10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2004          Commission File Number: 1-12162

BorgWarner Inc.

(Exact name of registrant as specified in its charter)

Delaware	13-3404508
(State of Incorporation)	(I.R.S. Employer Identification No.)

3850 Hamlin Road

Auburn Hills, Michigan 48326

(248) 754-9200

(Address and telephone number of principal executive offices)

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

	Name of each exchange on
Title of each class	which registered
Common Stock, par value $0.01 per share	New York Stock Exchange

Securities registered Pursuant to Section 12(g) of the Act: None

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

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ         No o

     The aggregate market value of the voting common stock of the registrant held by stockholders (not including voting common stock held by directors and executive officers of the registrant) on June 30, 2004 (the last business day of the most recently completed second fiscal quarter) was approximately $2.4 billion. As of March 4, 2005, the registrant had 56,474,025 shares of voting common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the following documents are incorporated herein by reference into the Part of the Form 10-K indicated.

	Part of Form 10-K
	into which
Document	incorporated
BorgWarner Inc. 2004 Annual Report to Stockholders	Parts I, II and IV
BorgWarner Inc. Proxy Statement for the 2005 Annual Meeting of Stockholders	Part III

BORGWARNER INC.

FORM 10-K

YEAR ENDED DECEMBER 31, 2004

INDEX

Item
Number		Page
PART I
1.	Business		3
2.	Properties		12
3.	Legal Proceedings		13
4.	Submission of Matters to a Vote of Security Holders		14
PART II
5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		14
6.	Selected Financial Data		14
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
7A.	Quantitative and Qualitative Disclosure About Market Risk		15
8.	Financial Statements and Supplementary Data		15
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		15
9A.	Controls and Procedures		15
9B.	Other Information		17
PART III
10.	Directors and Executive Officers of the Registrant		17
11.	Executive Compensation		17
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		17
13.	Certain Relationships and Related Transactions		18
PART IV
14.	Principal Accountant Fees and Services		18
15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		18
Annual Report to Stockholders
Subsidiaries
Consent
Certification
Certification
Certification
Cautionary Statements

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PART I

Item 1.  Business

      BorgWarner Inc. (the “Company”), a Delaware corporation, was incorporated in 1987. The Company is a leading, global supplier of highly engineered systems and components, primarily for powertrain applications. The Company’s products help improve vehicle performance, fuel efficiency, air quality and vehicle stability. These products are manufactured and sold worldwide, primarily to original equipment manufacturers (“OEMs”) of light vehicles (passenger cars, sport-utility vehicles, vans and light trucks). The Company’s products are also sold to OEMs of commercial trucks, buses and agricultural and off-highway vehicles. The Company operates manufacturing facilities serving customers in the Americas, Europe and Asia, and is an original equipment supplier to every major automotive OEM in the world.

Financial Information About Segments

      Incorporated herein by reference is Note Sixteen of the Notes to Consolidated Financial Statements on pages 52 through 54 of the Company’s Annual Report for the year ended December 31, 2004 (the “Company’s Annual Report”) filed as an exhibit to this report.

Narrative Description of Operating Segments

      The Company reports its results under two reportable operating segments: Drivetrain and Engine. Net revenues by segment for the three years ended December 31, 2004, 2003 and 2002, are as follows (in millions of dollars):

	Year Ended December 31,
	2004			2003			2002
Drivetrain	$	1,358.6		$	1,245.6		$	1,122.1
Engine		2,217.0			1,869.7			1,648.2
Inter-segment eliminations		(50.3	)		(46.1	)		(39.2	)
Net sales	$	3,525.3		$	3,069.2		$	2,731.1

      The sales information presented above excludes the sales by the Company’s unconsolidated joint ventures (See “Joint Ventures” section). Such sales totaled approximately $500 million in 2004, $391 million in 2003 and $332 million in 2002.

Drivetrain

      The Drivetrain Group leverages the Company’s legacy and understanding of powertrain torque management to develop interactive electronic control systems and strategies for the Company’s traditional mechanical products. The Drivetrain Group’s products are primarily transmission components and systems for torque management applications.

      The Drivetrain Group engineers and manufactures components for automatic transmissions and the systems that combine such components in North America, Asia and Europe. Principal product lines include friction plates, one-way clutches, transmission bands and torque converter lock-up clutches for automatic transmissions. The Company is a supplier to virtually every major automatic transmission manufacturer in the world. The Company’s 50%-owned joint venture in Japan, NSK-Warner Kabushiki Kaisha (“NSK-Warner”), is a leading producer of friction plates and one-way clutches in Japan.

      The Drivetrain Group also designs and manufactures sophisticated electro-mechanical, mechanical and electronic components and systems used for automated transmissions. Key products for transmission controls include single function solenoids, complex solenoids and multi-function modules.

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      In 2003, the Company launched its DualTronic^TM transmission technology on the VW Golf R32 DSG and the Audi TT 3.2. The technology provides the smooth-shifting convenience of an automatic transmission with the fuel efficiency of a manual transmission. Through advanced electrohydraulic controls and a unique two-clutch wet-friction system, DualTronic^TM technology eliminates the disruptive feel of a manual transmission gear shift. This technology is being launched across the entire VW Group vehicle family, including VW, Audi, Skoda and Seat.

      There has been a noticeable trend in transmission technology from four and five speed to six speed transmissions. Six speed transmissions improve fuel economy and vehicle performance. These transmissions are being developed by a variety of transmission manufacturers, including ZF, Aisin AW, GM, Ford and Jatco. The Company supplies solenoids, transmission control modules, friction plates and clutching mechanisms for six speed transmissions.

      The Company’s torque management products include four-wheel drive (“4WD”) and all-wheel drive transfer cases for rear wheel drive vehicles and torque management systems to transfer torque within the drivetrain for front-wheel drive (“FWD”)/all-wheel drive (“AWD”) based vehicles. The main focus is on electronically controlled torque management devices and systems.

      Transfer cases are installed primarily on light trucks and sport-utility vehicles (“SUVs”). A transfer case attaches to the transmission and distributes torque to the front and rear axles for 4WD, improving vehicle control during off-road use and in a variety of road conditions. The Company has designed and developed an exclusive 4WD TORQUE-ON-DEMAND® (“TOD®”) transfer case system, which allows vehicles to automatically shift from two-wheel drive to 4WD when electronic sensors indicate it is necessary. The TOD® transfer case is available on the Ford Explorer, the best selling SUV in the United States in 2004, 2003 and 2002, and the Ford Expedition, Lincoln Navigator and SsangYong Musso. In 2001, this technology was also adopted by Hyundai for its Terracan SUV, and was launched on the Kia Sorento in 2002.

      Sales of rear wheel drive based transfer cases represented approximately 18%, 20% and 21% of the Company’s total revenues for 2004, 2003 and 2002, respectively. The Company’s largest customer of 4WD transfer cases is Ford Motor Company. The Company supplies the majority of the 4WD transfer cases to Ford, including those installed in the Ford Explorer, the Lincoln Aviator, the Ford Expedition, the Ford F-150, Ranger pick-up trucks, the Mercury Mountaineer and the Lincoln Navigator. The Company also began supplying transfer cases to several new General Motors applications in 2002 including the Hummer H2, the Cadillac Escalade, the Chevrolet Tahoe and the Suburban, along with the GMC Yukon and the Yukon XL. The Company also supplies transfer cases for the Cadillac SRX and STS and will begin supplying transfer cases for the new Hummer H3 in 2005.

      One of the Company’s AWD products is the INTERACTIVE TORQUE MANAGEMENT^TM (“ITM®”) system. This product was introduced on the Acura MDX in 2000, was launched on the Honda Pilot in 2002 and will be installed on the 2006 Honda Ridgeline, new midsize pickup. ITM® uses electronically controlled clutches to distribute power to the individual rear wheels when traction is required. The Company is actively involved in developing this technology for new applications in both front-wheel drive based cross-over vehicles and passenger cars. A variant of this product, ITM 1®, which features a single clutch pack in front of the rear axle differential, was launched on the Hyundai Santa Fe in 2002, the Hyundai Tucson and KIA Sportage in 2004.

      The Company’s drivetrain products are manufactured in North America, Europe, and Asia.

Engine

      The Engine Group develops strategies and products to manage engines for fuel efficiency, reduced emissions, and enhanced performance. Its products currently fall into three major categories: turbochargers, chains, and emissions and thermal systems.

      The Engine Group provides turbochargers for light vehicle, commercial vehicle and industrial applications for diesel and gasoline engine manufacturers in Europe, North America, South America

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and Asia. The Engine Group has greatly benefited from the growth in turbocharger demand in Europe. This growth is linked to increasing demand for diesel engine light vehicles and for turbocharged gasoline engines. Benefits of turbochargers in both light vehicle and commercial vehicle applications include increased power for a given engine size, improved fuel economy and significantly reduced emissions. The Company believes it is a leading manufacturer of turbochargers worldwide.

      Sales of turbochargers for light vehicles represented approximately 16%, 13% and 9% of the Company’s total revenues for 2004, 2003 and 2002. The Company currently supplies light vehicle turbochargers to VW, Renault, PSA, International and Fiat and commercial vehicle turbochargers to Caterpillar, John Deere, DaimlerChrysler, Deutz and RVI. The Company expects to supply the next generation of light vehicle turbochargers in Europe to VW, Renault, PSA, BMW, Ford and Fiat. In 2004, the Company announced that it would supply the 3.0 liter, 6-cylinder engine for the BMW 5-series with its regulated two-stage turbocharging system known as R2S®. The system allows continuously variable adaption of the turbine and compressor side for every operating point of the engine.

      Chain and chain systems include timing chain and timing chain systems, crankshaft and camshaft sprockets, chain tensioners and snubbers, HY-VO® FWD transmission chain and 4WD chain, and MORSE GEMINI® chain systems for light vehicle and commercial vehicle applications. These products are provided from facilities in North America, Europe and Asia.

      The Company’s timing chain systems are used on Ford’s family of overhead cam engines, including the Duratech and Triton and in-line 4 cylinder engines, as well as Chrysler’s 2.7 liter, 3.7 liter, 4.7 liter and 5.7 liter overhead cam engines, which includes the Hemi applications. In addition, the Company provides timing systems for a number of Asian OEMs and their North American transplant operations, including Honda and Nissan, and to several European OEMs. The Company believes that it is the world’s leading manufacturer of timing chain systems.

      The Engine Group also will begin production of its first high-volume variable cam timing (“VCT”) systems for a new family of GM V6 engines. VCT is a means of precisely controlling the flow of air into and out of an engine by allowing the camshaft to be dynamically phased relative to its crankshaft. The Company’s VCT system includes Torsional Assist^TM technology, which utilizes camshaft torque as its actuation energy instead of the conventional oil-pressure actuated approach. The VCT systems will be utilized by GM’s new 3.5 liter and 3.9 liter, V-6 engines in the 2006 model year Chevrolet Impala, Chevrolet Monte Carlo and Pontiac G6.

      HY-VO® chain is used to transfer power from the engine to the drivetrain. The Company’s MORSE GEMINI® chain system emits significantly less chain pitch frequency noise than conventional transmission chain systems. The chain in a transfer case distributes power between the front and rear output shafts which, in turn, drive the front and rear wheels. The Company believes it is the world’s leading manufacturer of chain for FWD transmissions and 4WD transfer cases.

      The Engine Group designs and manufactures sophisticated electro-mechanical, mechanical and electronic components and systems used for automated transmissions, fluid pumps, engine air intake modules, engine emission controls and actuation systems. Key products for transmission controls include single function solenoids, complex solenoids and multi-function modules. The Company also manufactures a wide variety of fluid pumps, including engine hydraulic pumps for variable cam timing and engine lubrication. Key products for engine air intake management include throttle bodies, electronic throttle control, and complete engine induction modules. The Company also designs and manufactures products to control emissions and improve gas mileage such as electric air pumps, variable force solenoids for the actuation of cam phasing systems and exhaust gas recirculation valves for gasoline and diesel applications. These products are provided from facilities in the United States, France and Germany.

      The Engine Group is a global provider of engine cooling solutions. The group manufactures and markets air sensing fan drives that can be mechanically controlled and electronically controlled fan

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drives that sense and respond to multiple cooling requirements simultaneously. The Engine Group also manufactures and markets polymer fans for engine cooling systems. The Company’s products provide improved vehicle fuel economy and reduced engine emissions while minimizing parasitic horsepower loss. These advanced cooling systems products are manufactured by facilities in the U.S., Germany, Brazil, Korea, China and India. The Company is a leading global provider of such products, but competes with other large independent producers. This business serves the global light, medium, and heavy vehicle markets, as well as selected off-highway applications.

      On January 4, 2005, the Company acquired 62.2% of the outstanding 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 ignition coils); and electronic control units and sensor technology (tire pressure sensors, diesel cabin heaters and selected sensors). Beginning in 2005, the Company will report the operating results of Beru within the Engine Group.

Joint Ventures

      As of December 31, 2004, the Company had nine joint ventures in which it has a less-than-100% ownership interest. Results from six of these ventures, in which the Company is the majority owner, are consolidated as part of the Company’s results. The Company’s ownership interest in NSK-Warner and Hitachi Warner is 50% each. Such interests are reported using the equity method of accounting.

      Management of the unconsolidated joint ventures is shared with the Company’s respective joint venture partners. Certain information concerning the Company’s joint ventures is set forth below:

					Percentage
					Owned by			Location			Fiscal 2004
			Year		the			of			Sales ($ in
Joint Venture		Products	Organized		Company			Operation		Joint Venture Partner	millions)(a)
Unconsolidated:
	NSK-Warner K.K.	Transmission components		1964		50%			Japan	Nippon Seiko K.K.	$	443
	Turbo Energy Limited(b)	Turbochargers		1987		32%			India	Sundaram Finance Limited Brakes India Limited	$	37
	Hitachi Warner Turbo Systems, Ltd.	Turbochargers		2001		50%			Japan	Hitachi	$	20
Consolidated:
	BorgWarner Transmission Systems Korea, Inc.	Transmission components		1987		60%	(c)		Korea	NSK-Warner K.K.	$	96
	Divgi-Warner Limited	Transfer cases and automatic locking hubs		1995		60%			India	Divgi Metalwares, Ltd.	$	8
	Borg-Warner Shenglong (Ningbo) Co. Ltd	Fans, fan drives		1999		70%			China	Ningbo Shenglong Group Co., Ltd.	$	18
	BorgWarner TorqTransfer Systems Beijing Co. Ltd.	Transfer cases		2000		80%			China	Beijing Automotive Industry Corporation	$	5
	BorgWarner Morse TEC Murugappa Pvt. Ltd	Chain products and engine timing system components		2002		74%			India	TI Diamond Chain Ltd.	$	3
	SeohanWarner TurboSystems Ltd.(d)	Turbochargers		2003		71%			Korea	Korea Flange Company	$	0

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(a)	All sales figures are for the year ended December 31, 2004, except for NSK-Warner and Turbo Energy Limited. NSK-Warner’s sales are reported for the 12 months ended November 30, 2004. Turbo Energy Limited’s sales are reported for the 12 months ended March 31, 2004.
(b)	The Company made purchases from Turbo Energy Limited totaling $17.4 million, $0.4 million, and $0.1 million for the years ended December 31, 2004, 2003 and 2002, respectively.
(c)	BorgWarner Inc. owns 50% of NSK-Warner, which has a 40% interest in BorgWarner Transmission Systems Korea, Inc. This gives the Company an additional indirect effective ownership percentage of 20%. This results in a total indirect effective ownership interest of 80%.
(d)	On December 22, 2003, the Company signed a joint venture agreement with Korea Flange Company Ltd. to form SeohanWarner Turbo Systems, Ltd. to supply turbochargers in Korea.

      See Note Sixteen of the Notes to Consolidated Financial Statements on pages 52 through 54 of the Company’s Annual Report for geographic information.

Customers

      Approximately 75% of the Company’s total sales in 2004 were to light and commercial vehicle OEMs, with the remaining 25% of the Company’s sales to a diversified group of industrial, construction and agricultural vehicle manufacturers, automotive parts manufacturers and to distributors of automotive aftermarket and replacement parts.

      The Company’s worldwide sales in 2004 to Ford, DaimlerChrysler, General Motors and Volkswagen constituted approximately 21%, 14%, 10% and 10%, respectively, of its 2004 consolidated sales. Approximately 44% of consolidated sales for 2004 were outside the United States, including exports. However, a substantial portion of such sales was to OEMs headquartered outside the United States that produce vehicles that are, in turn, exported to the United States. See Note Sixteen of the Notes to Consolidated Financial Statements on pages 52 through 54 of the Company’s Annual Report.

      The Company’s automotive products are generally sold directly to OEMs substantially pursuant to negotiated annual contracts, long-term supply agreements or terms and conditions as may be modified by the parties. Deliveries are subject to periodic authorizations based upon the production schedules of the OEMs. The Company typically ships its products directly from its plants to the OEMs.

Sales and Marketing

      Each of the Company’s business units within its two operating segments has its own sales function headed by a vice president of sales. Account executives for each business unit are assigned to serve specific OEM customers for one or more of a business unit’s products. Such account executives spend the majority of their time in direct contact with OEM purchasing and engineering employees and are responsible for servicing existing business and for identifying and obtaining new business. Because of their close relationship with the OEMs, account executives are able to identify and meet customers’ needs based upon their knowledge of the Company’s products and design and manufacturing capabilities. Upon securing a new order, account executives participate in product launch team activities as a key interface to the customers.

      In addition, within the Engine segment and the Drivetrain segment, sales and marketing employees work together to explore cross-development opportunities for the business units. The development of DualTronic^TM, the Company’s wet-clutch and control-system technology for a new-concept automated transmission, is an example of a successful collaboration.

Seasonality

      The Company’s business is moderately seasonal because the Company’s largest North American customers typically halt vehicle production for approximately two weeks in July and one week in December. Additionally, customers in Europe typically shut down vehicle production during portions

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of August and one week in December. Accordingly, the Company’s third and fourth quarters may reflect those trends.

Research and Development

      Each of the Company’s operating segments has its own research and development (“R&D”) organization. The Company has 639 employees, including engineers, mechanics and technicians, engaged in R&D activities at facilities worldwide. The Company also operates testing facilities such as prototype, measurement and calibration, life cycle testing and dynamometer laboratories.

      By working closely with the OEMs and anticipating their future product needs, the Company’s R&D personnel conceive, design, develop and manufacture new proprietary automotive components and systems. R&D personnel also work to improve current products and production processes. The Company believes its commitment to R&D will allow it to obtain new orders from its OEM customers.

      Consistent with its strategy of developing technologically innovative products, the Company spent approximately $123.1 million, $118.2 million and $109.1 million in 2004, 2003 and 2002, respectively, on R&D activities. Not included in the reported R&D activities were customer-sponsored R&D activities of approximately $31.8 million, $22.3 million and $14.2 million in 2004, 2003 and 2002, respectively.

Patents and Licenses

      The Company has approximately 3,200 active domestic and foreign patents and patent applications pending or under preparation, and receives royalties from licensing patent rights to others. While it considers its patents on the whole to be important, the Company does not consider any single patent, group of related patents or any single license essential to its operations in the aggregate or to the operations of any of the Company’s business groups individually. The expiration of the patents individually and in the aggregate is not expected to have a material effect on the Company’s financial position or future operating results. The Company owns numerous trademarks, some of which are valuable, but none of which are essential to its business in the aggregate.

      The Company owns the “BorgWarner” and “Borg-Warner Automotive” trade names and housemarks, and variations thereof, which are material to the Company’s business.

Competition

      The Company’s operating segments compete worldwide with a number of other manufacturers and distributors which produce and sell similar products. Price, quality and technological innovation are the primary elements of competition. Many of these companies are larger and have greater resources than the Company.

      The Company’s major competitors include:

Product Type	Name of Competitor
Turbochargers:	Honeywell International Inc. Ishikawajima Harima Heavy Industries, Ltd.
Chains:	Tsubaki Group
Torque transfer products:	Magna International Inc. GKN PLC
Transmission products:	Dynax Corporation INA-Schaeffler
Emissions/Thermal:	Behr GmbH & Co. Kolbenschmidt Pierburg AG

      In addition, a number of the Company’s major OEM customers manufacture, for their own use and for others, products which compete with the Company’s products. Although these OEM customers have indicated that they will continue to rely on outside suppliers, the OEMs could elect to

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manufacture products to meet their own requirements or to compete with the Company. There can be no assurance that the Company’s business will not be adversely affected by increased competition in the markets in which it operates.

      For many of its products, the Company’s competitors include suppliers in other parts of the world that enjoy economic advantages such as lower labor costs, lower health care costs and, in some cases, export subsidies and/or raw materials subsidies.

Employees

      As of December 31, 2004, the Company and its consolidated subsidiaries had approximately 14,500 salaried and hourly employees (as compared with approximately 14,300 employees at December 31, 2003), of which approximately 7,900 were U.S. employees. Approximately 26% of the Company’s domestic workers are unionized. The hourly workers at the Company’s non-U.S. operations are typically unionized. The Company believes its present relations with employees to be satisfactory.

Raw Materials

      In 2004, several raw materials used in the Company’s products hit record pricing levels, including steel, copper, aluminum, and resins. This was due to a host of factors, not the least of which included unprecedented growth in China. Despite these difficulties, the Company used a variety of tactics in order to limit the impact of rising prices and supply shortages of certain raw materials. The Company formed a global purchasing organization to drive cost reductions and create collaboration across business operations. In addition, the Company used long-term contracts, cost sharing arrangements, design changes, re-sourcing, customer buy programs, and hedging instruments to help control costs. The Company intends to use similar tactics in 2005 and beyond.

      For 2005, each of the Company’s operating segments believes that its supplies of raw materials for manufacturing requirements are adequate and are available from multiple sources. It is common, however, for customers to require their prior approval before certain raw materials or components can be used, thereby reducing sources of supply that would otherwise be available. Manufacturing operations for each of the Company’s operating segments are dependent upon natural gas, fuel oil, and electricity.

Environmental Regulation and Proceedings

      The Company’s operations are subject to federal, state, local and foreign laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. The Company believes that it has operated its business and facilities in compliance in all material respects with applicable environmental and health and safety laws and regulations, many of which provide for substantial fines and criminal sanctions for violations. However, the operation of automotive parts manufacturing plants entails risks in these areas even for a company complying with all laws, and there can be no assurance that the Company will not incur material costs or liabilities. In addition, through various acquisitions over the years, the Company has acquired a number of manufacturing facilities and there can be no assurance that the Company will not incur material costs and liabilities relating to activities which predate the Company’s ownership. In addition, potentially significant expenditures could be required in order to comply with evolving environmental and health and safety laws, regulations or requirements that may be adopted or imposed in the future.

      The Company believes that the overall impact of compliance with regulations and legislation protecting the environment will not have a material effect on its financial position or future operating results, although no assurance can be given in this regard. Capital expenditures and expenses in 2004 attributable to compliance with such legislation were not material.

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      The Company and certain of its current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identified by the United States Environmental Protection Agency (“EPA”) and certain state environmental agencies and private parties as potentially responsible parties (“PRPs”) at various hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act (“Superfund”) and equivalent state laws and, as such, may presently be liable for the cost of clean-up and other remedial activities at 39 such sites. Responsibility for clean-up and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula.

      Based on the information available to the Company, which in most cases, includes: an estimate of allocation of liability among PRPs; the probability that other PRPs, many of whom are large solvent public companies, will fully pay the cost apportioned to them; currently available information from PRPs and/or federal or state environmental agencies concerning the scope of contamination and estimated remediation and consulting costs; remediation alternatives; estimated legal fees; and other factors, the Company has established an accrual for indicated environmental liabilities with a balance at December 31, 2004 of approximately $25.7 million. The Company expects this amount to be expended over the next three to five years.

      The Company believes that none of these matters, individually or in the aggregate, will have a material adverse effect on its financial condition or future operating results, generally either because estimates of the maximum potential liability at a site are not large or because liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such matter.

      In connection with the sale of Kuhlman Electric Corporation (“Kuhlman Electric”), the Company agreed to indemnify the buyer and Kuhlman Electric for certain environmental liabilities relating to the past operations of Kuhlman Electric. The liabilities at issue relate from operations of Kuhlman Electric that pre-date the Company’s acquisition of Kuhlman Corporation. During 2000, Kuhlman Electric notified the Company that it discovered potential environmental contamination at its Crystal Springs, Mississippi plant while undertaking an expansion of the plant.

      The Company has been working with the Mississippi Department of Environmental Quality, the EPA and Kuhlman Electric to investigate the extent of and remediate the contamination. The investigation revealed the presence of Polychlorinated Biphenyls (“PCBs”) in portions of the soil at the plant and neighboring areas. Cleanup began in 2000 and is continuing. Kuhlman Electric and others, including the Company, have been sued in numerous related lawsuits, in which multiple claimants allege personal injury and property damage. The first trial in these lawsuits is currently scheduled to begin in March 2005.

      The Company believes that the accrual for environmental liabilities and any insurance recoveries are adequate to cover any potential liability associated with environmental matters. However, due to the nature of environmental remediation and litigation, there can be no assurance that the actual amount of environmental liabilities will not exceed the accrual amount.

Available Information

      Through its website (www.borgwarner.com), the Company makes available, free of charge, the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and other filings with the Securities and Exchange Commission, as soon as reasonably practicable after they are filed. The Company also makes the following documents available on its website: the Finance and Audit Committee Charter; the Compensation Committee Charter; the Corporate Governance Committee Charter; the Company’s Corporate Governance Guidelines; the Company’s Code of Ethical Conduct; and the Company’s Code of Ethics for CEO and Senior Financial Officers. You may also obtain a copy of any of the foregoing documents, free of charge, if you submit a written request to Mary Brevard, Vice President, Investor Relations and Corporate Communications, 3850 Hamlin Road, Auburn Hills, Michigan 48326.

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Executive Officers of the Registrant

      Set forth below are the names, ages, positions and certain other information concerning the executive officers of the Company as of March 4, 2005.

Name	Age		Position With Company
Timothy M. Manganello		55	Chairman and Chief Executive Officer
Robin J. Adams		51	Executive Vice President, Chief Financial Officer and Chief Administrative Officer
Mary E. Brevard		58	Vice President, Investor Relations and Corporate Communications
William C. Cline		55	Vice President, Acquisition Coordination and Special Projects
Angela D’Aversa		58	Vice President, Human Resources
Jamal M. Farhat		45	Vice President, Chief Information Officer
Anthony D. Hensel		46	Vice President and Treasurer
Laurene H. Horiszny		49	Vice President, General Counsel and Secretary
John J. McGill		50	Vice President, Global Supply Chain and Champion of Emerging Market Utilization
Cynthia A. Niekamp		45	Vice President
Jeffrey L. Obermayer		49	Vice President and Controller
Mark A. Perlick		58	Vice President
Christopher H. Vance		45	Vice President, Business Development and M&A
Alfred Weber		47	Vice President
F. Lee Wilson		50	Vice President
Roger J. Wood		42	Vice President

      Mr. Manganello has been Chairman of the Board since June 2003 and Chief Executive Officer since February 2003. He was also President and Chief Operating Officer of the Company from February 2002 until February 2003. He was Executive Vice President from June 2001 until February 2002. He was Vice President of the Company from February 1999 to June 2001 and President and General Manager of BorgWarner TorqTransfer Systems Inc. (“TorqTransfer Systems”) from February 1999 until February 2002.

      Mr. Adams has been Executive Vice President, Chief Financial Officer and Chief Administrative Officer since April 2004. He was Executive Vice President -Finance and Chief Financial Officer of American Axle & Manufacturing Holdings Inc. (“American Axle”) from July 1999 until April 2004. Prior to joining American Axle, he was Vice President and Treasurer and principal financial officer of BorgWarner from May 1993 until June 1999.

      Ms. Brevard has been Vice President of the Company since November 2003. She was Director of Investor Relations and Communications from February 1997 until November 2003.

      Mr. Cline has been Vice President, Acquisition Coordination and Special Projects since January 2005. He was Acting Chief Financial Officer of the Company from November 2003 until April 2004 and was Vice President and Controller of the Company from May 1993 until January 2005.

      Ms. D’Aversa has been Vice President, Human Resources of the Company since October, 2004. She was Acting Vice President, Human Resources from April 2004 until September 2004 and Senior Director, Management and Organization Development from April 2004 until September 2004. She was Director Management & Organization Development from January 1995 until March 2004.

11

      Mr. Farhat has been Vice President and Chief Information Officer of the Company since August 2004. He was Chief Information Officer and Executive Director of supply chain management at LDM Technologies, a $600 million tier I supplier to the automotive industry, from April 1999 until March 2004.

      Mr. Hensel has been Vice President of the Company since July 2002 and Treasurer since January 2005. He was Vice President, Business Development of the Company from July 2002 until December 2004. He was Vice President, Finance of BorgWarner Morse TEC Inc. from July 1999 to June 2002.

      Ms. Horiszny has been Vice President, Secretary and General Counsel of the Company since May 1993.

      Mr. McGill has been Vice President of the Company since October 1999 and Vice President, Global Supply Chain and Champion of Emerging Market Utilization since August 2004. He was President and General Manager of TorqTransfer Systems from December 2002 until July 2004. He was President and General Manager of BorgWarner Cooling Systems Inc. from October 1999 until December 2002.

      Ms. Niekamp has been Vice President of the Company and President and General Manager of TorqTransfer Systems since July 2004. She was Senior Vice President and Chief Financial Officer of Mead Westvaco Corp. (“Mead”) from April 2003 until March 2004. She was Senior Vice President, Strategy & Specialty Operations of Mead from February 2002 until April 2003. She was President and General Manager of the Mead Specialty Paper Division from July 1998 until January 2002. She is also a Director of Delphi Corporation.

      Mr. Obermayer has been Vice President of the Company since December 1999 and Controller since January 2005. He was Vice President and Treasurer of the Company from December 1999 until December 2004.

      Mr. Perlick has been Vice President of the Company and President of Transmission Systems since September 2004 and he was Acting President of Transmission Systems from November 2003 until August 2004. He was Vice President — Engineering of TorqTransfer Systems from February 1999 until October 2003 and was Acting President of TorqTransfer Systems from February 2002 to December 2002 .

      Mr. Vance has been Vice President — Business Development and M&A since January 2005. He was Vice President, Finance for Transmission Systems from January 2000 until December 2004. He was Group Controller for Transmission Systems from June 1999 until December 1999.

      Mr. Weber has been Vice President of the Company since July 2002 and has been the President and General Manager of BorgWarner Emissions Systems Inc. and BorgWarner Thermal Systems Inc. since January 2003. He was President and General Manager of BorgWarner Emissions Systems Inc. from July 2002 until December 2002. He was Vice President, Passenger Car Operations, of BorgWarner Turbo Systems Inc. from January 1999 to June 2002.

      Mr. Wilson has been Vice President of the Company and President and General Manager of BorgWarner Turbo Systems Inc. since January 2000. He was a Director for Allied Signal Aerospace (n/k/a Honeywell) for various product lines from October 1997 to December 1999.

      Mr. Wood has been Vice President of the Company and President of BorgWarner Morse TEC Inc. since January 2001. He was Vice President of Business Development of TorqTransfer Systems from September 1999 to January 2001.

Item 2.  Properties

      As of December 31, 2004, the Company had 43 manufacturing and technical facilities strategically located throughout the United States and worldwide. In addition to its domestic manufacturing facilities, the Company has five facilities in Germany, four facilities in India, three facilities in Korea,

12

two facilities in each of China, Japan and the United Kingdom, and one facility in each of Brazil, Canada, France, Hungary, Italy, Mexico, and Taiwan. The Company also has several sales offices, warehouses and technical centers. The Company has relocated its executive offices from Chicago, Illinois to a leased facility in Auburn Hills, Michigan. In 2002, the Company completed construction of the BorgWarner Powertrain Technical Center (the “PTC”) in Auburn Hills, Michigan, which serves as the primary research and development facility and headquarters for several of the Company’s business units. There are approximately 510 employees located at the PTC. In general, the Company believes that its properties are in good condition and are adequate to meet its current and reasonably anticipated needs.

      The following is additional information concerning the headquarters and the major manufacturing plants operated by the Company and its consolidated subsidiaries. Unless otherwise noted, these plants are owned by the Company:

	2004 Percent of
	Capacity
Locations	Utilization(1)(2)
Engine		85.4	%
Headquarters: Auburn Hills, Michigan; Ithaca, New York; Kirchheimbolanden, Germany
Aoyama, Japan; Arcore, Italy; Asheville, North Carolina; Bradford, England; Cadillac, Michigan; Campinas Sao Paolo, Brazil; Changwon, South Korea (leased); Chennai, India; Cortland, New York; Dixon, Illinois; Fletcher, North Carolina; Guadalajara, Mexico; Kakkalur, India (74% JV); Markdorf, Germany; Marshall, Michigan; Nabari City, Japan; Ningbo, China (70% JV); Oroszlany, Hungary; Pyungtek, Korea (leased); Sallisaw, Oklahoma; Simcoe, Ontario, Canada; Tainan Shien, Taiwan; Water Valley, Mississippi
Drivetrain		87.9	%
Headquarters: Auburn Hills, Michigan
Arnstadt, Germany; Beijing, China (80% JV); Bellwood, Illinois; Eumsung, Korea (80% JV); Frankfort, Illinois; Heidelberg, Germany; Ketsch, Germany; Livonia, Michigan; Longview, Texas (leased); Margam, Wales; Muncie, Indiana; Pune, India (60% JV); Seneca, South Carolina; Sirsi, India (60% JV); Tulle, France

(1)

The figure shown in each case is a weighted average of the percentage utilization of each plant within the segment. Each individual plant is weighted in proportion to the number of employees employed when such plant runs at 100% capacity. With the exception of the Company’s Bellwood, Illinois, Ithaca, New York (timing chain), and Muncie, Indiana plants, capacity utilization at the 100% level is defined as operating five days per week, with two eight-hour shifts per day and normal vacation hours. Capacity utilization at the 100% level at the Company’s Bellwood, Illinois, Ithaca, New York (timing chain), and Muncie, Indiana plants is defined as operating five days per week, with three eight-hour shifts per day and normal vacation hours.

(2)

The table excludes joint ventures owned 50% or less.

Item 3. Legal Proceedings

      The Company is subject to a number of claims and judicial and administrative proceedings (some of which involve substantial amounts) arising out of the Company’s business or relating to matters for which the Company may have a contractual indemnity obligation. See Note Eleven of the Notes to Consolidated Financial Statements for a discussion of environmental, asbestos and other litigation, which is incorporated herein by reference.

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Item 4. Submission of Matters to a Vote of Security Holders

      There were no matters submitted to the Company’s security holders during the fourth quarter of 2004.

PART II

Item 5.  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

      The Company’s Common Stock is listed for trading on the New York Stock Exchange under the symbol BWA. As of March 4, 2005, there were approximately 2,850 holders of record of Common Stock.

      The Company has increased its dividend during each of the last three years. During 2003, the Company paid a quarterly dividend of $0.18, on a pre-split basis. During 2004, the Company paid a quarterly dividend of $0.25 on a pre-split basis. In May 2004, the Company declared a two-for-one stock split, thereby adjusting the quarterly dividend to $0.125. For the first quarter of 2005, the Company announced an increase in the cash dividend from $0.125 per share to $0.14 per share. While the Company currently expects that comparable quarterly cash dividends will continue to be paid in the future, the dividend policy is subject to review and change at the discretion of the Board of Directors.

      High and low sales prices*(as reported on the New York Stock Exchange composite tape) for the Common Stock for each quarter in 2003 and 2004 were:

Quarter Ended	High		Low
March 31, 2003	$	27.67	$	21.66
June 30, 2003	$	31.13	$	23.68
September 30, 2003	$	36.68	$	31.72
December 31, 2003	$	42.75	$	34.14
March 31, 2004	$	49.32	$	39.84
June 30, 2004	$	45.08	$	38.39
September 30, 2004	$	48.77	$	40.73
December 31, 2004	$	54.68	$	39.50

*  The full year 2003 and the 2004 first quarter shares prices were adjusted for the stock split effective May 17, 2004.

Item 6. Selected Financial Data

      The Selected Financial Data for the five years ended December 31, 2004 with respect to the following line items set forth on page 55 of the Company’s Annual Report is incorporated herein by reference and made a part of this report: net sales; net earnings; net earnings per share; total assets; total debt; and cash dividend declared per share. See the material incorporated herein by reference in response to Item 7 of this report for a discussion of the factors that materially affect the comparability of the information contained in such data.

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

      The Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth on pages 25 through 34 in the Company’s Annual Report to Stockholders are incorporated herein by reference and made a part of this report.

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Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

      Information with respect to interest rate risk and foreign currency exchange risk is contained on pages 46 and 47 of the Company’s Annual Report and is incorporated herein by reference. Information with respect to the levels of indebtedness subject to interest rate fluctuation is contained in Note Seven of the Notes to Consolidated Financial Statements on page 46 of the Company’s Annual Report and is incorporated herein by reference. Information with respect to the Company’s level of business outside the United States which is subject to foreign currency exchange rate market risk is contained in Note Sixteen of the Notes to Consolidated Financial Statements on page 54 under the caption “Geographic Information” and is incorporated herein by reference.

Item 8.  Financial Statements and Supplementary Data

      The Consolidated Financial Statements (including the notes thereto, except as noted below) of the Company and the Independent Registered Public Accounting Firm’s Report as set forth on pages 35 through 54 in the Company’s Annual Report are incorporated herein by reference and made a part of this report. Supplementary financial information regarding quarterly results of operations (unaudited) for the years ended December 31, 2004 and 2003 is set forth on page 54 of the Company’s Annual Report. For a list of financial statements filed as part of this report, see Item 15, “Exhibits, Financial Statement Schedules, and Reports on Form 8-K” beginning on page 18.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

      Not applicable.

Item 9A.  Controls and Procedures

Disclosure Controls and Procedures

      The Company’s management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There have been no changes in internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are likely to materially affect our internal controls over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

      The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(e). Management conducted an assessment of the Company’s internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on the assessment, management concluded that, as of December 31, 2004, the Company’s internal control over financial reporting is effective. Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report below.

15

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of BorgWarner Inc.:

      We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

      A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

      We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2004, and the related consolidated statement of operations, cash flows and stockholders’

16

equity and comprehensive income for the year ended December 31, 2004 and our report dated March 7, 2005 expressed an unqualified opinion on those financial statements.

Detroit, Michigan

March 7, 2005

Item 9B. Other Information

      On November 10, 2004 the Board of Directors approved a new compensation package for non-employee directors. Beginning on January 1, 2005, non-employee director compensation shall consist of: an annual retainer of $40,000 for each director; a Board meeting attendance fee of $1,500 per meeting; a Board committee meeting attendance fee of $1,500 per meeting; a committee chair meeting attendance fee of $3,000 per meeting; a Finance and Audit committee chair attendance fee of $5,000 per meeting; and $165,000 worth of restricted stock at the beginning of each three year term to vest one-third each year. For the Class I and Class II non-employee directors who have one year and two years remaining in their current terms, respectively, each director shall receive a pro rata share of the $165,000 worth of restricted stock in 2005 which will vest evenly over the reminder of their terms.

PART III

Item 10.  Directors and Executive Officers of the Registrant

      The following information from the Company’s Proxy Statement is incorporated herein by reference and made a part of this report: “Election of Directors” on pages 1 and 2; “Information on Nominees for Directors and Continuing Directors” on pages 2 and 3; “Board of Directors and Its Committees” on pages 3 through 6; “Involvement in Certain Legal Proceedings” on page 6; “Section 16(a) Beneficial Ownership Reporting Compliance” on page 11; and “Code of Ethics” on page 11. Information with respect to executive officers of the Company is set forth in Part I of this report.

Item 11.  Executive Compensation

      Information with respect to compensation of executive officers and directors of the Company under the captions “Director Compensation” on page 6 of the Company’s Proxy Statement and “Executive Compensation,” “Stock Options,” “Long-Term Incentive Plans,” and “Change of Control Employment Agreements” on pages 12 through 15 of the Company’s Proxy Statement is incorporated herein by reference and made a part of this report.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

      Information under the captions “Security Ownership of Certain Beneficial Owners and Management” on page 10 of the Company’s Proxy Statement and “Equity Compensation Plan Information” on page 11 of the Company’s Proxy Statement is incorporated herein by reference and made a part of this report.

17

Item 13.  Certain Relationships and Related Transactions

      None.

PART IV

Item 14.  Principal Accountant Fees and Services

      Information with respect to the fees and services of our principal accountant under the caption “Principal Accountant Fees and Services” on page 8 of the Company’s Proxy Statement is incorporated herein by reference and made a part of this report.

Item 15.  Exhibits, Financial Statement Schedules, and Reports On Form 8-K

(a) 1. The following consolidated financial statements of the Company on pages 35 through 54 of the Company’s Annual Report are incorporated herein by reference:

Independent Registered Public Accounting Firm’s Report

Consolidated Statements of Operations — years ended December 31, 2004, 2003 and 2002

Consolidated Balance Sheets — December 31, 2004 and 2003

Consolidated Statements of Cash Flows — years ended December 31, 2004, 2003 and 2002

Consolidated Statements of Stockholders’ Equity and Comprehensive Income —
years ended December 31, 2004, 2003 and 2002

Notes to Consolidated Financial Statements

      2. Certain schedules for which provisions are made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.

      3. The exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index on page A-1.

      (b) Reports on Form 8-K.

      On October 25, 2004, the Company filed a report on Form 8-K, furnishing a copy of a news release relating to third quarter results.

      On November 1, 2004, the Company filed a report on Form 8-K, announcing that the Company, through a wholly-owned German subsidiary, entered into a Sale and Purchase Agreement to acquire approximately 62% of the outstanding shares of Beru, a German publicly-traded company for €59 per shares. The Company also announced that a tender offer to acquire the remaining shares of Beru would be commenced at a price of €67.50 per share.

      On November 15, 2004, the Company filed a report on Form 8-K, announcing that David T. Brown had been appointed to the board of directors.

      On November 30, 2004, the Company filed a report on Form 8-K, announcing that the Company entered into a €700,000,000 senior bridge term credit facility to finance the proposed acquisition of Beru.

      On December 9, 2004, the Company filed a report on Form 8-K, announcing that BorgWarner Germany GmbH, a wholly owned German subsidiary, published in Germany, the tender offer regarding the Beru acquisition.

      On December 20, 2004, the Company filed a report on Form 8-K, announcing that the European Commission would not oppose the proposed acquisition of Beru.

18

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) 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.

BORGWARNER INC.

By:  /s/ TIMOTHY M. MANGANELLO

Timothy M. Manganello

Chairman and Chief Executive Officer

Date: March 14, 2005

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this 14th day of March, 2005.

Signature	Title
/s/ TIMOTHY M. MANGANELLO Timothy M. Manganello	Chairman and Chief Executive Officer (Principal Executive Officer)
/s/ ROBIN J. ADAMS Robin J. Adams	Executive Vice President, Chief Financial Officer & and Chief Administrative Officer (Principal Financial Officer)
/s/ JEFFREY L. OBERMAYER Jeffrey L. Obermayer	Vice President and Controller (Principal Accounting Officer)
/s/ PHYLLIS O. BONANNO Phyllis O. Bonanno	Director
/s/ ANDREW F. BRIMMER Andrew F. Brimmer	Director
/s/ DAVID T. BROWN David T. Brown	Director
/s/ WILLIAM E. BUTLER William E. Butler	Director
/s/ JERE A. DRUMMOND Jere A. Drummond	Director
/s/ PAUL E. GLASKE Paul E. Glaske	Director
/s/ ALEXIS P. MICHAS Alexis P. Michas	Director
/s/ ERNEST J. NOVAK, JR. Ernest J. Novak, Jr.	Director
/s/ JOHN RAU John Rau	Director

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EXHIBIT INDEX

Exhibit
Number			Description
	*3	.1	Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit No. 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1993).
	*3	.2	Amended and Restated By-laws of the Company (incorporated by reference to Exhibit No. 3.2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
	*3	.3	Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.3 of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999).
	*3	.4	Certificate of Ownership and Merger Merging BorgWarner Inc. into Borg-Warner Automotive, Inc. (incorporated by reference to Exhibit 99.1 of the Company’s Quarterly Report on Form  10-Q for the quarter ended March 31, 2000).
	*4	.1	Indenture, dated as of November 1, 1996, between Borg-Warner Automotive, Inc. and The First National Bank of Chicago (incorporated by reference to Exhibit No. 4.1 to Registration Statement No. 333-14717).
	*4	.2	Indenture, dated as of February 15, 1999, between Borg-Warner Automotive, Inc. and The First National Bank of Chicago (incorporated by reference to Exhibit No. 4.1 to Amendment No. 1 to Registration Statement No. 333-66879).
	*4	.3	Rights Agreement, dated as of July 22, 1998, between Borg-Warner Automotive, Inc. and ChaseMellon Shareholder Services, L.L.C. (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form 8-A filed on July 24, 1998).
	*10	.1	Credit Agreement dated November 23, 2004 among BorgWarner Inc., The Lenders Party Hereto Morgan Stanley Senior Funding, Inc., as Administrative Agent and Syndication Agent, Euro 700,000,000 Senior Bridge Term Credit Facility, Morgan Stanley Senior Funding, Inc., as Lead Arranger and Book Runner (incorporated by reference to Exhibit No. 10.1 to the Company’s Current Report on Form 8-K dated November 30, 2004).
	*10	.2	Credit Agreement dated as of July 22, 2004 among BorgWarner Inc., as Borrower, the Lenders Party Hereto, JPMorgan Chase Bank, Administrative Agent, Bank of America, N.A. as Syndication Agent and Calyon New York Branch (incorporated by reference to Exhibit No. 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004).
	†*10	.3	BorgWarner Inc. 2004 Deferred Compensation Plan (incorporated by reference to Exhibit No. 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004).
	*10	.4	Form of BorgWarner Inc. 2004 Stock Incentive Plan, Non-Qualified Stock Option Award Agreement (incorporated by reference to Exhibit No. 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004).
	†*10	.5	BorgWarner Inc. 2004 Stock Incentive Plan (incorporated by reference to Appendix B of the Company’s Proxy Statement dated March 22, 2004 for its 2004 Annual Meeting of Stockholders).
	*10	.6	Distribution and Indemnity Agreement dated January 27, 1993 between Borg-Warner Automotive, Inc. and Borg-Warner Security Corporation (incorporated by reference to Exhibit No. 10.2 to Registration Statement No. 33-64934).
	*10	.7	Tax Sharing Agreement dated January 27, 1993 between Borg-Warner Automotive, Inc. and Borg-Warner Security Corporation (incorporated by reference to Exhibit No. 10.3 to Registration Statement No. 33-64934).

A-1

Exhibit
Number			Description
	*10	.8	Receivables Transfer Agreement dated as of January 28, 1994 among BWA Receivables Corporation, ABN AMRO Bank N.V. as Agent and the Program LOC Provider and Windmill Funding Corporation (incorporated by reference to Exhibit No. 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1993).
	*10	.9	Amended and Restated Receivables Loan Agreement dated as of December 23, 1998 among BWA Receivables Corporation, as Borrower, Borg-Warner Automotive, Inc., as Collection Agent, ABN AMRO Bank N.V., as Agent, the Banks from time to time party hereto, ABN AMRO Bank N.V., as the Program LOC Provider and the Program LOC Provider and Windmill Funding Corporation (incorporated by reference to Exhibit No. 10.11 of the Company’s Annual Report on Form 10-K for the year ended December 31, 1998).
	*10	.10	First Amendment dated as of March 25, 1999 to Amended and Restated Receivables Loan Agreement dated as of December 23, 1998 (incorporated by reference to Exhibit No. 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
	*10	.11	Second Amendment dated as of December 22, 1999 to Amended and Restated Receivables Loan Agreement dated as of December 23, 1998 (incorporated by reference to Exhibit No. 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999).
	*10	.12	Third Amendment dated as of December 20, 2000 to Amended and Restated Receivables Loan Agreement dated as of December 23, 1998 (incorporated by reference to Exhibit No. 10.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000).
	*10	.13	Fourth Amendment dated as of April 13, 2001 to Amended and Restated Receivables Loan Agreement dated as of December 23, 1998 (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001).
	*10	.14	Fifth Amendment dated as of July 25, 2001 to Amended and Restated Receivables Loan Agreement dated as of December 23, 1998 (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001).
	*10	.15	Sixth Amendment dated as of December 22, 2001 to Amended and Restated Receivables Loan Agreement dated as of December 23, 1998 (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001).
	*10	.16	Seventh Amendment dated as of February 19, 2002 to Amended and Restated Receivables Loan Agreement dated as of December  23, 1998 (incorporated by reference to Exhibit No. 10.15 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002).
	*10	.17	Eighth Amendment dated as of February 18, 2003 to Amended and Restated Receivables Loan Agreement dated as of December  23, 1998 (incorporated by reference to Exhibit No. 10.16 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002).
	*10	.18	Ninth Amendment dated as of February 17, 2004 to Amended and Restated Receivables Loan Agreement dated as of December  23, 1998 (incorporated by reference to Exhibit No. 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended.
	†*10	.19	Borg-Warner Automotive, Inc. Management Incentive Bonus Plan dated January 1, 1994 (incorporated by reference to Exhibit 10.18 the Company’s Annual Report on Form 10-K for the year ended December 31, 1993).
	†*10	.20	Borg-Warner Automotive, Inc. Retirement Savings Excess Benefit Plan dated January 27, 1993 (incorporated by reference to Exhibit No. 10.20 of the Company’s Annual Report on Form 10-K for the year ended December 31, 1993).
	†*10	.21	Borg-Warner Automotive, Inc. Retirement Savings Plan dated January 27, 1993 as further amended and restated effective as of April  1, 1994 (incorporated by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995).

A-2

Exhibit
Number			Description
	†*10	.22	Borg-Warner Automotive, Inc. Board of Directors Deferred Compensation Plan dated April 18, 1995 (incorporated by reference to Exhibit No. 10.23 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002).
	†*10	.23	Form of Change of Control Employment Agreement for Executive Officers (incorporated by reference to Exhibit No. 10.1 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 1997).
	*10	.24	Assignment of Trademarks and License Agreement (incorporated by reference to Exhibit No. 10.0 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1994).
	*10	.25	Amendment to Assignment of Trademarks and License Agreement (incorporated by reference to Exhibit No. 10.23 of the Company’s Form 10-K for the year ended December 31, 1998).
	†*10	.26	Borg-Warner Automotive, Inc. Executive Stock Performance Plan, Revised and Re-approved February 2, 2000 (incorporated by reference to Appendix B of the Company’s Proxy Statement dated March 22, 2000).
	*10	.27	Sale and Purchase Agreement dated October 30, 2004 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on November 4, 2004).
	13	.1	Annual Report to Stockholders for the year ended December 31, 2004 with manually signed Independent Registered Public Accounting Firm’s Report. (The Annual Report, except for those portions which are expressly incorporated by reference in the Form 10-K, is furnished for the information of the Commission and is not deemed filed as part of the Form 10-K).
	21	.1	Subsidiaries of the Company.
	23	.1	Independent Registered Public Accounting Firm’s Consent.
	31	.1	Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer.
	31	.2	Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer.
	32	.1	Section 1350 Certifications.
	99	.1	Cautionary Statements.

*  Incorporated by reference.

†  Indicates a management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c).

A-3 EX-13.1 2 c92839exv13w1.txt ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13.1 Management's Discussion and Analysis of Financial Condition and Results of Operations BorgWarner Inc. and Consolidated Subsidiaries 25 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 stability. 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 segments: 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 amendment 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 outstanding 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 Euro 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 ignition coils); and electronic and sensor technology (tire pressure sensors, 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 discussion 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 allocation 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:

millions of dollars, except per share data Year ended December 31, 2004 2003 2002 - --------------------------------------------------------------------------------------- Drivetrain $ 106.9 $ 98.4 $ 99.9 Engine 281.7 239.6 215.9 ------------------------------------------ Segment earnings before interest and taxes 388.6 338.0 315.8 Corporate (50.3) (48.0) (44.3) ------------------------------------------ Consolidated earnings before interest and taxes 338.3 290.0 271.5 Interest expense and finance charges 29.7 33.3 37.7 ------------------------------------------ Earnings before income taxes 308.6 256.7 233.8 Provision for income taxes 81.2 73.2 77.2 Minority interest, net of tax 9.1 8.6 6.7 ------------------------------------------ Net earnings before cumulative effect of accounting change 218.3 174.9 149.9 Cumulative effect of change in accounting principle, net of tax -- -- (269.0) ------------------------------------------ Net earnings/(loss) $ 218.3 $ 174.9 $ (119.1) ------------------------------------------ Per share data -- assuming dilution: Earnings per share before cumulative effect of accounting change $ 3.86 $ 3.20 $ 2.79 Cumulative effect of accounting change -- -- (5.01) ------------------------------------------ Earnings/(loss) per share $ 3.86 $ 3.20 $ (2.22) ------------------------------------------

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 million in 2003. Management's Discussion and Analysis of Financial Condition and Results of Operations 26 RESULTS OF OPERATIONS NET SALES The table below summarizes the overall worldwide global light vehicle production percentage changes for 2004 and 2003: WORLDWIDE LIGHT VEHICLE YEAR OVER YEAR CHANGE IN PRODUCTION*

2004 2003 - ---------------------------------------------------------------------------- North America (0.7)% (3.0)% Europe 5.0 % 1.4 % Japan and Korea 3.9 % (0.7)% Total World-wide 5.2 % (1.6)% *Data provided by CSM Worldwide. BorgWarner Year Over Year Net Sales Change 14.9 % 12.4 %

Our net sales increase in 2004 and 2003 was strong compared to the estimated worldwide market production increase of approximately 5.2% in 2004 and decrease of (1.6)% in 2003. The Company's net sales increased 14.9% from 2003 and increased 12.4% from 2002 to 2003. The increase in 2004 was driven by both of our operating segments from higher demand for turbochargers, especially in Europe; new DualTronic(TM) transmissions; all-wheel drive systems; and timing chain systems in Asia and Europe. The effect of changing currency rates also had a positive impact on net sales and net earnings in 2004. The effect of non-U.S. currencies, primarily the Euro, U.K. Pound, Japanese Yen and Korean Won, added $114.0 million to net sales in 2004 and $161.9 million in 2003. The year over year increase in net sales excluding the favorable impact of currency was 11.1% in 2004 and 6.5% in 2003. Consolidated net sales included sales to Ford Motor Company of approximately 21%, 23%, and 26%; to DaimlerChrysler of approximately 14%, 17%, and 20%; and to General Motors Corporation of approximately 10%, 12%, and 12% for the years ended December 31, 2004, 2003 and 2002, respectively. Sales to Volkswagen were approximately 10% in 2004. Both of our operating segments had significant sales to all four of the customers listed above. Such sales consisted of a variety of products to a variety of customer locations and regions. No other single customer accounted for more than 10% of consolidated sales in any year of the periods presented. Over the past several years as our major customers have continued to consolidate, we have increased our sales to several other global OEMs, bringing us more in line with our customers' share of the global vehicle market. As a result, sales to Ford, DaimlerChrysler and General Motors have become a smaller percentage of total sales. Our overall outlook for 2005 is positive. Sales are expected to grow in excess of a projected flat to slightly positive global production rate and we expect to benefit from the continuation of several trends: change in Europe to diesel engines, which utilize turbochargers and certain Beru products; shift in Europe to automatic transmissions; and the switch from timing belts to timing chains in Asia and Europe. Each of these trends is positive for the Company. Assuming no major changes to the above assumptions, the Company expects continued long-term sales and net earnings growth. RESULTS BY OPERATING SEGMENT The following tables present net sales and earnings before interest and income taxes (EBIT) by segment for the years 2004, 2003 and 2002.

NET SALES millions of dollars Year ended December 31, 2004 2003 2002 - -------------------------------------------------------------------------- Drivetrain $ 1,358.6 $ 1,245.6 $ 1,122.1 Engine 2,217.0 1,869.7 1,648.2 Inter-segment eliminations (50.3) (46.1) (39.2) ----------------------------------------------- Net sales $ 3,525.3 $ 3,069.2 $ 2,731.1 -----------------------------------------------

EARNINGS BEFORE INTEREST AND TAXES (EBIT)

millions of dollars Year ended December 31, 2004 2003 2002 - ---------------------------- ---------------------------------------------- Drivetrain $ 106.9 $ 98.4 $ 99.9 Engine 281.7 239.6 215.9 ----------------------------------------------- Segment earnings before interest and taxes 388.6 338.0 315.8 Corporate (50.3) (48.0) (44.3) ----------------------------------------------- Consolidated earnings before interest and taxes $ 338.3 $ 290.0 $ 271.5 ----------------------------------------------- Interest expense and finance charges 29.7 33.3 37.7 ----------------------------------------------- Earnings before income taxes $ 308.6 $ 256.7 $ 233.8 -----------------------------------------------

The DRIVETRAIN segment net sales increased 9.1% from 2003 to 2004; EBIT increased 8.6% for the same period. The sales increase was the result of strong global demand for transmission components and all-wheel drive systems. The Company's new DualTronic(TM) transmission product continues to ramp-up volume in Europe. The increase in EBIT was due to increased volume and continued focus on cost reductions in our operations. These positive trends were offset by commodity price increases of approximately $20 million, which is primarily steel, and start up costs. The Drivetrain segment net sales increased 11.0% from 2002 to 2003, but EBIT declined 1.5% for the same period. The sales gains were due to all-wheel drive transfer case programs with General Motors, increased sales of the Company's Interactive Torque Management (TM) all-wheel drive systems to Honda and Hyundai, and steady demand for transmission components and systems, especially with increased automatic transmission adoption in Europe. These sales gains were offset by declines in North American automotive production. The decrease in EBIT was due to start-up costs for the Company's new DualTronic(TM) transmission product, including the opening of a new assembly facility in Europe. Profitability also suffered from a less favorable product mix and an increase in pension and retiree health care costs over the previous year. In 2005, growth in the Drivetrain segment is expected to be flat as demand for traditional light-trucks will be about the same as in 2004. Sport-utility vehicles are expected to decline, while sales of front-wheel-drive based all-wheel-drive systems are expected to increase. Transmission products will benefit from increased penetration of automatic transmissions in Europe and Asia, and the continued ramp-up of DualTronic(TM) transmission modules in Europe. BorgWarner Inc. and Consolidated Subsidiaries 27 The ENGINE segment 2004 net sales increased 18.6% over 2003 and EBIT increased 17.6% over the same period. This segment benefited from strong demand for the Company's turbochargers for European passenger cars and commercial vehicles. The segment EBIT was impacted by increased volume, productivity and positive currency impact, which offset commodity price increases of approximately $20 million and start up costs in Korea and China. The Engine segment 2003 net sales increased 13.4% over 2002 and EBIT increased 11.0% over the same period. This segment benefited from continued demand for the Company's turbochargers for European passenger cars and commercial vehicles as well as continued growth of our timing chain and emissions products. The EBIT was impacted by increased productivity and production in the turbocharger business, which translated into higher profitability. This was partially offset by start up costs for Variable Cam Timing systems, which will launch in 2004 and for new Korean operations. For 2005, the Engine Group expects to deliver continued growth from further penetration of diesel engines in Europe, which will continue to boost demand for turbochargers and Beru technologies, and the launch of our first high-volume variable cam timing (VCT) system. Investments in Korea and China are expected to begin to contribute to results. This growth is expected to help offset anticipated weakness in North American light vehicle production. CORPORATE is the difference between calculated total Company EBIT and the total from the segments and represents corporate headquarters expenses and expenses not directly attributable to the individual segments and includes equity in affiliate earnings. This net expense was $50.3 million in 2004, $48.0 million in 2003, and $44.3 million in 2002. The main reasons for the increase from 2003 to 2004 was an increase in our environmental spending related to the Crystal Springs, Mississippi site and the $3.7 million write down of a note relating to the sale of Kuhlman Electric Corporation, which were mostly offset by stronger equity earnings from NSK-Warner. The increase from 2002 to 2003 was due to higher pension and post retirement health care costs for discontinued operations, which are recorded at the corporate level. OTHER FACTORS AFFECTING RESULTS OF OPERATIONS The following table details our results of operations as a percentage of sales:

Year Ended December 31, 2004 2003 2002 - ------------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales 81.5 80.9 79.7 ------------------------------------------ Gross profit 18.5 19.1 20.3 Selling, general and administrative expenses 9.6 10.3 11.1 Other, net 0.1 -- -- ------------------------------------------ Operating income 8.8 8.8 9.2 ------------------------------------------ Equity in affiliate earnings, net of tax -0.8 -0.7 -0.7 Interest expense and finance charges 0.8 1.1 1.4 ------------------------------------------ Earnings before income taxes 8.8 8.4 8.5 Provision for income taxes 2.3 2.4 2.8 Minority interest, net of tax 0.3 0.3 0.2 ------------------------------------------ Net earnings before cumulative effect of accounting change 6.2% 5.7% 5.5% ------------------------------------------

GROSS PROFIT for 2004 was 18.5% down from 19.1% in 2003 and down from 20.3% in 2002. The decrease in gross profit in 2004 was due to several factors, including significant commodity price increases, including steel, a change in sales mix and geographic expansion. The geographic expansion includes new facilities in Europe and Asia for both operating segments. We anticipate 2005 margins to be impacted by the leveling off of commodity price increases, the continued shift from components to systems sales and continued results from our cost reduction initiatives. Also impacting gross margins in 2004, 2003 and 2002 is the effect of a royalty agreement the Company entered into with Honeywell International for certain variable turbine geometry (VTG) turbochargers after a German court ruled in favor of Honeywell in a patent infringement action. In order to continue shipping to its OEM customers, the Company and Honeywell entered into two separate royalty agreements, signed in July 2002 and June 2003, respectively. The June 2003 agreement runs through 2006 with a minimum royalty for shipments up to certain volume levels and a per unit royalty for any units sold above these stated amounts. The royalty agreement costs recognized under the agreements were $14.2 million in 2004, $23.2 million in 2003 and $13.5 million in 2002. These costs were based on units shipped and were recorded in cost of goods sold. It is anticipated that these costs will be at minimal levels in 2005 and 2006 as the Company's primary customers have converted most of their requirements to the next generation VTG turbocharger. SELLING, GENERAL AND ADMINISTRATIVE expenses (SG&A) as a percentage of net sales decreased to 9.6% from 10.3% in 2003 and 11.1% in 2002. While SG&A spending in dollars increased slightly, we were able to slow that growth to a level below the growth in sales through continued focus on cost controls, and leveraging the existing infrastructure to support the increased sales. Research and development (R&D) is a major component of the Company's SG&A expenses. R&D spending was $123.1 million, or 3.5% of sales in 2004, compared to $118.2 million, or 3.9% of sales in 2003, and $109.1 million, or 4.0% of sales in 2002. We continue to increase our spending in R&D, although the growth rate has been somewhat lower than our sales growth rate. We also continue to invest in a number of cross-business R&D programs, as well as a number of other key programs, all of which are necessary for short- and long-term growth. Our long-term target for R&D spending is approximately 4% of sales. We intend to maintain our commitment to R&D spending while continuing to focus on controlling other SG&A costs. OTHER, NET decreased to $(3.0) million of loss in 2004, from $0.1 million of income in 2003 and $0.9 million of income in 2002. The major item was losses from capital asset disposals of $3.5 million in 2004. EQUITY IN AFFILIATES EARNINGS, NET OF TAX increased by $9.1 million from 2003, and by $0.6 million between 2003 and 2002. This line item is primarily driven by the results of our 50% owned Japanese joint venture, NSK-Warner. For more discussion of NSK-Warner, see Note 5 of the Consolidated Financial Statements. Management's Discussion and Analysis of Financial Condition and Results of Operations 28 INTEREST EXPENSE, NET decreased by $3.6 million in 2004 and decreased by $4.4 million between 2003 and 2002. The decreases in 2004 and 2003 were due to lower debt levels, as we used cash generated from operations to pay off debt. In 2004, our balance sheet debt decreased by $71.0 million. In 2003, our balance sheet debt decreased $2.7 million excluding the fair value adjustment for interest rate swaps, and we reduced the amount of securitized accounts receivable sold by $40.0 million. We took advantage of lower interest rates through the use of interest rate and cross-currency swap arrangements described more fully in Note 7 to the Consolidated Financial Statements. THE PROVISION FOR INCOME TAXES resulted in an effective tax rate for 2004 of 26.3% compared with rates of 28.5% in 2003 and 33.0% for 2002. Our effective tax rates have been lower than the standard federal and state tax rates due to the realization of certain R&D and foreign tax credits; foreign rates, which differ from those in the U.S.; and offset by non-deductible expenses. In addition, the Company made an $11.4 million year-end adjustment to various tax accounts due to changes in circumstances related to various tax items, including changes in tax laws. The year-end adjustment resulted in a reduction in the U.S. effective tax rate for 2004. In 2005, we anticipate our tax rate to be approximately 30% to 31% based on our current mix of business. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities of $426.6 million was primarily used to fund $204.9 million of capital expenditures, $47.5 million of tooling, net of customer reimbursements, pay down long-term debt of $61.8 million, pay $27.9 million of dividends to our shareholders, and increase cash and cash equivalents by $116.6 million. OPERATING ACTIVITIES Net cash provided by operating activities of $426.6 million is $119.7 million more than in 2003. The $426.6 million consists of net income of $218.3 million, increased for non-cash charges of $222.4 million and offset by a $17.3 million increase in net operating assets and liabilities. Non-cash charges are primarily comprised of $177.0 million in depreciation and amortization expense. Accounts receivable increased a total of $84.2 million, of which $23.8 was due to currency. The remaining increase was due to higher business levels, particularly in Europe. Certain of our European customers tend to pay slower than our North American customers. Inventory increased by $22.1 million, but our inventory turns improved to 12.9 times from 12.3 times in 2003. INVESTING ACTIVITIES Net cash used in investing activities totaled $257.2 million, compared with $228.2 million in the prior year. Capital spending totaling $204.9 million in 2004 was $32.9 million higher than in 2003. Approximately 60% of the 2004 capital spending was related to expansion, with the remainder for cost reduction and other purposes. Heading into 2005, we plan to continue to spend on capital to support the launch of our new applications and for cost reductions and productivity improvement projects. Our target for capital spending is to be approximately 5.5% of sales. The 2003 investing uses of cash includes $12.8 million of payments to resolve a valuation dispute regarding the value of the turbocharger business of Aktiengesellschaft Khnle, Kopp & Kausch (AGK). The valuation payment resulted from the settlement in 2003 of a lawsuit brought by certain minority shareholders of AGK related to the automotive turbocharger business of AGK, which the Company purchased from AGK in 1998. Since the settlement of the dispute, the Company extended a formal tender offer to purchase all of the outstanding common and preferred shares of AGK from the remaining shareholders. The Company spent $9.0 million in 2004 and $14.4 million in 2003 to purchase additional shares of AGK, an unconsolidated subsidiary of the Company, which has been recorded as an "Investment in business held for sale" in the Consolidated Balance Sheets. Effective February 17, 2005, the Company signed a Share Transfer Agreement (STA) with Turbo Group GmbH for the sale of its 95.42% interest in AGK. The STA will become effective no later than seven banking days after receipt of approval from both the German Federal Cartel Office and the Austrian Merger Control Authority. The transaction is anticipated to close before March 31, 2005. The estimated proceeds from the pending sale, net of closing costs are approximately Euro 39.8 million. FINANCING ACTIVITIES AND LIQUIDITY Stockholders' equity increased by $273.8 million in 2004. The increase was primarily caused by net income of $218.3 million, along with currency translation and hedge instruments adjustments of $28.4 million, stock option exercises of $14.4 million and stock issuances to retirement plans of $25.8 million. These factors were somewhat offset by dividend payments of $27.9 million. In relation to the U.S. Dollar, the currencies in foreign countries where we conduct business, particularly the Euro and Yen, strengthened, causing the currency translation component of other comprehensive income to increase in both 2004 and 2003. Our total capitalization as of December 31, 2004 of $2,140.9 million is comprised of short-term debt of $16.5 million, long-term debt of $568.0 million, minority interest of $22.2 million and stockholders' equity of $1,534.2 million. Capitalization at December 31, 2003 was $1,934.2 million. During the year, we reduced our balance sheet debt to debt plus equity ratio to 27.3% from 34.2% in 2003. The Company has a new revolving credit facility, which provides for borrowings up to $600 million through July 2009. The new facility effective July 22, 2004, replaced the Company's previous facility of $350 million. Additionally, we have $300 million available under a universal shelf registration statement on file with the Securities and Exchange Commission through which a variety of debt and/or equity instruments may be issued. The Company also has access to the commercial paper market through a $50 million accounts receivable securitization facility, which is rolled over annually. From a credit quality perspective, we have an investment grade credit rating of A- from Standard & Poor's and Baa2 from Moody's. BorgWarner Inc. and Consolidated Subsidiaries 29 The Company's significant contractual obligation payments at December 31, 2004, are as follows:

millions of dollars Total 2005 2006-2007 2008-2009 After 2009 - --------------------------------------------------------------------------------------------------------------------- Other post retirement benefits excluding $ 1,599.9 $ 30.8 $ 60.0 $ 61.5 $ 1,447.6 pensions(a) Notes payable and long-term debt 586.8 16.5 158.1 152.7 259.5 Projected minimum interest costs(b) 89.7 26.2 38.9 20.9 3.7 Non-cancelable operating leases 58.0 29.1 9.0 7.1 12.8 Minimum royalty payments(c) 1.5 1.5 -- -- -- --------------------------------------------------------------------------- Total $ 2,335.9 $ 104.1 $ 266.0 $ 242.2 $ 1,723.6 ---------------------------------------------------------------------------

(a) Other post retirement benefits (excluding pensions) include anticipated future payments to cover retiree medical and life insurance benefits. Since the timing and amount of payments for pension plans is not certain for future years, such payments have been excluded from this table. The Company expects to contribute a total of $20 million to $25 million into all pension plans during 2005. See Note 8 to the Consolidated Financial Statements for disclosures related to the Company's pension and other post retirement benefits. (b) Projection is based upon an average debt portfolio interest rate of 5.00%. The calculation excludes the impact of the Beru transaction. (c) The minimum royalty payments are related to the Honeywell royalty agreement discussed more fully in Note 12 to the Consolidated Financial Statements. The Company has other royalty agreements that are based on sales volumes. These royalty agreements do not have minimum royalty payments and are typically cancellable and have been excluded from the amounts in the table. The Company does not have any long-term or fixed purchase obligations for inventories. The Company has a credit agreement that is subject to the usual terms and conditions applied by banks to an investment grade company. The Company was in compliance with all covenants at December 31, 2004. We believe that the combination of cash from operations, cash balances, available credit facilities and the universal shelf registration will be sufficient to satisfy our cash needs for our current level of operations and our planned operations, including the acquisition of Beru, for the foreseeable future. We will continue to balance our needs for internal growth, external growth, debt reduction, dividends and share repurchase. OFF BALANCE SHEET ARRANGEMENTS As of December 31, 2004, the accounts receivable securitization facility was sized at $50 million and has been in place with its current funding partner since January 1994. This facility sells accounts receivable without recourse. The Company has certain leases that are recorded as operating leases. Types of operating leases include leases on the headquarters facility, an airplane, vehicles, and certain office equipment. The Company also has a lease obligation for production equipment at one of it facilities. The total expected future cash outlays for all lease obligations at the end of 2004 is $58.0 million. See Note 12 to the Consolidated Financial Statements for more information on operating leases, including future minimum payments. The Company has guaranteed the residual values of the leased production equipment. The guarantees extend through the maturity of the underlying lease, which is in 2005. In the event the Company exercises its option not to purchase the production equipment, the Company has guaranteed a residual value of $16.3 million. We do not believe we have any potential loss due to this guarantee. PENSION AND OTHER POST RETIREMENT BENEFITS The Company's policy is to fund its defined benefit pension plans in accordance with applicable U.S., U.K., German and Japanese government regulations and to make additional contributions when management deems it appropriate. At December 31, 2004, all legal funding requirements had been met. The Company contributed $36.3 million to its pension plans in 2004 and $17.1 million in 2003. The Company expects to contribute a total of $20 million to $25 million in 2005. The funded status of pension plans with accumulated benefit obligations in excess of plan assets improved from $(148.1) million at the end of 2003 to $(127.8) million at the end of 2004. The improvement was primarily due to positive returns on plan assets of $43.6 million and company contributions of $36.3 million, which were partially offset by interest costs of $28.8 million, service costs of $11.7 million and foreign currency translation of $9.7 million. Other post retirement benefits primarily consist of post retirement health care benefits. The Company funds these benefits as retiree claims are incurred. Other post retirement benefits had an unfunded status of $(537.2) million at the end of 2004, and $(537.4) million at the end of 2003. The unfunded levels were relatively stable as increases in the liabilities related to a decline in the interest rate assumptions used to calculate the ending liabilities for each of the plans were offset by benefits of the new Medicare Part D plan enacted during 2004. The Company believes it will be able to fund the requirements of these plans through cash generated from operations or other sources for the foreseeable future. Management's Discussion and Analysis of Financial Condition and Results of Operations 30 OTHER MATTERS CONTINGENCIES In the normal course of business the Company and its subsidiaries are parties to various legal claims, actions and complaints, including matters involving intellectual property claims, general liability and various other risks. It is not possible to predict with certainty whether or not the Company and its subsidiaries will ultimately be successful in any of these legal matters or, if not, what the impact might be. The Company's environmental and product liability contingencies are discussed separately below. The Company's management does not expect that the results in any of these legal proceedings will have a material adverse effect on the Company's results of operations, financial position or cash flows. ENVIRONMENTAL The Company and certain of its current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identified by the United States Environmental Protection Agency and certain state environmental agencies and private parties as potentially responsible parties (PRPs) at various hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund) and equivalent state laws and, as such, may presently be liable for the cost of clean-up and other remedial activities at 39 such sites. Responsibility for clean-up and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. Based on information available to us, which in most cases, includes: an estimate of allocation of liability among PRPs; the probability that other PRPs, many of whom are large, solvent public companies, will fully pay the cost apportioned to them; currently available information from PRPs and/or federal or state environmental agencies concerning the scope of contamination and estimated remediation and consulting costs; remediation alternatives; estimated legal fees; and other factors, we have established an accrual for indicated environmental liabilities with a balance at December 31, 2004 of approximately $25.7 million. We expect this amount to be expended over the next three to five years. The Company believes that none of these matters, individually or in the aggregate, will have a material adverse effect on its financial condition or future operating results, generally either because estimates of the maximum potential liability at a site are not large or because liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such matter. In connection with the sale of Kuhlman Electric Corporation, the Company agreed to indemnify the buyer and Kuhlman Electric for certain environmental liabilities relating to the past operations of Kuhlman Electric. The liabilities at issue result from operations of Kuhlman Electric that pre-date the Company's acquisition of Kuhlman Electric's parent company, Kuhlman Corporation, in 1999. During 2000, Kuhlman Electric notified us that it discovered potential environmental contamination at its Crystal Springs, Mississippi plant while undertaking an expansion of the plant. The Company has been working with the Mississippi Department of Environmental Quality and Kuhlman Electric to investigate the extent of and remediate the contamination. The investigation revealed the presence of polychlorinated biphenyls (PCBs) in portions of the soil at the plant and neighboring areas. Clean up began in 2000 and is continuing. Kuhlman Electric and others, including the Company, have been sued in numerous related lawsuits, in which multiple claimants allege personal injury and property damage. The Company has moved to be dismissed from some of these lawsuits. The first trial in these lawsuits is currently scheduled to begin in March 2005. We believe that the accrual for environmental liabilities is sufficient to cover any potential liability associated with this matter. However, due to the nature of environmental liability matters, there can be no assurance that the actual amount of environmental liabilities will not exceed the amount accrued. PRODUCT LIABILITY Like many other industrial companies who have historically operated in the United States, the Company (or parties the Company indemnifies) continues to be named as one of many defendants in asbestos-related personal injury actions. Management believes that the Company's involvement is limited because, in general, these claims relate to a few types of automotive friction products, manufactured many years ago that contained encapsulated asbestos. The nature of the fibers, the encapsulation and the manner of use lead the Company to believe that these products are highly unlikely to cause harm. At December 31, 2004, the Company had approximately 100,000 pending asbestos-related product liability claims. Of these outstanding claims, approximately 92,000 are pending in just three jurisdictions, where significant tort reform activities are underway. The Company's policy is to aggressively defend against these lawsuits and the Company has been successful in obtaining dismissal of many claims without any payment. The Company expects that the vast majority of the pending asbestos-related product liability claims where it is a defendant (or has an obligation to indemnify a defendant) will result in no payment being made by the Company or its insurers. In 2004 of the 4,062 claims settled, only 255 (6.3%) resulted in any payment being made to a claimant by or on behalf of the Company. In 2003 of the 4,664 claims settled, only 273 (5.9%) resulted in any payment being made to claimants. The settlement costs of these claims were paid by the insurance carriers, except for the $1.0 million in 2004 as described in the paragraph below. Based upon the encapsulated nature of the products, our experiences in aggressively defending and resolving claims in the past, and our significant insurance coverage with solvent carriers as of the date of this filing, management does not believe that asbestos-related product liability claims are likely to have a material adverse effect on the Company's results of operations, cash flows or financial condition. Prior to June 2004, all claims were covered by the Company's primary layer insurance coverage, and these carriers administered, defended, settled and paid all claims under a funding agreement. In June 2004, the Company was notified by primary layer insurance BorgWarner Inc. and Consolidated Subsidiaries 31 carriers of the exhaustion of their policy limits. This led the Company to access the next available layer of insurance coverage. Since June 2004, secondary layer insurers have paid asbestos-related litigation defense and settlement expenses pursuant to a funding agreement. Two secondary layer insurers are currently not participating in this arrangement until they are satisfied through an audit process, that the primary level of insurance is exhausted. The Company therefore paid $1.0 million in defense and settlement costs in late 2004 and expects to recover those amounts from either these insurers, or the primary layer insurers if the exhaustion audit shows that primary layer insurance is still available. The Company's contractual relationship with the secondary layer carriers provides a change in circumstances and allows the Company to take a more direct role in defending and settling claims than with the primary carriers. Previously, the Company's arrangement utilized the primary layer insurance carriers' positions to defend and negotiate the settlements with periodic input from the Company. At December 31, 2004, the Company recorded a liability of $40.8 million; with a related asset of $40.8 million to recognize the insurance proceeds receivable to the Company for estimated claim losses. For 2003, the comparable value of the insurance receivable and accrued liability was $41.6 million. The amounts recorded in the Consolidated Balance Sheets are as follows:

millions of dollars 2004 2003 - ---------------------------------------------------------------------------- Assets: Prepayments and other current assets $ 13.5 $ 13.7 Other non-current assets 27.3 27.9 ----------------------------- Total insurance receivable $ 40.8 $ 41.6 ----------------------------- Liabilities: Accounts payable and accrued expenses $ 13.5 $ 13.7 Long-term liabilities -- other 27.3 27.9 ----------------------------- Total accrued liability $ 40.8 $ 41.6 -----------------------------

The insurance receivable and accrued liability of $41.6 million in 2003 have been reclassified as outlined above and the reclassification is not material to the Company's Consolidated Financial Statements. We cannot reasonably estimate possible losses, if any, in excess of those for which we have accrued, because we cannot predict how many additional claims may be brought against the Company (or parties the Company has an obligation to indemnify) in the future, the allegations in such claims, the possible outcomes, or the impact of tort reform legislation currently being considered at the State and Federal levels. A declaratory judgment action was filed in January 2004 in the Circuit Court of Cook County, Illinois by Continental Casualty Company and related companies (CNA) against the Company and certain of its other historical general liability insurers. CNA provided the Company with both primary and additional layer insurance, and, in conjunction with other insurers, is currently defending and indemnifying the Company in all of its pending asbestos-related product liability claims. The lawsuit seeks to determine the extent of insurance coverage available to the Company including whether the available limits exhaust on a "per occurrence" or an "aggregate" basis, and to determine how the applicable coverage responsibilities should be apportioned. In addition to the primary insurance available for asbestos-related claims, the Company has substantial additional layers of insurance available for potential future asbestos-related product claims. Although it is impossible to predict the outcome of pending or future claims; due to the encapsulated nature of the products, our experiences in aggressively defending and resolving claims in the past, and our significant insurance coverage with solvent carriers as of the date of this filing, management does not believe that asbestos-related product liability claims are likely to have a material adverse effect on the Company's results of operations, cash flows or financial condition. CRITICAL ACCOUNTING POLICIES The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The significant accounting principles which management believes are the most important to aid in fully understanding our financial results are included below. Management also believes that all of the accounting policies are important to investors. REVENUE RECOGNITION The Company recognizes revenue upon shipment of product when title and risk of loss pass to the customer. Although the Company may enter into long-term supply agreements with its major customers, each shipment of goods is treated as a separate sale and the price is not fixed over the life of the agreements. SALES OF RECEIVABLES The Company securitizes and sells certain receivables through third party financial institutions without recourse. The amount sold can vary each month based on the amount of underlying receivables. In the fourth quarter of 2003, the Company reduced the maximum size of the facility from $90 million to $50 million. In the fourth quarter of 2002, the Company reduced the maximum size of the facility from $120 million to $90 million. Management's Discussion and Analysis of Financial Condition and Results of Operations 32 IMPAIRMENT OF LONG-LIVED ASSETS The Company periodically reviews the carrying value of its long-lived assets, whether held for use or disposal, including other intangible assets, when events and circumstances warrant such a review. This review is performed using estimates of future cash flows. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value. Management believes that the estimates of future cash flows and fair value assumptions are reasonable; however, changes in assumptions underlying these estimates could affect the evaluations. GOODWILL The Company annually reviews its goodwill for impairment in the fourth quarter of each year for all of its reporting units, or when events and circumstances warrant such a review. This review requires us to make significant assumptions and estimates about the extent and timing of future cash flows, discount rates, and growth rates. The cash flows are estimated over a significant future period of time, which makes those estimates and assumptions subject to an even higher degree of uncertainty. We also utilize market valuation models and other financial ratios, which require us to make certain assumptions and estimates regarding the applicability of those models to our assets and businesses. We believe that the assumptions and estimates used to determine the estimated fair values of each of our reporting units are reasonable. However, different assumptions could materially affect the estimated fair value. The goodwill impairment test was performed in November 2004, and no impairment was found. Amortization continues to be recorded for other intangible assets with definite lives. ENVIRONMENTAL ACCRUAL We work with outside experts to determine a range of potential liability for environmental sites. The ranges for each individual site are then aggregated into a loss range for the total accrued liability. Management's estimate of the loss range for 2004 is between $21.3 million and $69.9 million. We record an accrual at the most probable amount unless one cannot be determined; in which case we record the accrual at the low end of the range. At the end of 2004, our total accrued environmental liability was $25.7 million. PRODUCT WARRANTY Provisions for estimated expenses related to product warranty are made at the time products are sold. These estimates are established using historical information about the nature, frequency, and average cost of warranty claims as related to the warranty provisions of our sales agreements with customers. We actively study trends of warranty claims and take action to improve product quality and minimize warranty claims. We believe that the warranty accrual is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the accrued liability. OTHER LOSS ACCRUALS AND VALUATION ALLOWANCES The Company has numerous other loss exposures, such as customer claims, workers' compensation claims, litigation, and recoverability of assets. Establishing loss accruals or valuation allowances for these matters requires the use of estimates and judgment in regards to the risk exposure and ultimate realization. We estimate losses under the programs using consistent and appropriate methods; however, changes to our assumptions could materially affect our recorded liabilities for loss. PENSION AND OTHER POST RETIREMENT BENEFITS The Company provides post retirement benefits to a substantial portion of its employees. Costs associated with post retirement benefits include pension and post retirement health care expenses for employees, retirees and surviving spouses and dependents. The Company's employee pension and post retirement heath care expenses are dependent on management's assumptions used by actuaries in calculating such amounts. These assumptions include discount rates, health care cost trend rates, inflation, long-term return on plan assets, retirement rates, mortality rates and other factors. Health care cost trend assumptions are developed based on historical cost data, the near-term outlook, and an assessment of likely long-term trends. The inflation assumption is based on an evaluation of external market indicators. Retirement and mortality rates are based primarily on actual plan experience. The Company's approach to establishing the discount rate is based upon corporate bond indices. In the United States, the discount rate assumption is based upon the Moody's Aa Corporate Bond Index as of December 31, 2004, rounded up or down to the nearest 25 basis points. Based on this approach, at December 31, 2004, the Company lowered the discount rate for its U.S. pension and other benefit plans to 5.75% from 6.00% at December 31, 2003. For the U.K. plans, the discount rate assumption is based on the iBoxx AA rated bonds. At December 31, 2004, the discount rate used was 5.75%. For other locations, similar indices and methods are used. The Company determines its expected return on plan asset assumptions by evaluating both historical returns as well as estimates of future returns. Specifically, the Company analyzed the average historical broad market returns for various periods of time over the past 100 years for equities and over a 30-year period for fixed income securities, and adjusted the computed amount for any expected changes in the long-term outlook for the equity and fixed income markets. The Company's expected return on assets was based on expected equity and fixed income returns weighted by the percentage of assets allocated to each plan. The Company's estimate of the long-term rate of return on assets for its U.S. pension is 8.75% for 2004 and 2003; and 9.5% for 2002. The Company does not anticipate a change in the long-term rate of return on assets for pension benefits in 2005. For the U.K. plan, the expected return is based upon the relative weight of equity and debt investments, and the recent performance of those investments. The Company's estimate of the long-term rate of return on assets for its U.K. pension is 6.75% for 2004 and 2003, and 7.0% for 2002. BorgWarner Inc. and Consolidated Subsidiaries 33 See Note 8 to the Consolidated Financial Statements for more information regarding costs and assumptions for employee retirement benefits. DERIVATIVES The Company recognizes that certain normal business transactions generate risk. Example of risks include exposure to exchange risk related to transactions denominated in currencies other than the functional currency, changes in cost of major raw materials and supplies, and changes in interest rates. It is the objective and responsibility of the Company to assess the impact of these transactions risks, and offer protection from selected risks through various methods including financial derivatives. All derivative instruments held by the Company are designated as hedges, have high correlation with the underlying exposure and are highly effective in offsetting underlying price movements. Accordingly, gains and losses from changes in derivative fair values are matched with the underlying transactions. The Company does not engage in any derivative transactions for purposes other than hedging specific risks. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN) No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51," which was revised in December 2003. FIN No. 46R requires that the assets, liabilities and results of the activity of variable interest entities be consolidated into the financial statements of the entity that has the controlling financial interest. FIN No. 46R also provides the framework for determining whether a variable interest entity should be consolidated. For the Company, this Interpretation, as revised, was effective January 1, 2004. The Company has no variable interest entities required to be consolidated as a result of adopting FIN No. 46R. In December 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (Medicare Act) introduced a prescription drug benefit under Medicare, as well as a federal subsidy to sponsors of retiree health care benefit plans. In January 2004, the FASB issued FASB Staff Position (FSP) No. 106-1, "Accounting Disclosure Requirements Related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003." FSP 106-1 permits a sponsor of a post retirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Medicare Act if there is insufficient data, time or guidance available to ensure appropriate accounting. The Company is a sponsor of post retirement health care plans that provide prescription benefits and, in accordance with the one-time election under FSP 106-1, elected to defer accounting for the Medicare Act. In May 2004, the FASB issued FSP 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," which supersedes FSP 106-1, to address the accounting and disclosure requirements related to the Medicare Act. This FSP was adopted by the Company beginning with its third quarter ended September 30, 2004. The effect of the adoption was to reduce the Company's 2004 post retirement benefits expense by $6.8 million. In November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory Costs" which is an amendment of ARB No. 43, Chapter 4. This statement provides clarification of accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. Generally, this statement requires that those items be recognized as current period charges. SFAS 151 will be effective for the Company on January 1, 2006. The Company is currently evaluating the impact that the adoption of SFAS 151 will have on its consolidated financial position, results of operations and cash flows. In December 2004, the FASB issued FSP 109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" (AJCA), and FSP 109-2 "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the AJCA." These two FSPs provide guidance on the application of the new provisions of the AJCA, which was signed into law on October 22, 2004. The AJCA provides a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. In return, the AJCA provides for a two-year phase-out of the existing extra-territorial income exclusion (ETI) for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union. Under the guidance in FSP 109-1, the deduction will be treated as a "special deduction" as described in SFAS 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on our tax return. The Company expects the net effect of the phase out of the ETI and the phase in of this new deduction will not have a material impact on its effective tax rate. FSP 109-2 provides guidance on the accounting for the deduction of 85% of certain foreign earnings that are repatriated, as defined in the AJCA. The Company may elect to apply this provision to qualifying earnings repatriations in 2005. Under the guidance set forth in FSP 109-2, the Company is allowed time beyond the financial reporting period of enactment to evaluate the effect of the AJCA on its plan for reinvestment or repatriation of foreign earnings. The Company has started an evaluation of the effects of the repatriation provision; however, the Company does not expect to be able to complete this evaluation until after the U.S. Congress or the Treasury Department provides additional clarifying language on key elements of the provision. The Company expects to complete its evaluation of the effects of the repatriation provision within a reasonable period of time following the publication of the additional clarifying language. The range of possible amounts that the Company is considering for repatriation under this provision is between zero and $74 million. The related range of income tax effects of such repatriation cannot be reasonably estimated until guidance is issued by Congress or the Treasury Department. In December 2004, the FASB issued SFAS No. 123R, "Shared-Based Payment" which requires companies to measure and recognize compensation expense for all share-based payments at fair value. Share-based payments include stock option grants and certain transactions under other Company stock plans. The Company grants options to Management's Discussion and Analysis of Financial Condition and Results of Operations 34 purchase common stock of the Company to some of its employees and directors under various plans at prices equal to the market value of the stock on the dates the options are granted. SFAS 123R will be effective for the Company beginning July 1, 2005. The Company is currently evaluating the impact that the adoption of SFAS 123R will have on its consolidated financial position, results of operations and cash flows. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK The Company's primary market risks include fluctuations in interest rates and foreign currency exchange rates. We are also affected by changes in the prices of commodities used or consumed in our manufacturing operations. Some of our commodity purchase price risk is covered by supply agreements with customers and suppliers. Other commodity purchase price risk is addressed by hedging strategies, which include forward contracts. The Company enters into derivative instruments only with high credit quality counterparties and diversifies its positions across such counterparties in order to reduce its exposure to credit losses. We do not engage in any derivative instruments for purposes other than hedging specific risks. We have established policies and procedures to manage sensitivity to interest rate, foreign currency exchange rate and commodity purchase price risk, which include monitoring the level of exposure to each market risk. INTEREST RATE RISK Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. The Company manages its interest rate risk by balancing its exposure to fixed and variable rates while attempting to minimize its interest costs. The Company selectively uses interest rate swaps to reduce market value risk associated with changes in interest rates (fair value hedges). At the end of 2004, the amount of net debt with fixed interest rates was 62% of total debt, including the impact of the interest rate swaps. Our earnings exposure related to adverse movements in interest rates is primarily derived from outstanding floating rate debt instruments that are indexed to floating money market rates. A 10% increase or decrease in the average cost of our variable rate debt would result in a change in pre-tax interest expense for 2004 of approximately $1.3 million, and $1.0 million in 2003. We also measure interest rate risk by estimating the net amount by which the fair value of all of our interest rate sensitive assets and liabilities would be impacted by selected hypothetical changes in market interest rates. Fair value is estimated using a discounted cash flow analysis. Assuming a hypothetical instantaneous 10% change in interest rates as of December 31, 2004, the net fair value of these instruments would increase by approximately $23.8 million if interest rates decreased and would decrease by approximately $21.9 million if interest rates increased. Our interest rate sensitivity analysis assumes a constant shift in interest rate yield curves. The model, therefore, does not reflect the potential impact of changes in the relationship between short-term and long-term interest rates. Interest rate sensitivity at December 31, 2003, measured in a similar manner, was slightly greater than at December 31, 2004. FOREIGN CURRENCY EXCHANGE RATE RISK Foreign currency risk is the risk that we will incur economic losses due to adverse changes in foreign currency exchange rates. Currently, our most significant currency exposures relate to the Euro, the Japanese Yen, the British Pound, the Hungarian Forint and the South Korean Won. We mitigate our foreign currency exchange rate risk principally by establishing local production facilities in markets we serve, by invoicing customers in the same currency as the source of the products and by funding some of our investments in foreign markets through local currency loans and cross currency swaps. Such non-U.S. Dollar debt was $324.6 million as of December 31, 2004 and $184.0 million as of December 31, 2003. We also monitor our foreign currency exposure in each country and implement strategies to respond to changing economic and political environments. In addition, the Company periodically enters into forward currency contracts in order to reduce exposure to exchange rate risk related to transactions denominated in currencies other than the functional currency. In the aggregate, our exposure related to such transactions was not material to our financial position, results of operations or cash flows in both 2004 and 2003. COMMODITY PRICE RISK Commodity price risk is the possibility that we will incur economic losses due to adverse changes in the cost of raw materials used in the production of our products. Commodity forward and option contracts are executed to offset our exposure to the potential change in prices mainly for various non-ferrous metals and natural gas consumption used in the manufacturing of automotive components. As of December 31, 2004, and 2003, we had contracts with a total notional value of $3.4 and $1.1 million, respectively. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS Statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements as contemplated by the 1995 Private Securities Litigation Reform Act that are based on management's current expectations, estimates and projections. Words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements are subject to risks and uncertainties, many of which are difficult to predict and generally beyond the control of the Company, which could cause actual results to differ materially from those projected or implied in the forward-looking statements. Such risks and uncertainties include: fluctuations in domestic or foreign automotive production, the continued use of outside suppliers, fluctuations in demand for vehicles containing BorgWarner products, general economic conditions, as well as other risks detailed in the Company's filings with the Securities and Exchange Commission, including the Cautionary Statements filed as Exhibit 99.1 to the Form 10-K for the fiscal year ended December 31, 2004. The Company does not undertake any obligation to update any forward-looking statement. Management's Responsibility for Consolidated Financial Statements 35 The information in this report is the responsibility of management. BorgWarner Inc. and Consolidated Subsidiaries (the "Company") has in place reporting guidelines and policies designed to ensure that the statements and other information contained in this report present a fair and accurate financial picture of the Company. In fulfilling this management responsibility, we make informed judgments and estimates conforming with accounting principles generally accepted in the United States of America. The accompanying Consolidated Financial Statements have been audited by Deloitte & Touche LLP, independent auditors. Management has made available all the Company's financial records and related information deemed necessary by Deloitte & Touche LLP. Furthermore, management believes that all representations made by it to Deloitte & Touche LLP during its audit were valid and appropriate. Management is responsible for maintaining a comprehensive system of internal control through its operations that provides reasonable assurance that assets are protected from improper use, that material errors are prevented or detected within a timely period and that records are sufficient to produce reliable financial reports. The system of internal control is supported by written policies and procedures that are updated by management as necessary. The system is reviewed and evaluated regularly by the Company's internal auditors as well as by the independent auditors in connection with their annual audit of the financial statements. The independent auditors conduct their evaluation in accordance with auditing standards generally accepted in the United States of America and perform such tests of transactions and balances as they deem necessary. Management considers the recommendations of its internal auditors and independent auditors concerning the Company's system of internal control and takes the necessary actions that are cost-effective in the circumstances. Management believes that, as of December 31, 2004, the Company's system of internal control was effective to accomplish the objectives set forth in the first sentence of this paragraph. The Company's Finance and Audit Committee, composed entirely of directors of the Company who are not employees, meets periodically with the Company's management and independent auditors to review financial results and procedures, internal financial controls and internal and external audit plans and recommendations. In carrying out these responsibilities, the Finance and Audit Committee and the independent auditors have unrestricted access to each other with or without the presence of management representatives. /s/ Timothy M. Manganello /s/ Robin J. Adams - ------------------------- ------------------------- Timothy M. Manganello Robin J. Adams Chairman and Executive Vice President, Chief Executive Officer Chief Financial Officer & Chief Administrative Officer March 7, 2005 To The Board of Directors and Stockholders of BorgWarner Inc.: We have audited the consolidated balance sheets of BorgWarner Inc. and Consolidated Subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of operations, cash flows, and stockholders' equity and comprehensive income for each of the three years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of BorgWarner Inc. and Consolidated Subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 7, 2005 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. /s/ Deloitte & Touche LLP Detroit, Michigan March 7, 2005 Consolidated Statements of Operations 36

millions of dollars, except per share amounts For the Year Ended December 31, 2004 2003 2002 - ------------------------------------------------------------------------------------------------------------- Net sales $3,525.3 $3,069.2 $2,731.1 Cost of sales 2,874.2 2,482.5 2,176.5 ---------------------------------- Gross profit 651.1 586.7 554.6 Selling, general and administrative expenses 339.0 316.9 303.5 Other, net 3.0 (0.1) (0.9) ---------------------------------- Operating income 309.1 269.9 252.0 Equity in affiliates earnings, net of tax (29.2) (20.1) (19.5) Interest expense and finance charges 29.7 33.3 37.7 ---------------------------------- Earnings before income taxes 308.6 256.7 233.8 Provision for income taxes 81.2 73.2 77.2 Minority interest, net of tax 9.1 8.6 6.7 ---------------------------------- Net earnings before cumulative effect of accounting change 218.3 174.9 149.9 Cumulative effect of change in accounting principle, net of tax -- -- (269.0) ---------------------------------- Net earnings/(loss) $ 218.3 $ 174.9 $(119.1) ---------------------------------- Earnings/(loss) per share -- basic: Earnings per share before cumulative effect of accounting change $ 3.91 $ 3.23 $ 2.82 Cumulative effect of change in accounting principle -- -- (5.05) ---------------------------------- Earnings/(loss) per share -- basic $ 3.91 $ 3.23 $ (2.23) ---------------------------------- Earnings/(loss) per share -- diluted: Earnings per share before cumulative effect of accounting change $ 3.86 $ 3.20 $ 2.79 Cumulative effect of change in accounting principle -- -- (5.01) ---------------------------------- Earnings/(loss) per share -- diluted $ 3.86 $ 3.20 $ (2.22) ---------------------------------- Average shares outstanding (thousands): Basic 55,872 54,116 53,250 Diluted 56,537 54,604 53,708

See Accompanying Notes to Consolidated Financial Statements. Consolidated Balance Sheets BorgWarner Inc. and Consolidated Subsidiaries 37

millions of dollars December 31, 2004 2003 - -------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 229.7 $ 113.1 Receivables 499.1 414.9 Inventories 223.4 201.3 Deferred income taxes 22.6 32.8 Investment in business held for sale 44.2 32.0 Prepayments and other current assets 55.3 44.2 ------------------------- Total current assets 1,074.3 838.3 Land 45.0 42.3 Buildings 358.2 327.4 Machinery and equipment 1,352.3 1,216.0 Capital leases 1.1 2.8 Construction in progress 103.0 77.2 ------------------------- 1,859.6 1,665.7 Less accumulated depreciation 782.4 680.4 ------------------------- Net property, plant and equipment 1,077.2 985.3 Tooling, net of amortization 102.1 90.5 Investments and advances 193.7 177.3 Goodwill 860.8 852.0 Other noncurrent assets 221.0 197.1 ------------------------- Total other assets 1,377.6 1,316.9 ------------------------- Total assets $3,529.1 $3,140.5 ------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable and current portion of long-term debt $ 16.5 $ 10.0 Accounts payable and accrued expenses 608.0 474.0 Income taxes payable 39.3 -- ------------------------- Total current liabilities 663.8 484.0 Long-term debt 568.0 645.5 Long-term liabilities: Retirement-related liabilities 498.0 503.0 Other 242.9 230.4 ------------------------- Total long-term liabilities 740.9 733.4 Minority interest in consolidated subsidiaries 22.2 17.2 Capital stock: Preferred stock, $0.01 par value; authorized shares: 5,000,000; none issued -- -- Common stock, $0.01 par value; authorized shares: 150,000,000; issued shares: 2004, 56,361,167 and 2003, 55,229,854; outstanding shares: 2004, 56,357,183; 2003, 55,157,190 0.6 0.3 Non-voting common stock, $0.01 par value; authorized shares: 25,000,000; none issued and outstanding -- -- Capital in excess of par value 797.1 756.3 Retained earnings 681.4 491.3 Accumulated other comprehensive income 55.2 14.0 Common stock held in treasury, at cost: 2004, 3,984 shares; 2003, 72,664 shares (0.1) (1.5) ------------------------- Total stockholders' equity 1,534.2 1,260.4 ------------------------- Total liabilities and stockholders' equity $3,529.1 $3,140.5 -------------------------

See Accompanying Notes to Consolidated Financial Statements. Consolidated Statements of Cash Flows 38

millions of dollars For the Year Ended December 31, 2004 2003 2002 - -------------------------------------------------------------------------------------------------------------- OPERATING Net earnings/(loss) $ 218.3 $ 174.9 $(119.1) Adjustments to reconcile net earnings/(loss) to net cash flows from operations: Non-cash charges (credits) to operations: Depreciation 138.8 124.5 108.1 Amortization of tooling 38.2 36.8 29.3 Cumulative effect of change in accounting principle, net of tax -- -- 269.0 Employee retirement benefits funded with common stock 25.8 12.9 20.8 Deferred income tax provision 13.8 40.0 30.4 Equity in affiliate earnings, net of dividends received, minority interest and other 5.8 (3.7) (4.1) ---------------------------------- Net earnings adjusted for non-cash charges 440.7 385.4 334.4 Changes in assets and liabilities, net of effects of divestitures: (Increase) in receivables (60.4) (90.4) (67.4) (Increase) in inventories (12.7) (9.1) (29.3) (Increase) decrease in prepayments (7.0) 7.3 (3.4) Increase (decrease) in accounts payable and accrued expenses 113.1 (0.3) (14.7) Increase (decrease) in income taxes payable 36.0 (0.2) 14.1 Net change in other long-term assets and liabilities (83.1) 14.2 27.7 ---------------------------------- Net cash provided by operating activities 426.6 306.9 261.4 INVESTING Capital expenditures (204.9) (172.0) (138.4) Tooling outlays, net of customer reimbursements (47.5) (42.4) (27.7) Net proceeds from asset disposals 4.2 8.0 12.3 Proceeds from sale of businesses -- 5.4 3.3 Tax refunds related to businesses sold -- -- 20.5 Contingent valuation payment on acquired business -- (12.8) -- Investment in unconsolidated subsidiary (9.0) (14.4) -- ---------------------------------- Net cash used in investing activities (257.2) (228.2) (130.0) FINANCING Net increase (decrease) in notes payable 5.3 (5.5) (22.8) Additions to long-term debt 0.6 0.3 2.3 Repayments of long-term debt (61.8) (16.1) (85.3) Payments for purchase of treasury stock -- (2.5) (18.1) Proceeds from stock options exercised 14.4 39.3 9.8 Dividends paid (27.9) (19.4) (16.0) ---------------------------------- Net cash used in financing activities (69.4) (3.9) (130.1) Effect of exchange rate changes on cash and cash equivalents 16.6 1.7 2.4 ---------------------------------- Net increase in cash and cash equivalents 116.6 76.5 3.7 Cash and cash equivalents at beginning of year 113.1 36.6 32.9 ---------------------------------- Cash and cash equivalents at end of year $ 229.7 $ 113.1 $ 36.6 ---------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION Net cash paid/(refunded) during the year for: Interest $ 29.3 $ 34.5 $ 39.5 Income taxes 35.0 24.4 (11.0) Non-cash financing transactions: Issuance of common stock for Executive Stock Performance Plan $ 1.7 $ 3.3 $ 1.2 Issuance of restricted common stock for non-employee directors 0.3 -- --

See Accompanying Notes to Consolidated Financial Statements. Consolidated Statements of Stockholders' Equity and Comprehensive Income BorgWarner Inc. and Consolidated Subsidiaries 39

millions of dollars --------------------------------------------------------------------------------- Comprehensive Number of shares Stockholders' equity income/(loss) ------------------- ------------------------------------------------------------------- ------------- Accumulated Issued Common Issued Capital in Management other common stock in common excess of Treasury shareholder Retained comprehensive stock treasury stock par value stock notes earnings income/(loss) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, January 1, 2002 54,079,936 (1,349,598) $ 0.3 $ 715.7 $(27.6) $ (2.0) $ 470.9 $(53.1) Purchase of treasury stock -- (770,000) -- (18.1) -- -- -- -- Dividends declared -- -- -- -- -- -- (16.0) -- -- Shares issued under stock incentive plans -- 435,264 -- 0.9 8.9 -- -- -- -- Shares issued under executive stock plan -- 46,560 -- 0.3 0.9 -- -- -- -- Shares issued under retirement savings plans 717,846 -- -- 20.8 -- -- -- -- -- Net loss -- -- -- -- -- -- (119.1) -- $(119.1) Adjustment for minimum pension liability -- -- -- -- -- -- -- (42.3) (42.3) Currency translation and hedge instruments adjustment -- -- -- -- -- -- -- 40.9 40.9 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 54,797,782 (1,637,77) $ 0.3 $ 737.7 $(35.9) $ (2.0) $335.80 $(54.5) $(120.5) 2002 Purchase of treasury stock -- (83,860) -- (2.5) -- -- -- -- Dividends declared -- -- -- -- -- -- (19.4) -- -- Management shareholder notes -- -- -- -- -- 2.0 -- -- -- Shares issued under stock incentive plans -- 1,517,208 -- 5.3 34.0 -- -- -- -- Shares issued under executive stock plan -- 131,762 -- 0.4 2.9 -- -- -- -- Shares issued under retirement savings plans 432,072 -- -- 12.9 -- -- -- -- -- Net income -- -- -- -- -- -- 174.9 -- $174.9 Adjustment for minimum pension liability -- -- -- -- -- -- -- 0.7 0.7 Currency translation and hedge instruments -- -- -- -- -- -- -- 67.8 67.8 adjustment - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 55,229,854 (72,664) $ 0.3 $ 756.3 $ (1.5) $ -- $ 491.3 $14.0 $243.4 31, 2003 Dividends declared -- -- -- -- -- -- (27.9) -- -- Stock split -- -- 0.3 -- -- -- (0.3) -- -- Shares issued under stock incentive plans 523,994 68,680 -- 13.0 1.4 -- -- -- -- Shares issued under executive stock plan 41,252 -- -- 1.7 -- -- -- -- -- Restricted shares issued under stock incentive plan 6,400 -- -- 0.3 -- -- -- -- -- Shares issued under retirement savings 559,667 -- -- 25.8 -- -- -- -- -- plans Net income -- -- -- -- -- -- 218.3 -- $218.3 Adjustment for minimum pension liability -- -- -- -- -- -- -- 12.8 12.8 Currency translation and hedge instruments -- -- -- -- -- -- -- 28.4 28.4 adjustment - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 56,361,167 (3,984) $ 0.6 $ 797.1 $ (0.1) $ -- $681.4 $55.2 $259.5 31, 2004 - ------------------------------------------------------------------------------------------------------------------------------------

See Accompanying Notes to Consolidated Financial Statements. Notes to Consolidated Financial Statements 40 INTRODUCTION BorgWarner Inc. and Consolidated Subsidiaries (the "Company") is a leading global supplier of highly engineered systems and components primarily for powertrain applications. These products are manufactured and sold worldwide, primarily to original equipment manufacturers of passenger cars, sport-utility vehicles, trucks, commercial transportation products and industrial equipment. Our products fall into two reportable operating segments: Drivetrain and Engine. NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following paragraphs briefly describe the Company's significant accounting policies. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements include all significant majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS Cash and cash equivalents are valued at cost, which approximates fair market value. It is the Company's policy to classify investments with original maturities of three months or less as cash and cash equivalents. ACCOUNTS RECEIVABLE The Company securitizes and sells certain receivables through third party financial institutions without recourse. The amount sold can vary each month based on the amount of underlying receivables. In the fourth quarter of 2003, the Company reduced the maximum size of the facility from $90 million to $50 million. In the fourth quarter of 2002, the Company reduced the maximum size of the facility from $120 million to $90 million. During the year ended December 31, 2004, total cash proceeds from sales of accounts receivable were $600 million. The Company paid servicing fees of $0.9 million, $1.3 million, and $2.5 million in 2004, 2003, and 2002, respectively, related to these receivables. These amounts are recorded in interest expense and finance charges in the Consolidated Statements of Operations. At December 31, 2004 and 2003, the Company had sold $50 million of receivables under a Receivables Transfer Agreement for face value without recourse. INVENTORIES Inventories are valued at the lower of cost or market. Cost of U.S. inventories is determined by the last-in, first-out (LIFO) method, while the foreign operations use the first-in, first-out (FIFO) or average-cost methods. Inventory held by U.S. operations was $106.1 million in 2004 and $97.1 million in 2003. Such inventories, if valued at current cost instead of LIFO, would have been greater by $6.6 million in 2004 and $3.6 million in 2003. PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION Property, plant and equipment are valued at cost less accumulated depreciation. Expenditures for maintenance, repairs and renewals of relatively minor items are generally charged to expense as incurred. Renewals of significant items are capitalized. Depreciation is computed generally on a straight-line basis over the estimated useful lives of the assets. Useful lives for buildings range from 15 to 40 years and useful lives for machinery and equipment range from 3 to 12 years. For income tax purposes, accelerated methods of depreciation are generally used. GOODWILL AND OTHER INTANGIBLE ASSETS The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. Under SFAS No. 142, goodwill is no longer amortized; however, it must be tested for impairment at least annually. Under the transitional provisions of this statement, the Company allocated goodwill to its reporting units and performed the two-step impairment analysis. The fair value of the Company's businesses used in determination of the goodwill impairment was computed using the expected present value of associated future cash flows. As a result of this analysis, the Company determined that goodwill associated with its Emissions/Thermal Systems business unit was impaired due to fundamental changes in their served markets, particularly the medium and heavy truck markets, and weakness at a major customer. A resulting pre-tax charge of $345 million, $269 million after tax, was recorded. The impairment loss was recorded in the first quarter of 2002 as a cumulative effect of change in accounting principle. The changes in the carrying amount of goodwill for the twelve months ended December 31, 2002, 2003 and 2004, are as follows:

millions of dollars Drivetrain Engine Total - --------------------------------------------------------------------------- Balance at January 1, 2002 $ 133.7 $1,026.9 $1,160.6 Change in accounting principle -- (345.0) (345.0) Translation adjustment -- 11.4 11.4 --------------------------------------------- Balance at December 31, 2002 $ 133.7 $ 693.3 $ 827.0 Contingent valuation payment on acquired business -- 12.8 12.8 Translation adjustment 0.6 11.6 12.2 --------------------------------------------- Balance at December 31, 2003 $ 134.3 $ 717.7 $ 852.0 Translation adjustment 0.3 8.5 8.8 --------------------------------------------- Balance at December 31, 2004 $ 134.6 $ 726.2 $ 860.8 ---------------------------------------------

In the fourth quarter of each year, or when events and circumstances warrant such a review, the Company reviews the goodwill for all of its reporting units for impairment. This review requires us to make significant assumptions and estimates about the extent and timing of future cash flows, discount rates and growth rates. The cash flows are estimated over a significant future period of time, which makes those estimates and assumptions subject to an even higher degree of uncertainty. We also utilize market valuation models and other financial ratios, which require us to make certain assumptions and estimates regarding the applicability of those models to our assets and businesses. We believe that the assumptions and estimates used to determine the estimated fair values of each of our reporting units are reasonable. However, different assumptions could materially affect the estimated fair value. The goodwill impairment test was performed in November 2004. The results of that analysis did not indicate an impairment of the book value of the Company's goodwill. BorgWarner Inc. and Consolidated Subsidiaries 41 The Company had intangible assets, primarily trade names, with a cost of $14.7 million, less accumulated amortization of $9.8 million and $8.7 million at December 31, 2004 and 2003, respectively. The intangible assets are being amortized on a straightline basis over their legal lives, which range from 10 to 15 years. Annual amortization expense recognized was $1.1 million in each of the years 2004, 2003, and 2002. The estimated future annual amortization expense for each of the successive years 2005 through 2008 is $1.2 million. REVENUE RECOGNITION The Company recognizes revenue upon shipment of product when title and risk of loss pass to the customer. Although the Company may enter into long-term supply agreements with its major customers, each shipment of goods is treated as a separate sale and the price is not fixed over the life of the agreements. FINANCIAL INSTRUMENTS Financial instruments consist primarily of investments in cash, short-term securities and receivables, and obligations under accounts payable, and debt instruments. The Company believes that the fair value of the financial instruments approximates the carrying value, except as noted in Note 6. The Company received corporate bonds with a face value of $30.3 million as partial consideration for the sales of Kuhlman Electric and Coleman Cable in 1999. These bonds were recorded at their estimated fair market value of $12.9 million using valuation techniques that considered cash flows discounted at current market rates and management's best estimates of credit quality. In 2001, the sale agreement with Coleman Cable was renegotiated, resulting in the exchange of the corporate bonds along with a purchase price receivable, for $3 million in cash and a $2 million note, which was fully collected in 2002. During the first quarter of 2004 the Kuhlman Electric agreement was renegotiated whereby the Company received a payment of $2.5 million and a new note from Kuhlman Electric Corporation. The maturity of this new note is April 2012. The face value of the note is $4.5 million at December 31, 2004. DERIVATIVE FINANCIAL INSTRUMENTS The Company recognizes that certain normal business transactions generate risk. Examples of risks include exposure to exchange rate risk related to transactions denominated in currencies other than the functional currency, changes in cost of major raw materials and supplies, and changes in interest rates. It is the objective and responsibility of the Company to assess the impact of these transaction risks, and offer protection from selected risks through various methods including financial derivatives. All derivative instruments held by the Company are designated as hedges, have high correlation with the underlying exposure and are highly effective in offsetting underlying price movements. Accordingly, gains and losses from changes in derivative fair values are matched with the underlying transactions. The Company does not engage in any derivative transactions for purposes other than hedging specific risks. FOREIGN CURRENCY The financial statements of foreign subsidiaries are translated to U.S. Dollars using the period-end exchange rate for assets and liabilities and an average exchange rate for each period for revenues, expenses, and capital expenditures. The local currency is the functional currency for substantially all the Company's foreign subsidiaries. Translation adjustments for foreign subsidiaries are recorded as a component of accumulated other comprehensive income in stockholders' equity. PRODUCT WARRANTIES The Company provides warranties on some of its products. The warranty terms are typically from one to three years. Provisions for estimated expenses related to product warranty are made at the time products are sold. These estimates are established using historical information about the nature, frequency, and average cost of warranty claims. Management actively studies trends of warranty claims and takes action to improve product quality and minimize warranty claims. Management believes that the warranty accrual is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the accrual. The accrual is represented in both long-term and short-term liabilities on the balance sheet. Below is a table that shows the activity in the warranty accrual accounts:

millions of dollars 2004 2003 2002 - ------------------------------------------------------------------------- Beginning balance $ 28.7 $ 23.7 $ 19.5 Provisions 10.2 12.4 14.2 Payments (12.5) (7.4) (10.0) ---------------------------------------- Ending balance $ 26.4 $ 28.7 $ 23.7 ---------------------------------------- Classified in the Consolidated Balance Sheets as: Accounts payable and accrued expenses $ 16.1 $ 17.6 $ 14.4 ---------------------------------------- Other long term liability $ 10.3 $ 11.1 $ 9.3 ----------------------------------------

STOCK BASED COMPENSATION SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," encourage, but do not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation in accordance with Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, no compensation cost has been recognized for fixed stock options because the exercise prices of the stock options equal the market value of the Company's common stock at the date of grant, which is the measurement date. Further disclosure about the Company's stock compensation plans can be found in Note 9. The following table illustrates the effect on the Company's net earnings/(loss) and net earnings/(loss) per share if the Company had applied the fair value recognition provision of SFAS No. 123.

millions of dollars, except per share data 2004 2003 2002 - ------------------------------------------------------------------------------ Net earnings/(loss), as reported $ 218.3 $ 174.9 $ (119.) Add: Stock-based employee compensation expense included in net income, net of income tax 1.6 2.7 4.5 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of income tax (7.7) (7.7) (10.7) ---------------------------------- Pro forma net earnings/(loss) $ 212.2 $ 169.9 $ (125.3) ---------------------------------- Earnings/(loss) per share: Basic - as reported $ 3.91 $ 3.23 $ (2.23) Basic - pro forma $ 3.80 $ 3.14 $ (2.36) Diluted - as reported $ 3.86 $ 3.20 $ (2.22) Diluted - pro forma $ 3.75 $ 3.11 $ (2.34)

Notes to Consolidated Financial Statements 42 NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN) No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51," which was revised in December 2003. FIN No. 46R requires that the assets, liabilities and results of the activity of variable interest entities be consolidated into the financial statements of the entity that has the controlling financial interest. FIN No. 46R also provides the framework for determining whether a variable interest entity should be consolidated. For the Company, this Interpretation, as revised, was effective January 1, 2004. The Company has no variable interest entities required to be consolidated as a result of adopting FIN No. 46R. In December 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (Medicare Act) introduced a prescription drug benefit under Medicare, as well as a federal subsidy to sponsors of retiree health care benefit plans. In January 2004, the FASB issued FASB Staff Position (FSP) No. 106-1, "Accounting Disclosure Requirements Related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003." FSP 106-1 permits a sponsor of a post retirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Medicare Act if there is insufficient data, time or guidance available to ensure appropriate accounting. The Company is a sponsor of post retirement health care plans that provide prescription benefits and, in accordance with the one-time election under FSP 106-1, elected to defer accounting for the Medicare Act. In May 2004, the FASB issued FSP No. 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," which supersedes FSP 106-1, to address the accounting and disclosure requirements related to the Medicare Act. The FSP was effective for the Company beginning with its third quarter ended September 30, 2004. The effect of the adoption was to reduce the Company's 2004 post retirement benefits expense by $6.8 million. In November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory Costs" which is an amendment of ARB No.43, Chapter 4. This statement provides clarification of accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. Generally, this statement requires that those items be recognized as current period charges. SFAS 151 will be effective for the Company on January 1, 2006. The Company is currently evaluating the impact that the adoption of SFAS 151 will have on its consolidated financial position, results of operations and cash flows. In December 2004, the FASB issued FSP 109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" (AJCA), and FAS 109-2 "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the AJCA". These two FSPs provide guidance on the application of the new provisions of the AJCA, which was signed into law on October 22, 2004. The AJCA provides a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. In return, the AJCA provides for a two-year phase-out of the existing extra-territorial income exclusion (ETI) for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union. Under the guidance in FSP 109-1, the deduction will be treated as a "special deduction" as described in SFAS 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on our tax return. The Company expects the net effect of the phase out of the ETI and the phase in of this new deduction will not have a material impact on its effective tax rate. FSP 109-2 provides guidance on the accounting for the deduction of 85% of certain foreign earnings that are repatriated, as defined in the AJCA. The Company may elect to apply this provision to qualifying earnings repatriations in 2005. Under guidance set forth in FAS 109-2, the Company is allowed time beyond the financial reporting period of enactment to evaluate the effect of the AJCA on its plan for reinvestment or repatriation of foreign. The Company has started an evaluation of the effects of the repatriation provision; however, the Company does not expect to be able to complete this evaluation until after the U.S. Congress or the Treasury Department provides additional clarifying language on key elements of the provision. The Company expects to complete its evaluation of the effects of the repatriation provision within a reasonable period of time following the publication of the additional clarifying language. The range of possible amounts that the Company is considering for repatriation under this provision is between zero and $74 million. The related range of income tax effects of such repatriation cannot be reasonably estimated until guidance is issued by Congress or the Treasury Department. In December 2004, the FASB issued SFAS No. 123R, "Shared-Based Payment" which requires companies to measure and recognize compensation expense for all share-based payments at fair value. Share-based payments include stock option grants and certain transactions under other Company stock plans. The Company grants options to purchase common stock of the Company to some of its employees and directors under various plans at prices equal to the market value of the stock on the dates the options are granted. SFAS 123R will be effective for the Company beginning July 1, 2005. The Company is currently evaluating the impact that the adoption of SFAS 123R will have on its consolidated financial position, results of operations and cash flows. RECLASSIFICATION Certain prior period amounts have been reclassified to conform to the current year's presentation and are not material to the Company's Consolidated Financial Statements. BorgWarner Inc. and Consolidated Subsidiaries 43 NOTE 2 RESEARCH AND DEVELOPMENT COSTS The Company spent approximately $123.1 million, $118.2 million, and $109.1 million in 2004, 2003 and 2002, respectively, on research and development (R&D) activities. R&D costs are included primarily in the selling, general, and administrative expenses of the Consolidated Statements of Operations. Not included in these amounts were customer-sponsored R&D activities of approximately $31.8 million, $22.3 million, and $14.2 million in 2004, 2003, and 2002, respectively. NOTE 3 OTHER INCOME Items included in other income consist of:

millions of dollars Year Ended December 31, 2004 2003 2002 - ------------------------------------------------------------------------- Gain on sale of business $ -- $ 0.5 $ -- Interest income 0.7 0.8 1.7 Loss on asset disposals, net (3.5) (1.7) (1.5) Other (0.2) 0.5 0.7 -------------------------------------------- $ (3.0) $ 0.1 $ 0.9 --------------------------------------------

NOTE 4 INCOME TAXES Earnings before income taxes and the provision for income taxes are presented in the following table. The earnings before income taxes amounts for 2003 and 2002 have been presented to conform to the 2004 U.S. versus non-U.S. presentation.

2004 2003 2002 millions of dollars U.S. Non-U.S. Total U.S. Non-U.S. Total U.S. Non-U.S. Total - ----------------------------------------------------------------------------------------------------------- Earnings before taxes $117.8 $190.8 $308.6 $120.5 $136.2 $256.7 $163.7 $70.1 233.8 ----------------------------------------------------------------------------------- Provision for income taxes: Current: Federal/foreign 1.4 63.8 65.2 18.5 13.1 31.6 11.1 10.6 21.7 State 2.2 -- 2.2 1.6 -- 1.6 3.1 -- 3.1 ----------------------------------------------------------------------------------- 3.6 63.8 67.4 20.1 13.1 33.2 14.2 10.6 24.8 Deferred 11.1 2.7 13.8 18.5 21.5 40.0 44.8 7.6 52.4 ----------------------------------------------------------------------------------- Total provision for income taxes $ 14.7 $ 66.5 $ 81.2 $ 38.6 $ 34.6 $ 73.2 $ 59.0 $18.2 $77.2 ----------------------------------------------------------------------------------- Effective tax rate 12.4% 34.9% 26.3% 32.0% 25.4% 28.5% 36.0% 26.0% 33.0% -----------------------------------------------------------------------------------

The provision for income taxes resulted in an effective tax rate for 2004 of 26.3% compared with rates of 28.5% in 2003 and 33.0% in 2002. Our effective tax rates have been lower than the standard federal and state tax rates due to the realization of certain R&D and foreign tax credits; foreign rates, which differ from those in the U.S.; and offset by non-deductible expenses. In addition, the Company made an $11.4 million year-end adjustment to various tax accounts due to changes in circumstances related to various tax items, including changes in tax laws. The year-end adjustment resulted in a reduction in the U.S. effective tax rate for 2004. The analysis of the variance of income taxes as reported from income taxes computed at the U.S. statutory rate for consolidated operations is as follows:

millions of dollars 2004 2003 2002 - ------------------------------------------------------------------------- Income taxes at U.S. statutory rate of 35% $ 108.0 $ 89.8 $ 81.8 Increases (decreases) resulting from: Income from non-U.S. sources including withholding taxes 3.6 (8.5) (2.2) Business tax credits, net (6.2) (6.3) (4.7) Affiliate earnings (10.2) (7.0) (6.8) Non-temporary differences and other (14.0) 5.2 9.1 ----------------------------------------- Provision for income taxes as reported $ 81.2 $ 73.2 $ 77.2 -----------------------------------------

Notes to Consolidated Financial Statements 44 Following are the gross components of deferred tax assets and liabilities as of December 31, 2004 and 2003:

millions of dollars 2004 2003 - -------------------------------------------------------------------------- Current deferred tax assets: Foreign tax credits $ 9.0 $ 7.1 Research and development credits 6.0 7.6 Employee related 5.1 5.8 Warranties -- 5.7 Other 2.5 6.6 ---------------------------------- Total current deferred tax assets $ 22.6 $ 32.8 ---------------------------------- Non-current deferred tax assets: Pension and other post retirement benefits $ 92.1 $ 90.4 Other comprehensive income 36.3 33.1 Employee related 9.0 8.7 Goodwill 3.5 13.9 Litigation and environmental 9.2 7.9 Warranties 7.7 -- Foreign tax credits 2.6 -- Research and development credits 4.9 -- Other 5.3 1.0 ---------------------------------- Non-current deferred tax assets $ 170.6 $ 155.0 Non-current deferred tax liabilities: Fixed assets $(163.4) $ (163.8) Lease obligation - production equipment (9.0) -- Other (7.0) -- ---------------------------------- Non-current deferred tax liabilities $(179.4) $ (163.8) ---------------------------------- Net deferred tax asset (current and non-current) $ 13.8 $ 24.0 ----------------------------------

The deferred tax assets (current and non-current) and liabilities recognized in the Company's Consolidated Balance Sheets are as follows:

millions of dollars 2004 2003 - -------------------------------------------------------------------------- Deferred income taxes - current assets $ 22.6 $ 32.8 Other non-current assets 51.8 48.5 Other long-term liabilities (60.6) (57.3) ---------------------------------- Net deferred tax asset (current and non-current) $ 13.8 $ 24.0 ----------------------------------

The other non-current assets are primarily comprised of amounts from the U.S., France and Korea. The other long-term liabilities are primarily comprised of amounts from Germany, Italy, U.K., Japan, and Canada. The non-current deferred tax asset in 2003 of $48.5 million was previously presented as a reduction of the non-current deferred tax liability; this amount has been reclassified to other non-current assets on the 2003 Consolidated Balance Sheets and the reclassification is not material to the Company's Consolidated Financial Statements. The foreign tax credits will expire beginning in 2012 through 2014. The R&D tax credits will expire beginning in 2022 through 2024. The company also has deferred tax assets for minimum tax credits of $3.2 million, which can be carried forward indefinitely. No deferred income taxes have been provided on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries or foreign corporate joint ventures totaling $353.9 million in 2004, as these amounts are essentially permanent in nature. The excess amount will become taxable on a repatriation of assets or sale or liquidation of the investment. It is not practicable to determine the unrecognized deferred tax liability on the excess amount because the actual tax liability on the excess amount, if any, is dependent on circumstances existing when remittance occurs. NOTE 5 BALANCE SHEET INFORMATION Detailed balance sheet data are as follows:

millions of dollars December 31, 2004 2003 - -------------------------------------------------------------------------- Receivables: Customers $ 453.9 $ 374.6 Other 56.1 46.0 ------------------------ Gross receivables 510.0 420.6 Less allowance for losses 10.9 5.7 ------------------------ Net receivables $ 499.1 $ 414.9 ------------------------ Inventories: Raw material $ 104.6 $ 95.5 Work in progress 69.8 65.1 Finished goods 49.0 40.7 ------------------------ Total inventories $ 223.4 $ 201.3 ------------------------ Investments and advances: NSK-Warner $ 188.2 $ 172.1 Other 5.5 5.2 ------------------------ Total investments and advances $ 193.7 $ 177.3 ------------------------ Other non-current assets: Deferred pension assets $ 113.1 $ 90.8 Product liability insurance receivable 27.3 27.9 Deferred income taxes, net 51.8 48.5 Other 28.8 29.9 ------------------------ Total other non-current assets $ 221.0 $ 197.1 ------------------------ Accounts payable and accrued expenses: Trade payables $ 390.6 $ 300.0 Payroll and related 74.5 63.7 Insurance 25.2 24.0 Warranties 16.1 17.6 Product liability accrual 13.5 13.7 Other 88.1 55.0 ------------------------ Total accounts payable and accrued expenses $ 608.0 $ 474.0 ------------------------ Other long-term liabilities: Environmental accruals $ 25.7 $ 19.6 Warranties 10.3 11.1 Deferred income taxes, net 60.6 57.3 Product liability accrual 27.3 27.9 Other 119.0 114.5 ------------------------ Total other long-term liabilities $ 242.9 $ 230.4 ------------------------

NSK-WARNER The Company has a 50% interest in NSK-Warner, a joint venture based in Japan that manufactures automatic transmission components. The Company's share of the earnings or losses reported by NSK-Warner is accounted for using the equity method of accounting. NSK-Warner has a fiscal year-end of March 31. The Company's equity in the earnings of NSK-Warner consists of the 12 months ended November 30 so as to reflect earnings on as current a basis as is reasonably BorgWarner Inc. and Consolidated Subsidiaries 45 feasible. NSK-Warner is the joint venture partner with a 40% interest in the Drivetrain Group's Korean subsidiary, BorgWarner Transmission Systems Korea Inc. Dividends received from NSK-Warner were $23.9 million in 2004, $9.7 million in 2003, and $8.4 million in 2002. Following are summarized financial data for NSK-Warner, translated using the ending or periodic rates as of and for the years ended November 30, 2004, 2003 and 2002 (unaudited):

millions of dollars 2004 2003 2002 - -------------------------------------------------------------------------- Balance sheets: Current assets $ 242.3 $ 210.7 $ 176.0 Non-current assets 180.7 173.3 151.0 Current liabilities 126.2 108.8 85.2 Non-current liabilities 18.5 14.8 10.7 Statements of operations: Net sales $ 443.5 $ 356.5 $ 303.8 Gross profit 97.3 71.4 69.8 Net income 52.6 34.5 34.0

The equity of NSK-Warner as of November 30, 2004, was $278.3 million, there was no debt and their cash and securities were $92.4 million. Purchases from NSK-Warner for the years ended December 31, 2004, 2003 and 2002 were $19.9 million, $16.9 million and $15.1 million, respectively. NOTE 6 NOTES PAYABLE AND LONG-TERM DEBT Following is a summary of notes payable and long-term debt. The weighted average interest rate on all borrowings for 2004 and 2003 was 5.1% and 4.9%, respectively.

millions of dollars 2004 2003 December 31, Current Long-Term Current Long-Term - ------------------------------------------------------------------------------------------------------------------------------------ Bank borrowings and other $ 9.2 $ 6.1 $ 2.9 $ 42.5 Term loans due through 2011 (at an average rate of 3.3% in 2004 and 3.3% in 2003) 7.3 26.9 7.1 31.4 7% Senior Notes due 2006, net of unamortized discount ($139 million converted to floating rate of 4.5% by interest rate swap at December 31, 2004) -- 139.0 -- 139.4 6.5% Senior Notes due 2009, net of unamortized discount ($100 million converted to floating rate of 5.2% by interest rate swap at December 31, 2004) -- 136.1 -- 164.7 8% Senior Notes due 2019, net of unamortized discount ($75 million converted to floating rate of 5.4% by interest rate swap at December 31, 2004) -- 133.9 -- 133.9 7.125% Senior Notes due 2029, net of unamortized discount -- 119.1 -- 122.1 ------------------------------------------------ Carrying amount of notes payable and long-term debt 16.5 561.1 10.0 634.0 Impact of derivatives on debt(a) -- 6.9 -- 11.5 ------------------------------------------------ Total notes payable and long-term debt $ 16.5 $ 568.0 $ 10.0 $ 645.5 ------------------------------------------------

(a) The $11.5 million impact of derivatives on debt from the interest rate swaps as of December 31, 2003 has been reclassified to long-term debt with a corresponding non-current asset. The reclassification is not material to the Company's Consolidated Financial Statements. INVESTMENT IN BUSINESS HELD FOR SALE The Company's investment in Aktiengesellschaft Kuhnle, Kopp & Kausch (AGK), an unconsolidated subsidiary of the Company, has been recorded in "Investment in business held for sale" in the Consolidated Balance Sheets. Effective February 17, 2005, the Company signed a Share Transfer Agreement (STA) for the sale of its 95.42% interest in AGK with Turbo Group GmbH. The STA will become effective no later than seven (7) banking days after receipt of approval from both the German Federal Cartel Office and the Austrian merger control authority. The transaction is anticipated to close before March 31, 2005. The proceeds, net of closing costs, are expected to be approximately Euro 39.8 million. The investment is carried on a cost basis, with dividends received from AGK applied against the carrying value of the asset. Following is summarized balance sheet data as of September 30, 2004 and 2003 for AGK (unaudited), which is the latest available. The assets and liabilities reported in Euros were translated using the respective year-end exchange rate:

millions of dollars 2004 2003 - --------------------------------------------------------------------------- Current assets $ 132.3 $ 79.9 Non-current assets 65.7 57.9 Current liabilities 79.7 43.7 Non-current liabilities 54.0 41.6

Notes to Consolidated Financial Statements 46

Annual principal payments required as of December 31, 2004 are as follows (in millions of dollars): 2005 $ 16.5 2006 151.4 2007 6.7 2008 6.7 2009 146.0 after 2009 259.5 --------------------- Total payments 586.8 Less: Unamortized discounts (2.3) --------------------- Total $ 584.5 ---------------------

The Company has a revolving credit facility, which provides for borrowings up to $600 million through July 2009. This new facility effective July 22, 2004 replaced the Company's previous facility of $350 million. At December 31, 2004 and December 31, 2003 there were no borrowings outstanding and no obligations under standby letters of credit under the facility. The credit agreement is subject to the usual terms and conditions applied by banks to an investment grade company. The Company was in compliance with all covenants at December 31, 2004 and expects to be compliant in future periods.

Interest Rates(b) Notional -------------------- Floating Interest Hedge Type Amount Receive Pay Rate Basis - ------------------------------------------------------------------------------------------------------------------------------- INTEREST RATE SWAPS(a) Fixed to floating Fair value $ 139 7.0% 4.5% 6 month LIBOREuro1.7% Fixed to floating Fair value $ 100 6.5% 5.2% 6 month LIBOREuro2.4% Fixed to floating Fair value $ 75 8.0% 5.4% 6 month LIBOREuro2.6% CROSS CURRENCY SWAP (MATURES IN 2006) Floating $ Net investment $ 125 4.2% -- 6 mo. USD LIBOREuro1.4% to floating E E 14,930 -- 1.7% 6 mo. JPY LIBOREuro1.6% CROSS CURRENCY SWAP (MATURES IN 2009) Floating $ Net investment $ 75 5.4% -- 6 mo. USD LIBOREuro2.6% to floating E E 57 -- 4.8% 6 mo. EURIBOREuro2.6% CROSS CURRENCY SWAP (MATURES IN 2019) Floating $ Net investment $ 75 5.4% -- 6 mo. USD LIBOREuro2.6% to floating E E 61 -- 4.8% 6 mo. EURIBOREuro2.6%

(a) The maturity of the swaps corresponds with the maturity of the hedged item as noted in the debt summary, unless otherwise indicated. (b) Interest rates are as of December 31, 2004. As of December 31, 2004 and December 31, 2003, the fair value of the fixed to floating interest rate swaps was $6.9 million and $11.5 million, respectively and are recorded in the Company's Consolidated Balance Sheets as Other non-current assets with a corresponding adjustment to the carrying value of the hedged debt. The change in fair value of the swaps exactly offsets the change in fair value of the hedged debt with no net impact on earnings. The cross currency swaps were recorded at their fair value of $(33.1) at December 31, 2004 and $(4.2) million at December 31, 2003. Fair value is based on quoted market prices for contracts with similar maturities and the ineffective portion of all swaps was not significant. NOTE 7 FINANCIAL INSTRUMENTS The Company's financial instruments include cash and cash equivalents, trade receivables, trade payables and notes payable. Due to the short-term nature of these instruments, the book value approximates fair value. The Company's financial instruments also include long-term debt, interest rate and currency swaps, commodity swap contracts, and foreign currency forward contracts. As of December 31, 2004 and 2003, the estimated fair values of the Company's senior unsecured notes totaled $589.0 million and $635.0 million, respectively. The estimated fair values were $60.9 million higher in 2004, and $74.9 million higher in 2003, than their respective carrying values. Fair market values are developed by the use of estimates obtained from brokers and other appropriate valuation techniques based on information available as of year-end. The fair value estimates do not necessarily reflect the values the Company could realize in the current markets. The Company manages its interest rate risk by balancing its exposure to fixed and variable rates while attempting to minimize its interest costs. The Company selectively uses interest rate swaps to reduce market value risk associated with changes in interest rates (fair value hedges). We also selectively use cross-currency swaps to hedge the foreign currency exposure associated with our net investment in certain foreign operations (net investment hedges). A summary of these instruments outstanding at December 31, 2004 follows (currency in millions): The Company also entered into certain commodity derivative instruments to protect against commodity price changes related to forecasted raw material and supplies purchases. The primary purpose of the commodity price hedging activities is to manage the volatility associated with these forecasted purchases. The Company utilizes forward and option contracts, which are designated as cash flow hedges. These instruments are intended to offset the effect of changes in commodity prices on forecasted purchases. As of December 31, 2004 the Company had commodity swap contracts with a total notional value of $3.4 million. The fair market value of the swap contracts was $0.4 million as of December 31, 2004, which is deferred in other comprehensive income and will be reclassified and matched into income as the underlying operating transactions are BorgWarner Inc. and Consolidated Subsidiaries 47 realized. As of December 31, 2003, the Company had commodity swap contracts with a total notional value of $1.1 million and a fair market value of $0.1 million as of December 31, 2003, which was deferred in other comprehensive income. During the twelve months ended December 31, 2004 and 2003, hedge ineffectiveness associated with these contracts was not significant. The Company uses foreign exchange forward contracts to protect against exchange rate movements for forecasted cash flows for purchases, operating expenses or sales transactions designated in currencies other than the functional currency of the operating unit. Most contracts mature in less than one year, however certain long-term commitments are covered by forward currency arrangements to protect against currency risk through the second quarter of 2009. Foreign currency contracts require the Company, at a future date, to either buy or sell foreign currency in exchange for the operating units local currency. At December 31, 2004 contracts were outstanding to buy or sell U.S. Dollars, Euros, British Pounds Sterling, Canadian Dollars and Hungarian Forints. Gains and losses arising from these contracts are unrealized in other comprehensive income and will be

Other post Pension benefits retirement benefits 2004 2003 2004 2003 millions of dollars U.S. Non-U.S. U.S. Non-U.S. - ----------------------------------------------------------------------------------------------------------------------------------- CHANGE IN PROJECTED BENEFIT OBLIGATION: Projected benefit obligation at beginning of year $ 316.5 $ 217.1 $ 283.2 $ 159.9 $ 537.4 $ 446.5 Service cost 2.4 9.3 2.5 7.5 6.0 5.3 Interest cost 17.3 11.5 18.5 9.5 28.8 29.7 Plan participants' contributions -- 0.3 -- 0.3 -- -- Actuarial (gain)/loss (8.3) 12.2 33.9 21.1 (2.1) 89.2 Currency translation -- 17.9 -- 24.7 -- -- Curtailments -- -- -- -- -- (0.8) Benefits paid (22.6) (8.1) (21.6) (5.9) (32.9) (32.5) --------------------------------------------------------------------------------- Projected benefit obligation at end of year $ 305.3 $ 260.2 $ 316.5 $ 217.1 $ 537.2 $ 537.4 --------------------------------------------------------------------------------- CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year $ 288.0 $ 103.4 $ 245.7 $ 77.8 Actual return on plan assets 34.7 8.9 52.9 15.1 Employer contribution 24.3 12.0 11.0 6.1 Plan participants' contribution -- 0.3 -- 0.3 Currency translation -- 8.2 -- 10.0 Benefits paid (22.6) (8.1) (21.6) (5.9) --------------------------------------------------------- Fair value of plan assets at end of year $ 324.4 $ 124.7 $ 288.0 $ 103.4 --------------------------------------------------------------------------------- FUNDED STATUS: Funded status at end of year $ 19.1 $ (135.5) $ (28.5) $ (113.7) $ (537.2) $ (537.4) Unrecognized net actuarial (gain) loss 79.1 57.2 101.2 45.2 203.7 214.4 Unrecognized transition obligation (asset) -- -- -- 0.2 -- -- Unrecognized prior service cost 7.5 0.3 9.0 0.4 (2.1) (2.3) --------------------------------------------------------------------------------- Net amount recognized $ 105.7 $ (78.0) $ 81.7 $ (67.9) $(335.6) $(325.3) --------------------------------------------------------------------------------- AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS CONSIST OF: Prepaid benefit cost $ 105.7 $ -- $ 81.7 $ -- $ -- $ -- Accrued benefit liability -- (78.0) -- (67.9) (335.6) (325.3) Additional minimum liability (63.2) (21.2) (80.5) (22.8) -- -- Intangible asset 7.2 0.2 8.7 0.4 -- -- Accumulated reduction in stockholders equity 56.0 21.0 71.8 22.4 -- -- --------------------------------------------------------------------------------- Net amount recognized $ 105.7 $ (78.0) $ 81.7 $ (67.9) $(335.6) $(325.3) --------------------------------------------------------------------------------- Total accumulated benefit obligation for all plans $ 301.8 $ 229.6 $ 316.2 $ 194.9

reclassified and matched into income as the underlying operating transactions are realized. As of December 31, 2004 unrealized gains amounted to $8.8 million, ($4.2 million maturing in less than one year) and unrealized losses amounted to $(4.1) million ($(3.2) million maturing in less than one year). As of December 31, 2003 unrealized gains amounted to $3.6 million and unrealized losses amounted to $(3.3) million. Hedge ineffectiveness associated with these contracts during 2003 and 2004 was not significant. NOTE 8 RETIREMENT BENEFIT PLANS The Company has a number of defined benefit pension plans and other post retirement benefit plans covering eligible salaried and hourly employees. The other post retirement benefit plans, which provide medical and life insurance benefits, are unfunded plans. The measurement date for all plans is December 31. The following provides a reconciliation of the plans' benefit obligations, plan assets, funded status and recognition in the Consolidated Balance Sheets. Notes to Consolidated Financial Statements 48 The funded status of pension plans included above with accumulated benefit obligations in excess of plan assets at December 31 is as follows:

millions of dollars 2004 2003 - ---------------------------------------------------------------------------- Accumulated benefit obligation $ (449.7) $ (418.1) Plan assets (321.9) (270.0) ---------------------------------------- Deficiency $ (127.8) $ (148.1) ---------------------------------------- Pension deficiency by country: United States $ (19.4) $ (56.7) United Kingdom (29.0) (30.0) Germany (72.5) (55.5) Japan (6.9) (5.9) ---------------------------------------- Total pension deficiency $ (127.8) $ (148.1) ----------------------------------------

The Company expects to contribute a total of $20 million to $25 million into all of its pension plans during 2005. The Company's net periodic pension benefit cost was $16.7 million in 2004, $23.2 million in 2003 and $6.8 million in 2002. See table below for a breakout between U.S. and non-U.S. plans.

millions of dollars Pension benefits Other post retirement benefits For the Year Ended December 31, 2004 2003 2002 2004 2003 2002 U.S. Non-U.S. U.S. Non-U.S. U.S. Non-U.S. - --------------------------------------------------------------------------------------------------- -------------------------------- COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost $ 2.4 $ 9.3 $ 2.5 $ 7.5 $ 2.1 $ 5.5 $ 6.0 $ 5.3 $ 5.0 Interest cost 17.3 11.5 18.5 9.5 18.8 7.5 28.8 29.7 28.8 Expected return on plan assets (26.1) (7.3) (20.7) (5.7) (25.5) (5.4) -- -- -- Amortization of unrecognized transition obligation -- 0.3 -- 0.3 -- (0.1) -- -- -- Amortization of unrecognized prior service cost 1.5 0.2 1.5 0.2 1.5 0.2 (0.2) (0.2) (0.1) Amortization of unrecognized loss 5.2 2.4 7.8 1.8 2.1 0.1 8.6 5.9 4.0 ------------------------------------------------------ -------------------------------- Net periodic benefit cost/(benefit) $ 0.3 $16.4 $ 9.6 $ 13.6 $ (1.0) $ 7.8 $ 43.2 $ 40.7 $ 37.7 ------------------------------------------------------ --------------------------------

The Company's weighted-average assumptions used to determine the benefit obligations for our defined benefit pension and other post retirement plans as of December 31, 2004 and 2003 were as follows:

percents 2004 2003 - ----------------------------------------------------------------------------- U.S. plans Discount rate 5.75 6.00 Rate of compensation increase 3.50 3.50 Non-U.S. plans Discount rate 5.04 5.49 Rate of compensation increase 3.36 3.40

The Company's weighted-average assumptions used to determine the net periodic benefit cost (income) for our defined benefit pension and other post retirement benefit plans for the three years ended December 31, 2004 were as follows: The weighted average asset allocations of the Company's funded pension plans at December 31, 2004 and 2003, and target allocations by asset category, are as follows:

Target percent 2004 2003 Allocation - ----------------------------------------------------------------------------- Cash, real estate and other 7% 4% 0-15% Fixed income securities 33 33 30-45 Equity securities 60 63 50-70 ------------------------------------------ 100% 100% ------------------------------------------

The Company's investment strategy is to maintain actual asset weightings within a preset range of target allocations. The Company believes these ranges represent an appropriate risk profile for the planned benefit payments of the plans based on the timing of the estimated benefit payments. Within each asset category, separate portfolios are maintained for additional diversification. Investment managers are retained within each asset category to manage each portfolio against its benchmark. Each investment manager has appropriate investment guidelines. In addition, the entire portfolio is evaluated against a relevant peer group. The pension plans did not hold any Company securities as investments as of December 31, 2004 and 2003.

- ---------------------------------------------------------------------------- percents 2004 2003 2002 - ---------------------------------------------------------------------------- U.S. plans Discount rate 6.00 6.75 7.25 Rate of compensation increase 3.50 4.50 4.50 Expected return on plan assets 8.75 8.75 9.50 Non-U.S. plans Discount rate 5.49 5.45 5.46 Rate of compensation increase 3.40 3.36 3.39 Expected return on plan assets 6.62 6.82 6.43

The return on assets assumption was developed through analysis of historical market returns, current market conditions, target allocations among asset classes and past experience. Overall, it was projected that the U.S. funds could achieve an 8.75% net return over time, based upon the targeted asset allocation. This assumes no benefit from manager selection strategies. BorgWarner Inc. and Consolidated Subsidiaries 49 The estimated future benefit payments for the pension and other post retirement benefits are as follows:

Other post millions of dollars Pension retirement Year benefits benefits - ---------------------------------------------------------------------------- 2005 $ 31.5 $ 30.8 2006 31.7 29.7 2007 32.0 30.3 2008 32.4 30.8 2009 33.1 30.7 2010-2014 175.7 162.3

The weighted-average rate of increase in the per capita cost of covered health care benefits is projected to be 8.0% in 2005 decreasing to 4.5% by the year 2009. A one-percentage point change in the assumed health care cost trend would have the following effects:

One percentage point millions of dollars increase decrease - ----------------------------------------------------------------------------- Effect on post retirement benefit obligation $70.0 $(55.7) Effect on total service and interest cost components $ 5.7 $ (4.5)

NOTE 9 STOCK INCENTIVE PLANS Under the Company's 1993 Stock Incentive Plan, the Company granted options to purchase shares of the Company's common stock at the fair market value on the date of grant. The options vest over periods up to three years and have a term of ten years from date of grant. As of December 31, 2003, there were no options available for future grants under the 1993 plan. The 1993 plan expired at the end of 2003 and was replaced by the Company's 2004 Stock Incentive Plan. Under the 2004 Stock Incentive Plan, the numbers of shares available for grant are 2,700,000. As of December 31, 2004, there are 2,990,205 outstanding options under the 1993 and 2004 Stock Incentive Plans. On July 28, 2004, the Company issued a total of 6,400 restricted shares of common stock to its non-employee directors under the 2004 Stock Incentive Plan. The Company accounts for stock options in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized for fixed stock options because the exercise price of the stock options exceeded or equaled the market value of the Company's common stock at the date of grant, which is the measurement date. A summary of the plan's shares under option at December 31, 2004, 2003 and 2002 follows:

2004 2003 2002 Shares Weighted-average Shares Weighted-average Shares Weighted-average (thousands) exercise price (thousands) exercise price (thousands) exercise price - ---------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 2,680 $26.44 3,650 $23.29 2,986 $22.34 Granted 1,063 44.56 682 32.74 1,232 25.34 Exercised (593) 24.22 (1,518) 21.80 (434) 22.61 Forfeited (160) 26.74 (134) 25.03 (134) 23.13 ---------------------------------------------------------------------------------------- Outstanding at end of year 2,990 $33.30 2,680 $26.44 3,650 $23.29 ---------------------------------------------------------------------------------------- Options exercisable at year-end 793 $23.78 554 $22.57 1,188 $22.61 ---------------------------------------------------------------------------------------- Options available for future grants 1,637 -----------

The following table summarizes information about stock options outstanding at December 31, 2004:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE Range of Number outstanding Weighted-average Weighted-average Number exercisable Weighted-average exercise prices (thousands) remaining contractual life exercise price (thousands) exercise price - ----------------------------------------------------------------------------------------------------------------------------------- $12.78-21.13 156 5.0 $18.31 156 $18.31 $24.14-26.56 1,106 7.1 25.14 575 24.90 $26.94-44.56 1,728 9.0 39.88 62 27.18 ------------------------------------------------------------------------------------------------------------ $12.78-44.56 2,990 8.1 $33.30 793 $23.78 ------------------------------------------------------------------------------------------------------------

The weighted average fair value at date of grant for options granted during 2004, 2003, and 2002 were $16.28, $11.91, and $10.13, respectively, and were estimated using the Black-Scholes options pricing model with the following weighted average assumptions:

2004 2003 2002 - ---------------------------------------------------------------------------- Risk-free interest rate 4.14% 3.58% 4.34% Dividend yield 1.26% 1.27% 1.32% Volatility factor 32.89% 34.38% 33.66% Weighted average expected life 6.5 YEARS 6.5 years 6.5 years

EXECUTIVE STOCK PERFORMANCE PLAN The Company has an Executive Stock Performance Plan that provides payouts to members of senior management at the end of successive three-year periods based on the Company's performance in terms of total stockholder return relative to a peer group of automotive companies. Payouts earned are payable 40% in cash and 60% in the Company's common stock. For the three-year measurement periods ended December 31, 2004, 2003 and 2002, the amounts expensed under the plan and the related share issuances were as follows: Notes to Consolidated Financial Statements 50 2004 2003 2002 - ----------------------------------------------------------------------------- Expense ($ millions) $ 2.0 $ 2.7 $ 4.5 Number of shares* 48,569 41,252 131,762 *Shares are issued in February of the following year. Estimated shares issuable under the plan are included in the computation of diluted earnings per share as earned. Under the terms of the Executive Stock Performance Plan, the final three-year period for which awards have been granted was for the three-year period beginning January 1, 2004 and ending on December 31, 2006. NOTE 10 OTHER COMPREHENSIVE INCOME The components of accumulated other comprehensive income/(loss), net of tax, in the Consolidated Balance Sheets are as follows: millions of dollars 2004 2003 - ----------------------------------------------------------------------------- Foreign currency translation adjustments, net $ 99.7 $ 74.3 Market value of hedge instruments, net 3.2 0.2 Minimum pension liability adjustment, net (47.7) (60.5) ------------------------------ Accumulated other comprehensive income $ 55.2 $ 14.0 ============================== The change in the components of other comprehensive income/(loss) in the Consolidated Statements of Stockholders' Equity are as follows: millions of dollars 2004 2003 2002 - ----------------------------------------------------------------------------- Foreign currency translation $ 10.7 $ 67.6 $ 55.9 adjustments Market value of hedge instruments 4.7 0.4 -- Income taxes 13.0 (0.2) (15.0) -------------------------------- Net foreign currency translation and hedge instruments adjustment 28.4 67.8 40.9 -------------------------------- Minimum pension liability 17.2 1.1 (65.4) adjustment Income taxes (4.4) (0.4) 23.1 -------------------------------- Net minimum pension liability adjustment 12.8 0.7 (42.3) -------------------------------- Other comprehensive income/(loss) $ 41.2 $ 68.5 $ (1.4) ================================ NOTE 11 CONTINGENCIES In the normal course of business the Company and its subsidiaries are parties to various legal claims, actions and complaints, including matters involving intellectual property claims, general liability and various other risks. It is not possible to predict with certainty whether or not the Company and its subsidiaries will ultimately be successful in any of these legal matters or, if not, what the impact might be. The Company's environmental and product liability contingencies are discussed separately below. The Company's management does not expect that the results in any of these legal proceedings will have a material adverse effect on the Company's results of operations, financial position or cash flows. ENVIRONMENTAL The Company and certain of its current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identified by the United States Environmental Protection Agency (EPA) and certain state environmental agencies and private parties as potentially responsible parties (PRPs) at various hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund) and equivalent state laws and, as such, may presently be liable for the cost of cleanup and other remedial activities at 39 such sites. Responsibility for clean-up and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. Based on information available to the Company, which in most cases, includes: an estimate of allocation of liability among PRPs; the probability that other PRPs, many of whom are large, solvent public companies, will fully pay the cost apportioned to them; currently available information from PRPs and/or federal or state environmental agencies concerning the scope of contamination and estimated remediation and consulting costs; remediation alternatives; estimated legal fees; and other factors, the Company has established a reserve for indicated environmental liabilities with a balance at December 31, 2004 of approximately $25.7 million. The Company expects this amount to be expended over the next three to five years. The Company believes that none of these matters, individually or in the aggregate, will have a material adverse effect on its financial condition or future operating results, generally either because estimates of the maximum potential liability at a site are not large or because liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such matter. In connection with the sale of Kuhlman Electric Corporation, the Company agreed to indemnify the buyer and Kuhlman Electric for certain environmental liabilities relating to the past operations of Kuhlman Electric. The liabilities at issue result from operations of Kuhlman Electric that pre-date the Company's acquisition of Kuhlman Electric's parent company, Kuhlman Corporation, during 1999. During 2000, Kuhlman Electric notified the Company that it discovered potential environmental contamination at its Crystal Springs, Mississippi plant while undertaking an expansion of the plant. The Company has been working with the Mississippi Department of Environmental Quality and Kuhlman Electric to investigate the extent of and remediate the contamination. The investigation revealed the presence of polychlorinated biphenyls (PCBs) in portions of the soil at the plant and neighboring areas. Clean up began in 2000 and is continuing. Kuhlman Electric and others, including the Company, have been sued in numerous related lawsuits, in which multiple claimants allege personal injury and property damage. The Company has moved to be dismissed from some of these lawsuits. The first trial in these lawsuits is currently scheduled to begin in March 2005. The Company believes that the accrual for environmental liabilities and any insurance recoveries are sufficient to cover any potential liability associated with this matter. However, due to the nature of environmental liability matters, there can be no assurance that the actual amount of environmental liabilities will not exceed the amount accrued. BorgWarner Inc. and Consolidated Subsidiaries 51 PRODUCT LIABILITY Like many other industrial companies who have historically operated in the United States, the Company (or parties the Company indemnifies) continues to be named as one of many defendants in asbestos-related personal injury actions. Management believes that the Company's involvement is limited because, in general, these claims relate to a few types of automotive friction products, manufactured many years ago that contained encapsulated asbestos. The nature of the fibers, the encapsulation and the manner of use lead the Company to believe that these products are highly unlikely to cause harm. At December 31, 2004, the Company had approximately 100,000 pending asbestos-related product liability claims. Of these outstanding claims, approximately 92,000 are pending in just three jurisdictions, where significant tort reform activities are underway. The Company's policy is to aggressively defend against these lawsuits and the Company has been successful in obtaining dismissal of many claims without any payment. The Company expects that the vast majority of the pending asbestos-related product liability claims where it is a defendant (or has an obligation to indemnify a defendant) will result in no payment being made by the Company or its insurers. In 2004 of the 4,062 claims settled, only 255 (6.3%) resulted in any payment being made to a claimant by or on behalf of the Company. In 2003 of the 4,664 claims settled, only 273 (5.9%) resulted in any payment being made to claimants. The settlement costs of these claims were paid by the insurance carriers, except for the $1.0 million in 2004 as described in the paragraph below. Based upon the encapsulated nature of the products, our experiences in aggressively defending and resolving claims in the past, and our significant insurance coverage with solvent carriers as of the date of this filing, management does not believe that asbestos-related product liability claims are likely to have a material adverse effect on the Company's results of operations, cash flows or financial condition. Prior to June 2004, all claims were covered by the Company's primary layer insurance coverage, and these carriers administered, defended, settled and paid all claims under a funding agreement. In June 2004, the Company was notified by primary layer insurance carriers of the exhaustion of their policy limits. This led the Company to access the next available layer of insurance coverage. Since June 2004, secondary layer insurers have paid asbestos-related litigation defense and settlement expenses pursuant to a funding agreement. Two secondary layer insurers are currently not participating in this arrangement, until they are satisfied through an audit process, that the primary level of insurance is exhausted. The Company therefore paid $1.0 million in defense and settlement costs in late 2004 and expects to recover those amounts from either these insurers, or the primary layer insurers if the exhaustion audit shows that primary layer insurance is still available. The Company's contractual relationship with the secondary layer carriers provides a change in circumstances and allows the Company to take a more direct role in defending and settling claims than with the primary carriers. Previously, the Company's arrangement utilized the primary layer insurance carriers' positions to defend and negotiate the settlements with periodic input from the Company. At December 31, 2004, the Company recorded a liability of $40.8 million; with a related asset of $40.8 million to recognize the insurance proceeds receivable to the Company for estimated claim losses. For 2003, the comparable value of the insurance receivable and accrued liability is $41.6 million. The amounts recorded in the Consolidated Balance Sheets are as follows: millions of dollars 2004 2003 - ----------------------------------------------------------------------------- Assets: Prepayments and other current assets $13.5 $13.7 Other non-current assets 27.3 27.9 ---------------------- Total insurance receivable $40.8 $41.6 ====================== Liabilities: Accounts payable and accrued expenses $13.5 $13.7 Long-term liabilities - other 27.3 27.9 ---------------------- Total accrued liability $40.8 $41.6 ====================== The insurance receivable and accrued liability of $41.6 million in 2003 have been reclassified as outlined above and the reclassification is not material to the Company's Consolidated Financial Statements. We cannot reasonably estimate possible losses, if any, in excess of those for which we have accrued, because we cannot predict how many additional claims may be brought against the Company (or parties the Company has an obligation to indemnify) in the future, the allegations in such claims, the possible outcomes, or the impact of tort reform legislation currently being considered at the State and Federal level. A declaratory judgment action was filed in January 2004 in the Circuit Court of Cook County, Illinois by Continental Casualty Company and related companies (CNA) against the Company and certain of its other historical general liability insurers. CNA provided the Company with both primary and additional layer insurance, and, in conjunction with other insurers, is currently defending and indemnifying the Company in all of its pending asbestos-related product liability claims. The lawsuit seeks to determine the extent of insurance coverage available to the Company including whether the available limits exhaust on a "per occurrence" or an "aggregate" basis, and to determine how the applicable coverage responsibilities should be apportioned. In addition to the primary insurance available for asbestos-related claims, the Company has substantial additional layers of insurance available for potential future asbestos-related product claims. Although it is impossible to predict the outcome of pending or future claims; due to the encapsulated nature of the products, our experiences in aggressively defending and resolving claims in the past, and our significant insurance coverage with solvent carriers as of the date of this filing, management does not believe that asbestos-related product liability claims are likely to have a material adverse effect on the Company's results of operations, cash flows or financial condition. Notes to Consolidated Financial Statements 52 NOTE 12 LEASES AND COMMITMENTS Certain assets are leased under long-term operating leases. These include production equipment at one plant, rent for the corporate headquarters, and an airplane. Most leases contain renewal options for various periods. Leases generally require the Company to pay for insurance, taxes and maintenance of the leased property. The Company leases other equipment such as vehicles and certain office equipment under short-term leases. Total rent expense was $18.0 million in 2004, $13.4 million in 2003, and $11.4 million in 2002. The Company does not have any material capital leases. The Company has guaranteed the residual values of certain leased production equipment at one of its facilities. The guarantees extend through the maturity of the underlying lease, which is in 2005. In the event the Company exercised its option not to purchase the production equipment, the Company has guaranteed a residual value of $16.3 million. We do not believe we have any loss exposure due to this guarantee. Future minimum operating lease payments at December 31, 2004 were as follows: millions of dollars - ---------------------------------------------------------------------------- 2005 $29.1 2006 4.7 2007 4.3 2008 3.8 2009 3.3 After 2009 12.8 --------- Total minimum lease payments $58.0 ========= The Company entered into two separate royalty agreements with Honeywell International for certain variable turbine geometry (VTG) turbochargers in order to continue shipping to its OEM customers after a German court ruled in favor of Honeywell in a patent infringement action. The two separate royalty agreements were signed in July 2002 and June 2003, respectively. The July 2002 agreement was effective immediately and expired in June 2003. The June 2003 agreement was effective July 2003 and covers the period through 2006 with a minimum royalty for shipments up to certain volume levels and a per unit royalty for any units sold above these stated amounts. The royalty costs recognized under the agreements were $14.2 million in 2004, $23.2 million in 2003 and $13.5 million in 2002. These costs were all recognized as part of cost of goods sold. These costs will be at minimal levels in 2005 and 2006 as the Company's primary customers have converted most of their requirements to the next generation VTG turbocharger. NOTE 13 STOCK SPLIT On April 21, 2004 the Company's stockholders approved an amendment 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. NOTE 14 EARNINGS PER SHARE In calculating earnings per share, earnings are the same for the basic and diluted calculations. Shares increased for diluted earnings per share by 665,000, 488,000, and 458,000 for 2004, 2003 and 2002, respectively, due to the effects of stock options and shares issuable under the executive stock performance plan. NOTE 15 SUBSEQUENT EVENT On January 4, 2005, the Company acquired 62.2% of the outstanding 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 E415 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 ignition coils); and electronic and sensor technology (tire pressure sensors, diesel cabin heaters and selected sensors). Beginning in 2005, the Company will report Beru within the Engine segment. The Company has not included a separate discussion 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 allocation of the excess purchase price over the net book value of assets acquired between intangible assets and goodwill. NOTE 16 OPERATING SEGMENTS AND RELATED INFORMATION The Company's business is comprised of two operating segments: Drivetrain and Engine. These reportable segments are strategic business units, which are managed separately because each represents a specific grouping of automotive components and systems. The Company evaluates the operating segments' performance based upon return on invested capital. The return on invested capital is comprised of earnings before income and taxes and the average capital invested in each operating segment. Inter-segment sales, which are not significant, are recorded at market prices. This footnote presents summary segment information. BorgWarner Inc. and Consolidated Subsidiaries 53 OPERATING SEGMENTS

Net sales Earnings ------------------------------------ before Long-lived Inter- interest Year end Depr./ asset millions of dollars Customers segment Net and taxes assets amort. expenditures(b) - ------------------------------------------------------------------------- ----------------------------------------------------- 2004 Drivetrain $1,358.6 $ -- $1,358.6 $106.9 $ 810.0 $ 66.1 $ 75.3 Engine 2,166.7 50.3 2,217.0 281.7 2,208.4 107.3 167.7 Inter-segment eliminations -- (50.3) (50.3) -- -- -- -- ------------------------------------ ----------------------------------------------------- Total 3,525.3 -- 3,525.3 388.6 3,018.4 173.4 243.0 Corporate -- -- -- (50.3) 510.7(a) 3.6 9.4 ------------------------------------ ----------------------------------------------------- Consolidated $3,525.3 $ -- $3,525.3 $338.3 $3,529.1 $177.0 $252.4 ------------------------------------ ----------------------------------------- Interest expense and finance charges 29.7 ----------- Earnings before income taxes $308.6 -----------

Net sales Earnings ------------------------------------ before Long-lived Inter- interest Year end Depr./ asset millions of dollars Customers segment Net and taxes assets amort. expenditures(b) - ------------------------------------------------------------------------- ----------------------------------------------------- 2003 Drivetrain $1,245.5 $ 0.1 $1,245.6 $ 98.4 $ 778.8 $ 60.1 $ 66.4 Engine 1,823.7 46.0 1,869.7 239.6 1,925.1 93.8 133.3 Inter-segment eliminations -- (46.1) (46.1) -- -- -- -- ------------------------------------ ----------------------------------------------------- Total 3,069.2 -- 3,069.2 338.0 2,703.9 153.9 199.7 Corporate -- -- -- (48.0) 436.6(a) 7.4 14.7 ------------------------------------ ----------------------------------------------------- Consolidated $3,069.2 $ -- $3,069.2 $290.0 $3,140.5 $161.3 $214.4 ------------------------------------ ----------------------------------------- Interest expense and finance charges 33.3 ----------- Earnings before income taxes $256.7 -----------

Net sales Earnings ------------------------------------ before Long-lived Inter- interest Year end Depr./ asset millions of dollars Customers segment Net and taxes assets amort. expenditures(b) - ------------------------------------------------------------------------- ----------------------------------------------------- 2002 Drivetrain $1,122.1 $-- $1,122.1 $ 99.9 $ 733.8 $ 50.0 $ 54.4 Engine 1,609.0 39.2 1,648.2 215.9 1,712.5 81.3 91.8 Inter-segment eliminations -- (39.2) (39.2) -- -- -- -- ------------------------------------ ----------------------------------------------------- Total 2,731.1 -- 2,731.1 315.8 2,446.3 131.3 146.2 Corporate -- -- -- (44.3) 236.6(a) 6.1 19.9 ------------------------------------ ----------------------------------------------------- Consolidated $2,731.1 $-- $2,731.1 $271.5 $2,682.9 $137.4 $166.1 ==================================== ========================================= Interest expense and finance charges 37.7 ----------- Earnings before income taxes $233.8 ===========

(a) Corporate assets, including equity in affiliates, are net of trade receivables securitized and sold to third parties, and include cash, marketable securities, deferred income taxes and investments and advances. (b) Long-lived asset expenditures includes capital expenditures and tooling outlays, net of customer reimbursements. Notes to Consolidated Financial Statements 54 GEOGRAPHIC INFORMATION No country outside the U.S., other than Germany and the United Kingdom, accounts for as much as 5% of consolidated net sales, attributing sales to the sources of the product rather than the location of the customer. Also, the Company's 50% equity investment in NSK-Warner (see Note 5) amounting to $188.2 million at December 31, 2004 is excluded from the definition of long-lived assets, as are goodwill and certain other non-current assets.

Net sales Long-lived assets millions of dollars 2004 2003 2002 2004 2003 2002 - ------------------------------------------------------------------------------------------------------------ United States $1,964.9 $1,889.2 $1,859.1 $ 637.1 $ 636.9 $643.0 ------------------------------------------------------------------------------------ Europe: Germany 834.1 637.7 453.4 278.7 234.6 182.3 United Kingdom 186.0 146.3 129.1 39.5 36.4 28.1 Other Europe 237.1 167.7 106.9 106.1 78.3 44.3 ------------------------------------------------------------------------------------ Total Europe 1,257.2 951.7 689.4 424.3 349.3 254.7 Other foreign 303.2 228.3 182.6 117.9 89.6 80.8 ------------------------------------------------------------------------------------ Total $3,525.3 $3,069.2 $2,731.1 $1,179.3 $1,075.8 $978.5 ------------------------------------------------------------------------------------

SALES TO MAJOR CUSTOMERS Consolidated sales included sales to Ford Motor Company of approximately 21%, 23%, and 26%; to DaimlerChrysler of approximately 14%, 17%, and 20%; and to General Motors Corporation of approximately 10%, 12%, and 12% for the years ended December 31, 2004, 2003 and 2002, respectively. Sales to Volkswagen were approximately 10% in 2004. Both of our operating segments had significant sales to all four of the customers listed above. Such sales consisted of a variety of products to a variety of customer locations and regions. No other single customer accounted for more than 10% of consolidated sales in any year of the periods presented. INTERIM FINANCIAL INFORMATION (UNAUDITED) The following information includes all adjustments, as well as normal recurring items, that the Company considers necessary for a fair presentation of 2004 and 2003 interim results of operations. Certain 2004 and 2003 quarterly amounts have been reclassified to conform to the annual presentation.

2004 2003 millions of dollars, except per share amounts ----------------------------------------- ----------------------------------------- Quarter Ended, Mar-31 Jun-30 Sep-30 Dec-31 Year 2004 Mar-31 Jun-30 Sep-30 Dec-31 Year 2003 - ---------------------------------------------------------------------------------------- ----------------------------------------- Net sales $903.1 $893.2 $839.8 $889.2 $3,525.3 $775.7 $769.5 $725.2 $ 798.8 $3,069.2 Cost of sales 730.5 723.4 694.7 725.5 2,874.2 624.2 622.8 595.9 639.7 2,482.5 ----------------------------------------- ----------------------------------------- Gross profit 172.6 169.8 145.1 163.7 651.1 151.5 146.7 129.3 159.1 586.7 Selling, general and administrative expenses 94.7 87.8 77.4 79.1 339.0 83.6 77.0 72.7 83.5 316.9 Other, net 0.3 0.6 (0.5) 2.7 3.0 -- 0.1 0.1 (0.4) (0.1) ----------------------------------------- ----------------------------------------- Operating income 77.6 81.4 68.2 81.9 309.1 67.9 69.6 56.5 76.0 269.9 Equity in affiliate earnings, net of tax (6.5) (8.4) (6.2) (8.1) (29.2) (6.4) (5.2) (3.6) (4.8) (20.1) Interest expense, net 7.5 7.7 7.5 7.0 29.7 9.0 8.7 8.1 7.5 33.3 ----------------------------------------- ----------------------------------------- Income before income taxes 76.6 82.1 66.9 83.0 308.6 65.3 66.1 52.0 73.3 256.7 Provision for income taxes 22.9 24.6 20.1 13.5 81.2 18.9 19.2 14.2 20.9 73.2 Minority interest, net of tax 2.6 2.8 2.0 1.8 9.1 2.2 2.1 1.9 2.4 8.6 ----------------------------------------- ----------------------------------------- Net earnings $ 51.1 $ 54.7 $ 44.8 $ 67.7 $ 218.3 $ 44.2 $ 44.8 $ 35.9 $ 50.0 $ 174.9 ========================================= ========================================= Earnings/(loss) per share - basic $ 0.92 $ 0.98 $ 0.80 $ 1.20 $ 3.91 $ 0.83 $ 0.83 $ 0.66 $ 0.91 $ 3.23 ========================================= ========================================= Earnings/(loss) per share - diluted $ 0.91 $ 0.97 $ 0.79 $ 1.19 $ 3.86 $ 0.82 $ 0.83 $ 0.65 $ 0.90 $ 3.20 ========================================= =========================================

Selected Financial Data BorgWarner Inc. and Consolidated Subsidiaries 55

millions of dollars, except per share data For the Year Ended December 31, 2004 2003 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA Net sales $3,525.3 $3,069.2 $2,731.1 $2,351.6 $2,645.9 Cost of sales 2,874.2 2,482.5 2,176.5 1,890.8 2,090.7 ----------------------------------------------------------- Gross profit 651.1 586.7 554.6 460.8 555.2 Selling, general and administrative expenses 339.0 316.9 303.5 249.7 258.7 Goodwill amortization -- -- -- 42.0 43.3 Other, net 3.0 (0.1) (0.9) (2.1) (8.1) Restructuring and other non-recurring charges -- -- -- 28.4(b) 62.9(c) ----------------------------------------------------------- Operating income 309.1 269.9 252.0 142.8 198.4 Equity in affiliate earnings, net of tax (29.2) (20.1) (19.5) (14.9) (15.7) Interest expense, net 29.7 33.3 37.7 47.8 62.6 ----------------------------------------------------------- Earnings before income taxes 308.6 256.7 233.8 109.9 151.5 Provision for income taxes 81.2 73.2 77.2 39.7 54.8 Minority interest, net of tax 9.1 8.6 6.7 3.8 2.7 ----------------------------------------------------------- Net earnings before cumulative effect of 218.3 174.9 149.9 66.4 94.0 accounting change Cumulative effect of change in accounting principle, net of tax -- -- (269.0)(a) -- -- ----------------------------------------------------------- Net earnings/(loss) $ 218.3 $ 174.9 $ (119.1) $ 66.4 $ 94.0 ----------------------------------------------------------- Earnings/(loss) per share -- basic $ 3.91 $ 3.23 $ (2.23)(a) $ 1.26(b) $ 1.78(c) ----------------------------------------------------------- Average shares outstanding (thousands) -- basic 55,872 54,116 53,250 52,630 52,782 Earnings/(loss) per share -- diluted $ 3.86 $ 3.20 $ (2.22)(a) $ 1.26(b) $ 1.77(c) ----------------------------------------------------------- Average shares outstanding (thousands)-- diluted 56,537 54,604 53,708 52,926 52,974 Cash dividend declared per share $ 0.50 $ 0.36 $ 0.30 $ 0.30 $ 0.30 BALANCE SHEET DATA (at end of period) Total assets $3,529.1 $3,140.5 $2,682.9 $2,770.9 $2,739.6 Total debt 584.5 655.5 646.7 737.0 794.8

(a) In 2002, upon the adoption of SFAS No. 142, the Company recorded a $269.0 million after tax charge for cumulative effect of accounting principle related to goodwill. This charge was $5.01 per diluted share. (b) In 2001, the Company recorded $28.4 million in non-recurring charges. Net of tax, this totaled $19.0 million or $0.36 per diluted share. (c) In 2000, the Company recorded $62.9 million in restructuring and other non-recurring charges. Net of tax, this totaled $38.7 million or $0.74 per diluted share. Corporate Information 56 COMPANY INFORMATION BorgWarner Inc. World Headquarters 3850 Hamlin Road Auburn Hills, MI 48326 248-754-9200 www.borgwarner.com STOCK LISTING Shares are listed and traded on the New York Stock Exchange. Ticker symbol: BWA. HIGH LOW - -------------------------------------------------------------------------------- Fourth Quarter 2004 $54.68 $39.50 Third Quarter 2004 48.77 40.73 Second Quarter 2004 45.08 38.35 First Quarter 2004 49.32 39.84 Fourth Quarter 2003 $42.75 $34.14 Third Quarter 2003 36.68 31.72 Second Quarter 2003 33.13 23.68 First Quarter 2003 27.70 21.66 CERTIFICATIONS o BorgWarner filed as an exhibit to its Annual Report on Form 10-K the CEO and CFO certifications as required by Section 302 of the Sarbanes-Oxley Act. o BorgWarner also submitted the required annual CEO certification to the NYSE. DIVIDENDS The current dividend practice established by the Board of Directors is to declare regular quarterly dividends. The last such dividend of 14 cents per share of common stock was declared on November 10, 2004, payable February 15, 2005, to stockholders of record on February 1, 2005. The current practice is subject to review and change at the discretion of the Board of Directors. STOCKHOLDER SERVICES Mellon Investor Services is the transfer agent, registrar and dividend dispersing agent for BorgWarner common stock. Mellon Investor Services for BorgWarner 85 Challenger Road Ridgefield Park, NJ 07660 www.melloninvestor.com Communications concerning stock transfer, change of address, lost stock certificates or proxy statements for the annual meeting should be directed to Mellon Investor Services at 800-851-4229. DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN The BorgWarner Dividend Reinvestment and Stock Purchase Plan has been established so that anyone can make direct purchases of BorgWarner common stock and reinvest dividends. We pay the brokerage commissions on purchases. Questions about the plan can be directed to Mellon at 800-851-4229. To receive a prospectus and enrollment package, contact Mellon at 800-842-7629. ANNUAL MEETING OF STOCKHOLDERS The 2005 annual meeting of stockholders will be held on Wednesday, April 27, 2005, beginning at 9:00 a.m. at the BorgWarner World Headquarters at 3850 Hamlin Road, Auburn Hills, Michigan. STOCKHOLDERS As of December 31, 2004, there were 2,877 holders of record and an estimated 18,000 beneficial holders. INVESTOR INFORMATION Visit www.borgwarner.com for a wide range of company information. For investor information, including the following, click on Investor Information. o BorgWarner News Releases o BorgWarner Stock Quote o Earnings Release Conference Call Calendar o Webcasts o Analyst Coverage o Stockholder Services o Corporate Governance o BorgWarner In The News Articles o Annual Reports o Proxy Statement and Card o Dividend Reinvestment/Stock Purchase Plan o Financials and SEC Filings (including the Annual Report on Form 10-K) o Request Information Form NEWS RELEASE SIGN-UP At our Investor Information web page, you can sign up to receive BorgWarner's news releases. Here's how to sign up: 1. Go to www.borgwarner.com 2. Click Investor Information 3. Click News 4. Click News Release Sign-up and follow the instructions INVESTOR INQUIRIES Investors and securities analysts requiring financial reports, interviews or other information should contact Mary E. Brevard, Vice President of Investor Relations and Corporate Communications at BorgWarner World Headquarters, 248-754-0882. BorgWarner Inc. owns U.S. trademark registrations for: BorgWarner, [LOGO], [BORGWARNER LOGO], and Visctronic. BorgWarner owns the following trademarks: ITM, InterActive Torque Management, Pre-emptive Torque Management, Morse Gemini, DualTronic and Regulated Two-Stage Turbocharger (R2S). EX-21.1 3 c92839exv21w1.txt SUBSIDIARIES EXHIBIT 21 BORGWARNER INC. (Parent) NAME OF SUBSIDIARY BorgWarner TorqTransfer Systems Inc. BorgWarner Powdered Metals Inc. BorgWarner South Asia Inc. Divgi-Warner Limited BorgWarner Automotive Components (Ningbo) Co. Ltd. BorgWarner TorqTransfer Systems Korea Inc. BorgWarner Shenglong (Ningbo) Co. Ltd. BorgWarner TorqTransfer Systems Beijing Co. Ltd. BorgWarner Diversified Transmission Products Inc. BorgWarner Diversified Transmission Products Services Inc. BorgWarner TorqTransfer Systems Ochang Inc. BorgWarner Emissions Systems Inc. BorgWarner Emissions Systems of Michigan Inc. BorgWarner Emissions Systems Holding Inc. BorgWarner Thermal Systems Inc. BorgWarner Thermal Systems of Michigan Inc. BorgWarner Cooling Systems (India) Private Limited BorgWarner Morse TEC Inc. BorgWarner Canada Inc. BorgWarner Japan Inc. BorgWarner Morse TEC Japan K.K. BorgWarner Automotive Taiwan Co., Ltd. BorgWarner Morse TEC Mexico S.A. de C.V. BorgWarner Morse TEC Murugappa Pvt. Ltd. BorgWarner Morse TEC Korea Ltd. BorgWarner Automotive Taiwan Co. Ltd. BorgWarner Transmission Systems Inc. BorgWarner NW Inc. BorgWarner Transmission Systems Korea, Inc. NSK-Warner K.K. Lapeer Warner, LLC BorgWarner Europe Inc. AG Kuhnle, Kopp & Kausch BorgWarner Holding Inc. BorgWarner France S.A.S. BorgWarner Transmission Systems Tulle S.A.S. BW Holding Ltd. BorgWarner Europe GmbH BorgWarner Holdings Ltd. BorgWarner Limited Kysor Industries S.A. Kysor Europe Limited Morse TEC Europe S.r.l. BorgWarner Germany GmbH BorgWarner Cooling Systems GmbH BorgWarner Transmission Systems Arnstadt GmbH BorgWarner Transmission Systems GmbH BorgWarner Vertriebs und Verwaltungs GmbH BorgWarner Turbo Systems Worldwide Headquarters GmbH BorgWarner Turbosystems GmbH TSA Turbochargers of South Africa Pty. Ltd. BorgWarner Turbo Systems Alkatreszgyarto Kft. Hitachi Warner Turbo Systems Ltd. Turbo Energy Ltd. Creon Insurance Agency Limited BorgWarner Trustees Limited Kuhlman Corporation BWA Turbo Systems Holding Corporation BorgWarner Turbo Systems Inc. BorgWarner Cooling Systems Korea, Inc. BorgWarner Brasil, Ltda. Kysor DO BRASIL LTDA. Seohan Warner Turbo Systems, Ltd. Kuhlman Plastics of Canada, Ltd. Spring Products Corporation Bronson Specialties Inc. EX-23.1 4 c92839exv23w1.txt CONSENT EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement Nos. 333-45423 dated February 2, 1998; 333-117171 dated July 6, 2004; 333-117707 dated July 28, 2004; 333-118203, 333-118202, 333-118201 and 333-118200 dated August 13, 2004 all on Form S-8; and Registration Statement Nos. 333-31259 dated July 14, 1997 on Form S-3 and dated August 1, 1997 on Form S-3/A; 333-73840 dated November 21, 2001 on Form S-3; 333-106787 dated July 3, 2003 and dated February 11, 2004 on Form S-3/A of BorgWarner Inc., of our reports dated March 7, 2005, relating to the financial statements of BorgWarner Inc., and management's report on the effectiveness of internal control over financial reporting, incorporated by reference in and appearing in, respectively, the Annual Report on Form 10-K of BorgWarner Inc. for the year ended December 31, 2004. DELOITTE & TOUCHE LLP March 14, 2005 Detroit, Michigan EX-31.1 5 c92839exv31w1.txt CERTIFICATION EXHIBIT 31.1 CERTIFICATION I, Timothy M. Manganello, certify that: 1. I have reviewed this annual report on Form 10-K of BorgWarner Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a- 15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: March 15, 2005 /s/ Timothy M. Manganello - ------------------------------------- Timothy M. Manganello Chairman and Chief Executive Officer EX-31.2 6 c92839exv31w2.txt CERTIFICATION EXHIBIT 31.2 CERTIFICATION I, Robin J. Adams, certify that: 1. I have reviewed this annual report on Form 10-K of BorgWarner Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a- 15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: March 15, 2005 /s/ Robin J. Adams - ------------------------------------------------ Robin J. Adams Executive Vice President, Chief Financial Officer and Chief Administrative Officer EX-32.1 7 c92839exv32w1.txt CERTIFICATION EXHIBIT 32.1 CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Annual Report of BorgWarner Inc. (the "Company") on Form 10-K for the period ended December 31, 2004 (the "Report"), each of the undersigned officers of the Company certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of such officer's knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 15, 2005 /s/ Timothy M. Manganello - ---------------------------------- Timothy M. Manganello Chairman & Chief Executive Officer /s/ Robin J. Adams - ---------------------------------- Robin J. Adams Executive Vice President, Chief Financial Officer & Chief Administrative Officer A signed original of this written statement required by Section 906 has been provided to BorgWarner Inc. and will be retained by BorgWarner Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.1 8 c92839exv99w1.txt CAUTIONARY STATEMENTS EXHIBIT 99.1 CAUTIONARY STATEMENTS Information provided by the Company from time to time may contain "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are typically identified by words or phrases such as "expects," "anticipates," "intends," "plans," "believes," "estimates" "should" and similar expressions. The Company does not intend or assume any obligation to update any of these forward-looking statements. Such forward-looking statements are subject to risks and uncertainties including, but not limited to, those discussed below, many of which are difficult to predict and generally beyond the control of the Company and which could cause actual results to differ materially from those expressed, projected or implied in the forward-looking statement. 1. The Company's principal operations are cyclical, because they are directly related to domestic and foreign vehicle production, which is itself cyclical and dependent on general economic conditions and other factors. Any significant reduction in such production would have an adverse effect on the level of the Company's sales to vehicle original equipment manufacturers ("OEMs") and on the Company's financial position and operating results. 2. Certain of the Company's products are currently used exclusively in sport-utility vehicles and light trucks. Any significant reduction in the production of such vehicles and trucks would have an adverse effect on the level of the Company's sales to OEMs and the Company's financial position and operating results. 3. A number of the Company's major OEM customers manufacture products for their own use that compete with the Company's products. Although these OEM customers have indicated that they will continue to rely on outside suppliers, the OEMs could elect to manufacture products for their own use and in place of the products now supplied by the Company. 4. The Company has a stated goal of increasing its revenues through the expansion of existing business and select acquisitions. Failure to grow existing business in sufficient volume because of changes in the vehicle market and/or the unavailability of suitable acquisition candidates could result in nonattainment of this goal. 5. Annual price reductions to OEM customers have become a permanent feature of the Company's business environment. To maintain its profit margins, the Company, among other things, seeks price reductions from its own suppliers, adopts improved production processes to increase manufacturing efficiency, updates product designs to reduce costs and develops new products whose benefits support increased pricing. The Company's ability to pass through increased raw material costs to its OEM customers is also limited, with cost recovery less than 100% and often on a delayed basis. There can be no assurance that the Company will be able to reduce costs in an amount equal to the annual price reductions and the increase in raw material costs. 6. The Company makes a significant annual investment in research and development activities to develop new and improved products and manufacturing processes. There can be no assurance that research and development activities will yield new or improved products or products which will be purchased by the OEMs, or new and improved manufacturing processes. 7. The Company has a stated goal to expand its operations in all significant global markets to balance the cyclical nature of the vehicle business. There can be no assurance that the Company will be able to expand its existing business or obtain new business outside of North America to balance its sales. In addition, there can be no assurance that vehicle production in North America, Europe, Asia and South America will not decline simultaneously. 8. The Company has a stated goal of continuing to increase revenues and operating earnings at a rate greater than overall world vehicle production by increasing its content per vehicle with innovative new components and systems. Any of the following factors could cause the Company to fail to outperform world automotive production: (a) a significant drop in production of sport utility vehicles and light trucks, high content vehicles for the Company's products; (b) a failure of research and development spending to result in new components and systems which will be purchased by the OEMs; (C) technology changes which could render the Company's components and systems obsolete; and (d) a reversal of the trend of supplying systems (which allows the Company to increase content per vehicle) instead of components. 9. With operations and sales in countries outside the United States, the Company could be affected by changes in trade, monetary and fiscal policies (both in the United States and elsewhere), trade restrictions or prohibitions, import and other charges or taxes, and fluctuations in foreign currency exchange rates, changing economic conditions and political instability and disputes. 10. The Company bases its growth projections, in part, on commitments made by our customers. These commitments generally are for one year. If the actual production orders from our customers do not approximate such commitments, it could have a material adverse effect on the Company's growth and financial performance. 11. The Company competes worldwide with a number of other manufactures and distributors that produce and sell similar products. Price, quality and technological innovation are the primary elements of competition. Competitors include a large number of independent domestic and international suppliers. Increased pressure to lower the selling price of the Company's products could affect the Company's profitability. 12. From time to time, the Company expresses its expectations regarding a number of financial measures, including, but not limited to, sales growth, earnings per share and debt-to-capital ratio. In addition to the factors outlined above, the Company's decision to pursue an acquisition may affect its ability to meet such stated targets and expectations. 13.The Company is a party to, or has an obligation to defend a party to, various legal proceedings, including those described in Note Eleven to the Notes to the Consolidated Financial Statements. Although the Company believes that none of these matters is likely to have a material adverse effect on its financial condition or future operating results, there can be no assurance as to the ultimate outcome of any such matter or proceeding. -----END PRIVACY-ENHANCED MESSAGE-----

EX-13.1

                                                                    EXHIBIT 13.1

Management's Discussion and Analysis
of Financial Condition and Results of Operations
                                                                 BorgWarner Inc.
                                                   and Consolidated Subsidiaries


                                                                              25

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 stability. 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 segments: 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 amendment 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 outstanding 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 Euro 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 ignition coils); and electronic
and sensor technology (tire pressure sensors, 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
discussion 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 allocation 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:




millions of dollars, except per share data
Year ended December 31,                             2004          2003         2002
- ---------------------------------------------------------------------------------------
                                                                  
Drivetrain                                     $   106.9     $    98.4     $   99.9
Engine                                             281.7         239.6        215.9
                                             ------------------------------------------
Segment earnings before
  interest and taxes                               388.6         338.0        315.8
Corporate                                          (50.3)        (48.0)       (44.3)
                                             ------------------------------------------
Consolidated earnings before
  interest and taxes                               338.3         290.0        271.5
Interest expense and finance charges                29.7          33.3         37.7
                                             ------------------------------------------
Earnings before income taxes                       308.6         256.7        233.8
Provision for income taxes                          81.2          73.2         77.2
Minority interest, net of tax                        9.1           8.6          6.7
                                             ------------------------------------------
Net earnings before cumulative effect
  of accounting change                             218.3         174.9        149.9
Cumulative effect of change in
  accounting principle, net of tax                    --            --       (269.0)
                                             ------------------------------------------
Net earnings/(loss)                            $   218.3     $   174.9     $ (119.1)
                                             ------------------------------------------
Per share data -- assuming dilution:
  Earnings per share before
    cumulative effect of
    accounting change                          $    3.86     $    3.20     $   2.79
Cumulative effect of accounting change                --            --        (5.01)
                                             ------------------------------------------
Earnings/(loss) per share                      $    3.86     $    3.20     $  (2.22)
                                             ------------------------------------------


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 million in 2003.





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


26


RESULTS OF OPERATIONS
NET SALES

The table below summarizes the overall worldwide global light vehicle production
percentage changes for 2004 and 2003:

WORLDWIDE LIGHT VEHICLE
YEAR OVER YEAR CHANGE IN PRODUCTION*



                                                        2004         2003
- ----------------------------------------------------------------------------
                                                              
North America                                           (0.7)%      (3.0)%
Europe                                                   5.0 %       1.4 %
Japan and Korea                                          3.9 %      (0.7)%
Total World-wide                                         5.2 %      (1.6)%
*Data provided by CSM Worldwide.
BorgWarner Year Over Year Net Sales Change              14.9 %      12.4 %


Our net sales increase in 2004 and 2003 was strong compared to the estimated
worldwide market production increase of approximately 5.2% in 2004 and decrease
of (1.6)% in 2003. The Company's net sales increased 14.9% from 2003 and
increased 12.4% from 2002 to 2003. The increase in 2004 was driven by both of
our operating segments from higher demand for turbochargers, especially in
Europe; new DualTronic(TM) transmissions; all-wheel drive systems; and timing
chain systems in Asia and Europe. The effect of changing currency rates also had
a positive impact on net sales and net earnings in 2004. The effect of non-U.S.
currencies, primarily the Euro, U.K. Pound, Japanese Yen and Korean Won, added
$114.0 million to net sales in 2004 and $161.9 million in 2003. The year over
year increase in net sales excluding the favorable impact of currency was 11.1%
in 2004 and 6.5% in 2003.

Consolidated net sales included sales to Ford Motor Company of approximately
21%, 23%, and 26%; to DaimlerChrysler of approximately 14%, 17%, and 20%; and to
General Motors Corporation of approximately 10%, 12%, and 12% for the years
ended December 31, 2004, 2003 and 2002, respectively. Sales to Volkswagen were
approximately 10% in 2004. Both of our operating segments had significant sales
to all four of the customers listed above. Such sales consisted of a variety of
products to a variety of customer locations and regions. No other single
customer accounted for more than 10% of consolidated sales in any year of the
periods presented.

Over the past several years as our major customers have continued to
consolidate, we have increased our sales to several other global OEMs, bringing
us more in line with our customers' share of the global vehicle market. As a
result, sales to Ford, DaimlerChrysler and General Motors have become a smaller
percentage of total sales.

Our overall outlook for 2005 is positive. Sales are expected to grow in excess
of a projected flat to slightly positive global production rate and we expect to
benefit from the continuation of several trends: change in Europe to diesel
engines, which utilize turbochargers and certain Beru products; shift in Europe
to automatic transmissions; and the switch from timing belts to timing chains in
Asia and Europe. Each of these trends is positive for the Company. Assuming no
major changes to the above assumptions, the Company expects continued long-term
sales and net earnings growth.

RESULTS BY OPERATING SEGMENT

The following tables present net sales and earnings before interest and income
taxes (EBIT) by segment for the years 2004, 2003 and 2002.




NET SALES
millions of dollars
Year ended December 31,            2004           2003          2002
- --------------------------------------------------------------------------
                                                    
Drivetrain                   $    1,358.6     $  1,245.6     $ 1,122.1
Engine                            2,217.0        1,869.7       1,648.2
Inter-segment eliminations          (50.3)         (46.1)        (39.2)
                           -----------------------------------------------
Net sales                    $    3,525.3     $  3,069.2     $ 2,731.1
                           -----------------------------------------------


EARNINGS BEFORE INTEREST AND TAXES (EBIT)



millions of dollars
Year ended December 31,                      2004           2003          2002
- ----------------------------        ----------------------------------------------
                                                            
Drivetrain                           $      106.9     $     98.4     $    99.9
Engine                                      281.7          239.6         215.9
                                   -----------------------------------------------
Segment earnings before interest
  and taxes                                 388.6          338.0         315.8
Corporate                                   (50.3)         (48.0)        (44.3)
                                   -----------------------------------------------
Consolidated earnings before
  interest and taxes                 $      338.3     $    290.0     $   271.5
                                   -----------------------------------------------
Interest expense and finance
  charges                                    29.7           33.3          37.7
                                   -----------------------------------------------
Earnings before income taxes         $      308.6     $    256.7     $   233.8
                                   -----------------------------------------------


The DRIVETRAIN segment net sales increased 9.1% from 2003 to 2004; EBIT
increased 8.6% for the same period. The sales increase was the result of strong
global demand for transmission components and all-wheel drive systems. The
Company's new DualTronic(TM) transmission product continues to ramp-up volume in
Europe. The increase in EBIT was due to increased volume and continued focus on
cost reductions in our operations. These positive trends were offset by
commodity price increases of approximately $20 million, which is primarily
steel, and start up costs.

The Drivetrain segment net sales increased 11.0% from 2002 to 2003, but EBIT
declined 1.5% for the same period. The sales gains were due to all-wheel drive
transfer case programs with General Motors, increased sales of the Company's
Interactive Torque Management (TM) all-wheel drive systems to Honda and Hyundai,
and steady demand for transmission components and systems, especially with
increased automatic transmission adoption in Europe. These sales gains were
offset by declines in North American automotive production. The decrease in EBIT
was due to start-up costs for the Company's new DualTronic(TM) transmission
product, including the opening of a new assembly facility in Europe.
Profitability also suffered from a less favorable product mix and an increase in
pension and retiree health care costs over the previous year.

In 2005, growth in the Drivetrain segment is expected to be flat as demand for
traditional light-trucks will be about the same as in 2004. Sport-utility
vehicles are expected to decline, while sales of front-wheel-drive based
all-wheel-drive systems are expected to increase. Transmission products will
benefit from increased penetration of automatic transmissions in Europe and
Asia, and the continued ramp-up of DualTronic(TM) transmission modules in
Europe.






                                                                 BorgWarner Inc.
                                                   and Consolidated Subsidiaries

                                                                              27

The ENGINE segment 2004 net sales increased 18.6% over 2003 and EBIT increased
17.6% over the same period. This segment benefited from strong demand for the
Company's turbochargers for European passenger cars and commercial vehicles. The
segment EBIT was impacted by increased volume, productivity and positive
currency impact, which offset commodity price increases of approximately $20
million and start up costs in Korea and China.

The Engine segment 2003 net sales increased 13.4% over 2002 and EBIT increased
11.0% over the same period. This segment benefited from continued demand for the
Company's turbochargers for European passenger cars and commercial vehicles as
well as continued growth of our timing chain and emissions products. The EBIT
was impacted by increased productivity and production in the turbocharger
business, which translated into higher profitability. This was partially offset
by start up costs for Variable Cam Timing systems, which will launch in 2004 and
for new Korean operations.

For 2005, the Engine Group expects to deliver continued growth from further
penetration of diesel engines in Europe, which will continue to boost demand for
turbochargers and Beru technologies, and the launch of our first high-volume
variable cam timing (VCT) system. Investments in Korea and China are expected to
begin to contribute to results. This growth is expected to help offset
anticipated weakness in North American light vehicle production.

CORPORATE is the difference between calculated total Company EBIT and the total
from the segments and represents corporate headquarters expenses and expenses
not directly attributable to the individual segments and includes equity in
affiliate earnings. This net expense was $50.3 million in 2004, $48.0 million in
2003, and $44.3 million in 2002. The main reasons for the increase from 2003 to
2004 was an increase in our environmental spending related to the Crystal
Springs, Mississippi site and the $3.7 million write down of a note relating to
the sale of Kuhlman Electric Corporation, which were mostly offset by stronger
equity earnings from NSK-Warner. The increase from 2002 to 2003 was due to
higher pension and post retirement health care costs for discontinued
operations, which are recorded at the corporate level.

OTHER FACTORS AFFECTING RESULTS OF OPERATIONS

The following table details our results of operations as a percentage of sales:




Year Ended December 31,                            2004          2003       2002
- -------------------------------------------------------------------------------------
                                                                  
Net sales                                         100.0%        100.0%     100.0%
Cost of sales                                      81.5          80.9       79.7
                                           ------------------------------------------
Gross profit                                       18.5          19.1       20.3
Selling, general and
  administrative expenses                           9.6          10.3       11.1
Other, net                                          0.1            --         --
                                           ------------------------------------------
Operating income                                    8.8           8.8        9.2
                                           ------------------------------------------
Equity in affiliate earnings, net of tax           -0.8          -0.7       -0.7

Interest expense and finance charges                0.8           1.1        1.4
                                           ------------------------------------------
   Earnings before income taxes                     8.8           8.4        8.5
Provision for income taxes                          2.3           2.4        2.8
Minority interest, net of tax                       0.3           0.3        0.2
                                           ------------------------------------------
Net earnings before cumulative effect
  of accounting change                              6.2%          5.7%       5.5%
                                           ------------------------------------------


GROSS PROFIT for 2004 was 18.5% down from 19.1% in 2003 and down from 20.3% in
2002. The decrease in gross profit in 2004 was due to several factors, including
significant commodity price increases, including steel, a change in sales mix
and geographic expansion. The geographic expansion includes new facilities in
Europe and Asia for both operating segments. We anticipate 2005 margins to be
impacted by the leveling off of commodity price increases, the continued shift
from components to systems sales and continued results from our cost reduction
initiatives.

Also impacting gross margins in 2004, 2003 and 2002 is the effect of a royalty
agreement the Company entered into with Honeywell International for certain
variable turbine geometry (VTG) turbochargers after a German court ruled in
favor of Honeywell in a patent infringement action. In order to continue
shipping to its OEM customers, the Company and Honeywell entered into two
separate royalty agreements, signed in July 2002 and June 2003, respectively.
The June 2003 agreement runs through 2006 with a minimum royalty for shipments
up to certain volume levels and a per unit royalty for any units sold above
these stated amounts.

The royalty agreement costs recognized under the agreements were $14.2 million
in 2004, $23.2 million in 2003 and $13.5 million in 2002. These costs were based
on units shipped and were recorded in cost of goods sold. It is anticipated that
these costs will be at minimal levels in 2005 and 2006 as the Company's primary
customers have converted most of their requirements to the next generation VTG
turbocharger.

SELLING, GENERAL AND ADMINISTRATIVE expenses (SG&A) as a percentage of net sales
decreased to 9.6% from 10.3% in 2003 and 11.1% in 2002. While SG&A spending in
dollars increased slightly, we were able to slow that growth to a level below
the growth in sales through continued focus on cost controls, and leveraging the
existing infrastructure to support the increased sales.

Research and development (R&D) is a major component of the Company's SG&A
expenses. R&D spending was $123.1 million, or 3.5% of sales in 2004, compared to
$118.2 million, or 3.9% of sales in 2003, and $109.1 million, or 4.0% of sales
in 2002. We continue to increase our spending in R&D, although the growth rate
has been somewhat lower than our sales growth rate. We also continue to invest
in a number of cross-business R&D programs, as well as a number of other key
programs, all of which are necessary for short- and long-term growth. Our
long-term target for R&D spending is approximately 4% of sales. We intend to
maintain our commitment to R&D spending while continuing to focus on controlling
other SG&A costs.

OTHER, NET decreased to $(3.0) million of loss in 2004, from $0.1 million of
income in 2003 and $0.9 million of income in 2002. The major item was losses
from capital asset disposals of $3.5 million in 2004.

EQUITY IN AFFILIATES EARNINGS, NET OF TAX increased by $9.1 million from 2003,
and by $0.6 million between 2003 and 2002. This line item is primarily driven by
the results of our 50% owned Japanese joint venture, NSK-Warner. For more
discussion of NSK-Warner, see Note 5 of the Consolidated Financial Statements.





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

28

INTEREST EXPENSE, NET decreased by $3.6 million in 2004 and decreased by $4.4
million between 2003 and 2002. The decreases in 2004 and 2003 were due to lower
debt levels, as we used cash generated from operations to pay off debt. In 2004,
our balance sheet debt decreased by $71.0 million. In 2003, our balance sheet
debt decreased $2.7 million excluding the fair value adjustment for interest
rate swaps, and we reduced the amount of securitized accounts receivable sold by
$40.0 million. We took advantage of lower interest rates through the use of
interest rate and cross-currency swap arrangements described more fully in Note
7 to the Consolidated Financial Statements.

THE PROVISION FOR INCOME TAXES resulted in an effective tax rate for 2004 of
26.3% compared with rates of 28.5% in 2003 and 33.0% for 2002. Our effective tax
rates have been lower than the standard federal and state tax rates due to the
realization of certain R&D and foreign tax credits; foreign rates, which differ
from those in the U.S.; and offset by non-deductible expenses. In addition, the
Company made an $11.4 million year-end adjustment to various tax accounts due to
changes in circumstances related to various tax items, including changes in tax
laws. The year-end adjustment resulted in a reduction in the U.S. effective tax
rate for 2004. In 2005, we anticipate our tax rate to be approximately 30% to
31% based on our current mix of business.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities of $426.6 million was primarily used
to fund $204.9 million of capital expenditures, $47.5 million of tooling, net of
customer reimbursements, pay down long-term debt of $61.8 million, pay $27.9
million of dividends to our shareholders, and increase cash and cash equivalents
by $116.6 million.

OPERATING ACTIVITIES

Net cash provided by operating activities of $426.6 million is $119.7 million
more than in 2003. The $426.6 million consists of net income of $218.3 million,
increased for non-cash charges of $222.4 million and offset by a $17.3 million
increase in net operating assets and liabilities. Non-cash charges are primarily
comprised of $177.0 million in depreciation and amortization expense.

Accounts receivable increased a total of $84.2 million, of which $23.8 was due
to currency. The remaining increase was due to higher business levels,
particularly in Europe. Certain of our European customers tend to pay slower
than our North American customers. Inventory increased by $22.1 million, but our
inventory turns improved to 12.9 times from 12.3 times in 2003.

INVESTING ACTIVITIES

Net cash used in investing activities totaled $257.2 million, compared with
$228.2 million in the prior year. Capital spending totaling $204.9 million in
2004 was $32.9 million higher than in 2003. Approximately 60% of the 2004
capital spending was related to expansion, with the remainder for cost reduction
and other purposes. Heading into 2005, we plan to continue to spend on capital
to support the launch of our new applications and for cost reductions and
productivity improvement projects. Our target for capital spending is to be
approximately 5.5% of sales.

The 2003 investing uses of cash includes $12.8 million of payments to resolve a
valuation dispute regarding the value of the turbocharger business of
Aktiengesellschaft Khnle, Kopp & Kausch (AGK). The valuation payment resulted
from the settlement in 2003 of a lawsuit brought by certain minority
shareholders of AGK related to the automotive turbocharger business of AGK,
which the Company purchased from AGK in 1998.

Since the settlement of the dispute, the Company extended a formal tender offer
to purchase all of the outstanding common and preferred shares of AGK from the
remaining shareholders. The Company spent $9.0 million in 2004 and $14.4 million
in 2003 to purchase additional shares of AGK, an unconsolidated subsidiary of
the Company, which has been recorded as an "Investment in business held for
sale" in the Consolidated Balance Sheets. Effective February 17, 2005, the
Company signed a Share Transfer Agreement (STA) with Turbo Group GmbH for the
sale of its 95.42% interest in AGK. The STA will become effective no later than
seven banking days after receipt of approval from both the German Federal Cartel
Office and the Austrian Merger Control Authority. The transaction is anticipated
to close before March 31, 2005. The estimated proceeds from the pending sale,
net of closing costs are approximately Euro 39.8 million.

FINANCING ACTIVITIES AND LIQUIDITY

Stockholders' equity increased by $273.8 million in 2004. The increase was
primarily caused by net income of $218.3 million, along with currency
translation and hedge instruments adjustments of $28.4 million, stock option
exercises of $14.4 million and stock issuances to retirement plans of $25.8
million. These factors were somewhat offset by dividend payments of $27.9
million. In relation to the U.S. Dollar, the currencies in foreign countries
where we conduct business, particularly the Euro and Yen, strengthened, causing
the currency translation component of other comprehensive income to increase in
both 2004 and 2003.

Our total capitalization as of December 31, 2004 of $2,140.9 million is
comprised of short-term debt of $16.5 million, long-term debt of $568.0 million,
minority interest of $22.2 million and stockholders' equity of $1,534.2 million.
Capitalization at December 31, 2003 was $1,934.2 million. During the year, we
reduced our balance sheet debt to debt plus equity ratio to 27.3% from 34.2% in
2003.

The Company has a new revolving credit facility, which provides for borrowings
up to $600 million through July 2009. The new facility effective July 22, 2004,
replaced the Company's previous facility of $350 million. Additionally, we have
$300 million available under a universal shelf registration statement on file
with the Securities and Exchange Commission through which a variety of debt
and/or equity instruments may be issued. The Company also has access to the
commercial paper market through a $50 million accounts receivable securitization
facility, which is rolled over annually. From a credit quality perspective, we
have an investment grade credit rating of A- from Standard & Poor's and Baa2
from Moody's.






                                                                 BorgWarner Inc.
                                                   and Consolidated Subsidiaries

                                                                              29


The Company's significant contractual obligation payments at December 31, 2004,
are as follows:




millions of dollars                           Total          2005        2006-2007      2008-2009         After 2009
- ---------------------------------------------------------------------------------------------------------------------
                                                                                           
Other post retirement benefits excluding  $  1,599.9      $  30.8        $   60.0         $   61.5        $  1,447.6
   pensions(a)
Notes payable and long-term debt               586.8         16.5           158.1            152.7             259.5
Projected minimum interest costs(b)             89.7         26.2            38.9             20.9               3.7
Non-cancelable operating leases                 58.0         29.1             9.0              7.1              12.8
Minimum royalty payments(c)                      1.5          1.5              --               --                --
                                         ---------------------------------------------------------------------------
  Total                                   $  2,335.9      $ 104.1        $  266.0         $  242.2        $  1,723.6
                                         ---------------------------------------------------------------------------


(a)      Other post retirement benefits (excluding pensions) include anticipated
         future payments to cover retiree medical and life insurance benefits.
         Since the timing and amount of payments for pension plans is not
         certain for future years, such payments have been excluded from this
         table. The Company expects to contribute a total of $20 million to $25
         million into all pension plans during 2005. See Note 8 to the
         Consolidated Financial Statements for disclosures related to the
         Company's pension and other post retirement benefits.

(b)      Projection is based upon an average debt portfolio interest rate of
         5.00%. The calculation excludes the impact of the Beru transaction.

(c)      The minimum royalty payments are related to the Honeywell royalty
         agreement discussed more fully in Note 12 to the Consolidated Financial
         Statements. The Company has other royalty agreements that are based on
         sales volumes. These royalty agreements do not have minimum royalty
         payments and are typically cancellable and have been excluded from the
         amounts in the table.

The Company does not have any long-term or fixed purchase obligations for
inventories.

The Company has a credit agreement that is subject to the usual terms and
conditions applied by banks to an investment grade company. The Company was in
compliance with all covenants at December 31, 2004.

We believe that the combination of cash from operations, cash balances,
available credit facilities and the universal shelf registration will be
sufficient to satisfy our cash needs for our current level of operations and our
planned operations, including the acquisition of Beru, for the foreseeable
future. We will continue to balance our needs for internal growth, external
growth, debt reduction, dividends and share repurchase.

OFF BALANCE SHEET ARRANGEMENTS

As of December 31, 2004, the accounts receivable securitization facility was
sized at $50 million and has been in place with its current funding partner
since January 1994. This facility sells accounts receivable without recourse.

The Company has certain leases that are recorded as operating leases. Types of
operating leases include leases on the headquarters facility, an airplane,
vehicles, and certain office equipment. The Company also has a lease obligation
for production equipment at one of it facilities. The total expected future cash
outlays for all lease obligations at the end of 2004 is $58.0 million. See Note
12 to the Consolidated Financial Statements for more information on operating
leases, including future minimum payments.

The Company has guaranteed the residual values of the leased production
equipment. The guarantees extend through the maturity of the underlying lease,
which is in 2005. In the event the Company exercises its option not to purchase
the production equipment, the Company has guaranteed a residual value of $16.3
million. We do not believe we have any potential loss due to this guarantee.

PENSION AND OTHER POST RETIREMENT BENEFITS

The Company's policy is to fund its defined benefit pension plans in accordance
with applicable U.S., U.K., German and Japanese government regulations and to
make additional contributions when management deems it appropriate. At December
31, 2004, all legal funding requirements had been met. The Company contributed
$36.3 million to its pension plans in 2004 and $17.1 million in 2003. The
Company expects to contribute a total of $20 million to $25 million in 2005.

The funded status of pension plans with accumulated benefit obligations in
excess of plan assets improved from $(148.1) million at the end of 2003 to
$(127.8) million at the end of 2004. The improvement was primarily due to
positive returns on plan assets of $43.6 million and company contributions of
$36.3 million, which were partially offset by interest costs of $28.8 million,
service costs of $11.7 million and foreign currency translation of $9.7 million.

Other post retirement benefits primarily consist of post retirement health care
benefits. The Company funds these benefits as retiree claims are incurred. Other
post retirement benefits had an unfunded status of $(537.2) million at the end
of 2004, and $(537.4) million at the end of 2003. The unfunded levels were
relatively stable as increases in the liabilities related to a decline in the
interest rate assumptions used to calculate the ending liabilities for each of
the plans were offset by benefits of the new Medicare Part D plan enacted during
2004.

The Company believes it will be able to fund the requirements of these plans
through cash generated from operations or other sources for the foreseeable
future.


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


30

OTHER MATTERS
CONTINGENCIES

In the normal course of business the Company and its subsidiaries are parties to
various legal claims, actions and complaints, including matters involving
intellectual property claims, general liability and various other risks. It is
not possible to predict with certainty whether or not the Company and its
subsidiaries will ultimately be successful in any of these legal matters or, if
not, what the impact might be. The Company's environmental and product liability
contingencies are discussed separately below. The Company's management does not
expect that the results in any of these legal proceedings will have a material
adverse effect on the Company's results of operations, financial position or
cash flows.

ENVIRONMENTAL

The Company and certain of its current and former direct and indirect corporate
predecessors, subsidiaries and divisions have been identified by the United
States Environmental Protection Agency and certain state environmental agencies
and private parties as potentially responsible parties (PRPs) at various
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act (Superfund) and equivalent state laws and, as
such, may presently be liable for the cost of clean-up and other remedial
activities at 39 such sites. Responsibility for clean-up and other remedial
activities at a Superfund site is typically shared among PRPs based on an
allocation formula.

Based on information available to us, which in most cases, includes: an estimate
of allocation of liability among PRPs; the probability that other PRPs, many of
whom are large, solvent public companies, will fully pay the cost apportioned to
them; currently available information from PRPs and/or federal or state
environmental agencies concerning the scope of contamination and estimated
remediation and consulting costs; remediation alternatives; estimated legal
fees; and other factors, we have established an accrual for indicated
environmental liabilities with a balance at December 31, 2004 of approximately
$25.7 million. We expect this amount to be expended over the next three to five
years.

The Company believes that none of these matters, individually or in the
aggregate, will have a material adverse effect on its financial condition or
future operating results, generally either because estimates of the maximum
potential liability at a site are not large or because liability will be shared
with other PRPs, although no assurance can be given with respect to the ultimate
outcome of any such matter.

In connection with the sale of Kuhlman Electric Corporation, the Company agreed
to indemnify the buyer and Kuhlman Electric for certain environmental
liabilities relating to the past operations of Kuhlman Electric. The liabilities
at issue result from operations of Kuhlman Electric that pre-date the Company's
acquisition of Kuhlman Electric's parent company, Kuhlman Corporation, in 1999.
During 2000, Kuhlman Electric notified us that it discovered potential
environmental contamination at its Crystal Springs, Mississippi plant while
undertaking an expansion of the plant.

The Company has been working with the Mississippi Department of Environmental
Quality and Kuhlman Electric to investigate the extent of and remediate the
contamination. The investigation revealed the presence of polychlorinated
biphenyls (PCBs) in portions of the soil at the plant and neighboring areas.
Clean up began in 2000 and is continuing. Kuhlman Electric and others, including
the Company, have been sued in numerous related lawsuits, in which multiple
claimants allege personal injury and property damage. The Company has moved to
be dismissed from some of these lawsuits. The first trial in these lawsuits is
currently scheduled to begin in March 2005.

We believe that the accrual for environmental liabilities is sufficient to cover
any potential liability associated with this matter. However, due to the nature
of environmental liability matters, there can be no assurance that the actual
amount of environmental liabilities will not exceed the amount accrued.

PRODUCT LIABILITY

Like many other industrial companies who have historically operated in the
United States, the Company (or parties the Company indemnifies) continues to be
named as one of many defendants in asbestos-related personal injury actions.
Management believes that the Company's involvement is limited because, in
general, these claims relate to a few types of automotive friction products,
manufactured many years ago that contained encapsulated asbestos. The nature of
the fibers, the encapsulation and the manner of use lead the Company to believe
that these products are highly unlikely to cause harm. At December 31, 2004, the
Company had approximately 100,000 pending asbestos-related product liability
claims. Of these outstanding claims, approximately 92,000 are pending in just
three jurisdictions, where significant tort reform activities are underway. The
Company's policy is to aggressively defend against these lawsuits and the
Company has been successful in obtaining dismissal of many claims without any
payment. The Company expects that the vast majority of the pending
asbestos-related product liability claims where it is a defendant (or has an
obligation to indemnify a defendant) will result in no payment being made by the
Company or its insurers. In 2004 of the 4,062 claims settled, only 255 (6.3%)
resulted in any payment being made to a claimant by or on behalf of the Company.
In 2003 of the 4,664 claims settled, only 273 (5.9%) resulted in any payment
being made to claimants. The settlement costs of these claims were paid by the
insurance carriers, except for the $1.0 million in 2004 as described in the
paragraph below. Based upon the encapsulated nature of the products, our
experiences in aggressively defending and resolving claims in the past, and our
significant insurance coverage with solvent carriers as of the date of this
filing, management does not believe that asbestos-related product liability
claims are likely to have a material adverse effect on the Company's results of
operations, cash flows or financial condition.

Prior to June 2004, all claims were covered by the Company's primary layer
insurance coverage, and these carriers administered, defended, settled and paid
all claims under a funding agreement. In June 2004, the Company was notified by
primary layer insurance






                                                                 BorgWarner Inc.
                                                   and Consolidated Subsidiaries

                                                                              31

carriers of the exhaustion of their policy limits. This led the Company to
access the next available layer of insurance coverage. Since June 2004,
secondary layer insurers have paid asbestos-related litigation defense and
settlement expenses pursuant to a funding agreement. Two secondary layer
insurers are currently not participating in this arrangement until they are
satisfied through an audit process, that the primary level of insurance is
exhausted. The Company therefore paid $1.0 million in defense and settlement
costs in late 2004 and expects to recover those amounts from either these
insurers, or the primary layer insurers if the exhaustion audit shows that
primary layer insurance is still available.

The Company's contractual relationship with the secondary layer carriers
provides a change in circumstances and allows the Company to take a more direct
role in defending and settling claims than with the primary carriers.
Previously, the Company's arrangement utilized the primary layer insurance
carriers' positions to defend and negotiate the settlements with periodic input
from the Company.

At December 31, 2004, the Company recorded a liability of $40.8 million; with a
related asset of $40.8 million to recognize the insurance proceeds receivable to
the Company for estimated claim losses. For 2003, the comparable value of the
insurance receivable and accrued liability was $41.6 million.

The amounts recorded in the Consolidated Balance Sheets are as follows:




millions of dollars                                        2004        2003
- ----------------------------------------------------------------------------
                                                            
Assets:
  Prepayments and other current assets            $        13.5   $    13.7
  Other non-current assets                                 27.3        27.9
                                               -----------------------------
    Total insurance receivable                    $        40.8   $    41.6
                                               -----------------------------
Liabilities:
  Accounts payable and accrued expenses           $        13.5   $    13.7
  Long-term liabilities -- other                           27.3        27.9
                                               -----------------------------
    Total accrued liability                       $        40.8   $    41.6
                                               -----------------------------


The insurance receivable and accrued liability of $41.6 million in 2003 have
been reclassified as outlined above and the reclassification is not material to
the Company's Consolidated Financial Statements.

We cannot reasonably estimate possible losses, if any, in excess of those for
which we have accrued, because we cannot predict how many additional claims may
be brought against the Company (or parties the Company has an obligation to
indemnify) in the future, the allegations in such claims, the possible outcomes,
or the impact of tort reform legislation currently being considered at the State
and Federal levels.

A declaratory judgment action was filed in January 2004 in the Circuit Court of
Cook County, Illinois by Continental Casualty Company and related companies
(CNA) against the Company and certain of its other historical general liability
insurers. CNA provided the Company with both primary and additional layer
insurance, and, in conjunction with other insurers, is currently defending and
indemnifying the Company in all of its pending asbestos-related product
liability claims. The lawsuit seeks to determine the extent of insurance
coverage available to the Company including whether the available limits exhaust
on a "per occurrence" or an "aggregate" basis, and to determine how the
applicable coverage responsibilities should be apportioned. In addition to the
primary insurance available for asbestos-related claims, the Company has
substantial additional layers of insurance available for potential future
asbestos-related product claims.

Although it is impossible to predict the outcome of pending or future claims;
due to the encapsulated nature of the products, our experiences in aggressively
defending and resolving claims in the past, and our significant insurance
coverage with solvent carriers as of the date of this filing, management does
not believe that asbestos-related product liability claims are likely to have a
material adverse effect on the Company's results of operations, cash flows or
financial condition.

CRITICAL ACCOUNTING POLICIES

The Consolidated Financial Statements are prepared in conformity with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires the use of estimates, judgments and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. In preparing these financial statements,
management has made its best estimates and judgments of certain amounts included
in the financial statements, giving due consideration to materiality. The
significant accounting principles which management believes are the most
important to aid in fully understanding our financial results are included
below. Management also believes that all of the accounting policies are
important to investors.

REVENUE RECOGNITION

The Company recognizes revenue upon shipment of product when title and risk of
loss pass to the customer. Although the Company may enter into long-term supply
agreements with its major customers, each shipment of goods is treated as a
separate sale and the price is not fixed over the life of the agreements.

SALES OF RECEIVABLES

The Company securitizes and sells certain receivables through third party
financial institutions without recourse. The amount sold can vary each month
based on the amount of underlying receivables. In the fourth quarter of 2003,
the Company reduced the maximum size of the facility from $90 million to $50
million. In the fourth quarter of 2002, the Company reduced the maximum size of
the facility from $120 million to $90 million.





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

32

IMPAIRMENT OF LONG-LIVED ASSETS

The Company periodically reviews the carrying value of its long-lived assets,
whether held for use or disposal, including other intangible assets, when events
and circumstances warrant such a review. This review is performed using
estimates of future cash flows. If the carrying value of a long-lived asset is
considered impaired, an impairment charge is recorded for the amount by which
the carrying value of the long-lived asset exceeds its fair value. Management
believes that the estimates of future cash flows and fair value assumptions are
reasonable; however, changes in assumptions underlying these estimates could
affect the evaluations.

GOODWILL

The Company annually reviews its goodwill for impairment in the fourth quarter
of each year for all of its reporting units, or when events and circumstances
warrant such a review. This review requires us to make significant assumptions
and estimates about the extent and timing of future cash flows, discount rates,
and growth rates. The cash flows are estimated over a significant future period
of time, which makes those estimates and assumptions subject to an even higher
degree of uncertainty. We also utilize market valuation models and other
financial ratios, which require us to make certain assumptions and estimates
regarding the applicability of those models to our assets and businesses. We
believe that the assumptions and estimates used to determine the estimated fair
values of each of our reporting units are reasonable. However, different
assumptions could materially affect the estimated fair value. The goodwill
impairment test was performed in November 2004, and no impairment was found.
Amortization continues to be recorded for other intangible assets with definite
lives.

ENVIRONMENTAL ACCRUAL

We work with outside experts to determine a range of potential liability for
environmental sites. The ranges for each individual site are then aggregated
into a loss range for the total accrued liability. Management's estimate of the
loss range for 2004 is between $21.3 million and $69.9 million. We record an
accrual at the most probable amount unless one cannot be determined; in which
case we record the accrual at the low end of the range. At the end of 2004, our
total accrued environmental liability was $25.7 million.

PRODUCT WARRANTY

Provisions for estimated expenses related to product warranty are made at the
time products are sold. These estimates are established using historical
information about the nature, frequency, and average cost of warranty claims as
related to the warranty provisions of our sales agreements with customers. We
actively study trends of warranty claims and take action to improve product
quality and minimize warranty claims. We believe that the warranty accrual is
appropriate; however, actual claims incurred could differ from the original
estimates, requiring adjustments to the accrued liability.

OTHER LOSS ACCRUALS AND VALUATION ALLOWANCES

The Company has numerous other loss exposures, such as customer claims, workers'
compensation claims, litigation, and recoverability of assets. Establishing loss
accruals or valuation allowances for these matters requires the use of estimates
and judgment in regards to the risk exposure and ultimate realization. We
estimate losses under the programs using consistent and appropriate methods;
however, changes to our assumptions could materially affect our recorded
liabilities for loss.

PENSION AND OTHER POST RETIREMENT BENEFITS

The Company provides post retirement benefits to a substantial portion of its
employees. Costs associated with post retirement benefits include pension and
post retirement health care expenses for employees, retirees and surviving
spouses and dependents. The Company's employee pension and post retirement heath
care expenses are dependent on management's assumptions used by actuaries in
calculating such amounts. These assumptions include discount rates, health care
cost trend rates, inflation, long-term return on plan assets, retirement rates,
mortality rates and other factors. Health care cost trend assumptions are
developed based on historical cost data, the near-term outlook, and an
assessment of likely long-term trends. The inflation assumption is based on an
evaluation of external market indicators. Retirement and mortality rates are
based primarily on actual plan experience.

The Company's approach to establishing the discount rate is based upon corporate
bond indices. In the United States, the discount rate assumption is based upon
the Moody's Aa Corporate Bond Index as of December 31, 2004, rounded up or down
to the nearest 25 basis points. Based on this approach, at December 31, 2004,
the Company lowered the discount rate for its U.S. pension and other benefit
plans to 5.75% from 6.00% at December 31, 2003. For the U.K. plans, the discount
rate assumption is based on the iBoxx AA rated bonds. At December 31, 2004, the
discount rate used was 5.75%. For other locations, similar indices and methods
are used.

The Company determines its expected return on plan asset assumptions by
evaluating both historical returns as well as estimates of future returns.
Specifically, the Company analyzed the average historical broad market returns
for various periods of time over the past 100 years for equities and over a
30-year period for fixed income securities, and adjusted the computed amount for
any expected changes in the long-term outlook for the equity and fixed income
markets. The Company's expected return on assets was based on expected equity
and fixed income returns weighted by the percentage of assets allocated to each
plan. The Company's estimate of the long-term rate of return on assets for its
U.S. pension is 8.75% for 2004 and 2003; and 9.5% for 2002. The Company does
not anticipate a change in the long-term rate of return on assets for pension
benefits in 2005. For the U.K. plan, the expected return is based upon the
relative weight of equity and debt investments, and the recent performance of
those investments. The Company's estimate of the long-term rate of return on
assets for its U.K. pension is 6.75% for 2004 and 2003, and 7.0% for 2002.





                                                                 BorgWarner Inc.
                                                   and Consolidated Subsidiaries

                                                                              33
See Note 8 to the Consolidated Financial Statements for more information
regarding costs and assumptions for employee retirement benefits.

DERIVATIVES

The Company recognizes that certain normal business transactions generate risk.
Example of risks include exposure to exchange risk related to transactions
denominated in currencies other than the functional currency, changes in cost of
major raw materials and supplies, and changes in interest rates. It is the
objective and responsibility of the Company to assess the impact of these
transactions risks, and offer protection from selected risks through various
methods including financial derivatives. All derivative instruments held by the
Company are designated as hedges, have high correlation with the underlying
exposure and are highly effective in offsetting underlying price movements.
Accordingly, gains and losses from changes in derivative fair values are matched
with the underlying transactions. The Company does not engage in any derivative
transactions for purposes other than hedging specific risks.

NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation (FIN) No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51," which was revised in December 2003. FIN No. 46R
requires that the assets, liabilities and results of the activity of variable
interest entities be consolidated into the financial statements of the entity
that has the controlling financial interest. FIN No. 46R also provides the
framework for determining whether a variable interest entity should be
consolidated. For the Company, this Interpretation, as revised, was effective
January 1, 2004. The Company has no variable interest entities required to be
consolidated as a result of adopting FIN No. 46R.

In December 2003, the Medicare Prescription Drug Improvement and Modernization
Act of 2003 (Medicare Act) introduced a prescription drug benefit under
Medicare, as well as a federal subsidy to sponsors of retiree health care
benefit plans. In January 2004, the FASB issued FASB Staff Position (FSP) No.
106-1, "Accounting Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003." FSP 106-1 permits a sponsor
of a post retirement health care plan that provides a prescription drug benefit
to make a one-time election to defer accounting for the effects of the Medicare
Act if there is insufficient data, time or guidance available to ensure
appropriate accounting. The Company is a sponsor of post retirement health care
plans that provide prescription benefits and, in accordance with the one-time
election under FSP 106-1, elected to defer accounting for the Medicare Act. In
May 2004, the FASB issued FSP 106-2, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003," which supersedes FSP 106-1, to address the accounting and disclosure
requirements related to the Medicare Act. This FSP was adopted by the Company
beginning with its third quarter ended September 30, 2004. The effect of the
adoption was to reduce the Company's 2004 post retirement benefits expense by
$6.8 million.

In November 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 151, "Inventory Costs" which is an amendment of ARB No. 43, Chapter
4. This statement provides clarification of accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted material. Generally,
this statement requires that those items be recognized as current period
charges. SFAS 151 will be effective for the Company on January 1, 2006. The
Company is currently evaluating the impact that the adoption of SFAS 151 will
have on its consolidated financial position, results of operations and cash
flows.

In December 2004, the FASB issued FSP 109-1, "Application of FASB Statement No.
109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004" (AJCA), and FSP
109-2 "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the AJCA." These two FSPs provide guidance on the application
of the new provisions of the AJCA, which was signed into law on October 22,
2004.

The AJCA provides a deduction for income from qualified domestic production
activities, which will be phased in from 2005 through 2010. In return, the AJCA
provides for a two-year phase-out of the existing extra-territorial income
exclusion (ETI) for foreign sales that was viewed to be inconsistent with
international trade protocols by the European Union. Under the guidance in FSP
109-1, the deduction will be treated as a "special deduction" as described in
SFAS 109. As such, the special deduction has no effect on deferred tax assets
and liabilities existing at the enactment date. Rather, the impact of this
deduction will be reported in the period in which the deduction is claimed on
our tax return. The Company expects the net effect of the phase out of the ETI
and the phase in of this new deduction will not have a material impact on its
effective tax rate.

FSP 109-2 provides guidance on the accounting for the deduction of 85% of
certain foreign earnings that are repatriated, as defined in the AJCA. The
Company may elect to apply this provision to qualifying earnings repatriations
in 2005. Under the guidance set forth in FSP 109-2, the Company is allowed time
beyond the financial reporting period of enactment to evaluate the effect of the
AJCA on its plan for reinvestment or repatriation of foreign earnings. The
Company has started an evaluation of the effects of the repatriation provision;
however, the Company does not expect to be able to complete this evaluation
until after the U.S. Congress or the Treasury Department provides additional
clarifying language on key elements of the provision. The Company expects to
complete its evaluation of the effects of the repatriation provision within a
reasonable period of time following the publication of the additional clarifying
language. The range of possible amounts that the Company is considering for
repatriation under this provision is between zero and $74 million. The related
range of income tax effects of such repatriation cannot be reasonably estimated
until guidance is issued by Congress or the Treasury Department.

In December 2004, the FASB issued SFAS No. 123R, "Shared-Based Payment" which
requires companies to measure and recognize compensation expense for all
share-based payments at fair value. Share-based payments include stock option
grants and certain transactions under other Company stock plans. The Company
grants options to



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

34

purchase common stock of the Company to some of its employees and directors
under various plans at prices equal to the market value of the stock on the
dates the options are granted. SFAS 123R will be effective for the Company
beginning July 1, 2005. The Company is currently evaluating the impact that the
adoption of SFAS 123R will have on its consolidated financial position, results
of operations and cash flows.

QUALITATIVE AND QUANTITATIVE DISCLOSURE
ABOUT MARKET RISK

The Company's primary market risks include fluctuations in interest rates and
foreign currency exchange rates. We are also affected by changes in the prices
of commodities used or consumed in our manufacturing operations. Some of our
commodity purchase price risk is covered by supply agreements with customers and
suppliers. Other commodity purchase price risk is addressed by hedging
strategies, which include forward contracts. The Company enters into derivative
instruments only with high credit quality counterparties and diversifies its
positions across such counterparties in order to reduce its exposure to credit
losses. We do not engage in any derivative instruments for purposes other than
hedging specific risks.

We have established policies and procedures to manage sensitivity to interest
rate, foreign currency exchange rate and commodity purchase price risk, which
include monitoring the level of exposure to each market risk.

INTEREST RATE RISK

Interest rate risk is the risk that we will incur economic losses due to adverse
changes in interest rates. The Company manages its interest rate risk by
balancing its exposure to fixed and variable rates while attempting to minimize
its interest costs. The Company selectively uses interest rate swaps to reduce
market value risk associated with changes in interest rates (fair value hedges).
At the end of 2004, the amount of net debt with fixed interest rates was 62% of
total debt, including the impact of the interest rate swaps. Our earnings
exposure related to adverse movements in interest rates is primarily derived
from outstanding floating rate debt instruments that are indexed to floating
money market rates. A 10% increase or decrease in the average cost of our
variable rate debt would result in a change in pre-tax interest expense for 2004
of approximately $1.3 million, and $1.0 million in 2003.

We also measure interest rate risk by estimating the net amount by which the
fair value of all of our interest rate sensitive assets and liabilities would be
impacted by selected hypothetical changes in market interest rates. Fair value
is estimated using a discounted cash flow analysis. Assuming a hypothetical
instantaneous 10% change in interest rates as of December 31, 2004, the net fair
value of these instruments would increase by approximately $23.8 million if
interest rates decreased and would decrease by approximately $21.9 million if
interest rates increased. Our interest rate sensitivity analysis assumes a
constant shift in interest rate yield curves. The model, therefore, does not
reflect the potential impact of changes in the relationship between short-term
and long-term interest rates. Interest rate sensitivity at December 31, 2003,
measured in a similar manner, was slightly greater than at December 31, 2004.

FOREIGN CURRENCY EXCHANGE RATE RISK

Foreign currency risk is the risk that we will incur economic losses due to
adverse changes in foreign currency exchange rates. Currently, our most
significant currency exposures relate to the Euro, the Japanese Yen, the British
Pound, the Hungarian Forint and the South Korean Won. We mitigate our foreign
currency exchange rate risk principally by establishing local production
facilities in markets we serve, by invoicing customers in the same currency as
the source of the products and by funding some of our investments in foreign
markets through local currency loans and cross currency swaps. Such non-U.S.
Dollar debt was $324.6 million as of December 31, 2004 and $184.0 million as of
December 31, 2003. We also monitor our foreign currency exposure in each country
and implement strategies to respond to changing economic and political
environments. In addition, the Company periodically enters into forward currency
contracts in order to reduce exposure to exchange rate risk related to
transactions denominated in currencies other than the functional currency. In
the aggregate, our exposure related to such transactions was not material to our
financial position, results of operations or cash flows in both 2004 and 2003.

COMMODITY PRICE RISK

Commodity price risk is the possibility that we will incur economic losses due
to adverse changes in the cost of raw materials used in the production of our
products. Commodity forward and option contracts are executed to offset our
exposure to the potential change in prices mainly for various non-ferrous metals
and natural gas consumption used in the manufacturing of automotive components.
As of December 31, 2004, and 2003, we had contracts with a total notional value
of $3.4 and $1.1 million, respectively.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

Statements contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operations may contain forward-looking statements as
contemplated by the 1995 Private Securities Litigation Reform Act that are based
on management's current expectations, estimates and projections. Words such as
"expects," "anticipates," "intends," "plans," "believes," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. Forward-looking statements are subject to risks and
uncertainties, many of which are difficult to predict and generally beyond the
control of the Company, which could cause actual results to differ materially
from those projected or implied in the forward-looking statements. Such risks
and uncertainties include: fluctuations in domestic or foreign automotive
production, the continued use of outside suppliers, fluctuations in demand for
vehicles containing BorgWarner products, general economic conditions, as well as
other risks detailed in the Company's filings with the Securities and Exchange
Commission, including the Cautionary Statements filed as Exhibit 99.1 to the
Form 10-K for the fiscal year ended December 31, 2004. The Company does not
undertake any obligation to update any forward-looking statement.



Management's Responsibility for
Consolidated Financial Statements

                                                                              35

The information in this report is the responsibility of management. BorgWarner
Inc. and Consolidated Subsidiaries (the "Company") has in place reporting
guidelines and policies designed to ensure that the statements and other
information contained in this report present a fair and accurate financial
picture of the Company. In fulfilling this management responsibility, we make
informed judgments and estimates conforming with accounting principles generally
accepted in the United States of America.

The accompanying Consolidated Financial Statements have been audited by Deloitte
& Touche LLP, independent auditors. Management has made available all the
Company's financial records and related information deemed necessary by Deloitte
& Touche LLP. Furthermore, management believes that all representations made by
it to Deloitte & Touche LLP during its audit were valid and appropriate.

Management is responsible for maintaining a comprehensive system of internal
control through its operations that provides reasonable assurance that assets
are protected from improper use, that material errors are prevented or detected
within a timely period and that records are sufficient to produce reliable
financial reports. The system of internal control is supported by written
policies and procedures that are updated by management as necessary. The system
is reviewed and evaluated regularly by the Company's internal auditors as well
as by the independent auditors in connection with their annual audit of the
financial statements. The independent auditors conduct their evaluation in
accordance with auditing standards generally accepted in the United States of
America and perform such tests of transactions and balances as they deem
necessary. Management considers the recommendations of its internal auditors and
independent auditors concerning the Company's system of internal control and
takes the necessary actions that are cost-effective in the circumstances.
Management believes that, as of December 31, 2004, the Company's system of
internal control was effective to accomplish the objectives set forth in the
first sentence of this paragraph.

The Company's Finance and Audit Committee, composed entirely of directors of the
Company who are not employees, meets periodically with the Company's management
and independent auditors to review financial results and procedures, internal
financial controls and internal and external audit plans and recommendations. In
carrying out these responsibilities, the Finance and Audit Committee and the
independent auditors have unrestricted access to each other with or without the
presence of management representatives.



/s/ Timothy M. Manganello        /s/ Robin J. Adams
- -------------------------        -------------------------
Timothy M. Manganello            Robin J. Adams
Chairman and                     Executive Vice President,
Chief Executive Officer          Chief Financial Officer &
                                 Chief Administrative Officer
March 7, 2005


To The Board of Directors and Stockholders of BorgWarner Inc.:

We have audited the consolidated balance sheets of BorgWarner Inc. and
Consolidated Subsidiaries (the Company) as of December 31, 2004 and 2003, and
the related consolidated statements of operations, cash flows, and stockholders'
equity and comprehensive income for each of the three years in the period ended
December 31, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of BorgWarner Inc. and Consolidated
Subsidiaries at December 31, 2004 and 2003, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2004 in conformity with accounting principles generally accepted in the
United States of America.

We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 7, 2005 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.

/s/ Deloitte & Touche LLP

Detroit, Michigan

March 7, 2005





Consolidated Statements of Operations

                                                                              36




millions of dollars, except per share amounts
For the Year Ended December 31,                                                2004         2003       2002
- -------------------------------------------------------------------------------------------------------------
                                                                                          
Net sales                                                                  $3,525.3     $3,069.2   $2,731.1
Cost of sales                                                               2,874.2      2,482.5    2,176.5
                                                                           ----------------------------------
  Gross profit                                                                651.1        586.7      554.6
Selling, general and administrative expenses                                  339.0        316.9      303.5
Other, net                                                                      3.0         (0.1)      (0.9)
                                                                           ----------------------------------
  Operating income                                                            309.1        269.9      252.0
Equity in affiliates earnings, net of tax                                     (29.2)       (20.1)     (19.5)
Interest expense and finance charges                                           29.7         33.3       37.7
                                                                           ----------------------------------
Earnings before income taxes                                                  308.6        256.7      233.8
Provision for income taxes                                                     81.2         73.2       77.2
Minority interest, net of tax                                                   9.1          8.6        6.7
                                                                           ----------------------------------
Net earnings before cumulative effect of accounting change                    218.3        174.9      149.9
Cumulative effect of change in accounting principle, net of tax                  --           --     (269.0)
                                                                           ----------------------------------
Net earnings/(loss)                                                        $  218.3     $  174.9    $(119.1)
                                                                           ----------------------------------
Earnings/(loss) per share -- basic:
  Earnings per share before cumulative effect of accounting change         $   3.91     $   3.23    $  2.82
  Cumulative effect of change in accounting principle                            --           --      (5.05)
                                                                           ----------------------------------
   Earnings/(loss) per share -- basic                                      $   3.91     $   3.23    $ (2.23)
                                                                           ----------------------------------
Earnings/(loss) per share -- diluted:
  Earnings per share before cumulative effect of accounting change         $   3.86     $   3.20    $  2.79
  Cumulative effect of change in accounting principle                            --           --      (5.01)
                                                                           ----------------------------------
    Earnings/(loss) per share -- diluted                                   $   3.86     $   3.20    $ (2.22)
                                                                           ----------------------------------
Average shares outstanding (thousands):
  Basic                                                                      55,872       54,116     53,250
  Diluted                                                                    56,537       54,604     53,708




See Accompanying Notes to Consolidated Financial Statements.



Consolidated Balance Sheets

                                                                 BorgWarner Inc.
                                                   and Consolidated Subsidiaries


                                                                              37




millions of dollars
December 31,                                                                         2004        2003
- --------------------------------------------------------------------------------------------------------

                                                                                       
ASSETS
Cash and cash equivalents                                                        $  229.7    $  113.1
Receivables                                                                         499.1       414.9
Inventories                                                                         223.4       201.3
Deferred income taxes                                                                22.6        32.8
Investment in business held for sale                                                 44.2        32.0
Prepayments and other current assets                                                 55.3        44.2
                                                                               -------------------------
    Total current assets                                                          1,074.3       838.3
Land                                                                                 45.0        42.3
Buildings                                                                           358.2       327.4
Machinery and equipment                                                           1,352.3     1,216.0
Capital leases                                                                        1.1         2.8
Construction in progress                                                            103.0        77.2
                                                                               -------------------------
                                                                                  1,859.6     1,665.7
Less accumulated depreciation                                                       782.4       680.4
                                                                               -------------------------
    Net property, plant and equipment                                             1,077.2       985.3
Tooling, net of amortization                                                        102.1        90.5
Investments and advances                                                            193.7       177.3
Goodwill                                                                            860.8       852.0
Other noncurrent assets                                                             221.0       197.1
                                                                               -------------------------
    Total other assets                                                            1,377.6     1,316.9
                                                                               -------------------------
       Total assets                                                              $3,529.1    $3,140.5
                                                                               -------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable and current portion of long-term debt                              $   16.5    $   10.0
Accounts payable and accrued expenses                                               608.0       474.0
Income taxes payable                                                                 39.3          --
                                                                               -------------------------
    Total current liabilities                                                       663.8       484.0
Long-term debt                                                                      568.0       645.5
Long-term liabilities:
  Retirement-related liabilities                                                    498.0       503.0
  Other                                                                             242.9       230.4
                                                                               -------------------------
    Total long-term liabilities                                                     740.9       733.4
Minority interest in consolidated subsidiaries                                       22.2        17.2
Capital stock:
  Preferred stock, $0.01 par value; authorized shares: 5,000,000; none issued          --          --
  Common stock, $0.01 par value; authorized shares: 150,000,000;
    issued shares: 2004, 56,361,167 and 2003, 55,229,854;
    outstanding shares: 2004, 56,357,183; 2003, 55,157,190                            0.6         0.3
  Non-voting common stock, $0.01 par value; authorized shares: 25,000,000;
    none issued and outstanding                                                        --          --
Capital in excess of par value                                                      797.1       756.3
Retained earnings                                                                   681.4       491.3
Accumulated other comprehensive income                                               55.2        14.0
Common stock held in treasury, at cost: 2004, 3,984 shares; 2003,
  72,664 shares                                                                      (0.1)       (1.5)
                                                                               -------------------------
    Total stockholders' equity                                                    1,534.2     1,260.4
                                                                               -------------------------
       Total liabilities and stockholders' equity                                $3,529.1    $3,140.5
                                                                               -------------------------


See Accompanying Notes to Consolidated Financial Statements.





Consolidated Statements of Cash Flows

38




millions of dollars
For the Year Ended December 31,                                                 2004       2003       2002
- --------------------------------------------------------------------------------------------------------------
                                                                                          
OPERATING
Net earnings/(loss)                                                          $ 218.3    $ 174.9    $(119.1)
Adjustments to reconcile net earnings/(loss) to net cash flows
from operations:
Non-cash charges (credits) to operations:
  Depreciation                                                                 138.8      124.5      108.1
  Amortization of tooling                                                       38.2       36.8       29.3
  Cumulative effect of change in accounting principle, net of tax                 --         --      269.0
  Employee retirement benefits funded with common stock                         25.8       12.9       20.8
  Deferred income tax provision                                                 13.8       40.0       30.4
  Equity in affiliate earnings, net of dividends received, minority
   interest and other                                                            5.8       (3.7)      (4.1)
                                                                            ----------------------------------
    Net earnings adjusted for non-cash charges                                 440.7      385.4      334.4
Changes in assets and liabilities, net of effects of divestitures:
  (Increase) in receivables                                                    (60.4)     (90.4)     (67.4)
  (Increase) in inventories                                                    (12.7)      (9.1)     (29.3)
  (Increase) decrease in prepayments                                            (7.0)       7.3       (3.4)
  Increase (decrease) in accounts payable and accrued expenses                 113.1       (0.3)     (14.7)
  Increase (decrease) in income taxes payable                                   36.0       (0.2)      14.1
  Net change in other long-term assets and liabilities                         (83.1)      14.2       27.7
                                                                            ----------------------------------
    Net cash provided by operating activities                                  426.6      306.9      261.4

INVESTING
Capital expenditures                                                          (204.9)    (172.0)    (138.4)
Tooling outlays, net of customer reimbursements                                (47.5)     (42.4)     (27.7)
Net proceeds from asset disposals                                                4.2        8.0       12.3
Proceeds from sale of businesses                                                  --        5.4        3.3
Tax refunds related to businesses sold                                            --         --       20.5
Contingent valuation payment on acquired business                                 --      (12.8)        --
Investment in unconsolidated subsidiary                                         (9.0)     (14.4)        --
                                                                            ----------------------------------
    Net cash used in investing activities                                     (257.2)    (228.2)    (130.0)

FINANCING
Net increase (decrease) in notes payable                                         5.3       (5.5)     (22.8)
Additions to long-term debt                                                      0.6        0.3        2.3
Repayments of long-term debt                                                   (61.8)     (16.1)     (85.3)
Payments for purchase of treasury stock                                           --       (2.5)     (18.1)
Proceeds from stock options exercised                                           14.4       39.3        9.8
Dividends paid                                                                 (27.9)     (19.4)     (16.0)
                                                                            ----------------------------------
    Net cash used in financing activities                                      (69.4)      (3.9)    (130.1)
Effect of exchange rate changes on cash and cash equivalents                    16.6        1.7        2.4
                                                                            ----------------------------------
Net increase in cash and cash equivalents                                      116.6       76.5        3.7
Cash and cash equivalents at beginning of year                                 113.1       36.6       32.9
                                                                            ----------------------------------
Cash and cash equivalents at end of year                                     $ 229.7    $ 113.1    $  36.6
                                                                            ----------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Net cash paid/(refunded) during the year for:
  Interest                                                                   $  29.3    $  34.5    $  39.5
  Income taxes                                                                  35.0       24.4      (11.0)
Non-cash financing transactions:
  Issuance of common stock for Executive Stock Performance Plan              $   1.7    $   3.3    $   1.2
  Issuance of restricted common stock for non-employee directors                 0.3         --         --




See Accompanying Notes to Consolidated Financial Statements.



Consolidated Statements of Stockholders' Equity and Comprehensive Income

                                                                 BorgWarner Inc.
                                                   and Consolidated Subsidiaries


                                                                              39



                                                                                  millions of dollars
                                                   ---------------------------------------------------------------------------------
                                                                                                                       Comprehensive
                              Number of shares                            Stockholders' equity                         income/(loss)
                            -------------------    ------------------------------------------------------------------- -------------
                                                                                                          Accumulated
                            Issued       Common    Issued  Capital in             Management                    other
                            common     stock in    common   excess of  Treasury  shareholder  Retained  comprehensive
                             stock     treasury     stock   par value    stock         notes  earnings   income/(loss)
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                            
Balance, January 1, 2002  54,079,936  (1,349,598)  $  0.3     $ 715.7   $(27.6)     $ (2.0)   $ 470.9          $(53.1)

 Purchase of treasury
  stock                           --    (770,000)                  --    (18.1)         --         --              --         --
  Dividends declared              --          --       --          --       --          --      (16.0)             --         --
 Shares issued under
  stock incentive plans           --     435,264       --         0.9      8.9          --         --              --         --
 Shares issued under
  executive stock plan            --      46,560       --         0.3      0.9          --         --              --         --
 Shares issued under
  retirement savings
  plans                      717,846          --       --        20.8       --          --         --              --         --

 Net loss                         --          --       --          --       --          --     (119.1)             --    $(119.1)
 Adjustment for minimum
  pension liability               --          --       --          --       --          --         --           (42.3)     (42.3)
 Currency translation and
  hedge instruments
  adjustment                      --          --       --          --       --          --         --            40.9       40.9
- ------------------------------------------------------------------------------------------------------------------------------------

Balance, December 31,     54,797,782  (1,637,77)   $ 0.3     $ 737.7    $(35.9)     $ (2.0)   $335.80          $(54.5)   $(120.5)
 2002

 Purchase of treasury
  stock                           --     (83,860)                  --     (2.5)         --         --              --         --
 Dividends declared               --          --       --          --       --          --      (19.4)             --         --
 Management shareholder
  notes                           --          --       --          --       --         2.0         --              --         --
 Shares issued under
  stock incentive plans           --   1,517,208       --         5.3     34.0          --         --              --         --
 Shares issued under
  executive stock plan            --     131,762       --         0.4      2.9          --         --              --         --
 Shares issued under
  retirement savings
  plans                      432,072          --       --        12.9       --          --         --              --         --
 Net income                       --          --       --          --       --          --      174.9              --     $174.9
 Adjustment for
  minimum
  pension liability               --          --       --          --       --          --         --             0.7        0.7
Currency
translation and hedge
instruments                       --          --       --          --       --          --         --            67.8       67.8
adjustment
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December          55,229,854    (72,664)   $ 0.3     $ 756.3   $ (1.5)       $ --  $   491.3           $14.0     $243.4
31, 2003


Dividends declared                --          --       --          --       --          --      (27.9)             --         --
Stock split                       --          --      0.3          --       --          --       (0.3)             --         --
Shares issued
  under stock
  incentive plans            523,994      68,680       --        13.0      1.4          --         --              --         --
Shares issued under
  executive stock plan        41,252          --       --         1.7       --          --         --              --         --
Restricted shares
  issued under
  stock incentive plan         6,400          --       --         0.3       --          --         --              --         --
Shares issued under
  retirement savings         559,667          --       --        25.8       --          --         --              --         --
  plans
Net income                        --          --       --          --       --          --      218.3              --     $218.3
Adjustment for
  minimum
  pension liability               --          --       --          --       --          --         --            12.8       12.8
Currency
  translation and hedge
  instruments                     --          --       --          --       --          --         --            28.4       28.4
  adjustment
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER          56,361,167     (3,984)   $ 0.6     $ 797.1   $ (0.1)       $ --     $681.4           $55.2     $259.5
31, 2004
- ------------------------------------------------------------------------------------------------------------------------------------



See Accompanying Notes to Consolidated Financial Statements.



Notes to Consolidated Financial Statements


40

INTRODUCTION

BorgWarner Inc. and Consolidated Subsidiaries (the "Company") is a leading
global supplier of highly engineered systems and components primarily for
powertrain applications. These products are manufactured and sold worldwide,
primarily to original equipment manufacturers of passenger cars, sport-utility
vehicles, trucks, commercial transportation products and industrial equipment.
Our products fall into two reportable operating segments: Drivetrain and Engine.

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following paragraphs briefly describe the Company's significant accounting
policies.

USE OF ESTIMATES The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements include all
significant majority-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.

CASH AND CASH EQUIVALENTS Cash and cash equivalents are valued at cost, which
approximates fair market value. It is the Company's policy to classify
investments with original maturities of three months or less as cash and cash
equivalents.

ACCOUNTS RECEIVABLE The Company securitizes and sells certain receivables
through third party financial institutions without recourse. The amount sold can
vary each month based on the amount of underlying receivables. In the fourth
quarter of 2003, the Company reduced the maximum size of the facility from $90
million to $50 million. In the fourth quarter of 2002, the Company reduced the
maximum size of the facility from $120 million to $90 million.

During the year ended December 31, 2004, total cash proceeds from sales of
accounts receivable were $600 million. The Company paid servicing fees of $0.9
million, $1.3 million, and $2.5 million in 2004, 2003, and 2002, respectively,
related to these receivables. These amounts are recorded in interest expense and
finance charges in the Consolidated Statements of Operations. At December 31,
2004 and 2003, the Company had sold $50 million of receivables under a
Receivables Transfer Agreement for face value without recourse.

INVENTORIES Inventories are valued at the lower of cost or market. Cost of U.S.
inventories is determined by the last-in, first-out (LIFO) method, while the
foreign operations use the first-in, first-out (FIFO) or average-cost methods.
Inventory held by U.S. operations was $106.1 million in 2004 and $97.1 million
in 2003. Such inventories, if valued at current cost instead of LIFO, would have
been greater by $6.6 million in 2004 and $3.6 million in 2003.

PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION Property, plant and equipment are
valued at cost less accumulated depreciation. Expenditures for maintenance,
repairs and renewals of relatively minor items are generally charged to expense
as incurred. Renewals of significant items are capitalized. Depreciation is
computed generally on a straight-line basis over the estimated useful lives of
the assets. Useful lives for buildings range from 15 to 40 years and useful
lives for machinery and equipment range from 3 to 12 years. For income tax
purposes, accelerated methods of depreciation are generally used.

GOODWILL AND OTHER INTANGIBLE ASSETS The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets,"
effective January 1, 2002. Under SFAS No. 142, goodwill is no longer amortized;
however, it must be tested for impairment at least annually. Under the
transitional provisions of this statement, the Company allocated goodwill to its
reporting units and performed the two-step impairment analysis. The fair value
of the Company's businesses used in determination of the goodwill impairment was
computed using the expected present value of associated future cash flows. As a
result of this analysis, the Company determined that goodwill associated with
its Emissions/Thermal Systems business unit was impaired due to fundamental
changes in their served markets, particularly the medium and heavy truck
markets, and weakness at a major customer. A resulting pre-tax charge of $345
million, $269 million after tax, was recorded. The impairment loss was recorded
in the first quarter of 2002 as a cumulative effect of change in accounting
principle. The changes in the carrying amount of goodwill for the twelve months
ended December 31, 2002, 2003 and 2004, are as follows:



millions of dollars              Drivetrain     Engine          Total
- ---------------------------------------------------------------------------
                                                    
Balance at January 1, 2002      $     133.7   $1,026.9       $1,160.6
Change in accounting principle           --     (345.0)        (345.0)
Translation adjustment                   --       11.4           11.4
                              ---------------------------------------------
Balance at December 31, 2002    $     133.7    $ 693.3       $  827.0
Contingent valuation payment
  on acquired business                   --       12.8           12.8
Translation adjustment                  0.6       11.6           12.2
                              ---------------------------------------------
Balance at December 31, 2003    $     134.3    $ 717.7       $  852.0
Translation adjustment                  0.3        8.5            8.8
                              ---------------------------------------------
Balance at December 31, 2004    $     134.6    $ 726.2       $  860.8
                              ---------------------------------------------


In the fourth quarter of each year, or when events and circumstances warrant
such a review, the Company reviews the goodwill for all of its reporting units
for impairment. This review requires us to make significant assumptions and
estimates about the extent and timing of future cash flows, discount rates and
growth rates. The cash flows are estimated over a significant future period of
time, which makes those estimates and assumptions subject to an even higher
degree of uncertainty. We also utilize market valuation models and other
financial ratios, which require us to make certain assumptions and estimates
regarding the applicability of those models to our assets and businesses. We
believe that the assumptions and estimates used to determine the estimated fair
values of each of our reporting units are reasonable. However, different
assumptions could materially affect the estimated fair value. The goodwill
impairment test was performed in November 2004. The results of that analysis did
not indicate an impairment of the book value of the Company's goodwill.


                                                                 BorgWarner Inc.
                                                   and Consolidated Subsidiaries


                                                                              41

The Company had intangible assets, primarily trade names, with a cost of $14.7
million, less accumulated amortization of $9.8 million and $8.7 million at
December 31, 2004 and 2003, respectively. The intangible assets are being
amortized on a straightline basis over their legal lives, which range from 10 to
15 years. Annual amortization expense recognized was $1.1 million in each of the
years 2004, 2003, and 2002. The estimated future annual amortization expense for
each of the successive years 2005 through 2008 is $1.2 million.

REVENUE RECOGNITION The Company recognizes revenue upon shipment of product when
title and risk of loss pass to the customer. Although the Company may enter into
long-term supply agreements with its major customers, each shipment of goods is
treated as a separate sale and the price is not fixed over the life of the
agreements.

FINANCIAL INSTRUMENTS Financial instruments consist primarily of investments in
cash, short-term securities and receivables, and obligations under accounts
payable, and debt instruments. The Company believes that the fair value of the
financial instruments approximates the carrying value, except as noted in Note
6.

The Company received corporate bonds with a face value of $30.3 million as
partial consideration for the sales of Kuhlman Electric and Coleman Cable in
1999. These bonds were recorded at their estimated fair market value of $12.9
million using valuation techniques that considered cash flows discounted at
current market rates and management's best estimates of credit quality. In 2001,
the sale agreement with Coleman Cable was renegotiated, resulting in the
exchange of the corporate bonds along with a purchase price receivable, for $3
million in cash and a $2 million note, which was fully collected in 2002. During
the first quarter of 2004 the Kuhlman Electric agreement was renegotiated
whereby the Company received a payment of $2.5 million and a new note from
Kuhlman Electric Corporation. The maturity of this new note is April 2012. The
face value of the note is $4.5 million at December 31, 2004.

DERIVATIVE FINANCIAL INSTRUMENTS The Company recognizes that certain normal
business transactions generate risk. Examples of risks include exposure to
exchange rate risk related to transactions denominated in currencies other than
the functional currency, changes in cost of major raw materials and supplies,
and changes in interest rates. It is the objective and responsibility of the
Company to assess the impact of these transaction risks, and offer protection
from selected risks through various methods including financial derivatives. All
derivative instruments held by the Company are designated as hedges, have high
correlation with the underlying exposure and are highly effective in offsetting
underlying price movements. Accordingly, gains and losses from changes in
derivative fair values are matched with the underlying transactions. The Company
does not engage in any derivative transactions for purposes other than hedging
specific risks.

FOREIGN CURRENCY The financial statements of foreign subsidiaries are translated
to U.S. Dollars using the period-end exchange rate for assets and liabilities
and an average exchange rate for each period for revenues, expenses, and capital
expenditures. The local currency is the functional currency for substantially
all the Company's foreign subsidiaries. Translation adjustments for foreign
subsidiaries are recorded as a component of accumulated other comprehensive
income in stockholders' equity.

PRODUCT WARRANTIES The Company provides warranties on some of its products. The
warranty terms are typically from one to three years. Provisions for estimated
expenses related to product warranty are made at the time products are sold.
These estimates are established using historical information about the nature,
frequency, and average cost of warranty claims. Management actively studies
trends of warranty claims and takes action to improve product quality and
minimize warranty claims. Management believes that the warranty accrual is
appropriate; however, actual claims incurred could differ from the original
estimates, requiring adjustments to the accrual. The accrual is represented in
both long-term and short-term liabilities on the balance sheet.

Below is a table that shows the activity in the warranty accrual accounts:



millions of dollars                     2004         2003        2002
- -------------------------------------------------------------------------
                                                     
Beginning balance                  $    28.7     $   23.7     $  19.5
Provisions                              10.2         12.4        14.2
Payments                               (12.5)        (7.4)      (10.0)
                                 ----------------------------------------
Ending balance                     $    26.4     $   28.7     $  23.7
                                 ----------------------------------------
Classified in the Consolidated
  Balance Sheets as:
Accounts payable and accrued
  expenses                         $    16.1     $   17.6     $  14.4
                                 ----------------------------------------
Other long term liability          $    10.3     $   11.1     $   9.3
                                 ----------------------------------------


STOCK BASED COMPENSATION SFAS No. 123, "Accounting for Stock-Based Compensation"
and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," encourage, but do not require, companies to record compensation
cost for stock-based employee compensation plans at fair value. The Company has
chosen to continue to account for stock-based compensation in accordance with
Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Accordingly, no compensation cost
has been recognized for fixed stock options because the exercise prices of the
stock options equal the market value of the Company's common stock at the date
of grant, which is the measurement date. Further disclosure about the Company's
stock compensation plans can be found in Note 9. The following table illustrates
the effect on the Company's net earnings/(loss) and net earnings/(loss) per
share if the Company had applied the fair value recognition provision of SFAS
No. 123.



 millions of dollars, except per share data        2004       2003       2002
- ------------------------------------------------------------------------------
                                                            
 Net earnings/(loss), as reported              $  218.3    $ 174.9   $  (119.)
Add: Stock-based employee
  compensation expense included
  in net income, net of income tax                  1.6        2.7        4.5
Deduct: Total stock-based employee
  compensation expense determined
  under fair value based method
  for all awards, net of income tax                (7.7)      (7.7)     (10.7)
                                            ----------------------------------
Pro forma net earnings/(loss)                  $  212.2    $ 169.9   $ (125.3)
                                            ----------------------------------
Earnings/(loss) per share:

  Basic - as reported                          $   3.91    $  3.23   $  (2.23)
  Basic - pro forma                            $   3.80    $  3.14   $  (2.36)
  Diluted - as reported                        $   3.86    $  3.20   $  (2.22)
  Diluted - pro forma                          $   3.75    $  3.11   $  (2.34)





Notes to Consolidated Financial Statements

42

NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting
Standards Board (FASB) issued Interpretation (FIN) No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51," which was revised
in December 2003. FIN No. 46R requires that the assets, liabilities and results
of the activity of variable interest entities be consolidated into the financial
statements of the entity that has the controlling financial interest. FIN No.
46R also provides the framework for determining whether a variable interest
entity should be consolidated. For the Company, this Interpretation, as revised,
was effective January 1, 2004. The Company has no variable interest entities
required to be consolidated as a result of adopting FIN No. 46R.

In December 2003, the Medicare Prescription Drug Improvement and Modernization
Act of 2003 (Medicare Act) introduced a prescription drug benefit under
Medicare, as well as a federal subsidy to sponsors of retiree health care
benefit plans. In January 2004, the FASB issued FASB Staff Position (FSP) No.
106-1, "Accounting Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003." FSP 106-1 permits a sponsor
of a post retirement health care plan that provides a prescription drug benefit
to make a one-time election to defer accounting for the effects of the Medicare
Act if there is insufficient data, time or guidance available to ensure
appropriate accounting. The Company is a sponsor of post retirement health care
plans that provide prescription benefits and, in accordance with the one-time
election under FSP 106-1, elected to defer accounting for the Medicare Act. In
May 2004, the FASB issued FSP No. 106-2, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003," which supersedes FSP 106-1, to address the accounting and disclosure
requirements related to the Medicare Act. The FSP was effective for the Company
beginning with its third quarter ended September 30, 2004. The effect of the
adoption was to reduce the Company's 2004 post retirement benefits expense by
$6.8 million.

In November 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 151, "Inventory Costs" which is an amendment of ARB No.43, Chapter 4.
This statement provides clarification of accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material. Generally, this
statement requires that those items be recognized as current period charges.
SFAS 151 will be effective for the Company on January 1, 2006. The Company is
currently evaluating the impact that the adoption of SFAS 151 will have on its
consolidated financial position, results of operations and cash flows.

In December 2004, the FASB issued FSP 109-1, "Application of FASB Statement No.
109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004" (AJCA), and FAS
109-2 "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision

within the AJCA". These two FSPs provide guidance on the application of the new
provisions of the AJCA, which was signed into law on October 22, 2004.

The AJCA provides a deduction for income from qualified domestic production
activities, which will be phased in from 2005 through 2010. In return, the AJCA
provides for a two-year phase-out of the existing extra-territorial income
exclusion (ETI) for foreign sales that was viewed to be inconsistent with
international trade protocols by the European Union. Under the guidance in FSP
109-1, the deduction will be treated as a "special deduction" as described in
SFAS 109. As such, the special deduction has no effect on deferred tax assets
and liabilities existing at the enactment date. Rather, the impact of this
deduction will be reported in the period in which the deduction is claimed on
our tax return. The Company expects the net effect of the phase out of the ETI
and the phase in of this new deduction will not have a material impact on its
effective tax rate.

FSP 109-2 provides guidance on the accounting for the deduction of 85% of
certain foreign earnings that are repatriated, as defined in the AJCA. The
Company may elect to apply this provision to qualifying earnings repatriations
in 2005. Under guidance set forth in FAS 109-2, the Company is allowed time
beyond the financial reporting period of enactment to evaluate the effect of the
AJCA on its plan for reinvestment or repatriation of foreign. The Company has
started an evaluation of the effects of the repatriation provision; however, the
Company does not expect to be able to complete this evaluation until after the
U.S. Congress or the Treasury Department provides additional clarifying language
on key elements of the provision. The Company expects to complete its evaluation
of the effects of the repatriation provision within a reasonable period of time
following the publication of the additional clarifying language. The range of
possible amounts that the Company is considering for repatriation under this
provision is between zero and $74 million. The related range of income tax
effects of such repatriation cannot be reasonably estimated until guidance is
issued by Congress or the Treasury Department.

In December 2004, the FASB issued SFAS No. 123R, "Shared-Based Payment" which
requires companies to measure and recognize compensation expense for all
share-based payments at fair value. Share-based payments include stock option
grants and certain transactions under other Company stock plans. The Company
grants options to purchase common stock of the Company to some of its employees
and directors under various plans at prices equal to the market value of the
stock on the dates the options are granted. SFAS 123R will be effective for the
Company beginning July 1, 2005. The Company is currently evaluating the impact
that the adoption of SFAS 123R will have on its consolidated financial position,
results of operations and cash flows.

RECLASSIFICATION Certain prior period amounts have been reclassified to conform
to the current year's presentation and are not material to the Company's
Consolidated Financial Statements.




                                                                 BorgWarner Inc.
                                                   and Consolidated Subsidiaries

                                                                              43


NOTE 2
RESEARCH AND DEVELOPMENT COSTS

The Company spent approximately $123.1 million, $118.2 million, and $109.1
million in 2004, 2003 and 2002, respectively, on research and development (R&D)
activities. R&D costs are included primarily in the selling, general, and
administrative expenses of the Consolidated Statements of Operations. Not
included in these amounts were customer-sponsored R&D activities of
approximately $31.8 million, $22.3 million, and $14.2 million in 2004, 2003, and
2002, respectively.

NOTE 3

OTHER INCOME

Items included in other income consist of:



millions of dollars
Year Ended December 31,                 2004          2003       2002
- -------------------------------------------------------------------------
                                                      
Gain on sale of business              $   --     $     0.5     $   --
Interest income                          0.7           0.8        1.7
Loss on asset disposals, net            (3.5)         (1.7)      (1.5)
Other                                   (0.2)          0.5        0.7
                             --------------------------------------------
                                      $ (3.0)    $     0.1     $  0.9
                             --------------------------------------------



NOTE 4
INCOME TAXES

Earnings before income taxes and the provision for income taxes are presented in
the following table. The earnings before income taxes amounts for 2003 and 2002
have been presented to conform to the 2004 U.S. versus non-U.S. presentation.



                                     2004                         2003                       2002
millions of dollars        U.S.   Non-U.S.  Total      U.S.   Non-U.S.  Total       U.S.   Non-U.S.   Total
- -----------------------------------------------------------------------------------------------------------
                                                                           
Earnings before taxes   $117.8     $190.8  $308.6    $120.5     $136.2  $256.7   $163.7      $70.1    233.8
                        -----------------------------------------------------------------------------------
Provision for income
  taxes:


  Current:
    Federal/foreign        1.4       63.8    65.2      18.5       13.1    31.6     11.1       10.6     21.7
    State                  2.2         --     2.2       1.6         --     1.6      3.1         --      3.1
                        -----------------------------------------------------------------------------------
                           3.6       63.8    67.4      20.1       13.1    33.2     14.2       10.6     24.8

  Deferred                11.1        2.7    13.8      18.5       21.5    40.0     44.8        7.6     52.4
                        -----------------------------------------------------------------------------------
Total provision for
  income taxes          $ 14.7    $  66.5  $ 81.2    $ 38.6     $ 34.6  $ 73.2   $ 59.0      $18.2    $77.2
                        -----------------------------------------------------------------------------------
Effective tax rate        12.4%      34.9%   26.3%     32.0%      25.4%   28.5%    36.0%      26.0%    33.0%
                        -----------------------------------------------------------------------------------


The provision for income taxes resulted in an effective tax rate for 2004 of
26.3% compared with rates of 28.5% in 2003 and 33.0% in 2002. Our effective tax
rates have been lower than the standard federal and state tax rates due to the
realization of certain R&D and foreign tax credits; foreign rates, which differ
from those in the U.S.; and offset by non-deductible expenses. In addition, the
Company made an $11.4 million year-end adjustment to various tax accounts due to
changes in circumstances related to various tax items, including changes in tax
laws. The year-end adjustment resulted in a reduction in the U.S. effective tax
rate for 2004.


The analysis of the variance of income taxes as reported from income taxes
computed at the U.S. statutory rate for consolidated operations is as follows:



millions of dollars                    2004          2003        2002
- -------------------------------------------------------------------------
                                                     
Income taxes at U.S. statutory
  rate of 35%                     $   108.0     $    89.8     $  81.8
Increases (decreases) resulting
  from:
  Income from non-U.S. sources
    including withholding taxes         3.6          (8.5)       (2.2)
  Business tax credits, net            (6.2)         (6.3)       (4.7)
  Affiliate earnings                  (10.2)         (7.0)       (6.8)
  Non-temporary differences and
    other                             (14.0)          5.2         9.1
                                -----------------------------------------
 Provision for income taxes as
    reported                      $    81.2     $    73.2     $  77.2
                                -----------------------------------------






Notes to Consolidated Financial Statements

44

Following are the gross components of deferred tax assets and liabilities as of
December 31, 2004 and 2003:



millions of dollars                                 2004          2003
- --------------------------------------------------------------------------
                                                        
Current deferred tax assets:

  Foreign tax credits                            $   9.0      $    7.1
  Research and development credits                   6.0           7.6
  Employee related                                   5.1           5.8
  Warranties                                          --           5.7
  Other                                              2.5           6.6
                                        ----------------------------------
Total current deferred tax assets                $  22.6      $   32.8
                                        ----------------------------------
Non-current deferred tax assets:
  Pension and other post retirement
   benefits                                      $  92.1      $   90.4
  Other comprehensive income                        36.3          33.1
  Employee related                                   9.0           8.7
  Goodwill                                           3.5          13.9
  Litigation and environmental                       9.2           7.9
  Warranties                                         7.7            --
  Foreign tax credits                                2.6            --
  Research and development credits                   4.9            --
  Other                                              5.3           1.0
                                        ----------------------------------
Non-current deferred tax assets                  $ 170.6     $   155.0
Non-current deferred tax liabilities:
  Fixed assets                                   $(163.4)    $  (163.8)
  Lease obligation - production
   equipment                                        (9.0)           --
  Other                                             (7.0)           --
                                        ----------------------------------
Non-current deferred tax liabilities             $(179.4)    $  (163.8)
                                        ----------------------------------
Net deferred tax asset (current and
 non-current)                                    $  13.8     $    24.0
                                        ----------------------------------


The deferred tax assets (current and non-current) and liabilities
recognized in the Company's Consolidated Balance Sheets are as follows:




millions of dollars                                 2004          2003
- --------------------------------------------------------------------------
                                                       
Deferred income taxes - current assets          $   22.6     $    32.8
Other non-current assets                            51.8          48.5
Other long-term liabilities                        (60.6)        (57.3)
                                        ----------------------------------
  Net deferred tax asset
    (current and non-current)                   $   13.8     $    24.0
                                        ----------------------------------



The other non-current assets are primarily comprised of amounts from the U.S.,
France and Korea. The other long-term liabilities are primarily comprised of
amounts from Germany, Italy, U.K., Japan, and Canada. The non-current deferred
tax asset in 2003 of $48.5 million was previously presented as a reduction of
the non-current deferred tax liability; this amount has been reclassified to
other non-current assets on the 2003 Consolidated Balance Sheets and the
reclassification is not material to the Company's Consolidated Financial
Statements.

The foreign tax credits will expire beginning in 2012 through 2014. The R&D tax
credits will expire beginning in 2022 through 2024. The company also has
deferred tax assets for minimum tax credits of $3.2 million, which can be
carried forward indefinitely.

No deferred income taxes have been provided on the excess of the amount for
financial reporting over the tax basis of investments in foreign subsidiaries or
foreign corporate joint ventures totaling $353.9 million in 2004, as these
amounts are essentially permanent in nature. The excess amount will become
taxable on a repatriation of assets or sale or liquidation of the investment. It
is not practicable to determine the unrecognized deferred tax liability on the
excess amount because the actual tax liability on the excess amount, if any, is
dependent on circumstances existing when remittance occurs.

NOTE 5

BALANCE SHEET INFORMATION

Detailed balance sheet data are as follows:




millions of dollars
December 31,                                              2004        2003
- --------------------------------------------------------------------------
                                                           
Receivables:
  Customers                                           $  453.9   $   374.6
  Other                                                   56.1        46.0
                                                   ------------------------
    Gross receivables                                    510.0       420.6
  Less allowance for losses                               10.9         5.7
                                                   ------------------------
    Net receivables                                   $  499.1   $   414.9
                                                   ------------------------
Inventories:
  Raw material                                        $  104.6   $    95.5
  Work in progress                                        69.8        65.1
  Finished goods                                          49.0        40.7
                                                   ------------------------
    Total inventories                                 $  223.4   $   201.3
                                                   ------------------------
Investments and advances:
  NSK-Warner                                          $  188.2   $   172.1
  Other                                                    5.5         5.2
                                                   ------------------------
Total investments and advances                        $  193.7   $   177.3
                                                   ------------------------
Other non-current assets:
  Deferred pension assets                             $  113.1   $    90.8
  Product liability insurance receivable                  27.3        27.9
  Deferred income taxes, net                              51.8        48.5
  Other                                                   28.8        29.9
                                                   ------------------------
      Total other non-current assets                  $  221.0   $   197.1
                                                   ------------------------
Accounts payable and accrued expenses:
  Trade payables                                      $  390.6   $   300.0
  Payroll and related                                     74.5        63.7
  Insurance                                               25.2        24.0
  Warranties                                              16.1        17.6
  Product liability accrual                               13.5        13.7
  Other                                                   88.1        55.0
                                                   ------------------------
     Total accounts payable and
       accrued expenses                               $  608.0   $   474.0
                                                   ------------------------
Other long-term liabilities:
  Environmental accruals                              $   25.7   $    19.6
  Warranties                                              10.3        11.1
  Deferred income taxes, net                              60.6        57.3
  Product liability accrual                               27.3        27.9
  Other                                                  119.0       114.5
                                                   ------------------------
     Total other long-term liabilities                $  242.9   $   230.4
                                                   ------------------------



NSK-WARNER

The Company has a 50% interest in NSK-Warner, a joint venture based in Japan
that manufactures automatic transmission components. The Company's share of the
earnings or losses reported by NSK-Warner is accounted for using the equity
method of accounting. NSK-Warner has a fiscal year-end of March 31. The
Company's equity in the earnings of NSK-Warner consists of the 12 months ended
November 30 so as to reflect earnings on as current a basis as is reasonably




                                                                 BorgWarner Inc.
                                                   and Consolidated Subsidiaries

                                                                              45

feasible. NSK-Warner is the joint venture partner with a 40% interest in the
Drivetrain Group's Korean subsidiary, BorgWarner Transmission Systems Korea Inc.
Dividends received from NSK-Warner were $23.9 million in 2004, $9.7 million in
2003, and $8.4 million in 2002.

Following are summarized financial data for NSK-Warner, translated using the
ending or periodic rates as of and for the years ended November 30, 2004, 2003
and 2002 (unaudited):




millions of dollars                           2004         2003      2002
- --------------------------------------------------------------------------
                                                         
Balance sheets:
  Current assets                          $  242.3     $  210.7   $ 176.0
  Non-current assets                         180.7        173.3     151.0
  Current liabilities                        126.2        108.8      85.2
  Non-current liabilities                     18.5         14.8      10.7
Statements of operations:
  Net sales                                $ 443.5      $ 356.5   $ 303.8
  Gross profit                                97.3         71.4      69.8
  Net income                                  52.6         34.5      34.0



The equity of NSK-Warner as of November 30, 2004, was $278.3 million, there was
no debt and their cash and securities were $92.4 million.

Purchases from NSK-Warner for the years ended December 31, 2004, 2003 and 2002
were $19.9 million, $16.9 million and $15.1 million, respectively.

NOTE 6
NOTES PAYABLE AND LONG-TERM DEBT

Following is a summary of notes payable and long-term debt. The weighted average
interest rate on all borrowings for 2004 and 2003 was 5.1% and 4.9%,
respectively.




millions of dollars                                                                    2004             2003
December 31,                                                                          Current       Long-Term    Current   Long-Term
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                
Bank borrowings and other                                                              $  9.2         $   6.1    $  2.9     $  42.5
Term loans due through 2011 (at an average rate of 3.3% in 2004 and 3.3% in 2003)         7.3            26.9       7.1        31.4
7% Senior Notes due 2006, net of unamortized discount ($139 million converted to
  floating rate of 4.5% by interest rate swap at December 31, 2004)                        --           139.0        --       139.4
6.5% Senior Notes due 2009, net of unamortized discount ($100 million converted to
  floating rate of 5.2% by interest rate swap at December 31, 2004)                        --           136.1        --       164.7
8% Senior Notes due 2019, net of unamortized discount ($75 million converted to
  floating rate of 5.4% by interest rate swap at December 31, 2004)                        --           133.9        --       133.9
7.125% Senior Notes due 2029, net of unamortized discount                                  --           119.1        --       122.1
                                                                                    ------------------------------------------------
Carrying amount of notes payable and long-term debt                                      16.5           561.1      10.0       634.0
Impact of derivatives on debt(a)                                                           --             6.9        --        11.5
                                                                                    ------------------------------------------------
Total notes payable and long-term debt                                                 $ 16.5         $ 568.0    $ 10.0     $ 645.5
                                                                                    ------------------------------------------------


(a)      The $11.5 million impact of derivatives on debt from the interest rate
         swaps as of December 31, 2003 has been reclassified to long-term debt
         with a corresponding non-current asset. The reclassification is not
         material to the Company's Consolidated Financial Statements.

INVESTMENT IN BUSINESS HELD FOR SALE

The Company's investment in Aktiengesellschaft Kuhnle, Kopp & Kausch (AGK), an
unconsolidated subsidiary of the Company, has been recorded in "Investment in
business held for sale" in the Consolidated Balance Sheets. Effective February
17, 2005, the Company signed a Share Transfer Agreement (STA) for the sale of
its 95.42% interest in AGK with Turbo Group GmbH. The STA will become effective
no later than seven (7) banking days after receipt of approval from both the
German Federal Cartel Office and the Austrian merger control authority. The
transaction is anticipated to close before March 31, 2005. The proceeds, net of
closing costs, are expected to be approximately Euro 39.8 million. The
investment is carried on a cost basis, with dividends received from AGK applied
against the carrying value of the asset.

Following is summarized balance sheet data as of September 30, 2004 and 2003 for
AGK (unaudited), which is the latest available. The assets and liabilities
reported in Euros were translated using the respective year-end exchange rate:




millions of dollars                                        2004       2003
- ---------------------------------------------------------------------------
                                                             
Current assets                                         $  132.3    $  79.9
Non-current assets                                         65.7       57.9
Current liabilities                                        79.7       43.7
Non-current liabilities                                    54.0       41.6






Notes to Consolidated Financial Statements

46




Annual principal payments required as of December 31, 2004 are as follows (in
millions of dollars):

                                                    
2005                                                           $   16.5
2006                                                              151.4
2007                                                                6.7
2008                                                                6.7
2009                                                              146.0
after 2009                                                        259.5
                                                       ---------------------
  Total payments                                                  586.8
Less: Unamortized discounts                                        (2.3)
                                                       ---------------------
  Total                                                        $  584.5
                                                       ---------------------


The Company has a revolving credit facility, which provides for borrowings up to
$600 million through July 2009. This new facility effective July 22, 2004
replaced the Company's previous facility of $350 million. At December 31, 2004
and December 31, 2003 there were no borrowings outstanding and no obligations
under standby letters of credit under the facility. The credit agreement is
subject to the usual terms and conditions applied by banks to an investment
grade company. The Company was in compliance with all covenants at December 31,
2004 and expects to be compliant in future periods.





                                                                                  Interest Rates(b)
                                                                      Notional   --------------------    Floating Interest
                                          Hedge Type                  Amount       Receive      Pay      Rate Basis
- -------------------------------------------------------------------------------------------------------------------------------
                                                                                          
INTEREST RATE SWAPS(a)
Fixed to floating                         Fair value                  $  139         7.0%       4.5%     6 month LIBOREuro1.7%
Fixed to floating                         Fair value                  $  100         6.5%       5.2%     6 month LIBOREuro2.4%
Fixed to floating                         Fair value                  $  75          8.0%       5.4%     6 month LIBOREuro2.6%

CROSS CURRENCY SWAP (MATURES IN 2006)
Floating $                                Net investment              $  125         4.2%        --      6 mo. USD LIBOREuro1.4%
 to floating E                                                        E  14,930       --        1.7%     6 mo. JPY LIBOREuro1.6%

CROSS CURRENCY SWAP (MATURES IN 2009)
Floating $                                Net investment              $  75          5.4%        --      6 mo. USD LIBOREuro2.6%
   to floating E                                                      E  57           --        4.8%     6 mo. EURIBOREuro2.6%

CROSS CURRENCY SWAP (MATURES IN 2019)
Floating $                                Net investment              $  75          5.4%        --      6 mo. USD LIBOREuro2.6%
   to floating E                                                      E  61           --        4.8%     6 mo. EURIBOREuro2.6%


(a)      The maturity of the swaps corresponds with the maturity of the hedged
         item as noted in the debt summary, unless otherwise indicated.
(b)      Interest rates are as of December 31, 2004.

As of December 31, 2004 and December 31, 2003, the fair value of the fixed to
floating interest rate swaps was $6.9 million and $11.5 million, respectively
and are recorded in the Company's Consolidated Balance Sheets as Other
non-current assets with a corresponding adjustment to the carrying value of the
hedged debt. The change in fair value of the swaps exactly offsets the change in
fair value of the hedged debt with no net impact on earnings. The cross currency
swaps were recorded at their fair value of $(33.1) at December 31, 2004 and
$(4.2) million at December 31, 2003. Fair value is based on quoted market prices
for contracts with similar maturities and the ineffective portion of all swaps
was not significant.

NOTE 7
FINANCIAL INSTRUMENTS

The Company's financial instruments include cash and cash equivalents, trade
receivables, trade payables and notes payable. Due to the short-term nature of
these instruments, the book value approximates fair value. The Company's
financial instruments also include long-term debt, interest rate and currency
swaps, commodity swap contracts, and foreign currency forward contracts.

As of December 31, 2004 and 2003, the estimated fair values of the Company's
senior unsecured notes totaled $589.0 million and $635.0 million, respectively.
The estimated fair values were $60.9 million higher in 2004, and $74.9 million
higher in 2003, than their respective carrying values. Fair market values are
developed by the use of estimates obtained from brokers and other appropriate
valuation techniques based on information available as of year-end. The fair
value estimates do not necessarily reflect the values the Company could realize
in the current markets.

The Company manages its interest rate risk by balancing its exposure to fixed
and variable rates while attempting to minimize its interest costs. The Company
selectively uses interest rate swaps to reduce market value risk associated with
changes in interest rates (fair value hedges). We also selectively use
cross-currency swaps to hedge the foreign currency exposure associated with our
net investment in certain foreign operations (net investment hedges). A summary
of these instruments outstanding at December 31, 2004 follows (currency in
millions):

The Company also entered into certain commodity derivative instruments to
protect against commodity price changes related to forecasted raw material and
supplies purchases. The primary purpose of the commodity price hedging
activities is to manage the volatility associated with these forecasted
purchases. The Company utilizes forward and option contracts, which are
designated as cash flow hedges. These instruments are intended to offset the
effect of changes in commodity prices on forecasted purchases. As of December
31, 2004 the Company had commodity swap contracts with a total notional value of
$3.4 million. The fair market value of the swap contracts was $0.4 million as of
December 31, 2004, which is deferred in other comprehensive income and will be
reclassified and matched into income as the underlying operating transactions
are





                                                                 BorgWarner Inc.
                                                   and Consolidated Subsidiaries

                                                                              47
realized. As of December 31, 2003, the Company had commodity swap contracts with
a total notional value of $1.1 million and a fair market value of $0.1 million
as of December 31, 2003, which was deferred in other comprehensive income.
During the twelve months ended December 31, 2004 and 2003, hedge ineffectiveness
associated with these contracts was not significant.

The Company uses foreign exchange forward contracts to protect against exchange
rate movements for forecasted cash flows for purchases, operating expenses or
sales transactions designated in currencies other than the functional currency
of the operating unit. Most contracts mature in less than one year, however
certain long-term commitments are covered by forward currency arrangements to
protect against currency risk through the second quarter of 2009. Foreign
currency contracts require the Company, at a future date, to either buy or sell
foreign currency in exchange for the operating units local currency. At December
31, 2004 contracts were outstanding to buy or sell U.S. Dollars, Euros, British
Pounds Sterling, Canadian Dollars and Hungarian Forints. Gains and losses
arising from these contracts are unrealized in other comprehensive income and
will be





                                                                                                                   Other post
                                                                        Pension benefits                       retirement benefits
                                                                 2004                    2003                   2004       2003
millions of dollars                                         U.S.       Non-U.S.     U.S.       Non-U.S.
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                        
CHANGE IN PROJECTED BENEFIT
OBLIGATION:
Projected benefit obligation at beginning of year         $ 316.5      $  217.1    $ 283.2       $ 159.9       $ 537.4    $ 446.5
Service cost                                                  2.4           9.3        2.5           7.5           6.0        5.3
Interest cost                                                17.3          11.5       18.5           9.5          28.8       29.7
Plan participants' contributions                               --           0.3         --           0.3            --         --
Actuarial (gain)/loss                                        (8.3)         12.2       33.9          21.1          (2.1)      89.2
Currency translation                                           --          17.9         --          24.7            --         --
Curtailments                                                   --            --         --            --            --       (0.8)
Benefits paid                                               (22.6)         (8.1)     (21.6)         (5.9)        (32.9)     (32.5)
                                                   ---------------------------------------------------------------------------------
Projected benefit obligation at end of year               $ 305.3      $  260.2    $ 316.5       $ 217.1       $ 537.2    $ 537.4
                                                   ---------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year            $ 288.0      $  103.4    $ 245.7       $  77.8
Actual return on plan assets                                 34.7           8.9       52.9          15.1
Employer contribution                                        24.3          12.0       11.0           6.1
Plan participants' contribution                                --           0.3         --           0.3
Currency translation                                           --           8.2         --          10.0
Benefits paid                                               (22.6)         (8.1)     (21.6)         (5.9)
                                                   ---------------------------------------------------------
Fair value of plan assets at end of year                  $ 324.4      $  124.7    $ 288.0       $ 103.4
                                                   ---------------------------------------------------------------------------------
FUNDED STATUS:
Funded status at end of year                              $  19.1      $ (135.5)   $ (28.5)   $   (113.7)   $   (537.2)  $ (537.4)
Unrecognized net actuarial (gain) loss                       79.1          57.2      101.2          45.2         203.7      214.4
Unrecognized transition obligation (asset)                     --            --         --           0.2            --         --
Unrecognized prior service cost                               7.5           0.3        9.0           0.4          (2.1)      (2.3)
                                                   ---------------------------------------------------------------------------------
Net amount recognized                                     $ 105.7      $  (78.0)   $  81.7       $ (67.9)      $(335.6)   $(325.3)
                                                   ---------------------------------------------------------------------------------
AMOUNTS RECOGNIZED IN THE CONSOLIDATED
  BALANCE SHEETS CONSIST OF:
Prepaid benefit cost                                      $ 105.7      $     --    $  81.7       $    --       $    --    $    --
Accrued benefit liability                                      --         (78.0)        --         (67.9)       (335.6)    (325.3)
Additional minimum liability                                (63.2)        (21.2)     (80.5)        (22.8)           --         --
Intangible asset                                              7.2           0.2        8.7           0.4            --         --
Accumulated reduction in stockholders equity                 56.0          21.0       71.8          22.4            --         --
                                                   ---------------------------------------------------------------------------------
Net amount recognized                                     $ 105.7      $  (78.0)   $  81.7       $ (67.9)      $(335.6)   $(325.3)
                                                   ---------------------------------------------------------------------------------
Total accumulated benefit obligation for all plans        $ 301.8      $  229.6    $ 316.2       $ 194.9




reclassified and matched into income as the underlying operating transactions
are realized. As of December 31, 2004 unrealized gains amounted to $8.8 million,
($4.2 million maturing in less than one year) and unrealized losses amounted to
$(4.1) million ($(3.2) million maturing in less than one year). As of December
31, 2003 unrealized gains amounted to $3.6 million and unrealized losses
amounted to $(3.3) million. Hedge ineffectiveness associated with these
contracts during 2003 and 2004 was not significant.

NOTE 8
RETIREMENT BENEFIT PLANS

The Company has a number of defined benefit pension plans and other post
retirement benefit plans covering eligible salaried and hourly employees. The
other post retirement benefit plans, which provide medical and life insurance
benefits, are unfunded plans. The measurement date for all plans is December 31.
The following provides a reconciliation of the plans' benefit obligations, plan
assets, funded status and recognition in the Consolidated Balance Sheets.



Notes to Consolidated Financial Statements

48
The funded status of pension plans included above with accumulated benefit
obligations in excess of plan assets at December 31 is as follows:




millions of dollars                                 2004           2003
- ----------------------------------------------------------------------------
                                                         
Accumulated benefit obligation                  $ (449.7)      $ (418.1)
Plan assets                                       (321.9)        (270.0)
                                    ----------------------------------------
Deficiency                                      $ (127.8)      $ (148.1)
                                    ----------------------------------------
Pension deficiency by country:
  United States                                 $  (19.4)      $  (56.7)
  United Kingdom                                   (29.0)         (30.0)
  Germany                                          (72.5)         (55.5)
  Japan                                             (6.9)          (5.9)
                                    ----------------------------------------
Total pension deficiency                        $ (127.8)      $ (148.1)
                                    ----------------------------------------


The Company expects to contribute a total of $20 million to $25 million into all
of its pension plans during 2005. The Company's net periodic pension benefit
cost was $16.7 million in 2004, $23.2 million in 2003 and $6.8 million in 2002.
See table below for a breakout between U.S. and non-U.S. plans.




millions of dollars                                               Pension benefits                   Other post retirement benefits
For the Year Ended December 31,                  2004                 2003             2002             2004       2003      2002
                                               U.S.   Non-U.S.     U.S.   Non-U.S.  U.S.   Non-U.S.
- --------------------------------------------------------------------------------------------------- --------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST:
                                                                                                
Service cost                                 $  2.4    $ 9.3    $  2.5   $ 7.5  $  2.1   $  5.5         $  6.0    $  5.3   $  5.0
Interest cost                                  17.3     11.5     18.5      9.5    18.8      7.5           28.8      29.7     28.8
Expected return on plan assets                (26.1)    (7.3)   (20.7)    (5.7)  (25.5)    (5.4)            --        --       --
Amortization of unrecognized transition
obligation                                       --      0.3       --      0.3      --     (0.1)            --        --       --
Amortization of unrecognized prior service
cost                                            1.5      0.2      1.5      0.2     1.5      0.2           (0.2)     (0.2)    (0.1)
Amortization of unrecognized loss               5.2      2.4      7.8      1.8     2.1      0.1            8.6       5.9      4.0
                                             ------------------------------------------------------ --------------------------------
Net periodic benefit cost/(benefit)          $  0.3    $16.4   $  9.6   $ 13.6  $ (1.0)  $  7.8         $ 43.2    $ 40.7   $ 37.7
                                             ------------------------------------------------------ --------------------------------


The Company's weighted-average assumptions used to determine the benefit
obligations for our defined benefit pension and other post retirement plans as
of December 31, 2004 and 2003 were as follows:




percents                                                       2004     2003
- -----------------------------------------------------------------------------
                                                                  
U.S. plans
  Discount rate                                                5.75     6.00
  Rate of compensation increase                                3.50     3.50
Non-U.S. plans
  Discount rate                                                5.04     5.49
  Rate of compensation increase                                3.36     3.40


The Company's weighted-average assumptions used to determine the net periodic
benefit cost (income) for our defined benefit pension and other post retirement
benefit plans for the three years ended December 31, 2004 were as follows:

The weighted average asset allocations of the Company's funded pension plans at
December 31, 2004 and 2003, and target allocations by asset category, are as
follows:



                                                                       Target
percent                                       2004         2003    Allocation
- -----------------------------------------------------------------------------
                                                          
Cash, real estate and other                      7%          4%      0-15%
Fixed income securities                         33          33       30-45
Equity securities                               60          63       50-70
                                   ------------------------------------------
                                               100%        100%
                                   ------------------------------------------


The Company's investment strategy is to maintain actual asset weightings within
a preset range of target allocations. The Company believes these ranges
represent an appropriate risk profile for the planned benefit payments of the
plans based on the timing of the estimated benefit payments. Within each asset
category, separate portfolios are maintained for additional diversification.
Investment managers are retained within each asset category to manage each
portfolio against its benchmark. Each investment manager has appropriate
investment guidelines. In addition, the entire portfolio is evaluated against a
relevant peer group. The pension plans did not hold any Company securities as
investments as of December 31, 2004 and 2003.




- ----------------------------------------------------------------------------
percents                                         2004         2003     2002
- ----------------------------------------------------------------------------
                                                              
U.S. plans
  Discount rate                                  6.00         6.75     7.25
  Rate of compensation increase                  3.50         4.50     4.50
  Expected return on plan assets                 8.75         8.75     9.50

Non-U.S. plans
  Discount rate                                  5.49         5.45     5.46
  Rate of compensation increase                  3.40         3.36     3.39
  Expected return on plan assets                 6.62         6.82     6.43


The return on assets assumption was developed through analysis of historical
market returns, current market conditions, target allocations among asset
classes and past experience. Overall, it was projected that the U.S. funds could
achieve an 8.75% net return over time, based upon the targeted asset allocation.
This assumes no benefit from manager selection strategies.



                                                                 BorgWarner Inc.
                                                   and Consolidated Subsidiaries


                                                                              49

The estimated future benefit payments for the pension and other post retirement
benefits are as follows:


                                                                     Other
                                                                      post
millions of dollars                                 Pension        retirement
Year                                                benefits        benefits
- ----------------------------------------------------------------------------
                                                               
2005                                                 $ 31.5          $ 30.8
2006                                                   31.7            29.7
2007                                                   32.0            30.3
2008                                                   32.4            30.8
2009                                                   33.1            30.7
2010-2014                                             175.7           162.3


The weighted-average rate of increase in the per capita cost of covered health
care benefits is projected to be 8.0% in 2005 decreasing to 4.5% by the year
2009. A one-percentage point change in the assumed health care cost trend would
have the following effects:



                                                     One percentage point
millions of dollars                                  increase    decrease
- -----------------------------------------------------------------------------
                                                           
Effect on post retirement benefit obligation          $70.0      $(55.7)
Effect on total service and interest
  cost components                                     $ 5.7      $ (4.5)





NOTE 9

STOCK INCENTIVE PLANS

Under the Company's 1993 Stock Incentive Plan, the Company granted options to
purchase shares of the Company's common stock at the fair market value on the
date of grant. The options vest over periods up to three years and have a term
of ten years from date of grant. As of December 31, 2003, there were no options
available for future grants under the 1993 plan. The 1993 plan expired at the
end of 2003 and was replaced by the Company's 2004 Stock Incentive Plan. Under
the 2004 Stock Incentive Plan, the numbers of shares available for grant are
2,700,000. As of December 31, 2004, there are 2,990,205 outstanding options
under the 1993 and 2004 Stock Incentive Plans. On July 28, 2004, the Company
issued a total of 6,400 restricted shares of common stock to its non-employee
directors under the 2004 Stock Incentive Plan.

The Company accounts for stock options in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, no compensation cost
has been recognized for fixed stock options because the exercise price of the
stock options exceeded or equaled the market value of the Company's common stock
at the date of grant, which is the measurement date.

A summary of the plan's shares under option at December 31, 2004, 2003 and 2002
follows:



                                                 2004                          2003                       2002
                                        Shares     Weighted-average    Shares     Weighted-average  Shares   Weighted-average
                                     (thousands)    exercise price   (thousands)   exercise price (thousands) exercise price
- ----------------------------------------------------------------------------------------------------------------------------
                                                                                          
Outstanding at beginning of year          2,680         $26.44         3,650          $23.29         2,986       $22.34
  Granted                                 1,063          44.56           682           32.74         1,232        25.34
  Exercised                                (593)         24.22        (1,518)          21.80          (434)       22.61
  Forfeited                                (160)         26.74          (134)          25.03          (134)       23.13
                                    ----------------------------------------------------------------------------------------
Outstanding at end of year                2,990         $33.30         2,680          $26.44         3,650       $23.29
                                    ----------------------------------------------------------------------------------------
Options exercisable at year-end             793         $23.78           554          $22.57         1,188       $22.61
                                    ----------------------------------------------------------------------------------------
Options available for future grants       1,637
                                    -----------


The following table summarizes information about stock options outstanding at
December 31, 2004:



                                             OPTIONS OUTSTANDING                                       OPTIONS EXERCISABLE
  Range of             Number outstanding      Weighted-average        Weighted-average       Number exercisable   Weighted-average
  exercise prices         (thousands)     remaining contractual life    exercise price            (thousands)       exercise price
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                   
  $12.78-21.13                  156                  5.0                   $18.31                    156               $18.31
  $24.14-26.56                1,106                  7.1                    25.14                    575                24.90
  $26.94-44.56                1,728                  9.0                    39.88                     62                27.18
                       ------------------------------------------------------------------------------------------------------------
  $12.78-44.56                2,990                  8.1                   $33.30                    793               $23.78
                       ------------------------------------------------------------------------------------------------------------


The weighted average fair value at date of grant for options granted during
2004, 2003, and 2002 were $16.28, $11.91, and $10.13, respectively, and were
estimated using the Black-Scholes options pricing model with the following
weighted average assumptions:



                                       2004           2003         2002
- ----------------------------------------------------------------------------
                                                    
Risk-free interest rate                4.14%          3.58%        4.34%
Dividend yield                         1.26%          1.27%        1.32%
Volatility factor                     32.89%         34.38%       33.66%
Weighted average expected life    6.5 YEARS      6.5 years    6.5 years


EXECUTIVE STOCK PERFORMANCE PLAN The Company has an Executive Stock Performance
Plan that provides payouts to members of senior management at the end of
successive three-year periods based on the Company's performance in terms of
total stockholder return relative to a peer group of automotive companies.
Payouts earned are payable 40% in cash and 60% in the Company's common stock.
For the three-year measurement periods ended December 31, 2004, 2003 and 2002,
the amounts expensed under the plan and the related share issuances were as
follows:




Notes to Consolidated Financial Statements

50

                                                 2004        2003        2002
- -----------------------------------------------------------------------------
Expense ($ millions)                         $    2.0  $      2.7  $      4.5
Number of shares*                              48,569      41,252     131,762

*Shares are issued in February of the following year.

Estimated shares issuable under the plan are included in the computation of
diluted earnings per share as earned. Under the terms of the Executive Stock
Performance Plan, the final three-year period for which awards have been
granted was for the three-year period beginning January 1, 2004 and ending on
December 31, 2006.

NOTE 10

OTHER COMPREHENSIVE INCOME

The components of accumulated other comprehensive income/(loss), net of tax, in
the Consolidated Balance Sheets are as follows:

millions of dollars                                          2004        2003
- -----------------------------------------------------------------------------
Foreign currency translation adjustments, net          $     99.7  $     74.3
Market value of hedge instruments, net                        3.2         0.2
Minimum pension liability adjustment, net                   (47.7)      (60.5)
                                               ------------------------------
Accumulated other comprehensive income                 $     55.2  $     14.0
                                               ==============================

The change in the components of other comprehensive income/(loss) in the
Consolidated Statements of Stockholders' Equity are as follows:

millions of dollars                              2004        2003        2002
- -----------------------------------------------------------------------------
Foreign currency translation                 $   10.7  $     67.6  $     55.9
  adjustments
Market value of hedge instruments                 4.7         0.4          --
Income taxes                                     13.0        (0.2)      (15.0)
                                             --------------------------------
  Net foreign currency translation
   and hedge instruments adjustment              28.4        67.8        40.9
                                             --------------------------------
Minimum pension liability                        17.2         1.1       (65.4)
  adjustment
Income taxes                                     (4.4)       (0.4)       23.1
                                             --------------------------------
   Net minimum pension liability
            adjustment                           12.8         0.7       (42.3)
                                             --------------------------------
Other comprehensive income/(loss)            $   41.2  $     68.5  $     (1.4)
                                             ================================

NOTE 11

CONTINGENCIES

In the normal course of business the Company and its subsidiaries are parties to
various legal claims, actions and complaints, including matters involving
intellectual property claims, general liability and various other risks. It is
not possible to predict with certainty whether or not the Company and its
subsidiaries will ultimately be successful in any of these legal matters or, if
not, what the impact might be. The Company's environmental and product liability
contingencies are discussed separately below. The Company's management does not
expect that the results in any of these legal proceedings will have a material
adverse effect on the Company's results of operations, financial position or
cash flows.

ENVIRONMENTAL The Company and certain of its current and former direct and
indirect corporate predecessors, subsidiaries and divisions have been identified
by the United States Environmental Protection Agency (EPA) and certain state
environmental agencies and private parties as potentially responsible parties
(PRPs) at various hazardous waste disposal sites under the Comprehensive
Environmental Response, Compensation and Liability Act (Superfund) and
equivalent state laws and, as such, may presently be liable for the cost of
cleanup and other remedial activities at 39 such sites. Responsibility for
clean-up and other remedial activities at a Superfund site is typically shared
among PRPs based on an allocation formula.

Based on information available to the Company, which in most cases, includes: an
estimate of allocation of liability among PRPs; the probability that other PRPs,
many of whom are large, solvent public companies, will fully pay the cost
apportioned to them; currently available information from PRPs and/or federal or
state environmental agencies concerning the scope of contamination and estimated
remediation and consulting costs; remediation alternatives; estimated legal
fees; and other factors, the Company has established a reserve for indicated
environmental liabilities with a balance at December 31, 2004 of approximately
$25.7 million. The Company expects this amount to be expended over the next
three to five years.

The Company believes that none of these matters, individually or in the
aggregate, will have a material adverse effect on its financial condition or
future operating results, generally either because estimates of the maximum
potential liability at a site are not large or because liability will be shared
with other PRPs, although no assurance can be given with respect to the ultimate
outcome of any such matter.

In connection with the sale of Kuhlman Electric Corporation, the Company agreed
to indemnify the buyer and Kuhlman Electric for certain environmental
liabilities relating to the past operations of Kuhlman Electric. The liabilities
at issue result from operations of Kuhlman Electric that pre-date the Company's
acquisition of Kuhlman Electric's parent company, Kuhlman Corporation, during
1999. During 2000, Kuhlman Electric notified the Company that it discovered
potential environmental contamination at its Crystal Springs, Mississippi plant
while undertaking an expansion of the plant.

The Company has been working with the Mississippi Department of Environmental
Quality and Kuhlman Electric to investigate the extent of and remediate the
contamination. The investigation revealed the presence of polychlorinated
biphenyls (PCBs) in portions of the soil at the plant and neighboring areas.
Clean up began in 2000 and is continuing. Kuhlman Electric and others, including
the Company, have been sued in numerous related lawsuits, in which multiple
claimants allege personal injury and property damage. The Company has moved to
be dismissed from some of these lawsuits. The first trial in these lawsuits is
currently scheduled to begin in March 2005.

The Company believes that the accrual for environmental liabilities and any
insurance recoveries are sufficient to cover any potential liability associated
with this matter. However, due to the nature of environmental liability matters,
there can be no assurance that the actual amount of environmental liabilities
will not exceed the amount accrued.


                                                                 BorgWarner Inc.
                                                   and Consolidated Subsidiaries


                                                                              51


PRODUCT LIABILITY Like many other industrial companies who have historically
operated in the United States, the Company (or parties the Company indemnifies)
continues to be named as one of many defendants in asbestos-related personal
injury actions. Management believes that the Company's involvement is limited
because, in general, these claims relate to a few types of automotive friction
products, manufactured many years ago that contained encapsulated asbestos. The
nature of the fibers, the encapsulation and the manner of use lead the Company
to believe that these products are highly unlikely to cause harm. At December
31, 2004, the Company had approximately 100,000 pending asbestos-related product
liability claims. Of these outstanding claims, approximately 92,000 are pending
in just three jurisdictions, where significant tort reform activities are
underway. The Company's policy is to aggressively defend against these lawsuits
and the Company has been successful in obtaining dismissal of many claims
without any payment. The Company expects that the vast majority of the pending
asbestos-related product liability claims where it is a defendant (or has an
obligation to indemnify a defendant) will result in no payment being made by the
Company or its insurers. In 2004 of the 4,062 claims settled, only 255 (6.3%)
resulted in any payment being made to a claimant by or on behalf of the Company.
In 2003 of the 4,664 claims settled, only 273 (5.9%) resulted in any payment
being made to claimants. The settlement costs of these claims were paid by the
insurance carriers, except for the $1.0 million in 2004 as described in the
paragraph below. Based upon the encapsulated nature of the products, our
experiences in aggressively defending and resolving claims in the past, and our
significant insurance coverage with solvent carriers as of the date of this
filing, management does not believe that asbestos-related product liability
claims are likely to have a material adverse effect on the Company's results of
operations, cash flows or financial condition.

Prior to June 2004, all claims were covered by the Company's primary layer
insurance coverage, and these carriers administered, defended, settled and paid
all claims under a funding agreement. In June 2004, the Company was notified by
primary layer insurance carriers of the exhaustion of their policy limits. This
led the Company to access the next available layer of insurance coverage. Since
June 2004, secondary layer insurers have paid asbestos-related litigation
defense and settlement expenses pursuant to a funding agreement. Two secondary
layer insurers are currently not participating in this arrangement, until they
are satisfied through an audit process, that the primary level of insurance is
exhausted. The Company therefore paid $1.0 million in defense and settlement
costs in late 2004 and expects to recover those amounts from either these
insurers, or the primary layer insurers if the exhaustion audit shows that
primary layer insurance is still available.

The Company's contractual relationship with the secondary layer carriers
provides a change in circumstances and allows the Company to take a more direct
role in defending and settling claims than with the primary carriers.
Previously, the Company's arrangement utilized the primary layer insurance
carriers' positions to defend and negotiate the settlements with periodic input
from the Company.

At December 31, 2004, the Company recorded a liability of $40.8 million; with a
related asset of $40.8 million to recognize the insurance proceeds receivable to
the Company for estimated claim losses. For 2003, the comparable value of the
insurance receivable and accrued liability is $41.6 million.

The amounts recorded in the Consolidated Balance Sheets are as follows:

millions of dollars                                          2004       2003
- -----------------------------------------------------------------------------
Assets:
  Prepayments and other current assets                      $13.5       $13.7
  Other non-current assets                                   27.3        27.9
                                                       ----------------------
    Total insurance receivable                              $40.8       $41.6
                                                       ======================
Liabilities:
  Accounts payable and accrued expenses                     $13.5       $13.7
  Long-term liabilities - other                              27.3        27.9
                                                       ----------------------
    Total accrued liability                                 $40.8       $41.6
                                                       ======================

The insurance receivable and accrued liability of $41.6 million in 2003 have
been reclassified as outlined above and the reclassification is not material to
the Company's Consolidated Financial Statements.

We cannot reasonably estimate possible losses, if any, in excess of those for
which we have accrued, because we cannot predict how many additional claims may
be brought against the Company (or parties the Company has an obligation to
indemnify) in the future, the allegations in such claims, the possible outcomes,
or the impact of tort reform legislation currently being considered at the State
and Federal level.

A declaratory judgment action was filed in January 2004 in the Circuit Court of
Cook County, Illinois by Continental Casualty Company and related companies
(CNA) against the Company and certain of its other historical general liability
insurers. CNA provided the Company with both primary and additional layer
insurance, and, in conjunction with other insurers, is currently defending and
indemnifying the Company in all of its pending asbestos-related product
liability claims. The lawsuit seeks to determine the extent of insurance
coverage available to the Company including whether the available limits exhaust
on a "per occurrence" or an "aggregate" basis, and to determine how the
applicable coverage responsibilities should be apportioned. In addition to the
primary insurance available for asbestos-related claims, the Company has
substantial additional layers of insurance available for potential future
asbestos-related product claims.

Although it is impossible to predict the outcome of pending or future claims;
due to the encapsulated nature of the products, our experiences in aggressively
defending and resolving claims in the past, and our significant insurance
coverage with solvent carriers as of the date of this filing, management does
not believe that asbestos-related product liability claims are likely to have a
material adverse effect on the Company's results of operations, cash flows or
financial condition.


Notes to Consolidated Financial Statements

52

NOTE 12
LEASES AND COMMITMENTS

Certain assets are leased under long-term operating leases. These include
production equipment at one plant, rent for the corporate headquarters, and an
airplane. Most leases contain renewal options for various periods. Leases
generally require the Company to pay for insurance, taxes and maintenance of the
leased property. The Company leases other equipment such as vehicles and certain
office equipment under short-term leases. Total rent expense was $18.0 million
in 2004, $13.4 million in 2003, and $11.4 million in 2002. The Company does not
have any material capital leases.

The Company has guaranteed the residual values of certain leased production
equipment at one of its facilities. The guarantees extend through the maturity
of the underlying lease, which is in 2005. In the event the Company exercised
its option not to purchase the production equipment, the Company has guaranteed
a residual value of $16.3 million. We do not believe we have any loss exposure
due to this guarantee.

Future minimum operating lease payments at December 31, 2004 were as follows:

millions of dollars
- ----------------------------------------------------------------------------
2005                                                                  $29.1
2006                                                                    4.7
2007                                                                    4.3
2008                                                                    3.8
2009                                                                    3.3
After 2009                                                             12.8
                                                                   ---------
Total minimum lease payments                                          $58.0
                                                                   =========

The Company entered into two separate royalty agreements with Honeywell
International for certain variable turbine geometry (VTG) turbochargers in order
to continue shipping to its OEM customers after a German court ruled in favor of
Honeywell in a patent infringement action. The two separate royalty agreements
were signed in July 2002 and June 2003, respectively. The July 2002 agreement
was effective immediately and expired in June 2003. The June 2003 agreement was
effective July 2003 and covers the period through 2006 with a minimum royalty
for shipments up to certain volume levels and a per unit royalty for any units
sold above these stated amounts.

The royalty costs recognized under the agreements were $14.2 million in 2004,
$23.2 million in 2003 and $13.5 million in 2002. These costs were all recognized
as part of cost of goods sold. These costs will be at minimal levels in 2005 and
2006 as the Company's primary customers have converted most of their
requirements to the next generation VTG turbocharger.

NOTE 13
STOCK SPLIT

On April 21, 2004 the Company's stockholders approved an amendment 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.

NOTE 14
EARNINGS PER SHARE

In calculating earnings per share, earnings are the same for the basic and
diluted calculations. Shares increased for diluted earnings per share by
665,000, 488,000, and 458,000 for 2004, 2003 and 2002, respectively, due to the
effects of stock options and shares issuable under the executive stock
performance plan.

NOTE 15
SUBSEQUENT EVENT

On January 4, 2005, the Company acquired 62.2% of the outstanding 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 E415 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 ignition coils); and electronic
and sensor technology (tire pressure sensors, diesel cabin heaters and selected
sensors). Beginning in 2005, the Company will report Beru within the Engine
segment. The Company has not included a separate discussion 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 allocation of the excess purchase price over the net book value
of assets acquired between intangible assets and goodwill.

NOTE 16
OPERATING SEGMENTS AND RELATED INFORMATION

The Company's business is comprised of two operating segments: Drivetrain and
Engine. These reportable segments are strategic business units, which are
managed separately because each represents a specific grouping of automotive
components and systems. The Company evaluates the operating segments'
performance based upon return on invested capital. The return on invested
capital is comprised of earnings before income and taxes and the average capital
invested in each operating segment. Inter-segment sales, which are not
significant, are recorded at market prices. This footnote presents summary
segment information.


                                                                 BorgWarner Inc.
                                                   and Consolidated Subsidiaries



                                                                              53




OPERATING SEGMENTS



                                                     Net sales                 Earnings
                                     ------------------------------------       before                              Long-lived
                                                     Inter-                   interest    Year end      Depr./         asset
millions of dollars                     Customers   segment      Net          and taxes     assets      amort.    expenditures(b)
- -------------------------------------------------------------------------    -----------------------------------------------------
                                                                                                   
2004
Drivetrain                               $1,358.6   $   --     $1,358.6         $106.9   $  810.0      $  66.1          $  75.3
Engine                                    2,166.7     50.3      2,217.0          281.7    2,208.4        107.3            167.7
Inter-segment eliminations                     --    (50.3)       (50.3)            --         --           --               --
                                     ------------------------------------    -----------------------------------------------------
  Total                                   3,525.3       --      3,525.3          388.6    3,018.4        173.4            243.0
Corporate                                      --       --           --          (50.3)     510.7(a)       3.6              9.4
                                     ------------------------------------    -----------------------------------------------------
Consolidated                             $3,525.3   $   --     $3,525.3         $338.3   $3,529.1       $177.0           $252.4
                                     ------------------------------------                -----------------------------------------

Interest expense and finance charges                                              29.7
                                                                             -----------
Earnings before income taxes                                                    $308.6
                                                                             -----------






                                                     Net sales                 Earnings
                                     ------------------------------------       before                              Long-lived
                                                     Inter-                   interest    Year end      Depr./         asset
millions of dollars                     Customers   segment      Net          and taxes     assets      amort.    expenditures(b)
- -------------------------------------------------------------------------    -----------------------------------------------------
                                                                                                   
2003
Drivetrain                               $1,245.5    $ 0.1       $1,245.6       $ 98.4   $  778.8       $ 60.1           $ 66.4
Engine                                    1,823.7     46.0        1,869.7        239.6    1,925.1         93.8            133.3
Inter-segment eliminations                     --    (46.1)         (46.1)          --         --           --             --
                                     ------------------------------------    -----------------------------------------------------
  Total                                   3,069.2       --        3,069.2        338.0    2,703.9        153.9            199.7
Corporate                                      --       --             --        (48.0)     436.6(a)       7.4             14.7
                                     ------------------------------------    -----------------------------------------------------
Consolidated                             $3,069.2    $  --       $3,069.2       $290.0   $3,140.5       $161.3           $214.4
                                     ------------------------------------                -----------------------------------------
Interest expense and finance charges                                              33.3
                                                                             -----------
Earnings before income taxes                                                    $256.7
                                                                             -----------






                                                     Net sales                 Earnings
                                     ------------------------------------       before                              Long-lived
                                                     Inter-                   interest    Year end      Depr./         asset
millions of dollars                     Customers   segment      Net          and taxes     assets      amort.    expenditures(b)
- -------------------------------------------------------------------------    -----------------------------------------------------
                                                                                                   
2002
Drivetrain                               $1,122.1    $--         $1,122.1       $ 99.9   $  733.8       $ 50.0          $  54.4
Engine                                    1,609.0   39.2          1,648.2        215.9    1,712.5         81.3             91.8
Inter-segment eliminations                     --  (39.2)          (39.2)           --         --           --               --
                                     ------------------------------------    -----------------------------------------------------
  Total                                   2,731.1     --          2,731.1        315.8    2,446.3        131.3            146.2
Corporate                                      --     --               --        (44.3)     236.6(a)       6.1             19.9
                                     ------------------------------------    -----------------------------------------------------
Consolidated                             $2,731.1    $--         $2,731.1       $271.5   $2,682.9       $137.4           $166.1
                                     ====================================                =========================================
Interest expense and finance charges                                              37.7
                                                                             -----------
Earnings before income taxes                                                    $233.8
                                                                             ===========


(a)  Corporate assets, including equity in affiliates, are net of trade
     receivables securitized and sold to third parties, and include cash,
     marketable securities, deferred income taxes and investments and advances.

(b)  Long-lived asset expenditures includes capital expenditures and tooling
     outlays, net of customer reimbursements.




Notes to Consolidated Financial Statements

54

GEOGRAPHIC INFORMATION

No country outside the U.S., other than Germany and the United Kingdom, accounts
for as much as 5% of consolidated net sales, attributing sales to the sources of
the product rather than the location of the customer. Also, the Company's 50%
equity investment in NSK-Warner (see Note 5) amounting to $188.2 million at
December 31, 2004 is excluded from the definition of long-lived assets, as are
goodwill and certain other non-current assets.




                                                Net sales                           Long-lived assets
millions of dollars                    2004         2003         2002            2004       2003       2002
- ------------------------------------------------------------------------------------------------------------
                                                                                   
United States                      $1,964.9     $1,889.2     $1,859.1        $  637.1   $  636.9     $643.0
                        ------------------------------------------------------------------------------------
Europe:
     Germany                          834.1        637.7        453.4           278.7      234.6      182.3
     United Kingdom                   186.0        146.3        129.1            39.5       36.4       28.1
     Other Europe                     237.1        167.7        106.9           106.1       78.3       44.3
                        ------------------------------------------------------------------------------------
Total Europe                        1,257.2        951.7        689.4           424.3      349.3      254.7
Other foreign                         303.2        228.3        182.6           117.9       89.6       80.8
                        ------------------------------------------------------------------------------------
  Total                            $3,525.3     $3,069.2     $2,731.1        $1,179.3   $1,075.8     $978.5
                        ------------------------------------------------------------------------------------


SALES TO MAJOR CUSTOMERS

Consolidated sales included sales to Ford Motor Company of approximately 21%,
23%, and 26%; to DaimlerChrysler of approximately 14%, 17%, and 20%; and to
General Motors Corporation of approximately 10%, 12%, and 12% for the years
ended December 31, 2004, 2003 and 2002, respectively. Sales to Volkswagen were
approximately 10% in 2004. Both of our operating segments had significant sales
to all four of the customers listed above. Such sales consisted of a variety of
products to a variety of customer locations and regions. No other single
customer accounted for more than 10% of consolidated sales in any year of the
periods presented.

INTERIM FINANCIAL INFORMATION (UNAUDITED)

The following information includes all adjustments, as well as normal recurring
items, that the Company considers necessary for a fair presentation of 2004 and
2003 interim results of operations. Certain 2004 and 2003 quarterly amounts have
been reclassified to conform to the annual presentation.




                                                                  2004                                       2003
millions of dollars, except per share amounts  -----------------------------------------  -----------------------------------------
Quarter Ended,                                 Mar-31  Jun-30  Sep-30  Dec-31  Year 2004  Mar-31  Jun-30  Sep-30  Dec-31  Year 2003
- ----------------------------------------------------------------------------------------  -----------------------------------------
                                                                                             
Net sales                                      $903.1  $893.2  $839.8  $889.2   $3,525.3  $775.7  $769.5  $725.2  $ 798.8  $3,069.2
Cost of sales                                   730.5   723.4   694.7   725.5    2,874.2   624.2   622.8   595.9    639.7   2,482.5
                                               -----------------------------------------  -----------------------------------------
  Gross profit                                  172.6   169.8   145.1   163.7      651.1   151.5   146.7   129.3    159.1     586.7

Selling, general and
  administrative expenses                        94.7    87.8    77.4    79.1      339.0    83.6    77.0    72.7     83.5     316.9
Other, net                                        0.3     0.6    (0.5)    2.7        3.0      --     0.1     0.1     (0.4)     (0.1)
                                               -----------------------------------------  -----------------------------------------
  Operating income                               77.6    81.4    68.2    81.9      309.1    67.9    69.6    56.5     76.0     269.9

Equity in affiliate earnings, net of tax         (6.5)   (8.4)   (6.2)   (8.1)     (29.2)   (6.4)   (5.2)   (3.6)    (4.8)    (20.1)
Interest expense, net                             7.5     7.7     7.5     7.0       29.7     9.0     8.7     8.1      7.5      33.3
                                               -----------------------------------------  -----------------------------------------
  Income before income taxes                     76.6    82.1    66.9    83.0      308.6    65.3    66.1    52.0     73.3     256.7

Provision for income taxes                       22.9    24.6    20.1    13.5       81.2    18.9    19.2    14.2     20.9      73.2
Minority interest, net of tax                     2.6     2.8     2.0     1.8        9.1     2.2     2.1     1.9      2.4       8.6
                                               -----------------------------------------  -----------------------------------------
Net earnings                                   $ 51.1  $ 54.7  $ 44.8  $ 67.7    $ 218.3  $ 44.2  $ 44.8  $ 35.9  $  50.0  $  174.9
                                               =========================================  =========================================
Earnings/(loss) per share - basic              $ 0.92  $ 0.98  $ 0.80  $ 1.20    $  3.91  $ 0.83  $ 0.83  $ 0.66  $  0.91  $   3.23
                                               =========================================  =========================================
Earnings/(loss) per share - diluted            $ 0.91  $ 0.97  $ 0.79  $ 1.19    $  3.86  $ 0.82  $ 0.83  $ 0.65  $  0.90  $   3.20
                                               =========================================  =========================================




Selected Financial Data

                                                                 BorgWarner Inc.
                                                   and Consolidated Subsidiaries

                                                                              55




millions of dollars, except per share data
For the Year Ended December 31,                             2004         2003         2002        2001       2000
- -------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
                                                                                            
Net sales                                               $3,525.3     $3,069.2     $2,731.1     $2,351.6    $2,645.9
Cost of sales                                            2,874.2      2,482.5      2,176.5      1,890.8     2,090.7
                                                        -----------------------------------------------------------
  Gross profit                                             651.1        586.7        554.6        460.8       555.2
Selling, general and administrative expenses               339.0        316.9        303.5        249.7       258.7
Goodwill amortization                                         --           --           --         42.0        43.3
Other, net                                                   3.0         (0.1)        (0.9)        (2.1)       (8.1)
Restructuring and other non-recurring charges                 --           --           --         28.4(b)     62.9(c)
                                                        -----------------------------------------------------------
Operating income                                           309.1        269.9        252.0        142.8       198.4
Equity in affiliate earnings, net of tax                   (29.2)       (20.1)       (19.5)       (14.9)      (15.7)
Interest expense, net                                       29.7         33.3         37.7         47.8        62.6
                                                        -----------------------------------------------------------
Earnings before income taxes                               308.6        256.7        233.8        109.9       151.5
Provision for income taxes                                  81.2         73.2         77.2         39.7        54.8
Minority interest, net of tax                                9.1          8.6          6.7          3.8         2.7
                                                        -----------------------------------------------------------
Net earnings before cumulative effect of                   218.3        174.9        149.9         66.4        94.0
  accounting change
Cumulative effect of change in accounting
  principle, net of tax                                       --           --       (269.0)(a)       --          --
                                                        -----------------------------------------------------------
Net earnings/(loss)                                     $  218.3     $  174.9     $ (119.1)    $   66.4    $   94.0
                                                        -----------------------------------------------------------
Earnings/(loss) per share -- basic                      $   3.91     $   3.23     $  (2.23)(a) $   1.26(b) $   1.78(c)
                                                        -----------------------------------------------------------
Average shares outstanding (thousands) -- basic           55,872       54,116       53,250       52,630      52,782
Earnings/(loss) per share -- diluted                    $   3.86     $   3.20     $  (2.22)(a) $   1.26(b) $   1.77(c)
                                                        -----------------------------------------------------------
Average shares outstanding (thousands)-- diluted          56,537       54,604       53,708       52,926      52,974
Cash dividend declared per share                        $   0.50     $   0.36     $   0.30     $   0.30    $   0.30

BALANCE SHEET DATA (at end of period)
Total assets                                            $3,529.1     $3,140.5     $2,682.9     $2,770.9    $2,739.6
Total debt                                                 584.5        655.5        646.7        737.0       794.8



(a)  In 2002, upon the adoption of SFAS No. 142, the Company recorded a $269.0
     million after tax charge for cumulative effect of accounting principle
     related to goodwill. This charge was $5.01 per diluted share.
(b)  In 2001, the Company recorded $28.4 million in non-recurring charges. Net
     of tax, this totaled $19.0 million or $0.36 per diluted share.
(c)  In 2000, the Company recorded $62.9 million in restructuring and other
     non-recurring charges. Net of tax, this totaled $38.7 million or $0.74 per
     diluted share.


Corporate Information

56

COMPANY INFORMATION

BorgWarner Inc.
World Headquarters
3850 Hamlin Road
Auburn Hills, MI 48326
248-754-9200
www.borgwarner.com

STOCK LISTING

Shares are listed and traded on the New York Stock Exchange. Ticker symbol: BWA.

                                                                   HIGH      LOW
- --------------------------------------------------------------------------------
Fourth Quarter 2004                                              $54.68   $39.50
Third Quarter 2004                                                48.77    40.73
Second Quarter 2004                                               45.08    38.35
First Quarter 2004                                                49.32    39.84
Fourth Quarter 2003                                              $42.75   $34.14
Third Quarter 2003                                                36.68    31.72
Second Quarter 2003                                               33.13    23.68
First Quarter 2003                                                27.70    21.66

CERTIFICATIONS

o  BorgWarner filed as an exhibit to its Annual Report on Form 10-K the CEO and
   CFO certifications as required by Section 302 of the Sarbanes-Oxley Act.

o  BorgWarner also submitted the required annual CEO certification to the NYSE.

DIVIDENDS

The current dividend practice established by the Board of Directors is to
declare regular quarterly dividends. The last such dividend of 14 cents per
share of common stock was declared on November 10, 2004, payable February 15,
2005, to stockholders of record on February 1, 2005. The current practice is
subject to review and change at the discretion of the Board of Directors.

STOCKHOLDER SERVICES

Mellon Investor Services is the transfer agent, registrar and dividend
dispersing agent for BorgWarner common stock.

Mellon Investor Services for BorgWarner
85 Challenger Road
Ridgefield Park, NJ 07660
www.melloninvestor.com

Communications concerning stock transfer, change of address, lost stock
certificates or proxy statements for the annual meeting should be directed to
Mellon Investor Services at 800-851-4229.

DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN

The BorgWarner Dividend Reinvestment and Stock Purchase Plan has been
established so that anyone can make direct purchases of BorgWarner common stock
and reinvest dividends. We pay the brokerage commissions on purchases. Questions
about the plan can be directed to Mellon at 800-851-4229. To receive a
prospectus and enrollment package, contact Mellon at 800-842-7629.

ANNUAL MEETING OF STOCKHOLDERS

The 2005 annual meeting of stockholders will be held on Wednesday, April 27,
2005, beginning at 9:00 a.m. at the BorgWarner World Headquarters at 3850 Hamlin
Road, Auburn Hills, Michigan.

STOCKHOLDERS

As of December 31, 2004, there were 2,877 holders of record and an estimated
18,000 beneficial holders.

INVESTOR INFORMATION

Visit www.borgwarner.com for a wide range of company information. For investor
information, including the following, click on Investor Information.

o  BorgWarner News Releases

o  BorgWarner Stock Quote

o  Earnings Release Conference Call Calendar

o  Webcasts

o  Analyst Coverage

o  Stockholder Services

o  Corporate Governance

o  BorgWarner In The News Articles

o  Annual Reports

o  Proxy Statement and Card

o  Dividend Reinvestment/Stock Purchase Plan

o  Financials and SEC Filings
   (including the Annual Report on Form 10-K)

o  Request Information Form

NEWS RELEASE SIGN-UP

At our Investor Information web page, you can sign up to receive BorgWarner's
news releases. Here's how to sign up:
1. Go to www.borgwarner.com
2. Click Investor Information
3. Click News
4. Click News Release Sign-up and follow the instructions

INVESTOR INQUIRIES

Investors and securities analysts requiring financial reports, interviews or
other information should contact Mary E. Brevard, Vice President of Investor
Relations and Corporate Communications at BorgWarner World Headquarters,
248-754-0882.

BorgWarner Inc. owns U.S. trademark registrations for: BorgWarner, [LOGO],
[BORGWARNER LOGO], and Visctronic. BorgWarner owns the following trademarks:
ITM, InterActive Torque Management, Pre-emptive Torque Management, Morse Gemini,
DualTronic and Regulated Two-Stage Turbocharger (R2S).

EX-21.1

                                                                      EXHIBIT 21

BORGWARNER INC. (Parent)
NAME OF SUBSIDIARY
BorgWarner TorqTransfer Systems Inc.
      BorgWarner Powdered Metals Inc.
      BorgWarner South Asia Inc.
            Divgi-Warner Limited
            BorgWarner Automotive Components (Ningbo) Co. Ltd.
            BorgWarner TorqTransfer Systems Korea Inc.
            BorgWarner Shenglong (Ningbo) Co. Ltd.
      BorgWarner TorqTransfer Systems Beijing Co. Ltd.
      BorgWarner Diversified Transmission Products Inc.
            BorgWarner Diversified Transmission Products Services Inc.
      BorgWarner TorqTransfer Systems Ochang Inc.
BorgWarner Emissions Systems Inc.
      BorgWarner Emissions Systems of Michigan Inc.
      BorgWarner Emissions Systems Holding Inc.
BorgWarner Thermal Systems Inc.
      BorgWarner Thermal Systems of Michigan Inc.
      BorgWarner Cooling Systems (India) Private Limited
BorgWarner Morse TEC Inc.
      BorgWarner Canada Inc.
      BorgWarner Japan Inc.
            BorgWarner Morse TEC Japan K.K.
      BorgWarner Automotive Taiwan Co., Ltd.
      BorgWarner Morse TEC Mexico S.A. de C.V.
      BorgWarner Morse TEC Murugappa Pvt. Ltd.
      BorgWarner Morse TEC Korea Ltd.
      BorgWarner Automotive Taiwan Co. Ltd.
BorgWarner Transmission Systems Inc.
      BorgWarner NW Inc.
            BorgWarner Transmission Systems Korea, Inc.
            NSK-Warner K.K.
      Lapeer Warner, LLC
      BorgWarner Europe Inc.
            AG Kuhnle, Kopp & Kausch
            BorgWarner Holding Inc.
                  BorgWarner France S.A.S.
                        BorgWarner Transmission Systems Tulle S.A.S.
              BW Holding Ltd.
                BorgWarner Europe GmbH
                  BorgWarner Holdings Ltd.
                    BorgWarner Limited
                       Kysor Industries S.A.
                       Kysor Europe Limited
                  Morse TEC Europe S.r.l.
                  BorgWarner Germany GmbH
                    BorgWarner Cooling Systems GmbH
                    BorgWarner Transmission Systems Arnstadt GmbH
                    BorgWarner Transmission Systems GmbH
                      BorgWarner Vertriebs und Verwaltungs GmbH
                        BorgWarner Turbo Systems Worldwide Headquarters GmbH
                              BorgWarner Turbosystems GmbH
                              TSA Turbochargers of South Africa Pty. Ltd.
                              BorgWarner Turbo Systems Alkatreszgyarto Kft.
                              Hitachi Warner Turbo Systems Ltd.
                              Turbo Energy Ltd.
Creon Insurance Agency Limited
   BorgWarner Trustees Limited
Kuhlman Corporation
      BWA Turbo Systems Holding Corporation



            BorgWarner Turbo Systems Inc.
            BorgWarner Cooling Systems Korea, Inc.
            BorgWarner Brasil, Ltda.
            Kysor DO BRASIL LTDA.
            Seohan Warner Turbo Systems, Ltd.
      Kuhlman Plastics of Canada, Ltd.
      Spring Products Corporation
      Bronson Specialties Inc.

EX-23.1

                                                                    EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos.
333-45423 dated February 2, 1998; 333-117171 dated July 6, 2004; 333-117707
dated July 28, 2004; 333-118203, 333-118202, 333-118201 and 333-118200 dated
August 13, 2004 all on Form S-8; and Registration Statement Nos. 333-31259 dated
July 14, 1997 on Form S-3 and dated August 1, 1997 on Form S-3/A; 333-73840
dated November 21, 2001 on Form S-3; 333-106787 dated July 3, 2003 and dated
February 11, 2004 on Form S-3/A of BorgWarner Inc., of our reports dated March
7, 2005, relating to the financial statements of BorgWarner Inc., and
management's report on the effectiveness of internal control over financial
reporting, incorporated by reference in and appearing in, respectively, the
Annual Report on Form 10-K of BorgWarner Inc. for the year ended December 31,
2004.

DELOITTE & TOUCHE LLP
March 14, 2005
Detroit, Michigan

EX-31.1

                                                                    EXHIBIT 31.1

                                  CERTIFICATION

I, Timothy M. Manganello, certify that:

1.    I have reviewed this annual report on Form 10-K of BorgWarner Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement
      of a material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this report;

4.    The registrant's other certifying officer(s) and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
      control over financial reporting (as defined in Exchange Act Rules 13a-
      15(f) and 15d-15(f)) for the registrant and have:

      a) Designed such disclosure controls and procedures, or caused such
      disclosure controls and procedures to be designed under our supervision,
      to ensure that material information relating to the registrant, including
      its consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared;

      b) Designed such internal control over financial reporting, or caused such
      internal control over financial reporting to be designed under our
      supervision, to provide reasonable assurance regarding the reliability of
      financial reporting and the preparation of financial statements for
      external purposes in accordance with generally accepted accounting
      principles;

      c) Evaluated the effectiveness of the registrant's disclosure controls and
      procedures and presented in this report our conclusions about the
      effectiveness of the disclosure controls and procedures, as of the end of
      the period covered by this report based on such evaluation; and



      d) Disclosed in this report any change in the registrant's internal
      control over financial reporting that occurred during the registrant's
      most recent fiscal quarter (the registrant's fourth fiscal quarter in the
      case of an annual report) that has materially affected, or is reasonably
      likely to materially affect, the registrant's internal control over
      financial reporting;

5.    The registrant's other certifying officer(s) and I have disclosed, based
      on our most recent evaluation of internal control over financial
      reporting, to the registrant's auditors and the audit committee of the
      registrant's board of directors (or persons performing the equivalent
      functions):

      a) All significant deficiencies and material weaknesses in the design or
      operation of internal controls over financial reporting which are
      reasonably likely to adversely affect the registrant's ability to record,
      process, summarize and report financial information; and

      b) Any fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal
      controls over financial reporting.

Date: March 15, 2005

/s/ Timothy M. Manganello
- -------------------------------------
Timothy M. Manganello
Chairman and Chief Executive Officer

EX-31.2

                                                                    EXHIBIT 31.2

                                  CERTIFICATION

I, Robin J. Adams, certify that:

1.    I have reviewed this annual report on Form 10-K of BorgWarner Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement
      of a material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this report;

4.    The registrant's other certifying officer(s) and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
      control over financial reporting (as defined in Exchange Act Rules 13a-
      15(f) and 15d-15(f)) for the registrant and have:

      a) Designed such disclosure controls and procedures, or caused such
      disclosure controls and procedures to be designed under our supervision,
      to ensure that material information relating to the registrant, including
      its consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared;

      b) Designed such internal control over financial reporting, or caused such
      internal control over financial reporting to be designed under our
      supervision, to provide reasonable assurance regarding the reliability of
      financial reporting and the preparation of financial statements for
      external purposes in accordance with generally accepted accounting
      principles;

      c) Evaluated the effectiveness of the registrant's disclosure controls and
      procedures and presented in this report our conclusions about the
      effectiveness of the disclosure controls and procedures, as of the end of
      the period covered by this report based on such evaluation; and



      d) Disclosed in this report any change in the registrant's internal
      control over financial reporting that occurred during the registrant's
      most recent fiscal quarter (the registrant's fourth fiscal quarter in the
      case of an annual report) that has materially affected, or is reasonably
      likely to materially affect, the registrant's internal control over
      financial reporting;

5.      The registrant's other certifying officer(s) and I have disclosed, based
      on our most recent evaluation of internal control over financial
      reporting, to the registrant's auditors and the audit committee of the
      registrant's board of directors (or persons performing the equivalent
      functions):

      a) All significant deficiencies and material weaknesses in the design or
      operation of internal controls over financial reporting which are
      reasonably likely to adversely affect the registrant's ability to record,
      process, summarize and report financial information; and

      b) Any fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal
      controls over financial reporting.

Date: March 15, 2005

/s/ Robin J. Adams
- ------------------------------------------------
Robin J. Adams
Executive Vice President, Chief Financial Officer
and Chief Administrative Officer

EX-32.1

                                                                    EXHIBIT 32.1

                           CERTIFICATIONS PURSUANT TO
                             18 U.S.C. SECTION 1350

In connection with the Annual Report of BorgWarner Inc. (the "Company") on Form
10-K for the period ended December 31, 2004 (the "Report"), each of the
undersigned officers of the Company certifies, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of such
officer's knowledge:

(1)   the Report fully complies with the requirements of Section 13(a) or 15(d)
      of the Securities Exchange Act of 1934; and

(2)   the information contained in the Report fairly presents, in all material
      respects, the financial condition and results of operations of the
      Company.

Dated: March 15, 2005

/s/ Timothy M. Manganello
- ----------------------------------
Timothy M. Manganello
Chairman & Chief Executive Officer

/s/ Robin J. Adams
- ----------------------------------
Robin J. Adams
Executive Vice President, Chief Financial Officer
& Chief Administrative Officer

A signed original of this written statement required by Section 906 has been
provided to BorgWarner Inc. and will be retained by BorgWarner Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.

EX-99.1

                                                                    EXHIBIT 99.1

                              CAUTIONARY STATEMENTS

Information provided by the Company from time to time may contain
"forward-looking statements" as defined by the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are typically identified by words
or phrases such as "expects," "anticipates," "intends," "plans," "believes,"
"estimates" "should" and similar expressions. The Company does not intend or
assume any obligation to update any of these forward-looking statements. Such
forward-looking statements are subject to risks and uncertainties including, but
not limited to, those discussed below, many of which are difficult to predict
and generally beyond the control of the Company and which could cause actual
results to differ materially from those expressed, projected or implied in the
forward-looking statement.

      1. The Company's principal operations are cyclical, because they are
directly related to domestic and foreign vehicle production, which is itself
cyclical and dependent on general economic conditions and other factors. Any
significant reduction in such production would have an adverse effect on the
level of the Company's sales to vehicle original equipment manufacturers
("OEMs") and on the Company's financial position and operating results.

      2. Certain of the Company's products are currently used exclusively in
sport-utility vehicles and light trucks. Any significant reduction in the
production of such vehicles and trucks would have an adverse effect on the level
of the Company's sales to OEMs and the Company's financial position and
operating results.

      3. A number of the Company's major OEM customers manufacture products for
their own use that compete with the Company's products. Although these OEM
customers have indicated that they will continue to rely on outside suppliers,
the OEMs could elect to manufacture products for their own use and in place of
the products now supplied by the Company.

      4. The Company has a stated goal of increasing its revenues through the
expansion of existing business and select acquisitions. Failure to grow existing
business in sufficient volume because of changes in the vehicle market and/or
the unavailability of suitable acquisition candidates could result in
nonattainment of this goal.

      5. Annual price reductions to OEM customers have become a permanent
feature of the Company's business environment. To maintain its profit margins,
the Company, among other things, seeks price reductions from its own suppliers,
adopts improved production processes to increase manufacturing efficiency,
updates product designs to reduce costs and develops new products whose benefits
support increased pricing. The Company's ability to pass through increased raw
material costs to its OEM customers is also limited, with cost recovery less
than 100% and often on a delayed basis. There can be no assurance that the
Company will be able to reduce costs in an amount equal to the annual price
reductions and the increase in raw material costs.

      6. The Company makes a significant annual investment in research and
development activities to develop new and improved products and manufacturing
processes. There can be no



assurance that research and development activities will yield new or improved
products or products which will be purchased by the OEMs, or new and improved
manufacturing processes.

      7. The Company has a stated goal to expand its operations in all
significant global markets to balance the cyclical nature of the vehicle
business. There can be no assurance that the Company will be able to expand its
existing business or obtain new business outside of North America to balance its
sales. In addition, there can be no assurance that vehicle production in North
America, Europe, Asia and South America will not decline simultaneously.

      8. The Company has a stated goal of continuing to increase revenues and
operating earnings at a rate greater than overall world vehicle production by
increasing its content per vehicle with innovative new components and systems.
Any of the following factors could cause the Company to fail to outperform world
automotive production: (a) a significant drop in production of sport utility
vehicles and light trucks, high content vehicles for the Company's products; (b)
a failure of research and development spending to result in new components and
systems which will be purchased by the OEMs; (C) technology changes which could
render the Company's components and systems obsolete; and (d) a reversal of the
trend of supplying systems (which allows the Company to increase content per
vehicle) instead of components.

      9. With operations and sales in countries outside the United States, the
Company could be affected by changes in trade, monetary and fiscal policies
(both in the United States and elsewhere), trade restrictions or prohibitions,
import and other charges or taxes, and fluctuations in foreign currency exchange
rates, changing economic conditions and political instability and disputes.

      10. The Company bases its growth projections, in part, on commitments made
by our customers. These commitments generally are for one year. If the actual
production orders from our customers do not approximate such commitments, it
could have a material adverse effect on the Company's growth and financial
performance.

      11. The Company competes worldwide with a number of other manufactures and
distributors that produce and sell similar products. Price, quality and
technological innovation are the primary elements of competition. Competitors
include a large number of independent domestic and international suppliers.
Increased pressure to lower the selling price of the Company's products could
affect the Company's profitability.

      12. From time to time, the Company expresses its expectations regarding a
number of financial measures, including, but not limited to, sales growth,
earnings per share and debt-to-capital ratio. In addition to the factors
outlined above, the Company's decision to pursue an acquisition may affect its
ability to meet such stated targets and expectations.

      13.The Company is a party to, or has an obligation to defend a party to,
various legal proceedings, including those described in Note Eleven to the Notes
to the Consolidated Financial Statements. Although the Company believes that
none of these matters is likely to have a material adverse effect on its
financial condition or future operating results, there can be no assurance as to
the ultimate outcome of any such matter or proceeding.