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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
                      ------------------------------------
 
                                   FORM 10-Q
(Mark One)
 

  
[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                   SECURITIES EXCHANGE ACT OF 1934
 
             For the Quarterly Period Ended June 30, 2005
 
                                  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 incorporation        (I.R.S. Employer Identification No.)
              or organization)
 
500 NORTH FIELD DRIVE, LAKE FOREST, ILLINOIS                         60045
  (Address of principal executive offices)                        (Zip Code)

 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 482-5000
 
     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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
                               Yes [X]     No [ ]
 
     Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
 
     Common Stock, par value $0.01 per share: 43,924,782 shares as of July 31,
2005.
 
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                               TABLE OF CONTENTS
 


                                                              PAGE
                                                              ----
                                                           
PART I--FINANCIAL INFORMATION
  Item 1. Financial Statements (Unaudited)..................    4
     Tenneco Automotive Inc. and Consolidated Subsidiaries--
       Report of Independent Registered Public Accounting
        Firm................................................    4
       Statements of Income.................................    5
       Balance Sheets.......................................    6
       Statements of Cash Flows.............................    7
       Statements of Changes in Shareholders' Equity........    8
       Statements of Comprehensive Income (Loss)............    9
       Notes to Consolidated Financial Statements...........   10
  Item 2. Management's Discussion and Analysis of Financial
     Condition and Results of Operations....................   29
  Item 3. Quantitative and Qualitative Disclosures About
     Market Risk............................................   57
  Item 4. Controls and Procedures...........................   57
PART II--OTHER INFORMATION
  Item 1. Legal Proceedings.................................    *
  Item 2. Unregistered Sales of Equity Securities and Use of
     Proceeds...............................................   58
  Item 3. Defaults Upon Senior Securities...................    *
  Item 4. Submission of Matters to a Vote of Security
     Holders................................................   58
  Item 5. Other Information.................................    *
  Item 6. Exhibits..........................................   58

 
---------------
 
* No response to this item is included herein for the reason that it is
  inapplicable or the answer to such item is negative.
 
             CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
       PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
 
     This Quarterly Report on Form 10-Q contains forward-looking statements
regarding, among other things, our prospects and business strategies. The words
"may," "will," "believes," "should," "could," "plans," "expects," "anticipate,"
"intends," "estimates," and similar expressions (and variations thereof),
identify these forward-looking statements. Although we believe that the
expectations reflected in these forward-looking statements are based on
reasonable assumptions, these expectations may not prove to be correct. Because
these forward-looking statements are also subject to risks and uncertainties,
actual results may differ materially from the expectations expressed in the
forward-looking statements. Important factors that could cause actual results to
differ materially from the expectations reflected in the forward-looking
statements include:
 
     - changes in automotive manufacturers' production rates and their actual
       and forecasted requirements for our products, including the overall
       highly competitive nature of the automotive parts industry, and our
       resultant inability to realize the sales represented by our awarded book
       of business which is based on anticipated pricing for the applicable
       program over its life, and is subject to increases or decreases due to
       changes in customer requirements, customer and consumer preferences, and
       the number of vehicles actually produced by customers;
 
     - increases in the costs of raw materials, including our ability to
       successfully reduce the impact of any such cost increases through
       materials substitutions, cost reduction initiatives and other methods;
 
                                        2

 
     - the cyclical nature of the global vehicular industry, including the
       performance of the global aftermarket sector, and changes in consumer
       demand and prices, including longer product lives of automobile parts and
       the cyclicality of automotive production and sales of automobiles which
       include our products, and the potential negative impact on our revenues
       and margins from such products;
 
     - our continued success in cost reduction and cash management programs and
       our ability to execute restructuring and other cost reduction plans and
       to realize anticipated benefits from these plans;
 
     - general economic, business and market conditions;
 
     - the impact of consolidation among automotive parts suppliers and
       customers on our ability to compete;
 
     - operating hazards associated with our business;
 
     - changes in distribution channels or competitive conditions in the markets
       and countries where we operate, including the impact of changes in
       distribution channels for aftermarket products on our ability to increase
       or maintain aftermarket sales;
 
     - the cost and outcome of existing and any future legal proceedings, and
       compliance with changes in regulations, including environmental
       regulations;
 
     - labor disruptions at our facilities or at any of our significant
       customers or suppliers;
 
     - economic, exchange rate and political conditions in the foreign countries
       where we operate or sell our products;
 
     - customer acceptance of new products;
 
     - new technologies that reduce the demand for certain of our products or
       otherwise render them obsolete;
 
     - our ability to realize our business strategy of improving operating
       performance;
 
     - capital availability or costs, including changes in interest rates,
       market perceptions of the industries in which we operate or ratings of
       securities;
 
     - changes by the Financial Accounting Standards Board or the Securities and
       Exchange Commission of authoritative generally accepted accounting
       principles or policies;
 
     - the impact of changes in and compliance with laws and regulations,
       including environmental laws and regulations, and environmental
       liabilities in excess of the amount reserved;
 
     - terrorism, acts of war and similar events, and their resultant impact on
       economic and political conditions; and
 
     - the occurrence or non-occurrence of other circumstances beyond our
       control.
 
                                        3

 
                                    PART I.
 
                             FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
 
            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
TENNECO AUTOMOTIVE INC.
 
     We have reviewed the accompanying consolidated balance sheet of Tenneco
Automotive Inc. and consolidated subsidiaries as of June 30, 2005, and the
related consolidated statements of income and comprehensive income (loss) for
the three-month and six-month periods ended June 30, 2005 and 2004, and of cash
flows and changes in shareholders' equity for the six-month periods ended June
30, 2005 and 2004. These interim financial statements are the responsibility of
Tenneco Automotive Inc.'s management.
 
     We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
 
     Based on our review, we are not aware of any material modifications that
should be made to such consolidated interim financial statements for them to be
in conformity with accounting principles generally accepted in the United States
of America.
 
     We previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
Tenneco Automotive Inc. and consolidated subsidiaries as of December 31, 2004,
and the related consolidated statements of income (loss), cash flows, changes in
shareholders' equity and comprehensive income (loss) for the year then ended
(not presented herein); and in our report dated March 8, 2005 (May 10, 2005 as
to Note 4), we expressed an unqualified opinion on those consolidated financial
statements (such report includes an explanatory paragraph relating to (i) a
change in accounting for goodwill and intangible assets upon the adoption of
Statement of Financial Accounting Standards No. 142 and (ii) a change in method
of accounting for certain inventory from the last-in, first-out method ("LIFO")
to the lower of cost, determined on a first-in, first-out ("FIFO") basis, or
market method). In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2004 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
 
DELOITTE & TOUCHE LLP
 
Chicago, Illinois
August 1, 2005
 
                                        4

 
             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
                              STATEMENTS OF INCOME
                                  (UNAUDITED)
 


                                              THREE MONTHS ENDED JUNE 30,     SIX MONTHS ENDED JUNE 30,
                                              ----------------------------    --------------------------
                                                  2005            2004           2005           2004
                                              ------------    ------------    -----------    -----------
                                                    (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
                                                                                 
REVENUES
  Net sales and operating revenues........    $     1,180     $     1,113     $     2,281    $     2,146
                                              -----------     -----------     -----------    -----------
COSTS AND EXPENSES
  Cost of sales (exclusive of depreciation
     shown below).........................            941             873           1,829          1,702
  Engineering, research, and
     development..........................             18              19              42             36
  Selling, general, and administrative....             93             100             191            209
  Depreciation and amortization of other
     intangibles..........................             44              44              90             89
                                              -----------     -----------     -----------    -----------
                                                    1,096           1,036           2,152          2,036
                                              -----------     -----------     -----------    -----------
OTHER INCOME (EXPENSE)
  Loss on sale of receivables.............             (1)             (1)             (1)            (1)
  Other income (loss).....................             --              --              (1)            --
                                              -----------     -----------     -----------    -----------
                                                       (1)             (1)             (2)            (1)
                                              -----------     -----------     -----------    -----------
INCOME BEFORE INTEREST EXPENSE, INCOME
  TAXES, AND MINORITY INTEREST............             83              76             127            109
  Interest expense (net of interest
     capitalized).........................             32              34              64             69
  Income tax expense......................             18              10              22              9
  Minority interest.......................             --               2               1              3
                                              -----------     -----------     -----------    -----------
NET INCOME................................    $        33     $        30     $        40    $        28
                                              ===========     ===========     ===========    ===========
EARNINGS PER SHARE
Average shares of common stock
  outstanding--
  Basic...................................     42,987,528      41,475,722      42,821,183     41,132,232
  Diluted.................................     45,072,761      44,181,228      45,030,976     43,839,409
Basic earnings per share of common
  stock...................................    $      0.75     $      0.73     $      0.92    $      0.69
Diluted earnings per share of common
  stock...................................    $      0.71     $      0.69     $      0.88    $      0.65

 
  The accompanying notes to financial statements are an integral part of these
                             statements of income.
                                        5

 
             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
                                 BALANCE SHEETS
                                  (UNAUDITED)
 


                                                                              (NOTE 3)
                                                                JUNE 30,    DECEMBER 31,
                                                                  2005          2004
                                                                --------    ------------
                                                                       (MILLIONS)
                                                                      
                                         ASSETS
Current assets:
  Cash and cash equivalents.................................    $    66       $   214
  Receivables--
    Customer notes and accounts, net........................        631           458
    Other...................................................         31            30
  Inventories--
    Finished goods..........................................        172           167
    Work in process.........................................         97            85
    Raw materials...........................................         98           105
    Materials and supplies..................................         37            39
  Deferred income taxes.....................................         70            70
  Prepayments and other.....................................        133           124
                                                                -------       -------
                                                                  1,335         1,292
                                                                -------       -------
Other assets:
  Long-term notes receivable, net...........................         21            24
  Goodwill..................................................        195           196
  Intangibles, net..........................................         23            24
  Deferred income taxes.....................................        302           304
  Other.....................................................        141           145
                                                                -------       -------
                                                                    682           693
                                                                -------       -------
Plant, property, and equipment, at cost.....................      2,369         2,451
  Less--Reserves for depreciation and amortization..........      1,319         1,317
                                                                -------       -------
                                                                  1,050         1,134
                                                                -------       -------
                                                                $ 3,067       $ 3,119
                                                                =======       =======
                          LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Short-term debt (including current maturities of long-term
    debt)...................................................    $    49       $    19
  Trade payables............................................        726           696
  Accrued taxes.............................................         39            24
  Accrued interest..........................................         37            35
  Accrued liabilities.......................................        217           226
  Other.....................................................         29            47
                                                                -------       -------
                                                                  1,097         1,047
                                                                -------       -------
Long-term debt..............................................      1,363         1,401
                                                                -------       -------
Deferred income taxes.......................................        118           126
                                                                -------       -------
Postretirement benefits.....................................        273           276
                                                                -------       -------
Deferred credits and other liabilities......................         65            86
                                                                -------       -------
Commitments and contingencies
  Minority interest.........................................         22            24
                                                                -------       -------
Shareholders' equity:
  Common stock..............................................         --            --
  Premium on common stock and other capital surplus.........      2,771         2,764
  Accumulated other comprehensive loss......................       (260)         (185)
  Retained earnings (accumulated deficit)...................     (2,142)       (2,180)
                                                                -------       -------
                                                                    369           399
  Less--Shares held as treasury stock, at cost..............        240           240
                                                                -------       -------
                                                                    129           159
                                                                -------       -------
                                                                $ 3,067       $ 3,119
                                                                =======       =======

 
  The accompanying notes to financial statements are an integral part of these
                                balance sheets.
                                        6

 
             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
                            STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
 


                                                                  SIX MONTHS
                                                                    ENDED
                                                                   JUNE 30,
                                                                --------------
                                                                2005     2004
                                                                -----    -----
                                                                  (MILLIONS)
                                                                   
OPERATING ACTIVITIES
Net income..................................................    $  40    $  28
Adjustments to reconcile net income to cash provided (used)
  by operating activities--Depreciation and amortization of
  other intangibles.........................................       90       89
  Deferred income taxes.....................................       (5)      (5)
  Loss on sale of assets, net...............................        1       --
  Changes in components of working capital (net of
     acquisition)--
     (Increase) decrease in receivables.....................     (200)    (113)
     (Increase) decrease in inventories.....................      (33)     (16)
     (Increase) decrease in prepayments and other current
      assets................................................      (19)     (27)
     Increase (decrease) in payables........................       64       60
     Increase (decrease) in accrued taxes...................       19       13
     Increase (decrease) in accrued interest................        2       (2)
     Increase (decrease) in other current liabilities.......      (10)      24
  Other.....................................................      (20)       8
                                                                -----    -----
Net cash provided (used) by operating activities............      (71)      59
                                                                -----    -----
INVESTING ACTIVITIES
Net proceeds from sale of assets............................        3       11
Expenditures for plant, property, and equipment.............      (63)     (54)
Acquisition of business.....................................      (11)      --
Investments and other.......................................        2       (2)
                                                                -----    -----
Net cash used by investing activities.......................      (69)     (45)
                                                                -----    -----
FINANCING ACTIVITIES
Issuance of common shares...................................        4        4
Retirement of long-term debt................................      (42)      (4)
Net increase (decrease) in short-term debt excluding current
  maturities of long-term debt..............................       34        1
Other.......................................................       --        2
                                                                -----    -----
Net cash provided (used) by financing activities............       (4)       3
                                                                -----    -----
Effect of foreign exchange rate changes on cash and cash
  equivalents...............................................       (4)       4
                                                                -----    -----
Increase (decrease) in cash and cash equivalents............     (148)      21
Cash and cash equivalents, January 1........................      214      145
                                                                -----    -----
Cash and cash equivalents, June 30 (Note)...................    $  66    $ 166
                                                                =====    =====
Cash paid during the period for interest....................    $  61    $  74
Cash paid during the period for income taxes (net of
  refunds)..................................................    $  11    $   7

 
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.
                                        7

 
             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
                 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                  (UNAUDITED)
 


                                                                          (NOTE 3)
                                                                 SIX MONTHS ENDED JUNE 30,
                                                       ----------------------------------------------
                                                               2005                     2004
                                                       ---------------------    ---------------------
                                                         SHARES      AMOUNT       SHARES      AMOUNT
                                                       ----------    -------    ----------    -------
                                                              (MILLIONS EXCEPT SHARE AMOUNTS)
                                                                                  
COMMON STOCK
Balance January 1..................................    44,275,594    $    --    42,167,296    $    --
  Issued pursuant to benefit plans.................       271,422         --       450,109         --
  Stock options exercised..........................       612,774         --       676,107         --
                                                       ----------    -------    ----------    -------
Balance June 30....................................    45,159,790         --    43,293,512         --
                                                       ==========               ==========
PREMIUM ON COMMON STOCK AND OTHER CAPITAL SURPLUS
Balance January 1..................................                    2,764                    2,751
  Premium on common stock issued pursuant to
  benefit plans....................................                        7                        6
                                                                     -------                  -------
Balance June 30....................................                    2,771                    2,757
                                                                     -------                  -------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance January 1..................................                     (185)                    (241)
  Other comprehensive loss.........................                      (75)                     (19)
                                                                     -------                  -------
Balance June 30....................................                     (260)                    (260)
                                                                     -------                  -------
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Balance January 1 (Note 3).........................                   (2,180)                  (2,205)
  Net income.......................................                       40                       28
  Other............................................                       (2)                      --
                                                                     -------                  -------
Balance June 30....................................                   (2,142)                  (2,177)
                                                                     -------                  -------
LESS--COMMON STOCK HELD AS TREASURY STOCK, AT COST
Balance January 1 and June 30......................     1,294,692        240     1,294,692        240
                                                       ==========    -------    ==========    -------
       Total.......................................                  $   129                  $    80
                                                                     =======                  =======

 
      The accompanying notes to financial statements are an integral part
            of these statements of changes in shareholders' equity.
                                        8

 
             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
                   STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                                  (UNAUDITED)
 


                                                               THREE MONTHS ENDED JUNE 30,
                                             ----------------------------------------------------------------
                                                          2005                              2004
                                             ------------------------------    ------------------------------
                                              ACCUMULATED                       ACCUMULATED
                                                 OTHER                             OTHER
                                             COMPREHENSIVE    COMPREHENSIVE    COMPREHENSIVE    COMPREHENSIVE
                                                INCOME           INCOME           INCOME           INCOME
                                                (LOSS)           (LOSS)           (LOSS)           (LOSS)
                                             -------------    -------------    -------------    -------------
                                                                        (MILLIONS)
                                                                                    
NET INCOME...............................                         $ 33                              $ 30
                                                                  ----                              ----
ACCUMULATED OTHER COMPREHENSIVE LOSS
CUMULATIVE TRANSLATION ADJUSTMENT
  Balance April 1........................        $ (98)                            $(149)
     Translation of foreign currency
       statements........................          (40)            (40)              (13)            (13)
                                                 -----                             -----
  Balance June 30........................         (138)                             (162)
                                                 -----                             -----
ADDITIONAL MINIMUM PENSION LIABILITY
  ADJUSTMENT
  Balance April 1 and June 30............         (122)                              (98)
                                                 -----                             -----
Balance June 30..........................        $(260)                            $(260)
                                                 =====            ----             =====            ----
Other comprehensive loss.................                          (40)                              (13)
                                                                  ----                              ----
COMPREHENSIVE INCOME (LOSS)..............                         $ (7)                             $ 17
                                                                  ====                              ====

 


                                                                SIX MONTHS ENDED JUNE 30,
                                             ----------------------------------------------------------------
                                                          2005                              2004
                                             ------------------------------    ------------------------------
                                              ACCUMULATED                       ACCUMULATED
                                                 OTHER                             OTHER
                                             COMPREHENSIVE    COMPREHENSIVE    COMPREHENSIVE    COMPREHENSIVE
                                                INCOME           INCOME           INCOME           INCOME
                                                (LOSS)           (LOSS)           (LOSS)           (LOSS)
                                             -------------    -------------    -------------    -------------
                                                                        (MILLIONS)
                                                                                    
NET INCOME...............................                         $ 40                              $ 28
                                                                  ----                              ----
ACCUMULATED OTHER COMPREHENSIVE LOSS
CUMULATIVE TRANSLATION ADJUSTMENT
  Balance January 1......................        $ (63)                            $(143)
     Translation of foreign currency
       statements........................          (75)            (75)              (19)            (19)
                                                 -----                             -----
  Balance June 30........................         (138)                             (162)
                                                 -----                             -----
ADDITIONAL MINIMUM PENSION LIABILITY
  ADJUSTMENT
  Balance January 1 and June 30..........         (122)                              (98)
                                                 -----                             -----
Balance June 30..........................        $(260)                            $(260)
                                                 =====            ----             =====            ----
Other comprehensive loss.................                          (75)                              (19)
                                                                  ----                              ----
COMPREHENSIVE INCOME (LOSS)..............                         $(35)                             $  9
                                                                  ====                              ====

 
      The accompanying notes to financial statements are an integral part
              of these statements of comprehensive income (loss).
                                        9

 
             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
 
     (1) As you read the accompanying financial statements and Management's
Discussion and Analysis you should also read our Annual Report on Form 10-K/A
for the year ended December 31, 2004.
 
     In our opinion, the accompanying unaudited financial statements contain all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly Tenneco Automotive Inc.'s financial position, results of operations, cash
flows, changes in shareholders' equity, and comprehensive income (loss) for the
periods indicated. We have prepared the unaudited interim consolidated financial
statements pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America ("GAAP") for annual financial statements.
 
     Our consolidated 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 and cumulative translation
adjustments from the date of acquisition since we have the ability to exert
significant influence over operating and financial policies.
 
     We have reclassified prior year's financial statements where appropriate to
conform to 2005 presentations.
 
     (2) 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 $11 million in cash and
expect the acquisition to be accretive within the first year. Gabilan generated
approximately $38 million in revenue in 2004. We began reporting Gabilan in our
results of operations for the quarter end March 31, 2005.
 
     (3) Effective January 1, 2005, we changed our accounting method for valuing
inventory for our U.S. based operations from the last-in, first-out ("LIFO")
method to the first-in, first-out ("FIFO") method. As a result, all U.S.
inventories are now stated at the lower of cost, determined on a FIFO basis, or
market. We elected to change to the FIFO method as we believe it is preferable
for the following reasons: 1) the change will provide better matching of revenue
and expenditures and 2) the change will achieve greater consistency in valuing
our global inventory. Additionally, we initially adopted LIFO as it provided
certain U.S. tax benefits which we no longer realize due to our U.S. net
operating losses (when applied for tax purposes, tax laws require that LIFO be
applied for GAAP as well). As a result of the change, we also expect to realize
administrative efficiencies.
 
     In accordance with GAAP, the change in inventory accounting has been
applied by adjusting prior year's financial statements. The effect of the change
in accounting principle as of December 31, 2004, was to increase inventories by
$14 million, reduce deferred tax assets by $5 million, and increase retained
earnings by $9 million. There was no impact on consolidated net income (loss)
for the six-month periods ended June 30, 2004 from this restatement.
 
     (4) 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 an annual
rate of 10 1/4 percent to floating interest rate debt at an annual rate of LIBOR
plus an average 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 ended December 31, 2004. Based on the rate in effect
through July 15, 2005 and using the current LIBOR as determined under these
agreements of 3.82 percent (which remains in effect until January 15, 2006),
these swaps would reduce our 2005 annual interest expense by approximately $2
million compared to having this debt remain fixed. These swaps qualify as fair
value hedges in accordance with Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
 
                                        10

             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                  (UNAUDITED)
 
Activities," as amended, 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 June 30, 2005, the fair value of the interest rate swaps was close to zero
and as such did not have a material impact on our financial position.
 
     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 were as follows: (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 were capitalized and are being
amortized over the remaining term of the agreement.
 
     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 if any amounts are drawn, they 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 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 funds in an amount equal to the size of the facility 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 funds on deposit with
the administrative agent. When we make repayments, the repayments are
redeposited with the administrative agent.
 
     The tranche B-1 letter of credit/revolving loan facility will be reflected
as debt on our balance sheet only if we borrow money under this facility or if
we use the facility to make payments for 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).
 
     In March 2005, we increased the amount of commitments under our revolving
credit facility from $220 million to $285 million and reduced the amount of
commitments under our tranche B-1 letter of credit/revolving loan facility from
$180 million to $170 million. This reduction of our tranche B-1 letter of
credit/revolving loan facility was required under the terms of the senior credit
facility, as we had increased the amount of our revolving credit facility
commitments by more than $55 million.
 
     In April 2005, we further increased the amount of commitments under our
revolving credit facility from $285 million to $300 million and, as required
under the terms of our senior credit facility, reduced the amount of commitments
under our tranche B-1 letter of credit/revolving loan facility from $170 million
to $155 million.
 
     (5) 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
 
                                        11

             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                  (UNAUDITED)
 
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.
 
     In October 2004, we announced a plan to eliminate 250 salaried positions
through selected layoffs and an elective early retirement program. The majority
of layoffs were at middle and senior management levels. We expect to incur total
charges of approximately $24 to $26 million related to these reductions. As of
June 30, 2005, we have incurred $23 million in severance costs. Of this total,
$7 million was recorded in cost of sales and $16 million was recorded in
selling, general and administrative expense. Of the total $23 million in
severance costs incurred to date, $20 million were cash payments with the
remainder accrued in other short-term liabilities.
 
     Including the above costs, we incurred $5 million in restructuring and
restructuring-related costs in the first half of 2005. Including the costs
incurred in 2002 through 2004 of $59 million, we have incurred a total of $64
million for activities related to our restructuring initiatives.
 
     Under the terms of our amended and restated senior credit agreement that
took effect on December 12, 2003, we were 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. In February of 2005, our senior credit facility was amended to
exclude all remaining cash charges and expenses related to restructuring
initiatives started before February of 2005. As of June 30, 2005, we have
excluded $62 million in allowable charges relating to restructuring initiatives
previously started.
 
                                        12

             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                  (UNAUDITED)
 
     Under our amended facility, we are allowed to exclude up to an additional
$60 million of cash charges and expenses, before taxes, related to restructuring
activities initiated after February 2005 from the calculation of the financial
covenant ratios required under our senior credit facility. As of June 30, 2005,
we have excluded $2 million in allowable charges relating to restructuring
initiatives against the $60 million available under the terms of the February
2005 amendment to the senior credit facility.
 
     (6) 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 June 30, 2005, 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 $10 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.
 
     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. For example, one of our Chinese joint ventures is
currently under investigation by local customs officials related to whether the
joint venture applied the proper tariff code to certain of its imports. 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
 
                                        13

             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                  (UNAUDITED)
 
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, results of operations or cash flows.
 
     We provide warranties on some of our products. The warranty terms vary but
range from one year up to limited lifetime warranties on some of our premium
aftermarket products. Provisions for estimated expenses related to product
warranty are made at the time products are sold or when specific warranty issues
are identified on OE products. These estimates are established using historical
information about the nature, frequency, and average cost of warranty claims. We
actively study trends of warranty claims and take action to improve product
quality and minimize warranty claims. We believe that the warranty reserve is
appropriate; however, actual claims incurred could differ from the original
estimates, requiring adjustments to the reserve. The reserve is included in both
long-term and short-term liabilities on the balance sheet.
 
     Below is a table that shows the activity in the warranty accrual accounts:
 


                                                                  SIX MONTHS
                                                                    ENDED
                                                                   JUNE 30,
                                                                --------------
                                                                2005      2004
                                                                ----      ----
                                                                  (MILLIONS)
                                                                    
Beginning Balance...........................................    $19       $18
Accruals related to product warranties......................      7         6
Reductions for payments made................................     (6)       (6)
                                                                ---       ---
Ending Balance..............................................    $20       $18
                                                                ===       ===

 
     (7) In November 2004, the Financial Accounting Standards Board ("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 did not 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
 
                                        14

             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                  (UNAUDITED)
 
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 reporting periods that begin
at the beginning of the next fiscal year January 1, 2006. We estimate that the
impact on our net income for the full year 2004 would not have exceeded
approximately $2 million or $0.05 per diluted share had we adopted the revised
SFAS No. 123.
 
     In December 2004, the FASB issued FASB Staff Position, ("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 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.
 
     In March 2005, the FASB issued Interpretation No. ("FIN") 46(R)-5,
"Implicit Variable Interests under FASB Interpretation No. 46 (revised December
2003)." The statement addresses whether a reporting enterprise should consider
whether it holds an implicit variable interest in a variable interest entity
("VIE") or potential VIE when specific conditions exist. The guidance should be
applied in the first reporting period beginning after March 3, 2005. The
adoption of FSP No. FIN 46(R)-5 does not have an impact on our consolidated
financial statements.
 
     In March 2005, the FASB issued FIN No. 47, "Accounting for Conditional
Asset Retirement Obligations." This interpretation clarifies that the term
conditional asset retirement obligation as used in FASB No. 143, "Accounting for
Assets Retirement Obligation," refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. This interpretation is effective no later than the end of fiscal years
ending after December 15, 2005. The adoption of FIN No. 47 is not expected to
have a material impact on our financial position or results of operation.
 
     In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Corrections," which supercedes APB No. 20, "Accounting Changes" and SFAS No. 3,
"Reporting Accounting Changes in Interim Financial Statements." This statement
changes the requirements for the accounting for and reporting of a change in
accounting principle. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The adoption of SFAS No. 154 is not expected to have a material impact on our
financial position or results of operation.
 
     (8) We sell an interest in some of our U.S. trade accounts receivable to
two third parties. Receivables become eligible for the program on a daily basis,
at which time the receivables are sold to the third parties, 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 $148 million at both June 30, 2005 and 2004, respectively. We
recognized a loss of approximately $1 million for each of the six months ended
June 30, 2005 and 2004, respectively, on these sales of trade accounts,
representing the discount from book values at which these receivables were sold
to the third parties. The discount rate varies based on funding cost incurred by
the third parties, and it averaged four percent during the time period in 2005
when we sold
 
                                        15

             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                  (UNAUDITED)
 
receivables. We retained ownership of the remaining interest in the pool of
receivables not sold to the third parties. 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.
 
     (9) 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." 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 only requirements of SFAS No. 123.
The following table illustrates the effect on net income and earnings per share
if we had applied the fair value recognition provisions of SFAS No. 123:
 


                                                                 THREE MONTHS        SIX MONTHS
                                                                    ENDED              ENDED
                                                                   JUNE 30,           JUNE 30,
                                                                --------------    ----------------
                                                                2005     2004     2005       2004
                                                                -----    -----    -----      -----
                                                                      (MILLIONS EXCEPT SHARE
                                                                      AND PER SHARE AMOUNTS)
                                                                                 
Net income..................................................    $  33    $  30    $  40      $  28
Add: Stock-based employee compensation expense included in
  net income, net of income tax.............................        2        1        3          8
Deduct: Stock-based employee compensation expense determined
  under fair value based method for all awards, net of
  income tax................................................       (2)      (1)      (4)        (9)
                                                                -----    -----    -----      -----
Pro forma net income........................................    $  33    $  30    $  39      $  27
                                                                =====    =====    =====      =====
Earnings per share:
Basic--as reported..........................................    $0.75    $0.73    $0.92      $0.69
Basic--pro forma............................................    $0.73    $0.73    $0.90      $0.67
Diluted--as reported........................................    $0.71    $0.69    $0.88      $0.65
Diluted--pro forma..........................................    $0.70    $0.68    $0.85      $0.63

 
     The fair value of each option granted during the first six months of 2005
and 2004 is estimated on the date of grant using the Black-Scholes option
pricing model using the following weighted-average assumptions for grants in the
first six months of 2005 and 2004, respectively: (i) risk-free interest rates of
4.0 percent and 4.1 percent; (ii) expected lives of 7 years and 10 years; (iii)
expected volatility of 43.0 percent and 43.6 percent; and (iv) no dividend
yield.
 
                                        16

             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                  (UNAUDITED)
 
     (10) Earnings per share of common stock outstanding were computed as
follows:
 


                                                 THREE MONTHS ENDED              SIX MONTHS ENDED
                                                      JUNE 30,                       JUNE 30,
                                             --------------------------    ----------------------------
                                                2005           2004           2005             2004
                                             -----------    -----------    -----------      -----------
                                                   (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
                                                                                
Basic earnings per share--
  Net income.............................    $        33    $        30    $        40      $        28
                                             ===========    ===========    ===========      ===========
  Average shares of common stock
     outstanding.........................     42,987,528     41,475,722     42,821,183       41,132,232
                                             ===========    ===========    ===========      ===========
  Earnings per average share of common
     stock...............................    $      0.75    $      0.73    $      0.92      $      0.69
                                             ===========    ===========    ===========      ===========
Diluted earnings per share--
  Net income.............................    $        33    $        30    $        40      $        28
                                             ===========    ===========    ===========      ===========
  Average shares of common stock
     outstanding.........................     42,987,528     41,475,722     42,821,183       41,132,232
  Effect of dilutive securities:
     Restricted stock....................        321,193        241,371        319,460          268,634
     Stock options.......................      1,764,040      2,464,135      1,890,333        2,438,543
                                             -----------    -----------    -----------      -----------
  Average shares of common stock
     outstanding including dilutive
     shares..............................     45,072,761     44,181,228     45,030,976       43,839,409
                                             ===========    ===========    ===========      ===========
  Earnings per average share of common
     stock...............................    $      0.71    $      0.69    $      0.88      $      0.65
                                             ===========    ===========    ===========      ===========

 
     Options to purchase 1,253,311 and 748,652 shares of common stock were
outstanding at June 30, 2005 and 2004, 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.
 
     (11) Net periodic pension costs (income) and postretirement benefit costs
(income) consist of the following components:
 


                                                                         THREE MONTHS ENDED
                                                                              JUNE 30,
                                                         --------------------------------------------------
                                                              2005              2004         2005      2004
                                                         --------------    --------------    ----      ----
                                                                     PENSION                 POSTRETIREMENT
                                                         --------------------------------    --------------
                                                         US     FOREIGN    US     FOREIGN     US        US
                                                         ---    -------    ---    -------    ----      ----
                                                                             (MILLIONS)
                                                                                     
Service cost--benefits earned during the year........    $ 3      $ 2      $ 4      $ 1      $--       $ 0
Interest cost........................................      5        3        4        4        2         2
Expected return on plan assets.......................     (4)      (3)      (5)      (3)      --        --
Net amortization:
  Actuarial loss.....................................      1       --        2       --        1         1
  Prior service cost.................................      1       --       --        1       (1)       (2)
                                                         ---      ---      ---      ---      ---       ---
Net pension and postretirement costs.................    $ 6      $ 2      $ 5      $ 3      $ 2       $ 1
                                                         ===      ===      ===      ===      ===       ===

 
                                        17

             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                  (UNAUDITED)
 


                                                                          SIX MONTHS ENDED
                                                                              JUNE 30,
                                                       ------------------------------------------------------
                                                              2005                2004         2005      2004
                                                       ------------------    --------------    ----      ----
                                                                     PENSION                   POSTRETIREMENT
                                                       ------------------------------------    --------------
                                                         US       FOREIGN    US     FOREIGN     US        US
                                                       -------    -------    ---    -------    ----      ----
                                                                             (MILLIONS)
                                                                                       
Service cost--benefits earned during the year......      $ 8        $ 4      $ 8      $ 2      $ 1       $ 1
Interest cost......................................        9          7        8        7        4         4
Expected return on plan assets.....................       (8)        (7)      (8)      (7)      --        --
Net amortization:
  Actuarial loss...................................        2          1        2        1        3         3
  Prior service cost...............................        1         --        1        1       (3)       (4)
                                                         ---        ---      ---      ---      ---       ---
Net pension and postretirement costs...............      $12        $ 5      $11      $ 4      $ 5       $ 4
                                                         ===        ===      ===      ===      ===       ===

 
     For the six months ended June 30, 2005, we made pension contributions of
approximately $14 million for our domestic pension plans and $5 million for our
foreign pension plans. Based on current actuarial estimates, we believe we will
be required to make approximately $30 million to $35 million in contributions
for the remainder of 2005.
 
     We made postretirement benefit contributions of approximately $5 million
during the first six months of 2005. Based on current actuarial estimates, we
believe we will be required to make approximately $4 million in contributions
for the remainder of 2005.
 
     (12) 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 June 30, 2005 and 2004,
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 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 14 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 $26 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.
 
     (13) 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.
 
                                        18

             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                  (UNAUDITED)
 
     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. 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.
 
     The following table summarizes certain Tenneco segment information:
 


                                                                             SEGMENT
                                                   -----------------------------------------------------------
                                                              EUROPE &
                                                    NORTH      SOUTH       ASIA      RECLASS &
                                                   AMERICA    AMERICA     PACIFIC      ELIMS      CONSOLIDATED
                                                   -------    --------    -------    ---------    ------------
                                                                           (MILLIONS)
                                                                                   
FOR THE THREE MONTHS ENDED JUNE 30, 2005
Revenues from external customers...............    $  536      $  541      $103        $ --          $1,180
Intersegment revenues..........................         2          15         3         (20)             --
Income before interest, income taxes, and
  minority interest............................        52          27         4          --              83
FOR THE THREE MONTHS ENDED JUNE 30, 2004
Revenues from external customers...............    $  523      $  481      $109        $ --          $1,113
Intersegment revenues..........................         1          13         5         (19)             --
Income before interest, income taxes, and
  minority interest............................        50          17         9          --              76
AT JUNE 30, 2005, AND FOR THE SIX MONTHS THEN
  ENDED
Revenues from external customers...............    $1,041      $1,048      $192        $ --          $2,281
Intersegment revenues..........................         3          30         6         (39)             --
Income before interest, income taxes, and
  minority interest............................        89          32         6          --             127
Total assets...................................     1,323       1,360       277         107           3,067
AT JUNE 30, 2004, AND FOR THE SIX MONTHS THEN
  ENDED
Revenues from external customers...............    $1,026      $  923      $197        $ --          $2,146
Intersegment revenues..........................         3          26         9         (38)             --
Income before interest, income taxes, and
  minority interest............................        80          17        12          --             109
Total assets (Note 3)..........................     1,229       1,281       253         172           2,935

 
     In July 2005, we announced a change in the structure of our organization
that will change our reportable segments. The Europe and South America segment
will now include our Indian operations. While this will have no impact on our
consolidated results, it will change our segment results. This change would have
increased the Europe and South America segment revenues by approximately $9
million for the second quarter and $16 million for the six months ended June 30,
2005. There would have been no impact on Europe and South America EBIT for both
the second quarter and the six months ended June 30, 2005. The change in segment
reporting will be reflected in our Form 10-Q for the quarter ended September 30,
2005.
 
                                        19

             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                  (UNAUDITED)
 
     (14) Supplemental guarantor condensed financial statements are presented
below:
 
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 2014 and our senior secured notes due 2013 on a joint and several basis. We
have not presented separate financial statements and other disclosures
concerning each of the Guarantor Subsidiaries because management has determined
that such information is not material to the holders of the notes. Therefore,
the Guarantor Subsidiaries are combined in the presentation below.
 
     These condensed consolidating financial statements are presented on the
equity method. Under this method, our investments are recorded at cost and
adjusted for our ownership share of a subsidiary's cumulative results of
operations, capital contributions and distributions, and other equity changes.
You should read the condensed consolidating financial statements of the
Guarantor Subsidiaries in connection with our consolidated financial statements
and related notes of which this note is an integral part.
 
Distributions
 
     There are no significant restrictions on the ability of the Guarantor
Subsidiaries to make distributions to us.
 
                                        20

             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                  (UNAUDITED)
 
                           STATEMENT OF INCOME (LOSS)
 


                                                         FOR THE THREE MONTHS ENDED JUNE 30, 2005
                                       ----------------------------------------------------------------------------
                                                                           TENNECO
                                                                       AUTOMOTIVE INC.
                                        GUARANTOR      NONGUARANTOR        (PARENT        RECLASS &
                                       SUBSIDIARIES    SUBSIDIARIES       COMPANY)          ELIMS      CONSOLIDATED
                                       ------------    ------------    ---------------    ---------    ------------
                                                                        (MILLIONS)
                                                                                        
REVENUES
  Net sales and operating
     revenues--
     External......................        $534            $646             $ --            $  --         $1,180
     Affiliated companies..........          18             128               --             (146)            --
                                           ----            ----             ----            -----         ------
                                            552             774               --             (146)         1,180
                                           ----            ----             ----            -----         ------
COSTS AND EXPENSES
  Cost of sales (exclusive of
     depreciation shown below).....         445             642               --             (146)           941
  Engineering, research, and
     development...................          10               8               --               --             18
  Selling, general, and
     administrative................          35              58               --               --             93
  Depreciation and amortization of
     other intangibles.............          17              27               --               --             44
                                           ----            ----             ----            -----         ------
                                            507             735               --             (146)         1,096
                                           ----            ----             ----            -----         ------
OTHER INCOME (EXPENSE)
  Loss on sale of receivables......          --              (1)              --               --             (1)
  Other income (expense)...........           6              (2)              --               (4)            --
                                           ----            ----             ----            -----         ------
                                              6              (3)              --               (4)            (1)
                                           ----            ----             ----            -----         ------
INCOME (LOSS) BEFORE INTEREST
  EXPENSE, INCOME TAXES, MINORITY
  INTEREST, AND EQUITY IN NET
  INCOME FROM AFFILIATED
  COMPANIES........................          51              36               --               (4)            83
  Interest expense--
     External (net of interest
       capitalized)................          --               1               31               --             32
     Affiliated companies (net of
       interest income)............          43             (16)             (27)              --             --
  Income tax expense (benefit).....          24              14               (2)             (18)            18
  Minority interest................          --              --               --               --             --
                                           ----            ----             ----            -----         ------
                                            (16)             37               (2)              14             33
  Equity in net income (loss) from
     affiliated companies..........          38              --               35              (73)            --
                                           ----            ----             ----            -----         ------
NET INCOME (LOSS)..................        $ 22            $ 37             $ 33            $ (59)        $   33
                                           ====            ====             ====            =====         ======

 
                                        21

             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                  (UNAUDITED)
 
                           STATEMENT OF INCOME (LOSS)
 


                                                         FOR THE THREE MONTHS ENDED JUNE 30, 2004
                                       ----------------------------------------------------------------------------
                                                                           TENNECO
                                                                       AUTOMOTIVE INC.
                                        GUARANTOR      NONGUARANTOR        (PARENT        RECLASS &
                                       SUBSIDIARIES    SUBSIDIARIES       COMPANY)          ELIMS      CONSOLIDATED
                                       ------------    ------------    ---------------    ---------    ------------
                                                                        (MILLIONS)
                                                                                        
REVENUES
  Net sales and operating
     revenues--
     External......................        $489            $624             $ --            $ --          $1,113
     Affiliated companies..........          10              81               --             (91)             --
                                           ----            ----             ----            ----          ------
                                            499             705               --             (91)          1,113
                                           ----            ----             ----            ----          ------
COSTS AND EXPENSES
  Cost of sales (exclusive of
     depreciation shown below).....         384             580               --             (91)            873
  Engineering, research, and
     development...................           9              10               --              --              19
  Selling, general, and
     administrative................          52              48               --              --             100
  Depreciation and amortization of
     other intangibles.............          20              24               --              --              44
                                           ----            ----             ----            ----          ------
                                            465             662               --             (91)          1,036
                                           ----            ----             ----            ----          ------
OTHER INCOME (EXPENSE)
  Loss on sale of receivables......          --              (1)              --              --              (1)
  Other income (expense)...........          10              (8)              --              (2)             --
                                           ----            ----             ----            ----          ------
                                             10              (9)              --              (2)             (1)
                                           ----            ----             ----            ----          ------
INCOME (LOSS) BEFORE INTEREST
  EXPENSE, INCOME TAXES, MINORITY
  INTEREST, AND EQUITY IN NET
  INCOME FROM AFFILIATED
  COMPANIES........................          44              34               --              (2)             76
  Interest expense--
     External (net of interest
       capitalized)................          --               2               32              --              34
     Affiliated companies (net of
       interest income)............          21              (3)             (18)             --              --
  Income tax expense (benefit).....         (31)             12              (17)             46              10
  Minority interest................          --               2               --              --               2
                                           ----            ----             ----            ----          ------
                                             54              21                3             (48)             30
  Equity in net income (loss) from
     affiliated companies..........          24              --               27             (51)             --
                                           ----            ----             ----            ----          ------
NET INCOME (LOSS)..................        $ 78            $ 21             $ 30            $(99)         $   30
                                           ====            ====             ====            ====          ======

 
                                        22

             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                  (UNAUDITED)
 
                           STATEMENT OF INCOME (LOSS)
 


                                                          FOR THE SIX MONTHS ENDED JUNE 30, 2005
                                       ----------------------------------------------------------------------------
                                                                           TENNECO
                                                                       AUTOMOTIVE INC.
                                        GUARANTOR      NONGUARANTOR        (PARENT        RECLASS &
                                       SUBSIDIARIES    SUBSIDIARIES       COMPANY)          ELIMS      CONSOLIDATED
                                       ------------    ------------    ---------------    ---------    ------------
                                                                        (MILLIONS)
                                                                                        
REVENUES
  Net sales and operating
     revenues--
     External......................       $1,055          $1,226            $ --            $  --         $2,281
     Affiliated companies..........           35             258              --             (293)            --
                                          ------          ------            ----            -----         ------
                                           1,090           1,484              --             (293)         2,281
                                          ------          ------            ----            -----         ------
COSTS AND EXPENSES
  Cost of sales (exclusive of
     depreciation shown below).....          872           1,250              --             (293)         1,829
  Engineering, research, and
     development...................           24              18              --               --             42
  Selling, general, and
     administrative................           75             116              --               --            191
  Depreciation and amortization of
     other intangibles.............           35              55              --               --             90
                                          ------          ------            ----            -----         ------
                                           1,006           1,439              --             (293)         2,152
                                          ------          ------            ----            -----         ------
OTHER INCOME (EXPENSE)
  Loss on sale of receivables......           --              (1)             --               --             (1)
  Other income (expense)...........            8              (5)             --               (4)            (1)
                                          ------          ------            ----            -----         ------
                                               8              (6)             --               (4)            (2)
                                          ------          ------            ----            -----         ------
INCOME (LOSS) BEFORE INTEREST
  EXPENSE, INCOME TAXES, MINORITY
  INTEREST, AND EQUITY IN NET
  INCOME FROM AFFILIATED
  COMPANIES........................           92              39              --               (4)           127
  Interest expense--
     External (net of interest
       capitalized)................           --               2              62               --             64
     Affiliated companies (net of
       interest income)............           70             (18)            (52)              --             --
  Income tax expense (benefit).....           37              15              (5)             (25)            22
  Minority interest................           --               1              --               --              1
                                          ------          ------            ----            -----         ------
                                             (15)             39              (5)              21             40
  Equity in net income (loss) from
     affiliated companies..........           46              --              45              (91)            --
                                          ------          ------            ----            -----         ------
NET INCOME (LOSS)..................       $   31          $   39            $ 40            $ (70)        $   40
                                          ======          ======            ====            =====         ======

 
                                        23

             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                  (UNAUDITED)
 
                           STATEMENT OF INCOME (LOSS)
 


                                                          FOR THE SIX MONTHS ENDED JUNE 30, 2004
                                       ----------------------------------------------------------------------------
                                                                           TENNECO
                                                                       AUTOMOTIVE INC.
                                        GUARANTOR      NONGUARANTOR        (PARENT        RECLASS &
                                       SUBSIDIARIES    SUBSIDIARIES       COMPANY)          ELIMS      CONSOLIDATED
                                       ------------    ------------    ---------------    ---------    ------------
                                                                        (MILLIONS)
                                                                                        
REVENUES
  Net sales and operating
     revenues--
     External......................        $890           $1,256            $ --            $  --         $2,146
     Affiliated companies..........          27              107              --             (134)            --
                                           ----           ------            ----            -----         ------
                                            917            1,363              --             (134)         2,146
                                           ----           ------            ----            -----         ------
COSTS AND EXPENSES
  Cost of sales (exclusive of
     depreciation shown below).....         703            1,133              --             (134)         1,702
  Engineering, research, and
     development...................          16               20              --               --             36
  Selling, general, and
     administrative................         108              101              --               --            209
  Depreciation and amortization of
     other intangibles.............          39               50              --               --             89
                                           ----           ------            ----            -----         ------
                                            866            1,304              --             (134)         2,036
                                           ----           ------            ----            -----         ------
OTHER INCOME (EXPENSE)
  Loss on sale of receivables......          --               (1)             --               --             (1)
  Other income (expense)...........          18              (11)             --               (7)            --
                                           ----           ------            ----            -----         ------
                                             18              (12)             --               (7)            (1)
                                           ----           ------            ----            -----         ------
INCOME (LOSS) BEFORE INTEREST
  EXPENSE, INCOME TAXES, MINORITY
  INTEREST, AND EQUITY IN NET
  INCOME FROM AFFILIATED
  COMPANIES........................          69               47              --               (7)           109
  Interest expense--
     External (net of interest
       capitalized)................          --                3              66               --             69
     Affiliated companies (net of
       interest income)............          42               (5)            (37)              --             --
  Income tax expense (benefit).....         (34)              14             (35)              64              9
  Minority interest................          --                3              --               --              3
                                           ----           ------            ----            -----         ------
                                             61               32               6              (71)            28
  Equity in net income (loss) from
     affiliated companies..........          38               --              22              (60)            --
                                           ----           ------            ----            -----         ------
NET INCOME (LOSS)..................        $ 99           $   32            $ 28            $(131)        $   28
                                           ====           ======            ====            =====         ======

 
                                        24

             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                  (UNAUDITED)
 
                                 BALANCE SHEET
 


                                                                      JUNE 30, 2005
                                       ----------------------------------------------------------------------------
                                                                           TENNECO
                                                                       AUTOMOTIVE INC.
                                        GUARANTOR      NONGUARANTOR        (PARENT        RECLASS &
                                       SUBSIDIARIES    SUBSIDIARIES       COMPANY)          ELIMS      CONSOLIDATED
                                       ------------    ------------    ---------------    ---------    ------------
                                                                        (MILLIONS)
                                                                                        
              ASSETS
Current assets:
  Cash and cash equivalents........       $   --          $   66           $   --          $    --        $   66
  Receivables, net.................          211             731               29             (309)          662
  Inventories......................          121             283               --               --           404
  Deferred income taxes............           60               9               52              (51)           70
  Prepayments and other............           17             116               --               --           133
                                          ------          ------           ------          -------        ------
                                             409           1,205               81             (360)        1,335
                                          ------          ------           ------          -------        ------
Other assets:
  Investment in affiliated
     companies.....................          445              --              941           (1,386)           --
  Notes and advances receivable
     from affiliates...............          625             136            4,711           (5,472)           --
  Long-term notes receivable,
     net...........................            1              20               --               --            21
  Goodwill.........................          136              59               --               --           195
  Intangibles, net.................           13              10               --               --            23
  Deferred income taxes............          256              46              175             (175)          302
  Other............................           36              70               35               --           141
                                          ------          ------           ------          -------        ------
                                           1,512             341            5,862           (7,033)          682
                                          ------          ------           ------          -------        ------
Plant, property, and equipment, at
  cost.............................          900           1,469               --               --         2,369
  Less--Reserves for depreciation
     and amortization..............          569             750               --               --         1,319
                                          ------          ------           ------          -------        ------
                                             331             719               --               --         1,050
                                          ------          ------           ------          -------        ------
                                          $2,252          $2,265           $5,943          $(7,393)       $3,067
                                          ======          ======           ======          =======        ======

LIABILITIES ANDSHAREHOLDERS' EQUITY
Current liabilities:
  Short-term debt (including
     current maturities of
     long-term debt)
     Short-term
       debt--non-affiliated........       $   --          $   15           $   34          $    --        $   49
     Short-term debt--affiliated...           67             147               10             (224)           --
  Trade payables...................          237             565               --              (76)          726
  Accrued taxes....................           69              22               --              (52)           39
  Other............................          123             131               36               (7)          283
                                          ------          ------           ------          -------        ------
                                             496             880               80             (359)        1,097
Long-term debt--non-affiliated.....           --              13            1,350               --         1,363
Long-term debt--affiliated.........          961             126            4,385           (5,472)           --
Deferred income taxes..............          260              58               --             (200)          118
Postretirement benefits and other
  liabilities......................          257              77               (1)               5           338
Commitments and contingencies
Minority interest..................           --              22               --               --            22
Shareholders' equity...............          278           1,089              129           (1,367)          129
                                          ------          ------           ------          -------        ------
                                          $2,252          $2,265           $5,943          $(7,393)       $3,067
                                          ======          ======           ======          =======        ======

 
                                        25

             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                  (UNAUDITED)
 
                                 BALANCE SHEET
 


                                                                         (NOTE 3)
                                                                    DECEMBER 31, 2004
                                       ----------------------------------------------------------------------------
                                                                           TENNECO
                                                                       AUTOMOTIVE INC.
                                        GUARANTOR      NONGUARANTOR        (PARENT        RECLASS &
                                       SUBSIDIARIES    SUBSIDIARIES       COMPANY)          ELIMS      CONSOLIDATED
                                       ------------    ------------    ---------------    ---------    ------------
                                                                        (MILLIONS)
                                                                                        
              ASSETS
Current assets:
  Cash and cash equivalents........       $  140          $   74           $   --          $    --        $  214
  Receivables, net.................          122             588               27             (249)          488
  Inventories......................          116             280               --               --           396
  Deferred income taxes............           59              10               23              (22)           70
  Prepayments and other............           12             112               --               --           124
                                          ------          ------           ------          -------        ------
                                             449           1,064               50             (271)        1,292
                                          ------          ------           ------          -------        ------
Other assets:
  Investment in affiliated
     companies.....................          396              --              980           (1,376)           --
  Notes and advances receivable
     from affiliates...............        3,060              87            4,588           (7,735)           --
  Long-term notes receivable,
     net...........................            2              22               --               --            24
  Goodwill.........................          136              60               --               --           196
  Intangibles, net.................           14              10               --               --            24
  Deferred income taxes............          275              29              179             (179)          304
  Other............................           37              73               35               --           145
                                          ------          ------           ------          -------        ------
                                           3,920             281            5,782           (9,290)          693
                                          ------          ------           ------          -------        ------
Plant, property, and equipment, at
  cost.............................          894           1,557               --               --         2,451
  Less--Reserves for depreciation
     and amortization..............          553             764               --               --         1,317
                                          ------          ------           ------          -------        ------
                                             341             793               --               --         1,134
                                          ------          ------           ------          -------        ------
                                          $4,710          $2,138           $5,832          $(9,561)       $3,119
                                          ======          ======           ======          =======        ======
   LIABILITIES AND SHAREHOLDERS'
               EQUITY
Current liabilities:
  Short-term debt (including
     current maturities of
     long-term debt)
     Short-term
       debt--non-affiliated........       $   --          $   14           $    5          $    --        $   19
     Short-term debt--affiliated...           93              69               10             (172)           --
  Trade payables...................          218             552               --              (74)          696
  Accrued taxes....................           25              21               --              (22)           24
  Other............................          135             141               34               (2)          308
                                          ------          ------           ------          -------        ------
                                             471             797               49             (270)        1,047
Long-term debt-non-affiliated......           --              16            1,385               --         1,401
Long-term debt-affiliated..........        3,408              79            4,248           (7,735)           --
Deferred income taxes..............          242              63               --             (179)          126
Postretirement benefits and other
  liabilities......................          261              95               --                6           362
Commitments and contingencies
Minority interest..................           --              24               --               --            24
Shareholders' equity...............          328           1,064              150           (1,383)          159
                                          ------          ------           ------          -------        ------
                                          $4,710          $2,138           $5,832          $(9,561)       $3,119
                                          ======          ======           ======          =======        ======

 
                                        26

             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                  (UNAUDITED)
 
                            STATEMENT OF CASH FLOWS
 


                                                              SIX MONTHS ENDED JUNE 30, 2005
                                       ----------------------------------------------------------------------------
                                                                           TENNECO
                                                                       AUTOMOTIVE INC.
                                        GUARANTOR      NONGUARANTOR        (PARENT        RECLASS &
                                       SUBSIDIARIES    SUBSIDIARIES       COMPANY)          ELIMS      CONSOLIDATED
                                       ------------    ------------    ---------------    ---------    ------------
                                                                        (MILLIONS)
                                                                                        
OPERATING ACTIVITIES
Net cash provided (used) by
  operating activities.............       $   7           $  35             $(113)          $  --         $ (71)
                                          -----           -----             -----           -----         -----
INVESTING ACTIVITIES
Net proceeds from the sale of
  assets...........................           2               1                --              --             3
Expenditures for plant, property,
  and equipment....................         (23)            (40)               --              --           (63)
Acquisition of business............          --             (11)               --              --           (11)
Investments and other..............           3              (1)               --              --             2
                                          -----           -----             -----           -----         -----
Net cash used by investing
  activities.......................         (18)            (51)               --              --           (69)
                                          -----           -----             -----           -----         -----
FINANCING ACTIVITIES
Issuance of common shares..........          --              --                 4              --             4
Retirement of long-term debt.......          --              (2)              (40)             --           (42)
Net increase (decrease) in
  short-term debt excluding current
  maturities of long-term debt.....        (169)            170                33              --            34
Intercompany dividends and net
  increase (decrease) in
  intercompany obligations.........          40            (156)              116              --            --
Other..............................          --              --                --              --            --
                                          -----           -----             -----           -----         -----
Net cash provided (used) by
  financing activities.............        (129)             12               113              --            (4)
                                          -----           -----             -----           -----         -----
Effect of foreign exchange rate
  changes on cash and cash
  equivalents......................          --              (4)               --              --            (4)
                                          -----           -----             -----           -----         -----
Increase (decrease) in cash and
  cash equivalents.................        (140)             (8)               --              --          (148)
Cash and cash equivalents, January
  1................................         140              74                --              --           214
                                          -----           -----             -----           -----         -----
Cash and cash equivalents, June 30
  (Note)...........................       $  --           $  66             $  --           $  --         $  66
                                          =====           =====             =====           =====         =====

 
NOTE: Cash and cash equivalents include highly liquid investments with a
      maturity of three months or less at the date of purchase.
 
                                        27

             TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                  (UNAUDITED)
 
                            STATEMENT OF CASH FLOWS
 


                                                              SIX MONTHS ENDED JUNE 30, 2004
                                       ----------------------------------------------------------------------------
                                                                           TENNECO
                                                                       AUTOMOTIVE INC.
                                        GUARANTOR      NONGUARANTOR        (PARENT        RECLASS &
                                       SUBSIDIARIES    SUBSIDIARIES       COMPANY)          ELIMS      CONSOLIDATED
                                       ------------    ------------    ---------------    ---------    ------------
                                                                        (MILLIONS)
                                                                                        
OPERATING ACTIVITIES
Net cash provided (used) by
  operating activities.............        $ 80            $ 93             $(114)          $  --          $ 59
                                           ----            ----             -----           -----          ----
INVESTING ACTIVITIES
Net proceeds from the sale of
  assets...........................          --              11                --              --            11
Expenditures for plant, property,
  and equipment....................         (18)            (36)               --              --           (54)
Investments and other..............          (1)             (1)               --              --            (2)
                                           ----            ----             -----           -----          ----
Net cash used by investing
  activities.......................         (19)            (26)               --              --           (45)
                                           ----            ----             -----           -----          ----
FINANCING ACTIVITIES
Issuance of common shares..........          --              --                 4              --             4
Retirement of long-term debt.......          --              (2)               (2)             --            (4)
Net increase (decrease) in
  short-term debt excluding current
  maturities of long-term debt.....          --               1                --              --             1
Intercompany dividends and net
  increase (decrease) in
  intercompany obligations.........         (35)            (77)              112              --            --
Other..............................          --               2                --              --             2
                                           ----            ----             -----           -----          ----
Net cash provided (used) by
  financing activities.............         (35)            (76)              114              --             3
                                           ----            ----             -----           -----          ----
Effect of foreign exchange rate
  changes on cash and cash
  equivalents......................          --               4                --              --             4
                                           ----            ----             -----           -----          ----
Increase (decrease) in cash and
  cash equivalents.................          26              (5)               --              --            21
Cash and cash equivalents, January
  1................................          70              75                --              --           145
                                           ----            ----             -----           -----          ----
Cash and cash equivalents, June 30
  (Note)...........................        $ 96            $ 70             $  --           $  --          $166
                                           ====            ====             =====           =====          ====

 
NOTE: Cash and cash equivalents include highly liquid investments with a
      maturity of three months or less at the date of purchase.
 
      (The preceding notes are an integral part of the foregoing financial
                                  statements.)
                                        28

 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
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
(OE) 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 approximately 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 $1.346 billion as of June 30, 2005. As such, our ability to
generate cash--both to fund operations and service our debt--is also a
significant area of focus for our company. See "Liquidity and Capital Resources"
below for further discussion of cash flows.
 
     Total revenues for the second quarter of 2005 were $1.2 billion, a six
percent increase over the second quarter of 2004. Higher global OE volumes,
customer recovery related to higher steel costs, strengthening currencies, and
improved aftermarket revenues primarily drove this increase. The balanced
distribution of our customers, geographies, markets, products and platforms
allowed us to outperform market production rates in a difficult auto
environment. Gross margin for the second quarter of 2005 was 20.3 percent down
1.3 percent from 21.6 percent in the second quarter of 2004. Higher gross steel
costs of $35 million, restructuring charges and business mix more than offset
savings and improved efficiencies from Lean manufacturing, Six Sigma programs,
cost recoveries, and other cost reduction initiatives. We reported selling,
general, administrative and engineering expenses for the second quarter of 2005
of 9.4 percent of revenues, as compared to 10.7 percent of revenues for the
second quarter of 2004. The improvement was driven by restructuring savings and
tight discretionary spending controls. EBIT was $83 million for the second
quarter of 2005, up $7 million from the $76 million reported in the second
quarter of 2004. Stronger global volumes and lower restructuring-related
expenses, customer changeover costs and consulting fees indexed to the stock
price helped drive this improvement.
 
     Total revenues for the first six months of 2005 were $2.3 billion, a six
percent increase over the $2.1 billion reported for the same period last year.
Strong OE volumes, customer recovery related to higher steel costs, improved
aftermarket revenues and currency appreciation primarily drove this increase.
Gross margin for first six months of 2005 was 19.8 percent down nine-tenths of a
percent from 20.7 for the first six months of 2004 primarily due to the impact
of higher materials costs. Selling, general, administrative and engineering
expenses for the first six months of 2005 were 10.2 percent of revenues,
compared to the 11.4 percent of revenues reported for the same period last year.
The decrease was driven by higher sales volumes, headcount reductions taken at
the end of 2004, and tight controls on discretionary spending. EBIT
 
                                        29

 
was $127 million for the first six months of 2005, up $18 million from the $109
million reported for prior year. The increase in EBIT was primarily driven by
higher volumes and lower restructuring-related expenses, customer changeover
costs and consulting fees indexed to the stock price.
 
     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 reporting has
been reflected in this management discussion and analysis for quarters ended
June 30, 2005 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, including working capital
adjustments, for $11 million in cash and expect the acquisition to be accretive
within the first year. Gabilan generated approximately $38 million in revenue in
2004.
 
     In July 2005, we announced a change in the structure of our organization
that will change our reportable segments. The Europe and South America segment
will now include our Indian operations. While this will have no impact on our
consolidated results, it will change our segment results. This change would have
increased the Europe and South America segment revenues by approximately $9
million for the second quarter and $16 million for the six months ended June 30,
2005. There would have been no impact on Europe and South America EBIT for both
the second quarter and the six months ended June 30, 2005. The change in segment
reporting will be reflected in our Form 10-Q for the quarter ended September 30,
2005.
 
RESULTS FROM OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
 
NET SALES AND OPERATING REVENUES
 
     The following tables reflect our revenues for the second quarter of 2005
and 2004. 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 2004 table since this is the base
period for measuring the effects of currency during 2005 on our operations. We
use this information to analyze the trend in our revenues before
 
                                        30

 
these factors. We believe investors find this information useful in
understanding period-to-period comparisons in our revenues.
 


                                                              THREE MONTHS ENDED JUNE 30, 2005
                                              -----------------------------------------------------------------
                                                                                   PASS-THROUGH      REVENUES
                                                                                      SALES         EXCLUDING
                                                                      REVENUES      EXCLUDING      CURRENCY AND
                                                          CURRENCY    EXCLUDING      CURRENCY      PASS-THROUGH
                                              REVENUES     IMPACT     CURRENCY        IMPACT          SALES
                                              --------    --------    ---------    ------------    ------------
                                                                         (MILLIONS)
                                                                                    
North America Aftermarket
  Ride Control............................     $  103       $--        $  103          $ --            $103
  Emission Control........................         43        --            43            --              43
                                               ------       ---        ------          ----            ----
       Total North America Aftermarket....        146        --           146            --             146
North America Original Equipment
  Ride Control............................        131        --           131            --             131
  Emission Control........................        259         3           256            68             188
                                               ------       ---        ------          ----            ----
       Total North America Original
          Equipment.......................        390         3           387            68             319
          Total North America.............        536         3           533            68             465
Europe Aftermarket
  Ride Control............................         51         1            50            --              50
  Emission Control........................         58         2            56            --              56
                                               ------       ---        ------          ----            ----
       Total Europe Aftermarket...........        109         3           106            --             106
Europe Original Equipment
  Ride Control............................         98         5            93            --              93
  Emission Control........................        284        10           274            85             189
                                               ------       ---        ------          ----            ----
       Total Europe Original Equipment....        382        15           367            85             282
South America.............................         50         7            43             3              40
       Total Europe & South America.......        541        25           516            88             428
Asia......................................         44         1            43            11              32
Australia.................................         59         4            55             5              50
                                               ------       ---        ------          ----            ----
          Total Asia Pacific..............        103         5            98            16              82
                                               ------       ---        ------          ----            ----
Total Tenneco Automotive..................     $1,180       $33        $1,147          $172            $975
                                               ======       ===        ======          ====            ====

 
                                        31

 


                                                              THREE MONTHS ENDED JUNE 30, 2004
                                              -----------------------------------------------------------------
                                                                                   PASS-THROUGH      REVENUES
                                                                                      SALES         EXCLUDING
                                                                      REVENUES      EXCLUDING      CURRENCY AND
                                                          CURRENCY    EXCLUDING      CURRENCY      PASS-THROUGH
                                              REVENUES     IMPACT     CURRENCY        IMPACT          SALES
                                              --------    --------    ---------    ------------    ------------
                                                                         (MILLIONS)
                                                                                    
North America Aftermarket
  Ride Control............................     $  100      $  --       $  100          $ --            $100
  Emission Control........................         44         --           44            --              44
                                               ------      -----       ------          ----            ----
     Total North America Aftermarket......        144         --          144            --             144
North America Original Equipment
  Ride Control............................        120         --          120            --             120
  Emission Control........................        259         --          259            84             175
                                               ------      -----       ------          ----            ----
     Total North America Original
       Equipment..........................        379         --          379            84             295
       Total North America................        523         --          523            84             439
Europe Aftermarket
  Ride Control............................         51         --           51            --              51
  Emission Control........................         52         --           52            --              52
                                               ------      -----       ------          ----            ----
     Total Europe Aftermarket.............        103         --          103            --             103
Europe Original Equipment
  Ride Control............................         91         --           91            --              91
  Emission Control........................        252         --          252            81             171
                                               ------      -----       ------          ----            ----
     Total Europe Original Equipment......        343         --          343            81             262
South America.............................         35         --           35             3              32
          Total Europe & South America....        481         --          481            84             397
Asia......................................         58         --           58            20              38
Australia.................................         51         --           51             4              47
                                               ------      -----       ------          ----            ----
       Total Asia Pacific.................        109         --          109            24              85
                                               ------      -----       ------          ----            ----
Total Tenneco Automotive..................     $1,113      $  --       $1,113          $192            $921
                                               ======      =====       ======          ====            ====

 
     Revenues from our North American operations increased $13 million in the
second quarter of 2005 compared to the same period last year reflecting higher
sales from both the OE and aftermarket businesses. Total North American OE
revenues were up $11 million to $390 million in the second quarter of 2005, as
compared to $379 million for the second quarter of 2004. OE emission control
volumes for the second quarter of 2005 were flat with the prior year primarily
as a result of lower pass-through sales. Pass-through catalytic converter sales
were down 19 percent to $68 million, mostly driven by the expiration of the
prior Ford Mustang platform. Adjusted for pass-through sales, OE emission
control sales were up $13 million compared to the prior year. OE ride control
revenues for the second quarter of 2005 increased nine percent from the prior
year, driven by higher heavy-duty volumes as well as increased sales on specific
Nissan and DaimlerChrysler platforms. Total OE revenues, excluding pass-through
sales and currency, increased eight percent in the second quarter of 2005, while
the North American light vehicle production experienced a two percent decline.
Favorable platform mix, increasing exposure to Japanese OE manufacturers, strong
heavy-duty ride control volumes and $10 million in revenues from our recent
acquisition of the exhaust business for Harley Davidson helped offset production
declines on key vehicle platforms. Aftermarket revenues for North America were
$146 million in the second quarter of 2005, representing an increase of one
percent compared to the prior year. Aftermarket ride control revenues increased
$3 million or three percent in the second quarter of 2005, due to price
increases, driven by higher steel costs. Aftermarket emission control revenues
decreased four percent in the second quarter of 2005 compared to 2004. Customer
consolidations and softer market conditions were primary reasons for the
decline.
 
     Our European and South American segment's revenues increased $60 million or
13 percent in the second quarter of 2005 compared to last year. Total Europe OE
revenues were $382 million in the second quarter of
 
                                        32

 
2005, up 12 percent from last year. OE emission control revenues increased 13
percent to $284 million in the second quarter of 2005, from $252 million in the
prior year. Excluding a $4 million increase in pass-through sales and a $10
million increase due to strengthening currency, OE emission control revenues
increased 12 percent over 2004. Our OE emission control revenues significantly
exceeded the one percent European light vehicle production rate increase as a
result of our position on successful platforms with Audi, Volkswagen,
DaimlerChrysler, PSA, Porsche and BMW. OE ride control revenues increased to $98
million in the second quarter of 2005, up eight percent from $91 million a year
ago. We changed our reporting in the second quarter of 2005 for an
"assembly-only" contract with an European OE ride control customer and began
accounting for those revenues as net of the related cost of sales. If we
reported our second quarter 2004 revenues in the same manner, they would have
been lower by $15 million. Our OE ride control revenue excluding a $5 million
benefit from currency appreciation, increased one percent. We experienced an
increase in OE ride control revenues due to stronger sales on new and existing
platforms with Volkswagen, Audi, Ford, Nissan and Suzuki. European aftermarket
sales were $109 million in the second quarter of 2005 compared to $103 million
last year. Excluding $3 million attributable to currency appreciation, European
aftermarket revenues increased three percent in the second quarter of 2005
compared to last year. Ride control aftermarket revenues, excluding the impact
of currency, were down four percent compared to the prior year as a result of
heightened competition, a soft market environment in Southern Europe and weaker
exports due to the comparatively stronger euro. Aftermarket emission control
revenues excluding currency increased by 10 percent, benefiting from market
share gains that are offsetting market declines relating to the introduction of
stainless steel (which lengthens our products' useful lives) by OE manufacturers
about 10 years ago. South American revenues were $50 million during the second
quarter of 2005, compared with $35 million a year earlier due to both higher OE
and aftermarket revenues. Currency appreciation in Brazil and Argentina also
added $7 million to South America's revenues.
 
     Revenues from our Asia Pacific segment, which includes Australia and Asia,
decreased $6 million to $103 million in the second quarter of 2005 as compared
to $109 million in the prior year. The Chinese government's restraints on
lending for new vehicles combined with continued soft consumer sales at our
largest China customer, Volkswagen, drove decreased revenues of $14 million at
our Asian operations. In Australia, stronger OE volumes and strengthening
currency increased revenues by 16 percent to $59 million. Excluding the impact
of currency, Australian revenues increased eight percent.
 
EARNINGS BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST ("EBIT")
 


                                                                 THREE MONTHS
                                                                     ENDED
                                                                   JUNE 30,
                                                                ---------------
                                                                2005       2004       CHANGE
                                                                ----       ----       ------
                                                                         (MILLIONS)
                                                                             
North America...............................................    $52        $50         $ 2
Europe & South America......................................     27         17          10
Asia Pacific................................................      4          9          (5)
                                                                ---        ---         ---
                                                                $83        $76         $ 7
                                                                ===        ===         ===

 
                                        33

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


                                                                  THREE MONTHS
                                                                     ENDED
                                                                    JUNE 30,
                                                                ----------------
                                                                2005        2004
                                                                -----       ----
                                                                   (MILLIONS)
                                                                      
North America
  Restructuring-related expenses............................    $ --         $1
  Changeover costs for a major new aftermarket customer.....      --          2
  Consulting fees indexed to stock price....................      --          1
Europe & South America
  Restructuring-related expenses............................       2          4

 
     EBIT for North American operations increased to $52 million in the second
quarter of 2005, from $50 million one year ago. Higher OE volumes increased EBIT
by $5 million. Higher North American aftermarket revenues increased EBIT by $2
million. Lower selling, general, administrative and engineering costs improved
EBIT by $8 million. These increases to North America EBIT were partially offset
by steel cost increases, net of other material costs savings and recovery from
customers. Included in North America's second quarter 2004 EBIT were $1 million
in restructuring and restructuring-related expenses, $2 million of changeover
costs for a major new aftermarket customer and $1 million in consulting fees
indexed to stock price. The customer changeover costs include the cost of
acquiring and disposing of competitor inventory when we supply aftermarket parts
to a new customer. These costs were substantial in the second quarter of 2004 as
we replaced one of our competitors at a significant customer. The 2004
consulting fees relate to a 1999 agreement that provided that a portion of the
consultant's compensation would be in stock appreciation rights that were priced
above the market price of our stock at the grant date. These rights expired in
November 2004.
 
     Our European and South American segment's EBIT was $27 million for the
second quarter of 2005 compared to $17 million during the same period last year.
Higher European OE volumes from both emission and ride control product lines
contributed $6 million to EBIT. Higher European aftermarket revenues improved
EBIT by $5 million. These increases to European EBIT were partially offset by
steel cost increases, net of other material cost savings and recovery from
customers. South American pricing offset higher steel and manufacturing costs.
Included in Europe and South America's second quarter 2005 EBIT was $2 million
in restructuring and restructuring-related expenses. Europe and South America's
2004 EBIT included $4 million in restructuring and restructuring-related
expenses.
 
     EBIT for our Asia Pacific segment was $4 million in the second quarter of
2005 compared to $9 million in the second quarter of 2004. Reduced volumes,
primarily in China, negatively impacted EBIT by $4 million. Steel cost
increases, net of other expected material cost savings and recovery from
customers, also negatively impacted Asia Pacific's EBIT. Partially offsetting
these decreases to EBIT were manufacturing cost reductions and efficiencies of
$2 million.
 
EBIT AS A PERCENTAGE OF REVENUE
 


                                                                 THREE MONTHS
                                                                     ENDED
                                                                   JUNE 30,
                                                                ---------------
                                                                2005       2004
                                                                ----       ----
                                                                     
North America...............................................    10%        10%
Europe & South America......................................     5%         4%
Asia Pacific................................................     4%         8%
  Total Tenneco Automotive..................................     7%         7%

 
     In North America, EBIT as a percentage of revenue for the second quarter of
2005 remained flat compared to the prior year. As a percent of revenues, higher
volumes in the OE segments, customer price
 
                                        34

 
recovery and lower selling, general, administrative and engineering costs were
offset by higher steel costs. In Europe and South America, EBIT margins for the
second quarter of 2005 increased one percent compared to the prior year. OE
volume increases and customer price recovery more than offset the impact of
higher steel costs. EBIT as a percentage of revenue for our Asia Pacific
operations decreased four percent in the second quarter of 2005 from the prior
year. Lower volumes and higher material costs drove the decrease.
 
INTEREST EXPENSE, NET OF INTEREST CAPITALIZED
 
     We reported interest expense of $32 million in the second quarter of 2005
compared to $34 million in the prior year. This decrease is primarily due to the
November 2004 refinancing of $500 million 11 5/8 percent senior subordinated
notes for $500 million of 8 5/8 percent senior subordinated notes due in 2014.
Interest expense was also reduced due to a $40 million prepayment of our senior
term loan B facility and an amendment to 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 decreases were partially
offset by higher interest expense on the variable portion of our debt. See more
detailed explanations on our debt structure, including our issuance of $500
million of 8 5/8 percent senior subordinated notes due 2014 in November 2004,
prepayments and amendments to our senior credit facility in February of 2005,
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 an annual rate of
10 1/4 percent to floating interest rate debt at an annual rate of LIBOR plus an
average 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
ended December 31, 2004. Based on the rate in effect through July 15, 2005 and
using the current LIBOR as determined under these agreements of 3.82 percent
(which remains in effect until January 15, 2006), these swaps would reduce our
2005 annual interest expense by approximately $2 million compared to having this
debt remain fixed. These swaps qualify as fair value hedges in accordance with
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, 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 June 30,
2005, the fair value of the interest rate swaps was close to zero and as such
did not have a material impact on our financial position.
 
INCOME TAXES
 
     Income taxes were $18 million in the second quarter of 2005, compared to
$10 million in the prior year. The second quarter of 2005 included $1 million of
tax expense, primarily related to adjusting state tax net operating loss
carryforwards, partially offset by settlement of prior year tax issues on a more
favorable basis than originally anticipated. Including these adjustments the
effective tax for the second quarter of 2005 was 36 percent. Excluding this
adjustment our effective tax rate was 33 percent. The second quarter of 2004
included $4 million of tax benefits, reflecting the settlement of prior year tax
issues on a more favorable basis than originally anticipated. Including these
benefits the effective tax for the first six months of 2004 was 23 percent.
Excluding these benefits our effective tax rate was 34 percent.
 
EARNINGS PER SHARE
 
     We reported net income of $33 million or $0.71 per diluted common share for
the second quarter of 2005, as compared to earnings of $30 million or $0.69 per
diluted common share for the second quarter of 2004. Included in the results for
the second quarter of 2005 were negative impacts from expenses related to our
restructuring activities and a tax adjustment for state net operating loss
carryforwards. The net impact of these items decreased earnings per diluted
share by $0.06. Included in the results for the second three months of 2004 were
negative impacts from expenses related to our restructuring activities, customer
changeover costs for a major new aftermarket customer, consulting fees indexed
to the stock price and tax benefits for the resolution of outstanding tax
issues. The net impact of these items decreased earnings per diluted share by
                                        35

 
$0.01. Please read the Notes to the consolidated financial statements for more
detailed information on earnings per share.
 
RESTRUCTURING AND OTHER NONRECURRING 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.
 
     In October 2004, we announced a plan to eliminate 250 salaried positions
through selected layoffs and an elective early retirement program. The majority
of layoffs were at middle and senior management levels. We expect to incur total
charges of approximately $24 to $26 million related to these reductions. As of
June 30, 2005, we have incurred $23 million in severance costs. Of this total,
$7 million was recorded in cost of sales and $16 million was recorded in
selling, general and administrative expense. Of the total $23 million in
severance costs incurred to date, $20 million were 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 $5 million in restructuring and
restructuring-related costs in the first half of 2005. Including the costs
incurred in 2002 through 2004 of $59 million, we have incurred a total of $64
million for activities related to our restructuring initiatives.
 
     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.
 
                                        36

 
     Under the terms of our amended and restated senior credit agreement that
took effect on December 12, 2003, we were 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. In February of 2005, our senior credit facility was amended to
exclude all remaining cash charges and expenses related to restructuring
initiatives started before February of 2005. As of June 30, 2005, we have
excluded $62 million in allowable charges relating to restructuring initiatives
previously started.
 
     Under our amended facility, we are allowed to exclude up to an additional
$60 million of cash charges and expenses, before taxes, related to restructuring
activities initiated after February 2005 from the calculation of the financial
covenant ratios required under our senior credit facility. As of June 30, 2005,
we have excluded $2 million in allowable charges relating to restructuring
initiatives against the $60 million available under the terms of the February
2005 amendment to the senior credit facility.
 
     In addition to the announced actions, we will continue to evaluate
additional opportunities and expect that we will 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. 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.
 
CRITICAL ACCOUNTING POLICES
 
     We prepare our financial statements in accordance with accounting
principles generally accepted in the United States of America. Preparing our
financial statements in accordance with generally accepted accounting principles
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The following paragraphs include a
discussion of some critical areas where estimates are required.
 
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 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 June 30, 2005, we had $16
million recorded as a long-term receivable from original equipment customers for
guaranteed pre-production design and development arrangements. While we believe
that the vehicle programs behind these arrangements will enter production, these
arrangements allow us to recover our pre-production design and development costs
in the event that the programs are cancelled or do not reach expected production
levels. We have not experienced any material losses on arrangements where we
have a contractual guarantee of reimbursement from our customers.
 
                                        37

 
Income Taxes
 
     We have a U.S. Federal tax net operating loss ("NOL") carryforward at June
30, 2005, of $561 million, which will expire in varying amounts from 2018 to
2025. The federal tax effect of that NOL is $196 million, and is recorded as an
asset on our balance sheet at June 30, 2005. 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 June 30, 2005, 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 Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," we estimate that
our pro-forma net income (loss) and earnings (loss) per share would be lower by
less than $1 million or $0.01 per diluted share for the second quarter of 2005
compared to less than $1 million or $0.02 per diluted share for the second
quarter of 2004.
 
Goodwill and Other Intangible Assets
 
     We utilize an impairment-only approach to value our purchased goodwill in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." Each year
in the fourth quarter, we perform an impairment analysis on the balance of
goodwill. Inherent in this calculation is the use of estimates as the fair value
of our designated reporting units is based upon the present value of our
expected future cash flows. In addition, our calculation includes our best
estimate of our weighted average cost of capital and growth rate. If the
calculation results in a fair value of goodwill which is less than the book
value of goodwill, an impairment charge would be recorded in the operating
results of the impaired reporting unit.
 
Pension and Other Postretirement Benefits
 
     We have various defined benefit pension plans that cover substantially all
of our employees. We also have postretirement health care and life insurance
plans that cover a majority of our domestic employees. Our pension and
postretirement health care and life insurance expenses and valuations are
dependent on management's assumptions used by our actuaries in calculating such
amounts. These assumptions include discount rates, health care cost trend rates,
long-term return on plan assets, retirement rates, mortality rates and other
factors. Health care cost trend rate assumptions are developed based on
historical cost data and an assessment of likely long-term trends. Retirement
rates are based primarily on actual plan experience while mortality rates are
based upon the general population experience which is not expected to differ
materially from our 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
                                        38

 
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 both 2004 and 2005.
 
     Except in the U.K., generally, our pension plans do not require employee
contributions. 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 June 30, 2005, all legal funding requirements had been
met. Other postretirement benefit obligations, such as retiree medical, and
certain foreign pension plans are not funded.
 
Inventory Valuation
 
     Effective January 1, 2005, we changed our accounting method for valuing
inventory for our U.S. based operations from the last-in, first-out ("LIFO")
method to the first-in, first-out ("FIFO") method. As a result, all U.S.
inventories are now stated at the lower of cost, determined on a FIFO basis, or
market. We elected to change to the FIFO method as we believe it is preferable
for the following reasons: 1) the change will provide better matching of revenue
and expenditures and 2) the change will achieve greater consistency in valuing
our global inventory. Additionally, we initially adopted LIFO as it provided
certain U.S. tax benefits which we no longer realize due to our U.S. net
operating losses (when applied for tax purposes, tax laws require that LIFO be
applied for accounting principles generally accepted in the United States of
America ("GAAP") as well). As a result of the change, we also expect to realize
administrative efficiencies.
 
     In accordance with GAAP, the change in inventory accounting has been
applied by adjusting prior year's financial statements. The effect of the change
in accounting principle as of December 31, 2004, was to increase inventories by
$14 million, reduce deferred tax assets by $5 million, and increase retained
earnings by $9 million. There was no impact on consolidated net income (loss)
for the six-month periods ended June 30, 2004 from this restatement.
 
CHANGES IN ACCOUNTING PRONOUNCEMENTS
 
     In November 2004, the Financial Accounting Standards Board ("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 did not 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 reporting periods that begin at the beginning of the next fiscal year
January 1, 2006. We estimate that the impact on our net income for the full year
2004 would not have exceeded approximately $2 million or $0.05 per diluted share
had we adopted the revised SFAS No. 123.
 
     In December 2004, the FASB issued FASB Staff Position, ("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
 
                                        39

 
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.
 
     In March 2005, the FASB issued Interpretation No. ("FIN") 46(R)-5,
"Implicit Variable Interests under FASB Interpretation No. 46 (revised December
2003)." The statement addresses whether a reporting enterprise should consider
whether it holds an implicit variable interest in a variable interest entity
("VIE") or potential VIE when specific conditions exist. The guidance should be
applied in the first reporting period beginning after March 3, 2005. The
adoption of FSP No. FIN 46(R)-5 does not have an impact on our consolidated
financial statements.
 
     In March 2005, the FASB issued FIN No. 47, "Accounting for Conditional
Asset Retirement Obligations." This interpretation clarifies that the term
conditional asset retirement obligation as used in FASB No. 143, "Accounting for
Assets Retirement Obligation," refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. This interpretation is effective no later than the end of fiscal years
ending after December 15, 2005. The adoption of FIN No. 47 is not expected to
have a material impact on our financial position or results of operation.
 
     In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Corrections," which supercedes APB No. 20, "Accounting Changes" and SFAS No. 3,
"Reporting Accounting Changes in Interim Financial Statements." This statement
changes the requirements for the accounting for and reporting of a change in
accounting principle. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The adoption of SFAS No. 154 is not expected to have a material impact on our
financial position or results of operation.
 
                                        40

 
RESULTS FROM OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
 
NET SALES AND OPERATING REVENUES
 
     The following tables reflect our revenues for the first six months of 2005
and 2004, including the same reconciliations as are presented above for the
second quarter of 2005 and 2004. See "Results from Operations for the Three
Months Ended June 30, 2005 and 2004" for a description of why we present, and
how we use, these reconciliations.
 


                                                               SIX MONTHS ENDED JUNE 30, 2005
                                              -----------------------------------------------------------------
                                                                                   PASS-THROUGH      REVENUES
                                                                                      SALES         EXCLUDING
                                                                      REVENUES      EXCLUDING      CURRENCY AND
                                                          CURRENCY    EXCLUDING      CURRENCY      PASS-THROUGH
                                              REVENUES     IMPACT     CURRENCY        IMPACT          SALES
                                              --------    --------    ---------    ------------    ------------
                                                                         (MILLIONS)
                                                                                    
North America Aftermarket
  Ride Control............................     $  194       $--        $  194          $ --           $  194
  Emission Control........................         82        --            82            --               82
                                               ------       ---        ------          ----           ------
     Total North America Aftermarket......        276        --           276            --              276
North America Original Equipment
  Ride Control............................        258        --           258            --              258
  Emission Control........................        507         5           502           135              367
                                               ------       ---        ------          ----           ------
     Total North America Original
       Equipment..........................        765         5           760           135              625
       Total North America................      1,041         5         1,036           135              901
Europe Aftermarket
  Ride Control............................         88         3            85            --               85
  Emission Control........................        103         4            99            --               99
                                               ------       ---        ------          ----           ------
     Total Europe Aftermarket.............        191         7           184            --              184
Europe Original Equipment
  Ride Control............................        207        16           191            --              191
  Emission Control........................        556        26           530           160              370
                                               ------       ---        ------          ----           ------
     Total Europe Original Equipment......        763        42           721           160              561
South America.............................         94        10            84             7               77
       Total Europe & South America.......      1,048        59           989           167              822
Asia......................................         86         1            85            24               61
Australia.................................        106         5           101             9               92
                                               ------       ---        ------          ----           ------
       Total Asia Pacific.................        192         6           186            33              153
                                               ------       ---        ------          ----           ------
Total Tenneco Automotive..................     $2,281       $70        $2,211          $335           $1,876
                                               ======       ===        ======          ====           ======

 
                                        41

 


                                                               SIX MONTHS ENDED JUNE 30, 2004
                                              -----------------------------------------------------------------
                                                                                   PASS-THROUGH      REVENUES
                                                                                      SALES         EXCLUDING
                                                                      REVENUES      EXCLUDING      CURRENCY AND
                                                          CURRENCY    EXCLUDING      CURRENCY      PASS-THROUGH
                                              REVENUES     IMPACT     CURRENCY        IMPACT          SALES
                                              --------    --------    ---------    ------------    ------------
                                                                         (MILLIONS)
                                                                                    
North America Aftermarket
  Ride Control............................     $  185      $  --       $  185          $ --           $  185
  Emissions Control.......................         81         --           81            --               81
                                               ------      -----       ------          ----           ------
       Total North America Aftermarket....        266         --          266            --              266
North America Original Equipment
  Ride Control............................        238         --          238            --              238
  Emissions Control.......................        522         --          522           172              350
                                               ------      -----       ------          ----           ------
       Total North America Original
          Equipment.......................        760         --          760           172              588
          Total North America.............      1,026         --        1,026           172              854
Europe Aftermarket
  Ride Control............................         89         --           89            --               89
  Emissions Control.......................         94         --           94            --               94
                                               ------      -----       ------          ----           ------
       Total Europe Aftermarket...........        183         --          183            --              183
Europe Original Equipment
  Ride Control............................        176         --          176            --              176
  Emissions Control.......................        495         --          495           158              337
                                               ------      -----       ------          ----           ------
       Total Europe Original Equipment....        671         --          671           158              513
South America.............................         69         --           69             7               62
          Total Europe and South
            America.......................        923         --          923           165              758
Asia......................................         97         --           97            33               64
Australia.................................        100         --          100             8               92
                                               ------      -----       ------          ----           ------
          Total Asia Pacific..............        197         --          197            41              156
                                               ------      -----       ------          ----           ------
Total Tenneco Automotive..................     $2,146      $  --       $2,146          $378           $1,768
                                               ======      =====       ======          ====           ======

 
     Revenues from our North American operations increased $15 million in the
first six months of 2005 compared to last year's first six months reflecting
higher sales from both OE and aftermarket businesses. Total North American OE
revenues increased one percent to $765 million in the first six months of this
year. OE emission control revenues were down three percent in the first six
months of 2005 as compared to the prior year. Pass-through emission control
sales decreased 22 percent to $135 million in the first six months of 2005.
Adjusted for pass-through sales, and currency, OE emission control sales were up
five percent compared to the prior year. OE ride control revenues increased
eight percent from the prior year. Total OE revenues, excluding pass-through
sales, and currency, increased six percent in the first six months of 2005,
while North American light vehicle production was down three percent from the
first six months a year ago. Our revenue improvement was greater than the North
American light vehicle production rate primarily due to our strong position on
top-selling platforms, as well as higher heavy-duty volumes. Aftermarket
revenues for North America were $276 million in the first six months of 2005,
representing an increase of four percent compared to the same period in the
prior year. Aftermarket ride control revenues increased $9 million or 5 percent
in the first six months of 2005, primarily due to customer recovery and higher
sales of premium priced products. Aftermarket emission control revenues
increased one percent in the first six months of 2005 compared to 2004, mostly
due to price increases driven by higher steel costs.
 
     Our European and South American segment's revenues increased $125 million
or 14 percent in the first six months of 2005 compared to last year's first six
months. Total Europe OE revenues were $763 million, up 14 percent from the first
six months of last year. OE emission control revenues in the first six months
increased 12 percent to $556 million from $495 million in the prior year.
Excluding a $2 million increase in pass-through sales and a $26 million increase
due to strengthening currency, OE emissions control revenues
 
                                        42

 
increased 10 percent over the first six months of 2004. This improvement was
greater than overall European production levels, which remained relatively
unchanged during the first six months compared to a year ago. Strong volumes on
PSA, DaimlerChrysler, Volkswagen, Audi, BMW and Porsche platforms more than
offset the general market's flat production rates. OE ride control revenues in
the first six months increased to $207 million, up 18 percent from $176 million
a year ago. We changed our reporting in the second quarter of 2005 for an
"assembly-only" contract with an European OE ride control customer and began
accounting for those revenues as net of the related cost of sales. Excluding a
$16 million benefit from currency appreciation, OE ride control revenues
increased eight percent. We experienced this revenue increase despite the
overall flat market build rates due to stronger sales on new and existing
platforms with Volkswagen, Audi, Ford, Nissan, and Suzuki. European aftermarket
sales were $191 million in the first six months of this year compared to $183
million in last year's first six months. Excluding $7 million attributable to
currency appreciation, European aftermarket revenues were relatively flat in the
first six months of 2005 compared to the same period last year. Ride control
aftermarket revenues, excluding the impact of currency, were down five percent
compared with the prior year, reflecting continued market pressure from customer
consolidations. Aftermarket emission control revenues were up 10 percent to $103
million compared to the six month period of last year. Excluding the impact of
currency, European aftermarket emission control revenues increased five percent
from the prior year. Stronger volumes, pricing and currency appreciation
increased South American revenues by $25 million or 38 percent over the same
period last year.
 
     Revenues from our Asia Pacific operations, which include Australia and
Asia, decreased $5 million to $192 million in the first six months of 2005 as
compared to $197 million in the first six months of the prior year. Lower OE
volumes and pass-through sales drove decreased revenues of $11 million at our
Asian operations. In Australia, stronger OE volumes and strengthening currency
increased revenues by six percent to $106 million.
 
EARNINGS BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST ("EBIT")
 


                                                                 SIX MONTHS
                                                                   ENDED
                                                                  JUNE 30,
                                                                ------------
                                                                2005    2004    CHANGE
                                                                ----    ----    ------
                                                                      (MILLIONS)
                                                                       
North America...............................................    $ 89    $ 80     $ 9
Europe & South America......................................      32      17      15
Asia Pacific................................................       6      12      (6)
                                                                ----    ----     ---
                                                                $127    $109     $18
                                                                ====    ====     ===

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


                                                                 SIX MONTHS
                                                                   ENDED
                                                                  JUNE 30,
                                                                ------------
                                                                2005    2004
                                                                ----    ----
                                                                 (MILLIONS)
                                                                  
North America
  Restructuring-related expenses............................     $2      $3
  Changeover costs for a major new aftermarket customer.....     --       8
  Consulting fees indexed to stock price....................     --       2
Europe & South America
  Restructuring-related expenses............................      3       7
  Consulting fees indexed to stock price....................     --       1
Asia Pacific
  Consulting fees indexed to stock price....................     --       1

 
                                        43

 
     EBIT for North American operations increased to $89 million in the first
six months of 2005, from $80 million one year ago. Higher OE volumes increased
EBIT by $6 million. Higher North American aftermarket revenues increased EBIT by
$11 million. Lower selling, general, administrative and engineering costs
improved EBIT by $18 million. These increases to North America EBIT were
partially offset by steel cost increases, net of other material costs savings
and recovery from customers. Included in North America's EBIT for the first six
months of 2005 was $2 million in restructuring and restructuring-related costs.
Included in North America's EBIT for the first six months of 2004 were $3
million in restructuring and restructuring-related expenses, $8 million of
changeover costs for a major new aftermarket customer and $2 million in
consulting fees indexed to stock price. The customer changeover costs include
the cost of acquiring and disposing of competitor inventory when we supply
aftermarket parts to a new customer. These costs were substantial in the first
half of 2004 as we replaced a competitor at a significant customer. The 2004
consulting fees relate to a 1999 agreement that provided that a portion of the
consultant's compensation would be in stock appreciation rights that were priced
above the market price of our stock at the grant date. These rights expired in
November 2004.
 
     Our European and South American segment's EBIT was $32 million for the
first half of 2005 compared to $17 million during the same period last year.
Higher European OE volumes from both emission and ride control product lines
contributed $10 million to EBIT. Higher Europe aftermarket revenues improved
EBIT by $7 million. These increases to European EBIT were partially offset by
steel cost increases, net of other material cost savings and recovery from
customers. In addition, higher selling, general, administrative, and engineering
costs reduced EBIT by $3 million. South American pricing offset higher steel and
manufacturing costs. Included in Europe and South America's EBIT for the first
six months of 2005 was $3 million in restructuring and restructuring-related
expenses. Europe and South America's 2004 EBIT included $7 million in
restructuring and restructuring-related expenses and $1 million in consulting
fees indexed to the stock price.
 
     EBIT for our Asia Pacific segment was $6 million in the first six months of
2005 compared to $12 million in the first six months of 2004. Reduced volumes,
primarily in China, negatively impacted EBIT by $5 million. Higher selling,
general, administrative, and engineering costs reduced EBIT by $3 million. Steel
cost increases, net of other material cost savings and recovery from customers,
also negatively impacted Asia Pacific's EBIT. Partially offsetting these
decreases to EBIT were manufacturing cost reductions and efficiencies of $7
million. Asia Pacific's 2004 EBIT included $1 million in consulting fees indexed
to the stock price.
 
EBIT AS A PERCENTAGE OF REVENUE
 


                                                                 SIX MONTHS
                                                                   ENDED
                                                                  JUNE 30,
                                                                ------------
                                                                2005    2004
                                                                ----    ----
                                                                  
North America...............................................     9%      8%
Europe & South America......................................     3%      2%
Asia Pacific................................................     3%      6%
  Total Tenneco Automotive..................................     6%      5%

 
     In North America, EBIT as a percentage of revenue for the first six months
of 2005 was up one percent compared to the prior year. Higher volumes in OE
segments, customer price recovery, and lower selling, general, and
administrative costs, were partially offset by higher steel costs. In Europe and
South America, EBIT margins for the first six months of 2005 were up one percent
compared with the same period last year. OE volume increases, customer price
recovery and cost savings more than offset the impact of higher steel and
selling, general, administrative, and engineering costs. EBIT as a percentage of
revenue for our Asia Pacific operations decreased to three percent in the first
six months of 2005 compared to six percent in the prior year. Lower volumes and
higher material costs primarily drove the decrease.
 
                                        44

 
INTEREST EXPENSE, NET OF INTEREST CAPITALIZED
 
     We reported interest expense of $64 million for the first six months of
2005 compared to $69 million in the prior year. This decrease is primarily due
to the November 2004 refinancing of $500 million 11 5/8 percent senior
subordinated notes for $500 million of 8 5/8 percent senior subordinated notes
due in 2014. Interest expense was also reduced due to a $40 million prepayment
of our senior term loan B facility and an amendment to 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
decreases were partially offset by higher interest expense on the variable
portion of our debt. See more detailed explanations on our debt structure,
including our issuance of $500 million of 8 5/8 percent senior subordinated
notes due 2014 in November 2004, prepayments and amendments to our senior credit
facility in February of 2005, and their anticipated impact on our interest
expense, in "Liquidity and Capital Resources--Capitalization" later in this
Management's Discussion and Analysis.
 
INCOME TAXES
 
     Income tax expense was $22 million for the first six months of 2005,
compared to $9 million for the first six months of 2004. The first six months of
2005 included $1 million of tax expense, primarily related to adjusting state
tax net operating loss carryforwards, partially offset by settlement of prior
year tax issues on a more favorable basis than originally anticipated. Including
these adjustments the effective tax for the first six months of 2005 was 36
percent. Excluding these adjustments our effective tax rate was 34 percent. The
first six months of 2004 included $5 million of tax benefits, reflecting the
settlement of prior year tax issues on a more favorable basis than originally
anticipated. Including these benefits the effective tax for the first six months
of 2004 was 23 percent. Excluding these benefits our effective tax rate was 34
percent.
 
EARNINGS PER SHARE
 
     We reported earnings per diluted common share of $0.88 for the first six
months of 2005, compared to $0.65 per diluted share for the first six months of
2004. Included in the results for the first six months of 2005 were the negative
impacts from expenses related to our restructuring activities and a tax
adjustment for state net operating loss carryforwards. In total, these items
decreased earnings per diluted common share by $0.09. Included in the results
for the first six months of 2004 were the negative impacts from expenses related
to our restructuring activities, customer changeover costs for a major new
aftermarket customer, consulting fees indexed to the stock price and benefits
for the resolution of outstanding tax issues. In total, these items decreased
earnings per diluted common share by $0.20. You should also read the Notes to
the financial statements for more detailed information on earnings per share.
 
LIQUIDITY AND CAPITAL RESOURCES
 
CAPITALIZATION
 


                                                                JUNE 30,    DECEMBER 31,
                                                                  2005          2004        % CHANGE
                                                                --------    ------------    --------
                                                                       (MILLIONS)
                                                                                   
Short-term debt and current maturities......................     $   49        $   19         158%
Long-term debt..............................................      1,363         1,401          (3)
                                                                 ------        ------
Total debt..................................................      1,412         1,420          (1)
                                                                 ------        ------
Total minority interest.....................................         22            24          (8)
Shareholders' equity........................................        129           159         (19)
                                                                 ------        ------
Total capitalization........................................     $1,563        $1,603          (2)
                                                                 ======        ======

 
     General.  The year-to-date decrease in shareholders' equity primarily
results from $75 million related to the translation of foreign balances into
U.S. dollars. This amount was partially offset by our net income, premium on
common stock issued pursuant to benefit plans and other transactions which
contributed $45 million to shareholders' equity. Although our book equity
balance was small at June 30, 2005, it should
 
                                        45

 
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. You should also read Note 4 to our
consolidated financial statements.
 
     Short-term debt, which includes the current portion of long-term
obligations and borrowings by foreign subsidiaries, as well as our revolving
credit facilities, increased approximately $30 million primarily related to
borrowings outstanding under our credit facilities. The current portion of
long-term debt decreased by approximately $4 million and was offset by a $1
million increase in foreign subsidiaries' obligations. Borrowings under our
revolving credit facilities were approximately $33 million as of June 30, 2005.
There were no borrowings outstanding under our revolving credit facilities as of
June 30, 2004. 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. 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. During the first six months of 2005, we increased
the amount of commitments under our revolving credit facility from $220 million
to $300 million and reduced the amount of commitments under our tranche B-1
letter of credit/revolving loan facility from $180 million to $155 million. As
of June 30, 2005, the senior credit facility consisted of a seven-year, $356
million term loan B facility maturing in December 2010; a five-year, $300
million revolving credit facility maturing in December 2008; and a seven-year,
$155 million tranche B-1 letter of credit/revolving loan facility maturing in
December 2010. 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. 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 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 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 an annual rate of
10 1/4 percent to floating interest rate debt at an annual rate of LIBOR plus an
average 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
ended December 31, 2004. Based upon the rate in effect through July 15, 2005 and
using the current LIBOR as determined under these agreements of 3.82 percent
(which remains in effect until January 15, 2006), these swaps would reduce our
2005 annual interest expense by approximately $2 million, compared to having
this debt remain fixed. These swaps qualify as fair value hedges in accordance
with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, 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 June 30, 2005, the fair value of the interest rate swaps was close to zero
and as such did not have a material impact on our financial position. On June
30, 2005, we had $994 million in long-term debt obligations that have fixed
interest rates. Of that amount, $489 million is fixed through July 2013 and $500
million through
                                        46

 
November 2014, while the remainder is fixed over periods of 2005 through 2025.
Included in the $489 million is $150 million of long-term debt obligations
subject to variable interest rates as a result of our swap agreements. There is
also $369 million in long-term debt obligations that have variable interest
rates based on a current market rate of interest.
 
     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. 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 were as follows: (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 were capitalized and are being
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.
 
     During the first six months of 2005, we increased the amount of commitments
under our revolving credit facility from $220 million to $300 million and
reduced the amount of commitments under our tranche B-1 letter of
credit/revolving loan facility from $180 million to $155 million. This reduction
of our tranche B-1 letter of credit/revolving loan facility was required under
the terms of the senior credit facility, as we had increased the amount of our
revolving credit facility commitments by more than $55 million.
 
     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
if any
 
                                        47

 
amounts are drawn, they 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 $155 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 $155 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 $155 million on deposit with the administrative agent.
When we make repayments, the repayments are redeposited with the administrative
agent.
 
     The tranche B-1 letter of credit/revolving loan facility will be reflected
as debt on our balance sheet only if we borrow money under this facility or if
we use the facility to make payments for 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 225 basis points reduced from 300 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 125 basis points reduced from 200 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 225 basis points reduced from 300
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).
 
     Through the first six months of 2005, borrowings under the revolving credit
facility bore 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 from
325 basis points in March and to be further reduced to 275 basis points in
August 2005; or (ii) a rate consisting of the greater of the JP Morgan Chase
prime rate or the Federal Funds rate plus 50 to be reduced to 37.5 basis points
in August of 2005, plus a margin of 200 reduced from 225 basis points in March
and to be further reduced to 175 basis points in August of 2005. 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 is reduced
by 25 basis points following each fiscal quarter for which the consolidated
leverage ratio is less than 4.0 beginning in March 2005. Since our consolidated
leverage ratio was 3.52 as of March 31, 2005, and 3.42 as of June 30, 2005, the
margin we pay on the revolving credit facility was reduced by 25 basis points in
the second quarter of 2005 and will be further reduced by 25 basis points in the
third quarter of 2005. We also pay a commitment fee of 50 basis points on the
unused portion of the revolving credit facility. This commitment fee
                                        48

 
will be reduced by 12.5 basis points during the third quarter of 2005 as our
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 first and second quarters of
2005, are shown in the following tables:
 


                                                                        QUARTER ENDED
                                                -------------------------------------------------------------
                                                 MARCH 31,        JUNE 30,      SEPTEMBER 30,    DECEMBER 31,
                                                    2005            2005            2005             2005
                                                ------------    ------------    -------------    ------------
                                                REQ.    ACT.    REQ.    ACT.        REQ.             REQ.
                                                ----    ----    ----    ----    -------------    ------------
                                                                               
Leverage Ratio (maximum)....................    4.75    3.52    4.75    3.42        4.50             4.50
Interest Coverage Ratio (minimum)...........    2.00    2.83    2.00    3.06        2.00             2.00
Fixed Charge Coverage Ratio (minimum).......    1.10    1.86    1.10    2.02        1.10             1.10

 


                                                                   QUARTERS ENDING
                                       ------------------------------------------------------------------------
                                        MARCH 31-      MARCH 31-      MARCH 31-      MARCH 31-      MARCH 31-
                                       DECEMBER 31,   DECEMBER 31,   DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                           2006           2007           2008           2009           2010
                                       ------------   ------------   ------------   ------------   ------------
                                           REQ.           REQ.           REQ.           REQ.           REQ.
                                       ------------   ------------   ------------   ------------   ------------
                                                                                    
Leverage Ratio (maximum).............      4.25           3.75           3.50           3.50           3.50
Interest Coverage Ratio (minimum)....      2.10           2.20           2.35           2.50           2.75
Fixed Charge Coverage Ratio
  (minimum)..........................      1.15           1.25           1.35           1.50           1.75

 
     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 June 30, 2005, 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.
 
                                        49

 
     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 June 30, 2005, 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 two commercial banks. We sell original equipment and
aftermarket receivables on a daily basis under this program. We sold accounts
receivable under this program of $82 million and $48 million at June 30, 2005
and 2004, 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. In March 2005,
the program was amended to increase the size to $90 million. In July 2005, the
program was again amended to increase the size up to $115 million. We also sell
some receivables in our European operations to regional banks in Europe. At June
30, 2005 we sold $66 million of accounts receivable in Europe down from $100
million at June 30, 2004. 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 and offset
higher raw material prices. 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.
 
                                        50

 
CONTRACTUAL OBLIGATIONS
 
     Our remaining required debt principal amortization and payment obligations
under lease and certain other financial commitments as of June 30, 2005, are
shown in the following table:
 


                                                                    PAYMENTS DUE IN:
                                                --------------------------------------------------------
                                                                                        BEYOND
                                                2005    2006    2007    2008    2009     2009     TOTAL
                                                ----    ----    ----    ----    ----    ------    ------
                                                                       (MILLIONS)
                                                                             
Obligations:
  Revolver borrowings.......................    $ 33    $ --    $ --    $ --    $ --    $   --    $   33
  Senior long-term debt.....................      --      --      --      --      --       356       356
  Long-term notes...........................       1      --       1       2      --       477       481
  Capital leases............................       2       3       3       2       2         3        15
  Subordinated long-term debt...............      --      --      --      --      --       500       500
  Other subsidiary debt.....................       1      --      --      --       1        --         2
  Short-term debt...........................      11      --      --      --      --        --        11
                                                ----    ----    ----    ----    ----    ------    ------
Debt and capital lease obligations..........      48       3       4       4       3     1,336     1,398
Operating leases............................      10      12      10       8       6         5        51
Interest payments...........................      55     109     109     109     109       387       878
Capital commitments.........................      16      --      --      --      --        --        16
                                                ----    ----    ----    ----    ----    ------    ------
Total Payments..............................    $129    $124    $123    $121    $118    $1,728    $2,343
                                                ====    ====    ====    ====    ====    ======    ======

 
     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.
 
     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 payment defaults and events that
cause, or in some cases permit, acceleration 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
225 basis points plus LIBOR of 3.34 percent which was the rate at June 30, 2005.
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.
 
     We have also included an estimate of expenditures required after June 30,
2005 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 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.
 
                                        51

 
     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, of
which approximately $24 million has been contributed as of June 30, 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 $10 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 June 30, 2005 and 2004, 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 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 14 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 $26 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.
 
CASH FLOWS
 


                                                                 SIX MONTHS
                                                                   ENDED
                                                                  JUNE 30,
                                                                ------------
                                                                2005    2004
                                                                ----    ----
                                                                 (MILLIONS)
                                                                  
Cash provided (used) by:
  Operating activities......................................    $(71)   $ 59
  Investing activities......................................     (69)    (45)
  Financing activities......................................      (4)      3

 
Operating Activities
 
     For the six months ended, June 30, 2005, operating activities used $71
million in cash compared to a source of $59 million in cash during the same
period last year. For the first six months of 2005, cash used for working
capital was $177 million versus $61 million for the first six months of 2004.
The discontinuation of accelerated payment programs with three major OE
customers in North America was the primary reason for
 
                                        52

 
higher year over year receivables balances that resulted in a cash outflow of
$200 million, an $87 million increase from last year. Inventory represented a
cash outflow of $33 million during the first six months of 2005, an increase of
$17 million over the prior year. This primarily resulted from building higher
inventories in advance of the selling season, particularly in the aftermarket
business units. Accounts payable provided cash of $64 million, slightly up from
last year's cash inflow of $60 million. Other current liabilities resulted in a
use of $10 million in cash for the first six months of 2005, versus providing a
source of $24 million in cash during the same period last year. This change of
$34 million was primarily related to severance payments and an increase in
pension contributions during the first six months of 2005, as well as last
year's increase in accruals for a new aftermarket customer. Cash taxes were a
$11 million outflow in the latest six months ending June 30, 2005, compared with
a $7 million outflow in the prior year, primarily due to the timing of foreign
tax payments.
 
     We had arrangements with three 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 $9 million and $88 million as of June 30, 2005 and
December 31, 2004, respectively. All three of these programs were discontinued
during the first six months of 2005. To mitigate the impact on our liquidity
from the termination of these programs, we supplemented our existing senior
credit facility by increasing from $220 million to $300 million the amount of
lenders' commitments under the revolving credit facility portion of the senior
credit facility. As part of this agreement, we reduced from $180 million to $155
million the amount of lenders' commitments under the tranche B-1 letter of
credit/revolving loan facility portion of the senior credit facility.
 
     One of our European subsidiaries receives payment from an OE customer
whereby accounts receivable are satisfied through the delivery of negotiable
financial instruments. We may collect these financial instruments before their
maturity date by either selling them at a discount or using them to satisfy
accounts receivable that have previously been sold to a European bank. The
reported sales of these financial instruments were no longer included in the
account receivables sold beginning in the fourth quarter of 2004. Any of these
financial instruments that are not sold are classified as other current assets
as they do not meet our definition of cash equivalents. The amount of financial
instruments that were collected before their maturity date totaled $25 million
at June 30, 2005, compared with $44 million at December 31, 2004.
 
Investing Activities
 
     Cash used for investing activities was $24 million higher in the first six
months of 2005 compared to the same period one year ago. During the first six
months of 2005, we used $11 million in cash to acquire the exhaust operations of
Gabilan Manufacturing, partially offset by net proceeds from the sale of assets
of $3 million. In the first six months of 2004, we received $11 million in cash
from the sale of our Birmingham, U.K. facility. Capital expenditures were $63
million in the first six months of 2005 compared to $54 million a year ago. This
increase of $9 million in capital expenditures was primarily due to the timing
of future OE customer platform launches.
 
Financing Activities
 
     Cash flow from financing activities was a $4 million outflow in the first
six months of 2005 compared to an inflow of $3 million in the same period of
2004. This is primarily attributable to $42 million in cash used to reduce our
long-term debt, partially offset by increased borrowings from our revolving
credit facility during the six months of 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 five 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 an
                                        53

 
annual rate of 10 1/4 percent to floating interest rate debt at an annual rate
of LIBOR plus an average 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 ended December 31, 2004. Based on the rate
in effect through July 15, 2005 and using the current LIBOR as determined under
these agreements of 3.82 percent (which remains in effect until January 15,
2006), these swaps would reduce our 2005 annual interest expense by
approximately $2 million compared to having this debt remain fixed. These swaps
qualify as fair value hedges in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended 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 June 30, 2005, the fair value of the
interest rate swaps was close to zero and as such did not have a material impact
on our financial position. On June 30, 2005, we had $994 million in long-term
debt obligations that have fixed interest rates. Of that amount, $489 million is
fixed through July 2013 and $500 million through November 2014, while the
remainder is fixed over periods of 2005 through 2025. Included in the $489
million is $150 million of long-term debt obligations subject to variable
interest rates as a result of our swap agreements. There is also $369 million in
long-term debt obligations that have variable interest rates based on a current
market rate of interest.
 
     We estimate that the fair value of our long-term debt at June 30, 2005 was
about 105 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.
 
OUTLOOK
 
     Continued higher steel pricing, volatile oil prices and rising interest
rates make this an uncertain and challenging environment for automotive
suppliers. North American OE light vehicle production levels for 2004 were 15.8
million units. Current estimates for 2005 indicate that North American OE light
vehicle production levels will be lower than 2004 at 15.6 million units. We
continue to remain very cautious about the outlook for North American production
rates due to recent and anticipated future production cuts by the largest North
American automakers. There is uncertainty about the ability of current incentive
programs to drive future demand, and how long the North American automakers will
be willing to offer this level of 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
lower 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 drop to 16.2 million units. We saw a strong
increase in heavy-duty truck production rates during 2004. Production rates 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. In Asia, the Chinese government's restraint on lending remains a negative
influence on consumer spending for automobiles. This combined with Volkswagen's
recent market share decline in China is expected to continue to negatively
impact our revenues in China. We believe that new joint ventures to serve Ford
and BMW, and a growing relationship with General Motors in China will improve
our position in the Asia Pacific region. Heightened competition in the European
aftermarket, weaker export sales due to the comparatively strong euro and longer
product replacement cycles are expected to have a continued impact on volumes.
We saw signs of sales stabilization in the North American aftermarket exhaust
business unit during 2004 and some improvements in revenues during the first
half of 2005. We are cautiously optimistic that these North American aftermarket
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.
 
                                        54

 
     These factors make us cautious concerning the outlook for the remainder of
2005. However, we believe our diversified customer base, geographies, product
lines, platforms and markets provide the opportunity to offset specific declines
in any one area. We are also benefiting from environmental legislation and
consumer safety concerns that drive higher content for exhaust and ride control
suppliers with innovative product solutions.
 
     We continue to focus on mitigating the impact of higher costs by completing
the restructuring initiative announced in the fourth quarter of last year, 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 our anticipated increase in 2005 revenues over those we achieved
in 2004. Lower interest expense as a result of our 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. In addition, as we move to
the back half of the year we are not expecting a significant impact on EBIT
year--over-year from higher steel costs, net of other material cost savings and
recovery from customers, as a result of a variety of offsetting cost reduction
initiatives.
 
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 June 30, 2005, 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 $10 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 6 to our consolidated financial statements
included under Item 1 for information regarding our warranty reserves.
 
                                        55

 
     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. For example, one of our Chinese joint ventures is
currently under investigation by local customs officials related to whether the
joint venture applied the proper tariff code to certain of its imports. 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.
 
EMPLOYEE STOCK OWNERSHIP PLANS
 
     We have established Employee Stock Ownership Plans for the benefit of our
employees. Under the plans, subject to limitations in the Internal Revenue Code,
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 eight percent of the employee's salary. We
recorded expense for these matching contributions of approximately $3 million
for each of the six months ended June 30, 2005 and 2004, respectively. All
contributions vest immediately.
 
OTHER
 
     As required under current rules, our chief executive officer provided to
the New York Stock Exchange, the Pacific Stock Exchange and the Chicago Stock
Exchange the annual CEO certification regarding Tenneco Automotive's compliance
with those stock exchanges' corporate governance listing requirements. There
were no qualifications to these certifications.
 
                                        56

 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     For information regarding our exposure to interest rate risk, see the
caption entitled "Interest Rate Risk" in "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations," which is
incorporated herein by reference.
 
ITEM 4. 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 quarter covered by this report. Based
on their evaluation, our Chief Executive Officer and 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.
 
                                        57

 
                                    PART II
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
     (a) None.
 
     (b) Not applicable.
 
     (c) Purchase of equity securities by the issuer and affiliated
purchasers.  The following table provides information relating to the Company's
purchase of shares of its common stock in the second quarter of 2005. All of
these purchases reflect shares withheld upon vesting of restricted stock upon
employees' termination of employment, to satisfy tax withholding obligations.
 


                                                                TOTAL NUMBER OF      AVERAGE
PERIOD                                                          SHARES PURCHASED    PRICE PAID
------                                                          ----------------    ----------
                                                                              
April 2005..................................................          295             $12.91
May 2005....................................................           --                 --
June 2005...................................................          295             $13.82
                                                                      ---
  Total.....................................................          590             $13.37
                                                                      ===

 
     The Company presently has no publicly announced repurchase plan or program,
but intends to continue to satisfy tax withholding obligations in connection
with the vesting of outstanding restricted stock through the withholding of
shares.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     We held our annual stockholders' meeting on May 10, 2005, to consider and
vote on two separate proposals: (i) a proposal to elect Charles W. Cramb,
Timothy R. Donovan, M. Kathryn Eickhoff, Mark P. Frissora, Frank E. Macher,
Roger B. Porter, David B. Price, Jr., Dennis G. Severance, Paul T. Stecko, and
Jane L. Warner as directors of our company for a term expiring at our next
annual stockholders' meeting, and (ii) a proposal to ratify the appointment of
Deloitte & Touche LLP as independent public accountants for 2005. The following
sets forth the vote results with respect to these proposals at the meeting:
 
ELECTION OF DIRECTORS
 


                                                                VOTES FOR     VOTES WITHHELD
                                                                ----------    --------------
                                                                        
Charles W. Cramb............................................    37,985,567      1,128,901
Timothy R. Donovan..........................................    38,119,427        995,041
M. Kathryn Eickhoff.........................................    37,897,550      1,216,918
Mark P. Frissora............................................    37,630,512      1,483,956
Frank E. Macher.............................................    37,908,993      1,205,475
Roger B. Porter.............................................    36,425,188      2,689,280
David B. Price, Jr. ........................................    36,486,743      2,627,725
Dennis G. Severance.........................................    37,946,396      1,168,072
Paul T. Stecko..............................................    34,915,442      4,199,026
Jane L. Warner..............................................    36,480,079      2,634,389

 
RATIFICATION OF APPOINTMENT OF DELOITTE & TOUCHE LLP
 


  VOTES FOR      VOTES AGAINST    VOTES ABSTAIN
-------------    -------------    -------------
                            
 37,801,374        1,029,881         283,214

 
ITEM 6. EXHIBITS
 
     (a) Exhibits.  The exhibits filed with this report are listed on the
Exhibit Index following the signature page of this report, which is incorporated
herein by reference.
 
                                        58

 
                                   SIGNATURE
 
     Pursuant to the requirements of the Securities Exchange Act of 1934,
Tenneco Automotive Inc. has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
 
                                          TENNECO AUTOMOTIVE INC.
 
                                          By:    /s/ KENNETH R. TRAMMELL
                                            ------------------------------------
                                                    Kenneth R. Trammell
                                                 Senior Vice President and
                                                  Chief Financial Officer
 
Dated: August 5, 2005
 
                                        59

 
                               INDEX TO EXHIBITS
                                       TO
                         QUARTERLY REPORT ON FORM 10-Q
                        FOR QUARTER ENDED JUNE 30, 2005
 


  EXHIBIT
   NUMBER                                    DESCRIPTION
  -------                                    -----------
               
   2           --    None
   3.1(a)      --    Restated Certificate of Incorporation of the registrant
                     dated December 11, 1996 (incorporated herein by reference
                     from Exhibit 3.1(a) of the registrant's Annual Report on
                     Form 10-K for the year ended December 31, 1997, File No.
                     1-12387).
   3.1(b)      --    Certificate of Amendment, dated December 11, 1996
                     (incorporated herein by reference from Exhibit 3.1(c) of the
                     registrant's Annual Report on Form 10-K for the year ended
                     December 31, 1997, File No. 1-12387).
   3.1(c)      --    Certificate of Ownership and Merger, dated July 8, 1997
                     (incorporated herein by reference from Exhibit 3.1(d) of the
                     registrant's Annual Report on Form 10-K for the year ended
                     December 31, 1997, File No. 1-12387).
   3.1(d)      --    Certificate of Designation of Series B Junior Participating
                     Preferred Stock dated September 9, 1998 (incorporated herein
                     by reference from Exhibit 3.1(d) of the registrant's
                     Quarterly Report on Form 10-Q for the quarter ended
                     September 30, 1998, File No. 1-12387).
   3.1(e)      --    Certificate of Elimination of the Series A Participating
                     Junior Preferred Stock of the registrant dated September 11,
                     1998 (incorporated herein by reference from Exhibit 3.1(e)
                     of the registrant's Quarterly Report on Form 10-Q for the
                     quarter ended September 30, 1998, File No. 1-12387).
   3.1(f)      --    Certificate of Amendment to Restated Certificate of
                     Incorporation of the registrant dated November 5, 1999
                     (incorporated herein by reference from Exhibit 3.1(f) of the
                     registrant's Quarterly Report on Form 10-Q for the quarter
                     ended September 30, 1999, File No. 1-12387).
   3.1(g)      --    Certificate of Amendment to Restated Certificate of
                     Incorporation of the registrant dated November 5, 1999
                     (incorporated herein by reference from Exhibit 3.1(g) of the
                     registrant's Quarterly Report on Form 10-Q for the quarter
                     ended September 30, 1999, File No. 1-12387).
   3.1(h)      --    Certificate of Ownership and Merger merging Tenneco
                     Automotive Merger Sub Inc. with and into the registrant,
                     dated November 5, 1999 (incorporated herein by reference
                     from Exhibit 3.1(h) of the registrant's Quarterly Report on
                     Form 10-Q for the quarter ended September 30, 1999, File No.
                     1-12387).
   3.1(i)      --    Certificate of Amendment to Restated Certificate of
                     Incorporation of the registrant dated May 9, 2000
                     (incorporated herein by reference from Exhibit 3.1(i) of the
                     registrant's Quarterly Report on Form 10-Q for the quarter
                     ended March 31, 2000, File No. 1-12387).
   3.2         --    By-laws of the registrant, as amended July 13, 2004
                     (incorporated herein by reference from Exhibit 3.2 of the
                     registrant's Quarterly Report on Form 10-Q for the quarter
                     ended June 30, 2004, File No. 1-12387).
   3.3         --    Certificate of Incorporation of Tenneco Global Holdings Inc.
                     ("Global"), as amended (incorporated herein by reference to
                     Exhibit 3.3 to the registrant's Registration Statement on
                     Form S-4, Reg. No. 333-93757).
   3.4         --    By-laws of Global (incorporated herein by reference to
                     Exhibit 3.4 to the registrant's Registration Statement on
                     Form S-4, Reg. No. 333-93757).
   3.5         --    Certificate of Incorporation of TMC Texas Inc. ("TMC")
                     (incorporated herein by reference to Exhibit 3.5 to the
                     registrant's Registration Statement on Form S-4, Reg. No.
                     333-93757).
   3.6         --    By-laws of TMC (incorporated herein by reference to Exhibit
                     3.6 to the registrant's Registration Statement on Form S-4,
                     Reg. No. 333-93757).
   3.7         --    Amended and Restated Certificate of Incorporation of Tenneco
                     International Holding Corp. ("TIHC") (incorporated herein by
                     reference to Exhibit 3.7 to the registrant's Registration
                     Statement on Form S-4, Reg. No. 333-93757).

 
                                        60

 


  EXHIBIT
   NUMBER                                    DESCRIPTION
  -------                                    -----------
               
   3.8         --    Amended and Restated By-laws of TIHC (incorporated herein by
                     reference to Exhibit 3.8 to the registrant's Registration
                     Statement on Form S-4, Reg. No. 333-93757).
   3.9         --    Certificate of Incorporation of Clevite Industries Inc.
                     ("Clevite"), as amended (incorporated herein by reference to
                     Exhibit 3.9 to the registrant's Registration Statement on
                     Form S-4, Reg. No. 333-93757).
   3.10        --    By-laws of Clevite (incorporated herein by reference to
                     Exhibit 3.10 to the registrant's Registration Statement on
                     Form S-4, Reg. No. 333-93757).
   3.11        --    Amended and Restated Certificate of Incorporation of the
                     Pullman Company ("Pullman") (incorporated herein by
                     reference to Exhibit 3.11 to the registrant's Registration
                     Statement on Form S-4, Reg. No. 333-93757).
   3.12        --    By-laws of Pullman (incorporated herein by reference to
                     Exhibit 3.12 to the registrant's Registration Statement on
                     Form S-4, Reg. No. 333-93757).
   3.13        --    Certificate of Incorporation of Tenneco Automotive Operating
                     Company Inc. ("Operating") (incorporated herein by reference
                     to Exhibit 3.13 to the registrant's Registration Statement
                     on Form S-4, Reg. No. 333-93757).
   3.14        --    By-laws of Operating (incorporated herein by reference to
                     Exhibit 3.14 to the registrant's Registration Statement on
                     Form S-4, Reg. No. 333-93757).
   4.1(a)      --    Rights Agreement dated as of September 8, 1998, by and
                     between the registrant and First Chicago Trust Company of
                     New York, as Rights Agent (incorporated herein by reference
                     from Exhibit 4.1 of the registrant's Current Report on Form
                     8-K dated September 24, 1998, File No. 1-12387).
   4.1(b)      --    Amendment No. 1 to Rights Agreement, dated March 14, 2000,
                     by and between the registrant and First Chicago Trust
                     Company of New York, as Rights Agent (incorporated herein by
                     reference from Exhibit 4.4(b) of the registrant's Annual
                     Report on Form 10-K for the year ended December 31, 1999,
                     File No. 1-12387).
   4.1(c)      --    Amendment No. 2 to Rights Agreement, dated February 5, 2001,
                     by and between the registrant and First Union National Bank,
                     as Rights Agent (incorporated herein by reference from
                     Exhibit 4.4(b) of the registrant's Post-Effective Amendment
                     No. 3, dated February 26, 2001, to its Registration
                     Statement on Form 8-A dated September 17, 1998).
   4.2(a)      --    Indenture, dated as of November 1, 1996, between the
                     registrant and The Chase Manhattan Bank, as Trustee
                     (incorporated herein by reference from Exhibit 4.1 of the
                     registrant's Registration Statement on Form S-4,
                     Registration No. 333-14003).
   4.2(b)      --    First Supplemental Indenture dated as of December 11, 1996
                     to Indenture dated as of November 1, 1996 between registrant
                     and The Chase Manhattan Bank, as Trustee (incorporated
                     herein by reference from Exhibit 4.3(b) of the registrant's
                     Annual Report on Form 10-K for the year ended December 31,
                     1996, File No. 1-12387).
   4.2(c)      --    Second Supplemental Indenture dated as of December 11, 1996
                     to Indenture dated as of November 1, 1996 between the
                     registrant and The Chase Manhattan Bank, as Trustee
                     (incorporated herein by reference from Exhibit 4.3(c) of the
                     registrant's Annual Report on Form 10-K for the year ended
                     December 31, 1996, File No. 1-12387).
   4.2(d)      --    Third Supplemental Indenture dated as of December 11, 1996
                     to Indenture dated as of November 1, 1996 between the
                     registrant and The Chase Manhattan Bank, as Trustee
                     (incorporated herein by reference from Exhibit 4.3(d) of the
                     registrant's Annual Report on Form 10-K for the year ended
                     December 31, 1996, File No. 1-12387).
   4.2(e)      --    Fourth Supplemental Indenture dated as of December 11, 1996
                     to Indenture dated as of November 1, 1996 between the
                     registrant and The Chase Manhattan Bank, as Trustee
                     (incorporated herein by reference from Exhibit 4.3(e) of the
                     registrant's Annual Report on Form 10-K for the year ended
                     December 31, 1996, File No. 1-12387).

 
                                        61

 


  EXHIBIT
   NUMBER                                    DESCRIPTION
  -------                                    -----------
               
   4.2(f)      --    Eleventh Supplemental Indenture, dated October 21, 1999, to
                     Indenture dated November 1, 1996 between The Chase Manhattan
                     Bank, as Trustee, and the registrant (incorporated herein by
                     reference from Exhibit 4.2(l) of the registrant's Quarterly
                     Report on Form 10-Q for the quarter ended September 30,
                     1999, File No. 1-12387).
   4.3         --    Specimen stock certificate for Tenneco Automotive Inc.
                     common stock (incorporated herein by reference from Exhibit
                     4.3 of the registrant's Annual Report on Form 10-K for the
                     year ended December 31, 2000, File No. 1-12387).
   4.4(a)      --    Indenture dated October 14, 1999 by and between the
                     registrant and The Bank of New York, as trustee
                     (incorporated herein by reference from Exhibit 4.4(a) of the
                     registrant's Quarterly Report on Form 10-Q for the quarter
                     ended September 30, 1999, File No. 1-12387).
   4.4(b)      --    Supplemental Indenture dated November 4, 1999 among Tenneco
                     Automotive Operating Subsidiary Inc. (formerly Tenneco
                     Automotive Inc.), Tenneco International Holding Corp.,
                     Tenneco Global Holdings Inc., the Pullman Company, Clevite
                     Industries Inc. and TMC Texas Inc. in favor of The Bank of
                     New York, as trustee (incorporated herein by reference from
                     Exhibit 4.4(b) of the registrant's Quarterly Report on Form
                     10-Q for the quarter ended September 30, 1999, File No.
                     1-12387).
   4.4(c)      --    Subsidiary Guarantee dated as of October 14, 1999 from
                     Tenneco Automotive Operating Subsidiary Inc. (formerly
                     Tenneco Automotive Inc.), Tenneco International Holding
                     Corp., Tenneco Global Holdings Inc., the Pullman Company,
                     Clevite Industries Inc. and TMC Texas Inc. in favor of The
                     Bank of New York, as trustee (incorporated herein by
                     reference to Exhibit 4.4(c) to the registrant's Registration
                     Statement on Form S-4, Reg. No. 333-93757).
   4.5(a)      --    Amended and Restated Credit Agreement, dated as of December
                     12, 2003, among Tenneco Automotive Inc., the several banks
                     and other financial institutions or entities from time to
                     time parties thereto, Bank of America, N.A. and Citicorp
                     North America, Inc., as co-documentation agents, Deutsche
                     Bank Securities Inc., as syndication agent, and JP Morgan
                     Chase Bank, as administrative agent (incorporated herein by
                     reference to Exhibit 4.5(a) to the registrant's Annual
                     Report on Form 10-K for the year ended December 31, 2003,
                     File No. 1-12387).
   4.5(b)      --    Amended and Restated Guarantee And Collateral Agreement,
                     dated as of November 4, 1999, by Tenneco Automotive Inc. and
                     the subsidiary guarantors named therein, in favor of
                     JPMorgan Chase Bank, as Administrative Agent (incorporated
                     herein by reference from Exhibit 4.5(f) to the registrant's
                     Quarterly Report on Form 10-Q for the quarter ended June 30,
                     2003, File No. 1-12387).
   4.5(c)      --    First Amendment, dated as of April 30, 2004, to the Amended
                     and Restated Credit Agreement dated as of December 12, 2003,
                     among Tenneco Automotive Inc., JP Morgan Chase Bank as
                     administrative agent and the various lenders party thereto
                     (incorporated herein by reference from Exhibit 4.5(c) to the
                     registrant's Quarterly Report on Form 10-Q for the quarter
                     ended September 30, 2004, File No. 1-12387).
   4.5(d)      --    Second Amendment, dated November 19, 2004, to the Amended
                     and Restated Credit Agreement dated as of December 12, 2003,
                     among Tenneco Automotive Inc., JP Morgan Chase Bank as
                     administrative agent and the various lenders party thereto
                     (incorporated herein by reference from Exhibit 99.2 of the
                     registrant's Current Report on Form 8-K dated November 19,
                     2004, File No. 1-12387).
   4.5(e)      --    Third Amendment, dated February 17, 2005, to the Amended and
                     Restated Credit Agreement, dated as of December 12, 2003
                     among Tenneco Automotive Inc., JP Morgan Chase Bank as
                     administrative agent and the various lenders party thereto
                     (incorporated by reference to Exhibit 99.1 to the
                     registrant's Current Report on Form 8-K dated February 17,
                     2005, File No. 1-12387).

 
                                        62

 


  EXHIBIT
   NUMBER                                    DESCRIPTION
  -------                                    -----------
               
   4.5(f)      --    New Lender Supplement, dated as of March 31, 2005, by and
                     among Wachovia Bank, National Association, Tenneco
                     Automotive Inc. and JPMorgan Chase Bank, N.A.; New Lender
                     Supplement, dated as of March 31, 2005, by and among Wells
                     Fargo Foothill, LLC, Tenneco Automotive Inc. and JPMorgan
                     Chase Bank, N.A.; New Lender Supplement, dated as of March
                     31, 2005, by and among Charter One Bank, NA, Tenneco
                     Automotive Inc. and JPMorgan Chase Bank, N.A (incorporated
                     herein by reference from Exhibit 4.5(f) to the registrant's
                     Quarterly Report on form 10-Q for the quarter ended March
                     31, 2005, File No. 1-12387).
   4.5(g)      --    New Lender Supplement, dated as of April 29, 2005, by and
                     among The Bank of Nova Scotia, Tenneco Automotive Inc. and
                     JPMorgan Chase Bank, N.A (incorporated herein by reference
                     from Exhibit 4.5(g) to the registrant's Quarterly Report on
                     Form 10-Q for the quarter ended March 31, 2005, File No.
                     1-12387).
   4.6(a)      --    Indenture, dated as of June 19, 2003, among Tenneco
                     Automotive Inc., the subsidiary guarantors named therein and
                     Wachovia Bank, National Association (incorporated herein by
                     reference from Exhibit 4.6(a) to the registrant's Quarterly
                     Report on Form 10-Q for the quarter ended June 30, 2003,
                     File No. 1-12387).
   4.6(b)      --    Collateral Agreement, dated as of June 19, 2003, by Tenneco
                     Automotive Inc. and the subsidiary guarantors named therein
                     in favor of Wachovia Bank, National Association (incorpo-
                     rated herein by reference from Exhibit 4.6(b) to the
                     registrant's Quarterly Report on Form 10-Q for the quarter
                     ended June 30, 2003, File No. 1-12387).
   4.6(c)      --    Registration Rights Agreement, dated as of June 19, 2003,
                     among Tenneco Automotive Inc., the subsidiary guarantors
                     named therein, and the initial purchasers named therein, for
                     whom JPMorgan Securities Inc. acted as representative
                     (incorporated herein by reference from Exhibit 4.6(c) to the
                     registrant's Quarterly Report on Form 10-Q for the quarter
                     ended June 30, 2003, File No. 1-12387).
   4.6(d)      --    Supplemental Indenture, dated as of December 12, 2003, among
                     Tenneco Automotive Inc., the subsidiary guarantors named
                     therein and Wachovia Bank, National Association
                     (incorporated herein by reference to Exhibit 4.6(d) to the
                     registrant's Annual Report on Form 10-K for the year ended
                     December 31, 2003, File No. 1-12387).
   4.6(e)      --    Registration Rights Agreement, dated as of December 12,
                     2003, among Tenneco Automotive Inc., the subsidiary
                     guarantors named therein, and the initial purchasers named
                     therein, for whom Banc of America Securities LLC acted as
                     representative agent (incorporated herein by reference to
                     Exhibit 4.5(a) to the registrant's Annual Report on Form
                     10-K for the year ended December 31, 2003, File No.
                     1-12387).
   4.7         --    Intercreditor Agreement, dated as of June 19, 2003, among
                     JPMorgan Chase Bank, as Credit Agent, Wachovia Bank,
                     National Association, as Trustee and Collateral Agent, and
                     Tenneco Automotive Inc. (incorporated herein by reference
                     from Exhibit 4.7 to the registrant's Quarterly Report on
                     Form 10-Q for the quarter ended June 30, 2003, File No.
                     1-12387).
   4.8(a)      --    Indenture, dated as of November 19, 2004, among Tenneco
                     Automotive Inc., the subsidiary guarantors named therein and
                     The Bank of New York Trust Company (incorporated herein by
                     reference from Exhibit 99.1 of the registrant's Current
                     Report on Form 8-K dated November 19, 2004, File No.
                     1-12387).
   4.8(b)      --    Supplemental Indenture, dated as of March 28, 2005, among
                     Tenneco Automotive Inc., the Guarantor party thereto and the
                     Bank of New York Trust Company, N.A., as trustee
                     (incorporated herein by reference from Exhibit 4.3 to the
                     registrant's Registration Statement on Form S-4, Reg. No.
                     333-123752).
   4.8(c)      --    Registration Rights Agreement, dated as of November 19,
                     2004, among Tenneco Automotive Inc., the guarantors party
                     thereto and the initial purchasers party thereto
                     (incorporated herein by reference from Exhibit 4.2 to the
                     registrant's Registration Statement on Form S-4, Reg No.
                     333-123752).

 
                                        63

 


  EXHIBIT
   NUMBER                                    DESCRIPTION
  -------                                    -----------
               
  10.1         --    Distribution Agreement, dated November 1, 1996, by and among
                     El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), the
                     registrant, and Newport News Shipbuilding Inc. (incorporated
                     herein by reference from Exhibit 2 of the registrant's Form
                     10, File No. 1-12387).
  10.2         --    Amendment No. 1 to Distribution Agreement, dated as of
                     December 11, 1996, by and among El Paso Tennessee Pipeline
                     Co. (formerly Tenneco Inc.), the registrant, and Newport
                     News Shipbuilding Inc. (incorporated herein by reference
                     from Exhibit 10.2 of the registrant's Annual Report on Form
                     10-K for the year ended December 31, 1996, File No.
                     1-12387).
  10.3         --    Debt and Cash Allocation Agreement, dated December 11, 1996,
                     by and among El Paso Tennessee Pipeline Co. (formerly
                     Tenneco Inc.), the registrant, and Newport News Shipbuild-
                     ing Inc. (incorporated herein by reference from Exhibit 10.3
                     of the registrant's Annual Report on Form 10-K for the year
                     ended December 31, 1996, File No. 1-12387).
  10.4         --    Benefits Agreement, dated December 11, 1996, by and among El
                     Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), the
                     registrant, and Newport News Shipbuilding Inc. (incorporated
                     herein by reference from Exhibit 10.4 of the registrant's
                     Annual Report on Form 10-K for the year ended December 31,
                     1996, File No. 1-12387).
  10.5         --    Insurance Agreement, dated December 11, 1996, by and among
                     El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), the
                     registrant, and Newport News Shipbuilding Inc. (incorporated
                     herein by reference from Exhibit 10.5 of the registrant's
                     Annual Report on Form 10-K for the year ended December 31,
                     1996, File No. 1-12387).
  10.6         --    Tax Sharing Agreement, dated December 11, 1996, by and among
                     El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.),
                     Newport News Shipbuilding Inc., the registrant, and El Paso
                     Natural Gas Company (incorporated herein by reference from
                     Exhibit 10.6 of the registrant's Annual Report on Form 10-K
                     for the year ended December 31, 1996, File No. 1-12387).
  10.8         --    Tenneco Automotive Inc. Value Added "TAVA" Incentive
                     Compensation Plan (incorporated herein by reference from
                     Exhibit 10.8 of the registrant's Quarterly Report on Form
                     10-Q for the quarter ended September 30, 2003, File No.
                     1-12387).
  10.9         --    Tenneco Automotive Inc. Change of Control Severance Benefits
                     Plan for Key Executives (incorporated herein by reference
                     from Exhibit 10.13 of the registrant's Quarterly Report on
                     Form 10-Q for the quarter ended September 30, 1999, File No.
                     1-12387).
  10.10        --    Tenneco Automotive Inc. Stock Ownership Plan (incorporated
                     herein by reference from Exhibit 10.10 of the registrant's
                     Registration Statement on Form S-4, Reg. No. 333-93757).
  10.11        --    Tenneco Automotive Inc. Key Executive Pension Plan
                     (incorporated herein by reference from Exhibit 10.11 to the
                     registrant's Quarterly Report on Form 10-Q for the quarter
                     ended June 30, 2000, File No. 1-12387).
  10.12        --    Tenneco Automotive Inc. Deferred Compensation Plan
                     (incorporated herein by reference from Exhibit 10.12 to the
                     registrant's Quarterly Report on Form 10-Q for the quarter
                     ended June 30, 2000, File No. 1-12387).
  10.13        --    Tenneco Automotive Inc. Supplemental Executive Retirement
                     Plan (incorporated herein by reference from Exhibit 10.13 to
                     the registrant's Quarterly Report on Form 10-Q for the
                     quarter ended June 30, 2000, File No. 1-12387).
  10.14        --    Human Resources Agreement by and between Tenneco Automotive
                     Inc. and Tenneco Packaging Inc. dated November 4, 1999
                     (incorporated herein by reference to Exhibit 99.1 to the
                     registrant's Current Report on Form 8-K dated November 4,
                     1999, File No. 1-12387).
  10.15        --    Tax Sharing Agreement by and between Tenneco Automotive Inc.
                     and Tenneco Packaging Inc. dated November 3, 1999
                     (incorporated herein by reference to Exhibit 99.2 to the
                     registrant's Current Report on Form 8-K dated November 4,
                     1999, File No. 1-12387).
  10.16        --    Amended and Restated Transition Services Agreement by and
                     between Tenneco Automotive Inc. and Tenneco Packaging Inc.
                     dated as of November 4, 1999 (incorporated herein by
                     reference from Exhibit 10.21 of the registrant's Quarterly
                     Report on Form 10-Q for the quarter ended September 30,
                     1999, File No. 1-12387).

 
                                        64

 


  EXHIBIT
   NUMBER                                    DESCRIPTION
  -------                                    -----------
               
  10.17        --    Assumption Agreement among Tenneco Automotive Operating
                     Company Inc., Tenneco International Holding Corp., Tenneco
                     Global Holdings Inc., The Pullman Company, Clevite
                     Industries Inc., TMC Texas Inc., Salomon Smith Barney Inc.
                     and the other Initial Purchasers listed in the Purchase
                     Agreement dated as of November 4, 1999 (incorporated herein
                     by reference from Exhibit 10.24 of the registrant's
                     Registration Statement on Form S-4, Reg. No. 333-93757).
  10.18        --    Amendment No. 1 to Change in Control Severance Benefits Plan
                     for Key Executives (incorporated herein by reference from
                     Exhibit 10.23 to the registrant's Quarterly Report on Form
                     10-Q for the quarter ended June 30, 2000, File No. 1-12387).
  10.19        --    Letter Agreement dated July 27, 2000 between the registrant
                     and Mark P. Frissora (incorporated herein by reference from
                     Exhibit 10.24 to the registrant's Quarterly Report on Form
                     10-Q for the quarter ended June 30, 2000, File No. 1-12387).
  10.20        --    Letter Agreement dated July 27, 2000 between the registrant
                     and Richard P. Schneider (incorporated herein by reference
                     from Exhibit 10.26 to the registrant's Quarterly Report on
                     Form 10-Q for the quarter ended June 30, 2000, File No.
                     1-12387).
  10.21        --    Letter Agreement dated July 27, 2000 between the registrant
                     and Timothy R. Donovan (incorporated herein by reference
                     from Exhibit 10.28 to the registrant's Annual Report on Form
                     10-K for the year ended December 31, 2000, File No.
                     1-12387).
  10.22        --    Form of Indemnity Agreement entered into between the
                     registrant and the following directors of the registrant:
                     Paul Stecko, M. Kathryn Eickhoff and Dennis Severance
                     (incorporated herein by reference from Exhibit 10.29 to the
                     registrant's Quarterly Report on Form 10-Q for the quarter
                     ended September 30, 2000, File No. 1-12387).
  10.23        --    Mark P. Frissora Special Appendix under Tenneco Automotive
                     Inc. Supplemental Executive Retirement Plan (incorporated
                     herein by reference from Exhibit 10.30 to the registrant's
                     Annual Report on Form 10-K for the year ended December 31,
                     2000, File No. 1-12387).
  10.24        --    Letter Agreement dated as of June 1, 2001 between the
                     registrant and Hari Nair (incorporated herein by reference
                     from Exhibit 10.28 to the registrant's Annual Report on Form
                     10-K for the year ended December 31, 2001. File No.
                     1-12387).
  10.25        --    Tenneco Automotive Inc. 2002 Long-Term Incentive Plan (As
                     Amended and Restated Effective March 11, 2003) (incorporated
                     herein by reference from Exhibit 10.26 to the registrant's
                     Quarterly Report on Form 10-Q for the quarter ended June 30,
                     2003. File No. 1-12387).
  10.26        --    Amendment No. 1 to Tenneco Automotive Inc. Deferred
                     Compensation Plan (incorporated herein by reference from
                     Exhibit 10.27 to the registrant's Annual Report on Form 10-K
                     for the year ended December 31, 2002, File No. 1-12387).
  10.27        --    Tenneco Automotive Inc. Supplemental Stock Ownership Plan
                     (incorporated herein by reference from Exhibit 10.28 to the
                     registrant's Annual Report on Form 10-K for the year ended
                     December 31, 2002, File No. 1-12387).
  10.28        --    Form of Stock Equivalent Unit Award Agreement under the 2002
                     Long-Term Incentive Plan, as amended (incorporated herein by
                     reference from Exhibit 99.1 of the registrant's Current
                     Report on Form 8-K dated January 13, 2005, File No.
                     1-12387).
  10.29        --    Form of Stock Option Agreement for employees under the 2002
                     Long-Term Incentive Plan, as amended (providing for a ten
                     year option term) (incorporated herein by reference from
                     Exhibit 99.2 of the registrant's Current Report on Form 8-K
                     dated January 13, 2005, File No. 1-12387).
  10.30        --    Form of Stock Option Agreement for non-employee directors
                     under the 2002 Long-Term Incentive Plan, as amended
                     (providing for a ten year option term) (incorporated herein
                     by reference from Exhibit 99.3 of the registrant's Current
                     Report on Form 8-K dated January 13, 2005, File No.
                     1-12387).

 
                                        65

 


  EXHIBIT
   NUMBER                                    DESCRIPTION
  -------                                    -----------
               
  10.31        --    Form of Restricted Stock Award Agreement for employees under
                     the 2002 Long-Term Incentive Plan, as amended (three year
                     cliff vesting) (incorporated herein by reference from
                     Exhibit 99.4 of the registrant's Current Report on Form 8-K
                     dated January 13, 2005, File No. 1-12387).
  10.32        --    Form of Restricted Stock Award Agreement for non-employee
                     directors under the 2002 Long-Term Incentive Plan, as
                     amended (incorporated herein by reference from Exhibit 99.5
                     of the registrant's Current Report on Form 8-K dated January
                     13, 2005, File No. 1-12387).
  10.33        --    Form of Restricted Stock Award Agreement for employees under
                     the 2002 Long-Term Incentive Plan, as amended (vesting 1/3
                     annually) (incorporated herein by reference from Exhibit
                     99.1 of the registrant's Current Report on Form 8-K dated
                     January 17, 2005, File No. 1-12387).
  10.34        --    Form of Stock Option Agreement for employees under the 2002
                     Long-Term Incentive Plan, as amended (providing for a seven
                     year option term) (incorporated herein by reference from
                     Exhibit 99.2 of the registrant's Current Report on Form 8-K
                     dated January 17, 2005, File No. 1-12387).
  10.35        --    Form of Stock Option Agreement for non-employee directors
                     under the 2002 Long-Term Incentive Plan, as amended
                     (providing for a seven year option term) (incorporated
                     herein by reference from Exhibit 99.3 of the registrant's
                     Current Report on Form 8-K dated January 17, 2005, File No.
                     1-12387).
  10.36        --    Form of Performance Share Agreement for non-employee
                     directors under the 2002 Long-Term Incentive Plan, as
                     amended. (incorporated herein by reference from Exhibit
                     10.36 of the registrant's Annual Report on Form 10-K for the
                     year ended December 31, 2004, File No. 1-12387).
  10.37        --    Summary of 2005 Outside Directors' Compensation.
                     (incorporated herein by reference from Exhibit 10.37 of the
                     registrant's Annual Report on Form 10-K for the year ended
                     December 31, 2004, File No. 1-12387).
 *10.38        --    Summary of 2005 Named Executive Officer Compensation.
  10.39        --    First Amendment to the Tenneco Automotive Inc. Key Executive
                     Pension Plan (incorporated herein by reference from Exhibit
                     10.39 to the registrant's Quarterly Report on Form 10-Q for
                     the quarter ended March 31, 2005, File No. 1-12387).
 *10.40        --    Amendment No. 1 to the Tenneco Automotive Inc. Supplemental
                     Executive Retirement Plan.
 *10.41        --    Second Amendment to the Tenneco Automotive Inc. Key
                     Executive Pension Plan.
 *10.42        --    Amendment No. 2 to the Tenneco Automotive Inc. Deferred
                     Compensation Plan.
 *10.43        --    Tenneco Automotive Inc. Supplemental Retirement Plan.
 *10.44        --    Mark P. Frissora Special Appendix under Tenneco Automotive
                     Inc. Supplemental Retirement Plan.
 *10.45        --    Tenneco Automotive Inc. Supplemental Pension Plan for
                     Management.
 *10.46        --    Tenneco Automotive Inc. Incentive Deferral Plan.
  11           --    None.
 *12           --    Computation of Ratio of Earnings to Fixed Charges.
 *15           --    Letter of Deloitte & Touche LLP regarding interim financial
                     information.
  19           --    None.
  22           --    None.
  23           --    None.
  24           --    None.
 *31.1         --    Certification of Mark P. Frissora under Section 302 of the
                     Sarbanes-Oxley Act of 2002.

 
                                        66

 


  EXHIBIT
   NUMBER                                    DESCRIPTION
  -------                                    -----------
               
 *31.2         --    Certification of Kenneth R. Trammell under Section 302 of
                     the Sarbanes-Oxley Act of 2002.
 *32.1         --    Certification of Mark P. Frissora and Kenneth R. Trammell
                     under Section 906 of the Sarbanes-Oxley Act of 2002.
  99           --    None.

 
---------------
 
* Filed herewith.
 
                                        67