UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

Commission file number: 1-11311

LEAR CORPORATION

Registrant’s telephone number, including area code: (248) 447-1500

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

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

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

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

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

As of June 28, 2003, the aggregate market value of the registrant’s Common Stock, par value $.01 per share, held by non-affiliates of the registrant was $2,971,916,857. The closing price of the Common Stock on June 28, 2003 as reported on the New York Stock Exchange was $44.90 per share.

As of February 27, 2004, the number of shares outstanding of the registrant’s Common Stock was 68,437,074 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Certain sections of the registrant’s Notice of Annual Meeting of Stockholders and Proxy Statement for its Annual Meeting of Stockholders to be held on May 13, 2004, as described in the Cross-Reference Sheet and a Table of Contents included herewith, are incorporated by reference into Part III of this Report.

Table of Contents

LEAR CORPORATION AND SUBSIDIARIES

CROSS REFERENCE SHEET AND TABLE OF CONTENTS

PART I

ITEM 1 - BUSINESS

In this Report, when we use the terms the “Company,” “Lear,” “we,” “us” and “our,” unless otherwise indicated or the context otherwise requires, we are referring to Lear Corporation and its consolidated subsidiaries. A substantial portion of the Company’s operations are conducted through wholly-owned and majority-owned subsidiaries controlled by Lear Corporation. The Company is also a party to various joint venture arrangements. Certain disclosures included in this Report constitute forward-looking statements that are subject to risk and uncertainty. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward-Looking Statements” and “– Risk Factors.”

BUSINESS OF THE COMPANY

General

We were incorporated in Delaware in 1987. We are the world’s largest automotive interior systems supplier based on net sales. Our net sales have grown from $9.1 billion for the year ended December 31, 1998 to $15.7 billion for the year ended December 31, 2003, a compound annual growth rate of 12%. The major sources of this growth have been new program awards and the completion of the acquisition of UT Automotive, Inc. (“UT Automotive”) in May 1999. We supply every major automotive manufacturer in the world, including General Motors, Ford, DaimlerChrysler, BMW, Fiat, PSA, Volkswagen, Renault/Nissan, Toyota and Subaru.

We have capabilities in all five principal segments of the automotive interior market: seat systems; flooring and acoustic systems; door panels; instrument panels and cockpit systems; and overhead systems. We are also one of the leading global suppliers of automotive electronic and electrical distribution systems. As a result of these capabilities, we can offer our customers fully-integrated automotive interiors, including electronic and electrical distribution systems. In 2002, we were awarded the first-ever total interior integrator program by General Motors for the 2006 Buick LeSabre and Cadillac DeVille models. As a total interior integrator, we work closely with the customer on the design and are responsible for the engineering, component/module sourcing, manufacturing and delivery of the automotive interiors for these two full-size passenger cars.

We are focused on delivering high-quality automotive interior systems and components to our customers on a global basis. In order to realize substantial cost savings and improved product quality and consistency, automotive manufacturers are requiring their suppliers to manufacture automotive interior systems and components in multiple geographic markets. In recent years, we have followed our customers and expanded our operations significantly in Europe, South America, South Africa and Asia. As a result of our efforts to expand our worldwide operations, our net sales outside of the United States and Canada have grown from $3.7 billion in 1998 to $7.3 billion in 2003.

Strategy

Our principal objective is to expand our position as a leading global supplier and integrator of automotive interior systems, including seat systems, interior components and electrical systems. We pursue this objective by focusing on the needs of our customers.

Our customers face continuing competitive pressures to improve quality and functionality at a lower cost and to reduce time to market and capital needs. These trends have resulted in automotive manufacturers outsourcing complete automotive interior systems. We believe that the criteria for selection of automotive interior systems suppliers are not only cost, quality, technology, delivery and service but also, increasingly, worldwide presence and full-service capabilities.

Specific elements of our strategy include:

     • Enhance Strong Relationships with our Customers by Focusing on Customer Service and Quality. We seek to be viewed as a partner, rather than as a supplier, to our customers. We believe that strong relationships with our customers allow us to identify business opportunities and anticipate the needs of our customers in the early stages of vehicle design. Working closely with our customers in the early stages of designing and engineering automotive interior systems gives us a competitive advantage in securing new business. In addition, we believe that strong design and engineering capabilities are critical to securing total interior integrator programs. The keys to enhancing customer relationships are service and quality. We work to maintain an excellent reputation with our customers for timely delivery and customer service and for providing world-class quality at competitive prices. In the J.D. Power and Associates 2003 Seat Quality Report^™, we improved our seat quality for

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the fourth straight year, and we continue to rank as the highest quality supplier that serves multiple automotive manufacturers. Also in 2003, we were ranked as America’s “Most Admired” Company in the motor vehicle parts industry by Fortune magazine. In recognition of our efforts, many of our facilities have won awards from the automotive manufacturers. We intend to maintain and improve the quality of our products and services through our ongoing “Quality First” initiative.

     • Expand our Business in Asian Markets and with Asian Automotive Manufacturers Worldwide. Our Asian strategy includes expanding our business in Asian markets and with Asian automotive manufacturers worldwide:

     • Expansion in Asian Markets. The Asian markets present growth opportunities, as automotive manufacturers expand production in this region to meet increasing demand. In particular, China is quickly becoming one of the largest automotive markets in the world, with approximately 3.9 million units produced in 2003 according to J.D. Power and Associates. We seek to partner with Chinese automotive manufacturers through supply and joint venture arrangements, and we are well positioned to take advantage of China’s emerging growth. We currently have eleven joint ventures in China, where the majority of our production is for the local market. We are focused on our core competencies, including seating, electrical distribution systems, door panels and flooring and acoustics. We also see opportunities for growth in Korea, where we expanded our presence in the local market in 2003 through the acquisition of a majority interest in Hanyil Co., Ltd., a seat supplier to Hyundai. We will seek to leverage this acquisition to grow our interior business beyond seats in Korea.

     • Asian Automotive Manufacturers. Asian automotive manufacturers are continuing to invest and expand their manufacturing operations in Asia (especially China), North America and Europe. We believe it is important to have a manufacturing footprint that aligns with our customers’ global presence. In 2003, we launched programs in North America with each of the three largest Japanese automotive manufacturers. Additional launches are planned for 2004 and 2005. We currently have eighteen strategic joint ventures based in North America and Asia serving our Asian customers, including Mazda, Toyota, Nissan, Subaru, Honda, Mitsubishi, Isuzu and Hyundai. In addition, many of our North American and European customers have made substantial investments in, or developed joint ventures with, Asian automotive manufacturers, including General Motors’ investments in Daewoo Motor, Suzuki Motor and Isuzu Motor; Ford’s investment in Mazda; DaimlerChrysler’s investments in Mitsubishi Motors and Hyundai Motor; and Renault’s investment in Nissan. As a result of our strong customer relationships, strategic alliances and full-service capabilities, we are well positioned to expand our business with Asian automotive manufacturers, both in Asia and elsewhere.

     • Improve European Business Structure and Expand European Market Share. In Europe, the automotive market is highly fragmented with significant overcapacity, making Europe a difficult market for automotive manufacturers and suppliers alike. We are continuing to improve our financial results in Europe by focusing significant new product initiatives on seating, electronics and cockpit programs, where there are opportunities for significant scale and we have a strong competitive position. We are also improving our overall business structure in Europe by consolidating administrative functions and reducing manufacturing costs by relocating and expanding component production in countries with lower labor costs.

     • Capitalize on Systems and Integration Opportunities. The same competitive pressures that led automotive manufacturers to outsource individual automotive interior components to independent suppliers have caused our customers to demand delivery of fully integrated automotive interior systems for new vehicle models. As automotive manufacturers continue to seek ways to differentiate their vehicles in the marketplace, improve quality and reduce costs, we believe they will increasingly look to independent suppliers to act as total interior integrators, by managing the design, engineering, sourcing, manufacturing and delivery of the total automotive interior. In 2002, we were awarded the first-ever total interior integrator program by General Motors for the 2006 Buick LeSabre and Cadillac DeVille models. We intend to leverage our leadership position in total interiors, particularly in North America, to offer one-stop interior solutions to our customers.

     • Leverage Electronic Capabilities and Invest in Product Technology and Design Capability. Consumers are demanding more in their automotive interiors, focusing on convenience, communication and safety, and automotive manufacturers increasingly view the vehicle interior as a major selling point to their customers. Because electronic and electrical distribution systems are an important part of automotive interior systems, we seek to take advantage of our capabilities in these areas to develop new products that respond to customer and consumer demands. We will also continue to make investments in technology and design capability to support our existing products as well as our new product development efforts. The focus of our research and development efforts is to identify new interior features that make vehicles safer, more comfortable and more attractive to consumers. We believe that in order to effectively develop total automotive interiors, it is necessary to integrate the engineering, research, design, development and validation of all of the automotive interior systems. We conduct extensive analysis and testing of consumer responses to automotive interior styling and innovations. We also have state-of-the-art acoustics testing and instrumentation and data analysis capabilities.

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We maintain six advanced technology centers and several customer-focused product engineering centers where we design and develop new products and conduct extensive product testing. In addition, our advanced technology center in Southfield, Michigan, provides us with the ability to integrate engineering, research, design, development and validation capabilities for all five automotive interior systems at one location.

     • Maintain Flexible and Efficient Cost Structure. We believe that our cost structure has one of the highest percentages of variable costs in the automotive supplier industry. By maintaining low fixed costs, we are better able to withstand fluctuations in industry demand as well as changing competitive and macroeconomic conditions. Our variable cost structure is maintained, in part, through ongoing Six Sigma initiatives throughout the organization as well as initiatives to promote and enhance the sharing of technology, engineering, purchasing and capital investments across customer platforms and facility consolidation actions to align our business with changing market conditions.

     • Strategic Acquisitions. We intend to selectively pursue strategic acquisitions, where appropriate, to expand or complement our existing business while maintaining a strong balance sheet. We will focus on financially attractive acquisitions that strengthen our relationships with our customers, enhance our existing products, processes and technological capabilities or lower our costs. We expect that any such acquisitions will be consistent with our core business of providing high-quality automotive interior systems and components. In particular, we may seek acquisitions that further our strategy of expanding our business in the Asian markets and with Asian automotive manufacturers or complement our focus in Europe on seating and electronics.

Products

We conduct our business in three product operating segments: seating; interior; and electronic and electrical. The seating segment includes seat systems and components thereof. The interior segment includes flooring and acoustic systems, door panels, instrument panels and cockpit systems, overhead systems and other interior products. The electronic and electrical segment includes electronic and electrical distribution systems, primarily wire harnesses, wireless systems and interior control systems. Net sales by product segment for the year ended December 31, 2003 as a percentage of total net sales were as follows: 68% seating, 18% interior and 14% electronic and electrical. For further information related to our reportable operating segments, see Note 12, “Segment Reporting,” to the consolidated financial statements included in this Report.

     • Seating. The seating segment consists of the manufacture, assembly and supply of vehicle seating requirements. Seat systems typically represent approximately 30% to 40% of the total cost of an automotive interior. We produce seat systems for automobiles and light trucks that are fully-assembled and ready for installation. Seat systems are designed to achieve maximum passenger comfort by adding a wide range of manual and power features such as lumbar supports, cushion and back bolsters and leg and thigh supports.

As a result of our strong product design and product technology, we are a leader in designing seats with convenience features and enhanced safety. For example, our ProTec^™ Self-Aligning Head Restraint is an advancement in front seat passive safety. By reducing the space between the occupant’s head and the headrest through use of a headrest system that “moves” with the occupant, the difference between the movement of the head and the shoulder area can be shortened in a rear-impact collision, potentially reducing the risk of injury. In addition, we are the exclusive manufacturer of a patented integrated restraint seat system that uses an ultra high-strength steel tower and a split-frame design to improve occupant comfort and convenience. We have also developed Occusense^™ seats, which detect the size and weight of an occupant to control airbag deployment.

     • Interior. The interior segment consists of the manufacture, assembly and supply of interior systems and components. Interior products are designed to provide a harmonious and comfortable interior for the vehicle occupants as well as a variety of functional and safety features. Set forth below is a description of our principal interior products:

     • Flooring and Acoustic Systems. We have an extensive and comprehensive portfolio of SonoTec^® acoustic products, including flooring systems and dash insulators. Carpet flooring systems generally consist of tufted or non-woven carpet with a thermoplastic backcoating which, when heated, allows the carpet to be fitted precisely to the interior or trunk compartment of the vehicle. Additional insulation materials are added to provide noise, vibration and harshness resistance. Non-carpeted flooring systems, used primarily in commercial and fleet vehicles, offer improved wear and maintenance characteristics. The dash insulator separates the passenger compartment from the engine compartment and is the primary component for preventing engine noise and heat from entering the passenger compartment.

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     • Door Panels. Door panels consist of several component parts, which are attached to a substrate by various methods. Specific components include vinyl or cloth-covered appliqués, armrests, radio speaker grilles, map pocket compartments, carpet and sound-reducing insulation. In addition, door systems often incorporate electronic and electrical distribution systems and products, including lock and latch, window glass, window regulators and audio systems as well as wire harnesses for the control of power seats, windows, mirrors and door locks.

     • Instrument Panels and Cockpit Systems. The instrument panel is a complex system of coverings and foam, plastic and metal parts designed to house various components and act as a safety device for the vehicle occupant. The cockpit system consists of, among other things, the instrument panel trim / pad, structural subsystem, electrical distribution system, climate control, driver control pedals, steering controls and driver and passenger safety systems. Specific components of the cockpit system include instrument cluster / gauges, cross car structure, electronic and electrical components, wiring harness, audio system, heating, ventilation and air conditioning module, air distribution ducts, air vents, the steering column and wheel and glove compartment assemblies. Airbag technologies also continue to be an important component of cockpit systems. As a result of our research and development efforts, we have introduced cost-effective, integrated, seamless airbag covers, which we believe will increase occupant safety as well as provide greater styling flexibility for the automotive manufacturer. We have also developed Spray PUR^™, a seamless polyurethane coating for instrument panels, which enables us to eliminate visual seams. This process will be used on the Cadillac DeVille and Buick LeSabre models beginning in 2006 and the Cadillac Escalade beginning in 2007. We believe that future trends in instrument panels and cockpit systems will continue to focus on safety, leading to the introduction of innovations such as inflatable knee restraints and energy-absorbing substructures.

     • Overhead Systems. Overhead systems consist of a headliner, lighting, visors, consoles, wiring and electronics as well as all other products located in the interior of the vehicle roof. Headliners consist of a substrate as well as a finished interior layer made of a variety of fabrics and materials. While headliners are an important contributor to interior aesthetics, they also provide insulation from road noise and can serve as carriers for a variety of other components, such as visors, overhead consoles, grab handles, coat hooks, electrical wiring, speakers, lighting and other electronic and electrical products. As the amount of electronic and electrical content available in vehicles has increased, headliners have emerged as an important carrier of technology since electronic features ranging from garage door openers to lighting systems are often optimally situated in the headliner.

     • Electronic and Electrical. The migration from electrical distribution systems to electronic and electrical distribution systems is facilitating the integration of wiring, electronics and switch/control products within the overall electrical architecture of a vehicle. This migration will reduce the overall system cost and weight and improve reliability and packaging by optimizing the overall system architecture and eliminating a portion of the terminals, connectors and wires normally required for a conventional electrical distribution system. Our umbrella technology, Intertronics^™, reflects our ability to integrate electronic products with automotive interior systems. This technology is already having an impact on a number of new and next generation products. For example, our integrated seat adjuster module has two dozen fewer cut circuits and five fewer connectors, weighs a half of a pound less and costs twenty percent less than a traditional seat wiring system. In addition, our smart junction box combines traditional junction box function with electronic capabilities by incorporating electronic control functions traditionally located elsewhere in the vehicle.

Our electronic and electrical products are grouped into three categories:

          • Electronic and Electrical Distribution Systems. Wire harness assemblies are a collection of terminals, connectors and wires that connect all of the various electronic/electrical devices in the vehicle to each other and/or to a power source. Terminals and connectors are components of wire harnesses and other electronic/electrical devices that connect wire harnesses and electronic/electrical devices. Fuse boxes are centrally located boxes in the vehicle that contain fuses and/or relays for circuit and device protection as well as power distribution. Junction boxes serve as a connection point for multiple wire harnesses. They may also contain fuses and relays for circuit and device protection. Smart junction boxes are junction boxes with integrated electronic functions, which eliminate interconnections and increase overall system reliability. Certain vehicles may have two or three smart junction boxes linked as a multiplexed buss line.

          • Wireless Systems. The dual range/dual function remote keyless entry system allows a single transmitter button to perform multiple functions depending upon the operator’s distance from the vehicle. The remote keyless entry and immobilizer unit combines the features of a remote keyless entry receiver and the immobilizer key reader into a single device. Custom key fobs use decorative molding to offer a wide variety of options in fob design patterns and colors, including textures, logos, text and translucent and glow-in-the-dark colors. The passive entry system allows the vehicle

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operator to unlock the door without using a key or physically activating the remote keyless entry fob. The passive entry technology is imbedded in the fob so that a separate device is not required. In addition, we have developed our Tire Pressure Monitoring System and the related Intellitire^™ Monitoring System, which alert drivers when tire pressure is low. Our Tire Pressure Monitoring System has received awards for 60% of Ford’s North American vehicles and several Hyundai models beginning in 2006. Some form of tire pressure monitoring system is expected to eventually be required on all new vehicles in the United States.

          • Interior Control Systems. The instrument panel center console control provides a control panel for the entertainment system, accessory switch functions, heating, ventilation and air conditioning. The multifunction turn signal control consolidates various combinations of hazard lights, headlamps, parking lamps, fog lamps, wiper and washer, cruise control, high/low headlamp beams and turn signal functions. The integrated seat adjuster module combines seat adjustment, power lumbar support, memory function and seat heating into one package. The integrated door control consolidates the controls for window lift, door lock, power mirror and seat heating. Lear’s Intertronic Flip Pack^™ integrates electrical and interior components and performs all power seat and power door functions from two stacked panels, improving access for drivers. The Mechatronic^™ lighting control module integrates electronic control logic and diagnostics with the headlamp switch. Other interior control system products include audio amplifiers, video modules and the floor-mounted MediaConsole^™ with a flip-up screen that provides DVD and video game viewing for back-seat passengers.

Manufacturing

A description of the manufacturing processes for each of our operating segments is set forth below.

     • Seating. Our seating facilities use just-in-time manufacturing techniques, and products are delivered to the automotive manufacturers on a just-in-time basis. These facilities are typically located near our customers’ manufacturing and assembly sites. Our seating facilities utilize a variety of methods whereby fabric is affixed to an underlying seat frame. Raw materials, including steel, aluminum and foam chemicals, used in our seat systems are generally readily available and obtained from multiple suppliers under various supply agreements. Leather, fabric and certain components are also purchased from multiple suppliers under supply agreements. Typically, our supply agreements last for at least one year and are terminable by us for breach or convenience. Some purchased components are obtained from our customers.

     • Interior. Our interior systems process capabilities include injection molding, low-pressure injection molding, blow molding, compression molding, rotational molding, urethane foaming and vacuum forming as well as various trimming and finishing methods. Raw materials, including resin and chemical products, which are formed and assembled into end products, are obtained from multiple suppliers, typically under supply agreements which last for at least one year and are terminable by us for breach or convenience. In addition, we produce carpet at one North American plant. Smaller facilities are dedicated to specific groups of customers and are strategically located near their production facilities.

     • Electronic and Electrical. Electrical distribution systems are networks of wiring and associated control devices that route electrical power and signals throughout the vehicle. Wire harness assemblies consist of raw, coiled wire, which is automatically cut to length and terminated. Individual circuits are assembled together on a jig or table, inserted into connectors and wrapped or taped to form wire harness assemblies. Cell-based manufacturing techniques are applied to manufacture products on a just-in-time basis. All materials are purchased from suppliers, with the exception of a portion of the connectors that are produced internally. Certain materials are available from a limited number of suppliers. Supply agreements typically last for at least one year and are terminable by us for breach or convenience. The assembly process is labor intensive, and as a result, production is generally performed in low labor cost sites in Mexico, Honduras, the Philippines, Eastern Europe and North Africa.

Some of the principal components attached to the wiring harness assemblies that we manufacture include junction boxes, electronic control modules and switches. Junction boxes are manufactured in North America and Europe with a proprietary, capital intensive assembly process, utilizing printed circuit boards purchased from selected suppliers. Proprietary processes have been developed to improve the function of these junction boxes in harsh environments, including high temperatures and humidity. Electronic control modules are assembled using high-speed surface mount placement equipment in both North America and Europe. Switches are assembled from electrical, mechanical and decorated plastic parts purchased in the United States, Mexico and Europe, using a combination of manual and automated assembly and test methods.

While we internally manufacture many of the components that are included within our automotive interior systems, a substantial portion of these components are furnished by independent, tier II automotive suppliers and other vendors throughout the world. In certain instances, it would be difficult and expensive for us to change suppliers of products and services that are critical to our

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business. With the recent decline in automotive production and substantial and continuing pressures to reduce costs, certain of our suppliers have experienced, or may experience, financial difficulties. We seek to carefully manage our supplier relationships to minimize any significant disruptions of our operations. However, adverse developments affecting one or more of our major suppliers, including certain sole-source suppliers, could negatively impact our operating results. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Factors – Adverse developments affecting one or more of our major suppliers could harm our profitability.”

Customers

We serve the worldwide automotive and light truck market, which produced over 58 million vehicles in 2003. We have automotive interior content on over 300 vehicle nameplates worldwide, and our automotive manufacturer customers (including customers of our non-consolidated joint ventures) currently include:

During the year ended December 31, 2003, General Motors and Ford, the two largest automotive and light truck manufacturers in the world, and their respective affiliates accounted for approximately 36% and 24%, respectively, of our net sales. Excluding net sales to Opel, Saab, Volvo, Jaguar and Land Rover, which are affiliates of General Motors or Ford, General Motors and Ford accounted for approximately 47% of our net sales in 2003. In addition, DaimlerChrysler accounted for approximately 11% of our net sales in 2003. For further information related to our customers and domestic and foreign sales and operations, see Note 12, “Segment Reporting,” to the consolidated financial statements included in this Report.

We receive blanket purchase orders from our customers. These purchase orders generally provide for the supply of a customer’s annual requirements for a particular vehicle model, rather than for the purchase of a specified quantity of products. Such supply relationships typically extend over the life of a vehicle model, with terms of up to ten years. Although purchase orders may be terminated at any time by our customers (but not by us), such terminations have been minimal and have not had a material impact on our results of operations. Our primary risk is that an automotive manufacturer will produce fewer units of a vehicle model than anticipated. In order to reduce our reliance on any one vehicle model, we produce automotive interior systems and components for a broad cross-section of both new and more established models. Our net sales for the year ended December 31, 2003 were comprised of the following vehicle categories: 52% cars, including 21% mid-size, 15% compact, 13% luxury/sport and 3% full-size, and 48% light truck, including 27% sport utility and 21% pickup and other light truck.

Our contracts with our major customers generally provide for an annual productivity cost reduction and provide for the recovery of increases in material and labor costs in rare instances. Historically, cost reductions through product design changes, increased productivity and similar programs with our suppliers have generally offset these customer-imposed productivity cost reduction requirements, although no assurances can be given that we will be able to achieve such cost reductions in the future. Our cost structure is comprised of a high percentage of variable costs. This structure provides us with additional flexibility during various economic cycles.

Technology

We believe that in order to develop effectively our total automotive interiors, it is necessary to integrate the engineering, research, design, development and validation of all of the automotive interior systems. Advanced technology development is conducted at our six advanced technology centers and at our product engineering centers worldwide. At these centers, we engineer our products to comply with applicable safety standards, meet quality and durability standards, respond to environmental conditions and conform to customer and consumer requirements. VisionWorks, our design studio located in Southfield, Michigan, develops and integrates new concepts and is our central location for consumer research, benchmarking, craftsmanship and industrial design activity for all of our automotive interior products.

We also have state-of-the-art acoustic testing and instrumentation and data analysis capabilities. We own an industry-leading validation test center featuring acoustic and sound quality testing, including a dual-surface, four-wheel chassis dynamometer acoustical chamber and reverberant sound room, capable of precision acoustic testing of front, rear and four-wheel drive vehicles. Together with the reverberant sound room, computer-controlled data acquisition and analysis capabilities provide precisely controlled laboratory testing conditions for sophisticated interior and exterior noise, vibration and harshness testing of parts, materials and systems, including powertrain, exhaust and suspension components. We also maintain an electromagnetic

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compactability lab at our electronic and electrical facility in Dearborn, Michigan, where we develop and test electronic products for compliance with FCC requirements as well as to meet customer specifications.

We have developed a number of designs for innovative interior features focused on increasing value to the customer. Our umbrella technology, Intertronics, reflects our ability to integrate electronic products with automotive interior systems. Intertronics products and technologies are grouped into three categories: electronic and electrical distribution systems; wireless systems; and interior control systems, which include smart junction boxes, remote keyless entry systems and advanced electronic products and switches. In addition, we incorporate many convenience, comfort and safety features into our interior designs, including advanced whiplash concepts, lifestyle vehicle interior storage systems, overhead integrated modules, integrated restraint seat systems (3-point and 4-point belt systems integrated into seats), side impact airbags, child restraint seats and integrated instrument panel airbag systems. We continually invest in our computer-aided-engineering-design and computer-aided-manufacturing systems. Recent enhancements to these systems include advanced acoustic modeling and analysis capabilities and the enhancement of our Virtual Technology Division website. Our Virtual Technology Division website is a tool used for global customer telecommunications, technology communications, collaboration and direct exchange of digital assets utilizing MediaXchange. In addition, the Virtual Technology Division website offers numerous design and engineering resources, which are available to all of our employees.

We have created certain brand identities, which highlight products for our customers. The ProTec™ brand identifies products optimized for interior safety; the SonoTec brand identifies products optimized for interior acoustics; and the EnviroTec™ brand identifies environmentally friendly products.

We hold in excess of 2,700 patents and patent applications pending worldwide. In addition, we hold several trademarks related to various manufacturing products and processes. We also license selected technologies to automotive manufacturers and other automotive suppliers. We continually strive to identify and implement new technologies for use in the design and development of our products.

We have dedicated, and will continue to dedicate, resources to research and development. Research and development costs incurred in connection with the development of new products and manufacturing methods, to the extent not recoverable from the customer, are charged to selling, general and administrative expenses as incurred. Such costs amounted to approximately $171.1 million, $176.0 million and $198.6 million for the years ended December 31, 2003, 2002 and 2001, respectively. In addition, we capitalized $181.2 million, $135.6 million and $94.5 million of pre-production engineering, research and development costs which are recoverable from customers for the years ended December 31, 2003, 2002 and 2001, respectively.

Joint Ventures and Minority Interests

We form joint ventures in order to gain entry into new markets, facilitate the exchange of technical information, expand our product offerings and broaden our customer base. In particular, we believe that certain joint ventures have provided us, and will continue to provide us, with the opportunity to expand our business relationships with Asian automotive manufacturers. Recently awarded business with these customers includes seating and electrical products for the Hyundai Sonata/Santa Fe; flooring and acoustic systems, overhead systems and electrical products for the Honda Pilot/Element; seating for the Toyota Sienna; and seating for the BMW Brilliance in China. We currently have 29 strategic joint ventures located in ten countries. Of these joint ventures, twelve are consolidated and seventeen are accounted for using the equity method of accounting; fifteen operate in Asia, eleven operate in North America (including six that are dedicated to serving Asian automotive manufacturers) and three operate in Europe. Net sales of our consolidated joint ventures accounted for less than 3% of our net sales for the year ended December 31, 2003. Our investments in non-consolidated joint ventures and our cost method investments totaled $54.6 million and support fourteen customers on over twenty programs as of December 31, 2003. For further information related to our joint ventures, see Note 6, “Investments in Affiliates and Other Related Party Transactions,” to the consolidated financial statements included in this Report.

Competition

Within each of our operating segments, we compete with a variety of independent suppliers and automotive manufacturer in-house operations, primarily on the basis of cost, quality, technology, delivery and service. A summary of our primary independent competitors is set forth below.

     • Seating. We are one of three primary independent suppliers in the outsourced North American seat systems market. Our primary independent competitors in this market are Johnson Controls and Intier. Our major independent competitors in Western Europe are Johnson Controls and Faurecia.

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     • Interior. We are one of three primary independent suppliers in the outsourced North American flooring and acoustic systems market as well as one of the largest global suppliers of door panels and overhead systems. Our primary independent competitors in the flooring and acoustic systems market are Collins & Aikman and Rieter Automotive. Our major independent competitors in the remaining interior markets include Johnson Controls, Intier, Faurecia, Collins & Aikman, Visteon, Delphi and a large number of smaller operations.

     • Electronic and Electrical. We are one of the leading independent suppliers of automotive electronic and electrical distribution systems in North America and Western Europe. Our major competitors in this market include Delphi, Yazaki, Sumitomo, Alcoa-Fujikura and Valeo. However, the automotive electronic and electrical products industry remains highly fragmented. Other participants include Alps, Bosch, Cherry, Delphi, Denso, Kostal, Methode, Niles, Omron, Siemens VDO, TRW, Tokai Rika, Valeo, Visteon and others.

As the automotive supply industry becomes increasingly global, certain of our European and Asian competitors have begun to establish a stronger presence in North America.

Seasonality

Our principal operations are directly related to the automotive industry. Consequently, we may experience seasonal fluctuations to the extent automotive vehicle production slows, such as in the summer months when plants close for model year changeovers and vacations. Historically, our sales and operating profit have been the strongest in the second and fourth calendar quarters. See Note 14, “Quarterly Financial Data,” to the consolidated financial statements included in this Report.

Employees

As of December 31, 2003, Lear employed approximately 111,000 people worldwide, including approximately 31,000 people in the United States and Canada, 32,000 in Mexico, 33,000 in Europe and 15,000 in other regions of the world. A substantial number of our employees are members of unions. We have collective bargaining agreements with several unions, including: the United Auto Workers; the Canadian Auto Workers; UNITE; the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America; and the International Association of Machinists and Aerospace Workers. Virtually all of our unionized facilities in the United States and Canada have a separate agreement with the union that represents the workers at such facilities, with each such agreement having an expiration date that is independent of other collective bargaining agreements. The majority of our European and Mexican employees are members of industrial trade union organizations and confederations within their respective countries. Many of these organizations and confederations operate under national contracts, which are not specific to any one employer. We have occasionally experienced labor disputes at our plants. We have been able to resolve all such labor disputes and believe our relations with our employees are generally good.

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward-Looking Statements” and “– Risk Factors – A significant labor dispute involving us or one or more of our customers or suppliers or that could otherwise affect our operations could reduce our sales and harm our profitability.”

Sales Backlog

For information regarding our sales backlog, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other Matters – Sales Backlog.”

Available Information on our Website

Our website address is http://www.lear.com. We make available on our website, free of charge, the periodic reports that we file with or furnish to the Securities and Exchange Commission (the “SEC”), as well as all amendments to these reports, as soon as reasonably practicable after such reports are filed with or furnished to the SEC. We also make available on our website, or in printed form upon request, free of charge, our Corporate Governance Guidelines, Code of Business Conduct and Ethics (which includes specific provisions for our executive officers), charters for the committees of our Board of Directors and other information relating to the Company.

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ITEM 2 – PROPERTIES

As of December 31, 2003, our operations were conducted through 289 facilities, some of which are used for multiple purposes, including 136 production/manufacturing facilities, 38 just-in-time (“JIT”) manufacturing facilities, 43 administrative/technical support facilities, 19 assembly sites, six advanced technology centers and three distribution centers, in 34 countries. The remaining facilities are primarily warehouses. Our corporate headquarters is located in Southfield, Michigan. Our facilities range in size up to 1,016,000 square feet.

Of our 289 total facilities, which include facilities owned or leased by our consolidated subsidiaries, 141 are owned and 148 are leased with expiration dates ranging from 2004 through 2022. We believe that substantially all of our property and equipment is in good condition and that we have sufficient capacity to meet our current and expected manufacturing and distribution needs. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Financial Condition.”

The following table presents the locations of our operating facilities and the operating segments ⁽¹⁾ that use such facilities:

Certain administrative/technical facilities are included within the operating segments.

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ITEM 3 - LEGAL PROCEEDINGS

Commercial Disputes

We are involved from time to time in legal proceedings or claims relating to commercial or contractual disputes, including disputes with our suppliers. We will continue to vigorously defend ourselves against these claims. Based on present information, including our assessment of the merits of the particular claims, we do not expect that these legal proceedings or claims, either individually or in the aggregate, will have a material adverse effect on our business, consolidated financial position or results of operations. However, the ultimate outcome of legal matters cannot be predicted with any degree of certainty, and we can provide no assurances in this regard.

On January 29, 2002, Seton Company, one of our leather suppliers, filed a suit alleging that we had breached a purported agreement to purchase leather from it for seats for the life of the General Motors GMT 800 program. This suit presently is pending in the U.S. District Court for the Eastern District of Michigan. Seton seeks compensatory and exemplary damages on the remaining claims of contract breach and promissory estoppel. The Court has dismissed Seton’s other claims for damages. Lear has filed a counterclaim. We believe that we have significant defenses and intend to vigorously contest Seton’s claims. As of the date of this Report, discovery is continuing, and the trial is scheduled for the first quarter of 2005.

Product Liability Matters

In the event that use of our products results in, or is alleged to result in, bodily injury and/or property damage or other losses, we may be subject to product liability lawsuits and other claims. In addition, we are a party to warranty-sharing and other agreements with our customers relating to our products. These customers may pursue claims against us for contribution of all or a portion of the amounts sought in connection with product liability lawsuits and warranty claims. We can provide no assurances that we will not experience material claims in the future or that we will not incur significant costs to defend such claims. In addition, if any of our products are or are alleged to be defective, we may be required or requested by our customers to participate in a recall or other corrective action involving such products.

Environmental Matters

We are subject to local, state, federal and foreign laws, regulations and ordinances which govern activities or operations that may have adverse environmental effects and which impose liability for the costs of cleaning up certain damages resulting from past spills, disposal or other releases of hazardous wastes and environmental compliance. Our policy is to comply with all applicable environmental laws and to maintain an environmental management program based on ISO 14001 to ensure compliance. However, we currently are, have been and in the future may become the subject of formal or informal enforcement actions or procedures.

We have been named as a potentially responsible party at several third-party landfill sites and are engaged in the cleanup of hazardous waste at certain sites owned, leased or operated by us, including several properties acquired in our 1999 acquisition of UT Automotive, Inc. (“UT Automotive”). Certain present and former properties of UT Automotive are subject to environmental liabilities which may be significant. We obtained agreements and indemnities with respect to certain environmental liabilities from United Technologies Corporation (“UTC”) in connection with our acquisition of UT Automotive. UTC manages and directly funds these environmental liabilities pursuant to its agreements and indemnities with us. While we do not believe that the environmental liabilities associated with our current and former properties will have a material adverse effect on our business, consolidated financial position or results of future operations, no assurances can be given in this regard.

One of our subsidiaries and certain predecessor companies were named as defendants in an action filed by three plaintiffs in August 2001 in the Circuit Court of Lowndes County, Mississippi asserting claims stemming from alleged environmental contamination caused by an automobile parts manufacturing plant located in Columbus, Mississippi. The plant was acquired by us as part of the UT Automotive acquisition in May 1999 and sold almost immediately thereafter, in June 1999, to Johnson Electric Holdings Limited (“Johnson Electric”). In December 2002, approximately 61 additional cases were filed by approximately 1,000 plaintiffs in the same court against us and other defendants relating to similar claims. In September 2003, we were dismissed as a party to these cases. Since that time, we have been named again as a defendant in certain of these same cases. In January 2004, the Company and two of our subsidiaries were named in four new actions filed by approximately 80 individual plaintiffs related to alleged environmental contamination from the same facility. The plaintiffs in these actions are persons who allegedly were either residents and/or owned property near the facility or worked at the facility. Each of these complaints seeks compensatory and/or punitive damages. To date, there has been limited discovery in these cases and the probability of liability and the amount of damages in the event of liability are unknown. UTC, the former owner of UT Automotive, and Johnson Electric have each sought indemnification from us under the respective acquisition agreements, and

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we have claimed indemnification from them under the same agreements. To date, no company admits to, or has been found to have, an obligation to fully defend and indemnify any other. We intend to vigorously defend against these claims and believe that we will eventually be indemnified by either UTC or Johnson Electric for any resulting losses.

Other Matters

We are involved in certain other legal actions and claims arising in the ordinary course of business, including, without limitation, intellectual property matters, personal injury claims and employment matters. Although the outcome of any legal matter cannot be predicted with certainty, we do not believe that any of these other legal proceedings or matters in which we are currently involved, either individually or in the aggregate, will have a material adverse effect on our business, consolidated financial position or results of operations.

In January 2004, the U.S. Securities and Exchange Commission (“SEC”) commenced an informal inquiry into our September 2002 amendment of our 2001 Form 10-K. The amendment was filed to report our employment of relatives of certain of our directors and officers and certain related-party transactions. In connection with the informal inquiry, we received a request from the SEC to voluntarily produce documents and other relevant information concerning these matters and have done so. The SEC has advised us that the inquiry should not be construed as an indication by the Commission or its staff that any violations of law have occurred, or as an adverse reflection upon any person or security. We are cooperating with the inquiry.

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

No matters were submitted to a vote of security holders during the fourth quarter of 2003.

SUPPLEMENTARY ITEM – EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth the names, ages and positions of our executive officers. Executive officers are elected annually by our Board of Directors and serve at the pleasure of our Board.

Set forth below is a description of the business experience of each of our executive officers.

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PART II

ITEM 5 - MARKET FOR THE COMPANY’S COMMON STOCK, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Lear’s Common Stock is listed on the New York Stock Exchange under the symbol “LEA.” The Transfer Agent and Registrar for Lear’s Common Stock is The Bank of New York, located in New York, New York. On February 27, 2004, there were 1,334 holders of record of Lear’s Common Stock.

On November 13, 2003, we announced that our Board of Directors had initiated a quarterly dividend program and declared our first-ever cash dividend of $0.20 per share of common stock, payable on January 9, 2004 to shareholders of record at the close of business on December 15, 2003. On February 3, 2004, we announced that our Board of Directors had declared a cash dividend of $0.20 per share of common stock, payable on March 8, 2004 to shareholders of record at the close of business on February 18, 2004. We expect to pay quarterly cash dividends in the future, although such payment is dependent upon our financial condition, results of operations, capital requirements and other factors. Also, we are subject to the restrictions on the payment of dividends contained in our primary credit facilities and in certain other contractual obligations. Under our primary credit facilities, payment of a quarterly dividend is permitted if at the time our Board of Directors declares such dividend, no default under our primary credit facilities

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has occurred, is occurring or would occur as a result of such dividend. In addition, such dividends (and other similar payments) are not to exceed, in the aggregate, in any fiscal quarter, the greater of (i) $25,000,000; or (ii) (a) 50% of our (and our subsidiaries’) consolidated net income (as defined in our primary credit facilities) for the four consecutive quarters immediately prior to the payment quarter (100% if we achieve “investment grade status” as defined in our credit facilities) less (b) the cash amount of all dividends (and other similar payments) paid and redemptions made with respect to our common stock during the same four quarters.

The high and low sales prices per share of common stock, as reported by the New York Stock Exchange, are shown below:

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ITEM 6 - SELECTED FINANCIAL DATA

The following income statement, balance sheet and cash flow statement data were derived from our consolidated financial statements. Our consolidated financial statements for the years ended December 31, 2003 and 2002, have been audited by Ernst & Young LLP. Our consolidated financial statements for the years ended December 31, 2001, 2000 and 1999, have been audited by Arthur Andersen LLP. The selected financial data below should be read in conjunction with our consolidated financial statements and the notes thereto and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in this Report. For a discussion of the risks relating to Arthur Andersen LLP’s audit of our financial statements, please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors — Risks relating to Arthur Andersen LLP.”

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ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Executive Overview

We are the world’s largest automotive interior systems supplier based on net sales. Our net sales have grown from $9.1 billion for the year ended December 31, 1998 to $15.7 billion for the year ended December 31, 2003. The major sources of this growth have been new program awards and the completion of the acquisition of UT Automotive, Inc. (“UT Automotive”) in May 1999. Our customers are the major automotive manufacturers, including General Motors, Ford, DaimlerChrysler, BMW, Fiat, PSA, Volkswagen, Renault/Nissan, Toyota and Subaru.

We have capabilities in all five principal segments of the automotive interior market: seat systems; flooring and acoustic systems; door panels; instrument panels and cockpit systems; and overhead systems. We are also one of the leading global suppliers of automotive electronic and electrical distribution systems. As a result of these capabilities, we can offer our customers fully-integrated automotive interiors, including electronic and electrical distribution systems. In 2002, we were awarded the first-ever total interior integrator program by General Motors for the 2006 Buick LeSabre and Cadillac DeVille models. As a total interior integrator, we work closely with the customer on the design and are responsible for the engineering, component/module sourcing, manufacturing and delivery of the automotive interiors for these two full-size passenger cars.

Demand for our products is directly related to automotive vehicle production. Automotive sales and production can be affected by general economic conditions, labor relations issues, regulatory requirements, trade agreements and other factors. In addition to overall automotive production, our operating results are significantly impacted by the commercial success of the vehicle platforms for which we supply products as well as the relative profitability of these platforms. Our operating results also depend on the market share of our customers. General Motors and Ford and their respective affiliates together accounted for approximately 59% of our net sales in 2003. Excluding Opel, Saab, Volvo, Jaguar and Land Rover, which are affiliates of General Motors or Ford, General Motors and Ford accounted for approximately 47% of our net sales in 2003. A significant loss of business with respect to these customers or with respect to any vehicle model for which we are a significant supplier could materially and negatively affect our operating results.

In 2003, automotive production decreased by approximately 3% in North America and approximately 2% in Western Europe as compared to 2002. Automotive production by General Motors, Ford and DaimlerChrysler in North America, in the aggregate, declined by approximately 6%. In addition, production on several of our key platforms in Western Europe declined by more than the industry average. Automotive industry conditions in North America and Europe continue to be challenging. In North America, the industry is characterized by significant overcapacity, fierce competition and significant pension and healthcare liabilities for the domestic automotive manufacturers. In Europe, the market structure is highly fragmented with significant overcapacity. Historically, the majority of our sales have been derived from the U.S.-based automotive manufacturers in North America, as well as automotive manufacturers in Western Europe. Our ability to increase sales in the future will depend, in part, on our ability to increase our penetration of Asian markets and our sales to Asian automotive manufacturers. See “– Risk Factors – The loss of business from a major customer could reduce our sales and harm our profitability.”

Our customers require us to reduce costs and, at the same time, assume greater responsibility for the design, development, engineering and integration of interior products. We seek to enhance our profitability by investing in technology, design capabilities and new product initiatives that respond to the needs of our customers and consumers. Our profitability is also dependent on our ability to implement product cost reductions in either our processes or those of our customers or to obtain similar reductions from our suppliers. We continually evaluate alternatives to align our business with the changing needs of our customers and to lower the operating costs of our company. This may include the realignment of our existing manufacturing capacity, facility closures or similar actions.

In evaluating our financial condition and operating performance, we focus primarily on profitable sales growth and cash flows of our operating segments as well as return on invested capital on a consolidated basis. In addition to maintaining and expanding our business with our existing customers in our more established markets, our future profitable sales growth depends, in part, on our ability to expand our business in Asian markets and with Asian automotive manufacturers worldwide. The Asian markets present growth opportunities, as automotive manufacturers expand production in these markets to meet increasing demand. We currently have eleven joint ventures in China and several other joint ventures dedicated to serving Asian automotive manufacturers. We will continue to seek ways to expand our business in Asian markets and with Asian automotive manufacturers worldwide.

Our success in generating cash flow will depend, in part, on our ability to efficiently manage working capital. Working capital can be significantly impacted by the timing of cash flows from sales and purchases. In addition, our

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cash flow is dependent on our ability to maintain a disciplined capital spending program. We can strengthen our balance sheet by promoting a flexible cost structure and efficiently utilizing our asset base. Return on invested capital is a measure of the efficiency with which assets are deployed to increase earnings. Improvements in our return on invested capital will depend on our ability to maintain an appropriate asset base for our business and to increase productivity and operating efficiency.

For further information related to other factors that have had, or may in the future have, a significant impact on our business, financial condition or results of operations, see “— Forward-Looking Statements” and “— Risk Factors.”

Results of Operations

A summary of our operating results as a percentage of net sales is shown below:

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

Net sales for the year ended December 31, 2003, were $15.7 billion as compared to $14.4 billion for the year ended December 31, 2002, an increase of $1.3 billion or 9.2%. New business, net of selling price reductions, and net foreign exchange rate fluctuations each increased net sales by $1.0 billion. These increases were partially offset by unfavorable changes in platform and product mix in Europe, which negatively impacted net sales by $424 million, and the impact of lower vehicle production volumes in North America, which negatively impacted net sales by $285 million.

Gross profit and gross margin were $1,346 million and 8.6% in 2003, as compared to $1,260 million and 8.7% in 2002. The benefit from our productivity initiatives and other efficiencies, net foreign exchange rate fluctuations and the positive impact of new business contributed $109 million, $61 million and $48 million, respectively, to the increase in gross profit. These increases were partially offset by the negative impact of lower vehicle production volumes in North America, unfavorable platform and product mix in both North America and Europe and selling price reductions, which collectively reduced gross profit by $104 million. Facility consolidation costs also negatively impacted gross profit by $37 million.

Selling, general and administrative expenses, including research and development, were $574 million for the year ended December 31, 2003, as compared to $517 million for the year ended December 31, 2002. As a percentage of net sales, selling, general and administrative expenses were 3.6% in both 2003 and 2002. Net foreign exchange rate fluctuations and increased marketing efforts related to Asian automotive manufacturers contributed $32 million and $7 million, respectively, to the increase in selling, general and administrative expenses.

Research and development costs incurred in connection with the development of new products and manufacturing methods, to the extent not recoverable from the customer, are charged to selling, general and administrative expenses as incurred. Such costs totaled $171 million in 2003 and $176 million in 2002. In addition, we capitalized $181 million and $136 million of pre-production engineering, research and development costs which are recoverable from the customer for the years ended December 31, 2003 and 2002, respectively.

Interest expense was $187 million in 2003 as compared to $211 million in 2002. Our reduced debt balance and lower interest rates, after giving effect to our hedging activities, favorably impacted interest expense by $14 million and $13 million, respectively, and were partially offset by the impact of net foreign exchange rate fluctuations.

The provision for income taxes was $154 million, representing an effective tax rate of 28.8%, for the year ended December 31, 2003, as compared to $157 million, representing an effective tax rate of 33.5%, for the year ended December 31, 2002. The

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decrease in the effective tax rate is primarily the result of our overall tax planning strategy as well as the mix of our earnings outside the United States. The effective tax rates for 2003 and 2002 approximated the United States Federal statutory income tax rate of 35%, adjusted for income taxes on foreign earnings, losses and remittances, valuation adjustments, research and development credits and other items. For further information related to income taxes, see Note 9, “Income Taxes,” to the consolidated financial statements included in this Report.

Net income was $381 million, or $5.55 per diluted share, for the year ended December 31, 2003, as compared to $13 million, or $0.19 per diluted share, for the year ended December 31, 2002. On January 1, 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, under which goodwill is no longer amortized but is subject to annual impairment analysis. As a result of our initial impairment analysis, we recorded a cumulative effect of a change in accounting principle related to impairment charges of $311 million ($299 million after tax) as of January 1, 2002. Income before cumulative effect of a change in accounting principle was $312 million, or $4.65 per diluted share, in 2002.

Reportable Operating Segments

The financial information presented below is for our three reportable operating segments for the periods presented. These segments are: seating, which includes seat systems and the components thereof; interior, which includes flooring and acoustic systems, door panels, instrument panels and cockpit systems, overhead systems and other interior products; and electronic and electrical, which includes electronic and electrical distribution systems, primarily wire harnesses, wireless systems and interior control systems. Financial measures regarding each segment’s income before interest, other expense and income taxes and income before interest, other expense and income taxes divided by net sales (“margin”) are not measures of performance under accounting principles generally accepted in the United States (“GAAP”). Such measures are presented because we evaluate the performance of our reportable operating segments, in part, based on income before interest, other expense (including minority interests in consolidated subsidiaries and equity in net income of affiliates) and income taxes. These measures should not be considered in isolation or as a substitute for net income, net cash provided by operating activities or other income statement or cash flow statement data prepared in accordance with GAAP or as measures of profitability or liquidity. In addition, these measures, as we determine them, may not be comparable to related or similarly titled measures reported by other companies. For a reconciliation of consolidated income before interest, other expense and income taxes to income before provision for income taxes, minority interests in consolidated subsidiaries, equity in net income of affiliates and cumulative effect of a change in accounting principle, see to Note 12, “Segment Reporting,” to the consolidated financial statements included in this Report.

Seating –

Seating net sales were $10.7 billion for the year ended December 31, 2003, as compared to $9.9 billion for the year ended December 31, 2002, an increase of $890 million or 9.0%. Net foreign exchange rate fluctuations, new business, net of selling price reductions, and the acquisition of Hanyil Co., Ltd., an automotive seats supplier in Korea, positively impacted net sales by $758 million, $555 million and $13 million, respectively. These increases were partially offset by the impact of lower vehicle production volumes which, combined with changes in platform and product mix, reduced net sales by $437 million. Income before interest, other expense and income taxes and the related margin on net sales were $738 million and 6.9% in 2003 as compared to $562 million and 5.7% in 2002. Income before interest, other expense and income taxes benefited from favorable platform and product mix which, offset by the impact of lower vehicle production volumes and selling price reductions, contributed $77 million to the increase. Income before interest, other expense and income taxes also benefited from our productivity initiatives and other efficiencies, net foreign exchange rate fluctuations and the positive impact of new business, which contributed $67 million, $31 million and $25 million, respectively, to the increase. These increases were partially offset by facility consolidation costs, which reduced income before interest, other expense and income taxes by $28 million. The improvement in the margin on net sales was primarily due to platform and product mix, partially offset by the impact of selling price reductions.

Interior –

Interior net sales were $2.8 billion for the year ended December 31, 2003, as compared to $2.6 billion for the year ended December 31, 2002, an increase of $267 million or 10.5%. New business, net of selling price reductions, and net foreign exchange rate fluctuations positively impacted net sales by $235 million and $103 million, respectively. These increases were partially offset by the impact of lower vehicle production volumes which, combined with changes in platform and product mix, reduced net sales by $62 million. Income before interest, other expense and income taxes and the related margin on net sales were $101 million and 3.6% in 2003 as compared to $139 million and 5.4% in 2002. The impact of lower vehicle production volumes, changes in platform and product mix and selling price reductions collectively reduced income before interest, other expense and income taxes by $87 million. Net foreign exchange rate fluctuations and facility consolidation costs also negatively impacted income before interest, other expense and income taxes by $10 million and $5 million, respectively. These decreases were partially offset by the benefit from our productivity initiatives and other efficiencies and the positive impact of new business, which contributed $52 million and $8 million, respectively, to income before interest, other expense and income

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taxes. The decline in the margin on net sales was primarily due to the impact of selling price reductions and net foreign exchange rate fluctuations, partially offset by the benefit from our productivity initiatives and other efficiencies.

Electronic and Electrical –

Electronic and electrical net sales were $2.2 billion for the year ended December 31, 2003, as compared to $2.0 billion for the year ended December 31, 2002, an increase of $165 million or 8.2%. New business, net of selling price reductions, and net foreign exchange rate fluctuations positively impacted net sales by $211 million and $157 million, respectively. These increases were partially offset by the impact of lower vehicle production volumes which, combined with changes in platform and product mix, reduced net sales by $203 million. Income before interest, other expense and income taxes and the related margin on net sales were $198 million and 9.1% in 2003 as compared to $232 million and 11.5% in 2002. The impact of lower vehicle production volumes, changes in platform and product mix and selling price reductions collectively reduced income before interest, other expense and income taxes by $78 million. Facility consolidation costs also negatively impacted income before interest, other expense and income taxes by $3 million. These decreases were partially offset by the benefit from our productivity initiatives and other efficiencies, net foreign exchange rate fluctuations and the positive impact of new business, which contributed $23 million, $13 million and $13 million, respectively, to income before interest, other expense and income taxes. The decline in the margin on net sales was primarily due to the impact of selling price reductions, partially offset by the benefit from our productivity initiatives and other efficiencies.

Year Ended December 31, 2002, Compared With Year Ended December 31, 2001

Net sales for the year ended December 31, 2002, were $14.4 billion as compared to $13.6 billion for the year ended December 31, 2001, an increase of $800 million or 5.9%. New business, net of selling price reductions, increased production volumes on existing programs in North America and foreign exchange rate fluctuations favorably impacted net sales by $752 million, $560 million and $42 million, respectively. These increases were partially offset by the negative impact of platform and product mix, lower production volumes in Western Europe and South America and the effect of our earlier period divestitures, which negatively impacted net sales by $224 million, $175 million, $127 million and $29 million, respectively.

Gross profit and gross margin were $1.3 billion and 8.7% in 2002 as compared to $1.0 billion and 7.6% in 2001. In 2001, we began to implement a restructuring plan to consolidate our operations and align our capacity and operations with existing market conditions. As a result of this restructuring plan, we recorded charges of $149 million, including $141 million recorded as cost of sales (see “— 2001 Restructuring Plan”). Excluding the impact of restructuring charges, gross profit and gross margin were $1.2 billion and 8.7% in 2001. New business and increased production volumes on existing programs, net of selling price reductions, in North America favorably impacted gross profit by $43 million and $90 million, respectively. These increases were partially offset by the impact of platform and product mix and decreased production volumes on existing programs and selling price reductions in Western Europe and South America, which collectively reduced gross profit by $67 million. Gross profit was also favorably impacted by improved plant performance and negatively impacted by several European program launches.

Selling, general and administrative expenses, including research and development, were $517 million for the year ended December 31, 2002, as compared to $514 million for the year ended December 31, 2001. As a percentage of net sales, selling, general and administrative expenses were 3.6% in 2002 and 3.8% in 2001. Excluding the impact of restructuring charges, selling, general and administrative expenses were $506 million and 3.7% as a percentage of net sales in 2001. A decrease in administrative costs was offset by the impact of our expanded marketing efforts related to the Asian automotive manufacturers in 2002.

Research and development costs incurred in connection with the development of new products and manufacturing methods, to the extent not recoverable from the customer, are charged to selling, general and administrative expenses as incurred. Such costs declined to $176 million in 2002 from $199 million in 2001, partially due to the global consolidation of our engineering centers. In addition, we capitalized $136 million and $95 million of pre-production engineering, research and development costs which are recoverable from the customer for the years ended December 31, 2002 and 2001, respectively.

Cost of sales and selling, general and administrative expenses for the year ended December 31, 2001 each included net severance costs of $5 million related to actions to reduce our cost base, which were completed during 2001. Approximately 4,800 employees in our worldwide workforce were terminated during this period.

Interest expense was $211 million in 2002 as compared to $255 million in 2001. Our reduced debt balance and lower interest rates favorably impacted interest expense by $31 million and $17 million, respectively.

Other expense, which includes state and local non-income taxes, foreign exchange gains and losses, gains and losses on the sales of fixed assets and other miscellaneous income and expense, was $52 million in 2002 as compared to $78 million in 2001.

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During 2001, we recorded a net gain of $1 million related to the sales of our Spanish wire business, a plastics molding facility, an interior acoustics facility and the metal seat frame portion of a facility as well as a loss of $3 million related to the write-down of certain other assets to net realizable value. In addition, during 2001, we recorded a redemption premium and a write-off of deferred financing fees totaling $13 million related to our 9.50% subordinated notes due 2006 and our prior credit facility and recognized a discount of $16 million, of which $3 million was non-recurring, related to the transfer of accounts receivable under an asset-backed securitization facility (the “ABS facility”). Excluding these non-recurring transactions, other expense was $60 million for the year ended December 31, 2001.

The provision for income taxes was $157 million, representing an effective tax rate of 33.5%, for the year ended December 31, 2002, as compared to $64 million, representing an effective tax rate of 70.7%, for the year ended December 31, 2001. The effective tax rates for 2002 and 2001 approximated the United States Federal statutory income tax rate of 35% adjusted for income taxes on foreign earnings, losses and remittances, valuation adjustments, research and development credits and other items. For further information related to income taxes, see Note 9, “Income Taxes,” to the consolidated financial statements included in this Report.

Net income was $13 million, or $0.19 per diluted share, for the year ended December 31, 2002, as compared to $26 million, or $0.40 per diluted share, for the year ended December 31, 2001. On January 1, 2002, we adopted SFAS No. 142, under which goodwill is no longer amortized but is subject to annual impairment analysis. As a result of our initial impairment analysis, we recorded a cumulative effect of a change in accounting principle related to impairment charges of $311 million ($299 million after tax) as of January 1, 2002. Income before cumulative effect of a change in accounting principle was $312 million, or $4.65 per diluted share, in 2002. In addition, had we discontinued the amortization of goodwill on January 1, 2001, net income would have been $110 million, or $1.68 per diluted share, in 2001.

Reportable Operating Segments

The financial information presented below is for our three reportable operating segments for the periods presented. These segments are: seating, which includes seat systems and the components thereof; interior, which includes flooring and acoustic systems, door panels, instrument panels and cockpit systems, overhead systems and other interior products; and electronic and electrical, which includes electronic and electrical distribution systems, primarily wire harnesses, wireless systems and interior control systems. Financial measures regarding each segment’s income before amortization, interest, other expense and income taxes and income before amortization, interest, other expense and income taxes divided by net sales (“margin”) are not measures of performance under GAAP. Such measures are presented because we evaluate the performance of our reportable operating segments, in part, based on income before amortization, interest, other expense (including minority interests in consolidated subsidiaries and equity in net income of affiliates) and income taxes. These measures should not be considered in isolation or as a substitute for net income, net cash provided by operating activities or other income statement or cash flow statement data prepared in accordance with GAAP or as measures of profitability or liquidity. In addition, these measures, as we determine them, may not be comparable to related or similarly titled measures reported by other companies. For a reconciliation of consolidated income before amortization, interest, other expense and income taxes to income before provision for income taxes, minority interests in consolidated subsidiaries, equity in net income of affiliates and cumulative effect of a change in accounting principle, see to Note 12, “Segment Reporting,” to the consolidated financial statements included in this Report.

Seating –

Seating net sales were $9.9 billion for the year ended December 31, 2002, as compared to $9.3 billion for the year ended December 31, 2001, an increase of $563 million or 6.1%. New business, net of selling price reductions, and increased production volumes on existing programs favorably impacted net sales by $536 million. Income before amortization, interest, other expense and income taxes and the related margin on net sales were $562 million and 5.7% in 2002 as compared to $434 million and 4.7% in 2001. New business and increased production volumes on existing programs, net of selling price reductions, contributed $57 million to the increase in income before amortization, interest, other expense and income taxes. Income before amortization, interest, other expense and income taxes also benefited from improved plant performance by $56 million.

Interior –

Interior net sales were $2.6 billion for the year ended December 31, 2002, as compared to $2.4 billion for the year ended December 31, 2001, an increase of $116 million or 4.8%. New business, net of selling price reductions, and increased production volumes on existing programs favorably impacted net sales by $137 million. The effect of our divestitures negatively impacted net sales by $29 million. Income before amortization, interest, other expense and income taxes and the related margin on net sales were $139 million and 5.4% in 2002 and $203 million and 8.4% in 2001. Lower product pricing was partially offset by both new business and increased production volumes on existing programs, which collectively contributed $17 million to the decline in income before amortization, interest, other expense and income taxes. European

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program launches, which negatively impacted income before amortization, interest, other expense and income taxes by $25 million, as well as lower than anticipated or delayed customer production, the implementation of new technologies and continuing commercial challenges with some products also contributed to the year over year decline. Income before amortization, interest, other expense and income taxes was further impacted by increased raw material costs.

Electronic and Electrical –

Electronic and electrical net sales were $2.0 billion for the year ended December 31, 2002, as compared to $1.9 billion for the year ended December 31, 2001, an increase of $120 million or 6.3%. New business, net of selling price reductions, and increased production volumes on existing programs favorably impacted net sales by $113 million. Income before amortization, interest, other expense and income taxes and the related margin on net sales were $232 million and 11.5% for 2002 as compared to $174 million and 9.2% for 2001. New business and increased production volumes on existing programs, net of selling price reductions, contributed $26 million to the increase in income before amortization, interest, other expense and income taxes. Income before amortization, interest, other expense and income taxes also benefited from improved plant performance.

Outlook

For the first quarter of 2004, we expect net sales to be up 10% to 12% from the comparable period of 2003, primarily reflecting the addition of new business globally and favorable foreign exchange rate fluctuations. Net income is expected to be in the range of $1.10 to $1.20 per share and includes the anticipated impact of additional costs associated with our actions to consolidate three of our U.S. seating facilities, which were initiated in December 2003. These additional costs are expected to continue into the second quarter of 2004 as these actions are completed, although the timing and amount of these costs may change based on labor negotiations and other factors. See “– Facility Consolidations.”

For the full year 2004, we expect net sales to be approximately $16.2 billion. The increase from 2003 primarily reflects the addition of new business globally. Our industry production planning assumptions for both North America and Western Europe are approximately 16.0 million units. Given this industry outlook and a forecasted tax rate of approximately 28%, net income is expected to be in the range of $5.85 to $6.25 per share. Our full year 2004 net income per share guidance is based on assumed 70.3 million shares outstanding and does not reflect the potential dilutive impact of our convertible senior notes. Full-year capital spending is forecasted to be approximately $300 million.

The foregoing constitutes forward-looking statements that are subject to risks and uncertainties. Please refer to “—Forward-Looking Statements” and “— Risk Factors” for a description of certain factors that may cause our actual results to differ from those expressed in our forward-looking statements. For further information relating to our convertible senior notes, see Note 8, “Long-Term Debt,” to the consolidated financial statements included in this Report.

Facility Consolidations

We continually evaluate alternatives to align our business with the changing needs of our customers and to lower the operating cost of our company. This may include the realignment of our existing manufacturing capacity, facility closures or similar actions. In December 2003, we initiated two significant actions to close or consolidate three of our U.S. seating facilities. As a result of phased-out programs and uncompetitive cost structures, it is not economical for us to continue to operate these facilities as they currently exist. The actions are expected to be completed in the second quarter of 2004. In accordance with SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” we recorded charges of $20 million in 2003 related to these actions for employee termination benefits required under related labor agreements. In addition, we recorded asset impairment charges of $5 million in 2003 related to these actions to write down machinery and equipment which is expected to be abandoned. These charges are included in cost of sales in our consolidated statement of income for the year ended December 31, 2003. Total facility consolidation costs associated with these actions are expected to be approximately $50 million and are expected to be paid in 2004. However, the timing and amount of these costs may change based on labor negotiations and other factors.

2001 Restructuring Plan

In order to better align our operations and capacity in response to changes in global automotive production volumes and our improved operating efficiencies, we began to implement a restructuring plan in the fourth quarter of 2001. This restructuring plan was designed to consolidate certain of our operations and to enhance our long-term competitive position. As a result of this restructuring plan, we recorded pre-tax charges of $149 million in the fourth quarter of 2001, including $141 million recorded as cost of sales and $8 million recorded as selling, general and administrative expenses. Significant activities included in the restructuring plan are as follows:

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There were no significant changes to the original restructuring plan. As of December 31, 2003, the restructuring plan was complete.

For further information related to our restructuring plan described above, see Note 4, “2001 Restructuring Plan,” to the consolidated financial statements included in this Report.

Liquidity and Financial Condition

Our primary liquidity needs are to fund capital expenditures, service indebtedness and support working capital requirements. Our principal sources of liquidity are cash flows from operating activities and borrowing availability under our primary credit facilities. A substantial portion of our operating income is generated by our subsidiaries. As a result, we are dependent on the earnings and cash flows of and the dividends, distributions or advances from our subsidiaries to provide the funds necessary to meet our obligations. There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions to Lear.

Cash Flow

Net cash provided by operating activities was $586 million in 2003 as compared to $545 million in 2002. The net decrease in sold accounts receivable resulted in a $176 million decrease in net cash provided by operating activities between periods. In addition, net cash provided by operating activities decreased as a result of the net change in recoverable customer engineering and tooling, which was a use of $8 million of cash in 2003 as compared to a source of $47 million of cash in 2002, reflecting both the timing of recoverable engineering and tooling expenditures and customer payments. These reductions were more than offset by income before cumulative effect of a change in accounting principle, which improved by $69 million between periods, and the net change in working capital items, which generated $124 million of cash in the current year and used $51 million of cash in the prior year. Increases in accounts receivable and accounts payable were a use of $197 million of cash and a source of $318 million of cash, respectively, in 2003, reflecting the timing of payments received from our customers and made to our suppliers.

Net cash used in investing activities was $347 million in 2003 as compared to $259 million in 2002. Capital expenditures were $376 million in 2003 as compared to $273 million in 2002. This increase largely reflects a shift in new program expenditures from the first quarter of 2004 to the fourth quarter of 2003. In 2003, capital expenditures related primarily to new programs.

Net cash used in financing activities was $159 million in 2003 as compared to $296 million in 2002. Net repayments of our long-term debt were $143 million in 2003 as compared to $332 million in 2002. In addition, proceeds from the exercise of stock options increased by $19 million between periods. These changes were partially offset by the change in drafts, which was a use of $57 million of cash in 2003 as compared to a source of cash of $20 million in 2002.

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Capitalization

In addition to cash provided by operating activities, we utilize a combination of committed credit facilities and long-term notes to fund our capital expenditures and working capital requirements. For the years ended December 31, 2003 and 2002, our average outstanding long-term debt balance, as of the end of each fiscal quarter, was $2.1 billion and $2.2 billion, respectively. The weighted average long-term interest rate, including rates under our committed credit facilities and the effect of hedging activities, was 6.6% and 6.7% for the respective periods.

We utilize uncommitted lines of credit as needed for our short-term working capital requirements. For the years ended December 31, 2003 and 2002, our average outstanding unsecured short-term borrowings, as of the end of each fiscal quarter, were $37 million and $44 million, respectively. The weighted average interest rate, including the effect of hedging activities, on the outstanding borrowings was 3.7% and 3.8% for the respective periods.

Primary Credit Facilities

Our primary credit facilities consist of a $1.7 billion amended and restated credit facility, which matures on March 26, 2006, and a $250 million revolving credit facility, which matures on May 4, 2004. We have not sought or received a commitment from any lender to extend or replace our $250 million revolving credit facility. As of December 31, 2003, we had no borrowings outstanding under our primary credit facilities and $43 million committed under outstanding letters of credit, resulting in more than $1.9 billion of unused availability under our primary credit facilities. Our primary credit facilities provide for multicurrency borrowings in a maximum aggregate amount of $615 million, the commitment for which is part of the aggregate primary credit facilities commitment. The commitment for $116 million of multicurrency borrowings matures in May 2004. As of December 31, 2002, the aggregate weighted average interest rate on outstanding borrowings under our primary credit facilities was 4.5%.

Subsidiary Guarantees -

The primary credit facilities are guaranteed by certain of our significant subsidiaries and are secured by the pledge of all or a portion of the capital stock of certain of our significant subsidiaries. Pursuant to the terms of the primary credit facilities, the guarantees and stock pledges may be released, at our option, when and if our senior long-term unsecured debt credit rating is at or above BBB- from Standard & Poor’s Ratings Services and at or above Baa3 from Moody’s Investors Service and certain other conditions are satisfied.

Covenants -

Our primary credit facilities contain operating and financial covenants that, among other things, could limit our ability to obtain additional sources of capital. None of our primary credit facilities require accelerated repayment in the event of a decrease in our credit ratings (see “— Credit Ratings”). As of December 31, 2003, we were in compliance with all covenants and other requirements set forth in our primary credit facilities.

For further information related to our primary credit facilities described above, see Note 8, “Long-Term Debt,” to the consolidated financial statements included in this Report and the agreements governing our primary credit facilities, which have been incorporated by reference as exhibits to this Report.

Senior Notes

As of December 31, 2003, we had $2.0 billion of senior notes outstanding, consisting primarily of zero-coupon convertible senior notes due 2022 with an accreted value of $273 million, Euro 250 million (approximately $314 million based on the exchange rate in effect as of December 31, 2003) of senior notes due 2008, $600 million of senior notes due 2005 and $800 million of senior notes due 2009.

Zero-Coupon Convertible Senior Notes -

In February 2002, we issued $640 million aggregate principal amount at maturity of zero-coupon convertible senior notes due 2022, yielding gross proceeds of approximately $250 million. The notes are unsecured and rank equally with our other unsecured senior indebtedness, including our other senior notes. Each note of $1,000 principal amount at maturity was issued at a price of $391.06, representing a yield to maturity of 4.75%. Holders of the notes may convert their notes at any time on or before the maturity date at a conversion rate, subject to adjustment, of 7.5204 shares of our common stock per note, provided that the average per share price of our common stock for the 20 trading days immediately prior to the conversion date is at least a specified percentage, beginning at 120% and declining 1/2% each year thereafter to 110% at maturity, of the accreted value of the note, divided by the conversion rate (the “Contingent Conversion Trigger”). The average per share price of our common stock for the 20 trading days immediately prior to December 31, 2003 was $60.11. As of December 31, 2003, the Contingent Conversion Trigger was $67.83. The notes are also convertible (1) if the long-term credit rating assigned to the notes by either

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Moody’s Investors Service or Standard & Poor’s Ratings Services is reduced below Ba3 or BB-, respectively, or either ratings agency withdraws its long-term credit rating assigned to the notes, (2) if we call the notes for redemption or (3) upon the occurrence of specified other events.

We have an option to redeem all or a portion of the notes for cash at their accreted value at any time on or after February 20, 2007. Holders may require us to purchase their notes on each of February 20, 2007, 2012 and 2017, as well as upon the occurrence of a fundamental change (as defined in the indenture governing the notes) at their accreted value on such dates. We may choose to pay the purchase price in cash or, subject to the satisfaction of certain conditions, shares of our common stock or a combination of cash and shares of our common stock. If the notes are required to be repurchased, we currently expect to purchase the notes for cash.

Under generally accepted accounting principles, the shares into which the notes are convertible will not be included in our calculation of diluted net income per share unless one of the contingent conversion events occurs, or it is expected that we will satisfy our obligation to purchase the notes with shares of our common stock. Accordingly, the notes are not included in our calculation of diluted net income per share.

We used the proceeds from the convertible note offering to repay indebtedness under the revolving portion of our primary credit facilities. The offering of the notes was made pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended. In June 2002, a registration statement covering the resale of the notes and the common stock issuable upon their conversion was declared effective by the Securities and Exchange Commission.

Subsidiary Guarantees -

Our senior notes are guaranteed by the same subsidiaries that guarantee our primary credit facilities. In the event that any such subsidiary ceases to be a guarantor under the primary credit facilities, such subsidiary will be released as a guarantor of the senior notes. Our senior notes are not secured by the pledge of the capital stock of any our subsidiaries.

Covenants -

Our senior notes contain covenants restricting our ability to incur liens and to enter into sale and leaseback transactions and restricting our ability to consolidate with, to merge with or into, or to sell or otherwise dispose of all or substantially all of our assets to, any person.

For further information related to our senior notes described above, see Note 8, “Long-Term Debt,” to the consolidated financial statements included in this Report and the indentures governing our senior notes, which have been incorporated by reference as exhibits to this Report.

Contractual Obligations

Our scheduled maturities of long-term debt, including capital lease obligations, our scheduled interest payments and our lease commitments under non-cancelable operating leases as of December 31, 2003, are shown below (in millions):

Borrowings under our primary credit facilities bear interest at variable rates. Therefore, an increase in interest rates would reduce our profitability. See “— Market Risk Sensitivity.”

In addition to the obligations set forth above, we have capital requirements with respect to new programs. We typically enter into agreements with our customers at the beginning of a given vehicle’s life for the fulfillment of our customers’ purchasing requirements for the entire production life of the vehicle, with terms of up to ten years. Prior to being formally awarded a program, we work closely with our customers in the early stages of designing and engineering a vehicle’s interior systems. Failure to complete the design and engineering work related to a vehicle’s interior systems, or to fulfill a customer’s contract, could adversely affect our business.

We also enter into agreements with suppliers to assist us in meeting our customers’ production needs. These agreements are requirements based and do not include any minimum stated volumes.

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We also have minimum funding requirements with respect to our pension obligations, which are expected to be $20 million to $25 million in 2004. Our minimum funding requirements after 2004 will depend on several factors. We also have payments due under our postretirement benefit plans. We do not fund our postretirement benefit obligation. Rather, payments are made as costs are incurred by covered employees. For further information related to our pension and other postretirement benefit plans, see “— Other Matters — Pension and Other Postretirement Benefit Plans.”

Off-Balance Sheet Arrangements

Asset-Backed Securitization Facility -

We have in place an ABS facility, which provides for maximum purchases of adjusted accounts receivable of $200 million. As of December 31, 2003, no accounts receivable had been sold under this facility. The level of funding utilized under this facility is based on the credit ratings of our major customers, the level of aggregate accounts receivable in a specific month and our funding requirements. Should our major customers experience reductions in their credit ratings, we may be unable, or elect not, to utilize the ABS facility in the future. Should this occur, we would utilize our primary credit facilities to replace the funding currently provided by the ABS facility. During 2003, our utilization of the ABS facility versus other available credit facilities resulted in a savings of approximately $1 million. In November 2003, the ABS facility was amended to extend the termination date from November 2003 to November 2004. For further information related to the ABS facility described above, see Note 13, “Financial Instruments,” to the consolidated financial statements included in this Report.

Guarantees and Commitments -

We guarantee the residual value of certain of our leased assets. As of December 31, 2003, these guarantees totaled $27 million. In addition, we guarantee 39% of certain of the debt of Total Interior Systems – America, L.L.C., a joint venture in which we own a 39% interest. As of December 31, 2003, the debt balance of Total Interior Systems – America, L.L.C. covered by our guarantees was $24 million.

Accounts Receivable Factoring

In addition, several of our European subsidiaries factor their accounts receivable with financial institutions. Such receivables are factored without recourse to us and are excluded from accounts receivable in our consolidated balance sheets. As of December 31, 2003 and 2002, the amount of factored receivables was $71 million and $160 million, respectively. We cannot provide any assurances that these factoring facilities will be available or utilized in the future.

Credit Ratings⁽¹⁾

The credit ratings of our senior unsecured debt as of December 31, 2003, are shown below:

The credit ratings by Standard & Poor’s Ratings Services and by Fitch Ratings are “investment grade.” The credit rating by Moody’s Investors Service is one level below “investment grade.”

Dividends

On November 13, 2003, we announced that our Board of Directors had initiated a quarterly dividend program and declared our first-ever cash dividend of $0.20 per share of common stock, payable on January 9, 2004 to shareholders of record at the close of business on December 15, 2003. On February 3, 2004, we announced that our Board of Directors had declared a cash dividend of $0.20 per share of common stock, payable on March 8, 2004 to shareholders of record at the close of business on February 18, 2004. We expect to pay quarterly cash dividends in the future, although such payment is dependent upon our financial condition, results of operations, capital requirements and other factors. Also, we are subject to the restrictions on the payment of dividends contained in our primary credit facilities and in certain other contractual obligations. See Item 5, “Market for the Company’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities.”

Common Stock Repurchase Program

In May 2002, the Board of Directors approved a common stock repurchase program that permits the discretionary repurchase of up to 3.3 million shares of our outstanding common stock over an initial period of 24 months. In 2003, we repurchased 31,800 shares of our outstanding common stock at an average purchase price of $34.07 per share. The extent to which we will

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repurchase our common stock and the timing of such repurchases will depend upon prevailing market conditions, alternative uses of capital and other factors.

Adequacy of Liquidity Sources

We believe that cash flows from operations and availability under our primary credit facilities will be sufficient to meet our long-term debt maturities, projected capital expenditures and anticipated working capital requirements for the foreseeable future. However, our cash flows from operations, borrowing availability and overall liquidity are subject to risks and uncertainties. Please see “— Executive Overview,” “— Forward-Looking Statements” and “— Risk Factors.”

Market Risk Sensitivity

In the normal course of business, we are exposed to market risk associated with fluctuations in foreign exchange rates and interest rates. We manage these risks through the use of derivative financial instruments in accordance with management’s guidelines. We enter into all hedging transactions for periods consistent with the underlying exposures. We do not enter into derivative instruments for trading purposes.

Foreign Exchange

Operating results may be impacted by our buying, selling and financing in currencies other than the functional currency of our operating companies (“transactional exposure”). We mitigate this risk by entering into forward foreign exchange, futures and option contracts. The foreign exchange contracts are executed with banks that we believe are creditworthy. Gains and losses related to foreign exchange contracts are deferred and included in the measurement of the foreign currency transaction subject to the hedge. Gains and losses incurred related to foreign exchange contracts are generally offset by the direct effects of currency movements on the underlying transactions.

Our most significant foreign currency transactional exposures relate to the Mexican peso, the Canadian dollar and the Euro. We have performed a quantitative analysis of our overall currency rate exposure as of December 31, 2003. The potential earnings benefit related to transactional exposures from a hypothetical 10% strengthening of the U.S. dollar relative to all other currencies for 2004 is approximately $7 million. The potential earnings decline related to transactional exposures from a similar strengthening of the Euro relative to all other currencies for 2004 is approximately $3 million.

As of December 31, 2003, foreign exchange contracts representing $1.7 billion of notional amount were outstanding with maturities within one year. As of December 31, 2003, the fair value of these contracts was approximately negative $18 million. A 10% change in the value of the U.S. dollar relative to all other currencies would result in a $6 million change in the aggregated fair value of these contracts. A 10% change in the value of the Euro relative to all other currencies would result in a $38 million change in the aggregated fair value of these contracts.

There are certain shortcomings inherent in the sensitivity analysis presented. The analysis assumes that all currencies would uniformly strengthen or weaken relative to the U.S. dollar or Euro. In reality, some currencies may strengthen while others may weaken, causing the earnings impact to increase or decrease depending on the currency and the direction of the rate movement.

In addition to the transactional exposure described above, our operating results are impacted by the translation of our foreign operating income into U.S. dollars (“translation exposure”). We do not enter into foreign exchange contracts to mitigate this exposure.

Interest Rates

We use a combination of fixed and variable rate debt and interest rate swap contracts to manage our exposure to interest rate movements. Our exposure to variable interest rates on outstanding floating rate debt instruments indexed to U.S. or European Monetary Union short-term money market rates is partially managed by the use of interest rate swap contracts to convert variable rate debt to fixed rate debt, matching effective and maturity dates to specific debt instruments. These interest rate swap contracts are executed with banks that we believe are creditworthy and are denominated in currencies that match the underlying debt instrument. Net interest payments or receipts from interest rate swap contracts are recorded as adjustments to interest expense in our consolidated statements of income on an accrual basis.

We have performed a quantitative analysis of our overall interest rate exposure as of December 31, 2003. This analysis assumes an instantaneous 100 basis point parallel shift in interest rates at all points of the yield curve. The potential adverse earnings impact from this hypothetical increase for 2004 is approximately $8 million.

As of December 31, 2003, interest rate swap contracts representing $600 million of notional amount were outstanding with maturity dates of May 2005 through May 2009. All of these contracts swap fixed rate debt for variable rate debt. The fair value

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of these interest rate swap contracts is subject to changes in value due to changes in interest rates. As of December 31, 2003, the fair value of these contracts was approximately negative $1 million. A 100 basis point parallel shift in interest rates would result in a $20 million change in the aggregated fair value of these contracts.

We have commodity price risk with respect to purchases of copper, leather, steel, resins, diesel fuel and natural gas. This risk, where not offset by pricing adjustments with our customers, is managed through a combination of fixed price agreements, staggered contract maturities and commercial negotiations with our suppliers. We may also pursue alternative commodities or alternative suppliers to mitigate this risk over time. We generally have not used financial instruments to mitigate this risk.

For further information related to the financial instruments described above, see Note 8, “Long-Term Debt,” and Note 13, “Financial Instruments,” to the consolidated financial statements included in this Report.

Other Matters

Pension and Other Postretirement Benefit Plans

Approximately 20% of our active workforce is covered by defined benefit pension plans. Approximately 10% of our active workforce is covered by other postretirement benefit plans. Pension plans provide benefits based on plan-specific benefit formulas as defined by the applicable plan documents. Postretirement benefit plans generally provide for the continuation of medical benefits for certain eligible employees. In addition, we have contractual arrangements with certain employees which provide for supplemental retirement benefits. In general, pension obligations are funded based on legal requirements, tax considerations and local practice. Additional contributions may be made when we believe it is financially advantageous to do so and based on our other capital requirements. We do not fund our postretirement benefit obligation.

As of December 31, 2003 (based on a September 30, 2003 measurement date), our projected benefit obligations related to our pension and other postretirement benefit plans were $509 million and $200 million, respectively. These obligations were valued using a weighted average discount rate of 6.25% for domestic plans and 6.50% for foreign plans. Discount rates are determined based on a review of the rates of return for high quality long-term bonds, such as Moody’s Long-Term AA Bond Index for domestic plans. As of December 31, 2003 and 2002, our unfunded pension obligation was $182 million and $178 million, respectively.

For the years ended December 31, 2003 and 2002, pension expense was $54 million and $41 million, respectively, and was determined using a variety of actuarial assumptions. Pension expense was calculated using an expected return on plan assets of 7.75% and 9% for domestic plans and 7% and 7% for foreign plans in 2003 and 2002, respectively. The expected return on plan assets is determined based on several factors, including adjusted historical returns, historical risk premiums for various asset classes and target asset allocations within the portfolio. Adjustments made to the historical returns are based on recent returns in the equity and fixed income markets and the belief that deviations from historical returns are likely over the relevant investment horizon.

Pension expense is estimated to be approximately $61 million in 2004. This estimate is based on a discount rate of 6.25% and 6.50% and an expected return on plan assets of 7.75% and 7.00% for domestic and foreign plans, respectively. Actual expense is also dependent on various other factors related to the employees covered by these plans. While we believe that these rates are currently reasonable, actuarial assumptions are reviewed periodically and adjusted when necessary. Adjustments to our actuarial assumptions could have a material adverse impact on our reported results of operations. Decreasing the discount rate by 1.0% would have increased our pension obligation and our pension expense by approximately $68 million and approximately $7 million, respectively, as of and for the year ended December 31, 2003. Decreasing the expected return on plan assets by 1.0% would have increased our pension expense by approximately $2 million for the year ended December 31, 2003.

We expect to contribute approximately $20 million to $25 million to our domestic and foreign pension portfolios in 2004. Contributions to our pension funds are consistent with minimum funding requirements of the relevant governmental authorities. We may make contributions in excess of these minimums when we believe it is financially advantageous to do so and based on our other capital requirements.

In addition, our domestic postretirement benefit obligation may be impacted by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) that was signed into law on December 8, 2003. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of certain other postretirement benefit plans that provide prescription drug benefits at least actuarially equivalent to Medicare Part D. The measurement of postretirement benefit obligation and net periodic postretirement benefit cost reflected in our consolidated financial statements and notes to the consolidated financial statements does not reflect the effects of the Act. We do not expect the effects of the Act to have a material impact on our postretirement benefit obligation and our net periodic postretirement benefit cost. Specific authoritative guidance on the accounting for the federal subsidy is pending and when issued, may require us to change previously reported plan information.

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For further information related to our pension and other postretirement benefit plans, see Note 10, “Pension and Other Postretirement Benefit Plans,” to the consolidated financial statements included in this Report.

Environmental Matters

We are subject to local, state, federal and foreign laws, regulations and ordinances which govern activities or operations that may have adverse environmental effects and which impose liability for the costs of cleaning up certain damages resulting from past spills, disposal or other releases of hazardous wastes and environmental compliance. Our policy is to comply with all applicable environmental laws and to maintain an environmental management program based on ISO 14001 to ensure compliance. However, we currently are, have been and in the future may become the subject of formal or informal enforcement actions or procedures.

We have been named as a potentially responsible party at several third-party landfill sites and are engaged in the cleanup of hazardous waste at certain sites owned, leased or operated by us, including several properties acquired in our 1999 acquisition of UT Automotive. Certain present and former properties of UT Automotive are subject to environmental liabilities which may be significant. We obtained agreements and indemnities with respect to certain environmental liabilities from United Technologies Corporation (“UTC”) in connection with our acquisition of UT Automotive. UTC manages and directly funds these environmental liabilities pursuant to its agreements and indemnities with us. While we do not believe that the environmental liabilities associated with our current and former properties will have a material adverse effect on our business, consolidated financial position or results of future operations, no assurances can be given in this regard.

For further information related to environmental matters, see “Item 3 – Legal Proceedings.”

Significant Accounting Policies and Critical Accounting Estimates

Our significant accounting policies are more fully described in Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements included in this Report. Certain of our accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are subject to an inherent degree of uncertainty. These estimates and assumptions are based on our historical experience, terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and suppliers and information available from other outside sources, as appropriate.

We consider an accounting estimate to be critical if it requires us to make assumptions about matters that were uncertain at the time the estimate was made and changes in the estimate would have had a significant impact on our financial condition or results of operations.

Pre-Production Costs Related to Long-Term Supply Arrangements

We incur pre-production engineering, research and development (“ER&D”) and tooling costs related to the products produced for our customers under long-term supply agreements. We expense all pre-production ER&D costs for which reimbursement is not contractually guaranteed by the customer. In addition, we expense all pre-production tooling costs related to customer-owned tools for which reimbursement is not contractually guaranteed by the customer or for which the customer has not provided a non-cancelable right to use the tooling. During 2003 and 2002, we capitalized $181 million and $136 million, respectively, of pre-production ER&D costs for which reimbursement is contractually guaranteed by the customer. In addition, during 2003 and 2002, we capitalized $381 million and $348 million, respectively, of pre-production tooling costs related to customer-owned tools for which reimbursement is contractually guaranteed by the customer or for which the customer has provided a non-cancelable right to use the tooling. During 2003 and 2002, we collected $540 million and $538 million, respectively, of cash related to ER&D and tooling costs.

Gains and losses related to ER&D and tooling projects are reviewed on an aggregate program basis. Net gains on projects are deferred and recognized over the life of the related long-term supply agreement. Net losses on projects are recognized as costs are incurred.

A change in the commercial arrangements affecting any of our significant programs that would require us to expense ER&D or tooling costs that we currently capitalize could have a material adverse impact on our reported results of operations.

Goodwill

On January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” Under this statement, goodwill is no longer amortized but is subject to annual impairment analysis. Our initial impairment analysis compared the fair values of each of our reporting units, based on discounted cash flow analyses, to the related net book values. Cash flows are estimated using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments.

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As a result of the adoption of SFAS No. 142, we recorded impairment charges of $311 million ($299 million after tax) as of January 1, 2002. These charges are reflected as a cumulative effect of a change in accounting principle, net of tax, in our consolidated statement of income for the year ended December 31, 2002. Our annual SFAS No. 142 impairment analysis was completed as of September 28, 2003, and there was no additional impairment. As of December 31, 2003, we had $2.9 billion of goodwill recorded. An impairment charge related to this amount could materially and negatively affect our operating results.

Long-Lived Assets

On January 1, 2002, we adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, we monitor our long-lived assets for impairment indicators. If impairment indicators exist, we perform the required analysis and record impairment charges in accordance with SFAS No. 144. In 2003, we recorded impairment charges of $5 million related to certain facility consolidations. In addition, we recorded impairment charges of $6 million related to other facility closures, an early program termination and ongoing losses at certain of our facilities. The estimated fair values were based upon either discounted cash flow analyses or estimated salvage values. Cash flows are estimated using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments. We have certain other facilities that have generated operating losses in recent years. The results of the related impairment analyses indicated that impairment of the fixed assets was not required. We will continue to monitor the operating plans of these facilities for potential impairment.

In 2001, an impairment charge of $52 million was recognized in connection with our related restructuring plan. See Note 4, “2001 Restructuring Plan,” to the consolidated financial statements included in this Report.

Legal and Other Contingencies

We are subject to legal proceedings and claims, including product liability claims, commercial or contractual disputes, environmental enforcement actions or procedures and other claims, that arise in the normal course of business. We routinely assess the likelihood of any adverse judgments or outcomes to these matters, as well as ranges of probable losses, by consulting with internal personnel principally involved with such matters and with our outside legal counsel handling such matters. We have accrued for estimated losses in accordance with GAAP for those matters where we believe that the likelihood that a loss has occurred is probable and the amount of loss is reasonably estimable. A determination of the amount of such reserves is based on knowledge and experience with regard to past and current matters and consultation with internal personnel principally involved with such matters and with our outside legal counsel handling such matters. The required reserves may change in the future due to new matters or developments in existing matters. The inherent uncertainty related to the outcome of these matters can result in amounts materially different from any provisions made with respect to their resolution.

For further information related to legal and other contingencies, see “Item 3 — Legal Proceedings.”

Revenue Recognition and Sales Commitments

We recognize revenue as our products are shipped to our customers. We enter into agreements with our customers to produce products at the beginning of a vehicle’s life. Although such agreements do not provide for minimum quantities, once we enter into such agreements, fulfillment of our customers’ purchasing requirements is our obligation for the entire production life of the vehicle, with terms of up to ten years. These agreements generally may be terminated by our customer (but not by us) at any time. Historically, terminations of these agreements have been minimal. In certain limited instances, we may be committed under existing agreements to supply products to our customers at selling prices which are not sufficient to cover the direct cost to produce such products. In such situations, we recognize losses as they are incurred.

We are required to provide our customers with annual cost reductions as part of certain agreements. In addition, we have ongoing adjustments to our pricing arrangements with our customers based on the related content and cost of our products. We accrue for such amounts as our products are shipped to our customers. Such pricing accruals are adjusted as they are settled with our customers.

Amounts billed to customers related to shipping and handling are included in net sales in our consolidated statements of income. Shipping and handling costs are included in cost of sales in our consolidated statements of income.

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In prior years, we recorded loss contract accruals in purchase accounting in conjunction with the Lear-Donnelly acquisition, the UT Automotive acquisition, the Peregrine acquisition and the Delphi acquisition. These loss contract accruals were not recorded in the historical operating results of Lear-Donnelly, UT Automotive, Peregrine or Delphi. The losses included in the accrual have not been, and will not be, included in our operating results since the respective acquisition dates. Further, our future operating results will benefit from accruing these contract losses in the related purchase price allocations. A summary of the loss contract accrual activity related to these acquisitions is shown below (in millions):

We utilized $7 million, $8 million and $24 million of the loss contract accruals to offset losses in 2003, 2002 and 2001, respectively. The estimated utilization of the aggregate loss contract accrual is $2 million in 2004, $8 million in 2005 and $4 million in 2006.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. During 2003, there were no material changes in the methods or policies used to establish estimates and assumptions. Generally, matters subject to estimation and judgment include amounts related to accounts receivable realization, inventory obsolescence, unsettled pricing discussions with customers and suppliers, warranty, pension and other postretirement benefit plan assumptions, plant consolidation and reorganization reserves, self-insurance accruals, asset valuation reserves and accruals related to litigation, environmental remediation costs and income taxes. Actual results may differ from estimates provided.

Sales Backlog

We typically enter into agreements with our customers at the beginning of a vehicle’s life for the fulfillment of our customers’ purchasing requirements for the entire production life of the vehicle. These agreements generally may be terminated by the customer (but not by us) at any time. Therefore, our backlog data does not reflect firm orders or firm commitments. Our incremental backlog reflects (i) formally awarded new programs, (ii) targeted programs for which we believe there is a substantial likelihood of award, (iii) phased-out and canceled programs, (iv) estimates regarding customer-mandated changes in selling prices and (v) estimates of expected changes in vehicle content. Changes in any of these components may significantly impact our backlog. In addition, backlog may be impacted by various assumptions imbedded in the calculation, including vehicle production levels on new, replacement or targeted programs, foreign exchange rates and the timing of major program launches. For purposes of the backlog data, we have made various assumptions, including the following: (i) North American vehicle production of 16.0 million units, (ii) Western European vehicle production of 16.0 million units, (iii) South American vehicle production of 1.9 million units and (iv) a Euro exchange rate of $1.20/Euro. As of December 31, 2003, we had an incremental sales backlog of $750 million for orders to be executed in 2004. Our current three-year sales backlog (2004 through 2006) exceeds our prior year three-year sales backlog (2003 through 2005) by approximately $400 million.

Recently Issued Accounting Pronouncements

Pensions and Other Postretirement Benefits

The FASB issued a revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This statement retains the original pension and other postretirement benefits disclosures of SFAS No. 132 and requires additional disclosures for both annual and interim periods. Additional annual reporting requirements related to plan assets, accumulated benefit obligations and expected plan contributions are effective for fiscal years ending after December 15, 2003 for domestic plans and for fiscal years ending after June 15, 2004 for foreign plans. Additional annual reporting requirements related to estimated future benefit payments are effective for fiscal years ending after June 15, 2004 for both domestic and foreign plans. Additional interim reporting requirements related to the components of net periodic benefit cost, contributions paid and significant changes in assumptions are effective for interim periods beginning after December 15, 2003 for both domestic and foreign plans. All annual disclosures required by this statement, with the exception of disclosures related to estimated future

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benefit payments, have been reflected in Note 10, “Pension and Other Postretirement Benefit Plans,” to the consolidated financial statements included in this Report.

Derivative Instruments and Hedging Activities

The FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” the provisions of which apply to contracts entered into or modified after June 30, 2003, and to hedging relationships designated after June 30, 2003. SFAS No. 149 amends and clarifies the accounting for derivative instruments and hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137 and SFAS No. 138. The effects of adoption were not significant.

Financial Instruments

The FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” the provisions of which apply to financial instruments issued or modified after May 31, 2003, and to all other instruments at the beginning of the first interim period beginning after June 15, 2003. This statement and its related interpretations address the classification of certain financial instruments with characteristics of both liabilities and equity. In addition, this statement and its related interpretations require that certain financial instruments be recorded at their fair values and that the fair values of minority interest liabilities related to consolidated affiliates be disclosed. The effects of adoption were not significant.

Variable Interest Entities

The FASB issued Interpretation (“FIN”) No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” the provisions of which apply immediately to any variable interest entity created after January 31, 2003, apply no later than the first period ending after December 15, 2003, to special purpose corporations, and apply in the first interim period ending after March 15, 2004, to any variable interest entity created prior to February 1, 2003. This interpretation requires the consolidation of a variable interest entity by its primary beneficiary and may require the consolidation of a portion of a variable interest entity’s assets or liabilities under certain circumstances. For those entities to which the provisions of this interpretation applied in 2003, the effects of adoption were not significant. We are currently evaluating the effects of applying the provision of this interpretation to variable interest entities created prior to February 1, 2003. Based on the entities included within the scope of FIN No. 46 and their relative size, we do not expect the effects of adoption to be significant.

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. The words “will,” “may,” “designed to,” “outlook,” “believes,” “should,” “anticipates,” “plans,” “expects,” “intends,” “estimates” and similar expressions identify these forward-looking statements. All statements contained or incorporated in this Report which address operating performance, events or developments that we expect or anticipate may occur in the future, including statements related to business opportunities, awarded sales contracts and net income per share growth or statements expressing views about future operating results, are forward-looking statements. Important factors, risks and uncertainties that may cause actual results to differ from those expressed in our forward-looking statements include, but are not limited to:

We do not assume any obligation to update any of these forward-looking statements.

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Risk Factors

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ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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Report of Independent Auditors

To the Board of Directors and Shareholders,
Lear Corporation

We have audited the consolidated balance sheets of Lear Corporation and Subsidiaries (the “Company”) as of December 31, 2003 and 2002, and the related consolidated statements of income, stockholders’ equity and cash flows for the years then ended. Our audits also included the financial statement schedule for the years ended December 31, 2003 and 2002, included as Item 15 (a) (2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The consolidated statements of income, stockholders’ equity and cash flows and schedule of the Company for the year ended December 31, 2001, were audited by other auditors who have ceased operations and whose report dated January 28, 2002 (except with respect to the information contained in Note 8, as to which the date is February 14, 2002), expressed an unqualified opinion on those statements before the restatement and disclosures described below and in Notes 2 and 16.

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

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

As discussed above, the financial statements and schedule of the Company for the year ended December 31, 2001, were audited by other auditors who have ceased operations. As described in Note 16, the 2001 guarantor statement of income included in the 2001 supplemental guarantor condensed consolidating financial statements has been restated to reflect certain adjustments to equity in net income of subsidiaries and to net income. We audited the adjustments that were applied to restate the disclosures reflected in Note 16. Our audit procedures included: (i) agreeing the adjusted amount for the equity in net income of subsidiaries of the guarantors to the Company’s underlying records obtained from management, and (ii) testing the mathematical accuracy in computing the restated amounts included in Note 16 related to the 2001 supplemental guarantor condensed consolidating statement of income. In addition, as described in Note 2, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 2 with respect to 2001 included (a) agreeing the previously reported net income to the previously issued financial statements and the adjustments to reported net income representing amortization expense (including related tax effects) recognized in 2001 related to goodwill, as a result of initially applying SFAS No. 142, to the Company’s underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income and the related net income per share amounts. In our opinion, the disclosures for 2001 in Note 2 are appropriate, and the adjustments to the 2001 guarantor statement of income included in the supplemental guarantor condensed consolidating financial statements described in Note 16 are appropriate and have been properly applied. However, we were not engaged to audit, review or apply any procedures to the 2001 financial statements and schedule of the Company other than with respect to such disclosures and adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2001 financial statements and schedule taken as a whole.

As discussed in Note 2 to the consolidated financial statements, in 2003 the Company changed its method of accounting for stock-based compensation.

/s/ ERNST & YOUNG LLP

Troy, Michigan,
January 26, 2004

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THIS REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP. THE REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP NOR HAS ARTHUR ANDERSEN LLP PROVIDED A CONSENT TO THE INCLUSION OF ITS REPORT IN THIS FORM 10-K. FOR FURTHER DISCUSSION, SEE EXHIBIT 23.2 TO THIS FORM 10-K OF WHICH THIS REPORT IS A PART. THE 2001 GUARANTOR STATEMENT OF INCOME INCLUDED IN THE 2001 SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS HAS BEEN RESTATED TO REFLECT CERTAIN ADJUSTMENTS TO EQUITY IN NET INCOME OF SUBSIDIARIES AND TO NET INCOME, AS DESCRIBED IN NOTE 16, “SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS,” TO THE CONSOLIDATED FINANCIAL STATEMENTS. IN ADDITION, THE FINANCIAL STATEMENTS OF LEAR CORPORATION AND SUBSIDIARIES TO WHICH THIS REPORT RELATES HAVE BEEN REVISED TO INCLUDE THE TRANSITIONAL DISCLOSURES REQUIRED BY STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142, “GOODWILL AND OTHER INTANGIBLE ASSETS,” AS DESCRIBED IN NOTE 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” TO THE CONSOLIDATED FINANCIAL STATEMENTS. THESE RESTATEMENTS AND REVISIONS ARE NOT COVERED BY THE COPY OF THE REPORT OF ARTHUR ANDERSEN LLP.

Report of Independent Public Accountants

To Lear Corporation:

We have audited the accompanying consolidated balance sheets of LEAR CORPORATION AND SUBSIDIARIES (“the Company”) as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.

/s/ ARTHUR ANDERSEN LLP

Detroit, Michigan,
          January 28, 2002 (except with respect to the matter discussed in Note 8,
          as to which the date is February 14, 2002).

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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)

The accompanying notes are an integral part of these consolidated balance sheets.

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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)

The accompanying notes are an integral part of these consolidated statements.

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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, except share data)

The accompanying notes are an integral part of these consolidated statements.

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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)

The accompanying notes are an integral part of these consolidated statements.

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Lear Corporation and Subsidiaries
Notes to Consolidated Financial Statements

(1) Basis of Presentation

The consolidated financial statements include the accounts of Lear Corporation (“Lear” or the “Parent”), a Delaware corporation, and the wholly-owned and majority-owned subsidiaries controlled by Lear (collectively, the “Company”). Investments in affiliates, other than wholly-owned and majority-owned subsidiaries controlled by Lear, in which Lear owns a 20% or greater interest are accounted for under the equity method (Note 6).

The Company and its affiliates design and manufacture interior systems and components for automobiles and light trucks. The Company’s main customers are automotive original equipment manufacturers. The Company operates facilities worldwide (Note 12).

(2) Summary of Significant Accounting Policies

Cash and Cash Equivalents

Accounts Receivable

The Company records accounts receivable as its products are shipped to its customers. The Company’s customers are the major automotive manufacturers in the world. The Company records accounts receivable reserves for known collectibility issues, as such issues relate to specific transactions or customer balances. As of December 31, 2003 and 2002, accounts receivable are reflected net of reserves of $30.6 million and $31.5 million, respectively. The Company writes off accounts receivable when it becomes apparent based upon age or customer circumstances that such amounts will not be collected.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Finished goods and work-in-process inventories include material, labor and manufacturing overhead costs. The Company records inventory reserves for inventory in excess of production and/or forecasted requirements and for obsolete inventory in production and service inventories. As of December 31, 2003 and 2002, inventories are reflected net of reserves of $55.8 million and $44.5 million, respectively. A summary of inventories is shown below (in millions):

Pre-Production Costs Related to Long-Term Supply Arrangements

The Company incurs pre-production engineering, research and development (“ER&D”) and tooling costs related to the products produced for its customers under long-term supply agreements. The Company expenses all pre-production ER&D costs for which reimbursement is not contractually guaranteed by the customer. In addition, the Company expenses all pre-production tooling costs related to customer-owned tools for which reimbursement is not contractually guaranteed by the customer or for which the customer has not provided a non-cancelable right to use the tooling. During 2003 and 2002, the Company capitalized $181.2 million and $135.6 million, respectively, of pre-production ER&D costs for which reimbursement is contractually guaranteed by the customer. In addition, during 2003 and 2002, the Company capitalized $380.5 million and $347.7 million, respectively, of pre-production tooling costs related to customer-owned tools for which reimbursement is contractually guaranteed by the customer or for which the customer has provided a non-cancelable right to use the tooling. These amounts are included in recoverable customer engineering and tooling and other long-term assets in the consolidated balance sheets. During 2003 and 2002, the Company collected $539.6 and $538.2 million, respectively, of cash related to ER&D and tooling costs.

During 2003 and 2002, the Company capitalized $39.2 million and $22.1 million, respectively, of Company-owned tooling. These amounts are included in property, plant and equipment, net, in the consolidated balance sheets.

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