The second generation S4 (Type 8D), also known as the Audi S4 quattro debuted in 1997, with factory production commencing October 1997, as part of the facelifted B5 platform Audi A4 line-up, although it was not available in North America until late 1999.

In addition to the saloon (sedan), an estate version (wagon)–the Audi S4 Avant–was introduced into the lineup from 1998. Production of the B5 S4 ceased in September 2001, although it was still sold together with the next B6 platform generation through 2002 in North America. Examples produced July 2001 to end of production are 2002 Model Year cars, the 10th digit of the VIN being the number "2".

Several years after it was sold new, the B5 S4 remains a potent enthusiast car, and as featured in the December 2007 issue of Sport Compact Car magazine, a heavily modified, Torque Factory tuned S4 won a comparison test against several other extreme performance cars.

B5 powertrain
The powertrain details of the B5 S4 feature a 2.7-litre twin-turbo ('biturbo') 90° third-generation V6 engine (parts code prefix: 078, identification codes: AGB, AZB, APB). Details of the powerplant include a cast iron cylinder block with two lightweight aluminium alloy cylinder heads. The valvetrain includes 30 valves (five valves per cylinder),[10][11] twin hybrid-driven (timing belt and roller chain) double overhead camshafts and variable valve timing for the inlet valves. The intake air is pressurized by two parallel water-cooled BorgWarner K03-series turbochargers; the charged air is cooled by two side-mounted air-to-air intercoolers (SMICs). It displaces 2,671 cubic centimetres (163.0 cu in), and is rated to produce a motive power output of 195 kW (265 PS; 261 bhp) at 5,800 rpm, and generates 400 N⋅m (295 lbf⋅ft) of torque at 1,850 rpm. Engine management was by way of a Bosch Motronic ME 7.1 (7.0 in North America) electronic engine control unit (ECU), and helped it meet the European EU-3D emissions standard. In all US-market cars, the engine was detuned to meet US emissions regulations; output was reduced to 184 kW (250 PS; 247 hp) and 350 N⋅m (258 lbf⋅ft) (identification code: APB).

As in the previous S4, a six-speed C90 manual transmission (parts code prefix: 01E, identification code: DSY, gear ratios: 1st: 3.500, 2nd: 1.889, 3rd: 1.231, 4th: 0.967, 5th: 0.806, 6th: 0.684) was standard equipment, as was the Torsen T-2 quattro permanent all-wheel drive system. Final drive (parts code prefix: 01H, identification code: DQA) ratio is 4.111. A five-speed ZF 5HP19 tiptronic automatic transmission (parts code prefix: 01V) became available for the first time as an option.

The B5 S4 claims acceleration from 0 to 100 km/h (0.0 to 62.1 mph) in 5.7 seconds, and has an electronically limited top speed of 250 km/h (155.3 mph), making it both the quickest saloon/sedan in the Audi model line, and among the quickest saloon/sedans in the world at that time.

The B5 S4 is fitted with 4-wheel independent suspension. The front suspension is a multi-link design with four individual control arms per wheel. The rear suspension is an unequal length double wishbone design; the lower control arms are mounted to a subframe which also carries the differential housing. Shock absorbers, coil springs, and anti-roll bars are fitted front and rear.

The B5 S4 brake system consisted of radially ventilated discs, 321 mm (12.64 in) in diameter by 30 mm (1.18 in) thick up front, and 256 mm (10.08 in) by 22 mm (0.87 in) at the rear. Two-piston Lucas HP2 brake calipers at the front (with four pads per caliper), with Lucas single-piston sliding brake calipers at the rear. A Bosch ABS 5.3 four-channel Anti-lock Braking System (with Electronic Brakeforce Distribution (EBD) and Electronic Differential Lock (EDL) - and later with ESP or Electronic Stability Programme), coupled with a vacuum servo completed the system.

Standard wheels were Audi's die-cast aluminium alloy six-arm 'Avus' 7.5Jx17H2 ET45 wheels, shod with 225/45 ZR17 performance tyres.

Available exterior colors included Brilliant Black, Laser Red, Light Silver, Cactus Green, Santorin Blue, Hibiscus Red, Casablanca White, Pearlescent White, Imola Yellow (spicy mustard), and Nogaro Blue. The last two colors were exclusive to the S4 model. Interior leather was available in Onyx or Silver. Available options included:

Bose premium sound system
Audi Navigation System
6-disc CD changer
Hands free Motorola cellular telephone
Premium Package: Sunroof, HomeLink transmitter, Auto dimming mirrors
Cold Weather Package: Heated front seats, Heated outside mirrors, Expandable ski sack
Enhanced Sport Package: Alcantara seat inserts, Silver aluminum belt line trim or Carbon Fibre trim (on late 2000-2001 models), Aluminum mirror housings (on 2001 & 2002 models)
The Sport Package replaced the wood-grain belt line trim with silver aluminum trim, and the wood grain finish around the shifter with black plastic. The Alcantara seat inserts were silver (on Onyx leather). With the black, white, or blue exteriors, the inserts were also available in blue Alcantara. On the early 2000 models, the Alcantara inserts in the rear seats did not fully extend forward to the front edge of the seat.

A motor racing version of the car achieved great success in the SpeedVision World Challenge with Michael Galati taking the 2001 SpeedVision GT title in a Champion Racing S4, winning four races, and helping Audi to its first Manufacturers' Championship.

The Audi Sport specification Champion A4 chassis included a B5 RS4 engine, and Alcon racing brake calipers (4 piston front and 2 piston rear calipers).

Don Istook, with Istook's Motorsports, built and campaigned several B5 S4's in first the Motorola Cup, and then the Grand Am Cup. The S4's were even raced by Istook's Motorsports in the Rolex GT category for several races to help fill the field. Of note, one of the S4's, racing against true GT cars, even ran as high as second place (in the rain) at Barber Motorsports Park.[citation needed] These S4's were built using existing S4, not RS4 engines, but used the B5 Audi RS4 K04 turbochargers.