the delivery of up to 1.5 million shares of common stock held in the
Company's treasury. This plan was and continues to be administered by the
Compensation/Nominating/Governance Committee. The Company's directors,
officers and other employees were eligible to receive awards under this
plan, although awards under the plan were limited to the Company's
non-executive employees. Awards under the plan could take the form of
non-statutory stock options, stock appreciation rights, restricted stock,
stock equivalent units or performance units. All awards made under this plan
were discretionary. The committee determined which eligible persons received
awards and determined all terms and conditions (including form, amount and
timing) of each award.

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 11, 2004 is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The sections entitled "Ratify Appointment of Independent Public
Accountants -- Audit, Audit-Related, Tax and Other Fees" and "Ratify Appointment
of Independent Public Accountants -- Pre-Approval Policy" in our definitive
Proxy Statement for the Annual Meeting of Stockholders to be held May 11, 2004
are incorporated herein by reference.

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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 or furnished the following Current Reports on Form 8-K during the
quarter ended December 31, 2003:

- Current Report on Form 8-K dated October 21, 2003, including pursuant to
Item 5 and 12 certain information pertaining to the results of our
operations for the third quarter 2003.

- Current Report on Form 8-K dated November 13, 2003, including pursuant to
Item 5 and 12 certain information pertaining to adjustments to the
results of our operations for the third quarter 2003.

- Current Report on Form 8-K dated December 4, 2003, including pursuant to
Item 5 certain information pertaining to our launch of a transaction to
refinance our existing $964 million credit facility.

- Current Report on Form 8-K dated December 8, 2003, including pursuant to
Item 5 certain information pertaining to our pricing of a private
offering of $125 million of 10.25 percent Senior Secured Notes due July
15, 2013.

- Current Report on Form 8-K dated December 15, 2003, including pursuant to
Item 5 certain information pertaining to the closing on our $800 million
senior credit facility and a private offering of $125 million of Senior
Secured Notes.

116

EXHIBITS

The following exhibits are filed with this Annual Report on Form 10-K for
the fiscal year ended December 31, 2003, 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

117

118

119

120

121

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

* Filed herewith.

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

122

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 *
------------------------------------
Mark P. Frissora
Chairman and Chief Executive Officer

Date: March 11, 2004

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 11, 2004.

123