TENNECO AUTOMOTIVE INC - 10-K Annual Report

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

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

OR

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

COMMISSION FILE NUMBER 1-12387

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

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

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

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

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

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

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

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

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

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

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* Based upon the closing sale price on the New York Stock Exchange Composite
Tape for the Common Stock on June 30, 2004.

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. Common Stock, par
value $.01 per share, 43,396,872 shares outstanding as of February 28, 2005.

DOCUMENTS INCORPORATED BY REFERENCE:

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

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

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

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

Changes in consumer demand and prices could materially and adversely impact
our financial condition and results of operations. Demand for and pricing of our
products are subject to economic conditions and other factors present in the
various domestic and international markets where the products are sold. Demand
for our original equipment ("OE") products is subject to the level of consumer
demand for new vehicles that are equipped with our parts. The level of new car
purchases is cyclical, affected by such factors as interest rates, consumer
confidence, patterns of consumer spending, fuel cost and the automobile
replacement cycle. For example, we believe a key strength for our company is our
supply of parts for many North American light trucks and SUVs, which are
currently top sellers, but which consumers may not continue to prefer. Demand
for our aftermarket, or replacement, products varies based upon such factors as
the level of new vehicle purchases, which initially displaces demand for
aftermarket products, the severity of winter weather, which increases the demand
for certain aftermarket products, and other factors, including the average
useful life of parts and number of miles driven. For example, weakened economic
conditions in the United States over the last several years resulted in
substantially all of the customers of our North American OE operations slowing
new vehicle production since 2001 compared to 1999 and 2000 levels. Further
decreases in demand for automobiles and automotive products generally, or in the
demand for our products in particular, could materially and adversely impact our
financial condition and results of operations.

We may be unable to realize sales represented by our awarded business,
which could materially and adversely impact our financial condition and results
of operations. The realization of future sales from awarded business is
inherently subject to a number of important risks and uncertainties, including
the number of vehicles that our OE customers will actually produce, the timing
of that production and the mix of options that our OE customers and consumers
may choose. For example, substantially all of our North American vehicle
manufacturer customers slowed new vehicle production in 2001, with a slight
increase in 2002. Production rates for 2003 were down three percent from 2002
and production rates for 2004 were down one percent from 2003. We remain
cautious regarding production volumes for 2005 due to rising interest rates, oil
and steel prices, current OE manufacturers' inventory levels and uncertainty
regarding the willingness of OE manufacturers to continue to support vehicle
sales through incentives. Given current economic conditions, we expect the North
American light vehicle build to be approximately 15.8 million units in 2005,
which is equal to 2004 levels. We also expect the European light vehicle
production to remain flat in 2005. In addition, our customers generally have the
right to replace us with another supplier at any time for a variety of reasons
and have increasingly demanded price decreases over

i

the life of awarded business. Accordingly, we cannot assure you that we will in
fact realize any or all of the future sales represented by our awarded business.
Any failure to realize these sales could have a material adverse effect on our
financial condition and results of operations.

In many cases, we must commit substantial resources in preparation for
production under awarded OE business well in advance of the customer's
production start date. In certain instances, the terms of our OE customer
arrangements permit us to recover these pre-production costs if the customer
cancels the business through no fault of our company. Although we have been
successful in recovering these costs under appropriate circumstances in the
past, we can give no assurance that our results of operations will not be
materially impacted in the future if we are unable to recover these types of
pre-production costs related to OE cancellation of awarded business.

We recently have experienced significant increases in raw materials
pricing, and further changes in the prices of raw materials could have a
material adverse impact on us. Significant increases in the cost of certain raw
materials used in our products, to the extent they are not timely reflected in
the price we charge our customers or otherwise mitigated, could materially and
adversely impact our results. For example, we recently have experienced
significant increases in processed metal and steel prices, which are a growing
concern. Increased pressure on steel prices is expected to continue into the
foreseeable future. We are working hard to address this issue by evaluating
alternative materials and processes, reviewing material substitution
opportunities, increasing component and assembly outsourcing to low cost
countries and aggressively negotiating with our customers to allow us to recover
these higher costs from them. In addition to these actions, we continue to
pursue productivity initiatives and review opportunities to reduce costs through
restructuring activities. The situation remains fluid as we continue to pursue
these actions and, at this point, we cannot assure you that these actions and
recent increases in new business awards will be effective in containing margin
pressures from these significant steel price increases. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations --
Outlook" included in Item 7 for more information.

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

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

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

ii

The cyclicality of automotive production and sales could cause a decline in
our financial condition and results. A decline in automotive sales and
production would likely cause a decline in our sales to vehicle manufacturers,
and could result in a decline in our results of operations and financial
condition. The automotive industry has been characterized historically by
periodic fluctuations in overall demand for vehicles due to, among other things,
changes in general economic conditions and consumer preferences. These
fluctuations generally result in corresponding fluctuations in demand for our
products. General Motors recently forecasted that it would produce 2.43 million
vehicles in North America during the first six months of 2005, approximately 11
percent fewer than it produced in North America during the first six months of
2004. Similarly, Ford recently announced a production forecast of 1.85 million
vehicles in North America during the first six months of 2005, approximately 6
percent fewer than it produced in North America during the first six months of
2004. The highly cyclical nature of the automotive industry presents a risk that
is outside our control and that cannot be accurately predicted.

Longer product lives of automotive parts are adversely affecting
aftermarket demand for some of our products. The average useful life of
automotive parts has steadily increased in recent years due to innovations in
products and technologies. The longer product lives allow vehicle owners to
replace parts of their vehicles less often. As a result, a portion of sales in
the aftermarket has been displaced. This has adversely impacted, and will likely
continue to adversely impact, our aftermarket sales. Also, any additional
increases in the average useful lives of automotive parts would further
adversely affect the demand for our aftermarket products. Aftermarket sales
represented approximately 24 percent of our net sales for 2004, as compared to
25 percent of our net sales for 2003.

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

Additionally, we are subject to a variety of environmental and pollution
control laws and regulations in all jurisdictions in which we operate. Soil and
groundwater remediation activities are being conducted at certain of our current
and former real properties. We record liabilities for these activities when
environmental assessments indicate that the remedial efforts are probable and
the costs can be reasonably estimated. On this basis, we have established
reserves that we believe are adequate for the remediation activities at our
current and former real properties. Although we believe our estimates of
remediation costs are reasonable and are based on the latest available
information, the cleanup costs are estimates and are subject to revision as more
information becomes available about the extent of remediation required. In
future periods, we could be subject to cash or non-cash charges to earnings if
we are required to undertake material additional remediation efforts based on
the results of our ongoing analyses of the environmental status of our
properties, as more information becomes available to us.

We also from time to time are involved in legal proceedings, claims or
investigations that are incidental to the conduct of our business. Some of these
proceedings allege damages against us relating to environmental liabilities,
intellectual property matters, personal injury claims, taxes, employment matters
or commercial or contractual disputes. For example, we are involved in
litigation with the minority owner of one of our Indian joint ventures over
various operational issues that involves a court-mandated bidding process. We
are also subject to a number of lawsuits initiated by a significant number of
claimants alleging health problems as a result of exposure to asbestos. Many of
these cases involve significant numbers of individual claimants. Many of these
cases also involve numerous defendants, with the number of each in

iii

some cases exceeding 200 defendants from a variety of industries. As major
asbestos manufacturers continue to go out of business, we may experience an
increased number of these claims.

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

The hourly workforce in the automotive industry is highly unionized and our
business could be adversely affected by labor disruptions. Although we consider
our current relations with our employees to be good, if major work disruptions
were to occur, our business could be adversely affected by, for instance, a loss
of revenues, increased costs or reduced profitability. We have not experienced a
material labor disruption in our workforce in the last ten years, but there can
be no assurance that we will not experience a material labor disruption at one
of our facilities in the future in the course of renegotiation of our labor
arrangements or otherwise. In addition, substantially all of the hourly
employees of North American vehicle manufacturers are represented by the United
Automobile, Aerospace and Agricultural Implement Workers of America under
collective bargaining agreements and vehicle manufacturers and their employees
in other countries are also subject to labor agreements. A work stoppage or
strike at the production facilities of a significant customer, at our facilities
or at a significant supplier could have an adverse impact on us by disrupting
demand for our products and/or our ability to manufacture our products. For
example, a General Motors strike in 1998 reduced second and third quarter
revenue and income growth of our OE business in that year.

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

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

We are dependent on large customers for future revenues, the loss of any of
which could have a material adverse impact on us. We depend on major vehicle
manufacturers for a substantial portion of our net sales. For example, during
2004, General Motors, Ford, Volkswagen, and DaimlerChrysler accounted for 18
percent, 12 percent, 11 percent, and 8 percent of our net sales, respectively.
The loss of all or a substantial portion of our sales to any of our large-volume
customers could have a material adverse effect on our financial condition and
results of operations by reducing cash flows and our ability to spread costs
over a larger revenue base. We may make fewer sales to these customers for a
variety of reasons, including: (1) loss of awarded business; (2) reduced or
delayed customer requirements; or (3) strikes or other work stoppages affecting
production by the customers.

We are subject to risks related to our international operations. We have
manufacturing and distribution facilities in many regions and countries,
including Australia, China, India, North America, Europe and South America, and
sell our products worldwide. For 2004, approximately 53 percent of our net sales
were derived from operations outside North America. International operations are
subject to

iv

various risks which could have a material adverse effect on those operations or
our business as a whole, including:

- exposure to local economic conditions;

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

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

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

- currency exchange rate fluctuations;

- hyperinflation in certain foreign countries;

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

- export and import restrictions.

Exchange rate fluctuations could cause a decline in our financial condition
and results of operations. As a result of our international operations, we
generate a significant portion of our net sales and incur a significant portion
of our expenses in currencies other than the U.S. dollar. To the extent we are
unable to match revenues received in foreign currencies with costs paid in the
same currency, exchange rate fluctuations in that currency could have a material
adverse effect on our business. For example, where we have significantly more
costs than revenues generated in a foreign currency, we are subject to risk if
that foreign currency appreciates against the U.S. dollar because the
appreciation effectively increases our cost in that country. From time to time,
as and when we determine it is appropriate and advisable to do so, we will seek
to mitigate the effect of exchange rate fluctuations through the use of
derivative financial instruments. We cannot assure you, however, that we will
continue this practice or be successful in these efforts.

The financial condition and results of operations of some of our operating
entities are reported in foreign currencies and then translated into U.S.
dollars at the applicable exchange rate for inclusion in our consolidated
financial statements. As a result, appreciation of the U.S. dollar against these
foreign currencies will have a negative impact on our reported revenues and
operating profit while depreciation of the U.S. dollar against these foreign
currencies will have a positive effect on reported revenues and operating
profit. For example, our European operations were positively impacted in 2002,
2003 and 2004 due to the strengthening of the Euro against the U.S. dollar. Our
South American operations were negatively impacted by the devaluation in 2000 of
the Brazilian currency as well as by the devaluation of the Argentine currency
in 2002. We do not generally seek to mitigate this translation effect through
the use of derivative financial instruments.

Further significant changes in our stockholder composition may jeopardize
our ability to use some or all of our net operating loss carryforwards. As of
December 31, 2004, we had a U.S. Federal tax net operating loss ("NOL")
carryforwards of $569 million available to reduce taxable income in future
years, and these NOL carryforwards expire in various years through 2024. The
federal tax effect of these NOL's is $199 million and is recorded as an asset on
our balance sheet as of December 31, 2004. Our ability to utilize our NOL
carryforwards could become subject to significant limitations under Section 382
of the Internal Revenue Code ("Section 382") if we undergo a majority ownership
change. We would undergo a majority ownership change if, among other things, the
stockholders who own or have owned, directly or indirectly, five percent or more
of our common stock or are otherwise treated as five percent stockholders under
Section 382 and the regulations promulgated thereunder, increase their aggregate
percentage ownership of our stock by more than 50 percentage points over the
lowest percentage of stock owned by these stockholders at any time during the
testing period, which is generally the three-year period preceding the potential
ownership change. In the event of a majority ownership change, Section 382
imposes an annual limitation on the amount of taxable income a corporation may
offset with the NOL carryforwards. Any unused annual limitation may be carried
over to later years until the applicable expiration of the respective NOL
carryforwards. If we were to undergo a majority ownership change, we would be
required to record a reserve for some or all of the asset currently recorded on
our balance sheet. As of

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December 31, 2004, we believe that there had been a significant change, but not
a majority change, in our ownership during the prior three years. We cannot,
however, assure you that we will not undergo a majority ownership change in the
future. Further, because an ownership change for federal tax purposes can occur
based on trades among our existing stockholders, whether we undergo a majority
ownership change may be a matter beyond our control.

Other Factors. In addition to the factors described above, we may be
impacted by a number of other matters and uncertainties, including: (i) general
economic, business and market conditions; (ii) potential legislation, regulatory
changes and other governmental actions, including the ability to receive
regulatory approvals and the timing of such approvals; (iii) new technologies
that reduce the demand for certain of our products or otherwise render them
obsolete; (iv) our ability to integrate operations of acquired businesses
quickly and in a cost effective manner; (v) changes in distribution channels or
competitive conditions in the markets and countries where we operate; (vi)
capital availability or costs, including changes in interest rates, market
perceptions of the industries in which we operate or ratings of securities;
(vii) increases in the cost of compliance with regulations, including
environmental regulations, and environmental liabilities in excess of the amount
reserved; (viii) changes by the Financial Accounting Standards Board, Public
Company Accounting Oversight Board or the Securities and Exchange Commission of
authoritative accounting principles generally accepted in the United States of
America or policies; (ix) acts of war or terrorism, including, but not limited
to, the events taking place in the Middle East, the current military action in
Iraq and the continuing war on terrorism, as well as actions taken or to be
taken by the United States and other governments as a result of further acts or
threats of terrorism, and the impact of these acts on economic, financial and
social conditions in the countries where we operate; and (x) the timing and
occurrence (or non-occurrence) of transactions and events which may be subject
to circumstances beyond our control.

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TABLE OF CONTENTS

PART I
Item 1. Business.................................................... 1
Tenneco Automotive Inc.................................... 1
Contributions of Major Businesses......................... 3
Description of Our Business............................... 5
Item 2. Properties.................................................. 20
Item 3. Legal Proceedings........................................... 20
Item 4. Submission of Matters to a Vote of Security Holders......... 22
Item
4.1. Executive Officers of the Registrant........................ 22
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters, and Issuer Repurchases of Equity Securities........ 25
Item 6. Selected Financial Data..................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 29
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 59
Item 8. Financial Statements and Supplementary Data................. 60
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 114
Item 9A. Controls and Procedures..................................... 114
Item 9B. Other Information........................................... 114
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 115
Item 11. Executive Compensation...................................... 115
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 115
Item 13. Certain Relationships and Related Transactions.............. 116
Item 14. Principal Accountant Fees and Services...................... 116
PART IV
Item 15. Exhibits and Financial Statement Schedules.................. 117

vii

PART I

ITEM 1. BUSINESS.

TENNECO AUTOMOTIVE INC.

GENERAL

Our company, Tenneco Automotive Inc., is one of the world's leading
manufacturers of automotive emission control and ride control products and
systems. Our company serves both original equipment vehicle manufacturers
("OEMs") and the repair and replacement markets, or aftermarket, worldwide. As
used herein, the term "Tenneco", "we", "us", "our", or the "Company" refers to
Tenneco Automotive Inc. and its consolidated subsidiaries.

Tenneco was incorporated in Delaware in 1996 under the name "New Tenneco
Inc." ("New Tenneco") as a wholly owned subsidiary of the company then known as
Tenneco Inc. ("Old Tenneco"). At that time, Old Tenneco's major businesses were
shipbuilding, energy, automotive and packaging. On December 11, 1996, Old
Tenneco completed the transfer of its automotive and packaging businesses to us,
and spun off our company to its public stockholders. In connection with the 1996
spin-off, Old Tenneco also spun off its shipbuilding division to its public
stockholders, the remaining energy company was acquired by El Paso Natural Gas
Company and we changed our name from New Tenneco to Tenneco Inc. Unless the
context otherwise requires, for periods prior to December 11, 1996, references
to "Tenneco", "we", "us", "our" or the "Company" also refer to Old Tenneco. In a
series of transactions commencing in January 1999 and culminating with the
November 4, 1999 spin off to our shareholders of the common stock of Tenneco
Packaging Inc., now known as Pactiv Corporation (the "1999 Spin-off"), we
separated our packaging businesses from our automotive business and in
connection therewith changed our name from Tenneco to Tenneco Automotive Inc.

During 2003, we completed a series of transactions pursuant to which we
refinanced, in its entirety, our then-existing senior credit facility. These
transactions involved (1) the sale of an aggregate of $475 million of senior
secured notes due 2013 in June and December, and (2) entering into an amended
and restated credit agreement with JPMorgan Chase Bank, as administrative agent,
and a group of other lenders in December. During 2004, we completed the
redemption of our $500 million 11 5/8 percent senior subordinated notes due
2009, using the net proceeds of our sale of $500 million of new 8 5/8 percent
senior subordinated notes due 2014 plus cash on hand. In February 2005 we
amended our senior credit facility to reduce by 75 basis points the interest
rate on the term loan B facility and the tranche B-1 letter of credit/revolving
loan facility. These transactions had or will have a substantial impact on the
nature of our outstanding debt, as well as our liquidity, debt amortization
requirements and interest expense. See the section entitled "Liquidity and
Capital Resources" included elsewhere in this report under Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," for a
description of these transactions.

CORPORATE GOVERNANCE AND AVAILABLE INFORMATION

We have established a comprehensive corporate governance plan for the
purpose of defining responsibilities, setting high standards of professional and
personal conduct and assuring compliance with such responsibilities and
standards. As part of its annual review process, the Board of Directors monitors
developments in the area of corporate governance. In late 2003, the Securities
and Exchange Commission ("SEC") approved changes proposed by the New York Stock
Exchange ("NYSE") to its corporate governance and listing requirements. The
Board of Directors determined to voluntarily implement these changes on an
accelerated basis in 2003 and 2004, to the extent our practices were not already
in compliance. Listed below are some of the key elements of our corporate
governance plan. For more information about these matters, see our definitive
Proxy Statement for the Annual Meeting of Stockholders to be held May 10, 2005.

1

INDEPENDENCE OF DIRECTORS

- Eight of our ten directors are independent under the revised NYSE listing
standards.

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

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

AUDIT COMMITTEE

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

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

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

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

COMPENSATION/NOMINATING/GOVERNANCE COMMITTEE

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

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

CORPORATE GOVERNANCE PRINCIPLES

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

STOCK OWNERSHIP GUIDELINES

- The Company has adopted Stock Ownership Guidelines to align the interests
of its executives with the interests of stockholders and promote the
Company's commitment to sound corporate governance.

- The Stock Ownership Guidelines apply to the independent directors, the
Chairman and Chief Executive Officer, all Executive Vice Presidents and
all Senior Vice Presidents. Ownership levels are determined as a multiple
of the participant's base salary or, in the case of an independent
director, his or her Board of Director's retainer fee and then converted
to a fixed number of shares.

COMMUNICATION WITH DIRECTORS

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

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

CODES OF BUSINESS CONDUCT AND ETHICS

- Management has adopted a Code of Ethical Conduct for Financial Managers,
which applies to our Chief Executive Officer, Chief Financial Officer,
Controller and other key financial managers. This code is filed as
Exhibit 14 to this report.

2

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

PERSONAL LOANS TO EXECUTIVE OFFICERS AND DIRECTORS

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

Our Internet address is www.tenneco-automotive.com. We make our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to those reports, as filed with or furnished to the SEC,
available free of charge on our Internet website as soon as reasonably
practicable after submission to the SEC. Securities ownership reports on Forms
3, 4, and 5 are also available free of charge on our website as soon as
reasonably practicable after submission to the SEC. The contents of our website
are not, however, a part of this report.

Our Audit Committee Charter, Compensation/Nominating/Governance Committee
Charter, Corporate Governance Principles, Stock Ownership Guidelines, Audit
Committee policy regarding accounting complaints, Code of Ethical Conduct for
Financial Managers, Statement of Business Principles, policy for communicating
with the Board of Directors and Audit Committee policy regarding the
pre-approval of audit, non-audit, tax and other services are available on our
website at www.tenneco-automotive.com. In addition, we will make a copy of any
of these documents available to any person, without charge, upon written request
to Tenneco Automotive Inc., 500 North Field Drive, Lake Forest, Illinois 60045,
Attn: General Counsel. We intend to satisfy the disclosure requirements under
Item 5.05 of Form 8-K and applicable NYSE rules regarding amendments to or
waivers of our Code of Ethical Conduct for Financial Managers and Statement of
Business Principles by posting this information on our website at
www.tenneco-automotive.com.

CEO AND CFO CERTIFICATIONS

In 2004, our chief executive officer provided to the NYSE the annual CEO
certification regarding Tenneco Automotive's compliance with the NYSE corporate
governance listing standards. In addition, our chief executive officer and chief
financial officer filed with the Securities and Exchange Commission all required
certifications regarding the quality of Tenneco Automotive's disclosures in its
fiscal 2004 SEC reports. There were no qualifications to these certifications.

CONTRIBUTIONS OF MAJOR BUSINESSES

For information concerning our operating segments, geographic areas and
major products or groups of products, see Note 11 to the consolidated financial
statements of Tenneco Automotive Inc. and Consolidated Subsidiaries included in
Item 8. The following tables summarize for each of our operating segments for
the periods indicated: (i) net sales and operating revenues; (ii) earnings
before interest expense, income taxes and minority interest ("EBIT"); and (iii)
capital expenditures. You should also read "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in Item 7 for
information about certain costs and charges included in our results.

NET SALES AND OPERATING REVENUES:

3

EBIT:

CAPITAL EXPENDITURES:

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

4

DESCRIPTION OF OUR BUSINESS

With 2004 revenues of over $4.2 billion, we are one of the world's largest
producers of automotive emission control and ride control systems and products.
We serve both original equipment manufacturers and replacement markets worldwide
through leading brands, including Monroe(R), Rancho(R), Clevite(R) Elastomers,
and Fric Rot(TM) ride control products and Walker(R), Fonos(TM), and Gillet(TM)
emission control products.

As an automotive parts supplier, we design, engineer, manufacture, market
and sell individual component parts for vehicles as well as groups of components
that are combined as modules or systems within vehicles. These parts, modules
and systems are sold globally to most leading OEMs and throughout all
aftermarket distribution channels.

OVERVIEW OF AUTOMOTIVE PARTS INDUSTRY

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

Demand for automotive parts in the OE market is generally a function of the
number of new vehicles produced, which in turn is a function of prevailing
economic conditions and consumer preferences. In 2004, the number of light
vehicles produced was 15.8 million in North America, 24.3 million in Europe and
South America and 21.2 million in Asia Pacific. Worldwide new light vehicle
production is forecasted to increase to over 67.6 million units in 2007 from
approximately 61.3 million units in 2004. Although OE demand is tied to planned
vehicle production, parts suppliers also have the opportunity to grow through
increasing their product content per vehicle, by further penetrating business
with existing customers and by gaining new customers and markets. Companies with
global presence and advanced technology, engineering, manufacturing and support
capabilities, such as our company, are, we believe, well positioned to take
advantage of these opportunities.

Demand for aftermarket products is driven by the quality of OE parts, the
number of vehicles in operation, the average age of the vehicle fleet, vehicle
usage and the average useful life of vehicle parts. Although more vehicles are
on the road than ever before, the aftermarket has experienced weakness due to
improved quality of OE parts and increases in average useful lives of automotive
parts as a result of technological innovation. In addition, the decline from
1995 to 2003 of the number of vehicles in the six to ten year-old vehicle
segment (from 63.7 million to 62.1 million) -- when cars generally need
first-line replacement parts such as those offered by us -- is also driving
aftermarket softness. Suppliers are increasingly being required to deliver
innovative aftermarket products that upgrade the performance or safety of a
vehicle's original components to drive aftermarket demand.

INDUSTRY TRENDS

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

OUTSOURCING AND DEMAND FOR SYSTEMS AND MODULES

OE manufacturers are increasingly moving towards outsourcing automotive
parts and systems to simplify the vehicle assembly process, lower costs and
reduce vehicle development time. Outsourcing allows OE manufacturers to take
advantage of the lower cost structure of the automotive parts suppliers and to
benefit from multiple suppliers engaging in simultaneous development efforts.
Furthermore, development of advanced electronics has enabled formerly
independent vehicle components to become "interactive," leading to a shift in
demand from individual parts to fully integrated systems. As a result,

5

automotive parts suppliers offer OE manufacturers component products
individually, as well as in a variety of integrated forms such as modules and
systems:

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

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

This shift in demand towards fully integrated systems has created the role
of the Tier 1 systems integrator. These systems integrators will increasingly
have the responsibility to execute a number of activities, such as design,
product development, engineering, testing of component systems and purchasing
from Tier 2 suppliers. We are an established Tier 1 supplier with more than ten
years of product integration experience. We have modules or systems for 71
vehicle platforms in production worldwide and modules or systems for 17
additional platforms under development. For example, we supply ride control
modules for the DaimlerChrysler Caravan, the Nissan Pathfinder, the VW
Transporter and the Peugeot 1007 and the exhaust emission control system for the
Porsche Boxster, Nissan Xterra, Ford Transit, DaimlerChrysler DR Ram and Jaguar
XJ Type.

GLOBAL CONSOLIDATION OF OE CUSTOMERS

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

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

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

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

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

GLOBAL RATIONALIZATION OF OE VEHICLE PLATFORMS

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

6

investment costs for molds, dies and prototype development. Light vehicle
platforms of over one million units are expected to grow from 19 percent to 30
percent of global OE production from 2004 to 2009.

INCREASING TECHNOLOGICALLY SOPHISTICATED CONTENT

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

Automotive parts customers are increasingly demanding technological
innovation from suppliers to address more stringent emission and other
regulatory standards and to improve vehicle performance. To develop innovative
products, systems and modules, we have invested $76 million for 2004 and $67
million for both 2003 and 2002 into engineering, research and development and we
continuously seek to take advantage of our technology investments and brand
strength by extending our products into new markets and categories. For example,
we were the first supplier to develop and commercialize a diesel particulate
filter that can virtually eliminate carbon and hydrocarbon emissions with
minimal impact on engine performance. Now, we have expanded our competence in
diesel particulate filters and are winning business in North America on these
same applications. In addition, we recently began supplying Volvo with a
computerized electronic suspension system that we co-developed with Ohlins
Racing AB. As another example, in 2002 we extended our stability improvement
valve technology to Europe which is similar to our acceleration sensitive
damping technology used on our Monroe Reflex(R) premium aftermarket shock
originally launched in North America in 1999. Further, our customers reimburse
us for engineering, research, and development costs on some platforms when we
prepare prototypes and incur costs before platform awards. Our engineering
research and development expense for 2004, 2003, and 2002 has been reduced by
$46 million, $38 million, and $32 million, respectively, for these
reimbursements.

INCREASING ENVIRONMENTAL STANDARDS

Automotive parts suppliers and OE manufacturers are designing products and
developing materials to respond to increasingly stringent environmental
requirements, a growing diesel market, the demand for better fuel economy and
safety concerns. Government regulations adopted over the past decade require
substantial reductions in automobile tailpipe emission, longer warranties on
parts of an automobile's pollution control equipment and additional equipment to
control fuel vapor emission. Some of these regulations also mandate more
frequent emission and safety inspections for the existing fleet of vehicles.
Manufacturers have responded by focusing their efforts towards technological
development to minimize pollution. As a leading supplier of emission control
systems with strong technical capabilities, we believe we are well positioned to
benefit from more rigorous environmental standards. For example, we developed
the diesel particulate filter to meet stricter air quality regulations in
Europe. We also have development contracts with a European heavy duty truck
manufacturer for our combined particulate filter and De-NOx, which can reduce
particulate emissions by up to 90 percent and nitrogen oxide emissions by up to
70 percent. In our ride control product line, we have invested both in North
America and Europe in new water-based paint systems to replace older
solvent-based technology. These new water-based systems significantly reduce the
amount of VOC's (volatile organic compounds) that are evaporated from the paint
during the drying process.

EXTENDED PRODUCT LIFE OF AUTOMOTIVE PARTS; DECLINING VEHICLE FLEET AGE

The average useful life of automotive parts -- both OE and
replacement -- has been steadily increasing in recent years due to innovations
in products and technologies. The longer product lives allow vehicle owners to
replace parts of their vehicles less often. As a result, although more vehicles
are on the road than ever before, the aftermarket has experienced weakness. In
addition, the average age of the vehicle fleet on the road has been declining in
the last several years, further contributing to softness in the aftermarket.
Accordingly, a supplier's future viability in the aftermarket will depend, in
part, on its ability to reduce costs and leverage its advanced technology and
recognized brand names to maintain or achieve

7

additional sales. As a Tier 1 OE supplier, we believe we are well positioned to
leverage our products and technology into the aftermarket.

CHANGING AFTERMARKET DISTRIBUTION CHANNELS

From 1994 to 2004, the number of retail automotive parts stores increased
50 percent while the number of jobber stores declined more than 22 percent.
Major automotive aftermarket retailers, such as AutoZone and Advance Auto Parts,
are attempting to increase their commercial sales by selling directly to
automotive parts installers in addition to individual consumers. These
installers have historically purchased from their local warehouse distributors
and jobbers, who are our more traditional customers. This enables the retailers
to offer the option of a premium brand, which is often preferred by their
commercial customers, or a standard product, which is often preferred by their
retail customers. We believe we are well positioned to respond to this trend in
the aftermarket because of our focus on cost reduction and high-quality, premium
brands.

SUPPLIER CONSOLIDATION

Over the past few years, automotive suppliers have been consolidating in an
effort to become more global, have a broader, more integrated product offering
and gain scale economies in order to remain competitive amidst growing pricing
pressures and increased outsourcing demands from the OEMs. Industry forecasters
estimate that consolidation will drive the number of North American based
automotive parts suppliers from more than 10,000 in 2000 to around 5,000 in
2010. A supplier's viability in this consolidating market will depend, in part,
on its ability to maintain and increase operating efficiencies and provide
value-added services.

SAFETY

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

ANALYSIS OF REVENUES

The following table provides, for each of the years 2004 through 2002,
information relating to our net sales, by primary product lines and customer
categories:

8

BRANDS

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

CUSTOMERS

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

Worldwide we serve more than 30 different OE manufacturers, and our
products or systems are included on 6 of the top 10 passenger car models
produced in North America and Western Europe and all of the top 10 light truck
models produced in North America for 2004. During 2004, our OE customers
included:

9

NORTH AMERICA EUROPE ASIA
AM General BMW BMW
Caterpillar DaimlerChrysler Club Car
Club Car Fiat E-Z Go Golf Car
DaimlerChrysler Ford Fiat
E-Z Go Golf Car General Motors First Auto Works
Ford Nissan Ford
Freightliner Paccar General Motors
General Motors Porsche Isuzu
Harley-Davidson PSA Peugeot Citroen Jinbei Automobile Co.
Honda Renault Nissan
Isuzu Scania PSA Peugeot Citroen
Motor Coach Industries Toyota TATA Motors
Navistar Volkswagen Toyota
Nissan Volvo Truck TVS Motor Co.
Paccar Volkswagen
Toyota AUSTRALIA
Volkswagen Club Car
Volvo Truck Ford
General Motors
SOUTH AMERICA Mazda
DaimlerChrysler Mitsubishi
Fiat Navistar
Ford Toyota
General Motors
Mitsubishi
PSA Peugeot Citroen
Renault
Scania
Volkswagen

During 2004, our aftermarket customers were comprised of full-line and
specialty warehouse distributors, retailers, jobbers, installer chains and car
dealers. These customers included such wholesalers and retailers as National
Auto Parts Association (NAPA), Advance Auto Parts, Pep Boys and O'Reilly
Automotive in North America and Temot, Kwik-Fit Europe and Auto Distribution
International in Europe. We believe we have a balanced mix of aftermarket
customers, with our top 10 aftermarket customers accounting for 34 percent of
our total net aftermarket sales and only 8 percent of our total net sales for
2004.

General Motors accounted for approximately 18 percent, 19 percent, and 20
percent of our net sales in 2004, 2003, and 2002, respectively, Ford accounted
for approximately 12 percent, 14 percent and 13 percent of our net sales in
2004, 2003, and 2002, respectively, Volkswagen accounted for approximately 11
percent, 11 percent, and 10 percent of our net sales in 2004, 2003, and 2002,
respectively and DaimlerChrysler accounted for approximately 8 percent, 9
percent, and 10 percent of our net sales in 2004, 2003, and 2002, respectively.
No other customer accounted for more than 10 percent of our net sales for any of
those years.

COMPETITION

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

10

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

SEASONALITY

Our business is somewhat seasonal. OE manufacturers' production
requirements have historically been higher in the first two quarters of the year
as compared to the last two quarters. Production requirements tend to decrease
in the third quarter due to plant shutdowns for model changeovers. In addition,
we believe this seasonality is due, in part, to consumer demand for new vehicles
softening during the holiday season and as a result of the winter months in
North America and Europe. Also, the major North American OE manufacturers
generally close their production facilities for the last two weeks of the year.
Our aftermarket business also experiences seasonality. Demand for aftermarket
products increases during the spring as drivers prepare for the summer driving
season. Although seasonality does impact our business, actual results may vary
from the above trends due to timing of platform launches and other production
related events.

EMISSION CONTROL SYSTEMS

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

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

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

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

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

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

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

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

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

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

We supply our emission control offerings to over 26 vehicle-makers for use
on over 145 vehicle models, including 6 of the top 10 passenger cars produced in
North America and Western Europe and 6 of the top 10 light trucks produced in
North America in 2004.

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

11

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

The following table provides, for each of the years 2004 through 2002,
information relating to our sales of emission control products and systems for
certain geographic areas:

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

(a) See Note 11 to the consolidated financial statements included under Item 8
for information about our foreign and domestic operations.

RIDE CONTROL SYSTEMS

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

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

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

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

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

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

12

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

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

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

We supply our ride control offerings to over 30 vehicle-makers for use on
over 140 vehicle models, including 4 of the top 10 light truck models produced
in North America for 2004. We also supply OE ride control products and systems
to a range of heavy-duty and specialty vehicle manufacturers including Volvo
Truck, Scania, International Truck and Engine (Navistar), PACCAR and E-Z Go Golf
Car.

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

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

The following table provides, for each of the years 2004 through 2002,
information relating to our sales of ride control equipment for certain
geographic areas:

- ---------------
(a) See Note 11 to the consolidated financial statements included under Item 8
for information about our foreign and domestic operations.

SALES, MARKETING AND DISTRIBUTION

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

For OE sales, our sales and marketing team is an integrated group of
professionals, including skilled engineers and program managers that are
organized by customer and product type (e.g., ride control and emission
control). Our sales and marketing team provides the appropriate mix of
operational and technical

13

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

For aftermarket sales and marketing, in North America our sales force is
generally organized by customer and region and covers multiple product lines.
Our sales forces in Europe and South America and Asia Pacific are generally
organized by customer and cover both ride and emission control products. We sell
aftermarket products through five primary channels of distribution: (1) the
traditional three-step distribution system: full line warehouse distributors,
jobbers and installers; (2) the specialty two-step distribution system:
specialty warehouse distributors that carry only specified automotive product
groups and installers; (3) direct sales to retailers; (4) direct sales to
installer chains; and (5) direct sales to car dealers. Our aftermarket sales and
marketing representatives cover all levels of the distribution channel,
stimulating interest in our products and helping our products move through the
distribution system. Also, to generate demand for our products from end-users,
we run print and television advertisements and offer pricing promotions. We were
one of the first parts manufacturers to offer business-to-business services to
customers with TA-Direct, an on-line order entry and customer service tool. In
addition, we maintain detailed web sites for each of the Walker(R), Monroe(R),
Rancho(R) and DynoMax(R) brands and our heavy duty products.

MANUFACTURING AND ENGINEERING

We focus on achieving superior product quality at the lowest operating
costs possible and generally use state-of-the-art manufacturing processes to
achieve that goal. Our manufacturing strategy centers on a lean production
system designed to reduce overall costs -- especially indirect costs -- while
maintaining quality standards and reducing manufacturing cycle time. In
addition, we have implemented Six Sigma in our processes to minimize product
defects and improve operational efficiencies. We deploy new technology where it
makes sense to differentiate our processes from our competitors' or to achieve
balance in one-piece flow through production lines.

EMISSION CONTROL

Our consolidated businesses operate nine emission control manufacturing
facilities in the U.S. and 31 emission control manufacturing facilities outside
of the U.S. We operate five of these international facilities through joint
ventures in which we own a controlling interest. We also operate four additional
manufacturing facilities outside of the U.S. through four joint ventures in
which we hold a noncontrolling interest. We operate four emission control
engineering and technical facilities worldwide and share two other such
facilities with our ride control operations.

Within each of our emission control manufacturing facilities, operations
are organized by component (muffler, catalytic converter, pipe, resonator and
manifold). Our manufacturing systems incorporate cell-based designs, allowing
work-in-process to move through the operation with greater speed and
flexibility. We continue to invest in plant and equipment to stay on top of the
industry. For instance, in our Harrisonburg, Virginia, aftermarket manufacturing
facility, we have developed a completely automated production process that
handles all facets of pipe production from tube milling to pipe bending.

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

During the 1990's, we expanded our converter and emission system design,
development, test and manufacturing capabilities. Our engineering capabilities
now include advanced predictive design tools, advanced prototyping processes and
state-of-the-art testing equipment. This expanded technological capability makes
us a "full system" integrator, supplying complete emission control systems from
the manifold to the tailpipe, to provide full emission and noise control. It
also allows us to provide JIT delivery and, when feasible, sequence delivery of
emission control systems to meet customer production requirements. For 2003, we
introduced our new Tubular Integrated (catalytic) Converter ("TIC") to major
vehicle manufacturers in North America. The TIC shortens production time,
reduces manufacturing cost by up to 25 percent and reduces weight by up to 20
percent using a new cold-formed, weld-free production process.

RIDE CONTROL

Our consolidated businesses operate nine ride control manufacturing
facilities in the U.S. and 22 ride control manufacturing facilities outside the
U.S. We operate four of these international facilities through joint ventures in
which we own a controlling interest. We operate seven engineering and technical
facilities worldwide and share two other such facilities with Walker.

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

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

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

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

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

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

Conventional shock absorbers and struts generally compromise either ride
comfort or vehicle control. Our innovative grooved-tube, gas-charged shock
absorbers and struts provide both ride comfort and vehicle control, resulting in
improved handling, reduced vibration and a wider range of vehicle control. This
technology can be found in our premium quality Sensa-Trac(R) shock absorbers. In
late 1997, we further enhanced this technology by adding the SafeTech(TM) fluon
banded piston, which improves shock absorber performance and durability. In
1999, we introduced the Monroe Reflex(R) shock absorber, which incorporates our
Impact Sensor(TM) device. This technology permits the shock absorber to
automatically switch in milliseconds between firm and soft compression damping
when the vehicle encounters rough road conditions, thus maintaining better
tire-to-road contact and improving handling and safety. We recently began
supplying Volvo with an innovative computerized electronic suspension system,
which features dampers developed by Tenneco and electronic valves designed by
Ohlins Racing AB. The continuously

15

controlled electronic suspension ("CES") ride control system is featured on
Volvo's new S60R, V70R, and S80R (4C-2WD) passenger cars. In late 2004, we
announced that CES will be offered as an option on the Audi A6 and the A6 Avant
in the spring of 2005.

QUALITY CONTROL

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

We believe our commitment to quality control and sound management practices
and policies is demonstrated by our successful participation in the
International Standards Organization/Quality Management Systems certification
process ("ISO/TS"). ISO/TS certifications are semi-annual or annual audits that
certify that a company's facilities meet stringent quality and business systems
requirements. Without TS or ISO certification, we would not be able to supply
our products for the aftermarket or the OE market, respectively, either locally
or globally. Of those manufacturing facilities where we have determined that TS
certification is required to service our customers or would provide us with an
advantage in securing additional business, 74 percent have achieved TS
16949:2002 certification. We plan to complete the certification of the remaining
26 percent of these plants by year end 2005. Of those manufacturing facilities
where we have determined that ISO 9000 certification is required or would
provide us with an advantage in securing additional business, 95 percent have
achieved ISO 9000 certification and we are pursuing certification of the
remaining five percent.

BUSINESS STRATEGY

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

LEVERAGE GLOBAL ENGINEERING AND ADVANCED SYSTEM CAPABILITIES

We continue to focus on the development of highly engineered systems and
complex assemblies and modules, which are designed to provide value-added
solutions to customers and generally increase vehicle content and carry higher
profit margins than individualized components. We have developed integrated,
electronically linked global engineering and manufacturing facilities, which we
believe help us to maintain our presence on top-selling vehicles. We have more
than 10 years of experience in integrating systems and modules. In addition, our
JIT and in-line sequencing manufacturing and distribution capabilities have
enabled us to better respond to our customers needs. We operate 23 JIT
facilities worldwide.

"OWN" THE PRODUCT LIFE CYCLE

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

COMMERCIALIZE INNOVATIVE, VALUE-ADDED PRODUCTS

To differentiate our offerings from those of our competitors, we focus on
commercializing innovative, value-added products, both on our own and through
strategic alliances, with emphasis on highly engineered systems and complex
assemblies and modules. We seek to continually identify and target new,
fast-growing niche markets and commercialize our new technologies for these
markets, as well as our existing markets.

16

For example, our exclusive Kinetic(R) Dynamic Suspension System, a version of
the Kinetic(R) Reversible Function Stabilizer Technology, is featured as an
option on the 2004 Lexus GX470 sports utility vehicle through a licensing
arrangement between us and Lexus.

EXPAND OUR AFTERMARKET BUSINESS

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

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

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

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

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

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

- Walker Perfection(TM) catalytic converters;

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

- DNX(TM) sport tunes cars with performance exhaust and adjustable
suspension systems; and

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

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

Our plans to expand our aftermarket business are focused on four key
marketing initiatives: new product introductions; building customer and industry
awareness of the maintenance, performance and other benefits of ensuring that a
vehicle's ride control systems are in good working condition; adding coverage to
current brands; and extending our brands and aftermarket penetration to new
product segments. For example, we are extending our line of car appearance
products- which we introduced in 2004 under the DuPont(TM) brand pursuant to a
development, manufacturing and sales agreement with DuPont- to include
performance chemicals, fuel system cleaners and engine treatment products, and
will introduce these products in 2005. In addition, Monroe(R) Quick Strut was
test marketed in 2004 and introduced as a new product in early 2005. Quick Strut
is a complete assembly that includes a Monroe Sensa-Trac(R) strut, spring, strut
mount bearing plate, upper and lower spring isolators and upper spring seat. We
launched a similar Monroe(R) coil springs product in Europe in the fourth
quarter of 2004. We also launched the Monroe(R) 50,000 mile replacement campaign
to help increase customer and industry awareness. The campaign is being
advertised on billboards throughout the United States and Canada stating
Monroe(R) recommends replacing your shocks and struts at 50,000 miles. We will
continue to carry that message to consumers and trade in 2005, again utilizing
billboards and ads in both trade and consumer magazines. In Europe, we launched
our DNX(TM) performance product line during the fourth quarter of 2004. Customer
shipments are expected to begin in the first quarter of 2005. We are exploring a
number of opportunities to extend our existing well-known brands, such as
Monroe(R), and our product line generally, to aftermarket product segments not
previously served. For example, in 2004 we entered into a licensee agreement
with Canadian Tire under which Canadian Tire is offering brake products under
the Monroe(R) Brakes brand. This program has led to increased sales of our
Monroe(R) shock absorbers. We believe that, when combined with our expansive
customer service network, these initiatives will yield incremental aftermarket
revenues.

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ACHIEVE GREATER CONTENT PER VEHICLE

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

EXECUTE FOCUSED TRANSACTIONS

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

We have developed a strategic alliance with Futaba, a leading exhaust
manufacturer in Japan that also includes a joint venture operation in Burnley,
England. We also have an alliance with Tokico, a leading Japanese ride control
manufacturer. These alliances help us grow our business with Japan-based OEMs by
leveraging the geographical presence of each partner to serve Japan-based global
platforms. We have established a presence in Thailand through a joint venture
that supplies exhaust components for GMIsuzu. Our joint venture operations in
Dalian and Shanghai, China have established us as one of the leading exhaust
suppliers in the rapidly growing Chinese automotive market. We expanded our
Chinese presence and, in early 2004, formed two new joint ventures in China. The
first was with Eberspacher International GmbH to supply emission control
products and systems for luxury cars produced by BMW and Audi in China, and the
second was with Chengdu Lingchuan Mechanical Plant to supply emission control
products and systems for various Ford platforms produced in China.

In February 2005, we acquired substantially all the assets of Gabilan
Manufacturing Inc., a manufacturer of exhaust systems for Harley-Davidson
Motorcycles. The acquisition, our first in over five years, represents an
example of our strategy to grow through niche opportunities.

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

GROWTH IN ADJACENT MARKETS

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

18

IMPROVE EFFICIENCY AND REDUCE COSTS

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

- We are successfully completing a workforce reduction which will eliminate
up to 250 salaried positions worldwide. The majority of the eliminated
positions are at the middle and senior management levels. As of December
31, 2004, we have incurred $21 million in severance costs. We anticipate
incurring the remaining $3 million to $5 million of costs associated with
this action by April of 2005. Of the total $21 million in severance costs
incurred to date, $5 million represents cash payments with the remainder
accrued in other short-term liabilities.

- We have successfully completed Project Genesis, our primary initiative
for improving global manufacturing and distribution efficiency. Since
launching Project Genesis in December 2001, we have reduced excess
manufacturing capacity and costs. We have closed eight facilities and
improved workflow at 20 plants worldwide.

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

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

- We have adopted the Business Operating System ("BOS"), a disciplined
system to promote and manage continuous improvement. BOS focuses on the
assembly and analysis of data for quick and effective problem resolution
to create more efficient and profitable operations.

- We are using Economic Value Added ("EVA(R)(1)"), a financial tool that
more effectively measures how efficiently we employ our capital
resources, and have linked the successful application of this management
discipline to our incentive compensation program.

In addition, we continue to work to reduce costs by standardizing products
and processes throughout our operations; further developing our global supply
chain management capabilities; improving our information technology; increasing
efficiency through employee training; investing in more efficient machinery; and
enhancing the global coordination of costing and quoting procedures, along with
other steps to reduce administrative and operational costs and improve cost
management.

REDUCE BORROWINGS AND IMPROVE CASH FLOW

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

ENVIRONMENTAL MATTERS

We estimate that we and our subsidiaries will make capital expenditures for
environmental matters of approximately $7 million in 2005 and approximately $2
million in 2006.

For additional information regarding environmental matters, see Item 3,
"Legal Proceedings," Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Environmental and Other Matters," and
Note 12 to the financial statements of Tenneco Automotive Inc. and Consolidated
Subsidiaries included under Item 8.

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

(1)EVA is a registered trademark of Stern Stewart & Co.
19

EMPLOYEES

As of December 31, 2004, we had approximately 18,400 employees,
approximately 55 percent are covered by collective bargaining agreements.
Approximately 25 percent of our employees that are covered by collective
bargaining agreements are also governed by European works councils. Several of
our existing labor agreements in the United States and Mexico are scheduled for
renegotiation in 2005, in addition to the seven agreements expiring in Europe
covering plants in the Czech Republic, France, Spain, Belgium, Portugal, and the
United Kingdom.

OTHER

The principal raw material utilized by us is steel. We obtain steel from a
number of sources pursuant to various contractual and other arrangements. We
believe that an adequate supply of steel can presently be obtained from a number
of different domestic and foreign suppliers. However, Tenneco Automotive is
actively addressing higher steels costs which are expected to continue through
2005. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Outlook" included in Item 7.

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

ITEM 2. PROPERTIES.

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

Walker's consolidated businesses operate nine manufacturing facilities in
the U.S. and 31 manufacturing facilities outside of the U.S., operate four
engineering and technical facilities worldwide and share two other such
facilities with Monroe. Fourteen of these manufacturing plants are JIT
facilities. Walker operates four additional manufacturing facilities outside of
the U.S. through four non-controlled joint ventures, three of which are JIT
facilities.

Monroe's consolidated businesses operate nine manufacturing facilities in
the U.S. and 22 manufacturing facilities outside the U.S., operate seven
engineering and technical facilities worldwide and share two other such
facilities with Walker. Six of these manufacturing plants are JIT facilities.

The above-described manufacturing locations outside of the U.S. are located
in Canada, Mexico, Belgium, Spain, the United Kingdom, the Czech Republic, South
Africa, France, Sweden, Germany, Poland, Portugal, Argentina, Brazil, Australia,
New Zealand, China, Thailand, Russia and India. We also have sales offices
located in Australia, Argentina, Brazil, Canada, India, Italy, Japan, Poland,
Russia, and Singapore. In 2005, we have plans to add a sales office in China.

We own approximately one half of the properties described above and lease
the other half. We hold 11 of the above-described international manufacturing
facilities through nine joint ventures in which we own a controlling interest.
In addition, we hold four others through four joint ventures in which we own a
non-controlling interest. We also have distribution facilities at our
manufacturing sites and at a few offsite locations, substantially all of which
we lease.

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

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

ITEM 3. LEGAL PROCEEDINGS.

As of December 31, 2004, we are designated as a potentially responsible
party in one Superfund site. We have estimated our share of the remediation
costs for this site to be less than $1 million in the

20

aggregate. In addition to the Superfund site, we may have the obligation to
remediate current or former facilities, and we estimate our share of remediation
costs at these facilities to be approximately $11 million. For the Superfund
site and the current and former facilities, we have established reserves that we
believe are adequate for these costs. Although we believe our estimates of
remediation costs are reasonable and are based on the latest available
information, the cleanup costs are estimates and are subject to revision as more
information becomes available about the extent of remediation required. At some
sites, we expect that other parties will contribute to the remediation costs. In
addition, at the Superfund site, the Comprehensive Environmental Response,
Compensation and Liability Act provides that our liability could be joint and
several, meaning that we could be required to pay in excess of our share of
remediation costs. Our understanding of the financial strength of other
potentially responsible parties at the Superfund site, and of other liable
parties at our current and former facilities, has been considered, where
appropriate, in our determination of our estimated liability.

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

From time to time we are subject to product warranty claims whereby we are
required to bear costs of repair or replacement of certain of our products.
Warranty claims may range from individual customer claims to full recalls of all
products in the field. See Note 12 to our consolidated financial statements
included under Item 8 for information regarding our warranty reserves.

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

21

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

No matters were submitted to the vote of security holders during the fourth
quarter of 2004.

ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT.

The following provides information concerning the persons who serve as our
executive officers as of March 1, 2005. For periods prior to November 4, 1999,
the date of the 1999 Pactiv spin-off, references to service to "us" or "our
company" reflect services to Old Tenneco's automotive operations.

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

TIMOTHY R. DONOVAN -- Mr. Donovan was named Managing Director of our
International Group in May 2001 with responsibility for all operations in Asia
and South America, as well as our Japanese OE business worldwide. In October
2004, he was named Managing Director -- Asia Pacific, with responsibility for
Australia, Asia, New Zealand and our Japanese OE business. He was named Senior
Vice President and General Counsel of our company in August 1999. He was
promoted to Executive Vice President in December 2001. Mr. Donovan also is in
charge of our worldwide Environmental, Health and Safety Program. Prior to
joining us, Mr. Donovan was a partner in the law firm of Jenner & Block from
1989, and at the time of his resignation in September 1999 was serving as the
Chairman of its Corporate and Securities Department and as a member of its
Executive Committee. He is also a director of John B. Sanfilippo & Son, Inc.,
where he is a member of its Compensation Committee and is the Chairman of its
Audit Committee. On March 9, 2004, Mr. Donovan was elected to our company's
Board of Directors.

HARI N. NAIR -- Mr. Nair was named our Executive Vice President and
Managing Director -- Europe effective June 2001. Previously he was Senior Vice
President and Managing Director -- International. Prior to December 2000, Mr.
Nair was the Vice President and Managing Director -- Emerging Markets.

22

Previously, Mr. Nair was the Managing Director for Tenneco Automotive Asia,
based in Singapore and responsible for all operations and development projects
in Asia. He began his career with the former Tenneco Inc. in 1987, holding
various positions in strategic planning, marketing, business development,
quality and finance. Prior to joining Tenneco, Mr. Nair was a senior financial
analyst at General Motors Corp. focusing on European operations.

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

BRENT J. BAUER -- Mr. Bauer joined the former Tenneco Automotive in August
1996 as a Plant Manager and was named Vice President and General
Manager -- European Original Equipment Emission Control in September 1999. Mr.
Bauer was named Vice President and General Manager -- European and North
American Original Equipment Emission Control in July 2001. Currently, Mr. Bauer
serves as the Senior Vice President and General Manager -- North American
Original Equipment Emission Control. Prior to joining Tenneco, he was employed
at AeroquipVickers Corporation for 10 years in positions of increasing
responsibility serving most recently as Director of Operations.

KENNETH R. TRAMMELL -- Mr. Trammell was named our Senior Vice President and
Chief Financial Officer in September 2003, having served as our Vice President
and Controller from September 1999. From April 1997 to November 1999 he served
as Corporate Controller of Tenneco Inc. He joined Tenneco Inc. in May 1996 as
Assistant Controller. Before joining Tenneco Inc., Mr. Trammell spent 12 years
with the international public accounting firm of Arthur Andersen LLP, last
serving as a senior manager.

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

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

NEAL YANOS -- Mr. Yanos was named our Senior Vice President and General
Manager -- North American Original Equipment Ride Control and North American
Aftermarket on May 8, 2003. He joined our Monroe ride control division as a
process engineer in 1988 and since that time has served in a broad range of
assignments including product engineering, strategic planning, business
development, finance, program management and marketing, including Director of
our North American original equipment GM/VW business unit and most recently as
our Vice President and General Manager -- North American Original Equipment Ride
Control from December 2000. Before joining our company, Mr. Yanos was employed
in various engineering positions by Sheller Globe Inc. (now part of Lear
Corporation) from 1985 to 1988.

23

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

24

PART II

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

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

As of February 22, 2005, there were approximately 34,355 holders of record
of our common stock, including brokers and other nominees.

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

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

25

ITEM 6. SELECTED FINANCIAL DATA.

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA

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

NOTE: Our financial statements for the three years ended December 31, 2004,
which are discussed in the following notes, are included in this Form 10-K under
Item 8.

(a) For a discussion of the significant items affecting comparability of the
financial information for the years ended 2004, 2003, and 2002, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." We have reduced revenues for 2000 by $21 million, to reflect
the reclassification of certain sales incentives that were previously shown
in selling, general and administrative expense. For all years presented, we
have also reclassed tax related contingency reserves between deferred tax
liability and other noncurrent liabilities. This reclass resulted in an
additional reclass between noncurrent liabilities and noncurrent assets for
reporting purposes. In October 2004, we announced a change in the structure
of our organization which changed our reportable segments. The European
segment now includes South American operations. While this has no impact on
our consolidated results, it changes our segment results.

(b) In accordance with Statement of Financial Accounting Standards ("SFAS") No.
145, the losses on prepayments of debt in 2000 of $2 million were
reclassified to interest expense.

(c) In 2002, we adopted SFAS No. 142 which changed the accounting for purchased
goodwill from an amortization method to an impairment-only approach. You
should also read the notes to the financial statements of Tenneco Automotive
Inc. and Consolidated Subsidiaries, appearing in Item 8, for additional
information.

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

27

always be comparable to similarly titled measures reported by other companies
due to differences in the components of the calculation. EBITDA is derived from
the statements of income (loss) as follows:

(e) For purposes of computing this ratio, earnings generally consist of income
before income taxes and fixed charges excluding capitalized interest. Fixed
charges consist of interest expense, the portion of rental expense
considered representative of the interest factor and capitalized interest.
For the years ended December 31, 2004, 2001 and 2000 earnings were
insufficient by $9 million, $80 million and $76 million, respectively, to
cover fixed charges. See Exhibit 12 to this Form 10-K for the calculation of
this ratio.

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

28

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

As you read the following review of our financial condition and results of
operations, you should also read our financial statements and related notes
beginning on page 65.

EXECUTIVE SUMMARY

We are one of the world's leading manufacturers of automotive emission
control and ride control products and systems. We serve both original equipment
vehicle manufacturers and the repair and replacement markets, or aftermarket,
globally through leading brands, including Monroe(R), Rancho(R), Clevite(R)
Elastomers and Fric Rot(TM) ride control products and Walker(R), Fonos(TM), and
Gillet(TM) emission control products. Worldwide we serve more than 30 different
original equipment manufacturers, and our products or systems are included on
six of the top 10 passenger car models produced in North American and Western
Europe and all of the top 10 light truck models produced in North America for
2004. During 2004, our aftermarket customers were comprised of full-line and
specialty warehouse distributors, retailers, jobbers, installer chains and car
dealers. We operate more than 70 manufacturing facilities worldwide and employ
more than 18,400 people to service our customer's demands.

Factors that are critical to our success include new business awards,
managing our overall global manufacturing footprint to ensure proper placement
and workforce levels in line with business needs, maintaining competitive wages
and benefits, maximizing efficiencies in manufacturing processes, fixing or
eliminating unprofitable businesses and reducing overall costs. In addition, our
ability to adapt to key industry trends, such as the consolidation of OE
customers, increasing technologically sophisticated content, changing
aftermarket distribution channels, increasing environmental standards and
extended product life of automotive parts, also plays a critical role in our
success. Other factors that are critical to our success include adjusting to
environmental and economic challenges such as increases in the cost of raw
materials and our ability to successfully reduce the impact of any such cost
increases through material substitutions, cost reduction initiatives and other
methods.

We have a substantial amount of indebtedness, with total debt, net of cash
balances, of $1.206 billion as of December 31, 2004. Our ability to generate
cash -- both to fund operations and service our debt -- is also a significant
area of focus for our company. See "Liquidity and Capital Resources" below for
further discussion of cash flows.

Total revenues for 2004 were more than $4.2 billion, an 11.9 percent
increase over 2003. Higher OE volumes combined with favorable platform mix and
strengthening currencies drove the majority of this increase. Gross margin for
2004 was 20.0 percent of revenues compared to 20.5 percent of revenues for 2003.
Strong growth in the global OE business outpaced the improvement in the higher
gross margin aftermarket. This shift in business mix coupled with increasing
steel costs and restructuring activities more than offset the benefits being
achieved through Lean Manufacturing, Six Sigma and ongoing restructuring
initiatives. We reported selling, general, administrative and engineering
expenses for 2004 of 11.7 percent of revenues, as compared to 11.4 percent of
revenues for 2003. This increase was driven by the impact of higher revenues
being more than offset by higher aftermarket new-customer changeover costs,
restructuring and costs we paid in 2004 for stock appreciation rights granted to
a consultant in 2000 for assisting us in implementing a compensation program
based on Economic Value Added. Earnings before interest expense, income taxes
and minority interest ("EBIT") was $171 million for 2004, down from the $176
million reported in 2003. The decrease was largely driven by stronger operating
performance being more than offset by increasing steel prices and charges for
restructuring and restructuring related activities, new aftermarket customer
changeover costs and the consulting fees indexed to the stock price. Earnings
per diluted share were $0.31 in 2004, compared to $0.65 per diluted share in
2003. See below for a more detailed discussion of operating performances for the
last three years.

In October 2004, we announced a change in the structure of our organization
that impacts our reportable segments. The European segment now includes South
American operations. In addition, Asia Pacific is a new reportable segment that
includes Asian and Australian operations. The change in segment
29

reporting has been reflected in this management discussion and analysis for
years ended December 31, 2004 and prior.

In February 2005, we announced the acquisition of substantially all the
exhaust assets of Gabilan Manufacturing, Inc., a privately held company that has
developed and manufactured motorcycle exhaust systems for Harley-Davidson
motorcycles since 1978. The company also produces aftermarket muffler kits for
Harley-Davidson. We purchased Gabilan's assets for $10 million in cash and
expect the acquisition to be accretive within the first year. Gabilan generated
approximately $38 million in revenue in 2004.

YEARS 2004 AND 2003

NET SALES AND OPERATING REVENUES

The following tables reflect our revenues for the years of 2004 and 2003.
We present these reconciliations of revenues in order to reflect the trend in
our sales in various product lines and geographic regions separately from the
effects of doing business in currencies other than the U.S. dollar.
Additionally, "pass-through" catalytic converter sales include precious metals
pricing, which may be volatile. These "pass-through" catalytic converter sales
occur when, at the direction of our OE customers, we purchase catalytic
converters or components from suppliers, use them in our manufacturing process,
and sell them as part of the completed system. While our original equipment
customers assume the risk of this volatility, it impacts our reported revenue.
Excluding pass-through catalytic converter sales removes this impact. We have
not reflected any currency impact in the 2003 table since this is the base
period for measuring the effects of currency during 2004 on our operations. We
use this information to analyze the trend in our revenues before these factors.
We believe investors find this information useful in understanding period to
period comparisons in our revenues.

30

Revenues from our North American operations increased $79 million in 2004
compared to the same period last year reflecting higher sales from both OE and
aftermarket businesses. Total North American OE revenues increased three percent
to $1,456 million in 2004. OE emission control revenues were up three percent to
$1,001 million from $972 million in the prior year. Pass-through emission
control sales increased five percent to $320 million in 2004. Adjusted for
pass-through sales and currency, OE emission control sales were up one percent
from the prior year. OE ride control revenues for 2004 increased three percent
from the prior year driven primarily by higher sales to heavy-duty vehicle
manufacturers. Total OE revenues, excluding pass-through sales and currency,
increased two percent in 2004, while North American light vehicle production
decreased approximately one percent from a year ago. We experienced this
improvement despite the build rate decline primarily due to new product launches
and our strong position on top-selling platforms with General Motors, Ford,
DaimlerChrysler, Toyota, Honda and Nissan, as well as the higher heavy-duty
volumes. Aftermarket revenues for North America were $503 million in 2004,
representing an increase of eight percent compared to the same period in the
prior year. Aftermarket ride control revenues increased $39 million or 13
percent in 2004, primarily due to orders from new

32

customers, higher sales of premium priced products and, to a lesser degree,
sales of our DuPont(TM)-branded car care appearance products launched earlier in
2004. For the last several years, revenues in the aftermarket emission control
business have been declining due to the OE's use of stainless steel, which
reduces aftermarket replacement rates. Aftermarket emission control revenues
declined one percent from 2003 to 2004 compared to a nine percent decline from
2002 to 2003, reflecting sales stabilization in this business.

Our European and South American segment's revenues increased $311 million
or 20 percent in 2004 compared to last year. Total Europe OE revenues were
$1,361 million, up 24 percent from last year. OE emission control revenues
increased 21 percent to $1,005 million from $832 million in the prior year.
Excluding a $58 million increase in pass-through sales and a $76 million
increase due to strengthening currency, OE emission control revenues increased
seven percent over 2003. This increase was greater than the change in European
production, estimated to have increased about one percent from prior year
levels. Our increase was greater than the market as a result of strong volumes
on existing platforms as well as the ramp up of new product launches from BMW,
PSA, Porsche and General Motors. OE ride control revenues increased by $91
million in 2004, up 34 percent from $265 million a year ago. Excluding a $33
million benefit from currency appreciation, OE ride control revenues increased
22 percent. We experienced this revenue increase despite the relatively flat
European build rate due to stronger sales on new and existing platforms with
Volkswagen, Ford and Renault. European aftermarket sales were $359 million in
2004 compared to $346 million last year. Excluding $28 million attributable to
currency appreciation, European aftermarket revenues declined four percent in
2004 compared to last year. Ride control aftermarket revenues, excluding the
impact of currency, were down eight percent compared to the prior year,
reflecting heightened competition, a softer market environment in Spain, and
weaker exports worldwide due to the strengthening of the euro. Aftermarket
emission control revenues were down one percent from prior year excluding the
benefits of currency. New customers and market share gains helped to partially
offset significant market declines relating to now standard use of longer
lasting stainless steel by OE manufacturers. South American revenues, excluding
the benefits of currency appreciation, were up 25 percent to $149 million
compared to last year. Higher OE volumes and pass-through sales as well as
improved product mix and pricing drove this increase.

Revenues from our Asia Pacific segment, which includes Australia and Asia,
increased $57 million to $381 million in 2004, as compared to $324 million in
the prior year. Excluding $1 million from currency appreciation, higher OE
volumes drove increased revenues of $14 million at our Asian operations in 2004
compared to last year. In Australia, strong OE volumes and strengthening
currency increased revenues in 2004 by 26 percent. Excluding the impact of
currency and pass-through sales, Australian revenues increased 12 percent.

EBIT

33

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

EBIT for North American operations decreased to $130 million in 2004 from
$131 million one year ago. Higher OE ride and emission control volumes increased
EBIT by $11 million and $8 million respectively. These increases were more than
offset by higher material costs of $16 million, price concessions and higher
manufacturing and selling, general and administrative costs. Higher North
American aftermarket ride control volumes increased EBIT by $23 million with
price and mix improvements adding another $4 million to EBIT. These increases
were partially offset by higher material costs of $4 million and higher selling,
general and administrative costs including changeover, promotion and advertising
expenses. Included in North America's 2004 EBIT were $11 million in
restructuring and restructuring-related expenses, $8 million in changeover costs
and $2 million in consulting fees indexed to the stock price. Included in 2003's
EBIT were $4 million in restructuring and restructuring-related expenses.

Our European and South American segment's EBIT was $22 million for 2004,
down $1 million from $23 million in 2003. Higher European OE volumes from both
product lines contributed $18 million to EBIT during 2004. Increased
manufacturing efficiencies and currency appreciation added $7 million and $5
million, respectively to EBIT. These increases were offset by material cost
increases of $3 million, price concessions, and higher selling, general and
administration costs. Lower Europe aftermarket volumes reduced EBIT by $9
million, but were partially offset by customer pricing actions. In South America
favorable volume and pricing actions added $8 million to EBIT. These increases
in EBIT were partially offset by higher material costs of $2 million and higher
selling, general and administration costs. Included in 2004's EBIT were $26
million in restructuring and restructuring-related expenses and $1 million in
consulting fees indexed to the stock price. For the same period last year, EBIT
included $4 million in restructuring-related expenses.

EBIT for our Asia Pacific segment, which includes Asia and Australia,
decreased $3 million to $19 million in 2004 compared to $22 million one year
ago. Higher OE volumes provided $5 million of additional EBIT in 2004 compared
to prior year. Additionally, favorable currency exchange rates in Australia
increased EBIT by $3 million. These increases were more than offset by price
concessions, restructuring and higher selling, general and administration costs.
Included in Asia Pacific's 2004 EBIT were $3 million in restructuring and
restructuring-related expenses and $1 million in consulting fees indexed to the
stock price.

34

EBIT AS A PERCENTAGE OF REVENUE

In North America, EBIT as a percentage of revenue for 2004 remained at
prior year levels. Higher OE and aftermarket volumes were offset by higher
material, restructuring and selling, general and administrative costs. In Europe
and South America, EBIT margins for 2004 were also unchanged from the same
period last year. OE volume increases and manufacturing efficiencies were offset
by higher material, restructuring and selling, general and administration costs.
EBIT as a percentage of revenue for our Asia Pacific operations decreased two
percent from the prior year. Higher OE volumes and currency appreciation were
more than offset by higher price concessions, restructuring and selling, general
and administration costs.

RESTRUCTURING AND OTHER CHARGES

Over the past several years we have adopted plans to restructure portions
of our operations. These plans were approved by the Board of Directors and were
designed to reduce operational and administrative overhead costs throughout the
business. Prior to the change in accounting required for exit or disposal
activities, we recorded charges to income related to these plans for costs that
do not benefit future activities in the period in which the plans were finalized
and approved, while actions necessary to affect these restructuring plans
occurred over future periods in accordance with established plans.

In the fourth quarter of 2001, our Board of Directors approved a
restructuring plan, a project known as Project Genesis, designed to lower our
fixed costs, improve efficiency and utilization, and better optimize our global
footprint. Project Genesis involved closing eight facilities, improving the
process flow and efficiency through value mapping and plant arrangement at 20
facilities, relocating production among facilities, and centralizing some
functional areas. The total of all these restructuring and other costs recorded
in the fourth quarter of 2001 was $32 million before tax, $31 million after tax,
or $0.81 per diluted common share. We eliminated 974 positions in connection
with Project Genesis. Additionally, we executed this plan more efficiently than
originally anticipated and as a result in the fourth quarter of 2002 reduced our
reserves related to this restructuring activity by $6 million, which was
recorded in cost of sales. In the fourth quarter of 2003, we reclassified $2
million of severance reserve to the asset impairment reserve. This
reclassification became necessary as actual asset impairments along with the
sale of our closed facilities were different than the original estimates. We
completed the remaining restructuring activities under Project Genesis as of the
end of 2004. Since Project Genesis was announced, we have undertaken a number of
related projects designed to restructure our operations, described below.

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

In October of 2003, we announced the closing of an emission control
manufacturing facility in Birmingham, U.K. Approximately 130 employees were
eligible for severance benefits in accordance with union contracts and U.K.
legal requirements. We incurred approximately $3 million in costs related to
this action in 2004. This action is in addition to the plant closings announced
in Project Genesis in the fourth quarter of 2001.

35

In October 2004, we announced a plan to eliminate 250 salaried positions
through selected layoffs and an elective early retirement program. The majority
of the layoffs are at the middle and senior management level. We expect to incur
charges of approximately $24 to $26 million related to these reductions. As of
December 31, 2004, we have incurred $21 million in severance costs. Of this
total, $6 million was recorded in cost of sales and $15 million was recorded in
selling, general and administrative. We anticipate incurring the remaining costs
by April of 2005. Of the total $21 million in severance costs incurred to date,
$5 million represents cash payments with the remainder accrued in other
short-term liabilities. We expect to generate savings of approximately $20
million annually from this initiative.

Including the above costs, we incurred $40 million in restructuring and
restructuring-related costs in 2004. Of this total, $18 million related to the
continuation of the optimization of our manufacturing footprint that was started
with Project Genesis in 2001.

Including the costs incurred in 2002 and 2003 of $19 million, we have
incurred a total of $59 million for activities related to our restructuring
actions initiated in prior periods that could not be accrued as part of the
restructuring charges for these actions.

We have generated about $31 million of annual savings from Project Genesis.
Approximately $7 million of savings was related to closing the eight facilities,
approximately $16 million of savings was related to value mapping and plant
arrangement and approximately $8 million of savings was related to relocating
production among facilities and centralizing some functional areas. There have
been no significant deviations from planned savings. All actions for Project
Genesis have been completed.

Under the terms of our amended and restated senior credit agreement that
took effect on December 12, 2003, we are allowed to exclude up to $60 million of
cash charges and expenses, before taxes, related to cost reduction initiatives
over the 2002 to 2006 time period from the calculation of the financial covenant
ratios we are required to maintain under our senior credit agreement. As of
December 31, 2004, we have excluded $59 million of the $60 million available
under the terms of the senior credit facility. In addition to the announced
actions, we will continue to evaluate additional opportunities to initiate
actions that will reduce our costs through implementing the most appropriate and
efficient logistics, distribution and manufacturing footprint for the future.
There can be no assurances, however, that we will undertake additional
restructuring actions. Actions that we take, if any, will require the approval
of our Board of Directors, or its authorized committee, and if the costs of the
plans exceed the amount previously approved by our senior lenders, could require
approval by our senior lenders. We plan to conduct any workforce reductions that
result in compliance with all legal and contractual requirements including
obligations to consult with workers' councils, union representatives and others.

In February of 2005, we amended our senior credit facility. As amended, we
are allowed to exclude up to $60 million of cash charges and expenses, before
taxes, related to restructuring initiatives occurring after February 2005 from
the calculation of the financial covenant ratios required under our senior
credit facility.

INTEREST EXPENSE, NET OF INTEREST CAPITALIZED

We reported interest expense of $179 million in 2004 compared to $149
million in 2003. Interest expense for 2004 includes $42 million related to the
refinancing of our $500 million 11 5/8 percent senior subordinated notes due
2009. We accomplished this refinancing by issuing new 8 5/8 percent senior
subordinated notes due 2014 in November and using the net proceeds of that
issuance, together with cash on hand, to redeem our 11 5/8 percent notes. The
11 5/8 percent notes were called for redemption in November and the redemption
was completed in December. Included in the total is a write-off of $8 million in
debt issuance costs; a premium of $29 million for redeeming the bonds prior to
their maturity date, and $5 million in overlapping interest expenses during the
time between the issuance of the 8 5/8 percent notes and the final redemption of
the 11 5/8 percent notes. Last year's interest expense includes $12 million for
the write-off of senior debt issuance costs that were deferred on the senior
debt that we partially paid with the proceeds of our $350 million bond offering
in June of 2003 and fully refinanced in December of 2003. See more detailed
explanations on our debt structure, including our issuance of
36

$500 million of 8 5/8 percent senior subordinated notes due 2014 in November
2004, our issuance of $350 million of 10 1/4 percent senior secured notes due
2013 in June 2003, our issuance of $125 million of 10 1/4 percent senior secured
notes due 2013 in December 2003 and our refinancing of our senior credit
facility in December 2003 and their anticipated impact on our interest expense,
in "Liquidity and Capital Resources -- Capitalization" later in this
Management's Discussion and Analysis.

In April 2004, we entered into three separate fixed-to-floating interest
rate swaps with two separate financial institutions. These agreements swapped an
aggregate of $150 million of fixed interest rate debt at a per annum rate of
10 1/4 percent to floating interest rate debt at a per annum rate of LIBOR plus
a spread of 5.68 percent. Each agreement requires semi-annual settlements
through July 15, 2013. The LIBOR in effect for these swaps during the course of
2004 resulted in lower interest expense of approximately $3 million for the
year. The LIBOR rate as of December 31, 2004 as determined under these
agreements is 1.86 percent. This rate remained in effect until January 15, 2005
when it increased to 2.89 percent. Based upon the LIBOR of 2.89 percent which
was in effect as of January 15, 2005 under these agreements (and remains in
effect until July 15, 2005), these swaps would reduce our 2005 annual interest
expense by approximately $2 million. These swaps qualify as fair value hedges in
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and as such are recorded on the balance sheet at market value with
an offset to the underlying hedged item, which is long term debt. As of December
31, 2004, the fair value of the interest rate swaps was a liability of
approximately $1 million, which has been recorded as a decrease to long term
debt and an increase to other long term liabilities.

INCOME TAXES

Income taxes were a benefit of $25 million in 2004, compared to a benefit
of $6 million in 2003. Included in 2004 were benefits of $21 million, including
book to return adjustments, settlements of prior year tax issues and benefits
related to previous tax losses in foreign operations. Due to efforts to improve
overseas operations, we can now recognize the benefits of these previous tax
losses in foreign operations, because it is more likely than not that we will be
able to utilize them to offset future cash tax payments. Included in 2003 were
benefits of $17 million, including book to return adjustments, settlements of
prior year tax issues on a more favorable basis than originally anticipated and
a foreign tax adjustment. The effective tax rate for 2004 including the $21
million benefit was 313 percent. Excluding the $21 million benefit our effective
tax rate was 58 percent. The effective tax rate for 2003 including the $17
million benefit was a negative 21 percent. Excluding the $17 million benefit our
effective tax rate was 37 percent.

EARNINGS PER SHARE

We reported earnings per diluted common share of $0.31 for 2004, compared
to $0.65 per diluted share for 2003. Included in the results for 2004 are
expenses related to our restructuring activities, the cost related to the
refinancing of our senior subordinated notes, customer changeover costs,
consulting fees indexed to the stock price and favorable tax adjustments. The
net impact of these items decreased earnings per diluted share by $0.87.
Included in the results for 2003 are expenses related to our restructuring
activities, the write-off of debt issuance costs relating to issuing senior
secured notes in June and December of 2003, the senior credit facility
refinancing in December of 2003 and tax benefits for the resolution of several
audit issues. The net impact of these items increased earnings per diluted share
by $0.10. Please read Note 8 to the consolidated financial statements included
in Item 8 for more detailed information on earnings per share.

CRITICAL ACCOUNTING POLICIES

We prepare our financial statements in accordance with accounting
principles generally accepted in the United States of America. Preparing our
financial statements in accordance with generally accepted accounting principles
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial

37

statements and the reported amounts of revenues and expenses during the
reporting period. The following paragraphs include a discussion of some critical
areas where estimates are required.

Revenue Recognition

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

Long-term Receivables

We expense pre-production design and development costs incurred for our
original equipment customers unless we have a contractual guarantee for
reimbursement of those costs from the customer. At December 31, 2004, we had $17
million recorded as a long-term receivable from OE customers for guaranteed
pre-production design and development arrangements. While we believe that the
vehicle programs behind these arrangements will enter production, these
arrangements allow us to recover our pre-production design and development costs
in the event that the programs are cancelled or do not reach expected production
levels. We have not experienced any material losses on arrangements where we
have a contractual guarantee of reimbursement from our customers.

Income Taxes

We have a U.S. Federal tax net operating loss ("NOL") carryforward at
December 31, 2004, of $569 million, which will expire in varying amounts from
2018 to 2024. The federal tax effect of that NOL is $199 million, and is
recorded as an asset on our balance sheet at December 31, 2004. We estimate,
based on available evidence both positive and negative, that it is more likely
than not that we will utilize the NOL within the prescribed carryforward period.
That estimate is based upon our expectations regarding future taxable income of
our U.S. operations and upon strategies available to accelerate usage of the
NOL. Circumstances that could change that estimate include future U.S. earnings
at lower than expected levels or a majority ownership change as defined in the
rules of the U.S. tax law. If that estimate changed, we would be required to
cease recognizing an income tax benefit for any new NOL and could be required to
record a reserve for some or all of the asset currently recorded on our balance
sheet. As of December 31, 2004, we believe that there has been a significant
change in our ownership, but not a majority change, in the last three years.

Stock-based Compensation

We utilize the intrinsic value method to account for our stock-based
compensation plans in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." If our compensation costs for
our stock-based compensation plans were determined using the fair value method
of accounting as provided in the revised SFAS No. 123, "Accounting for
Stock-Based Compensation," we estimate that our pro-forma net income and
earnings per share would be lower by approximately $2 million or $0.05 per
diluted share for the full year 2004 and by approximately $2 million or $0.04
per diluted share for the full year 2003.

Goodwill and Other Intangible Assets

We utilize an impairment-only approach to value our purchased goodwill in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." Each year
in the fourth quarter, we perform an impairment analysis on the balance of
goodwill. Inherent in this calculation is the use of estimates as the

38

fair value of our designated reporting units is based upon the present value of
our expected future cash flows. In addition, our calculation includes our best
estimate of our weighted average cost of capital and growth rate. If the
calculation results in a fair value of goodwill which is less than the book
value of goodwill, an impairment charge would be recorded in the operating
results of the impaired reporting unit. We had $196 million of goodwill recorded
at December 31, 2004.

Pension and Other Postretirement Benefits

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

Our approach to establishing the discount rate assumption for both our
domestic and foreign plans starts with high-quality investment-grade bonds
adjusted for an incremental yield based on actual historical performance. This
incremental yield adjustment is the result of selecting securities whose yields
are higher than the "normal" bonds that comprise the index. Based on this
approach, at September 30, 2004 we lowered the weighted average discount rate
for pension plans to 6.0 percent, from 6.1 percent. The discount rate for
postretirement benefits was lowered from 6.5 percent at September 30, 2003 to
6.25 percent at September 30, 2004.

Our approach to determining expected return on plan asset assumptions
evaluates both historical returns as well as estimates of future returns, and is
adjusted for any expected changes in the long-term outlook for the equity and
fixed income markets. As a result, our estimate of the weighted average long-
term rate of return on plan assets for our pension plans was 8.4 percent for
2004, 2003 and 2002. See Note 10 to the financial statements for more
information regarding costs and assumptions for employee retirement benefits.

Generally, our pension plans are non-contributory. Our policy is to fund
our pension plans in accordance with applicable U.S. and foreign government
regulations and to make additional payments as funds are available to achieve
full funding of the accumulated benefit obligation. At December 31, 2004, all
legal funding requirements had been met. Employees contributed $1 million to our
pension plans in 2004 and less than $1 million in 2003.

Other postretirement benefit obligations, such as retiree medical, are not
funded. Funded status is derived by subtracting the value of the projected
benefit obligations at December 31, 2004, from the end of the year fair value of
plan assets.

CHANGES IN ACCOUNTING PRINCIPLES

In January 2003, the Financial Accounting Standard Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"),
which was revised in December 2003. FIN 46 requires that the assets, liabilities
and results of the activity of variable interest entities be consolidated into
the financial statements of the entity that has the controlling financial
interest. FIN 46 also provides the framework for determining whether a variable
interest entity should be consolidated based on voting interest or significant
financial support provided to it. This interpretation as revised was effective
January 1, 2004. The adoption of FIN 46 had no impact on our consolidated
financial statements.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amended and
clarified financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts
entered into or

39

modified after June 30, 2003. The adoption of SFAS No. 149 had no impact on our
financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 established standards for classification of certain financial
instruments that have characteristics of both liabilities and equity but have
been presented entirely as equity or between the liabilities and equity section
of the statement of financial position. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003. The adoption of SFAS
No. 150 had no impact on our financial position.

In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits an amendment of FASB Statements
Nos. 87, 88, and 106." The revised SFAS No. 132 changes employers' disclosures
about pension plans and other postretirement benefits and requires additional
disclosures about assets, obligations, cash flows and net periodic benefit cost.
For disclosures required by this statement, see Note 10 to the consolidated
financial statements of Tenneco Automotive Inc. and Consolidated Subsidiaries
included in Item 8.

On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) introduced a voluntary prescription drug
benefit under Medicare as well as a federal subsidy to sponsors of retiree
healthcare plans that provide prescription drug benefits that are at least
actuarially equivalent to Medicare Part D. As permitted by FASB Staff Position
("FSP") 106-1, we previously chose to defer recognizing the effects of the Act
on our postretirement healthcare insurance plans until authoritative guidance
was issued by the FASB. In May 2004, the FASB issued FSP No. 106-2, which
supercedes FSP No. 106-1 and required accounting for the effects of the Act no
later than our quarter ended September 30, 2004. The adoption of FSP 106-2 did
not have a material impact on our consolidated financial statements.

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs an
amendment of Accounting Research Bulletin No. 43, Chapter 4." This statement
requires idle facility expenses, excessive spoilage, double freight and
rehandling costs to be recognized as current period charges regardless of
whether they meet the criterion of "so abnormal." SFAS No. 151 is effective for
fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 is not
expected to have a material impact on our financial position or results of
operations.

In December 2004, the FASB revised SFAS No. 123, "Share-Based Payment"
which supersedes Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees." This revised statement establishes standards for
the accounting for transactions in which an entity exchanges its equity
instruments for goods or services. It also addresses transactions in which an
entity incurs liabilities in exchange for goods or services that are based on
the fair value of the entity's equity instruments or that may be settled by the
issuance of those equity instruments. The revised SFAS No. 123 is effective for
interim or annual reporting periods that begin after June 15, 2005. We estimate
that the impact on our net income and earnings per share will not exceed
approximately $2 million or $0.05 per diluted share. See Note 1 to the
consolidated financial statements of Tenneco Automotive Inc. and Consolidated
Subsidiaries included in Item 8.

In December 2004, the FASB issued FSP No. 109-1. FSP No. 109-1 provides
guidance on the application of FASB Statement No. 109, "Accounting for Income
Taxes," to the provision within The American Jobs Creation Act of 2004 (The Act)
that provides a tax deduction on qualified production activities. The purpose
behind this special deduction is to provide a tax incentive to companies that
maintain or expand U.S. manufacturing activities. FSP No. 109-1 was effective
upon issuance. The adoption of FSP 109-1 did not have any impact on our
consolidated financial statements.

In December 2004, the FASB issued FSP No. 109-2. FSP No. 109-2 addresses
the question on the impact of a company's APB No. 23 Accounting for Income Taxes
- -- Special Areas representation under The Act, which provides for a special
one-time 85 percent dividend deduction on dividends from foreign

40

subsidiaries. FSP No. 109-2 was effective upon issuance. The issuance of FSP No.
109-2 does not change how we apply APB No. 23, and therefore, did not have any
impact on our consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

Capitalization

General. The year-to-date increase in shareholders' equity primarily
results from $80 million related to the translation of foreign balances into
U.S. dollars. In addition, net income, premium on common stock issued pursuant
to benefit plans and other transactions contributed $36 million to the increase
in shareholders' equity. The increase in shareholders' equity was partially
offset by an adjustment to the additional minimum pension liability of $24
million as a result of an increase in the accrued benefit obligation. Although
our book equity balance was small at December 31, 2004, it should not affect our
business operations. We have no debt covenants that are based upon our book
equity, and there are no other agreements that are adversely impacted by our
relatively low book equity.

Short-term debt, which includes the current portion of long-term
obligations and borrowings by foreign subsidiaries, as well as our revolving
credit facility, decreased approximately $1 million as a result of a $1 million
increase in the current portion of long-term debt offset by a $2 million
decrease in foreign subsidiaries' obligations. There were no borrowings
outstanding under our revolving credit facility at either December 31, 2004 or
2003. The overall decrease in long-term debt resulted from payments made on our
outstanding long-term debt and capital leases in addition to our position on
interest rate swaps entered into in April 2004. See below for further
information on the interest rate swaps.

Senior Credit Facility -- Overview and Recent Transactions. Our financing
arrangements are primarily provided by a committed senior secured financing
arrangement with a syndicate of banks and other financial institutions. The
arrangement is secured by substantially all our domestic assets and pledges of
66 percent of the stock of certain first-tier foreign subsidiaries, as well as
guarantees by our material domestic subsidiaries. We originally entered into
this facility in 1999 and since that time have periodically requested and
received amendments to the facility for various purposes. In December of 2003,
we engaged in a series of transactions that resulted in the full refinancing of
the facility, through an amendment and restatement. As of December 31, 2004, the
senior credit facility consisted of a seven-year, $396 million term loan B
facility maturing in December 2010; a five-year, $220 million revolving credit
facility maturing in December 2008; and a seven-year, $180 million tranche B-1
letter of credit/revolving loan facility maturing in December 2010. In February
2005, we amended the facility, which resulted in reduced interest rates on the
term loan B and tranche B-1 letter of credit/revolving loan portions of the
facility. We also made a voluntary prepayment of $40 million on the term loan B
facility, reducing borrowings to $356 million. These transactions are described
in more detail below.

In June 2003, we issued $350 million of 10 1/4 percent senior secured
notes. The notes have a final maturity date of July 15, 2013. We received net
proceeds in the second quarter of 2003 from the offering of the notes, after
deducting underwriting discounts, commissions and expenses, of $338 million. We
used

41

the net proceeds of the offering to repay outstanding amounts under our senior
credit facility as follows: (i) to prepay $199 million on the term loan A that
was due November 4, 2005, (ii) to prepay $52 million on the term loans B and C
that was due November 4, 2007 and May 4, 2008, respectively, and (iii) to prepay
outstanding borrowings of $87 million under the revolving credit portion of our
senior credit facility. These notes are described in more detail below under
"Senior Secured and Subordinated Notes."

In December 2003, we amended and restated our senior credit facility and
issued an additional $125 million of 10 1/4 percent senior secured notes. We
received $136 million of net proceeds from the offering of the additional $125
million of 10 1/4 percent senior secured notes, after deducting underwriting
discounts and other expenses and including a 13 percent price premium over par.
We also received $391 million in net proceeds from new term loan B borrowings
under the amended and restated senior credit facility, after deducting fees and
other expenses. We used the combined net proceeds of $527 million to prepay the
remaining $514 million outstanding under term loans A, B and C under the senior
credit facility immediately prior to the completion of the transaction. The
remaining $13 million of net proceeds were used for general corporate purposes.

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

Based on our use of the net proceeds from both the June and December 2003
transactions, these transactions would have increased our annual interest
expense by approximately $9 million. This does not give effect to the
fixed-to-floating interest rate swaps we completed in April 2004, described
below. In addition, we expensed in the second and fourth quarters of 2003 a
total of approximately $12 million of existing deferred debt issuance costs as a
result of retiring the term loans under the senior credit facility.

In April 2004, we entered into three separate fixed-to-floating interest
rate swaps with two separate financial institutions. These agreements swapped an
aggregate of $150 million of fixed interest rate debt at a per annum rate of
10 1/4 percent to floating interest rate debt at a per annum rate of LIBOR plus
a spread of 5.68 percent. Each agreement requires semi-annual settlements
through July 15, 2013. The LIBOR in effect for these swaps during the course of
2004 resulted in lower interest expense of approximately $3 million for the
year. The LIBOR rate as of December 31, 2004 as determined under these
agreements is 1.86 percent. This rate remained in effect until January 15, 2005
when it increased to 2.89 percent. Based upon the LIBOR of 2.89 percent which
was in effect as of January 15, 2005 under these agreements (and remains in
effect until July 15, 2005), these swaps would reduce our 2005 annual interest
expense by approximately $2 million. These swaps qualify as fair value hedges in
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and as such are recorded on the balance sheet at market value with
an offset to the underlying hedged item, which is long term debt. As of December
31, 2004, the fair value of the interest rate swaps was a liability of
approximately $1 million, which has been recorded as a decrease to long term
debt and an increase to other long term liabilities.

In November 2004, we refinanced our $500 million of 11 5/8 percent senior
subordinated notes maturing in October of 2009 with new senior subordinated
notes. The new notes have an interest rate of 8 5/8 percent, a maturity date of
November 15, 2014 and contain substantially similar terms as the notes
refinanced. Premium payments and other fees in connection with the refinancing
of these notes totaled approximately $40 million, including a $29 million or
5.813% price premium over par on the redeemed notes. The new notes accrue
interest from November 19, 2004 with an initial interest payment date of May 15,
2005. These notes are described in more detail below under "Senior Secured and
Subordinated Notes."

In connection with the refinancing of the $500 million in senior
subordinated notes we amended the senior credit facility effective November 17,
2004. This amendment allowed us to use up to $50 million in cash on hand to pay
redemption premiums and/or other fees and costs in connection with the
redemption and refinancing of the senior subordinated notes. This amendment also
excluded any redemption premium
42

associated with the 11 5/8 percent senior subordinated notes and any interest
incurred on the notes between the call date of November 19, 2004 and the
redemption date of December 20, 2004 from cash interest expense for purposes of
the definition of consolidated interest expense in the senior credit facility.
In exchange for these amendments, we agreed to pay a small fee to the consenting
lenders. We also incurred approximately $13 million in legal, advisory and other
costs related to the amendment and the issuance of the new senior subordinated
notes. These amounts were capitalized and will be amortized over the remaining
terms of the senior subordinated notes and senior credit facility.

Our interest expense increased in 2004 by $42 million due to the fees and
expenses associated with the refinancing of our senior subordinated notes, which
includes an expense of $8 million for existing deferred debt issuance costs
associated with the 11 5/8 percent senior subordinated notes. Beginning in 2005,
annual interest expense savings from this transaction are anticipated to be
about $15 million. This does not give effect to the fixed-to-floating interest
rate swaps we completed in April 2004 described above.

In February 2005 we amended our senior credit facility to reduce by 75
basis points the interest rate on the term loan B facility and the tranche B-1
letter of credit/revolving loan facility. In connection with the amendment, we
voluntarily prepaid $40 million in principal on the term loan B, reducing the
term loan B facility from $396 million to $356 million.

Additional provisions of the amendment to the senior credit facility
agreement (i) amend the definition of EBITDA to exclude up to $60 million in
restructuring-related expenses announced and taken after February 2005, (ii)
increase permitted investments to $50 million, (iii) exclude expenses related to
the issuance of stock options from the definition of consolidated net income,
(iv) permit us to redeem up to $125 million of senior secured notes after
January 1, 2008 (subject to certain conditions), (v) increase our ability to add
commitments under the revolving credit facility by $25 million, and (vi) make
other minor modifications. We incurred approximately $1 million in fees and
expenses associated with this amendment, which will be capitalized and amortized
over the remaining term of the agreement. As a result of the amendment and the
voluntary prepayment of $40 million under the term loan B, our interest expense
in 2005 will be approximately $6 million lower than what it would otherwise have
been.

Senior Credit Facility -- Forms of Credit Provided. Following the February
2005 voluntary prepayment of $40 million, the term loan B facility is payable as
follows: $74 million due March 31, 2010, and $94 million due each of June 30,
September 30 and December 12, 2010. The revolving credit facility requires that
it be repaid by December 2008. Prior to that date, funds may be borrowed, repaid
and reborrowed under the revolving credit facility without premium or penalty.
Letters of credit may be issued under the revolving credit facility.

The tranche B-1 letter of credit/revolving loan facility requires that it
be repaid by December 2010. We can borrow revolving loans from the $180 million
tranche B-1 letter of credit/revolving loan facility and use that facility to
support letters of credit. The tranche B-1 letter of credit/revolving loan
facility lenders have deposited $180 million with the administrative agent, who
has invested that amount in time deposits. We do not have an interest in any of
the funds on deposit. When we draw revolving loans under this facility, the
loans are funded from the $180 million on deposit with the administrative agent.
When we make repayments, the repayments are redeposited with the administrative
agent.

Under current accounting rules, the tranche B-1 letter of credit/revolving
loan facility will be reflected as debt on our balance sheet only if we have
outstanding thereunder revolving loans or payments by the facility in respect of
letters of credit. We will not be liable for any losses to or misappropriation
of any (i) return due to the administrative agent's failure to achieve the
return described above or to pay all or any portion of such return to any lender
under such facility or (ii) funds on deposit in such account by such lender
(other than the obligation to repay funds released from such accounts and
provided to us as revolving loans under such facility).

Senior Credit Facility -- Interest Rates and Fees. Borrowings under the
term loan B facility and the tranche B-1 letter of credit/revolving loan
facility bear interest at an annual rate equal to, at our option, either (i) the
London Interbank Offering Rate plus a margin of 300 basis points (reduced to 225
basis

43

points in February 2005); or (ii) a rate consisting of the greater of the JP
Morgan Chase prime rate or the Federal Funds rate plus 50 basis points, plus a
margin of 200 basis points (reduced to 125 basis points in February 2005). There
is no cost to us for issuing letters of credit under the tranche B-1 letter of
credit/ revolving loan facility, however outstanding letters of credit reduce
our availability to borrow revolving loans under this portion of the facility.
If a letter of credit issued under this facility is subsequently paid and we do
not reimburse the amount paid in full, then a ratable portion of each lender's
deposit would be used to fund the letter of credit. We pay the tranche B-1
lenders a fee which is equal to LIBOR plus 300 basis points (reduced to 225
basis points in February 2005). This fee is offset by the return on the funds
deposited with the administrative agent which earn interest at a per annum rate
approximately equal to LIBOR. Outstanding revolving loans reduce the funds on
deposit with the administrative agent which in turn reduce the earnings of those
deposits and effectively increases our interest expense at a per annum rate
equal to LIBOR. The interest margins for borrowings under the term loan B
facility and tranche B-1 letter of credit/revolving loan facility will be
further reduced by 25 basis points following: the end of each fiscal quarter for
which the consolidated leverage ratio is less than 3.0 or at the point our
credit ratings are improved to BB- or better by Standard & Poor's (and are rated
at least B1 by Moody's) or to Ba3 or better by Moody's (and are rated at least
B+ by Standard & Poor's).

Borrowings under the revolving credit facility bear interest at an annual
rate equal to, at our option, either (i) the London Interbank Offering Rate plus
a margin of 325 basis points; or (ii) a rate consisting of the greater of the JP
Morgan Chase prime rate or the Federal Funds rate plus 50 basis points, plus a
margin of 225 basis points. Letters of credit issued under the revolving credit
facility accrue a letter of credit fee at a per annum rate of 325 basis points
for the pro rata account of the lenders under such facility and a fronting fee
for the ratable account of the issuers thereof at a per annum rate in an amount
to be agreed upon payable quarterly in arrears. The interest margins for
borrowings and letters of credit issued under the revolving credit facility are
subject to adjustment based on the consolidated leverage ratio (consolidated
indebtedness divided by consolidated EBITDA as defined in the senior credit
facility agreement) measured at the end of each quarter. The margin we pay on
the revolving credit facility will be reduced by 25 basis points following each
fiscal quarter for which the consolidated leverage ratio is less than 4.0
beginning in March 2005. We also pay a commitment fee of 50 basis points on the
unused portion of the revolving credit facility. This commitment fee will be
reduced by 12.5 basis points following the end of each fiscal quarter for which
the consolidated leverage ratio is less than 3.5.

Senior Credit Facility -- Other Terms and Conditions. The amended and
restated senior credit facility requires that we maintain financial ratios equal
to or better than the following consolidated leverage ratio (consolidated
indebtedness divided by consolidated EBITDA), consolidated interest coverage
ratio (consolidated EBITDA divided by consolidated cash interest paid), and
fixed charge coverage ratio (consolidated EBITDA less consolidated capital
expenditures, divided by consolidated cash interest paid) at the end of each
period indicated. The financial ratios required under the amended senior credit
facility and, the actual ratios we achieved for the four quarters of 2004, are
shown in the following tables:

The senior credit facility agreement provides: (i) the ability to refinance
our senior subordinated notes and/or our senior secured notes using the net cash
proceeds from the issuance of similarly structured debt; (ii) the ability to
repurchase our senior subordinated notes and/or our senior secured notes using
the net cash proceeds from issuing shares of our common stock; and (iii) the
prepayment of the term loans by an amount equal to 50 percent of our excess cash
flow as defined by the agreement.

The senior credit facility agreement also contains restrictions on our
operations that are customary for similar facilities, including limitations on:
(i) incurring additional liens; (ii) sale and leaseback transactions (except for
the permitted transactions as described in the amendment); (iii) liquidations
and dissolutions; (iv) incurring additional indebtedness or guarantees; (v)
capital expenditures; (vi) dividends; (vii) mergers and consolidations; and
(viii) prepayments and modifications of subordinated and other debt instruments.
Compliance with these requirements and restrictions is a condition for any
incremental borrowings under the senior credit facility agreement and failure to
meet these requirements enables the lenders to require repayment of any
outstanding loans. As of December 31, 2004, we were in compliance with all the
financial covenants (as indicated above) and operational restrictions of the
facility.

Our senior credit facility does not contain any terms that could accelerate
the payment of the facility as a result of a credit rating agency downgrade.

Senior Secured and Subordinated Notes. Our outstanding debt also includes
$475 million of 10 1/4 percent senior secured notes due July 15, 2013, in
addition to the $500 million of 8 5/8 percent senior subordinated notes due
November 15, 2014 described above. We can redeem some or all of the notes at any
time after July 15, 2008, in the case of the senior secured notes, and November
15, 2009, in the case of the senior subordinated notes. If we sell certain of
our assets or experience specified kinds of changes in control, we must offer to
repurchase the notes. We are permitted to redeem up to 35 percent of the senior
secured notes with the proceeds of certain equity offerings completed before
July 15, 2006 and up to 35 percent of the senior subordinated notes with the
proceeds of certain equity offerings completed before November 15, 2007.

Our senior secured and subordinated notes require that, as a condition
precedent to incurring certain types of indebtedness not otherwise permitted,
our consolidated fixed charge coverage ratio, as calculated on a proforma basis,
to be greater than 2.25 and 2.00, respectively. We have not incurred any of the
types of indebtedness not otherwise permitted by the indentures. The indentures
also contain restrictions on our operations, including limitations on: (i)
incurring additional indebtedness or liens; (ii) dividends; (iii) distributions
and stock repurchases; (iv) investments; (v) asset sales and (vi) mergers and
consolidations. Subject to limited exceptions, all of our existing and future
material domestic wholly owned subsidiaries fully and unconditionally guarantee
these notes on a joint and several basis. In addition, the senior secured notes
and related guarantees are secured by second priority liens, subject to
specified exceptions, on all of our and our subsidiary guarantors' assets that
secure obligations under our senior credit facility, except that only a portion
of the capital stock of our and our subsidiary guarantor's domestic subsidiaries
is provided as collateral and no assets or capital stock of our direct or
indirect foreign subsidiaries secure the notes or guarantees. There are no
significant restrictions on the ability of the subsidiaries that have guaranteed
these notes to make distributions to us. The senior subordinated notes

45

rank junior in right of payment to our senior credit facility and any future
senior debt incurred. As of December 31, 2004, we were in compliance with the
covenants and restrictions of these indentures.

Accounts Receivable Securitization. In addition to our senior credit
facility, senior secured notes and senior subordinated notes, we also sell some
of our accounts receivable. In North America, we have an accounts receivable
securitization program with a commercial bank. We sell original equipment and
aftermarket receivables on a daily basis under this program. We sold accounts
receivable under this program of $68 million and $36 million at December 31,
2004 and 2003, respectively. This program is subject to cancellation prior to
its maturity date if we were to (i) fail to pay interest or principal payments
on an amount of indebtedness exceeding $50 million, (ii) default on the
financial covenant ratios under the senior credit facility, or (iii) fail to
maintain certain financial ratios in connection with the accounts receivable
securitization program. In January 2005, this program was renewed for 364 days
to January 30, 2006 at the existing facility size of $75 million. We also sell
some receivables in our European operations to regional banks in Europe. At
December 31, 2004 we sold $56 million of accounts receivable in Europe down from
$87 million at December 31, 2003. The arrangements to sell receivables in Europe
are not committed and can be cancelled at any time. If we were not able to sell
receivables under either the North American or European securitization programs,
our borrowings under our revolving credit agreements would increase. These
accounts receivable securitization programs provide us with access to cash at
costs that are generally favorable to alternative sources of financing, and
allow us to reduce borrowings under our revolving credit agreements.

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

46

Contractual Obligations

Our remaining required debt principal amortization and payment obligations
under lease and certain other financial commitments as of December 31, 2004, are
shown in the following table:

We principally use our revolving credit facilities to finance our
short-term capital requirements. As a result, we classify any outstanding
balances of the revolving credit facilities within our short-term debt even
though the revolving credit facility has a termination date of December 13, 2008
and the tranche B-1 letter of credit facility/revolving loan facility has a
termination date of December 13, 2010. The revolving credit facilities balances
included in short-term debt was zero at both December 31, 2004 and 2003,
respectively.

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

Included in our contractual obligations is the amount of interest to be
paid on our long-term debt. As our debt structure contains both fixed and
variable rate interest debt, we have made assumptions in calculating the amount
of the future interest payments. Interest on our senior secured notes and senior
subordinated notes is calculated using the fixed rates of 10 1/4 percent and
8 5/8 percent, respectively. Interest on our variable rate debt is calculated as
300 basis points plus LIBOR of 2.4 percent which was the rate at December 31,
2004. We have assumed that LIBOR will remain unchanged for the outlying years.
See "-- Capitalization." In addition we have included the impact of our interest
rate swaps entered into in April 2004. See "Interest Rate Risk" below. In
February 2005, we made a $40 million voluntary payment on our senior long-term
debt. The impact of this payment eliminates each quarterly $1 million payment we
were required to make through 2009 and reduces by $20 million our first
quarterly payment due in 2010.

We have also included an estimate of expenditures required after December
31, 2004 to complete the facilities and projects authorized at December 31,
2004, in which we have made substantial commitments in connections with
facilities.

We have not included purchase obligations as part of our contractual
obligations as we generally do not enter into long-term agreements with our
suppliers. In addition, the agreements we currently have do not specify the
volumes we are required to purchase. If any commitment is provided, in many
cases the agreements state only the minimum percentage of our purchase
requirements we must buy from the

47

supplier. As a result, these purchase obligations fluctuate from year to year
and we are not able to quantify the amount of our future obligation.

We have not included material cash requirements for taxes as we are a
taxpayer in certain foreign jurisdictions but not in domestic locations.
Additionally, it is difficult to estimate taxes to be paid as changes in where
we generate income can have a significant impact on future tax payments. We have
also not included cash requirements for funding pension and postretirement
benefit costs. Based upon current estimates we believe we will be required to
make contributions between $58 million to $63 million to those plans in 2005.
Pension and postretirement contributions beyond 2005 will be required but those
amounts will vary based upon many factors, including the performance of our
pension fund investments during 2005. In addition, we have not included cash
requirements for environmental remediation. Based upon current estimates we
believe we will be required to spend approximately $11 million over the next 20
to 30 years. However, due to possible modifications in remediation processes and
other factors, it is difficult to determine the actual timing of the payments.
See "-- Environmental and Other Matters".

We occasionally provide guarantees that could require us to make future
payments in the event that the third party primary obligor does not make its
required payments. We have not recorded a liability for any of these guarantees.
The only third party guarantee we have made is the performance of lease
obligations by a former affiliate. Our maximum liability under this guarantee
was approximately $4 million at both December 31, 2004 and 2003, respectively.
We have no recourse in the event of default by the former affiliate. However, we
have not been required to make any payments under this guarantee.

Additionally, we have from time to time issued guarantees for the
performance of obligations by some of our subsidiaries, and some of our
subsidiaries have guaranteed our debt. All of our then existing and future
material domestic wholly-owned subsidiaries fully and unconditionally guarantee
our senior credit facility, our senior secured notes and our senior subordinated
notes on a joint and several basis. The arrangement for the senior credit
facility is also secured by first-priority liens on substantially all our
domestic assets and pledges of 66 percent of the stock of certain first-tier
foreign subsidiaries. The arrangement for the $475 million senior secured notes
is also secured by second-priority liens on substantially all our domestic
assets, excluding some of the stock of our domestic subsidiaries. No assets or
capital stock of our direct or indirect foreign subsidiaries secure these notes.
You should also read Note 13 where we present the Supplemental Guarantor
Condensed Consolidating Financial Statements.

We have issued guarantees through letters of credit in connection with some
obligations of our affiliates. We have guaranteed through letters of credit
support for local credit facilities, travel and procurement card programs, and
cash management requirements for some of our subsidiaries totaling $24 million.
We have also issued $19 million in letters of credit to support some of our
subsidiaries' insurance arrangements. In addition, we have issued $3 million in
guarantees through letters of credit to guarantee other obligations of
subsidiaries primarily related to environmental remediation activities.

Dividends on Common Stock

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

48

Cash Flows

Operating Activities

For the year ended December 31, 2004, cash flow provided from operating
activities was $200 million as compared to $281 million in the prior year. For
2004 cash flow provided from working capital was $48 million as compared to $78
million for 2003. Higher sales levels in 2004 are the primary driver for higher
year over year receivables balances. In addition, 2003 benefited from actions to
rationalize our aftermarket product offering, which generated $55 million in
cash flow from reduced inventory levels. Cash interest payments in 2004 were
also significantly higher as a result of the refinancing transactions. This was
partially offset by lower cash tax payments.

In June 2001, we entered into arrangements with two major OE customers in
North America under which, in exchange for a discount, payments for product
sales are made earlier than otherwise required under existing payment terms.
These arrangements reduced accounts receivable by $80 million and $83 million as
of December 31, 2004 and 2003, respectively. We have been informed that the
financing company that supports this program intends to discontinue advance
payments on behalf of the OE customers by the end of 2005 with a small portion
of the program ending in the first quarter of 2005. Although we cannot assure
you that another similar arrangement will be available for periods after
December 2005 on commercially reasonable terms, we intend to seek such an
arrangement.

In June 2003, we entered into a similar arrangement with a third major OE
customer in North America. This arrangement reduced accounts receivable by $8
million as of December 31, 2004. We have been informed that this program will be
discontinued after December 31, 2004. In March 2004, we entered into another
arrangement with a major OE customer in Europe. This arrangement reduced
accounts receivable by $25 million at December 31, 2004. This arrangement can be
cancelled at any time.

One of our European subsidiaries receives payment from one of its OE
customers whereby the account receivables are satisfied through the delivery of
negotiable financial instruments. These financial instruments are then sold at a
discount to a European bank. The sales of these financial instruments are not
included in the account receivables sold in 2004. Any of these financial
instruments which were not sold as of December 31, 2004 and 2003 are classified
as other current assets and are excluded from our definition of cash
equivalents. We had sold approximately $44 million of these instruments at
December 31, 2004.

Investing Activities

Cash used for investing activities was $11 million lower in 2004 compared
to the same period a year ago. In 2004 we received $11 million in cash from the
sale of a portion of our Birmingham, U.K. facility. Capital expenditures were
$130 million in both 2004 and 2003.

Financing Activities

Cash flow from financing activities was a $12 million outflow in 2004
compared to an outflow of $49 million in the same period of 2003. The primary
reason for the change is attributable to the $350 million bond offering in June
2003, the $125 million bond offering in December 2003, the senior debt
refinancing in December of 2003 and the subordinated debt refinancing in
November of 2004.

49

OUTLOOK

North American OE light vehicle production levels for 2004 were 15.8
million units, down one percent from 2003. Current estimates for 2005 indicate
that North American OE light vehicle production levels will be equal to 2004 at
15.8 million units. However, we remain cautious about the outlook for North
American production rates due to rising interest rates, oil and steel prices and
current original equipment manufacturers' inventory levels. We are also
uncertain about the willingness of the original equipment manufacturers to
continue to support consumer vehicle sales through incentives. We believe that
new product launches and our position on top-selling platforms, along with
increasing market positions with Toyota, Honda and Nissan, will help us to
offset pressures from North American production rates. Western Europe light
vehicle production volumes grew about one percent during 2004 to 16.6 million
units. Expectations for 2005 indicate production will remain flat at 2004
levels. We saw a strong increase in heavy-duty truck production rates during
2004. Compared to 2003, heavy-duty truck production rates increased 36 percent
in 2004, and are expected to increase another 16 to 19 percent in 2005. Although
heavy-duty business represents a small percentage of our overall revenues, this
should benefit our North American operations. In the global aftermarket, issues
that have impacted revenues in the past will likely continue to be a challenge
in 2005. Heightened competition in the European aftermarket and longer product
replacement cycles are expected to continue their impact on volumes. We saw
signs of sales stabilization in the North America aftermarket exhaust business
unit during 2004, and we are cautiously optimistic that these conditions will
continue in 2005. We also plan to continue our efforts to increase new and
existing sales in the North American aftermarket ride control business unit.

Based on anticipated vehicle production levels our global original
equipment customer book of business is expected to be $270 million higher than
our 2004 OE revenues, or about $3.5 billion in 2005, and is expected to increase
an additional $150 million to about $3.6 billion in 2006. Adjusted for pass-
through sales, our global original equipment customer book of business is
expected to be $2.7 billion and $2.8 billion for 2005 and 2006, respectively, or
reflects an expected increase of about $210 million in 2005 and $280 million in
2006 over our 2004 OE revenues adjusted for pass-through sales. When we refer to
our book of business, we mean revenues for original equipment manufacturer
programs that have been formally awarded to us as well as programs which we are
highly confident will result in revenues based on either informal customer
indications consistent with past practices and/or our status as supplier for the
existing program and relationship with the customer. This book of business is
subject to increase or decrease due to changes in customer requirements,
customer and consumer preferences, and the number of vehicles actually produced
by our customers. We do not intend, however, to update the amounts shown above
due to these changes. In addition, our book of business is based on our
anticipated pricing for each applicable program over its life. However, we are
under continuing pricing pressures from our OE customers. We do not intend to
update the amounts shown above for any price changes. Finally, for our foreign
operations the book of business assumes a fixed foreign currency value. This
value is used to translate foreign business to the US dollar. Currency in our
foreign operations is subject to fluctuation based on the economic conditions in
each of our foreign operations. We do not intend to update the amounts shown
above due to these fluctuations. See "Cautionary Statement for Purposes of the
"Safe Harbor' Provisions of the Private Securities Litigation Reform Act of
1995."

We are actively addressing higher steel costs, expected to continue through
2005. We anticipate that steel cost increases, net of other expected material
cost savings and recovery from customers, will be between $30 million and $50
million for 2005. We are intensely focused on mitigating the impact of higher
costs by implementing a restructuring initiative announced in the fourth
quarter, which is expected to generate $20 million in annual savings; improving
manufacturing efficiency with Lean; generating at least $20 million in Six Sigma
savings; and capitalizing on the projected $270 million increase in the 2005 OE
book of business. Lower interest expense as a result of our company's debt
refinancing in the fourth quarter of 2004 and amendments to our senior credit
facility in the first quarter of 2005 will also help mitigate the impact.

50

ENVIRONMENTAL AND OTHER MATTERS

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

As of December 31, 2004, we are designated as a potentially responsible
party in one Superfund site. We have estimated our share of the remediation
costs for this site to be less than $1 million in the aggregate. In addition to
the Superfund site, we may have the obligation to remediate current or former
facilities, and we estimate our share of remediation costs at these facilities
to be approximately $11 million. For the Superfund site and the current and
former facilities, we have established reserves that we believe are adequate for
these costs. Although we believe our estimates of remediation costs are
reasonable and are based on the latest available information, the cleanup costs
are estimates and are subject to revision as more information becomes available
about the extent of remediation required. At some sites, we expect that other
parties will contribute to the remediation costs. In addition, at the Superfund
site, the Comprehensive Environmental Response, Compensation and Liability Act
provides that our liability could be joint and several, meaning that we could be
required to pay in excess of our share of remediation costs. Our understanding
of the financial strength of other potentially responsible parties at the
Superfund site, and of other liable parties at our current and former
facilities, has been considered, where appropriate, in our determination of our
estimated liability.

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

From time to time we are subject to product warranty claims whereby we are
required to bear costs of repair or replacement of certain of our products.
Warranty claims may range from individual customer claims to full recalls of all
products in the field. See Note 12 to our consolidated financial statements
included under Item 8 for information regarding our warranty reserves.

We also from time to time are involved in legal proceedings, claims or
investigations that are incidental to the conduct of our business. Some of these
proceedings allege damages against us relating to environmental liabilities
(including toxic tort, property damage and remediation), intellectual property
matters (including patent, trademark and copyright infringement, and licensing
disputes), personal injury claims (including injuries due to product failure,
design or warnings issues, and other product liability related matters), taxes,
employment matters, and commercial or contractual disputes, sometimes related to
acquisitions or divestitures. As an example, we are involved in litigation with
the minority owner of one of our Indian joint ventures over various operational
issues that involves a court-mandate bidding process. We vigorously defend
ourselves against all of these claims. In future periods, we could be subjected
to cash costs or non-cash charges to earnings if any of these matters is
resolved on unfavorable terms. However, although the ultimate outcome of any
legal matter cannot be predicted with certainty, based on present information,
including our assessment of the merits of the particular claim, we do not expect
that these legal proceedings or claims will have any material adverse impact on
our future consolidated financial

51

position or results of operations. In addition, we are subject to a number of
lawsuits initiated by a significant number of claimants alleging health problems
as a result of exposure to asbestos. Many of these cases involve significant
numbers of individual claimants. However, only a small percentage of these
claimants allege that they were automobile mechanics who were allegedly exposed
to our former muffler products and a significant number appear to involve
workers in other industries or otherwise do not include sufficient information
to determine whether there is any basis for a claim against us. We believe,
based on scientific and other evidence, it is unlikely that mechanics were
exposed to asbestos by our former muffler products and that, in any event, they
would not be at increased risk of asbestos-related disease based on their work
with these products. Further, many of these cases involve numerous defendants,
with the number of each in some cases exceeding 200 defendants from a variety of
industries. Additionally, the plaintiffs either do not specify any, or specify
the jurisdictional minimum, dollar amount for damages. As major asbestos
manufacturers continue to go out of business, we may experience an increased
number of these claims. We vigorously defend ourselves against these claims as
part of our ordinary course of business. In future periods, we could be subject
to cash costs or non-cash charges to earnings if any of these matters is
resolved unfavorably to us. To date, with respect to claims that have proceeded
sufficiently through the judicial process, we have regularly achieved favorable
resolution in the form of a dismissal of the claim or a judgment in our favor.
Accordingly, we presently believe that these asbestos-related claims will not
have a material adverse impact on our future financial condition or results of
operations.

EMPLOYEE STOCK OWNERSHIP PLANS

We have established Employee Stock Ownership Plans for the benefit of our
employees. Under the plans, participants may elect to defer up to 50 percent of
their salary through contributions to the plan, which are invested in selected
mutual funds or used to buy our common stock. We currently match in cash 50
percent of each employee's contribution up to 8 percent of the employee's
salary. We recorded expense for these matching contributions of approximately $7
million and $6 million for the years ended December 31, 2004 and 2003. All
contributions vest immediately.

DERIVATIVE FINANCIAL INSTRUMENTS

Foreign Currency Exchange Rate Risk

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

In managing our foreign currency exposures, we identify and aggregate
existing offsetting positions and then hedge residual exposures through
third-party derivative contracts. The following table summarizes by major
currency the notional amounts, weighted average settlement rates, and fair value
for foreign

52

currency forward purchase and sale contracts as of December 31, 2004. All
contracts in the following table mature in 2005.

Interest Rate Risk

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

In April 2004, we entered into three separate fixed-to-floating interest
rate swaps with two separate financial institutions. These agreements swapped an
aggregate of $150 million of fixed interest rate debt at a per annum rate of
10 1/4 percent to floating interest rate debt at a per annum rate of LIBOR plus
a spread of 5.68 percent. Each agreement requires semi-annual settlements
through July 15, 2013. The LIBOR in effect for these swaps during the course of
2004 resulted in lower interest expense of approximately $3 million for the
year. The LIBOR rate as of December 31, 2004 as determined under these
agreements is 1.86 percent. This rate remained in effect until January 15, 2005
when it increased to 2.89 percent. Based on the January 15, 2005 LIBOR rate of
2.89 percent (which remains in effect until July 15, 2005), these swaps would
reduce our 2005 annual interest expense by approximately $2 million. These swaps
qualify as fair value hedges in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and as such are recorded on the
balance sheet at market value with an offset to the underlying hedged item,
which is long-term debt. As of December 31, 2004, the fair value of the interest
rate swaps was a liability of approximately $1 million, which has been recorded
as a decrease to long-term debt and an increase to other long-term liabilities.
On December 31, 2004, we had $994 million in long-term debt obligations that
have fixed interest rates. Of that amount, $475 million is fixed through July
2013 and $500 million through November 2014, while the remainder is fixed over
periods of 2005 through 2025. There is also $411 million in long-term debt
obligations that have variable interest rates based on a current market rate of
interest.

53

We estimate that the fair value of our long-term debt at December 31, 2004
was about 108 percent of its book value. A one percentage point increase or
decrease in interest rates would increase or decrease the annual interest
expense we recognize in the income statement and the cash we pay for interest
expense by about $3 million after tax, excluding the effect of the interest rate
swaps we completed in April 2004. A one percentage point increase or decrease in
interest rates on the swaps we completed in April 2004 would increase or
decrease the annual interest expense we recognize in the income statement and
the cash we pay for interest expense by approximately $1 million after tax.

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

YEARS 2003 AND 2002

NET SALES AND OPERATING REVENUES

The following tables reflect our revenues for the years of 2003 and 2002.
See "-Years 2004 and 2003-Net Sales and Operating Revenues" for a description of
why we present these reconciliations of revenues.

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

Our European and South American segment's revenues increased $238 million
or 18 percent in 2003 compared to the prior year. Total European OE revenues
were $1,097 million, up 21 percent from last year. European OE emission control
revenues increased 15 percent to $832 million from $723 million in

55

the prior year. Excluding a $45 million increase in pass-through sales and a
$132 million increase due to strengthening currency, European OE emission
control revenues decreased 13 percent from 2002. This was greater than the
change in European production levels, which decreased approximately one percent
from one year ago. Our decrease was greater than the market decline as a result
of several older PSA, Volkswagen and Peugeot models where lower volumes are not
yet being offset by the launch or ramp up of the replacement models. European OE
ride control revenues increased to $265 million in 2003 or up 42 percent from
$187 million the prior year. Excluding a $40 million benefit from currency
appreciation, European OE ride control revenues increased 20 percent. We
experienced this revenue increase despite the decline in the European build rate
due to stronger sales on new platforms with Volkswagen and Ford. European
aftermarket sales were $346 million in 2003 compared to $311 million the prior
year. Excluding $60 million attributable to currency appreciation, European
aftermarket revenues declined eight percent in 2003 compared to the prior year.
Ride control aftermarket revenues, excluding the impact of currency, were down
one percent compared to the prior year, reflecting the continued overall
weakness in the European aftermarket, partially offset by the continued positive
impact of the Monroe Reflex(R) introduction in the second quarter of 2002.
Additionally, aftermarket emission control revenues were lower as a result of
the now standard use of longer lasting stainless steel by OE manufacturers.
Excluding the impact of currency, European aftermarket emission control revenues
declined 14 percent from the prior year. South American revenues were up $16
million primarily as a result of increased OE volumes and a stabilizing
currency.

Revenues from our Asia Pacific Segment, which includes Australia and Asia,
increased $87 million to $324 million in 2003 as compared to $237 million in the
prior year. Higher volumes and increased pass-through sales drove increased
revenues of $45 million at our Asian operations. In Australia, stronger OE
volumes and strengthening currency increased revenues by 34 percent. Excluding
the impact of currency, Australian revenues increased eight percent.

EBIT

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

56

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

Our European and South American segment's EBIT was $23 million for 2003,
down $1 million from $24 million in 2002. However, included in 2002's EBIT was
an $11 million gain on the sale of our York, U.K. facility and $1 million
related to amending the senior credit facility. Also included in 2002's EBIT was
a favorable adjustment in the reserve for our costs to complete Project Genesis,
which increased EBIT by $1 million. Included in 2003's EBIT were $4 million of
restructuring-related expenses. Higher European OE volumes primarily in ride
control contributed $7 million to EBIT. Also contributing to EBIT were European
manufacturing efficiencies of $14 million primarily in OE emission control and
currency appreciation of $11 million. Additionally, benefits we are realizing
from Project Genesis, which is described further in "Restructuring and Other
Charges" in this Management's Discussion and Analysis, added to EBIT. These
increases were partially offset by lower European aftermarket volumes that
reduced EBIT by $11 million. In addition, as a result of our inventory reduction
programs, EBIT was reduced by $6 million due to a lower amount of fixed
manufacturing costs being absorbed into inventory. Also reducing EBIT were
higher selling general and administrative costs. Higher OE revenues for South
America helped to reduce the gap between 2003 and 2002 EBIT.

EBIT for our Asia Pacific segment increased $6 million to $22 million in
2003 compared to $16 million in the prior year. Higher OE revenues in all
regions drove this improvement. Additionally, favorable currency exchange rates
in Australia increased EBIT by $4 million.

EBIT AS A PERCENTAGE OF REVENUE

In North America, EBIT as a percentage of revenue for 2003 remained flat to
the prior year. Higher OE ride control volumes and manufacturing efficiencies
were offset by lower aftermarket volumes and related manufacturing
inefficiencies. In Europe and South America, EBIT margins for 2003 were down one
percent compared to the prior year. OE volume increases, manufacturing
efficiencies, restructuring savings and currency appreciation were offset by the
impact of a gain on a facility sale in the prior year, lower aftermarket
volumes, and higher manufacturing costs. EBIT as a percentage of revenue for our
Asia Pacific operations remained at prior year levels. The increase in EBIT from
higher OE volumes and currency appreciation was proportional to the change in
revenues.

57

INTEREST EXPENSE, NET OF INTEREST CAPITALIZED

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

INCOME TAXES

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

EARNINGS PER SHARE

We reported earnings, before cumulative effect of change in accounting
principle, per diluted common share of $0.65 for 2003, compared to $0.74 per
diluted share for 2002. Included in the results for 2003 are the negative
impacts from expenses related to our restructuring activities, the write-off of
debt issuance costs relating to the bond transactions in June and December of
2003, the senior debt refinancing in December of 2003 and tax benefits for the
resolution of several audit issues. The net impact of these items increased
earnings per diluted share by $0.10. Included in the results for 2002 are the
negative impacts from expenses related to our restructuring activities, costs
related to amending the senior credit facility, a tax benefit for lower
withholding on foreign repatriation of earnings, a tax benefit for accrual to
return adjustments, a tax benefit for a change in the effective tax rate in
Belgium and the gain on the sale of our York, U.K. facility. In total, these
items improved earnings per diluted common share by $0.53. You should also read
Note 8 to the consolidated financial statements included in Item 8 for more
detailed information on earnings per share.

CASH FLOWS

58

Operating Activities

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

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

Investing Activities

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

Financing Activities

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

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

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

59

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

60

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Tenneco Automotive Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting (as defined in
Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934).
Management's internal control system is designed to provide reasonable assurance
regarding the preparation and fair presentation of published financial
statements. All internal control systems, no matter how well designed, have
inherent limitations, including the possibility of human error or circumvention
or overriding of controls. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation and may not prevent or detect
misstatements in financial reporting. Further, due to changing conditions and
adherence to established policies and controls, internal control effectiveness
may vary over time.

Management assessed the company's effectiveness of internal controls over
financial reporting. In making this assessment, it used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control-Integrated Framework.

Based on our assessment we believe that the company's internal control over
financial reporting is effective as of December 31, 2004.

Deloitte & Touche LLP, Tenneco Automotive Inc.'s independent registered
public accounting firm, has issued an audit report on our assessment of the
company's internal control over financial reporting. This report appears below.

61

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited management's assessment, included in the accompanying
Management Report on Internal Controls Over Financial Reporting, that Tenneco
Automotive Inc. and consolidated subsidiaries (the "Company") maintained
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control -- Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
("COSO"). The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.

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

A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the criteria established in
COSO. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on the criteria established in COSO.

62

We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of the Company as of December 31, 2004 and the related consolidated
statement of income (loss), cash flows, changes in shareholders' equity and
comprehensive income (loss) for the year ended December 31, 2004. Our audit also
included the financial statement schedule listed in the index at Item 8. Our
report dated March 8, 2005 expressed an unqualified opinion on those financial
statements and financial statement schedule.

DELOITTE & TOUCHE LLP
Chicago, Illinois
March 8, 2005

63

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of Tenneco
Automotive Inc. and consolidated subsidiaries (the "Company") as of December 31,
2004 and 2003, and the related consolidated statements of income (loss), cash
flows, changes in shareholders' equity, and comprehensive income (loss) for each
of the three years in the period ended December 31, 2004. Our audits also
included the financial statement schedule listed in the Index at Item 8. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
2004 and 2003, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly
in all material respects the information set forth therein.

As discussed in Note 4, effective January 1, 2002, the Company changed its
method of accounting for goodwill and intangible assets upon adoption of
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets.

We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
based on the criteria established in Internal Control -- Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 8, 2005 expressed an unqualified opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.

DELOITTE & TOUCHE LLP
Chicago, Illinois
March 8, 2005

64

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF INCOME (LOSS)

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

65

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

BALANCE SHEETS

The accompanying notes to financial statements are an integral part of these
balance sheets.
66

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF CASH FLOWS

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

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

67

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

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

68

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

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

69

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF ACCOUNTING POLICIES

Consolidation and Presentation

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

Sales of Accounts Receivable

We entered into an agreement during the third quarter of 2000 to sell an
interest in some of our U.S. trade accounts receivable to a third party.
Receivables become eligible for the program on a daily basis, at which time the
receivables are sold to the third party, net of a factoring discount, through a
wholly-owned subsidiary. Under this agreement, as well as individual agreements
with third parties in Europe, we have sold accounts receivable of $124 million,
$123 million, and $101 million at December 31, 2004, 2003, and 2002,
respectively. We recognized a loss of approximately $1 million, $2 million, and
$2 million during 2004, 2003, and 2002, respectively, on these sales of trade
accounts, representing the discount from book values at which these receivables
were sold to the third party. The discount rate varies based on funding cost
incurred by the third party, and it averaged 4.7 percent during the time period
in 2004 when we sold receivables. We retained ownership of the remaining
interest in the pool of receivables not sold to the third party. The retained
interest represents a credit enhancement for the program. We value the retained
interest based upon the amount we expect to collect from our customers, which
approximates book value.

Inventories

At December 31, 2004 and 2003, inventory by major classification was as
follows:

Our inventories are stated at the lower of cost or market value. A portion
of total inventories (17 percent and 19 percent at December 31, 2004 and 2003,
respectively) is valued using the last-in, first-out method. If we had used the
first-in, first-out ("FIFO") method of accounting for these inventories, they
would have been $14 million and $11 million higher at December 31, 2004 and
2003, respectively. We value all other inventories using the FIFO or average
cost methods at the lower of cost or market value.

Goodwill and Intangibles, net

At December 31, 2004 and 2003, goodwill and intangibles, net of
amortization, by major category were as follows:

70

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The changes in the carrying amount of goodwill for the twelve months ended
December 31, 2004, are as follows:

You should read "Changes in Accounting Principles" below for information
about the goodwill accounting requirement and the charge we recorded in 2002 to
recognize the cumulative effect of this change in accounting principle. You
should also read Note 4 to the financial statements for additional information
related to the charge recorded.

We have capitalized certain intangible assets, primarily trademarks and
patents, based on their estimated fair value at the date we acquired them. We
amortize these intangible assets on a straight-line basis over periods ranging
from five to 30 years. Amortization of intangibles amounted to less than $1
million in 2004, 2003, and 2002, and is included in the statements of income
(loss) caption "Depreciation and amortization of other intangibles." The
carrying amount and accumulated amortization are as follows:

Non-amortized intangible assets include $21 million for the company's
intangible pension assets.

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

Plant, Property, and Equipment, at Cost

At December 31, 2004 and 2003, plant, property, and equipment, at cost, by
major category were as follows:

71

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

We depreciate these properties on a straight-line basis over the estimated
useful lives of the assets. Useful lives range from 10 to 50 years for buildings
and improvements and from three to 25 years for machinery and equipment.

Notes Receivable and Allowance for Doubtful Accounts

Short and long-term notes receivable outstanding were $34 million and $28
million at December 31, 2004 and 2003, respectively. The allowance for doubtful
accounts on short- and long-term notes receivable was zero at both December 31,
2004 and 2003, respectively.

At December 31, 2004 and 2003, the allowance for doubtful accounts on
short- and long-term accounts receivable was $22 million and $23 million,
respectively.

Other Long-Term Assets

We expense pre-production design and development costs as incurred unless
we have a contractual guarantee for reimbursement from the original equipment
customer. We had long-term receivables of $17 million and $15 million on the
balance sheet at December 31, 2004 and 2003, respectively, for guaranteed
pre-production design and development reimbursement arrangements with our
customers. In addition, property, plant and equipment includes $57 million and
$49 million at December 31, 2004 and 2003, respectively, for original equipment
tools and dies that we own, and prepayments and other includes $44 million and
$34 million at December 31, 2004 and 2003, respectively, for in-process tools
and dies that we are building for our original equipment customers.

We capitalize certain costs related to the purchase and development of
software that we use in our business operations. We amortize the costs
attributable to these software systems over their estimated useful lives,
ranging from three to 12 years, based on various factors such as the effects of
obsolescence, technology, and other economic factors. Capitalized software
development costs, net of amortization, were $90 million and $89 million at
December 31, 2004 and 2003, respectively, and is recorded in other long-term
assets.

Income Taxes

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

Revenue Recognition

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

72

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Earnings Per Share

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

Engineering, Research and Development

We expense engineering, research, and development costs as they are
incurred. Engineering, research and development expenses were $76 million for
2004 and $67 million for both 2003 and 2002, and are included in the income
statement caption of the same name. Of these amounts, $12 million in 2004, $9
million in 2003, and $6 million in 2002 relate to research and development,
which includes the search, design, and development of a new unproven product or
process. Additionally, $35 million, $35 million, and $36 million of engineering,
research, and development expense for 2004, 2003, and 2002, respectively,
relates to improvements and enhancements to existing products and processes. The
remainder of the expenses in each year relate to engineering costs we incurred
for application of existing products and processes to vehicle platforms.
Further, our customers reimburse us for engineering, research, and development
costs on some platforms when we prepare prototypes and incur costs before
platform awards. Our engineering research and development expense for 2004,
2003, and 2002 has been reduced by $46 million, $38 million, and $32 million,
respectively, for these reimbursements.

Foreign Currency Translation

We translate the financial statements of foreign subsidiaries into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and a weighted-average exchange rate for revenues and expenses in
each period. We record translation adjustments for those subsidiaries whose
local currency is their functional currency as a component of accumulated other
comprehensive loss in shareholders' equity. We recognize transaction gains and
losses arising from fluctuations in currency exchange rates on transactions
denominated in currencies other than the functional currency in earnings as
incurred, except for those transactions which hedge purchase commitments and for
those intercompany balances which are designated as long-term investments. Net
income (loss) included foreign currency transaction losses of $2 million in
2004, $3 million in 2003, and $9 million in 2002.

Risk Management Activities

We use derivative financial instruments, principally foreign currency
forward purchase and sale contracts with terms of less than one year, to hedge
our exposure to changes in foreign currency exchange rates, and interest rate
swaps to hedge our exposure to changes in interest rates. Our primary exposure
to changes in foreign currency rates results from intercompany loans made
between affiliates to minimize the need for borrowings from third parties. Net
gains or losses on these foreign currency exchange contracts that are designated
as hedges are recognized in the income statement to offset the foreign currency
gain or loss on the underlying transaction. Additionally, we enter into foreign
currency forward purchase and sale contracts to mitigate our exposure to changes
in exchange rates on some intercompany and third party trade receivables and
payables. Since these anticipated transactions are not firm commitments, we mark
these forward contracts to market each period and record any gain or loss in the
income statement. From time to time we have also entered into forward contracts
to hedge our net investment in foreign subsidiaries. We recognize the after-tax
net gains or losses on these contracts on the accrual basis in the

73

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

balance sheet caption "Accumulated other comprehensive loss." In the statement
of cash flows, cash receipts or payments related to these exchange contracts are
classified consistent with the cash flows from the transaction being hedged.

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

Stock Options

We account for our stock-based employee compensation plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Our stock-based employee compensation plans are
described more fully in Note 8. As permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation," and amended by SFAS No. 148, "Accounting for Stock-
based Compensation -- Transition and Disclosure, an amendment of FASB Statement
No. 123," we follow the disclosure requirements only of SFAS No. 123. The
following table illustrates the effect on net income (loss) and earnings (loss)
per share if we had applied the fair value recognition provisions of SFAS No.
123:

The fair value of each option granted during 2004, 2003, and 2002 is
estimated on the date of grant using the Black-Scholes option pricing model
using the following weighted-average assumptions for grants in 2004, 2003, and
2002, respectively: (i) risk-free interest rates of 4.07 percent, 4.01 percent,
and 5.09 percent; (ii) expected lives of 10.0, 10.0, and 10.0 years; (iii)
expected volatility 43.56 percent, 40.45 percent, and 39.56 percent; and (iv)
dividend yield of 0.0 percentage, 0.0 percentage, and 0.0 percentage.

Changes in Accounting Principles

In January 2003, the Financial Accounting Standard Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"),
which was revised in December 2003. FIN 46 requires that the assets, liabilities
and results of the activity of variable interest entities be consolidated into
the financial statements of the entity that has the controlling financial
interest. FIN 46 also provides the framework for determining whether a variable
interest entity should be consolidated based on voting interest or significant
financial support provided to it. This interpretation as revised was effective
January 1, 2004. The adoption of FIN 46 had no impact on our consolidated
financial statements.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amended and
clarified financial accounting and

74

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS No. 133. SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003.
The adoption of SFAS No. 149 had no impact on our financial position or results
of operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 established standards for classification of certain financial
instruments that have characteristics of both liabilities and equity but have
been presented entirely as equity or between the liabilities and equity section
of the statement of financial position. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003. The adoption of SFAS
No. 150 had no impact on our financial position.

In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits an amendment of FASB Statements
Nos. 87, 88 and 106." The revised SFAS No. 132 changes employers' disclosures
about pension plans and other postretirement benefits and requires additional
disclosures about assets, obligations, cash flows and net periodic benefit cost.
For disclosures required by this statement see Note 10.

On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) introduced a voluntary prescription drug
benefit under Medicare as well as a federal subsidy to sponsors of retiree
healthcare plans that provide prescription drug benefits that are at least
actuarially equivalent to Medicare Part D. As permitted by FASB Staff Position
("FSP") 106-1, we previously chose to defer recognizing the effects of the Act
on our postretirement healthcare insurance plans until authoritative guidance
was issued by the FASB. In May 2004, the FASB issued FSP No. 106-2, which
supercedes FSP No. 106-1 and required accounting for the effects of the Act no
later than our quarter ended September 30, 2004. The adoption of FSP 106-2 did
not have a material impact on our consolidated financial statements.

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs an
amendment of Accounting Research Bulletin No. 43, Chapter 4." This statement
requires idle facility expenses, excessive spoilage, double freight and
rehandling costs to be recognized as current period charges regardless of
whether they meet the criterion of "so abnormal." SFAS No. 151 is effective for
fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 is not
expected to have a material impact on our financial position or results of
operations.

In December 2004, the FASB revised SFAS No. 123, "Share-Based Payment"
which supersedes Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees." This revised statement establishes standards for
the accounting for transactions in which an entity exchanges its equity
instruments for goods or services. It also addresses transactions in which an
entity incurs liabilities in exchange for goods or services that are based on
the fair value of the entity's equity instruments or that may be settled by the
issuance of those equity instruments. The revised SFAS No. 123 is effective for
interim or annual reporting periods that begin after June 15, 2005. We estimate
that the impact on our net income and earnings per share will not exceed
approximately $2 million or $0.05 per diluted share. See "Stock Options" above.

In December 2004, the FASB issued FSP No. 109-1. FSP No. 109-1 provides
guidance on the application of FASB Statement No. 109, "Accounting for Income
Taxes," to the provision within The American Jobs Creation Act of 2004 (The Act)
that provides a tax deduction on qualified production activities. The purpose
behind this special deduction is to provide a tax incentive to companies that
maintain or expand U.S. manufacturing activities. FSP No. 109-1 was effective
upon issuance. The adoption of FSP 109-1 did not have any impact on our
consolidated financial statements.

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In December 2004, the FASB issued FSP No. 109-2. FSP No. 109-2 addresses
the question on the impact of a company's APB No. 23 Accounting for Income
Taxes -- Special Areas representation under The Act, which provides for a
special one-time 85 percent dividend deduction on dividends from foreign
subsidiaries. FSP No. 109-2 was effective upon issuance. The issuance of FSP No.
109-2 does not change how we apply APB No. 23, and therefore, did not have any
impact on our consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. These estimates include allowances for doubtful
receivables, promotional and product returns, pension and post-retirement
benefit plans, income taxes, and contingencies. These items are covered in more
detail in Note 1, Note 7, Note 10, and Note 12. Actual results could differ from
those estimates.

Reclassifications

Prior years' financial statements have been reclassified where appropriate
to conform to 2004 presentations.

2. RESTRUCTURING AND OTHER CHARGES

Over the past several years we have adopted plans to restructure portions
of our operations. These plans were approved by the Board of Directors and were
designed to reduce operational and administrative overhead costs throughout the
business. Prior to the change in accounting required for exit or disposal
activities, we recorded charges to income related to these plans for costs that
do not benefit future activities in the period in which the plans were finalized
and approved, while actions necessary to affect these restructuring plans
occurred over future periods in accordance with established plans.

In the fourth quarter of 2001, our Board of Directors approved a
restructuring plan, a project known as Project Genesis, designed to lower our
fixed costs, improve efficiency and utilization, and better optimize our global
footprint. Project Genesis involved closing eight facilities, improving the
process flow and efficiency through value mapping and plant arrangement at 20
facilities, relocating production among facilities, and centralizing some
functional areas. The total of all these restructuring and other costs recorded
in the fourth quarter of 2001 was $32 million before tax, $31 million after tax,
or $0.81 per diluted common share. We eliminated 974 positions in connection
with Project Genesis. Additionally, we executed this plan more efficiently than
originally anticipated and as a result in the fourth quarter of 2002 reduced our
reserves related to this restructuring activity by $6 million, which was
recorded in cost of sales. In the fourth quarter of 2003, we reclassified $2
million of severance reserve to the asset impairment reserve. This
reclassification became necessary as actual asset impairments along with the
sale of our closed facilities were different than the original estimates. We
completed the remaining restructuring activities under Project Genesis as of the
end of 2004. Since Project Genesis was announced, we have undertaken a number of
related projects designed to restructure our operations, described below.

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

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

In October of 2003, we announced the closing of an emission control
manufacturing facility in Birmingham, U.K. Approximately 130 employees were
eligible for severance benefits in accordance with union contracts and U.K.
legal requirements. We incurred approximately $3 million in costs related to
this action in 2004. This action is in addition to the plant closings announced
in Project Genesis in the fourth quarter of 2001.

In October 2004, we announced a plan to eliminate 250 salaried positions
through selected layoffs and an elective early retirement program. The majority
of the layoffs are at the middle and senior management level. We expect to incur
charges of approximately $24 to $26 million related to these reductions. As of
December 31, 2004, we have incurred $21 million in severance costs. Of this
total, $6 million was recorded in cost of sales and $15 million was recorded in
selling, general and administrative. We anticipate incurring the remaining costs
by April of 2005. Of the total $21 million in severance costs incurred to date,
$5 million represents cash payments with the remainder accrued in other
short-term liabilities.

Including the above costs, we incurred $40 million in restructuring and
restructuring-related costs in 2004. Of this total, $18 million related to the
continuation of the optimization of our manufacturing footprint that was started
with Project Genesis in 2001.

Including the costs incurred in 2002 and 2003 of $19 million, we have
incurred a total of $59 million for activities related to our restructuring
actions initiated in prior periods that could not be accrued as part of the
restructuring charges for these actions.

Under the terms of our amended and restated senior credit agreement that
took effect on December 12, 2003, we are allowed to exclude up to $60 million of
cash charges and expenses, before taxes, related to cost reduction initiatives
over the 2002 to 2006 time period from the calculation of the financial covenant
ratios we are required to maintain under our senior credit agreement. As of
December 31, 2004, we have excluded $59 million of the $60 million available
under the terms of the senior credit facility. In addition to the announced
actions, we will continue to evaluate additional opportunities to initiate
actions that will reduce our costs through implementing the most appropriate and
efficient logistics, distribution and manufacturing footprint for the future.
There can be no assurances, however, that we will undertake additional
restructuring actions. Actions that we take, if any, will require the approval
of our Board of Directors, or its authorized committee, and if the costs of the
plans exceed the amount previously approved by our senior lenders, could require
approval by our senior lenders. We plan to conduct any workforce reductions that
result in compliance with all legal and contractual requirements including
obligations to consult with workers' councils, union representatives and others.

In February of 2005, we amended our senior credit facility. As amended, we
are allowed to exclude up to $60 million of cash charges and expenses, before
taxes, related to restructuring initiatives occurring after February 2005 from
the calculation of the financial covenant ratios required under our senior
credit facility.

3. ACQUISITION

In February 2005, we announced the acquisition of substantially all the
exhaust assets of Gabilan Manufacturing, Inc., a privately held company that has
developed and manufactured motorcycle exhaust systems for Harley-Davidson
motorcycles since 1978. The company also produces aftermarket muffler kits for
Harley-Davidson. We purchased Gabilan's assets for $10 million in cash and
expect the acquisition to be accretive within the first year. Gabilan generated
approximately $38 million in revenue in 2004.

4. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

Effective January 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 changes the accounting for purchased goodwill
from an amortization method to an impairment-
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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

only approach. Therefore, amortization of all purchased goodwill, including
amortization of goodwill recorded in past business combinations, ceased upon
adoption. Prior to the adoption of SFAS No. 142, goodwill was amortized using
the straight-line method over periods ranging from 15 to 40 years.

As required by this standard, we performed an impairment analysis using
discounted cash flows and market multiples. As a result, we recorded an
impairment loss of $218 million, net of tax, as a cumulative effect of a change
in accounting principle in the first quarter of 2002. The impaired goodwill was
associated with our North American ride control and the European aftermarket
businesses. We are required to test the remaining goodwill balance for
impairment on an annual basis. There has been no further impairment of goodwill
since January 1, 2002.

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

Long-Term Debt

A summary of our long-term debt obligations at December 31, 2004 and 2003,
is set forth in the following table:

The aggregate maturities and sinking fund requirements applicable to the
issues outstanding at December 31, 2004, are $9 million, $7 million, $8 million,
$9 million, and $8 million for 2005, 2006, 2007, 2008, and 2009, respectively.

Short-Term Debt

We principally use revolving credit facilities to finance our short-term
capital requirements. As a result, we classify the outstanding balance of
borrowings under the revolving credit facilities within our short-term debt. The
revolving credit facility balance included in short-term debt was zero at both

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 2004 and December 31, 2003. Information regarding our short-term
debt as of and for the years ended December 31, 2004 and 2003 is as follows:

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

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

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

Financing Arrangements

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

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

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

Senior Credit Facility -- Overview and Recent Transactions. Our financing
arrangements are primarily provided by a committed senior secured financing
arrangement with a syndicate of banks and other financial institutions. The
arrangement is secured by substantially all our domestic assets and pledges of
66 percent of the stock of certain first-tier foreign subsidiaries, as well as
guarantees by our material domestic subsidiaries. We originally entered into
this facility in 1999 and since that time have periodically requested and
received amendments to the facility for various purposes. In December of 2003,
we engaged in a series of transactions that resulted in the full refinancing of
the facility, through an amendment and restatement. As of December 31, 2004, the
senior credit facility consisted of a seven-year, $396 million

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

term loan B facility maturing in December 2010; a five-year, $220 million
revolving credit facility maturing in December 2008; and a seven-year, $180
million tranche B-1 letter of credit/revolving loan facility maturing in
December 2010. In February 2005, we amended the facility, which resulted in
reduced interest rates on the term loan B and tranche B-1 letter of
credit/revolving loan portions of the facility. We also made a voluntary
prepayment of $40 million on the term loan B facility, reducing borrowings to
$356 million. These transactions are described in more detail below.

In June 2003, we issued $350 million of 10 1/4 percent senior secured
notes. The notes have a final maturity date of July 15, 2013. We received net
proceeds in the second quarter of 2003 from the offering of the notes, after
deducting underwriting discounts, commissions and expenses, of $338 million. We
used the net proceeds of the offering to repay outstanding amounts under our
senior credit facility as follows: (i) to prepay $199 million on the term loan A
that was due November 4, 2005, (ii) to prepay $52 million on the term loans B
and C that was due November 4, 2007 and May 4, 2008, respectively, and (iii) to
prepay outstanding borrowings of $87 million under the revolving credit portion
of our senior credit facility. These notes are described in more detail below
under "Senior Secured and Subordinated Notes."

In December 2003, we amended and restated our senior credit facility and
issued an additional $125 million of 10 1/4 percent senior secured notes. We
received $136 million of net proceeds from the offering of the additional $125
million of 10 1/4 percent senior secured notes, after deducting underwriting
discounts and other expenses and including a 13 percent price premium over par.
We also received $391 million in net proceeds from new term loan B borrowings
under the amended and restated senior credit facility, after deducting fees and
other expenses. We used the combined net proceeds of $527 million to prepay the
remaining $514 million outstanding under term loans A, B and C under the senior
credit facility immediately prior to the completion of the transaction. The
remaining $13 million of net proceeds were used for general corporate purposes.

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

Based on our use of the net proceeds from both the June and December 2003
transactions, these transactions would have increased our annual interest
expense by approximately $9 million. This does not give effect to the
fixed-to-floating interest rate swaps we completed in April 2004, described
below. In addition, we expensed in the second and fourth quarters of 2003 a
total of approximately $12 million of existing deferred debt issuance costs as a
result of retiring the term loans under the senior credit facility.

In April 2004, we entered into three separate fixed-to-floating interest
rate swaps with two separate financial institutions. These agreements swapped an
aggregate of $150 million of fixed interest rate debt at a per annum rate of
10 1/4 percent to floating interest rate debt at a per annum rate of LIBOR plus
a spread of 5.68 percent. Each agreement requires semi-annual settlements
through July 15, 2013. The LIBOR in effect for these swaps during the course of
2004 resulted in lower interest expense of approximately $3 million for the
year. The LIBOR rate as of December 31, 2004 as determined under these
agreements is 1.86 percent. This rate remained in effect until January 15, 2005
when it increased to 2.89 percent. Based upon the LIBOR of 2.89 percent which
was in effect as of January 15, 2005 under these agreements (and remains in
effect until July 15, 2005), these swaps would reduce our 2005 annual interest
expense by approximately $2 million. These swaps qualify as fair value hedges in
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and as such are recorded on the balance sheet at market value with
an offset to the underlying hedged item, which is long term debt. As of December
31, 2004, the fair value of the interest rate swaps was a liability of
approximately $1 million, which has been recorded as a decrease to long term
debt and an increase to other long term liabilities.

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

In November 2004, we refinanced our $500 million of 11 5/8 percent senior
subordinated notes maturing in October of 2009 with new senior subordinated
notes. The new notes have an interest rate of 8 5/8 percent, a maturity date of
November 15, 2014 and contain substantially similar terms as the notes
refinanced. Premium payments and other fees in connection with the refinancing
of these notes totaled approximately $40 million, including a $29 million or
5.813% price premium over par on the redeemed notes. The new notes accrue
interest from November 19, 2004 with an initial interest payment date of May 15,
2005. These notes are described in more detail below under "Senior Secured and
Subordinated Notes."

In connection with the refinancing of the $500 million in senior
subordinated notes we amended the senior credit facility effective November 17,
2004. This amendment allowed us to use up to $50 million in cash on hand to pay
redemption premiums and/or other fees and costs in connection with the
redemption and refinancing of the senior subordinated notes. This amendment also
excluded any redemption premium associated with the 11 5/8 percent senior
subordinated notes and any interest incurred on the notes between the call date
of November 19, 2004 and the redemption date of December 20, 2004 from cash
interest expense for purposes of the definition of consolidated interest expense
in the senior credit facility. In exchange for these amendments, we agreed to
pay a small fee to the consenting lenders. We also incurred approximately $13
million in legal, advisory and other costs related to the amendment and the
issuance of the new senior subordinated notes. These amounts were capitalized
and will be amortized over the remaining terms of the senior subordinated notes
and senior credit facility.

Our interest expense increased in 2004 by $42 million due to the fees and
expenses associated with the refinancing of our senior subordinated notes, which
includes an expense of $8 million for existing deferred debt issuance costs
associated with the 11 5/8 percent senior subordinated notes.

In February 2005 we amended our senior credit facility to reduce by 75
basis points the interest rate on the term loan B facility and the tranche B-1
letter of credit/revolving loan facility. In connection with the amendment, we
voluntarily prepaid $40 million in principal on the term loan B, reducing the
term loan B facility from $396 million to $356 million.

Additional provisions of the amendment to the senior credit facility
agreement (i) amend the definition of EBITDA to exclude up to $60 million in
restructuring-related expenses announced and taken after February 2005, (ii)
increase permitted investments to $50 million, (iii) exclude expenses related to
the issuance of stock options from the definition of consolidated net income,
(iv) permit us to redeem up to $125 million of senior secured notes after
January 1, 2008 (subject to certain conditions), (v) increase our ability to add
commitments under the revolving credit facility by $25 million, and (vi) make
other minor modifications. We incurred approximately $1 million in fees and
expenses associated with this amendment, which will be capitalized and amortized
over the remaining term of the agreement.

Senior Credit Facility -- Forms of Credit Provided. Following the February
2005 voluntary prepayment of $40 million, the term loan B facility is payable as
follows: $74 million due March 31, 2010, and $94 million due each of June 30,
September 30 and December 12, 2010. The revolving credit facility requires that
it be repaid by December 2008. Prior to that date, funds may be borrowed, repaid
and reborrowed under the revolving credit facility without premium or penalty.
Letters of credit may be issued under the revolving credit facility.

The tranche B-1 letter of credit/revolving loan facility requires that it
be repaid by December 2010. We can borrow revolving loans from the $180 million
tranche B-1 letter of credit/revolving loan facility and use that facility to
support letters of credit. The tranche B-1 letter of credit/revolving loan
facility

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

lenders have deposited $180 million with the administrative agent, who has
invested that amount in time deposits. We do not have an interest in any of the
funds on deposit. When we draw revolving loans under this facility, the loans
are funded from the $180 million on deposit with the administrative agent. When
we make repayments, the repayments are redeposited with the administrative
agent.

Under current accounting rules, the tranche B-1 letter of credit/revolving
loan facility will be reflected as debt on our balance sheet only if we have
outstanding thereunder revolving loans or payments by the facility in respect of
letters of credit. We will not be liable for any losses to or misappropriation
of any (i) return due to the administrative agent's failure to achieve the
return described above or to pay all or any portion of such return to any lender
under such facility or (ii) funds on deposit in such account by such lender
(other than the obligation to repay funds released from such accounts and
provided to us as revolving loans under such facility).

Senior Credit Facility -- Interest Rates and Fees. Borrowings under the
term loan B facility and the tranche B-1 letter of credit/revolving loan
facility bear interest at an annual rate equal to, at our option, either (i) the
London Interbank Offering Rate plus a margin of 300 basis points (reduced to 225
basis points in February 2005); or (ii) a rate consisting of the greater of the
JP Morgan Chase prime rate or the Federal Funds rate plus 50 basis points, plus
a margin of 200 basis points (reduced to 125 basis points in February 2005).
There is no cost to us for issuing letters of credit under the tranche B-1
letter of credit/ revolving loan facility, however outstanding letters of credit
reduce our availability to borrow revolving loans under this portion of the
facility. If a letter of credit issued under this facility is subsequently paid
and we do not reimburse the amount paid in full, then a ratable portion of each
lender's deposit would be used to fund the letter of credit. We pay the tranche
B-1 lenders a fee which is equal to LIBOR plus 300 basis points (reduced to 225
basis points in February 2005). This fee is offset by the return on the funds
deposited with the administrative agent which earn interest at a per annum rate
approximately equal to LIBOR. Outstanding revolving loans reduce the funds on
deposit with the administrative agent which in turn reduce the earnings of those
deposits and effectively increases our interest expense at a per annum rate
equal to LIBOR. The interest margins for borrowings under the term loan B
facility and tranche B-1 letter of credit/revolving loan facility will be
further reduced by 25 basis points following: the end of each fiscal quarter for
which the consolidated leverage ratio is less than 3.0 or at the point our
credit ratings are improved to BB- or better by Standard & Poor's (and are rated
at least B1 by Moody's) or to Ba3 or better by Moody's (and are rated at least
B+ by Standard & Poor's).

Borrowings under the revolving credit facility bear interest at an annual
rate equal to, at our option, either (i) the London Interbank Offering Rate plus
a margin of 325 basis points; or (ii) a rate consisting of the greater of the JP
Morgan Chase prime rate or the Federal Funds rate plus 50 basis points, plus a
margin of 225 basis points. Letters of credit issued under the revolving credit
facility accrue a letter of credit fee at a per annum rate of 325 basis points
for the pro rata account of the lenders under such facility and a fronting fee
for the ratable account of the issuers thereof at a per annum rate in an amount
to be agreed upon payable quarterly in arrears. The interest margins for
borrowings and letters of credit issued under the revolving credit facility are
subject to adjustment based on the consolidated leverage ratio (consolidated
indebtedness divided by consolidated EBITDA as defined in the senior credit
facility agreement) measured at the end of each quarter. The margin we pay on
the revolving credit facility will be reduced by 25 basis points following each
fiscal quarter for which the consolidated leverage ratio is less than 4.0
beginning in March 2005. We also pay a commitment fee of 50 basis points on the
unused portion of the revolving credit facility. This commitment fee will be
reduced by 12.5 basis points following the end of each fiscal quarter for which
the consolidated leverage ratio is less than 3.5.

Senior Credit Facility -- Other Terms and Conditions. The amended and
restated senior credit facility requires that we maintain financial ratios equal
to or better than the following consolidated leverage ratio (consolidated
indebtedness divided by consolidated EBITDA), consolidated interest coverage
ratio

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(consolidated EBITDA divided by consolidated cash interest paid), and fixed
charge coverage ratio (consolidated EBITDA less consolidated capital
expenditures, divided by consolidated cash interest paid) at the end of each
period indicated. The financial ratios required under the amended senior credit
facility and, the actual ratios we achieved for the four quarters of 2004, are
shown in the following tables:

The senior credit facility agreement provides: (i) the ability to refinance
our senior subordinated notes and/or our senior secured notes using the net cash
proceeds from the issuance of similarly structured debt; (ii) the ability to
repurchase our senior subordinated notes and/or our senior secured notes using
the net cash proceeds from issuing shares of our common stock; and (iii) the
prepayment of the term loans by an amount equal to 50 percent of our excess cash
flow as defined by the agreement.

The senior credit facility agreement also contains restrictions on our
operations that are customary for similar facilities, including limitations on:
(i) incurring additional liens; (ii) sale and leaseback transactions (except for
the permitted transactions as described in the amendment); (iii) liquidations
and dissolutions; (iv) incurring additional indebtedness or guarantees; (v)
capital expenditures; (vi) dividends; (vii) mergers and consolidations; and
(viii) prepayments and modifications of subordinated and other debt instruments.
Compliance with these requirements and restrictions is a condition for any
incremental borrowings under the senior credit facility agreement and failure to
meet these requirements enables the lenders to require repayment of any
outstanding loans. As of December 31, 2004, we were in compliance with all the
financial covenants (as indicated above) and operational restrictions of the
facility.

Our senior credit facility does not contain any terms that could accelerate
the payment of the facility as a result of a credit rating agency downgrade.

Senior Secured and Subordinated Notes. Our outstanding debt also includes
$475 million of 10 1/4 percent senior secured notes due July 15, 2013, in
addition to the $500 million of 8 5/8 percent senior subordinated notes due
November 15, 2014 described above. We can redeem some or all of the notes at any
time after July 15, 2008, in the case of the senior secured notes, and November
15, 2009, in the case of the senior subordinated notes. If we sell certain of
our assets or experience specified kinds of changes in control, we must offer to
repurchase the notes. We are permitted to redeem up to 35 percent of the senior
secured notes with the proceeds of certain equity offerings completed before
July 15, 2006 and up to 35 percent of the senior subordinated notes with the
proceeds of certain equity offerings completed before November 15, 2007.
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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Our senior secured and subordinated notes require that, as a condition
precedent to incurring certain types of indebtedness not otherwise permitted,
our consolidated fixed charge coverage ratio, as calculated on a proforma basis,
to be greater than 2.25 and 2.00, respectively. We have not incurred any of the
types of indebtedness not otherwise permitted by the indentures. The indentures
also contain restrictions on our operations, including limitations on: (i)
incurring additional indebtedness or liens; (ii) dividends; (iii) distributions
and stock repurchases; (iv) investments; (v) asset sales and (vi) mergers and
consolidations. Subject to limited exceptions, all of our existing and future
material domestic wholly owned subsidiaries fully and unconditionally guarantee
these notes on a joint and several basis. In addition, the senior secured notes
and related guarantees are secured by second priority liens, subject to
specified exceptions, on all of our and our subsidiary guarantors' assets that
secure obligations under our senior credit facility, except that only a portion
of the capital stock of our and our subsidiary guarantor's domestic subsidiaries
is provided as collateral and no assets or capital stock of our direct or
indirect foreign subsidiaries secure the notes or guarantees. There are no
significant restrictions on the ability of the subsidiaries that have guaranteed
these notes to make distributions to us. The senior subordinated notes rank
junior in right of payment to our senior credit facility and any future senior
debt incurred. As of December 31, 2004, we were in compliance with the covenants
and restrictions of these indentures.

Accounts Receivable Securitization. In addition to our senior credit
facility, senior secured notes and senior subordinated notes, we also sell some
of our accounts receivable. In North America, we have an accounts receivable
securitization program with a commercial bank. We sell original equipment and
aftermarket receivables on a daily basis under this program. We sold accounts
receivable under this program of $68 million and $36 million at December 31,
2004 and 2003, respectively. This program is subject to cancellation prior to
its maturity date if we were to (i) fail to pay interest or principal payments
on an amount of indebtedness exceeding $50 million, (ii) default on the
financial covenant ratios under the senior credit facility, or (iii) fail to
maintain certain financial ratios in connection with the accounts receivable
securitization program. In January 2005, this program was renewed for 364 days
to January 30, 2006 at the existing facility size of $75 million. We also sell
some receivables in our European operations to regional banks in Europe. At
December 31, 2004 we sold $56 million of accounts receivable in Europe down from
$87 million at December 31, 2003. The arrangements to sell receivables in Europe
are not committed and can be cancelled at any time. If we were not able to sell
receivables under either the North American or European securitization programs,
our borrowings under our revolving credit agreements would increase. These
accounts receivable securitization programs provide us with access to cash at
costs that are generally favorable to alternative sources of financing, and
allow us to reduce borrowings under our revolving credit agreements.

6. FINANCIAL INSTRUMENTS

The carrying and estimated fair values of our financial instruments by
class at December 31, 2004 and 2003 were as follows:

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Asset and Liability Instruments

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

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

Instruments With Off-Balance-Sheet Risk

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

We manage our foreign currency risk by entering into derivative financial
instruments with major financial institutions that can be expected to fully
perform under the terms of such agreements. Based on exchange rates at December
31, 2004 and 2003, the cost of replacing these contracts in the event of non-
performance by the counterparties would not have been material.

Guarantees -- We occasionally provide guarantees that could require us to
make future payments in the event that the third party primary obligor does not
make its required payments. We have not recorded a liability for any of these
guarantees. The only third party guarantee we have made is the performance of
lease obligations by a former affiliate. Our maximum liability under this
guarantee was approximately $4 million at both December 31, 2004 and 2003,
respectively. We have no recourse in the event of default by the former
affiliate. However, we have not been required to make any payments under this
guarantee.

Additionally, we have from time to time issued guarantees for the
performance of obligations by some of our subsidiaries, and some of our
subsidiaries have guaranteed our debt. All of our then existing and future
material domestic wholly-owned subsidiaries fully and unconditionally guarantee
our senior credit facility, our senior secured notes and our senior subordinated
notes on a joint and several basis. The arrangement for the senior credit
facility is also secured by first-priority liens on substantially all our
domestic assets and pledges of 66 percent of the stock of certain first-tier
foreign subsidiaries. The arrangement for the $475 million senior secured notes
is also secured by second-priority liens on

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substantially all our domestic assets, excluding some of the stock of our
domestic subsidiaries. No assets or capital stock of our direct or indirect
foreign subsidiaries secure these notes. You should also read Note 13 where we
present the Supplemental Guarantor Condensed Consolidating Financial Statements.

We have issued guarantees through letters of credit in connection with some
obligations of our affiliates. We have guaranteed through letters of credit
support for local credit facilities, travel and procurement card programs, and
cash management requirements for some of our subsidiaries totaling $24 million.
We have also issued $19 million in letters of credit to support some of our
subsidiaries' insurance arrangements. In addition, we have issued $3 million in
guarantees through letters of credit to guarantee other obligations of
subsidiaries primarily related to environmental remediation activities.

Interest Rate Swaps -- In April 2004, we hedged our exposure to fixed
interest rates by entering into fixed-to-floating interest rate swaps covering
$150 million of our fixed interest rate debt. The cost of replacing these
contracts in the event of non-performance by the counterparties was not
material. These hedges are effective, so we have not recognized in earnings any
amounts related to the ineffectiveness of the interest rate swaps. No amounts
were excluded from the assessment of hedge effectiveness.

Negotiable Financial Instruments -- One of our European subsidiaries
receives payment from one of its OE customers whereby the account receivables
are satisfied through the delivery of negotiable financial instruments. These
financial instruments are then sold at a discount to a European bank. The sales
of these financial instruments are not included in the account receivables sold
in 2004. Any of these financial instruments which were not sold as of December
31, 2004 and 2003 are classified as other current assets and are excluded from
our definition of cash equivalents. We had sold approximately $44 million of
these instruments at December 31, 2004.

7. INCOME TAXES

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

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

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

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

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

As shown by the valuation allowance in the table above, we had potential
tax benefits of $54 million and $65 million at December 31, 2004 and 2003,
respectively, that we did not recognize in the statements of income (loss) when
they were generated. These unrecognized tax benefits resulted primarily from
foreign tax loss carryforwards and foreign investment tax credits that are
available to reduce future foreign tax liabilities.

We have a U.S. Federal tax net operating loss carryforward ("NOL") at
December 31, 2004, of $569 million, which will expire in varying amounts from
2018 to 2024. The federal tax effect of that NOL is $199 million, and is
recorded as an asset on our balance sheet at December 31, 2004. We estimate,
based on available evidence both positive and negative, that it is more likely
than not that we will utilize the NOL within the prescribed carryforward period.
That estimate is based upon our expectations regarding future taxable income of
our U.S. operations and upon strategies available to accelerate usage of

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the NOL. Circumstances that could change that estimate include future U.S.
earnings at lower than expected levels or a majority ownership change as defined
in the rules of the U.S. tax law. If that estimate changed, we would be required
to cease recognizing an income tax benefit for any new NOL and could be required
to record a reserve for some or all of the asset currently recorded on our
balance sheet. As of December 31, 2004, we believe that there has been a
significant change in our ownership, but not a majority change, in the last
three years.

As of December 31, 2004, for foreign income tax purposes, we have $75
million of foreign tax NOLs. Of the $75 million of foreign tax NOLs, $60 million
does not expire and the remainder will expire in varying amounts from 2005 to
2019.

We do not provide for U.S. income taxes on unremitted earnings of foreign
subsidiaries, except for the earnings of certain of our China operations, as our
present intention is to reinvest the unremitted earnings in our foreign
operations. Unremitted earnings of foreign subsidiaries are approximately $413
million at December 31, 2004. We estimated that the amount of U.S. income taxes
that would be accrued upon remittance of the assets that represent those
unremitted earnings is $145 million.

We have tax sharing agreements with our former affiliates that allocate tax
liabilities for prior periods and establish indemnity rights on certain tax
issues.

8. COMMON STOCK

We have authorized 135 million shares ($.01 par value) of common stock, of
which 44,275,594 shares and 42,167,296 shares were issued at December 31, 2004
and 2003, respectively. We held 1,294,692 shares of treasury stock at both
December 31, 2004 and 2003.

Reserved

The total number of shares of our common stock reserved at December 31,
2004 and 2003, were as follows:

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

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

Stock Plans

Tenneco Automotive Inc. 2002 Long-Term Incentive Plan and Other Equity
Plans -- In December 1996, we adopted the 1996 Stock Ownership Plan, which
permitted the granting of a variety of awards, including common stock,
restricted stock, performance units, stock appreciation rights ("SARs"), and
stock options to our directors, officers, and employees. The plan, which
terminated as to new awards on December 31, 2001, was renamed the "Tenneco
Automotive Inc. Stock Ownership Plan." In December

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1999, we adopted the Tenneco Automotive Inc. Supplemental Stock Ownership Plan,
which permitted the granting of a variety of similar awards to our directors,
officers and employees. We were authorized to deliver up to about 1.1 million
treasury shares of common stock under the Supplemental Stock Ownership Plan,
which also terminated as to new awards on December 31, 2001. In March 2002, we
adopted the Tenneco Automotive Inc. 2002 Long-Term Incentive Plan which permits
the granting of a variety of similar awards to our officers, directors and
employees. Up to 4 million shares of our common stock have been authorized for
delivery under the 2002 Long-Term Incentive Plan, of which 205,833 had been
issued as of December 31, 2004.

Restricted Stock/Units, Performance Units, and Stock Equivalent Units -- We
have granted restricted stock and restricted units to certain key employees.
These awards generally require, among other things, that the employee remains
our employee during the restriction period. We have also granted performance
units to certain key employees that are payable in common stock at the end of a
three year performance period after the date of grant based on the attainment of
specified performance goals for the three years. We have also granted stock
equivalent units to certain key employees that are payable in cash annually at
the then current market price of our common stock based on the attainment of
specified performance goals. During 2004, 2003, and 2002, we granted 1,261,208,
1,111,543, and 285,822 shares and units, respectively, with a weighted average
fair value based on the price of our common stock on the grant date of $8.82,
$3.79, and $3.20 per share, respectively. Of these shares and units, included
were 956,125, 961,293 and 261,691 related to grants of stock equivalent units in
2004, 2003 and 2002, respectively, that were settled in cash. At December 31,
2004, 419,208 restricted shares at an average price of $7.27 per share, and
913,625 stock equivalent units at an average price of $8.83 per unit were
outstanding.

We have granted performance units to certain members of the Board of
Directors who are not also an employee of the company. We also granted
restricted stock to certain directors in satisfaction of residual obligations
under the discontinued retirement plan for directors. During 2004 and 2003, no
performance units for non-employee directors were issued under this program.
During 2002, 7,000 performance units were issued under this program at a
weighted average fair value of our stock on the grant date of $3.90. During
2004, 1,774 restricted shares were issued under this program to a non-employee
director at the weighted average fair value of our stock on the grant date of
$8.68 per share. During 2003 and 2002, 4,085 and 3,949 restricted shares,
respectively, were issued under this program at a weighted average fair value of
our stock on the grant date of $3.77 and $3.90, respectively. At December 31,
2004, 16,436 restricted shares and 7,000 performance units at an average price
of $4.68 and $3.90, respectively, per unit were outstanding under this program.

We recognized after-tax stock based compensation expense in 2004 of $14
million, 2003 of $4 million, and in 2002 of $4 million.

Employee Stock Ownership Plans (401(k) Plans) -- We have established
Employee Stock Ownership Plans for the benefit of our employees. Under the
plans, participants may elect to defer up to 50 percent of their salary through
contributions to the plan, which are invested in selected mutual funds or used
to buy our common stock. We currently match in cash 50 percent of each
employee's contribution up to 8 percent of the employee's salary. We recorded
expense for these matching contributions of approximately $7 million, $6 million
and $7 million for the years ended December 31, 2004, December 31, 2003 and
2002, respectively. All contributions vest immediately.

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

The following table reflects summarized information about stock options
outstanding at December 31, 2004:

Rights Plan

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

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

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

Earnings Per Share

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

Options to purchase 741,921, 2,367,094, and 2,551,872 shares of common
stock were outstanding at December 31, 2004, 2003, and 2002, respectively, but
were not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the common shares
on such dates.

9. PREFERRED STOCK

We had 50 million shares of preferred stock ($.01 par value) authorized at
December 31, 2004 and 2003. No shares of preferred stock were outstanding at
those dates. We have designated and reserved 2 million shares of the preferred
stock as junior preferred stock for the Rights Plan.

10. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

We have various defined benefit pension plans that cover substantially all
of our employees. The measurement date used to determine measurement of the
majority of our pension plan assets and benefit

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obligations is September 30th, for both our domestic and foreign plans. Benefits
are based on years of service and, for most salaried employees, on final average
compensation. Our funding policy is to contribute to the plans amounts necessary
to satisfy the funding requirement of applicable federal or foreign laws and
regulations. Pension plan assets were invested in the following classes of
securities:

Our investment policy for both our domestic and foreign plans is to invest
more heavily in equity securities rather than debt securities. Targeted pension
plan allocations are 70 percent in equity securities and 30 percent in debt
securities, with acceptable tolerance levels of plus or minus five percent
within each category for our domestic plans. Our foreign plans are individually
managed to different target levels depending on the investing environment in
each country.

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

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

- -------------------------
Notes: Assets of one plan may not be utilized to pay benefits of other plans.
Additionally, the prepaid (accrued) pension cost has been recorded based
upon certain actuarial estimates as described below. Those estimates are
subject to revision in future periods given new facts or circumstances.
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Net periodic pension costs (income) for the years 2004, 2003, and 2002,
consist of the following components:

The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for all pension plans with accumulated benefit obligations
in excess of plan assets at September 30, 2004 and 2003 were as follows:

The following estimated benefit payments are payable from the pension plans
to participants:

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The following assumptions were used in the accounting for the pension plans
for the years of 2004, 2003, and 2002:

We made contributions of $24 million to these pension plans during 2004.
Based on current actuarial estimates, we believe we will be required to make
contributions of $49 million to $54 million to those plans during 2005. Pension
contributions beyond 2005 will be required, but those amounts will vary based
upon many factors, including the performance of our pension fund investments
during 2005.

We have life insurance plans which cover a majority of our domestic
employees. We also have postretirement plans for our domestic employees hired
before January 1, 2001. The plans cover salaried employees retiring on or after
attaining age 55 who have at least 10 years of service with us after attaining
age 45. For hourly employees, the postretirement benefit plans generally cover
employees who retire according to one of our hourly employee retirement plans.
All of these benefits may be subject to deductibles, copayment provisions and
other limitations, and we have reserved the right to change these benefits. For
those employees hired after January 1, 2001, we do not provide any
postretirement benefits. Our postretirement healthcare and life insurance plans
are not funded. The measurement date used to determine postretirement benefit
obligations is September 30th.

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

In July 2004, we entered into a settlement with a group of the retirees
which were a part of the September 2003 change mentioned above. This settlement
provided the group with increased coverage, and as a result, a portion of the
negative plan amendment was reversed and a positive plan amendment put in place.
The effect of the settlement increased our 2004 postretirement benefit expense
by approximately $1 million and increased our accumulated postretirement benefit
obligation by approximately $13 million.

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Net periodic postretirement benefit cost for the years 2004, 2003, and
2002, consists of the following components:

The following estimated postretirement benefit payments are payable from
the plans to participants:

The weighted average assumed health care cost trend rate used in
determining the 2004 accumulated postretirement benefit obligation was 9
percent, declining to 5 percent by 2009. In 2003 and 2002 the health care cost
trend rate was 10 percent and 9 percent, respectively.

The following assumptions were used in the accounting for postretirement
cost for the years of 2004, 2003 and 2002:

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

Based on current actuarial estimates, we believe we will be required to
make postretirement contributions of approximately $9 million during 2005.

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On December 8, 2003, the President signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) into law. The Act introduces
a voluntary prescription drug benefit under Medicare as well as a federal
subsidy to sponsors of retiree healthcare plans that provide prescription drug
benefits that are at least actuarially equivalent to Medicare Part D. This
subsidy covers a defined portion of an individual beneficiary's annual covered
prescription drug costs, and is exempt from federal taxation.

In May 2004, the FASB issued FSP 106-2 which provides guidance on the
accounting for the effects of the Act. We adopted the provisions of FSP 106-2 in
the third quarter of 2004 which lowered our 2004 postretirement benefit expense
by less than $1 million. The application of the Medicare subsidy reduced our
2004 accumulated postretirement benefit obligation by $10 million, all of which
was related to benefits attributed to past service and was accounted for as an
actuarial gain as required by the FSP.

11. SEGMENT AND GEOGRAPHIC AREA INFORMATION

In October 2004, we announced a change in the structure of our organization
which changed our reportable segments. The European segment now includes South
American operations. While this has no impact on our consolidated results, it
changes our segment results.

We are a global manufacturer with three geographic reportable segments:
North America, Europe and South America, and Asia Pacific. Each segment
manufactures and distributes ride control and emission control products
primarily for the automotive industry. We have not aggregated individual
operating segments within these reportable segments. The accounting policies of
the segments are the same as described in Note 1, "Summary of Accounting
Policies." We evaluate segment performance based primarily on income before
interest expense, income taxes, and minority interest. Products are transferred
between segments and geographic areas on a basis intended to reflect as nearly
as possible the "market value" of the products. Segment results for 2004, 2003,
and 2002 are as follows:

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

During 2004, sales to four major customers comprised approximately 18
percent, 12 percent, 11 percent and 8 percent of consolidated net sales and
operating revenues. During 2003, sales to four major customers comprised
approximately 19 percent, 14 percent, 11 percent and 9 percent of consolidated

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net sales and operating revenues. During 2002, sales to four major customers
comprised approximately 20 percent, 13 percent, 10 percent and 10 percent of
consolidated net sales and operating revenues.

- -------------------------
Notes: (a) Revenues from external customers and long-lived assets for individual
foreign countries other than Germany are not material.

(b) Revenues are attributed to countries based on location of the seller.

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

12. COMMITMENTS AND CONTINGENCIES

Capital Commitments

We estimate that expenditures aggregating approximately $49 million will be
required after December 31, 2004 to complete facilities and projects authorized
at such date, and we have made substantial commitments in connection with these
facilities and projects.

Lease Commitments

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

Total rental expense for the year 2004, 2003, and 2002 was $32 million, $33
million, and $30 million respectively.

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Litigation

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

Product Warranties

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

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

Environmental Matters

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

As of December 31, 2004, we are designated as a potentially responsible
party in one Superfund site. We have estimated our share of the remediation
costs for this site to be less than $1 million in the aggregate. In addition to
the Superfund site, we may have the obligation to remediate current or former
facilities, and we estimate our share of remediation costs at these facilities
to be approximately $11 million. For the Superfund site and the current and
former facilities, we have established reserves that we believe are adequate for
these costs. Although we believe our estimates of remediation costs are
reasonable and are based on the latest available information, the cleanup costs
are estimates and are subject to revision as more information becomes available
about the extent of remediation required. At some sites, we expect that other
parties will contribute to the remediation costs. In addition, at the Superfund
site, the Comprehensive Environmental Response, Compensation and Liability Act
provides that our liability could be joint and several, meaning that we could be
required to pay in excess of our share of remediation costs. Our understanding
of the financial strength of other potentially responsible parties at the
Superfund site, and of other liable parties at our current and former
facilities, has been considered, where appropriate, in our determination of our
estimated liability.

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

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13. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

Basis of Presentation

Subject to limited exceptions, all of our existing and future material
domestic wholly owned subsidiaries (which are referred to as the Guarantor
Subsidiaries) fully and unconditionally guarantee our senior subordinated notes
due in 2014 and our senior secured notes due 2013 on a joint and several basis.
You should also read Note 6, "Financial Instruments" for further discussion of
the notes and related guarantee. We have not presented separate financial
statements and other disclosures concerning each of the Guarantor Subsidiaries
because management has determined that such information is not material to the
holders of the notes. Therefore, the Guarantor Subsidiaries are combined in the
presentation below.

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

Distributions

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

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STATEMENT OF INCOME (LOSS)

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STATEMENT OF INCOME (LOSS)

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STATEMENT OF INCOME (LOSS)

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BALANCE SHEET

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BALANCE SHEET

108

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

STATEMENT OF CASH FLOWS

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

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

109

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

STATEMENT OF CASH FLOWS

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

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

110

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

STATEMENT OF CASH FLOWS

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

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

111

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

14. QUARTERLY FINANCIAL DATA (UNAUDITED)

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

Note: The sum of the quarters may not equal the total of the respective year's
earnings per share on either a basic or diluted basis due to changes in
the weighted average shares outstanding throughout the year.

(The preceding notes are an integral part of the foregoing financial
statements.)

112

SCHEDULE II

TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

113

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

None.

ITEM 9A. CONTROLS AND PROCEDURES.

An evaluation was carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the year covered by this report. Based on
this evaluation, our Chief Executive Officer and our Chief Financial Officer
have concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by our company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. There were no changes in our internal
control over financial reporting that occurred during the fourth quarter of 2004
that have materially affected, or are likely to materially affect, our internal
control over financial reporting.

ITEM 9B. OTHER INFORMATION.

None.

114

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The sections entitled "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in our definitive Proxy Statement for the Annual
Meeting of Stockholders to be held May 10, 2005 is incorporated herein by
reference. In addition, Item 4.1 of this Annual Report on Form 10-K, which
appears at the end of Part I, is incorporated herein by reference.

A copy of our Code of Ethical Conduct for Financial Managers, which applies
to our Chief Executive Officer, Chief Financial Officer, Controller and other
key financial managers, is filed as Exhibit 14.1 to this Form 10-K. We have
posted a copy of the Code of Ethical Conduct for Financial Managers on our
Internet website at www.tenneco-automotive.com. We will make a copy of this code
available to any person, without charge, upon written request to Tenneco
Automotive Inc., 500 North Field Drive, Lake Forest, Illinois 60045, Attn:
General Counsel. We intend to satisfy the disclosure requirement under Item 5.05
of Form 8-K and applicable NYSE rules regarding amendments to or waivers of our
Code of Ethical Conduct by posting this information on our Internet website at
www.tenneco-automotive.com.

ITEM 11. EXECUTIVE COMPENSATION.

The sections entitled "Executive Compensation" and "Election of
Directors -- Compensation of Directors" in our definitive Proxy Statement for
the Annual Meeting of Stockholders to be held May 10, 2005 are incorporated
herein by reference.

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

The section entitled "Ownership of Common Stock" in our definitive Proxy
Statement for the Annual Meeting of Stockholders to be held May 10, 2005 is
incorporated herein by reference.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table shows, as of December 31, 2004, information regarding
outstanding awards available under our compensation plans (including individual
compensation arrangements) under which our equity securities may be delivered:

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

(1) Reflects the number of shares of the Company's common stock. Does not
include 276,547 shares that may be issued in settlement of common stock
equivalent units that were credited to outside directors as payment for
their retainer fee. In general, these units are settled in cash. At the
option of the Company, however, the units may be settled in shares of the
Company's common stock.

115

(2) This plan terminated as to new awards on December 31, 2001 (except awards
pursuant to commitments outstanding at that date). Does not include 6,628
shares subject to outstanding restricted stock (vest over time) and
stock-settled performance share awards (vest based on the achievement of
performance goals over a specified period) outstanding as of December 31,
2004 that were issued at a weighted-average issue price of $4.65 per share.

(3) Does not include 436,016 shares subject to outstanding restricted stock
(vest over time) and stock-settled performance share awards (vest based on
the achievement of performance goals over a specified period) outstanding as
of December 31, 2004 that were issued at a weighted-average issue price of
$7.16 per share.

(4) Under this plan, as of December 31, 2004, a maximum of 527,859 shares
remained available for delivery under full value awards (i.e., bonus stock,
stock equivalent units, performance units, restricted stock and restricted
stock units). At March 4, 2005, the Company had issued 291,290 shares of
stock under this plan and had outstanding awards granted under this plan
covering the delivery of up to 2,922,781 shares of common stock.
Accordingly, at March 4, 2005, 785,929 shares remained available under the
plan, of which 242,459 could be delivered as full value awards.

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

None.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The sections entitled "Ratify Appointment of Independent Public
Accountants -- Audit, Audit-Related, Tax and Other Fees" and "Ratify Appointment
of Independent Public Accountants -- Pre-Approval Policy" in our definitive
Proxy Statement for the Annual Meeting of Stockholders to be held May 10, 2005
are incorporated herein by reference.

116

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

FINANCIAL STATEMENTS INCLUDED IN ITEM 8

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

INDEX TO SCHEDULE INCLUDED IN ITEM 8

SCHEDULES OMITTED AS NOT REQUIRED OR INAPPLICABLE

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

117

EXHIBITS

The following exhibits are filed with this Annual Report on Form 10-K for
the fiscal year ended December 31, 2004, or incorporated herein by reference
(exhibits designated by an asterisk are filed with the report; all other
exhibits are incorporated by reference):

INDEX TO EXHIBITS

118

119

120

121

122

123

124

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

* Filed herewith.

125

SIGNATURES

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

TENNECO AUTOMOTIVE INC.

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

Date: March 16, 2005

Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed by the following persons in the capacities indicated on
March 16, 2005.

126