UNIVERSAL AUTOMOTIVE INDUSTRIES INC /DE/ - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K

[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

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

Commission File Number
0-25198

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

Delaware 36-3973627
(State of Incorporation) (IRS Employer Identification No.)

11859 South Central Street, Alsip, Illinois 60803
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (708) 293-4050

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

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

Common Stock, $0.01 Par Value Nasdaq SmallCap Market
- ----------------------------- ----------------------
(Title of Class)

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 (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. | |

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

The aggregate market value of the Registrant's Common Stock held as of
March 31, 2004, was approximately $16,231,722.

The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based on the closing sale price of the Common Stock on March
31, 2004 as reported on the Nasdaq SmallCap Market, was approximately
$11,857,678. Common Stock held by officers, directors and each person who owns
10% or more of the outstanding Common Stock have been excluded because such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.

The number of shares of Registrant's Common Stock, par value of $0.01
per share, outstanding as of March 31, 2004 was 10,893,773 shares.

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS(1)

OVERVIEW

Our primary business is the manufacturing and marketing of brake and
undercar parts, including brake rotors, brake drums, disc brake pads,
remanufactured brake shoes, remanufactured calipers, new clutch kits, suspension
and hydraulic parts for the North American Automotive aftermarket. Since the
recent acquisition of certain North American assets of TRW Automotive's
Kelsey-Hayes Company subsidiary in January 2004, which approximately doubled our
size, we have expanded our breadth of brake and undercar parts and most
importantly added such well established brands such as Powerstop, ValuMaxx and
Autospeciality to our recognized Ultimate, Evolution and UBP brands.(1) We have
entered into a licensing agreement for the use of the TRW trademark for premium
quality brake rotors and drums and a supply agreement for TRW suspension parts.
The branding campaign reflects management's desire to add value through
increasing brand awareness and assisting our customers gain meaningful revenue
growth with the professional installer. We have expanded our parts availability
from under 10,000 parts to over 40,000 parts in the brake and undercar product
segment. This product and brand extension has transformed us from a private
label provider of brake parts to a complete brake and undercar parts provider
with industry respected brands and market leading private label capabilities,
therefore, enabling customers to consolidate all their brake and undercar parts
requirements with one supplier. We manufacture over 90% of our friction
products, 40% of our brake rotors (measured in revenues), remanufacture 100% of
our brake calipers and purchase for resale the balance of our brake and undercar
products from respected manufacturers throughout the world. An estimated 50% of
our sales are marketed under our customers' private labels and the balance of
our sales under our brands including the Autospeciality, Powerstop, ValuMaxx,
Ultimate and UBP trademarks. Twenty percent of our 2003 revenues come from our
wholesale products business in which we buy and sell fast moving automotive
parts such as spark plugs, headlights and motor oils. In prior years, sales of
wholesale products amounted to approximately ten percent of our total revenues.
Typically, the margin in the commodity business is substantially less than the
brake business.

Readers should carefully review the items included under the subsection
Risks Affecting Forward Looking Statements and Stock Prices, as they relate to
forward looking statements, as actual results could differ materially from those
projected in the forward looking statement.

We operate two friction plants, an 83,000 square foot disc pad plant
located in Brampton, Ontario and a 70,000 square foot brake drum lining and
brake shoe remanufacturing plant in Walkerton, Virginia. Our friction business
has experienced substantial growth since we acquired our first friction plant in
September 1996. Unlike the brake rotor and drum product group, there is no
material competition from offshore friction suppliers. In 2003, several friction
suppliers based in Mainland China entered the North American aftermarket with an
economy line of disc brake pads. We believe Chinese manufactured friction will
gradually increase its marketshare with economy level products. We believe the
barrier to entry in the premium friction category is significant due to the
following reasons: (i) building brand acceptance is difficult due to safety
related concerns; (ii) capital requirements are intensive; (iii) friction
formulations are usually patented or highly classified; and (iv) the product
foundation and production is an art as much as a science and requires highly
experienced management. Our first plant in 1996 was located in a 17,500 square
foot facility. Today we have 140,000 square feet dedicated to the friction
manufacturing business. In November 2002, we launched our Evolution line of
ceramic disc pads, developed by our research team at our Brampton, Ontario
facility. Our Evolution disc pads are targeted at the professional installer.
Parts Plus, Inc, a leading aftermarket programmed distribution group with over
2,000 Parts Plus stores and Car Care centers,

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(1) Some of the statements included in Item 1, Business, and Item 7,
Management's Discussion and Analysis of Financial Conditions and Results of
Operations, may be considered to be "forward looking statements" since such
statements relate to matters which have not yet occurred. For example,
phrases such as "we anticipate," "believe" or "expect" indicate that it is
possible that the event anticipated, believed or expected may not occur.
Should such event not occur, then the result which we expected also may not
occur or occur in a different manner, which may be more or less favorable to
us. We do not undertake any obligation to publicly release the result of any
revisions to these forward looking statements that may be made to reflect
any future events or circumstances.

selected Evolution ceramic disc pads as their Parts Plus Ceramic disc pad line
in October 2003. Ceramic disc pad sales exceeded $1 million dollars in 2003 and
are expected to double in 2004.

We operate a state of the art brake rotor manufacturing plant at our
Alsip, Illinois facility. We recently completed the relocation of the
Kelsey-Hayes brake rotor plant from Carson, California to our Alsip facility.
The consolidation of the two plants has eliminated and/or reduced redundant
labor and certain fixed costs. We primarily manufacture brake rotors for our
branded product offering. We believe that in order to satisfy the customer's
request for maximum quality at the most competitive economics, we must have the
flexibility to manufacture or source (primarily from China) brake rotors and
drums. We believe the brake rotors we manufacture in the USA are superior in
quality and value to the same parts supplied through plants located in China and
"add value" to our customer relationships, providing us with a competitive edge
over competitors who are exclusively marketers of imported brake drums and
rotors. We also believe that we have improved our ability to source product in
China through our strategic relationship with Wanxiang America Corporation,
China's leading auto parts supplier to the OEM and aftermarket. See further
detail regarding our relationship with Wanxiang America Corporation under "Line
of Credit and Recent Financings."

We acquired our brake caliper manufacturing business in the
Kelsey-Hayes transaction. The brake caliper manufacturing plant is operated out
of our Carson, California distribution center, formerly operated by Kelsey-Hayes
Company. Calipers are used in the disc braking system. We offer semi-loaded and
loaded calipers; loaded calipers are calipers that include the disc pads and
associated hardware.

The trend over the last year has favored growth in the private label
segment as customers choose to support their own brands. We believe there has
been a shift over the last several years by national buying groups and retailers
to build their brand equity as opposed to supporting the Big Three brake
manufacturing companies (Dana, Federal-Mogul and Honeywell) and their brands.
However, the addition of our new brands will enable us to service that segment
of the automotive aftermarket that desires nationally respected and trusted,
branded product.

With the additional product lines, product line coverage and respected
brands we have positioned ourselves as one of the only full line alternatives to
the Big Three brake companies. Our other competitors specialize primarily in one
brake category which makes it more difficult for a customer to manage (one
supplier for each category) from a marketing, supply and inventory management
function. We believe there are substantial new growth opportunities by the way
of cross selling related to the recent acquisition. Our customer base has more
then doubled in number and our product line offering has increased, offering
opportunities for new sales initiatives. We are hopeful of selling the new
product lines acquired in the Kelsey-Hayes transaction to existing customers
such as Parts Plus, National Pronto Association and Independent Auto Parts
Association, in which we are an approved supplier for two or more brake
categories.

INDUSTRY BACKGROUND

Braking Systems. There are two primary types of braking systems for
cars and light trucks. The first is a drum brake system, in which the braking
action is created by a brake shoe being forced outward against the inside of a
rotating drum. The second, and newer, system is a disc braking system, in which
the braking action is created by two brake pads squeezing a rotor. Each vehicle
has either one drum or one rotor at each wheel. In either case, the braking is
initiated by the driver pressing a brake pedal, which causes a master cylinder
to compress fluid in the vehicle's braking system, which, in turn, causes the
fluid pressure to pass through a brake line to a hydraulic cylinder which causes
the action of the brake shoes in a drum system or brake pads in a disc system.

Distribution in the Aftermarket. The ultimate consumers for automotive
aftermarket products can be divided into two primary categories. The first
category consists of customers who choose to have their cars repaired at a
commercial service establishment, such as a service station, repair shop or car
dealer, and is known as the "installer segment." Customers in the second
category, the "do-it-yourself" segment, are those customers who choose to make
the repairs themselves.

Traditionally, many car parts have been distributed though a system
under which products are sold from manufacturers to warehouse distributors, who
then sell to "jobbers," who, in turn, sell to installers and consumers. We
believe that in recent years there has been an industry shift away from the
traditional channels of distribution

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toward alternative distribution channels, including manufacturers who sell parts
to mass market retailers who serve do-it-yourself customers, and manufacturers
who sell parts to warehouse distributors, who sell directly to installers that
provide repair and installation services. We believe the traditional warehouse
jobber distribution system has suffered, and may continue to suffer, some
erosion of total market share as a result of the expansion of these alternative
distribution channels, particularly as a result of the increased presence in the
marketplace of the mass-market retailer. However, we believe that these shifts
in distribution channels will benefit us, as our principal brake parts customers
include these mass market retailers.

Frost & Sullivan estimates that sales of brake parts in the United
States' aftermarket for passenger cars, sports utility vehicles and light trucks
totaled $1.8 billion measured at manufacturer's level in 2002. This market grew
by an estimated 4% in 2002, according to Frost & Sullivan.

We believe the demand for aftermarket brake parts, will continue to
grow because of the following factors:

o An increasing number of vehicles on the road. New car sales
were strong from 1998 through 2003; we expect vehicles sold
during this time period to require replacement parts in 2004
to 2006.

o An aging vehicle population, which creates the need for more
replacement parts. The average age of light vehicles has been
increasing since 1999. In 2004 the average age of a light
vehicle is forecasted at 8.76 years according to Frost &
Sullivan.

o Increased production of front wheel drive vehicles, which
create more wear on brake parts than rear wheel drive
vehicles. Over 70% of all new vehicles are designed with front
wheel drive.

o A trend toward the use of affordable replacement brake rotors
rather than resurfacing existing rotors. Historically, due to
the high cost of new rotors, consumers and installers
generally chose to resurface brake rotors rather than purchase
replacement rotors. However, due to the availability of
lower-cost replacement rotors, in recent years, consumers and
installers are increasingly choosing to purchase replacement
rotors.

o Modern design innovations, including the automotive industry's
shift to the production of an increased number of
lighter-weight rotors and metallic brake pads. The newer
metallic brake pads are abrasive and wear rotor surfaces much
faster than the non-metallic pads used in the past. Lighter
weight rotors are less costly than heavier rotors, and, when
the rotors have worn down, it is generally more cost effective
to discard rather than refurbish them.

OUR GROWTH STRATEGY

Our strategy is to capitalize on the increasing demand for brake and
undercar parts by being a highly focused competitive preferred brake parts
supplier to the Automotive Aftermarket excelling in quality and delivery. We
will distinguish ourselves by being first to market, and providing solutions to
problematic applications.

o Selling more product to our more then 500 customers by
marketing additional brake and undercar categories, with the
objective of becoming our customer's sole or primary source
for their branded and private label brake and undercar
requirements.

o New product launches. We believe that products can be improved
to perform better then the original equipment part; our focus
is to deliver outstanding new products with feature and
benefits that exceed our competition and the original
equipment part.

o Expansion of our high performance Powerstop products. Sales of
high margin Powerstop products to sport and tuner car markets
offer new and exciting growth opportunities.

o Adding value by growing brand equity. We are targeting sales
to the professional installer markets.

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o Continuing to address the growing demand for customers'
private labels across all of our product lines.

o Considering the acquisition of other specialty brake parts
distributors and manufacturers.

PRODUCTS

The brake parts we sell can be divided into two main categories: brake
system and undercar parts. The brake system parts consists of friction,
hydraulic and rotating parts (brake rotor and drum parts). The undercar parts
consist of clutches and suspension parts. The friction category of parts
consists of brake shoes for drum systems and brake pads for disc systems.
Cylinders, brake calipers and brake hoses are examples of hydraulic parts. We
manufacture some of these parts and act as a distributor for others. We
manufacture disc brake rotors in our Alsip, Illinois facility. The Kelsey-Hayes
rotor manufacturing plant was closed in December 2003 and production was moved
to our Alsip, Illinois facility during the first quarter of 2003. We formulate
and manufacture disc brake pads at our plant, located in Brampton, Ontario,
Canada. At our plant in Walkerton, Virginia, we manufacture, brake shoes and
drum brake lining. Calipers are remanufactured in our Carson, California plant.
The remaining hydraulic parts we sell are all purchased from suppliers.

We also offer a line of high performance brake parts marketed under our
Powerstop brand. The Powerstop offering includes slotted and drilled brake
rotors (manufactured in our Alsip, Illinois facility), PowerStop extreme
performance disc pads and brake calipers. These products are primarily sold to
specialty performance distributors who in turn sell them directly to the
consumer. In the future we intend to expand our Powerstop product offering with
additional brake and undercar performance products.

We now supply a complete line of branded and private label brake and
undercar parts to mass-market retailers, traditional warehouse distributors and
specialty undercar distributors in North America. Many of our competitors
specialize in only one category, such as friction parts or drums and rotors. By
offering a full line of products in several categories, we believe we have an
advantage over those competitors offering products in fewer categories, in light
of the industry trend toward consolidation of the number of suppliers of
products.

WHOLESALE PRODUCT OPERATION

We conduct a wholesale product operation from our headquarters facility
in Alsip, Illinois, purchasing automotive items such as spark plugs, motor oil
and freon, in large volume, at below market prices, and reselling these products
at slightly higher prices. We make large-volume purchases of products on the
open market, generally buying from domestic and foreign manufacturers and other
warehouse distributors, and reselling these products to other warehouse
distributors, mass market retailers and jobbers. These operations, while
historically profitable, result in gross margins that are significantly lower
than gross margins from our brake part operation. For the years ended December
31, 2003, 2002 and 2001, excluding sales from our former Hungarian foundry, net
sales from our wholesale product operations accounted for approximately 22%, 10%
and 8%, respectively, of our total net sales, and 23%, 8% and 5%, respectively,
of our total gross profits.

MARKETING AND DISTRIBUTION

Marketing

We organize our marketing operations around two principal customer
groups: traditional aftermarket warehouse distributors and mass market
retailers.

Private Label Brake Parts Customers. We are one of the industry's
leading providers of private label brake and undercar products, approximately
50%, are sold under our customers' private brand labels. Most aftermarket
distributors are members of national buying/marketing groups and have developed
their own private brand labels.

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We supply one or more brake product lines to the following marketing
groups under the group's private label: National Pronto Association; IAPA; APA;
and Parts Plus, Inc. We also supply national retailers such as Advance Auto
Parts under their private brand labels.

Branded Product Customers. Branded products are primarily targeted at
the professional installer customer. We are building brand awareness through
trade magazine promotions, training clinics and world class products.

Sales/Marketing. Our Vice President of Sales manages our independent
sales representative network through nine full time sales personnel. A Vice
President-Marketing manages our marketing and product branding efforts.

We believe we have retained some of the best independent sales
representatives across the country. These representatives assist us with direct
sales efforts, customer field work, trade shows and other marketing and sales
activities. These independent sales representatives are compensated on a
commission basis. Agreements with our independent sales representatives may be
terminated at any time by either party, upon varying periods of notice dependent
on the contract.

Distribution

We believe we offer the quickest delivery service of any full-line
national brake and undercar supplier in the US aftermarket through three
strategically located distribution centers. We service our Midwest customers
from a 263,000 square foot distribution center at our headquarters facility
located in Alsip, Illinois. Our East coast customers are serviced from the
former Kelsey-Hayes 88,000 square foot Parsippany, NJ warehouse. We service our
West Coast customers from the former Kelsey-Hayes 192,000 square foot
distribution facility in Carson, California. We consolidated our former 28,000
square foot southern California warehouse into the Kelsey-Hayes facility in
March of 2004. We generally are able to fulfill customer orders quickly, as the
industry demands, and, therefore, typically do not have a large order backlog.
We generally ship orders to our brake parts customers within 72 hours days from
the time the order is placed. In addition, we seek to maintain high fill rates
for orders, and, accordingly, do not generally have a large number of back
orders. Customers may place their stock orders by telephone, electronically or
by facsimile. Deliveries are made from all warehouses, almost exclusively by
common carrier.

MANUFACTURING

In the first quarter of 2004, in order to reduce costs, we relocated
the former Kelsey-Hayes rotor machining facility from Carson, California to our
Alsip, Illinois facility, which was closer to our castings supplier. At present
we have a capacity to machine approximately 300,000 rotors annually on a
one-shift basis.

In 1996, we acquired North American Friction, which at the time
occupied a 17,000 square foot facility near Toronto, Ontario. Today, as a result
of significant growth in the sales of friction products since we entered that
market segment this operation currently occupies a 79,000 square foot facility
in suburban Toronto, Ontario. We now offer a full line of friction grades in
both riveted and integrally-molded disc brake pads. We were awarded ISO 9001
certification in July 1999 and BEEP (Brake Effectiveness Evaluation Procedure)
certification in 2003. BEEP is becoming the industry benchmark to assess
friction material performance.

We acquired the Total Brake Industries assets in November 1999 and
operate these assets from a 77,000 square foot leased facility in Walkerton,
Virginia. This facility remanufactures brake shoes and brake shoe lining for use
in this remanufacturing process. In addition, we sell drum brake shoe lining to
third party customers.

We acquired the brake caliper manufacturing business from Kelsey-Hayes
in January 2004. The brake caliper manufacturing plant is operated out of our
Carson, California distribution center formerly operated by Kelsey-Hayes. This
plant remanufactures brake calipers. Calipers are used in the disc braking
system. We offer semi loaded and loaded calipers; loaded calipers are calipers
that include the disc pads and associated hardware.

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SUPPLIERS AND RAW MATERIALS

Suppliers

We centralize product selection and purchasing functions for our
warehouse distribution business at our headquarters located in Alsip, Illinois.
Most of the drums, rotors and hydraulic parts we sell are purchased from a
variety of suppliers. We manufacture the vast majority of the friction parts
that we sell. Currently, of the drums and rotors we purchase, approximately 70%
are manufactured in the Peoples Republic of China and the remainder in Taiwan,
Italy, Canada and the United States.

In connection with a transaction under which we issued 201,438 shares
of Series A Preferred Stock to Venture Equities Management, Inc., an affiliate
of Wanxiang America Corporation and Wanxiang Group Corporation, one of the
leading manufacturers of automotive parts in the Peoples Republic of China, we
entered into a supply agreement with Wanxiang America Corporation. Under the
supply agreement, we agreed to make annual purchases of parts from Wanxiang
America Corporation totaling $5,000,000, provided the prices of the products we
purchase from Wanxiang America are substantially comparable to the prices
charged by other suppliers in the Peoples Republic of China for similar
products. In the event we do not purchase $5,000,000 in products from Wanxiang
America in a year, we are obligated under the agreement to pay Wanxiang America
20% of the difference between $5,000,000 and the amount we have purchased from
Wanxiang America for products during the year. The agreement provides Wanxiang
America with a right of refusal with respect to products we seek to purchase
from other suppliers located in the Peoples Republic of China. The supply
agreement has an indefinite term, but can be terminated by Wanxiang America at
any time and by us if Wanxiang America materially fails to perform its
obligations under the agreement, or if the number of shares of our common stock
underlying the shares of Series A Preferred Stock owned by Venture Equities
Management falls below a specified level. During 2003 we fulfilled our purchase
requirements with Wanxiang. None of our suppliers provide a majority or all of
our requirements for a particular product or product subcategory.

The International Trade Commission has ruled that rotor sales from
China materially injured U.S. rotor manufacturers. As a result of this
determination, the U.S. Customs Service has imposed anti-dumping duties on some
Chinese suppliers. These duties can be reviewed annually if requested by a
Chinese manufacturer or by a U.S. brake rotor manufacturer and depending on the
results of the review, the tariff may be decreased or increased. The dumping
duties are plant specific and are retroactive to the importer of record.
However, we are not the importer of record for this purpose and, therefore, to
date, have not been affected by dumping duties.

Raw Materials

The main components used in our brake rotor manufacturing operations
are iron castings. We primarily purchase castings from Waupaca Foundry, Inc.,
based in Wisconsin. The prices of castings fluctuate based on the scrap metal
and energy costs. In the most recent three-year period, these prices have
generally stayed within a range of 10% below to 10% above the price at the
beginning of the period. In addition to Waupaca Foundry, we purchase castings
from a foundry in Canada. Although we believe that we have developed good
relationships with the foundries that supply our iron castings, any of these
foundries could discontinue producing these castings for us at any time.

We believe that the number of foundries equipped to produce iron
castings such as the ones used by us in our manufacturing operations is limited.
The loss of any major foundry as a supplier of iron castings and our inability
to identify new foundries for the production of iron castings in a timely manner
could have a material adverse effect on our business. In addition, we cannot
provide assurances that the foundries currently producing our iron castings will
be able to accommodate the anticipated expansion of our manufacturing
capabilities. We are continuously seeking to locate additional foundries that
would be suitable for the production of our iron castings.

CORPORATE HISTORY

Our wholly-owned subsidiary, Universal Automotive, Inc., an Illinois
corporation, began operations in 1981 as a warehouse distributor of a wide
variety of automotive aftermarket replacement parts servicing the Chicago

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area market. We were incorporated in Delaware in January 1994 to act as the
holding company for several subsidiaries. In the early 1990's, we started
shifting our focus to the brake parts segment of the business, and in 1996 we
elected to discontinue our non-brake parts warehouse distributor operations due
to the lower margins and declining growth prospects of this segment of the
business. In January 2004, we began to operate the wholesale products operation
under a new wholly owned subsidiary, The Automotive Commodity Connection, Inc.
We currently conduct our business through the following subsidiaries:

o Universal Automotive, Inc.;

o Universal Brake Parts, Inc., an Ontario, Canada corporation;

o Universal Automotive of Virginia, Inc., a Virginia
corporation; and

o The Automotive Commodity Connection, Inc., an Illinois
corporation.

Our principal executive offices are located at 11859 South Central,
Alsip, IL 60803, and our telephone number is (708) 293-4050.

DISCONTINUED OPERATIONS

We have discontinued the operations of two other subsidiaries. The
first is eParts eXchange, Inc., which was discontinued in 2001 and which was
unsuccessful in developing a business-to-business online exchange for automotive
aftermarket parts. We have consolidated the telemarketing and outbound e-mail
operations of eParts eXchange into our core business. The second subsidiary is
UBP Hungary, Inc., a Delaware corporation, which we own and which owned UBP
Csepel Iron Foundry, Kft., a Hungarian corporation, which operates a foundry in
Budapest, Hungary. We sold our ownership interest in UBP Csepel as of December
31, 2001. We decided to exit the foundry business in 1999 due to continuing
losses at the foundry and our belief that our stable relationship with Waupaca
Foundry eliminated the need to develop an in-house capacity for manufacturing
rotor castings. In our 1999 financial statements, we wrote down the carrying
value of the foundry property to its estimated net realizable value. We also
provided a reserve for costs of disposal and losses of the foundry before its
disposal or liquidation. We wrote-off the balance of this investment in 2003.
See "Business -- Discontinued Operations."

COMPETITION

Our markets are highly competitive. We compete primarily on the basis
of service, price, inventory availability, delivery time and responsiveness. We
offer a full line of brake and undercar parts. We compete directly with other
companies that offer full or multiple product offerings as well as single
category value line distributors. We believe our complete product offering gives
us an advantage over single line competitors and, thus provides an attractive
alternative to the full line "Big Three" competitors.

According to Frost & Sullivan, a leading industry analyst, the big
three brake companies, Dana Corporation (Raybestos), Federal-Mogul (Wagner Brake
Products) and Honeywell (Bendix) comprised an estimated 70% of the brake parts
aftermarket in 2002. We believe the high concentration of business among the
"Big Three" favors us for the following reasons:

1. Dana Corporation has publicly stated its desire to divest itself of
its $2.5 aftermarket business which includes its Raybestos brake product line,
which accounts for the largest share of the aftermarket brake business, a 40%
market share. The president of the Raybestos brake business resigned earlier in
2003. He joined an aftermarket remanufacturer and subsequently has been joined
by other key executives of the Raybestos brake business.

2. Federal-Mogul accounts for the second largest share of the
aftermarket brake business, a 20% market share, and voluntarily filed for
protection under Chapter 11 of the United States Bankruptcy Code in October
2001.

3. Honeywell, with a 10% market share, has had their original equipment
and aftermarket brake business for sale for the last three years, has now stated
the business is not for sale.

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It appears that among the leading full line aftermarket brake
suppliers, this is a time of uncertainty.

We also compete with single category value line friction suppliers such
as Morse Automotive and Satisfied Brake. Both companies are highly respected
competitors that account for 5% to 8%, respectively, of the friction aftermarket
according to Frost & Sullivan 2002 Report. We believe our full line offering
offers an advantage for many customers who utilize these single line competitors
through our full product line offering while effectively competing with products
we believe are of comparable quality, price and value.

INTELLECTUAL PROPERTY

We believe that our historic labels, UBP and Ultimate, are important to
our marketing efforts. The UBP and Ultimate Braking Power trademarks have been
registered with the United States Patent and Trademark Office and Canadian
Trademarks Office. The Powerstop, ValuMaxx and Autospeciality brands, acquired
from Kelsey-Hayes, and our license of the TRW brand in certain applications,
also represent trademarks that have been federally registered. We cannot provide
assurance that prior registrations or uses of these trademarks, or confusingly
similar marks, do not exist in the United States. If prior registrations or uses
exist, we might be precluded from using these trademarks in the United States.
We cannot provide assurance that our trademarks would be upheld if challenged or
that we would not be prevented from using the trademarks, either of which could
have a material adverse effect on us.

The formulations for our integrally molded brake pads, pucks and drum
brake lining are trade secrets, which we maintain as confidential information.
We believe these trade secrets to be valuable.

We could be subject to claims by others that we infringe upon their
intellectual property rights. Any litigation regarding our proprietary rights
could be costly and divert our management's attention from our operations,
result in the loss of certain of our proprietary rights or the payment of
substantial monetary damages, require us to seek licenses from third parties or
prevent us from selling our products.

EMPLOYEES

As of December 31, 2003, we had 234 full-time employees, in the
following areas:

o 121 in manufacturing;

o 71 in distribution;

o 10 in sales and marketing; and

o 32 in administration.

With the acquisition of certain assets of Kelsey-Hayes, our full time
employment as of April 1, 2004 totaled approximately 440 employees.

INSURANCE

We maintain insurance in amounts and with coverages and deductibles
that our management believes are adequate. The primary risks that we insure
against are professional liability, workers' compensation, personal injury,
bodily injury, property damage, business interruption and fidelity losses. We
cannot provide assurance that our insurance will adequately protect us from
potential losses and liabilities. We maintain key man term life insurance
policies covering the life of Mr. Scott in the amount of $6,000,000 and Mr. Tzur
in the amount of $1,000,000. The proceeds of these policies would be payable to
us. We paid premiums of approximately $10,000 for these key man life insurance
policies in 2003.

8

LINE OF CREDIT AND RECENT FINANCINGS

Line of Credit. The Company had a credit agreement with LaSalle Bank
National Association or its subsidiaries ("LaSalle") for a revolving line of
credit of up to $22,000,000 based on eligible accounts receivable and inventory.
The weighted average interest rates on the aforementioned revolving credit
facility borrowings were 5.04 percent, 5.70 percent, and 8.68 percent for the
years ended December 31, 2003, 2002, and 2001, respectively.

The revolving line of credit had a term ending May 1, 2005 and an
interest rate of prime plus 1.5% per annum. During 2001 the interest rate was
changed from prime plus 0.5 percent per annum. The line of credit is subject to
an ongoing option to convert to LIBOR plus 2.5 percent per annum. A term loan
was payable in monthly principal installments of $18,705 and bore interest at
prime plus 0.75 percent per annum.

The LaSalle agreement contained certain limitations on dividends and
capital expenditures and requires the Company to satisfy a certain financial
test concerning defined minimum tangible net worth. The entire credit facility
was secured by a first lien on the inventory and accounts receivable of the
Company.

At December 31, 2003, approximately $269,000 was available for
borrowing under the revolving credit line. On January 12, 2004 the LaSalle
credit facility was replaced with a new credit facility from Congress Financial
Corporation ("Congress").

In connection with the purchase of certain assets of Kelsey Hayes
Company, we entered into a revolving line-of-credit agreement with Congress,
replacing the LaSalle indebtedness. The revolving line-of-credit is for up to
$35,000,000 based on eligible accounts receivable and inventory. The revolving
line-of-credit has a term ending January 12, 2007 and an interest rate of prime
plus .50% per annum. The line is subject to an on-going option to convert to
LIBOR plus 2.75% per annum.

The Congress agreement contains certain limitations on dividends and
capital expenditures and requires the Company to satisfy a financial test
concerning earnings before interest, taxes, depreciation and amortization
(EBITDA). The revolving line-of-credit is fully secured by a first lien on the
inventory and the accounts receivable of the Company.

Issuance of Convertible Notes to Global Capital Funding Group, L.P. On
July 3, 2003 we sold a $1,550,000 unsecured convertible note to Global Capital
Funding Group, L.P. (Global). This note was sold at a discounted amount of
$1,240,000 and is due July 2005. This note provides, among other provisions, for
voluntary conversion at the option of the noteholder. The conversion price is
equal to the greater of the weighted average sales price for the ten business
days immediately prior to the date of conversion or $0.35. We will issue a total
of 1,139,706 shares if the conversion price is at $1.36 per share, which was the
costing price on December 31, 2003; however, we will issue a total of
approximately 4,430,000 shares if this note is exercised at a conversion price
of $0.35 per share. We will not know the exact conversion price until we receive
a request for conversion. In connection with the issuance of this note, the
investor received a warrant to purchase 250,000 shares of our common stock. The
common stock purchase warrant may be exercised at any time and is valid for five
years from the date of issuance at an exercise price of $1.20 per share. In
addition to the common stock purchase warrant issued to Global, we also issued
to a financial advisor a common stock purchase warrant for 200,000 shares of our
common stock. This warrant may be exercised at any time and is valid for five
years from the date of issuance at an exercise price of $1.16 per share. These
warrants were valued at $124,853 and were recorded as a deferred financing fee.
Total fees and expenses paid in cash were $163,250 and have been recorded as
deferred financing fees. These costs will be amortized over the term of the
note. As of December 31, 2003, the unamortized deferred financing fees related
to this transaction are $292,505.

On November 26, 2003 we issued an unsecured convertible note in the
original amount of $1,200,000 to Global Capital Funding Group, L.P. (Global II -
an affiliate of Global) for an aggregate price received at closing of $960,000.
The note provides for a lump sum payment of $1,200,000 on November 26, 2005. In
addition the note contains a voluntary conversion at the option of the note
holder at a conversion price of the lesser of $3.00 per share or of 95% of the
volume weighted average sales price for 10 trading days immediately prior to the
notice date of conversion except than in no event will the conversion price be
less than $0.35 per share. We also issued 250,000 warrants to Global II and
50,000 warrants to a financial advisor. The Global II warrants are exercisable
over five

9

years at a price of $1.92 per share. The warrants issued to the financial
advisor are exercisable over five years at $1.90 per share. The warrants were
valued at $106,300 and were recorded as a deferred financing fee. Cash fees and
expenses of $110,500 were incurred in connection with securing this loan and
were also recorded as a deferred financing fee. These deferred financing fees
are being amortized over the term of the note. As of December 31, 2003, the
unamortized deferred financing fees related to this transaction are $216,800.

On January 15, 2004 we issued an unsecured convertible note in the face
amount of $300,000 to GCA Strategic Investment Fund Ltd, an affiliate of Global
Capital Funding Group , L.P. for aggregate proceeds received at closing of
$240,000. The note provides for a lump sum payment of $300,000 on January 15,
2006. In addition the note contains a voluntary conversion at the option of the
note holder at a conversion price of the lesser of $3.00 per share or 95% of the
volume weighted average selling price for the 10 trading days immediately prior
to the notice date of conversion except that in no event will the conversion
price be less than $0.35 per share.

Issuance of Secured Convertible Notes to Laurus Master Funds, Ltd. On
October 31, 2003 we issued a secured convertible note to Laurus Master Funds
Ltd. (Laurus) in the principal amount of $2,500,000 which is payable in 33 equal
monthly installments beginning January 31, 2004 and is secured by a first lien
on our fixed assets. Interest is payable at the prime rate plus two percent
(6.0% as of December 31, 2003). The note provides that payments of principal and
interest may, at our sole option, be made in cash or shares of our common stock.
The payment of principal and interest may be made in our common stock if the
closing price for the five trading days preceding the payment date is at least
$1.30 per share. The conversion price was reduced from $1.39 to $1.30 per share
effective January 9, 2004. If our common stock is not $1.30 per share for the
five days preceding the payment date then the conversion price will be 90% of
the lowest closing price for the 22 trading days prior to the payment date, with
a floor conversion price of $0.50 per share. If the payment of principal and
interest is made in cash, then the amount due will be 103% of the amount which
would otherwise be due. We also issued 350,000 warrants to Laurus and 312,500
warrants to a financial advisor. The Laurus warrants are exercisable over five
years at a price of $1.60 to $2.02 per share. The warrants issued to the
financial advisor are exercisable over five years at $1.60 per share. The
warrants were valued at $206,347 and were recorded as a deferred financing fee.
Cash fees and expenses of $393,650 were incurred in connection with securing
this loan and were also recorded as a deferred financing fee. These deferred
financing fees are being amortized over the term of the note. As of December 31,
2003, the unamortized deferred financing fees related to this transaction are
$583,345. The indebtedness under the Laurus note was increased to $4,500,000 in
the aggregate in January 2004 simultaneous with the closing of the Congress
Financial Corporation loan.

On January 9, 2004 the Company issued a secured convertible note to
Laurus Master Funds Ltd. (Laurus) in the principle amount of $2,000,000 which is
payable in 33 equal monthly installments beginning April 1, 2004 and is secured
by a first lien on the fixed assets of the Company, including the fixed assets
acquired in connection with the acquisition of certain assets of the Kelsey
Hayes Company. Interest is payable at the prime rate plus two percent (6.0% as
of January 9, 2004). The note provides that payments of principal and interest
may, at our sole option, be made in cash or shares of our common stock. The
payment of principal and interest may be made in our common stock if the closing
price for the five trading days preceding the payment date is at least $1.30 per
share. If our common stock is not $1.30 per share for the five days preceding
the payment date then the conversion price will be 90% of the lowest closing
price for the 22 trading days prior to the payment date, with a floor conversion
price of $0.50 per share. If the payment of principal and interest is made in
cash then the amount due will be 103% of the amount which would otherwise be
due. We also issued 280,000 warrants to Laurus and 250,500 warrants to a
financial advisor. The Laurus warrants are exercisable over five years at a
price of $1.60 to $2.01 per share. The warrants issued to the financial advisor
are exercisable over five years at $1.76 per share.

Issuance of Series A Preferred Stock to Venture Equities Management,
Inc. On August 29, 2001, we issued 201,438 shares of Series A Preferred Stock to
Venture Equities Management, Inc., or "VEMI," an affiliate of Wanxiang America
Corporation, for consideration of $2,800,000. We used $1,000,000 of the proceeds
of the Series A Preferred Stock to make the payment to FINOVA Mezzanine Capital
Inc. under the restructuring of a debenture discussed below, and reserved an
additional $500,000 to make the remaining principal payments under the
restructuring agreement. The balance of the proceeds were used to reduce the
amount outstanding on our revolving loan indebtedness.

10

Wanxiang America is based in Elgin, Illinois, and is the United States
home office of Wanxiang Group Companies, a leading supplier of auto parts to the
automotive aftermarket and original equipment manufacturers based in the Peoples
Republic of China. The shares of Series A Preferred Stock are currently
convertible into a total of 2,014,380 shares of our common stock, subject to
increase on a weighted average anti-dilution basis with respect to stock and
stock equivalent issuances below $1.39 per share. In connection with the
purchase agreement for the Series A Preferred Stock, we also issued to Wanxiang
three warrants to purchase a total of 4,100,000 shares of our common stock. Two
of these warrants, exercisable for 1,600,000 shares in the aggregate, have
lapsed. The remaining warrant, to purchase 2,500,000 shares of our common stock,
is only exercisable upon the occurrence of events of default specified in the
warrant.

The purchase agreement relating to the Series A Preferred Stock and
related documents contain other agreements among the parties, including:

o a registration rights agreement pursuant to which we have now
registered shares of our common stock into which the Series A Shares
are convertible (before anti-dilution adjustments);

o a stockholders agreement among us, VEMI and three of our founders,
Arvin Scott, Yehuda Tzur and Sami Israel, granting to VEMI certain
rights of first refusal, a contingent proxy as to some of the founders'
shares and a voting agreement to ensure two of nine board seats to
VEMI's designees; and

o a supply agreement between us and Wanxiang America requiring us to
purchase a minimum quantity of product from Wanxiang America each year
and giving Wanxiang America a right of first refusal to supply
Chinese-manufactured parts on competitive terms and conditions.

Restructuring of Subordinated Debenture held by FINOVA Mezzanine
Capital Inc. On July 14, 1997, we sold a $4,500,000 subordinated debenture to
FINOVA Mezzanine Capital, Inc. (formerly Tandem Capital, Inc.) calling for
payments of interest at 12.25% per annum through maturity on July 14, 2002.
Through August 14, 2001 we had issued FINOVA warrants to purchase 1,575,000
shares of our common stock at exercise prices ranging from $0.83 to $1.58, based
on 80% of the average closing bid price of our common stock for the 20 days
preceding the respective issuance dates. The warrants were exercisable at any
time through the sixth anniversary of the debenture issue date. During 2000,
FINOVA elected to exercise one of its warrants to purchase 450,000 shares of our
common stock at an exercise price of $0.83 per share, using a "cashless"
exercise provision whereby FINOVA received a net of 279,260 shares of common
stock after surrendering 170,743 shares which had a fair market value equal to
the aggregate exercise price. We received no cash proceeds from this transaction
when such shares were issued.

On October 31, 2001 we completed a restructuring of the $4,500,000
subordinated debt held by FINOVA. The restructuring resulted in the following:
(i) FINOVA surrendered to us all of its holdings in our common stock and
warrants (279,260 shares and warrants to purchase an additional 1,125,000 shares
at prices ranging from $1.12 to $1.58 per share); (ii) our payment of $1,000,000
to FINOVA; (iii) issuance to FINOVA of $2,000,000 of Series B Preferred Stock
($0.01 par value); and (iv) the amendment of the debenture to a reduced
principal balance of $1,500,000. The amendment to the debenture also reduced the
interest rate from 12.25% to 7.0% and required us to reduce the outstanding
balance by $500,000 over time, which payments have been made, with a final
payment of $1,000,000 due July 11, 2005. The surrendered warrants had cashless
exercise features which, based on the closing price of our common stock of $1.89
per share on the date of the restructuring, would have allowed FINOVA to receive
322,619 shares of common stock. This transaction resulted in an ordinary gain of
$829,714 (inclusive of an accrual of all remaining interest to be paid of
approximately $272,000) for the year ended December 31, 2001. The Series B
Preferred Stock has no fixed dividend, entitles the holder to a liquidation
preference, is redeemable at any time at our option and is convertible into
1,000,000 shares of common stock for which we provided FINOVA with registration
rights.

11

In connection with our financings with Global and Laurus, we further
amended the FINOVA credit agreement to provide as follows:

o On October 8, 2003 as an inducement for Finova to approve the
additional financing from Global Capital Funding Group, L.P.
the Company paid a consent fee of $50,000, capitalized as a
deferred financing cost.

o On October 31, 2003 as an inducement for Finova to approve the
additional financing from Laurus Master Funds, we amended the
subordinated debenture. This amendment resulted in the
following: (i) our payment of $250,000; (ii) the interest rate
increase from 7.0 percent to 8.0 percent; (iii) monthly
installment payments of $25,000 beginning January 1, 2005
through July 1, 2005; (iv) a final payment of $575,000 on July
11, 2005; and (v) our payment of a consent fee of $12,000,
capitalized as a deferred financing cost.

AVAILABLE INFORMATION

We file reports with the Securities and Exchange Commission ("SEC"),
including annual reports on Form 10-K, quarterly reports on Form 10-Q, and other
reports from time to time. The public may read and copy any materials filed with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer
and the SEC maintains an Internet site at www.sec.gov that contains the reports,
proxy and information statements, and other information filed electronically.
Our website address is www.universalbrake.com. We make available free of charge
through our website our Annual Report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and all amendments to those reports as soon
as reasonably practicable after such material is electronically filed with or
furnished to the SEC. The information provided on our website is not part of
this report, and is therefore not incorporated by reference unless such
information is otherwise specifically referenced elsewhere in this report.

RISK FACTORS

In evaluating us and our business, you should carefully consider the
following risk factors. This report contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
Our actual results could differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below as well as
those discussed elsewhere in this report. The order in which the following risks
are presented is not intended to represent the magnitude of the risks described.

WE HAVE NOT EARNED PROFITS AND CANNOT ASSURE YOU THAT WE WILL BECOME PROFITABLE.

From 1996 through 2003, we lost a total of approximately $13,900,000,
including losses from our Hungarian foundry and eParts eXchange operations,
which were sold as of the end of 2001. Although 2002 was a profitable year, we
incurred losses in excess of $4,200,000 in 2003. We have a plan for achieving
profitability which involves improving our balance sheet, gaining market share
in the market for friction brake products, enhancing the efficiency of our
manufacturing operations, improving brand awareness for our products and
developing new, higher-margin friction products. See "Business - Our Strategy."
However, we cannot assure you that this plan will succeed and, if it does not,
we may not achieve or sustain profitability.

WE HAVE A SUBSTANTIAL AMOUNT OF DEBT, WHICH COULD REDUCE OUR ABILITY TO EXPAND
OUR BUSINESS AND LIMIT OUR FINANCIAL FLEXIBILITY.

We have now, and will continue to have a significant amount of debt. As
of December 31, 2003, giving effect to the restructuring of a subordinated
debenture held by FINOVA Mezzanine Capital Inc. and the new debt issued to
Laurus and Global, we had approximately $17.7 million in debt, and stockholders'
equity of approximately $2.6 million. Our debt-to-equity ratio was therefore
approximately seven times. In connection with the Kelsey-Hayes acquisition we
acquired significant assets by increasing our borrowings through a combination
of a significantly larger line of credit with Congress Financial and a series of
convertible debt financings with two

12

separate lenders, which significantly increased our leverage and debt to equity
ratio. The amount of our debt could have important consequences to you. For
example, it could:

o increase our vulnerability to general adverse economic and
industry conditions;

o require us to dedicate a substantial portion of our cash flow
from operations to payments on our debt, thereby reducing the
availability of our cash flow to fund capital expenditures,
product development efforts and other general corporate
requirements;

o limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate;

o place us at a competitive disadvantage compared to those of
our competitors who have less debt;

o limit our ability to pay dividends;

o limit, along with the financial and other restrictive
covenants relating to our debt, among other things, our
ability to borrow additional funds; and

o make it more difficult for us to complete acquisitions.

IF WE ARE UNABLE TO MAINTAIN OUR LINE OF CREDIT OR SERVICE OUR CONVERTIBLE DEBT,
OR IF INTEREST RATES SHOULD RISE SIGNIFICANTLY, THIS COULD HAVE A SIGNIFICANT
NEGATIVE EFFECT ON OUR FINANCIAL CONDITION.

We have a line of credit under a credit agreement we entered into with
Congress Financial Corporation. We depend significantly on the line of credit to
fund our purchases of inventory, payroll, freight charges, commission expenses
and other expenses. The line of credit is scheduled to expire on January 12,
2007. We may not be able to renew this line of credit, or obtain another line of
credit, on similar terms, if at all. If we cannot renew this line of credit or
obtain a replacement line of credit, this will significantly impair our ability
to fund our operations. If we are able to renew this line of credit or obtain a
replacement line of credit only on less favorable terms, the increased interest
expense or other costs of the new line of credit will make it more difficult for
us to achieve profitability. Additionally, our line of credit contains several
covenants which are tied to our operations and certain financial ratios. Should
we breach any of these covenants, there is a potential that the lender will seek
to terminate the line of credit.

Our line of credit with Congress Financial Corporation and our loan
agreements with our three convertible debt lenders and with FINOVA all have
cross default provisions, as well as affirmative and negative covenants, which
require consent for certain actions and prohibit certain other actions without
their consent. We must use great caution to ensure that none of these negative
or affirmative covenants are triggered, to avoid default under all the loans.
This may in certain instances restrict the scope of our activities, to the
extent we are unable to obtain the lenders' consent.

OUR ABILITY TO GROW AND IMPROVE OUR FINANCIAL PERFORMANCE DEPENDS ON FACTORS
SUCH AS OUR ABILITY TO GAIN ADDITIONAL MARKET SHARE, EXPANSION OF OUR
MANUFACTURING CAPABILITIES, POSSIBLE ACQUISITIONS OF OTHER MANUFACTURERS OR
DISTRIBUTORS AND INCREASING SALES TO EXISTING CUSTOMERS.

Our ability to grow and improve our financial performance will depend
in part on the following factors:

o our ability to gain additional market share for friction brake
products;

o the purchase of additional manufacturing machinery and brake
rotor molds to increase the different types of brake rotors
we manufacture;

13

o the possible acquisition of other brake parts manufacturers or
distributors on favorable terms; and

o our ability to increase sales to current customers and
maintain or increase our profit margins with them.

While we regularly evaluate and discuss possible acquisitions, we have
not entered into any commitment, agreement or understanding with any potential
acquisition candidates, and we cannot assure you that we will be successful in
locating suitable acquisition candidates or that any additional acquisitions
will be completed in the future. See Item 1, "Business -- Our Strategy." In
addition, we cannot assure that any operations that we may acquire can be
effectively and profitably integrated into our business, or that any future
expansion of our operations or acquisitions will not have a negative effect on
our operating results, particularly during the periods immediately following any
expansion or acquisition.

TRADING IN OUR COMMON STOCK ON THE NASDAQ SMALLCAP MARKET MAY BE TERMINATED

On January 21, 2003, Nasdaq notified us that our stock price had
dropped below $1.00 per share and that if the trading price did not increase to
over $1.00 per share for a minimum of ten consecutive trading days by July 21,
2003, Nasdaq would initiate proceedings to cause our common stock to be delisted
from trading on the Nasdaq SmallCap Market. We were able to maintain our Nasdaq
listing due to a subsequent rise in our stock price; however, there is an
ongoing risk of delisting should our stock price decline in the future. We may
also be subject to a risk of Nasdaq delisting if we fail to maintain a minimum
net worth of at least $2,500,000 and the value of the public float on our common
stock is less than $35,000,000. In the event of a delisting, our shares could
only be traded on over-the counter bulletin board system. This method of trading
could significantly impair our ability to raise new capital and adversely impede
future trading of our stock. In addition, it could result in increased dilution
to shareholders, due to the rights of our convertible note lenders to convert
their loans into an increasing number of shares linked to declines in share
price.

In the event that our common stock was delisted from the Nasdaq
SmallCap Market, we likely would become subject to special rules, called penny
stock rules that impose additional sales practice requirements on broker-dealers
who sell our common stock. The rules require, among other things, the delivery,
prior to the transaction, of a disclosure schedule required by the Securities
and Exchange Commission relating to the market for penny stocks. The
broker-dealer also must disclose the commissions payable both to the
broker-dealer and the registered representative and current quotations for the
securities, and monthly statements must be sent disclosing recent price
information.

In the event that our common stock becomes characterized as a penny
stock, our market liquidity could be severely affected. The regulations relating
to penny stocks could limit the ability of broker-dealers to sell our common
stock and the ability of owners of our common stock to sell shares in the
secondary market.

OUR ABILITY TO EXPAND OUR BUSINESS DEPENDS ON OUR OBTAINING ADDITIONAL
FINANCING, AND THERE IS NO GUARANTEE WE WILL BE ABLE TO OBTAIN THIS FINANCING.

We will be required to seek additional financing to fund any expansion
we undertake through acquisitions or the upgrade of existing facilities. We have
no current commitments or arrangements for additional financing and we cannot
assure you that additional financing will be available on acceptable terms, or
at all. We may also issue common stock or other securities in connection with
future acquisitions, resulting in additional dilution to existing stockholders.

THE AUTOMOTIVE INDUSTRY IS CYCLICAL, AND A DOWNTURN IN THE INDUSTRY COULD HAVE A
SUBSTANTIAL NEGATIVE EFFECT ON OUR BUSINESS.

Our business is dependent upon sales of the automotive industry, which
creates the total number of vehicles available for repair. This industry is
cyclical and has historically experienced periodic downturns. These downturns
are difficult to predict and in the past have not had an immediate impact on the
aftermarket. The primary market for replacement parts is vehicles that have been
on the road for at least five years. Although we believe that downturns in the
industry generally benefit us because they result in longer holding periods for
cars and further wear and tear

14

on brakes, a protracted downturn in the automotive industry could have a
negative effect on the performance of the aftermarket parts industry in general
and our performance in particular. Our future performance may be harmed by
automotive industry downturns.

OUR BUSINESS WILL SUFFER IF WE CANNOT SUCCESSFULLY COMPETE WITH OTHER COMPANIES
IN OUR INDUSTRY, MANY OF WHOM HAVE FAR GREATER RESOURCES THAN US.

Our markets are highly competitive. As a brake parts manufacturer and
distributor, we compete directly with other brake parts manufacturers and
distributors, including: Aimco and Raybestos Brake Products, which are divisions
of Dana Corporation; Wagner Brake Products, a division of Federal Mogul; and
Bendix, a division of Honeywell. We also compete with numerous value-line
distributors specializing in one or more specific brake categories, including
Morse Automotive and Satisfied Brake. Many of our competitors are larger and
have greater capital, management and other resources than we have, and we cannot
assure you that we will continue to compete successfully with these businesses.

OUR SUCCESS DEPENDS ON THE CONTINUED SERVICES OF KEY PERSONNEL.

Our continued success will depend to a significant degree upon the
efforts and abilities of our senior management, particularly Yehuda Tzur, our
Chairman of the Board, and Arvin Scott, our President and Chief Executive
Officer. If we were to lose the services of Mr. Tzur or Mr. Scott, this could
have a material adverse effect on us. We have employment agreements with Mr.
Tzur and Mr. Scott.

OUR SUPPLIES OF RAW MATERIALS AND FINISHED GOODS COULD BE DISRUPTED FOR A
VARIETY OF REASONS, AND ANY DISRUPTION WOULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS.

The primary components used in our brake rotor manufacturing operations
are raw iron castings. Most of the finished rotor castings are purchased from
China and most of our raw iron castings are produced by, and purchased from, one
foundry located in Wisconsin. We duplicate raw iron casting molds used for the
production of our better-selling brake rotors, and place these molds primarily
at this foundry. Although we believe that we have developed a good relationship
with this foundry, it could discontinue producing these castings for us at any
time. The number of foundries equipped to produce raw iron castings such as the
one used by us in our manufacturing operations is limited. Our inability to
identify new foundries for the production of raw iron castings in a timely
manner could have a substantial negative effect on our business.

We have historically sourced most of our finished product imports of
drums and rotors from China. In 2003, our largest supplier of drums and rotors
experienced a fire, which resulted in a disruption of supply of product, and our
second largest supplier also experienced problems in timely delivery of product
to us, which adversely impacted our ability to fill orders and resulted in the
loss of certain customers. Since that time, we have resumed purchases from these
suppliers and taken steps to ensure that similar supply chain interruption will
not occur in the future; however, there can be no absolute assurances that this
will be the case. We have regained certain of the lost customers and have also
developed new customers; however, this supply chain interruption had a
significant impact on 2003 operations.

THE IMPOSITION OF ANTI-DUMPING DUTIES ON PRODUCTS WE IMPORT FROM CHINA COULD
SUBSTANTIALLY INCREASE OUR COSTS AND HAMPER OUR EFFORTS TO ACHIEVE
PROFITABILITY.

On March 7, 1996, a petition was filed before the United States
Department of Commerce and International Trade Commission seeking the imposition
of "anti-dumping" duties on some brake drums and rotors imported from the
People's Republic of China. The International Trade Commission later ruled that
rotor sales from China materially injured United States manufacturers of rotors.
As a result of the decision by the International Trade Commission, the United
States Customs Service has imposed anti-dumping duties on several Chinese
suppliers. See Item 1, "Business -- Suppliers and Raw Materials." These duties
are specific to particular plants at which rotors are manufactured, and, to
date, none of the plants from which we purchase rotors has been subject to a
duty. However,

15

if any of the plants from which we purchase rotors become subject to duties,
this could increase our costs of purchasing these rotors and make it more
difficult for us to achieve profitability.

WE ARE OBLIGATED TO PURCHASE A SUBSTANTIAL PORTION OF OUR SUPPLIES FROM WANXIANG
AMERICA CORPORATION, WHICH COULD LIMIT OUR ABILITY TO NEGOTIATE FAVORABLE TERMS
WITH OTHER SUPPLIERS.

In connection with the issuance of our Series A Preferred Stock, we
entered into a supply agreement with Wanxiang America Corporation, an affiliate
of the purchaser of the Series A Preferred Stock, which obligates us, with
certain exceptions, to purchase at least $5,000,000 worth of products each year
from Wanxiang America, provided it is able to supply the products on
substantially competitive terms. See Item 1, "Business -- Suppliers and Raw
Materials." Our obligations under this contract could have the effect of
limiting our ability to negotiate favorable terms with other suppliers.

OUR EXECUTIVE OFFICERS AND DIRECTORS CONTROL A SUBSTANTIAL MINORITY BLOCK OF OUR
VOTING POWER AND THEIR INTERESTS MAY BE DIFFERENT FROM YOURS AND, AS A RESULT,
YOU MAY HAVE NO EFFECTIVE VOICE IN OUR MANAGEMENT.

Our executive officers and members of our board of directors, as a
result of their ownership of common stock and options to purchase shares of our
common stock, beneficially own a significant minority percentage of our voting
stock. See Item 12, "Security Ownership of Certain Beneficial Owners and
Management." By virtue of this ownership, these individuals can exercise control
over our business, policies and affairs and exert substantial influence over the
election of our directors, and the approval or disapproval of actions requiring
a shareholder vote. Accordingly, you may have no effective voice in our
management. This concentration of stock ownership could have the effect of
delaying or preventing, and may discourage attempts to bring about, a change in
control or the removal of our existing management. These negative effects would
become even more likely if these members of our management and board of
directors agreed to vote their shares in a similar manner as Venture Equities
Management, Inc. which, as discussed below, owns a substantial percentage of our
voting stock.

Venture Equities Management, Inc., or "VEMI," by virtue of its holding
201,438 shares of Series A Preferred Stock, currently convertible into 2,014,380
shares of our common stock (subject to anti-dilution adjustment rights),
beneficially owns approximately 18% of our voting stock assuming conversion of
all preferred stock to common. In connection with the issuance of the Series A
Preferred Stock, VEMI and its affiliates were granted numerous rights, including
VEMI's right to designate two members of our board of directors. As a result,
VEMI has significant influence over decisions on matters such as a change of
control, the removal of our management or similar matters. If VEMI agreed to
vote its shares in the same manner as the members of our management and board of
directors, these shareholders would have the ability to ensure the approval of
any of these types of decisions. VEMI also owns a "default warrant" to purchase
2,500,000 shares of our common stock which would become exercisable if any of
several events of default, as defined in the default warrant, occur. There are
numerous events which would constitute an event of default under the default
warrant, and if our financial condition deteriorates or should we fail to make
timely payments on our accounts payable to Wanxiang America Corporation, an
affiliate of VEMI, or otherwise default in our supply agreement with Wanxiang
America Corporation and fail to cure the same. VEMI could be entitled to
purchase the shares underlying this warrant at a substantial discount to the
current price of our common stock. In addition, Mr. Tzur and Mr. Scott, our two
largest individual shareholders, have granted a proxy to VEMI or its designees
which will give it power to vote their shares if specified events of default of
occur, in some cases without exercising the default warrant. If any of these
events of default occurred, and VEMI exercised all of the warrants held by it,
it could acquire a significant minority percentage of our voting power, assuming
exercise of the default and common stock warrants. If VEMI held this percentage
of our voting power, it could control the outcome of votes on matters such as a
change of control, the removal of our management, or similar matters, regardless
of whether it voted its shares in the same manner as our executive officers and
directors.

WE COULD BE SUBJECT TO CLAIMS BASED ON THE USE OF ASBESTOS

Brake parts have continued to evolve over the years, with substantial
improvements in product formulations over time. For example, new materials such
as ceramics have been introduced into the marketplace. In 1999, we acquired
from Total Brake Industries a factory in Walkerton, Virginia, pursuant to an
asset purchase agreement.

16

Prior to the acquisition, products manufactured at the facility contained
asbestos. Shortly following the acquisition, we converted our product
formulation to a non-asbestos formulation and since that time no products
manufactured at the factory contain asbestos. We are not aware of any claims
having been made at any of our facilities related to asbestos exposure, but a
risk exists that persons may seek to assert that this exposure was related to
our operations, which could subject us to liability. Additionally, persons may
seek to assert that our operation as a warehouse distributor prior to 1996 may
have resulted in the sale of products that contained asbestos.

WE DO NOT ANTICIPATE PAYING DIVIDENDS IN THE FORESEEABLE FUTURE.

We do not intend to declare or pay any cash dividends on our common
stock in the foreseeable future and anticipate that earnings, if any, will be
used to finance the development and expansion of our business. Moreover,
agreements with our primary and mezzanine lenders and the certificate of
designations for our Series A Preferred Stock prohibit us from paying dividends
without the consent of these lenders and the holders of a majority of the Series
A Preferred Stock. You should not expect us to pay dividends on our common stock
until such time, if any, that we are able to obtain a release of these
prohibitions on the payments of dividends imposed by the terms of these
documents. We do not anticipate obtaining a release on these prohibitions in the
foreseeable future. Any payment of future dividends and the amounts thereof will
depend upon our earnings, financial requirements, and other factors deemed
relevant by our board of directors, including our contractual obligations.

THERE ARE NUMEROUS OUTSTANDING WARRANTS AND CONVERSION RIGHTS TO PURCHASE SHARES
OF OUR COMMON STOCK, WHICH COULD IMPAIR OUR ABILITY TO OBTAIN ADDITIONAL CAPITAL
ON FAVORABLE TERMS.

Venture Equities Management, Inc.'s warrant to purchase 2,500,000
shares would become exercisable if any of several events of default specified in
the warrant occur. We have also issued warrants for various other purposes which
are still outstanding. As December 31, 2003, there were other warrants to
purchase a total of 3,318,302 shares of our common stock outstanding, (in
addition to the other warrants referred to above). In connection with the
financing of the Kelsey-Hayes asset acquisition we have issued significant sums
of convertible debt with conversion prices tied in certain instances to our
common stock market price, and with significant additional dilution possible in
the event of decline in such price; such lenders also received certain warrants
to purchase our common stock. In addition, placement agents involved in the
placement of such debt, as well as other investment advisors to us have been
issued significant additional warrants, which if exercised could result in
substantial dilution.

OUR ABILITY TO ISSUE "BLANK CHECK" PREFERRED STOCK COULD DISCOURAGE TAKEOVER
ATTEMPTS AND, THEREFORE, CAUSE THE PRICE OF OUR STOCK TO DECLINE.

Our certificate of incorporation authorizes the issuance of "blank
check" preferred stock with designations, rights and preferences as may be
determined from time to time by our board of directors. Accordingly, our board
of directors has the ability, without stockholder approval, to issue preferred
stock with dividend, liquidation, conversion, voting or other rights which could
diminish the voting power or other rights of the holders of our common stock. We
have already issued a substantial number of shares of Series A and Series B
Preferred Stock. The existing preferred stock, together with any shares of
preferred stock we may issue in the future, could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control. This possible impact on takeover attempts could cause the price of our
common stock to decline.

FUTURE SALES OF SECURITIES HELD BY OUR OFFICERS, DIRECTORS OR THE HOLDERS OF OUR
PREFERRED STOCK COULD CAUSE THE PRICE OF OUR STOCK TO DECLINE.

The shares beneficially owned by officers and directors, 3,014,000
shares issuable upon conversion of preferred stock (subject to possible
increased due to anti-dilution adjustment) and shares issuable upon exercise of
outstanding warrants (except to the extent the shares underlying the same are
already registered by us) are "restricted securities" under Rule 144 promulgated
under the Securities Act and may not be resold except pursuant to a registration
statement effective under the Securities Act or pursuant to an exemption from
registration, including the exemption provided by Rule 144. In general, under
Rule 144 as currently in effect, subject to the satisfaction of other
conditions, a person who has owned restricted shares of common stock for at
least one year is entitled to sell these shares subject to the volume
limitations prescribed by Rule 144. Shares issuable upon conversion of our
Series

17

A and Series B Preferred Stock are presently eligible for sale under Rule 144
(and we have also registered the shares into which they are convertible pursuant
to registration statements filed in 2003) and, therefore, may become freely
tradeable, at an earlier date. In addition, the shares issuable to the holders
of our convertible debt have the right to convert the principal and interest
owing under their loans into registered common stock, and the holders of
warrants associated with the placement of such debt also have conversion rights
into equity. The shares held by our officers, directors and affiliates are
presently eligible for sale under Rule 144. Future sales of shares of common
stock by our officers and directors under Rule 144, or by the holders of the
Series A and B Preferred Stock to the extent these shares are converted into the
common stock, could cause the price of our common stock to decline.

THE MARKET FOR OUR STOCK IS LESS ACTIVE THAN THAT OF MANY OTHER STOCKS INCLUDED
IN THE NASDAQ STOCK MARKET, WHICH COULD MAKE IT DIFFICULT TO SELL SHARES WHEN
DESIRED.

Although our stock is included in the Nasdaq SmallCap Market, it is
less actively traded than the shares of many of the other companies included in
Nasdaq. The volume of trading in our stock on the Nasdaq SmallCap Market is
frequently low, which means that you may have difficulty selling the shares at a
time when you desire.

WE PROVIDE EXTENSIVE INDEMNIFICATION TO OUR OFFICERS AND DIRECTORS, WHICH LIMITS
OUR ABILITY TO RECOVER DAMAGES FROM OUR OFFICERS AND DIRECTORS AND COULD GREATLY
INCREASE THE COSTS TO US IN THE EVENT OF SHAREHOLDER LITIGATION.

We intend to indemnify our officers and directors to the fullest extent
permissible under the law. Under most circumstances, our officers and directors
may not be held liable to us or our shareholders for errors in judgment or other
acts or omissions in the conduct of our business unless these errors in
judgment, acts or omissions constitute fraud, gross negligence or malfeasance.
This indemnification limits our ability to recover damages from our officers and
directors in the event they cause us to suffer losses. In addition, it could
substantially increase our costs in the event of shareholder litigation.

18

ITEM 2. PROPERTIES

The following table sets forth the general location, principal uses and
approximate size of our principal properties, along with annual lease payments
and expiration of the leases:

All of the leases on the above properties are with unaffiliated third
parties. We believe our facilities are of sufficient size to accommodate our
current employees and operations. We have no agreements, understandings or
arrangements with regard to any additional space as of the date of this
document. In February, 2004, we moved our Compton, California inventory into the
Carson, California facility. We are presently in negotiation for a long-term
extension of our Alsip, Illinois lease.

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ITEM 3. LEGAL PROCEEDINGS

All legal proceedings and actions to which we are a party are of an
ordinary and routine nature incidental to our operations. We believe that these
proceedings will not, individually or together, have a material adverse effect
on our business or financial condition or results of operations.

During 2002, we were named, along with numerous other defendants
(typically, 100 or more), in a total of 65 lawsuits in Madison County, Illinois,
and one lawsuit in Outagamie County, Wisconsin. The lawsuits named most of the
major domestic manufacturers and distributors of brake parts, among others. The
counts against us alleged negligence (Count I) and willful and wanton conduct
(Count II) regarding asbestos exposure over extended periods of time. We
referred these cases to experienced asbestos toxic tort counsel. We received
notice from the courts that all of these lawsuits, naming us a defendant and
claiming alleged liability in connection with the sale and distribution of brake
parts containing asbestos, were voluntarily dismissed without prejudice by the
plaintiffs.

On February 27, 2003, we were named as a defendant in a lawsuit filed
in St. Louis County, Missouri, making allegations similar to those made in the
lawsuits which were dismissed. We received notice from the court that this
lawsuit, naming us as a defendant and claiming alleged liability in connection
with the sale and distribution of brake parts containing asbestos, was
voluntarily dismissed without prejudice by the plaintiff.

Our current liability insurance policy does not cover asbestos related
claims. We have not yet established a reserve against potential liability with
respect to these lawsuits.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our stockholders during the
fourth quarter of the year ended December 31, 2003.

20

PART II

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

Our common stock is included in the Nasdaq SmallCap Market under the
symbol "UVSL." We had issued warrants in connection with our initial public
offering which had been registered (and quoted under the symbol "UVSLW") but all
such warrants have since either been exercised or lapsed, due to their
expiration.

As of March 31, 2004, there were 545 holders of our common stock. The
following table sets forth, for the periods indicated, the high and low bid
prices per share for the common stock and the redeemable common stock purchase
warrants as reported by the Nasdaq SmallCap Market.

COMMON STOCK

REDEEMABLE COMMON STOCK PURCHASE WARRANTS

On March 31, 2004, the last reported sale prices of our common stock
and included on the Nasdaq SmallCap Market was $1.49. Our redeemable stock
purchase warrants expired on January 31, 2004.

On April 19, 2001, we received a notice from The Nasdaq Stock Market
that we were not in compliance with a Nasdaq rule requiring that we have net
tangible assets in excess of $2,000,000 in order to maintain our inclusion in
the market. On August 17, 2001, Nasdaq conducted a hearing before its Listing
Qualifications Panel at which we presented information regarding of the
then-proposed issuance of the Series A Preferred Stock. The issuance of the
Series A Preferred Stock was completed on August 30, 2001 and Nasdaq advised us
that the transaction brought us back in compliance with its net tangible assets
requirement. See "Supplemental Financial Information - Line of Credit and Recent
Financings." On October 16, 2001, Nasdaq notified us that the Listing
Qualifications Panel had ruled in favor of our continued inclusion in the Nasdaq
Stock Market.

On January 21, 2003, Nasdaq notified us that the trading price of our
common stock had dropped below $1.00 per share and that if the trading price did
not increase to over $1.00 per share for a minimum of ten consecutive trading
days by July 21, 2003, Nasdaq would initiate proceedings to cause our common
stock to be

21

delisted from trading on the Nasdaq SmallCap Market. The stock price
subsequently rose above $1.00 per share for ten consecutive trading days and the
Nasdaq delisting issue was thereby terminated.

We have not paid any cash dividends on our Common Stock. We do not
intend to declare or pay any cash dividends on our Common Stock in the
foreseeable future and anticipate that earnings, if any, will be used to finance
the development of and expansion of our business. Moreover, our bank lines of
credit prohibit the declaration and payment of cash dividends. Any payment of
future dividends and the amounts thereof will be dependent upon our earnings,
financial requirements, and other factors deemed relevant by our Board of
Directors, including our contractual obligations. See Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources.

Each public warrant originally entitled the holder to purchase, at any
time until December 15, 1999, one share of our common stock at an exercise price
of $7.00 per share, subject to certain adjustments based upon anti-dilution
protections. In December 1999, we extended the expiration date of these warrants
to December 31, 2000, and reduced their exercise price from $7.00 to $2.25 per
share. We later extended the expiration date of these warrants on three
additional occasions. The latest extension, in May 2002, changed the expiration
date to August 15, 2003. On June 2, 2003 the Company reduced the price on these
warrants to $0.50 per share from $2.25 per share and extended the expiration
date to August 15, 2003. On July 28, 2003 the Company further extended the
expiration date of the warrants to January 31, 2004. A total of 393,148 and
142,350 of these warrants were exercised during 2003 and 2002, respectively
providing total proceeds of $196,574 and $320,287.50, respectively.

During the quarter ended December 31, 2001, we issued 100,000 shares of
our Series B Preferred Stock in a transaction not registered under the
Securities Act of 1933, as amended (the "Securities Act"). The Series B
Preferred Stock was issued to FINOVA Mezzanine Capital Inc. ("FINOVA") in
connection with the restructuring of certain indebtedness which we owed to
FINOVA. The consideration which we received in connection with the issuance of
the Series B Preferred Stock was a redemption of indebtedness owed to FINOVA
from $4,500,000 to $1,500,000 and reduction of the interest rate from 12.25% to
7.0%. This indebtedness has been further reduced as set forth in "Restructuring
of Subordinated Debenture held by FINOVA Mezzanine Capital, Inc."

Also during the quarter ended December 31, 2001, we issued warrants to
purchase 450,000 shares of Common Stock to a securities broker-dealer in partial
consideration of certain services it provided to us.

We did not use the services of any finders or securities broker-dealers
in connection with the offer or sale of the Series B Preferred Stock or the
warrant to the securities broker-dealer. We believe that all offers and shares
of Series B Preferred Stock and warrants issued in the above transactions are
exempt from registration under the Securities Act by virtue of Section 4(2) of
the Securities Act and/or Regulation D promulgated thereunder.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction
with our financial statements and notes thereto and Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Form 10-K. The statement of operations data for the
years ended December 31, 2003, 2002 and 2001 and the balance sheet data at
December 31, 2003 and 2002 are derived from our audited financial statements
included elsewhere in this Form 10-K. The statement of operations data for the
years ended December 31, 2000 and 1999 and the balance sheet data at December
31, 2001, 2000 and 1999 are derived from audited financial statements not
included herein. The pro forma data are based on the circumstances described in
the accompanying footnotes.

22

,

(1) Certain amounts reported in the 1999, 2000 and 2001 financial
statements have been reclassified to conform with the 2003
presentation.

(2) "Basic Earnings per Share" is computed by dividing net income (loss) by
the weighted average number of shares of common stock outstanding
during the period. "Diluted Earnings per Share" reflects the potential
dilution that could occur if warrants and options or other contracts to
issue common stock were exercised and resulted in the issuance of
additional common shares. All options and warrants are omitted from the
computation of diluted earnings per share when net losses are reported
because the options and warrants are antidilutive. For the years ended
December 31, 2003, 2001, 2000 and 1999 diluted earnings per share and

23

basic earnings per share are identical because the loss from continuing
operations incurred during those years is antidilutive. See Note 2 of
the Notes to our Consolidated Financial Statements.

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

GENERAL

Our primary business is the manufacturing and marketing of brake and
undercar parts, including brake rotors, brake drums, disc brake pads, brake
shoes, remanufactured calipers, new clutch kits, suspension and hydraulic parts
for the North American Automotive aftermarket. Since the recent acquisition of
certain North American assets of TRW Automotive's Kelsey-Hayes Company
subsidiary in January 2004, which approximately doubled our size, we have
expanded our breadth of brake and undercar parts and most importantly added such
well established brands such as Powerstop, ValuMaxx and Autospeciality to our
recognized Ultimate, Evolution and UBP brands.

Some of the statements included in Management's Discussion and Analysis
of Financial Condition and Results of Operations, may be considered to be
"forward looking statements" since such statements relate to matters which have
not yet occurred. For example, phrases such as "we anticipate," "believe" or
"expect" indicate that it is possible that the event anticipated, believed or
expected may not occur. Should such event not occur, then the result which we
expected also may not occur or occur in a different manner, which may be more or
less favorable to us. We do not undertake any obligation to publicly release the
result of any revisions to these forward looking statements that may be made to
reflect any future event or circumstances.

RESULTS OF OPERATIONS

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

The following table sets forth our selected operations data for the years ended
December 31, 2003 and 2002. This data should be read in conjunction with our
financial statements in Item 8 of this Form 10-K.

24

(All numbers in thousands)

The decrease in net sales for the year ended December 31, 2003 as
compared with the year ended December 31, 2002 was a result of a sharp, rapid
decline in sales that resulted from a major supply chain interruption which
occurred during the second quarter of the year. This was partially offset by a
$7,000 increase in the revenues generated by the wholesale commodity products
operation.

The decrease in gross profits for the year ended December 31, 2003 was
a result of lower sales revenues and an increase in the cost of the Company's
Canadian manufactured friction products due to the decline in the U.S. dollars
exchange rate as compared to the Canadian dollar. The exchange rate decline
served to increase product cost by approximately $850 (USD).

Selling, general and administrative expenses were lower as a result of
reduced commissions and reduced freight on the lower sales volume and cost
containment efforts over the same period in 2002.

The increase in other operating expenses for the year ended December
31, 2003 as compared with the same period in 2002 is primarily related to
expenses relating to lease costs on the abandoned Cuba, MO facility offset by
the absence of certain expenses incurred during 2002.

There was no loss from Hungarian operations in 2003 due to the write
off of the net balance on the note receivable recorded during 2002.

The increase in other expenses for the year ended December 31, 2003 for
the same period of 2002 is due to the non-cash costs associated with the
issuance and re-pricing of warrants, a full reserve against the shareholder
notes and the absence of a gain of the disposition of assets incurred during
2002 partially offset by lower interest costs on lower outstanding debt
balances.

25

No adjustment was made in 2003 for the amount of our provision for
taxes. For the year ended December 31, 2003 and 2002, the deferred tax benefit
of the year's losses was offset by an increase in deferred tax asset valuation
allowance.

The net income earned in the year ended December 31, 2003 compared to a
net loss for the year ended December 31, 2002 resulted primarily from::

o lower gross margins resulting from lower sales of brake parts of
approximately $4.6 million partially offset by an increase in gross
margin on the increase revenues of the wholesale products operation of
approximately $700,000;

o increase in the cost of friction products due to exchange rate
differences of approximately $850,000;

o decrease in selling, general and administrative expenses of
approximately $900,000 primarily due to reduced commissions on lower
sales of brake parts;

o lower interest costs due to lower outstanding borrowings;

o the non-cash expense of $648,000 relating to the issuance and
re-pricing of warrants and options and,

o increase in reserve requirement on the shareholder notes.

26

The following table sets forth our selected operations data for the
years ended December 31, 2002 and 2001. This data should be read in conjunction
with our financial statements in Item 8 of this Form 10-K.

(All amounts in thousands)

The decrease in net sales for the year ended December 31, 2002 as
compared to the year ended December 31, 2001 was a result of price deflation in
the drum and rotor product lines and the loss of several customers through the
consolidation which has affected the aftermarket business. (e.g. major market
customers is acquired by a chain which does not buy from us.)

The increase in gross profits for the year ended December 31, 2002 as
compared to the year ended December 31, 2001 was a result of higher prices on
friction products and a delay in price reductions resulting from price
deflation. Also included in the gross profit for the year ended December 31,
2002 was $965,000 and $563,000, respectively, relating to the under absorption
of manufacturing costs at the Walkerton, Virginia facility and higher than
expected production costs and inefficiencies at the Cuba, Missouri facilities.
The Cuba, Missouri rotor facility was closed in December 2002 and the operations
relocated to our existing Alsip, Illinois facility.

The decrease in selling, general and administrative expenses in the
twelve months ended December 31, 2002 as compared to the same period in 2001
resulted from cost containment efforts coupled with reduced selling expenses on
the lower sales volume.

The decrease in other operating expenses for the year ended December
31, 2002 as compared to the same period in 2001 is primarily related to the
write-off of unused barter credits in 2001 of $276,000, .moving expenses in 2001
related to the relocation of the rotor manufacturing from Laredo, Texas to Cuba,
Missouri of $269,000, eParts eXchange shutdown expenses incurred in 2001 of
$114,000 and $122,000 of other items, offset by expenses

27

relating to the termination of the Supply Agreement negotiations with Creative
Friction, LLC of $ 45,000 and Michigan SBT taxes due on prior years activities
of $40,000.

The decrease in loss from Hungarian Operations resulted from the net
balance on the note receivable arising from the 2001 sale of the operations was
fully reserved in 2002.

The decrease in other expenses for the year ended December 31, 2002
from the same period of 2001 is due to lower interest expense effected by lower
interest rates and lower outstanding debt balances.

Since the restructuring of our debt owed to FINOVA was completed in
2001, which resulted in an ordinary gain in 2001, there was no comparable gain
on debt restructuring in 2002.

No adjustment was made in 2002 for the amount of our provision for
taxes. For the year ended December 31, 2002 and 2001, the deferred tax benefit
of the year's losses was offset by an increase in deferred tax asset valuation
allowance of $136,358 and $797,00, respectively.

The attainment of net income in 2002, compared to a net loss of
$2,978,000 for the year ended December 31, 2001, resulted primarily from:

o the absence of the net loss from the Hungarian operations of
$224,000, which was sold during 2001;

o decreased other operating expenses relating to the absence of
relocation of the rotor manufacturing facility incurred in
2001;

o the absence of the write-off of unused barter credits in
2001;

o the increase in gross margins resulting from delays in
pricing compression in the drum and rotor lines;

o decrease in selling general and administrative expenses due
to reduced selling related expenses and cost containment
efforts; and

o the absence of an increase in the deferred tax asset
valuation allowance which was recorded in 2001. These amounts
were partially offset by the absence of a gain of $830,000
recorded in 2001 resulting from the restructuring of the
FINOVA subordinated debt.

CAPITAL EXPENDITURES

For the year ended December 31, 2003 capital expenditures totaled
approximately $566,000, consisting primarily of (i) the acquisition of machinery
and equipment used to produce friction products (ii) upgrades and enhancements
to our computer systems and (iii) additional brake rotor patterns and tooling
related to brake rotor manufacturing.

For the year ended December 31, 2002, capital expenditures totaled
approximately $569,000, consisting primarily of (i) the acquisition of machinery
and equipment used to produce friction products, (ii) upgrades and enhancements
to our computer systems and (iii) additional brake rotor patterns and tooling
related to brake rotor manufacturing.

For the year ended December 31, 2001, capital expenditures totaled
approximately $913,000, consisting primarily of (i) the acquisition of machinery
and equipment used to produce friction products in Walkerton, Virginia, (ii) the
acquisition of leaseholds and fixtures related to the new Canadian friction
manufacturing facility and (iii) additional brake rotor patterns and tooling
related to friction manufacturing.

28

LIQUIDITY AND CAPITAL RESOURCES

Our primary liquidity needs are associated with carrying accounts
receivable and maintaining inventories. We rely on internally generated funds,
credit made available from suppliers and senior secured and unsecured
lines-of-credit. Our working capital needs are generally not seasonal in nature,
although business slows down slightly during the winter months.

We have incurred significant indebtedness, to date, in connection with
our operations. As of December 31, 2003, our total consolidated indebtedness was
approximately $17,725,000. A substantial portion of this indebtedness is secured
by substantially all of our assets and by a pledge of all of the outstanding
capital stock of our subsidiaries. As a result of such indebtedness, we (i) are
prohibited from paying cash dividends pursuant to certain covenants and
restrictions contained in the loan agreements governing such indebtedness, (ii)
could be hindered in our efforts to obtain additional financing in the future
for working capital, capital expenditures, acquisitions or general corporate or
other purposes, and (iii) would be vulnerable to increases in interest rates
since substantially all of our borrowings are at floating rates of interest.

The Company had a credit agreement with LaSalle Bank National
Association or its subsidiaries ("LaSalle") for a revolving line of credit of up
to $22,000,000 based on eligible accounts receivable and inventory. The weighted
average interest rates on the aforementioned revolving credit facility
borrowings were 5.04 percent, 5.70 percent, and 8.68 percent for the years ended
December 31, 2003, 2002, and 2001, respectively.

The revolving line of credit had a term ending May 1, 2005 and an
interest rate of prime plus 1.5% per annum. During 2001 the interest rate was
changed from prime plus 0.5 percent per annum. The line of credit is subject to
an ongoing option to convert to LIBOR plus 2.5 percent per annum. A term loan
was payable in monthly principal installments of $18,705 and bore interest at
prime plus 0.75 percent per annum.

The LaSalle agreement contained certain limitations on dividends and
capital expenditures and requires the Company to satisfy a certain financial
test concerning defined minimum tangible net worth. The entire credit facility
was secured by a first lien on the inventory and accounts receivable of the
Company.

At December 31, 2003, approximately $269,000 was available for
borrowing under the revolving credit line. On January 12, 2004 the LaSalle
credit facility was replaced with a new credit facility from Congress Financial
Corporation ("Congress").

In connection with the purchase of certain assets of Kelsey-Hayes
Company, the Company entered into a revolving line-of-credit agreement with
Congress, replacing the LaSalle indebtedness. The revolving line-of-credit is
for up to $35,000,000 based on eligible accounts receivable and inventory. The
revolving line-of-credit has a term ending January 12, 2007 and an interest rate
of prime plus .50% per annum. The line is subject to an on-going option to
convert to LIBOR plus 2.75% per annum.

The Congress agreement contains certain limitations on dividends and
capital expenditures and requires the Company to satisfy a financial test
concerning earnings before interest, taxes, depreciation and amortization
(EBITDA).

In addition to replacing the credit facility with LaSalle Bank, the
credit facility with Congress was used to fund our acquisition of certain assets
of Kelsey-Hayes Company described under "Subsequent Events" below. The facility
is secured by a blanket lien on all or substantially all of our assets,
including the assets acquired from Kelsey-Hayes. The lien and security interest
granted to Congress under the credit facility constitutes a first priority lien
and security interest, except that the lien on furniture, fixtures and equipment
granted to Congress is junior to the existing lien on this property granted to
Laurus Master Fund, Ltd. and described below.

The credit facility with Congress has an initial term of three years
and continues from year to year thereafter, unless earlier terminated in
accordance with its terms. Congress may terminate the facility at the expiration
of the term or one year thereafter by giving us 90 days' written notice. We may
terminate the credit facility on these dates by giving 60 days' written notice.

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Under the credit facility, Congress agrees to provide or arrange for
certain letter of credit accommodations for our account. Any payments made by
Congress in connection with the letter of credit accommodations will be
considered loans under the facility. The facility provides us with the option of
having interest accrue based on a prime rate index, a Eurodollar rate index or a
combination of the two. The applicable margins to be added to the prime rate
index and the Eurodollar rate index vary depending on the monthly average excess
availability under the facility. The margin for prime rate loans will be in a
range of from .25% to .75%, while the margins for Eurodollar rate loans will be
in a range of from 2.50% to 3.00%. The Congress agreement contains certain
limitations on dividends and capital expenditures and requires us to satisfy a
financial test concerning earnings before interest, taxes, depreciation and
amortization, or "EBITDA."

In connection with the credit facility with Congress, we paid Congress
a commitment fee of $131,250, and a closing fee of $131,250. In addition, we
must pay Congress an unused line fee equal to .375% per year of the amount by
which the maximum credit amount exceeds the average monthly balance of loans and
letters of credit outstanding, payable monthly in arrears. We must also pay
Congress a service fee of $5,000 per quarter.

On July 14, 1997, we sold a $4,500,000 subordinated debenture to FINOVA
Mezzanine Capital, Inc. (formerly Tandem Capital, Inc.) calling for payments of
interest at 12.25% per year through maturity on July 14, 2002. Through August
14, 2001 we had issued FINOVA warrants to purchase 1,575,000 shares of our
common stock at exercise prices ranging from $0.83 to $1.58, based on 80% of the
average closing bid price of our common stock for the 20 days preceding the
respective issuance dates. The warrants were exercisable at any time through the
sixth anniversary of the debenture issue date. During 2000, FINOVA elected to
exercise one of its warrants to purchase 450,000 shares of our common stock at
an exercise price of $0.83 per share, using a "cashless" exercise provision
whereby FINOVA received a net of 279,260 shares of common stock after
surrendering 170,743 shares which had a fair market value equal to the aggregate
exercise price. We received no cash proceeds from this transaction when such
shares were issued.

On October 31, 2001 we completed a restructuring of the $4,500,000
subordinated debt held by FINOVA. The restructuring resulted in the following:
(i) FINOVA surrendered to us all of its holdings in our common stock and
warrants (279,260 shares and warrants to purchase an additional 1,125,000 shares
at prices ranging from $1.12 to $1.58 per share); (ii) our payment of $1,000,000
to FINOVA; (iii) issuance to FINOVA of $2,000,000 of Series B Preferred Stock
($0.01 par value); and (iv) the amendment of the debenture to $1,500,000. The
amendment to the debenture also reduced the interest rate from 12.25 to 7.0% and
allowed us to pay the remaining balance by making five $100,000 payments every
45 days beginning December 15, 2001 (which payments were made) with a final
payment due July 11, 2005. The surrendered warrants had cashless exercise
features which, based on the closing price of our common stock of $1.89 per
share on the date of the restructuring, would have allowed FINOVA to receive
322,619 shares of common stock. This transaction resulted in an ordinary gain of
$829,714, inclusive of an accrual of all remaining interest to be paid of
approximately $272,000, for the year ended December 31, 2001. The Series B
Preferred Stock has no fixed dividend, entitles the holder to a liquidation
preference, is redeemable at any time at our option and is convertible into
1,000,000 shares of common stock for which we provided FINOVA with registration
rights. On October 8, 2003 as an inducement for Finova to approve the additional
financing from Global Capital Funding Group, L.P. (See Note 11) we paid a
consent fee of $50,000. On October 31, 2003 as an inducement for Finova to
approve the additional financing from Laurus Master Funds, we amended the
subordinated debenture. This amendment resulted in the following: (i) our
payment of $250,000, (ii) the interest rate increase from 7.0 percent to 8.0
percent, (iii) monthly installment payments of $25,000 beginning January 1, 2005
through July 1, 2005, (iv) a final payment of $575,000 on July 11, 2005 and (v)
our payment of a consent fee of $12,000, capitalized as a deferred financing
cost.

On August 29, 2001, we issued 201,438 shares of Series A Preferred
Stock ($0.01 par value) to Venture Equities Management, Inc. (VEMI) (an
affiliate of Wanxiang America Corporation - see Note 12 to our financial
statements) in exchange for $2,800,000 in cash. The Series A Preferred Stock has
no fixed dividend, entitles the holder to a liquidation preference, is
redeemable at our option subject to certain conditions, and is convertible into
2,014,380 shares of our common stock (with registration rights), subject to
certain antidilution provisions. In connection with the issuance of the Series A
Preferred Stock, we also issued to VEMI three warrants to purchase common stock.
The first and second warrants for 800,000 shares were exercisable at any time
through August 28, 2002 at an exercise price of $2.00 per share. The exercise
date for the first and second warrants was extended to August 28, 2003 and the
exercise price was increased to $2.25 per share. The third warrant for 2,500,000
shares is

30

exercisable only upon the occurrence of events of default at an exercise price
to be determined based on a defined computation.

On July 3, 2003 we sold an unsecured convertible note with a face
value of $1,550,000 to Global Capital Funding Group, L.P. (Global). This note
was sold at a discounted amount of $1,240,000 and is due July 2005. This note
provides, among other provisions, for voluntary conversion into our common stock
at the option of the noteholder. The conversion price is equal to the greater of
the weighted average market value of our common stock for the ten business days
immediately prior to the date of conversion or $0.35. We will issue a total of
1,139,706 shares if the conversion price is at $1.36 per share, which was the
closing price on December 31, 2003; however, we will issue a total of
approximately 4,430,000 shares if this note is exercised at a conversion price
of $0.35 per share. We will not know the exact conversion price until we receive
a request for conversion. In connection with the issuance of this note, the
investor received a warrant to purchase 250,000 shares of our common stock. The
warrant may be exercised at any time and is valid for five years from the date
of issuance at an exercise price of $1.20 per share. In addition to the common
stock purchase warrant issued to Global, we also issued to a financial advisor a
common stock purchase warrant for 200,000 shares of our common stock. This
warrant may be exercised at any time and is valid for five years from the date
of issuance at an exercise price of $1.16 per share. These warrants were valued
at $124,853 and were recorded as a deferred financing fee. Total fees and
expenses paid in cash were $163,250 and have been recorded as deferred financing
fees. These costs will be amortized over the term of the note. As of December
31, 2003, the unamortized deferred financing fees related to this transaction
are $292,505.

On October 31, 2003 we issued a secured convertible note to Laurus
Master Funds Ltd. ("Laurus") in the principal amount of $2,500,000, which is
payable in 33 equal monthly installments beginning January 31, 2004 and is
secured by a first lien on our fixed assets. Interest is payable at the prime
rate plus 2% (6.0% as of December 31, 2003). The note provides that payments of
principal and interest may, at our sole option, be made in cash or shares of our
common stock under certain circumstances. Specifically, the payment of principal
and interest may be made in our common stock if the closing price for the five
trading days preceding the payment date is at least $1.30 per share. This
conversion price was reduced to $1.30 per share (from the original level of
$1.39 per share) effective January 9, 2004. If our common stock is not $1.30 per
share for the five days preceding the payment date then the conversion price
will be 90% of the lowest closing price for the 22 trading days prior to the
payment date, with a floor conversion price of $0.50 per share. If the payment
of principal and interest is made in cash, the amount due will be 103% of the
amount which would otherwise be due. We issued 350,000 warrants to Laurus and
312,500 warrants to a financial advisor in connection with the placement of the
note. The Laurus warrants are exercisable over five years at a price of $1.60 to
$2.02 per share. The warrants issued to the financial advisor are exercisable
over five years at $1.60 per share. The warrants were valued at $206,347 and
were recorded as a deferred financing fee. Cash fees and expenses of $393,650
were incurred in connection with securing this loan and were also recorded as a
deferred financing fee. These deferred financing fees are being amortized over
the term of the note. As of December 31, 2003, the unamortized deferred
financing fees related to this transaction are $583,345. The indebtedness under
the Laurus note was increased to $4,500,000 in the aggregate in January 2004
simultaneous with the closing of the Congress Financial Corporation loan.

On November 26, 2003 we issued an unsecured convertible note with a
face value of $1,200,000 to Global Capital Funding Group, L.P. (Global II - an
affiliate of Global) for aggregate proceeds of $ 960,000. The note provides for
a lump sum payment of $1,200,000 on November 26, 2005. In addition the note
contains a voluntary conversion at the option of the note holder at a conversion
price not to exceed the lesser of $3.00 per share or of 95% of the volume
weighted average market value of our common stock for ten business days
immediately prior to the notice date of conversion except than in no event will
the conversion price be less than $ 0.35 per share. We also issued 250,000
warrants to Global II and 50,000 warrants to a financial advisor. The Global II
warrants are exercisable over five years at a price of $1.92 per share. The
warrants issued to the financial advisor are exercisable over five years at
$1.90 per share. The warrants were valued at $106,300 and were recorded as a
deferred financing fee. Cash fees and expenses of $110,500 were incurred in
connection with securing this loan and were also recorded as a deferred
financing fee. These deferred financing fees are being amortized over the term
of the note. As of December 31, 2003, the unamortized deferred financing fees
related to this transaction are $216,800.

31

On January 9, 2004 we issued a secured convertible note to Laurus in
the original face amount of $2,000,000 which is payable in 33 equal monthly
installments beginning April 1, 2004 and is secured by a first lien on our fixed
assets, including the fixed assets acquired in connection with the Autospecialty
acquisition described under "Subsequent Events" below. This $2,000,000 note is
in addition to a $2,500,000 convertible term note previously issued to Laurus
Fund on October 31, 2003 secured by the same collateral and described above.
Interest on the $2,000,000 note is payable at the prime rate plus two percent,
subject to a floor of 6% per year. As of January 9, 2004, the interest rate on
the note equaled 6.0%. In addition, the note is convertible at Laurus Fund's
option into our common stock at a fixed conversion price of $1.30 per share. The
note provides that payments of principal and interest may, at our sole option,
be made in cash or shares of our common stock, subject to certain limitations.
The payment of principal and interest may be made in our common stock if the
closing price for the five trading days preceding the payment date is at least
$1.39 per share. If our common stock is not $1.30 per share for the five days
preceding the payment date then the conversion price will be 90% of the lowest
closing price for the 22 trading days prior to the payment date, with a floor
conversion price of $0.50 per share. If the payment of principal and interest is
made in cash, the amount due will be 103% of the amount which would otherwise be
due.

The note issued to Laurus is secured by a security interest in
property, plant and equipment, exclusive of any inventory and receivables. A
separate intercreditor agreement has been entered into between Laurus and
Congress, under which Congress agrees to subordinate its primary security
interest in our property, plant and equipment to that of the Laurus.

We have the right to prepay some or all of the obligations due under
the Laurus note if the average closing price of our common stock exceeds $1.30
per share for at least five consecutive trading days preceding our delivery of a
prepayment notice, subject to a volume limitation of 25% of the aggregate dollar
trading volume of our common stock for the 22 trading days immediately preceding
the date of payment, and further subject to a limitation excluding the trading
volume for any day during the 22-day period where the price dropped below $1.30
per share. We may also prepay the note at 115% of the remaining obligation under
the note, subject to our obligation to fulfill any conversions elected prior to
delivery of notice of election to prepay the note in full.

The note has automatic adjustments for changes in our capital structure
due to extraordinary capital events. In addition, it contains a standard
weighted average anti-dilution clause to the extent of subsequent securities
issuances and conversion rights, at a price below the conversion price, subject
to shareholder approval.

In connection with the issuance of the note to Laurus, we also issued
280,000 warrants to Laurus and 250,500 warrants to a financial advisor. The
Laurus warrants are exercisable over five years at a price of $1.60 to $2.01 per
share. The warrants issued to the financial advisor are exercisable over five
years at $1.76 per share. We also paid Laurus Capital Management, L.L.C. a
closing fee of $70,000 and reimbursed it for due diligence and legal fees in the
amount of $15,000. We entered into a registration rights agreement with Laurus
and have caused it to be filed as declared effective.

On January 15, 2004 we issued an unsecured convertible note in the
original amount of $300,000 to GCA Strategic Investment Fund Ltd, an affiliate
of Global Capital Funding Group, L.P., for a price of $240,000. The note
provides for a lump sum payment of $300,000 on January 15, 2006. In addition the
note contains a voluntary conversion at the option of the note holder at a
conversion price of the lesser of $3.00 per share or 95% of the volume weighted
average market value of our common stock for the ten business days immediately
prior to the notice date of conversion except that in no event will the
conversion price be less than $0.35 per share.

We believe that cash generated from operations, borrowings under our
Congress Financial Corporation line and the Laurus notes of credit, and credit
from our suppliers is sufficient to fund our working capital requirements and
capital expenditures through 2004.

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Future contractual obligations of ours are as follows:

PAYMENTS DUE BY PERIOD

SEASONALITY

Our business is typically slightly seasonal in nature, primarily as a
result of the impact of weather conditions on the demand for automotive
replacement parts. Historically, our sales and profits have been slightly higher
in the second and third calendar quarters of each year than in the first or
fourth quarters. During 2003 sales declined during the second and third quarter
over the same period in the prior year due to a major supply chain interruption
which occurred during the second quarter of the year.

EFFECTS OF INFLATION

We historically have been able to diminish the effects of inflationary
cost expenses through increased prices to customers and productivity
improvements. Non-inventory cost increases, such as payroll, supplies and
services, have generally been offset through price increases.

CRITICAL ACCOUNTING POLICIES; RECENT ACCOUNTING PRONOUNCEMENTS

Our significant accounting policies are described in Note 2 to the
Consolidated Financial Statements. The application of these policies may require
management to make judgments and estimates about the amounts reflected in the
financial statements. Management uses historical experience and all available
information to make these estimates and judgments, and different amounts could
be reported using different assumptions and estimates.

In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("SFAS 141") and Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). SFAS 141 requires all business combinations to be accounted for
using the purchase method of accounting and is effective for all business
combinations initiated after June 30, 2001. Under SFAS 142, the Company is no
longer required to amortize goodwill and other intangible assets with indefinite
lives, but will be subject to periodic testing for impairment. Effective January
1, 2002, the Company adopted SFAS 142 and evaluated the effect that such
adoption may have on its consolidated results of operations and financial
position. The Company applied the new rules on accounting for goodwill and other
intangibles assets beginning the first quarter of 2002. Application of the
nonamortization provisions of SFAS No. 142 resulted in no change to the goodwill
amount. The Company performed the transitional impairment tests of goodwill as
of January 1, 2002, and the required annual impairment test during the fiscal
fourth quarter 2002 and 2003, and has determined that goodwill was not impaired

In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Obligations Associated with the Retirement of
Long-Lived Assets" ("SFAS 143"). SFAS 143 establishes accounting

33

standards for the recognition and measurement of an asset retirement obligation
and its associated asset cost. It also provides accounting guidance for legal
obligations associated with the retirement of tangible long-lived assets. SFAS
143 is effective in fiscal years beginning after June 15, 2002, with early
adoption permitted. The Company adopted SFAS 143 effective January 1, 2003. The
Company has determined that the effect of adopting SFAS 143 on results of
operations or financial position was immaterial.

In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 establishes a single accounting model for the
impairment or disposal of long-lived assets, including discontinued operations.
SFAS 144 superseded Statement of Financial Accounting Standards No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," and APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." The provisions of
SFAS 144 are effective in fiscal years beginning after December 15, 2001, with
early adoption permitted, and in general are to be applied prospectively. The
Company adopted SFAS 144 effective January 1, 2002. The Company has determined
that the effect of adopting SFAS 144 on results of operations or financial
position was immaterial.

In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation NO. 46, "Consolidation of Variable Interest Entities" (FIN 46).
FIN 46 is an interpretation of Accounting Research Bulletin (ARB) No. 51
"Consolidated Financial Statements" (ARB 51). The primary objective of FIN 46
are to provide guidance on the identification of entities for which control is
achieved through means other than through voting rights and how to determine
when and which business enterprise should consolidate these variable interest
entities. The adoption of FIN 46 did not materially impact our consolidated
financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity: FASB
No. 150). This standard improves the accounting for certain financial
instruments that issuers previously accounted for as equity, requiring such
instruments to be classified as liabilities in certain situations. SFAS No. 150
is generally effective for all financial instruments entered into or modified
after May 31, 2003 and otherwise for interim periods beginning after June 15,
2003. The adoption of SFAS No. 150 did not have a material impact on our
consolidated financial statements.

SUBSEQUENT EVENTS

On January 12, 2004, through Universal Automotive, Inc., a wholly-owned
subsidiary, we purchased substantially all the assets used in the business of
the Autospecialty division of Kelsey-Hayes Company, a subsidiary of TRW
Automotive, Inc. which we will refer to as "Autospecialty," for an initial
consideration of approximately $10,641,000 plus the assumptions of certain
liabilities as described in a purchase agreement between our subsidiary and
Kelsey-Hayes dated December 23, 2003. The initial consideration is subject to
certain adjustments based upon the net asset value of the Autospecialty business
as of January 9, 2004 and the future collection of trade accounts receivable.

The Autospecialty assets purchased include Autospecialty's interests in
various leases, including that for its central office and warehouse facility in
Carson, California and other warehouses, machinery and equipment; inventories,
trade receivables and other items. In addition, in connection with the
Autospeciality acquisition, we entered into the following ancillary agreements:

o a transitional services agreement under which Autospecialty
agreed to provide us with certain transitional services for a
specified consideration and for a limited period of time;

o a supply agreement between us and Federal Mogul for the
purchase by us of certain chassis parts to be marketed by us
under the TRW trademark;

o a trademark license agreement between us and TRW Intellectual
Property Corporation under which we are granted a license to
use certain TRW trademarks in connection with the sale of
premium rotors and drums in the Independent Aftermarket of
North America limited by the right

34

reserved by TRW Automotive, Inc. for itself and its
subsidiaries to use this name and mark in connection with
marketing, distribution and sales of rotors and drums in
foreign vehicle applications in North America and in parts or
kits for non-domestic vehicle applications in Mexico; and

The initial term of the TRW trademark license agreement expires
December 31, 2008, and we have an option to extend the term for an additional
term of six years. We must exercise this extension option by December 31, 2008
and may only exercise it if we have made certain minimum royalty payments over
the initial term of the agreement. If the extension option is exercised, the
trademark license will be converted to a non-exclusive license for the renewal
term. Under the trademark license agreement, we are required to pay royalties on
sales made during the period commencing January 1, 2005 and ending December 31,
2008.

In connection with the purchase of Autospecialty's assets, we entered
into a revolving line-of-credit agreement with Congress Financial Corporation
replacing the LaSalle indebtedness. This line of credit is described in more
detail under "Liquidity and Capital Resources" above.

On January 9, 2004 we issued a secured convertible note to Laurus
Master Funds Ltd. in the principal amount of $2,000,000, and on January 15, 2004
we issued an unsecured convertible note in the original amount of $300,000 to
GCA Strategic Investment Fund Ltd, an affiliate of Global Capital Funding Group,
L.P. for proceeds of $240,000. These notes are described in greater detail in
"Liquidity and Capital Resources," above. In connection with the transaction
with Laurus Master Funds, under a selling agreement we had previously entered
into with an investment banker, at the closing of the issuance of the $2,000,000
note to Laurus, we paid an investment banker a commission of $140,000 in cash
and issued to it a five-year warrant to purchase 250,000 shares of our common
stock exercisable at $1.76 per share.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We believe that we do not have significant exposure to market risk
associated with derivative financial instruments, other financial instruments or
derivative commodity instruments. We had previously utilized only limited
derivative financial instruments and did not use them for trading purposes and
have never used derivative commodity instruments. At December 31, 2003, there
were no such derivative instruments. The fair value of financial instruments,
other then debt instruments, closely approximates their carrying value. Because
the interest rate of the revolving loan and the term loan with LaSalle Bank
National Association adjusts with the changes in the market rate of interest, we
believe that the fair value is equivalent to the carrying value.

We believe that the interest rate of 8.0% on the subordinated debenture
is approximately equal to the current rate available for similar debt.
Accordingly, the fair value of this debenture approximates its carrying value.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary financial data required by
this Item 8 are included as Part IV, Item 14 of this Annual Report on Form 10-K.

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

Our Audit Committee of the board of directors annually considers and
recommends to the board the selection of our independent public accountants. As
recommended by our Audit Committee, the board of directors, on June 20, 2002
decided to no longer engage Altschuler Melvoin and Glasser LLP ("AM&G") as our
independent public accountants and engaged Ernst & Young LLP to serve as our
independent public accountants for 2002 and 2003.

35

AM&G's reports on our consolidated financial statements for 2001 did
not contain an adverse opinion or disclaimer of opinion, nor were they qualified
or modified as to uncertainty, audit scope or accounting principles. AM&G's
report on our consolidated financial statements for 2001 was issued on March 27,
2002 containing an unqualified opinion in conjunction with the publication of
our Annual Report to Shareholders and the filing of our Annual Report on Form
10-K.

During 2001 and through June 20, 2002, there were no disagreements with
AM&G on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which, if not resolved to AM&G's
satisfaction, would have cause them to make reference to the subject matter in
connection with their report on our consolidated financial statements for such
years, and there were no reportable events, as listed in Item 304(a)(1)(v) of
Regulation S-K.

We provided AM&G with a copy of the foregoing disclosures and AM&G has
agreed that these disclosures are accurate.

During our two most recent fiscal years and through March 31, 2004, we
did not consult Ernst & Young with respect to the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our consolidated financial
statements, or any other matters or reportable events listed in Items
304(a)(2)(i) and (ii) of Regulation S-K.

ITEM 9A. CONTROLS AND PROCEDURES

We maintain a system of controls and procedures designed to provide
reasonable assurance as to the reliability of the financial statements and other
disclosures included in this report, as well as to safeguard assets from
unauthorized use or disposition. The system is supported by policies and
procedures intended to ensure employees adhere to the highest standards of
personal and professional integrity. Our internal audit function monitors and
reports on the adequacy of and compliance with the internal control system, and
appropriate actions are taken to address significant control deficiencies and
other opportunities for improving the system as they are identified. However, no
cost-effective internal control system will preclude all errors and
irregularities, and management is necessarily required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.

We evaluated the effectiveness of the design and operation of our
disclosure controls and procedures under the supervision and with the
participation of management, including our chief executive officer and chief
financial officer, within 90 days prior to the filing date of this report. Based
upon that evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
Securities and Exchange Commission filings. No significant changes were made to
our internal controls or other factors that could significantly effect these
controls subsequent to the date of their evaluation.

36

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth information regarding our officers,
directors and key personnel as of March 15, 2004:

Yehuda Tzur, Chairman of the Board. Mr. Tzur, our founder, has served
as the Chairman of our board of directors since October 1994. From 1981 to March
1996, Mr. Tzur served as the President and Chief Executive Officer of our
predecessor, Universal Automotive, Inc., and of us.

Arvin Scott, President and Chief Executive Officer. Mr. Scott has
served as our President and Chief Executive Officer since March 1996. From 1994
to March 1996, Mr. Scott served as the President and Chief Executive Officer of
our predecessor, Universal Automotive, Inc., and of us. From 1986 to October
1994, Mr. Scott served as Vice President of Universal Automotive, Inc. and of
us. Mr. Scott joined us in 1981 as a purchaser of automotive aftermarket
replacement parts for distribution in the Chicago jobber market. From 1984 to
1986, Mr. Scott served as Vice President of an unaffiliated Chicago-based
warehouse distributor, of which he was a 50% owner.

Robert W. Zimmer, Chief Financial Officer, Secretary and Treasurer. Mr.
Zimmer joined us as our Chief Financial Officer, Secretary and Treasurer in
November 2001. Prior to joining us, Mr. Zimmer was the Chief Financial Officer,
Secretary and Treasurer of IMPAXX, Inc., an international packaging
manufacturer. Mr. Zimmer was previously the Chief Financial Officer of CFI
Industries, Inc. and Kalmus & Associates, Inc.

Alan Zeffer, Director. Mr. Zeffer is President of American Health
Products Corporation, which imports and distributes latex gloves, polyvinyl
gloves and related disposable items to the medical, dental and food service
markets. AHPC is a wholly-owned subsidiary of WRP Corporation, a Nasdaq SmallCap
Market listed company, for which he also serves as Chief Financial Officer.

Dennis L. Kessler, Director. Mr. Kessler is President of Kessler
Management Consulting, LLC. Prior to February 1998, Mr. Kessler was Co-President
of Fel-Pro Incorporated, which manufactures and distributes gaskets, engine
parts and industrial chemicals. Mr. Kessler previously served in various
capacities with Fel-Pro, beginning in 1964.

M. Catherine Jaros, Director. M. Catherine Jaros manages a strategy,
marketing and business development consulting firm under her name. Ms. Jaros is
also managing director for DSI Investment Banking Services, Inc., a boutique
investment banking firm in Chicago and member of IMAP, International Network of
Managers and Acquisition Professionals. Ms. Jaros is the former chief executive
officer of Display Edge Technology, president of Starbelly.com, and chief
executive of Digital Image Bank Services. Ms. Jaros served in various officer
level positions at several major Chicago corporations including Tribune, Tappan
Capital Partners, Kraft and the Quaker Oats Company.

37

Zemin Xu, Director. Mr. Xu is a Vice President and a director of
Venture Equities Management, Inc. From 1993 to 1998, Mr. Xu was the Deputy
General Manager of the Department of Investment at Bank of China International
Investment (Hainan) Ltd.

DIRECTORS, EXECUTIVE OFFICERS AND KEY PERSONNEL

Our bylaws provide that we will have nine directors or such other
number as is fixed by our board of directors. We currently have a board
comprised of seven members. Once elected, our directors hold office until our
next annual meeting of shareholders or until a successor has been elected and
qualified, unless they resign at some earlier time. As a result, all of our
director positions will be filled at each annual meeting.

In a stockholders' agreement entered into between us, Mr. Tzur, Mr.
Scott, Mr. Israel and Venture Equities Management, Inc., or "VEMI," in
connection with VEMI's purchase of the Series A Preferred Stock, we agreed to
take all necessary action so that our board of directors will consist of nine
members, two of whom are designated by VEMI, and that one of the individuals
designated by VEMI would be appointed as co-chairman of the board. We also
agreed that the composition of the board of directors of each of our
subsidiaries would be proportionate to that of our board, provided that at least
one VEMI designee was on the board of each of our subsidiaries, and that the
composition of any committees of our board of directors would be proportionate
to that of our board, provided that at least one VEMI designee would be on each
committee. The stockholders' agreement also provides that Mr. Tzur, Mr. Scott
and Mr. Israel will vote their shares in favor of the election of the VEMI
designees to our board of directors. The rights of VEMI with respect to the
designation of two directors will terminate at such time as the shares of our
common stock into which the shares of the Series A Preferred Stock owned by VEMI
are convertible fall below 1,007,190, which is half of the number of shares into
which the Series A Preferred Stock was convertible when it was originally
issued. VEMI has exercised its right to designate Mr. Xu and one other person as
members of our board of directors. Our board has decreased by three members due
to the retirement of Sheldon Robinson, the death of Sol Weiner and the
resignation of one of the two VEMI nominees and of Sami Israel. We expect to
fill Mr. Robinson's vacancy and we are waiting for a new nominee from VEMI to
fill the other vacancy.

Our executive officers are appointed by our board on an annual basis
until their successors have been elected and qualified. Mr. Tzur is the
brother-in-law of Mr. Israel.

Under the terms of a stock purchase agreement entered into between us
and FINOVA Mezzanine Capital Inc. in October, 2001, we agreed that for so long
as it continues to hold any of our Series B Convertible Preferred Stock, it will
be entitled to attend our board meetings and receive copies of all
correspondence and materials sent to our board of directors. In connection with
the simultaneous pay down of the debenture originally issued to FINOVA in 1997,
it relinquished its rights to designate a nominee to serve as a member of our
board of directors.

BOARD COMMITTEES

Audit Committees. Our audit committee consists of our three independent
directors - Mr. Zeffer, Mr. Kessler and Ms. Jaros. Mr. Zeffer is Chairman of the
audit committee. The duties of the audit committee are generally to recommend
and review the activities and reports of our independent auditors and to report
the results of this review to our board of directors. The audit committee also
periodically reviews the adequacy of our internal controls. Our board of
directors has determined that Mr. Zeffer qualifies as an "Audit Committee
Financial Expert," as that term is defined in rules of the Securities and
Exchange Commission implementing requirements of the Sarbanes-Oxley Act of 2002.

Compensation Committee. The compensation committee of our board of
directors is comprised of Ms. Jaros, Mr. Zeffer and Mr. Kessler, none of whom
have ever been an officer or employee of ours. Mr. Kessler is chairman of the
compensation committee. None of our executive officers serves or has served as a
member of the board of directors or compensation committee of any entity that
has one or more of its executive officers serving on our board or compensation
committee. Before we formed the compensation committee, all compensation
decisions were made by our entire board of directors. The duties of the
compensation committee are generally to review employment, development,
reassignment and compensation matters involving corporate officers and other
executive level employees as may be appropriate including, among other things,
issues relating to salary, bonus, stock options and other incentive
arrangements.

38

Nominating Committee. Our nominating committee consists of Mr. Scott,
who is the committee's Chairman, and Messrs. Kessler and Tzur. The nominating
committee nominates candidates for election to our board of directors.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires that our
directors, executive officers and persons who own more than 10% of the
outstanding shares of our common stock file with the Securities and Exchange
Commission reports relating to their ownership of our common stock and changes
in this ownership. We are required to identify any persons subject to this
requirement who failed to file any of these reports on a timely basis. Based
solely on a review of the copies of the reports furnished to us, we believe all
of these reports were filed on a timely basis for 2003.

CODE OF ETHICS

Our Board of Directors believes that adherence to sound corporate
governance policies and practices is important in ensuring that we are governed
and managed with the highest standards of responsibility, ethics and integrity
and in the best interests of our stockholders. The Board has adopted a Code of
Ethics, which provides an effective corporate governance framework for us,
intending to reflect a set of core values that provide the foundation for our
governance and management systems and our interactions with others. Our Code of
Ethics applies to all of our officers and employees, including our CEO, CFO and
Controller. Our Code of Ethics is attached as an exhibit to this report. We
intend to disclose any amendments to, or waivers of, our Code of Ethics on the
investor relations page of our website, at www.universalbrake.com, rather than
by filing reports on Form 8-K.

ITEM 11. EXECUTIVE COMPENSATION

DIRECTOR COMPENSATION

Each director, who is not an officer or employee, other than Mr. Xu,
receives a fee of $12,500 per annum plus $1,000 per Board meeting and $500 per
committee meeting ($1,000 if chairing), and is reimbursed for out-of-pocket
expenses incurred in connection with attending meetings of our board of
directors. During 2003, Mr. Kessler and Ms. Jaros each received $15,000 in
director's fees and Mr. Zeffer received $7,750. Although we do not have a formal
policy regarding the issuance of options to directors as part of their
compensation, we have historically made an annual grant to each of our directors
of options to purchase 1,000 shares of our common stock. In February 2004 the
board of directors approved the grant to directors Jaros, Kessler and Zeffer of
2,500 options each to purchase common stock at $1.43 per share (intended to
cover services rendered in 2003). It is expected that the board of directors
will approve an overall increase in option grants in 2004 to 5,000 options per
year to each outside director.

EMPLOYMENT AGREEMENTS

Mr. Tzur and Mr. Scott are each parties to employment agreements with
us. All of these agreements extend to May 2004, unless terminated sooner in
accordance with the provisions of the agreements, and provide for the automatic
renewal of the agreements for successive periods of one year. The employment
agreements of Mr. Tzur, and Mr. Scott currently provide for annual base salaries
of $230,200 and $256,985, respectively, and periodic bonuses. Each employment
agreement provides for a payment of two years then salary in the event of
termination of employment without cause. Under the terms of the employment
agreements, as amended, these officers' compensation is subject to periodic
adjustment by our board of directors, or a committee of the board.

The above employment agreements contain non-competition covenants under
which Messrs. Tzur and Scott are prohibited from owning, subject to limited
exceptions, or providing specified services to, businesses similar to or in
competition with our business, during the period that these individuals are
employed under the employment agreements, and for a one-year period thereafter.

39

EXECUTIVE COMPENSATION

The following table sets forth information with respect to the total
annual compensation paid by us to our Chief Executive Officer and each of our
other executive officers whose total cash compensation for the year ended
December 31, 2003 exceeded $100,000:

SUMMARY COMPENSATION TABLE

(1) Bonus paid in 2004 earned in 2003.

(2) Bonus paid in 2003 earned in 2002.

(3) Mr. Zimmer was employed by us effective November 30, 2001.

The total compensation we paid to all persons who served as our
directors and executive officers in 2003, 5 persons, was $929,940.

STOCK OPTION PLAN

We maintain the Universal Automotive Industries, Inc. Share Option
Plan, which we will refer to as the "stock option plan," for the benefit of key
employees, non-employee directors, advisors, independent contractors and other
persons whom our board of directors believes are valuable to us. Options granted
under the stock option plan may be either incentive stock options, or "ISOs,"
under Section 422 of the Internal Revenue Code of 1986 or nonstatutory options,
or options which are not intended to be "incentive stock options," as defined in
Section 422 of the Code.

Our stock option plan, which was adopted by the Board of Directors on
October 13, 1994 and approved by our stockholders on October 13, 1994, is
intended to encourage ownership of our common stock by eligible persons such as
employees, officers, directors, and consultants, in order to attract these
persons or to encourage them to serve or continue to serve with us, and to
provide additional incentives for these persons to promote our success. The
stock option plan has been amended on several occasions to increase the number
of shares subject to the plan. The latest amendment increased the total shares
of common stock reserved for issuance under the stock option plan to 2,500,000.
The plan is administered by our board of directors, which may delegate its
authority to a committee.

Under our stock option plan, no ISOs may be granted after ten years
from the date of adoption and approval of the stock option plan by our board and
stockholders. The fair market value of shares of common stock with

40

respect to which ISOs are exercisable for the first time by any person eligible
to participate in the plan during any calendar year shall not exceed $100,000.

The exercise price per share for shares underlying each nonstatutory
option will be determined by our board of directors, which has the power to
determine eligibility to receive options and the terms of any options granted,
including the exercise price, the number of shares subject to the nonstatutory
option, the vesting schedule and the exercise period. The exercise price per
share for shares underlying all ISOs granted under the stock option plan must be
at least equal to the fair market value of a share of our common stock on the
date of the grant. With respect to any participant who owns stock possessing
more than 10% of the voting power of our outstanding capital stock, the exercise
price per share for shares underlying any ISO granted must equal at least 110%
of the fair market value of a share of common stock covered by the ISO on the
grant date, and the ISO shall terminate not more than ten years from the grant
date.

Nonstatutory options must terminate not more than eleven years from the
date of grant. All options granted under the stock option plan may be exercised
over a period of time after such person leaves our employment or after death.
All options granted under the stock option plan are non-transferable.

As of March 31, 2004 the market value of our common stock, based upon
the closing price on the Nasdaq SmallCap Market, was $1.49 per share. The
following table sets forth the amount of all options received through December
31, 2003, by the persons listed in the table:

41

OPTION GRANTS

The following table sets forth information with respect to options
granted to Messrs. Tzur, Scott, Israel and Zimmer during the year ended December
31, 2003 under our stock option plan.

Option Grants in 2003

AGGREGATED OPTION EXERCISES IN FISCAL 2003 AND FISCAL YEAR-END OPTION VALUES

The following table provides information on option exercises during the
year ended December 31, 2003 by our executive officers and the value of these
officers' unexercised stock options as of December 31, 2003.

LIMITATION ON LIABILITY OF AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

Our certificate of incorporation limits the liability of directors to
the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except for:

o any breach of their duty of loyalty to the corporation or its
stockholders;

o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

o unlawful payments of dividends or unlawful stock repurchases or
redemptions; or

o any transaction from which the director derived an improper personal
benefit.

The limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.

42

Our certificate of incorporation and bylaws provide that we will
indemnify our directors and officers and may indemnify our employees and other
agents to the fullest extent permitted by law. We believe that indemnification
under our bylaws covers at least negligence on the part of indemnified parties.
Our bylaws also permit us to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her
actions in his or her capacity as an officer, director, employee or other agent,
regardless of whether our bylaws would permit indemnification for the liability.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
ours, we have been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.

We intend to enter into agreements to indemnify our directors and
executive officers, in addition to the indemnification provided for in our
bylaws, prior to the completion of this offering. These agreements, among other
things, will provide for indemnification for judgments, fines, settlement
amounts and expenses, including attorneys' fees incurred by any director,
executive officer or controller of ours in any action or proceeding, including
any action by us or on our behalf, arising out of the person's services as a
director, executive officer or controller of ours, or of any of our subsidiaries
or any other company or enterprise to which the person provides services at our
request. We believe that these provisions and agreements are necessary to
attract and retain qualified persons as directors and executive officers. The
limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against our directors for breach of their fiduciary duty and may reduce the
likelihood of derivative litigation against our directors and officers, even
though a derivative action, if successful, might otherwise benefit us and our
stockholders. A stockholder's investment in us may lose value to the extent we
pay the costs of settlement or damage awards against our directors and officers
under these indemnification provisions. At present, there is no pending
litigation or proceeding involving any of our directors, officers or employees
in which indemnification is sought, nor are we aware of any threatened
litigation that may result in claims for indemnification.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of our compensation committee are Mr. Zeffer, Mr. Kessler
and Ms. Jaros. None of the members of the compensation committee, which reviews
and approves the compensation of all of our directors and executive officers, is
currently or has been, at any time since our formation, one of our officers or
employees. None of our executive officers currently serves or in the past has
served as a member of the Board of Directors or compensation committee of any
entity that has one or more executive officers serving on our board or
compensation committee.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding the beneficial
ownership of shares of our voting stock as of March 31, 2004 by:

o each director who beneficially owns shares of our voting stock;

o each of our executive officers;

o each person that is known by us to beneficially own more than 5% of the
outstanding shares of our voting stock; and

o all of our directors and executive officers as a group.

As of March 31, 2004, we had 10,893,773 shares of common stock, 201,438
shares of Series A Preferred Stock and 100,000 shares of Series B Preferred
Stock outstanding. The outstanding shares of Series A and Series B Preferred
Stock, as of March 15, 2004, were convertible into, and had voting rights
equivalent to, 3,014,380 shares of our common stock (subject to anti-dilution
rights).

43

For purposes of the following table, a person is deemed to be the
beneficial owner of securities that can be acquired by the person within 60 days
from March 31, 2004 upon the exercise of warrants or options. Each beneficial
owner's percentage ownership is determined by assuming that options or warrants
that are held by the person, but not those held by any other person, and which
are exercisable within 60 days from March 15, 2004, have been exercised. Unless
otherwise indicated, we believe that all persons named in this table have sole
voting and investment power with respect to all shares of common stock
beneficially owned by them. Unless otherwise indicated, the address of each
person listed in the following table is 11859 South Central, Alsip, Illinois
60803.

- ----------

* Less than 1%

(1) Includes 201,438 shares of Series A Preferred Stock which are
convertible into, and have voting rights equivalent to, 2,014,380
shares of our common stock (subject to anti-dilution rights). All of
the shares of Series A Preferred Stock are owned by Venture Management,
Inc. Wanxiang American Corporation and Wanxiang Group Corporation are
also considered beneficial owners of these shares. Wanxiang America
Corporation and Wanxiang Group Corporation disclaim beneficial
ownership of these shares. The address of Venture Equities Management,
Inc. and Wanxiang America Corporation is 88 Airport Road, Elgin,
Illinois 60123. The address of Wanxiang Group Corporation is Xiaoshan
District, Hangzhou, Zhejiang, 3112 15, P.R. China.

(2) Consists of shares issuable upon the exercise of options held by Mr.
Scott.

(3) Consists of shares issuable upon the exercise of options held by Mr.
Tzur.

(4) Consists of 100,000 shares of Series B Preferred Stock which are
convertible into, and have voting rights equivalent to, 1,000,000
shares of our common stock (subject to anti-dilution rights). The
address of FINOVA Capital is 500 Church Street, Suite 200, Nashville,
TN 37219.

(5) Includes 423,050 shares owned by Mr. Israel's spouse and children.

(6) Consists of 15,200 shares of issuable upon the exercise of options held
by Mr. Israel.

(7) Mr. Kessler's address is 170 Lakeside Place, Highland Park, Illinois
60035.

44

(8) Consists of 7,500 shares issuable upon the exercise of options held by
Mr. Kessler.

(9) Consists of 28,640 shares issuable upon exercise of options held by Mr.
Zimmer

(10) Ms. Jaros' address is 216 Summerfield Road, Northbrook, Illinois 60062.

(11) Consists of 3,500 shares issuable upon exercise of options held by Ms.
Jaros.

(12) The address of Mr. Xu is 88 Airport Drive, Elgin, Illinois 60191.

EQUITY COMPENSATION PLANS

As of December 31, 2003 we had the following compensation plans under
which our equity securities are authorized for issuance:

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

RELATED PARTY TRANSACTIONS

Other than the employment agreements described in Item 11, Executive
Compensation, and the transactions described below, since January 1, 2000 there
has not been, nor is there currently proposed, any transaction or series of
similar transactions to which we were or are to be a party in which the amount
involved exceeds $60,000, and in which any director, executive officer, holder
of more than 5% of our common stock or any member of the immediate family of any
of these people had or will have a direct or indirect material interest.

We maintain key man term life insurance policies which we purchased
through an insurance agency of which Sheldon Robinson, one of our former
directors, is an owner, covering the lives of Mr. Scott and Mr. Tzur. We paid
premiums of approximately $10,000 for these policies in 2003.

Our board of directors has approved unsecured loans to each of Yehuda
Tzur, our Chairman and Arvin Scott, our President and Chief Executive Officer.
The last advance made on these loans dated September 12, 2001, and the board of
directors has not approved any future advances on these loans. As of December
31, 2003, principal amounts of $155,000 and $115,000 were due from Messrs. Tzur
and Scott, respectively. The loans are due on demand and bear interest at the
applicable federal rate imposed by the Internal Revenue Service for one-year
obligations. At December 31, 2003 the Company determined that the collectibility
of these loans was in doubt and reserved the full amount due including interest.

45

During 2003 we purchased material from Wanxiang America Corporation, an
affiliate of Venture Equities Management Inc., which holds all of our
outstanding Series A Preferred Stock. The aggregate amount of such purchases was
approximately $5,150,000.

We believe that the transactions described above were fair and
reasonable and on terms at least as favorable as we would expect to negotiate
with an unaffiliated third party. In the future, we intend to present all
proposed transactions between us and our officers, directors or 5% shareholders,
and affiliates, to our board of directors for consideration and approval. Any
such transaction will require approval by a majority of the directors and such
transactions will be on terms no less favorable than those available to
disinterested third parties.

During 2003 we were advanced the sum of $500,000 from Mrs. Tzur, wife
of Yehuda Tzur, Chairman. The advance was made to fund working capital needs.
This amount was repaid during the year without interest.

STOCKHOLDERS AGREEMENT AND PROXIES

In connection with the issuance of the Series A Preferred Stock to
Venture Equities Management, Inc., or "VEMI," we, Mr. Tzur, Mr. Scott, Mr.
Israel and VEMI entered into a stockholders agreement. In the stockholders
agreement Mr. Tzur, Mr. Scott and Mr. Israel agreed to vote their shares in
favor of, and we agreed to take all actions within our control so that, our
board of directors will consist of nine members, two of whom are designated by
VEMI, and that one of the individuals designated by VEMI would be appointed as
co-chairman of the board. We also agreed to take any actions within our control,
and these shareholders agreed to vote in favor of actions, needed to ensure that
the composition of the board of directors of each of our subsidiaries would be
proportionate to that of our board, provided that at least one VEMI designee was
on the board of each of our subsidiaries, and that the composition of any
committees of our board of directors would be proportionate to that of our
board, provided that at least one VEMI designee would be on each committee. The
stockholders' agreement also provides that Mr. Tzur, Mr. Scott and Mr. Israel
will vote their shares in favor of the election of the VEMI designees to our
board of directors. As noted in "Directors, Executive Officers and Key
Personnel", our board is currently comprised of seven persons including one VEMI
nominee, and we remain prepared to add a second director nominee from VEMI, when
and if nominated by VEMI.

The stockholders agreement provides that if Mr. Tzur, Mr. Scott or Mr.
Israel wish to transfer their shares, they must notify VEMI of the proposed
transfer, and that VEMI has the right to purchase the shares on the proposed
terms. The agreement provides a similar right to Mr. Tzur, Mr. Scott and Mr.
Israel in the event VEMI proposes to transfer its shares to a competitor of
ours.

In the stockholders agreement we also granted pre-emptive rights to
VEMI which entitle VEMI, in connection with most offerings of stock or
securities convertible into stock, to purchase a number of the new securities
sufficient to enable VEMI to maintain its percentage of ownership of our voting
stock, on the most favorable terms made available to other purchasers in the
offering. The pre-emptive rights granted to VEMI do not apply to the issuance of
up to 200,000 shares of our common stock under our stock option plan to persons
who have never been directors of ours, or shares issued upon the exercise of
options or warrants outstanding on the date we issued the Series A Preferred
Stock. The provisions of the stockholders agreement with regard to the
designation of directors by VEMI and similar matters, the rights of VEMI and Mr.
Tzur, Mr. Scott and Mr. Israel to purchase stock in specified circumstances and
the pre-emptive rights granted to VEMI will terminate if the shares of our
common stock into which the shares of the Series A Preferred Stock owned by VEMI
are convertible fall below 1,007,190, which is half of the number of shares into
which the Series A Preferred Stock was convertible when it was originally
issued.

In connection with the issuance of the Series A Preferred Stock to
VEMI, Mr. Scott and Mr. Tzur both executed irrevocable proxies in favor of VEMI
or its representative. The proxies cover all the shares of our common stock
owned by Mr. Scott and Mr. Tzur, which is currently 1,916,100 shares. The
proxies effectively grant VEMI voting power over the shares owned by Mr. Tzur
and Mr. Scott if an event of default, as defined in the certificate of
designations for the Series A Preferred Stock or the Default Warrant issued to
VEMI, occurs. We purchase products from Wanxiang on a regular basis under the
supply agreement which calls for 60 day payment terms. Periodically, depending
upon our cash position, certain of our payables to Wanxiang have exceeded 60
days, as is presently the case. Wanxiang has never declared an event of default
with regard to its default warrant as a result of the foregoing,

46

and the default warrant has a 30 day cure period in the event of monetary
defaults. The proxies generally give VEMI the power to vote a number of shares
owned by Mr. Scott and Mr. Tzur equal to the number of shares it acquires upon
exercise of the Default Warrant, which can only be exercised if a defined event
of default occurs. However, if the default in question stems from our breach of
any provision of the purchase agreement relating to the issuance of the Series A
Preferred Stock, the stockholders agreement described above, any of the warrants
issued to VEMI, or the supply agreement entered into with Wanxiang America
Corporation, VEMI or its designee will have the right to vote all of the shares
held by Mr. Tzur and Mr. Scott whether or not it exercises the default warrant.
If a default occurs which grants VEMI or its designee voting rights over all of
the shares and is later cured, the voting rights will terminate after one year.

ITEM 14. PRINCIPAL Accountant Fees and Services

The table below sets forth the fees paid to our independent auditors in
the years ended December 31, 2003 and December 31, 2002. In 2003 and 2002 our
independent auditors were Ernst & Young LLP, and in 2001 our independent
auditors were Altschuler Melvoin & Glasser LLP.

(a) Includes fees paid for professional services rendered in
connection with the audit of the annual financial statements, for
the review of the quarterly financial statements and for services
that are normally provided by the accountants in connection with
statutory and regulatory filings or engagements.

(b) Includes fees paid for professional services rendered in
connection with assurance and related services that are reasonably
related to the performance of the audit or review of our financial
statements.

(c) Includes fees paid for tax compliance, tax advice, and tax
planning.

(d) Includes fees paid for any services not included in the first
three categories.

The Audit Committee has considered whether the provisions of the
non-audit services described in the table above for 2003 is compatible with
maintaining the independence of Ernst & Young LLP.

The Audit Committee has adopted a policy requiring pre-approval by the
committee of all services, both audit and non-audit, to be provided to us by our
independent auditor. In accordance with that policy, the Audit Committee has
given its approval for the provision of audit services by Ernst & Young LLP for
fiscal 2004 and has also given its approval for up to one year in advance for
the provision by Ernst & Young LLP of particular categories or types of
audit-related, tax and permitted non-audit services, in each case subject to a
specific budget. In cases where the Audit Committee's pre-approval is not
covered by one of those approvals, a designated member of the Audit Committee
has the delegated authority to pre-approve the provision of services, and such
pre-approvals are then communicated to the full Audit Committee.

47

PART IV

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

(a) List of documents filed:

(1) Financial Statements:

(2) Financial Statement Schedules:

All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.

(3) Exhibits

3(a) Restated Certificate of Incorporation of Universal
Automotive Industries, Inc. ("UAI") (Exhibit 3.1
to our Registration Statement on Form S-1 (No.
33-85162) as filed with the SEC on October 14,
1994)*

3(b) Restated Bylaws of UAI (Exhibit 3.2 to our
Registration Statement on Form S-1 (No. 33- 85162)
as filed with the SEC on October 14, 1994)*

3(c) Certificate of Designations, Preferences and
Rights of Class A Preferred Stock (Exhibit 4.1 to
our Form 8-K Report as filed with the SEC on
September 9, 2001)*

3(d) Certificate of Amendment to Certificate of
Designations, Preferences and Rights of Class A
Preferred Stock (Exhibit 3(d) to our Form 10-K
Annual Report filed with the SEC on April 1,
2002)*

3(e) Certificate of Designations, Preferences and
Rights of Series B Convertible Preferred Stock
(Exhibit 3(e) to our Form 10-K Annual Report filed
with the SEC on April 1, 2002)*

3(f) Certificate of Amendment to Certificate of
Incorporation dated August 27, 2001 (Exhibit 3(f)
to our Form 10-K Annual Report filed with the SEC
on April 1, 2002)*

4(a) Form of Warrant Agreement (including form of
Warrant) (Exhibit 4.3 to the Company's
Registration Statement on Form S-1 (No. 33-85162)
as filed with the SEC on October 14, 1994)*

10(a) Form of UAI Share Option Plan (Exhibit 10.1 to the
Company's Registration Statement on Form S-1 (No.
33-85162) as filed with the SEC on October 14,
1994)*

10(b) Amended Universal Automotive Industries, Inc.
Share Option Plan (Exhibit 10 to our Registration
Statement on Form S-8 (No. 333-67150) filed with
the SEC on August 9, 2001)*

10(c) Stock Exchange Agreement, dated May 5, 1994, by
and between UAI, and Yehuda Tzur, Reuben Gabay,
Sami Israel and Arvin Scott (Exhibit 10.9 to the
Company's Registration Statement on Form S-1 (No.
33-85162) as filed with the SEC on October 14,
1994)*

10(d) Stock Exchange Agreement, dated April 30, 1994, by
and between UAI and Yehuda Tzur, Reuben Gabay,
Sami Israel, Arvin Scott and Eric Goodman (Exhibit
10.10 to the Company's Registration Statement on
Form S-1 (No. 33-85162) as filed with the SEC on
October 14, 1994)*

10(e) Employment Agreement, dated May 5, 1994, by and
between UA and Yehuda Tzur (Exhibit 10.27 to the
Company's Registration Statement on Form S-1 (No.
33-85162) as filed with the SEC on October 14,
1994)*

48

10(f) First Amendment to Employment Agreement dated
December 14, 1994, between UA and Yehuda Tzur
(Exhibit 10.28 to the Company's Registration
Statement on Form S-1 (No. 33- 85162) as filed
with the SEC on October 14, 1994)*

10(g) Amendment to Employment Agreement dated December
14, 1994 between Universal Automotive Industries,
Inc. and Yehuda Tzur (Exhibit 10(g) to our Form
10-K Annual Report filed with the SEC on April 1,
2002)*

10(h) Employment Agreement, dated May 5, 1994, by and
between UA and Arvin Scott (Exhibit 10.29 to the
Company's Registration Statement on Form S-1 (No.
33-85162) as filed with the SEC on October 14,
1994)*

10(i) First Amendment to Employment Agreement, dated
December 14, 1994, between UA and Arvin Scott
(Exhibit 10.30 to the Company's Registration
Statement on Form S-1 (No. 33- 85162) as filed
with the SEC on October 14, 1994)*

10(j) Amendment to Employment Agreement dated December
14, 1994 between Universal Automotive Industries,
Inc. and Arvin Scott (Exhibit 10(j) to our Form
10-K Annual Report filed with the SEC on April 1,
2002)*

10(k) Employment Agreement, dated May 5, 1994 by and
between UA and Sami Israel (Exhibit 10.35 to the
Company's Registration Statement on Form S-1 (No.
33-85162) as filed with the SEC on October 14,
1994)*

10(l) First Amendment to Employment\Agreement, dated
December 14, 1994 by and between UA and Sami
Israel (Exhibit 10.36 to the Company's
Registration Statement on Form S-1 (No. 33-85162)
as filed with the SEC on October 14, 1994)*

10(m) Amendment to Employment Agreement dated December
14, 1994 between Universal Automotive Industries,
Inc. and Sami Israel (Exhibit 10(m) to our Form
10-K Annual Report filed with the SEC on April 1,
2002)*

10(n) Purchase Agreement dated August 28, 2001 between
Universal Automotive Industries, Inc. and Venture
Equities Management, Inc. (Exhibit 10.1 to our
Form 8-K Report filed with the SEC on September 9,
2001)*

10(o) VEMI Default Warrant to purchase up to 2,500,000
Shares of Registrant's Common Stock (Exhibit 10.2
to our Form 8-K Report filed with the SEC on
September 9, 2001)*

10(p) VEMI Warrant to purchase up to 800,000 Shares of
Registrant's Common Stock at $2.00 per Share
(Exhibit 10.3 to our Form 8-K Report filed with
the SEC on September 9, 2001)*

10(q) VEMI Warrant to purchase up to 800,000 Shares of
Registrant's Common Stock at greater of $2.00 per
Share or 60 Day Average Market Price (Exhibit 10.4
to our Form 8-K Report filed with the SEC on
September 9, 2001)*

10(r) Registration Rights Agreement Between Registrant
and VEMI (Exhibit 10.5 to our Form 8-K Report
filed with the SEC on September 9, 2001)*

10(s) Stockholders Agreement Among VEMI, Registrant,
Arvin Scott, Yehuda Tzur and Sami Israel (Exhibit
10.6 to our Form 8-K Report filed with the SEC on
September 9, 2001)*

10(t) Supply Agreement Between Registrant and Wanxiang
America Corporation (Exhibit 10.7 to our Form 8-K
Report filed with the SEC on September 9, 2001)*

10(u) Letter Agreement Granting VEMI a "Put" Right in
Event of Failure to Obtain Nasdaq Confirmation of
Net Tangible Assets Compliance (Exhibit 10.8 to
our Form 8-K Report filed with the SEC on
September 9, 2001)*

49

10(v) Consulting Agreement between Universal Automotive
Industries, Inc. and EBI Securities Corporation
dated May 6, 1999 (Exhibit 4.1 to our Registration
Statement on Form S-3 (No. 333-45538) filed with
the SEC on September 11, 2001)*

10(w) Credit Agreement by and between LaSalle National
Bank and Universal Automotive Industries, Inc.
dated as of July 14, 1997 (Exhibit 10.42 to our
Annual Report on Form 10-K for the year ended
December 31, 2000 filed with the SEC on April 17,
2001)*

10(x) Debenture Purchase Agreement between Universal
Automotive Industries, Inc. and Sirrom Capital
Corporation dated July 11, 1997 (Exhibit 10.42 to
our Annual Report on Form 10-K for the year ended
December 31, 2000 filed with the SEC on April 17,
2001)*

10(y) Preferred Stock Agreement dated October 30, 2001
by and between Universal Automotive Industries,
Inc. and FINOVA Mezzanine Capital, Inc. (Exhibit
10(y) to our Form 10-K Annual Report filed with
the SEC on April 1, 2002)*

10(z) Preferred Stock Voting Agreement dated December 5,
2001. (Exhibit 10(z) to our Form 10-K Annual
Report filed with the SEC on April 1, 2002)*

10(aa) First Amendment to Debenture Purchase Agreement
dated as of October 30, 2001 by and between
Universal Automotive Industries, Inc. and FINOVA
Mezzanine Capital, Inc. (Exhibit 10(aa) to our
Form 10-K Annual Report filed with the SEC on
April 1, 2002)*

10(ab) First Amendment to Universal Automotive
Industries, Inc. 12.25% Subordinated Debenture due
July 11, 2002 (Exhibit 10(ab) to our Form 10-K
Annual Report filed with the SEC on April 1,
2002)*

10(ac) Prepayment Agreement dated as of October 30, 2001
between Universal Automotive Industries, Inc. and
FINOVA Mezzanine Capital, Inc. (Exhibit 10(ac) to
our Form 10-K Annual Report filed with the SEC on
April 1, 2002)*

10(ah) Investment Banking Agreement dated as of November
30, 2001 by and between Universal Automotive
Industries, Inc. and J.P. Turner & Company, L.L.C.
(Exhibit 10(ah) to our Form 10-K Annual Report
filed with the SEC on April 1, 2002)*

10(ai) Corporate Consulting Agreement dated October 16,
2001 by and between Universal Automotive
Industries, Inc. and Schneider Securities, Inc.
(Exhibit 10(ai) to our Form 10-K Annual Report
filed with the SEC on April 1, 2002)*

10(aj) Corporate Consulting Agreement dated May 28, 2002
by and between Universal Automotive Industries,
Inc and Rockwell Asset Management Company, Inc.
(Exhibit 10(aj) to our Form 10-K Annual Report
filed with the SEC on April 15, 2003)*

14 Code of Ethics

21 Subsidiaries of the Registrant

23.1 Consent of Ernst and Young LLP

23.2 Consent of Altschuler, Melvoin & Glasser, LLP

31.1 (Description to Come)

31.2 (Description to Come)

32.1 Certification Required by Section 906 of the
Sarbanes-Oxley Act of 2002

* These exhibits are incorporated herein by reference to the report
referenced after each exhibit next to which an asterisk appears.

+ Indicates executive compensation plans and arrangements.

(b) Reports on Form 8-K

The Company filed the following reports on Form 8-K during the fourth quarter of
2003: (i) third quarter earnings release; (ii) summary of Laurus Master Fund
financing agreement; and (iii) summary of Global Capital financing agreement.

50

SIGNATURES

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

UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.

By: /s/ Arvin Scott
Arvin Scott, Chief Executive Officer

Date: April 14, 2004

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

UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
TABLE OF CONTENTS
DECEMBER 31, 2003 AND 2002

INDEPENDENT AUDITORS' REPORT

Board of Directors of Universal Automotive Industries, Inc.

We have audited the accompanying consolidated balance sheets of Universal
Automotive Industries, Inc. as of December 31, 2003 and 2002, and the related
consolidated statement of operations, changes in stockholders' equity and cash
flows for the years then ended. Our audits also included the financial statement
schedule listed in the index at 15(a). These financial statements and schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Universal Automotive Industries, Inc. as of December 31, 2003 and 2002 and the
consolidated results of their operations and cash flows for each of the years
then ended, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, present fairly in all material respects the information set forth
therein.

ERNST & YOUNG LLP

Chicago, Illinois
March 12, 2004

Board of Directors of Universal Automotive Industries, Inc.

We have audited the accompanying consolidated statement of operations, changes
in stockholders' equity and cash flows for year ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. We did not audit the financial statements of the Company's Hungarian
subsidiary (Notes 1 and 15) which statements reflect aggregate total assets of
$0 as of December 31, 2001. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for such subsidiary (before estimated loss on disposal) is
based solely on the report of the other auditors.

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

In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated results of their operations and cash flows
for the year ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.

ALTSCHULER, MELVOIN AND GLASSER LLP

Chicago, Illinois
March 27, 2002

F-1

UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND DECEMBER 31, 2002

See accompanying notes.

F-2

UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

See accompanying notes.

F-3

UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

See accompanying notes.

F-4

UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

See accompanying notes.

F-5

UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

See accompanying notes.

F-6

UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

See accompanying notes.

F-7

UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

NOTE 1 STRUCTURE

Universal Automotive Industries, Inc. (the Company) acts as a holding
company for its wholly-owned direct and indirect subsidiaries which, as of
December 31, 2003, are as follows:

Universal Automotive, Inc. (Universal)

Universal Automotive of Virginia, Inc.

Universal Brake Parts, Inc. (an amalgamation of 3 Canadian corporations
previously owned by the Company, two of which were inactive in 2001).

UBP Hungary, Inc. (Hungary), a United States Corporation and its wholly
owned subsidiary, UBP Csepel Iron Foundry, KFT, a Hungarian limited liability
company (see Notes 2 and 15).

eParts eXchange, Inc., E-Commerce business-to-business activity (see
Note 14)

NOTE 2 NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES

Universal Automotive Industries, Inc. is engaged principally in the
manufacture and distribution of automotive brake parts and operates from leased
facilities in Alsip, Illinois; Compton, California; Walkerton, Virginia; Cuba,
Missouri (closed effective December 31, 2002) and Toronto, Canada. Sales are
made throughout the United States. The Company's Hungarian subsidiary, which was
engaged in the manufacture of iron casting products, was sold during 2001 as
described in Note 15.

PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.

SEGMENT - The United States and Canadian operations are vertically
integrated, and are considered part of the same industry segment and geographic
segment (North America).

REVENUE RECOGNITION - Revenues are recognized at the time of shipment
to the customer which is generally when title passes. The sales incentives
provided to customers in the amount of $49,146; $99,935; and $493,828 for 2003,
2002 and 2001, respectively, have been reflected as a reduction of revenue.

USE OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.

FOREIGN CURRENCY TRANSLATION - The functional currency for the
Company's foreign operation is the applicable local currency. Accordingly, all
balance sheet accounts have been translated using the exchange rate in effect at
the balance sheet date and income statement amounts have been translated at the
weighted average exchange rate for the year. The translation adjustments
resulting from the changes in exchange rates have been reported as a separate
component of stockholders equity. The effect of transaction gains and losses,
which are reported in income, were not material for the periods presented.

F-8

CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with a maturity of three months or less to be cash equivalents. At
times during the year, the Company maintains cash balances in excess of insured
limits.

CONCENTRATION OF CREDIT RISK - Financial instruments, which potentially
subject the Company to concentration of credit risk, consist principally of
trade receivables. Credit risk with respect to trade receivables is limited due
to the diversity of customers comprising the Company's customer base. The
Company performs ongoing credit evaluations of its customers and maintains
sufficient allowances for potential credit losses. The Company evaluates the
collectibility of its accounts receivable based on the length of time the
receivable is past due and the anticipated future write-offs based upon
historical experience. The Company's policy is to not charge interest on trade
receivables after the invoice becomes past due. A receivable is considered past
due if payments have not been received within agreed-upon invoice terms.

INVENTORIES - Inventories are stated at the lower of cost or market
value with cost generally determined using the weighted average method, which
approximates the first-in, first-out (FIFO) method. Consideration is given to
deterioration, obsolescence and other factors in evaluating the estimated market
value of inventory based upon management judgment and available information.

PROPERTY AND EQUIPMENT - Property and equipment, including amounts
capitalized under capital leases is stated at cost less accumulated
depreciation. Depreciation is computed under accelerated and straight-line
methods. Depreciation expense was $1,086,482, $1,121,523 and $1,181,998 for the
years ended December 31, 2003, 2002 and 2001, respectively.

DEFERRED FINANCING COSTS - Deferred financing costs represent
capitalized fees, expenses and cost allocated to warrants associated with
obtaining financing. During 2003 $1,485,445 was incurred in connection with
obtaining new financing of which $261,250 was the value of warrants given to the
purchasers of the convertible notes and $176,250 was the value of warrants
provided to financial advisors. These costs are being amortized using the
straight-line method, which approximates the interest method, over the period of
the related financing. Accumulated amortization of deferred financing costs at
December 31, 2003 was $64,749.

COST OF SALES - The Company considers warehousing (including certain
salaries, occupancy costs, supplies) and buying expenses as an integral
component of cost of sales.

FREIGHT-OUT COSTS - The Company records freight-out costs in selling
and administrative expense. Such amounts were $2,659,285, $3,342,626 and
$3,484,585 for the years ended December 31, 2003, 2002 and 2001, respectively.

GOODWILL - Goodwill was being amortized on a straight-line basis over
its estimated economic life of 20 to 40 years through December 31, 2001. In June
2001, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" (SFAS No.
142), which became effective for the Company as of January 1, 2002. Under the
new rules, goodwill and intangible assets deemed to have indefinite lives are no
longer amortized but are subject to impairment tests at least annually. Other
intangible assets will continue to be amortized over their contractual lives. If
the Company had excluded amortization expense relating to goodwill for the year
ended December 31, 2001, the net loss would have been $2,949,187.

The Company applied the new rules on accounting for goodwill and other
intangibles assets beginning the first quarter of 2002. Application of the
nonamortization provisions of SFAS No. 142 resulted in no change to the goodwill
amount. The Company performed the transitional impairment tests of goodwill as
of January 1, 2002, and the required annual impairment test during the fiscal
fourth quarter 2002 and 2003, and has determined that goodwill was not impaired.

IMPAIRMENT OF LONG-LIVED ASSETS - In the event that facts and
circumstances indicate that the cost of any long-lived assets may be impaired,
an evaluation would be completed to determine if the assets are

F-9

impaired. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the asset's carrying
amount. If less, the Company would record an impairment based on market value.

INCOME TAXES - Deferred income tax assets and liabilities are
recognized for the expected future tax consequences related to assets and
liabilities that have a different basis for tax and financial reporting.
Deferred income tax assets and liabilities are determined based on the enacted
tax rates during periods when the differences are expected to reverse. When
there is uncertainty regarding realization of deferred tax assets, a valuation
allowance is recorded (Note 12).

FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of financial
instruments, other than debt instruments, closely approximates their carrying
value. Because the interest rate of the revolving loan and the term loan with
LaSalle National Bank adjusts with changes in the market rate of interest,
management believes the fair value is equivalent to the carrying value.
Management believes that the interest rate of 7.00 percent on the subordinated
debenture is approximately equal to the current rate available for similar debt.
Accordingly, the fair value of these debentures approximates their carrying
value.

STOCK BASED COMPENSATION - The Company grants employees stock options
with an exercise price equal to the estimated fair market value of the common
stock at the date of grant. The Company accounts for stock options in accordance
with the provisions of Accounting Principles Bulletin (APB) Opinion No. 25 (APB
25), Accounting for Stock Issued to Employees. The Company has adopted the
disclosure only option rather than the fair value accounting method provided for
under Financial Accounting Standards Board Statement No. 123 (FAS 123),
Accounting for Stock-Based Compensation, as amended by FAS 148 Accounting for
Stock-Based Compensation-Transition and Disclosure. Under APB 25, when the
exercise price of options granted equals the market price of the underlying
stock on the date of grant, no compensation expense is required.

ADVERTISING - All costs associated with advertising are charged to
operations when incurred. Advertising expense was $392,695, $349,171 and
$548,146 for the years ended December 31, 2003, 2002 and 2001, respectively.

NEW ACCOUNTING STANDARDS - In January 2003, the Financial Accounting
Standards Board (FASB) issued Interpretation NO. 46, "Consolidation of Variable
Interest Entities" (FIN 46). FIN 46 is an interpretation of Accounting Research
Bulletin (ARB) No. 51 "Consolidated Financial Statements" (ARB 51). The primary
objective of FIN 46 is to provide guidance on the identification of entities for
which control is achieved through means other than through voting rights and how
to determine when and which business enterprise should consolidate these
variable interest entities. The adoption of FIN 46 did not have a material
impact on our consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity: FASB
No. 150). This standard provides guidance for the accounting for certain
financial instruments that issuers previously accounted for as equity, requiring
such instruments to be classified as liabilities in certain situations. SFAS No.
150 is generally effective for all financial instruments entered into or
modified after May 31, 2003 and otherwise for interim periods beginning after
June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on
our consolidated financial statements.

NOTE 3 INVENTORIES

Inventories consist of the following:

F-10

NOTE 4 PROPERTY AND EQUIPMENT

Property and equipment is summarized as follows:

NOTE 5 ACCRUED EXPENSES

Accrued expenses as summarized as follows:

NOTE 6 OTHER OPERATING EXPENSES

Other operating expenses consist of the following:

NOTE 7 DUE FROM STOCKHOLDERS

Amounts due from stockholders represent advances made to certain
stockholders who are also executives of the Company as well as the related
accrued and unpaid interest. The advances bear interest at the IRS prescribed
rate and are due on demand. As of December 31, 2003 these notes have been fully
reserved. Interest income from these advances amounted to $0; $24,367; and
$22,209 for 2003, 2002 and 2001, respectively.

F-11

NOTE 8 SUBORDINATED DEBENTURE AND PREFERRED STOCK

On July 14, 1997, the Company sold a $4,500,000 subordinated debenture
to Finova Mezzanine Capital, Inc. (formerly Tandem Capital, Inc.) with interest
at 12.25 percent per annum through maturity on July 14, 2002. Through August 14,
2001 the Company had issued Finova warrants to purchase 1,575,000 shares of the
Company's common stock at exercise prices ranging from $0.83 to $1.58, based on
80 percent of the average closing bid price of the Company's common stock for
the 20 days preceding the respective issuance dates. The warrants were
exercisable at any time through the sixth anniversary of the debenture issue
date. During 2000, Finova elected to exercise one of its warrants to purchase
450,000 shares of the Company's common stock at an exercise price of $0.83 per
share, using a "cashless" exercise provision whereby Finova received a net of
279,260 shares of common stock after surrendering 170,743 shares which had a
fair market value equal to the aggregate exercise price. The Company received no
cash proceeds from this transaction when such shares were issued.

On October 31, 2001 the Company completed a restructuring of the
$4,500,000 subordinated debt held by Finova. The restructuring resulted in the
following: (i) Finova surrendered to the Company all of its holdings in the
Company's common stock and warrants (279,260 shares and warrants to purchase an
additional 1,125,000 shares at prices ranging from $1.12 to $1.58 per share);
(ii) the Company's payment of $1,000,000 to Finova; (iii) issuance to Finova of
$2,000,000 of series B preferred stock ($0.01 par value); and (iv) the amendment
of the debenture to $1,500,000. The amendment to the debenture also reduced the
interest rate from 12.25 percent to 7.0 percent and allowed the Company to pay
the remaining balance by making five $100,000 payments every 45 days beginning
December 15, 2001 with a final payment due July 11, 2005. The surrendered
warrants had cashless exercise features which, based on the closing price of the
Company's common stock of $1.89 per share on the date of the restructuring,
would have allowed Finova to receive 322,619 shares of common stock. This
transaction has been accounted for as a troubled debt restructuring and resulted
in a gain of $829,714 (inclusive of an accrual of all remaining interest to be
paid of approximately $272,000) during the year ended December 31, 2001. The
series B preferred stock has no fixed dividend, entitles the holder to a
liquidation preference, is redeemable at any time at the Company's option and is
convertible into 1,000,000 shares of common stock for which the Company provided
Finova with registration rights. The Company has registered the common stock
into which the Series B preferred stock will be convertible.

On October 8, 2003 as an inducement for Finova to approve the
additional financing from Global Capital Funding Group, L.P. (See Note 11) the
Company paid a consent fee of $ 50,000 which was recorded as a deferred
financing cost.

On October 31, 2003 as an inducement for Finova to approve the
additional financing from Laurus Master Funds, (see Note 11) the Company amended
the subordinated debenture. This amendment resulted in the following: (i) the
Company's payment of $250,000, (ii) the interest rate increase from 7.0 percent
to 8.0 percent, (iii) monthly installment payments of $25,000 beginning January
1, 2005 through July 1, 2005, (iv) a final payment of $575,000 on July 11, 2005
and (v) the Company's payment of a consent fee of $12,000, which was recorded as
a deferred financing cost.

On August 29, 2001, the Company issued 201,438 shares of series A
preferred stock ($0.01 par value) to Venture Equities Management, Inc. (VEMI)
(an affiliate of Wanxiang America Corporation - see Note 16) in exchange for
$2,800,000 in cash. The series A preferred stock has no fixed dividend, entitles
the holder to a liquidation preference, is redeemable at the Company's option
subject to certain conditions, and is convertible into 2,014,380 shares of the
Company's common stock (with registration rights), subject to certain
anti-dilution provisions. In connection with the issuance of the series A
preferred stock, the Company also issued to VEMI three warrants to purchase
common stock: the first and second warrants for 800,000 shares each were
exercisable at any time through August 28, 2003 at an exercise price of $2.25
per share (and have now lapsed); the third warrant for 2,500,000 shares is
exercisable only upon the occurrence of events of default with respect to
certain ongoing covenants contained in the certificate of designation for the
Series A preferred stock, at an exercise price to be determined based on a
defined computation. The costs related to the issuance of the preferred stock
amounted to approximately $100,000. The Company has also registered the common
stock into which the Series A preferred stock is convertible, consistent with
the VEMI's registration rights under the loan agreement.

F-12

NOTE 9 LASALLE INDEBTEDNESS

The Company has a credit agreement with LaSalle Bank National
Association or its subsidiaries ("LaSalle") for a revolving line of credit of up
to $22,000,000 based on eligible accounts receivable and inventory. The weighted
average interest rates on the aforementioned revolving credit facility
borrowings were 5.04 percent, 5.70 percent, and 8.68 percent for the years ended
December 31, 2003, 2002, and 2001, respectively.

The revolving line of credit had a term ending May 1, 2005 and an
interest rate of prime plus 1.5% per annum. During 2001 the interest rate was
changed from prime plus 0.5 percent per annum. The line of credit is subject to
an ongoing option to convert to LIBOR plus 2.5 percent per annum.

The LaSalle agreement contained certain limitations on dividends and
capital expenditures and requires the Company to satisfy a certain financial
test concerning defined minimum tangible net worth. The entire credit facility
was secured by a first lien on the inventory and accounts receivable of the
Company.

At December 31, 2003, approximately $269,000 was available for
borrowing under the revolving credit line. On January 12, 2004 the LaSalle
credit facility was replaced with a new credit facility from Congress Financial
Corporation (see Note 20).

NOTE 10 LONG-TERM INDEBTEDNESS

Long term indebtedness is summarized as follows:

The approximate aggregate maturities of all long-term indebtedness are:

NOTE 11 CONVERTIBLE NOTES

On July 3, 2003 the Company issued an unsecured convertible note with
a face value of $1,550,000 to Global Capital Funding Group, L.P. (Global). The
note was sold at a discounted amount of $1,240,000 and is due July 2005. This
note provides, among other provisions, for voluntary conversion into the
Company's common stock at the option of the holder. The conversion price is
equal to the greater of the weighted average market value of the Company's
common stock for the ten business days immediately prior to the date of
conversion or $0.35. We will issue a total of 1,139,706 shares if the conversion
price is at $1.36 per share, which was the closing price on December 31, 2003;
however, we will issue a total of approximately 4,430,000 shares if this note is
converted at $0.35 per share. We will not know the exact conversion price until
we receive a request for conversion. In

F-13

connection with the issuance of this note, the investor received a warrant to
purchase 250,000 shares of the Company's common stock. The common stock purchase
warrant may be exercised at any time and is valid for five years from the date
of issuance at an exercise price of $1.20 per share. In addition to the common
stock purchase warrant issued to Global, the Company also issued to a financial
advisor a common stock purchase warrant for 200,000 shares of the Company's
common stock. This warrant may be exercised at any time and is valid for five
years from the date of issuance at an exercise price of $1.16 per share. These
warrants were valued at $124,853 and were recorded as a deferred financing fee.
Total fees and expenses paid in cash were $163,250 and have been recorded as
deferred financing fees. These costs will be amortized over the term of the
note. As of December 31, 2003, the unamortized deferred financing fees related
to this transaction are $292,505.

On October 31, 2003 the Company issued a secured convertible note to
Laurus Master Funds Ltd. (Laurus) in the amount of $2,500,000 which is payable
in 33 equal monthly installments beginning January 31, 2004 and is secured by a
first lien on the fixed assets of the Company. Interest is payable at the prime
rate plus two percent (4.0% as of December 31, 2003). The note provides that
payments of principal and interest may, at the sole option of the Company, be
made in cash or shares of common stock of the Company. The payment of principal
and interest may be made in common stock of the Company if the closing price for
the five trading days preceding the payment date is at least $1.30 per share.
The conversion price was reduced from $1.39 to $1.30 per share effective January
9, 2004. If the Company's common stock is not $1.30 per share for the five days
preceding the payment date then the conversion price will be 90% of the lowest
closing price for the 22 trading days prior to the payment date, with a floor
conversion price of $0.50 per share. If the payment of principal and interest in
made in cash, the amount due will be 103% of the amount which would otherwise be
due. The Company also issued 350,000 warrants to Laurus and 312,500 warrants to
a financial advisor. The Laurus warrants are exercisable over five years at a
price of $1.60 to $2.02 per share. The warrants issued to the financial advisor
are exercisable over five years at $1.60 per share. The warrants were valued at
$206,347 and were recorded as a deferred financing fee. Cash fees and expenses
of $393,650 were incurred in connection with securing this loan and were also
recorded as a deferred financing fee. These deferred financing fees are being
amortized over the term of the note. As of December 31, 2003, the unamortized
deferred financing fees related to this transaction are $583,345. The
indebtedness under the Laurus note was increased to $4,500,000 in the aggregate
in January 2004 simultaneous with the closing of the Congress Financial
Corporation loan (see Note 20).

On November 26, 2003 the Company issued an unsecured convertible note
with a face value of $1,200,000 to Global Capital Funding Group, L.P. (Global II
- - an affiliate of Global) for an aggregate proceeds of $ 960,000. The note
provides for a lump sum payment of $1,200,000 on November 26, 2005. In addition
the note may be converted at the option of the note holder at a conversion price
of the lesser of $3.00 per share or of 95% of the volume weighted average market
value of the Company's common stock for the ten business days immediately prior
to the notice date of conversion provided that in no event will the conversion
price be less than $0.35 per share. The Company also issued 250,000 warrants to
Global II and 50,000 warrants to a financial advisor. The Global II warrants are
exercisable over five years at a price of $1.92 per share. The warrants issued
to the financial advisor are exercisable over five years at $1.90 per share. The
warrants were valued at $106,300 and were recorded as a deferred financing fee.
Cash fees and expenses of $110,500 were incurred in connection with securing
this loan and were also recorded as a deferred financing fee. These deferred
financing fees are being amortized over the term of the note. As of December 31,
2003, the unamortized deferred financing fees related to this transaction are
$216,800.

F-14

'

NOTE 12 INCOME TAXES

The components of the net deferred tax assets are as follows:

At December 31, 2003, the Company had a United States net operating
loss carryforward of approximately $12,671,000, expiring in years 2018 to 2023.
Due to uncertainty regarding realization of the net deferred tax assets, a
valuation allowance has been recorded.

A reconciliation of the provision for income taxes and the amounts
computed by applying the federal statutory rate to income (loss) from operations
before income tax expense is as follows:

NOTE 13 LEASES

The Company leases all of its facilities from unaffiliated parties. The
lease terms range from month-to-month to long-term leases, the latest of which
expires in 2012.

Aggregate rent expense for all facilities was approximately $2,030,051;
$1,980,000; and $1,978,000 for 2003, 2002 and 2001, respectively.

The Company leases certain equipment under a capital lease payable in
aggregate monthly installments of $12,913 through 2005. The net book value of
such equipment under capital lease is $235,029 and $261,143 at December 31, 2003
and 2002, respectively (see Note 10).

F-15

Minimum operating lease payments due over the remaining terms of the
leases are as follows:

NOTE 14 MINORITY INTEREST IN SUBSIDIARY

In December 1999, a new subsidiary, eParts eXchange, Inc. ("EPX") was
formed. EPX, built and ran a business-to-business e-commerce Internet platform
(www.goepx.com) for worldwide buyers and sellers of automotive aftermarket parts
focusing on the commodity, surplus and international trade segments. In June
2000, the funding of EPX was completed through the sale of $450,000 of preferred
shares with conversion rights into the Company's common stock to a limited
number of purchasers. In January 2001, the Company determined that it was better
served by redirecting the efforts of the EPX team to augment the sales and
marketing of the Company's products. As a result, the Company closed the website
and remaining employees were permanently reassigned to the Company's
distribution business. During 2001, the preferred shares of EPX were converted
into 225,000 shares of the Company's common stock.

NOTE 15 HUNGARIAN OPERATIONS

On December 9, 1999, the Company finalized its decision to discontinue
its Hungarian operations. At December 31, 1999, the carrying value of the
Hungarian plant and equipment was reflected at its estimated net realizable
value of $800,000, resulting in a write-down of $1,583,000. The Company provided
in 1999 for estimated costs of disposition of $1,500,000, including estimated
losses of the Hungarian operations during the disposal period. The disposition
was initially expected to occur by the end of 2000. Commencing in 2001, because
the Company had not disposed of the Hungarian operations within one year,
generally accepted accounting principles required that income or loss from such
discontinued operations be included in the statement of operations as a
component of income (loss) from continuing operations.

The Company's subsidiary, UBP Hungary, Inc., sold its ownership
interest in UBP Csepel Iron Foundry, Kft to Euro-Industrial Limited, LLC (an
unrelated third party), as of December 31, 2001, for $100,000, paid with a
single promissory note. Also in connection with the sale, several instruments
evidencing debt owed by UBP Csepel to UBP Hungary were replaced by a single
promissory note in the amount of $728,000. Under the terms of the promissory
note for the purchase price, the $100,000 was to be paid in quarterly
installments beginning April 2002 and ending January 2003. This note did not
bear interest unless there was a default under the note. As of December 31, 2002
this note was in default. The $728,000 promissory note was to be repaid in
monthly installments beginning in November 2003 and ending in October 2006. This
promissory note bore interest at the rate of 6.5 percent per year. Due to the
uncertainty of the collectability of this note, the Company provided a reserve
for the entire balance including accrued interest.

NOTE 16 COMMITMENTS AND CONTINGENCIES

In connection with the issuance of series A preferred stock in August
2001 (see Note 8), the Company entered into a supply agreement with Wanxiang.
Under the supply agreement, the Company agreed to make annual purchases of parts
from Wanxiang totaling at least $5,000,000, provided that the prices of the
products the Company purchases from Wanxiang are substantially comparable to the
prices charged by other suppliers in the Peoples Republic of China for similar
products. In the event the Company does not purchase $5,000,000 in products from
Wanxiang in a year, the Company is obligated under the agreement to pay Wanxiang
20 percent of the difference between $5,000,000 and the amount the Company has
purchased during the year. The agreement provides Wanxiang with a right of first
refusal with respect to products the Company seeks to purchase from other
suppliers

F-16

located in the Peoples Republic of China. The supply agreement has an indefinite
term, but can be terminated by Wanxiang at any time and by the Company if
Wanxiang materially fails to perform its obligations under the agreement, or if
the number of shares of the Company's common stock underlying the shares of
series A preferred stock owned by VEMI falls below a specified level. During the
years ended December 31, 2003 and 2002 the Company purchased approximately
$5,150,000 and $5,400,000 of products from Wanxiang, respectively.

The Company is a party to various other claims, legal actions and
complaints arising in the ordinary course of business. In the opinion of
management, all such matters are adequately covered by insurance, or, if not
covered, are without merit or are of such kind or involve such amounts that
unfavorable disposition would not have a material effect on the Company's
financial position, results of operations or liquidity.

NOTE 17 STOCK WARRANTS AND OPTIONS

At December 31, 2003, the Company had 744,302 outstanding redeemable
common stock purchase warrants with an exercise price of $0.50 per share,
expiring on January 31, 2004 On June 2, 2003 the Company reduced the exercise
price to $0.50 per share from $2.25 per share and extended the expiration date
to August 15, 2003. On July 28, 2003 the Company further extended the expiration
date of the warrants to January 31, 2004. A total of 393,148 and 142,350 of
these warrants were exercised during 2003 and 2002, respectively. As a result of
the modifications related to the reduction in the exercise price and the
extension of the exercise price, the Company was required to revalue the
warrants and recorded a non-cash charge of $275,543.

In addition to the warrants discussed above and in Notes 8, and 11, in
exchange for consulting services the Company issued:

(a) in 2003, warrants to purchase 700,000 shares of the Company's
common stock at an exercise price of $0.75 per share,
exercisable until 2005. In connection with the issuance of
these warrants the Company recorded a deferred expense which
is being amortized over the life of the consulting services
contracts. These warrants were valued at $466,475 with
$202,144 being amortized during 2003. At December 31, 2003,
the unamortized portion of the deferred consulting services
expense was $264,330;

(b) in 2002, warrants to purchase 215,000 shares of the Company's
common stock at exercise prices ranging from $ $2.25 to $3.00
per share, exercisable until 2005 (60,000 shares with an
exercise price of $3.00 were forfeited in 2002 as termination
damages under the consulting services agreement). In June 2003
the exercise price was reduced to $.50 per share through
January 2004 at which time the exercise price would revert to
their original amounts. As a result of the decrease in the
exercise price, $29,466 was recorded as a non-cash charge in
2003;

(c) in 2001, warrants to purchase 456,500 shares of the Company's
common stock at exercise prices ranging from $1.62 to $3.74
per share which are exercisable until 2004. In June 2003 the
exercise price of 450,000 of these warrants was reduced to
$0.50 per share thru January 2004 at which time the exercise
price would revert to their original amounts. As a result of
the decrease in the exercise price, $106,196 was recorded as a
non-cash charge in 2003;

(d) in 2000, warrants to purchase 325,000 shares of the Company's
common stock at exercise prices ranging from $2.00 to $2.75
per share exercisable until 2005 (180,000 shares were
exercised in 2003 at $0.50 per share, 125,000 shares expired
in 2003 without being exercised with exercise prices $2.00 and
$2.33 per share, and 20,000 shares were exercised in 2002 at
$2.50 per share). In June 2003 the exercise price of 180,000
shares was reduced to $0.50 per share thru January 2004 at
which time the exercise price would revert to their original
amounts. AS a result of the decrease in the exercise price,
$34,677 was recorded as a non-cash charge in 2003;

(e) in 1999, warrants to purchase 200,000 shares of the Company's
common stock at exercise prices ranging from $1.4375 to $2.00
per share exercisable until 2004 (40,000 shares were exercised
in

F-17

2002 at $2.00 per share, 100,000 and 60,000 shares were
exercised in 2001 at $1.4375 and $2.00 per share,
respectively); and

(f) in 1998, warrants to purchase 50,000 shares of the Company's
common stock at an exercise of $1.375 per share exercisable
until 2003 (25,000 shares were exercised in 2002 at $1.375 per
share and during 2003, 25,000 shares expired without being
exercised).

In connection with the exercise of the warrant for 60,000 shares in
2001 ((c) above), the Company issued the common stock and reflected a stock
subscription receivable in the amount of $120,000. At December 31, 2003 this
stock subscription receivable is $48,650.

As discussed in Note 11 in connection with the issuance of convertible
notes, the Company issued a total of 1,412,500 warrants with exercise prices
from $1.16 to $2.02 per share exercisable until 2008. The convertible notes
contained a beneficial conversion feature calculated based upon the difference
between the effective conversion price of the proceeds allocated to the
convertible notes and the fair value of the common stock as the date of
issuance. The discount arising from the beneficial conversion feature aggregated
$261,250. This discount is being amortized and recorded as a deferred financing
expense during the term of the respective notes. The warrants issued to the
financial advisor were valued at $176,250 and are being amortized and recorded
as deferred financing expense over the term of the respective notes.

Following is a table indicating the activity during 2003, 2002 and 2001
for the warrants.

F-18

The following table summarizes information about the outstanding stock
warrants, all of which are exercisable, as of December 31, 2003

The Company maintains a Stock Option Plan for defined key employees and
others. Options granted may be either incentive stock options as specified by
the Internal Revenue Code or non-qualified options. The Company has reserved
2,500,000 shares of common stock for issuance under the Stock Option Plan.

Following is a table indicating the activity during 2003, 2002 and 2001
for such Stock Option Plan:

F-19

The following table summarizes information about the outstanding and
exercisable stock options as of December 31, 2003:

Compensation expense is being recorded over the respective service
periods required of the optionees, based on the difference between the grant
price and the market price of the stock on the dates of such grants, as required
by APB Opinion 25, "Accounting for Stock Issued to Employees." In 2002 and 2001,
compensation expense of $19,800 and $39,600, respectively, was recorded.

The Company has adopted only the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123) and continues to account for stock options in
accordance with APB Opinion 25.

The Company has computed the pro forma disclosures required under SFAS
No. 123, as amended by SFAS No. 148, for options granted using the minimal value
option-pricing model prescribed by SFAS No. 13. The assumptions used for grants
during the year ended December 31, 2003 include a dividend yield of 0.0%,
risk-free interest rates of 2.50%, an option term of immediate to 10 years and a
volatility factor of 78%. Had the compensation costs for these plans been
determined consistent with SFAS No. 123, the Company's net loss would have been
increased by $134,916 to $4,375,931 for the period ended December 31, 2003.

The foregoing amount of compensation expense for 2002 and 2001 differs
by less than $.01 per share from that which would have been recorded using the
Black-Scholes option valuation method.

NOTE 18 EMPLOYEE RETIREMENT PLANS

The Company's defined contribution plan provides substantially all U.S.
salaried and hourly employees of the Company an opportunity to accumulate
personal funds for their retirement, subject to minimum duration of employment
requirements. Contributions made by employees to this plan are on a pre-tax
basis.

As determined by the provisions of the plan, the Company matches a
portion of the employees' basic voluntary contribution. Company matching
contributions are made in company stock, and were approximately $44,927;
$36,272; and $40,253 for the years ended December 31, 2003; 2002; and 2001
respectively.

F-20

NOTE 19 EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted
earnings per share from continuing operations:

NOTE 20 QUARTERLY RESULTS (UNAUDITED)

The fourth quarter 2003 loss was attributable to (a) significantly
lower sales consistent with a sluggish automotive aftermarket and (b) under
absorption of manufacturing costs. Included in the income (loss) before income
taxes for the fourth quarter 2003 is $648,027 of non-cash expense relating to
stock warrants. Of this amount approximately $420,000 relates to warrants issued
during the second quarter ended June 30, 2003 and approximately $101,000 relates
to warrants issued during the third quarter ended September 30, 2003.

The fourth quarter 2002 loss was attributable to (a) significantly
lower sales consistent with a sluggish automotive aftermarket and (b) under
absorption of manufacturing costs.

F-21

NOTE 21 SUBSEQUENT EVENTS

On January 12, 2004 the Company purchased substantially all the assets
of the Autospecialty division of Kelsey-Hayes Company a subsidiary of TRW
Automotive, Inc ("Autospecialty"), for approximately $10,641,000 plus the
assumption of certain liabilities as set forth in the Purchase Agreement dated
December 23, 2003 between the Company and TRW Automotive, Inc. The purchase
price is subject to certain adjustments based upon the net asset value as of
January 9, 2004 and the future collection of trade accounts receivable.

In connection with the purchase of the Autospecialty assets the Company
entered into a revolving line-of-credit agreement with Congress Financial
Corporation. ("Congress"), replacing the LaSalle indebtedness. The maximum
available amount of the revolving line-of-credit is $35,000,000 based on
eligible accounts receivable and inventory. The revolving line-of-credit has a
term ending January 12, 2007 and an interest rate of prime plus .50% per annum.
The line is subject to an on-going option to convert to LIBOR plus 2.75% per
annum.

The Congress agreement contains certain limitations on dividends and
capital expenditures and requires the Company to satisfy a financial test
concerning earnings before interest, taxes, depreciation and amortization
(EBITDA). The revolving line-of-credit is fully secured by a first lien on the
inventory and the accounts receivable of the Company.

On January 9, 2004 the Company issued a secured convertible note to
Laurus Master Funds Ltd. (Laurus) in the amount of $2,000,000 which is payable
in 33 equal monthly installments beginning April 1, 2004 and is secured by a
first lien on the fixed assets of the Company, including the fixed assets
acquired in connection with the Autospecialty acquisition. Interest is payable
at the prime rate plus two percent (6.0% as of January 9, 2004). The note
provides that payments of principal and interest may, at the sole option of the
Company, be made in cash or in shares of common stock of the Company. The
payment of principal and interest may be made in common stock of the Company if
the closing price for the five trading days preceding the payment date is at
least $1.30 per share. If the Company's common stock is not $1.30 per share for
the five days preceding the payment date, the conversion price will be 90% of
the lowest closing price for the 22 trading days prior to the payment date, with
a floor conversion price of $0.50 per share. If the payment of principal and
interest is made in cash then the amount due will be 103% of the amount which
would otherwise be due. The Company also issued 280,000 warrants to Laurus and
250,000 warrants to a financial advisor. The Laurus warrants are exercisable
over five years at a price of $1.60 to $2.01 per share. The warrants issued to
the financial advisor are exercisable over five years at $1.76 per share.

On January 15, 2004 the Company issued an unsecured convertible note in
the original amount of $300,000 to GCA Strategic Investment Fund Ltd, an
affiliate of Global Capital Funding Group , L.P., for proceeds of $240,000. The
note provides for a lump sum payment of $300,000 on January 15, 2006. In
addition the note contains a voluntary conversion at the option of the note
holder at the lesser of $3.00 per share or 95% of the volume weighted average
market value of the Company's common stock for the ten business days immediately
prior to the date of conversion notice, except that in no event will the
conversion price be less than $0.35 per share.

F-22

INDEPENDENT AUDITORS' REPORT ON SCHEDULE I

Board of Directors of Universal Automotive Industries, Inc.

In connection with our audit of the consolidated financial statements of
Universal Automotive Industries, Inc. referred to in our report dated March 27,
2002, which is included in this Form 10 K, we have also audited Schedule 1 as of
and for the year ended December 31, 2001. In our opinion, these schedules
present fairly, in all material respects, the information required to be set
forth therein.

ALTSCHULER, MELVOIN AND GLASSER LLP

Chicago, Illinois
March 27, 2002

S-1

UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
VALUATION AND QUALIFYING ACCOUNTS (SCHEDULE I)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

S-2