6-K

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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

Pursuant to Rule 13a-16 or 15d-16 of
The Securities Exchange Act of 1934

For the Month of April 2004

TESMA INTERNATIONAL INC.
(Translation of registrant's name into English)

Commission File Number:    0-26104

1000 Tesma Way, Concord, Ontario, Canada L4K 5R8
(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F o Form 40-F ý

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):                                 

Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):                                 

Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant's "home country"), or under the rules of the home country exchange on which the registrant's securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant's security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes o No ý

If "Yes" is marked, indicate below the file number assigned to the registrant in connection with
Rule 12g3-2(b): 82-                             

Signatures

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	TESMA INTERNATIONAL INC. (Registrant)
Date: April 8, 2004
	By:	/s/  STEFAN T. PRONIUK Stefan T. Proniuk, Vice-President, Secretary and General Counsel

EXHIBITS

Exhibit 19	Annual Report to Shareholders of the Registrant, including (1) Management's Discussion and Analysis of Operations and Financial Position and (2) Audited Consolidated Financial Statements, in each case for the year ended December 31, 2003.
Exhibit 22.1	Notice of the Annual Meeting of Shareholders of the Registrant to be held at 11:00 a.m. on May 4, 2004 in Toronto, Ontario.
Exhibit 22.2	Management Information Circular/Proxy Statement of the Registrant in respect of its Annual Meeting of Shareholders to be held on May 4, 2004.
Exhibit 22.3	Class A Subordinate Voting Shares Proxy Form of the Registrant for the year ended December 31, 2003.
Exhibit 22.4	NP41 Letter (Notice to Non-Registered Shareholders re: Interim Mailing) of the Registrant for the year ended December 31, 2003.
Exhibit 22.5	Letter to Shareholders dated April 8, 2004 re: Annual Meeting of Shareholders of the Registrant to be held on May 4, 2004.

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[PHOTO]

Tesma International Inc.
Annual Report 2003

TESMA Measuring Our Success

Tesma At A Glance

	2003 Operating Highlights	Major Customers
Tesma Engine Technologies	•  Expanded customer base to include Hyundai, Fiat and    the PSA Group •  Expanded product line to include more value-added    assemblies and modules — Hyundai V6 engine front cover    module, General Motors' (GM) 3.9L engine front cover    module •  Established two new entities in Italy on one site to produce    oil and water pump assemblies and front end accessory drive    components for European customers •  Intensified Six Sigma continuous improvement activities •  Established a plant in China to manufacture automatic belt    tensioners for Volkswagen	•  General Motors    (including Fiat, Saab, Isuzu) •  Ford    (including Volvo, Mazda,    Jaguar) •  DaimlerChrysler    (including Mitsubishi,    Hyundai) •  Honda •  Toyota •  Renault-Nissan-Samsung •  Hitachi
Tesma Transmission Technologies	•  Awarded hub and housing business on new GM    6-speed rear wheel drive transmission •  Launched various new products, including continuously    variable transmission (CVT) cylinders for ZF in Europe and    aluminium clutch pistons for GM •  Expanded research and development (R&D) capabilities    to include high-speed spin burst testing and multi-channel    torque and axial load fatigue testing •  Launched transfer case shafts and hubs for a key    program for Magna Steyr •  Launched transmission centre support housing for GM •  Realized operational efficiency and capacity utilization    improvements through Six Sigma initiatives •  Announced agreement to acquire Davis Industries, Inc.    (Davis), a U.S.-based powertrain supplier (completed    January 2, 2004)	•  General Motors •  Ford    (including Mazda) •  DaimlerChrysler •  Allison Transmission •  ZF •  Renault-Nissan-Samsung •  Magna Steyr
Tesma Fuel Technologies	•  Focused R&D initiatives on the development of low    permeation capless filler systems, filler pipes and fuel tank    assemblies to meet Low Emission Vehicle (LEV II)    Legislation and Partial Zero Emission Vehicle (PZEV)    legislation •  Continued Six Sigma initiatives, LEAN/Synchronous    manufacturing efforts and VA/VE design improvements    to increase product functionality and reduce costs •  Launched several fuel filler pipe programs in Europe and    North America for Ford and DaimlerChrysler •  Launched the Volkswagen PQ34 PZEV stainless steel    fuel tank in Europe	•  General Motors    (including Fiat) •  Ford    (including Volvo) •  DaimlerChrysler •  Volkswagen Group •  BMW •  Audi

Product Offerings	2004 Goals and Strategy
•  Front End Accessory Drive Systems •  Accessory and Timing Drive Tensioners •  Steel, Phenolic and Aluminium Pulleys •  Idler Assemblies •  Engine Front Cover Modules •  Engine Oil Pumps •  Water Pumps •  Cooling Management Systems •  Overrunning Alternator Decouplers •  Cam Covers •  Variable Camshaft Phasing Systems •  Engine Oil Pan Assemblies •  Engine Balance Shaft Assemblies •  Collapsible Drive Shaft Assemblies •  Rocker Covers	•  Capitalize on Tesma's component manufacturing    expertise/capabilities and further integrate to value-added    assemblies and modules •  Expand customer base in key markets for our engine front    cover modules, cooling and lubrication systems •  Continue to develop full-service capabilities by further    expanding our design, development, testing and validation    capabilities at both the component and systems levels •  Continue to expand benchmarking capabilities for cooling,    lubrication and engine systems products •  Successfully launch our first oil pumps and pulleys from    our operations in Italy •  Continue to develop unique and innovative products,    technologies and materials •  Successfully launch significant business at our    South Korean operations, including our first engine    front cover module for Hyundai
•  Automatic Transmission Clutch Housings and Shaft Assemblies •  Flow-Formed Clutch Housings •  Cam Die-Formed Transmission Shells •  Torque Converter Damper Assemblies •  Oil Pump Assemblies •  Die-Formed Oil Pan Assemblies •  Aluminium Die-Cast and Machined Case Extensions    and Clutch Housings •  Servo Piston and Accumulator Assemblies •  Roller Die-Formed Drive Hubs and Housings •  Fineblanked Products, Separator Plates and Backing Plates •  Flexplates •  Reaction and Input Shells •  CVT — Pistons, Plungers and Clutch Housings •  Friction Clutch Pack Assemblies •  Transfer Case Output Shafts and Flanges •  Torque Converter Stator Shafts	•  Successfully integrate the Davis operations •  Expand engineering and testing capabilities to include    complete clutch pack assemblies •  Continue to pursue and expand content in the precision    aluminium transmission die-cast components area •  Continue to pursue value-added sub-assemblies for    various transmission applications •  Expand our transmission oil pump assemblies to include    vane pump technology and unique variable flow    technology •  Expand transfer case component and sub-assembly    capability •  Expand customer base into non-traditional OEM market
•  Fuel Caps •  Fuel Filler Inlets and Valves •  Capless Filler Systems •  Steel Fuel Filler Pipes •  Steel Fuel Tank Assemblies •  Vent, Fill and Spud Tubes •  Fuel Sender Units	•  Provide leadership in the development and market    introduction of innovative fuel system solutions and    alternative material applications •  Expand our current product portfolio in Europe and    North America •  Provide customers with improved fuel system permeation    and corrosion performance and reduced waste through    improved recyclability •  Successfully launch the JR fuel tank and LX fuel filler pipe    programs for DaimlerChrysler in North America •  Continue with the successful ramp-up of Ford's global C1    fuel filler pipe program in our Austrian facility

Profile

Tesma International Inc. (Tesma or the Company) designs, engineers, tests and manufactures technologically-advanced engine, transmission and fuel components, modules and systems for the global automotive industry. Tesma employs over 5,500 people in 28 manufacturing facilities (subsequent to the Davis Industries, Inc. acquisition) in North and South America, Europe and Asia and five focused tooling, design and R&D centres supporting our three principal product technology groups: Tesma Engine Technologies, Tesma Transmission Technologies and Tesma Fuel Technologies. Tesma ships its products to Original Equipment Manufacturers (OEMs) on six continents.

Tesma's Class A Subordinate Voting Shares trade on the Toronto Stock Exchange under the symbol TSM. A and the NASDAQ Stock Market under the symbol TSMA.

Forward-Looking Statements: This Annual Report may contain "forward-looking statements" within the meaning of applicable securities legislation. Such statements involve certain risks, assumptions, uncertainties and other factors (as described in Tesma's Annual Information Form, Form 40-F and other public filings) which may cause Tesma's actual future results or performance to differ materially from those expressed or implied herein. Tesma expressly disclaims any intention, and undertakes no obligation, to update or revise any forward-looking statements to reflect subsequent information, events, results, circumstances or otherwise.

FOLD — OUT		Tesma At A Glance
02		Results
03		Global Performance
03		Content Per Vehicle
04		Chairman's Message
05		Letter to Shareholders
09		Glossary
10		Components, Modules and Systems
13		Tesma Engine Technologies
17		Tesma Transmission Technologies
21		Tesma Fuel Technologies
	22	Policies
	22	Corporate Constitution
	22	Employee's Charter
23		Corporate Governance
24		Review

[PHOTO]

Customers. Employees. Shareholders.
They all have expectations.

And Tesma delivers results.

We're an industry leader in quality.
That's what our customers tell us.
They assess our performance every day.

We're a great place to work.
That's what employees tell us — in opinion surveys
and through long-term commitments to our team.

We build shareholder value.
That's what financial metrics tell us.
We're a leader among our peers.

But no one expects more of Tesma
than we do of ourselves.
That's how we measure our success.

The details are inside.

TESMA        1

Results

Financial Highlights

			December 31
							% change
			2003		2002
(U.S. dollars in millions, except per share and shares amounts)
Results for the year ended
Sales			$	1,098.6	$	925.9	+19%
Income before income taxes			$	110.0	$	82.9	+33%
Net income			$	74.1	$	56.0	+32%
Operating cash flow			$	143.8	$	112.6	+28%
Capital expenditures			$	61.2	$	68.9	-11%
Earnings per Class A Subordinate
	Voting Share or Class B Share
		Basic	$	2.29	$	1.82	+26%
		Diluted	$	2.28	$	1.80	+27%
Cash dividends paid per Class A Subordinate
	Voting Share or Class B Share (CDN $)		$	0.75	$	0.64
Average number of Class A Subordinate
	Voting Shares and Class B Shares outstanding
		Basic		32.3		30.7	+5%
		Diluted		32.5		31.1	+5%
Year end position, as at
Cash (net of bank indebtedness)			$	122.5	$	89.0	+38%
Total assets			$	839.0	$	656.8	+28%
Long-term debt (including current portion)			$	66.8	$	49.4	+35%
Shareholders' equity			$	549.3	$	410.2	+34%
Book Value per Class A Subordinate
	Voting Share or Class B Share		$	16.92	$	12.66	+34%

2        TESMA

Global Performance

	NORTH AMERICA				EUROPE					OTHER
	December 31				December 31					December 31
Operating Segment
	2003		2002		2003		2002			2003			2002
(U.S. dollars in millions, except facilities and employees)
Sales	$	856.0	$	725.5	$	235.6	$	180.6		$	28.8		$	33.8
Income before income taxes	$	97.5	$	87.5	$	18.3	$	(6.1	)	$	(5.8	)	$	1.5
Capital assets	$	206.1	$	197.8	$	65.2	$	49.1		$	32.4		$	26.2
Manufacturing facilities		15		15		6		5			4			3
Employees		3,600		3,500		1,100		1,200			300			200

Content Per Vehicle

TESMA        3

[PHOTO]

MANFRED GINGL
Chairman & Chief Executive Officer

Chairman's Message

Tesma's success is very much a measure of our corporate culture and structure, both of which have their roots in Magna. Why have we placed such an emphasis on these two elements of how we do business? The answer is quite simple. It's not enough to have the right structure; a great company needs the right people, too.

Our greatest asset is outstanding and entrepreneurial individuals. We hold them accountable, we challenge and empower them — and we reward them through employee profit participation and share ownership programs. We provide them with training and education programs, as well as the opportunity to use what they have learned. Financial compensation is an important incentive — but so is the sense of pride and ownership that comes from working for, and contributing to, the success of Tesma. And so is "having fun along the way"!

Our manufacturing divisions operate as individual profit centres with dedicated production, finance, human resources and engineering teams. These teams can quickly respond to issues impacting operations, as well as investing in resources to develop opportunities for the future. In a centralized organization, by the time information reaches the top and filters back again, it's often too late.

While we work in a decentralized environment, we still try to capitalize on Tesma's brand identity and purchasing power, as well as its expertise in treasury, finance, information technology, tax and sales by maintaining certain centralized corporate office functions. This structure allows each general manager to focus on his division's performance in quality, delivery and profitability. To ensure consistency in our human resources initiatives and policies within all divisions, Tesma's HR department oversees the implementation and compliance of these initiatives on an ongoing basis.

I believe in our culture and our structure. It is the unique combination of these elements at Tesma that will allow us to continue to drive forward, benefit from trends in the automotive powertrain area and provide further growth and success.

/s/ MANFRED GINGLMANFRED GINGL
CHAIRMAN & CHIEF EXECUTIVE OFFICER

4        TESMA

[PHOTO]

ANTHONY E. DOBRANOWSKI
President & Chief Financial Officer

Letter to Shareholders

We had another great year. We surpassed our competitors in key performance measures such as return on funds employed, return on assets and return on equity. We increased sales 19% over 2002 and continued to grow our content per vehicle, which rose from U.S. $36.87 to U.S. $43.95 in North America and from €14.90 to €16.28 in Europe. Our North American sales grew 18% to U.S. $856 million despite lower vehicle production volumes. Overall, our bottom line increased to U.S. $74.1 million from U.S. $56.0 million a year ago.

TESMA        5

Why does Tesma remain profitable in the current tough market?

Many factors play a part. I'll point out just a few. First, we have people with the product development and manufacturing skills needed to wring savings from our processes, make continuous improvements, enhance quality and productivity and provide strong technical expertise and service to our customers.

We also have great discipline in the quoting process. We won't quote on jobs just to fill floor space and increase sales. And we are intensifying our focus on initiatives like better supplier management and offshore purchasing.

Geographic diversification allows us to increase our opportunities while mitigating our risks. From a product standpoint, we have expertise on a part of the vehicle that offers relatively great scope for proprietary products and technical proficiency, which we have developed through innovative solutions.

How are your customer relationships evolving?

We have solid and stable relationships with the majority of the world's major vehicle manufacturers. Our operations are efficient and world-class, with the right people and processes in place to help our customers. We are always looking for ways to exceed their expectations. Our industry faces price and margin pressures from OEMs, which means Tesma must make products better, faster and at lower cost than our competitors — and we do.

Our three technology groups have grown by taking single products and building on them. Tesma Engine Technologies, which began by manufacturing pulleys and front end accessory drive components, now makes entire front cover modules and is expanding down the engine. Tesma Transmission Technologies started with a few components and today offers a variety of transmission modules and assemblies. Tesma Fuel Technologies originally manufactured only caps, but has evolved to sell complete filler pipes and tanks as well. That's our organic growth curve.

Our customers are buying more and more systems and modules, rather than individual products — and they are relying on suppliers for engineering and development. In 2003, we derived approximately 80% of our sales from complete, value-added modules and assemblies, up from 75% last year. These types of products also represented about 80% of the business awarded to us during the year.

Our plan is to increase our North American market presence beyond the "Big Three" and to derive 15% of our sales from New Domestic manufacturers by 2006. The acquisition of Davis in early January 2004 moves us closer to this goal. Davis, a U.S.-based automotive parts manufacturer and supplier with annual sales of U.S. $129 million in their recently completed fiscal year, focuses on stamped powertrain components and assemblies that complement our existing product offerings.

Davis gives us, for the first time, a presence close to the assembly facilities of the OEMs in the southern U.S. Just as importantly, the acquisition broadens our customer relationships with non-traditional customers, as a high percentage of Davis' sales are to New Domestics. We expect Davis to be immediately accretive and to add more than U.S. $0.10 per share annually to our earnings in 2004.

80%

In 2003, we derived approximately 80% of our sales from complete, value-added modules and assemblies, up from 75% last year.

6        TESMA

What are you doing to diversify geographically and why?

From a very sound base in North America, we have set our sights on obtaining significant business in Europe and Asia. Our approach is to start small and develop the critical mass required to meet our customers' needs, while achieving good returns and strategic leverage for Tesma.

Global presence is important for the simple reason that our customers are demanding global capability from their suppliers. They expect us to offer global manufacturing, testing and product development, and technical and sales representation. With this in mind, we made a number of moves in 2003.

From a manufacturing perspective, we opened our first Italian operations. We'll use these operations to migrate to Europe some pulley business that is currently exported from Canada and will supply Fiat with oil and water pumps for the European market. We expanded our South Korean facilities and established our first plant in China. It will manufacture automatic belt tensioners for Volkswagen to supply the Chinese market. We are building an infrastructure and a team with potential to broaden our manufacturing capabilities and capitalize on future business opportunities in China.

In terms of testing and product development, we added resources in Korea and began building our capabilities in China. We also improved our ability to conduct testing and product development in Europe. And we increased our technical and sales representation in Japan.

Are more acquisitions likely?

There are three key elements that influence our interest in acquisitions: products, processes and geographic presence. We are reviewing our products to determine whether we should make any changes in our focus due to the emergence of new technologies or for other reasons. We already use more than 50 processes, but there are others, such as those used to manufacture powdered metal and magnesium components, which could strengthen our portfolio. Our decisions with respect to geographic location are a balance between what customers want us to do, what our real needs are and whether we have a viable business model. For example, we are looking to create critical mass in Europe and continue to review acquisition opportunities on that continent.

In evaluating acquisition targets, we try to strike a balance between the price we are willing to pay for a "strategic" versus a "good fit" acquisition; our ability to support the purchase price and future growth requirements; the implementation and integration risks that are inherent in all transactions; and the impact on our shareholders. Other factors include "cultural" and employee fit and reliance on particular customers.

We continue to look for attractive targets, but we will only make deals that make sense for Tesma. Acquisitions are not the only way to expand our business. We are launching new products and generating solid internal growth. For instance, in 2003 we booked new business that will represent over U.S. $270 million in annual sales by the time these programs reach full production volumes in 2007. Our strong balance sheet and cash reserves give us the flexibility to make the best choices for Tesma.

U.S. $270M

In 2003, we booked new business that will represent over U.S. $270 million in annual sales at full production volumes.

TESMA        7

What is the market potential — and how competitive is Tesma?

While outsourcing is an accelerating trend among OEMs, the powertrain sector is one of the least exploited segments and offers the best potential. In spite of Tesma's excellent growth record, we currently represent just 2.3% of the estimated U.S. $46 billion annual global powertrain market for Tesma's product portfolio.

Certainly foreign exchange is a competitive challenge for any Canadian exporter, as the Canadian dollar appreciated by 12% in 2003 against the U.S. dollar. Our Canadian counterparts are in the same boat as Tesma, but we also have competitors in the United States. Up to now, we have managed the impact of foreign exchange; if the dollar appreciates beyond a certain point we'll feel the pain of converting Canadian costs into U.S. dollars for quoting purposes. Still, it's not the end of the world for us.

We do have the flexibility to set up manufacturing facilities locally if appropriate. The Davis acquisition expands our presence in the southern U.S. and improves this flexibility.

Also, one needs to consider where sales are generated. It's not just a question of the differential between the Canadian and U.S. dollars. Our sales are denominated in yen, in euros and in various other currencies. We may lose on one transaction, but benefit on another.

Other aspects of competitiveness include the immediate pressures for customer givebacks. This means we must review and adjust the resources within our facilities to make the most of our manufacturing processes. We're doing an effective job of that.

The question of competitiveness underscores why it's important to diversify our customer base and geographic presence. We don't want to be overly reliant on any single source of business.

How will Tesma measure up in 2004 and beyond?

        From 2003 to 2006, vehicle production volumes are expected to grow from 15.9 million units to 16.5 million units in North America and from 16.5 million units to 17.3 million units in Europe. Like the economy and currency fluctuations, industry volumes are among the uncontrollable factors that affect our business. We are determined to optimize Tesma's performance, whatever the conditions.

We anticipate that Tesma's annual sales will increase 12 to 13%, on average, over the next three years. We will enhance our performance metrics through sales growth and rigorous focus on costs and production efficiencies. During nearly a decade as a public company, Tesma has focused on the "Big Three" OEMs. In 2004 and beyond, we will continue to grow this business while highlighting opportunities with other OEMs in North America, Europe and Asia, including the New Domestic OEMs.

I am confident that Tesma will measure up well over the long term, due largely to our strong relationships with customers, employees and shareholders. I'd like to express my personal thanks for their support in 2003.

Tesma's ultimate vision is to be the world's leading Tier 1 supplier of advanced powertrain modules and systems. By designing, testing and building highly-engineered and proprietary products for global markets and a growing customer base, we are well positioned to reach our goal.

/s/ ANTHONY E. DOBRANOWSKIANTHONY E. DOBRANOWSKI
PRESIDENT & CHIEF FINANCIAL OFFICER

2.3%

We currently represent just 2.3% of the estimated U.S. $46 billion annual global powertrain market for Tesma's product portfolio.

8        TESMA

Glossary

"Big 3" or Traditional OEMs

Refers to the North American operations of General Motors, Ford Motor Company and DaimlerChrysler

Content Per Vehicle (North America or Europe)

The average dollar (or euro) value of parts produced by Tesma included in each vehicle assembled in North America (or Europe) respectively. It is calculated as Tesma's total product sales to customers in North America or Europe divided by the number of vehicles assembled in each of these markets.

Continuously Variable Transmission (CVT)

A transmission that continuously varies the gear ratios between the engine input and torque output. A CVT allows optimum revolutions per minute (RPM), for maximized fuel economy, engine efficiency, low emissions and improved performance. A manual or automatic transmission has a predefined set of gear ratios, which does not allow for optimal performance.

DaimlerChrysler Group

Includes the automotive companies Chrysler, Mercedes-Benz, Hyundai, MCC (Smart) and Mitsubishi

European Vehicle Production

Vehicles assembled in Western Europe, which includes Austria, Belgium, Finland, France, Germany, Italy, the Netherlands, Norway, Portugal, Spain, Sweden and the United Kingdom

Ford Motor Company

Includes the automotive companies Ford, Volvo, Jaguar, Aston Martin, Mazda and Land Rover

General Motors Group

Includes the automotive companies General Motors, Hummer, Saab, Saturn, Fiat, Isuzu, Subaru (Fuji Heavy Industries), Holden, Opel, Vauxhall and Daewoo

Global Six

The six largest automotive OEMs: General Motors, Ford Motor Company, DaimlerChrysler, Toyota, Volkswagen Group and Renault-Nissan-Samsung

Low Emission Vehicle (Level 2) LEV II

LEV I was the original Low Emission Vehicle specification for conventional gas fueled vehicles and LEV II was established with more stringent specifications for emissions. It was initiated by the California Air Resources Board (CARB).

Modules and Systems

A series of components or sub-assemblies that are integrated into a package.

North American New Domestic OEMs

OEMs that assemble vehicles, engines or transmissions in North America other than the "Big 3" — examples are: Toyota, Honda, Renault-Nissan Samsung and BMW

North American Non-traditional OEMs

OEMs that sell vehicles in North America other than the "Big 3" — examples are: Toyota, Honda and KIA

North American Vehicle Production

The number of light vehicles assembled in the United States, Canada and Mexico

OEM Outsourcing

The procuring of components, modules and systems used in the manufacture of motor vehicles to outside suppliers or manufacturers in order to cut costs.

Original Equipment Manufacturers (OEMs)

Assemblers of complete vehicles, including their engine and transmission operations. OEMs provide the original product design and are directly responsible for manufacturing and modifying the products, making them commercially available and providing warranty coverage.

Partial Zero Emission Vehicle (PZEV)

A lower emission vehicle (a more stringent regulation than LEV II) which does not meet full-zero emission specifications for gas fueled vehicles as set out by CARB regulations.

Powertrain

An engine and transmission combined; can also include the driveshaft and drive axle

Production Part Approval Process (PPAP)

An OEM process where quality and specification monitoring is done prior to the part entering the commercial manufacturing stage.

Six Sigma

A disciplined and data driven approach to eliminate waste and reduce variation in any process using the Breakthrough Methodology which is define, measure, analyze, improve and control.

Tier 1 Supplier

A company that sells their products directly to the Original Equipment Manufacturer (OEM).

Volkswagen Group

Includes the automotive companies Volkswagen, Audi, Seat, Skoda and Auto-Europa

TESMA        9

Components, Modules and Systems

Tesma manufactures thousands of individual components. These products are assembled in a variety of modules and systems for the world's leading vehicle manufacturers. To us, the quality of each component, each module and each system is the foundation of our success.

[PHOTO]	Tesma Engine Technologies
[PHOTO]	Engine Front Cover Module
[PHOTO]	Balance Shaft Assembly
[PHOTO]	Water Pump
[PHOTO]	Engine Oil Pump
[PHOTO]	Water Management (Thermostat) Assembly
[PHOTO]	Accessory and Timing Drive Tensioner	[PHOTO]
[PHOTO]	Water Pump Pulley
[PHOTO]	Engine Oil Pan Assembly
[PHOTO]	Rocker Cover
[PHOTO]	Water Pump Module
[PHOTO]	Camshaft Phasing System	Products shown are representative parts only, illustrating Tesma's capabilities. Actual parts used in this vehicle may be different.

10        TESMA

Tesma Fuel Technologies	Fuel Tank	[PHOTO]
	Fuel Filler Pipe	[PHOTO]
	Fuel Cap	[PHOTO]
	Universal Sender Unit	[PHOTO]
Tesma Transmission Technologies	Die-Cast Transmission Case Extension	[PHOTO]
	Flexplate	[PHOTO]
	Rotating Clutch Housing	[PHOTO]
[PHOTO]	Torque Converter Damper Assembly	[PHOTO]
	Centre Support	[PHOTO]
	Transmission Oil Pan	[PHOTO]
	Servo Piston Assembly	[PHOTO]
	Transmission Oil Pump Assembly	[PHOTO]
	Clutch Pack Assembly	[PHOTO]
	Torque Converter Cover	[PHOTO]

TESMA        11

[PHOTO]

Quality is not simply about the ability to use gauges or instruments to measure a part's performance. Quality is about process capability. It's about having equipment in place that can accurately perform a particular function — and people in place who can use it most effectively. Tesma stands out in quality. That's how we measure success.

12        TESMA

[PHOTO]	[PHOTO]	[PHOTO]
JON ENOAE	PETER VERT	RANDY SCOTT
Group Vice President Engine Technologies	Director of Group Engineering & Product Development Engine Technologies	Group Controller Engine Technologies	"Tesma's philosophy is that we don't want to compete at the bottom end of the market — what we refer to in the engineering world as 'quote to print'. Companies that do this wind up competing on price alone. We differentiate ourselves, first of all, by excelling in complex design, engineering, testing, quality and delivery. Secondly, we are establishing ourselves as a leading supplier of modules. In value-added markets, few suppliers can compete with us."
			GM 3.9L V6 ENGINE FRONT COVER MODULE
			[PHOTO]

Tesma Engine Technologies

Quality Standout

Tesma is a pioneer and leader in front end accessory drive systems, tensioners and idler assemblies. Our strategy is to combine components at the front of the engine and ship them to our customers as modules. We have unique manufacturing and engineering experience in every facet of the front of the engine, including water and oil pumps, castings to make covers, pulleys, and accessory drive systems.

Tesma Engine Technologies' sales increased 17% to U.S. $745 million in 2003 from U.S. $639 million in 2002. Our success shows that our strategy is working.

Key awards in 2003 included the front cover module and oil pan assembly for GM's 3.9L V6 engine for its higher volume mid-size car platforms. We also won the front cover module and flexplates for Hyundai's largest V6 engine program — Tesma's first major award from this South Korean manufacturer. Front covers are our primary strategic focus. Tesma is one of the few companies that can design, develop and manufacture most of the components that make up the front cover module. Over the next couple of years, the percentage of sales from front cover modules in the Tesma Engine Technologies group will more than double.

Just half a dozen years ago, Tesma made no water pumps. In 2003, we were the largest water pump manufacturer in North America, with annual sales of about 4.5 million units. This equates to more than 30% of all engines assembled during the year in North America. Moreover, through our Litens Automotive Partnership, we are the largest supplier of accessory drive tensioners in the world.

17%

Sales increase in 2003.

TESMA        13

[PHOTO]	[PHOTO]	[PHOTO]
	Our skilled and experienced people — from press operators and tool makers to facility general managers — embrace our focus on operational efficiencies. We look to them to share their ideas for manufacturing process improvements and cost-effective solutions.

During 2003, Ford China ordered accessory drive tensioners for its 1.3L L4 engine –opening up a new geographic market for our product. We also won the oil and water pump business for PSA's 2.2L diesel engine. While this award represents just U.S. $7 million in sales by 2007, it is a significant order from one of Europe's most successful vehicle manufacturers. In addition, we increased our oil and water pump sales to Ford of Europe by launching these products for the Lion V6 diesel engine.

Highlights for the year included major product launches. Among these were GM's HFV6 engine front cover module, DaimlerChrysler's 5.7L LX engine water pump, GM's GEN IV engine cam cover and balance shaft assemblies for GM's Line 4 and Line 5 engine programs. We also began making oil pumps for the Jaguar V8 and Lincoln LS V8 engines — shipping these pumps to plants in England and the United States. Our launch of the water pump for Honda's Accord was the first time a non-Japanese supplier has provided water pumps to this customer.

During the year, we completed the purchase of 55% of an Italian company with a manufacturing facility near Naples, Italy. This provides a domestic beachhead for our pulley business in Europe and is located close to the Fiat plants it will initially supply. Our first water pumps for Fiat from our wholly-owned subsidiary on the same site have been through the Production Parts Approval Process (PPAP) and will launch in 2004. Three new oil pumps are scheduled for launch in the next couple of years from this facility. We expect our Italian manufacturing capabilities will enhance our penetration of the European market.

In 2003, we set up our first plant in China and it will begin manufacturing automatic belt tensioners for Volkswagen in the first quarter of 2004. China represents great business potential for us. We expect that our plant will become the focal point for expanding our manufacturing and sales in the country. We also increased our presence in Asia last year by adding significant manufacturing space and increasing our testing and product development capabilities in our existing facilities in South Korea.

Important product development initiatives include electric water pumps, variable flow oil pumps, linear and rotary proportional valves and balance shaft driven oil pumps. These products have the potential to represent important new business for us going forward, based on attractive near-term market opportunities and good long-term growth potential.

Tesma's test engineering staff are instrumental in designing and specifying some of the most sophisticated test rigs, customized to the needs of each OEM and product application.

[GRAPHIC]

Tesma's new facilities located in Italy and China

14        TESMA

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TESMA        15

[PHOTO]

Tesma leads the competition in its ability to select the materials and processes best suited to making a product from among a wide range of in-house choices. Our diversity of materials and manufacturing processes allows us to provide the greatest benefits in terms of cost versus function for each product application. That's how we measure success.

16        TESMA

[PHOTO]	[PHOTO]	[PHOTO]
SAM BOZZO	DAVE PASCOE	BRIAN HOYLE
Group Vice President Transmission Technologies	Director of Group Engineering & Product Development Transmission Technologies	Group Controller Transmission Technologies	"Many of the people who work in product development have a manufacturing background, because Tesma is built on grassroots manufacturing. So when our people are designing products they are already thinking about the most economical way to manufacture them. At the end of the day, it's about taking cost out of the equation, not about eroding margin — while making a technically better product that can be sold at a lower price."
			CLUTCH HOUSING FOR MAGNA STEYR
			[PHOTO]

Tesma Transmission Technologies

Greatest Benefits

In less than a decade, Tesma Transmission Technologies has progressed from a stamper of single components to a successful supplier of value-added assemblies and modules. When Tesma became a public company in 1995, our products represented less than 1% of the North American outsourced transmission module market. Today we have 4% of the total transmission pump business in North America and 1% of the world market.

Tesma Transmission Technologies' sales increased 15% to U.S. $250 million in 2003 from U.S. $218 million in 2002.

A key to our success in 2003 was the continued ramp-up of the Ford 5R110 oil pump; essentially, an oil pump and transmission hydraulic control unit combined. With 66 components and required tolerances to within a few microns, this is the most complex assembly ever launched by Tesma. In 2004, we are ramping up from 1,200 to 2,000 assemblies daily. Nearly 80,000 individual components move along the single assembly line for this product each day.

We are gearing up our facilities by installing equipment, refining designs and conducting tests in order to fill a number of major product launches in 2004. For instance, we have installed large and complex presses to facilitate production of high tolerance components in clutch pack assemblies for ZF, a Tier 1 European-based transmission design and manufacturing company.

We were recently awarded business to supply die-cast and machined components and assemblies to GM. These parts will be used in various transmission applications for certain of their mid-size vehicles, full-size Cadillac models and heavier duty full-size pick-up trucks.

15%

Sales increase in 2003.

TESMA        17

[PHOTO]	[PHOTO]	[PHOTO]
	Our technologies and facilities are second to none. We continually invest in state-of-the-art equipment to enhance our design, development, engineering, testing, program management and manufacturing capabilities.

We are also preparing to supply flow-formed clutch housings to Magna Steyr Powertrain as part of a large multi-year contract awarded in 2003. This is significant in terms of both volume and strategy. In the past, we have focused primarily on automotive transmissions, but the Magna Steyr business enables us to apply our product capabilities to the transfer case market as well.

During 2003, we enhanced our flow-forming capability. Flow-forming is a process where precision internal splines are produced in various types of material using chipless rotational forming techniques. This manufacturing method enables us to make clutch housings as a single component.

Also, we were awarded business from GM based in part on our decision to add grobing to our broad portfolio of technologies and processes. Grobing involves the incremental forming of splines onto a stamped steel clutch housing by means of rollers forming splines onto a mandrel. This is the first use of grobing by any Tesma division on this type of product and it should create new opportunities for us to win clutch housing and other business where this process is the best application.

The acquisition of Davis in January 2004 adds three manufacturing facilities to this technology group. Davis' main product focus is stamped powertrain components and assemblies, which complements and broadens our current product offerings.

Our priorities in 2004 include expanding our clutch module business for automatic transmissions to enhance our market position. Going forward, our product development program will focus on lightweight differentials, new methods of power transmission from shaft-to-shaft and planetary carriers in each case utilizing various methods of manufacturing to best serve our customers' requirements. We are also continuing to evolve our modules and systems product line, particularly in the oil pump and transfer case areas.

Innovative, highly-engineered, complex — the Ford 5R110 transmission oil pump represents one of the most advanced products in the Tesma modular product portfolio.

Ford 5R55N transmission oil pan manufactured at Davis.

18        TESMA

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TESMA        19

[PHOTO]

We offer our customers much more than design and manufacturing expertise; as important as these are. In some instances, we have test rigs with capabilities our customers can't duplicate. They come to us for testing because we can simulate a variety of unique operating conditions. Customers can then rewrite performance specifications for their products using the support we provide. That's how we measure success.

20        TESMA

[PHOTO]
PAUL MANNERS
Group Vice President Fuel Technologies	"The key message is innovation. There is no doubt that success in our business requires us to come up with better-functioning solutions that involve less cost to the customer and to Tesma. At the same time, we recognize that people drive innovation. Attracting, developing, maintaining and stimulating talent is essential to our success. Tesma hires people who can fuel the innovation process that sets us apart from the competition."
	DAIMLERCHRYSLER JR FUEL TANK
	[PHOTO]

Tesma Fuel Technologies

We Offer More

In just a few years, Tesma Fuel Technologies has moved rapidly up the value chain from a small parts manufacturer to a full-service fuel systems supplier. We began by producing fuel caps for the European market and now supply caps, fuel filler pipes and entire fuel tank assemblies to OEM customers in North America and Europe.

A key to this evolution was our early introduction of metal filler pipes and tanks, which reduce permeation and improve recyclability. Various U.S. states, beginning with California, have mandated lower fuel permeation rates and increased corrosion resistance on all vehicles. These standards take effect beginning in 2005. Tesma Fuel Technologies continues to work with all of our customers to develop the best technical and commercial solutions to meet these new requirements.

We launched a variety of fuel filler pipe and metal fuel tank programs in late 2002 and 2003. Key programs include fuel filler pipes for Ford, fuel filler tubes and a fuel tank for DaimlerChrysler and fuel tanks for Volkswagen and Volvo. Business awarded in 2003 included fuel filler pipes for General Motors Daewoo of South Korea — expanding our global reach into the Asian market.

Tesma Fuel Technologies' sales increased 51% to U.S. $104 million in 2003 from U.S. $64 million in 2002.

As we look to the future, we aim to continue diversifying our existing product portfolio by developing improved tank ventilation systems, capless refueling systems and universal sender unit modules.

51%

Sales increase in 2003.

TESMA        21

Policies

Corporate Constitution

Tesma's Corporate Constitution includes the following principles:

Employee Equity and Profit Participation

Ten percent of Tesma's profit before tax will be allocated to employees. These funds will be used for the purchase of Tesma shares in trust for employees and for cash distributions to employees, recognizing length of service.

Shareholder Profit Participation

Tesma will distribute, on average, not less than 20 percent of its annual net profit after tax to shareholders.

Management Profit Participation

To obtain long-term contractual commitment from senior management, Tesma provides a compensation arrangement which, in addition to a base salary below industry standards, allows for the distribution of up to six percent of its profit before tax.

Research and Development

Tesma will allocate a minimum of 7 percent of its profit before tax for research and development to ensure its long-term viability.

Social Responsibility

Tesma will allocate a maximum of 2 percent of its profit before tax for charitable, cultural, educational and political purposes to support the basic fabric of society.

Minimum Profit Performance

Management has an obligation to produce a profit. If Tesma does not generate a minimum after-tax return of 4 percent on share capital for two consecutive years, Tesma's Class A shareholders, voting as a class, will have the right to elect additional directors.

Unrelated Investments

Tesma Class A and Class B shareholders, with each class voting separately, will have the right to approve any investment in an unrelated business in the event such investment, together with all other investments in unrelated businesses, exceeds 20 percent of Tesma's equity.

Board of Directors

Tesma believes that outside directors provide independent counsel and discipline. A majority of the members of Tesma's Board of Directors will be outsiders.

Constitutional Amendments

Any change to the Corporate Constitution will require the approval of Tesma's Class A and Class B shareholders, with each class voting separately.

Employee's Charter

Tesma is committed to an operating philosophy which is based on fairness and concern for people. This philosophy is part of Tesma's Fair Enterprise culture in which employees and management share in the responsibility to ensure the success of the Company.

It includes these principles:

Job Security

Being competitive by making a better product for a better price is the best way to enhance job security. Tesma is committed to working together with its employees to help protect their job security.

To assist employees, Tesma will provide:

•

Job Counselling



•

Training



•

Employee Assistance Programs

A Safe and Healthful Workplace

Tesma strives to provide employees with a working environment which is safe and healthful.

Fair Treatment

Tesma offers equal opportunities based on an individual's qualifications and performance, free from discrimination or favouritism.

22        TESMA

Competitive Wages and Benefits

Tesma will provide employees with information which will enable them to compare their total compensation, including total wages and total benefits, with those earned by employees of competitors, as well as with other plants in the community. If total compensation is found not to be competitive, then wages will be adjusted.

Employee Equity and Profit Participation

Tesma believes that every employee should share in the financial success of the Company.

Communication and Information

Through regular monthly meetings between management and employees and through publications, Tesma will provide employees with information so they will know what is going on in the Company and within the industry.

The Hotline

Should an employee have a problem, or feel the above principles are not being met, Tesma encourages such employees to contact the Hotline to register their complaints. Employees do not have to give their name, but if they do, it will be held in strict confidence. Hotline Investigators will answer the call. The Hotline is committed to investigate and resolve all employee concerns or complaints and must report the outcome to Magna's Global Human Resources Department.

Employee Relations Advisory Board

The Employee Relations Advisory Board is a group of people who have proven recognition and credibility relating to humanitarian and social issues. This Board will monitor, advise and ensure that Tesma operates within the spirit of this Employee's Charter and the principles of Tesma's Corporate Constitution.

Corporate Governance

Tesma believes that effective corporate governance structures and practices help to protect the well-being of the Corporation as a whole and its stakeholders. Accordingly, Tesma has adopted a number of structures and procedures to assist in the implementation of effective corporate governance practices and permit the Board of Directors to functions independently of management. These include:

•

Tesma's Corporate Constitution, which attempts to strike a balance among Tesma's stakeholders — its employees, managers and investors — by specifically defining their respective rights to participate in the Corporation's profits, while at the same time imposing certain responsibilities and disciplines on management;



•

Tesma's Board Charter, which requires that a majority of the Board of Directors be comprised of independent directors, formalizes the Board's overall responsibility for the stewardship of Tesma and assists in defining the limits of management's responsibility;



•

Tesma's Audit Committee Charter, which formalizes the Audit Committee's responsibility for ensuring the integrity of Tesma's financial statements and the financial reporting process;



•

Tesma's Corporate Governance and Compensation Committee Charter, which invests this Committee with broad authority for the development of Tesma's system of, and overall approach to, corporate governance generally; and



•

Tesma's Code of Conduct, applicable equally to our directors, officers and employees, which defines the types of conduct which Tesma encourages and those which it prohibits, and establishes a system of enforcement to ensure effective implementation of the Code.

Each of the above, together with the other elements of Tesma's corporate governance structures and practices, are available for review on Tesma's website (www.tesma.com) under the heading Corporate.

TESMA        23

Review

[PHOTO]

25	Management's Discussion and Analysis
44	Financial Results
	44	Management's Responsibility for Financial Reporting
	44	Auditors' Report
	45	Consolidated Financial Statements
	52	Notes to Consolidated Financial Statements
	80	Quarterly Results of Operations
	81	Historical Financial Summary
82	Shareholder Information
84	Board of Directors
85	Officers
86	Corporate Information

24        TESMA

Management's Discussion and Analysis of Results of Operations and Financial Position

For the year ended December 31, 2003

        Tesma International Inc. (Tesma or the Company) designs, engineers, tests and manufactures technologically-advanced powertrain (engine, transmission and fuel) components, modules and systems for the global automotive industry. Subsequent to our acquisition of Davis Industries, Inc. (Davis), we employ approximately 5,500 skilled and motivated people in 28 manufacturing facilities in North and South America, Europe and Asia, and five focused tooling, design and research and development (R&D) centres supporting our three principal product technology groups: Tesma Engine Technologies, Tesma Transmission Technologies and Tesma Fuel Technologies.

        Effective December 31, 2002, we changed our fiscal year end from July to December. This change was made, in part, to enable our financial performance to be compared more readily to that of our peer group in the automotive industry. The statements of income and cash flows presented for the immediately preceding period for comparative purposes in our consolidated financial statements are for the five-month period ended December 31, 2002. However, to provide for more informative and appropriate discussion and analysis, the following management's discussion and analysis of our results of operations and financial position (MD&A) will focus on the audited results for the year ended December 31, 2003 compared to results for the unaudited year ended December 31, 2002 (as presented on page 28 of this annual report). This MD&A should be read in conjunction with the accompanying audited consolidated financial statements and notes for the year ended December 31, 2003 found on pages 44 through 79 of this annual report. All amounts reported in this MD&A are in millions of U.S. dollars unless otherwise noted.

OVERVIEW

        Our strategic objective is to be the world's leading Tier 1 supplier of advanced powertrain modules and systems. Our ability to develop and manufacture individual components and to assemble them as highly-engineered modules and systems places us at the forefront of industry trends towards modularization and outsourcing. Our reputation for product quality and reliability, our strong customer relationships and our world-class development, manufacturing and testing capabilities help position us to achieve this objective.

        We posted strong 2003 results, despite continued vehicle production declines and decreasing market share at our traditional North American customers. Our content per vehicle for the year increased in both of our major markets, reflecting the launch of more complex and value-added modules and systems over the latter part of the year. These launches included our first fully-integrated engine front cover module for General Motors' (GM) High Feature V6 engine, the fuel filler pipe assembly for Ford's high-volume C170 Focus program in Europe and initial ramp-up volumes of several new production programs launched in South Korea.

        We completed the acquisition of Davis in early January 2004. This acquisition increases our presence in the United States, including the south, providing us with a closer presence to some of our non-traditional customers. It also improves the balance of our North American operations between Canada and the United States which, given the recent strength of the Canadian dollar, improves our overall competitiveness. The majority of Davis' current product base complements our existing transmission product offerings and other stamped components. Given Davis' existing strong relationships with Ford, Honda and Nissan, we see the opportunity to expand and strengthen our relationships with these customers and offer our broader and more technologically-advanced transmission and engine modules and systems to them.

        We also made additional strategic investments in foreign markets during 2003. First, we completed a transaction to acquire a 55% interest in an Italian company which will produce pulleys and other engine components for European customers. We intend to capitalize on this additional presence in Europe with the launch of new production business in the near term (including water pump assemblies) and, over the longer term, as we pursue our objective of increasing the penetration of our more complex modules and systems across the European market. Additionally, we have entered the Chinese market with a moderate investment in a new plant to establish limited production capability. We view China as a market with strong growth potential; however, our initial focus will be to support the operations of some of our current customers that have set up production facilities in China. Through this initial step, we intend to gain valuable insight and experience in operating in China and ultimately reduce risk as we plan for additional investments in this developing automotive market. Our newly established presence will put us in a better position to capitalize on future opportunities that are likely to evolve.

Our content per vehicle increased in both of our major markets as we launched more complex, value-added modules and systems.

We made strategic investments beyond our domestic market through acquisitions and plant start-ups in the United States, Italy and China.

TESMA        25

        As previously reported, our future business growth looks strong with the awards of new business during the latter part of the year from some of our traditional customers (new assemblies for DaimlerChrysler and for GM, in particular the engine front cover module, water pump and oil pan for GM's new 3.9L engine used in their higher volume midsize car platforms) and non-traditional customers (including water pumps and oil pumps for the PSA Group, other assemblies for Land Rover, as well as the selection of our South Korean facility by Hyundai Motor Company to supply front cover modules for a new V6 engine program to be produced in both Korea and North America). Our future growth was further solidified by some recent awards of significant business including cam covers for GM's Line 4, 5 and 6 engine programs (which are installed in their mid-size SUV and pick-up truck platforms) and takeover volumes to supply several die-cast and machined components and assemblies that are currently installed into GM's 4T65E, 4T80E and 4L80 transmissions (which are assembled into certain of their mid-size vehicles, full-size Cadillac models and heavier duty full-size pick-up trucks, respectively). This organic growth, combined with the acquired Davis business, provides a solid base for us to continue our track record of growth.

        Although we funded a significant portion of the Davis acquisition from our existing cash balances, our financial position continues to be very strong. Our considerable cash reserves that remain will enable us to capitalize on new business opportunities and we continue to look for other potential acquisition targets that, like Davis, will add both growth and profitability, at a reasonable price, and will ultimately increase shareholder value.

        As previously communicated, we undertook an evaluation of the viability of our German die-casting operations (Eralmetall) and potential initiatives that could help improve its operating performance. This evaluation was completed during the fourth quarter of 2003. Over the past eighteen months, Eralmetall's new management team has worked hard to improve production and eliminate waste, our employees have agreed to assist in achieving targeted savings and our customers have expressed a willingness to discuss alternatives to support this operation. Although still not meeting our financial expectations, the decision was made to continue operating Eralmetall as a going concern in support of our customers, as doing so is not expected to significantly affect our overall results. We will continue to closely monitor the results of this operation and evaluate its future prospects should results deteriorate.

ACQUISITION OF DAVIS INDUSTRIES, INC.

        Subsequent to our year-end, on January 2, 2004, we completed the acquisition of Davis. Through this acquisition, we added over 700 employees and 3 manufacturing facilities located in Indiana (2 facilities) and Tennessee to our North American manufacturing operations. Davis' main product focus is stamped powertrain components and assemblies, including driveplate assemblies, transmission shells and oil pan assemblies and engine valve covers, but also includes some body and chassis stampings and fuel filler door assemblies. For their most recently completed fiscal year ended September 30, 2003, Davis reported sales of approximately $129 million.

        The total consideration for the acquisition of all the outstanding shares of Davis amounted to approximately $75.0 million, consisting of $45.1 million paid in cash (including transaction costs), the assumption of $22.0 million of long-term debt, $4.5 million of other long-term obligations and the issuance of a $3.4 million five-year note payable bearing interest at the rate of prime plus 1% per annum (see Note 24(a) of the accompanying audited consolidated financial statements and notes thereto).

OTHER ACQUISITION

        In October 2003, we completed the acquisition of a 55% interest in Agla Benevento S.r.l. of Benevento, Italy (subsequently renamed Tesma-Agla S.r.l. (Tesma-Agla)), for cash consideration, including transaction costs, of $1.2 million (net of cash acquired of $0.2 million). The transaction was accounted for under the purchase method of accounting and the initial impact on our consolidated balance sheet was an increase in non-cash working capital of $0.4 million, property, plant, equipment and other long-lived assets of $2.6 million, assumed debt of $2.0 million and net future tax assets of $0.2 million.

Our future growth will be driven by new business awards and acquisitions.

26        TESMA

        Pursuant to agreements executed upon the closing of the transaction, the approval of certain strategic, operating and financing decisions of this company are subject to a majority vote by Tesma-Agla's Board of Directors. The Board of Directors consists of four members, of which we are entitled to appoint two (including the Chairman of the Board). We account for our interest in this jointly-controlled entity using the proportionate consolidation method. Tesma-Agla had no operating activities prior to October 2003, but was preparing for the launch of pulleys and other engine components for the European market.

ACCOUNTING CHANGES

Reporting Currency

        Effective January 1, 2003, we implemented the previously announced change in our financial reporting currency from the Canadian dollar to the United States dollar (U.S. dollar). This change enables our financial performance to be compared more readily to that of our peer group in the global automotive industry. We implemented this change in accordance with Canadian generally accepted accounting principles (CDN GAAP) and consistent with the requirements under accounting principles generally accepted in the United States (U.S. GAAP). In accordance with these rules, comparative amounts have been restated in U.S. dollars using the current rate method, whereby all revenues, expenses and cash flows are translated at the average exchange rates that were in effect during these periods and all assets and liabilities are translated at the closing rate in effect at the end of these periods. Utilizing this method, the comparative unaudited consolidated statements of income and cash flows for the year ended December 31, 2002, as presented and discussed in this MD&A, were translated into U.S. dollars using an average rate for the year of U.S. $0.6372 per CDN $1.00. The comparative consolidated balance sheet at December 31, 2002 was translated into U.S. dollars using the prevailing rate at December 31, 2002 of U.S. $0.6376 per CDN $1.00.

Stock-Based Compensation

        In September 2003, the Canadian Institute of Chartered Accountants (CICA) issued amendments to Handbook Section 3870, "Stock-Based Compensation and other Stock-Based Payments" (CICA 3870) which are effective for fiscal years beginning on or after January 1, 2004. The amended standard now requires recognition of all stock-based compensation transactions at fair value and eliminates the alternative of using the intrinsic value method of accounting with fair value disclosures provided on a pro forma basis. We have elected to adopt these amendments early and to apply them on a retroactive basis to stock-based awards granted on or after August 1, 2002, the date we were initially required to adopt CICA 3870. Upon application of the new rules, we recorded compensation expense totaling $0.5 million and $0.1 million in the years ended December 31, 2003 and 2002, respectively. Diluted earnings per share for these same periods decreased by $0.01 and $nil, respectively, as a result of the adoption of these rules.

        Compensation expense to be recognized is determined by first calculating the total estimated fair value of each tranche of stock options as at the date of grant and then recording compensation expense, on an amortized basis, over the applicable vesting periods of the underlying stock options. As such, at each reporting date, cumulative compensation expense will be recognized for each tranche of stock options to the extent that they are vested as at that date. Compensation expense recognized is recorded as part of selling, general and administrative expense, with a corresponding increase to contributed surplus. As the underlying stock options issued on or after August 1, 2002 are exercised, a portion of the accumulated balance in contributed surplus is transferred systematically to the Class A Subordinate Voting Shares issued and reflected as additional proceeds received on these exercises.

REPORTING CURRENCY

The currency in which a company discloses its financial information including its financial statements. Tesma's reporting currency is the U.S. dollar. All of Tesma's divisions with functional currencies other than the U.S. dollar have their financial results converted to U.S. dollars for reporting purposes.

TESMA        27

RESULTS OF OPERATIONS

        The Company's comparative consolidated operating results for the years ended December 31, 2003 and 2002 are as follows:

		2003			2002
(U.S. dollars in thousands, except per share and share figures)		(audited)			(unaudited)
Sales		$	1,098,591		$	925,921
Cost of goods sold			855,503			718,136
Selling, general and administrative			69,204			59,833
Depreciation and amortization			51,609			40,536
Affiliation and social fees			12,449			10,404
Interest (income) expense, net			(204	)		1,987
Impairment loss at German die-casting subsidiary			—			12,088
Income before income taxes			110,030			82,937
Income taxes			35,918			26,978
Net income attributable to Class A Subordinate Voting Shares and Class B Shares		$	74,112		$	55,959
Earnings per Class A Subordinate Voting Share or Class B Share
	Basic	$	2.29		$	1.82
	Diluted	$	2.28		$	1.80
Average number of Class A Subordinate Voting Shares and Class B Shares     outstanding (in thousands)
	Basic		32,344			30,725
	Diluted		32,531			31,057

Impairment Loss at German Die-Casting Subsidiary

        Our comparative results for the year ended December 31, 2002 were significantly affected by an impairment loss booked in 2002 at Eralmetall, our German die-casting subsidiary. Initially prompted by a history of operating losses and projected future losses following the launch of new business at Eralmetall, we initiated and completed a review for impairment on $20.6 million of machinery, equipment, land, buildings and other long-lived assets at this subsidiary. As a result of this review, an impairment loss of $12.1 million ($8.5 million after applicable taxes) was recorded as an operating expense in the year ended December 31, 2002. The impact of this loss on diluted earnings per share for the year ended December 31, 2002 was $0.27.

Foreign Currency Exchange Rates

        As substantially all of our operations have functional currencies other than the U.S. dollar, our reported results in U.S. dollars can be affected by movements in the exchange rates of the Canadian dollar, euro, Swiss franc and Korean won, all relative to the U.S. dollar. The magnitude of the impact of foreign exchange on our results in periods presented will primarily depend on, and vary directly with, the size of fluctuations, relative to the U.S. dollar, of the underlying functional currencies in our Canadian, European and South Korean-based operations.

        The average exchange rates for our most significant functional currencies relative to the U.S. dollar during the years ended December 31 were as follows:

	2003	2002	%
Canadian dollar	0.7159	0.6372	+12%
Euro	1.1320	0.9456	+20%
Korean won	0.000840	0.000804	+4%

        The impact of the strengthening of foreign currencies relative to the U.S. dollar, in particular strong gains by the Canadian dollar and euro, increased sales by approximately $125 million or 72% of our overall growth in 2003. Similarly, the strengthening of these functional currencies significantly affected all other line items on our income statement, the extent of which will be specifically addressed in each of the respective discussions that follow.

FUNCTIONAL CURRENCY

The currency in which each entity transacts its business. For example, a subsidiary located in Germany uses the euro as its functional currency, and pays its employees and purchases the majority of its materials in its functional currency.

FOREIGN CURRENCY TRANSLATION

When divisional functional currency results are converted to Tesma's reporting currency (U.S. dollars), the results are converted at the average foreign exchange rate for the period.

28        TESMA

        The exchange rates in effect as at the end of the years ended December 31 were as follows:

	2003	2002	%
Canadian dollar	0.7752	0.6376	+22%
Euro	1.2591	1.0411	+21%
Korean won	0.000836	0.000835	unch.

Vehicle Production Volumes

			Change
	2003	2002	Units		%
(in millions of units)
North America	15.9	16.3	(0.4	)	-3%
Europe	16.4	16.3	0.1		+1%

        North American vehicle production volumes, as historically reported by us, included medium and heavy trucks. To conform our reporting with most of our industry peers, effective January 1, 2003, we changed our reporting basis to include light vehicles only. All comparative North American vehicle production and content per vehicle amounts have been restated to conform with this new presentation. On this basis, North American vehicle production volumes for the year were 15.9 million units, a 3% decrease from the 16.3 million units produced in the prior year. In 2003, North America's "Big Three" (General Motors, Ford and DaimlerChrysler) Original Equipment Manufacturers (OEMs) continued to offer record levels of attractive financing rates and other consumer incentive campaigns to spur demand and maintain market share. However, the use of these incentive campaigns was unsuccessful in the aggregate as the "Big Three" experienced production declines ranging from 3% to 9% in 2003. As a result, their production share declined largely to the benefit of the New Domestic OEMs (mainly Toyota, Honda and Nissan) which experienced production volume increases ranging from 8% to 11% during the year.

        In Europe, vehicle production volumes were 16.4 million, up 1% from last year. However, some of our larger customers, namely DaimlerChrysler and Fiat, experienced production declines of 3% and 16%, respectively, during the year.

Average Content per Vehicle

        Average content per vehicle is a measure commonly used in the automotive supply industry to measure a company's growth, penetration and success, excluding the impact of fluctuations in vehicle production levels. Continued growth in content per vehicle indicates success in introducing products onto new programs (primarily engine and transmission) or vehicle platforms, and/or expanded sales on existing programs (i.e. if more vehicle platforms are added to a particular engine program, or if strong demand for certain vehicle platforms, such as SUVs, is driving increased engine production on which we have significant content). Industry analysts use content per vehicle to assess our performance and growth in our two major markets, North America and Europe. This measure is calculated by dividing our production sales to North American and European customers, respectively, by the industry's North American and European total light vehicle production volumes, respectively. Although this measure does indicate growth, management does not place significant emphasis on this measure to assess performance as it has certain shortcomings. The majority of our products are shipped to OEM engine and transmission facilities, not vehicle assembly plants. Many engine and transmission programs are produced in a single facility, and then shipped to many global assembly facilities. As a result, the number of engine and transmissions produced in each major region in which we operate can differ materially from the number of vehicles assembled. Unfortunately, the availability of accurate data for engine and transmission production in each of our three key markets does not currently exist on a timely basis. Therefore, we cannot use an alternative measure to present content information on a timely basis.

        Our average content per vehicle for the years ended December 31 was as follows:

	2003	2002	%
North America	$43.95	$36.87	+19%
Europe	€ 16.28	€ 14.90	+9%

TESMA        29

Sales

	2003			2002			Change
(in millions)
North America	$	856.0		$	725.5		+18%
Europe		235.6			180.6		+30%
Other Automotive		28.8			33.8		-15%
Intersegment		(21.8	)		(14.0	)
Total external sales	$	1,098.6		$	925.9		+19%

        Consolidated sales in 2003 increased 19% from 2002 to $1.1 billion. North American sales rose 18%, while sales increased 30% in our European operations. Our strong growth in North America occurred despite the 3% decrease in North American vehicle production volumes and even larger declines experienced by our largest customers. In Europe, our growth was fueled by the launch of new business, as vehicle production levels increased only slightly over the prior year.

North American Operations

        During 2003, our North American operations consisted of 15 manufacturing facilities (13 in Canada and 2 in the United States) employing 3,600 employees. These operations reported sales of $856.0 million for the year, up 18% from $725.5 million in the prior year. The stronger Canadian dollar accounted for approximately $85 million or 65% of this growth. The remaining increase of approximately $45 million represents true native currency growth of 6%, and, as discussed above, was realized despite the 3% to 9% production declines at our largest customers. Our growth was fueled by increases in our average content per vehicle, which grew 19% to $43.95 for the year from $36.87 for 2002. The true native currency growth in 2003 reflects new program launches and higher volumes on production ramp-ups of other recently launched programs.

        The new launches include a complex integrated front cover module for the GM High Feature V6 engine, balance shaft assemblies for GM's Line 4 and Line 5 engine programs, water pumps, camshaft phasers and housings for GM's Premium V8 engine, and fuel filler pipe assemblies for DaimlerChrysler's JR car and HB truck programs. We were not able to realize the full benefit of these launches, however, as many of them occurred in the second half of the year at lower than expected levels.

        Significant programs on which we achieved higher volumes included the following:

•

the complex oil pump assembly and other components supplied for Ford's 5R110 transmission used in the diesel engine application of Ford's heavier duty F-Series trucks;



•

front covers with an integrated oil pump, oil pan, thermostat housing and crossover tube and other components for GM's L850 4-cylinder engine program used in some of GM's high volume vehicle platforms (including the Chevrolet Cavalier and Malibu, Pontiac Sunfire and Grand Am and Saturn Ion and VUE models);



•

continued strength in demand for GM's GEN III/IV engine installed in light trucks, including full-size pickups (including the Chevrolet Silverado and Avalanche models) and SUVs (including the Chevrolet Tahoe and Suburban and GMC Yukon);



•

the water pump assembly for the Honda Accord; and



•

certain tensioner and alternator decoupler programs for Ford, GM, Honda and VW.

        The above increases in our North American content were partially offset by the continuing pressure for price givebacks. North American sales represented 76% of our consolidated sales for the year compared to 77% last year.

European Operations

        Our six European manufacturing facilities located in Germany, Austria and Italy employed 1,100 employees during 2003. These operations experienced a $55.0 million or 30% sales increase in 2003, despite an increase in vehicle production volumes of less than 1%. This growth was fueled by the strengthening of the euro relative to the U.S. dollar, which accounted for approximately $38 million (over two-thirds) of this increase. The remaining $17 million increase in sales for the year resulted from the growth in our European content per vehicle (presented in euros to exclude the impact of foreign exchange fluctuations) of 9% to €16.28 from €14.90 last year.

Sales grew 19% to $1.1 billion despite declining vehicle production in North America and a marginal increase in Europe.

30        TESMA

        The growth in content per vehicle primarily reflects:

•

the initial launch and ramp-up in volumes of the fuel filler pipe assembly for Ford's high-volume C1 (Focus) platform launched in the summer of 2003;



•

increased shipments of drive belt tensioners and other components launched for the Volkswagen Group (VW), GM and DaimlerChrysler;



•

the continued ramp-up in volumes for a stainless steel fuel tank assembly for the portion of VW's PQ34 program volumes assembled in Mexico and sold in California;



•

volume increases on the steel fuel tank assembly programs for Volvo and Audi initially launched during the third quarter of 2002;



•

higher sales of the rear-axle crossover component and other parts supplied to DaimlerChrysler; and,



•

an increased supply of service parts.

        European sales represented 21% of our total consolidated sales in 2003 compared to 19% in the prior year.

Other Automotive

        During 2003, our Other Automotive segment consisted of 2 manufacturing facilities in South Korea, one facility in China and a small assembly facility in Brazil, employing approximately 300 people in aggregate. Sales for the year were 15% lower at $28.8 million versus $33.8 million a year earlier and represented approximately 3% of our consolidated sales, compared to approximately 4% last year. The decrease in sales for the year occurred primarily in our South Korean facilities and resulted from lower shipments of the oil pump for the Ford FN transmission, declining volumes on Ford's 1.9L engine oil and water pumps, (which are expected to balance out soon) and lower exports to Japan (as certain older programs produced for Mazda balance out). In addition, a significant amount of tooling sales associated with the 2003 launches at our South Korean facilities were booked in 2002. Many of these new program launches involve long "lead-time" requirements for customers in the United States and Europe, so although initial volumes have been produced and shipped for some of these programs, the sales (and related contribution margin) are deferred until customer receipt and in some instances, acceptance, in accordance with the specific terms of each customer contract. The new launches that occurred in the latter part of the year include the DaimlerChrysler 5.7L engine water pump, an adaptor assembly for the GM line 4 engine program, a front cover and water pump for Renault-Nissan-Samsung's new SM3 engine program, and a front cover and water pump exported to GM North America for their Premium V8 engine used in certain Cadillac models.

Tooling and Other

        For 2003, tooling and other sales were constant at $55.3 million. However, translation increases of approximately $6 million resulting from the strengthening of our functional currencies relative to the U.S. dollar were offset by the absence of large tooling sales for the fuel tank assembly programs in Austria which occurred in 2002. For the year, our North American operations recorded 70% of consolidated tooling sales, while Europe and Other Automotive reported 27% and 3%, respectively, compared to 55%, 38%, and 7%, respectively, for the same operations a year ago.

Sales by Geographic Region and by Customer

        Sales to our North American customers increased 15% to $728.7 million in 2003 compared to $631.6 million last year, and represented 66% of our consolidated sales in 2003 (68% in 2002). As a result, our North American content per vehicle increased due to the specific programs discussed above. Sales to our European-based customers grew 26% to $326.0 million compared to $258.1 million a year ago, and represented 30% of our consolidated sales in 2003 (28% in 2002). European content per vehicle increased by approximately 9% over a year ago reflecting new fuel system programs launched for our European customers. Sales to Australasian customers increased by 31% to $30.1 million in 2003 compared to $23.0 million last year, and represented approximately 3% of our consolidated sales. Our sales to South American customers increased slightly by 4% to $13.8 million and continue to account for approximately 1% of our consolidated sales.

TOOLING

Tooling consists of custom-built moulds, dies or other tools that are designed for the production of unique parts to be supplied to a specific customer.

AUSTRALASIAN CUSTOMERS

Our customers with manufacturing facilities located in Korea, Australia, Japan, China, Thailand, Taiwan, Singapore and other Asian countries.

TESMA        31

        Sales to GM, Ford, DaimlerChrysler and the VW Group, our four largest customers, were 76% of total sales in the current and prior year. GM represented approximately 43% of our consolidated sales, similar to 2002. While no single product accounted for more than 10% of our consolidated sales in the years ended December 31, 2003 and 2002, respectively, approximately 20% of consolidated sales were generated from a number of components, modules and assemblies produced for GM's GEN III/IV and L850 engine programs, compared to 18% of sales from these programs in the prior year.

Sales by Product Line

        On a product line basis, sales of Tesma Engine Technologies products increased to $745 million compared to $639 million a year ago and accounted for 68% of consolidated sales compared to 69% a year ago. The growth was the result of increased sales of tensioners and decouplers, volume increases in the water pump and die-casting businesses in North America, increased volumes for plastic water management products, an increase in service and aftermarket sales in Europe and translation increases on stronger Canadian dollar and euro currencies relative to the U.S. dollar.

        Sales of Tesma Transmission Technologies products rose 15% to $250 million from $218 million a year ago and represented 23% of total sales in 2003, compared to 24% in 2002. The increase is primarily due to the volume increases for the oil pump and other components supplied for the Ford 5R110 transmission and currency translation, primarily due to a stronger Canadian dollar relative to the U.S. dollar.

        Sales of Tesma Fuel Technologies products increased 51% to $104 million from $69 million in 2002, driven in part by a strengthening euro relative to the Canadian dollar, as a significant portion of Fuel Technologies products are produced in Europe. Also contributing to the increase was the launch of the high-volume fuel filler pipe for Ford's C1 Focus platform and volume increases on stainless steel fuel tank assemblies for VW, Volvo and Audi. Sales of Tesma Fuel Technologies products represented 9% of consolidated sales in 2003 up from 7% in 2002.

Gross Margin

	2003			2002			Change
(in millions)
Sales	$	1,098.6		$	925.9		+19%
Cost of goods sold		855.5			718.1		+19%
Gross margin	$	243.1		$	207.8		+17%
Gross margin percentage		22.1	%		22.4	%	-1%

        Gross margin as a percentage of sales decreased by 1% in 2003 to 22.1% compared to 22.4% in 2002.

        The decline in our gross margin percentage for the year reflected:

•

a continued shift in mix (as we execute our strategy) to much higher material content modules and systems (including integrated engine front covers, camshaft phasers, filler pipe assemblies, balance shaft assemblies, combined with volume increases on the Ford 5R110 transmission oil pump and various stainless steel fuel tank programs);



•

the negative impact of the 3% decline in North American production volumes (with higher declines experienced at our key customers);



•

the continued launch and operating support costs at certain facilities in North America and South Korea, in the midst of, or in preparation for, program launches, (some of which have been delayed);



•

higher facility rental costs (with a corresponding but lesser reduction of depreciation) for certain manufacturing facilities sold to MI Developments Inc. (MID) in January 2003 and now leased back (see "Other Matters" below); and



•

continued pricing concessions demanded by our customers.

Our four largest customers — GM, Ford, DaimlerChrysler and the VW Group — accounted for 76% of total sales in 2003.

32        TESMA

        Partially offsetting these negative factors were positive items that included:

•

a lower realized exchange rate on U.S. dollar-denominated material purchases by certain of our Canadian operations;



•

recognized R&D tax credits relating to prior fiscal years that were claimed under new rules and interpretations governing claimable expenditures;



•

improvements in operating results at our Eralmetall die-casting operation (including employee benefit savings); and



•

labour efficiencies on highly-automated programs, improvements in capacity utilization and other production efficiencies achieved at certain of our facilities.

        Gross R&D expenditures in 2003 were $18.0 million, $0.5 million higher than the prior year. Customer and government funding and tax credits reduced net R&D expenses by approximately $8 million in 2003 compared to $6 million in 2002. Gross spending on R&D was 16% of income before income taxes in 2003 exceeding our Corporate Constitution requirement of investing no less than 7% of profit before income taxes in R&D.

Income Before Income Taxes

	2003			2002		Change
(in millions)
Gross margin	$	243.1		$	207.8	+17%
Less:
Selling, general and administrative		69.3			59.8	+16%
Depreciation and amortization		51.6			40.6	+27%
Affiliation and social fees		12.4			10.4	+19%
Interest (income) expense, net		(0.2	)		2.0	-110%
Impairment loss at German die-casting subsidiary		—			12.1	-100%
Income before income taxes	$	110.0		$	82.9	+33%

        Income before income taxes increased by 33% to $110.0 million in 2003 compared to $82.9 million in 2002. The increased gross margin on higher sales and interest income (versus interest expense in 2002) was partially offset by higher selling, general and administrative (SG&A) costs, increased depreciation charges, and higher affiliation and social fees paid to Magna International Inc. (Magna).

        Fueled by higher content per vehicle levels and the translation impact of a stronger Canadian dollar relative to the U.S. dollar during the year, income before income taxes at our North American operations increased 11% to $97.5 million or 89% of consolidated income before income taxes, compared to $87.6 million in 2002. Our European operations contributed $18.3 million or 17% of consolidated income before income taxes this year compared to a loss of $6.1 million a year ago, largely attributable to the impairment loss recorded at Eralmetall in 2002 totaling $12.1 million. Excluding this impairment loss, our European operations still showed improvement reflecting better capacity utilization on increased sales at our Austrian subsidiary, the positive impact of the employee benefit savings and reduced depreciation charges at Eralmetall, and translation increases due to a strengthening euro. Our Other Automotive operations (which include local sales and engineering offices in Asia and South America) reported a loss before income taxes of $5.8 million in 2003 compared to $1.5 million of income last year. The decline in the results for this segment reflects the balancing out of older programs at our South Korean facilities combined with higher engineering, design and other upfront product development and support costs for current and future program launches. In addition, we also incurred costs associated with the initial start-up of operations in China.

Selling, General and Administrative Expenses

        SG&A expenses increased to $69.3 million in 2003 compared to $59.8 million in 2002, or approximately 6.3% and 6.5% respectively of our consolidated sales in these periods. The $9.5 million increase in SG&A costs resulted primarily from foreign exchange translation, which contributed approximately $8 million of additional translated expenses. In addition, other increases during the year included costs incurred for potential acquisitions that did not materialize, $0.5 million of stock compensation expenses booked upon the adoption of new accounting rules, a provision for cost overruns on capital equipment charged by a related party (as described in more detail in Note 20(b)(ii) of the accompanying consolidated financial statements and notes thereto) and increased incentive-based compensation based on significantly higher profitability levels this year (largely due to the negative impact of the impairment loss booked in the prior year). These increases were partially offset by foreign exchange gains (including recognized currency translation gains) in the current year compared to losses recorded in the same period a year ago.

Our Corporate Constitution requires we invest 7% of profit before income taxes on R&D — in 2003 we invested 16%.

TESMA        33

        Commencing January 1, 2003, specific charges paid to Magna Services Inc. (ServiceCo), a wholly-owned subsidiary of Magna, were reclassified and recorded primarily as part of SG&A costs (with prior year's comparative amounts restated on the same basis). These specific charges are negotiated annually and are based on the level of benefits or services provided to us by ServiceCo and include, but are not limited to: information technology (WAN infrastructure and support services), human resource and employee relations services (including administration of the Employee Equity Participation and Profit Sharing Program), specialized legal, environmental, finance and treasury support, management and technology training, and an allocated share of the facility and overhead costs dedicated to providing these services. For the year, we paid $1.7 million for specific charges compared to $1.9 million a year ago. The amount paid in 2002 includes approximately $0.4 million of costs billed by ServiceCo for services provided in 2001.

Depreciation and Amortization

        Depreciation and amortization expense increased by 27% to $51.6 million in 2003 from $40.6 million in 2002. The increase resulted from our continuing investment in capital assets (over $61 million over the past twelve months) primarily for facility upgrades and equipment for new programs, many of which were put into service for launches during 2003. Further increasing depreciation and amortization for the year was $1.4 million of non-cash provisions recorded in relation to specific assets for which changes in the respective circumstances surrounding their utilization indicated impairments.

Affiliation and Social Fees

        Affiliation and social fees paid to Magna increased by 19% to $12.4 million in 2003 compared to $10.4 million in 2002 and include the following:

•

Under our amended and restated affiliation agreement with Magna in effect until December 31, 2009 (subject to annual renewals thereafter), we pay an affiliation fee calculated as 1% of our consolidated net sales, subject to certain exceptions for sales from acquired businesses (which are exempt from the calculation of the affiliation fee in the year of acquisition, with 50% inclusion in the year after acquisition and full inclusion in all subsequent years). The affiliation fee is paid to Magna in exchange for, among other things, a non-exclusive worldwide license to use certain Magna trademarks, access to Magna management resources, and the collaboration and sharing of best practices in areas such as new management techniques, employee benefits and programs, marketing and technological initiatives. For the year, we paid $10.8 million under the affiliation agreement, compared to $9.2 million a year ago, entirely a result of our increased sales levels.



•

Under our social fee agreement with Magna in effect until December 31, 2009 (subject to annual renewals thereafter), we pay Magna a social fee of 1.5% of profits before income taxes as a contribution towards social and charitable programs coordinated by Magna on behalf of Magna and its affiliated companies. We paid $1.6 million of social fees to Magna in 2003 compared to $1.2 million last year.

Net Interest (Income) Expense, net

        Net interest income amounted to $0.2 million in 2003 compared to $2.0 million of interest expense in 2002, due primarily to higher levels of cash and cash equivalents for the majority of 2003 which were available for investment in short-term interest bearing investments.

Impairment Loss at German Die-Casting Subsidiary

        As discussed in the Overview section of this MD&A, in the year ended December 31, 2002, we recorded an impairment loss of $12.1 million ($8.5 million after applicable taxes) on capital and other long-lived assets at our German die-casting subsidiary. The impact of this loss on diluted earnings for the year ended December 31, 2002 was $0.27.

34        TESMA

Net Income and Earnings per Share

		2003		2002		Change
(in millions)
Income before income taxes		$	110.0	$	82.9	+33%
Income taxes			35.9		26.9	+33%
Net income attributable to Class A Subordinate Voting Shares and Class B Shares		$	74.1	$	56.0	+32%
Earnings per Class A Subordinate Voting Share or Class B Share
	Basic	$	2.29	$	1.82	+26%
	Diluted	$	2.28	$	1.80	+27%
Average number of shares outstanding (in millions)
	Basic		32.3		30.7	+5%
	Diluted		32.5		31.1	+5%

Effective Income Tax Rates

        Our effective income tax rate was 32.6% in 2003 compared to 32.5% last year. Significantly impacting the rate during the year was the recognition of a $2.1 million benefit for income tax losses available for carryforward and other future tax deductible amounts at one of our jointly-controlled entities. The initial recognition of these amounts became necessary once the entity established a record of profitability after the launch of its major production programs, and once its projected future operating results (based on existing contracts, at existing and future contracted prices and cost structures) are projected to generate more than sufficient future taxable income to utilize these future tax deductible amounts. Offsetting this benefit was $1.1 million of additional future tax expense recorded in relation to the Ontario government's decision to repeal previously enacted corporate tax rate reductions (thereby increasing the enacted combined corporate income tax rate from 33.62% to 34.52%) and losses at certain operations not tax benefited.

        In the prior year, a reduction in the effective tax rate due to tax refunds realized at one of our foreign subsidiaries (as the final stage of prior year tax planning initiatives) was partially offset by the impact of a lower overall effective tax rate recorded on the impairment loss at Eralmetall (reflecting the rates anticipated to be in effect when the amounts would be deductible for tax purposes).

Net Income

        Our net income attributable to Class A Subordinate Voting Shares and Class B Shares for the year increased by 32% to $74.1 million from $56.0 million a year ago. Excluding the impact of the impairment charge and foreign currency translation increases, net income would have been essentially unchanged from a year ago.

Earnings Per Share

        Earnings per Class A Subordinate Voting Share or Class B Share on a diluted basis increased 27% to $2.28 from $1.80, while basic earnings per Class A Subordinate Voting Share or Class B Share increased 26% to $2.29 from $1.82 in 2002. As discussed earlier, the effect of the impairment loss (excluding its impact on the DPSP and other profit-based fees and compensation) in the year ended December 31, 2002 was to decrease diluted earnings per Class A Subordinate Voting Share or Class B Share by $0.27.

        These figures reflect 5% increases in the average number of basic and diluted shares outstanding in the year to 32.3 and 32.5 million, respectively (from 30.7 and 31.1 million, respectively, last year), due primarily to the public offering of 2.85 million shares in July 2002.

TESMA        35

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash provided from (used for):	2003			2002			Change
(in millions)
Operating activities	$	101.9		$	107.5		-5%
Investing activities		(80.0	)		(69.5	)	+15%
Financing activities		(24.5	)		66.6		-137%
Effect of exchange rate changes on cash and cash equivalents		30.8			2.0
Net increase in cash and cash equivalents	$	28.2		$	106.6		-74%

        Our cash balances at December 31, 2003, net of bank indebtedness, were $122.5 million compared to $89.0 million a year earlier. The increase occurred because cash provided from operations, proceeds from the sale-leaseback transaction for the Tesma Corporate Campus, the issuance of long-term debt and proceeds from the exercise of stock options during the year exceeded capital expenditures, investments in non-cash working capital, the payment of dividends, debt repayments, reductions in indebtedness levels and funds set aside in escrow for acquisition related activities.

Operating Activities

	2003			2002			Change
(in millions)
Net income	$	74.1		$	56.0		+32%
Items not involving current cash flows		69.7			56.6		+23%
Cash provided from operations		143.8			112.6		+28%
Net change in non-cash working capital		(41.9	)		(5.1	)	+722%
Cash provided from operating activities	$	101.9		$	107.5		-5%

        Cash provided from operations, before the effect of changes in non-cash working capital, increased 28% to $143.8 million in 2003 compared to $112.6 million in 2002 due to higher non-cash charges, mainly future tax provisions (versus net recoveries booked in the prior year) and depreciation. Investments in non-cash working capital increased $36.8 million due to increased accounts receivable and inventory levels to support our sales growth, which were only partially offset by higher levels of accounts payable and accruals. As a result, cash provided from operating activities decreased 5% to $101.9 million in 2003 from $107.5 million for the same period last year.

Investing Activities

	2003			2002			Change
(in millions)
Capital asset additions	$	(61.2	)	$	(68.9	)	-11%
Funds held in escrow		(44.6	)		—
Investment in subsidiaries		(1.4	)		(1.0	)	+40%
Increase in other assets		(0.2	)		(2.0	)	-90%
Proceeds from disposal of capital and other assets		27.2			2.4
Cash and cash equivalents acquired on investment in subsidiary		0.2			—
Cash used for investing activities	$	(80.0	)	$	(69.5	)	+15%

        Investment spending in 2003 increased 15% to $80.0 million compared to $69.5 million in 2002. Cash spent on capital assets decreased 11% to $61.2 million compared to $68.9 million last year and was spent primarily on facility upgrades and machinery and equipment purchased to support new production program launches and increased business.

        Capital assets purchased for our North American operations accounted for 62% of the total capital spending in 2003 compared to 72% a year ago. Our European operations accounted for 21% of our total capital spending in both years and our Other Automotive operations accounted for 17% compared to 7% a year ago.

        Funds held in escrow consist of $44.6 million of cash deposited into an escrow account (thus restricting its use) as consideration to be issued upon the closing of the Davis acquisition.

36        TESMA

        In October 2003, we invested $1.2 million (net of cash acquired) in an Italian joint venture (see Other Acquisitions discussion). In the prior year, we made payments totaling $1.0 million under earnout provisions associated with our acquisition of Triam Automotive Corporation in 1998.

        The $27.2 million of cash proceeds from capital asset disposals relates primarily to the Corporate Campus sale and leaseback transaction completed with MID in January 2003.

Financing Activities

	2003			2002
Dividends	$	(17.3	)	$	(12.2	)
(Decrease) increase in bank indebtedness		(12.4	)		18.9
Repayments of long-term debt		(2.1	)		(3.6	)
Issues of long-term debt		6.7			—
Issuance of Class A Subordinate Voting Shares		0.6			63.5
Surrender of stock options		—			—
Cash provided from (used for) financing activities	$	(24.5	)	$	66.6

        Our Corporate Constitution requires the payment of dividends of at least 20% of after-tax profits on a rolling three-year basis. Dividend payments for the year totaled $17.3 million compared to $12.2 million paid in 2002. This large increase occurred as a result of our change in fiscal year end to December in 2002, which resulted in the payment of dividends on account of an additional two months of income (14 months in total) in fiscal 2003 compared to dividends paid on account of twelve months of income in the prior year. In addition to these extra payments, the dividends paid this year reflect the increase in the number of Class A Subordinate Voting Shares outstanding since our public share offering, completed in July 2002, and the effect of higher translation on the dividend amounts predominately paid in Canadian dollars (with a stronger Canadian dollar relative to the U.S. dollar in 2003).

        Funds used to repay advances on operating lines of credit were $12.4 million in 2003 compared to $18.9 million borrowed under operating lines of credit in 2002. Bank indebtedness levels at our Austrian subsidiary were reduced as $6.7 million of long-term debt was negotiated during the year and the proceeds were used to repay operating lines of credit with higher carrying costs. In the prior year, indebtedness levels increased at our South Korean operations (to finance the expansion of one of their facilities and for new machinery and equipment for upcoming programs) and at our Austrian subsidiary (for assembly lines and other equipment for new business launches). In addition, regularly scheduled debt repayments of $2.1 million were made in 2003 compared to $3.6 million a year ago.

        During the year, 30,000 Class A Subordinate Voting Shares were issued on the exercise of stock options for consideration totaling approximately $0.6 million, compared to 186,150 shares issued for consideration of $1.4 million last year. In addition, in July 2002, we completed a public offering of 2.85 million Class A Subordinate Voting Shares, which generated cash proceeds, net of underwriter fees and other related costs, totaling $62.1 million.

Effect of Exchange Rate Changes on Cash

        The translation impact on our cash balances totaled $30.8 million, reflecting a significant strengthening of the Canadian dollar (the currency in which a majority of our net cash balances are held) relative to the U.S. dollar since December 2002.

Financing Resources

        At December 31, 2003, our cash and cash equivalents on hand (net of bank indebtedness) totaled $122.5 million. In addition, we had unused and available credit facilities (excluding those available for foreign exchange purposes) of approximately $69 million. Of our total long-term debt of $66.8 million, only 6% becomes due and payable in 2004, while over 89% does not mature until 2006 or later.

        Our ratio of long-term debt to total capitalization was a conservative 10% at the end of 2003, unchanged from December 2002. We expect this ratio to increase as the result of our acquisition of Davis in January 2004, as we assumed $22.0 million of Davis' long-term debt and issued a five-year note payable for $3.4 million as part of the total consideration.

Our Corporate Constitution requires the payment of dividends of at least 20% of after-tax profits on a rolling three-year basis.

TOTAL CAPITALIZATION

Is the sum of long-term debt (excluding current portion) and shareholders' equity.

TESMA        37

Shareholders' Equity

        During 2003, shareholders' equity increased by 34% or $139.0 million, due mainly to an increase in undistributed earnings, stock options exercised and an increase in the value of the currency translation account. As a result, the book value per Class A Subordinate Voting Share or Class B Share on a diluted basis increased by 34% to $16.92 (CDN $21.83) at December 31, 2003 from $12.66 (CDN $19.85) in the prior year.

        The cumulative currency translation adjustment account represents the unrealized change in the value of our net investment in Canadian operations and foreign subsidiaries having a functional currency other than the U.S. dollar. The $77.8 million increase in the currency translation adjustment account resulted primarily from strong gains in the Canadian dollar and euro (up 22% and 21%, respectively) relative to the U.S. dollar since December 31, 2002.

FOREIGN CURRENCY ACTIVITIES

        We operate globally, which gives rise to a risk that our earnings, cash flows and shareholders' equity may be adversely affected by fluctuations in relative foreign exchange rates. More specifically, we have operations in Canada, the United States, Germany, Austria, Italy, Switzerland, South Korea, Brazil, and China with each division or subsidiary operating in the functional currency of the region in which it is located. As a result, there are seven principal currencies in which we currently conduct business (in the order of relative current importance): the Canadian dollar, the euro, the U.S. dollar, the Korean won, the Swiss franc, the Brazilian real and the Chinese renminbi.

        In our operations, where possible, we negotiate sales contracts and purchase materials, equipment and labour in the functional currencies of the region in which the operation is located. This allows foreign currency cash flows for the purchase of materials and capital equipment denominated in foreign currencies to be naturally hedged when contracts to deliver certain products are also denominated in the same foreign currencies. In an effort to manage the remaining exposure, we have instituted a foreign currency cash flow hedging program in which we utilize foreign exchange forward contracts to manage foreign exchange risk from our underlying customer contracts. In particular, foreign exchange forward contracts are used for the sole purpose of hedging a significant portion of our projected foreign currency inflows and outflows, consisting primarily of U.S. dollar, euro and Korean won-denominated contractual commitments of our Canadian-based operations (to deliver products to customers, or buy products from suppliers, in addition to the other anticipated transactions expected to be settled in foreign currencies). We do not enter into foreign exchange contracts for speculative purposes.

        We have established formal documentation of the relationships between the specific hedging instruments entered into under the hedging program and the underlying cash inflows and outflows expected to result from specific firm commitments or forecasted transactions. The amount and timing of forward contracts are dependent upon a number of factors, including anticipated production delivery schedules, anticipated customer payment dates and anticipated product costs which may be paid in foreign currencies. We formally assess and monitor, both at the inception of the hedge instrument and on an ongoing basis, whether the derivatives used for hedging purposes are effective in offsetting changes in the fair values or cash flows of the hedged items. As long as the derivative remains effective, gains and losses on the derivative contracts are accounted for as a component of the related hedged transaction. If the derivative contracts are determined at any point in time to be ineffective as hedges, previously unrecognized gains or losses pertaining to the portion of the hedged transactions in excess of the projected foreign-denominated cash flows would be recognized in income at the time this condition was identified.

        For details concerning the amount and timing of foreign exchange forward contracts at December 31, 2003, refer to Note 14(a) of the accompanying audited consolidated financial statements and notes. In addition, Note 14(c) discusses the risks we face in dealing with counterparties on our foreign-exchange forward contracts and the procedures we employ for mitigating these risks.

Tesma does business in seven principal currencies, producing natural hedges that we supplement with a formal foreign currency cash flow hedging program.

38        TESMA

OTHER MATTERS

Sale-Leaseback Transaction with Magna

        On January 31, 2003, we completed a sale-leaseback transaction with MID, then a wholly-owned subsidiary of Magna, for all land and buildings comprising our Corporate Campus, which includes the corporate head office and two manufacturing facilities.

        Under the terms of the purchase and sale agreement, the land and buildings comprising the corporate campus (with a carrying value of $23.5 million) were sold to MID for cash proceeds approximating fair value which totaled $25.0 million. The gain of $1.5 million resulting on the sale is being deferred and amortized on a straight-line basis over the term of the leases.

        As part of the transaction, we entered into agreements to lease the properties back from MID (at prevailing rates) for a term of twelve years (with an initial option to renew for three years followed by two subsequent five-year renewal options) requiring annual lease payments of approximately $2.7 million per year, with approximately 75% of these payments pertaining to the two manufacturing facilities.

        On August 29, 2003, all of the shares of MID were distributed to the shareholders of Magna pursuant to a planned reorganization of Magna. As a result of this distribution, MID became directly controlled by the same entity that indirectly controls us, so that MID remains a related party to us, but is no longer part of the group of companies controlled by Magna.

SUBSEQUENT EVENTS

Acquisition of Davis Industries, Inc.

        The acquisition of Davis Industries, Inc. which was completed on January 2, 2004 is discussed in greater detail in the Overview section at the beginning of this MD&A.

Reduction In Ownership Interest of Jointly-Controlled Entity

        Pursuant to the agreement signed when we increased our ownership interest in one of our jointly-controlled entities from 45% to 75% in December 2001 (see Note 3 of the accompanying audited consolidated financial statements and notes), the other remaining shareholder retained an option to purchase an additional 25% equity interest from us at any time prior to August 1, 2004 at a formula price. Effective February 7, 2004, this shareholder exercised its option and acquired an additional 25% interest in the jointly-controlled entity for nominal cash consideration. In addition, as part of this transaction, $7.7 million of shareholder loans from the jointly-controlled entity were sold by us to the other shareholder for $7.7 million in cash, thereby bringing each shareholder's proportionate share of loans to an equal basis.

        As a result of this transaction, our ownership interest in this jointly-controlled entity will be reduced to 50% effective February 7, 2004 and, commencing February 8, 2004, we will reduce to 50% the proportion of assets, liabilities, revenues, expenses and cash flows included in our consolidated financial statements. This jointly-controlled entity reported total sales of approximately $62 million for the year ended December 31, 2003.

CRITICAL ACCOUNTING POLICIES

        This MD&A is based upon the accompanying audited consolidated financial statements, which have been prepared in accordance with CDN GAAP. Note 22 to consolidated financial statements sets out the material differences between CDN GAAP and U.S. GAAP. The preparation of the consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. On an ongoing basis, we evaluate our estimates. However, actual results may differ from these estimates under different assumptions or conditions.

        We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. Management has discussed the selection of these critical accounting policies with the Audit Committee of the Board of Directors, and the Audit Committee has reviewed our disclosure relating to critical accounting policies in this MD&A.

TESMA        39

Revenue Recognition

Separately Priced Tooling Contracts

        With respect to our contracts with OEMs for particular vehicle programs, we perform multiple revenue-generating activities. The most common arrangement is where, in addition to contracting for the production and sale of parts, we also have a separately priced contract with the OEM for related tooling costs. In the majority of these arrangements entered into by us, the construction of the tooling is subcontracted to third party tooling vendors who construct and supply tooling to be used by us in the production of parts for the OEM. On completion of the tooling build, and upon acceptance of the tooling by the OEM, we sell the separately priced tooling to the OEM pursuant to a separate tooling purchase order.

        Revenues and cost of sales from separately priced tooling contracts are presented on a gross basis in the consolidated statements of income when we are acting as principal and are subject to significant risks and rewards in connection with the process of bringing the tool to its final state and in the post-sale dealings with our customers. Otherwise, components of revenue and related costs are presented on a net basis. To date, revenues and cost of sales on separately priced tooling contracts have been reported by us on a gross basis.

        Revenues from separately priced engineering services and tooling contracts are recognized substantially on a percentage of completion basis, but in some cases, depending on the terms of the contract, the completed contract basis is applied. The percentage of completion method recognizes revenue and cost of sales over the period of the construction of the tool or the period of service for the engineering or design services to be provided. As contracts for tooling and engineering services are usually developed or provided over a term longer than a typical sale arrangement, the use of the percentage of completion method more closely matches revenues and costs to the earnings process. The amount of revenue and cost of sales to be recognized at any reporting date is determined based on an estimate of the stage of completion for the overall tooling job or service to be provided, which is estimated by supervisors and/or managers directly involved in the execution and completion of the tooling job or service to be provided. In circumstances where we recognize tooling or engineering service contracts on a completed contract basis, revenue and cost of sales are recognized only when the contract is completed and the tool is accepted by the customer. All costs net of customer advances are reported in tooling inventory in our consolidated balance sheet until that time.

        Tooling contract prices are generally fixed; however, price changes, change orders and program cancellations may affect the ultimate amount of revenue recorded with respect to a contract. Contract costs are estimated at the time of signing the contract and are reviewed at each reporting date. Adjustments to the original estimates of total contract costs are often required as work progresses under the contract and as experience is gained, even though the scope of the work under the contract may not change. When the current estimates of total contract revenue and total contract costs indicate a loss, a provision for the entire loss on the contract is made in the period that this condition is identified. Factors that are considered in arriving at the forecasted loss on a contract include, among others, cost overruns, non-reimbursable costs, change orders and potential price changes. We make these assessments on a contract-by-contract basis.

        The Emerging Issues Task Force recently issued Abstract 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" (EITF 00-21). In addition, the Canadian Institute of Chartered Accountants (CICA) recently issued Emerging Issues Committee Abstract No. 142, "Revenue Arrangements with Multiple Deliverables" (EIC-142). These documents provide guidance on accounting by a vendor for arrangements involving multiple deliverables. They specifically address how a vendor determines whether an arrangement involving multiple deliverables contains more than one unit of accounting and they also address how consideration should be measured and allocated to the separate units of accounting in the arrangement. These Abstracts are effective for revenue arrangements entered into by us on or after January 1, 2004. The effect of these pronouncements on our consolidated financial statements has not been determined.

40        TESMA

Costs for Engineering and Customer-Owned Tooling Arrangements

        We expense all costs as incurred related to the design, development and testing of moulds, dies and other tools that we will not own unless a separate customer purchase order, contract or other form of customer documentation exists and supports the reimbursement of all such costs. In certain arrangements with our customers, the costs related to the design, development and testing of moulds, dies and other tools that we will not own and that will be used in subsequent related parts production are reimbursed as part of the piece-price amount recognized upon shipments of the related parts. Such costs are capitalized only when the supply agreement provides us with a contractual guarantee for reimbursement of costs or the non-cancelable right to use the moulds, dies and other tools during the supply agreement.

        Similarly, we incur pre-production engineering research and development (ER&D) costs related to the products we eventually intend to produce for our customers under long-term supply agreements. We expense ER&D costs unless a separate customer purchase order, contract or other form of customer documentation exists and supports the reimbursement of all such costs. When customer reimbursement for these costs are to be paid as part of subsequent related production piece-price amounts, costs are expensed as incurred unless a contractual guarantee for reimbursement exists.

        Customer-owned tooling and ER&D costs to be reimbursed through piece-price arrangements that qualify for capitalization treatment are recorded in "Other assets" and are amortized on a systematic basis over the related parts production long-term supply agreement. As at December 31, 2003, the total unamortized carrying value of customer-owned tooling or ER&D costs capitalized in Other assets to be reimbursed through piece-price arrangements was not significant.

Long-Lived Asset Impairments

Goodwill

        The carrying value of goodwill is subject to an impairment testing annually, or more frequently when an event or circumstance occurs that more likely than not reduces the fair value of a reporting unit below its carrying value. During the year ended December 31, 2003, we assessed the fair value of all reportable segments to which underlying goodwill is attributed and determined that no charge for impairment of goodwill was necessary.

Capital and Other Long-Lived Assets

        We evaluate capital and other long-lived assets and consider whether factors exist that indicate a potential impairment in the carrying value of any long-lived assets within the consolidated entity. Indicators of impairment include prolonged operating losses or an event or decision that results in the disposal of, or changes to, the remaining estimated useful life of an existing capital or other long-lived asset (or asset group). An asset (or asset group) is considered to be impaired if the sum of the future undiscounted cash flows expected to result from the asset (or asset group) is less than the carrying value. When an asset is impaired in accordance with the above test, an impairment loss is measured and recognized as the excess, if any, of the carrying value of the asset (or asset group) over the respective fair value. Amounts recorded in this fashion are included as part of regular depreciation and amortization charges and are not separately disclosed unless significant, considered either individually or in aggregate with other similar adjustments.

        We believe that accounting estimates related to both goodwill and capital asset impairment assessments are "critical accounting estimates" because: (i) they are subject to significant measurement uncertainty and are susceptible to change as we are required to make forward-looking assumptions regarding the impact of improvement plans on current operations, insourcing and other new business opportunities, program price and cost assumptions on current and future business, the timing of new program launches and future forecasted production volumes; and (ii) any resulting impairment loss could have a material effect on our consolidated net income and on the carrying amounts for goodwill and/or capital assets reported on our consolidated balance sheet.

TESMA        41

Future Income Tax Assets

        At December 31, 2003, we had recorded future tax assets (net of related valuation allowances), primarily in relation to loss carryforwards, share issue costs and other future tax deductible amounts, of $2.8 million. The majority of these amounts relate to our Canadian operations.

        During the year ended December 31, 2003, we recognized a $2.1 million benefit for income tax losses available for carryforward and other future tax deductible amounts (previously unrecognized) at one of our jointly-controlled entities. In the judgment of management, the initial recognition of these amounts became appropriate once the entity established a record of profitability after the launch of its major production programs, and once its projected future operating results (based on existing contracts, at existing and future contracted prices and cost structures) are projected to generate more than sufficient future taxable income to utilize these future tax deductible amounts. Accordingly, the valuation allowance previously recorded against these future tax deductible amounts was reversed.

        On a quarterly basis, we evaluate the carrying value of any future tax assets (net of any valuation allowances) recognized on the consolidated balance sheet by reassessing the sources of taxable income that are anticipated to be available in the future to utilize any tax deductible amounts currently available. The factors used in this reassessment include our forecast of future taxable income and available tax planning strategies that could be implemented to realize the future tax assets (in the specific operations to which they are recorded). We have, and will continue to use, tax planning strategies to realize future tax assets, where applicable, in order to avoid the potential loss of any associated tax benefits.

        At December 31, 2003, we had gross income tax loss carryforwards of approximately $36 million, which relate to operations in various jurisdictions in which we operate. Of these losses, $27 million have no expiry date and $9 million expire between 2006 and 2009. The tax benefits of $34 million of these losses have not been recognized in the consolidated financial statements. All of the loss carryforward amounts with no expiry date pertain to one foreign operation with a history of operating losses in recent years. This loss history is generally presumed to be a strong indication that future tax assets relating to loss carryforwards should not be recognized. Similarly, for the remaining losses, the particular operations are either in the midst of significant program launches or are in the pre-production stage such that the likelihood of generating future taxable income to offset these taxable losses is too low to recover the potential benefits. If any of these operations improve to profitable levels in the future, and the improvements are sustained for a prolonged period of time, our earnings will benefit from these loss carryforward pools.

Warranty Obligations, Including Obligations Related to Product Liability and Recalls

        In certain circumstances, we are at risk for warranty costs, including product liability and recall costs. Product liability provisions are established based on our best estimate of the amounts necessary to settle existing claims on product default issues. Recall costs are costs incurred when we and/or our customer decide, either voluntarily or involuntarily, to recall a product due to a known or suspected performance issue. Costs typically include the cost of products being replaced and the customer's cost of recall and labour to remove and replace the defective part. When a decision to recall a product has been made or is probable, the estimated cost of the recall is recorded as a charge to net earnings in that period. In making this estimate, judgment is required as to the number of units that may be returned as a result of the recall, the total cost of the recall campaign, the ultimate negotiated sharing of the cost between us and our customer and, in some cases, the extent to which a supplier to us or an insurance provider (where coverage is available and exists) will share in the recall cost. Due to the nature of the costs, we make our best estimate of the expected future costs; however, the ultimate amount of such costs could be materially different.

        To date, we have not experienced significant warranty responsibility, including product liability and recall costs. However, we continue to experience increased customer pressure to assume greater warranty responsibility. Currently, we only account for existing or probable claims; however, a significant increase in warranty responsibility for any one of our customers could require us to consider accounting for possible future claims.

42        TESMA

Contingencies

        In the ordinary course of business activities, we may be contingently liable for litigation and claims with customers, suppliers or former employees. On an ongoing basis, we assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable costs and losses. A determination of the provision required, if any, for these contingencies is made after analysis of each individual issue. The required provision may change in the future due to new developments in each matter or changes in approach, such as a change in settlement strategy in dealing with these matters.

        Contingent liabilities currently recognized in our consolidated financial statements are not significant.

RISKS AND UNCERTAINTIES (FORWARD-LOOKING STATEMENTS)

        This MD&A contains statements which, to the extent that they are not recitations of historical fact, may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include financial and other projections, as well as statements regarding our future plans, objectives or performance, or our underlying assumptions. The words "estimate", "anticipate", "believe", "expect", "intend" and other similar expressions are intended to identify forward-looking statements. Persons reading this MD&A are cautioned that such statements are only predictions, and that our actual future results or performance may be materially different.

        Forward-looking information involves certain risks, assumptions, uncertainties and other factors which may cause actual future results or anticipated events to differ materially from those expressed or implied in any forward-looking statements. In our case, these factors principally relate to the risks associated with the automotive industry and include, but are not limited to: our operating and/or financial performance, including the effect of new accounting standards (such as the ongoing requirement for impairment testing of long-lived assets) on our financial results; our ability to identify, negotiate, complete and integrate acquisitions; the ability to finance our business requirements, including raising required funding as necessary; global economic conditions and changes in the various economies in which we operate; our relationship with Magna International Inc.; fluctuations in interest rates; changes in consumer and business confidence levels; consumers' personal debt levels; vehicle prices; the extent and nature of purchasing or leasing incentive campaigns offered by automotive manufacturers; environmental emission and safety regulations; fuel prices and availability; the continuation and extent of outsourcing by automotive manufacturers; the extent, continued use and availability of steel as a primary material for automotive parts versus alternative materials (such as aluminum and plastics); our ability to continue to meet customer specifications relating to product performance, cost, quality and service; industry cyclicality or seasonality; trade and/or labour issues or disruptions; customer pricing pressures, pricing concessions and cost absorptions; warranty, recall and product liability costs and risks; actual levels of program production volumes by our customers compared to original expectations, including program cancellations or delays and changes in product mix; new program launch risks; our dependence on certain engine and transmission programs and the market success and consumer acceptance of the vehicles into which such powertrain products are installed; our relationship with and dependence on certain customers; currency exposure; technological developments by our competitors; governmental, environmental and regulatory policies and our ability to anticipate or respond to changes therein; disruptions of terrorism or war; and other changes in the competitive environment in which we operate.

        For a more detailed discussion of some of these factors, refer to the disclosures regarding risks and uncertainties set forth in our Annual Information Form, Form 40-F and other public filings. We do not intend, nor do we undertake any obligation, to update or revise any forward-looking statements to reflect subsequent information, events, results, circumstances or otherwise.

TESMA        43

Management's Responsibility for Financial Reporting

        Tesma's management is responsible for the preparation and presentation of the consolidated financial statements and all information in this Annual Report. The consolidated financial statements were prepared by management in accordance with Canadian generally accepted accounting principles, and, where appropriate, reflect estimates based upon the judgment of management. Where alternative accounting methods exist, management has selected those that it considered to be the most appropriate in the circumstances. Financial statements include certain amounts based on estimates and judgments. Management has determined such amounts on a reasonable basis designed to ensure that the consolidated financial statements are presented fairly, in all material respects. Financial information presented elsewhere in this Annual Report has been prepared by management on a basis consistent with the consolidated financial statements. The consolidated financial statements have been reviewed by the Audit Committee, audited by the independent auditors and approved by the Board of Directors of the Company.

        Management is responsible for the development and maintenance of systems of internal accounting and administrative controls of high quality, consistent with reasonable cost. Such systems are designed to provide reasonable assurance that the financial information is accurate, relevant and reliable, and that the Company's assets are appropriately accounted for and adequately safeguarded.

        Tesma's Audit Committee is appointed by the Board of Directors annually and is comprised solely of outside independent directors. The Committee meets periodically with management, as well as with the independent auditors, to satisfy itself that each is properly discharging its responsibilities, to review the consolidated financial statements and the independent Auditors' Report and to discuss significant financial reporting issues and auditing matters. The Audit Committee reports its finding to the Board of Directors for consideration when approving the consolidated financial statements for issuance to the shareholders.

        The consolidated financial statements have been audited by Ernst & Young LLP, the independent auditors, in accordance with Canadian and United States generally accepted auditing standards on behalf of the shareholders of Tesma. The Auditors' Report outlines the nature of their examination and their opinion on the consolidated financial statements of the Company. The independent auditors have full and unrestricted access to the Audit Committee.

Toronto, Canada
February 16, 2004

/s/ ANTHONY E. DOBRANOWSKIANTHONY E. DOBRANOWSKI
PRESIDENT & CHIEF FINANCIAL OFFICER /s/ JAMES L. MOULDSJAMES L. MOULDS
VICE PRESIDENT, FINANCE & TREASURER

Auditors' Report

To the Shareholders of Tesma International Inc.

        We have audited the consolidated balance sheets of Tesma International Inc. as at December 31, 2003 and December 31, 2002 and the consolidated statements of income and retained earnings and cash flows for the year ended December 31, 2003, the five-month period ended December 31, 2002 and each of the years in the two-year period ended July 31, 2002. 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 Canadian and United States generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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.

        In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2003 and 2002 and the results of its operations and its cash flows for the year ended December 31, 2003, the five-month period ended December 31, 2002 and each of the years in the two-year period ended July 31, 2002 in accordance with Canadian generally accepted accounting principles.

        As described in Note 1 to these consolidated financial statements, the Company changed its reporting currency to the U.S. dollar effective January 1, 2003 and its accounting policy for stock-based compensation.

Toronto, Canada February 16, 2004	ERNST & YOUNG LLP CHARTERED ACCOUNTANTS

44        TESMA

Consolidated Financial Statements

SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation

        Tesma International Inc. designs, engineers, tests and manufactures technologically-advanced powertrain (engine, transmission and fuel) components, modules and systems for the global automotive industry.

        The consolidated financial statements of Tesma International Inc. and its subsidiary entities (the Company) have been prepared following Canadian generally accepted accounting principles (Canadian GAAP). These principles are also in conformity, in all material respects, with United States generally accepted accounting principles (U.S. GAAP), except as described in Note 22 to the consolidated financial statements.

(b) Principles of Consolidation

        The consolidated financial statements include the accounts of the Company. The Company accounts for its interests in jointly-controlled entities using the proportionate consolidation method. All significant intercompany balances and transactions have been eliminated.

(c) Reporting Currency and Foreign Currency Translation

        Effective January 1, 2003, the Company changed its reporting currency to the United States dollar (U.S. dollar). Prior to January 1, 2003, the Company reported in Canadian dollars. In accordance with Canadian GAAP (and consistent with the requirements under U.S. GAAP), all comparative amounts have been restated to U.S. dollars using the current rate method whereby all revenues, expenses and cash flows are translated at the average exchange rates that were in effect during these periods and all assets and liabilities are translated at the closing rate in effect at the end of these periods. Utilizing this method, the comparative consolidated statements of income and cash flows for the five-month period ended December 31, 2002 and each of the years in the two-year period ended July 31, 2002 are translated into U.S. dollars using an average rate for the period of U.S. $0.6372, U.S. $0.6375, and U.S. $0.6568 per CDN $1.00, respectively. The comparative consolidated balance sheet at December 31, 2002 is translated into U.S. dollars using the prevailing rate at December 31, 2002 of U.S. $0.6376 per CDN $1.00.

        For periods up to and including December 31, 2002, assets and liabilities of the Company's self-sustaining foreign subsidiaries and investees having a functional currency other than the Canadian dollar are translated using the exchange rate in effect at the end of the year and revenues and expenses are translated at the average rate during the year. Exchange gains or losses on translation of the Company's net equity investment in these foreign subsidiaries and investees were deferred as a separate component of shareholders' equity.

        For periods after December 31, 2002, assets and liabilities of the Company's self-sustaining foreign subsidiaries and Canadian operations having a functional currency other than the U.S. dollar are translated using the exchange rate in effect at the end of the year and revenues and expenses are translated at the average rate during the year. Exchange gains or losses on translation of the Company's net equity investment in Canadian operations and foreign subsidiaries are deferred as a separate component of shareholders' equity. The appropriate amounts of exchange gains or losses accumulated in the separate component of shareholders' equity are reflected in income when there is a reduction in the Company's investment in these operations as a result of capital transactions.

        Foreign exchange gains and losses on transactions occurring in a currency different than an operation's functional currency are reflected in income, except for gains and losses on foreign exchange forward contracts used to hedge specific future commitments in foreign currencies. Gains or losses on these contracts are accounted for as a component of the related hedged transaction.

(d) Use of Estimates

        The preparation of consolidated financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent; however, actual results could differ from these estimates.

TESMA        45

(e) Cash and Cash Equivalents

        Cash and cash equivalents include cash on account, bonds, demand deposits and other short-term investments with original or remaining maturities of three months or less. Cost approximates fair value.

(f) Inventories

        Inventories are valued at the lower of cost and net realizable value, with cost being determined substantially on a first-in, first-out basis. Cost includes the cost of materials, plus direct labour applied to the product and the applicable share of manufacturing overhead.

        Tooling inventories, which are predominantly outsourced, are valued at the lower of subcontracted costs and net realizable value.

(g) Capital Assets

        Capital assets are recorded at historical cost, including interest capitalized on capital expenditures in progress, less related investment tax credits and government grants.

        Depreciation is provided on a straight-line basis over the estimated useful lives of capital assets (including those under capital leases) as follows:

Asset Class		Useful Life
Buildings and building improvements		20 to 40 years
Leasehold improvements		amortized in equal amounts over the term of the lease
Machinery and equipment
	General purpose	5 to 15 years
	Program-dedicated	5 to 7 years, or program life, if shorter
Computer hardware		3 years
Computer software		2 years
Office furniture and other equipment		5 to 10 years

(h) Goodwill and Indefinite Life Intangible Assets

        Goodwill represents the excess of the purchase price of the Company's interest in subsidiary entities over the fair value of the underlying net identifiable tangible and intangible assets arising on acquisitions.

        Effective August 2001, the Company adopted the non-amortization and impairment rules for goodwill and other intangible assets that meet the criteria for indefinite life. Accordingly, these assets are no longer amortized and are subject to an impairment review, conducted annually or upon the occurrence of certain events or circumstances that may indicate an impairment in the carrying value of the goodwill for a reporting unit. Goodwill impairment is assessed based on the comparison of the fair value of each reporting unit to which goodwill has been attributed to the carrying value of the reporting unit's net assets, including goodwill. When the carrying amount of the reporting unit exceeds its fair value, the fair value of the reporting unit's goodwill is compared with its carrying amount to measure the amount of the impairment loss, if any. The fair value of goodwill is determined in the same manner as in a business combination.

        Prior to August 1, 2001, goodwill was generally amortized over 10 to 20 years, and in all cases, amortization did not exceed 40 years.

(i) Other Assets

        Other assets includes amounts receivable under certain long-term contracts or agreements, deferred preproduction costs, investments and other amounts for which the expected recovery or period of benefit is beyond the next fiscal year.

        Deferred preproduction costs are costs incurred in establishing new facilities which require substantial time to reach commercial production capability. Amortization is provided over periods up to five years from the date commercial production is achieved. No amounts were capitalized during the respective periods ended December 31, 2003 and December 31, 2002.

        The Company accounts for its investments in which it has significant influence on the equity basis.

46        TESMA

(j) Long-Lived Assets

        Long-lived assets are assets that do not meet the definition of a current asset. In the five-month period ended December 2002, the Company adopted new Canadian GAAP rules which established standards for the consideration and potential recognition, measurement and disclosure of an impairment in the carrying value of long-lived assets held for use. In accordance with the new standard, the Company is required to consider whether factors exist that would indicate that there is a potential impairment in the carrying value of any long-lived assets within the consolidated entity. An impairment loss should be recognized when the carrying amount of a long-lived asset or asset group is not recoverable and exceeds its fair value. An asset is considered to be impaired if the estimated undiscounted future cash flows attributable to the asset are less than the associated carrying amount. When an asset is impaired in accordance with the above test, an impairment loss is measured and recognized as the excess, if any, of the carrying value of the asset over the respective fair value.

        In the normal course of its operations, changes in events or circumstances surrounding specific production programs can impact the useful life and/or utilization of program-specific or dedicated assets. The Company assesses whether the related assets can be redeployed to other revenue-generating activities. If no alternative uses are identified, the Company will record additional depreciation as necessary to properly reflect changes in the useful life of the affected assets. Amounts recorded in this fashion are included as part of regular deprecation and amortization charges and not separately disclosed unless significant, considered either individually or in aggregate with other similar adjustments.

(k) Revenue Recognition

        Revenue from the sale of manufactured products is recognized:

•

upon shipment to, or receipt by, our customers (depending on contractual terms);



•

upon acceptance, by our customers, of the products delivered in accordance with mutually agreed-upon specifications and quality standards detailed in the underlying contracts or agreements with them;



•

when measurable, in accordance with mutually agreed-upon prices; and



•

when collection is reasonably assured.

        Revenues from separately priced engineering services and tooling contracts are recognized primarily on a percentage of completion basis, but in some cases, depending upon the terms of the contract, the completed contract basis is applied.

        Revenue and cost of sales are presented on a gross basis in the consolidated statements of income when the Company is acting as principal and is subject to the significant risks and rewards of the business. Otherwise, components of revenues and related costs are presented on a net basis.

(l) Preproduction Costs Related to Long-Term Supply Agreements

        Costs incurred (net of customer subsidies) related to design and engineering, which are reimbursed as part of subsequent related parts production piece price amounts, are expensed as incurred unless a contractual guarantee for reimbursement exists.

        Costs incurred (net of customer subsidies) related to design and development costs for moulds, dies and other tools that the Company does not own (and that will be used in, and reimbursed as part of the piece price amounts for, subsequent related parts production) are expensed as incurred unless the supply agreement provides a contractual guarantee for reimbursement or the non-cancelable right to use the moulds, dies and other tools during the supply agreement.

        Costs deferred in the above circumstances are amortized to cost of goods sold over the shorter of the anticipated term of the supply agreement or the term of the non-cancelable right.

(m) Government Financing

        The Company makes periodic applications for financial assistance under available government assistance programs in the various jurisdictions in which the Company operates. Grants relating to capital expenditures are reflected as a reduction of the cost of the related assets. Grants and tax credits relating to current operating expenditures are recorded as a reduction of expense at the time the eligible expenses are incurred. The Company also receives loans which are recorded as liabilities in amounts equal to the cash received.

TESMA        47

(n) Research and Development

        The Company carries out various applied research and development (R&D) programs, some of which are partially or fully funded by governments or by customers of the Company. Funding received is accounted for using the cost reduction approach. Research costs are expensed as incurred. Development costs are expensed as incurred, unless they meet certain criteria under generally accepted accounting principles for deferral and amortization.

(o) Income Taxes

        The Company uses the liability method of tax allocation for accounting for income taxes. Under the liability method of tax allocation, future tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse.

(p) Stock-Based Compensation

        The Company has two stock-based compensation plans which are described in Note 12. In September 2003, the Canadian Institute of Chartered Accountants (CICA) issued amendments to Handbook Section 3870 "Stock-Based Compensation and other Stock-based Payments" (CICA 3870) which are effective for fiscal years beginning on or after January 1, 2004. The amended standard now requires recognition of all stock-based compensation transactions at fair value and eliminates the alternative of using the intrinsic value method of accounting through fair value disclosures on a pro forma basis. The Company has elected to adopt the amendments to CICA 3870 early and to apply them on a retroactive basis to stock-based awards granted on or after August 1, 2002, the date the Company was initially required to adopt CICA 3870. Upon application of the new rules during the current year ended December 31, 2003 and the comparative five-month period ended December 31, 2002, the Company recorded compensation expense totaling $0.5 million and $0.1 million, respectively. Diluted earnings per share for these same periods decreased by $0.01 and $nil, respectively, as a result of the adoption of these rules. These costs are recorded as selling, general and administrative expenses with a corresponding increase to contributed surplus.

        Compensation expense under the non-employee director share-based compensation plan is recorded at fair value as described in Note 12(c).

(q) Post-Retirement Medical Benefits

        The Company provides a defined benefit post-retirement medical benefits plan covering eligible employees and retirees. The cost of post-retirement medical benefits is determined using the projected benefit method prorated based on employment services and is expensed as employment services are rendered. Past service costs which arose upon introduction of the plan are being amortized to income over the employees' expected average remaining service lives.

(r) Earnings per Class A Subordinate Voting Share or Class B Share

        Basic earnings per Class A Subordinate Voting Share or Class B Share are calculated using the weighted average number of Class A Subordinate Voting Shares outstanding during the year, plus the weighted average number of Class B Shares outstanding during the year.

        Diluted earnings per Class A Subordinate Voting Share or Class B Share are calculated using the treasury stock method for the determination of the dilutive effect of outstanding options. Under this method:

•

the exercise of options is assumed at the beginning of the period (or at time of issuance, if later) and Class A Subordinate Voting Shares are assumed to have been issued;



•

the proceeds from exercise plus future period stock-based compensation expense on each tranche of options granted on or after August 1, 2002 are assumed to be used to purchase Class A Subordinate Voting Shares at the average market price during the period; and



•

the incremental number of Class A Subordinate Voting Shares (the difference between the number of Class A Subordinate Voting Shares assumed issued and assumed purchased) is included in the denominator of the diluted earnings per share computation.

48        TESMA

Consolidated Balance Sheets

Tesma International Inc.
Incorporated under the laws of Ontario

As at December 31		Note	2003		2002
(U.S. dollars in thousands)			(restated — Note 23)
ASSETS
Current
	Cash and cash equivalents		$	163,255	$	135,080
	Accounts receivable	20		193,160		146,192
	Inventories	4		100,216		74,924
	Income taxes recoverable			2,372		—
	Future tax assets	9		979		190
	Prepaid expenses and other			10,152		8,208
				470,134		364,594
Capital assets		5,6,20		303,749		273,105
Escrow deposit		24		44,635		—
Goodwill		7		15,096		13,609
Other assets		6,8		3,527		5,014
Future tax assets		9		1,834		450
			$	838,975	$	656,772
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
	Bank indebtedness	10	$	40,756	$	46,086
	Accounts payable	20		80,398		77,574
	Other accrued liabilities	12,20		34,290		24,156
	Accrued salaries and wages	11		32,581		21,015
	Future tax liabilities	9		16,796		656
	Long-term debt due within one year	10		3,919		1,799
	Dividends payable			—		3,251
	Income taxes payable			—		9,578
				208,740		184,115
Long-term debt		10		62,879		47,565
Future tax liabilities		9		18,102		14,844
Shareholders' equity
	Class A Subordinate Voting Shares	12		198,250		197,701
	Class B Shares	12		1,894		1,894
	Contributed surplus	12		572		79
	Retained earnings			285,736		225,599
	Currency translation adjustment	15		62,802		(15,025	)
				549,254		410,248
			$	838,975	$	656,772
Commitments and contingencies (Notes 10, 14 and 21)
See accompanying notes

On behalf of the Board:

/s/ MANFRED GINGLMANFRED GINGL
DIRECTOR /s/ JUDSON D. WHITESIDEJUDSON D. WHITESIDE
DIRECTOR

TESMA        49

Consolidated Statements of Income and Retained Earnings

				Year ended December 31 2003			Five-month period ended December 31 2002			Years ended July 31
			Note							2002			2001
(U.S. dollars in thousands, except per share and share figures)							(restated — Note 23)
Sales			20	$	1,098,591		$	399,352		$	855,162		$	789,014
Cost of goods sold			11,20		855,503			309,978			667,867			611,773
Selling, general and administrative			15,16,20		69,204			24,759			55,721			51,872
Depreciation and amortization			7		51,609			17,993			37,384			33,906
Affiliation fees and other charges			20		12,449			4,347			9,777			9,112
Interest, net			10,20		(204	)		316			2,556			1,104
Impairment loss at German die-casting subsidiary			6		—			12,088			—			—
Income before income taxes					110,030			29,871			81,857			81,247
Income taxes			9		35,918			9,249			28,225			23,267
Net income attributable to Class A Subordinate Voting Shares and Class B Shares					74,112			20,622			53,632			57,980
Retained earnings, beginning of period					225,599			211,529			169,774			127,131
Dividends					(13,975	)		(6,552	)		(11,877	)		(12,397	)
Cumulative adjustment for change in     accounting policy			9		—			—			—			(2,659	)
Surrender of stock options					—			—			—			(281	)
Retained earnings, end of period				$	285,736		$	225,599		$	211,529		$	169,774
Earnings per Class A Subordinate
	Voting Share or Class B Share
		Basic	13	$	2.29		$	0.64		$	1.82		$	1.98
		Diluted	13	$	2.28		$	0.63		$	1.80		$	1.96
Average number of Class A Subordinate
	Voting Shares and Class B Shares outstanding during the period (in thousands)
		Basic	13		32,344			32,300			29,454			29,214
		Diluted	13		32,531			32,513			29,829			29,558

See accompanying notes

50        TESMA

Consolidated Statements of Cash Flows

		Year ended December 31 2003			Five-month period ended December 31 2002			Years ended July 31
	Note							2002			2001
(U.S. dollars in thousands)					(restated — Note 23)
CASH PROVIDED FROM (USED FOR):
OPERATING ACTIVITIES
Net income		$	74,112		$	20,622		$	53,632		$	57,980
Items not involving current cash flows	18		69,697			26,093			44,228			29,935
			143,809			46,715			97,860			87,915
Net change in non-cash working capital	18		(41,949	)		(18,293	)		(6,230	)		(39,709	)
			101,860			28,422			91,630			48,206
INVESTING ACTIVITIES
Capital asset additions	20		(61,153	)		(28,401	)		(77,589	)		(64,025	)
Funds held in escrow	24		(44,635	)		—			—			—
Investment in subsidiaries	3,7		(1,394	)		(512	)		(500	)		(531	)
Increase in other assets			(236	)		(508	)		(1,106	)		(953	)
Proceeds from disposal of capital and other assets	20		27,234			1,697			969			277
Cash and cash equivalents acquired on investment in     subsidiaries	3		202			—			375			—
			(79,982	)		(27,724	)		(77,851	)		(65,232	)
FINANCING ACTIVITIES
Dividends on Class A Subordinate Voting Shares and     Class B Shares			(17,275	)		(3,276	)		(11,877	)		(12,397	)
Increase (decrease) in bank indebtedness			(12,423	)		25,997			(11,699	)		(2,237	)
Repayments of long-term debt	10		(2,086	)		(1,684	)		(3,239	)		(6,402	)
Issues of long-term debt	10		6,715			—			79			5,811
Issuance of Class A Subordinate Voting Shares, net of     related costs	12		549			257			63,261			1,186
Surrender of stock options			—			—			—			(281	)
			(24,520	)		21,294			36,525			(14,320	)
Effect of exchange rate changes on cash and     cash equivalents			30,817			1,793			(1,373	)		(3,159	)
Net increase (decrease) in cash and cash equivalents			28,175			23,785			48,931			(34,505	)
Cash and cash equivalents, beginning of period			135,080			111,295			62,364			96,869
Cash and cash equivalents, end of period		$	163,255		$	135,080		$	111,295		$	62,364
See accompanying notes

TESMA        51

Notes To Consolidated Financial Statements

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

        The significant accounting policies followed by the Company are set out under "Significant Accounting Policies" preceding these consolidated financial statements.

NOTE 2. JOINTLY-CONTROLLED ENTITIES

        The consolidated financial statements include the Company's proportionate share of the combined revenues, expenses, assets, liabilities and cash flows of its jointly-controlled entities. As described in Note 3, in October 2003, the Company acquired a 55% ownership interest in an Italian entity which is jointly-controlled by the Company and the former owner. As a result, the Company has three jointly-controlled entities at December 31, 2003 [December 31, 2002 — two]. The amounts included in the Company's consolidated financial statements relating to jointly-controlled entities are as follows:

					Years ended July 31
	Year ended December 31 2003		Five-month period ended December 31 2002
Results of Operations
					2002		2001
(U.S. dollars in thousands)
Sales	$	385,002	$	134,174	$	276,140	$	251,739
Cost of goods sold, other expenses and income taxes (i)		338,909		117,341		245,989		224,498
Net income, after tax allocation	$	46,093	$	16,833	$	30,151	$	27,241

Financial Position, as at December 31	2003		2002
(U.S. dollars in thousands)
Assets
Current assets	$	127,424	$	105,266
Long-term assets		40,163		30,502
Total assets	$	167,587	$	135,768
Liabilities and Equity
Current liabilities	$	40,736	$	49,960
Other liabilities		1,787		—
Loans from partners and shareholders		36,741		30,024
Equity		88,323		55,784
Total liabilities and equity	$	167,587	$	135,768

								Years ended July 31
		Year ended December 31 2003			Five-month period ended December 31 2002
Statements of Cash flows
								2002			2001
(U.S. dollars in thousands)
Cash provided from (used for):
	Operating activities	$	43,132		$	26,592		$	39,948		$	28,433
	Investing activities		(6,633	)		(4,353	)		(13,688	)		(5,202	)
	Financing activities (ii)		(38,823	)		(22,367	)		(30,897	)		(12,935	)
		$	(2,324	)	$	(128	)	$	(4,637	)	$	10,296

(i)

The results of operations for the year ended December 31, 2003 include $2.1 million recognized as the benefit for income tax losses available for carryforward and other future tax deductible amounts (previously unrecognized) at one of our jointly-controlled entities (see Note 9(a)(i)).

52        TESMA

As described in Note 9(a)(iii), the results of operations for the five-month period ended December 31, 2002, and the year ended July 31, 2001, include the benefit of income tax refunds totaling $1.8 million and $4.0 million, respectively.

(ii)

Included in cash flows from financing activities for the year ended December 31, 2003 is a net cash distribution to the Company of $41.8 million [five-month period ended December 31, 2002 — $22.4 million; years ended July 31, 2002 — $32.8 million; 2001 — $12.9 million].

        Pursuant to agreements among the partners of one of the jointly-controlled entities, net income is to be distributed annually to the partners and each partner is required to loan back to the entity approximately 35% of such distribution, unless otherwise determined by the management committee of the entity. No amounts were required to be loaned back during the year ended December 31, 2003, the five-month period ended December 31, 2002, or in the years ended July 31, 2002 or 2001. The management committee is responsible for overseeing and directing the operations and management of the entity and is comprised of four members, of which the Company is entitled to appoint two. The repayment of this entity's partners' capital of $5.4 million at December 31, 2003 [December 31, 2002 — $5.4 million] and loans are subject to the approval of the management committee.

        In another jointly-controlled entity, the Company's share of shareholders' loans totaled $23.9 million at December 31, 2003 [December 31, 2002 — $19.8 million]. These loans are interest bearing at the rate of prime plus 2%, payable monthly, with principal repayment due on August 1, 2004.

        Subsequent to December 31, 2003 (as described in Note 24(b)), the other shareholder of one of the Company's jointly-controlled entities exercised an option to purchase an additional 25% equity ownership of this entity from the Company, reducing the Company's ownership to 50%. This option had been outstanding since December 2001, when the Company had completed the acquisition of an additional 30% interest in this entity.

NOTE 3. BUSINESS ACQUISITIONS

Acquisitions in the year ended December 31, 2003

        In October 2003, the Company completed the acquisition of a 55% interest in Agla Benevento S.r.l., of Benevento, Italy (subsequently renamed Tesma-Agla S.r.l. (Tesma-Agla)), for cash consideration, including transaction costs, of $1.2 million (net of cash acquired of $0.2 million). Pursuant to agreements executed upon the closing of the transaction, the approval of certain strategic, operating and financing decisions of this company are subject to a majority vote by Tesma-Agla's Board of Directors. The Board of Directors consists of four members, of which the Company is entitled to appoint two (including the Chairman of the Board). The Company accounts for its interest in this jointly-controlled entity using the proportionate consolidation method. Tesma-Agla had no operating activities prior to October 2003 but was preparing for the launch of pulleys and other engine components for the European markets.

        The initial impact on the Company's consolidated balance sheet was an increase in non-cash working capital of $0.4 million, property, plant, equipment and other long-lived assets of $2.6 million, debt of $2.0 million and net future tax assets of $0.2 million. These amounts and the results of this entity are included in the European Automotive segment of the Company's operations (see Note 19).

Acquisitions in Prior Years

        In December 2001, the Company completed the acquisition of an additional 30% interest in one of its jointly-controlled entities for nominal cash consideration, increasing the Company's ownership to 75%. The transaction was accounted for using the purchase method. The net effect on the Company's balance sheet was a net decrease in working capital of $3.1 million (including cash acquired of $0.4 million), an increase in capital assets of $2.9 million, additional long-term debt acquired of $0.3 million and an increase in goodwill of $0.4 million. Pursuant to agreements executed on the purchase, the only other remaining shareholder of the jointly-controlled entity had an option to purchase an additional 25% equity ownership interest from the Company at any time prior to August 1, 2004 at a formula price. Effective February 7, 2004, the other remaining shareholder exercised this option and repurchased the additional 25% equity ownership of the jointly-controlled entity from the Company, reducing the Company's ownership to 50%, as fully described in Note 24(b). Under the terms of the shareholder agreements (including the period of time that the above option was outstanding), the Company and the remaining shareholder each have the right to nominate one of the two directors composing the board of directors of this jointly-controlled entity.

TESMA        53

NOTE 4. INVENTORIES

        Inventories consist of:

	2003		2002
(U.S. dollars in thousands)
Raw materials and supplies	$	35,277	$	28,023
Work-in-process		13,329		11,485
Finished goods		28,804		18,337
Tooling and engineering (i)		22,806		17,079
	$	100,216	$	74,924

(i)

Tooling and engineering inventory represents costs incurred on separately priced tooling and engineering service contracts in excess of billed and unbilled amounts included in accounts receivable.

NOTE 5. CAPITAL ASSETS

        Capital assets consist of:

	2003							2002
	Cost		Accumulated Depreciation			Net Book Value		Cost		Accumulated Depreciation			Net Book Value
(U.S. dollars in thousands)
Land (i), (ii)	$	16,424	$	—		$	16,424	$	19,396	$	—		$	19,396
Buildings and leasehold improvements (i), (ii)		80,285		(24,506	)		55,779		80,103		(17,972	)		62,131
Machinery and equipment (ii), (iii)		399,110		(207,163	)		191,947		279,810		(138,422	)		141,388
Computer hardware		12,428		(10,029	)		2,399		9,666		(7,509	)		2,157
Computer software		9,070		(7,453	)		1,617		6,519		(5,038	)		1,481
Office furniture and other equipment		21,278		(14,402	)		6,876		16,111		(10,526	)		5,585
Capital expenditures in progress (iv)		28,707		—			28,707		40,967		—			40,967
	$	567,302	$	(263,553	)	$	303,749	$	452,572	$	(179,467	)	$	273,105

(i)

As described in Note 20(a)(ii), the Company sold certain land and buildings described as "the Tesma Corporate campus" to MI Developments Inc. (MID) as part of a sale and leaseback transaction. As a result, land with a carrying value of $5.8 million and buildings with a carrying value of $17.7 million were transferred to MID.

(ii)

As fully described in Note 6, during the five-month period ended December 31, 2002, the Company recorded a write-down in the carrying value of long-lived assets at a foreign subsidiary consisting mainly of land, buildings, and machinery and equipment. As part of the write-down, the Company recorded reductions to both the cost and accumulated depreciation balances related to these assets.

(iii)

Machinery and equipment at December 31, 2003 includes costs of $13.1 million and accumulated depreciation of $7.6 million for assets under capital leases [December 31, 2002 — $12.3 million and $5.6 million, respectively].

(iv)

Capital expenditures in progress include costs incurred to date, including deposits, for machinery and equipment, assembly lines, and facility upgrades and expansions which are still in progress or are not yet in service as at the balance sheet date. Accordingly, depreciation on these assets will not commence until the assets are put into service.

54        TESMA

NOTE 6. IMPAIRMENT LOSS AT GERMAN DIE-CASTING SUBSIDIARY

        In the five-month period ended December 31, 2002, the Company, prompted by a history of operating losses and projected future losses following the launch of new business at its German die-casting subsidiary, initiated and completed a review for impairment on $20.6 million of machinery, equipment, land, buildings and other long-lived assets at this subsidiary. As part of this process, the Company determined the fair value of this asset group primarily using a market-based approach which estimates value based on market prices in actual transactions and on asking prices for currently available assets that are in a similar state and condition. The remaining assets, for which the market approach was not possible, were valued using a cost approach, which estimates value based on what a prudent investor would pay to reproduce the assets with a similar application or utility. Utilizing these approaches, the fair value of this asset group was determined to be approximately $8.5 million, requiring the Company to record a $12.1 million write-down of the carrying values of the respective assets of this subsidiary to their estimated fair values and to record a corresponding impairment loss in the five-month period ended December 31, 2002 totaling $8.5 million, net of applicable taxes. The results of this subsidiary (including the impairment loss in the five-month comparative period) are included in the European Automotive segment of the Company's operations (see Note 19).

NOTE 7. GOODWILL

        At December 31, 2003, the Company had consolidated goodwill, recorded at carrying value, totaling $15.1 million [December 31, 2002 — $13.6 million]. Commencing August 1, 2001, the Company prospectively adopted the CICA non-amortization and impairment rules for existing goodwill, and accordingly ceased recording amortization of goodwill. Prior to adoption of the new standard, goodwill amortization of $1.1 million was recorded during the year ended July 31, 2001.

        Under the terms of the acquisition of Triam Automotive Corporation (Sterling Heights) in October 1998, the Company agreed to pay an additional amount not to exceed $2.5 million in respect of the five-year period commencing February 1, 1998 if Sterling Heights exceeded certain predetermined levels of earnings. During the five-month period ended December 31, 2002 and each of the years in the two-year period ended July 31, 2002, the Company recorded approximately $0.5 million of additional goodwill on these earnout provisions. All required payments under these earnout provisions have been made prior to December 31, 2002.

        During the year ended December 31, 2003, the Company assessed the fair value of all the reportable segments to which underlying goodwill is attributed and determined that no charge for impairment of goodwill was required.

NOTE 8. OTHER ASSETS

        Other assets consist of:

	2003		2002
(U.S. dollars in thousands)
Long-term receivables	$	1,079	$	1,705
Net deferred preproduction costs		86		924
Other		2,362		2,385
	$	3,527	$	5,014

NOTE 9. INCOME TAXES

(a) Rate Reconciliation

        Effective August 1, 2000, the Company adopted the liability method of tax allocation for income taxes. The consolidated financial statements for periods prior to this date have not been restated. The cumulative effect of adopting these recommendations was an increase in future tax liabilities and a reduction to retained earnings of $2.7 million.

TESMA        55

        The provision for income taxes differs from the expense that would be obtained by applying Canadian statutory rates as a result of the following:

					Years ended July 31
	Year ended December 31 2003		Five-month period ended December 31 2002
					2002		2001
Canadian statutory income tax rate	37.0	%	39.0	%	40.0	%	42.9	%
Manufacturing and processing profits deduction	(3.4	)	(5.4	)	(6.2	)	(8.2	)
Expected income tax rate	33.6		33.6		33.8		34.7
Loss carryforwards and other future tax deductible amounts     recognized (i)	(1.9	)	—		—		—
Adjustments for enacted tax rate changes (ii)	1.0		(0.5	)	(0.5	)	—
Losses not tax benefited in excess of (less than) losses utilized	1.5		2.0		1.3		(0.1	)
Foreign rate differentials	(0.4	)	(0.8	)	(0.5	)	0.7
Tax refunds on profit distributions (iii)	—		(6.0	)	—		(7.7	)
Other	(1.2	)	2.6		0.4		1.0
Effective income tax rate	32.6	%	30.9	%	34.5	%	28.6	%

(i)

During the year ended December 31, 2003, the Company recognized $2.1 million as the benefit for income tax losses available for carryforward and other future tax deductible amounts (previously unrecognized) at one of our jointly-controlled entities. The recognition was a result of the entity establishing a record of profitability subsequent to the launch of its major program combined with projected future operating results (based on existing contracts, at existing and future contracted prices and cost structures) that are projected to generate more than sufficient taxable income to utilize these tax loss carryforwards and other future deductible amounts.

(ii)

In accordance with rules under Canadian and U.S. GAAP, at December 31, 2003, the Company recorded additional future tax expense of $1.1 million to reflect an increase in its future tax liabilities as a result of the substantively enacted increase in the Ontario tax rate, thereby increasing the combined federal and provincial corporate rate in Ontario from 33.6% to 34.5% beginning in January 1, 2004.

(iii)

During the five-month period ended December 31, 2002, the Company recognized $1.8 million in tax refunds realized by one of the Company's foreign subsidiaries as the final stage of prior year tax planning initiatives. In the year ended July 31, 2001, the Company recognized the full benefit of tax refunds totaling $6.2 million on dividends paid, and to be paid, out of two German subsidiaries. The refunds represented the recovery of taxes paid at higher rates in prior years through the payment of dividends before the end of calendar year 2001.

(b) Provision

        The details of the income tax provision are as follows:

							Years ended July 31
		Year ended December 31 2003		Five-month period ended December 31 2002
Results of Operations
							2002		2001
(U.S. dollars in thousands)
Current provision (recovery)
	Canadian federal taxes	$	10,114	$	11,516		$	11,049	$	14,285
	Canadian provincial taxes		4,157		6,164			6,853		7,830
	Foreign taxes (i)		5,892		(3,568	)		5,018		8,319
		$	20,163	$	14,112		$	22,920	$	30,434
Future provision (recovery)
	Canadian federal taxes	$	9,255	$	(4,192	)	$	2,961	$	(2,071	)
	Canadian provincial taxes		5,914		(2,208	)		1,559		(483	)
	Foreign taxes (i), (ii)		586		1,537			785		(4,613	)
		$	15,755	$	(4,863	)	$	5,305	$	(7,167	)
		$	35,918	$	9,249		$	28,225	$	23,267

(i)

Included in the December 31, 2002 current foreign tax recovery and the July 31, 2001 future tax recovery are tax refunds referred to in Note 9(a)(iii).

(ii)

Included in the future tax provision for foreign entities for the five-month period ended December 31, 2002 is a $3.6 million recovery consisting of book depreciation (including impairment charges) in excess of tax depreciation recognized as part of the write-down of certain long-lived assets to their fair value for accounting purposes as described in Note 6.

56        TESMA

(c) Future Provision (Recovery)

        Future income taxes have been provided (recovered) on temporary differences which consist of the following:

							Years ended July 31
	Year ended December 31 2003			Five-month period ended December 31 2002
							2002			2001
(U.S. dollars in thousands)
Tax deferred income	$	14,018		$	(5,038	)	$	3,431		$	(709	)
Increase (reduction) for changes in enacted tax rates (Note 9(a)(ii))		1,101			(146	)		(427	)		—
Book depreciation (in excess of) less than tax depreciation     (Note 9(b)(ii))		534			(3,957	)		(96	)		301
Book amortization of deferred preproduction costs in excess     of tax basis		(351	)		(120	)		(290	)		(305	)
Tax refunds on profit distributions		—			4,506			2,232			(6,179	)
Other		453			(108	)		455			(275	)
	$	15,755		$	(4,863	)	$	5,305		$	(7,167	)

(d) Future Tax Assets and Liabilities

        Future tax assets and liabilities consist of the following:

		2003		2002
(U.S. dollars in thousands)
Current future tax assets
	Loss carryforwards (Note 9(a)(i))	$	635	$	—
	Share issue costs		219		190
	Other		125		—
		$	979	$	190
Long-term future tax assets
	Tax depreciation in excess of book depreciation (Note 9(a)(i))	$	1,209	$	—
	Share issue costs		389		450
	Other		236		—
		$	1,834	$	450
Current future tax liabilities
	Tax deferred income (i)	$	16,505	$	—
	Net preproduction costs book value in excess of tax value		30		288
	Tax depreciation in excess of book depreciation		—		245
	Other		261		123
		$	16,796	$	656
Long-term future tax liabilities
	Tax depreciation in excess of book depreciation	$	9,002	$	6,118
	Tax deferred income (i)		7,113		5,573
	Net preproduction costs book value in excess of tax value		—		24
	Other		1,987		3,129
		$	18,102	$	14,844
Net future income tax liabilities		$	32,085	$	14,860

TESMA        57

(i)

Due to the Company's change in its fiscal year end from July 31 to December 31 in 2002, certain temporary differences were reclassified to current income taxes payable at December 31, 2002 due to the shortened five-month period. Similar temporary differences that arose subsequent to August 1, 2002, have been recorded as future tax liabilities consistent with the treatment in prior periods.

(e) Taxes Paid

        Income taxes paid in cash were $31.5 million for the year ended December 31, 2003 [five-month period ended December 31, 2002 — $10.1 million; years ended July 31, 2002 — $24.8 million; 2001 — $30.5 million].

(f) Loss Carryforwards

        At December 31, 2003, certain subsidiaries of the Company have tax loss carryforwards, in various jurisdictions, of approximately $35.9 million. Of these losses, $26.6 million have no expiry date and $9.3 million expire between 2006 and 2009. The tax benefits of $34.3 million of these losses have not been recognized in the consolidated financial statements.

NOTE 10. DEBT

(a) Long-Term Debt

        The Company's long-term debt consists of the following:

	2003		2002
(U.S. dollars in thousands)
6.22% Senior Unsecured Notes (Note 10(b))	$	46,512	$	38,256
Bank-term debt (Note 10(c))		18,058		8,759
Obligations under capital leases (Note 10(d))		1,457		1,645
Other		771		704
		66,798		49,364
Less amounts due within one year		3,919		1,799
	$	62,879	$	47,565

(b) 6.22% Senior Unsecured Notes

        The $46.5 million (CDN $60 million) [December 31, 2002 — $38.3 million (CDN $60 million)] 6.22% Senior Unsecured Notes (the Notes) are due May 25, 2006. These Notes require the Company to maintain certain covenants and are denominated in Canadian dollars.

(c) Bank-Term Debt

        Bank-term debt consists of amounts originally denominated in the following currencies or legacy currencies:

	Final maturity	Weighted average interest rate	2003		2002
(U.S. dollars in thousands)
Austrian schillings (i)	2009	1.95%	$	10,388	$	6,579
Euros (ii)	2008 - 2012	2.15%		5,573		—
German deutschmarks (iii)	2004 - 2007	6.65%		1,317		1,320
Other	2008	3.80%		780		860
			$	18,058	$	8,759

(i)

Austrian Schillings

Under a banking arrangement which was conditional on the attainment of certain employment and capital expenditure requirements, at December 31, 2003, long-term debt of $10.4 million (€8.3 million) [December 31, 2002 — $6.4 million (€6.2 million)] has been advanced under potential lines totaling $18.3 million (€14.5 million) as conditions required for drawing further funds under this arrangement have not been satisfied. Interest is currently payable at a fixed rate of 1.95%. The loan is repayable in equal semi-annual installments beginning July 1, 2003 and expiring on January 1, 2009. A portion of the loan is collateralized by land and buildings of certain subsidiaries.

58        TESMA

(ii)

Euros

At December 31, 2003, bank-term debt of $5.6 million (€4.4 million) has been advanced under total lines of $5.6 million (€4.4 million). Interest is currently payable at a fixed rate of 1.5% and floating rates between 3.41% and 3.61%. The principal amounts are repayable by semi-annual installments. This debt is collateralized by land and building of certain subsidiaries and jointly-controlled entities.

(iii)

German Deutschmarks

At December 31, 2003, bank-term debt of $1.3 million (€1.0 million) [December 31, 2002 — $1.3 million (€1.3 million)] has been advanced under total lines of $1.3 million (€1.0 million) [December 31, 2002 –$1.3 million (€1.3 million)]. Interest is currently payable at fixed rates ranging from 6.50% to 7.32%. The principal amounts are repayable at various intervals over the next four years. This debt is collateralized by land, building and specific assets of certain subsidiaries.

(d) Obligations Under Capital Leases

        Obligations under capital leases consists of amounts originally denominated in the following currencies or legacy currencies:

	Final maturity	Weighted average interest rate	2003		2002
(U.S. dollars in thousands)
U.S. dollars	2004	8.50%	$	669	$	1,028
German deutschmarks	2005	5.75%		492		604
Euro (i)	2006-2008	5.35%		296		—
Korean won		12.80%		—		13
			$	1,457	$	1,645

(i)

Interest is payable at floating rates currently ranging from 5.06% to 5.83%.

(e) Principal Repayments

        Future annual principal repayments on long-term debt are estimated to be as follows for the years ending December 31:

(U.S. dollars in thousands)
2004	$	3,919
2005		3,287
2006		50,114
2007		3,370
2008		3,238
Thereafter		2,870
	$	66,798

(f) Bank Indebtedness

(i)

The Company has an unsecured $38.8 million (CDN $50 million) operating line of credit bearing interest at variable rates per annum not exceeding the bank's prime rate of interest. At December 31, 2003, the Company had outstanding letters of credit in the amount of $0.5 million drawn under this line of credit and $38.3 million of this line was unused and available. The related credit agreement requires the Company to maintain certain covenants. The Company also has foreign exchange facilities in the amount of $23.3 million (see Note 14(a)).

(ii)

One of the Company's jointly-controlled entities has an unsecured $11.6 million (CDN $15 million) operating line of credit bearing interest at variable rates per annum not exceeding the bank's prime rate of interest all of which was unused and available at December 31, 2003. The related credit agreement provides for the maintenance of certain financial ratios. This jointly-controlled entity also has a foreign exchange facility in the amount of $50 million (see Note 14(a)) and one of its subsidiaries has unsecured demand lines of credit totaling $3.1 million (€2.5 million), all of which were unused and available at December 31, 2003. Interest is payable at a negotiated interest rate based on the European Central Bank's (the ECB) leading interest rate.

TESMA        59

(iii)

The Company has various operating lines of credit for its European subsidiaries denominated in euros, or legacy currencies, totaling $22.6 million (€17.9 million). At December 31, 2003, $17.7 million was drawn on these lines while $4.9 million remains unused and available. Interest on the Austrian operating lines of credit is currently payable at negotiated interest rates based on either the Austrian Control Bank Corporation interest rate or the Euribor, as well as floating rates based on Euribor plus a margin ranging from 0.70% to 1.63%. Interest on German operating lines of credit is payable at negotiated interest rates based on the Euribor and the leading interest rates of the ECB. Interest on the Austrian lines of credit is payable at a fixed rate of 6.4%, floating rates based on Euribor plus 0.38% and a negotiated interest rate based on the Austrian National Bank interest rate for operating lines of credit. Accounts receivable and certain assets of the related subsidiaries have been pledged as collateral under these lines of credit.

(iv)

The Company's South Korean subsidiary has various operating lines of credit, denominated primarily in Korean won, of $28.7 million (34.4 billion won). At December 31, 2003, $13.3 million of these lines were unused and available. Interest is payable at negotiated variable rates currently ranging from 5.5% to 8.4%, based on prime and daily best lending rates, which are adjusted at periodic intervals. Certain assets of this subsidiary have been pledged as collateral under certain of these lines of credit.

(g) Interest, net

        Net interest expense (income) includes:

								Years ended July 31
		Year ended December 31 2003			Five-month period ended December 31 2002
								2002			2001
(U.S. dollars in thousands)
Interest on long-term debt		$	3,189		$	1,142		$	2,956		$	3,129
Other interest income, net — external			(3,397	)		(834	)		(418	)		(2,098	)
Interest expense — Magna
	International Inc. (Magna)		4			8			18			73
Interest, net		$	(204	)	$	316		$	2,556		$	1,104

        Net interest received in cash was $0.2 million for the year ended December 31, 2003. Net interest paid in cash was $0.6 million for the five-month period ended December 31, 2002 [years ended July 31, 2002 — $2.5 million; July 31, 2001 — $1.2 million].

NOTE 11. POST-RETIREMENT MEDICAL BENEFITS

        The Company provides a post-retirement medical benefits plan covering eligible employees and retirees. Retirees sixty years of age or older with ten or more years of service are eligible for benefits. In addition, existing retirees as at the date of plan implementation who meet the above criteria are also eligible for benefits. Benefits are capped based on years of service.

        The cost of benefits earned by employees is actuarially determined using the projected benefit method prorated based on service and on management's best estimate of compensation increases, retirement ages of employees, future termination levels and expected returns on plan assets.

        The significant actuarial assumptions adopted in measuring the Company's projected benefit obligations are as follows:

			Years ended July 31
	Year ended December 31 2003	Five-month period ended December 31 2002
			2002	2001
Discount rate	6.0%	6.8%	6.8%	7.5%
Rate of compensation increase	4.0%	4.0%	4.0%	4.0%

60        TESMA

(a) Projected Benefit Obligation

        The projected benefit obligation and the net amount included in accrued salaries and wages in the consolidated balance sheets, are calculated as follows:

	2003			2002
(U.S. dollars in thousands)
Balance, beginning of period	$	1,708		$	1,642
Current service costs		217			76
Interest costs on projected benefit obligation		129			47
Actuarial (gains) losses and changes in actuarial assumptions		367			(73	)
Benefits paid		(11	)		(3	)
Currency translation		209			19
Unfunded obligation		2,619			1,708
Unrecognized past service costs		(1,243	)		(1,181	)
Unrecognized actuarial gains (losses)		(148	)		196
Net amount recognized in the consolidated balance sheet	$	1,228		$	723

(b) Net Periodic Cost

        The calculation of net periodic cost is as follows:

					Years ended July 31
	Year ended December 31 2003		Five-month period ended December 31 2002
					2002			2001
(U.S. dollars in thousands)
Current service costs	$	217	$	76	$	140		$	133
Interest costs on projected benefit obligation		129		47		90			84
Amortization of past service costs		83		31		75			77
Amortization of experience gains		—		—		(10	)		(3	)
	$	429	$	154	$	295		$	291

NOTE 12. CAPITAL STOCK

(a) Class A Subordinate Voting Shares and Class B Shares

        Class A Subordinate Voting Shares without par value (unlimited amount authorized) have the following attributes:

•

Each share is entitled to one vote per share at all meetings of shareholders; and,



•

Each share shall participate equally as to cash dividends with each Class B Share.

        Class B Shares without par value (unlimited amount authorized) have the following attributes:

•

Each share is entitled to 10 votes per share at all meetings of shareholders;



•

Each share shall participate equally as to cash dividends with each Class A Subordinate Voting Share; and,



•

Each share may be converted at any time into fully-paid Class A Subordinate Voting Shares on a one-for-one basis.

        In the event that either the Class A Subordinate Voting Shares or the Class B Shares are subdivided or consolidated, the other class shall be similarly changed to preserve the relative number of shares in each class.

TESMA        61

        Outstanding Class A Subordinate Voting Shares and Class B Shares included in shareholders' equity of the Company consist of:

	Class A Subordinate Voting Shares			Class B Shares
	Number of shares	Consideration		Number of shares	Consideration
(U.S. dollars in thousands, except number of shares)
Balance, July 31, 2000	14,899,779	$	132,094	14,223,900	$	1,894
Exercise of incentive stock options (Note 12(b))	142,600		1,186	—		—
Balance, July 31, 2001	15,042,379		133,280	14,223,900		1,894
Issuance of Class A Subordinate Voting Shares through     public offering (i)	2,850,000		62,777	—		—
Exercise of incentive stock options (Note 12(b))	182,400		1,387	—		—
Balance, July 31, 2002	18,074,779		197,444	14,223,900		1,894
Exercise of incentive stock options (Note 12(b))	35,650		257	—		—
Balance, December 31, 2002	18,110,429		197,701	14,223,900		1,894
Exercise of incentive stock options (Note 12(b))	30,000		549	—		—
Balance, December 31, 2003	18,140,429	$	198,250	14,223,900	$	1,894

(i)

On July 18, 2002, the Company completed a public offering of Class A Subordinate Voting Shares. The details of the proceeds from the offering are as follows:

(U.S. dollars in thousands)
Total proceeds on issue of 2,850,000 shares at CDN $35.15	$	64,707
Underwriters' fee		(2,588	)
Other expenses of the issue		(257	)
Tax savings in respect of the above fee and expenses		915
Net proceeds	$	62,777

(b) Incentive Stock Option Plan

        Under the Company's amended and restated Incentive Stock Option Plan, the Company may grant options to purchase Class A Subordinate Voting Shares to present and future officers, directors and other full-time employees or consultants of the Company. During fiscal 2003, following approval by the Company's Board of Directors, shareholders and other regulatory authorities, the maximum number of shares reserved to be issued for stock options was increased from three million Class A Subordinate Voting Shares to four million. The number of unoptioned shares available to be reserved at December 31, 2003 was 746,500 [December 31, 2002 — 10,000].

        All options granted are for a term not exceeding ten years from the date of grant. In general, management options vest 20% on the date of grant, 20% on the first day of the fiscal year or period subsequent to the year of grant, and 20% on each anniversary thereafter. In addition, directors' options generally vest 50% on the date of grant and 50% on August 1 of the following year. The 300,000 options granted to Stronach & Co. (S & Co) vested 16²/3% on October 25, 2000 and will vest 16²/3% on each of the following five anniversaries of this date. All options allow the holder to purchase Class A Subordinate Voting Shares at a price equal to or greater than the market price of such shares at the date of grant.

62        TESMA

        The following is the continuity schedule of the options outstanding:

	Number of options		Range of exercise price		Options exercisable		Weighted average exercisable
(Share prices in Canadian dollars)
Balance, July 31, 2001	1,433,400		$	10.50 – $29.40	624,000		$	21.89
Exercised	(182,400	)	$	10.50 – $26.00	(182,400	)	$	12.03
Vested					240,600
Balance, July 31, 2002	1,251,000		$	10.50 – $29.40	682,200		$	23.33
Granted	44,500		$	31.74			$	31.74
Exercised	(35,650	)	$	10.50 – $26.00	(35,650	)	$	11.22
Expired	(10,000	)	$	26.00	(10,000	)	$	26.00
Vested					201,000
Balance, December 31, 2002	1,249,850		$	10.50 – $31.74	837,550		$	23.96
Granted	275,000		$	28.80			$	28.80
Exercised	(30,000	)	$	17.25 – $26.00	(30,000	)	$	24.63
Expired	(11,500	)	$	19.00 – $26.00	(11,500	)	$	25.09
Vested					243,500
Balance, December 31, 2003	1,483,350		$	10.50 – $31.74	1,039,550		$	23.50

        The following table summarizes the outstanding and exercisable options held by directors, officers, employees and S & Co at December 31, 2003:

	Options outstanding
	Exercise price		Number of options		Remaining contractual life (years)	Number of options exercisable
(Share prices in Canadian dollars)
	$	10.50		80,000	1.6		80,000
	$	10.50		60,000	2.6		60,000
	$	17.25		62,000	4.6		62,000
	$	19.00		54,000	5.6		54,000
	$	21.70		10,000	3.6		10,000
	$	22.50		60,000	3.6		60,000
	$	26.00		405,350	6.6		328,750
	$	26.45		300,000	6.6		200,000
	$	28.80		275,000	9.0		55,000
	$	29.40		132,500	6.6		106,000
	$	31.74		44,500	8.6		23,800
				1,483,350			1,039,550
Weighted average exercise price			$	24.83		$	23.50
Weighted average remaining contractual life, in years				6.4			5.7

        As fully described in Note 1(p), the Company adopted the new rules under CICA 3870 which require that all stock-based compensation transactions be accounted for at fair value. The Company determines the total estimated fair value of each tranche of stock options as at the date of grant and then records compensation expense, on an amortized basis, over the applicable vesting periods of the underlying stock options. As such, at each reporting date, cumulative compensation expense will be recognized for each tranche of stock options to the extent that they are vested as at that date.

TESMA        63

        The Company elected to adopt the amendments to CICA 3870 early and to apply them on a retroactive basis to stock-based awards granted on or after August 1, 2002, the date the Company was initially required to adopt CICA 3870. As a result, during the current year ended December 31, 2003 and the comparative five-month period ended December 31, 2002, the Company recorded compensation expense totaling $0.5 million and $0.1 million, respectively. The costs were recorded as selling, general and administrative expenses with a corresponding increase to contributed surplus. The balance of contributed surplus related to stock compensation is as follows:

	2003		2002
(U.S. dollars in thousands)
Balance, beginning of period	$	79	$	—
Compensation expense		493		79
Balance, end of period	$	572	$	79

        Upon future exercises of the underlying stock options recorded at fair value (i.e. those issued on or after August 1, 2002), the Company will record a reduction to the accumulated balance of contributed surplus and will record a corresponding increase in the value attributed to the Class A Subordinate Voting Shares issued on the exercise of these stock options.

        The Company records compensation expense by estimating the fair value of stock options at the date of grant using the Black Scholes option pricing model. The Black Scholes option valuation model used by the Company to determine fair values, along with other currently accepted option valuation models, was developed for use in estimating the fair value of freely traded options which are fully transferable and have no vesting restrictions. In addition, this model requires the input of highly subjective assumptions, including future stock volatility and expected time until exercise. Management believes that the estimates utilized in this model are reasonable for the purpose of estimating and recording compensation expense at fair value.

        The weighted average fair value of options granted during the year and the weighted average assumptions used in determining the fair value of options on the date of grant were as follows:

Options Granted	August 2003			August 2002
(U.S. dollars in thousands)
Expected volatility		29.0	%		24.2	%
Risk-free interest rate		4.0	%		4.5	%
Expected dividend yield		2.2	%		2.0	%
Expected life of options (years)		5			5
Weighted average fair value of options granted	$	7.34		$	7.47

(c) Non-Employee Director Share-Based Compensation Plan

        Under this plan, established during fiscal 2000, non-employee directors can elect to receive a portion of their annual retainers and other Board-related compensation in the form of deferred share units (DSUs) which are credited to the director's account, and the Company records a liability. The number of DSUs issued is based upon the market value of the Company's shares at each allocation date. One DSU has a cash value equal to the market price of one of the Company's Class A Subordinate Voting Shares. Within a specified time after retirement, non-employee directors receive a cash payment equal to the market value of their DSUs. During the year ended December 31, 2003, $0.4 million was recorded as compensation expense (including foreign exchange and revaluation of the DSUs to their fair values at December 31, 2003) and $0.1 million was paid out under this plan [$nil expensed and $0.1 million paid out under this plan in the five-month period ended December 31, 2002]. At December 31, 2003, there were 28,265 DSUs [December 31, 2002 — 19,551] having a total value of $0.6 million [December 31, 2002 — $0.3 million] that were issued and outstanding.

64        TESMA

(d) Maximum Number of Shares

        The following table presents the maximum number of shares that would be outstanding if all of the options outstanding at December 31, 2003 were exercised:

	Number of shares
Class A Subordinate Voting Shares outstanding at December 31, 2003	18,140,429
Class B Shares outstanding at December 31, 2003	14,223,900
Options to purchase Class A Subordinate Voting Shares	1,483,350
	33,847,679

NOTE 13. EARNINGS PER CLASS A SUBORDINATE VOTING SHARE OR CLASS B SHARE

        The following table presents the reconciliation from the weighted average number of Class A Subordinate Voting Shares and Class B Shares outstanding to the weighted average number of these shares outstanding on a diluted basis:

				Years ended July 31
		Year ended December 31 2003	Five-month period ended December 31 2002
				2002	2001
(in thousands)
Average number of Class A Subordinate
	Voting Shares and Class B Shares outstanding during the period	32,344	32,300	29,454	29,214
Effect of dilutive securities:
	Stock options to purchase Class A Subordinate Voting Shares	187	213	375	344
Average number of Class A Subordinate Voting Shares and     Class B Shares outstanding during the period on a diluted basis		32,531	32,513	29,829	29,558

        For the year ended December 31, 2003, there were options to purchase 44,500 and 275,000 Class A Subordinate Voting Shares at an exercise price of $31.74 and $28.80, respectively, per share [five-month period ended December 31, 2002 — 44,500 at $31.74 per share] that were outstanding and not included in the computation of diluted earnings per Class A Subordinate Voting Share or Class B Share because their impact was antidilutive. All options to purchase Class A Subordinate Voting Shares outstanding during the years ended July 31, 2002 and July 31, 2001 have been considered in the computation of diluted earnings per Class A Subordinate Voting Share or Class B Share because their impact was dilutive.

NOTE 14. FINANCIAL INSTRUMENTS

(a) Foreign Exchange Contracts and Other Hedging Instruments

(i)

Foreign Currency Hedges

The Company operates globally, which gives rise to a risk that its earnings and cash flows may be adversely impacted by fluctuations in foreign exchange. The Company utilizes foreign exchange forward contracts to manage foreign exchange risk from its underlying customer contracts. In particular, the Company uses foreign exchange forward contracts for the sole purpose of hedging a significant portion of projected currency inflows and outflows, which differ from an operation's functional currency. These consist primarily of U.S. dollar, euro and Korean won-denominated contractual commitments to deliver products to the Company's customers or buy products from suppliers to the Company's Canadian operations in addition to other anticipated transactions expected to be settled in foreign currencies. The Company does not enter into foreign exchange contracts for speculative purposes.

TESMA        65

At December 31, 2003, the Company had outstanding foreign exchange forward contracts representing a commitment to sell approximately $61.1 million and €148.6 million, at weighted average rates of exchange of CDN $1.58 and CDN $1.62, respectively, and to buy approximately $72.0 million and €15.3 million at weighted average rates of exchange of CDN $1.47 and CDN $1.39, respectively. These contracts mature over the next five years as follows:

	For Canadian dollars
	U.S. dollars amount		Weighted average rate	Euros amount		Weighted average rate
(Amounts in millions, except rates)
2004	U.S. $(23.4	)	1.55	€(41.3	)	1.60
2004	52.8		1.47	6.9		1.38
2005	(15.5	)	1.59	(37.2	)	1.62
2005	14.4		1.45	5.7		1.40
2006	(13.8	)	1.60	(29.9	)	1.64
2006	4.8		1.57	2.7		1.42
2007	(8.4	)	1.60	(23.2	)	1.64
2008	—		—	(17.0	)	1.65
	U.S. $10.9			€(133.3	)

At December 31, 2003, the Company also had outstanding foreign-exchange contracts representing a commitment to purchase approximately 4.2 billion Korean won in each of the years ending December 31, 2004 and 2005 at weighted average rates of exchange of CDN $0.001104 and CDN $0.001102, respectively.

The fair values of foreign exchange forward contracts represent an approximation of the amounts the Company would have paid to, or received from, counterparties to unwind its positions at December 31, 2003. The fair value of the Company's net benefit for all foreign exchange forward contracts at December 31, 2003 was approximately $5.1 million [December 31, 2002 — $4.5 million]. If these contracts ceased to be effective as hedges (i.e., if the related projected cash flows changed significantly), previously unrecognized gains or losses pertaining to the portion of the hedging transactions in excess of projected foreign denominated cash flows would be recognized in income at the time this condition was identified.

(ii)

Other Financial Instruments

The Company, through one of its jointly-controlled entities, has outstanding foreign-exchange options that require it to sell €1.5 million at a weighted average rate of U.S. $0.92. The fair value of these options at December 31, 2003 is approximately $1.9 million which is $0.5 million lower than the carrying value at December 31, 2002 [December 31, 2002 — $0.3 million lower]. Due to the fact these options do not qualify as part of an effective hedging relationship, the Company recorded a $0.5 million charge against earnings in the year ended December 31, 2003 [five-month period ended December 31, 2002 — $0.3 million]. The charge has been included in selling, general and administrative expenses.

To manage the electricity cost volatility that may arise since the Ontario, Canada hydro-electricity market was deregulated in May 2002, the Company entered into electricity swap contracts to purchase approximately 131,000 mega-watt hours (MWH) of electricity over a three-year period with a weighted average rate of CDN $53.80 per MWH at the inception of the contracts. The swaps remaining at December 31, 2003 have an annual notional energy volume of 45,397 MWH for which the Company pays a fixed average price of CDN $55.74 per MWH and receives a floating average price per MWH based on the hourly Ontario energy price. The net settlements under the electricity swap contracts are recognized in the same period as, and are part of, the hedged transactions. The Company does not enter into electricity supply contracts for speculative purposes. At December 31, 2003, the mark-to-market fair value of this contact was not significant.

66        TESMA

(b) Fair Value

        The Company has determined the estimated values of its financial instruments based on appropriate valuation methodologies. However, considerable judgment is required to develop these estimates. Accordingly, these estimated values are not necessarily indicative of the amounts the Company could realize in a current market exchange. The estimated fair value amounts can be materially affected by the use of different assumptions or methodologies. The methods and assumptions used to estimate the fair value of each class of financial instruments are discussed below.

        Short-term financial assets and liabilities, including cash and cash equivalents, accounts receivable, bank indebtedness, accounts payable, accrued liabilities and income taxes payable or recoverable, are valued at their carrying amounts as presented in the consolidated balance sheets. The carrying values of the amounts are reasonable estimates of fair value due to the short period to maturity of these financial instruments, except for the obligation for the post-retirement medical benefits plan for which the actuarially determined obligation exceeds the carrying value by $1.4 million as described in Note 11(a).

        Fair value information is not readily available for the Company's long-term monetary assets included in other assets. However, management believes the market value of these assets approximates their carrying value.

        Rates currently available to the Company for long-term debt, with similar terms and remaining maturities have been used to estimate the fair value of the long-term debt, which approximates the carrying value for all years, except for the $46.5 million (CDN $60 million) 6.22% Senior Unsecured Notes which had a fair value of approximately $48.1 million (CDN $62 million) at December 31, 2003 [December 31, 2002 — $40.2 million (CDN $63 million)].

        The Company enters into foreign exchange forward contracts to manage foreign currency risk. If the Company did not use forward contracts, its exposure to financial risks would be higher. The Company does not enter into forward contracts for speculative purposes. The fair values of foreign exchange forward contracts represent an approximation of the amounts that the Company would have paid to or received from counter-parties to unwind its positions prior to maturity. The fair value of the Company's net benefit for all foreign exchange forward contracts, none of which is recorded, is discussed in Note 14(a).

(c) Credit Risk

        The Company's financial assets that are exposed to credit risk consist primarily of cash and cash equivalents, accounts receivable (including long-term receivables), escrow deposits and foreign exchange forward contracts with positive fair values.

        The Company, in the normal course of business, is exposed to credit risk from its customers substantially all of which are in the automotive industry. These accounts receivable are subject to normal industry credit risks particular to each geographic region in which the Company operates.

        Cash and cash equivalents and escrow deposits consist of short-term investments, including bonds, commercial paper and certified deposits with original or remaining maturities of three months or less. The Company limits its exposure to credit risk by investing in bonds and commercial paper of governments and corporations with a minimum credit rating of R1 (low) from the Dominion Bond Rating Service (DBRS) or its equivalent in the United States, and further limits the amount to be invested at this minimum credit rating level to 15% or less of the total invested in these instruments at any time. In addition, the Company deals with banks or financial institutions with a minimum Financial Strength Rating of A from Standard & Poor's or its equivalent. Credit risk is further reduced by limiting the amount which is invested in any one government or corporation.

        The Company is also exposed to credit risk from the potential default by any of its counterparties on its foreign exchange forward contracts. The Company mitigates this credit risk by generally dealing only with counterparties which are banks with a minimum credit rating of A from Standard & Poor's or its equivalent, and which are included on an authorized list of counterparties maintained by the Company. The Company also monitors its relative positions with each counterparty. At December 31, 2003, the maximum credit risk, based on the theoretical amount and the term and exchange rates, amounts to approximately $20.0 million. This risk is divided among six financial institutions. The Company does not anticipate non-performance of their contractual obligations by any of the counterparties.

TESMA        67

(d) Interest Rate Risk

        The following table summarizes the Company's exposure to interest rate risk as at December 31, 2003:

					Fixed interest rate maturing in
		Floating rate			1 year or less			1 to 5 years			More than 5 years			Non-interest bearing			Total
(U.S. dollars in thousands, except rates)
Financial assets
	Cash	$	163,255														$	163,255
	Accounts receivable													$	193,160			193,160
	Escrow deposit		44,635															44,635
	Other assets		84		$	47									2,234			2,365
Financial liabilities
	Bank indebtedness		(40,756	)														(40,756	)
	Accounts payable and all other accrued     liabilities and payables														(164,065	)		(164,065	)
	Long-term debt		(2,761	)		(2,860	)	$	(58,787	)	$	(2,078	)		(312	)		(66,798	)
		$	164,457		$	(2,813	)	$	(58,787	)	$	(2,078	)	$	31,017		$	131,796
Average fixed rate of long-term debt						2.88%			5.37%			3.30%

NOTE 15. CURRENCY TRANSLATION ADJUSTMENT

        The following is a continuity schedule of the currency translation adjustment account included as a separate component of shareholders' equity:

	2003			2002
(U.S. dollars in thousands)
Balance, beginning of period	$	(15,025	)	$	(20,950	)
Realized translation (gain) loss on the reduction of the net investment in foreign operations		(667	)		293
Unrealized translation adjustments		78,494			5,632
Balance, end of period	$	62,802		$	(15,025	)

        Unrealized translation adjustments arise on the translation to U.S. dollars of assets and liabilities of the Company's Canadian operations and self-sustaining foreign operations that operate in functional currencies other than the U.S. dollar. For the year ended December 31, 2003, an unrealized currency translation gain of $78.5 million [five-month period ended December 31, 2002 — gain of $5.6 million] resulted primarily from the strengthening of the euro and Canadian dollar against the U.S. dollar during the period.

        The translation gain of $0.7 million for the year ended December 31, 2003 [five-month period ended December 31, 2002 — $0.3 million loss] was realized on the reduction of the net investment in foreign operations upon the payment of dividends and was recorded as a reduction to selling, general and administrative expenses [increase to selling, general and administrative expenses in the five-month period ended December 31, 2002].

NOTE 16. FOREIGN EXCHANGE

        Included as part of selling, general and administrative expenses are gains (losses) resulting from foreign exchange as follows:

						Years ended July 31
			Five-month period ended December 31 2002
	Year ended December 31 2003
						2002		2001
(U.S. dollars in thousands)
Foreign exchange gains (losses)	$	2,308	$	(510	)	$	1,414	$	361

68        TESMA

NOTE 17. RESEARCH AND DEVELOPMENT

        Gross R&D expenditures for the year ended December 31, 2003 were $18.0 million [December 31, 2002 –$6.5 million; years ended July 31, 2002 — $15.6 million; 2001 — $12.4 million]. These expenditures were partially funded by governments or customers in the amount of $7.5 million [December 31, 2002 — $1.7 million; years ended July 31, 2002 — $4.0 million; 2001 — $4.3 million].

NOTE 18. DETAILS OF CASH FROM OPERATING ACTIVITIES

(a) Items Not Involving Current Cash Flows

        Items not involving current cash flows consist of:

							Years ended July 31
				Five-month period ended December 31 2002
	Year ended December 31 2003
							2002			2001
(U.S. dollars in thousands)
Depreciation and amortization	$	51,609		$	17,993		$	37,384		$	33,906
Future income tax provision (recovery)		15,755			(4,863	)		5,305			(7,167	)
Write-down of long-term receivables		853			—			—			—
(Gain) loss on disposal of capital assets		(430	)		(400	)		101			283
Realized translation losses (gains) on the reduction of net investments in foreign operations		(667	)		293			(118	)		2,215
Stock-based compensation expense		493			79			—			—
Loss on equity-accounted investee		426			—			—			—
Net periodic cost on post-retirement medical benefits plan		429			154			295			291
Impairment loss at German die-casting operations (Note 6)		—			12,088			—			—
Other		1,229			749			1,261			407
	$	69,697		$	26,093		$	44,228		$	29,935

(b) Net Change in Non-Cash Working Capital

        The net change in non-cash working capital, net of foreign exchange fluctuations, consists of:

							Years ended July 31
				Five-month period ended December 31 2002
	Year ended December 31 2003
							2002			2001
(U.S. dollars in thousands)
Accounts receivable	$	(27,186	)	$	(19,359	)	$	(15,306	)	$	(23,572	)
Inventories		(17,756	)		(7,186	)		(5,994	)		(8,116	)
Prepaid expenses and other		(2,489	)		(360	)		(824	)		(179	)
Accounts payable and other accrued liabilities		9,319			10,119			14,294			(6,150	)
Accrued salaries and wages		10,247			(6,036	)		2,693			755
Income taxes payable (recoverable)		(14,084	)		4,529			(1,093	)		(2,447	)
	$	(41,949	)	$	(18,293	)	$	(6,230	)	$	(39,709	)

NOTE 19. SEGMENTED INFORMATION

(a) Operating Segments

        The Company currently operates in one industry segment, the automotive powertrain business, designing and manufacturing parts and assemblies primarily for the automotive OEMs or their Tier I and Tier II powertrain component manufacturers.

        The Company operates internationally and its manufacturing facilities are arranged geographically to meet the requirements of the Company's customers in each market. Each manufacturing facility has the capability to offer many different powertrain parts and assemblies, as the technological processes employed can be used to make many different parts and assemblies. Additionally, specific marketing and distribution strategies are required in each geographic region.

TESMA        69

        The Company currently operates in four geographic segments of which only two are reportable segments. The accounting policies for the segments are the same as those described in Note 1 to the consolidated financial statements and intersegment sales are accounted for at prices which approximate fair value.

        Executive management assesses the performance of each segment based on income before income taxes as the management of income tax expense is centralized.

        The following tables show certain information with respect to operating segment disclosures:

	North American Automotive			European Automotive			Other Automotive			Total
(U.S. dollars in thousands)
Year ended December 31, 2003
Total sales	$	856,000		$	235,643		$	28,772		$	1,120,415
Intersegment sales		(19,069	)		(2,632	)		(123	)		(21,824	)
Sales to external customers	$	836,931		$	233,011		$	28,649		$	1,098,591
Depreciation and amortization	$	39,810		$	8,200		$	3,599		$	51,609
Interest, net	$	(2,687	)	$	1,139		$	1,344		$	(204	)
Income before income taxes	$	97,538		$	18,251		$	(5,759	)	$	110,030
Capital assets, net (Notes 6, 20 and 24)	$	206,142		$	65,208		$	32,399		$	303,749
Capital asset additions (Note 20)	$	38,134		$	12,859		$	10,160		$	61,153
Goodwill, at carrying value (Note 7)	$	13,172		$	1,924		$	—		$	15,096
Five-month period ended December 31, 2002
Total sales	$	312,295		$	79,462		$	14,008		$	405,765
Intersegment sales		(4,668	)		(1,681	)		(64	)		(6,413	)
Sales to external customers	$	307,627		$	77,781		$	13,944		$	399,352
Depreciation and amortization	$	12,966		$	3,748		$	1,279		$	17,993
Interest, net	$	(311	)	$	249		$	378		$	316
Income before income taxes (Note 6)	$	40,185		$	(10,450	)	$	136		$	29,871
Capital assets, net (Note 20)	$	197,769		$	49,102		$	26,234		$	273,105
Capital asset additions	$	20,006		$	4,692		$	3,703		$	28,401
Goodwill, at carrying value (Note 7)	$	13,006		$	603		$	—		$	13,609
Year ended July 31, 2002
Total sales	$	674,914		$	161,666		$	29,591		$	866,171
Intersegment sales		(9,462	)		(1,547	)		—			(11,009	)
Sales to external customers	$	665,452		$	160,119		$	29,591		$	855,162
Depreciation and amortization	$	28,204		$	6,413		$	2,767		$	37,384
Interest, net	$	939		$	535		$	1,082		$	2,556
Income before income taxes	$	74,047		$	6,691		$	1,119		$	81,857
Capital assets, net	$	189,546		$	56,732		$	24,234		$	270,512
Capital asset additions (Note 20)	$	59,375		$	15,641		$	2,573		$	77,589
Goodwill, at carrying value (Note 7)	$	12,484		$	596		$	—		$	13,080
Year ended July 31, 2001
Total sales	$	622,315		$	144,327		$	29,926		$	796,568
Intersegment sales		(5,731	)		(1,823	)		—			(7,554	)
Sales to external customers	$	616,584		$	142,504		$	29,926		$	789,014
Depreciation and amortization (Note 7)	$	25,620		$	5,496		$	2,790		$	33,906
Interest, net	$	298		$	(335	)	$	1,141		$	1,104
Income before income taxes	$	67,966		$	11,280		$	2,001		$	81,247
Capital assets, net	$	163,072		$	41,653		$	22,701		$	227,426
Capital asset additions	$	52,669		$	10,272		$	1,084		$	64,025
Goodwill, net (Note 7)	$	11,645		$	887		$	—		$	12,532

70        TESMA

(b) Geographic and Customer Information

        The geographic destination of the Company's sales to its external customers is as follows:

					Years ended July 31
			Five-month period ended December 31 2002
	Year ended December 31 2003
					2002		2001
(U.S. dollars in thousands)
United States	$	589,324	$	230,212	$	493,366	$	457,761
Canada		108,009		30,744		77,702		72,100
Europe		326,017		112,640		232,809		211,124
Other foreign countries		75,241		25,756		51,285		48,029
	$	1,098,591	$	399,352	$	855,162	$	789,014

        In the year ended December 31, 2003, sales to the Company's four largest customers (including their global subsidiaries) amounted to 43%, 16%, 9% and 7% of total sales [five-month period ended December 31, 2002 — 43%, 17%, 9% and 7%; years ended July 31, 2002 — 42%, 18%, 9%, and 7%; and 2001 — 40%, 20%, 8% and 8%].

NOTE 20. RELATED PARTY TRANSACTIONS

(a) Transactions with Controlling Shareholder

        The Company completed transactions with Magna, the Company's controlling shareholder and other companies under Magna's control as follows:

						Years ended July 31
				Five-month period ended December 31 2002
	Year ended December 31 2003
						2002		2001
(U.S. dollars in thousands)
Sales (i)	$	7,585		$	3,656	$	13,418	$	10,019
Purchases of materials (i)	$	3,591		$	1,036	$	3,257	$	4,571
Rental of facilities (ii)	$	1,877		$	341	$	847	$	641
Affiliation fee (iii)	$	10,816		$	3,913	$	8,552	$	7,890
Social fee (iv)	$	1,633		$	434	$	1,225	$	1,222
Other specific charges (v)	$	1,718		$	380	$	1,857	$	905
Interest	$	4		$	8	$	18	$	73
Construction management fees (ii)	$	(1,293	)	$	—	$	1,419	$	—

(i)

Sales to, and purchases from, Magna and other companies under Magna's control, and the resulting accounts receivable and payable balances are typically effected on normal commercial terms.

(ii)

On January 31, 2003, the Company completed a sale and leaseback transaction with MID, then a wholly-owned subsidiary of Magna, for all the land and buildings on the Tesma Corporate Campus, which includes the corporate office building and two manufacturing facilities. This transaction was approved by the Company's Board of Directors upon recommendation by a Special Committee of independent directors established to review the transaction.

Under the terms of the purchase and sale agreement, the land and buildings comprising the corporate campus (with a carrying value of $23.5 million) were sold to MID for cash proceeds approximating fair value which totaled $25.0 million. The gain of $1.5 million resulting from the sale is being deferred and amortized on a straight-line basis over the term of the leases.

Under the terms of the transaction, $1.3 million of construction management fees (including carrying charges) previously billed in fiscal 2002 by MID to the Company regarding this project were refunded. In addition, the Company entered into agreements to lease the properties back from MID (at prevailing market rates existing at inception) for a term of twelve years (with an initial option to renew for three years followed by two subsequent five-year renewal options) and is required to make lease payments of approximately $2.7 million per year.

TESMA        71

Rental payments totaling $1.9 million were paid to MID for the period from February 1, 2003 to August 29, 2003, the date when all of the shares of MID were distributed to the shareholders of Magna pursuant to a planned reorganization of Magna. As a result of this distribution, MID became directly controlled by the same entity that indirectly controls the Company, such that MID remains a related party to the Company, but is no longer part of the group of companies controlled by Magna. During the year ended July 31, 2002 and the subsequent five-month period ended December 31, 2002, the Company was billed an aggregate of $13.3 million by MID (acting as project manager) on a cost recovery basis for the construction and development costs associated with these properties.

(iii)

The Company is party to an affiliation agreement with Magna that provides for payment by the Company of an affiliation fee in exchange for, among other things, a non-exclusive world-wide license to use certain Magna trademarks, access to Magna management resources, and the collaboration and sharing of best practices in areas such as new management techniques, employee benefits and programs, marketing and technological initiatives. This agreement became effective for a term of seven years and five months commencing August 1, 2002 and expires on December 31, 2009 (subject to annual renewals thereafter). Under this agreement, affiliation fees payable to Magna are calculated as one percent of the Company's consolidated net sales, subject to certain exceptions for sales from acquired businesses (which are exempt from the calculation of the affiliation fee in the year of acquisition, with 50% inclusion in the year after acquisition and full inclusion in subsequent years).

(iv)

Under the terms of a social fee agreement, the Company pays Magna a social fee of 1.5% of pre-tax profits as a contribution to social and charitable programs coordinated by Magna on behalf of Magna and its affiliated companies, including the Company. This agreement became effective for a term of seven years and five months, commencing August 1, 2002 and expires on December 31, 2009 (subject to annual renewals thereafter).

(v)

Other specific charges, which are recorded primarily as part of selling, general and administrative expenses, are negotiated annually and are based on the level of certain benefits or services provided by Magna Services Inc., a wholly owned subsidiary of Magna. These services include, but are not limited to: information technology (WAN infrastructure and support services), human resource and employee relations services (including administration of the Employee Equity Participation and Profit Sharing Program), specialized legal, environmental, finance and treasury support, management and technology training, and an allocated share of the facility and overhead costs dedicated to providing these services.

(b) Other Related Party Transactions

(i)

Rental payments to MID subsequent to August 29, 2003 (the date of the reorganization of Magna) amounted to $1.1 million and were paid under lease agreements entered into at prevailing market rates.

(ii)

Effective January 1, 2003, the Company's Austrian subsidiary transferred certain assets and activities into Magna Systemtechnik AG (MST), an entity controlled by Magna established for the training of apprentices in the design, development and manufacturing of tools, prototypes and automotive components. Effective this same date, the Company acquired a minority equity ownership interest in MST and will participate in its ongoing activities to the extent of this equity ownership interest. The Company accounts for this investment using the equity method and accordingly, $0.4 million has been recorded in selling, general and administrative expenses as the Company's share of the net losses of MST to December 31, 2003.

During 2003, the Company incurred $0.4 million of capital costs relating to the portion of certain assembly lines that MST was subcontracted to build (the costs of the completed assembly lines were billed by another supplier). In addition, due to the cost overruns and other issues pertaining to these assembly lines, MST billed the Company an additional $0.8 million, which was expensed in fiscal 2003. At December 31, 2003, the Company had a net payable of $1.0 million due to MST.

(iii)

During the year ended December 31, 2003, the Company was billed an additional $0.5 million for costs relating to various tooling and other services provided in 2002 by a company owned by the CEO of the Company. In the five-month period ended December 31, 2002, the Company sold $0.1 million of products and services to this company. At December 31, 2003, $nil was recorded as a net receivable from this company [December 31, 2002 — $0.5 million].

(iv)

During 2003, the Company paid $0.4 million to a financing company for the buyout of certain equipment under lease and recorded the amount as due from a related party. The equipment was used in the business activities of the company owned by the CEO of the Company, the activities of which were transferred to MST in 2003. The balance of $0.4 million remains outstanding at December 31, 2003.

72        TESMA

(v)

On October 25, 2000, the Company signed a Consulting Services Agreement (CSA) with S & Co. Under the terms of the CSA, S & Co is providing the Company with various consulting services in continental Europe and in other non-North American countries for a period of six years ending October 25, 2006. In consideration for the consulting services to be provided under the CSA, the Board of Directors granted to S & Co options to purchase 300,000 Class A Subordinate Voting Shares at an exercise price of $26.45 per share (see Note 12(b)). The general partner of S & Co is the Chairman of Magna.

(vi)

Due to the abandoned merger between the Company and the Magna Steyr Group in December 2001, costs approximating $0.4 million (net of a $1.3 million recovery from Magna pursuant to the merger agreement between the Company and Magna) that had been incurred specifically for the merger transaction were expensed by the Company as part of selling, general and administrative costs in the year ended July 31, 2002.

(c) Outstanding Balances

        The outstanding balances with all related parties resulting from these transactions included in the consolidated financial statements at the end of the period are as follows:

	2003		2002
(U.S. dollars in thousands)
Accounts receivable	$	1,560	$	988
Accounts payable and other accrued liabilities	$	1,882	$	3,108

NOTE 21. COMMITMENTS AND CONTINGENCIES

(a) Operating Leases

        The Company had commitments under operating leases requiring future minimum annual rental payments for the years ending December 31 as follows:

(U.S. dollars in thousands)
2004	$	7,944
2005		7,056
2006		6,210
2007		5,259
2008		4,839
Thereafter		23,866
	$	55,174

        During the year, the Company completed a sale and leaseback transaction with MID as described in Note 20(a)(ii), and began to make rental payments under lease agreements with MID of $2.7 million per annum. As a result, approximately 76% [December 31, 2002 — 54%] of the lease commitments at December 31, 2003 are with related parties.

        Approximately 11% [December 31, 2002 — 13%] of these lease commitments represent the Company's share of commitments of its proportionately consolidated jointly-controlled entities.

        For the year ended December 31, 2003, payments under operating leases amounted to $7.9 million [five-month period ended December 31, 2002 — $2.5 million; years ended July 31, 2002 — $5.0 million; 2001 — $4.1 million].

(b) Purchase Commitments

        The Company has commitments to purchase capital assets of approximately $28.7 million as at December 31, 2003 [December 31, 2002 — $25.2 million].

        In addition, as described in Note 14(a)(ii), in May 2002 the Company entered into a three-year contract to purchase specified levels of hydro-electricity supply during expected peak and non-peak time periods at specified fixed prices. The total commitment remaining under this contract at December 31, 2003 is approximately $2.5 million [December 31, 2002 — $3.6 million].

TESMA        73

(c) Corporate Constitution

        The Company's Corporate Constitution requires that a portion of the Company's profits be distributed or used for certain purposes, including but not limited to the following:

•

allocation or distribution of 10% of pre-tax profits to employees and/or the Tesma Employee Equity Participation and Profit Sharing Program (including the Tesma International Inc. (Canadian) Deferred Profit Sharing Plan and the Tesma International of America, Inc. U.S. Employees' Deferred Profit Sharing Plan forming part thereof);



•

allocation of a minimum of 7% of pre-tax profits to R&D; and



•

payment of dividends to shareholders based on a formula of after-tax profits.

(d) Potential Warranty and Product Recalls

        In certain circumstances, the Company is at risk for warranty costs including product liability and recall costs. Product liability provisions are established based on the Company's best estimate of the amounts necessary to settle existing claims on product default issues. Recall costs are costs incurred when the Company and/or the customer decide, either voluntarily or involuntarily, to recall a product due to a known or suspected performance issue. Costs typically include the cost of product being replaced, the customer's cost of recall and labour to remove and replace the defective part. When a decision to recall a product has been made or is probable, the Company's estimated cost of the recall is recorded as a charge to net earnings in that period. In making this estimate, judgment is required as to the number of units that may be returned as a result of the recall, the total cost of the recall campaign, the ultimate negotiated sharing of the cost between the Company and the customer and, in some cases, the extent to which a supplier to the Company or an insurance provider (where coverage is available and exists) will share in the recall cost. Due to the nature of the costs, the Company makes its best estimate of the expected future costs, however, the ultimate amount of such costs could be materially different. To date, the Company has not experienced significant warranty responsibility, including product liability or recall costs. However, the Company continues to experience increased customer pressure to assume greater warranty responsibility. Currently the Company only accounts for existing or probable claims, however, a significant increase in warranty responsibility for any one of the Company's customers could require the Company to consider accounting for possible future claims.

(e) General

        In the ordinary course of business activities, the Company may be contingently liable for litigation and claims from customers, suppliers and former employees. On an ongoing basis, the Company assesses the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable costs and losses. A determination of the provision required, if any, for these contingencies is made after analysis of each individual issue. The required provision may change in the future due to new developments in each matter or changes in approach, such as a change in settlement strategy in dealing with these matters. Management believes that adequate provisions have been recorded in the accounts where required. Although it is not possible to estimate the extent of potential costs and losses, if any, management believes, but can provide no assurance, that the ultimate resolution of such contingencies would not have a material adverse effect on the consolidated financial position of the Company.

NOTE 22. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

        The Company's consolidated financial statements are prepared in accordance with Canadian GAAP which conform in all material respects with U.S. GAAP except for the following:

(a) Derivative Instruments and Hedging

        The Company uses foreign exchange forward contracts to manage foreign exchange risk from its underlying customer contracts. As detailed in Note 14, the Company uses foreign exchange forward contracts for the sole purpose of hedging certain of its future committed U.S. dollar and euro inflows and outflows for its Canadian operations. Under Canadian GAAP, gains and losses on these contracts are accounted for as a component of the related hedged transaction.

        Effective August 1, 2000, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by FASB Statements No. 137, 138 and 149 (collectively, the Statement), which establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts and for hedging activities. The Statement requires a company to recognize all of its derivative instruments, whether designated in hedging relationships or not, on the balance sheet at fair value. The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship. The Statement establishes certain criteria to be met in order to designate a derivative instrument as a hedge and deem a hedge as effective.

74        TESMA

        Effective January 1, 2004, the Company implemented a new treasury management system that complies with the documentation requirements for hedge accounting under the Statement. As a result, for the periods prior to December 31, 2003, the Company's derivative portfolio is not eligible for hedge accounting despite the fact that management considers its portfolio to be an effective foreign currency risk management tool and an economic hedge of the Company's projected cash flows.

        Accordingly, upon initial adoption of the Statement, the Company recorded a cumulative gain of $1.7 million as a component of comprehensive income, of which $1.4 million has now been realized through U.S. GAAP net income. The amount recorded as the change in fair value of derivative instruments for U.S. GAAP purposes in the year ended December 31, 2003 was nominal [loss of $0.6 million in the five-month period ended December 31, 2002; income of $1.5 million in each of the years in the two-year period ended July 31, 2002, respectively].

        The Company has reviewed its other commercial contracts outstanding as at December 31, 2003 in relation to the Statement and has concluded that there are no freestanding derivatives having a significant impact on the consolidated financial statements. In addition, the Company has determined that there are no other embedded derivative instruments outstanding.

(b) Deferred Preproduction Costs

        Under U.S. GAAP, the Company would have expensed all preproduction costs as incurred.

(c) Joint Ventures

        The Company has certain interests in jointly-controlled entities, which have been proportionately consolidated in the Company's consolidated financial statements. Under U.S. GAAP, the Company would account for its interests in its jointly-controlled entities using the equity method, and accordingly net income, earnings per share and shareholders' equity under U.S. GAAP are not impacted by the proportionate consolidation of these interests in jointly-controlled entities.

        As permitted under U.S. GAAP, foreign private issuers using proportionate consolidation instead of the equity method are not required to reconcile their financial statements to U.S. GAAP. Accordingly, the consolidated balance sheets presented under U.S. GAAP reflect a proportionate share of the assets and liabilities of the Company's jointly-controlled entities. It is the Company's assessment that this preparation is more useful and more representative of its assets and obligations.

(d) Accounting for Stock Options

        For U.S. GAAP purposes, the Company has historically measured compensation cost related to awards of stock options using the intrinsic value-based method of accounting as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and then provided pro forma earnings disclosures as if the fair value method as prescribed under FASB Statement No. 123 "Accounting for Stock-Based Compensation" (FAS 123), had been applied.

        As described in Note 1(p), for Canadian GAAP purposes, the Company elected to adopt new amendments to CICA 3870 that now requires that all stock-based compensation be recorded at fair value and charged to income over the vesting period of the underlying awards. These new rules under CICA 3870 are substantially harmonized with the existing fair value rules under FAS 123 and the methodology utilized in calculating and recognizing compensation expense under Canadian GAAP as described in Note 12(b) is consistent with that required for U.S. GAAP.

        As a result of this change, the Company has elected to adopt the fair value rules of FAS 123 for its U.S. GAAP reporting. The Company has adopted these rules on a retroactive basis with restatement of prior periods and has included amounts previously calculated as compensation expense for purposes of proforma earnings disclosures as a charge to earnings. The impact of retroactively applying these rules for U.S. GAAP purposes to the comparative five-month period ended December 31, 2002 and the years ended July 31, 2002 and 2001 was to decrease income by $0.4 million, $0.8 million and $0.9 million, respectively, and to record a cumulative adjustment to retained earnings of $2.8 million. Similarly, diluted earnings per share under U.S. GAAP for these periods decreased by $0.01, $0.03 and $0.03, respectively, as a result of the retroactive application of these rules. The corresponding offsets to amounts recognized as compensation expense are recorded as increases to contributed surplus. Subsequently, upon the exercise of the underlying stock options, proportionate amounts originally recorded as contributed surplus are reclassified and recorded as additional value attributed to Class A Subordinate Voting Shares issued on these exercises.

        Under U.S. GAAP, compensation expense that is calculated and reported includes all of the Company's options granted since adoption of this U.S. Standard on August 1, 1996. The initial adoption of CICA 3870 for Canadian GAAP (as permitted by the transitional provisions therein) was applied to awards granted on or after the date of initial adoption, which for the Company was August 1, 2002. As such, the amount of compensation expense calculated for U.S. GAAP will differ from that calculated for Canadian GAAP until all options granted prior to August 1, 2002 have fully vested and all related compensation expense has been recorded for U.S. GAAP purposes.

TESMA        75

(e) Recognition of Translation Gains and Losses on Reduction of Net Investment in Canadian Operations and Foreign Subsidiaries

        Under U.S. GAAP, FASB Statement No. 52 (FAS 52), the Company would realize a gain or loss only on the portion of the currency translation adjustment included as a separate component of the net investment in an operation with a functional currency different from the Company's reporting currency upon the sale or complete, or substantially complete, liquidation of the related investment. Under FAS 52, no gains or losses are recognized as a result of capital transactions, including the payment of dividends. Under Canadian GAAP, the Company is required to realize a gain or loss equal to the appropriate portion of the cumulative translation adjustment account when there is a reduction in the Company's net investment in operations with functional currencies different from the U.S. dollar (the Company's reporting currency), which includes the payment of dividends.

(f) Statements of Income and Retained Earnings

        The following table presents net income, retained earnings and earnings per share information following U.S. GAAP:

									Years ended July 31
						Five-month period ended December 31 2002
			Year ended December 31 2003
									2002			2001
(U.S. dollars in thousands)						restated — Note 22(d)
Net income attributable to Class A Subordinate Voting Shares and Class B Shares under Canadian GAAP			$	74,112		$	20,622		$	53,632		$	57,980
Adjustments:
Amortization of deferred preproduction costs				636			235			562			573
Change in fair value of derivative instruments				(19	)		(648	)		1,487			1,478
Translation (gains) losses realized on the reduction of the     net investment in foreign subsidiaries				(667	)		293			(118	)		2,215
Stock-based compensation (expense) recovery on stock options     issued for consulting services				(384	)		79			(240	)		(257	)
Reversal of stock-based compensation expense under     Canadian GAAP				493			79			—			—
Stock-based compensation expense under U.S. GAAP				(1,198	)		(384	)		(785	)		(943	)
Compensation expense on repurchase of stock options				—			—			—			(274	)
Net income attributable to Class A Subordinate Voting Shares and     Class B Shares under U.S. GAAP				72,973			20,276			54,538			60,772
Retained earnings, beginning of period				224,660			210,936			168,275			122,715
Dividends				(13,975	)		(6,552	)		(11,877	)		(12,397	)
Cumulative adjustment for change in accounting policy     (Note 22(d))				—			—			—			(2,815	)
Retained earnings, end of period			$	283,658		$	224,660		$	210,936		$	168,275
Earnings per Class A Subordinate Voting Share or Class B Share under U.S. GAAP
		Basic	$	2.26		$	0.63		$	1.85		$	2.08
		Diluted	$	2.24		$	0.62		$	1.83		$	2.06
Weighted average number of Class A Subordinate
	Voting Shares and Class B Shares outstanding during the year (in thousands)
		Basic		32,344			32,300			29,454			29,214
		Diluted		32,531			32,513			29,829			29,558

76        TESMA

(g) Comprehensive Income

								Years ended July 31
					Five-month period ended December 31 2002
		Year ended December 31 2003
								2002			2001
(U.S. dollars in thousands)		restated — Note 22(d)
Net income attributable to Class A Subordinate
	Voting Shares and Class B Shares under U.S. GAAP	$	72,973		$	20,276		$	54,538		$	60,772
Adjustments:
Unrealized foreign exchange gains (losses) on translation of     Canadian operations and self-sustaining foreign operations			78,494			5,632			1,293			(12,189	)
Adjustment for derivative instruments matured in the period,     included in the cumulative adjustment at July 31, 2001			(372	)		(200	)		(857	)		—
Cumulative adjustment to derivative instruments			—			—			—			1,712
Comprehensive income attributable to Class A Subordinate Voting     Shares and Class B Shares under U.S. GAAP		$	151,095		$	25,708		$	54,974		$	50,295

(h) Balance Sheets

        The following table presents condensed consolidated balance sheets following accounting policies under U.S. GAAP except as described in Note 22(c):

As at December 31	2003		2002
(U.S. dollars in thousands)			restated — Note 22(d)
ASSETS
Current assets	$	470,134	$	364,598
Capital assets		303,749		273,108
Goodwill and other long-term assets		63,822		17,700
Fair value of derivative instruments		3,942		4,477
Long-term future tax assets		2,184		450
	$	843,831	$	660,333
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities	$	209,740	$	184,527
Long-term debt		62,879		47,566
Long-term future tax liabilities		19,432		15,993
		292,051		248,086
Shareholders' equity
Class A Subordinate Voting Shares and Class B Shares (Note 22(d))		201,797		201,028
Contributed surplus (Note 22(d))		4,961		3,181
Retained earnings		283,658		224,660
Accumulated other comprehensive income		61,364		(16,622	)
		551,780		412,247
	$	843,831	$	660,333

TESMA        77

(i) Recently Issued Pronouncements

        Under Staff Accounting Bulletin 74, the Company is required to disclose certain information related to new accounting standards which have not yet been adopted due to delayed effective dates.

Canadian GAAP Standards and Guidelines

        In 2003, the CICA issued Emerging Issues Committee Abstract No. 142, "Revenue Arrangements with Multiple Deliverables" (EIC-142), which provides guidance on accounting by a vendor for arrangements involving multiple deliverables. It specifically addresses how a vendor determines whether an arrangement involving multiple deliverables contains more than one unit of accounting and also addresses how consideration should be measured and allocated to the separate units of accounting in the arrangement. The guidance in EIC-142 is applicable for revenue arrangements with multiple deliverables entered into by the Company on or after January 1, 2004. Although the Company is currently reviewing EIC-142, the impact of this abstract, if any, on the Company's consolidated financial statements has not been determined.

        In 2003, the CICA issued Handbook Section 3110, "Asset Retirement Obligations" (CICA 3110), which establishes standards for the recognition, measurement and disclosure of asset retirement obligations and the related asset retirement costs. This new Section is effective for the Company's 2004 fiscal year and harmonizes Canadian requirements with existing U.S. GAAP. The Company will adopt these rules for Canadian GAAP purposes on January 1, 2004 and the impact on the consolidated financial statements for the implementation of these rules is not expected to be significant.

        In 2003, the CICA issued Accounting Guideline AcG-15, "Consolidation of Variable Interest Entities", to provide guidance for applying the principles in Handbook Section 1590, "Subsidiaries", to certain entities. Although the CICA is contemplating amendments to the guideline, it is expected to be effective for the Company's 2005 fiscal year. Although the Company is currently reviewing AcG-15, the impact of the guideline, if any, on the Company's consolidated financial statements has not been determined.

        In 2003, the CICA finalized amendments to Accounting Guideline AcG-13, "Hedging Relationships", that clarified certain of the requirements in AcG-13 and provided additional application guidance. AcG-13 is applicable for the Company's 2004 fiscal year. The Company does not expect the adoption of this guideline to have a material impact on its consolidated financial statements.

U.S. GAAP Standards

        In 2003, the FASB finalized Emerging Issues Task Force Abstract No. 00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple Deliverables." The guidance in this Abstract is consistent with the guidance in EIC-142, which was recently issued by the CICA. The guidance in EITF 00-21 is applicable for revenue arrangements with multiple deliverables that the Company enters into on or after January 1, 2004.

        In 2003, the FASB amended Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46R"). FIN 46R requires that a variable interest entity ("VIE") be consolidated by a company if that company is subject to a majority of the risk of loss from the VIE's activities and/or is entitled to receive a majority of the VIE's residual returns. For the Company, the requirements of FIN 46R apply in 2003 for all VIEs created after January 31, 2003. For VIEs created before January 31, 2003, the requirements of FIN 46R apply as of December 31, 2004 for a VIE that does not meet the definition of a special-purpose entity ("SPE") and as of January 1, 2004 for a VIE that is an SPE.

        Although the Company is currently reviewing EITF 00-21 and FIN 46R, the impact, if any, of these pronouncements on the Company's consolidated financial statements has not been determined.

NOTE 23. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS

        The Company has retroactively restated the comparative consolidated financial statements for changes in the Company's reporting currency and changes in accounting policy as described in Notes 1(c) and 1(p).

        Certain other comparative figures have been reclassified to conform to the current year's method of presentation.

78        TESMA

NOTE 24. SUBSEQUENT EVENTS

(a) Acquisition of Davis Industries, Inc.

        On January 2, 2004, the Company completed the acquisition of Davis Industries, Inc. (Davis). Davis at the time of acquisition employed over 700 employees at 3 manufacturing facilities located in Indiana (2 facilities) and Tennessee. The main product focus for Davis is stamped powertrain components and assemblies, including driveplate assemblies, transmission shells and oil pan assemblies, and engine valve covers, but also includes some body and chassis stampings and fuel filler door assemblies. For the most recently completed fiscal year ended September 30, 2003, Davis reported sales of approximately $129 million.

        The total consideration issued for the acquisition of all the outstanding shares of Davis amounted to $75.0 million, consisting of $45.1 million paid in cash (including transaction costs), the assumption of $22.0 million of long-term debt (including current portion), $4.5 million of other long-term obligations and the issuance of a five-year, $3.4 million note bearing interest at the rate of prime plus 1% per annum. At December 31, 2003, the Company had cash of $44.6 million that had been deposited into an escrow account (thus restricting its use) to be released to the former shareholders of Davis upon closing and in accordance with the agreements executed therein.

        The Company will account for this transaction using the purchase method of accounting and will record 100% of the assets, liabilities, revenues, expenses and cash flows of Davis in its consolidated results commencing January 3, 2004.

        The preliminary estimates of the effect this transaction will have on the Company's consolidated balance sheet will be that the $45 million of cash paid (including transaction costs) and an increase in long-term debt and other obligations of $30 million (including current portion and the additional five-year note payable issued by the Company) were issued as total consideration to acquire the following: additional non-cash working capital of approximately $7 million, additional capital assets of $26 million, net future tax assets of $11 million, intangible assets of approximately $4 million and goodwill of $27 million.

(b) Reduction in Ownership Interest of Jointly-Controlled Entity

        Pursuant to the agreement that resulted in the increase of the Company's interest in one of its jointly-controlled entities from 45% to 75% in December 2001 (see Note 3), the other remaining shareholder retained an option to purchase an additional 25% equity ownership from the Company at any time prior to August 1, 2004 at a formula price. Effective February 7, 2004, this shareholder exercised its option and acquired an additional 25% interest in the jointly-controlled entity for nominal cash consideration. In addition, as part of the transaction, $7.7 million of shareholder loans due to the Company from the jointly-controlled entity were sold by the Company to the other shareholder for $7.7 million in cash, thereby bringing each shareholder's proportionate share of loans to an equal basis.

        As a result of this transaction, the Company's ownership interest in this jointly-controlled entity will be reduced to 50% effective February 7, 2004 and, commencing February 8, 2004, the Company will proportionately consolidate the assets, liabilities, revenues, expenses and cash flows in accordance with its 50% ownership percentage. This jointly-controlled entity reported total sales of approximately $62 million for the year ended December 31, 2003.

TESMA        79

Quarterly Results of Operations

(Quarterly figures unaudited)
(U.S. dollars in thousands, except per share and share figures)

For the Year Ended December 31, 2003

	March 31		June 30		September 30		December 31		Total
Sales	$	267,373	$	278,846	$	254,317	$	298,055	$	1,098,591
Net income (i)	$	16,298	$	21,247	$	15,908	$	20,659	$	74,112
Basic EPS (i)	$	0.50	$	0.66	$	0.49	$	0.64	$	2.29
Diluted EPS (i)	$	0.50	$	0.66	$	0.48	$	0.63	$	2.28
Weighted average number of shares outstanding on a     diluted basis (in millions)		32.5		32.5		32.6		32.6		32.5

For the Year Ended December 31, 2002

	March 31		June 30		September 30		December 31		Total
Sales	$	211,208	$	242,312	$	224,559	$	247,842	$	925,921
Net income (i)	$	13,924	$	18,253	$	14,052	$	9,730	$	55,959
Basic EPS (i)	$	0.47	$	0.62	$	0.44	$	0.30	$	1.82
Diluted EPS (i)	$	0.47	$	0.61	$	0.44	$	0.30	$	1.80
Weighted average number of shares outstanding on a     diluted basis (in millions)		29.8		29.9		32.1		32.5		31.1

(i)

Restated to reflect the retroactive adoption of new rules for stock-based compensation (see Note 1(p) of the audited consolidated financial statements contained in this Annual Report).

80        TESMA

Historical Financial Summary

Results of Operations

		Years ended December 31				Five-month period ended December 31		Years Ended July 31
		2003		2002		2002		2002		2001		2000		1999		1998
(U.S. dollars in millions, except per share and shares amounts)
Sales		$	1,098.6	$	925.9	$	399.4	$	855.2	$	789.0	$	766.0	$	592.9	$	452.7
Income before income taxes		$	110.0	$	82.9	$	29.9	$	81.9	$	81.2	$	90.8	$	56.2	$	29.1
Net income attributable to Class A     Subordinate Voting Shares and     Class B Shares		$	74.1	$	56.0	$	20.6	$	53.6	$	58.0	$	57.7	$	34.8	$	20.7
Earnings per Class A Subordinate Voting Share or Class B Share
	Basic	$	2.29	$	1.82	$	0.64	$	1.82	$	1.98	$	2.01	$	1.22	$	0.88
	Diluted	$	2.28	$	1.80	$	0.63	$	1.80	$	1.96	$	1.97	$	1.19	$	0.71
Average number of Class A Subordinate     Voting Shares and Class B Shares     outstanding (in millions)
	Basic		32.3		30.7		32.3		29.5		29.2		28.8		28.5		23.4
	Diluted		32.5		31.1		32.5		29.8		29.6		29.3		29.2		29.1
Cash flow from operating activities		$	101.9	$	107.5	$	28.4	$	91.6	$	48.2	$	99.6	$	63.1	$	34.9
Cash dividends paid per Class A     Subordinate Voting Share or     Class B Share (CDN $)		$	0.75	$	0.64	$	0.16	$	0.64	$	0.64	$	0.545	$	0.31	$	0.22

Financial Position

	December 31				July 31
As at
	2003		2002		2002		2001		2000		1999		1998
(U.S. dollars in millions, except per share amounts and ratios)
Cash (net of bank indebtedness)	$	122.5	$	89.0	$	92.4	$	33.2	$	62.9	$	31.8	$	25.1
Total assets	$	839.0	$	656.8	$	604.8	$	494.0	$	482.4	$	403.2	$	264.2
Capital expenditures (i)	$	61.2	$	68.9	$	76.8	$	63.6	$	55.4	$	46.3	$	43.0
Long-term debt (excluding current portion)	$	62.9	$	47.6	$	47.4	$	50.3	$	50.8	$	54.6	$	9.3
Shareholders' equity	$	549.3	$	410.2	$	389.9	$	282.8	$	248.7	$	201.6	$	173.0
Book value per Class A Subordinate Voting Share     or Class B Share (US $)	$	16.92	$	12.66	$	12.07	$	9.66	$	8.54	$	7.05	$	6.07
Book value per Class A Subordinate Voting Share     or Class B Share (CDN $)	$	21.83	$	19.85	$	19.17	$	14.83	$	12.61	$	10.62	$	9.17
Long-term debt (excluding current portion) to     total capitalization ratio (ii)		0.10:1		0.10:1		0.11:1		0.15:1		0.17:1		0.21:1		0.05:1

(i)

December 2002 comparative figure presented on a twelve-month basis.

(ii)

Total capitalization is the sum of long-term debt (excluding current portion) and shareholders' equity.

TESMA        81

Shareholder Information

Annual Meeting of Shareholders
The Annual Meeting of Shareholders will be held on Tuesday, May 4, 2004. The meeting will take place at the Design Exchange, 234 Bay Street, Toronto-Dominion Centre, Toronto, Ontario, Canada
commencing at 11:00 a.m.

Transfer Agents and Registrars Canada
Class A: Computershare Trust Company of Canada

Tel: 1 800 564-6253
(North America/International
toll free 514 982-7555)

Fax: 1 866 249-7775
(North America/International
toll free 416 263-9524)

Mail:
9th Floor, 100 University Avenue
Toronto, Ontario M5J 2Y1
e-mail: service@computershare.com
Internet: www.computershare.com

United States
Class A: Computershare Trust Company, Inc., New York

Tel: 514 982-7555
North America/International toll free

Fax: 416 263-9524
North America/International toll free

Mail:
350 Indiana Street, Suite 800
Golden, Colorado 80401
e-mail: service@computershare.com
Internet: www.computershare.com Principal Bankers
Canadian Imperial Bank of Commerce, Toronto, Canada

Auditors
Ernst & Young LLP, Toronto, Canada

Dividends
The current quarterly dividend rate is set at CDN $0.16 per share. Dividends are paid quarterly on or about the 15th of March, June, September and December in each year with a record date on or about the last business day of February, May, August and November (subject to approval by the Board of Directors).

Payment of Dividends to Non-Residents
Shareholders with addresses of record in the United States receive dividends in U.S. funds. The dividend amount is converted at the Bank of Canada's noon rate of exchange on the record date. All other non-resident shareholders may elect to receive dividends in U.S. or Canadian funds. In all cases, the applicable Canadian withholding tax is deducted.

Annual Information Form/ Form 40-F
The Company files an Annual Information Form (AIF) with Canadian Provincial Securities Regulators and a Report on Form 40-F with the U.S. Securities and Exchange Commission. The AIF is available on the Tesma website at www.tesma.com or upon written request to the Manager, Investor Relations of the Company at the corporate office. Investor Information
Inquiries regarding the Company or requests to be placed on our supplementary mailing list, fax list or e-mail list to receive Tesma's Annual and Quarterly Reports or Press Releases, please contact Lynn Riley, Manager, Investor Relations at:

1000 Tesma Way
Concord, Ontario, L4K 5R8
Tel: 905 417-2160
Fax: 905 417-2148
e-mail: lynn. riley@tesma.com

82        TESMA

Stock Market Information

Stock Exchange Listings
Tesma International Inc. Class A Subordinate Voting Shares are listed on the Toronto Stock Exchange (TSX) — TSM.A and NASDAQ — TSMA.

Index Listings
S&P/TSX Composite
S&P/TSX Capped Composite
S&P/TSX Small Cap
S&P/TSX Capped Consumer
Discretionary Index Issued and Outstanding Shares
As at December 31, 2003
Class A Subordinate Voting Shares
(one vote per share) 18,140,429
Class B Shares
(10 votes per share) 14,223,900 Magna International Inc. owns, directly and indirectly, all Class B Shares carrying approximately 89% of the total votes attaching to all outstanding shares of the Company.

Class A Subordinate Voting Share Stock Performance (closing prices)

		Jan		Feb		Mar		Apr		May		June		July		Aug		Sept		Oct		Nov		Dec
TSX (CDN $)
High	2003	$	28.50	$	26.95	$	26.50	$	27.86	$	29.50	$	27.20	$	29.45	$	30.99	$	32.24	$	32.25	$	32.18	$	31.75
	2002	$	32.46	$	33.50	$	37.28	$	35.15	$	36.75	$	39.58	$	35.05	$	32.78	$	33.75	$	33.00	$	26.00	$	27.26
Low	2003	$	26.11	$	24.02	$	22.26	$	22.91	$	25.00	$	25.26	$	25.54	$	28.69	$	30.09	$	29.91	$	28.31	$	28.38
	2002	$	29.50	$	31.00	$	30.29	$	32.50	$	34.75	$	34.70	$	31.00	$	30.01	$	29.50	$	24.90	$	22.50	$	22.25
Close	2003	$	26.61	$	26.00	$	22.79	$	27.75	$	26.00	$	26.05	$	29.22	$	30.50	$	30.61	$	32.25	$	29.60	$	29.25
	2002	$	31.80	$	33.00	$	32.55	$	34.50	$	36.10	$	34.76	$	32.75	$	30.45	$	32.45	$	25.75	$	23.25	$	27.24
NASDAQ (U.S. $)
High	2003	$	18.50	$	17.71	$	17.72	$	19.33	$	21.00	$	20.25	$	20.75	$	23.50	$	23.60	$	24.39	$	25.01	$	23.59
	2002	$	20.15	$	21.10	$	23.50	$	22.12	$	23.90	$	25.73	$	23.06	$	20.59	$	22.00	$	20.62	$	16.85	$	17.85
Low	2003	$	16.50	$	16.00	$	15.50	$	15.84	$	18.15	$	17.80	$	19.94	$	20.50	$	21.70	$	21.34	$	21.34	$	21.00
	2002	$	18.30	$	19.55	$	19.32	$	20.45	$	22.25	$	22.10	$	19.41	$	19.27	$	18.83	$	15.50	$	14.50	$	14.25
Close	2003	$	17.38	$	17.59	$	16.05	$	19.33	$	18.65	$	19.45	$	20.75	$	22.23	$	22.79	$	24.33	$	22.96	$	22.51
	2002	$	20.09	$	20.30	$	21.70	$	21.77	$	23.60	$	22.90	$	20.54	$	19.27	$	20.51	$	16.35	$	14.86	$	16.90

Cumulative Relative Total Returns to December 31, 2003 (CDN $)

TESMA        83

Board of Directors

[PHOTO]	Manfred Gingl(1) Director since April 1995; Executive Vice Chairman, Magna International Inc.; Chairman (since February 2004) and Chief Executive Officer (since April 1995), Tesma International Inc. Previously: Vice Chairman (May 2002 — February 2004) and President (April 1995 — May 2002) of Tesma; Managing Director of Blau International Ges.m.b.H. and President of Blau Autotec Inc. (June 1993 — February 1995); President and Chief Operating Officer (December 1981 — June 1993) and Chief Executive Officer (April 1988 — June 1993) of Magna. Mr. Gingl also serves on the boards of directors of Magna and Decoma International Inc.
[PHOTO]	Oscar B. Marx, III(5) Director since July 1995; Vice-President, Automotive Sector, TMW Enterprises, Inc.; Chairman, Amerigon Incorporated Previously: A variety of positions at Ford Motor Company (1962 — 1994), including Vice President, Ford Automotive Components Group (now Visteon Corporation). Mr. Marx is a Director of Amerigon Incorporated, Parametric Technologies,  Inc. and Pullman Industries, Inc.
[PHOTO]	Judson D. Whiteside(2)(7) Director since July 1995; Senior Partner, Chairman and Chief Executive Officer, Miller Thomson LLP Mr. Whiteside also serves on the boards of directors of: Addison Estates Limited; Answorth Leasing Corporation; GN Hearing Care Canada Ltd.; Nihon Kenko Zoushin Kenkyukai Canada; The Pampered Chef-Canada, Ltd.; Shaklee Canada Inc.; Teranet Land Information Services Inc.; the Miller Thomson Foundation; and Direct Sellers Assn. of Canada.
[PHOTO]	Hon. David R. Peterson, P.C., Q.C.(5)(6) Director since February 2002; Chairman, Cassels Brock & Blackwell LLP Previously: Premier of the Province of Ontario (1985 — 1990); Leader of the Ontario Liberal Party (1982); elected as a Member of the Ontario Legislature (1975). Mr. Peterson also serves on the boards of directors of: BNP Paribas (Canada); Industrial-Alliance Life Insurance Company; INSCAPE Corporation; Ivanhoe Cambridge Inc.; The National Life Assurance Company of Canada; Rogers Communications Inc.; Rogers Wireless Communications Inc.; and numerous charitable, educational and environmental organizations.
[PHOTO]	Siegfried Wolf Director since June 2002; Executive Vice Chairman, Magna International Inc. Previously: President and Chief Executive Officer of Magna Steyr (2001 — 2002); President of Magna Europe (1995 — 2000); various senior positions with Magna's European operations beginning in 1994. Mr. Wolf also serves on the boards of directors of Magna, Decoma International Inc. and Intier Automotive Inc.
[PHOTO]	Hon. M. Douglas Young, P.C.(4)(6) Director since July 2002; Chairman, Summa Strategies Canada Inc.; Counsel, Patterson Palmer Previously: Served as Canada's Minister of Transport, Minister of Human Resources Development and Minister of National Defence and Veterans Affairs (1975 — 1997). Mr. Young also serves on the boards of directors of: ARG; Conner's Bros.; Genesee & Wyoming Inc.; Heating Oil Partners; and Magellan Aerospace Corporation.
[PHOTO]	Vincent J. Galifi(3) Director since February 2004; Executive Vice President and Chief Financial Officer, Magna International Inc. (since 1997) Previously: Held a variety of positions in the taxation and finance department of Magna (1989 — 1997); associate at the international accounting firm of Coopers & Lybrand (1982 — 1989). Mr. Galifi also serves on the boards of directors of Decoma International Inc. and Intier Automotive Inc.
	(1)  Chairman of the Board
	(2)  Chairman of the Audit Committee
	(3)  Chairman of the Corporate Governance and Compensation Committee
	(4)  Chairman of the Environmental, Health and Safety Committee
	(5)  Member of the Audit Committee
	(6)  Member of the Corporate Governance and Compensation Committee
	(7)  Member of the Environmental, Health and Safety Committee

84        TESMA

Officers

[PHOTO]	Manfred Gingl Chairman (since February 2004) and Chief Executive Officer (since April 1995), Tesma International Inc. Previously: Vice Chairman (May 2002 — February 2004) and President (April 1995 — May 2002) of Tesma; Managing Director of Blau International Ges.m.b.H. and President of Blau Autotec Inc. (June 1993 — February 1995); President and Chief Operating Officer (December 1981 — June 1993) and Chief Executive Officer (April 1988 — June 1993) of Magna. Mr. Gingl also serves on the boards of directors of Magna and Decoma International Inc.
[PHOTO]	Anthony E. Dobranowski President (since May 2002) and Chief Financial Officer (since April 1995) Previously: Executive Vice President (April 1995 — May 2002) of Tesma; Executive Vice President, Finance and Treasurer of Atoma International Inc. [now Intier Automotive Inc.] (September 1991 — March 1995); various senior financial positions with Atoma and its operating groups (March 1986 — September 1991).
[PHOTO]	Pasquale Cerullo Executive Vice President, Sales, Marketing and Corporate Development (since March 2002) Previously: Vice President, Sales and Marketing of Tesma (March 1995 — March 2002); Director, Sales and Marketing at Blau Autotec Inc. [acquired by Tesma in 1995] (August 1993 — March 1995); various sales positions, including Director of Sales, for Tesma (May 1984 — August 1993).
[PHOTO]	James L. Moulds Vice President, Finance (since September 1999) and Treasurer (since September 2002) Previously: Controller (August 1995 — September 1999) of Tesma; Manager, Financial Reporting at Magna (October 1994 — July 1995); Manager, Financial Reporting at Atoma International Inc. (April 1994 — September 1994); various public accounting and auditing capacities with Ernst & Young LLP (September 1990 — April 1994).
[PHOTO]	Stefan T. Proniuk Vice President, Secretary and General Counsel (since April 1995) Previously: Partner, in the law firm Crossley Mann, Toronto, Ontario (February 1993 — February 1995); consultant to automotive parts and components supplier (September 1992 — January 1993); Vice-President, Secretary and General Counsel of Cosma International Inc. [wholly-owned subsidiary of Magna] (January 1988 — August 1992); Legal Counsel at Magna (August 1987 — January 1988).
[PHOTO]	Thomas More Controller (since September 2002) Previously: Assistant Controller of Tesma (February 2001 — September 2002); Controller at two privately-held companies (February 1999 — February 2001); various public accounting and auditing capacities with Ernst & Young LLP (September 1994 — February 1999).
[PHOTO]	Karl H. Steinbauer Vice President, Manufacturing (since January 2004) Previously: General Manager of the "light metals" divisions of Tesma (August 2001 — January 2004); Vice President, Operations of Tesma (December 1999 — July 2001); General Manager of the Toral Cast division of Tesma (November 1995 — November 1999); various positions in the fields of engineering, quality, tooling and manufacturing in the European automotive industry (December 1979 — October 1995).

TESMA        85

Corporate Information

Corporate Office

Tesma International Inc.
1000 Tesma Way
Concord, Ontario
Canada L4K 5R8
Tel: 905 417-2100
Fax: 905 417-2101 Sales Office Locations: Canada

Tesma Asia-Pacific Sales
1000 Tesma Way
Concord, Ontario
Canada L4K 5R8
Tel: 905 417-2191
Fax: 905 417-2136

United States

Tesma Corporate Sales
23300 Haggerty Road, Suite 200
Farmington Hills, MI
U.S.A. 48335
Tel: 248 888-5550
Fax: 248 427-1458

Austria

Tesma Motoren-und-
Getriebetechnik Ges.m.b.H.
Tesma Allee 1
A-8261 Sinabelkirchen
Austria
Tel: 011 43-3118-2055
Fax: 011 43-3118-2055-111

Germany

Tesma Vertrieb
Marktplatz 10
D-86441 Zusmarshausen
Germany
Tel: 011 49-8291-790140
Fax: 011 49-8291-790150

France

c/o Magna International
4 route de Gisy
Burospace-bat 6
91570 Bievres
France
Tel: 011 33 (0) 1-69332072
Fax: 011 33 (0) 1-69332079 Italy

Via Caselle, 6
84099 S. Cipriano-Picentino (Salerno)
Italy
Tel/Fax: 011-39 (0) 89-862065

United Kingdom

Tesma International
Suite 2, Melville House
High Street, Great Dunmow
Essex, CM6 1AF
Great Britain
Tel: 011 44-1371-875333
Fax: 011 44-1371-875151

South Korea

HAC Corporation
4F Mosan Building, 14-4
Yangjae-dong, Seocho-Gu
Seoul 137-130
South Korea
Tel: 011 82-2-571-9350
Fax: 011 82-2-571-9355

Japan

Tesma International
Crest Yasuda Building 3F
3-21 Kanda Nishiki-cho,
Chiyoda-ku, Tokyo 101-0057
Japan
Tel: 011 81 (0) 3518-8980
Fax: 011 81 (0) 3518-8010

86        TESMA

Tesma Customers Around The World

[GRAPHIC]

Tesma Global Facilities

	Sales	Manufacturing	R&D/Design/Tooling
Canada	2	13	4
United States	1	5
Brazil		1
United Kingdom	1
Italy	1	1
Austria	1	2	1
Germany	1	3
Japan	1
South Korea	2	2
China		1

Tesma International Inc. 1000 Tesma Way, Concord, Ontario, Canada L4K 5R8 Tel: (905) 417-2100 Fax: (905) 417-2101 www.tesma.com

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Tesma At A Glance
Profile
Results
Global Performance
Content Per Vehicle
Chairman's Message
Letter to Shareholders
Glossary
Components, Modules and Systems
Quality Standout
Greatest Benefits
We Offer More
Policies
Review
Management's Discussion and Analysis of Results of Operations and Financial Position
Management's Responsibility for Financial Reporting
Auditors' Report
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income and Retained Earnings
Consolidated Statements of Cash Flows
Notes To Consolidated Financial Statements
Quarterly Results of Operations
Historical Financial Summary
Shareholder Information
Board of Directors
Officers
Corporate Information

EX-22.1

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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

NOTICE is hereby given that the Annual Meeting of Shareholders (the "Meeting") of Tesma International Inc. ("Tesma" or the "Corporation") will be held at the Design Exchange, 2^nd Floor, Toronto-Dominion Centre, Ernst & Young Tower, 234 Bay Street, Toronto, Ontario, Canada, on Tuesday, May 4, 2004, commencing at 11:00 a.m. (Toronto time), for the following purposes:

1.

to receive the consolidated financial statements of the Corporation for the year ended December 31, 2003, and the report of the Auditors thereon;



2.

to elect directors;



3.

to re-appoint the Auditors for the ensuing year and to authorize the Audit Committee of the Board of Directors to fix the Auditors' remuneration; and



4.

to transact such further or other business or matters as may properly come before the Meeting or any adjournment(s) thereof.

Only shareholders of record at the close of business on March 26, 2004 are entitled to receive notice of the Meeting.

Tesma's Annual Report to Shareholders contains the consolidated financial statements of the Corporation for the year ended December 31, 2003, and the report of the Auditors thereon. The Management Information Circular/Proxy Statement (the "Circular") and form of proxy for the Corporation's Class A Subordinate Voting Shares are provided with this Notice of Meeting. The Circular sets out additional information concerning the matters to be dealt with at the Meeting. If you are unable to be present at the Meeting in person, please complete, date and sign the enclosed proxy and return it to the Secretary of the Corporation in the envelope provided for that purpose. Your proxy must arrive at one of the locations specified on page 1 of the Circular not later than 5:00 p.m. (Toronto time) on May 3, 2004 or, if the Meeting is adjourned or postponed, not less than 48 hours (excluding weekends and holidays) before the time of the adjourned or postponed meeting.

By order of the Board of Directors,

(Signed) "STEFAN T. PRONIUK"

Stefan T. Proniuk
Vice President, Secretary
and General Counsel
TESMA INTERNATIONAL INC.

March 25, 2004
Concord, Ontario

TESMA INTERNATIONAL INC.
1000 Tesma Way • Concord • Ontario • Canada • L4K 5R8 • (T) (905) 417-2100 • (F) (905) 417-2101
www.tesma.com

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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

EX-22.2

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MANAGEMENT INFORMATION CIRCULAR/PROXY STATEMENT

        This Management Information Circular/Proxy Statement (this "Circular") is furnished to the shareholders of Tesma International Inc. ("Tesma" or the "Corporation") in connection with the solicitation by and on behalf of management and the board of directors of the Corporation (the "Board") of proxies to be used at the Annual Meeting of Shareholders (the "Meeting") to be held at the Design Exchange, 2^nd Floor, Toronto-Dominion Centre, Ernst & Young Tower, 234 Bay Street, Toronto, Ontario, Canada, on Tuesday, May 4, 2004, commencing at 11:00 a.m. (Toronto time), and at any adjournment(s) or postponement(s) thereof, for the purposes set forth in the attached Notice of Annual Meeting of Shareholders (the "Notice").

        This Circular, the Notice, the accompanying form of proxy and the Tesma Annual Report to Shareholders are being mailed, on or about April 8, 2004, to shareholders of record of the Corporation as of the close of business on March 26, 2004. The Corporation will bear all costs associated with the preparation and mailing of this Circular, the Notice, the accompanying form of proxy and the Tesma Annual Report to Shareholders, as well as the costs of the solicitation of proxies. The solicitation will be primarily by mail; however, officers and other employees of the Corporation may also solicit proxies (but not for additional compensation) personally, by telephone, telefax or other means of electronic transmission. Banks, brokerage houses and other custodians and nominees or fiduciaries will be requested to forward proxy solicitation material to their principals and to obtain authorizations for the execution of proxies, and will be reimbursed for their reasonable expenses in doing so.

        Pursuant to the Corporation's by-laws, the Board unanimously approved the change of the Corporation's financial year end to December 31, effective December 31, 2002, and the change in the Corporation's financial reporting currency to the U.S. dollar commencing January 1, 2003.

        For the purposes of this Circular, all references to dollar amounts are to U.S. dollars unless otherwise stated, and all amounts shown in U.S. dollars for periods prior to January 1, 2003 have been converted from Canadian dollars to U.S. dollars at the applicable exchange rates as described in "Significant Accounting Policies — (c) Reporting Currency and Foreign Currency Translation" of the Corporation's audited consolidated financial statements for the year ended December 31, 2003. All references to "calendar 2003" are references to the one year period ended December 31, 2003, all references to the "fiscal 2002 stub period" are references to the five-month period ended December 31, 2002, and all references to "fiscal years" (including references to "fiscal" followed by a specific year) are references to the one year period ended on July 31 in the year specified.

APPOINTMENT AND REVOCATION OF PROXIES

Registered Holders

        The persons named in the form of proxy accompanying this Circular are officers of the Corporation. A shareholder has the right to appoint a person (who need not be a shareholder of the Corporation) as nominee to attend and act for and on behalf of such shareholder at the Meeting, other than the management representatives named in the accompanying form of proxy. This right may be exercised either by striking out the names of the management representatives where they appear on the front of the form of proxy and by inserting in the blank space provided the name of the other person who the shareholder wishes to appoint, or by completing and submitting another proper form of proxy naming such other person as proxyholder.

        A shareholder who has given a proxy, in addition to revocation in any other manner permitted by applicable Canadian law, may revoke the proxy within the time periods described in this Circular by an instrument in writing executed by the shareholder or by his/her attorney authorized in writing or, if the shareholder is a body corporate, by an officer or attorney thereof duly authorized.

        Shareholders desiring to be represented at the Meeting by proxy must deposit their form of proxy at either of the following locations:

•

the principal executive offices of the Corporation at 1000 Tesma Way, Concord, Ontario, Canada, L4K 5R8, addressed to the Secretary of the Corporation; or



•

the offices of Computershare Trust Company of Canada, 100 University Avenue, 9^th Floor, Toronto, Ontario, Canada M5J 2Y1, addressed to the Proxy Department.

        In either case, a proxy must arrive not later than 5:00 p.m. (Toronto time) on May 3, 2004, or if the Meeting is adjourned or postponed, not less than 48 hours (excluding weekends and holidays) before the time of the adjourned or postponed Meeting. If a shareholder who has completed a proxy attends the Meeting in person, any votes cast by such shareholder on a poll will be counted and the proxy will be disregarded.

        Shareholders desiring to revoke a proxy previously given must deposit their revocation of proxy:

•

at the principal executive offices of the Corporation at 1000 Tesma Way, Concord, Ontario, Canada, L4K 5R8, addressed to the Secretary of the Corporation, at any time up to 5:00 p.m. (Toronto time) on the last business day preceding the day of the Meeting, or any adjournment or postponement thereof; or



•

with the chair of the meeting on the day of the Meeting or any adjournment or postponement thereof.

Non-Registered Holders

        Only registered shareholders, or the persons that they appoint as their proxies, are permitted to attend and vote at the Meeting. However, in many cases, shares beneficially owned by a holder (a "Non-Registered Holder") are registered either:

•

in the name of an intermediary that the Non-Registered Holder deals with in respect of the shares, such as, among others, banks, trust companies, securities dealers or brokers and trustees or administrators of registered plans; or



•

in the name of a depository (such as The Canadian Depository for Securities Limited) of which the intermediary is a participant.

        In accordance with the requirements of National Instrument 54-101 of the Canadian securities laws, the Corporation will be distributing copies of the Notice, this Circular, the accompanying form of proxy and the Tesma Annual Report to Shareholders (collectively, the "meeting materials") to the depository and intermediaries for further distribution to Non-Registered Holders. Intermediaries are required to forward the meeting materials to Non-Registered Holders and receive voting instructions from them unless a Non-Registered Holder has waived the right to receive the meeting materials. Intermediaries often use service companies to forward the meeting materials to Non-Registered Holders. Generally, Non-Registered Holders who have not waived the right to receive the meeting materials will either:

•

be given a voting instruction form which must be completed and signed by the Non-Registered Holder in accordance with the directions set out on the voting instruction form (which may, in some cases, permit the completion of the voting instruction form by telephone); or



•

less typically, be given a proxy which has already been signed by the intermediary (usually by way of a facsimile, stamped signature) which is restricted as to the number of shares beneficially owned by the Non-Registered Holder, but which is otherwise uncompleted. In this case, the Non-Registered Holder who wishes to submit the proxy should otherwise properly complete and deposit it with the Corporation or Computershare Trust Company of Canada, as described above. This proxy need not be signed by the Non-Registered Holder.

        In either case, the purpose of these procedures is to permit Non-Registered Holders to direct the voting of the shares which they beneficially own. Should a Non-Registered Holder who receives a proxy signed by the intermediary wish to attend and vote at the Meeting in person (or have another person attend and vote on behalf of the Non-Registered Holder), the Non-Registered Holder should strike out the name(s) of the person(s) named in the proxy and insert the name of the Non-Registered Holder (or such other person) in the blank space provided. A Non-Registered Holder who receives a voting instruction form should follow the corresponding instructions on the form. In either case, Non-Registered Holders should carefully follow the instructions of their intermediaries and their intermediaries' service companies.

        A Non-Registered Holder may revoke a voting instruction form (or proxy) or a waiver of the right to receive the meeting materials given to an intermediary, at any time, by written notice to the intermediary, except that an intermediary is not required to act on a revocation of a voting instruction form (or proxy) or a revocation of a

2

waiver of the right to receive the meeting materials that is not received by the intermediary at least seven days prior to the Meeting.

VOTING OF PROXIES

        The shares represented by any valid proxy in favour of the management representatives named in the accompanying form of proxy will be voted for or withheld from voting (abstain) on the election of directors and the re-appointment of the Auditors, including the authorization of the Audit Committee of the Board to fix the remuneration of the Auditors, in each case in accordance with any specific instructions given by a shareholder on the form of proxy. In the absence of such specific instructions, such shares will be voted by the management representatives FOR the election as directors of the management nominees named in this Circular and FOR the re-appointment of Ernst & Young LLP ("Ernst & Young") as the Auditors of the Corporation and the authorization of the Audit Committee of the Board to fix the Auditors' remuneration.

        The accompanying form of proxy confers discretionary authority upon the persons named therein with respect to amendments or variations to matters identified in the Notice and with respect to such other business or matters which may properly come before the Meeting or any adjournment(s) or postponement(s) thereof. As of the date of this Circular, the Corporation is not aware of any such amendments or variations or any other business or matters to be raised at the Meeting.

RECORD DATE

        The Board has fixed the close of business on March 26, 2004 as the record date (the "Record Date") for the Meeting. Only holders of record of Class A Subordinate Voting Shares and Class B Shares as of the close of business on the Record Date are entitled to receive notice of, and to attend and vote at, the Meeting, except that:

•

in accordance with applicable law, a transferee of Class A Subordinate Voting Shares or Class B Shares acquired after the Record Date shall be entitled to vote at the Meeting if such transferee produces properly endorsed share certificates or otherwise establishes ownership of such shares, and has demanded in writing, not later than 10 days before the Meeting, that the name of such transferee be included in the list of shareholders entitled to vote at the Meeting; and



•

a holder of Class A Subordinate Voting Shares issued by the Corporation after the Record Date in connection with the exercise of stock options or conversion rights to acquire such shares shall be entitled to vote at the Meeting in person or by proxy if such holder establishes ownership of such shares to the satisfaction of the Secretary of the Corporation or the chairman of the Meeting prior to the Meeting or any adjournment(s) or postponement(s) thereof.

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VOTING SECURITIES AND PRINCIPAL HOLDERS

        As of the Record Date, there were 18,204,329 Class A Subordinate Voting Shares outstanding. Holders of Class A Subordinate Voting Shares are entitled to cast one (1) vote per Class A Subordinate Voting Share held by them on each matter to be acted on at the Meeting.

        As of the Record Date, there were 14,223,900 Class B Shares outstanding. Holders of Class B Shares are entitled to cast ten (10) votes per Class B Share held by them on each matter to be acted on at the Meeting. Holders of Class B Shares are entitled, at any time and from time to time, to convert each Class B Share into a Class A Subordinate Voting Share on a one-for-one basis.

        The following table sets forth information with respect to the only shareholders known to the directors or officers of the Corporation to own beneficially, directly or indirectly, or exercise control or direction over, more than 10% of the issued and outstanding Class A Subordinate Voting Shares or Class B Shares, as of the Record Date:

	Class of Shares	Number of Shares	Percentage of Class
Magna International Inc.(1)	Class B	14,223,900	100%

(1)

4,484,477 of these shares are held by 1128969 Ontario Inc., a wholly-owned subsidiary of Magna International Inc. ("Magna"). The Stronach Trust controls Magna through its right to direct the votes attached to 726,829 class B shares of Magna. Mr. Frank Stronach (the founder, chairman and a director of Magna) and Ms. Belinda Stronach (a director and the Chairman of the Corporation during calendar 2003, and the President, Chief Executive Officer and a director of Magna during its financial year ended December 31, 2003), together with two other members of their family, are the trustees of the Stronach Trust. Mr. Stronach and Ms. Stronach are also two of the members of the class of potential beneficiaries of the Stronach Trust.

        Magna International Inc. ("Magna") has advised the Corporation that it intends to vote its Class B Shares for the election of the management nominees named in this Circular as directors of the Corporation and for the re-appointment of Ernst & Young as the Auditors of the Corporation, including the authorization of the Audit Committee of the Board to fix the Auditors' remuneration.

BUSINESS TO BE TRANSACTED AT THE MEETING

Financial Statements and Auditors' Report

        Management, on behalf of the Board, will submit to the shareholders at the Meeting the audited consolidated financial statements of the Corporation for the year ended December 31, 2003, and the report of the Auditors thereon, but no vote by the shareholders with respect thereto is required or proposed to be taken. The audited consolidated financial statements and Auditors' report form part of the Corporation's Annual Report to Shareholders which is being mailed to shareholders with the Notice and this Circular.

Election of Directors

        Under the restated articles of incorporation of the Corporation, the Board is to consist of a minimum of three (3) and a maximum of fifteen (15) directors. A special resolution passed on July 31, 1995 authorizes the directors to determine the number of directors of the Corporation from time to time. Pursuant to that special resolution, the number of directors of the Corporation is currently fixed at seven (7). The term of office for each current director expires at the close of the Meeting unless successors are not elected, in which case the current directors remain in office until their successors are elected or appointed in accordance with applicable law and the Corporation's by-laws.

        Management proposes to nominate, and the persons named in the accompanying form of proxy will vote for (in the absence of specific instructions to withhold or abstain from voting on the proxy), the election of the seven (7) persons whose names are set forth below, all of whom are now and have been directors of the Corporation for the periods indicated, but will not vote for a greater number of persons than the number of nominees named in the form of proxy. A shareholder may withhold his/her/its vote from any individual nominee by striking a line through the particular nominee's name in the form of proxy. Management does not contemplate that any of the nominees will be unable to serve as a director. If, as a result of circumstances

4

not now contemplated, any nominee is unavailable to serve as a director of the Corporation, the proxy will be voted for the election of such other person or persons as management may select. Each director elected will hold office until the close of the next annual meeting of the shareholders of the Corporation or until his/her earlier resignation or replacement in accordance with applicable law and the Corporation's by-laws.

        The following table sets forth information with respect to each of the seven (7) management nominees for director, including the number of Class A Subordinate Voting Shares, Tesma deferred share units and Class B Shares beneficially owned, directly or indirectly, or over which control or direction is exercised, by each such nominee, as of the Record Date:

Name and Address of Proposed Nominee	Age	Director Since	Other Positions and Offices Presently Held With the Corporation	Principal Occupation	Class A Subordinate Voting Shares/Per Cent of Class	Deferred Share Units(1)	Class B Shares/ Per Cent of Class
Vincent J. Galifi(2) Woodbridge, Ontario	44	February 24, 2004	None	Executive Vice-President and Chief Financial Officer, Magna International Inc. (auto parts manufacturer)	20,590(3)	Nil	Nil
Manfred Gingl Kettleby, Ontario	55	April 27, 1995	Chairman and Chief Executive Officer	Chairman and Chief Executive Officer of the Corporation and Executive Vice Chairman, Magna International Inc. (auto parts manufacturer)	112,538(3)(4)	Nil	Nil
Oscar B. Marx, III(2)(5)(6) Laguna Beach, California	65	July 31, 1995	None	Vice President, TMW Enterprises Inc. (private investment firm)	3,610 (3)(7)(8)	12,511.37	Nil
Hon. David R. Peterson, P.C.(2)(6) Toronto, Ontario	60	February 13, 2002	None	Chairman, Cassels Brock & Blackwell LLP (Barristers and Solicitors)	2,000(3)(8)	5,610.66	Nil
Judson D. Whiteside(6)(9) Thornhill, Ontario	57	July 31, 1995	None	Chairman and Chief Executive Officer, Miller Thomson LLP (Barristers and Solicitors)	5,010(3)(8)(10)	6,888.16	Nil
Siegfried Wolf Weikersdorf, Austria	46	June 6, 2002	None	Executive Vice Chairman, Magna International Inc. (auto parts manufacturer)	103,948(3)	Nil	Nil
Hon. M. Douglas Young, P.C.(2)(9) Beresford (Bathurst), New Brunswick	63	July 31, 2002	None	Chairman, Summa Strategies Canada Inc. (government relations agency)	Nil(8)	5,658.77	Nil

(1)

Granted pursuant to the Tesma International Inc. Non-Employee Director Share-Based Compensation Plan. See "Compensation of Directors and Executive Officers — Directors' Compensation — Directors' Deferred Compensation Plan" below.

(2)

Member of the Corporate Governance and Compensation Committee (formerly the Human Resources and Compensation Committee). See "Board of Directors and Committees of the Board" below.

(3)

These shares represent less than 1% of the class.

(4)

These shares are held as follows: 40,000 of these shares are held by Wahlheim Capital Inc., a company controlled by Mr. Gingl; 51,474 of these shares are held by 1593057 Ontario Inc., which in turn is directly owned by the Gingl Family Trust, of which Mr. Gingl is one of several potential beneficiaries; 20,623 of these shares are held in a registered retirement savings plan, of which Mr. Gingl is the beneficial owner; and 441 of these shares are held directly.

(5)

Mr. Marx was appointed Lead Director of the Board on March 25, 2004.

(6)

Member of the Audit Committee. See "Board of Directors and Committees of the Board" below.

(7)

These shares are held by the OB Marx III Revocable Trust. Mr. Marx is the trustee for the OB Marx III Revocable Trust.

(8)

Each of Messrs. Marx and Whiteside also hold options to acquire 10,000 Class A Subordinate Voting Shares granted to them in their capacities as directors of the Corporation under the Tesma incentive stock option plan (the "Stock Option Plan") during fiscal 2000. Such options were granted for a term of ten years ending June 14, 2010, at an exercise price of $26.00, and vested as to 50% on the date of the grant (June 15, 2000) and the remaining 50% vested on August 1, 2001. Following their respective appointments as directors of the Corporation during fiscal 2002, each of Messrs. Peterson and Young were granted options to acquire 5,000 Class A Subordinate Voting Shares under the Stock Option Plan. Such options were granted for a term not exceeding ten years ending July 31, 2012, at an exercise price of $31.74, and vesting as to 50% on the date of the grant (August 21, 2002) with the remaining 50% vesting on August 1, 2003. Neither Mr. Galifi nor Mr. Wolf have been granted options to acquire Class A Subordinate Voting Shares. As to the options granted to Mr. Gingl (in his capacity as an officer of the Corporation) under the Stock Option Plan, see "Compensation of Directors and Executive Officers — Stock Option Plans, Grants and Exercises" below.

(9)

Member of the Environmental, Health and Safety Committee. See "Board of Directors and Committees of the Board" below.

(10)

600 of these shares are held by an associate of Mr. Whiteside.

        All of the management nominees for director were elected to their present terms of office by the shareholders of the Corporation at the annual and special meeting held on May 6, 2003, except Mr. Galifi who was appointed on February 24, 2004 to fill the vacancy created by the resignation of Ms. Belinda Stronach as a member of the Board on January 20, 2004. Manfred Gingl served as Vice-Chairman of the Corporation during calendar 2003, but was appointed as Chairman on February 24, 2004 to fill the vacancy created by the resignation of Ms. Stronach.

        Each of the management nominees for director has held the principal occupation identified in the above table or another position with the same employer for the past five years. Messrs. Gingl and Wolf are also directors of Magna. For biographical information relating to the Corporation's directors, please visit Tesma's website at www.tesma.com/corporate/corporategovernance.

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        A majority of the nominees for director are considered to be "outside" or non-management directors and "unrelated directors" for the purposes of The Toronto Stock Exchange ("TSX") Corporate Governance Guidelines and "independent" for the purposes of the NASDAQ Stock Market, Inc. ("NASDAQ") Corporate Governance Rules. See Schedule "B" — "Report on Corporate Governance" of this Circular for a discussion of director independence from management.

        There are no contracts, arrangements or understandings between any management nominee and any other person (other than the directors and officers of the Corporation acting solely in such capacity) pursuant to which the nominee has been or is to be elected as a director of the Corporation.

        As of the Record Date, 1,677,754 Class A Subordinate Voting Shares, representing approximately 9.2% of the class, are held by the Tesma Canadian and U.S. Deferred Profit Sharing Plans (the "Tesma DPSPs") for the benefit of qualifying employees of the Corporation as part of the Tesma Employee Equity Participation and Profit Sharing Program (see "Compensation of Directors and Executive Officers — Report on Executive Compensation"). Through his position as the President of the Corporation, Mr. Anthony E. Dobranowski retains the right to direct the trustees of the Tesma DPSPs in regards to voting and disposing of such shares. The trustees, absent any direction from Mr. Dobranowski, have the right to vote such shares. Mr. Dobranowski is not a beneficiary under the Tesma DPSPs.

        Excluding the shares that Mr. Dobranowski may exercise control or direction over through the Tesma DPSPs, the directors and officers of the Corporation as a group (13 persons) owned beneficially or exercised control or direction over 309,424 Class A Subordinate Voting Shares, or approximately 1.7% of the class, and no Class B Shares, as of the Record Date.

Re-Appointment of Auditors/Auditors' Remuneration

        At the Meeting, the shareholders will be asked to re-appoint Ernst & Young as the Auditors of the Corporation, based on the recommendations of the Audit Committee and the Board. Ernst & Young have served as the Auditors of Tesma and its predecessors since November 1987. The persons named in the accompanying form of proxy will, in the absence of specific instructions to withhold or abstain from voting on the proxy, vote for the re-appointment of Ernst & Young as the Auditors of the Corporation to hold office until the next annual meeting of shareholders of the Corporation and to authorize the Audit Committee of the Board to fix the Auditors' remuneration.

        For a description of the fees billed to the Corporation by Ernst & Young for audit, audit-related and non-audit services provided during calendar 2003, see "Board of Directors and Committees of the Board — Audit Committee — Auditors Independence" below. Audit-related services provided by Ernst & Young to the Corporation are generally closely linked to the performance of the audit of Tesma's annual financial statements, including review engagement procedures of Tesma's quarterly interim financial statements, or are recurring services that are typically performed by the external auditors. Non-audit services consist primarily of tax compliance, advisory and research services, as well as special tax projects and transfer pricing assistance.

        Representatives of Ernst & Young are expected to attend the Meeting and will have an opportunity to make a statement if they so desire. Such representatives are also expected to be available to respond to appropriate questions.

BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD

        In general, the Board is responsible for the stewardship of the Corporation. The Board oversees the business and affairs of the Corporation and the day-to-day conduct of business by senior management, establishes or approves overall corporate policies where required and involves itself jointly with management in the creation of shareholder value, the preservation and protection of the Corporation's assets and the establishment of the Corporation's strategic direction. For these purposes, the Board holds regularly scheduled meetings on a quarterly basis, with additional meetings held as required. A separate strategic planning and business plan review meeting is held at, or prior to, the commencement of each financial year. There were a total of nine meetings of the Board during calendar 2003. The Board's independent directors

6

also met in executive sessions either prior to or immediately following the Board's regular quarterly meetings. In addition, there is ongoing communication between senior management and Board members on an informal basis and through Committee meetings.

        To assist in the discharge of its responsibilities, the Board has established three standing committees — the Corporate Governance and Compensation Committee (formerly the Human Resources and Compensation Committee), the Environmental, Health and Safety Committee and the Audit Committee — and prescribed the responsibilities and mandates or charters of each such Committee. From time to time, the Board also establishes Special Committees composed entirely of independent directors (i.e. "outside" or non-management directors and "unrelated directors" within the meaning of the TSX Corporate Governance Guidelines (the "TSX Guidelines") — see "Report on Corporate Governance" in Schedule "B" to this Circular) to review and make recommendations on specific business matters, including related party transactions. See, for example, "Interests of Management and Other Insiders in Certain Transactions — Sale/Leaseback Transaction with Magna" below. Each such Special Committee operates pursuant to written guidelines or the mandate set out in the Board resolutions establishing such Special Committee.

Corporate Governance and Compensation Committee

        In March 2004, the Board approved the expansion of the size and scope of, and change of name of, the Human Resources and Compensation Committee (originally established in September 1995) to the Corporate Governance and Compensation Committee.

        The Corporate Governance and Compensation Committee is currently comprised of four directors: Messrs. Galifi (Chairman), Marx (appointed in March 2004), Peterson and Young, all of whom are "outside" or non-management directors. Messrs. Marx, Peterson and Young are also "unrelated directors" within the meaning of the TSX Guidelines and "independent" within the meaning of the NASDAQ Corporate Governance Rules. Mr. Galifi (who is Executive Vice President and Chief Financial Officer of Magna) has been determined by the Board to be a "related" director within the meaning of the TSX Guidelines in recognition of the various interests and business relationships that exist between Magna and Tesma from time to time, and is not considered "independent" within the meaning of the NASDAQ Corporate Governance Rules due to his position with Magna.

        In accordance with its written charter, the mandate of the Corporate Governance and Compensation Committee is to:

•

develop the Corporation's system of, and overall approach to, corporate governance generally, monitor compliance with applicable corporate governance requirements, assess the Board's effectiveness in governance matters and make recommendations to the Board with respect to corporate governance of the Corporation as a whole, including without limitation:



•

the stewardship role of the Board in respect of management of the Corporation;



•

Board size and composition;



•

director compensation; and



•

such processes and procedures as may be reasonably necessary to allow the Board to function independently of management of the Corporation;



•

generally review and make recommendations to the Board with respect to all direct and indirect compensation, benefits and perquisites (cash and non-cash) for the Chief Executive Officer, for the members of Corporate Management (as defined in Tesma's Corporate Constitution) other than the Chief Executive Officer, and for other senior officers of the Corporation;



•

review and make recommendations to the Board regarding incentive compensation and equity based plans generally;



•

administer those functions delegated to the Committee pursuant to the Corporation's 2003 Amended and Restated Incentive Stock Option Plan, as may be amended from time to time, or any successor or replacement plan; and

7

•

generally review and make recommendations to the Board with respect to succession planning for the Chief Executive Officer, for the members of Corporate Management other than the Chief Executive Officer, and for other senior officers of the Corporation.

        Specific responsibilities of the Corporate Governance and Compensation Committee also include the review and approval of the disclosure relating to the compensation of directors and executive officers of the Corporation contained in this Circular (and, if applicable, in other documents prior to their distribution to Tesma's shareholders), and the preparation of the Report on Executive Compensation contained herein. See "Compensation of Directors and Executive Officers — Corporate Governance and Compensation Committee — Report on Executive Compensation" below. In addition, the Corporate Governance and Compensation Committee is responsible for periodically reviewing the mandates or written charters of all Board Committees, including its own, and recommending any amendments necessary or advisable to reflect the Corporation's system of, and overall approach to, corporate governance practices.

        The Corporate Governance and Compensation Committee is empowered to retain outside legal and other experts at the expense of the Corporation where reasonably required to assist and advise the Committee in carrying out its duties and responsibilities.

        The full text of the Corporate Governance and Compensation Committee Charter is posted on Tesma's website (www.tesma.com/corporate/corporategovernance).

        The predecessor to the Corporate Governance and Compensation Committee met two times in calendar 2003.

Environmental, Health and Safety Committee

        The Environmental, Health and Safety Committee is currently comprised of two directors: Messrs. Young (Chairman) and Whiteside, both of whom are "outside" or non-management directors, "unrelated directors" within the meaning of the TSX Guidelines and "independent" within the meaning of the NASDAQ Corporate Governance Rules.

        In accordance with the authorizing resolution establishing the Environmental, Health and Safety Committee, the mandate of the Committee is to:

•

meet periodically to review, make recommendations and advise the Board with respect to environmental and occupational health and safety matters affecting the Corporation and its operating divisions;



•

have oversight responsibilities over the Corporation's Health, Safety and Environmental Policy, including the periodic review of such Policy and, if deemed necessary, the recommendation to the Board of amendments or changes thereto; and



•

be responsible for the review of the management systems in place for environmental and workplace health and safety matters, including the scheduled inspection and audit programs and other controls maintained by Tesma for its operating divisions.

        The Environmental, Health and Safety Committee is empowered to retain outside legal and other experts at the expense of the Corporation where reasonably required to assist and advise the Committee in carrying out its duties and responsibilities.

        The Environmental, Health and Safety Committee was only established as a standing committee of the Board in February 2003 and met once in calendar 2003; however, throughout calendar 2003, management provided quarterly reports to the full Board on environmental, health and safety matters in conjunction with regular quarterly Board meetings. Prior to February 2003, management formally reported to the full Board on all material environmental and occupational health and safety matters affecting Tesma and its operating divisions.

8

Audit Committee

        The Audit Committee is currently comprised of three directors: Messrs. Whiteside (Chairman), Marx and Peterson, all of whom are "outside" or non-management directors and "unrelated directors" within the meaning of the TSX Guidelines. Each of Messrs. Whiteside, Marx and Peterson has been determined by the Board to meet the "independence" and "financial literacy" requirements for Audit Committee members currently applicable to the Corporation as set forth in the NASDAQ Corporate Governance Rules. In addition, the Audit Committee currently consists of and will continue to consist of at least one member who meets the financial experience, professional certification and financial sophistication requirements under the NASDAQ Corporate Governance Rules. Currently, this individual is Mr. Marx, who was also determined by the Board to be an "audit committee financial expert" as defined in Item 401 of Regulation S-K of the United States securities laws.

        Effective July 31, 2005, Audit Committee members will be required to meet a new definition of independence. The Board has reviewed the composition of the Audit Committee in light of this new definition of independence, and has determined that each of Messrs. Marx and Peterson will continue to be considered independent under such definition. The Board has also determined that Mr. Whiteside will not meet the new independence definition as of July 31, 2005 as a result of the fees paid by the Corporation to Miller Thomson LLP, the law firm in which he is a partner. The Corporation intends to fully comply with the new definition as required no later than July 31, 2005. Accordingly, to the extent that Miller Thomson LLP provides legal services to the Corporation or any of its subsidiaries in the future, Mr. Whiteside shall only continue to serve on the Audit Committee until a suitable replacement can be found prior to July 31, 2005 who satisfies the new independence definition for Audit Committee members. (See Schedule "B" — "Report on Corporate Governance — Statement of Corporate Governance Practices — NASDAQ Corporate Governance Rules" of this Circular.)

        The Audit Committee operates pursuant to its written charter (revised in March 2004), as well as the Corporation's by-laws and applicable law. In accordance with its charter, the mandate of the Audit Committee is to assist the Board in fulfilling its oversight responsibilities to the Corporation's shareholders with respect to the integrity of the Corporation's financial statements and reports, and the financial reporting process. Specific responsibilities include:

•

reviewing and recommending to the Board the approval of the Corporation's interim and annual financial statements and management's discussion and analysis of results of operations and financial position related thereto;



•

being directly responsible for the appointment, compensation, retention and oversight of the work of the external Auditors;



•

pre-approving, or establishing procedures and policies for the pre-approval of, the engagement and compensation of the external Auditors in respect of the provision of (i) all audit, audit-related, review or attestation engagements required by applicable law, and (ii) all non-audit services permitted to be provided by the external Auditors;



•

reviewing and approving the objectives and general scope of the external audit (including the overall audit plan, proposed timing and completion dates) and discussing the external audit with the external Auditors;



•

satisfying itself that management has established and is maintaining an adequate and effective system of internal financial and accounting controls and is responding on a timely basis to any significant weaknesses which have been identified;



•

reviewing and discussing with the external Auditors the (i) selection, use and quality of application of, and proposed changes to, critical accounting policies and practices of the Corporation and related judgments by management, and (ii) alternative treatments under generally accepted accounting principles for policies and practices relating to material items;



•

reviewing, on behalf of the Board, any actual or potential illegal, improper or fraudulent behaviour which may have a negative effect on the integrity or reputation of the Corporation;

9

•

assessing with management the Corporation's material risk exposures and the Corporation's actions to monitor and control such exposures;



•

reviewing all material off-balance sheet transactions entered into by management, and the related accounting presentation and disclosure;



•

discussing with the external Auditors the matters required to be discussed by the Statement of Auditing Standards Nos. 54, 61, 89 and 90 (and comparable generally accepted auditing standards in Canada) and other applicable standards or requirements in effect from time to time relating to the conduct of the audit of the annual financial statements and the quarterly review of the interim financial results of the Corporation;



•

preparing the Audit Committee report contained in this Circular; and



•

establishing procedures for (i) the receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal controls and auditing matters, and (ii) the confidential, anonymous submission of complaints by employees of the Corporation of concerns regarding questionable accounting or auditing matters.

        The Audit Committee is also responsible for annually reviewing its charter and recommending any changes or amendments to the Board.

        The Audit Committee is empowered to retain outside financial, legal, accounting and other experts at the expense of the Corporation where reasonably required to assist and advise the Committee in carrying out its duties and responsibilities.

        The full text of the Corporation's Audit Committee Charter is attached as Schedule "A" to this Circular and is also posted on Tesma's website (www.tesma.com/corporate/corporategovernance).

        The Audit Committee met six times in calendar 2003 with management and representatives of Ernst & Young. The Audit Committee also regularly met with, and received reports on the activities of, the providers of internal audit services to the Corporation.

Auditors' Independence

        The Audit Committee discusses with Ernst & Young, as the external Auditors of the Corporation, their independence from management and the Corporation, and considers any services (in addition to audit and audit-related services, and non-audit tax compliance, advisory and research services) intended to be provided by Ernst & Young to the Corporation. There were no such additional services contemplated or provided by Ernst & Young in calendar 2003.

        The aggregate fees billed by Ernst & Young for: (i) audit and audit-related, and (ii) non-audit services provided to Tesma in calendar 2003, the fiscal 2002 stub period and fiscal 2002 were as follows:

	Calendar 2003	Fiscal 2002 Stub Period	Fiscal 2002
Audit and Audit-Related	$0.7 million	$0.3 million	$0.4 million
Non-Audit	$0.6 million	$0.1 million	$0.3 million

        Fees for audit and audit-related services include fees for the performance of the audits of the Corporation's financial statements for the periods in question, accounting and assurance services, the performance of quarterly review engagement procedures (commencing in the first quarter of calendar 2003), attendance at quarterly Audit Committee meetings and the provision of related information and reports. Substantially all of the fees paid for non-audit services were for tax compliance, advisory and research services, special tax projects and transfer pricing assistance. In calendar 2003, the fiscal 2002 stub period and fiscal 2002, Ernst & Young did not provide any consulting services to the Corporation or services relating to the design or implementation of the Corporation's financial information systems.

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Audit Committee Report

        In connection with the audited consolidated financial statements of the Corporation for calendar 2003, the Audit Committee has:

(i)

reviewed and discussed the audited consolidated financial statements and management's discussion and analysis of results of operations and financial position ("MD&A") with Tesma's senior management;



(ii)

discussed with Ernst & Young the matters required to be discussed by the Canadian Institute of Chartered Accountants and the U.S. Statement of Auditing Standards No. 61 (Communication with Audit Committees), as amended;



(iii)

received and reviewed with Ernst & Young the written disclosures and related letter required by the Canadian Institute of Chartered Accountants and U.S. Independence Standards Board Standard No. 1 (Independence Discussion with Audit Committees), as amended, discussed with Ernst & Young their independence as Auditors of the Corporation pursuant to the Sarbanes-Oxley Act of 2002 and Rule 3600T of the Public Company Accounting Oversight Board (which designates as interim independence standards Rule 101 of the American Institute of Certified Public Accountants' Code of Professional Conduct and Standards Nos. 1, 2 and 3 of the Independence Standards Board), and accepted Ernst & Young's confirmation of such independence; and



(iv)

reviewed with Ernst & Young its report to shareholders on the consolidated financial statements.

        Management is responsible for the Corporation's internal controls and the financial reporting process. Ernst & Young are responsible for performing an independent audit on the Corporation's consolidated financial statements in accordance with Canadian generally accepted auditing standards and United States generally accepted auditing standards, and issuing an auditors' report thereon. The Audit Committee's responsibility is to monitor and oversee these processes in accordance with its mandate (the Audit Committee Charter).

        Based on the reviews and discussions above, the Audit Committee has approved and recommended to the Board, and the Board has approved, the inclusion of the audited consolidated financial statements and the related MD&A in the Tesma Annual Report to Shareholders, and other forms and reports required to be filed by the Corporation with the applicable Canadian securities regulatory authorities, the United States Securities and Exchange Commission and the applicable stock exchanges in respect of calendar 2003.

        The members of the Audit Committee have approved the contents of this report and its inclusion in this Circular.

        The foregoing report is dated as of March 25, 2004 and is submitted by the Tesma Audit Committee.

Judson D. Whiteside (Chairman) Oscar B. Marx, III David R. Peterson

11

COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS

Summary Compensation Table

        The following table (the "Summary Compensation Table") sets forth a summary of all annual, long-term and other compensation earned for services in all capacities to the Corporation, its subsidiaries and other entities in which the Corporation has an interest, in calendar 2003, the fiscal 2002 stub period and fiscal 2002, in respect of individuals who were, as of December 31, 2003, the Chief Executive Officer and the four other most highly compensated executive officers (collectively, the "Named Executive Officers") of the Corporation.

		Annual Compensation (1)			Long-Term Compensation Awards
Name and Principal Position	Financial Year	Salary	Bonus (2)	Other Annual Compensation	Securities Under Options Granted	All Other Compensation
Manfred Gingl (3)     Chairman and Chief Executive Officer	2003 2002 Stub (4) 2002	$— $— $112,832	$— $— $687,855	— — (5)	— — Nil		— — Nil
Anthony E. Dobranowski (6)     President and Chief Financial Officer	2003 2002 Stub (4) 2002	$110,500 $46,206 $94,085	$928,720 $251,278 $520,862	(5) (5) (5)	100,000 Nil Nil		Nil Nil Nil
Paul Manners (7)     Executive Vice President and Chief Operating Officer	2003 2002 Stub (4) 2002	$110,500 $46,206 $84,066	$371,488 $100,512 $219,947	(5) (5) (5)	20,000 20,000 Nil		Nil Nil Nil
Pasquale Cerullo (8)     Executive Vice President, Sales, Marketing and Corporate Development	2003 2002 Stub(4) 2002	$100,000 $41,668 $117,000	$619,147 $167,420 $440,190	(5) (5) (5)	75,000 Nil Nil	$ $ $	16,500 6,250 16,500
James L. Moulds (9)     Vice President, Finance and Treasurer	2003 2002 Stub (4) 2002	$97,555 $36,372 $87,333	$371,488 $100,512 $278,148	(5) (5) (5)	10,000 Nil Nil		Nil Nil Nil

(1)

All amounts shown for calendar 2003, the fiscal 2002 stub period and fiscal 2002 have been converted from Canadian dollars, the currency in which such amounts were paid, to U.S. dollars at the average exchange rates that were in effect during these periods (Cdn.$1.3969, Cdn.$1.5694 and Cdn.$1.5687 per U.S. $1.00, respectively), except for the amounts shown for Mr. Cerullo which were paid in U.S. dollars.

(2)

Incentive bonuses that are directly related to the performance of the Corporation. See "Employment Contracts" below.

(3)

Mr. Gingl was appointed as Chairman of the Corporation (relinquishing the title of Vice Chairman of the Corporation) effective February 24, 2004. Since May 1, 2002, 100% of Mr. Gingl's compensation arrangements (including base salary, annual cash bonus and fringe benefits) have been borne by Magna (as a consequence of his appointment as Executive Vice Chairman of Magna). See "Employment Contracts" below.

(4)

2002 Stub is the five-month period ended December 31, 2002.

(5)

Perquisites and other personal benefits do not exceed the lesser of $50,000 and 10% of the total of the annual salary and bonus for the designated Named Executive Officer for each period shown.

(6)

Mr. Dobranowski was appointed as President of the Corporation (relinquishing the title of Executive Vice-President of the Corporation) effective May 6, 2002.

(7)

Mr. Manners was appointed as Executive Vice President and Chief Operating Officer of the Corporation effective May 6, 2002 and served in that capacity until January 2, 2004. Prior to May 6, 2002, Mr. Manners served in various operational positions within the Corporation, including tenures as a plant manager, divisional general manager, group general manager and, most recently, as group vice president, operations of Tesma Fuel Technologies. The amounts set out in the Summary Compensation Table for each of calendar 2003, the fiscal 2002 stub period and fiscal 2002 represent 100% of the compensation received by Mr. Manners from the Corporation in each such period. See "Employment Contracts" below.

(8)

Mr. Cerullo was appointed Executive Vice-President, Sales, Marketing and Corporate Development (relinquishing the title of Vice-President, Sales and Marketing) effective March 6, 2002. Mr. Cerullo was not directly employed or compensated by the Corporation during calendar 2003, the fiscal 2002 stub period or fiscal 2002, but was employed and compensated by a Detroit-based sales representation company. During calendar 2003, the fiscal 2002 stub period and fiscal 2002, Mr. Cerullo performed services on behalf of Tesma, and the amounts set out in the Summary Compensation Table for each such period represent 100% of Mr. Cerullo's compensation paid by the sales representation company in such periods. See "Employment Contracts" below.

(9)

Mr. Moulds was appointed as Treasurer of the Corporation (relinquishing the title of Controller of the Corporation) effective September 19, 2002.

Stock Option Plans, Grants and Exercises

        On July 19, 1995, Tesma adopted an incentive stock option plan (the "Stock Option Plan") in order to provide incentive stock options and, if specifically granted, stock appreciation rights in respect of its Class A

12

Subordinate Voting Shares to eligible senior officers and employees of the Corporation and its subsidiaries. Effective October 24, 1996 and subject to shareholder approval (which was received on December 4, 1996), the Board authorized an amendment and restatement of the Stock Option Plan to (a) extend the group of persons eligible to participate under the Stock Option Plan to include directors and persons engaged to provide management or consulting services to or for the benefit of the Corporation or its subsidiaries and (b) specifically adopt, in the text of the Stock Option Plan, the provisions of section 630 of the rules of the TSX on listed company incentive share arrangements. Effective June 15, 2000, the Board authorized a further amendment and restatement of the Stock Option Plan to (a) enable members of the Human Resources and Compensation Committee (now the Corporate Governance and Compensation Committee, which is responsible for the administration of the Stock Option Plan) to become eligible, together with the other directors of the Corporation, to participate in the Stock Option Plan, and (b) permit the transfer of options by participants under the Stock Option Plan to their family members, registered retirement savings plans, family trusts or controlled corporations in accordance with the applicable policies of the TSX. Effective March 24, 2003 and subject to shareholder approval (which was received on May 6, 2003) the Board authorized a further amendment and restatement of the Stock Option Plan to increase the maximum number of Class A Subordinate Voting Shares for which options and stock appreciation rights may be granted thereunder, from 3,000,000 to 4,000,000 (subject to certain customary anti-dilutive adjustments).

        The option price for options granted under the Stock Option Plan is established at the time of the grant, but cannot be less than the closing price of the Class A Subordinate Voting Shares on the TSX (with respect to options denominated in Canadian dollars) or on the NASDAQ National Market (with respect to options denominated in U.S. dollars) on the trading day immediately prior to the date of the grant. Each option is exercisable in such manner as may be determined at the time of the grant, and options granted are for terms not exceeding ten years. Under the Stock Option Plan, the Corporation does not provide any financial assistance to participants in order to facilitate the purchase of Class A Subordinate Voting Shares thereunder.

        As at December 31, 2003, options to purchase an aggregate of 1,483,350 Class A Subordinate Voting Shares were outstanding under the Stock Option Plan. The outstanding options have exercise prices of Cdn.$10.50 per share (for 140,000 options), Cdn.$17.25 per share (for 62,000 options), Cdn.$19.00 per share (for 54,000 options), Cdn.$21.70 per share (for 10,000 options), Cdn.$22.50 per share (for 60,000 options), Cdn.$26.00 per share (for 405,350 options), Cdn.$26.45 per share (for 300,000 options), Cdn.$28.80 per share (for 275,000 options), Cdn.$29.40 per share (for 132,500 options) and Cdn.$31.74 per share (for 44,500 options), and have expiration dates of July 30, 2005 (for 80,000 options), July 31, 2006 (for 60,000 options), July 31, 2007 (for 70,000 options), July 31, 2008 (for 62,000 options), July 31, 2009 (for 54,000 options), June 14, 2010 (for 405,350 options), July 31, 2010 (for 432,500 options), July 31, 2012 (for 44,500 options) and December 31, 2012 (for 275,000 options).

        No stock appreciation rights or options to purchase securities of the Corporation or its subsidiaries were granted to any of the Named Executive Officers during calendar 2003, except as disclosed in the following table:

Option Grants During Calendar 2003 (1)
	Number of Securities Under Options Granted	% of Total Options Granted to Employees During Calendar 2003		Exercise or Base Price per Share (Cdn.$/Share)	Market Value of Securities Underlying Options on Date of Grant (Cdn.$/Share)	Expiration Date
Manfred Gingl	—	—		—	—	—
Anthony E. Dobranowski	100,000	36.4	%	$28.80	$28.80	December 31, 2012
Paul Manners	20,000	7.3	%	$28.80	$28.80	December 31, 2012
Pasquale Cerullo	75,000	27.3	%	$28.80	$28.80	December 31, 2012
James L. Moulds	10,000	3.6	%	$28.80	$28.80	December 31, 2012

(1)

On January 14, 2004, options to purchase Class A Subordinate Voting Shares of the Corporation were granted to Messrs. Dobranowski (32,500; 29.8% of total grant), Manners (10,000; 9.2% of total grant), Cerullo (22,500: 20.6% of total grant) and Moulds (10,000; 9.2% of total grant) at an exercise price of Cdn.$31.55 per share (being the closing trading price of the Class A Subordinate Voting Shares on the TSX on January 13, 2004), and having an expiration date of December 31, 2010.

13

        The following table sets forth certain information with respect to the options exercised or surrendered by the Named Executive Officers in calendar 2003, the aggregate number of unexercised options granted to the Named Executive Officers that were outstanding on December 31, 2003, and the value of such unexercised in-the-money options at such date:

Aggregate Option Exercises Year Ended December 31, 2003 and 2003 Year-End Option Values
			Unexercised Options at December 31, 2003		Value of Unexercised In-the-Money Options at December 31, 2003 (1)
Name	Class A Subordinate Voting Shares Acquired on Exercise (#)	Aggregate Value Realized on Exercise (Cdn.$)	Exercisable (#)	Unexercisable (#)	Exercisable (Cdn.$)		Unexercisable (Cdn.$)
Manfred Gingl	—	—	160,000	40,000	$	520,000	$	130,000
Anthony E. Dobranowski	—	—	274,000	106,000	$	2,373,250	$	101,000
Paul Manners	—	—	20,800	30,200	$	4,400	$	7,850
Pasquale Cerullo	—	—	155,000	70,000	$	1,469,875	$	43,250
James L. Moulds	—	—	28,000	14,500	$	85,400	$	13,350

(1)

Based on the difference between the closing trading price of the Class A Subordinate Voting Shares on the TSX on December 31, 2003 (being Cdn.$29.25) and the exercise price of the related options, multiplied by the number of options held by the Named Executive Officer.

Pension Plans

        None of the officers of the Corporation or its subsidiaries, including the Named Executive Officers, participate in any Magna or Corporation-provided pension plans.

Employment Contracts

        During calendar 2003, Ms. Stronach served as the Chairman of the Corporation. The Chairman of the Corporation is a non-executive position and, accordingly, Ms. Stronach was not employed by, had no employment contract with, and received no direct remuneration from, Tesma. Ms. Stronach resigned as the Chairman and as a director of the Corporation effective January 20, 2004.

        During calendar 2003, Mr. Gingl served as the Vice Chairman and Chief Executive Officer of the Corporation. Mr. Gingl was appointed the Chairman of the Corporation on February 24, 2004 following the resignation of Ms. Stronach. The Corporation has not entered into an employment contract with Mr. Gingl in connection with his position as the Chairman and Chief Executive Officer of Tesma. Since May 1, 2002, 100% of Mr. Gingl's compensation arrangements (including base salary, annual cash bonus and fringe benefits) have been borne by Magna, as a consequence of his appointment as Executive Vice Chairman of Magna.

        The Corporation entered into an employment contract with Mr. Dobranowski in his capacity as President and Chief Financial Officer of Tesma commencing May 1, 2002 and continuing until terminated in accordance with its provisions. For calendar 2003, Mr. Dobranowski's employment contract provided for a base salary of $110,500 per annum, an annual cash bonus based on a specified percentage of Tesma's adjusted pre-tax profits, the ownership of a minimum number of Class A Subordinate Voting Shares, as well as confidentiality obligations and non-competition restrictions. Mr. Dobranowski's employment contract further provides that his employment may be terminated by the Corporation either by giving advance written notice of termination for a prescribed period of time or by paying severance in lieu thereof. No notice or severance payment is required for a termination for just cause or upon Mr. Dobranowski's voluntary resignation.

        The Corporation entered into an employment contract with Mr. Manners in his capacity as Executive Vice President and Chief Operating Officer of Tesma commencing May 1, 2002, which continued until Mr. Manners' relinquished such position on January 2, 2004 in order to resume his role as group vice president of Tesma Fuel Technologies. For calendar 2003, Mr. Manners' employment contract provided for a base salary of $110,500 per annum, an annual cash bonus based on a specified percentage of Tesma's adjusted pre-tax profits, the ownership of a minimum number of Class A Subordinate Voting Shares, as well as confidentiality

14

obligations and non-competition restrictions. Mr. Manners' employment contract further provided that his employment may be terminated by the Corporation either by giving advance written notice of termination for a prescribed period of time or by paying severance in lieu thereof. No notice or severance payment was required for a termination for just cause or upon Mr. Manners' voluntary resignation.

        Mr. Cerullo serves as Executive Vice President, Sales, Marketing and Corporate Development of Tesma. Mr. Cerullo has not entered into an employment contract with, nor did he receive any direct remuneration from, the Corporation during calendar 2003 (see footnote 8 to the Summary Compensation Table above).

        The Corporation entered into an employment contract with Mr. Moulds in his capacity as Vice President, Finance and Controller of Tesma commencing September 16, 1999 and continuing until terminated in accordance with its provisions. Effective September 19, 2002, Mr. Moulds relinquished his title of Controller and was named Treasurer of the Corporation. Mr. Moulds' employment contract continues to apply in his new capacity as Vice President, Finance and Treasurer of the Corporation. For calendar 2003, Mr. Moulds' employment contract provided for a base salary of Cdn.$137,000 per annum, an annual cash bonus based on a specified percentage of Tesma's adjusted pre-tax profits, the ownership of a minimum number of Class A Subordinate Voting Shares, as well as confidentiality obligations and non-competition restrictions. Mr. Moulds' employment contract further provides that his employment may be terminated by the Corporation either by giving advance written notice of termination for a prescribed period of time or by paying severance in lieu thereof. No notice or severance payment is required for a termination for just cause or upon Mr. Moulds' voluntary resignation.

        No payments are required to be made under any current employment contracts with the Named Executive Officers in the event of a change in the control of the Corporation. The maximum total amount payable by the Corporation pursuant to such contracts for severance is approximately $2.3 million in the aggregate, plus any annual bonus entitlement pro rated to the date of termination.

Directors' Compensation

Directors' Fees

        For calendar 2003, each director who was neither an employee of the Corporation nor a director or an officer of Magna (an "Eligible Director") was paid (or was eligible to be paid) as remuneration for his services as a director of the Corporation, the amounts set out below:

Annual Board Retainer (total)		$	20,000
	Cash (maximum)	$	15,000
	Class A Subordinate Voting Shares(1) (minimum)	$	5,000
Annual Committee Retainer		$	2,500
Annual Committee Chair Retainer
	Audit/Compensation Committees	$	8,000
	Environmental/Other Committees	$	4,000
Per Meeting Fee (Board and Committee)		$	1,000
Written Resolutions Fee (per resolution)		$	250
Board/Committee Work Day Fee		$	1,500
Travel Day Fee(2)		$	1,500

(1)

Also payable in Tesma deferred share units.

(2)

Eligible Directors are also entitled to be reimbursed for travelling and other expenses incurred by them in attending meetings of the Board or any Committee.

15

        Eligible Directors are subject to a minimum maintenance (hold) requirement in respect of any Class A Subordinate Voting Shares received from the Corporation as payment for their services as directors of the Corporation. This maintenance requirement encourages director investment in the Corporation by requiring such directors to accumulate, during their tenures as directors (in minimum annual increments of $5,000), Class A Subordinate Voting Shares having a minimum market value of $30,000. The market value of any deferred share units credited to the director pursuant to the non-employee director share-based compensation plan (see "Directors' Deferred Compensation Plan" below) also applies to this $30,000 minimum maintenance requirement.

        The total amount of directors fees paid to (or deferred by) Eligible Directors for calendar 2003 was approximately $301,000 (excluding expense reimbursements).

        On March 25, 2004, Mr. Marx was appointed the Lead Director of the Board. In conjunction with this appointment, the Board determined to pay an annual Lead Director retainer of $8,000, subject to further review and recommendation by the Corporate Governance and Compensation Committee.

Directors' Deferred Compensation Plan

        Effective January 1, 1999, Tesma established a non-employee director share-based compensation plan (the "Plan") which provides Eligible Directors with a choice to defer up to 100% (in increments of 25%, 50%, 75% or 100%) of their total annual remuneration as directors from Tesma (including Board and Committee retainers, Committee chair retainers, meeting attendance fees, written resolution fees and work and travel day fees), until the director ceases to be a director of the Corporation for any reason. The amounts deferred are reflected in deferred share units allocated under the Plan, each of which has an initial value equal to the market value of a Class A Subordinate Voting Share at the time that the particular payment(s) to the director would become payable. The value of a deferred share unit appreciates (or depreciates) with increases (or decreases) in the market price of the Class A Subordinate Voting Shares, and the Plan also takes into account any dividends paid on the Class A Subordinate Voting Shares. If an Eligible Director elects to participate in the Plan, the requirement to be paid a portion of the annual Board retainer (minimum of $5,000) in Class A Subordinate Voting Shares ceases to apply. Under the Plan, when an Eligible Director leaves the Board, he receives (within a prescribed period of time) a cash payment equal to the then value of his accrued deferred share units, net of withholding taxes. As of the Record Date, Messrs. Marx, Peterson, Whiteside and Young (all of whom are Eligible Directors) have elected to participate in the Plan. For details as to the number of deferred share units held by each Eligible Director as of the Record Date, see "Business to be Transacted at the Meeting — Election of Directors" above.

Corporate Governance and Compensation Committee

        For a discussion of the composition and mandate of the Corporate Governance and Compensation Committee, see "Board of Directors and Committees of the Board — Corporate Governance and Compensation Committee" above.

Report on Executive Compensation

        Tesma has adopted the organizational and operating policies and principles utilized by Magna for many years, certain of which have been embodied in the Corporate Constitution. See Schedule "B" — "Report on Corporate Governance — Corporate Constitution" of this Circular. Tesma's Corporate Constitution attempts to balance the interests of shareholders, employees and management by specifically defining the rights of employees (including management) and investors to participate in the Corporation's profits and growth, and reflects certain operational and compensation philosophies which align employee (including management) and shareholder interests. These philosophies and the Corporate Constitution assist in maintaining an entrepreneurial environment or culture at Tesma which encourages flexibility, productivity, ingenuity and innovation. Two key elements of this entrepreneurial culture are an emphasis on decentralization, which provides management with a high degree of autonomy at all levels of operation, as well as direct participation in profits by eligible employees (including variable, incentive-based compensation for management), who are also shareholders of the Corporation (either directly or indirectly by virtue of participation in the Tesma

16

DPSPs). It is Tesma's objective to maintain its entrepreneurial culture. Accordingly, the Corporation intends to continue to apply its established compensation philosophies, which have been essential to its ability to attract, retain and motivate skilled, entrepreneurial employees at all levels of the Tesma organization, while assisting in the alignment of the interests of the Corporation's shareholders and employees.

        Consistent with the Corporate Constitution, certain managers who have senior operational or corporate responsibilities receive a remuneration package consisting of a base salary (which is generally lower than comparable industry standards) and an annual incentive bonus based on direct profit participation at the operating or corporate level at which such manager is involved. All other qualifying employees participate in 10% of the Corporation's "Employee Pre-Tax Profits Before Profit Sharing" (as defined in the Corporate Constitution) under the Tesma Employee Equity Participation and Profit Sharing Program which fosters employee participation in the profits and share ownership of Tesma and consists of a deferred profit sharing component (which is invested primarily in Class A Subordinate Voting Shares) and an annual cash distribution. As of the date of this report, the deferred profit sharing component of the Tesma Employee Equity Participation and Profit Sharing Program holds approximately 9.2% of the outstanding Class A Subordinate Voting Shares.

        The Corporate Governance and Compensation Committee, in accordance with its mandate, considers and applies the historical operating philosophies and policies of the Corporation, including its Corporate Constitution, direct profit participation, mandatory stock ownership and the use of stock options granted under the Stock Option Plan, to align the interests of management and shareholders and to create shareholder value. The Corporate Governance and Compensation Committee, therefore, applies the following criteria in determining or reviewing recommendations for compensation for management, including where applicable, the executive officers of the Corporation:

Base Salaries.    Base salaries should generally be below base salaries for comparable positions within North American industrial companies (including the automotive parts supplier industry) and are not customarily increased on an annual basis. As a result, fixed compensation costs are contained or reduced, with financial rewards coming principally from variable incentive compensation.

Incentive Compensation.    The amount of direct profit participation and, therefore, the amount of compensation "at risk" increases with the level of performance and/or responsibility. In many cases, the incentive-based compensation component for operational and corporate management represents the majority of an individual's total compensation package. Variable incentive cash compensation for calendar 2003 paid to the Named Executive Officers represented, on average, almost 83% of such individuals' total cash compensation and reflects the financial performance (and the overall performance of management) during calendar 2003. Due to the variable nature of profit participation, incentive cash compensation is generally reduced in cyclical or other down periods due to reduced profits. As a result, management (including Tesma's executive officers) are encouraged to emphasize consistent profitability over the medium to long-term to sustain stable levels of annual compensation. Under the Corporate Constitution, the aggregate incentive bonuses paid and payable to Corporate Management (which includes the Named Executive Officers) in respect of any financial year shall not exceed 6% of the Corporation's "Pre-Tax Profits Before Profit Sharing" (as defined in the Corporate Constitution) for such year.

Long-Term Incentives.    Minimum stock ownership in the Corporation is generally required of all profit participators (including executive officers) in order to align their interests with those of shareholders and to encourage the enhancement of shareholder value. In addition, upon the grant of options under the Stock Option Plan, extended vesting and exercise periods (of up to 5 and 10 years, respectively) are frequently used to encourage option recipients to remain as employees or officers of Tesma over the long-term, thereby promoting management stability.

Written Employment Contracts.    The Corporation extensively utilizes written employment contracts with its executive and senior officers and members of group or divisional management to reflect the terms of their respective employment, including compensation, severance, stock ownership, confidentiality and non-competition arrangements. Prior to the entry into, renewal and/or material amendment of employment contracts with executive or senior officers of the Corporation, the Corporate Governance

17

and Compensation Committee reviews such officer's compensation in the context of Tesma's historical compensation philosophies and policies, such officer's individual performance and relevant industry comparators, with the objective of ensuring that the compensation payable to such officer is, in the circumstances, commensurate with the Corporation's performance and is primarily "at risk". The calendar 2003 annual, long-term and other compensation referred to in the Summary Compensation Table for the Named Executive Officers properly reflects the compensation and benefits provided to them under their respective employment contracts.

Tesma believes that its continued growth, superior financial returns and growth in shareholder value justify meaningful financial rewards for its executive and senior officers which are contingent on the continued profitability of the Corporation.

        The members of the Corporate Governance and Compensation Committee have approved the contents of this report and its inclusion in this Circular.

        The foregoing report is dated as of March 25, 2004 and is submitted by the Tesma Corporate Governance and Compensation Committee.

Vincent J. Galifi (Chairman) David R. Peterson M. Douglas Young

SHAREHOLDER PERFORMANCE REVIEW GRAPH

        The following graph compares the yearly total cumulative return (including dividends) for Cdn.$100 invested in Class A Subordinate Voting Shares on July 31, 1999, with the yearly cumulative total return of the S&P/TSX Composite Index and the TSX Auto Parts Sub-Index (a peer industry index of automotive parts suppliers) for each of Tesma's last four most recently completed full fiscal years and the fiscal 2002 stub period. The values of each investment reflected in the graph are based on share price appreciation or depreciation plus, in the case of the Class A Subordinate Voting Shares, dividend reinvestment.

(All amounts in Cdn.$)	July 31, 1999	July 31, 2000	July 31, 2001	July 31, 2002	December 31, 2002	December 31, 2003
Class A Subordinate Voting Shares	$100.00	$139.32	$148.06	$172.82	$145.15	$158.74
S&P/TSX Total Return Composite Index	$100.00	$148.87	$111.51	$97.40	$98.36	$124.64
TSX Auto Parts Sub-Index	$100.00	$84.56	$109.25	$104.18	$97.20	$128.80

Total Cumulative Return on Cdn.$100 Investment made July 31, 1999
(Assuming Reinvestment of Dividends)

18

INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS

        None of the current or former directors, executive officers, senior officers or employees of the Corporation or its subsidiaries, nor any associates of such persons, were indebted at any time during calendar 2003 to the Corporation or its subsidiaries in connection with the purchase of securities of the Corporation or its subsidiaries. As of the Record Date, the aggregate amount of indebtedness to the Corporation or its subsidiaries incurred other than in connection with the purchase of securities of the Corporation or its subsidiaries, excluding routine indebtedness, was approximately $0.3 million in the case of employees of the Corporation and its subsidiaries. Excluding routine indebtedness, as of the Record Date, none of the current or former directors, executive officers and senior officers of the Corporation, nor any associates of such persons, were indebted to the Corporation or its subsidiaries.

INTERESTS OF MANAGEMENT AND OTHER INSIDERS IN CERTAIN TRANSACTIONS

Affiliation Agreement

        Magna and Tesma are parties to an Affiliation Agreement which formalizes certain aspects of their relationship and which continues to substantially reflect the arrangements adhered to by Magna and Tesma (including Tesma's predecessors) since September 1, 1988. Pursuant to the Affiliation Agreement, Magna provides Tesma with:

•

access to its senior management;



•

representation on Tesma's Board;



•

details of new management techniques and incentive programs;



•

Magna-wide marketing and market research materials, joint consultation with respect to future research and development, and marketing efforts; and



•

a non-exclusive, world-wide licence to use trademarks which identify Magna (and its products, services and activities) in order to identify Tesma (and its products, services and activities) as being affiliated with Magna,

in return for an affiliation fee calculated on the basis of 1.0% of the Corporation's consolidated net sales, with special "phase-in" arrangements applying to net sales generated from acquisitions completed by the Corporation. There is no affiliation fee payable on the net sales generated from an acquired business in the financial year of the acquisition and only 50% of the affiliation fee (i.e. a fee calculated at 0.5% of net sales) is payable during the following financial year. The full 1.0% affiliation fee is payable by Tesma on the net sales from such acquired business in all subsequent financial years. Pursuant to the Corporate Constitution, the affiliation fee may not be increased without the prior approval of the holders of the Class A Subordinate Voting Shares and the holders of the Class B Shares, each voting separately as a class. The aggregate affiliation fee paid by the Corporation to Magna in respect of calendar 2003 was $10.8 million.

        Under the Affiliation Agreement, Magna has the right to obtain non-exclusive licences under Tesma's present and future patents, upon normal commercial terms, to utilize any such patent in a field of operation or area of use not intended to be utilized by Tesma and in respect of products which do not compete with products produced by Tesma. Subject to Magna's discretion to license any new technology or intellectual property developed by Magna to any of Magna's subsidiaries, which may or may not include Tesma, each of Magna and Tesma have agreed to make reasonable commercial efforts to license to the other exclusively, upon normal commercial terms, any new technology or intellectual property developed by them.

        The Affiliation Agreement also provides that all programs established by Magna for the general benefit of Magna's employees (other than the Magna employee equity participation and profit sharing program) will be made available to employees of Tesma, and that the Corporation will pay its pro rata share of the costs of these programs. Specifically, the Affiliation Agreement also provides that the Corporation will fund its pro rata share of the cost of Simeon Park, a 100 acre recreational park situated near Toronto, Ontario maintained by Magna for the exclusive use of the employees (and their families) of Magna and its affiliates, including Tesma.

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        The Affiliation Agreement is effective for a term of seven years and five months ending December 31, 2009, and will be renewed automatically for further one-year terms unless terminated by the Corporation or Magna upon six months' notice prior to the date of renewal.

Social Fee Agreement

        Under the terms of the Social Fee Agreement, Tesma pays Magna a fee based on 1.5% of pre-tax profits as a contribution to social and charitable programs co-ordinated by Magna on behalf of itself and its affiliates, including Tesma. This social commitment fee represents partial compliance with the requirement in the Corporate Constitution for Tesma to allocate a portion of its "Pre-Tax Profits" for political, patriotic, philanthropic, charitable, educational, scientific, artistic, social or other useful purposes in the communities in which Tesma and its affiliates, including Magna, operate. The aggregate social commitment fee paid by the Corporation to Magna in respect of calendar 2003 was $1.6 million.

        The Social Fee Agreement is effective for a term of seven years and five months ending December 31, 2009, and will be renewed automatically for further one-year terms unless terminated by the Corporation or Magna upon six months' notice prior to the date of renewal.

Magna Services Inc.

        Tesma enters into separate arrangements from time to time with Magna Services Inc. ("ServiceCo"), a wholly-owned subsidiary of Magna, regarding the provision of certain administrative services for charges negotiated annually. Currently, the services provided by ServiceCo to the Corporation include: information technology (WAN infrastructure and support services); human resource and employee relations services (including administration of the Tesma Employee Equity Participation and Profit Sharing Program); foreign marketing services; insurance; specialized legal, environmental, immigration, finance and treasury support; and management and technology training. The aggregate charges for such services, including an allocated share of ServiceCo's facility and overhead costs dedicated to providing these services, paid by the Corporation to ServiceCo in respect of calendar 2003 was $1.7 million.

Sale/Leaseback Transaction with Magna

        On January 31, 2003, Tesma completed a sale and leaseback transaction with MI Developments Inc. ("MID"), then a wholly-owned subsidiary of Magna, for all the land and buildings on the Tesma corporate campus, which includes the corporate office building and two manufacturing facilities. This transaction was reviewed by a Special Committee of independent directors, consisting of Messrs. Whiteside (Chairman), Marx, Peterson and Young, which recommended to the Board to proceed with the transaction (subject to certain amended terms) as being in the best interests of Tesma in the circumstances. The unrelated directors on the Board accepted the Special Committee's recommendation and approved the transaction on the amended terms proposed.

        Under the terms of the purchase and sale agreement, the land and buildings comprising the Tesma corporate campus (with a carrying value of $23.5 million) were sold to MID for cash proceeds approximating fair value of $25.0 million. As part of the transaction, Tesma entered into agreements to lease the properties back from MID (at prevailing market rates at inception) for a term of twelve years (with an initial option to renew for three years followed by two subsequent five-year renewal options) and to make lease payments of approximately $2.7 million per year. In addition, under the terms of the transaction, construction management fees (including carrying charges) of $1.3 million previously billed in fiscal 2002 by MID to the Corporation on account of this project were refunded.

        Rental payments totalling $1.9 million were paid to MID for the period from February 1, 2003 to August 29, 2003, the date when all of the shares of MID were distributed to the shareholders of Magna pursuant to a planned reorganization of Magna. As a result of this distribution, MID became directly controlled by the same entity that indirectly controls Tesma, such that MID remains a related party to Tesma, but is no longer part of the group of companies controlled by Magna.

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Other Transactions

        Effective January 1, 2003, Tesma's Austrian subsidiary transferred certain assets and activities into Magna Systemtechnik AG ("MST"), an entity controlled by Magna established for the training of apprentices in the design, development and manufacturing of tools, prototypes and automotive components. Effective this same date, Tesma acquired a minority equity ownership interest in MST and will participate in its ongoing activities to the extent of this equity ownership interest. Tesma accounts for this investment using the equity method and, accordingly, $0.4 million was recorded as Tesma's share of the net losses of MST to December 31, 2003.

        During calendar 2003, Tesma incurred $0.4 million of capital costs relating to the portion of certain assembly lines that MST was subcontracted to build (the costs of the completed assembly lines were billed by another supplier). In addition, due to the cost overruns and other issues pertaining to these assembly lines, MST billed Tesma an additional $0.8 million, which was expensed in calendar 2003. At December 31, 2003, Tesma had a net payable of $1.0 million due to MST.

        During calendar 2003, Tesma was billed an additional $0.5 million for costs relating to various tooling and other services provided in calendar 2002 by an Austrian company controlled by the Chief Executive Officer of the Corporation. At December 31, 2003, there were no amounts owing to Tesma from this company.

        During calendar 2003, Tesma paid $0.4 million to a financing company for the buyout of certain equipment under lease and recorded the amount as due from a related party. The equipment was used in the business activities of the Austrian company controlled by the Chief Executive Officer of the Corporation, which activities were transferred to MST in calendar 2003. At December 31, 2003, the entire $0.4 million receivable balance was outstanding.

        Tesma's manufacturing plants buy from and sell products to Magna's plants on an ongoing basis in the normal course of their business and on normal commercial terms. As such, Magna is both a supplier to, and customer of, Tesma. Tesma's sales to Magna and its affiliates in calendar 2003 were $7.6 million, and Tesma's purchases of materials from Magna and its affiliates in calendar 2003 were $3.6 million.

        Rental payments to MID subsequent to August 29, 2003 (the date of the reorganization of Magna) amounted to $1.1 million and were paid under existing lease agreements (see "Sale/Leaseback Transaction with Magna" above).

CORPORATE GOVERNANCE

        The Board believes that effective corporate governance structures and practices are necessary to the well-being of the Corporation and its shareholders. Tesma has adopted certain structures and procedures, in addition to the Corporate Constitution, to assist in the implementation of effective corporate governance practices and to ensure that the Board functions independently of management. Certain of these structures and procedures were recently reviewed and revised as a consequence of the various corporate governance initiatives adopted and/or refined during calendar 2003 by securities regulatory authorities in Canada and the United States (including the TSX, the Ontario Securities Commission, NASDAQ and the United States Securities and Exchange Commission). Tesma believes that its corporate governance practices are in substantial compliance with all regulatory initiatives implemented and applicable to the Corporation to date and, in a number of instances, Tesma has voluntarily complied with regulatory initiatives which have not yet come into effect. Management and the Board will continue to actively monitor and assess those initiatives that remain at the proposal or refinement stage, or which currently do not apply to the Corporation, with a view to making appropriate changes to Tesma's corporate governance structures and procedures as and when such initiatives are finalized and/or otherwise applicable.

        A report on Tesma's corporate governance practices, which describes certain aspects of Tesma's Corporate Constitution and specifically addresses and comments on the application to Tesma of: (i) the 14 items set out in the TSX Guidelines contained in Section 474 of Part IV of the TSX Company Manual; and (ii) the NASDAQ Corporate Governance Rules, is set forth in Schedule "B" to this Circular.

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DIRECTORS' AND OFFICERS' LIABILITY INSURANCE

        The Corporation participates with Magna in the purchase of directors' and officers' liability insurance, which provides, among other things, coverage for executive liability of up to $255 million per occurrence and in the aggregate for all claims made during each year of the applicable policy period (currently August 1, 2001 to July 31, 2004), for directors and officers of the Corporation and its affiliates (including Magna), subject to a $250,000 aggregate deductible for executive indemnification. This policy does not provide coverage for losses arising from the breach of fiduciary responsibilities under statutory or common law or from the violation or enforcement of pollutant laws and regulations. Tesma's allocation of the premium payable for the executive indemnification portion of this insurance policy was approximately $51,000 for calendar 2003.

SHAREHOLDER PROPOSALS AND COMMUNICATIONS

        Proposals from shareholders for inclusion in the management information circular/proxy statement in respect of the Corporation's next annual meeting of shareholders (to be held in calendar 2005) must be received by the Secretary at the principal executive offices of the Corporation, at 1000 Tesma Way, Concord, Ontario, Canada, L4K 5R8, on or before March 4, 2005.

        Shareholders wishing to communicate with the non-management members of the Board may do so by contacting the Lead Director through the office of the Corporation's Corporate Secretary at 1000 Tesma Way, Concord, Ontario, Canada, L4K 5R8.

OTHER MATTERS

        Management is not aware of any amendments or variations to matters identified in the Notice or of any other matters that are to be presented for action to the Meeting, other than those described in the Notice.

        Information stated in this Circular is dated as of March 26, 2004, except where otherwise indicated. The contents and the mailing of this Circular have been approved by the Board.

(Signed) "ANTHONY E. DOBRANOWSKI"
President and
Chief Financial Officer
(Signed) "STEFAN T. PRONIUK"
Vice President, Secretary
and General Counsel

The Corporation files an Annual Information Form with the Canadian securities regulatory authorities and a corresponding annual report on Form 40-F with the United States Securities and Exchange Commission. A copy of the most recent Annual Information Form, this Circular and Tesma's Annual Report to Shareholders containing the consolidated financial statements of the Corporation for the year ended December 31, 2003, the report of the Auditors thereon and management's discussion and analysis of consolidated operating results and financial position, are available on the Corporation's website at www.tesma.com and will be sent to any person upon request in writing addressed to the Secretary at the principal executive offices of the Corporation set out in this Circular. Such copies will be sent to any Tesma shareholder without charge.

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SCHEDULE "A"
AUDIT COMMITTEE CHARTER

Purpose

1.

The Audit Committee (the "Committee") of the Board of Directors (the "Board") of the Corporation shall provide assistance to the Board in fulfilling its oversight responsibilities to the Corporation's shareholders with respect to the integrity of the Corporation's financial statements and reports, and the financial reporting process. In so doing, it is the responsibility of the Committee to maintain free and open communications between the Board, the independent Auditors, the internal auditors for the Corporation (the "Internal Auditors") and management of the Corporation, and to monitor their performance, recognizing that the independent Auditors are ultimately responsible to the Committee, the Board and the shareholders of the Corporation.

Organization

2.

The Committee shall be composed of not less than three (3) and not more than five (5) members, each of whom shall be financially literate and shall have such accounting or financial management expertise as is required to comply with applicable law and the applicable rules and regulations of the Ontario Securities Commission (the "OSC"), the United States Securities and Exchange Commission (the "SEC"), The Toronto Stock Exchange (the "TSX"), the NASDAQ Stock Market ("NASDAQ") and any other applicable regulator or authority from time to time. Each of the members of the Committee shall meet the independence standards required by the applicable rules and regulations of the OSC, the SEC, the TSX, NASDAQ and any other applicable regulatory authorities which are in effect from time to time. No member of the Committee shall serve as a member of the audit committees of more than three other boards of directors of other public companies. The Board shall annually appoint the members of the Committee, including a Chairman from amongst those appointed, to hold office until the close of the next annual meeting of shareholders of the Corporation or until their respective earlier resignation or replacement. The members of the Committee shall serve at the pleasure of the Board, and vacancies occurring from time to time shall be filled by the Board.

3.

A majority of the members of the Committee shall constitute a quorum for any Committee meeting, and all actions of the Committee shall be taken by a majority of the members present at the meeting.

4.

Meetings of the Committee shall be called by the Chairman of the Committee, and may be called by any member of the Committee or by the Chairman, a Vice Chairman, the Chief Executive Officer, the President, the Chief Financial Officer, the Vice President of Finance, the Controller or the Secretary of the Corporation, or by the Internal Auditors or the independent Auditors of the Corporation.

5.

Unless otherwise determined by the Committee, the Secretary (or an Assistant Secretary) of the Corporation shall act as Secretary of the Committee and shall provide each member of the Committee, the independent Auditors and the Internal Auditors, as well as, the Chief Executive Officer, the President, the Chief Financial Officer, the Vice President of Finance and the Controller of the Corporation, with notice of each meeting of the Committee, all of whom shall be entitled to attend each such Committee meeting. (Where the meeting is called by the Chairman or any Vice Chairman of the Corporation in accordance with paragraph 4 above, such individual(s) shall also be provided with the notice of the meeting, and be entitled to attend thereat). In addition, the Chairman of the Committee or the Committee itself may request that any officer or employee of the Corporation or its affiliates attend any Committee meeting(s). In the absence of the Secretary (or an Assistant Secretary) of the Corporation at any meeting of the Committee, the Committee shall select an individual to act as the Secretary of the meeting. The Secretary of the meeting will keep minutes of the meeting of the Committee, and such minutes will be retained with the corporate records of the Corporation.

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6.

In addition to any meeting of the Committee called pursuant to paragraph 4 above, the Committee shall meet with management and the independent Auditors of the Corporation within:

(a)

sixty (60) days, or such lesser period as may be prescribed by applicable law, following the end of each of the first three financial quarters of the Corporation, but in any event prior to the public release of the financial results for each such quarter and their filing with the applicable regulatory authorities, to review and discuss the unaudited interim financial statements of the Corporation for the preceding financial quarter and the related Management's Discussion and Analysis of Results of Operations and Financial Position ("MD&A"), as well as the results of the independent Auditors' review of the interim financial statements for such quarter, and, if satisfied, report thereon to, and recommend their approval by, the Board and their inclusion in the Corporation's required regulatory filings for such quarter; and

(b)

ninety (90) days, or such lesser period as may be prescribed by applicable law, following the financial year-end of the Corporation, but in any event prior to the public release of the financial results for the financial year and their filing with the applicable regulatory authorities, to review and discuss the audited financial statements of the Corporation for the preceding financial year and the related MD&A and, if satisfied, report thereon to, and recommend their approval by, the Board and the shareholders of the Corporation as required by applicable law and their inclusion in the Corporation's Annual Report and other required regulatory filings.

In reviewing the quarterly and annual financial statements of the Corporation, the Committee shall ensure that adequate procedures exist for the review of such financial statements, including timely review by the independent Auditors.

7.

For purposes of performing their duties and responsibilities, the members of the Committee shall have full access to, and the right to discuss any matters relating to such duties and responsibilities with, management, any employee of the Corporation, the Internal Auditors, the independent Auditors and any external advisors to the Corporation, as well as the right to inspect all books, records and facilities of the Corporation and its subsidiaries, and shall be permitted to discuss such books, records, facilities and any other matters relating to the financial position of the Corporation with management, any employee of the Corporation, the Internal Auditors, the independent Auditors and any external advisors to the Corporation.

8.

The Committee may retain outside financial, legal, accounting and other experts at the expense of the Corporation where reasonably required to assist and advise the Committee in carrying out its duties and responsibilities.

Duties and Responsibilities

9.

With respect to audit-related matters, and in addition to the duties and responsibilities of the Committee under applicable law, the Committee may examine and consider such matters in relation to the internal and external audits of the Corporation's accounts (including the results of such audits), financial controls, financial reporting and the general financial affairs of the Corporation, as the Committee may deem necessary or desirable, except for those matters specifically delegated by the Board to another standing Board committee or specifically retained by the Board itself.

        In carrying out its duties and responsibilities, the Committee shall:

(a)

be directly responsible for the appointment, compensation, retention and oversight of the work of the independent Auditors, including resolution of disagreements between management and the independent Auditors regarding financial reporting, for the purposes of preparing or issuing an audit report or related work, or performing other audit, review or attestation services for the Corporation;



(b)

pre-approve, or establish procedures and policies for the pre-approval of, the engagement and compensation of the independent Auditors in respect of the provision of (i) all audit, audit-related, review or attestation engagements required by applicable law, and (ii) all non-audit services

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permitted to be provided by the independent Auditors in accordance with applicable law and the rules of the OSC, the SEC and other applicable regulatory authorities;

(c)

review and approve, in advance, all non-audit services permitted to be provided by the independent Auditors to the Corporation in accordance with applicable law and the rules of the OSC, the SEC and other applicable regulatory authorities; provided that the Committee may (i) pre-approve certain services within designated thresholds on an annual basis, and (ii) delegate to the Chairman or such other member(s) of the Committee that it deems appropriate certain pre-approval authority (with the requirement that any pre-approvals granted by such person(s) be reported at the next regularly scheduled meeting of the Committee);



(d)

review and approve the objectives and general scope of the external audit (including the overall audit plan, proposed timing and completion dates) and discuss the external audit with the independent Auditors;



(e)

evaluate the performance, quality control procedures and efficiency of the independent Auditors in carrying out their responsibilities; review the experience and qualifications of the independent Auditors' professional staff providing services to the Corporation; make annual recommendations to the Board as to the appointment or re-appointment of the independent Auditors (and the need, if any, for rotation of the independent Auditors); and review the independence of the independent Auditors, including the receipt, at least annually, of a disclosure report from the independent Auditors regarding their independence as required by applicable law, regulatory requirements and standards of professional conduct, including generally accepted auditing standards in Canada and the United States;



(f)

satisfy itself generally that there is a good working relationship between management and the independent Auditors; review any management letters, schedules of unadjusted differences or other reports of the independent Auditors; and discuss any material differences of opinion between management and the independent Auditors;



(g)

satisfy itself that management has established and is maintaining an adequate and effective system of internal financial and accounting controls and is responding on a timely basis to any significant weaknesses which have been identified; meet with, and review significant reports of, the Internal Auditors and the independent Auditors relating to such internal controls; and review the appointment, termination and replacement of the senior management of the Internal Auditors, the scope of the Internal Auditor's work plan and the overall performance, staffing and resources of the Internal Auditors;



(h)

review annually management's assessment and report relating to the effectiveness of the Corporation's internal financial controls and procedures in respect of each financial year of the Corporation, as well as the independent Auditors' attestation of such assessment in each case when required under applicable law;



(i)

review the (i) selection, use and quality of application of, and proposed material changes to, critical accounting policies and practices of the Corporation and related judgments by management, and (ii) alternative treatments under applicable generally accepted accounting principles ("GAAP") for policies and practices relating to material items, including the ramifications of such alternative disclosures or treatments and any recommended treatments, to ensure that the critical accounting policies and practices and GAAP treatments adopted by management are appropriate and consistent with the Corporation's needs and applicable requirements; and discuss the same with the independent Auditors;



(j)

review with management and the independent Auditors any issues raised by regulators or governmental agencies and any employee complaints or published reports which raise material issues regarding the Corporation's financial statements or accounting or auditing practices;



(k)

review, on behalf of the Board, any actual or potential illegal, improper or fraudulent behaviour which may have a negative effect on the integrity or reputation of the Corporation; review the findings of any

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regulatory authorities in relation to the financial affairs of the Corporation; review the disclosure of all related party transactions; and monitor compliance with the Corporation's Code of Conduct and/or Code of Ethics which may be in effect from time to time;

(l)

satisfy itself that there is an agreed course of action between management, the Internal Auditors and/or the independent Auditors (as the case may be) leading to the resolution of significant unsettled issues that do not affect the audited financial statements of the Corporation (e.g. disagreements regarding correction of internal control weaknesses or the application of accounting principles to proposed transactions), if any;



(m)

assess with management the Corporation's material risk exposures and the Corporation's actions to monitor and control such exposures;



(n)

review and approve the hiring of former employees of the independent Auditors who were engaged in providing services to the Corporation within the last three years prior to such hiring;



(o)

review all material off-balance sheet transactions entered into by management, and the related accounting presentation and disclosure;



(p)

discuss with the independent Auditors the matters required to be discussed by the Statement of Auditing Standards Nos. 54, 61, 89 and 90 (and comparable generally accepted auditing standards in Canada) and other applicable standards or requirements in effect from time to time relating to the conduct of the audit of the annual financial statements and the quarterly review of the interim financial results of the Corporation;



(q)

prepare the Audit Committee report in the form and at the time required by the applicable rules of the OSC, the SEC, the TSX, NASDAQ or other applicable regulatory authorities which are in effect from time to time for inclusion in the Corporation's Annual Report, Annual Information Form, Annual Report on Form 40-F and/or management information circular/proxy statement;



(r)

review and, where appropriate, approve all public disclosure documents of the Corporation containing financial information or forecasts of the Corporation prior to its release, including all press releases containing such information or forecasts;



(s)

establish procedures for (i) the receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal controls, and auditing matters, and (ii) the confidential, anonymous submission of complaints by employees of the Corporation of concerns regarding questionable accounting or auditing matters;



(t)

review and assess this Charter annually and make recommendations to the Board for such changes or amendments to this Charter as the Committee considers necessary or desirable; and



(u)

perform such other functions and activities as requested or delegated by the Board from time to time or as required by the Corporation's articles or by-laws, or by applicable legal or regulatory requirements.

Limitations

10.

Notwithstanding the foregoing and subject to applicable law, the Committee shall not be responsible to plan or conduct internal or external audits or to determine that the Corporation's financial statements are complete, accurate or in accordance with generally accepted accounting principles (as such functions are the responsibility of management, the Internal Auditors and the independent Auditors of the Corporation). This Charter has been established to assist in ensuring sound business practices within the Corporation and compliance by the Corporation with applicable laws and regulations; however, nothing in this Charter is intended to expand any applicable legal or regulatory standards of liability for the directors of the Corporation or the members of the Committee.

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SCHEDULE "B"
REPORT ON CORPORATE GOVERNANCE

Corporate Constitution

        Tesma is a controlled public subsidiary of Magna and, together with Tesma's predecessors, has been part of the Magna family of companies for over 25 years. Magna's unique, entrepreneurial corporate culture includes certain principles and corporate governance practices prescribed by Magna's corporate constitution. Tesma applies the same principles and corporate governance practices, and, as a separate public company, has adopted its own Corporate Constitution (as set out in its restated articles of incorporation).

        Tesma's Corporate Constitution attempts to strike a balance among Tesma's stakeholders — its employees, managers and investors — by specifically defining their respective rights to participate in the Corporation's profits, while at the same time imposing certain responsibilities and disciplines on management. Elements of these rights, responsibilities and disciplines include:

•

the entitlement of shareholders to certain minimum annual dividend distributions of, on average (over a rolling three year period), 20% of the Corporation's annual net profits (the Dividend Policy);



•

the restriction on investments by the Corporation in unrelated businesses where the amount of any such particular investment, together with all other investments in unrelated businesses, exceeds 20% of the Corporation's equity (the Investment Policy);



•

the allocation of specified distributions of the Corporation's annual adjusted pre-tax profits to eligible employees through the Employee Equity Participation and Profit Sharing Program (10%), to Corporate Management (as defined in the Corporate Constitution) as incentive, profit-based compensation arrangements (maximum 6%), to research and development activities (minimum 7%), and to the support of social objectives (maximum 2%) (the Distribution Policy), with the balance of the Corporation's profits allocated for future growth, reinvestment and taxes;



•

the requirement for a majority of the members of the Board to be individuals who are not officers or employees of the Corporation, nor persons related to such officers or employees, and that a minimum of two directors not be officers or employees of the Corporation or its affiliates (including Magna), or directors of the Corporation's affiliates (including Magna), nor persons related to any such officers, employees or directors; and



•

the ability of holders of Class A Subordinate Voting Shares to directly elect directors if, on average (over a rolling two year period), a minimum 4% return on capital is not achieved or the distributions under the Dividend Policy are not paid.

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Statement of Corporate Governance Practices — TSX Guidelines

        The following is a statement of Tesma's corporate governance practices, with specific reference to the TSX Guidelines.

TSX Guideline	Corporate Governance Practice of Tesma
The board of directors of every corporation should explicitly assume responsibility for the stewardship of the corporation and, as part of the overall stewardship responsibility, should assume responsibility for the following matters:	Tesma's Board is responsible for the stewardship of the Corporation. The Board oversees Tesma's business and affairs and the day-to-day conduct of business by senior management, establishes or approves all corporate policies as required and involves itself jointly with management in the creation of shareholder value, the preservation and protection of the Corporation's assets and the establishment of Tesma's strategic plan. The Board acts in accordance with the Business Corporations Act (Ontario), Tesma's articles of incorporation (including the Corporate Constitution contained therein) and by-laws, Tesma's Board Charter, the charters and authorizing resolutions of the Board's Committees, various company policies and other applicable laws, rules and regulations. The Board recently adopted a Code of Conduct and Ethics for the Corporation which applies to members of the Board, as well as to management and all other employees of Tesma. A copy of the Board Charter and the Code of Conduct and Ethics are available on Tesma's website (www.tesma.com/corporate/corporate governance).
	In general terms, the Board approves all significant decisions and material transactions affecting Tesma prior to implementation by management, supervises such implementation and reviews the results. In order to assist in defining the limits of management's authority, the Board Charter sets forth the following specific matters requiring Board approval, in addition to those specific matters requiring prior Board approval under applicable laws, rules and regulations:
	•  the Corporation's interim and annual financial statements;
	•  strategic plans, business plans and capital expenditure budgets;
	•  raising of debt or equity capital and other major financial activities;
	•  executive hiring, compensation and succession;
	•  major organizational restructurings;
	•  material acquisitions and divestitures; and
	•  major corporate policies.
	As part of its overall stewardship responsibility, the Board has assumed responsibility for the following matters:
	Satisfying Itself as to the Integrity of Management
	The Board is responsible for taking such actions as it deems necessary to satisfy itself of:
	•  the integrity of the Corporation's Chief Executive Officer and other members of Corporate Management (as defined in the Corporate Constitution); and
	•  the creation by the Chief Executive Officer and other members of Corporate Management of a culture of integrity throughout the Corporation.
(a) adoption of a strategic planning process;	Adoption of a Strategic Planning Process Tesma has implemented a strategic planning process which directly involves both management and the Board. At or prior to the commencement of each financial year, the Board participates in a meeting with management devoted to strategic planning issues in which:
	•  future trends, opportunities and risks in the automotive industry over a three- to seven-year horizon are jointly identified and discussed;
	•  a strategic plan is considered which addresses such trends, opportunities and risks;
	•  specific product strategies and three-year business plans are presented by management for review and discussion by the Board;
	•  capital expenditure projects for the ensuing financial year are presented and reviewed; and
	•  the business plan and capital expenditures budget for the ensuing financial year are presented for approval by the Board.

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	Additionally, updates on industry trends, product strategies, new product and technology developments, major new business awards, capital expenditures and specific problem areas/action plans are presented by Tesma's management and discussed as part of a management report at each regular quarterly Board meeting.
	As part of its overall mandate, and consistent with the allocation of responsibility between the Board and management, the Board is required to review and consider any material changes to the approved business plan, as well as any transactions which would have a significant impact on the approved business plan.
(b) the identification of the principal risks of the corporation's business and ensuring the implementation of appropriate systems to manage these risks;	Identification and Management of Principal Risks The Board, through the Audit Committee, is responsible for assessing with management the Corporation's: •  material risk exposures; and •  actions to monitor and control such exposures.
	The principal risks facing the Corporation which have been identified by the Audit Committee include the following risks (and other factors):
	•  the automotive industry;
	•  pricing concessions and cost absorptions;
	•  product warranty, recall and product liability costs;
	•  dependence on new and redesigned product introductions by customers and technology improvements;
	•  competition;
	•  reliance on major customers;
	•  reliance on sub-suppliers;
	•  production volumes;
	•  currency exposure;
	•  environmental matters;
	•  new facilities;
	•  government regulations;
	•  availability of financing; and
	•  control of Tesma and relationship with Magna.
	These risks (and other factors) are reviewed and discussed in greater detail in the Corporation's Annual Information Form (and corresponding Annual Report on Form 40-F) which are periodically filed with applicable securities regulatory authorities in Canada and the United States and are available on Tesma's website (www.tesma.com/investors/financialreports).
	In order to fulfil its responsibility regarding the risks facing the Corporation, the Audit Committee meets regularly with the Corporation's internal and external auditors to discuss such risks and other related matters. Furthermore, the Audit Committee monitors the actions taken to control these risks through discussions with, and reports from, management on specific issues from time to time, updates to the Board as a whole at the Board's quarterly meetings and at the annual strategic planning meeting conducted with management.

B-3

(c) succession planning, including appointing, training and monitoring senior management;	Succession Planning, Including Appointing, Training and Monitoring Senior Management Tesma has continued Magna's long-established policy of profit-based compensation in order to attract, retain and motivate skilled and entrepreneurial management and employees, as reflected in the Corporation Constitution.
	The Board, through its review of all officer appointments, is involved in management succession and manpower planning. In reviewing and appointing corporate officers, the Board will satisfy itself that candidates possess the necessary levels of integrity, skill and experience. The Board has delegated to the Corporate Governance and Compensation Committee the review of succession plans for the Chief Executive Officer and other key positions within the Corporation, including other members of Corporate Management and other senior officers of the Corporation (with the Committee to provide its report and recommendations to the Board). The Board has delegated to management the review of succession plans for the Corporation's subsidiaries and operating divisions (with management to provide its report and recommendations to the Corporate Governance and Compensation Committee and/or, in appropriate circumstances, to the Board).
	In fulfilling its mandate with respect to succession planning, the Corporate Governance and Compensation Committee will review Corporate Management's succession plans and make recommendations to the Board, taking into consideration the management and operational needs of the Corporation and its operating philosophy.
	While the responsibility for direct training has traditionally been left to senior management, the Corporate Governance and Compensation Committee satisfies itself that the necessary levels of integrity, skill and experience exist when reviewing and making recommendations to the Board. Both the Corporate Governance and Compensation Committee and the Board support Tesma's ongoing commitment to training and skills development of employees at all levels of the organization, including the participation in technical apprenticeship training and management skills training initiatives coordinated by Magna.
	As part of its mandate with respect to management compensation, the Corporate Governance and Compensation Committee monitors and evaluates Corporate Management and reviews and implements Tesma's profit-based compensation policy to ensure that management performance (as measured by the Corporation's profitability) bears a direct relationship to their levels of compensation. See "Compensation of Directors and Executive Officers — Corporate Governance and Compensation Committee — Report on Executive Compensation" in the Circular.
(d) a communications policy for the corporation; and	Communications Policy — The Board bears responsibility for ensuring that the Corporation maintains programs to effectively communicate with its stakeholders, including shareholders, employees and the general public. The Board reviews and approves all material communications issued by the Corporation, such as interim and annual financial statements, press releases, other required regulatory filings and the dissemination of other material information.
	In addition to the Board's review and approval of the financial statements, the Audit Committee first reviews and recommends to the Board, for approval, the Corporation's interim and annual financial statements, as well as the related management's discussion and analysis of results of operations and financial position.

B-4

In March 2004, the Board adopted a Corporate Disclosure Policy which operates to, in large part, formalize the procedures previously followed by Tesma with respect to corporate disclosure and, in accordance with current regulatory requirements, seeks to ensure timely, effective and accurate disclosure of material information to stakeholders and other applicable authorities. Accordingly, Tesma's Corporate Disclosure Policy:

•  requires the Disclosure Committee (see below) to review and approve all public disclosures of material non-public information;

•  designates certain specified officers of the Corporation as authorized spokespersons on behalf of the Corporation;

•  sets out a procedure for the disclosure of Tesma's quarterly earnings information (including advance notice of quarterly earnings conference calls and/or web casts);

•  assigns to the Chief Financial Officer the responsibility for reviewing models or reports requested to be reviewed by analysts, and, subject to applicable regulatory authority restrictions, prescribes the ability to comment thereon; and

•  assigns to the Corporate Secretary the responsibility for all continuous disclosure/regulatory filings on behalf of the Corporation.

The Corporate Disclosure Policy also establishes a Disclosure Committee, consisting of the Corporation's Chief Financial Officer, Vice-President, Finance, Treasurer, Controller, General Counsel, Corporate Secretary and the senior person responsible for Tesma's investor relations, to identify, review and approve the disclosure, from time to time, by Tesma of material non-public information. The Disclosure Committee reports to the Chief Executive Officer and the President at least quarterly and to the Audit Committee and the Board as a whole as required from time to time.

The President and Chief Financial Officer, as an authorized spokesperson for the Corporation, conducts meetings and publicly accessible conference calls and web casts from time to time with representatives of industry, analysts, brokerage firms and institutional and private investors to explain information released to the public about Tesma and its financial and operating performance. Additionally, Tesma's management makes extensive presentations at annual shareholders' meetings to review the Corporation's operating results for the prior year and its business objectives and strategies for the future.

The Corporation also places great emphasis on its employee communications programs as contemplated under its Employee's Charter of Rights. These programs include:

•  monthly employee communications meetings;

•  the publication of employee newsletters;

•  divisional employee opinion surveys; and

•  through the Corporation's continued affiliation with Magna, the maintenance of an employee hotline, employee advocate programs and divisional fairness committees to directly address individual employee concerns.

In keeping with Tesma's commitment to maintain safe and healthful workplaces as prescribed in its Employee's Charter of Rights, employees at all levels are encouraged to communicate to management and, where appropriate, directly to the Environmental, Health and Safety Committee or the Board, all concerns and incidents relating to workplace environmental, health and safety issues.

The Corporation is in the process of implementing a "Whistleblower Hotline" mechanism for reporting fraudulent, illegal or other prescribed activities (whether relating to financial reporting or otherwise)

Shareholders of the Corporation are able to communicate with the Corporation in a number of different ways, including mail, phone and e-mail to the President and Chief Financial Officer, the Vice-President, Secretary and General Counsel and the Manager of Investor Relations. In addition, shareholders have ample opportunity to pose questions to management and the Corporation's external auditors at the Corporation's annual meeting of shareholders.

Tesma also maintains a website (www.tesma.com) which includes information of interest to stakeholders, including copies of recent press releases, annual and quarterly reports, and other major communications items.

B-5

(e) the integrity of the corporation's internal control and management information systems.	Integrity of Internal Control and Management Information Systems The Board has assigned to the Audit Committee the responsibility for ensuring that effective systems are in place to monitor the integrity of the Corporation's internal control and management information systems.
	As part of its mandate pursuant to its written charter, the Audit Committee is responsible for:
	•  satisfying itself that management has established and is maintaining an adequate and effective system of internal financial and accounting controls;
	•  satisfying itself that management is responding on a timely basis to any significant weaknesses in the system of internal financial and accounting controls which have been identified;
	•  meeting with and reviewing significant reports of the internal auditors and the external auditors relating to such internal controls; and
	•  reviewing the appointment, termination and replacement of the senior management of the internal auditors, the scope of the internal auditors' work plan and the overall performance, staffing and resources of the internal auditors.
	The Audit Committee meets quarterly prior to, and reports at, each quarterly Board meeting. During its meetings, the Audit Committee meets with management, the external auditors and the internal auditors to review and discuss the Corporation's internal control and management information systems
	Additionally, management formally reports to the Environmental, Health and Safety Committee (for the period from its establishment in February 2003, prior to which management reported to the full Board) on a periodic basis the status of all material environmental and occupational health and safety matters affecting the Corporation and its operating divisions (as such matters may arise from the divisional environmental and health and safety inspection and audit programs maintained by Tesma). In the event that the Corporation's environmental or health and safety monitoring and review systems would reveal material non-compliance issues (which, to date, has not been the case), management would promptly communicate the same, together with proposed budgets and remediation plans, for review and consideration by the Environmental, Health and Safety Committee and, in appropriate circumstances, the full Board.
The board of directors of every corporation should be constituted with a majority of individuals who qualify as unrelated directors. An unrelated director is a director who is independent of management and is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director's ability to act with a view to the best interests of the corporation, other than interests and relationships arising from shareholding. A related director is a director who is not an unrelated director. If the corporation has a significant shareholder, in addition to a majority of unrelated directors, the board should include a number of directors who do not have interests in or relationships with either the corporation or the significant shareholder and which fairly reflects the investment in the corporation by shareholders other than the significant shareholder. A significant shareholder is a shareholder with the ability to exercise a majority of the votes for the election of the board of directors.	As noted above, the Corporate Constitution requires that a majority of the members of the Board be individuals who are not officers or employees of the Corporation, nor persons related to such officers or employees, and that a minimum of two directors not be officers or employees of the Corporation or its affiliates (including Magna), or directors of the Corporation's affiliates (including Magna), nor persons related to such officers, employees or directors. In its assessment of the Corporation's compliance with the TSX Guidelines and its Corporate Constitution, both the Corporate Governance and Compensation Committee and the Board considered the circumstances of the various directors and concluded that four of the Corporation's seven directors, Messrs. Marx, Peterson, Whiteside and Young, are "unrelated directors" within the meaning of the TSX Guidelines as they are "free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director's ability to act with a view to the best interests of the corporation, other than interests and relationships arising from shareholding". Mr. Marx serves as a Vice President of TMW Enterprises Inc., a management services/holding company which controls several subsidiaries operating various automotive businesses. The Board has considered the operations of the subsidiaries of TMW Enterprises Inc., noted that no supplier or competitor relationships with Tesma exist, and concluded that such operations do not affect Mr. Marx's independence as a director of Tesma. Accordingly, the Board considers Mr. Marx to be an "unrelated director" within the meaning of the TSX Guidelines. In light of such independence and based on his tenure with the Board and his extensive prior automotive industry experience, Mr. Marx was appointed as the Lead Director of the Board on March 25, 2004.

B-6

The application of the definition of "unrelated director" to the circumstances of each individual director should be the responsibility of the board which will be required to disclose on an annual basis whether the board has a majority of unrelated directors or, in the case of a corporation with a significant shareholder, whether the board is constituted with the appropriate number of directors which are not related to either the corporation or the significant shareholder. Management directors are related directors. The board will also be required to disclose on an annual basis the analysis of the application of the principles supporting this conclusion.	Mr. Peterson is a senior partner and serves as Chairman of Cassels Brock & Blackwell LLP, a law firm located in Toronto, Canada. Cassels Brock & Blackwell LLP does not provide any legal work or services to Tesma or any of its subsidiaries. Accordingly, the Board considers Mr. Peterson to be an "unrelated director" within the meaning of the TSX Guidelines. Mr. Whiteside is a senior partner and serves as Chairman and Chief Executive Officer of Miller Thomson LLP, a firm which periodically provides litigation and real estate related legal services to the Corporation and to Magna (and its affiliates). During calendar 2003, the Corporation paid Miller Thomson LLP less than $11,000 for such legal services, and Mr. Whiteside was not personally involved in the provision of such services to the Corporation. Management has advised the Board that the amount or dollar value of the legal services provided from time to time by Miller Thomson LLP to the Corporation is not considered to be significant or material (nor reasonably capable of being perceived as significant or material) in the circumstances, and the Board has agreed with this conclusion. Accordingly, the Board considers Mr. Whiteside to be an "unrelated director" within the meaning of the TSX Guidelines. Mr. Young serves as Chairman of Summa Strategies Canada Inc., a government relations agency, which provides no services to Tesma or any of its subsidiaries. Accordingly, the Board considers Mr. Young to be an "unrelated director" within the meaning of the TSX Guidelines.
	During calendar 2003, Mr. Gingl served as the Vice Chairman and Chief Executive Officer of the Corporation. Effective February 24, 2004, Mr. Gingl was appointed the Chairman of the Corporation (in addition to his existing position of Chief Executive Officer). As Chief Executive Officer, Mr. Gingl is a member of management and a "related director" within the meaning of the TSX Guidelines.
	The remaining two directors who served during calendar 2003, Ms. Stronach and Mr. Wolf, are not, by virtue of their position as directors and officers of Magna (considered a "significant shareholder" under the TSX Guidelines due to its ability to exercise a majority of the votes for the election of Tesma's Board), "related directors" within the meaning of the TSX Guidelines. However, for the purposes of the TSX Guidelines, the Board has determined to consider each of Ms. Stronach and Mr. Wolf as "related directors" in recognition of (i) Ms. Stronach being a trustee of, and otherwise associated with, the Stronach Trust, the entity that controls Magna (see "Voting Securities and Principal Shareholders" in the Circular) and (ii) the various interests and business relationships that exist between Magna and Tesma from time to time (see "Interests of Management and Other Insiders in Certain Transactions" in the Circular) and the potential for the perception that such interests and relationships might have a bearing on their respective abilities to act with a view to the best interests of the Corporation.
	Mr. Galifi was appointed as a director on February 24, 2004 to fill the vacancy created by the resignation of Ms. Stronach as the Chairman of the Board and a director. Mr. Galifi serves as the Executive Vice President and Chief Financial Officer of Magna and, for reasons similar to those applicable to Mr. Wolf, the Board has determined Mr. Galifi to be a "related director" in recognition of the various interests and business relationships that exist between Magna and Tesma from time to time.
	Additional information regarding Tesma's directors is found above under "Business to be Transacted at the Meeting — Election of Directors" in the Circular and on Tesma's website (www.tesma.com/corporate/corporategovernance). Tesma's website includes biographical information about each director and provides a listing of the other boards on which they serve.
	Based on the foregoing considerations, the Board believes that its current composition consisting of a majority of "unrelated directors" (Messrs. Marx, Peterson, Whiteside and Young), all of whom (with the exception of Mr. Whiteside on a limited and non-material basis) do not have interests in or relationships with either the Corporation or Magna (as the "significant shareholder" of Tesma), adequately and fairly reflects the investment in Tesma by its minority shareholders.

B-7

The board of directors of every corporation should appoint a committee of directors composed exclusively of outside, i.e., non-management, directors, a majority of whom are unrelated directors, with the responsibility for proposing to the full board new nominees to the board and for assessing directors on an ongoing basis.	Tesma has not established a separate nominations committee as recommended by the TSX Guidelines. However, the Corporation has adopted a Board Charter which requires the Board to select one "unrelated" and independent director to act as the Lead Director of the Board to, among other things, assist in identifying potential nominees to the Board (within the requirements established by Tesma's Corporate Constitution) and assist in the development and conduct of the assessment of Board effectiveness. The Board Charter and the Corporate Governance and Compensation Committee Charter also address a number of other issues normally considered by a nominations committee, such as the size and composition of the Board (and, in the Corporate Governance and Compensation Committee Charter, the Board has specifically delegated to the Committee the responsibility for recommending timely changes in the role, size, competencies, skills and structure of the Board and all Board Committees). The Board believes that matters normally considered by a nominations committee have and will continue to be effectively dealt with by the Board acting as a whole, which is comprised of six (out of seven) "outside" or non-management directors and a majority of "unrelated directors", and/or by the Corporate Governance and Compensation Committee, as applicable, together with the Lead Director.
Every board of directors should implement a process to be carried out by the nominating committee or other appropriate committee for assessing the effectiveness of the board as a whole, the committees of the board and the contribution of individual directors.	The Board has delegated to the Corporate Governance and Compensation Committee the responsibility for annually assessing and overseeing the evaluation of the effectiveness of the Board as a whole and of the individual Committees of the Board, as well as recommending timely changes in the role, size, composition, competencies, skills and structure of the Board and of all Board Committees. The Corporate Governance and Compensation Committee distributed a self-assessment questionnaire to each director and Committee member in respect of Board and Committee meetings and activities during calendar 2003. In this questionnaire, directors and Committee members were asked to comment on a number of items, including Board priorities, responsibilities, operations and effectiveness, as well as individual Committee responsibilities, operations and effectiveness. Based on the responses received to this questionnaire and following its own deliberations, the Corporate Governance and Compensation Committee considered the composition, size and effectiveness of the Board and its Committees, and concluded that the Board and its Committees functioned effectively throughout calendar 2003. The Corporate Governance and Compensation Committee also took note of the new definition of "independence" for Audit Committee members under the NASDAQ Corporate Governance Rules which comes into effect on July 31, 2005. See "Board of Directors and Committees of the Board — Audit Committee" in the Circular.
	With the appointment of Mr. Marx as the Lead Director of the Board on March 25, 2004, in accordance with the Board Charter, Mr. Marx will, in the future, assist the Corporate Governance and Compensation Committee in the continuing development and conduct of the process to annually assess the effectiveness of the Board as a whole, the Committees of the Board and, where appropriate, individual directors.
Every corporation, as an integral element of the process for appointing new directors, should provide an orientation and education program for new recruits to the board.	The Corporate Governance and Compensation Committee is mandated, pursuant to its written charter, to recommend to the Board from time to time rules and guidelines governing and regulating the affairs of the Board, such as the orientation and education of new and existing members of the Board regarding the structure and operations of the Corporation, as well as the continuing education, tenure, retirement, compensation and indemnification of directors.
	To assist its new Board members in contributing effectively from the outset of their election or appointment, Tesma currently uses an orientation process to provide new directors with a basic understanding of its business. This process includes:
	•  the supply of a comprehensive orientation manual about the Corporation and its operations;
	•  meetings with senior management and operational personnel; and
	•  scheduled visits and tours of the Corporation's manufacturing and other facilities.
	Such facility visits and meetings with corporate and operational management are encouraged throughout the term of each director's tenure.
	Tesma also encourages its "outside" or non-management directors and its "unrelated directors" to attend professional development programs at the Corporation's expense.

B-8

Every board of directors should examine its size and, with a view to determining the impact of the number upon effectiveness, undertake where appropriate, a program to reduce the number of directors to a number which facilitates more effective decision- making.	The Board currently consists of seven directors which is believed to be adequate, appropriate and conducive to effective and efficient communications and decision-making. Pursuant to its charter, the Corporate Governance and Compensation Committee annually assesses and oversees the evaluation of the effectiveness of the Board as a whole, as well as the individual Committees of the Board. As part of this mandate, the Corporate Governance and Compensation Committee recommends, to the extent necessary, changes in the role, size, composition, competencies, skills and structure of the Board and all Board Committees in order to ensure effectiveness and efficient communications and decision-making.
	While there are no specific criteria for Board members, Tesma attempts to maintain a diversity of personal experience, particularly among its "unrelated directors".
The board of directors should review the adequacy and form of the compensation of directors and ensure the compensation realistically reflects the responsibilities and risk involved in being an effective director.	The Board has delegated to the Corporate Governance and Compensation Committee the responsibility for recommending to the Board rules and guidelines relating to, among other things, director compensation. Directors who are not employees of Tesma nor directors or officers of Magna were, during calendar 2003, paid (or entitled to be paid) those annual, per meeting and other fees referred to under "Compensation of Directors and Executive Officers — Directors' Compensation" in the Circular (including the requirement to accumulate and maintain minimum levels of Tesma Class A Subordinate Voting Shares, annually and in aggregate, or deferred share units in lieu thereof). The form and adequacy of the compensation paid (or payable) to "unrelated directors" was reviewed, revised and approved by the Board in February 2003. The Corporate Governance and Compensation Committee will continue to regularly assess and review director compensation relative to comparator companies of similar size and global presence, both within and outside the automotive industry, in order to ascertain that the level of compensation paid by Tesma to its directors realistically reflects the responsibilities and risks involved in serving as a Board member.
Committees of the board of directors should generally be composed of outside directors, a majority of whom are unrelated directors, although some board committees, such as the executive committee, may include one or more inside directors.	The Board has established three standing Committees: •  the Audit Committee; •  the Corporate Governance and Compensation Committee; and •  the Environmental, Health and Safety Committee, in order to permit directors to delegate and share responsibilities and to devote the necessary expertise and resources to particular areas. Each of these Committees has a specifically defined mandate and responsibilities which, in each case, is set forth in a written charter or resolution adopted by the Board.
	All of the members of each of the Audit Committee, the Corporate Governance and Compensation Committee and the Environmental, Health and Safety Committee are "outside" or non-management directors. Moreover, a majority of the members of the Corporate Governance and Compensation Committee and all of the members of the Audit Committee and the Environmental, Health and Safety Committee are currently "unrelated directors" within the meaning of the TSX Guidelines. The Corporation does not have a separate executive committee or nominating committee of the Board. For a review of the composition, roles and responsibilities of each of the Audit Committee, the Corporate Governance and Compensation Committee and the Environmental, Health and Safety Committee, see "Board of Directors and Committees of the Board" in the Circular.
	A copy of the current Audit Committee Charter is attached to the Circular as Schedule "A" and is also posted, together with a copy of the current charter of the Corporate Governance and Compensation Committee, on Tesma's website (www.tesma.com/corporate/corporategovernance).
Every board of directors should expressly assume responsibility for, or assign to a committee of directors the general responsibility for, developing the corporation's approach to governance issues. This committee would, amongst other things, be responsible for the corporation's response to these governance guidelines.	The Board has assigned to the Corporate Governance and Compensation Committee responsibility for: •  developing the Corporation's system of, and overall approach to, corporate governance practices as a whole, consistent with applicable law, rules and regulations of applicable regulatory authorities and the Corporation's needs; •  making recommendations to the Board for implementation of such system; •  assessing the effectiveness of the Corporation's system of corporate governance; and •  monitoring the implementation and compliance with any rules, regulations or guidelines promulgated by regulatory authorities relating to corporate governance.

B-9

	In addition to monitoring corporate governance requirements mandated by applicable regulatory authorities, the Corporate Governance and Compensation Committee will review and consider corporate governance "best practices" of comparable Canadian and U.S. public companies in order to ensure that the Corporation maintains high standards of corporate governance.
	The Corporate Governance and Compensation Committee is responsible for, and has approved, this Report on Corporate Governance on March 25, 2004.
The board of directors, together with the CEO, should develop position descriptions for the board and for the CEO, involving the definition of the limits to management's responsibilities. In addition, the board should approve or develop the corporate objectives which the CEO is responsible for meeting.	The Board has delegated to the Corporate Governance and Compensation Committee responsibility for annually overseeing the evaluation of management and monitoring and assessing the relationship between the Board and management, defining the limits to management's responsibilities and ensuring that the Board is able to function independently of management. While a specific position description for the Chief Executive Officer does not currently exist, the Board Charter sets out the role of the Board and its responsibilities, including a listing of the decisions or matters (in addition to those required under applicable laws, rules and regulations) requiring Board approval prior to implementation by management. These matters are discussed above in response to the first TSX guideline and are set forth in the Board Charter which is posted on Tesma's website (www.tesma.com/corporate/corporategovernance).
	The Corporate Governance and Compensation Committee is also responsible for annually reviewing and approving the corporate objectives of the Chief Executive Officer and Tesma's senior management team (as a whole) and reporting thereon to the Board. At its annual review meeting with the Chief Executive Officer and the President and Chief Financial Officer of the Corporation, the performance of senior management is reviewed and evaluated against the prior financial year's objectives and the objectives for the upcoming financial year (developed in relation to the Corporation's overall strategic objectives) are considered and approved.
	Each Board Committee has a formal written charter or mandate outlining such Committee's responsibilities and its obligation to report its recommendations to the Board. Subject to those powers which it has specifically delegated, the Board retains all residual authority to manage or supervise the management of the business and affairs of Tesma.
Every board of directors should have in place appropriate structures and procedures to ensure that the board can function independently of management. An appropriate structure would be to (i) appoint a chair of the board who is not a member of management with responsibility to ensure the board discharges its responsibilities or (ii) adopt alternate means such as assigning this responsibility to a committee of the board or to a director, sometimes referred to as the "lead director". Appropriate procedures may involve the board meeting on a regular basis without management present or may involve expressly assigning the responsibility for administering the board's relationship to management to a committee of the board.	The Corporation believes it has appropriate structures and procedures in place to ensure that its Board can function independently of management, including: •  the requirements in the Corporate Constitution that a majority of the directors be individuals who are not (or not related to) officers or employees of the Corporation and that, at a minimum, two directors not be (or not be related to) officers or employees of the Corporation or its affiliates (including Magna) or directors of the Corporation's affiliates (including Magna); •  the actual composition of the Board whereby six of the current seven directors are "outside" or non-management directors and a majority are "unrelated directors"; •  the requirement in the Board Charter for the Board to appoint a Lead Director from among the Board's "unrelated" and independent directors; and •  the responsibility delegated to the Corporate Governance and Compensation Committee to ensure that the Board is able to function independently of management. During calendar 2003, Ms. Stronach was the Chairman of the Board, a non-executive position since she was not involved in the day-to-day management of the business and affairs of the Corporation. Effective February 24, 2004, Mr. Gingl was appointed as the Chairman to fill the vacancy created by Ms. Stronach's resignation. In order to ensure greater independence of the Board from management in light of Mr. Gingl's appointment as the Chairman (in addition to his existing position as the Chief Executive Officer), the Board appointed Mr. Marx, an "unrelated" and independent director, as Lead Director of the Board on March 25, 2004.

B-10

	Pursuant to the Board Charter, the Lead Director's duties include:
	•  representing the Corporation's "unrelated" and independent directors in discussions with Corporate Management on corporate governance issues and other matters;
	•  assisting in ensuring that the Board functions independently of management;
	•  assisting in identifying potential nominees to the Board; and
	•  assisting in the development and conduct of the assessment of Board effectiveness.
	Historically, the "outside" or non-management directors and the "unrelated directors" have assumed the responsibility for ensuring that the Board discharges its duties independently of management, and it is expected that the "unrelated directors", under the leadership of the Lead Director, will continue to do so in appropriate circumstances. For example, the "unrelated directors" participate in periodic meetings or discussions amongst themselves, without the presence of management representatives. Additionally, through the use of the Special Committee process, the "unrelated directors" have reviewed and made recommendations to the Board independently of management on specific matters pertaining to corporate governance and other related matters (including, for example, the consideration of related party transactions).
The audit committee of every board of directors should be composed only of outside directors. The roles and responsibilities of the audit committee should be specifically defined so as to provide appropriate guidance to audit committee members as to their duties. The audit committee should have direct communication channels with the internal and external auditors to discuss and review specific issues as appropriate. The audit committee duties should include oversight responsibility for management reporting on internal control. While it is management's responsibility to design and implement an effective system of internal control, it is the responsibility of the audit committee to ensure that management has done so.	For a review of the composition, roles and responsibilities of the Audit Committee, including the Audit Committee Charter and, as specifically contemplated therein, the Audit Committee's oversight responsibility for management reporting on internal controls, see "Board of Directors and Committees of the Board — Audit Committee" in the Circular. For the full text of the Audit Committee Charter, see Schedule "A" to the Circular. The Audit Committee meets regularly following the conclusion of each financial quarter (and financial year end) at which time members of the Audit Committee engage in direct communications with the internal and external auditors and Tesma's senior financial management (including separate in camera sessions with each of them). Commencing in respect of the first quarter of calendar 2003, the Audit Committee formally engaged the external auditors to perform review procedures on Tesma's unaudited quarterly financial statements. The Audit Committee's quarterly meetings also involve a regular assessment of the adequacy of both the internal and external financial reporting of the Corporation, and a review and discussion of specific issues as circumstances warrant. During each financial year end meeting, the Audit Committee engages in separate in camera discussions with the external auditors and Tesma's senior financial management with respect to the financial year end audit process, including a review of the cooperation received from the Corporation's management and an evaluation of the performance of the external auditors. Accordingly, and as a result of direct communications between the external auditors and the Chairman of the Audit Committee when required, effective communication channels exist between the Audit Committee and the external auditors to discuss and review specific issues as appropriate.
	At its regular quarterly meetings, the Audit Committee meets with the internal auditors to review the activities of the internal auditors over the preceding financial quarter and to confirm the internal audit plan for the remainder of the financial year. As the individuals performing the internal audit services report directly to the Chairman of the Audit Committee, effective communication channels exist between the Audit Committee and the internal auditors to discuss and review specific issues, as appropriate.

B-11

The board of directors should implement a system which enables an individual director to engage an outside advisor at the expense of the corporation in appropriate circumstances. The engagement of the outside advisor should be subject to the approval of an appropriate committee of the board.

Pursuant to the Board Charter, the Board may retain outside legal and other experts at the expense of the Corporation where reasonably required to assist and advise the Board in carrying out its duties and responsibilities. In addition, pursuant to their respective charters or mandates, each standing Committee of the Board is empowered to engage such advisors at the expense of the Corporation where required in the course of its duties. During calendar 2003, and except for the engagement of Ernst & Young LLP by the Audit Committee to perform the audit of the Corporation's consolidated annual financial statements, no outside experts or advisors were retained by the Board or any of its standing Committees. However, real estate appraisers were retained by a Special Committee of independent directors established by the Board to review the sale and leaseback transaction completed in January 2003 with MI Developments Inc., then a wholly-owned subsidiary of Magna, for all the land and buildings on the Tesma corporate campus (see "Interests of Management and Other Insiders in Certain Transactions - Sale/Leaseback Transaction with Magna" in the Circular), and separate legal and financial advisors were retained by another Special Committee of independent directors established by the Board to review a potential acquisition transaction.

The Board will also consider requests to retain outside legal and other advisors at the expense of the Corporation by individual directors or Committee members on their respective merits at the time that any such request may be made.

B-12

Statement of Corporate Governance Practices — NASDAQ Corporate Governance Rules

        The following is a statement of Tesma's corporate governance practices, with specific reference to the NASDAQ Corporate Governance Rules.

NASDAQ Rule	Corporate Governance Practice of Tesma
Distribution of Annual and Interim Reports
Each issuer shall distribute to shareholders copies of an annual report containing audited financial statements of the company and its subsidiaries. The report shall be distributed to shareholders a reasonable period of time prior to the company's annual meeting of shareholders and shall be filed with NASDAQ at the time it is distributed to shareholders.	Tesma distributes to each registered shareholder and non-objecting beneficial shareholder a copy of the Tesma Annual Report to Shareholders (which contains, among other things, the Corporation's audited consolidated annual financial statements, the notes thereto and management's discussion and analysis of results of operations and financial position related thereto) simultaneously with the distribution of the Corporation's management information circular/proxy statement, both of which are sent to shareholders not less than 25 nor more than 60 days in advance of Tesma's annual meeting of shareholders. Tesma files its Annual Report to Shareholders with NASDAQ at the time it is distributed to shareholders. In order to ensure broad shareholder access to the Corporation's disclosure documents, including its Annual Report to Shareholders, Tesma files such disclosure documents with the United States Securities and Exchange Commission (the "SEC") via EDGAR.
Each issuer which is not subject to SEC Rule 13a-13 and which is required to file with the Commission, or another federal or state regulatory authority, interim reports relating primarily to operations and financial position, shall make available to shareholders reports which reflect the information contained in those interim reports. Such reports shall be made available to shareholders either before or as soon as practicable following filing with the appropriate regulatory authority. If the form of the interim report provided to shareholders differs from that filed with the regulatory authority, the issuer shall file one copy of the report to shareholders with NASDAQ in addition to the report to the regulatory authority that is filed with NASDAQ pursuant to Rule 4310(c)(14).	SEC Rule 13a-13 relates to the filing of quarterly reports on Form 10-Q and is applicable only to U.S. domestic issuers. Tesma is a foreign private issuer under United States securities laws. However, under the laws of the Corporation's jurisdiction of incorporation (Ontario, Canada), Tesma is required to file and deliver to shareholders quarterly reports within 60 days of the end of each financial quarter. Tesma mails its quarterly report (which contains, among other things, the Corporation's unaudited consolidated interim financial statements, the notes thereto and management's discussion and analysis of results of operations and financial position related thereto) at the same time to all registered shareholders and all beneficial shareholders who have not objected to receiving such reports, irrespective of where such shareholders reside. Tesma files its quarterly reports with NASDAQ, as well as with the SEC (on Form 6-K) via EDGAR, at the time such reports are filed with Tesma's home jurisdiction regulators and mailed to shareholders.

B-13

Independent Directors
A majority of the board of directors must be comprised of independent directors as defined in Rule 4200. The company must disclose in its annual proxy (or, if the issuer does not file a proxy, in its Form 10-K or 20-F) those directors that the board of directors has determined to be independent under Rule 4200. If an issuer fails to comply with this requirement due to one vacancy, or one director ceases to be independent due to circumstances beyond their reasonable control, the issuer shall regain compliance with the requirement by the earlier of its next annual shareholders meeting or one year from the occurrence of the event that caused the failure to comply with this requirement. An issuer relying on this provision shall provide notice to NASDAQ immediately upon learning of the event or circumstance that caused the non-compliance.	Tesma's Board consists of seven directors. Four of the Corporation's directors are independent directors as defined in Rule 4200(a)(14), which is currently in effect, and Rule 4200(a)(15), which comes into effect on July 31, 2005 for the Corporation. Three of the Corporation's directors are not independent. Both the Corporate Governance and Compensation Committee and the Board have determined that Messrs. Marx, Peterson, Whiteside and Young are independent on the basis that none of them is an officer or employee of the Corporation or any of its affiliates, nor does any of them have a relationship which, in the opinion of the Board, would interfere with the exercise of independent judgement in carrying out their responsibilities as directors. Mr. Marx serves as a Vice President of TMW Enterprises Inc., a management services/holding company which controls several subsidiaries operating various automotive businesses. The Board has considered the operations of the subsidiaries of TMW Enterprises Inc., noted that no supplier or competitor relationships with Tesma exist, and concluded that such operations do not affect Mr. Marx's independence as a director of Tesma. In addition, Mr. Marx is not a person deemed not to be independent by virtue of the types of relationships specified in Rule 4200(a)(14) and Rule 4200(a)(15). Accordingly, the Board considers Mr. Marx to be an independent director as defined in such Rules.
	Mr. Peterson is a senior partner and serves as Chairman of Cassels Brock & Blackwell LLP, a law firm located in Toronto, Canada. Cassels Brock & Blackwell LLP does not provide any legal work or services for Tesma or any of its subsidiaries. In addition, Mr. Peterson is not a person deemed not to be independent by virtue of the types of relationships specified in Rule 4200(a)(14) and Rule 4200(a)(15). Accordingly, the Board considers Mr. Peterson to be an independent director as defined in such Rules.
	Mr. Whiteside is a senior partner and serves as Chairman and Chief Executive Officer of Miller Thomson LLP, a firm which periodically provides litigation and real estate related legal services to the Corporation and to Magna (and its affiliates). However, the payments made by the Corporation to Miller Thomson LLP did not exceed the greater of (i) 5% of the Corporation's or Miller Thomson LLP's consolidated gross revenues, or (ii) $200,000, in any of the past three years. In addition, Mr. Whiteside is not a person deemed not to be independent by virtue of the other types of relationships specified in Rule 4200(a)(14) and Rule 4200(a)(15). Accordingly, the Board considers Mr. Whiteside to be an independent director as defined in such Rules.
	Mr. Young serves as Chairman of Summa Strategies Canada Inc., a government relations agency, which provides no services to Tesma or any of its subsidiaries. In addition, Mr. Young is not a person deemed not to be independent by virtue of the types of relationships specified in Rule 4200(a)(14) and Rule 4200(a)(15). Accordingly, the Board considers Mr. Young to be an independent director as defined in such Rules.
	During calendar 2003, Mr. Gingl served as the Vice Chairman and Chief Executive Officer of the Corporation. Effective February 24, 2004, Mr. Gingl was appointed the Chairman of the Corporation (in addition to his existing position of Chief Executive Officer). As an officer of the Corporation, Mr. Gingl is not considered to be an independent director as defined in Rule 4200(a)(14) and Rule 4200(a)(15).
	The remaining two directors who served during calendar 2003, Ms. Stronach and Mr. Wolf, are not, by virtue of their position as directors and officers of Magna, independent directors as defined in Rule 4200(a)(14) and Rule 4200(a) (15). Similarly, Mr. Galifi, who was appointed as a director on February 24, 2004 to fill the vacancy created by the resignation of Ms. Stronach effective January 20, 2004, is not, by virtue of his position as an officer of Magna, an independent director as defined in Rule 4200(a)(14) and Rule 4200(a)(15).

B-14

Independent directors must have regularly scheduled meetings at which only independent directors are present ("executive sessions"). Compensation of the chief executive officer of the company must be determined, or recommended to the Board for determination, either by: (i) a majority of the independent directors, or (ii) a compensation committee comprised solely of independent directors. The chief executive officer may not be present during voting or deliberations.	The Corporation's Board Charter (adopted in March 2004) formalizes the existing practice by the Corporation's independent directors of meeting in executive sessions. During calendar 2003, the Board's independent directors met in executive sessions either prior to or immediately following the regular quarterly meetings of the Board. The Corporate Governance and Compensation Committee, pursuant to its written charter, bears responsibility for evaluating the Chief Executive Officer's performance, including in respect of any established goals and objectives, and reviewing and making recommendations to the Board with respect to all direct and indirect compensation, benefits and perquisites (cash and non-cash) for the Chief Executive Officer based on such evaluation. The Corporate Governance and Compensation Committee is comprised of three independent directors, Messrs. Marx, Peterson and Young, as well as one non-independent director, Mr. Galifi (during calendar 2003, Ms. Stronach, also a non-independent director). Since more than 50% of the voting power attaching to Tesma's Class A Subordinate Voting Shares and Class B Shares is held by Magna, Tesma is a "controlled company" as defined in Rule 4350 and is exempt from the requirement to have a compensation committee comprised solely of independent directors.
	As a practical matter, the compensation of the Corporation's Chief Executive Officer, Mr. Gingl, has been paid entirely by Magna since May 1, 2002 as a consequence of his appointment as Executive Vice Chairman of Magna.
	The Corporate Governance and Compensation Committee Charter specifically provides that the Chief Executive Officer is not entitled to be present during voting or deliberations by the Corporate Governance and Compensation Committee on the Chief Executive Officer's compensation.
Compensation of all other executive officers must be determined, or recommended to the Board for determination, either by: (i) a majority of the independent directors, or (ii) a compensation committee comprised solely of independent directors.	As a "controlled company" as defined in Rule 4350, Tesma is exempt from the requirement to have a compensation committee comprised solely of independent directors. However, the Board has delegated to the Corporate Governance and Compensation Committee, which is comprised of a majority of independent directors, responsibility for reviewing and making recommendations to the Board with respect to compensation, benefits and perquisites for the members of Corporate Management other than the Chief Executive Officer, and for other senior officers of the Corporation.
Director nominees must either be selected, or recommended for the Board's selection, either by: (i) a majority of the independent directors, or (ii) a nominations committee comprised solely of independent directors.	As a "controlled company" as defined in Rule 4350, Tesma is exempt from the requirement to have a nominations committee comprised solely of independent directors. However, the Corporation's Board Charter requires the Board to select one independent director to act as the Lead Director of the Board to, among other things, assist in identifying potential nominees to the Board (within the requirements established by Tesma's Corporate Constitution). The Board Charter and the Corporate Governance and Compensation Committee Charter also address a number of other issues normally considered by a nominations committee, such as the size and composition of the Board (and, in the Corporate Governance and Compensation Committee Charter, the Board has specifically delegated to the Committee the responsibility for recommending timely changes in the role, size, composition, competencies, skills and structure of the Board and all Board Committees). The Board believes that matters normally considered by a nominations committee have and will continue to be effectively dealt with by the Board acting as a whole, which is comprised of a majority of independent directors, and/or by the Corporate Governance and Compensation Committee, as applicable, together with the Lead Director.
Each issuer must certify that it has adopted a formal written charter or board resolution, as applicable, addressing the nominations process and such related matters as may be required under the federal securities laws.	As a "controlled company" as defined in Rule 4350, Tesma is exempt from the requirement to certify that it has adopted a formal written charter or board resolution addressing the nominations process and related matters. Nevertheless, Tesma has formalized in its Board Charter and in its Corporate Governance and Compensation Committee Charter the respective roles of the Lead Director and the Corporate Governance and Compensation Committee in the nominations process.

B-15

Audit Committee

Each issuer must certify that it has adopted a formal written audit committee charter and that the audit committee has reviewed and reassessed the adequacy of the formal written charter on an annual basis. The charter must specify: (A) the scope of the audit committee's responsibilities, and how it carries out those responsibilities, including structure, processes, and membership requirements; (B) the audit committee's responsibility for ensuring its receipt from the outside auditors of a formal written statement delineating all relationships between the auditor and the company, consistent with Independence Standards Board Standard 1, and the audit committee's responsibility for actively engaging in a dialogue with the auditor with respect to any disclosed relationships or services that may impact the objectivity and independence of the auditor and for taking, or recommending that the full board take, appropriate action to oversee the independence of the outside auditor; and (C) the committee's purpose of overseeing the accounting and financial reporting processes of the issuer and the audits of the financial statements of the issuer; (D) the specific audit committee responsibilities and authority set forth in Rule 4350(d)(3).

Tesma has adopted a formal written Audit Committee Charter, a copy of which is attached as Schedule "A" to the Circular. The Audit Committee Charter requires the Audit Committee to annually review and assess the Charter and make recommendations to the Board for such changes or amendments to the Charter as the Committee considers necessary or desirable. Tesma's Audit Committee Charter meets the requirements of the NASDAQ Corporate Governance Rules and the applicable rules of the SEC. Tesma will certify to NASDAQ that it has adopted a formal written Audit Committee Charter and that the Audit Committee has reviewed and assessed the adequacy of such Charter on an annual basis.

B-16

Each issuer must have, and certify that it has and will continue to have, an audit committee of at least three members, each of whom must: (i) be independent as defined under Rule 4200(a)(15); (ii) meet the criteria for independence set forth in Rule 10A-3(b)(1) under the Act (subject to the exemptions provided in Rule 10A-3(c)); (iii) not have participated in the preparation of the financial statements of the company or any current subsidiary of the company at any time during the past three years; and (iv) be able to read and understand fundamental financial statements, including a company's balance sheet, income statement, and cash flow statement. Additionally, each issuer must certify that it has, and will continue to have, at least one member of the audit committee who has past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual's financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities.	The Corporation's Audit Committee is composed of three members, Messrs. Whiteside (Chairman), Marx and Peterson. The Board has determined that all three members of the Audit Committee meet the requirements for Audit Committee members currently applicable to the Corporation on the basis that each of them (i) is not an officer or employee of Tesma or its subsidiaries, (ii) is independent (see discussion below), (iii) has not, at any time, participated in the preparation of Tesma's or any of its subsidiary's financial statements; and (iv) is able to read and understand fundamental financial statements, including Tesma's consolidated balance sheets, income statements and cash flow statements. In addition, Tesma will certify to NASDAQ that it has, and will continue to have, at least one member of the audit committee who meets the financial experience/certification/sophistication requirements under the NASDAQ Corporate Governance Rules. Currently, such individual is Mr Marx who was also determined by the Board to be an "audit committee financial expert" as defined in Item 401 of Regulation S-K. With respect to the matter of independence, the Board specifically considered the circumstances of each of Messrs. Whiteside, Marx and Peterson and determined that none of them has a relationship which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out his responsibilities as a director. The currently applicable NASDAQ Rules (Rule 4200A(a)(14) for foreign private issuers such as Tesma) set forth five categories of persons who are deemed not to be independent, namely: •  a director who is employed by the corporation or any of its affiliates for the current year or any of the past three years; •  a director who accepts any compensation from the corporation or any of its affiliates in excess of $60,000 during the previous financial year, other than compensation for board service, benefits under a tax-qualified retirement plan or non-discretionary compensation; •  a director who is a member of the immediate family of an individual who is, or has been in any of the past three years, employed by the corporation or any of its affiliates as an executive officer. Immediate family includes a person's spouse, parents, children, siblings, mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-law and anyone who resides in such person's home; •  a director who is a partner in, or a controlling shareholder or an executive officer of, any for-profit business organization to which the corporation made, or from which the corporation received, payments (other than those arising solely from investments in the corporation's securities) that exceed 5% of the corporation's or business organization's consolidated gross revenues for that year, or $200,000, whichever is more, in any of the past three years; and •  a director who is employed as an executive of another entity where any of the corporation's executives serve on that entity's compensation committee.
	As indicated above, the Board has determined that each of Messrs. Marx, Peterson and Whiteside are independent directors as defined in NASDAQ Rule 4200(a)(14). Although Mr. Whiteside is a senior partner and serves as Chairman and Chief Executive Officer of Miller Thomson LLP, a firm which periodically provides litigation and real estate related legal services to the Corporation and to Magna (and its affiliates), the payments made by the Corporation to Miller Thomson LLP did not exceed the greater of (i) 5% of the Corporation's or Miller Thomson LLP's consolidated gross revenues, or (ii) $200,000, in any of the past three years.
	Effective July 31, 2005, the Corporation's Audit Committee members will be required to meet a new definition of independence. In addition to the items listed above (as amended in certain respects in Rule 4200(a)(15)), Audit Committee members must meet the following independence requirements:
	•  each member must meet the requirements of audit committee members under the United States Securities Exchange Act of 1934, namely:     •  each must be a member of the Board;     •  no member can accept, directly or indirectly, any consulting, advisory or other compensatory fee from Tesma or any of its subsidiaries (except in his or her capacity as a member of the Audit Committee, the Board or any other Committee of the Board); and     •  no member can be an "affiliated person" of Tesma or any of its subsidiaries; •  no member can have participated in the preparation of the financial statements of the Corporation or any current subsidiary of the Corporation at any time during the past three years; and •  each member must be able to read and understand fundamental financial statements, including a corporation's balance sheet, income statement, and cash flow statement.

B-17

	The Board has reviewed the composition of the Audit Committee in light of the new definition of independence which comes into effect on July 31, 2005, and has determined that each of Messrs. Marx and Peterson will continue to be considered independent under such definition. The Board has also determined that Mr. Whiteside will not meet the new independence definition as of July 31, 2005 as a result of the fees paid by the Corporation to Miller Thomson LLP, the law firm in which he is a partner. The Corporation intends to fully comply with the new definition as required no later than July 31, 2005. Accordingly, to the extent that Miller Thomson LLP provides legal services to the Corporation or any of its subsidiaries in the future, Mr. Whiteside shall only continue to serve on the Audit Committee until a suitable replacement can be found prior to July 31, 2005 who satisfies the new independence definition for Audit Committee members.
The audit committee must have the specific audit committee responsibilities and authority necessary to comply with Rule 10A-3(b)(2), (3), (4) and (5) under the Act (subject to the exemptions provided in Rule 10A-3(c)), concerning responsibilities relating to: (i) registered public accounting firms, (ii) complaints relating to accounting, internal accounting controls or auditing matters, (iii) authority to engage advisors, and (iv) funding as determined by the audit committee. Audit committees for investment companies must also establish procedures for the confidential, anonymous submission of concerns regarding questionable accounting or auditing matters by employees of the investment adviser, administrator, principal underwriter, or any other provider of accounting related services for the investment company, as well as employees of the investment company.	A detailed discussion of the Corporation's Audit Committee Charter can be found in the Circular under the heading "Board of Directors and Committees of the Board — Audit Committee". In addition, the full text of the Audit Committee Charter is reproduced in Schedule "A" to the Circular. The Tesma Audit Committee has reviewed its Charter and determined that it meets the requirements established by NASDAQ and the SEC.
Shareholders Meetings
Each issuer shall hold an annual meeting of shareholders and shall provide notice of such meeting to NASDAQ.	The Corporation holds an annual meeting of shareholders in May each year and provides advance notice of such meeting to NASDAQ. In accordance with applicable law, rules and regulations in Tesma's jurisdiction of incorporation, Tesma provides not less than 25 nor more than 60 days advance notice of, and materials relating to, its annual shareholder meeting to NASDAQ and to shareholders (including both registered shareholders and non-registered shareholders who have not objected to receiving such materials).
Quorum
Each issuer shall provide for a quorum as specified in its by-laws for any meeting of the holders of common stock; provided, however, that in no case shall such quorum be less than 331/3% of the outstanding shares of the company's common voting stock.	The Corporation's by-laws specify that quorum for any meeting of the holders of Tesma's shares is two persons holding or representing by proxy not less than a majority of the total votes attaching to the issued shares of the Corporation entitled to be voted at such meeting. For separate class meetings of Tesma's Class A Subordinate Voting shareholders or Class B shareholders, as the case may be, the Corporation's by-laws specify that the quorum shall be two persons holding or representing by proxy not less than 331/3% of the total votes attaching to the issued shares of such class entitled to vote at such meeting.
Solicitation of Proxies
Each issuer shall solicit proxies and provide proxy statements for all meetings of shareholders and shall provide copies of such proxy solicitation to NASDAQ.	Tesma solicits proxies and provides management information circulars/proxy statements for all meetings of shareholders. Tesma provides copies of its proxy solicitation materials to NASDAQ and files all such materials with the SEC via EDGAR to ensure broad access to such materials.

B-18

Conflicts of Interest
Each issuer shall conduct an appropriate review of all related party transactions for potential conflict of interest situations on an ongoing basis and all such transactions must be approved by the company's audit committee or another independent body of the board of directors. For purposes of this rule, the term "related party transaction" shall refer to transactions required to be disclosed pursuant to SEC Regulation S-K, Item 404.	From time to time, the Board establishes Special Committees composed entirely of independent directors to review and make recommendations on specific business matters, including related party transactions. For example, the Board established a Special Committee of independent directors to review the sale and leaseback transaction completed in January 2003 with MI Developments Inc., then a wholly-owned subsidiary of Magna, for all the land and buildings on the Tesma corporate campus. This Special Committee, which consisted of Messrs. Whiteside (Chairman), Marx, Peterson and Young, recommended to the Board to proceed with the transaction (subject to certain amended terms) as being in the best interests of Tesma in the circumstances. The independent directors on the Board accepted the Special Committee's recommendation and approved the transaction on the amended terms proposed. See "Interests of Management and Others in Certain Transactions" in the Circular.
	The Audit Committee, which is composed entirely of independent directors, reviews the disclosure of all related party transactions in the Corporation's unaudited interim and audited annual financial statements, and the respective notes thereto.
Shareholder Approval
Each issuer shall require shareholder approval prior to the issuance of shares in connection with a number of types of specified transactions including: •  option or purchase plan is to be established or materially amended or other equity compensation arrangement made or materially amended, pursuant to which stock may be acquired by officers, directors, employees, or consultants; •  when the issuance or potential issuance will result in a change of control of the issuer; •  in connection with the acquisition of the stock or assets of another company in certain circumstances; •  in connection with a transaction other than a public offering involving the sale, issuance or potential issuance by the issuer of common stock (or securities convertible into or exercisable for common stock): (i) at a price less than the greater of book or market value which together with sales by officers, directors or substantial shareholders of the company equals 20% or more of common stock or 20% or more of the voting power outstanding before the issuance; or (ii) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.	The Corporation requires shareholder approval prior to the issuance of shares in connection with the specified transactions. For example, Tesma obtained shareholder approval to the amendment and restatement of its incentive stock option plan to increase the maximum number of Class A Subordinate Voting Shares issuable thereunder (from 3.0 million to 4.0 million) at its annual and special meeting of shareholders held on May 6, 2003. See "Compensation of Directors and Executive Officers — Stock Option Plans, Grants and Exercises" in the Circular. There are circumstances in which a change of control of the Corporation could occur under applicable law without shareholder approval. Under applicable Canadian law, an offer to purchase Tesma Class B Shares would not necessarily result in an offer to purchase Tesma Class A Subordinate Voting Shares. Magna (including its intermediary holding corporation, 1128969 Ontario Inc. ("1128969")), as the direct and indirect holder of all of the Corporation's issued and outstanding Class B Shares, entered into an agreement (the "Trust Agreement") on July 19, 1995 with the Corporation and the Montreal Trust Company of Canada ("Montreal Trust"), as trustee, for the purpose of ensuring that the holders of Class A Subordinate Voting Shares will not be deprived of any rights under applicable take-over bid legislation to which they would have been entitled in the event of a take-over bid (which term includes, in certain circumstances, a private offer to purchase) if the Class B Shares and the Class A Subordinate Voting Shares were a single class of shares. Under an assignment of trusts agreement dated January 24, 2003, Montreal Trust resigned as trustee under the Trust Agreement and was replaced by the Computershare Trust Company of Canada (the "Trustee"). Pursuant to this Trust Agreement, Magna (including 1128969) has agreed not to sell any Class B Shares, directly or indirectly, pursuant to a take-over bid, as defined under the Securities Act (Ontario), in circumstances in which such legislation would require the same offer or a follow-up offer on the same terms to be made to the holders of Class A Subordinate Voting Shares if the sale had been a sale of Class A Subordinate Voting Shares. These circumstances include the sale of Class B Shares at a price per share in excess of 115% of the market price of the Class A Subordinate Voting Shares as determined under such legislation. This prohibition does not apply if: (i) such sale is made pursuant to an offer to purchase only a limited number of Class B Shares made to all holders of Class B Shares and an identical offer in all material respects is made concurrently to purchase the Class A Subordinate Voting Shares, which identical offer has no additional condition attached other than the right not to take-up and pay for shares tendered if no shares are purchased pursuant to the offer for the Class B Shares, or (ii) there is a concurrent unconditional offer to purchase all Class A Subordinate Voting Shares at a price per share at least as high as the highest price per share paid pursuant to the take-over bid for the Class B Shares.

B-19

	The Trust Agreement contains provisions for the authorization of action by the Trustee to enforce the relevant rights of the holders of Class A Subordinate Voting Shares as beneficiaries of the trust. The obligation of the Trustee to take such action is conditional on the Corporation or the holders of Class A Subordinate Voting Shares providing such funds and indemnity as the Trustee may require. No holder of Class A Subordinate Voting Shares has the right, other than through the Trust Agreement, to institute any action or proceeding or to exercise any other remedy to enforce any rights arising under the Trust Agreement unless the Trustee fails to act on a request authorized by the holders of not less than 10% of the outstanding Class A Subordinate Voting Shares after provision of reasonable funds and indemnity to the Trustee.
	The Trust Agreement provides that Magna (including 1128969) will not dispose of any Class B Shares, directly or indirectly, unless the disposition is conditional upon the person or company acquiring such shares becoming a party to the Trust Agreement. Conversions of Class B Shares into Class A Subordinate Voting Shares and the subsequent sale of the Class A Subordinate Voting Shares resulting from such conversions are excluded from this prohibition. The Trust Agreement provides that it may not be amended and no material provision thereof may be waived, except with the approval of at least two-thirds of the votes cast by the holders of Class A Subordinate Voting Shares present or represented at a meeting duly called for the purpose of considering such amendment or waiver. The two-thirds majority must include a simple majority of the votes cast by the holders of Class A Subordinate Voting Shares excluding Magna (and 1128969) and any of its affiliates and associates and any persons who have an agreement to purchase the Class B Shares on terms which would constitute a sale for the purposes of the Trust Agreement not otherwise permitted thereby prior to giving effect to the amendment or waiver.
	The Trust Agreement does not prevent any holder of Class B Shares from:
	•  granting a security interest, whether directly or indirectly, in Class B Shares in connection with a bona fide borrowing, provided that the secured party concurrently agrees in writing to become a party to and abide by the terms of the Trust Agreement; or •  selling, transferring or otherwise disposing of any or all of the Class B Shares which the holder directly or indirectly holds to a company controlled by or under common control with the holder, provided further that the transferee (if not already a party to the Trust Agreement) concurrently agrees in writing to become a party to and abide by the terms of the Trust Agreement.
	No provision of the Trust Agreement limits the rights of any holder of Class A Subordinate Voting Shares under applicable securities legislation.
Listing Agreement
Each issuer shall execute a Listing Agreement in the form designated by NASDAQ.	Tesma executed a Listing Agreement in the form designated by NASDAQ at the time of its original listing.

B-20

Peer Review
Each issuer must be audited by an independent public accountant that: •  received an external quality control review by an independent public accountant ("peer review") that determines whether the auditor's system of quality control is in place and operating effectively and whether established policies and procedures and applicable auditing standards are being followed; or •  is enrolled in a peer review program and within 18 months receives a peer review that meets acceptable guidelines.	Tesma's financial statements are audited by Ernst & Young LLP, an independent pubic accountant that has confirmed to Tesma the belief that Ernst & Young's system of quality control for their accounting and auditing practice meets the requirements of quality control standards adopted by the Public Company Accounting Oversight Board ("PCAOB") and the Canadian Public Accountability Board ("CPAB") for a public company accounting and auditing practice. Ernst & Young have advised that, in Canada, the process for an external quality control review by an independent public accountant ("peer review") does not exist. However, Ernst & Young have also advised that the PCAOB began performing annual inspections of their public company accounting and auditing practice in calendar 2003 and that the CPAB will begin similar inspections in calendar 2004. Under the Sarbanes-Oxley Act of 2002, the PCAOB is required to inspect registered accounting firms to assess their compliance with the Act, the rules of the PCAOB and the SEC, and professional standards in connection with the audits of SEC issuers. The CPAB is Canada's new independent public oversight board for accountants and accounting firms that audit reporting issuers.
Direct Registration Program
If an issuer establishes or maintains a Direct Registration Program for its shareholders, the issuer shall, directly or through its transfer agent, participate in an electronic link with a securities depository registered under Section 17A of the Exchange Act to facilitate the electronic transfer of securities held pursuant to such program.	Tesma has not established and does not maintain a Direct Registration Program for its shareholders.
Notification of Material Noncompliance
An issuer must provide NASDAQ with prompt notification after an executive officer of the issuer becomes aware of any material noncompliance by the issuer with the requirements of this Rule 4350.	As a foreign private issuer, Tesma is required, and intends to comply with, the requirements of Rule 4350 by no later than July 31, 2005.
Code of Conduct
Each issuer shall adopt a code of conduct applicable to all directors, officers and employees, which shall be publicly available. A code of conduct satisfying this rule must comply with the definition of a "code of ethics" set out in Section 406(c) of the Sarbanes-Oxley Act of 2002 ("the Sarbanes-Oxley Act") and any regulations promulgated thereunder by the Commission. See 17 C.F.R. 228.406 and 17 C.F.R. 229.406. In addition, the code must provide for an enforcement mechanism. Any waivers of the code for directors or executive officers must be approved by the Board. Domestic issuers shall disclose such waivers in a Form 8-K within five business days. Foreign private issuers shall disclose such waivers either in a Form 6-K or in the next Form 20-F.	The Corporation has adopted a Code of Conduct and Ethics applicable to all its directors, officers and employees, a copy of which is posted on Tesma's website (www.tesma.com/corporate/corporategovernance). Tesma's Code of Conduct and Ethics complies with applicable regulatory requirements, including the definition of a "code of ethics" set out in Section 406(c) of the Sarbanes-Oxley Act of 2002. The Corporation's Audit Committee bears responsibility for monitoring compliance with the Code, and the enforcement of the Code is effected through Tesma's Employee Hotline, the "Whistleblowing Hotline" mechanism currently being implemented by the Corporation, as well as through the reporting of violations to the Audit Committee. Waivers of the Code may from time to time be granted in limited circumstances to directors, officers and employees of the Corporation. Any director or officer who requires such a waiver must seek it in writing from the Corporate Governance and Compensation Committee and, if granted, such waiver will be publicly disclosed by the Corporation on Form 6-K within five business days after the grant of the waiver. Any employee that is not a director or officer of the Corporation may seek a written waiver of the Code of Conduct and Ethics from Tesma's President and Chief Financial Officer or Vice-President, Secretary and General Counsel.

B-21

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MANAGEMENT INFORMATION CIRCULAR/PROXY STATEMENT
APPOINTMENT AND REVOCATION OF PROXIES
VOTING OF PROXIES
RECORD DATE
VOTING SECURITIES AND PRINCIPAL HOLDERS
BUSINESS TO BE TRANSACTED AT THE MEETING
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
SHAREHOLDER PERFORMANCE REVIEW GRAPH
INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS
INTERESTS OF MANAGEMENT AND OTHER INSIDERS IN CERTAIN TRANSACTIONS
CORPORATE GOVERNANCE
DIRECTORS' AND OFFICERS' LIABILITY INSURANCE
SHAREHOLDER PROPOSALS AND COMMUNICATIONS
OTHER MATTERS
SCHEDULE "A" AUDIT COMMITTEE CHARTER
SCHEDULE "B" REPORT ON CORPORATE GOVERNANCE

EX-22.3

CLASS A SUBORDINATE VOTING SHARES
PROXY
THIS PROXY IS SOLICITED BY AND ON BEHALF OF MANAGEMENT
AND THE BOARD OF DIRECTORS OF THE CORPORATION

The undersigned shareholder of Tesma International Inc. (the "Corporation") hereby appoints Manfred Gingl, or failing him Anthony E. Dobranowski, or failing him Stefan T. Proniuk, or instead of any of them:

as the proxyholder of the undersigned, with full power of substitution, in respect of all the Class A Subordinate Voting Shares of the Corporation held by the undersigned, to attend at, and to act and vote on behalf of the undersigned in respect of all matters that may come before, the Annual Meeting of Shareholders of the Corporation on Tuesday, May 4, 2004 and any and all adjournments thereof, and, without limiting the general authority conferred by this proxy, the undersigned hereby specifically directs such proxyholder as follows:

(a)

to vote FOR o or ABSTAIN o in respect of the election of Vincent Galifi, Manfred Gingl, Oscar B. Marx, III, David R. Peterson, Judson D. Whiteside, Siegfried Wolf and M. Douglas Young as directors (to withhold your vote from any individual nominee strike a line through the nominee's name); and

(b)

to vote FOR o or ABSTAIN o in respect of the reappointment of Ernst & Young LLP as the Auditors of the Corporation and authorizing the Audit Committee of the Board of Directors to fix the Auditors' remuneration.

This proxy confers discretionary authority to vote on amendments or variations to the matters identified in the Notice of Annual Meeting of Shareholders and on all other business or matters as may properly come before the meeting or any adjournment(s) thereof.

The proxyholder will vote FOR the management nominees for the office of director and FOR the reappointment of Ernst & Young LLP as the Auditors of the Corporation and authorizing the Audit Committee of the Board of Directors to fix the Auditors' remuneration.

The undersigned confirms the express wish that this document and the documents relating hereto, including the Management Information Circular/Proxy Statement, be in English only. Le soussigné confirme sa volonté expresse que ce document et les documents se rattachant à la présente, y compris la circulaire d'information et de procuration de la direction soient rédigés en anglais seulement.

The undersigned hereby revokes any proxy previously given.

Date                                                   , 2004

Signature 

NOTES:

1.

This proxy must be signed by the shareholder or his/her attorney duly authorized in writing.

2.

If the shareholder is a corporation, this proxy must be executed by an officer or attorney thereof duly authorized in writing.

3.

Please date this proxy. If not dated, it shall be deemed to be dated the day on which it is mailed.

4.

A shareholder has the right to appoint a person to attend and to act for him/her/it on his/her/its behalf at the meeting other than the management nominees named above. Such right may be exercised by striking out the names of Messrs. Manfred Gingl, Anthony E. Dobranowski and Stefan T. Proniuk and inserting in the space provided the name of the person to be appointed, who need not be a shareholder of the Corporation, or by completing another proper form of proxy.

If your address as shown is incorrect, please give your correct address when returning this proxy.

EX-22.4

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NOTICE TO NON-REGISTERED SHAREHOLDERS
RE: INTERIM MAILINGS

April 8, 2004

        Tesma International Inc. ("Tesma") maintains a Supplemental Mailing List which includes the names of shareholders whose shares are registered in the name of a bank, trust company, securities dealer or broker, trustee or administrator of a register plan or other intermediary, rather than in their own names. Tesma mails interim financial material (e.g. quarterly reports) directly to such non-registered shareholders on the Supplemental Mailing List. This List is in addition to, and separate from, the Registered Shareholder Mailing List maintained by Tesma's Registrar and Transfer Agent.

If you are a non-registered shareholder and wish to be added to our Supplemental Mailing List so as to receive interim financial material (e.g. quarterly reports) directly from Tesma, please detach and return the reply section of this Notice with your completed proxy. Kindly note that we create our Supplemental Mailing List annually. Alternatively, rather than receiving interim financial material by mail, non-registered shareholders are invited to access these materials on Tesma's website at www.tesma.com.

Registered shareholders will continue to receive interim mailings and need not reply.

        For further information, please contact:

Lynn Riley Tesma International Inc. 1000 Tesma Way Concord, Ontario, Canada L4K 5R8
Telephone:	(905) 417-2160
Telefax:	(905) 417-2148
Email:	lynn.riley@tesma.com

        Your privacy is important to us. Your name and mailing address are being collected to aid in administering our Supplemental Mailing List and, except as may be required by applicable law, will not be used or disclosed for any other purpose without your prior consent.

PLEASE COMPLETE AND DETACH THE FORM BELOW

CUSIP: 881908107

Company Code: TSMQ    Class Code: CLA

To receive interim financial material from Tesma International Inc., please PRINT your name and address in the space below and return this reply section of the Notice with your completed proxy.

NAME OF NON-REGISTERED SHAREHOLDER
MAILING ADDRESS
	Postal Code/Zip Code
SIGNATURE
DATE

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NOTICE TO NON-REGISTERED SHAREHOLDERS RE: INTERIM MAILINGS

EX-22.5

Exhibit 22.5

April 8, 2004

Dear Shareholder:

On behalf of management and our Board of Directors, we are pleased to invite you to attend the Annual Meeting of Shareholders of Tesma International Inc. in respect of our year ended December 31, 2003.

This Meeting will be held at the Design Exchange, 2^nd Floor, Toronto-Dominion Centre, Ernst & Young Tower, 234 Bay Street, Toronto, Ontario, Canada, commencing at 11:00 a.m. (Toronto time) on Tuesday, May 4, 2004. The Notice of Meeting, Management Information Circular/Proxy Statement and form of proxy for our Class A Subordinate Voting Shares are enclosed with this letter.

Your shares should be represented at the Meeting. If you are unable to attend, please complete, date and sign the enclosed form of proxy, and return it in the envelope provided. Even if you plan to attend the Meeting, you may nevertheless find it convenient to express your views in advance by completing and returning the proxy form.

Non-registered shareholders should refer to the section of the enclosed Management Information Circular/Proxy Statement entitled "Appointment and Revocation of Proxies — Non-Registered Holders" to find out how to attend or instruct an intermediary on the voting of shares beneficially owned by them.

Due to other personal commitments, Ms. Belinda Stronach tendered her resignation as a director and the Chairman of the Board of Tesma effective as of January 20, 2004. On behalf of management, the Board and all shareholders, we thank Ms. Stronach for her service and contribution to our growth and success during her tenure on our Board of Directors.

We look forward to seeing you at the Tesma Annual Meeting of Shareholders on May 4, 2004. For those of you who are unable to attend in person, please visit our website at www.tesma.com to watch a web cast of the Annual Meeting.

Yours truly,

(Signed) "MANFRED GINGL"	(Signed) "ANTHONY E. DOBRANOWSKI"
Manfred Gingl Chairman and Chief Executive Officer TESMA INTERNATIONAL INC.	Anthony E. Dobranowski President and Chief Financial Officer TESMA INTERNATIONAL INC.

TESMA INTERNATIONAL INC.
1000 Tesma Way • Concord • Ontario • Canada • L4K 5R8 • (T) (905) 417-2100 • (F) (905) 417-2101
www.tesma.com