We also made significant progress across all of our Strategic Priorities (Best Quality, Lowest Cost, Global Reach and Innovative Technology). These Priorities, which are essential to the Company’s long-term competitiveness, have become ingrained in our daily business activities and are used to guide our allocation of resources to support research and development, manufacturing investments and growth initiatives.

During the course of the year, we experienced a number of profit pressures, including customer demands for price reductions, erosion of market share of our largest North American customers, rising interest rates, customer and supplier solvency issues and significantly higher costs for commodities such as steel, resins, energy and more recently aluminum.

Despite these challenges, TRW achieved a healthy financial performance in 2005, growing sales by more than 5 percent and posting solid profits. Operating profits before restructuring-related expenses increased by approximately 7 percent compared to 2004. Our performance can be attributed to the success of our safety product positioning in the marketplace, together with our industry-leading diversification and the benefits derived from well-executed productivity improvements and cost reduction programs, including Six Sigma, Value Engineering and Operational Excellence.

Our leading diversification improved in 2005. For the year, we generated 64 percent of our sales outside of North America, our largest customer stood at 16 percent of sales and the largest vehicle program represented just3 percent of our sales. Further, our diversification strengthened as a result of last year’s acquisition of a majority stake in Dalphi Metal Espana, S.A. (“Dalphimetal”), which manufactures airbags and steering wheels. The integration of Dalphimetal provides increased business with leading European manufacturers and better positions us to meet the growing demand for passive safety products.

There is a tremendous sense of urgency at TRW to enhance our status as a leading supplier and to improve our competitiveness in this unrelenting industry environment. We accelerated our cost reduction plans in 2005, announcing ten plant closures and raising our restructuring-related expenses above $100 million. The incremental investment in restructuring will provide a more competitive footprint by improving capacity utilization and lowering manufacturing costs.

Our focus on safety innovation has never been sharper. For the third consecutive year, we increased our investment in research, development and engineering, spending approximately $780 million or 6.2 percent of sales in 2005. Most of the additional investment was in technical expertise, raising our engineering population worldwide to approximately 5,000 employees. We are investing capital to grow our capabilities in all regions, including the acquisition of Dalphimetal and significant investments in Asia, where we now have 30 facilities, 3,600 employees and 14 joint ventures as well as wholly owned TRW facilities. In 2005, we opened technical centers in China and Poland, and another one is planned for Japan.

We believe TRW’s level of safety offerings has no equal in the marketplace. As a leader in integrated safety systems, we have the unique ability to assist our customers in taking automotive safety to the next level. This is one reason why vehicle manufacturers regularly seek our expertise to help them develop advanced safety solutions.

In the final evaluation, our customers judge whether we are meeting or exceeding their expectations. It is always the next contract that provides the best indicator, which was the case in 2005, when we had another outstanding year for new business wins. The sales awards we received in 2005 were in line with our objectives and at a level that supports our future growth expectations and enhances the diversity and mix of our customer portfolio.

2005 Financial Highlights
We reported 2005 sales of $12.6 billion, which represents an increase of 5.3 percent compared to the prior year period. Growth in 2005 was strong, fueled by the success of our safety products and the strength of a number of customer platforms, particularly in Europe, together with benefits derived from currency translation and incremental sales resulting from our acquisition of Dalphimetal in the fourth quarter of last year. Sales were negatively impacted by annual price reductions provided to customers and continued domestic market share losses by some of our major North American customers.

Operating income for the 2005 year was $553 million or 4.4 percent of sales, which compares to $580 million or 4.8 percent in 2004. TRW significantly increased its restructuring activities in 2005, resulting in increased expenses that were approximately $70 million more than in the prior year. Operating income was also impacted by the negative industry factors discussed previously.

In 2005, the Company reduced interest and securitization expense by $21 million to $231 million for the year. The year-to-year reduction resulted from the benefits derived from past deleveraging efforts partially offset by the impact of rising interest rates associated with the Company’s floating rate debt.

Full-year 2005 net earnings were $204 million or $1.99 per diluted share, which compares to net earnings of $29 million or $0.29 per diluted share in the prior year. Net earnings after adjusting for one-time items in both periods, net of the assumed tax impacts, were $176 million or $1.72 per diluted share in 2005, which compares to $173 million or $1.72 per diluted share in the prior year.^a

Solid profitability led to a year of good cash flow generation, with net cash provided by operations of $502 million, which compares to $787 million in 2004. The year-to-year decline of $285 million resulted primarily from an increase in working capital at year-end and a higher level of pension funding in 2005. Capital expenditures, which support our new business growth, totaled $503 million in 2005, which compares to $493 million in the prior year.

Business Outlook
Looking toward the longer term, we will maintain our focus on vehicle safety, continue to diversify the customer and geographic spread of the business and continue to leverage our highly skilled workforce to grow the business profitably. We believe our business model offers us resiliency and strength in today’s environment and increasingly the ability to be flexible when adversity and uncertainty yield market opportunities.

The global automotive industry is changing at a rapid pace. Competition for market share among vehicle manufacturers in the major vehicle producing regions continues to intensify and is reshaping the vehicle and component industry.

Many of the challenges we faced last year will again be center stage in 2006. We expect significant profit pressures relating to customer demands for price reductions, higher commodity costs, customer and supplier solvency issues and rising interest rates.

The demand for safety products is critical to sustaining our growth, as we expect minimal vehicle volume increases in Europe and North America over the foreseeable future.

The sales generated from safety products along with the benefits derived from our cost reduction programs and past restructuring actions are expected to help mitigate many of the negative industry pressures that we are experiencing.

With that backdrop, the level of uncertainty surrounding the 2006 environment is daunting, as severe economic strain continues to take its toll on the automotive industry. For the 2006 year, we have committed to a plan that will test our highly disciplined operational programs and will require good execution to achieve. We are ready to meet those tests and I look forward to reporting our progress to you during 2006.

Sincerely,

John C. Plant
President and Chief Executive Officer
TRW Automotive