ARVINMERITOR INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 28, 2003
COMMISSION FILE NUMBER 1-15983
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ARVINMERITOR, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

INDIANA 38-3354643
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

2135 WEST MAPLE ROAD 48084-7186
TROY, MICHIGAN (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (248) 435-1000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

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

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

The aggregate market value of the registrant's voting and non-voting common
equity held by non-affiliates of the registrant on March 28, 2003 (the last
business day of the most recently completed second fiscal quarter) was
approximately $947.6 million.

68,496,814 shares of the registrant's Common Stock, par value $1 per share,
were outstanding on November 30, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information contained in the Proxy Statement for the Annual Meeting of
Shareowners of the registrant to be held on February 18, 2004 is incorporated by
reference into Part III.

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PART I

ITEM 1. BUSINESS.

ArvinMeritor, Inc. (the "company" or "ArvinMeritor"), headquartered in
Troy, Michigan, is a leading global supplier of a broad range of integrated
systems, modules and components serving light vehicle, commercial truck, trailer
and specialty original equipment manufacturers and certain aftermarkets. The
company also provides coil coating applications to the transportation,
appliance, construction, heating, ventilation and air conditioning, and doors
industries.

ArvinMeritor was incorporated in Indiana in March 2000, in connection with
the merger of Meritor Automotive, Inc. ("Meritor") and Arvin Industries, Inc.
("Arvin"), which was effective on July 7, 2000. As used in this Annual Report on
Form 10-K, the terms "company," "ArvinMeritor," "we," "us" and "our" include
ArvinMeritor, its consolidated subsidiaries and its predecessors unless the
context indicates otherwise.

The company's fiscal quarters end on the Sundays nearest December 31, March
31 and June 30, and its fiscal year ends on the Sunday nearest September 30.
Fiscal year 2003 ended on September 28, 2003. All year and quarter references
relate to our fiscal year and fiscal quarters unless otherwise stated.

Whenever an item of this Annual Report on Form 10-K refers to information
in the Proxy Statement for the Annual Meeting of Shareowners of ArvinMeritor to
be held on February 18, 2004 (the "2004 Proxy Statement"), or under specific
captions in Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations or Item 8. Financial Statements and Supplementary
Data, the information is incorporated in that item by reference.

ArvinMeritor serves a broad range of original equipment manufacturer
("OEM") customers worldwide, including truck OEMs, light vehicle OEMs, trailer
producers and specialty vehicle manufacturers, and certain aftermarkets. Our
total sales in fiscal year 2003 were $7.8 billion. Our ten largest customers
accounted for approximately 65% of fiscal year 2003 sales. We operated 122
manufacturing facilities in 24 countries around the world in fiscal year 2003,
including facilities operated by joint ventures in which we have interests.
Sales outside the United States accounted for approximately 57% of total sales
in fiscal year 2003. We also participated in ten joint ventures that generated
unconsolidated revenues of $1.1 billion in fiscal 2003.

We serve customers worldwide through the following operating segments:

- Light Vehicle Systems ("LVS") supplies air and emissions systems,
aperture systems (roof and door systems and products and motion control
products), and undercarriage systems (suspension and ride control systems
and wheel products) for passenger cars, motorcycles, all-terrain
vehicles, light trucks and sport utility vehicles to OEMs.

- Commercial Vehicle Systems ("CVS") supplies drivetrain systems and
components, including axles and drivelines, braking systems, suspension
systems, and exhaust and ride control products for medium-and heavy-duty
trucks, trailers and specialty vehicles to OEMs and to the commercial
vehicle aftermarket.

- Light Vehicle Aftermarket ("LVA") supplies exhaust, ride control and
filter products and other automotive parts to the passenger car, light
truck and sport utility aftermarket.

- Our coil coating operation, which does not primarily focus on automotive
products, is classified as "Other."

Note 22 of the Notes to Consolidated Financial Statements under Item 8.
Financial Statements and Supplementary Data contains financial information by
segment for each of the three years ended September 30, 2003, including
information on sales and assets by geographic area for each segment. The heading
"Products" below includes information on LVS, CVS, LVA and Other sales by
product for each of the three years ended September 30, 2003.

The industry in which we operate is cyclical and has been characterized
historically by periodic fluctuations in demand for vehicles for which we supply
products. Industry cycles, which are outside our
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control and cannot be predicted with certainty, can have a positive or negative
effect on our financial results. See "Seasonality; Cyclicality" and Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview and Outlook, and -- Results of Operations below.

References in this Annual Report on Form 10-K to our being a leading
supplier or the world's leading supplier, and other similar statements as to our
relative market position are based principally on calculations we have made.
These calculations are based on information we have collected, including company
and industry sales data obtained from internal and available external sources,
as well as our estimates. In addition to such quantitative data, our statements
are based on other competitive factors such as our technological capabilities,
our research and development efforts and innovations and the quality of our
products and services, in each case relative to that of our competitors in the
markets we address.

ArvinMeritor began operations as a combined company on July 7, 2000 and,
accordingly, does not have an operating history as a combined company prior to
that date. Except where otherwise noted, the historic financial information
included in this Annual Report on Form 10-K for periods prior to July 7, 2000
reflects the results of Meritor and its consolidated subsidiaries. The
information for periods after July 7, 2000 represents the results of
ArvinMeritor and its consolidated subsidiaries. This information may not be
indicative of our future results of operations, financial position or cash
flows.

BUSINESS STRATEGIES

We are a global supplier of a broad range of integrated systems, modules
and components for use in commercial, specialty and light vehicles worldwide and
we have developed market positions as a leader in most of our served markets. We
are working to enhance our leadership positions and capitalize on our existing
customer, product and geographic strengths, and to increase sales, earnings and
profitability. We employ various business strategies to achieve these goals.

Several significant factors and trends in the automotive industry present
opportunities and challenges to industry suppliers and influence our business
strategies. These factors and trends include the cyclicality of the industry;
consolidation and globalization of OEMs and their suppliers; increased
outsourcing by OEMs; increased demand for modules and systems by OEMs; pricing
pressures from OEMs that could negatively impact suppliers' earnings even when
sales are increasing; and an increasing emphasis on engineering and technology.
Our business strategies, described below, are influenced by these industry
factors and trends and are focused on leveraging our resources to create a
competitive cost structure.

Minimize the Risks of Cyclicality Through Business Diversity. As noted
above, the automotive industry is cyclical in nature and subject to periodic
fluctuations in demand for vehicles. This in turn results in fluctuation in
demand for our products. We seek to diversify our business in order to mitigate
the effects of market downturns and better accommodate the changing needs of
OEMs. We strive to maintain diversity in three areas:

- Revenues. We manufacture and sell a wide range of products in various
segments of the automotive market. For fiscal year 2003, our annual sales
include $4.4 billion for LVS, $2.4 billion for CVS, $0.8 billion for LVA
and $0.2 billion for Other.

- Customers. A diverse customer base helps to mitigate market
fluctuations. We have a large customer base comprised of most major
vehicle producers.

- Global Presence. Cycles in the major geographic markets of the
automotive industry are not necessarily concurrent or related. We seek to
maintain a strong global presence and to expand our global operations to
mitigate the effect of periodic fluctuations in demand in one or more
geographic areas. A strong global presence also helps to meet the global
sourcing needs of our customers.

Focus on Organic Growth While Reviewing Strategic Opportunities. We have
identified the areas of our business that we believe have the most potential for
leveraging into other products and markets, and we are working to grow these. We
seek to take advantage of opportunities for operating synergies and cross
selling of products between our light vehicle and commercial vehicle businesses.
For example, CVS continues to adapt

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products and technologies, originally developed by LVS air and emissions
systems, in the development of exhaust products for its commercial vehicle
customers.

We also consider strategic opportunities that could enhance the company's
growth. Automotive suppliers continue to consolidate into larger, more efficient
and more capable companies and collaborate with each other in an effort to
better serve the global needs of their OEM customers. We regularly evaluate
various strategic and business development opportunities, including licensing
agreements, marketing arrangements, joint ventures, acquisitions and
dispositions. We remain committed to selectively pursuing alliances and
acquisitions that would allow us to leverage our capabilities, gain access to
new customers and technologies, enter new product markets and implement our
business strategies. We also continue to review the prospects of our existing
businesses to determine whether any of them should be modified, restructured,
sold or otherwise discontinued. See "Strategic Initiatives" and "Joint Ventures"
below for information on initiatives in these areas.

Grow Content Per Vehicle Through Technologically Advanced Systems and
Modules. Increased outsourcing by OEMs has resulted in higher overall per
vehicle sales by independent suppliers and presents an opportunity for supplier
sales growth at a faster rate than the overall automotive industry growth trend.
OEMs are also demanding modules and integrated systems that require little
assembly by the OEM customer. In both light and commercial vehicle markets, we
believe that the trend is also away from sales of components to customers, and
toward integration of components into systems and eventual partnering for joint
development of integrated vehicles.

One of our significant growth strategies is to provide engineering and
design expertise, develop new products and improve existing products that meet
these customer needs. We will continue to invest in new technologies and product
development and work closely with our customers to develop and implement design,
engineering, manufacturing and quality improvements. We will also continue to
integrate our existing product lines by using our design, engineering and
manufacturing expertise and teaming with technology partners to expand sales of
higher-value modules and systems. For example:

- LVS is a supplier of complete roof modules comprised of a roof head liner
bound to an outer shell using a patented process, which can also
incorporate LVS sunroof technology. Our roof module is featured in the
DaimlerChrysler SMART car.

- LVS has begun production on a modular door concept for a European OEM,
and has developed a glass motion module for use in door systems, which is
currently being evaluated by several OEMs, including some Japanese
customers. LVS also has a contract with Hyundai to provide door modules,
incorporating window regulators, latches, motors, speakers and wire
harnesses, for two platforms beginning production in 2005.

- LVS' suspension systems group has entered into an agreement to provide
several front modules to a major OEM, with production beginning in 2004,
including a wheel end module featuring a knuckle, hub and bearing and
brake assemblies; strut modules including a spring, shock and upper
mount; and a cross car module incorporating the cradle assembly, axle
assembly, steering system, lower control arms and stabilizer bar.

- CVS has contracts to provide integrated axles and wheel ends to
Freightliner, and integrated axles and suspension systems for Blue Bird
and Workhorse.

- CVS is developing a portfolio of technologically advanced products and
applications to address increasingly stringent regulatory standards for
diesel particulate matter and nitrogen oxide emissions. These include:

- Thermal Regenerator -- on demand, active regeneration technology that
offers a safe and effective way to remove diesel particulate matter.

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- Selective Catalytic Reduction (SCR) System -- a compact, low-weight
option to effectively reduce nitrogen oxide emissions to the levels
required to meet the 2005 European standards. The system also achieves
reduction of diesel particulate matter and allows the engine to operate
in ways that could maximize fuel economy.

- Hydrogen-Assisted Regeneration Technology, based on plasma fuel
reformer -- a system that creates a hydrogen-rich gas from any fuel
source, which enables more efficient regeneration of nitrogen oxide
adsorbers and lean nitrogen oxide traps. This technology could be less
sensitive to sulfur contamination and could use less fuel than
conventional regeneration and consume minimal power.

Management believes that the strategy of continuing to introduce new and
improved systems and technologies will be an important factor in our efforts to
achieve our growth objectives. We will draw upon the engineering resources of
our Technical Centers in Troy, Michigan, Columbus, Indiana and Augsberg,
Germany, and our engineering centers of expertise in the United States, Brazil,
Canada, France, Germany and the United Kingdom. See "Research and Development"
below.

Enhance Core Products to Address Safety and Environmental Issues. Another
industry trend is the increasing amount of equipment required for changes in
environmental and safety-related regulatory provisions. OEMs select suppliers
based not only on the cost and quality of products, but also on their ability to
meet these demands. We utilize our technological expertise to anticipate trends
and to develop products that address safety and environmental concerns.

To address safety, our LVS group designs its aperture systems with stronger
materials, creates designs that enhance the vehicle's crashworthiness and
develops undercarriage systems that offer improved ride and vehicle control
dynamics. Our CVS group is focusing on the integration of braking and stability
products and suspension products, as well as the development of electronic
control capabilities. CVS is also developing braking systems technology that
would assist customers in meeting proposed U.S. regulations to improve braking
performance and reduce stopping distances for commercial motor vehicles.

With respect to emissions regulations, LVS is an industry leader in air and
emissions systems that improve fuel economy and reduce air pollutants, while CVS
is leveraging our expertise in light vehicle air and emissions technologies to
bring products to the commercial vehicle market, as described in the preceding
section. Looking forward, we will continue to develop products that will permit
us to assist customers in meeting new and more stringent emissions requirements
that will be phased in over the next ten years in our primary markets in North
America and Europe.

We believe these more stringent regulations will result in continued growth
in Europe, and the potential growth in North America, of diesel engines. Diesel
engines have the advantage of improved fuel economy, better vehicle handling and
improving emissions levels. Through our Zeuna Starker subsidiary, LVS has
contracts to provide diesel emissions systems to six light vehicle OEMs in
Europe, with production beginning in 2004. Approximately 40% of all new vehicles
in Europe are sold with diesel engine powertrains.

Strengthen our Presence in Emerging Global Markets. Geographic expansion
to meet the global sourcing needs of customers and to address new markets is an
important element of our growth strategy. ArvinMeritor currently has joint
ventures and wholly-owned subsidiaries in China and India and is negotiating
several programs to support customers as they establish and expand operations in
those markets. We also have regional joint ventures in South America, a market
with potential for significant growth.

Drive a Continuous Improvement Culture Focused on Return on Capital. In
2001, we implemented the ArvinMeritor Performance System, a continuous
improvement initiative that guides our philosophy for achieving operational
excellence, eliminating waste, improving quality and earning customer loyalty.
Throughout the company, continuous improvement teams work to achieve significant
cost savings, increase productivity and efficiency and streamline operations.
They focus on eliminating non-value-added tasks, reducing lead and cycle times
and improving customer service.

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A continuous improvement culture is important to our business operations
and to maintaining and improving our earnings. Process improvement initiatives
are required to achieve our goals with respect to return on invested capital
(defined as net income plus minority interest plus tax effected interest,
divided by total debt plus equity plus minority interest liability) ("ROIC"). We
believe that ROIC is a key performance measure, and that our focus on ROIC will
help us achieve strong cash flow and debt reduction.

PRODUCTS

ArvinMeritor designs, develops, manufactures, markets, distributes, sells,
services and supports a broad range of products for use in commercial, specialty
and light vehicles. In addition to sales of original equipment systems and
components, we provide our products to OEMs, dealers, distributors, fleets and
other end-users in certain aftermarkets.

The following chart sets forth operating segment sales by product for each
of the three fiscal years ended September 30, 2003. A narrative description of
the principal products of our three operating segments and other operations
follows the chart.

SALES BY PRODUCT

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(1) Prior to January 2003, we owned a minority interest in Zeuna Starker & Co.
KG ("Zeuna Starker"), a German air and emissions systems company. At that
time, we acquired the remaining interest in Zeuna Starker, and its sales are
included in LVS air and emissions systems for the portion of fiscal year
2003 after the date of acquisition.

(2) We sold our seat motors business in August 2001. Sales from these products
are included in LVS aperture systems prior to that date.

(3) In December 2002, we sold our off-highway planetary axle business. Prior to
that date, sales from these products are included in CVS specialty systems.

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Light Vehicle Systems

A key strategy of LVS is to enhance our market position in air and
emissions systems, aperture systems (including roof and door systems and motion
control products), and undercarriage components and systems (including
suspension and ride control systems and wheel products). The following products
comprise our LVS portfolio.

Air and Emissions Systems

We are a leading global supplier of a complete line of exhaust systems and
exhaust system components, including air induction and filtration, mufflers,
exhaust pipes, catalytic converters and exhaust manifolds. We sell these
products to OEMs primarily as original equipment, while also supporting
manufacturers' needs for replacement parts and dealers' needs for service parts.
We also produce integrated airflow systems that combine air induction and
exhaust systems.

We participate in this business both directly and through joint ventures
and affiliates. These alliances include our 50% interest in Arvin Sango Inc., an
exhaust joint venture based in North America. Prior to January 2003, we owned a
49% interest in Zeuna Starker, an exhaust systems supplier headquartered in
Germany. At that time, we acquired the remaining 51% interest, and Zeuna Starker
is now a wholly owned subsidiary.

Zeuna Starker has contracts to provide diesel emissions systems to light
vehicle OEMs in Europe, with production beginning in 2004. See "Business
Strategies -- Enhance Core Products to Address Safety and Environmental Issues"
above for information on the importance of diesel technology to LVS strategies
for future growth.

Aperture Systems

Roof Systems. ArvinMeritor is one of the world's leading independent
suppliers of sunroofs and roof systems products for use in passenger cars, light
trucks and sport utility vehicles. We make complete roofs, some of which
incorporate sunroofs, that provide OEMs with cost savings by reducing assembly
time and parts. Our roof system manufacturing facilities are located in North
America and Europe.

Door Systems. We are a leading supplier of integrated door modules and
systems, including manual and power window regulators and latch systems. Our
wide range of power and manual door system products utilize numerous
technologies, including our own electric motors with electronic function
capabilities, which are custom designed for individual applications to maximize
operating efficiency and reduce noise levels. We manufacture window regulators
at plants in North and South America, Europe and the Asia/Pacific region for
light vehicle and heavy-duty commercial vehicle OEMs.

We also supply manual and power activated latch systems to light vehicle
manufacturers. Our access control products include modular and integrated door
latches, actuators, trunk and hood latches and fuel flap locking devices, with a
leadership market position in Europe. We manufacture access control systems at
assembly facilities in North and South America, Europe and the Asia/Pacific
region.

Motion Control Products. We manufacture and supply motion control and
counterbalancing products for the automotive industry. Our products include gas
lift supports and vacuum actuators. We have motion control products
manufacturing facilities in the United States and the United Kingdom.

Undercarriage Systems

Suspension Systems. Through our 57%-owned joint venture with Mitsubishi
Steel Manufacturing Co., we are one of the leading independent suppliers of
products used in suspension systems for passenger cars, light trucks and sport
utility vehicles in North America. Our suspension system products, which are
manufactured at facilities in the United States and Canada, include coil
springs, stabilizer bars and torsion bars. In addition, we supply automotive
suspension components for the European light vehicle market from a manufacturing
facility in England.

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Ride Control Systems. We provide ride control products, including shock
absorbers, struts, ministruts and corner modules. We participate in this
business both directly and through a joint venture. In fiscal year 2003, we
manufactured ride control products and were a leading supplier in the European
OEM market through our joint venture with Kayaba Industries, Inc. ("Kayaba").
See "Joint Ventures" below.

Wheel Products. We are a leading supplier of steel wheel products to the
light vehicle OEM market, principally in North and South America. We have wheel
manufacturing facilities in Brazil and Mexico. Our wheel products include
fabricated steel wheels, bead seat attached wheels, full-face designed wheels
and clad wheels with the appearance of a chrome finish. Our cladding process
offers enhanced styling options previously available only in aluminum wheels.

Commercial Vehicle Systems

Drivetrain Systems

Truck Axles. We are one of the world's leading independent suppliers of
axles for medium- and heavy-duty commercial vehicles, with axle manufacturing
facilities located in North America, South America, Europe and the Asia/Pacific
region. Our extensive truck axle product line includes a wide range of drive and
non-drive front steer axles and single and tandem rear drive axles, which can
include driver-controlled differential lock for extra traction, aluminum
carriers to reduce weight and pressurized filtered lubrication systems for
longer life. Our front steer and rear drive axles can be equipped with our cam,
wedge or disc brakes, automatic slack adjusters and anti-lock braking systems.

Drivelines and Other Products. We also supply universal joints and
driveline components, including our Permalube(TM) universal joint and
Permalube(TM) driveline, which are low maintenance, permanently lubricated
designs used in the high mileage on-highway market.

Braking Systems

We are a leading independent supplier of air and hydraulic brakes to
medium- and heavy-duty commercial vehicle manufacturers in North America and
Europe. In Brazil, the third largest truck and trailer market in the world, our
49%-owned joint venture with Randon S. A. Veiculos e Implementos is a leading
supplier of brakes and brake-related products.

Through manufacturing facilities located in North America and Europe, we
manufacture a broad range of foundation air brakes, as well as automatic slack
adjusters for brake systems. Our foundation air brake products include cam drum
brakes, which offer improved lining life and tractor/trailer interchangeability;
air disc brakes, which provide fade resistant braking for demanding
applications; wedge drum brakes, which are lightweight and provide automatic
internal wear adjustment; hydraulic brakes; and wheel end components such as
hubs, drums and rotors.

Federal regulations require that new heavy- and medium-duty vehicles sold
in the United States be equipped with anti-lock braking systems ("ABS"). Our
50%-owned joint venture with WABCO Automotive Products ("WABCO"), a wholly-owned
subsidiary of American Standard, Inc., is the leading supplier of ABS and a
supplier of other electronic and pneumatic control systems for North American
heavy-duty commercial vehicles. The joint venture also supplies hydraulic ABS to
the North American medium-duty truck market and produces stability control
systems for tractors and trailers, which are designed to help maintain vehicle
stability and aid in reducing tractor-trailer rollovers.

Specialty Products

Off-Highway Vehicle Products. We supply brakes in North America, South
America, Europe and the Asia/Pacific region, and heavy-duty axles and drivelines
in the Asia/Pacific region, for use in numerous off-highway vehicle
applications, including construction, material handling, agriculture, mining and
forestry. These products are designed to tolerate high tonnages and operate
under extreme conditions. In December 2002, we sold our off-highway planetary
axle business. See "Strategic Initiatives" below.

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Government Products. We supply axles, brakes and brake system components
including ABS, trailer products, transfer cases and drivelines for use in
medium-duty and heavy-duty military tactical wheeled vehicles, principally in
North America.

Specialty Vehicle Products. We supply axles, brakes and transfer cases for
use in buses, coaches and recreational, fire and other specialty vehicles in
North America and Europe, and we are the leading supplier of bus and coach axles
and brakes in North America.

Suspension Systems and Trailer Products

We believe we are the world's leading manufacturer of heavy-duty trailer
axles, with leadership positions in North America and in Europe. Our trailer
axles are available in over 40 models in capacities from 20,000 to 30,000 pounds
for virtually all heavy trailer applications and are available with our broad
range of brake products, including ABS. In addition, we supply trailer air
suspension systems and products for which we have strong market positions in
Europe and an increasing market presence in North America.

Through our 50%-owned joint venture with Randon Participacoes, we develop,
manufacture and sell truck suspensions, trailer axles and suspensions and
related wheel-end products in the South American market.

Transmissions

Our 50%-owned joint venture with ZF Friedrichshafen AG ("ZF") produces
technologically advanced transmission components and systems for heavy vehicle
OEMs and the aftermarket in the United States, Canada and Mexico. This
transmission product line enables us to supply a complete drivetrain system to
heavy-duty commercial vehicle manufacturers in North America. The most recent
addition to the joint venture's range of transmission models is the
FreedomLine(TM), a fully automated mechanical truck transmission without a
clutch pedal.

Light Vehicle Aftermarket

The principal LVA products include mufflers; exhaust and tail pipes;
catalytic converters; shock absorbers; struts; and automotive oil, air, and fuel
filters. These products are sold under the brand names Arvin(R)(mufflers);
Gabriel(R) (shock absorbers); and Purolator(R) (filters). LVA also markets
products under private label to customers such as CARQUEST, NAPA and AC Delco
(ride control) and Motorcraft, Quaker State, Shell and Mobil (filters).

Other

"Other" consists of our coil coating operation, which is not focused
predominantly on automotive products. Coated steel and aluminum substrates are
used in a variety of applications, which include consumer appliances; roofing
and siding; garage and entry doors; heating, ventilation and air conditioning
(HVAC); and transportation.

CUSTOMERS; SALES AND MARKETING

ArvinMeritor's operating segments have numerous customers worldwide and
have developed long-standing business relationships with many of these
customers. Our ten largest customers accounted for approximately 65% of our
total sales in fiscal year 2003.

Original Equipment. Both LVS and CVS market and sell products principally
to OEMs. In North America, CVS also markets truck and trailer products directly
to dealers, fleets and other end-users, which may designate the components and
systems of a particular supplier for installation in the vehicles they purchase
from OEMs.

Consistent with industry practice, LVS and CVS make most of their sales to
OEMs through open purchase orders, which do not require the purchase of a
minimum number of products. The customer typically

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may cancel these purchase orders on reasonable notice. LVS and CVS also sell
products to certain customers under long-term arrangements that require us to
provide annual cost reductions (through price reductions or other cost benefits
for the OEMs). If we are unable to generate sufficient cost savings in the
future to offset such price reductions, our gross margins will be adversely
affected.

Both LVS and CVS are dependent upon large OEM customers with substantial
bargaining power with respect to price and other commercial terms. Although we
believe that our businesses generally enjoy good relations with our OEM
customers, loss of all or a substantial portion of sales to any of our large
volume customers for whatever reason (including, but not limited to, loss of
contracts, reduced or delayed customer requirements, plant shutdowns, strikes or
other work stoppages affecting production by such customers) could have a
significant adverse effect on our financial results. During fiscal year 2003,
DaimlerChrysler AG (which owns Chrysler, Mercedes-Benz AG and Freightliner
Corporation), a significant customer of LVS and CVS, accounted for approximately
16% of our total sales. In addition, General Motors Corporation, a significant
customer of LVS, accounted for approximately 12% of our total sales. No other
customer accounted for over 10% of our total sales in fiscal year 2003.

Except as noted above with respect to the North American market for
heavy-duty trucks and trailers, LVS and CVS generally compete for new business
from OEMs, both at the beginning of the development of new vehicle platforms and
upon the redesign of existing platforms. New platform development generally
begins two to four years prior to start-up of production.

Aftermarkets. CVS also provides truck and trailer products and off-highway
and specialty products to OEMs, dealers and distributors in the aftermarket. LVA
sells products primarily to wholesale distributors, retailers and installers.
The light vehicle aftermarket includes fewer and larger customers, as the market
consolidates and as OEMs increase their presence in the market.

Coil Coating. Our coil coating customers include steel companies, service
centers and end manufacturers engaged in the transportation, appliance,
construction, HVAC and doors industries.

COMPETITION

Each of ArvinMeritor's businesses operates in a highly competitive
environment. LVS and CVS compete worldwide with a number of North American and
international providers of components and systems, some of which belong to, or
are associated with, some of our customers. Some of these competitors are larger
and some are smaller than the company in terms of resources and market shares.
The principal competitive factors are price, quality, service, product
performance, design and engineering capabilities, new product innovation and
timely delivery. LVS has numerous competitors across its various product lines
worldwide, including Tenneco, Faurecia and Eberspaecher (air and emissions
systems); Webasto and Inalfa (roof systems); Brose, Magna, Hi-Lex and Grupo
Antolin (door systems); Kiekert, Valeo, Brose and Aisin Seiki (latch systems);
Stabilus and Suspa (motion control products); Thyssen-Krupp, Rassini and NHK
Spring (suspension systems); Kayaba, Tenneco and Sachs (ride control systems);
and Hayes-Lemmerz and Michelin (wheel products). The major competitors of CVS
are Dana Corporation ("Dana") (truck axles and drivelines); Knorr/Bendix and
Haldex Braking Systems (braking systems); Hendrickson and Holland-Neway
(suspension systems); Hendrickson and Dana (trailer products); and Eaton
Corporation (transmissions). In addition, certain OEMs manufacture for their own
use products of the types we supply, and any future increase in this activity
could displace our sales.

LVA competes with both OEMs and independent suppliers in North America and
Europe and serves the market through our own sales force, as well as through a
network of manufacturers' representatives. Major competitors include Tenneco,
Goerlich's, Bosal, Flowmaster, Sebring and Remus (exhaust products); Tenneco,
Kayaba and Sachs (ride control products); and Champion Laboratories, Honeywell,
Dana, Mann & Hummel, Sogefi Filtration and Mahle (filtration products).
Competitive factors include customer loyalty, competitive pricing, customized
service, quality, timely delivery, product development and manufacturing process
efficiency.

9

Our coil coating operation competes with other coil coaters and with
customers' internal painting systems.

RAW MATERIALS AND SUPPLIES

We believe we have adequate sources for the supply of raw materials and
components for our business segments' manufacturing needs with suppliers located
around the world. We do, however, concentrate our purchases of certain raw
materials and parts over a limited number of suppliers, some of which are
located in developing countries, and we are dependent upon the ability of our
suppliers to meet performance and quality specifications and delivery schedules.
The loss of a significant supplier or the inability of a supplier to meet
performance and quality specifications or delivery schedules could have an
adverse effect on us.

In March 2002, President Bush, acting under Section 201 of the Trade Act of
1974, imposed tariffs of up to 30% on imports of most flat rolled carbon steel
products for a three-year period. Imports of finished steel decreased after
imposition of the tariffs, and we experienced rising steel prices and spot
shortages of certain steel products beginning in the second half of fiscal year
2002 and continuing through fiscal year 2003, primarily in our LVS segment. We
estimate that higher steel prices and other costs associated with steel
shortages reduced our operating income by approximately $30 million in fiscal
year 2003. See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations for information on
the effect of these factors on our financial results for those periods.
President Bush rescinded the tariffs in December 2003. We cannot predict the
effect of the rescission of the tariffs on availability or price of steel in
fiscal year 2004. If supplies are inadequate for our needs, or if prices remain
at current levels or increase and we are unable to either pass these prices to
our customer base or mitigate the costs by alternative sourcing of material or
components, our sales and operating income could be adversely affected.

STRATEGIC INITIATIVES

We regularly consider various strategic and business opportunities,
including licensing agreements, marketing arrangements and acquisitions, and
review the prospects of our existing businesses to determine whether any of them
should be modified, restructured, sold or otherwise discontinued.

We believe that the industry in which we operate could experience
significant consolidation among suppliers. This trend is due in part to
globalization and increased outsourcing of product engineering and manufacturing
by OEMs, and in part to OEMs reducing the total number of their suppliers by
more frequently awarding long-term, sole-source or preferred supplier contracts
to the most capable global suppliers. Scale is an important competitive factor,
with the largest industry participants able to maximize key resources and
contain costs.

On July 9, 2003, we initiated a tender offer to acquire the outstanding
common stock of Dana for $15 per share in cash. The offer was conditioned on,
among other things, the tender and acceptance of more than two-thirds of Dana's
shares; the removal or invalidation of Dana's "poison pill," an anti-takeover
mechanism; receipt of necessary regulatory approvals; obtaining sufficient
financing; and other customary conditions. On July 22, 2003, Dana announced that
its Board of Directors had recommended that its shareholders reject the tender
offer. On November 17, 2003, we announced that we had increased the offer price
to $18.00 per share and that the offer would expire at 5:00 P.M. (E.S.T.) on
December 2, 2003 unless the Dana Board of Directors agreed to begin negotiating
a merger agreement by that date. The Dana Board again rejected the offer, and
the tender offer was terminated on November 24, 2003.

During fiscal year 2003, we completed the following strategic initiatives
(see Note 5 of the Notes to Consolidated Financial Statements under Item 8.
Financial Statements and Supplementary Data below):

- In December 2002, we sold our off-highway planetary axle business. The
sale included manufacturing sites at Oshkosh, Wis. and St. Etienne,
France and the planetary axle operations in Osasco, Brazil, and Seoul,
Korea.

10

- In January 2003, we acquired the remaining 51% interest in Zeuna Starker,
a German air and emissions company in which we had previously held a 49%
interest.

- In August 2003, we sold our LVS exhaust tube manufacturing facility. The
facility continues to supply stainless steel exhaust tubing to our US and
Canadian air and emissions technologies plants under a supply agreement.

In fiscal year 2003, we recorded restructuring charges of $22 million
related to workforce reductions and facility consolidations and closures in the
LVS and LVA segments. The purpose of these actions was primarily to address the
competitive challenges in the automotive supplier industry and weak demand in
the exhaust aftermarket business, and to realign the LVS businesses. The charge
related to asset impairment costs from facility closures and the rationalization
of operations, as well as employee severance benefits for approximately 400
salaried employees and 400 hourly employees. We also recorded restructuring
costs of $5 million in fiscal year 2003 as a result of the acquisition of Zeuna
Starker, relating to severance and other termination benefits for approximately
300 employees. See Note 4 of the Notes to Consolidated Financial Statements
under Item 8. Financial Statements and Supplementary Data below for further
information.

No assurance can be given as to whether or when any additional strategic
initiatives will be consummated in the future. We will continue to consider
acquisitions as a means of growing the company or adding needed technologies,
but cannot predict whether our participation or lack of participation in
industry consolidation will ultimately be beneficial to us. If an agreement with
respect to any additional acquisitions were to be reached, we may be able to
finance such acquisitions by issuance of additional debt or equity securities.
The additional debt from any such acquisitions, if consummated, could increase
our debt to capitalization ratio. In addition, the ultimate benefit of any
acquisition would depend on our ability to successfully integrate the acquired
entity or assets into our existing business and to achieve any projected
synergies.

JOINT VENTURES

As the automotive industry has become more globalized, joint ventures and
other cooperative arrangements have become an important element of our business
strategies. At September 30, 2003, we participated in 25 joint ventures with
interests in the United States, Brazil, Canada, China, Colombia, the Czech
Republic, Germany, India, Japan, Mexico, Spain, Turkey, Venezuela and the United
Kingdom.

In accordance with accounting principles generally accepted in the United
States, our consolidated financial statements include the operating results of
those majority-owned joint ventures in which we have control. Significant
consolidated joint ventures include our 57%-owned North American joint venture
with Mitsubishi Steel Manufacturing Co. (suspension products for passenger cars,
light trucks and sport utility vehicles). Significant unconsolidated joint
ventures include our 50%-owned North American joint venture with WABCO (ABS
systems for heavy-duty commercial vehicles); our 50%-owned joint venture in the
United States with ZF (transmissions); and our 50% interest in Arvin Sango Inc.
in the United States.

In October 2002, Kayaba purchased our 40% interest in a Spanish joint
venture that manufactures steering pumps, and our participation in the joint
venture terminated.

In January 2003, our Mexican joint venture with Quimmco S.A. de C.V. was
restructured, and we increased our ownership share from 40% to 49.99%. The new
joint venture, Sistemas Automotrices de Mexico S.A. de C.V., manufactures axles,
air brakes and drivelines for medium- and heavy-duty commercial trucks and
trailers, primarily for OEMs in Mexico. The new joint venture is also expected
to play a larger role in supplying the company and its customers in other
locations.

On December 18, 2003, we entered into a definitive agreement to sell our
75% interest in a joint venture in Spain to our joint venture partner, Kayaba.
The joint venture manufactures shock absorbers for the global automotive market.
Completion of the transaction is subject to receipt of regulatory approvals and
other customary conditions. We expect the sale to be completed in the second
quarter of fiscal year 2004.

11

RESEARCH AND DEVELOPMENT

We have significant research, development, engineering and product design
capabilities. We spent $167 million in fiscal year 2003, $132 million in fiscal
year 2002 and $136 million in fiscal year 2001 on research, development and
engineering. At September 30, 2003, we employed approximately 2,000 professional
engineers and scientists.

PATENTS AND TRADEMARKS

We own or license many United States and foreign patents and patent
applications in our manufacturing operations and other activities. While in the
aggregate these patents and licenses are considered important to the operation
of our businesses, management does not consider them of such importance that the
loss or termination of any one of them would materially affect a business
segment or ArvinMeritor as a whole.

Our registered trademarks ArvinMeritor(R), Arvin(R) and Meritor(R) are
important to our business. Other significant trademarks owned by us include
Gabriel(R) (shock absorbers and struts) and Purolator(R) (filters) with respect
to LVA, Zeuna Starker(R) (air and emissions systems) with respect to LVS, and
ROR(TM) (trailer axles) with respect to CVS. In connection with the 1997
spin-off of Meritor's common stock to the shareowners of Rockwell International
Corporation (now Rockwell Automation, Inc., and referred to in this Annual
Report on Form 10-K as "Rockwell") and the transfer of Rockwell's automotive
businesses to Meritor, Meritor entered into an agreement that allows us to
continue to apply the "Rockwell" brand name to our products until September 30,
2007.

EMPLOYEES

At September 30, 2003, we had approximately 32,000 full-time employees. At
that date, approximately 4,500 employees in the United States and Canada were
covered by collective bargaining agreements and most of our facilities outside
of the United States and Canada were unionized. We believe our relationship with
unionized employees is satisfactory. No significant work stoppages have occurred
in the past five years.

ENVIRONMENTAL MATTERS

Federal, state and local requirements relating to the discharge of
substances into the environment, the disposal of hazardous wastes and other
activities affecting the environment have, and will continue to have, an impact
on our manufacturing operations. The process of estimating environmental
liabilities is complex and dependent on physical and scientific data at the
site, uncertainties as to remedies and technologies to be used and the outcome
of discussions with regulatory agencies. We record liabilities for environmental
issues in the accounting period in which our responsibility is established and
the cost can be reasonably estimated. At environmental sites in which more than
one potentially responsible party has been identified, we record a liability for
our allocable share of costs related to our involvement with the site, as well
as an allocable share of costs related to insolvent parties or unidentified
shares. At environmental sites in which we are the only potentially responsible
party, we record a liability for the total estimated costs of remediation before
consideration of recovery from insurers or other third parties.

We have been designated as a potentially responsible party at eight
Superfund sites, excluding sites as to which our records disclose no involvement
or as to which our potential liability has been finally determined. Management
estimates the total reasonably possible costs we could incur for the remediation
of Superfund sites at September 30, 2003, to be approximately $33 million, of
which $11 million is recorded as a liability.

In addition to Superfund sites, various other lawsuits, claims and
proceedings have been asserted against us, alleging violations of federal, state
and local environmental protection requirements or seeking remediation of
alleged environmental impairments, principally at previously disposed-of
properties. For these matters, management has estimated the total reasonably
possible costs we could incur at September 30, 2003, to be approximately $48
million, of which $22 million is recorded as a liability.

See Note 21 of the Notes to Consolidated Financial Statements under Item 8.
Financial Statements and Supplementary Data below for information on the changes
in environmental accruals during fiscal year 2003.
12

The process of estimating environmental liabilities is complex and
dependent on physical and scientific data at the site, uncertainties as to
remedies and technologies to be used, and the outcome of discussions with
regulatory agencies. The actual amount of costs or damages for which we may be
held responsible could materially exceed the foregoing estimates because of
uncertainties, including the financial condition of other potentially
responsible parties, the success of the remediation and other factors that make
it difficult to predict actual costs accurately. However, based on management's
assessment, after consulting with Vernon G. Baker, II, Esq., General Counsel of
ArvinMeritor, and subject to the difficulties inherent in estimating these
future costs, we believe that our expenditures for environmental capital
investment and remediation necessary to comply with present regulations
governing environmental protection and other expenditures for the resolution of
environmental claims will not have a material adverse effect on our business,
financial condition or results of operations. In addition, in future periods,
new laws and regulations, advances in technology and additional information
about the ultimate clean-up remedy could significantly change our estimates.
Management cannot assess the possible effect of compliance with future
requirements.

INTERNATIONAL OPERATIONS

Approximately 48% of our total assets as of September 30, 2003 and 46% of
fiscal year 2003 sales were outside North America. See Note 22 of the Notes to
Consolidated Financial Statements under Item 8. Financial Statements and
Supplementary Data below for financial information by geographic area for the
three fiscal years ended September 30, 2003.

Management believes that international operations have significantly
benefited our financial performance. However, our international operations are
subject to a number of risks inherent in operating abroad, including, but not
limited to:

- risks with respect to currency exchange rate fluctuations;

- local economic and political conditions;

- disruptions of capital and trading markets;

- restrictive governmental actions (such as restrictions on transfer of
funds and trade protection measures, including export duties and quotas
and customs duties and tariffs);

- changes in legal or regulatory requirements;

- import or export licensing requirements;

- limitations on the repatriation of funds;

- difficulty in obtaining distribution and support;

- nationalization;

- the laws and policies of the United States affecting trade, foreign
investment and loans;

- tax laws; and

- labor disruptions.

There can be no assurance that these risks will not have a material adverse
impact on our ability to increase or maintain our foreign sales or on our
financial condition or results of operations.

The impact that the euro and other currencies will have on our sales and
operating income in fiscal year 2004 is difficult to predict. We enter into
foreign exchange contracts to offset the effect of exchange rate fluctuations on
foreign currency denominated payables and receivables. These contracts help
minimize the risk of loss from changes in exchange rates and are generally of
short duration (less than three months). It is our policy not to enter into
derivative financial instruments for speculative purposes and, therefore, we
hold no derivative instruments for trading purposes. We have not experienced any
material adverse effect on our business, financial condition or results of
operations related to these foreign currency contracts. See Item 7.

13

Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quantitative and Qualitative Disclosures About Market Risk below.

SEASONALITY; CYCLICALITY

LVS and CVS may experience seasonal variations in the demand for products
to the extent automotive vehicle production fluctuates. Historically, for both
segments, demand has been somewhat lower in the quarters ended September 30 and
December 31, when OEM plants may close during model changeovers and vacation and
holiday periods.

In addition, the industry in which LVS and CVS operate has been
characterized historically by periodic fluctuations in overall demand for
trucks, passenger cars and other vehicles for which we supply products,
resulting in corresponding fluctuations in demand for our products. The cyclical
nature of the automotive industry is outside our control and cannot be predicted
with certainty. Cycles in the major automotive industry markets of North America
and Europe are not necessarily concurrent or related. We have sought and will
continue to seek to expand our operations globally to mitigate the effect of
periodic fluctuations in demand of the automotive industry in one or more
particular countries.

The following table sets forth vehicle production in principal markets
served by LVS and CVS for the last five fiscal years:

- ---------------
Source: Automotive industry publications and management estimates.

We anticipate the North American heavy-duty truck market to be up
approximately 35% in fiscal year 2004, with production at an estimated 222,000
units. In Western Europe, we expect production of heavy- and medium-duty trucks
to remain relatively flat at 363,000 units. Our most recent outlook shows North
American and Western European light vehicle production to be 15.8 million and
16.2 million vehicles, respectively, during fiscal year 2004. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview and Outlook and -- Results of Operations below for
information on the effects of recent market cycles on our sales and earnings.

AVAILABLE INFORMATION

We make available free of charge through our web site
(www.arvinmeritor.com) our Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, all amendments to those reports, and other
filings with the Securities and Exchange Commission, as soon as reasonably
practicable after they are filed.

14

CAUTIONARY STATEMENT

This Annual Report on Form 10-K contains statements relating to future
results of the company (including certain projections and business trends) that
are "forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are typically identified by words
or phrases such as "believe," "expect," "anticipate," "estimate," "should," "are
likely to be" and similar expressions. Actual results may differ materially from
those projected as a result of certain risks and uncertainties, including but
not limited to global economic and market conditions; the demand for commercial,
specialty and light vehicles for which the company supplies products; risks
inherent in operating abroad, including foreign currency exchange rates; the
availability and cost of raw materials; OEM program delays; demand for and
market acceptance of new and existing products; successful development of new
products; reliance on major OEM customers; labor relations of the company, its
customers and suppliers; successful integration of acquired or merged
businesses; achievement of the expected annual savings and synergies from past
and future business combinations; competitive product and pricing pressures; the
amount of the company's debt; the ability of the company to access capital
markets; the credit ratings of the company's debt; the outcome of existing and
any future legal proceedings, including any litigation with respect to
environmental or asbestos-related matters; as well as other risks and
uncertainties, including but not limited to those detailed herein and from time
to time in other filings of the company with the Securities and Exchange
Commission. See also the following portions of this Annual Report on Form 10-K:
Item 1. Business -- "Customers; Sales and Marketing"; "Competition"; "Raw
Materials and Supplies"; "Strategic Initiatives"; "Environmental Matters";
"International Operations"; and "Seasonality; Cyclicality"; Item 3. Legal
Proceedings; and Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. These forward-looking statements are made
only as of the date hereof, and the company undertakes no obligation to update
or revise the forward-looking statements, whether as a result of new
information, future events or otherwise, except as otherwise required by law.

ITEM 2. PROPERTIES.

At September 30, 2003, our operating segments and joint ventures had the
following facilities in the United States, Europe, South America, Canada,
Mexico, Australia, South Africa and the Asia/Pacific region:

15

These facilities had an aggregate floor space of approximately 29.6 million
square feet, substantially all of which is in use. We owned approximately 78%
and leased approximately 22% of this floor space. There are no major
encumbrances (other than financing arrangements that in the aggregate are not
material) on any of our plants or equipment. In the opinion of management, our
properties have been well maintained, are in sound operating condition and
contain all equipment and facilities necessary to operate at present levels. A
summary of floor space of these facilities at September 30, 2003, is as follows:

ITEM 3. LEGAL PROCEEDINGS.

1. On July 17, 1997, Eaton Corporation filed suit against Rockwell in the
U.S. District Court in Wilmington, Delaware, asserting infringement of Eaton's
U.S. Patent No. 4850236, which covers certain aspects of heavy-duty truck
transmissions, by our Engine SynchroShift(TM) transmission for heavy-duty
trucks, and seeking damages and injunctive relief. Meritor was joined as a
defendant on June 11, 1998. During the period from July 1, 1998 through October
11, 2001, a number of judgments and orders were issued in the District Court
case, including: a jury verdict in favor of Eaton, finding that Meritor had
infringed Eaton's patent and awarding compensatory damages; an order granting
damages to Eaton in the amount of $2.9 million, plus post-judgment interest; a
ruling by the judge in a separate phase of the trial that we had not provided
clear and convincing evidence that Eaton had engaged in inequitable conduct in
obtaining its patent and that the patent was unenforceable; an order granting
Eaton's request for a permanent injunction against our manufacturing or selling
the Engine SynchroShift(TM) transmission and any "colorable variations;" and an
order denying our motions for a new trial and for judgment as a matter of law.
We appealed these judgments and orders to the United States Court of Appeals for
the Federal Circuit ("Federal Circuit").

On March 27, 2003, after de novo review of the District Court's
interpretation of Eaton's claims and the facts of the case, the Federal Circuit
reversed the District Court's judgment that the company had infringed Eaton's
patent and vacated the award of damages and the entry of a permanent injunction
against the company. The Federal Circuit affirmed the District Court's judgment
of patent validity and no inequitable conduct by Eaton. Eaton filed a request
for rehearing with the Federal Circuit on April 11, 2003, asserting that the
case should be remanded to the District Court for consideration of whether the
company had infringed Eaton's patent under the Federal Circuit's new claim
interpretation. The Federal Circuit denied Eaton's request for rehearing on May
12, 2003. The time for appealing these decisions has expired, and this matter is
now concluded.

2. Maremont Corporation ("Maremont," a subsidiary of ArvinMeritor) and
many other companies are defendants in suits brought by individuals claiming
personal injuries as a result of exposure to asbestos-containing products.
Maremont manufactured friction products containing asbestos from 1953 through
1977, when it sold its friction product business. Arvin acquired Maremont in
1986.

Maremont's potential liabilities for asbestos-related claims include the
following:

- Unbilled committed settlements entered into by the Center for Claims
Resolution: Maremont participated in the Center for Claims Resolution
("CCR") and shared with other CCR members in the payments of defense and
indemnity costs for asbestos-related claims. The CCR handled the

16

resolution and processing of asbestos claims on behalf of its members
until February 2001, when it was reorganized and discontinued negotiating
shared settlements. There were no significant billings to insurance
companies related to committed settlements in fiscal year 2003.

- Pending claims: Upon dissolution of the CCR in February 2001, Maremont
began handling asbestos-related claims through its own defense counsel
and is committed to examining the merits of each asbestos-related claim.
Maremont had approximately 63,000 and 37,500 pending asbestos-related
claims at September 30, 2003 and 2002, respectively. Although Maremont
has been named in these cases, in the cases where actual injury has been
alleged, very few claimants have established that a Maremont product
caused their injuries. For purposes of establishing reserves for pending
asbestos-related claims, Maremont estimates its defense and indemnity
costs based on the history and nature of filed claims to date and
Maremont's experience. Maremont developed experience factors for
indemnity and litigation costs using data on actual experience in
resolving claims since February 2001 and its assessment of the nature of
the claims. Billings to insurance companies for indemnity and defense
costs of resolved cases were $15 million in fiscal year 2003.

- Shortfall: Several former members of the CCR have filed for bankruptcy
protection, and these members have failed, or may fail, to pay certain
financial obligations with respect to settlements that were reached while
they were CCR members. Maremont is subject to claims for payment of a
portion of these defaulted member shares. In an effort to resolve the
affected settlements, Maremont has entered into negotiations with
plaintiffs' attorneys, and an estimate of Maremont's obligation for the
shortfall is included in the total asbestos-related reserves (discussed
below). In addition, Maremont and its insurers are engaged in legal
proceedings to determine whether existing insurance coverage should
reimburse any potential liability related to this issue. Payments by the
company related to shortfall and other were $1 million in fiscal year
2003.

Maremont has insurance that reimburses a substantial portion of the costs
incurred defending against asbestos-related claims. The coverage also reimburses
Maremont for any indemnity paid on those claims. The coverage is provided by
several insurance carriers based on the insurance agreements in place. Based on
its assessment of the history and nature of filed claims to date, and of
Maremont's insurance carriers, management believes that existing insurance
coverage is adequate to cover substantially all costs relating to pending
asbestos-related claims.

At September 30, 2003, Maremont had established reserves of $82 million
relating to these potential asbestos-related liabilities and corresponding
asbestos-related recoveries of $76 million. The amounts recorded for the
asbestos-related reserves and recoveries from insurance companies are based upon
assumptions and estimates derived from currently known facts. All such estimates
of liabilities for asbestos-related claims are subject to considerable
uncertainty because such liabilities are influenced by variables that are
difficult to predict. If the assumptions with respect to the nature of pending
claims, the cost to resolve claims and the amount of available insurance prove
to be incorrect, the actual amount of Maremont's liability for asbestos-related
claims, and the effect on ArvinMeritor, could differ materially from current
estimates. Maremont does not have sufficient information to make a reasonable
estimate of its potential liability for asbestos-related claims that may be
asserted against it in the future, and has not accrued reserves for these
unknown claims.

3. ArvinMeritor, along with hundreds of other companies, is also a
defendant in suits claiming personal injury as a result of exposure to asbestos
used in products manufactured by Rockwell many years ago. Liability for these
claims was transferred to the company at the time of the spin-off of the
automotive business to Meritor from Rockwell in 1997. Most of the complaints,
however, do not identify any of Rockwell's products or specify which of the
claimants, if any, were exposed to asbestos attributable to Rockwell's products,
and past experience has shown that the vast majority of the claimants will never
identify any of Rockwell's products. For those claimants who do show that they
worked with Rockwell's products, we nevertheless believe we have meritorious
defenses, and we defend those cases vigorously. Historically, ArvinMeritor has
been dismissed from most (approximately 95%) of these claims with no payment to
claimants. Rockwell maintained insurance coverage that we believe covers
indemnity and defense costs, over and above self-

17

insurance retentions, for most of the claims where there is any exposure to
Rockwell's products. We do not believe these lawsuits will have a material
adverse effect on ArvinMeritor's financial condition.

ArvinMeritor has not established reserves for pending claims and
corresponding recoveries for Rockwell-legacy asbestos-related claims, and
defense and indemnity costs related to these claims are expensed as incurred. We
have not established reserves because management believes that the amounts
involved are not material. In determining the amount of pending claims and
corresponding recoveries in connection with these matters, we use estimates of
our defense and indemnity costs, based on the history and nature of filed claims
to date and Rockwell's and our experience in resolving claims. All such
estimates of liabilities for asbestos-related claims are subject to considerable
uncertainty because such liabilities are influenced by variables that are
difficult to predict. If the assumptions with respect to the nature of pending
claims, the cost to resolve claims and the amount of available insurance prove
to be incorrect, the actual amount of our liability for Rockwell-legacy
asbestos-related claims, and the effect on ArvinMeritor, could differ materially
from current estimates.

Rockwell was not a member of the CCR and handled its asbestos-related
claims using its own litigation counsel. As a result, we do not have any
additional potential liabilities for committed CCR settlements or shortfall (as
described above) in connection with the Rockwell-legacy cases.

4. See Item 1. Business, "Environmental Matters" for information relating
to environmental proceedings.

5. Various other lawsuits, claims and proceedings have been or may be
instituted or asserted against ArvinMeritor or our subsidiaries relating to the
conduct of our business, including those pertaining to product liability,
intellectual property, environmental, safety and health, and employment matters.
Although the outcome of litigation cannot be predicted with certainty and some
lawsuits, claims or proceedings may be disposed of unfavorably to ArvinMeritor,
management believes, after consulting with Vernon G. Baker, II, Esq.,
ArvinMeritor's General Counsel, that the disposition of matters that are pending
will not have a material adverse effect on our business, financial condition or
results of operations.

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

There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal year 2003.

ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.

The name, age, positions and offices held with ArvinMeritor and principal
occupations and employment during the past five years of each of our executive
officers as of November 30, 2003, are as follows:

LARRY D. YOST, 65 -- Chairman of the Board and Chief Executive Officer
since July 2000. Chairman of the Board and Chief Executive Officer of Meritor
from May 1997 to July 2000; Acting President, Light Vehicle Systems of Meritor
from January 1998 to March 1999.

VERNON G. BAKER, II, 50 -- Senior Vice President and General Counsel since
July 2000. Secretary of ArvinMeritor from July 2000 to November 2001; Senior
Vice President, General Counsel and Secretary of Meritor from August 1999 to
July 2000; Vice President and General Counsel, Corporate Research and Technology
of Hoechst Celanese Corporation, a subsidiary of Hoechst AG (pharmaceuticals and
industrial chemicals), from 1989 to July 1999.

BRIAN P. CASEY, 49 -- Vice President and Treasurer since July 2003; Vice
President, Global Systems of Lear Corporation (automotive component supplier)
from September 2002 to July 2003; Assistant Treasurer of Lear Corporation from
June 2000 to September 2002; Treasury Director of Kellogg Company (packaged
goods manufacturer) from June 1995 to June 2000.

LINDA M. CUMMINS, 56 -- Senior Vice President, Communications since July
2000. Senior Vice President, Communications of Meritor from April 2000 to July
2000; Vice President, Communications of Meritor from August 1999 to April 2000;
Vice President of Advanced Marketing and Worldwide Communi-
18

cations of United Technologies Automotive (automotive component supplier) from
August 1997 to August 1999.

WILLIAM K. DANIEL, 38 -- Senior Vice President and President, Light Vehicle
Aftermarket since July 2000. President of Arvin Replacement Products business
group from December 1999 to July 2000; Managing Director of Arvin Replacement
Products in Europe from January 1998 to November 1999.

JUAN L. DE LA RIVA, 59 -- Senior Vice President and President, Light
Vehicle Systems since August 2003. Senior Vice President, Corporate Development
& Strategy, Engineering and Procurement of ArvinMeritor from October 2001 to
August 2003; Senior Vice President, Corporate Development and Strategy of
ArvinMeritor from July 2000 to October 2001; Senior Vice President, Business
Development of Meritor from February 2000 to July 2000; Senior Vice President,
Business Development and Communications of Meritor from February 1999 to
February 2000; Vice President, Business Development and Communications of
Meritor from September 1998 to February 1999.

THOMAS A. GOSNELL, 53 -- Senior Vice President and President, Commercial
Vehicle Systems since November 2000. Senior Vice President and President, Heavy
Vehicle Systems Aftermarket Products of ArvinMeritor from July 2000 to November
2000; Senior Vice President and President, Worldwide Aftermarket of Meritor from
September 1999 to July 2000; Vice President and General Manager, Aftermarket, of
Meritor from February 1998 to September 1999.

PERRY L. LIPE, 57 -- Senior Vice President and Chief Information Officer
since July 2000. Vice President, Information Technology of Arvin from September
1998 to July 2000.

TERRENCE E. O'ROURKE, 56 -- President and Chief Operating Officer since
June 2002. Senior Vice President and President, Light Vehicle Systems of
ArvinMeritor from July 2000 to May 2002; Senior Vice President and President,
Light Vehicle Systems of Meritor from March 1999 to July 2000; Group Vice
President and President -- Ford Division of Lear Corporation (automotive
component supplier) from January 1996 to January 1999.

RAKESH SACHDEV, 47 -- Vice President and Controller since August 2003. Vice
President and General Manager, Worldwide Braking Systems of ArvinMeritor from
December 2000 to July 2003; Vice President and General Manager, Worldwide
Trailer Products of ArvinMeritor from February 1999 to December 2000; various
senior management positions with Cummins Inc. (diesel engines and related
components) prior to February 1999, most recently as Chief Financial Officer of
Cummins' Automotive Business Unit.

DEBRA L. SHUMAR, 47 -- Senior Vice President, Continuous Improvement,
Quality, Engineering and Technology, since September 2003. Senior Vice
President, Continuous Improvement and Quality of ArvinMeritor from July 2002 to
September 2003; Vice President, Quality of ArvinMeritor from July 2000 to July
2002; Vice President, Quality of Meritor from 1999 to July 2000; Director,
Quality, Light Vehicle Systems of Meritor from 1998 to 1999; Director, Quality,
Structural Systems of ITT Automotive (automotive component supplier) from 1994
to 1998.

S. CARL SODERSTROM, JR., 50 -- Senior Vice President and Chief Financial
Officer since July 2001. Senior Vice President, Engineering, Quality and
Procurement of ArvinMeritor from July 2000 to July 2001; Senior Vice President,
Engineering, Quality and Procurement of Meritor from February 1998 to July 2000.

ERNEST T. WHITUS, 48 -- Senior Vice President, Human Resources, since April
2001. Vice President, Human Resources-Commercial Vehicle Systems of ArvinMeritor
from July 2000 to April 2001; Vice President, Human Resources-Heavy Vehicle
Systems of Meritor from October 1998 to July 2000.

BONNIE WILKINSON, 53 -- Vice President and Secretary since November 2001.
Assistant General Counsel of ArvinMeritor from July 2000 to November 2001;
Assistant General Counsel of Meritor from September 1997 to July 2000.

There are no family relationships, as defined in Item 401 of Regulation
S-K, between any of the above executive officers and any director, executive
officer or person nominated to become a director or executive

19

officer. No officer of ArvinMeritor was selected pursuant to any arrangement or
understanding between him or her and any person other than ArvinMeritor. All
executive officers are elected annually.

PART II

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

ArvinMeritor's common stock, par value $1 per share ("Common Stock"), is
listed on the New York Stock Exchange and trades under the symbol "ARM." On
November 30, 2003, there were 32,601 shareowners of record of ArvinMeritor's
Common Stock.

The high and low sale prices per share of ArvinMeritor Common Stock for
each quarter of fiscal years 2003 and 2002 were as follows:

Quarterly cash dividends in the amount of $0.10 per share were declared and
paid in each quarter of the last two fiscal years.

In July 2003, we issued a total of 1,512 restricted shares of Common Stock
to three non-employee directors of ArvinMeritor, in lieu of cash payment of the
quarterly retainer and meeting fees for board service. In addition, on July 16,
2003, we issued 750 restricted shares of Common Stock to one newly-elected non-
employee director, as a pro rata portion of the annual grant of shares under the
Directors Stock Plan. All of these shares were issued pursuant to the terms of
our Directors Stock Plan and the issuance was exempt from registration under the
Securities Act of 1933, as amended, as a transaction not involving a public
offering under Section 4(2).

See Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters for information on securities authorized for
issuance under equity compensation plans.

20

ITEM 6. SELECTED FINANCIAL DATA.

The following sets forth selected consolidated financial data. The data
should be read in conjunction with the information included under Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Item 8. Financial Statements and Supplementary Data below.

ARVINMERITOR, INC.

SELECTED FINANCIAL DATA

- ---------------
(1) Fiscal 2003 net income and basic and diluted earning per share include a
restructuring charge of $22 million ($15 million after-tax, or $0.22 per
share) and a gain on divestitures of $22 million ($15 million after-tax, or
$0.22 per share). Fiscal 2002 net income and basic and diluted earnings per
share include a restructuring charge of $15 million ($10 million after-tax,
or $0.15 per share) and a gain on sale of the exhaust accessories
manufacturing operations of $6 million ($4 million after-tax, or $0.06 per
share). Net income and basic and diluted earnings per share for fiscal year
2001 include restructuring costs of $67 million ($45 million after-tax, or
$0.68 per share), an employee separation charge of $12 million ($8 million
after-tax, or $0.12 per share) and an environmental charge of $5 million ($3
million after-tax, or $0.05 per share). Net income and basic and diluted
earnings per share for fiscal year 2000 include a gain of $83 million ($51
million after-tax, or $0.96 per share) for the sale of the seat adjusting
systems business, restructuring costs of $26 million ($16 million after-tax,
or $0.30 per share) and other charges of $4 million ($3 million after-tax,
or $0.06 per share). Net income and basic and diluted earnings per share for
fiscal year 1999 include restructuring costs of $28 million ($17 million
after-tax, or $0.33 per share) and a gain of $24 million ($18 million
after-tax, or $0.34 per share) recorded to reflect the formation of a
transmission and clutch joint venture with ZF Friedrichshafen AG.

21

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

OVERVIEW AND OUTLOOK

Our industry is rapidly transforming to keep pace with the continued OEM
trends toward outsourcing, increased OEM demand for modules and systems and an
increasing emphasis on engineering and technology. The increased competitive
pressures and complexity of the industry are presenting suppliers with
challenges, as well as growth opportunities.

During fiscal 2003, the company experienced a reduction in margins driven
by the performance of its Light Vehicle Systems and Light Vehicle Aftermarket
business segments. Excess industry capacity and customer consolidations led to a
reduction in selling prices and the acquisition of Zeuna Starker contributed to
margin dilution in the LVS business. The company's cost reduction programs and
restructuring activities were unable to fully offset the impact of lower prices
and higher steel costs.

Over the business cycle the company has experienced periodic fluctuations
in demand for light, commercial and specialty vehicles and related aftermarkets,
most notably our commercial vehicle markets in North America. Vehicle production
in our principal markets for the last five fiscal years is shown below:

- ---------------
Source: Automotive industry publications and management estimates.

Our fiscal 2004 outlook for light vehicle production is 15.8 million
vehicles in North America and 16.2 million vehicles in Western Europe. We expect
that North American heavy-duty (also referred to as Class 8) truck production
will increase about 35 percent in fiscal 2004 to 222,000 units. This recovery,
along with new business wins and greater market penetration, should put the
company in a good position to continue its organic growth.

The company continues to integrate Zeuna Starker and further consolidate
its LVS businesses to address competitive challenges in the automotive supplier
industry. Anticipated restructuring actions include additional facility
closures, business consolidations and workforce downsizing. The company
estimates total fiscal 2004 pre-tax costs of approximately $15 to $20 million
and annualized pre-tax savings of approximately $20 million related to these
actions. These restructuring costs are expected to be incurred between the
second and fourth quarters of fiscal 2004.

Other factors that could affect the company's results for the full fiscal
year include the impact of currency fluctuations on sales and operating income,
which is difficult to predict. In addition, the company terminated its tender
offer to acquire all of the outstanding shares of Dana Corporation. For
additional information concerning the company's tender offer see the discussion
under the heading Tender Offer below.

On December 18, 2003, the company signed a definitive agreement to sell its
75 percent shareholding in AP Amortiguadores S.A. (APA). The joint venture
manufactures shock absorbers for the global automotive

22

market. Although the sale is subject to regulatory approval, the company expects
the transaction to be completed in the second quarter of fiscal 2004. APA had
sales of $158 million in fiscal 2003.

RESULTS OF OPERATIONS

The following is a summary of the financial results for the fiscal years
ended September 30, 2003, 2002 and 2001.

TOTAL COMPANY

2003 COMPARED TO 2002

Sales for fiscal 2003 were $7,788 million, up $906 million, or 13 percent,
over last year. The increase in sales was primarily attributable to the
acquisition of Zeuna Starker, which added $550 million in sales, and favorable
foreign currency translation, primarily due to the stronger euro, which added
approximately
23

$370 million in sales. Excluding the effects of currency and the Zeuna Starker
acquisition, sales declined in North America and Europe. However, sales were up
by approximately 40 percent in the rest of the world, driven by sales growth in
the Asia/Pacific region.

Operating income was $309 million, a decline of $34 million, compared to
fiscal 2002, reflecting an operating margin of 4.0 percent, down from 5.0
percent in fiscal 2002. While operating income for fiscal 2003 was favorably
impacted by a gain on the sale of the exhaust tube manufacturing facility of $20
million (see Note 5 of the Notes to Consolidated Financial Statements), this
gain was more than offset by continued pricing pressures, higher steel and other
steel related costs of approximately $30 million, higher premium product launch
costs of $8 million, higher engineering and warranty costs of $10 million and
increased pension and other retirement expenses of approximately $20 million. In
the fourth quarter of fiscal 2003, the company also recorded $11 million of
costs related to account reconciliations and information system implementation
issues in a facility in Mexico, of which $6 million related to prior fiscal
years (see Note 23 of the Notes to Consolidated Financial Statements). It has
been determined that the amount related to prior fiscal years is not material on
a quantitative and qualitative basis both individually or in the aggregate.
Also, during fiscal 2003 the company recorded restructuring charges of $22
million. These costs included severance and other employee termination costs of
$13 million related to a reduction of approximately 400 salaried employees and
400 hourly employees, and $9 million associated with asset impairment costs from
the rationalization of operations. The company recorded restructuring charges of
$15 million in fiscal 2002. For more information concerning the status of the
company's restructuring programs, see Note 4 of the Notes to Consolidated
Financial Statements. Fiscal 2002 operating income included a gain on the sale
of the company's exhaust accessories manufacturing operations of $6 million.

Equity in earnings of affiliates was $8 million in fiscal 2003, as compared
to equity in losses of affiliates of $3 million a year ago. The increase was
primarily related to improved performance and higher earnings of the company's
commercial vehicle affiliates. Interest expense, net and other for fiscal 2003
was $104 million, compared to $105 million in fiscal 2002. The effective income
tax rate of 32% in fiscal 2003 was unchanged from fiscal 2002.

Net income for fiscal 2003 was $136 million, or $2.00 per diluted share, as
compared to $107 million, or $1.59 per diluted share in the prior year. Net
income in fiscal 2003 included a fourth quarter charge for the cumulative effect
of accounting change upon adoption of FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities" of $6 million ($4 million
after-tax, or $0.06 per diluted share). Net income in fiscal 2002 included the
cumulative effect of the goodwill accounting change upon adoption of Statement
of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other
Intangible Assets." In fiscal 2002, the company recorded an impairment loss on
goodwill as a cumulative effect of accounting change for its coil coating
operations of $42 million ($42 million after-tax, or $0.63 per diluted share).

2002 COMPARED TO 2001

Sales for fiscal 2002 were $6,882 million, up $77 million, or one percent,
over fiscal 2001. The sales increase was primarily attributable to higher
production volumes of North American heavy-duty trucks and the favorable impact
of a stronger euro.

Operating income for fiscal 2002 was $343 million, up $148 million from
fiscal 2001. Fiscal 2002 operating margin improved to 5.0 percent, up from 2.9
percent in fiscal 2001. The company improved its operating margin through
savings generated by cost-reduction initiatives and restructuring programs. In
the first quarter of fiscal 2002, the company recorded a restructuring charge of
$15 million for severance and other employee costs related to a net reduction of
approximately 450 employees. The company recorded restructuring costs of $67
million in fiscal 2001. This charge included severance and other employee costs
of approximately $48 million related to a net reduction of approximately 1,350
employees, with the balance primarily associated with asset impairment costs
from the rationalization of operations. For more information concerning the
status of the company's restructuring programs, see Note 4 of the Notes to
Consolidated Financial Statements.

24

Fiscal 2002 results include a gain on sale of the company's exhaust
accessories manufacturing operations of $6 million. Fiscal 2001 operating income
includes other charges of $12 million related to an employee separation
agreement and $5 million related to environmental liability costs. In fiscal
2002 the company adopted Statement of Financial Accounting Standards No. 142
(SFAS 142), "Goodwill and Other Intangible Assets", which eliminated goodwill
amortization expense of $24 million.

Equity in losses of affiliates was $3 million in fiscal 2002, as compared
to equity in earnings of affiliates of $4 million in fiscal 2001. The decline
was primarily related to the company's commercial vehicle affiliates. Interest
expense, net and other for fiscal 2002 was $105 million, down $31 million, or 23
percent, from fiscal 2001, principally as a result of lower average debt levels
and the favorable interest rate environment. The effective income tax rate in
fiscal 2002 was 32 percent, down from 33.5 percent in fiscal 2001.

Income before cumulative effect of accounting change was $149 million in
fiscal 2002, compared to $35 million in fiscal 2001. As required by SFAS 142,
the company reviewed the fair values of each of its reporting units, using
discounted cash flows and market multiples. As a result of this review, the
company recorded an impairment loss on goodwill as a cumulative effect of
accounting change for its coil coating operations of $42 million ($42 million
after-tax, or $0.63 per diluted share) in the first quarter of fiscal 2002.
Increased competition, consolidation in the coil coating applications industry
and the struggling U.S. steel market caused a decrease in the fair value of this
business.

Net income for fiscal 2002 was $107 million, or $1.59 per diluted share, as
compared to fiscal 2001 net income of $35 million, or $0.53 per diluted share.
Net income in fiscal 2002 included the cumulative effect of the goodwill
accounting change of $42 million or $0.63 per diluted share. Net income in
fiscal 2001 included goodwill amortization expense of $20 million or $0.30 per
diluted share.

BUSINESS SEGMENTS

LIGHT VEHICLE SYSTEMS

2003 COMPARED TO 2002

Light Vehicle Systems (LVS) sales increased to $4,355 million in fiscal
2003, up $754 million, or 21 percent, from $3,601 million a year ago. Foreign
currency translation, primarily as a result of the stronger euro, favorably
impacted sales by approximately $240 million and the acquisition of Zeuna
Starker added $550 million in sales.

LVS operating income was $147 million in fiscal 2003, down $39 million, or
21 percent, from fiscal 2002. During fiscal 2003, LVS experienced narrowing
margins, due primarily to industry overcapacity, customer price concessions and
increases in material costs. As a result, operating margin declined to 3.4
percent from 5.2 percent in fiscal 2002. As part of the company's long-term
strategy to reduce vertical integration, concentrate on systems design and
integration and focus on core competencies, it sold its exhaust tube
manufacturing facility. Fiscal 2003 operating income included a $20 million gain
on the sale of this facility. This gain was offset by an $11 million charge
related to the previously discussed account reconciliations and information
system implementation issues in a facility in Mexico. Higher product launch
costs and steel and other steel related costs of approximately $8 million and
$20 million, respectively, also negatively impacted operating income. As part of
an ongoing strategy to implement actions to improve profitability and to better
align LVS' capacity with market conditions, LVS continued its restructuring
efforts and recorded $19 million and $7 million of restructuring charges in
fiscal 2003 and 2002, respectively. These charges included costs associated with
facility rationalization and consolidations and workforce reductions. For more
information concerning the status of LVS' restructuring programs, see Note 4 of
the Notes to Consolidated Financial Statements.

2002 COMPARED TO 2001

LVS sales increased to $3,601 million in fiscal 2002, up $43 million from
$3,558 million in fiscal 2001. Sales were up in fiscal 2002 principally due to
new business awards. Acquisition activity added approximately $80 million to
sales in fiscal 2002 due to the inclusion of two previously unconsolidated joint
ventures in
25

Germany and China for which a controlling interest was acquired in fiscal 2002.
LVS also sold its seat motors business in August 2001 and divested its
investment in a majority-owned joint venture in North America effective
September 30, 2001. These businesses contributed sales of approximately $120
million in fiscal 2001.

LVS operating income was $186 million in fiscal 2002, compared to $184
million in fiscal 2001. Operating margins were 5.2 percent in fiscal 2002 and
2001. Operating margins were impacted by pricing pressure from the vehicle
manufacturers, higher engineering and selling, general and administrative costs
of $7 million, start-up costs associated with a new Detroit manufacturing
facility of approximately $9 million and increases in steel costs of
approximately $3 million. Restructuring costs totaled $7 million and $27 million
in fiscal 2002 and 2001, respectively, as LVS continued to identify and
implement cost-reduction initiatives to mitigate the pricing pressures from the
vehicle manufacturers.

COMMERCIAL VEHICLE SYSTEMS

2003 COMPARED TO 2002

Commercial Vehicle Systems (CVS) sales were $2,422 million, up $173
million, or eight percent, from fiscal 2002. Foreign currency translation
increased sales by approximately $98 million, as compared to fiscal 2002. During
fiscal 2003, CVS sold net assets related to its off-highway planetary axle
products. The loss of sales associated with this transaction was approximately
$90 million in fiscal 2003. Removing the effects of currency and the sale of the
off-highway axle business, sales would have been higher than fiscal 2002 by
approximately $165 million. This was primarily due to higher trailer volumes in
North America, additional sales in Mexico and sales growth in China. These
increases were partially offset by declines in the North American heavy-duty
truck markets (also known as Class 8 trucks), which experienced production
declines of 3.0 percent due in part to buyers purchasing Class 8 trucks in
fiscal 2002 in advance of the emissions standards change that occurred on
October 1, 2002.

CVS operating income was $122 million, an increase of $34 million from
fiscal 2002. Operating margin improved to 5.0 percent, up from 3.9 percent in
fiscal 2002. The increase in operating income is largely attributable to the
higher sales volumes and cost savings resulting from prior year restructuring
programs and other cost-reduction actions. These cost reductions were partially
offset by higher engineering and warranty costs of $10 million in fiscal 2003.
Restructuring charges attributable to the CVS segment were $6 million in fiscal
2002.

2002 COMPARED TO 2001

CVS sales were $2,249 million, up $50 million, or two percent, compared to
fiscal 2001. Vehicle build rates in CVS markets were mixed in fiscal 2002. A
13-percent increase in North American Class 8 truck volumes drove higher
drivetrain and braking systems sales of approximately $70 million. However,
declines in worldwide trailer markets contributed to lower suspension systems
and trailer product sales of approximately $35 million.

CVS operating income was $88 million, an increase of $96 million from
fiscal 2001. Operating margin improved to 3.9 percent, up from (0.4) percent in
fiscal 2001. Restructuring charges attributable to the CVS segment were $6
million and $40 million, respectively, in fiscal 2002 and 2001. Cost savings
from these restructuring programs and other cost-reduction actions resulted in
CVS lowering its fixed cost structure and contributed to the operating margin
improvement.

LIGHT VEHICLE AFTERMARKET

2003 COMPARED TO 2002

Light Vehicle Aftermarket (LVA) sales were $845 million in fiscal 2003, a
three percent decrease from $875 million in the prior year. Favorable foreign
currency translation increased sales by approximately $30 million and the
consolidation of a joint venture in Venezuela as of October 1, 2002 added sales
of $15 million. Despite these increases, sales declined as LVA continued to
experience lower demand across all product lines during fiscal 2003. Increasing
global competition, customer consolidation and the decreased need
26

for replacement parts, due to the longer life and improved quality of original
equipment parts, continued to weaken demand for these products.

LVA operating income was $31 million in fiscal 2003, with an operating
margin of 3.7 percent, compared to operating income of $66 million and an
operating margin of 7.5 percent in fiscal 2002. Lower volumes, price decreases,
higher steel prices of approximately $5 million, and higher changeover and
product returns costs of approximately $7 million contributed to the decrease
from the prior year. Included in operating income in fiscal 2002 was a $6
million gain on sale of the company's exhaust accessories manufacturing
operations.

2002 COMPARED TO 2001

LVA sales were $875 million in fiscal 2002, a two percent decrease from
$889 million in fiscal 2001. LVA continued to experience lower demand in exhaust
and ride control products during fiscal 2002, as the quality of original
equipment parts continued to weaken demand for these products.

LVA operating income was $66 million in fiscal 2002, with an operating
margin of 7.5 percent, compared to operating income of $46 million and an
operating margin of 5.2 percent in fiscal 2001. Despite lower sales for
aftermarket parts, LVA was able to increase its operating margin, as the result
of improved pricing and cost-reduction activities.

AFFILIATES

At September 30, 2003, the company had investments in 10 joint ventures
that were not majority-owned or controlled and were accounted for under the
equity method of accounting. These strategic alliances provide for sales,
product design, development and manufacturing in certain product and geographic
areas. Aggregate sales of these affiliates were $1,092 million, $1,565 million
and $1,641 million in fiscal 2003, 2002 and 2001, respectively. The decrease in
sales in fiscal 2003 is principally due to the acquisition of the remaining 51
percent interest in Zeuna Starker in the second quarter of fiscal 2003.

The company's equity in earnings (losses) of affiliates was $8 million in
fiscal 2003, $(3) million in fiscal 2002, and $4 million in fiscal 2001. Cash
dividends to ArvinMeritor were $19 million in fiscal 2003 and 2002 and $24
million in fiscal 2001.

FINANCIAL CONDITION

The company remains committed to strong cash flow generation and investment
grade capital structure. The company's primary source of liquidity continues to
be cash generated from operations, supplemented by its accounts receivables
securitization programs and, as required, borrowings on the revolving credit
facilities. The company's total debt to capitalization ratio was 62 percent at
September 30, 2003 compared to 65 percent at September 30, 2002.

CASH FLOWS

OPERATING CASH FLOW -- Cash flow from operations was $255 million in fiscal
2003, up $71 million from fiscal 2002. The increase is largely attributable to
the accounts receivable securitization program. Operating cash flow for fiscal
2003 included net receivable sales of $94 million. The company increased its
balance outstanding under its U.S. accounts receivable facility and used the
proceeds from these receivables sales to fund the acquisition of the remaining
51-percent interest in Zeuna Starker and for other general corporate purposes.
During fiscal 2002, as a result of strong cash flow, the company reduced its
balance outstanding under the accounts receivable securitization program by $106
million. Offsetting the increase in receivable sales in fiscal 2003 were higher
pension and retiree medical contributions of $27 million and higher working
capital levels primarily due to payments in fiscal 2003 for taxes and incentive
compensation that were expensed in fiscal 2002, higher inventory levels and
additional investments in customer reimbursable tooling. Working capital as a
percentage of sales at September 30, 2003, 2002 and 2001 was 6.6 percent, 4.3
percent and 4.2 percent, respectively. In computing this ratio, the company
defines working capital as current assets, excluding cash and cash equivalents,
less current liabilities, excluding short-term debt. The company then

27

adjusts current assets to include receivables sold under the securitization and
factoring programs. Cash flow from operations was $605 million in fiscal 2001.

INVESTING CASH FLOW -- Cash used for investing activ