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Demand for front-wheel all-wheel drive systems and six-speed automatic and dual clutch transmissions are expected to drive growth. The number of automated transmissions in Europe is expected to triple in ten years. Front-wheel all-wheel drive penetration could grow 34% in the next five years. 

## Customer Diversity 2005 Estimated Combined Sales* 

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* Includes Beru and NSK-Warner 

## Drivetrain 2014 

## Engine 20 14 

In the next ten years, gasoline engines are expected to experience 34% growth worldwide; diesel engine penetration is anticipated to grow 82%. The need for improved fuel economy and reduced emissions will drive growth. 

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## INTRODUCTION 

BorgWarner Inc. and Consolidated Subsidiaries (the Company) is a leading global supplier of highly engineered systems and components primarily for powertrain applications. Our products help improve vehicle performance, fuel efficiency, air quality and vehicle stabil- ity. They are manufactured and sold worldwide, primarily to original equipment manufacturers (OEMs) of light vehicles (i.e. passenger cars, sport-utility vehicles, vans and light-trucks). Our products are also manufactured and sold to OEMs of commercial trucks, buses and agricultural and off-highway vehicles. We operate manufacturing facilities serving customers in the Americas, Europe and Asia, and are an original equipment supplier to every major OEM in the world. 

The Company’s products fall into two reportable operating seg- ments: Drivetrain and Engine. The Drivetrain segment is comprised of all-wheel drive transfer cases, torque management systems and components and systems for automatic transmissions. The Engine Segment is comprised of turbochargers, timing chain systems, air management, emissions and thermal systems. 

## Stock Split 

On April 21, 2004 the Company’s stockholders approved an amend- ment to the Company’s Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 50,000,000 to 150,000,000. The approval of the amendment allowed the Company to proceed with its two-for-one stock split on May 17, 2004 to stockholders of record on May 3, 2004. All prior year share and per share amounts disclosed in this document have been restated to reflect the two-for-one stock split. 

## Beru Transaction 

On January 4, 2005, the Company acquired 62.2% of the outstand- ing shares of Beru Aktiengesellschaft (Beru), headquartered in Ludwigsburg, Germany, from the Carlyle Group and certain family shareholders. In conjunction with the acquisition, the Company launched a tender offer for the remaining outstanding shares of Beru. The tender offer period officially ended on January 24, 2005. Presently the Company holds 69.42% of the shares of Beru at a cost of approximately €415 million. Beru is a leading global automotive supplier of diesel cold starting technology (glow plugs and instant starting systems); gasoline ignition technology (spark plugs and igni- tion coils); and electronic and sensor technology (tire pressure sen- sors, diesel cabin heaters and selected sensors). Beginning in 2005, the Company will report the operating results of Beru within the Engine segment. The Company has not included a separate discus- sion of the Beru operations in the outlook for 2005, although many of the same factors that impact the Company’s other operations can be expected to impact the business of Beru. In addition, the impact of Beru on the Company’s future results will be affected by the alloca- tion of the excess purchase price over the net book value of assets acquired between intangible assets and goodwill. 

## Overview 

A summary of our operating results by segment for the years ended December 31, 2004, 2003 and 2002 is as follows: 

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A summary of major factors impacting the Company’s net earnings for the years ended December 31, 2004 in comparison to 2003 and 2002 is as follows: 

• Continued demand for our products in both Drivetrain and Engine segments. 

• Continued results of our cost reduction programs, including containment of selling, general & administrative expenses, which helped to offset our commodity cost increases and start up costs incurred for our expansion in Korea and China. 

• Lower interest expenses due to lower debt levels. 

• Favorable currency impact of $11.0 million in 2004 and $14.5 mil- lion in 2003. 

