As we indicated a few days ago (we sat on it for a while as per a request from a source) BMW would be utilizing engines similar to the four cylinder turbo specifically utilized in the John Cooper Works MINI Cooper S. Weeks ago we discussed the 7 series will be offering a hybrid. Today it was all made official:

BMW to use engines jointly developed with PSA in BMW brand cars
05.06.08, 1:32 PM ET
FRANKFURT (Thomson Financial) – Bayerische Motoren Werke AG. will use the four-cylinder engines it has jointly developed with French carmaker PSA in BMW brand cars, chief executive Norbert Reithofer said in a pre-release of his interview with Frankfurter Allgemeine Zeitung.
He said the future generation of the BMW 1 Series will be fitted with these four-cylinder engines.
The report said BMW had previously intended to use these engines only in the MINI brand cars.
Reithofer also disclosed the new generation of the BMW 7-Series, which will be launched this year, will be fitted with a new hybrid engine.

These BMW / PSA engines are engineered in Munich by BMW engineers not PSA. PSA engineers only adapt the PSA cars to meet the needs of the BMW designed engines. PSA is responsible for purchasing, logistics & production. BMW staff then use this information and apply them into the now BMW / MINI engine plant in Hams Hall (UK).

It is worth noting that the main engine components are manufactured in the PSA plant, and by suppliers. Of course all the processes, material & parts have to comply to BMW Group quality standards and final assembly for engines to be utilized in BMWs will be in the Hams Hall plant

This is not the first time a BMW engine is not produced within a BMW plant. Magna in Graz, Austria currently produces some I4 & I6 diesel engines for BMW. Not only are these engines produced there, but were also (co)developed with Magna.

The following information relates to the current MINI engines and the agreement from several yeas ago, the new agreement will be fairly similar.

Leadership of the engine engineering and development was BMW Group responsibility involving a high degree of commitment from PSA Peugeot Citroën engineers. The core of the engine engineering team is based at BMW Group Research Center (FIZ) in Münich and gathers a staff of fifty members out of which fifteen are PSA Peugeot Citroën engineers.
The production and manufacturing aspect is the responsibility of PSA Peugeot Citroën. The main engine components are machined exclusively at Française de Mécanique in Douvrin (Pas-de-Calais,in Northern France). PSA Peugeot Citroën is responsible for identifying and selecting suppliers. Engines for BMW Group needs are assembled in Hams Hall plant.
The role of the Hams Hall plant is to assemble the engines required by the BMW Group for future variants of Mini. The proximity of Hams Hall to plant Oxford enables the “just in sequence” delivery process to be managed extremely accurately and flexibly, reducing stock levels and minimizing the lead time. The assembly of the engines in Hams allows the BMW Group to ensure that they can be produced to meet the exact requirements of Mini brand products.