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SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

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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, 2001

COMMISSION FILE NUMBER: 333-48299

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SAUER-DANFOSS INC.(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction of incorporation or organization)    |  | 36-3482074(I.R.S. Employer Identification No.)
|------------------------------------------------------------------------- |  | ----------------------------------------------
|2800 East 13th Street, Ames, Iowa(Address of principal executive offices) |  | 50010-8600(Zip Code)                          

(515) 239-6000(Registrant's telephone number, including Area Code)

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

Common Stock, par value $0.01 per share
(Title of each class)

New York Stock ExchangeFrankfurt (Germany) Stock Exchange
(Name of each exchange on which registered)


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

(Title of class)

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 ý    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: ý

The
aggregate market value of the voting stock of the Registrant held by nonaffiliates at March 8, 2002, was $106,345,644. As of March 8, 2002, there were 47,410,768 shares
of common stock, $0.01 par value, of the Registrant outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the annual meeting of stockholders to be held May 1, 2002 are incorporated by reference into Parts II and III.

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PART I

Item 1. Business.



Sauer-Danfoss Inc. ("Sauer-Danfoss" or the "Company"), a U.S. Delaware corporation, and its predecessor organizations have been active in the mobile
hydraulics industry since the 1960s. Sauer-Danfoss, established in 1987, is a global manufacturer of components and integrated hydraulic systems that generate, transmit, and control fluid power in
mobile equipment. Principal products are hydrostatic transmissions, gear pumps and motors, orbital motors, hydrostatic steering units, proportional load-sensing valves, microprocessor
controls, and electrohydraulics. The Company sells its products to original equipment manufacturers ("OEMs") who use Sauer-Danfoss products to provide the hydraulic power for the propel, work, and
control functions of their vehicles. The Company's products are sold primarily to the construction, road building, agriculture, turf care, and specialty vehicle markets. In May 2000, the
Company completed the acquisition of Danfoss Fluid Power (DFP) by issuing 16,149,812 shares of its common stock in exchange for all of the outstanding shares of DFP. DFP, which had 1999 sales of
$322 million, manufactures orbital motors, hydrostatic steering units, load-sensing proportional valves, gear pumps and electrohydraulic products for the mobile equipment market.
The acquisition was accounted for under the purchase method of accounting and accordingly, the consolidated statements of income include the results of DFP beginning May 2000. As a result of
the Company's acquisition of DFP, the Company changed its name from Sauer Inc. to Sauer-Danfoss Inc. The Company conducts its business globally under the Sauer-Danfoss name.

On
February 19, 2002, the Company announced that it had completed an agreement to purchase a minority interest in Comatrol S.p.A., effective January 1, 2002, and to enter
into a strategic alliance to develop and manufacture cartridge valves and hydraulic integrated circuits (HICs) under the Sauer-Danfoss brand label as well as marketing, sales and support through the
Sauer-Danfoss organization. Comatrol, located in Reggio Emilia, Italy, has 90 employees and approximately $16 million in annual
sales. The Company, which paid approximately $6.0 million, will own 45% of Comatrol as a minority interest partner and will not consolidate the financial results. The Company has the option to
acquire additional ownership interest in Comatrol in the future, but is not required to do so.

In
January 2001, the Company completed the acquisition of Compact Controls, Inc. ("CCI") by acquiring all of the outstanding stock of CCI in exchange for approximately
$36 million in cash. CCI, located in Hillsboro, Oregon, is a leading manufacturer of cartridge valves and hydraulic integrated circuit manifolds in North America. The purchase was accounted for
under the purchase method of accounting for business combinations.

During
January 2001, the Company acquired all of the assets and business operations of portions of the fluid power business of Danfoss A/S. The asset acquisition was
agreed-to in principle by Sauer Inc. and Danfoss A/S when Sauer Inc. purchased eleven companies comprising the Danfoss Fluid Power group on May 3, 2000. The operations
are located in Australia, Belgium, Japan, Latin America, Netherlands, Portugal, Singapore, and Spain. The Company issued 2,091,150 shares of its common stock and the acquisition was accounted for
under the purchase method of accounting for business combinations in the first quarter of 2001.

Also
in January 2001, the Company acquired Italdigit s.r.l. in an all-cash transaction. Headquartered in Italy, Italdigit manufactures electronic controls and wiring
harnesses in mobile hydraulics as well as other areas. The purchase was accounted for under the purchase method of accounting for business combinations.

During
2001, the Company established a marketing and distribution base in India by acquiring certain assets of Dantal Hydraulics Ltd for approximately $2.3 million. Dantal
had previously been a distributor for Danfoss Fluid Power in India since 1989. Headquartered in New Delhi, Dantal also has branch offices

1

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in Ahmedabad, Mumbai, Bangalore, Chennai and Calcutta. The Company closed this transaction during the second quarter of 2001.

In
April 2001, the Company entered into an agreement with Topcon Laser Systems, Inc. to create a new joint venture company called Topcon Sauer-Danfoss (TSD). TSD operates
out of the Company's Minneapolis, Minnesota, facility and out of Topcon's facility in Pleasanton, California. This new company focuses on the development and marketing of electronic systems used to
control the work functions of vehicles. The Company owns 50.1% of TSD, and accordingly, consolidates TSD into the Company's consolidated financial statements.

In
September 2001, the Company completed the previously announced transaction with Daikin Industries, Ltd. to establish two joint venture companies. The two companies, a
sales company and a manufacturing company, will operate as part of the Company's global organization covering the
Asia-Pacific region. The Company owns 65% of the sales company and 45% of the manufacturing company. Accordingly, the Company consolidates the sales company, but does not consolidate the
manufacturing company.



Information about the Company's two reportable segments defined by geographic region is set forth in Note 16 of the Notes to Consolidated Financial Statements on
pages 51-52 of this report, and is incorporated herein by reference.



Information regarding the Company's principal products and the business in general is presented below. Information regarding sales by the Company's product lines
is set forth in Note 16 of the Notes to Consolidated Financial Statements on page 52, and is incorporated herein by reference. No individual customer, OEM or other, accounted for 10% or more of the
Company's overall net sales for 2001.

Hydrostatic Transmissions

Sauer-Danfoss designs, manufactures, and sells a range of closed circuit axial piston hydrostatic transmissions for both the propulsion and work functions of
mobile equipment in the Americas, Europe, and Asia Pacific. High-power (typically over 50 HP) and medium-power (typically 25 to 50 HP) applications for hydrostatic transmissions
manufactured by the Company include construction and agricultural mobile equipment. Light-power (typically 15 to 25 HP) and bantam-power (typically under 15 HP) applications for hydrostatic
transmissions manufactured by the Company include light agricultural and turf care mobile equipment.

Electrohydraulics

Sauer-Danfoss designs and manufactures electrohydraulic valves and electronic controls, including microprocessor-based controls and electronic sensors through its
electrohydraulics operations in the United States and Sweden and also designs electrohydraulic products in Germany, the United Kingdom, Italy, and Denmark. Electrohydraulic controls and sensors
integrate hydraulics, hydrostatic transmissions, and mechanical components with electronic controls and are used by OEMs of mobile equipment to control the Company's hydraulic systems, as well
as the hydraulic systems of other manufacturers. The
electrohydraulic products bring together the propulsion function and the work function by providing standard or custom-designed controls.

2

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Gear Pumps and Motors

The Company designs, manufactures, and sells custom-designed gear pumps, as well as a broad range of high-performance standard gear pumps and motors.
Gear pumps and motors are the most widely used type of mobile hydraulic pumps and motors in the industry. The Company manufactures customized gear pumps at its Swindon, England, facility and standard
gear pumps and motors at its facilities in Bologna, Italy, and West Branch, Iowa.

Open Circuit Piston Pumps

The Company designs, manufactures, and sells custom-designed open circuit piston pumps used to transform mechanical power from the engine to hydraulic power for
the work function of the vehicle. The advantages of open circuit piston pumps compared to other types of pumps, such as vane or gear pumps are the high degree of control within the work function
hydraulic system and the more efficient use of engine power. These products are designed and manufactured in the United States and Europe.

Control Valves

Sauer-Danfoss designs, manufactures and sells a variety of spool type control valves to meet its customers' needs, ranging from very sophisticated
electrohydraulic valves for highly sophisticated forestry and agricultural harvesting equipment, to very simple low cost valves for high volume Ag Tractors. These products are manufactured in the
factories in Caxias do Sul, Brazil, Nordborg, Denmark, and Easley, South Carolina.

The
Company also designs, manufactures and sells a complete line of cartridge valves and hydraulic integrated circuits (HIC's) in the facilities in Reggio Emilia, Italy, Hillsboro,
Oregon and Easley, South Carolina. Aerial lift platforms and road building equipment are a very large user of cartridge valves.

Low Speed High Torque Motors

The Company designs and manufactures a complete line of geroller and gerotor motors at its Nordborg, Denmark facilities. These motors are used for both propel and
work functions in all served markets.

Steering Units

Sauer-Danfoss designs, manufactures, and sells hydrostatic steering units to customers throughout the world. These steering units are manufactured in three
plants; Nordborg, Denmark, Wroclaw, Poland, and Sturtevant, Wisconsin. These steering units convert steering wheel motion into hydraulic flow and pressure to provide steering motion for ag tractors,
combines, earthmoving equipment, etc.

3

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Major Markets and Applications

|Construction and Road
Building                                                                                                                                                                                                                 |  | Agriculture                                                              |  | Turf Care                                                                                                                   |  | Specialty Vehicles                                                                                                                                                                                                                                                                         
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Chip spreaders
Concrete pumps
Concrete saws
Crawler dozers
Crawler loaders
Ditchers/trenchers
Excavators
Grinders
Landfill compactors
Oil distributors
Pavers
Planers
Rollers
Skid steer loaders
Transit mixers
Utility tractors
Wheel loaders |  | Combines
Cotton pickers
Detasselers
Seeders
Sprayers
Tractors
Windrowers |  | Commercial-wide area, walk-
    behind mowers
Commercial zero-turn mowers
General turf maintenance
Lawn and garden tractors |  | Fruit pickers
Industrial lift trucks
Logging equipment
Marine equipment
Mining equipment
Oil field equipment
Railway maintenance
Rough terrain fork lifts
Self-propelled boom aerial lifts
Self-propelled scissor aerial lifts
Snow groomers
Sweepers
Tree shakers
Truck and bus fan drives

General Characteristics

The Company sells both standard and customized products, with most products being built to order. With respect to some of the most technologically demanding
vehicles, such as those used in forestry, construction, and road building, Sauer-Danfoss's engineers work closely with customers from design through manufacture of the final product, a cycle that can
take as long as four to six years for a major new machine.

Sauer-Danfoss
operates 24 manufacturing facilities in the Americas, Europe, and the Asia-Pacific region. The Company's decentralized manufacturing capabilities allow it to
adapt its products to local market needs and to provide flexibility to meet customer delivery requirements. In North America, the Company sells and distributes its products directly to large
OEMs and through independent distributors to smaller OEMs. In Europe, South America, and the Asia-Pacific region, the Company sells and distributes its products either
directly or through sales subsidiaries located in Australia, Belgium, Brazil, China, Denmark, Finland, France, Germany, Netherlands, India, Italy, Japan, Norway, Poland, Portugal, Singapore, Slovakia,
Spain, Sweden, and the United Kingdom.

In
accordance with standard industry practice for mobile hydraulics, the Company warrants its products to be free from defects in material and workmanship. The warranty period varies
from one to three years from the date of first use or date of manufacture, depending on the type of product or, in some cases, the application. The Company's warranty expense has been less than 1.0%
of net sales in each of the past three years.

Because
many of its products are designed and developed in conjunction with its customers' design teams to fit their specific needs and to minimize inventory levels, the Company
primarily manufactures products to order. The Company typically machines components with long lead times according to a sales forecast and machines certain unique components for specific customers
according to firm orders. Inventories at the Company's manufacturing sites consist primarily of raw materials and machined iron housings and components. Only small amounts of assembled finished units
are maintained in inventory. Inventories at the Company's sales locations consist mainly of finished units manufactured specifically for distribution to customers in those locations.

4

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The Company does not normally accept orders subject to late delivery penalties. On occasion, the Company sells its products to government agencies, including those used for military
applications, but it does not design its products specifically according to government standards and usually only enters into contracts for the supply of commercial products. There are no government
contracts of material value to the Company.

Raw Materials

The Company purchases iron housings and components from various U.S. and European foundries. The principal materials used by the Company are iron, steel, brass,
and aluminum. All materials used by the Company are generally available from a number of sources in quantities sufficient to meet current requirements.

Patents, Trademarks, and Licenses

The Company owns or licenses rights to approximately 540 patents and trademarks relating to its business. While the Company considers its patents and trademarks
important in the operation of its business and in protecting its technology from being used by competitors, its business is not dependent on any single patent or trademark or group of related patents
or trademarks. The Company licenses the use of the Sundstrand name from Hamilton Sundstrand (formerly Sundstrand Corporation), a division of United Technologies, under agreements that extend to
March 31, 2004. The Company has discontinued the use of the Sundstrand name and does not expect to seek renewal of the license.

To
ensure worldwide availability of the Company's design of products, the Company has, in the past, licensed its technology to companies in certain countries. Prior to 2001, the Company
licensed all its open- and closed-circuit piston pumps and motor and electrohydraulic valve technology to a subsidiary of Daikin Industries Ltd. in Japan. Effective
October 1, 2001, the Company terminated this license and entered into a joint venture agreement with Daikin to jointly manufacture these products for distribution into the
Asia-Pacific region. The Company also previously licensed its original hydrostatic transmission technology to Larsen & Toubro Ltd. in India. During 2001, the Company
terminated this license agreement in conjunction with its acquisition of Dantal Hydraulics Ltd. Royalty income generated by these licenses during 2001, 2000, and 1999 was approximately
$0.9 million, $1.3 million, and $1.0 million, respectively.

Backlog

The amount of the Company's backlog is significant because, among other factors, customer orders typically involve long lead times and specific model types. On a
comparable basis, at December 31, 2001, the Company's backlog (consisting of accepted but unfilled customer orders primarily scheduled for delivery during 2002) was $320 million as
compared with $375 million at December 31, 2000.
However, orders can be canceled or rescheduled by customers. Thus, the level of orders currently in backlog could decline because of cancellation or rescheduling. The lower year-end 2001
backlog amount has been impacted by the declining economy, particularly in the Americas. In addition, the Company's U.S. distributor customers are placing orders with shorter lead times due to the
Company's ability to fulfill such orders in a shorter time frame.

Competition

The mobile hydraulics industry is very competitive. Sauer-Danfoss competes based on technological product innovation, quality, and customer service. The Company
believes that long-term successful suppliers to mobile equipment manufacturers will be those companies that have the ability to capitalize on the changing needs of the industry by
providing technological innovation, shorter product development times, and reduced manufacturing lead times at globally competitive price levels.



The closed circuit hydrostatic transmission market is highly concentrated and intensely competitive. There are a small number of manufacturers of hydrostatic
transmissions with which the Company

5

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competes worldwide that are not captive suppliers of OEMs. These include the Rexroth Hydromatic division of Robert Bosch AG, Eaton Corporation, and Linde AG. In addition, the Company competes
with alternative products, such as mechanical transmissions of other manufacturers.

The
Company competes with a number of smaller companies that typically offer a single, specialized product on a more limited geographic basis as a component of a closed circuit
hydrostatic transmission system.

In
terms of global supply of closed circuit hydrostatic transmissions, the Company believes it is the world leader in terms of product range, market share, and geographic coverage. Only
Rexroth offers similar geographic coverage.



The open circuit work function market is fragmented with a large number of suppliers of all types of products, including open circuit piston pumps, gear pumps and
motors, hydraulic and electrohydraulic valves, electronic sensors and controls, and with intensive competition on pricing at the component level. There are approximately ten major companies that
compete on a global basis, including Rexroth/Robert Bosch Group, Parker Hannifin Corporation, and Eaton Corporation, and in Japan, Kayaba and Kawasaki. The supply of standard gear pumps and motors and
hydraulic valves is particularly fragmented with more than 50 companies worldwide in each respective area. Most of these competitors have a limited product range and operate in a limited geographic
market.



In the electrohydraulics market, which covers both propulsion and work function systems, there are few suppliers of propulsion system controls and only three are
worldwide competitors. The main competition in this area comes from major OEMs, who produce controls for their own use. In work function electrohydraulic valves, electronic sensors, and controls,
there is a wide range of niche suppliers in limited geographic markets. In recent years, larger companies have increasingly acquired these niche or regional suppliers and thereby have improved their
ability to offer integrated systems. The Company believes it is well positioned to establish itself as a technology leader in the work function segment as there is no clearly established technology in
this sector that is deemed to be an industry standard.



The control valve marketplace is fragmented with a large number of suppliers who are primarily focused on limited valve types or flow ranges. Sauer-Danfoss
provides a comprehensive line of both spool valves and cartridge valves to meet the specific needs of their customers. Competitors who provide partial lines include, Eaton Corporation, Hydra-Force,
Sterling Hydraulics, Husco, Sun Hydraulics, Integrated Hydraulics, Walvoil, and Oil Control, plus many others. Complete global control valve line competitors are limited to Parker-Hannifin and
Rexroth/Robert Bosch Group.



There are a limited number of competitors who can provide a complete line of low speed, high torque motors. Competitors include Eaton Corporation, Rexroth/Robert
Bosch Group, White Hydraulics,
Parker-Hannifin Corporation and M&S Hydraulics. This market is extremely price competitive, and is growing, providing Sauer-Danfoss opportunity to develop new products to increase share.



Hydrostatic Steering units are provided to the market from the same competitors as LSHT Motors (above) plus Ognibene. Sauer-Danfoss has the largest European
market share and a growing share globally. As steering systems grow and needs expand Sauer-Danfoss is providing electronic control of steering and complete electrical steering solutions to meet the
growing demands of the steering market. Today, Sauer-Danfoss leads the industry in this direction for steering.

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Research and Development

The Company's research and development expenditures during 2001, 2000, and 1999 were approximately $38.1 million, $29.9 million, and
$23.3 million, respectively.

Environmental Matters

In all countries in which it operates, the Company is subject to environmental laws and regulations concerning emissions to air, discharge to waterways, and the
generation, handling, storage, transportation, treatment, and disposal of waste materials. These laws and regulations are constantly evolving, and it is impossible to predict accurately the effect
they will have on the Company in the future. The regulations are subject to varying and conflicting interpretations and implementation. In some cases, compliance can only be achieved by additional
capital expenditures. The Company cannot accurately predict what capital expenditures, if any, may be required to comply with applicable environmental laws and regulations in the future; however, the
Company does not currently estimate that any future capital expenditures for environmental control facilities will be material. The Company is not currently subject to any governmental remediation
order, nor is the Company aware of any environmental problems that would have a materially adverse effect on the Company.

Employees

As of December 31, 2001 and 2000 the Company had 6,790 and 6,733 employees, respectively.

Financial Information about Geographic Areas

Information regarding the Company's net sales and long-lived assets by geographic area is set forth in Note 16 of the Notes to Consolidated
Financial Statements on page 52 of this report, and is incorporated herein by reference.

Item 2. Properties.

Sauer-Danfoss Inc. conducts its manufacturing operations at 24 locations; ten in the United States, three in Italy, two in the United Kingdom and Slovakia,
and one each in Brazil, China, Denmark, Germany, Japan, Poland, and Sweden. The following table sets forth certain information relating to the Company's principal manufacturing facilities:

|Location      |                        | Principal Products |                                                   | Approx.
Area in
Sq. Ft. |         | Owned/Leased
|------------- | ---------------------- | ------------------ | ------------------------------------------------- | ----------------------- | ------- | ------------
|United States |                        |                    |                                                   |                         |         |             
|              | Ames, Iowa             |                    | Hydrostatic transmissions                         |                         | 330,000 |             
|              | LaSalle, Illinois      |                    | Hydrostatic transmissions                         |                         | 325,000 |             
|              | Freeport, Illinois     |                    | Hydrostatic transmissions                         |                         | 183,000 |             
|              | Lawrence, Kansas       |                    | Hydrostatic transmissions                         |                         | 162,000 |             
|              | Easley, South Carolina |                    | Valves                                            |                         | 184,000 |             
|              | Hillsboro, Oregon      |                    | Valves                                            |                         | 60,000  |             
|              | Sturtevant, Wisconsin  |                    | Steering units                                    |                         | 25,000  |             
|              | Minneapolis, Minnesota |                    | Electrohydraulics                                 |                         | 75,000  |             
|              | West Branch, Iowa      |                    | Gear pumps and motors                             |                         | 105,000 |             
|              | Sullivan, Illinois     |                    | Hydrostatic transmissions                         |                         | 176,000 |             
|South America |                        |                    |                                                   |                         |         |             
|              | Caxias do Sul, Brazil  |                    | Valves                                            |                         | 29,000  |             
|Europe        |                        |                    |                                                   |                         |         |             
|              | Neumünster, Germany    |                    | Hydrostatic transmissions and electrohydraulics   |                         | 463,000 |             
|              | Nordborg, Denmark      |                    | Steering units, gear pumps and motors, and valves |                         | 680,000 |             

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|     | Wroclaw, Poland              |       | Steering motors and pumps                           |  | 41,000  |           | Owned 
|---- | ---------------------------- | ----- | --------------------------------------------------- |  | ------- | --------- | ------
|     | Povazská-Bystrica, Slovakia  |       | Hydrostatic transmissions and mechanical gear boxes |  | 351,500 |           | Owned 
|     | Dubnica nad Vahom, Slovakia  |       | Hydrostatic transmissions                           |  | 236,000 |           | Leased
|     | Swindon, England             |       | Gear pumps                                          |  | 229,000 |           | Leased
|     | Stratford upon-Avon, England |       | Electrohydraulics                                   |  | 5,000   |           | Owned 
|     | Bologna, Italy               |       | Gear pumps and motors                               |  | 246,000 |           | Owned 
|     | Cento, Italy                 |       | Electrohydraulics                                   |  | 3,500   |           | Owned 
|     | Reggio Emelia, Italy         |       | Valves                                              |  | 53,000  |           | Leased
|     | Almhult, Sweden              |       | Electrohydraulics                                   |  | 20,000  |           | Owned 
|Asia |                              |       |                                                     |  |         |          
|     | Shanghai/Pudong, China       |       | Hydrostatic transmissions                           |  | 105,000 |           | Leased
|     | Osaka, Japan                 |       | Hydrostatic transmissions                           |  | 94,000  |           | Leased
|     |                              |       |                                                     |  |         |          
|     |                              | Total |                                                     |  |         | 4,181,000 |       
|     |                              |       |                                                     |  |         |          

Item 3. Legal Proceedings.

From time to time, the Company is involved in various legal matters considered normal in the course of its business. The Company intends to vigorously defend
against all such claims. It is the Company's policy to accrue for amounts related to these matters if it is probable that a liability has been incurred and an amount can be reasonably estimated.
Although the outcome of such matters cannot be predicted with certainty and no assurances can be given with respect to such matters, the Company believes that the outcome of these matters in which it
is currently involved will not have a materially adverse effect on its results of operations, liquidity, or financial position.

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

The Company did not submit any matter to a vote of security holders, through a solicitation of proxies or otherwise, during the fourth quarter of 2001.

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EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth certain information regarding the executive officers of the Company, each of whom are elected annually at the annual meeting of the
Board of Directors to serve until the next annual meeting of the Board and until their successors are duly elected and shall qualify:

|Name                    |  | Age |  | Position                                                      |  | Year
Appointed
|----------------------- |  | --- |  | ------------------------------------------------------------- |  | --------------
|Klaus H. Murmann (1)(2) |  | 70  |  | Chairman and Director                                         |  | 1989          
|Joergen M. Clausen (3)  |  | 53  |  | Vice Chairman and Director                                    |  | 2000          
|David L. Pfeifle (1)    |  | 57  |  | President, Chief Executive Officer and Director               |  | 2000          
|David J. Anderson (1)   |  | 54  |  | Executive Vice President  Strategic Business Development     |  | 2000          
|Hans J. Cornett (4)     |  | 51  |  | Executive Vice President  Sales and Marketing                |  | 2000          
|Niels Erik Hansen (4)   |  | 53  |  | Executive Vice President  Work Function and Control Products |  | 2000          
|Karl J. Schmidt (8)     |  | 48  |  | Executive Vice President and Chief Financial Officer          |  | 2002          
|James R. Wilcox (7)     |  | 56  |  | Executive Vice President  Propel Products                    |  | 2000          
|Per Have (4)            |  | 45  |  | Vice President  Information Technology                       |  | 2000          
|Richard Jarboe (5)      |  | 59  |  | Vice President  Open Circuit                                 |  | 2000          
|Thomas K. Kittel (1)    |  | 53  |  | Vice President  Hydrostatics  Europe                        |  | 2000          
|Henrik Krabsen (4)      |  | 40  |  | Vice President  Valves                                       |  | 2000          
|Finn Lyhne (4)          |  | 47  |  | Vice President  Motors and Steering                          |  | 2000          
|Kenneth D. McCuskey (1) |  | 47  |  | Vice President  Finance, Treasurer and Secretary             |  | 2000          
|Don O'Grady (9)         |  | 52  |  | Vice President  Human Resources                              |  | 2001          
|Albert Zahalka (6)      |  | 50  |  | Vice President  Electrohydraulics                            |  | 2000          

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PART II

Item 5. Market for the Company's Common Stock and Related Stockholder Matters.



The Company's Common Stock is traded on the New York Stock Exchange and the Frankfurt (Germany) Stock Exchange. As of March 12, 2002, there were
approximately 197 stockholders of record. Although exact information is unavailable, the Company also estimates that there are 3,500 additional beneficial owners of the Company's Common Stock, based
upon the 2002 proxy solicitation.

The
Company is currently paying a quarterly dividend of $0.07 per share. The payment of dividends is subject to restrictions as described in Management's Discussion and Analysis of
Financial Conditions and Results of Operations  Other Matters, on page 20 of this report.

The
following table sets forth the high and low prices on the New York Stock Exchange for the Company's Common Stock since January 1, 2000, and the quarterly cash dividends paid
in 2001 and 2000:

1st

2nd

3rd

4th

Full Year2001High

$
10.29

$
9.95

$
9.43

$
8.48

$
10.29Low

$
8.41

$
7.27

$
7.37

$
6.64

$
6.64Dividends

$
0.07

$
0.07

$
0.07

$
0.07

$
0.282000High

$
11.70

$
11.00

$
10.91

$
10.05

$
11.70Low

$
7.28

$
8.19

$
8.80

$
6.76

$
6.76Dividends

$
0.07

$
0.07

$
0.07

$
0.07

$
0.28


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Item 6. Selected Financial Data.

SELECTED FINANCIAL DATA

|                                            |                      | 2001 |         | 2000 (1) |   | 1999    |         | 1998 |         | 1997    |  
|------------------------------------------- | -------------------- | ---- | ------- | -------- | - | ------- | ------- | ---- | ------- | ------- | -
|
|Operating Data:                             |                      |      |         |          |   |         |         |      |         |         |  
|Net sales                                   |                      | $    | 855,279 |          | $ | 782,537 |         | $    | 534,382 |         | $
|Gross profit                                |                      |      | 193,233 |          |   | 201,011 |         |      | 125,932 |         |  
|Marketing                                   |                      |      | 63,318  |          |   | 40,874  |         |      | 24,727  |         |  
|Research and development                    |                      |      | 38,054  |          |   | 29,874  |         |      | 23,311  |         |  
|Administration                              |                      |      | 59,485  |          |   | 57,302  |         |      | 33,655  |         |  
|Total operating expenses                    |                      |      | 160,857 |          |   | 128,050 |         |      | 81,693  |         |  
|Earnings before interest and taxes          |                      |      | 24,976  |          |   | 55,347  |         |      | 37,625  |         |  
|Total interest expense, net                 |                      |      | 17,377  |          |   | 11,194  |         |      | 8,566   |         |  
|Net income                                  |                      |      | 4,730   |          |   | 26,925  |         |      | 18,120  |         |  
|Per Share Data:                             |                      |      |         |          |   |         |         |      |         |         |  
|Income per common share, basic and diluted  |                      | $    | 0.10    |          | $ | 0.69    |         | $    | 0.67    |         | $
|Cash dividends per share                    |                      | $    | 0.28    |          | $ | 0.28    |         | $    | 0.28    |         | $
|Weighted average basic shares outstanding   |                      |      | 46,977  |          |   | 39,216  |         |      | 27,225  |         |  
|Weighted average diluted shares outstanding |                      |      | 46,980  |          |   | 39,217  |         |      | 27,240  |         |  
|Balance Sheet Data:                         |                      |      |         |          |   |         |         |      |         |         |  
|Inventories                                 |                      | $    | 141,652 |          | $ | 146,232 |         | $    | 73,977  |         | $
|Property, plant & equipment, net            |                      |      | 423,195 |          |   | 422,986 |         |      | 269,485 |         |  
|Total assets                                |                      |      | 884,891 |          |   | 840,963 |         |      | 442,515 |         |  
|Total debt                                  |                      |      | 298,799 |          |   | 245,739 |         |      | 131,855 |         |  
|Stockholder's equity                        |                      |      | 347,184 |          |   | 342,397 |         |      | 150,752 |         |  
|Debt to debt plus equity                    |                      |      | 44.5    | %        |   | 39.8    | %       |      | 41.7    | %       |  
|Other Data:                                 |                      |      |         |          |   |         |         |      |         |         |  
|Backlog (at year-end)                       |                      | $    | 319,905 |          | $ | 375,052 |         | $    | 252,400 |         | $
|Depreciation and amortization               |                      |      | 69,474  |          |   | 53,338  |         |      | 35,538  |         |  
|Capital expenditures                        |                      |      | 69,697  |          |   | 67,931  |         |      | 57,149  |         |  
|EBITDA*                                     |                      |      | 94,450  |          |   | 108,685 |         |      | 73,163  |         |  
|Cash flows from (used in):                  |                      |      |         |          |   |         |         |      |         |         |  
|                                            | Operating activities |      |         | 67,266   |   |         | 81,859  |      |         | 77,786  |  
|                                            | Investing activities |      |         | (110,143 | ) |         | (62,305 | )    |         | (56,779 | )
|                                            | Financing activities |      |         | 33,497   |   |         | 5,406   |      |         | (22,940 | )
|Number of employees (at year-end)           |                      |      | 6,790   |          |   | 6,733   |         |      | 3,836   |         |  
|Sales/total compensation expense            |                      |      | 3.22x   |          |   | 3.32x   |         |      | 3.49x   |         |  

---

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

Safe Harbor Statement

This annual report and other written reports as well as oral statements made from time to time by the Company may contain "forward-looking
statements," statements regarding matters that are not historical facts,

11

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but rather are subject to risks and uncertainties. All statements regarding future performance, growth, sales and earnings projections, conditions or developments are forward-looking statements.
These statements are based on current financial and economic conditions and rely heavily on the Company's interpretations of what it considers key economic assumptions. Actual future results may
differ materially depending on a variety of factors, including, but not limited to, changes in: global economic factors, including foreign currency movements; general economic conditions, including
interest rates; specific economic conditions in the agriculture, construction, road building, turf care and specialty vehicle markets and the impact of such conditions on the Company's customers in
such markets; major customers' product and program development plans and the Company's role in such plans; business relationships with major customers and suppliers; energy prices; difficulties
entering new markets; pricing and product initiatives and other actions taken by competitors; ability of suppliers to provide materials as needed and the Company's ability to recover any price
increases for materials in product pricing; labor relations; the Company's execution of internal performance plans; and other business conditions.

Overview

Sauer-Danfoss Inc. and subsidiaries (the Company) is a leading international supplier of components and systems that generate, transmit and control fluid
power in mobile equipment. The Company's products are used by original equipment manufacturers (OEMs) of mobile equipment, including construction, road building, agricultural, turf care and specialty
equipment. The Company designs, manufactures and sells its products in North America, Europe and the Asia Pacific Region, and sells its products throughout the rest of the world either directly or
through distributors. The Company also manufactures and sells its products in South America through its manufacturing plant and sales office in Caxias do Sul and Sao Paulo, Brazil.

The
Company began 2001 with high expectations of reaping the benefits of bringing Sauer and Danfoss Fluid Power (DFP) together, but instead ended the year disappointed with its overall
financial performance. The year began with a steep downturn in the U.S. markets that the Company serves, which eventually spread to Europe later in the year. Overall, the Company's sales declined 9.5%
from the prior year after adjusting for the effects of acquisitions made in both years. Although this decline is less than the decline experienced by the overall industry that the Company serves, the
financial results were further impacted by unexpected nonrecurring costs associated with the merger of DFP and the continued commitment to future customer programs. These items will be discussed
further in sections below.

The
Company now turns its attention immediately to 2002 by taking several substantial actions to return to more acceptable levels of profitability, including reducing fixed costs in both
the factories and offices, not hiring for open positions, having selected layoffs, reducing the use of outside contractors and consultants, and redirecting a portion of its engineering resources
towards increasing plant productivity and further harvesting operational synergies. The Company feels that it can take these actions and still be well prepared for the expected upturn in its markets.

Results of Operations

2001 Compared to 2000

Net Sales Sales for 2001 of $855.3 million increased by $72.8 million, or 9.3%,
from the prior year. However, all of this increase was due to the impact of acquisitions, both from having a full year effect of acquisitions made in 2000, and the effect of acquisitions made during
2001. On a comparable basis, including a full year of 2000 sales from DFP and excluding the effects of acquisitions made during 2001, net sales decreased 7.9% in local currencies, and were down 9.5%
as reported in U.S. dollars. Further comparisons of the Company's markets are very difficult due to acquisitions, however, by including DFP for the full year of 2000, the Company experienced decreases
in most of its markets as follows: construction declined 6.9%, road building was down 6.1%, turf care declined 5.1% and the distributor area was down 8.3%. The only bright spots were in agriculture,
which increased a modest 4.9% compared to

12

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significantly lower levels in the past couple of years, and in the specialty market which was essentially flat with the prior year.

The
following table sets forth the Company's net sales by market, including DFP for the full year 2000, in millions of dollars and as a percentage of total net sales, for the years ended
December 31, 2001 and 2000:

December 31,2001

2000(Dollars)

% of Total

(Dollars)

% of TotalAgriculture

$
162.9

19.0

$
155.3

17.5Specialty


145.2

17.0


144.8

16.3Turf care


135.6

15.9


142.9

16.1Construction


116.4

13.6


125.0

14.1Road building


75.3

8.8


80.2

9.0Distribution and aftermarket


219.9

25.7


239.9

27.0$
855.3

100.0

$
888.1

100.0


Gross Profit Gross profit for 2001 of $193.2 million, or 22.6% of sales was down from the reported
$201.0 million of gross profit in 2000, which was 25.7% of sales. The lower gross profit experienced in 2001 was due in large part to lower plant utilization experienced from the dramatic
decline in sales in the Americas with a slightly lower impact in Europe. Coupled with this effect was a pretax charge of $8.3 million of unexpected additional costs associated with the final
closure of the Racine, Wisconsin, plant and associated move to the Company's West Branch, Iowa, plant. In addition, the Company took a bad debt write-off of $1.4 million before
taxes relating to a customer in the aerial lift market filing for bankruptcy during the second quarter. During 2001 the Company took several actions to reduce manufacturing expenses including
reductions in factory headcount commensurate with the volume
reduction, several weeklong plant shutdowns and other cost reduction activities. However, these measures were not enough to completely offset the effects of the above-mentioned items.

Selling, General and Administrative Expenses Selling, general and administrative expenses for 2001 of $122.8 million
increased by $24.6 million, or 25.1%, from the same period of 2000. The inclusion of four additional months in 2001 of DFP results accounts for $13.7 million of this increase. An
additional $3.5 million of expense was incurred due to a full year's amortization of goodwill from DFP, and additional amortization from other intangibles established from the final appraisals
related to the DFP and other acquisitions. The Company anticipates that ongoing amortization will be reduced by approximately $2.8 million per year for 2002 and beyond due to the implementation
of Statement of Financial Accounting Standard No. 142. See "Other Matters" below for further discussion on this new accounting pronouncement. The majority of the remaining $7.4 million
increase is due to acquisitions made in 2001.

Research and Development Expenses Research and development expenses of $38.1 million increased by
$8.2 million, or 27.4%, from 2000 and represent 4.5% of total net sales for 2001 compared to 3.8% of net sales in 2000. The additional four months of DFP in 2001 accounts for
$1.7 million of the increase. The remaining increase reflects the effects of acquisitions made during 2001 and the Company's ongoing development of new customer programs, such as the recent
introduction of the hydro-mechanical transmission for the agriculture tractor market.

Nonoperating Expenses, Net Net nonoperating expenses for 2001 of $16.9 million were $9.0 million higher than
2000 net expenses of $7.9 million. Net interest expense for 2001 of $17.4 million increased by $6.2 million from the 2000 net expense of $11.2 million. Despite overall
declines in the Company's floating borrowing rates during 2001, (see discussion of the Company's borrowing rates in Note 12 of the Notes to Consolidated Financial Statements), the higher
overall bank borrowings used to fund acquisitions during the year has driven the net interest expense significantly higher along with the additional four months of

13

---

borrowings in 2001 for the DFP acquisition in May 2000. Other income, net for 2001 of $0.5 million decreased by $2.8 million from 2000's other income of $3.3 million
related primarily to currency exchange gains. In addition, the Company realized $0.4 million less royalty income from its Japanese licensee, Daikin Industries, Ltd., due to the formation
of a joint venture with Daikin as of October 1, 2001. The license agreement was terminated as of that date, and the Company will no longer receive royalties from Daikin.

Provision for Income Taxes Provision for income taxes for 2001 of $2.9 million decreased $14.3 million from
the 2000 provision for income taxes of $17.2 million. The decrease is a direct result of the decrease in income before income taxes of $36.6 million coupled with a slight decrease in the
effective tax rate for 2001 of 37.8% compared to an effective tax rate for 2000 of 39.0%.

Net Income The Company ended 2001 with net income of $4.7 million, down $22.2 million from the
$26.9 million of net income in 2000. The economic downturn experienced by most of the Company's
markets, coupled with the nonrecurring plant shutdown costs, bad debt write-off discussed above, and higher interest expense contributed to this decline.

Order Backlog Total order backlog at the end of 2001 was $319.9 million, compared to $375.0 million at the end
of 2000, a decrease of 14.7%. On a comparable basis, excluding the effects of acquisitions, order backlog declined 17.1% from the year-end 2000 levels, or 15.2% excluding the impact of
currency fluctuations. During the fourth quarter of 2001, $229.8 million in new orders were written, a decrease of 5.2% compared to the fourth quarter of 2000. Excluding the impact of
acquisitions, orders written in the fourth quarter were $207.1 million, which was 14.5% less than the orders written in the fourth quarter of 2000, or a decrease of 13.6% excluding the impact
of currency fluctuation.

Results of Operations

2000 Compared to 1999

Net Sales Net sales for 2000 of $782.5 million increased by $248.1 million, or 46.4%,
from 1999 net sales of $534.4 million. On a comparable basis, net sales increased 12.6% in local currency, and at $579.6 million, were up 8.5% from 1999 as reported in U.S. dollars. On a
comparable basis, the Company experienced increases in all of its primary markets with the exception of road building, which decreased $6.2 million, or 8.9%, from 1999. Turf care sales
increased $26.8, million or 24.2%, agriculture increased $9.4 million or 11.1%, specialty increased $4.7 million, or 10.3%, and construction increased $4.7 million, or 5.5%, over
1999. Each of the Company's product lines experienced increased sales levels from 1999 with hydrostatics up $32.7 million, open circuit gear products and piston pumps up $3.6 million and
electrohydraulics and controls up $9.0 million.

The
following table sets forth the Company's Sauer-only net sales by market for comparison purposes, in millions of dollars and as a percentage of total
Sauer-only net sales for the years ended December 31, 2000 and 1999:

December 31,2000

1999(Dollars)

% of Total

(Dollars)

% of TotalTurf care

$
137,357

23.7

$
110,585

20.7Agriculture


94,525

16.3


85,087

15.9Construction


89,904

15.5


85,218

16.0Road building


63,294

10.9


69,494

13.0Specialty


50,308

8.7


45,556

8.5Distribution and aftermarket


144,211

24.9


138,442

25.9$
579,599

100.0

$
534,382

100.0


14

---

Gross Profit Gross profit for 2000 of $201.0 million was 25.7% of net sales, slightly higher than the
23.6% of net sales for 1999. The higher gross profit percentage in relation to sales reflects the higher absorption rates of expenses from increased plant utilization experienced during the year from
the higher sales levels. Gross profit as a percentage of net sales for the former DFP companies was comparable to that of Sauer for the year.

Selling, General and Administrative Expenses Selling, general and administrative expenses for 2000 of $98.2 million
increased by $39.8 million, or 68.2%, from 1999 expenses of $58.4 million. The inclusion of eight months of DFP results accounts for $32.1 million of this increase. An additional
$1.2 million of expense was incurred due to goodwill amortization related to the DFP acquisition. The Company anticipates that ongoing amortization of goodwill and other intangibles will equal
approximately $2.7 million per year on a pretax basis. The majority of the remaining $6.5 million increase is due to merger-related integration costs and higher spending on information
technology.

Research and Development Expenses Research and development expenses of $29.9 million increased by
$6.6 million, or 28.3%, from 1999 and represent 3.8% of total net sales for 2000. The inclusion of eight months of DFP results accounts for $4.0 million of the increase. The remaining
increase reflects the Company's ongoing development of new customer programs and demonstrates the Company's emphasis on being a technology leader. Several new frame sizes of open circuit piston pumps
were introduced into the market during 2000, bolstering the Company's product offerings in this important market area.

Restructuring Charges During 2000, the Company recorded $11.2 million of restructuring charges related to former
Sauer operations as a result of the DFP acquisition. A total of $4.5 million related to the closing of its Newtown, Pennsylvania, facility, the operations of which were relocated to Easley,
South Carolina. These charges related to employee severance costs, building lease termination, relocation of equipment and an accrual to cover ongoing building maintenance and services through the end
of the lease term. The Company also recorded $5.0 million related primarily to asset impairments due to relocations in preparation for the closing and moving of the Racine, Wisconsin,
operations to its West Branch, Iowa, and Ames, Iowa, facilities. The Company believes that substantially all of the restructuring charges related to the DFP acquisition have been recorded as of
December 31, 2000.

Nonoperating Expenses, Net Net nonoperating expenses for 2000 of $7.9 million were $0.8 million lower than
1999 net expenses of $8.7 million. Net interest expense for 2000 of $11.2 million increased by $2.6 million from 1999 net expense of $8.6 million, reflecting higher overall
bank borrowings due to increases in working capital and the DFP merger. Other income, net for 2000 of $3.2 million increased by $3.3 million from 1999's other net expense of
$0.1 million primarily due to an increase of $0.3 million of royalty income from its Japanese licensee and $1.5 million of currency gains in Europe.

Provision for Income Taxes Provision for income taxes for 2000 of $17.2 million increased by $6.3 million from
1999 provision for income taxes of $10.9 million. The increase is a result of the increase in income before income taxes of $15.1 million coupled with an increase in the effective tax
rate for 2000 of 39.0% compared to an effective tax rate for 1999 of 37.6%.

Net Income Net income increased in 2000 to $26.9 million from $18.1 million in 1999, an increase of
$8.8 million, or 48.6%. Of the increase, $7.2 million relates to the eight months of DFP results while the remaining $1.6 million of increased net income comes from the comparable
Sauer-only results. Excluding the restructuring charges and one-time merger-related costs and gains, net income for 2000 would have been $35.7 million, or an increase of
$17.6 million from 1999.

Order Backlog On a comparable basis, total order backlog at the end of 2000 was $279.6 million, compared to
$252.4 million at the end of 1999, an increase of 10.8%. Excluding the impact of currency fluctuations, order backlog was up 13.2% from year-end 1999. During the fourth quarter of
2000, $157.1 million in new orders were written, an increase of 10.0% compared to the fourth quarter of 1999, or an increase of 12.2% excluding the impact of currency fluctuation. However, the
Company's Sullivan,

15

---

Illinois, facility, which serves the consumer turf care market, received especially strong orders in the fourth quarter 2000. These orders can vary significantly from month to month, and as a result,
quarter-over-quarter comparisons may not fairly reflect the trends in orders. When viewed over a more representative period, orders for the consumer turf care market were level
with the prior year. Adjusted for this, orders received for fourth quarter 2000 were down 5.0% from fourth quarter 1999 and order backlog was level with the prior year.

Market Risk

The Company is exposed to various market risks, including changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising
from adverse changes in market rates and prices, such as foreign currency exchange rates and interest rates.

Foreign Currency The Company does not currently enter into any type of foreign currency hedging or derivative arrangements
to manage its exposure to fluctuations in the foreign currency markets. The Company feels it is presently well balanced between its U.S. and European operations because the Company generally reports
its sales in the same country in which it incurs its expenses. However, the Company is impacted by foreign currency fluctuations in terms of comparing results from period to period as discussed below.

Impact of Currency Fluctuations

The Company has operations and sells its products in many different countries of the world and therefore conducts its business in various currencies. The
Company's financial statements, which are presented in U.S. dollars, can be impacted by foreign exchange fluctuations through both translation risk and transaction risk. Translation risk is the risk
that the financial statements of the Company, for a particular period or as of a certain date, may be affected by changes in the exchange rates that are used to translate the financial statements of
the Company's operations from foreign currencies into dollars. Transaction risk is the risk from the Company receiving its sale proceeds or holding its assets in a currency different from that in
which it pays its expenses and holds its liabilities.

With
respect to translation risk, fluctuations of currencies against the U.S. dollar can be substantial and therefore significantly impact comparisons with prior periods. The impact is
primarily a reporting
consideration and does not affect the underlying results of operations. The translation impact on making prior period comparisons with respect to the Company's net sales can be material. However, as
shown in the table below, historically the translation impact on net sales has not been significant in recent years.

Percentage Sales Growth/
(Decline)
over Prior Year2001 (1)

2000 (2)

1999As Reported

(9.5
%)
8.5
%
(5.3
%)Without Currency Translation Impact

(7.9
%)
12.6
%
(3.7
%)


---

With
respect to transaction risk, the impact on the Company's operating results has not been significant. With its various manufacturing plants located primarily in its
customers' countries of operation, generally the Company sells in the same currency in which it incurs its expenses.

16

---

Interest Rates The Company does not currently enter into any type of interest rate hedging or derivative arrangements to
manage its exposure to interest rate changes. The following table summarizes the maturity of the Company's debt obligations for fixed and variable rate debt:

Fixed
Rate Debt

Variable
Rate Debt2002

$
9,217

$
5102003


10,398


70,8502004


69,952


2,3232005


7,154


1,6192006


10,615


1,441Thereafter


47,390


14,284Total

$
154,726

$
91,027


Liquidity and Capital Resources

The Company's principal sources of liquidity have been from internally generated funds from operations and from borrowings under its credit facilities in 2001,
2000 and 1999.

Net
cash provided by operating activities for 2001 of $67.3 million decreased by $14.6 million from $81.9 million for 2000. While reductions in trade receivables and
inventories generated a combined $15.4 million of increased cash flow, this was offset by reductions in trade payables, other accrued liabilities and other working capital accounts of
$30.3 million, accounting for the majority of the reduced operating cash flow. The decrease in payables and accrued liabilities was led by four primary factors. The first is that the Company
has greatly reduced the amount of capital expenditures in process as of the end of 2001, meaning outstanding payables were less by approximately $3.0 million for these items heading into the
new year. Secondly, the Company had established approximately $7.0 of restructuring reserves at the end of 2000 that were used during 2001. Thirdly, the Company had several retrofit warranty issues
which arose in 2000 and that were accrued. During 2001, the Company determined its initial estimates for warranty were more than actual claims incurred during 2001 and accordingly, has
reduced its retrofit warranty reserve by approximately $1.9 million. Finally, the Company did not accrue any bonuses for its management group as of the end of 2001 due to the weaker financial
performance.

Capital
expenditures for 2001 of $69.7 million were up slightly, $1.8 million, from the 2000 capital expenditure levels of $67.9 million. Heading into 2002, the
Company will reduce the level of capital expenditures to focus on harvesting the benefits of past investments. The Company believes it has existing production capacity, flexibility and efficiency to
handle any market upturn in the near future. For 2001, the percentage of capital expenditures by region were approximately 40% in the Americas, 59% in Europe and the remaining amount in Asia, compared
to the year 2000 split of 52% in the Americas, 48% in Europe and some small amounts in Asia. This change in capital spending distribution reflects the changes in the regional economies during the
year.

The
cash provided by operating activities nearly funded 2001 capital expenditures of $69.7 million, while dividends of $13.3 million, distributions to minority interest
partners of $13.5 million and acquisitions of $41.5 million were funded through existing cash and bank borrowings. Net borrowings under short- and long-term credit facilities
increased in 2001 by $60.3 million compared to an increase in 2000 of $29.4 million. The increase in net borrowings in 2001 reflects borrowings made to fund acquisitions during the year.
Net borrowings for 2000 reflected the assumption of debt related to the DFP merger as well as increased cash needs to fund higher inventory levels.

The
Company operates under certain covenants as defined under its various credit agreements with its banks. During 2001, the Company did renegotiate its U.S. Revolving Credit Facility.
This negotiation resulted in changes to covenants related to earnings performance and cash flow. Although the Company is

17

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currently meeting these new covenants, certain factors such as the uncertain economy in the U.S. coupled with the Company's financial performance could put the Company at risk of continuing to meet
these covenants. Should the Company not meet these covenants, the result would be a default on the U.S. Revolving Credit Facility, causing the entire outstanding balance to be classified as currently
payable. However, the Company does not currently anticipate that this will happen and has held discussions with its lenders to consider alternatives in the event of such a default. See Note 12
of the Notes to Consolidated Financial Statements for further discussion of these covenants.

The
following table discloses all of the Company's future commitments under contractual obligations as of December 31, 2001:

|Contractual Cash
Obligations       |  | Total |         | 2002 |   | 2003   |  | 2004 |        | 2005 |   | 2006   |  | Thereafter
|---------------------------------- |  | ----- | ------- | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | ----------
|Long-term debt                     |  | $     | 245,753 |      | $ | 9,727  |  | $    | 81,248 |      | $ | 72,275 |  | $         
|Operating leases                   |  |       | 98,930  |      |   | 10,590 |  |      | 9,556  |      |   | 8,175  |  |           
|Other                              |  |       | 2,481   |      |   | 288    |  |      | 248    |      |   | 224    |  |           
|                                   |  |       |         |      |   |        |  |      |        |      |   |        |  |           
|Total Contractual Cash Obligations |  | $     | 347,164 |      | $ | 20,605 |  | $    | 91,052 |      | $ | 80,674 |  | $         
|                                   |  |       |         |      |   |        |  |      |        |      |   |        |  |           

Other Matters

The Company's Critical Accounting Policies In preparing the consolidated financial statements
in conformity with accounting principles generally accepted in the United States of America, management must make a variety of decisions which impact the reported amounts and related disclosures. Such
decisions include the selection of the appropriate accounting principles to be applied, the assumptions on which to base accounting estimates, and the consistent application of those accounting
principles. The Company feels that due to the type of industry it is in and the manufacturing nature of its business, the following accounting policies are the most critical. Critical accounting
policies have been deemed as those which are significant to the reporting of the Company's financial condition and results, and require management's most difficult, complex or subjective judgments. A
more comprehensive list
of the Company's accounting policies is presented in Note 1 of the Notes to the Consolidated Financial Statements.

Inventory Valuation Being a manufacturing company, inventory is a substantial portion of the total assets of the Company.
Therefore, the Company must periodically evaluate the carrying value of its inventory to assess the proper valuation. This includes having adequate reserves to 1) cover losses in the normal
course of operation, 2) provide for excess and obsolete inventory, and 3) ensure that inventory is valued at the lower of cost or market as required by accounting principles generally
accepted in the United States of America. For all of these, the Company applies consistent practices based upon historical data such as actual loss experience, past usage, and actual margins generated
from trade sales of its products.

Warranty Provisions The Company warrants its various products over differing periods depending upon the type of product and
application. Consequently, the Company, from time to time in the normal course of business, incurs costs to repair or replace defective products. The Company records a provision for future warranty
claims against its applicable product sales based on past trends of actual warranty claims compared to the actual sales levels to which those claims apply.

Useful Lives of Property, Plant and Equipment The Company has a significant amount invested in manufacturing plants and
machine tools. This requires the Company to periodically assess the estimated useful lives of its assets in order to match, through depreciation, the cost of those assets with the benefits derived
over the period of usefulness. The useful lives of these assets can be shortened through greater use due to volume increases, rapidly changing technology such as the use of electronics and
computer-operated controls, and through inadequate maintenance.

18

---

Valuation of Trade Receivables The Company records trade receivables due from its customers at the time a sale is recorded
in accordance with its revenue recognition policy. The future collectability of these amounts can be impacted by the Company's collection efforts, the financial stability of its customers, and the
general economic climate in which it operates. The Company applies a consistent practice of establishing an allowance for accounts that it feels are no longer collectable through reviewing the
historical aging of its receivables and by monitoring the financial strength of its customers.

Workers Compensation The Company has an insurance policy to cover workers compensation claims in which the Company pays the
first $0.25 million per claim, per incident. The Company establishes the reserve based on historic growth factors of claims and an estimate of incurred, but not reported claims.

New Accounting Policies During 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial
Accounting Standards (SFAS) No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminates the
pooling-of-interests method of accounting for business combinations effective June 30, 2001, and requires the purchase method. SFAS No. 142 changes the accounting
for goodwill from an amortization approach to a non-amortization approach, under which goodwill would be periodically tested for impairment. The Statement requires amortization of goodwill
recorded in connection with previous business combinations to cease upon adoption of the Statement. For the Company, this will be effective as of January 1, 2002. The Company's amortization of
goodwill during 2001 was $2.8 million; the Company's 2002 earnings are expected to increase by $0.06 per share as compared to 2001 due to the cessation of goodwill amortization. The Company is
currently undertaking the initial impairment analysis of intangible assets at its various reporting units, as required, and expects to complete this analysis during the first two quarters of 2002.

In
August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement addresses the conditions under
which an impairment charge should be recorded related to long-lived assets to be held and used, except goodwill, and those to be disposed of by sale or otherwise. The Statement is
effective on January 1, 2002, for calendar year companies and replaces SFAS No. 121. At this time, the Company does not expect this Statement to have a material impact on its results of
operations, liquidity or financial position.

Acquisitions and Business Ventures On January 19, 2001, the Company completed its acquisition of Compact
Controls Inc. (CCI) for approximately $36.0 million. CCI, located in Hillsboro, Oregon, is a leading manufacturer of cartridge valves and hydraulic integrated circuit manifolds. The
acquisition has been accounted for under the purchase method of accounting for business combinations, and accordingly, the consolidated statements of income and consolidated statements of cash flows
include the operations and cash flow of CCI since January 19, 2001. The transaction resulted in approximately $22.0 million of goodwill being recognized.

During
January 2001, the Company acquired all of the assets and business operations of portions of the fluid power business of Danfoss A/S. Sauer Inc. and Danfoss A/S
agreed to the asset acquisition in principle when Sauer Inc. purchased eleven companies comprising the DFP group on May 3, 2000. The operations are located in Australia, Belgium, Japan,
Latin America, Netherlands, Portugal, Singapore, and Spain. The Company issued 2,091 shares of its common stock and the acquisition has been accounted for under the purchase method of accounting for
business combinations. The transaction resulted in approximately $7.0 million of goodwill. Accordingly, the consolidated statements of income and consolidated statements of cash flows include
the operations and cash flow of these business operations since January 1, 2001.

During
April 2001, the Company entered into an agreement with Topcon Laser Systems, Inc. to create a new joint venture company called Topcon Sauer-Danfoss (TSD). TSD
operates out of the Company's Minneapolis, Minnesota, facility and out of a facility in Pleasanton, California. This new company focuses on the development and marketing of electronic systems used to
control the work functions of vehicles.

19

---

The Company owns 50.1% of TSD and accordingly, consolidates TSD into its consolidated financial statements.

During
July 2001, the Company completed the acquisition of Hidrover Valvulas S.A. in an all-cash transaction. Hidrover develops and manufactures directional control
valves and other hydraulic valves primarily serving the application areas of agriculture, material handling, and utility machinery. The company, located in Caxias do Sul, Brazil, has approximately 80
employees and annual sales of approximately $4.0 million.

In
September 2001, the Company completed the previously announced transaction with Daikin Industries, Ltd. to establish two joint venture companies. The two companies, a
sales company and a manufacturing company, will operate as part of the Company's global organization covering the Asia-Pacific region. The Company owns 65% of the sales company and 45% of
the manufacturing company. The Company will not consolidate the manufacturing company.

Dividend Restrictions The Company's ability to pay dividends to its stockholders is effectively limited by certain
restrictive covenants contained in the U.S. Revolving Credit Facility, Danish Revolving Credit Facility, and German credit agreements, which limit the amount of dividends the U.S. operating company,
Danish operating company and German operating company can distribute to the Company. During 2001, the U.S. operating company made distributions to the Company of $7.7 million. At
December 31, 2001, the U.S. operating company was restricted under its U.S. Revolving Credit Facility from paying any additional dividends to the Company. The German operating company and
Danish holding company did not make any distributions to the Company during 2001, and at December 31, 2001, $30.0 million was not restricted as to the payment of dividends.

Outlook As mentioned in the "Overview" section above, the Company was disappointed in its 2001 financial performance and is
taking aggressive actions to reduce both fixed and variable production expenses as well as to reduce fixed expenses in sales support and administrative areas. As 2002 begins, there are some signs of a
mild recovery in select areas, such as forestry, distribution and the on-highway markets. Historically, these markets have been the first to experience declines, but also the first to
begin to recover. The Company's agriculture market began to improve in late 2001 and it appears that this recovery will continue at a slow, but continuous pace through 2002. The U.S. federal
government's Farm Bill, which is still unresolved, could have a significant impact on the ability of farmers to begin replacement of their aging equipment. Finally, although housing starts in the U.S.
have remained strong throughout 2001, the construction market has remained depressed. Existing field inventories and longer service lives of equipment have continued to hold down the demand in this
market. Overall, the Company is still taking a cautious approach to 2002. At this time, it appears that 2002 will behave as originally forecasted last fall, with slow growth during the first half of
the year leading to an improved second half and ending the year 2002 with stronger backlogs heading into 2003. The Company believes that the slight increase in sales coupled with the savings achieved
through the efforts described earlier will position the Company to realize improved profitability over that of 2001.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Certain market risks are discussed on page 16 and page 17 of this report, and the other disclosure requirements are either considered not applicable or not
material.

Item 8. Financial Statements and Supplementary Data.

The Consolidated Financial Statements, Report of Management, and Report of Independent Auditors' are presented on pages 28-55 of this report.

20

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PART III

Item 10. Directors and Executive Officers of the Registrant

Information regarding directors of the Company is set forth under "Election of Directors" on pages 5-7 of the Company's Proxy Statement for the annual
meeting of stockholders to be held May 1, 2002, and is incorporated herein by reference. Information regarding executive officers of the Company is set forth in Part I of this report
under the caption "Executive Officers of the Company".

Item 11. Executive Compensation

Information as to Executive Compensation is set forth under "Executive Compensation" on pages 9-16 of the Company's Proxy Statement for the annual
meeting of stockholders to be held May 1, 2002, and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Information regarding security ownership is set forth under "Security Ownership of Certain Beneficial Owners and Management" on pages 2-4 of the
Company's Proxy Statement for the annual meeting of stockholders to be held May 1, 2002, and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

In connection with the acquisition of DFP in May 2000 and the acquisition of additional assets and business operations of the fluid power business of DFP
in January 2001, the Company has entered into several agreements with Danfoss A/S to purchase ongoing operational services from Danfoss A/S. Information regarding these relationships and
agreements is set forth in Note 13 of the Notes to Consolidated Financial Statements on pages 49-50 of this report, and is incorporated herein by reference.

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(1)  The
following consolidated financial statements and related information, included in Item 8, are filed as a separate section of this report:



21

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(2)  The
following financial statements and schedules:



(3)  Exhibits

|Exhibit
No. |  | Description of Document                                                                                                                                                                                                                                                                   
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | The Amended and Restated Certificate of Incorporation of the Company dated May 3, 2000, is attached as Exhibit 3.1 to the Company's Form 10-Q filed on August 16, 2000, and is incorporated herein by
reference.                                                                          
|3.2         |  | The Amended and Restated Bylaws of the Company dated May 3, 2000, is attached as Exhibit 3.2 to the Company's Form 10-Q filed on August 16, 2000, and is incorporated herein by reference.                                                                                                
|4           |  | The form of Certificate of the Company's Common Stock, $.01 Par Value, is attached as Exhibit 4 to the Company's Form 10-Q filed on August 16, 2000 and is incorporated herein by reference.                                                                                              
|10.1(a)     |  | The Termination Agreement and Release dated May 3, 2000 relating to the termination of a Silent Partnership Agreement is attached as Exhibit 10.1(a) to the Company's Form 10-Q filed on August 16, 2000 and
is incorporated herein by reference.                                         
|10.1(b)     |  | The Registration Rights Agreement is attached as Exhibit 10.1(b) to Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.                                                                                    
|10.1(c)     |  | The form of Indemnification Agreement entered into between the Company and each of its directors and certain officers is attached as Exhibit 10.1(c) to Amendment No. 1 to the Company's Form S-1 Registration Statement
filed on April 23, 1998, and is incorporated herein by reference.
|10.1(d)     |  | The Lease Agreement for the Company's Dubnica, Slovakia facility is attached as Exhibit 10.1(f) to Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein
by reference.                                                     
|10.1(e)     |  | The Lease Agreement for the Company's Swindon, England facility is attached as Exhibit 10.1(g) to Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein
by reference.                                                      
|10.1(f)     |  | The Lease Agreement for the Company's Minneapolis, Minnesota facility is attached as Exhibit 10.1(h) to Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein
by reference.                                                

22

---

|10.1(g) |  | The Lease Agreement for the Company's Newtown, Pennsylvania facility is attached as Exhibit 10.1(i) to Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein
by reference.                                                                          
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1(h) |  | The Lease Agreement for the Company's Shanghai/Pudong, China facility is attached as Exhibit 10.1(j) to Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein
by reference.                                                                         
|10.1(i) |  | The Employment Contract with Klaus Murmann is attached as Exhibit 10.1(k) to Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.                                                                                                    
|10.1(j) |  | The Agreement and Amendment to Employment Agreement, effective May 3, 2000, relating to the Employment Contract referred to in 10.1(i) above with Klaus Murmann is attached as Exhibit 10.1 (j) to the Company's Form
10-Q filed on August 16, 2000, and is incorporated herein by reference.                      
|10.1(k) |  | The Employment Contract with David L. Pfeifle is attached as Exhibit 10.1(x) to the Company's Form 10-Q filed on May 18, 2000 and is incorporated herein by reference.                                                                                                                                             
|10.1(l) |  | The Executive Employment Agreement with Neils Erik Hansen dated May 3, 2000 is attached as Exhibit 10.1 (l) to the Company's Form 10-Q filed on August 16, 2000, and is incorporated herein by reference.                                                                                                          
|10.1(m) |  | The Employment Contract with Thomas Kittel is attached as Exhibit 10.1(m) to Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.                                                                                                    
|10.1(n) |  | The Sauer Inc. Management Incentive Plan is attached as Exhibit 10.1(r) to Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.                                                                                                      
|10.1(o) |  | The Sauer-Danfoss Inc. Annual Management Performance Incentive Plan effective January 1, 2002 restates the Sauer Inc. Management Incentive Plan referred to in Exhibit 10.1(n) above, and is attached
hereto.                                                                                                      
|10.1(p) |  | The Sauer-Sundstrand Company Supplemental Retirement Benefit Plan for Certain Key Executives is attached as Exhibit 10.1(t) to Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and
is incorporated herein by reference.                                                  
|10.1(q) |  | The Sauer-Sundstrand Company Supplemental Retirement Benefit Plan for Certain Key Executives Previously Employed by the Sundstrand Corporation is attached as Exhibit 10.1(u) to Amendment No. 1 to the Company's Form
S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.
|10.1(r) |  | The Sauer-Sundstrand Employees' Savings & Retirement Plan is attached as Exhibit 10.1(v) to Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by
reference.                                                                                     
|10.1(s) |  | The Amendment Number One, effective December 15, 2000, to the Sauer-Sundstrand Employees' Savings and Retirement Plan referred to in Exhibit 10.1(r) above, is attached as Exhibit 10.1(aj) to the Company's Form 10-Q filed
on August 15, 2001, and is incorporated herein by reference.                          
|10.1(t) |  | The Amendment Number Two, effective January 1, 2002, to the Sauer-Danfoss Employees' Savings Plan, (formerly the Sauer-Sundstrand Employees' Savings and Retirement Plan), referred to in Exhibit 10.1(r) above, is attached
hereto.                                                                               
|10.1(u) |  | The Amended and Restated Post-Retirement Care Agreement for Klaus Murmann, effective May 3, 2000, is attached as Exhibit 10.1(s) to the Company's Form 10-Q filed on August 16, 2000, and is incorporated herein by
reference.                                                                                     

23

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|10.1(v)  |  | The European Employees' Pension Plan is attached as Exhibit 10.1(y) to Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.                                                                                     
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1(w)  |  | The Sauer-Danfoss Inc. 1998 Long-Term Incentive Plan is attached as Exhibit 10.1(p) to Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998 and is incorporated herein by
reference.                                                                      
|10.1(x)  |  | The Amendment, effective May 3, 2000 to the Sauer-Danfoss Inc. 1998 Long-Term Incentive Plan referred to in 10.1(w) above is attached as Exhibit 10.1(v) to the Company's Form 10-Q filed on August 16, 2000, and is
incorporated herein by reference.                                        
|10.1(y)  |  | The Sauer-Danfoss Inc. Non-employee Director Stock Option and Restricted Stock Plan is attached as Exhibit 10.1(q) to Amendment No. 1 to the Company's Registration Statement filed on April 23, 1998 and is incorporated
herein by reference.                                                
|10.1(z)  |  | The Amendment, effective May 3, 2000, to the Sauer-Danfoss Inc. Non-employee Director Stock Option and Restricted Stock Plan referred to in 10.1(y) above is attached as Exhibit 10.1(x) to the Company's Form 10-Q
filed on August 16, 2000, and is incorporated herein by reference.        
|10.1(aa) |  | The 1999 Sauer-Danfoss Inc. Bonus Plan is attached as Exhibit 10.1(a) to the Company's Form 10-Q filed on August 13, 1999 and is incorporated herein by reference.                                                                                                                            
|10.1(ab) |  | The Sauer-Danfoss Inc. Annual Officer Performance Incentive Plan effective January 1, 2002 restates the 1999 Sauer-Danfoss Inc. Bonus Plan referred to in Exhibit 10.1(aa) above, and is attached hereto.                                                                                     
|10.1(ac) |  | The Amendment, effective May 3, 2000, to the 1999 Sauer-Danfoss Inc. Bonus Plan referred to in 10.1(aa) above is attached as Exhibit 10.1(z) to the Company's Form 10-Q filed on August 16, 2000, and is incorporated herein
by reference.                                                    
|10.1(ad) |  | The form of the Sauer-Danfoss Inc. Change in Control Agreement for U.S. Participants dated May 3, 2000 is attached as Exhibit 10.1(aa) to the Company's Form 10-Q filed on August 16, 2000, and is incorporated herein by
reference.                                                          
|10.1(ae) |  | The form of the Sauer-Danfoss Inc. Change in Control Agreement for European Participants dated May 3, 2000 is attached as Exhibit 10.1(ab) to the Company's Form 10-Q filed on August 16, 2000, and is incorporated herein by
reference.                                                      
|10.1(af) |  | The Trademark and Trade Name Agreement dated May 3, 2000 between the Company and Danfoss A/S is attached as Exhibit 10.1(ac) to the Company's Form 10-Q filed on August 16, 2000, and is incorporated herein by
reference.                                                                    
|10.1(ag) |  | The Termination Agreement with Tonio P. Barlage dated March 31, 2000 is attached as Exhibit 10.1(y) to the Company's Form 10-Q filed on May 18, 2000 and is incorporated herein by reference.                                                                                                 
|10.1(ah) |  | The Stock Exchange Agreement dated January 22, 2000 by and among the Registrant, Danfoss A/S, Danfoss Murmann Holding A/S. and K. Murmann Verwaltungsgesellschaft mbH is attached as Annex A to the Company's Proxy Statement
filed on March 28, 2000 and is incorporated herein by reference.
|10.1(ai) |  | The Stock Purchase Agreement with Tonio P. Barlage and Maria Barlage dated March 31, 2000 is attached as Exhibit 10.1(aa) to the Company's Form 10-Q filed on May 18, 2000 and is incorporated herein by
reference.                                                                           
|10.1(aj) |  | The Sauer-Danfoss Employees' Retirement Plan as amended and restated, effective January 1, 2000, and renamed as of May 3, 2000, is attached as Exhibit 10.1(ah) to the Company's Form 10-Q filed on November 15, 2000,
and is incorporated herein by reference.                               

24

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|10.1(ak) |  | The Amendment Number One, effective December 15, 2000, to the Sauer-Danfoss Employees' Retirement Plan referred to in Exhibit 10.1(aj) above, is attached as Exhibit 10.1(ai) to the Company's Form 10-Q filed on August
15, 2001, and is incorporated herein by reference.                                                                 
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1(al) |  | The Second Amendment, effective March 26, 2001, to the Sauer-Danfoss Employees' Retirement Plan, (formerly the Sauer-Sundstrand Employees' Savings and Retirement Plan), referred to in Exhibit 10.1(aj) above, is attached
as Exhibit 10.1(ag) to the Company's Form 10-Q filed on August 15, 2001 and is incorporated herein by reference.
|10.1(am) |  | The Indenture of Lease agreement for the Company's Norborg, Denmark, facility effective May 3, 2000, is attached as Exhibit 10.1(ah) to the Company's Form 10-K filed on March 30, 2001, and is incorporated herein by
reference.                                                                                                           
|10.1(an) |  | The Lease Agreement for the Company's Hillsboro, Oregon, facility effective January 19, 2001, is attached as Exhibit 10.1(ai) to the Company's Form 10-K filed on March 30, 2001, and is incorporated herein by
reference.                                                                                                                  
|10.1(ao) |  | The Third Amendment to the Sauer-Danfoss LaSalle Factory Employee Savings Plan, effective January 1, 2001, is attached as Exhibit 10.1(al) to the Company's Form 10-Q filed on November 14, 2001, and is incorporated herein
by reference.                                                                                                  
|10.1(ap) |  | Amendment Number Four to the Sauer-Danfoss LaSalle Factory Employee Savings Plan, effective February 8, 2002, is attached hereto.                                                                                                                                                                                                           
|10.1(aq) |  | The Fifth Amendment to the Sauer-Danfoss LaSalle Factory Employee Savings Plan, effective February 25, 2002, is attached hereto.                                                                                                                                                                                                            
|10.1(ar) |  | The Sauer-Danfoss Racine Employees' Savings Plan, effective December 1, 2000, is attached as Exhibit 10.1(am) to the Company's Form 10-Q filed on November 14, 2001, and is incorporated herein by reference.                                                                                                                               
|21       |  | Subsidiaries of the Registrant, on pages 61 and 62.                                                                                                                                                                                                                                                                                         
|23.1     |  | Consent of KPMG LLP on page 63.                                                                                                                                                                                                                                                                                                             
|23.2     |  | Consent of Arthur Andersen LLP on page 64.                                                                                                                                                                                                                                                                                                  



25

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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.

Each
person signing below also hereby appoints Klaus H. Murmann and Kenneth D. McCuskey, and each of them singly, his or her lawful attorney-in-fact
with full power to execute and file any and all amendments to this report together with exhibits thereto and generally to do all such things as such attorney-in-fact may deem
appropriate to enable Sauer-Danfoss Inc. to comply with the provisions of the Securities Exchange Act of 1934 and all requirements of the Securities and Exchange Commission.

|                     |  | SAUER-DANFOSS INC.
|-------------------- |  | ------------------
|                     |  | By:               
|                     |  |                   
|Date: March 29, 2002 |  |                   

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 and on
the dates indicated.

|Signature                                 |  | Title                                                                        |  | Date          
|----------------------------------------- |  | ---------------------------------------------------------------------------- |  | --------------
|                                          |  |                                                                              |  |               
|/s/KLAUS H. MURMANNKlaus H. Murmann       |  | Director and Chairman                                                        |  | March 29, 2002
|/s/DAVID L. PFEIFLEDavid L. Pfeifle       |  | Director and President and Chief Executive Officer                           |  | March 29, 2002
|/s/KENNETH D. MCCUSKEYKenneth D. McCuskey |  | Vice President  Finance, Treasurer, Secretary, Principal Accounting Officer |  | March 29, 2002
|/s/OLE STEEN ANDERSENOle Steen Andersen   |  | Director                                                                     |  | March 29, 2002
|/s/JOERGEN M. CLAUSENJoergen M. Clausen   |  | Director and Vice Chairman                                                   |  | March 29, 2002
|                                          |  |                                                                              |  |               

26

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|/s/NICOLA KEIMNicola Keim                     |  | Director |  | March 29, 2002
|--------------------------------------------- |  | -------- |  | --------------
|/s/JOHANNES F. KIRCHHOFFJohannes F. Kirchhoff |  | Director |  | March 29, 2002
|/s/HANS KIRKHans Kirk                         |  | Director |  | March 29, 2002
|/s/F. JOSEPH LOUGHREYF. Joseph Loughrey       |  | Director |  | March 29, 2002
|/s/SVEN MURMANNSven Murmann                   |  | Director |  | March 29, 2002
|/s/RICHARD M. SCHILLINGRichard M. Schilling   |  | Director |  | March 29, 2002

27

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Sauer-Danfoss Inc. and Subsidiaries        Consolidated Statements of Income        For The Years Ended December 31, 2001, 2000, And 1999        (in
thousands, except per share data)

|                                                      |                                       | 2001 |                            | 2000    |   | 1999    |        
|----------------------------------------------------- | ------------------------------------- | ---- | -------------------------- | ------- | - | ------- | -------
|Net Sales                                             |                                       | $    | 855,279                    |         | $ | 782,537 |        
|                                                      |                                       |      |                            |         |   |         |        
|Costs and Expenses:                                   |                                       |      |                            |         |   |         |        
|                                                      | Cost of sales                         |      |                            | 662,046 |   |         | 581,526
|                                                      | Selling, general and administrative   |      |                            | 122,803 |   |         | 98,176 
|                                                      | Research and development              |      |                            | 38,054  |   |         | 29,874 
|                                                      | Restructuring charges and impairments |      |                            |        |   |         | 11,232 
|                                                      |                                       |      |                            |         |   |         |        
|                                                      |                                       |      | Total costs and expenses   |         |   | 822,903 |        
|                                                      |                                       |      |                            |         |   |         |        
|                                                      |                                       |      | Operating income           |         |   | 32,376  |        
|                                                      |                                       |      |                            |         |   |         |        
|Nonoperating Income (Expenses):                       |                                       |      |                            |         |   |         |        
|                                                      | Interest expense                      |      |                            | (21,151 | ) |         | (15,499
|                                                      | Interest income                       |      |                            | 3,774   |   |         | 4,305  
|                                                      | Royalty income                        |      |                            | 881     |   |         | 1,255  
|                                                      | Other, net                            |      |                            | (399    | ) |         | 2,023  
|                                                      |                                       |      |                            |         |   |         |        
|                                                      |                                       |      | Nonoperating expenses, net |         |   | (16,895 | )      
|                                                      |                                       |      |                            |         |   |         |        
|Income Before Income Taxes and Minority Interest      |                                       |      | 15,481                     |         |   | 53,813  |        
|Minority Interest in Income of Consolidated Companies |                                       |      | (7,882                     | )       |   | (9,660  | )      
|                                                      |                                       |      |                            |         |   |         |        
|Income Before Income Taxes                            |                                       |      | 7,599                      |         |   | 44,153  |        
|Provision for Income Taxes                            |                                       |      | (2,869                     | )       |   | (17,228 | )      
|                                                      |                                       |      |                            |         |   |         |        
|                                                      |                                       |      | Net income                 |         | $ | 4,730   |        
|                                                      |                                       |      |                            |         |   |         |        
|Basic and diluted net income per common share         |                                       | $    | 0.10                       |         | $ | 0.69    |        
|                                                      |                                       |      |                            |         |   |         |        
|Weighted average basic shares outstanding             |                                       |      | 46,977                     |         |   | 39,216  |        
|                                                      |                                       |      |                            |         |   |         |        
|Weighted average diluted shares outstanding           |                                       |      | 46,980                     |         |   | 39,217  |        
|                                                      |                                       |      |                            |         |   |         |        

See
accompanying notes to consolidated financial statements.

28

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Sauer-Danfoss Inc. and Subsidiaries        Consolidated Balance Sheets        As of December 31, 2001, and 2000        (in thousands, except per share
data)

|                                                          |                                                                                                                                                                            | 2001 |                            | 2000    |  
|--------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | -------------------------- | ------- | -
|Assets                                                    |                                                                                                                                                                            |      |                            |         |  
|Current Assets:                                           |                                                                                                                                                                            |      |                            |         |  
|                                                          | Cash and cash equivalents                                                                                                                                                  |      | $                          | 14,324  |  
|                                                          | Accounts receivable (net of allowance for doubtful accounts of $5,570 and $3,588 in 2001 and 2000, respectively)                                                           |      |                            | 134,586 |  
|                                                          | Inventories                                                                                                                                                                |      |                            | 141,652 |  
|                                                          | Other current assets                                                                                                                                                       |      |                            | 23,066  |  
|                                                          |                                                                                                                                                                            |      |                            |         |  
|                                                          |                                                                                                                                                                            |      | Total current assets       |         |  
|                                                          |                                                                                                                                                                            |      |                            |         |  
|Property, Plant and Equipment, net                        |                                                                                                                                                                            |      | 423,195                    |         |  
|                                                          |                                                                                                                                                                            |      |                            |         |  
|Other Assets:                                             |                                                                                                                                                                            |      |                            |         |  
|                                                          | Goodwill, net                                                                                                                                                              |      |                            | 88,907  |  
|                                                          | Other intangible assets, net                                                                                                                                               |      |                            | 38,433  |  
|                                                          | Investments in unconsolidated affiliates                                                                                                                                   |      |                            | 1,391   |  
|                                                          | Deferred income taxes                                                                                                                                                      |      |                            | 11,639  |  
|                                                          | Other                                                                                                                                                                      |      |                            | 7,788   |  
|                                                          |                                                                                                                                                                            |      |                            |         |  
|                                                          |                                                                                                                                                                            |      | Total other assets         |         |  
|                                                          |                                                                                                                                                                            |      |                            |         |  
|                                                          |                                                                                                                                                                            | $    | 884,981                    |         | $
|                                                          |                                                                                                                                                                            |      |                            |         |  
|Liabilities and Stockholders' Equity                      |                                                                                                                                                                            |      |                            |         |  
|Current Liabilities:                                      |                                                                                                                                                                            |      |                            |         |  
|                                                          | Notes payable and bank overdrafts                                                                                                                                          |      | $                          | 53,046  |  
|                                                          | Long-term debt due within one year                                                                                                                                         |      |                            | 9,727   |  
|                                                          | Accounts payable                                                                                                                                                           |      |                            | 57,096  |  
|                                                          | Accrued salaries and wages                                                                                                                                                 |      |                            | 18,212  |  
|                                                          | Accrued warranty                                                                                                                                                           |      |                            | 8,472   |  
|                                                          | Other accrued liabilities                                                                                                                                                  |      |                            | 23,293  |  
|                                                          |                                                                                                                                                                            |      |                            |         |  
|                                                          |                                                                                                                                                                            |      | Total current liabilities  |         |  
|                                                          |                                                                                                                                                                            |      |                            |         |  
|Long-Term Debt                                            |                                                                                                                                                                            |      | 236,026                    |         |  
|                                                          |                                                                                                                                                                            |      |                            |         |  
|Other Liabilities:                                        |                                                                                                                                                                            |      |                            |         |  
|                                                          | Long-term pension liability                                                                                                                                                |      |                            | 31,608  |  
|                                                          | Postretirement benefits other than pensions                                                                                                                                |      |                            | 16,337  |  
|                                                          | Deferred income taxes                                                                                                                                                      |      |                            | 42,991  |  
|                                                          | Other                                                                                                                                                                      |      |                            | 15,408  |  
|                                                          |                                                                                                                                                                            |      |                            |         |  
|                                                          |                                                                                                                                                                            |      | Total other liabilities    |         |  
|                                                          |                                                                                                                                                                            |      |                            |         |  
|Minority Interest in Net Assets of Consolidated Companies |                                                                                                                                                                            |      | 25,581                     |         |  
|                                                          |                                                                                                                                                                            |      |                            |         |  
|Stockholders' Equity:                                     |                                                                                                                                                                            |      |                            |         |  
|                                                          | Preferred stock, par value $.01 per share, authorized 4,500 shares, no shares issued or outstanding                                                                        |      |                            |        |  
|                                                          | Common stock, par value $.01 per share, authorized 75,000 shares in 2001 and 2000; issued 47,411 in 2001 and 46,483 in 2000; outstanding 47,411 in 2001 and 45,312 in 2000 |      |                            | 474     |  
|                                                          | Additional paid-in capital                                                                                                                                                 |      |                            | 313,662 |  
|                                                          | Retained earnings                                                                                                                                                          |      |                            | 48,803  |  
|                                                          | Accumulated other comprehensive loss                                                                                                                                       |      |                            | (15,663 | )
|                                                          | Unamortized restricted stock compensation                                                                                                                                  |      |                            | (92     | )
|                                                          | Common stock in treasury (at cost), 0 shares in 2001 and 1,171 shares in 2000                                                                                              |      |                            |        |  
|                                                          |                                                                                                                                                                            |      |                            |         |  
|                                                          |                                                                                                                                                                            |      | Total stockholders' equity |         |  
|                                                          |                                                                                                                                                                            |      |                            |         |  
|                                                          | Commitments and contingencies                                                                                                                                              |      |                            |        |  
|                                                          |                                                                                                                                                                            | $    | 884,981                    |         | $
|                                                          |                                                                                                                                                                            |      |                            |         |  

See accompanying notes to consolidated financial statements.

29

---



Sauer-Danfoss Inc. and Subsidiaries        Consolidated Statements of Stockholders' Equity and Comprehensive Income        For The Years Ended December 31, 2001,
2000, and 1999        (in thousands, except per share data)

|                              |                                            | Number of
Shares
Outstanding |                | Common
Stock |        | Additional
Paid-in
Capital |   | Retained
Earnings |         | Accumulated
Other
Comprehensive
Income (Loss) |         | Unamortized
Restricted
Stock
Compensation |        | Common
Stock
in
Treasury |       | Total  |        
|----------------------------- | ------------------------------------------ | ---------------------------- | -------------- | ------------ | ------ | -------------------------- | - | ----------------- | ------- | --------------------------------------------- | ------- | ----------------------------------------- | ------ | ------------------------ | ----- | ------ | -------
|Year Ended December 31, 1999: |                                            |                              |                |              |        |                            |   |                   |         |                                               |         |                                           |        |                          |       |        |        
|                              | Beginning balance                          |                              | 27,397         |              | $      | 281                        |   | $                 | 120,092 |                                               | $       | 31,416                                    |        | $                        | 1,813 |        | $      
|                              | Comprehensive income:                      |                              |                |              |        |                            |   |                   |         |                                               |         |                                           |        |                          |       |        |        
|                              |                                            | Net income                   |                |             |        |                            |  |                   |         |                                              |         |                                           | 18,120 |                          |       |       |        
|                              |                                            | Pension adjustment           |                |             |        |                            |  |                   |         |                                              |         |                                           |       |                          |       | (150   | )      
|                              |                                            | Translation adjustment       |                |             |        |                            |  |                   |         |                                              |         |                                           |       |                          |       | (8,701 | )      
|                              | Total comprehensive income                 |                              |               |              |        |                           |   |                   |        |                                               |         |                                          |        |                          |      |        |        
|                              | Restricted stock grant                     |                              | 13             |              |        |                           |   |                   | 126     |                                               |         |                                          |        |                          |      |        |        
|                              | Restricted stock compensation              |                              |               |              |        |                           |   |                   |        |                                               |         |                                          |        |                          |      |        |        
|                              | Forfeitures of restricted stock            |                              | (11            | )            |        |                           |   |                   | (165    | )                                             |         |                                          |        |                          |      |        |        
|                              | Cash dividends ($.28 per share)            |                              |               |              |        |                           |   |                   |        |                                               |         | (7,673                                    | )      |                          |      |        |        
|                              |                                            |                              |                |              |        |                            |   |                   |         |                                               |         |                                           |        |                          |       |        |        
|                              |                                            |                              | Ending balance |              | 27,399 |                            |   | 281               |         |                                               | 120,053 |                                           |        | 41,863                   |       |        | (7,038 
|Year Ended December 31, 2000: |                                            |                              |                |              |        |                            |   |                   |         |                                               |         |                                           |        |                          |       |        |        
|                              | Comprehensive income:                      |                              |                |              |        |                            |   |                   |         |                                               |         |                                           |        |                          |       |        |        
|                              |                                            | Net income                   |                |             |        |                            |  |                   |         |                                              |         |                                           | 26,925 |                          |       |       |        
|                              |                                            | Pension adjustment           |                |             |        |                            |  |                   |         |                                              |         |                                           |       |                          |       | (134   | )      
|                              |                                            | Translation adjustment       |                |             |        |                            |  |                   |         |                                              |         |                                           |       |                          |       | (3,482 | )      
|                              | Total comprehensive income                 |                              |               |              |        |                           |   |                   |        |                                               |         |                                          |        |                          |      |        |        
|                              | Treasury shares issued for acquisition     |                              | 103            |              |        |                           |   |                   | 768     |                                               |         |                                          |        |                          |      |        |        
|                              | Shares issued for acquisition              |                              | 16,150         |              |        | 161                        |   |                   | 180,070 |                                               |         |                                          |        |                          |      |        |        
|                              | Repurchase of common stock                 |                              | (600           | )            |        |                           |   |                   |        |                                               |         |                                          |        |                          |      |        |        
|                              | Shares issued to minority interest partner |                              | 2,250          |              |        | 23                         |   |                   | 19,665  |                                               |         |                                          |        |                          |      |        |        
|                              | Common control  deemed dividend           |                              |               |              |        |                           |   |                   | (17,337 | )                                             |         |                                          |        |                          |      |        |        
|                              | Restricted stock grant                     |                              | 10             |              |        |                           |   |                   | 85      |                                               |         |                                          |        |                          |      |        |        
|                              | Restricted stock compensation              |                              |               |              |        |                           |   |                   |        |                                               |         |                                          |        |                          |      |        |        
|                              | Cash dividends ($.28 per share)            |                              |               |              |        |                           |   |                   |        |                                               |         | (11,440                                   | )      |                          |      |        |        
|                              |                                            |                              |                |              |        |                            |   |                   |         |                                               |         |                                           |        |                          |       |        |        
|                              |                                            |                              | Ending balance |              | 45,312 |                            |   | 465               |         |                                               | 303,304 |                                           |        | 57,348                   |       |        | (10,654
|Year Ended December 31, 2001: |                                            |                              |                |              |        |                            |   |                   |         |                                               |         |                                           |        |                          |       |        |        
|                              | Comprehensive income:                      |                              |                |              |        |                            |   |                   |         |                                               |         |                                           |        |                          |       |        |        
|                              |                                            | Net income                   |                |             |        |                            |  |                   |         |                                              |         |                                           | 4,730  |                          |       |       |        
|                              |                                            | Pension adjustment           |                |             |        |                            |  |                   |         |                                              |         |                                           |       |                          |       | (200   | )      
|                              |                                            | Translation adjustment       |                |             |        |                            |  |                   |         |                                              |         |                                           |       |                          |       | (4,809 | )      
|                              | Total comprehensive income                 |                              |               |              |        |                           |   |                   |        |                                               |         |                                          |        |                          |      |        |        
|                              | Treasury shares issued for acquisition     |                              | 1,172          |              |        |                           |   |                   | 2,244   |                                               |         |                                          |        |                          |      |        |        
|                              | Shares issued for acquisition              |                              | 919            |              |        | 9                          |   |                   | 8,036   |                                               |         |                                          |        |                          |      |        |        
|                              | Restricted stock grant                     |                              | 8              |              |        |                           |   |                   | 78      |                                               |         |                                          |        |                          |      |        |        
|                              | Restricted stock compensation              |                              |               |              |        |                           |   |                   |        |                                               |         |                                          |        |                          |      |        |        
|                              | Cash dividends ($.28 per share)            |                              |               |              |        |                           |   |                   |        |                                               |         | (13,275                                   | )      |                          |      |        |        
|                              |                                            |                              |                |              |        |                            |   |                   |         |                                               |         |                                           |        |                          |       |        |        
|                              |                                            |                              | Ending balance |              | 47,411 |                            | $ | 474               |         | $                                             | 313,662 |                                           | $      | 48,803                   |       | $      | (15,663
|                              |                                            |                              |                |              |        |                            |   |                   |         |                                               |         |                                           |        |                          |       |        |        

See accompanying notes to consolidated financial statements.

30

---



Sauer-Danfoss Inc. and Subsidiaries        Consolidated Statements of Cash Flows        For The Years Ended December 31, 2001, 2000, and 1999        (in
thousands):

|                                                                     |                                                                                                                                                                                                                           | 2001                                                                              |                                                                             | 2000                           |                                                     | 1999    |        
|-------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------ | --------------------------------------------------- | ------- | -------
|Cash Flows From Operating Activities:                                |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                |                                                     |         |        
|                                                                     | Net income                                                                                                                                                                                                                |                                                                                   | $                                                                           | 4,730                          |                                                     | $       | 26,925 
|                                                                     |                                                                                                                                                                                                                           | Adjustments to reconcile net income to net cash provided by operating activities: |                                                                             |                                |                                                     |         |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   | Depreciation and amortization                                               |                                |                                                     | 69,474  |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   | Minority interest in income of consolidated companies                       |                                |                                                     | 7,882   |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   | (Increase) decrease in working capital, excluding effects of acquisitions  |                                |                                                     |         |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             | Accounts receivable, net       |                                                     |         | 4,028  
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             | Inventories                    |                                                     |         | 11,404 
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             | Accounts payable               |                                                     |         | (16,735
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             | Accrued liabilities            |                                                     |         | 575    
|                                                                     |                                                                                                                                                                                                                           |                                                                                   | Other                                                                       |                                |                                                     | (14,092 | )      
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                |                                                     |         |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                | Net cash provided by operating activities           |         |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                |                                                     |         |        
|Cash Flows From Investing Activities:                                |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                |                                                     |         |        
|                                                                     | Purchases of property, plant and equipment                                                                                                                                                                                |                                                                                   |                                                                             | (69,697                        | )                                                   |         | (67,931
|                                                                     | Purchase of minority interest                                                                                                                                                                                             |                                                                                   |                                                                             |                               |                                                     |         | (138   
|                                                                     | Payments for acquisitions, net of cash acquired                                                                                                                                                                           |                                                                                   |                                                                             | (41,510                        | )                                                   |         | 5,386  
|                                                                     | Proceeds from sales of property, plant and equipment                                                                                                                                                                      |                                                                                   |                                                                             | 1,064                          |                                                     |         | 378    
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                |                                                     |         |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                | Net cash used in investing activities               |         |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                |                                                     |         |        
|Cash Flows From Financing Activities:                                |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                |                                                     |         |        
|                                                                     | Net borrowings (repayments) on notes payable and bank overdrafts                                                                                                                                                          |                                                                                   |                                                                             | 13,126                         |                                                     |         | 16,976 
|                                                                     | Net borrowings of long-term debt                                                                                                                                                                                          |                                                                                   |                                                                             | 47,146                         |                                                     |         | 12,411 
|                                                                     | Repurchase of common stock                                                                                                                                                                                                |                                                                                   |                                                                             |                               |                                                     |         | (5,722 
|                                                                     | Cash dividends                                                                                                                                                                                                            |                                                                                   |                                                                             | (13,275                        | )                                                   |         | (11,440
|                                                                     | Distribution to minority interest partners                                                                                                                                                                                |                                                                                   |                                                                             | (13,500                        | )                                                   |         | (6,819 
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                |                                                     |         |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                | Net cash provided by (used in) financing activities |         |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                |                                                     |         |        
|Effect of Exchange Rate Changes                                      |                                                                                                                                                                                                                           |                                                                                   | (1,050                                                                      | )                              |                                                     | (5,267  | )      
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                |                                                     |         |        
|Cash and Cash Equivalents:                                           |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                |                                                     |         |        
|                                                                     | Net increase (decrease) during the year                                                                                                                                                                                   |                                                                                   |                                                                             | (10,430                        | )                                                   |         | 19,693 
|                                                                     | Beginning balance                                                                                                                                                                                                         |                                                                                   |                                                                             | 24,754                         |                                                     |         | 5,061  
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                |                                                     |         |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                | Ending balance                                      |         | $      
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                |                                                     |         |        
|Supplemental Cash Flow Disclosures:                                  |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                |                                                     |         |        
|Interest paid                                                        |                                                                                                                                                                                                                           | $                                                                                 | 20,552                                                                      |                                | $                                                   | 13,513  |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                |                                                     |         |        
|Income taxes paid                                                    |                                                                                                                                                                                                                           | $                                                                                 | 10,044                                                                      |                                | $                                                   | 20,444  |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                |                                                     |         |        
|Supplemental schedule of noncash investing and financing activities: |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                |                                                     |         |        
|                                                                     | During 2001, the Company acquired assets of certain distribution operations of the fluid power business of Danfoss A/S in exchange for 2,091 shares of common stock. The consideration paid and allocation is as
follows: |                                                                                   |                                                                             |                                |                                                     |         |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   | Consideration paid:                                                         |                                |                                                     |         |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             | Common stock issued            |                                                     | $       | 18,298 
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             | Other liabilities assumed      |                                                     |         | 6,497  
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                |                                                     |         |        
|                                                                     |                                                                                                                                                                                                                           | $                                                                                 | 24,795                                                                      |                                |                                                     |        |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   | Allocated to:                                                               |                                |                                                     |         |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             | Inventory                      |                                                     | $       | 7,248  
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             | Accounts receivable            |                                                     |         | 9,020  
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             | Other current assets           |                                                     |         | 902    
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             | Property, plant and equipment  |                                                     |         | 193    
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             | Goodwill and other intangibles |                                                     |         | 7,432  
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                |                                                     |         |        
|                                                                     |                                                                                                                                                                                                                           | $                                                                                 | 24,795                                                                      |                                |                                                     |        |        
|                                                                     | During 2000, the Company acquired Danfoss Fluid Power Companies in exchange for 16,150 shares of common stock. The consideration paid and allocation is as follows:                                                       |                                                                                   |                                                                             |                                |                                                     |         |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   | Consideration paid:                                                         |                                |                                                     |         |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             | Common stock issued            |                                                     |         |       
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             | Long-term debt assumed         |                                                     |         |       
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             | Other liabilities assumed      |                                                     |         |       
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                |                                                     |         |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                            |                                | $                                                   | 326,932 |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   | Allocated to:                                                               |                                |                                                     |         |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             | Cash acquired                  |                                                     |         |       
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             | Inventory                      |                                                     |         |       
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             | Other current assets           |                                                     |         |       
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             | Property, plant & equipment    |                                                     |         |       
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             | Goodwill and other intangibles |                                                     |         |       
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                             |                                |                                                     |         |        
|                                                                     |                                                                                                                                                                                                                           |                                                                                   |                                                                            |                                | $                                                   | 326,932 |        

See accompanying notes to consolidated financial statements.

31

---



Sauer-Danfoss Inc. and Subsidiaries        Notes to Consolidated Financial Statements        December 31, 2001, 2000, and 1999        (in thousands,
except per share data)

(1) Summary of Significant Accounting Policies:

The Company and Its Operations 

Sauer-Danfoss Inc., a U.S. Delaware corporation, and subsidiaries (the Company) is a leading international manufacturer of components and systems that
generate, transmit and control fluid power in mobile equipment. The Company's products are used by original equipment manufacturers of mobile equipment, including construction, road building,
agricultural, turf care, and specialty equipment. The Company's products are sold throughout the world either directly or through distributors.

The
Company, which is a holding company, conducts its business in North America as Sauer-Danfoss (US) Company (the U.S. Operating Company), and in Germany as Sauer-Danfoss (Neumunster)
GmbH & Co. (the German Operating Company), as well as through various other operating companies throughout the world. The Company has manufacturing plants in Brazil, China, Denmark, Germany,
Italy, Japan, Poland, Slovakia, Sweden, the United Kingdom and the United States, as well as sales companies in other locations. Sauer-Danfoss GmbH (the German Holding Company), which is wholly owned
by the Company, functions as a management and holding company on behalf of the Company.

The
Company is majority owned by Danfoss Murmann Holding A/S (the Holding Company). The Holding Company is a Danish company owned by entities and persons under the control of Klaus H.
Murmann, the Chairman of the Company, and Danfoss A/S.

Basis of Presentation and Principles of Consolidation 

The consolidated financial statements represent the consolidation of all companies in which the Company has a controlling interest and are stated in accordance
with accounting principles generally accepted in the United States of America. The Company records its investment in each unconsolidated affiliated company (generally 20 to 50 percent owned) at
its related equity in the net assets of such affiliate. All significant intercompany balances, transactions and profits have been eliminated in the consolidated financial statements.

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 that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates, but management believes that such
differences are immaterial.

New Accounting Principles 

During 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations,"
and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations effective
June 30, 2001, and requires the purchase method. SFAS No. 142 changes the accounting for goodwill from an amortization approach to a non-amortization approach, under which
goodwill would be periodically tested for impairment. The Statement requires amortization of goodwill recorded in connection with previous business combinations to cease upon adoption of the Statement
by

32

---

calendar year companies on January 1, 2002, and that all goodwill created from acquisitions after June 30, 2001, is not amortized. The Company's amortization of goodwill during 2001 was
$2,800; the Company's 2002 earnings are expected to increase by $0.06 per share as compared to 2001 due to the cessation of goodwill amortization. The Company is currently undertaking the initial
impairment analysis of intangible assets at its various reporting units, as required, and expects to complete this analysis during the first two quarters of 2002.

In
August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement addresses the conditions under
which an impairment charge should be recorded related to long-lived assets to be held and used, except goodwill, and those to be disposed of by sale or otherwise. The Statement is
effective on January 1, 2002, for calendar year companies and replaces SFAS No. 121. At this time, the Company does not expect this Statement to have a material impact on its results of
operations, liquidity or financial position.

Revenue Recognition 

Net sales are recorded at the time of shipment to customers along with related expenses including estimates for future warranty expense. This is consistent with
when the risks and rewards of ownership and title to the product have transferred to the customer.

Cash and Cash Equivalents 

Cash equivalents are considered by the Company to be all highly liquid instruments purchased with original maturities of three months or less.

Inventories 

Inventories are valued at the lower of cost or market, using various cost methods, and include the cost of material, labor and factory overhead. The percentage of
year-end inventory using average cost, last-in, first-out (LIFO), and first-in, first-out (FIFO) was 51%, 28% and 21%, respectively, for
2001 and 23%, 30% and 47%, respectively, for 2000. The change in the percentage mix of year-end inventory between 2001 and 2000 is due to the use of average cost by the locations acquired
during 2001.

Property, Plant and Equipment and Depreciation 

Property, plant and equipment are stated at historical cost, net of accumulated depreciation. Depreciation is generally computed on the straight-line
method for building equipment and buildings over 10-37 years and for machinery and equipment over 3-12 years. Additions and improvements that substantially extend
the useful life of a particular asset are capitalized. Repair and maintenance costs ($22,012, $22,059 and $13,004 in 2001, 2000 and 1999, respectively) are charged to expense. When property, plant and
equipment is retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in net income.

33

---

Goodwill and Other Intangible Assets 

Goodwill and other intangibles represent the excess of the purchase price over the estimated fair values of net tangible assets acquired in the purchase of
businesses, and are being amortized on a straight-line basis over periods ranging from 2 to 40 years or the specific remaining identifiable life on a straight-line
basis. Goodwill was $88,907 and $85,317 as of December 31, 2001 and 2000, net of accumulated amortization of $8,669 and $5,974, respectively. Amortization of goodwill and other intangibles was
$6,946 for 2001, $2,499 for 2000 and $414 for 1999.

Impairment of Long-Lived Assets and Assets to be Disposed Of 

Consistent with the requirements of SFAS No. 121, the Company periodically assesses whether events or circumstances have occurred that may indicate the
carrying value of its long-lived tangible and intangible assets may not be recoverable. The carrying value of long-lived tangible and intangible assets to be held and used is
evaluated based on the expected future undiscounted operating cash flows. When events or circumstances indicate the carrying value of an asset is impaired, the Company recognizes an impairment loss to
the extent that the carrying value of the assets exceeds the fair value of the assets. Based upon its most recent analysis, the Company believes that no impairments existed at December 31,
2001. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Income Taxes 

The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes
represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or
payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax bases of the Company's assets and liabilities and
is adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred taxes when it is more likely than not that a tax benefit will not be
realized.

Earnings Per Share 

Basic net income per common share is based on the weighted average number of common shares outstanding in each year. Diluted net income per common share assumes
that outstanding common shares were increased by shares issuable upon exercise of those restricted stock shares for which market price exceeds exercise price, if any, less shares which could have been
purchased by the Company with the related proceeds. Shares resulting in an antidilutive effect are excluded in accordance with SFAS No. 128 "Earnings per Share".

Fair Value of Financial Instruments 

Fair value estimates, methods, and assumptions are set forth below.

34

---

The
carrying values of cash and cash equivalents, accounts and other receivables, notes payable and bank overdrafts, and accounts payable approximates fair value because of the
short-term nature of these instruments.

The
fair value of long-term debt is calculated by discounting scheduled cash flows through maturity using estimated market discount rates. The discount rate is estimated
using the rates currently offered for long-term debt of similar remaining maturities. At December 31, 2001, the Company estimated the fair value of its long-term debt,
including amounts due within one year, at $246,557. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.

Translation of Foreign Currencies 

Assets and liabilities of consolidated foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at the end of each period, while revenues
and expenses are translated at average exchange rates prevailing during the period. The resulting translation adjustments are included in stockholders' equity. Gains or losses on transactions
denominated in foreign currencies and the related tax effects, which are not material, are reflected in net income.

Reclassifications 

Certain previously reported amounts have been reclassified to conform to the current period presentation.

(2) Business Ventures:

In December 1996, the German Holding Company and ZTS, a.s. formed a business venture organized as a Slovakian corporation under the name Sauer ZTS, a.s.
The German Holding Company contributed approximately $5,800 of cash and technology for a 65% interest in Sauer ZTS, a.s. During 1998, the Company contributed an additional $693 to increase its
interest in Sauer ZTS, a.s. to 87.8%. During 2000, the Company contributed $138 to increase its interest in Sauer ZTS, a.s. to 88.4%. During 2001, the Company contributed $1,491 to increase its
interest in Sauer ZTS, a.s. to 89.6% and changed the name of the company to Sauer-Danfoss (Dubnica) a.s. The principal business of Sauer-Danfoss (Dubnica) a.s. is the manufacture of high power
hydrostatic transmissions. The Company consolidates Sauer-Danfoss (Dubnica) a.s. into its consolidated financial statements.

In
April 2001, the Company entered into an agreement with Topcon Laser Systems, Inc. to create a new joint venture company called Topcon Sauer-Danfoss (TSD). TSD operates
out of the Company's Minneapolis, Minnesota, facility and out of a facility in Pleasanton, California. This new company focuses on the development and marketing of electronic systems used to control
the work functions of vehicles. The Company owns 50.1% of TSD and accordingly, consolidates TSD into its consolidated financial statements.

In
September 2001, the Company completed the previously announced transaction with Daikin Industries, Ltd. to establish two joint venture companies. The two companies, a
sales company and a

35

---

manufacturing company, will operate as part of the Company's global organization covering the Asia-Pacific region. The Company owns 65% of the sales company and 45% of the manufacturing
company. Accordingly, the Company consolidates the sales company, but does not consolidate the manufacturing company.

(3) Acquisitions:

The following acquisitions have been accounted for under the purchase method of accounting for business combinations, and accordingly, the Company's consolidated
financial statements include the results of operations and cash flows since the effective date of acquisition.

During
January 2001, the Company completed its acquisition of Compact Controls Inc. (CCI) for approximately $36,000. CCI, located in Hillsboro, Oregon, is a leading
manufacturer of cartridge valves and hydraulic integrated circuit manifolds. The transaction resulted in approximately $22,000 of goodwill being recognized.

During
January 2001, the Company acquired all of the assets and business operations of portions of the fluid power business of Danfoss A/S. Sauer Inc. and Danfoss A/S
agreed to the asset acquisition in principle when Sauer Inc. purchased eleven companies comprising the DFP group on May 3, 2000. The operations are located in Australia, Belgium, Japan,
Latin America, Netherlands, Portugal, Singapore, and Spain. The Company issued 2,091 shares of its common stock valued at $18,298. The transaction resulted in approximately $8,000 of goodwill.

During
July 2001, the Company completed the acquisition of Hidrover Valvulas S.A. for approximately $3,500 in an all-cash transaction. This resulted in approximately
$2,700 being recognized as goodwill. Hidrover develops and manufactures directional control valves and other hydraulic valves primarily serving the application areas of agriculture, material handling,
and utility machinery. The company, located in Caxias do Sul, Brazil, has approximately 80 employees and annual sales of approximately $4,000.

During
January 2000, the Company paid $3,600 and issued 103 shares of its common stock to acquire all of the assets of Custom Design Electronics of Sweden AB (CDE) and its
subsidiary NOB Electronik AB, which manufactures and sells electronic control panels and related software. The acquisition resulted in approximately $3,000 of goodwill being recognized.

In
May 2000, the Company issued 16,150 shares of its common stock in exchange for all of the outstanding shares of Danfoss Fluid Power Companies (DFP), which designs, manufactures
and sells orbital motors, hydrostatic steering units, proportional load-sensing valves, gear pumps and electrohydraulics for use by OEMs of mobile equipment. The assets acquired and
liabilities assumed were recorded at estimated fair values as determined by the Company's management based on information currently available and on current assumptions as to future operations. The
Company has obtained independent appraisals of the fair values of acquired property, plant and equipment, and identifiable intangible assets, and their remaining useful lives. The proper adjustments
to record these assets at their fair market value have been made and the related depreciation and amortization expense is reflected in the consolidated financial statements.

36

---

(4) Unusual Charges:

As a result of the acquisition of DFP, the Company incurred acquisition integration expenses for the incremental costs to exit and consolidate activities at
former DFP locations, to involuntarily terminate employees, and for other costs to integrate operating locations and other activities of DFP with the Company. Accounting principles generally accepted
in the United States require that these acquisition integration expenses, which are not associated with the generation of future revenues and have no future economic benefit, be reflected as assumed
liabilities in the allocation of the purchase price to the net assets acquired. On the other hand, accounting principles require that acquisition integration expenses which are associated with the
generation of future revenues and have future economic benefit, and those associated with integrating former Sauer locations into DFP locations, must be recorded as expenses. The components of the
acquisition liabilities included in the purchase price allocation for DFP are as follows:

Original Costs
Estimated

Utilized

Portion
Unutilized

Balance
Remaining at
December 31, 2001Workforce reductions

$
3,902

$
3,902

$


$
Asset impairments


3,522


2,716


806


Other


4,653


3,953


700


$
12,077

$
10,571

$
1,506

$



The
acquisition integration liabilities were based on the Company's integration plan which focused on three key areas of integration: 1) manufacturing process and supply chain
rationalization, including plant
closings, 2) elimination or consolidation of redundant administrative overhead and support activities, and 3) restructuring and consolidating the sales and marketing organizations in
Europe to eliminate redundancies in these activities.

The
workforce reductions represented the termination of 158 DFP employees, primarily production personnel. As of December 31, 2001, all 158 had been terminated. The above amounts
were funded through cash flows from the combined operations.

Under
accounting principles generally accepted in the United States of America, adjustments to the estimated acquisition integration liabilities are to be included in the allocation of
the purchase price of DFP, if the adjustment is determined within the purchase price allocation period. Adjustments that are determined after the end of the purchase price allocation period are to be
1) recorded as a reduction of net income, if the ultimate amount of the liability exceeds the estimate, or 2) recorded as a reduction of goodwill, if the amount of the liability is less
than the estimate. During 2001, the Company finalized its adjustments and had a balance of $1,506 of unused liability that had been recorded as of December 31, 2000. Accordingly, this balance
was recorded as a reduction of goodwill related to the DFP acquisition.

During
2000, the Company recorded restructuring charges of $11,232 ($6,852 after tax, or $0.17 per share) associated with the integration of the DFP acquisition. These charges related to
plant consolidation and other expenses, liability for workforce reductions, severance and other related employee benefits, building lease termination, and relocation of inventory and equipment and are
included in the Consolidated Statements of Income. Included in the restructuring charge was $1,500 recorded for the

37

---

expected termination of 70 employees, primarily manufacturing personnel. As of December 31, 2000, all of these employees had been terminated.

Movement
of the various components of the restructuring liabilities follows:

|                                       |  | Employees |  | Workforce
Reductions |       | Inventory and
Other Asset
Write-downs |   | Plant
Consolidation
and Other |  | Total
|-------------------------------------- |  | --------- |  | -------------------- | ----- | ------------------------------------- | - | ----------------------------- |  | -----
|2000                                   |  | 70        |  | $                    | 1,500 |                                       | $ | 5,590                         |  | $    
|Utilized in 2000                       |  | 70        |  |                      | 1,500 |                                       |   | 4,090                         |  |      
|Utilized in 2001                       |  |          |  |                      |      |                                       |   | 1,500                         |  |      
|                                       |  |           |  |                      |       |                                       |   |                               |  |      
|Balance remaining at December 31, 2001 |  |          |  | $                    |      |                                       | $ |                              |  | $    
|                                       |  |           |  |                      |       |                                       |   |                               |  |      

(5) Minority Interests:

Minority interest in net assets and income reflected in the accompanying consolidated financial statements consists of:



38

---



The
following tables set forth the components of minority interest in the consolidated balance sheets and consolidated statements of income:

Minority Interest Reflected in Consolidated Balance Sheets

December 31,2001

2000Hydro-Gear Limited Partnership

$
20,703

$
26,514Sauer Shanghai Hydraulic Transmission Company


2,546


2,470Sauer-Danfoss (Dubnica) a.s.


832


869Sauer-Danfoss Daikin, Ltd.


1,181


Topcon Sauer-Danfoss


319


Total

$
25,581

$
29,853


Minority Interest in (Income) Loss Reflected in Consolidated Statements of Income

Years Ended December 31,2001

2000

1999Hydro-Gear Limited Partnership

$
(7,690
)
$
(9,180
)
$
(4,914
)German Operating Company





(1,486
)

(2,387
)Sauer Shanghai Hydraulic Transmission Company


(76
)

1,042


417Sauer-Danfoss (Dubnica) a.s.


57


(36
)

358Sauer-Danfoss Daikin, Ltd.


96





Topcon Sauer-Danfoss


(269
)




Total

$
(7,882
)
$
(9,660
)
$
(6,526
)


Until
May 3, 2000, the Company was the general partner and 80% owner of the German Operating Company. The Murmann Limited Partners had certain rights which included an annual cash
payment equal to 7.6% of the income of Sauer Inc. and subsidiaries before taxes and the Murmann Limited Partnership Interests and the right to consent to certain actions of the German Operating
Company. However, the Company had the right to elect by the action of its independent directors or the holders of its common stock other than the Murmann family to terminate the Murmann Limited
Partnership Interests in exchange for 2,250 shares of common stock of Sauer Inc. As such, the Company controlled and consolidated the German Operating Company.

As
a result of the DFP acquisition, the Company elected, by the action of its independent directors, to terminate the limited partnership interests. Pursuant to the terms of the
agreement creating the limited partnership, in exchange for the termination of the limited partnership interests, the Company issued 2,250 shares of its common stock and paid the balance of the
current accounts of the Limited Partners of $3,873. The difference between the fair market value of the shares issued and the historical basis of the limited partnership interest was considered to be
a deemed dividend of $17,337 under common control

39

---

accounting. In addition, the agreement required the Company to pay an amount in cash equal to the income tax payable as a result of the exchange of the shares of common stock of the Company for the
limited partnership interests, but not to exceed 23,354 deutsche marks, $10,577 at December 31, 2001 using an exchange rate of 2.208 deutsche marks to the U.S. dollar. As of December 31,
2001, the Company has paid $3,254 toward this tax liability. However, the Murmann Limited Partners are currently in dispute in the German tax courts over the total amount of tax liability related to
this transaction. Although the Company may ultimately be liable for additional tax liability related to the termination of this agreement, there is no reasonable way to estimate the future outcome,
therefore, no further accrual has been made at this time. However, the Company believes that the outcome of this matter will not have a materially adverse effect on its results of operations,
liquidity of financial position.

(6) Inventories:

The composition of inventories is as follows:

December 31,2001

2000Raw materials

$
49,839

$
52,779Work in process


23,343


26,005Finished goods and parts


77,189


75,385LIFO allowance


(8,719
)

(7,937
)Total

$
141,652

$
146,232


(7) Property, Plant and Equipment:

The cost and related accumulated depreciation of property, plant and equipment are summarized as follows:

December 31,2001

2000Cost Land and improvements

$
8,083

$
8,224Buildings and improvements


102,485


99,898Machinery and equipment


643,165


604,916Construction in progress


48,072


41,793Total cost


801,805


754,831Less  accumulated depreciation


(378,610
)

(331,845
)Net property, plant and equipment

$
423,195

$
422,986


Depreciation
expense for 2001, 2000 and 1999 was $62,528, $50,839, and $35,124, respectively.

40

---

(8) Pension Benefits:

The Company has noncontributory defined benefit plans covering substantially all employees. The benefits under these plans are based primarily on years of service
and compensation levels. The Company's funding policy outside of Germany is to contribute annually an amount that falls within the range determined to be deductible for income tax purposes. The net
pension liabilities reflected in the accompanying consolidated balance sheets result principally from unfunded pension plans of the Company's operations in Germany, where it is common practice to fund
pension obligations at the time payments are made to retirees.

Pension
expense for 2001, 2000 and 1999 for these defined benefit plans consists of the following components:

December 31,2001

2000

1999Service cost

$
3,240

$
3,298

$
3,691Interest cost


7,151


6,820


6,972Expected return on plan assets


(6,945
)

(6,892
)

(5,842
)Amortization of prior service cost


592


426


452Amortization of net loss


132


46


57Amortization of transition obligation


(251
)

(262
)

(280
)Net periodic pension expense

$
3,919

$
3,436

$
5,050


41

---

The
following table sets forth the plans' funded status as of the respective balance sheet dates:

|                                            |  | December 31, 2001 |         | December 31, 2000 |  
|------------------------------------------- |  | ----------------- | ------- | ----------------- | -
|
|Benefit obligation at January 1             |  | $                 | (17,747 | )                 | $
|Service cost                                |  |                   | (775    | )                 |  
|Interest cost                               |  |                   | (1,156  | )                 |  
|Benefit obligation assumed by acquisition   |  |                   |        |                   |  
|Plan participant contributions              |  |                   | (351    | )                 |  
|Plan amendments                             |  |                   | (4,320  | )                 |  
|Actuarial gain (loss)                       |  |                   | (897    | )                 |  
|Benefit payments                            |  |                   | 1,143   |                   |  
|Effect of exchange rate changes             |  |                   | 361     |                   |  
|                                            |  |                   |         |                   |  
|Benefit obligation at December 31           |  |                   | (23,742 | )                 |  
|                                            |  |                   |         |                   |  
|Reconciliation of fair value of plan assets |  |                   |         |                   |  
|Fair value of plan assets at January 1      |  |                   | 27,941  |                   |  
|Plan assets assumed by acquisition          |  |                   |        |                   |  
|Actual return on plan assets                |  |                   | (3,024  | )                 |  
|Employer contributions                      |  |                   | 664     |                   |  
|Effect of exchange rate changes             |  |                   | (737    | )                 |  
|Plan participants' contributions            |  |                   | 351     |                   |  
|Benefit payments                            |  |                   | (1,143  | )                 |  
|                                            |  |                   |         |                   |  
|Fair value of plan assets at December 31    |  |                   | 24,052  |                   |  
|                                            |  |                   |         |                   |  
|Funded status at December 31                |  |                   | 310     |                   |  
|Unrecognized prior service cost             |  |                   | 305     |                   |  
|Unrecognized actuarial gain                 |  |                   | 5,145   |                   |  
|Unrecognized net transition obligation      |  |                   | 66      |                   |  
|                                            |  |                   |         |                   |  
|Net amount recognized                       |  | $                 | 5,826   |                   | $
|                                            |  |                   |         |                   |  

Amounts
recognized in the balance sheet as of December 31:

|                                       |  | December 31, 2001 |       | December 31, 2000 |  
|-------------------------------------- |  | ----------------- | ----- | ----------------- | -
|
|Long-term pension asset (liability)    |  | $                 | 5,826 |                   | $
|Accumulated other comprehensive income |  |                   |      |                   |  
|                                       |  |                   |       |                   |  
|Net amount recognized                  |  | $                 | 5,826 |                   | $
|                                       |  |                   |       |                   |  

42

---

Significant
assumptions used in determining pension expense and related pension obligations are as follows:

December 31,2001

2000

1999Discount rates United States

7.5
%
7.5
%
7.5
%Germany

6.5

6.5

6.5United Kingdom

5.8

7.0

7.0Rates of increase in compensation levels United States

4.5

4.5

4.5Germany

2.5

2.5

2.5United Kingdom

3.8

5.0

5.0Expected long-term rate of return on assets United States

8.5

8.5

8.5United Kingdom

6.8

7.0

7.0


The
plans' assets consist principally of short-term U.S. Government securities, UK Government securities, equity securities, and fixed income contracts.

43

---

(9) Postretirement Benefits Other than Pensions:

The Company provides health benefits for retired employees and certain dependents when the employee becomes eligible for these benefits by satisfying plan
provisions that include certain age and/or service requirements. Health benefits for retirees of non-U.S. operations, where applicable, are provided through government-sponsored plans to
which contributions by the Company are required. The health benefit plans covering substantially all U.S. employees are contributory, with contributions reviewed annually and adjusted as appropriate.
These plans contain other cost-sharing features such as deductibles and coinsurance. The Company does not pre-fund these plans and has the right to modify or terminate any of
these plans in the future.

The
components of the postretirement benefit provisions of the Company-sponsored plans for 2001, 2000 and 1999 were as follows:

2001

2000

1999Service cost

$
438

$
413

$
429Interest cost


1,258


1,186


1,058Net deferral and amortization


24


24


31Postretirement benefit provision

$
1,720

$
1,623

$
1,518


The
funded status of the Company-sponsored plans was as follows:

December 31,2001

2000Reconciliation of benefit obligation:Accumulated postretirement benefit liability at January 1

$
(17,629
)
$
(16,440
)Accumulated postretirement benefit assumed by acquisition





(556
)Service cost


(438
)

(413
)Interest cost


(1,258
)

(1,186
)Actuarial gain (loss)


(1,115
)

114Benefit payments


1,072


852Accumulated postretirement benefit liability at December 31


(19,368
)

(17,629
)Reconciliation of fair value of plan assets:Fair value of plan assets at January 1





Employer contributions


1,072


852Benefit payments


(1,072
)

(852
)Fair value of plan assets at December 31





Funded status


(19,368
)

(17,629
)Unrecognized actuarial loss


3,031


1,942Postretirement benefit liability

$
(16,337
)
$
(15,687
)


The
assumed weighted average annual rate of increase in the per capita cost of medical benefits is 9.0% for 2002 and is assumed to decrease ratably in 2003 through 2005 and remain level
at 5.5% thereafter.

U.S.
employees retiring after March 1, 1993, and hired prior to January 1, 1993, will receive the standard health benefits up to age 65 and then will be eligible for a
Medicare reimbursement allowance based on years of service. U.S. employees hired after January 1, 1993, will only be eligible after age 65 for a Medicare reimbursement allowance based on years
of service.

44

---

A
one percent increase or decrease in the annual health care trend rates would have increased or decreased the accumulated postretirement benefit obligation at December 31, 2001,
by $1,539, and increased or decreased postretirement benefit expense for 2001 by $189. The weighted average discount rate used to estimate the accumulated postretirement benefit obligation was 7.5%
for 2001 and 2000.

(10) Long-Term Incentive Plan:

The Company's Long-Term Incentive Plan provides for the grant of stock options, stock appreciation rights, restricted stock, performance units,
performance shares and other incentive awards to officers and key employees and for the reimbursement to certain participants for the personal income tax liability resulting from such awards. The
total number of shares of common stock that may be subject to awards or be issued under the Long-Term Incentive Plan will not exceed 2,400 shares, of which no more than 1,200 shares may be
issued as restricted stock.

The
Company also has a Non-employee Director Stock Option and Restricted Stock Plan which permits the granting of non-qualified stock options and restricted
common stock to directors of the Company who are not also employees of the Company. The total number of shares of common stock to be issued under this plan shall not exceed 250 shares.

During
2001 and 2000, the Company awarded 8 shares of restricted stock in each of the years to non-employee directors and 220 and 165, respectively, of performance units to
employees. The restricted stock awards entitle the participants to full dividend and voting rights. Unvested shares are restricted as to disposition and subject to forfeiture under certain
circumstances. The value of each award was established based on the market value of the stock as of the grant date. The shares vest over three years. The performance units entitle the participants to
an amount equal to the Company's dividends and vest after three years.

Unearned
compensation related to the restricted stock is shown as a reduction of stockholders' equity in the accompanying consolidated balance sheets and is being amortized ratably over
the life of the grants. Unearned compensation was computed based on the market value of the restricted shares. Compensation expense recognized in conjunction with the restricted stock outstanding in
2001 and 2000 amounted to $43 and $1,735, respectively. The majority of the compensation expense recognized in 2000 was the result of grants awarded prior to 2000 vesting 100% due to the change in
control occurring with the acquisition of DFP on May 3, 2000.

(11) Income Taxes:

The Company's income before income taxes is as follows:

Years Ended December 31,2001

2000

1999United States

$
(8,104
)
$
17,693

$
24,265European and other


15,703


26,460


4,794Total

$
7,599

$
44,153

$
29,059


The
Company's primary German operation is treated as a flow-through entity for United States tax purposes. The above analysis of pretax income and the following analysis of
the income tax provision by taxing jurisdiction are therefore not directly related.

45

---

The
(provision) benefit for income taxes by taxing jurisdiction location is as follows:

Years Ended December 31,2001

2000

1999Current:United StatesFederal

$
6,009

$
(6,544
)
$
(4,936
)State


1,026


(346
)

(625
)European and other


(8,405
)

(9,154
)

(2,733
)Total current


(1,370
)

(16,044
)

(8,294
)Deferred:United StatesFederal


(2,158
)

(554
)

(2,283
)State


(576
)

445


95European and other


1,235


(1,075
)

(457
)Total deferred


(1,499
)

(1,184
)

(2,645
)Total income tax provision

$
(2,869
)
$
(17,228
)
$
(10,939
)


A
reconciliation of the U.S. statutory and effective income tax provision (benefit) based on the Company's income before income taxes is as follows:

Years Ended December 31,2001

2000

1999U.S. statutory tax rate

35.0
%
35.0
%
35.0
%Deferred tax benefit not previously recognized

(18.2
)
(0.6
)
(6.4
)Goodwill and nondeductible expenses

16.5

2.7

1.7European and Asian locations' losses not tax benefited

14.3

1.2

7.0U.S. tax on distributed foreign earnings



1.8

Taxes on European locations' income at rates which differ from the U.S. rate

(7.5
)
(1.9
)
State income taxes

(2.9
)
0.8

2.1Other

0.6



(1.8
)Effective income tax rate

37.8
%
39.0
%
37.6
%


46

---

The
components of the Company's net deferred tax assets and (liabilities), determined on a jurisdictional and entity basis, are as follows:

|                                                                   |  | December 31, |        
|------------------------------------------------------------------ |  | ------------ | -------
|
|
|Tax loss and tax credit carryforwards                              |  | $            | 24,265 
|Internal Revenue Code Section 743 and other tax basis step-ups     |  |              | 2,269  
|Deferred compensation, postretirement and accrued pension benefits |  |              | 2,910  
|Fixed asset basis differences                                      |  |              | 2,487  
|Restructuring accruals                                             |  |              |       
|Inventory and warranty accruals                                    |  |              | 8,840  
|Intangible asset fair market value step-up                         |  |              |       
|Other items                                                        |  |              | 2,078  
|U.S. tax on unremitted earnings of foreign subsidiaries            |  |              |       
|                                                                   |  |              |        
|Gross deferred tax assets/(liabilities)                            |  |              | 42,849 
|Valuation allowance                                                |  |              | (22,732
|                                                                   |  |              |        
|Net deferred tax assets/(liabilities)                              |  |              | 20,117 
|Less-current portion                                               |  |              | (8,478 
|                                                                   |  |              |        
|Net deferred tax assets/(liabilities), long-term                   |  | $            | 11,639 
|                                                                   |  |              |        

For
the years ended December 31, 2001 and 2000, the valuation allowance increased by $1,168 and $18,399, respectively. The 2001 increase stems primarily from a valuation allowance
established against current year foreign tax credits generated. The 2000 increase stems primarily from a valuation allowance established against certain net operating losses of acquired companies. To
the extent the unrecognized tax net operating loss carryforwards at the date of acquisition are recognized in the future, the tax benefits of such recognition will reduce goodwill.

As
of December 31, 2001, the Company had not provided U.S. federal income taxes on $60,116 of undistributed earnings recorded by certain subsidiaries outside the United States
since these earnings were deemed permanently invested. Although it is not practicable to determine the deferred tax liability on the unremitted earnings, foreign tax credits would be available to
substantially reduce any U.S. tax liability if these foreign earnings were remitted.

The
Company had the following tax return carryforwards available to offset future years' taxes at December 31, 2001:

|                            |  | Amount |        | Expiration Dates
|--------------------------- |  | ------ | ------ | ----------------
|German net operating losses |  | $      | 49,550 |                 
|U.S. net operating losses   |  | $      | 57,123 |                 
|U.S. foreign tax credits    |  | $      | 4,000  |                 

The
German net operating losses reflected above have reduced U.S. income taxes in prior years due to the treatment of the Company's primary German operations as a partnership.
Accordingly, no deferred tax asset has been established for the German loss carryforwards. The U.S. loss carryforwards will be limited by IRC Section 382.

47

---

The
Internal Revenue Service (IRS) has audited the Company's federal income tax returns for fiscal years 1997 and 1998. The Company received a notice of proposed tax deficiency for the
two years and filed an appeal on October 12, 2001, in response to that IRS notice. Final proposed adjustments have not been received for these years. Although the outcome of such review cannot
be predicted with certainty and no assurances can be given with respect to such reviews, the Company believes that the ultimate outcome of this review in which it is currently involved will not have a
materially adverse effect on its results of operations, liquidity or financial position.

(12) Notes Payable and Long-Term Debt:

Long-term debt consisted of the following:

December 31,2001

2000U.S. Revolving Credit Facility, due through 2003

$
68,000

$
30,400U.S. 1997 Senior Notes, due through 2007


22,000


25,000U.S. 2000 Senior Notes, due through 2010


35,000


35,000U.S. Industrial Development Revenue Bonds, due
through 2026


8,530


8,530German Long-Term Bank Facilities maturing through 2018


37,720


34,339Danish Long-Term Facilities, due through 2006


60,824


59,947Other borrowings


13,679


9,621Total debt


245,753


202,837Less  scheduled current maturities


(9,727
)

(4,205
)Total long-term debt

$
236,028

$
198,632


The
U.S. Revolving Credit Facility, dated October 6, 2000, permits the Company to choose between two interest rate options and to specify what portion of the loan is covered by a
specific interest rate option and the applicable funding period to which the interest rate option is to apply. The interest rate options are based on the bank's prime lending rate and LIBOR. The
Revolving Credit Facility permits unsecured borrowings up to $90,000. The Company pays a commitment fee on the unused portion of the U.S. Revolving Credit Facility to have the funds available. At
December 31, 2001, this fee was 0.25%. At December 31, 2001 and 2000, the weighted average interest rate on outstanding borrowings was approximately 3.8% and 7.8%, respectively.

The
U.S. Revolving Credit Facility contains certain restrictions, including limitations on the payment of dividends. The U.S. Revolving Credit Facility also requires the U.S. Operating
Company to maintain certain minimum levels of profitability and cash flow as defined. Finally, the U.S. Revolving Credit Facility requires the maintenance of minimum tangible net worth and maximum
leverage (as defined). The U.S. Operating Company was in compliance with the requirements at December 31, 2001. During 2001, the Company did renegotiate its U.S. Revolving Credit Facility. This
negotiation resulted in changes to covenants related to earnings performance and cash flow. Although the Company is currently meeting these new covenants, certain factors such as the uncertain economy
in the U.S. coupled with the Company's financial performance could put the Company at risk of continuing to meet these covenants. Should the Company not meet these covenants, the result would be a
default on the U.S. Revolving Credit Facility causing the entire outstanding balance to be classified as a current liability. However, the Company does not currently anticipate that this will happen
and has held discussions with its lenders to consider alternatives in the event of such a default.

48

---

On
December 15, 1997, the U.S. Operating Company issued $25,000 of 6.68% Senior Notes (1997 Senior Notes). The 1997 Senior Notes have remaining annual repayments on
December 15, 2002, through December 15, 2007. The 1997 Senior Notes contain certain restrictions and require the maintenance of certain financial ratios which are similar to the U.S.
Revolving Credit Facility. At December 31, 2001, the U.S. Operating Company was in compliance with these requirements.

On
October 1, 2000, the U.S. Operating Company issued $35,000 of 8.07% Senior Notes (2000 Senior Notes). The 2000 Senior Notes have scheduled annual payments starting on
September 30, 2008, through September 30, 2010. The 2000 Senior Notes contain certain restrictions and require the maintenance of certain financial ratios which are similar to the U.S.
Revolving Credit Facility. At December 31, 2001, the U.S. Operating Company was in compliance with these requirements.

On
May 1, 1996, the U.S. Operating Company issued $9,000 of Industrial Development Revenue Bonds (Bonds) of which $8,530 remains outstanding. The Bonds are at variable interest
rates. At December 31, 2001 and 2000, the interest rate on the bonds was 1.75% and 5.05%, respectively. The Bonds are secured by a bank letter of credit. The Bonds contain certain covenants and
restrictions similar to those included in the U.S. Revolving Credit Facility. At December 31, 2001, the U.S. Operating Company was in compliance with these requirements.

The
German Long-Term Facilities represent a series of long-term bank facilities, with an aggregate principal of $37,720 at December 31, 2001. These
facilities generally carry fixed rates of interest, ranging from 4.6% to 6.9%. These facilities contain a variety of repayment schedules and have final maturities ranging from December 2002
through June 2018.

The
Danish Long-Term Facilities represent the drawn portion, $60,824, of a total available credit facility of $95,837. The Danish Long-Term Facilities requires
the Company to maintain certain minimum levels of profitability and equity (as defined). The Company was in compliance with the requirements at December 31, 2001. The drawn portion of the
facility bears interest at a rate of 4.9% at December 31, 2001.

Payments
required on long-term debt outstanding as of December 31, 2001, during the years ending 2002 through 2006 and for years thereafter, are $9,727, $81,248,
$72,275, $8,773, $12,056 and $61,674, respectively.

The
Company also maintains revolving credit facilities, notes payable and bankers' acceptances for its European and other operations. The German Operating Company's credit agreement
contains restrictions similar to those in the U.S. Operating Company's agreements. The German Operating Company was in compliance with the requirements at December 31, 2001. At
December 31, 2001, accounts receivable, inventories, property, plant and machinery and equipment in the amount of $5,276 were pledged as collateral under these European and other operations
credit facilities.

The
weighted average interest rates on short-term borrowings at year-end were 4.6% in 2001 and 7.1% in 2000 and 1999.

(13) Related Parties:

In connection with the acquisition of DFP on May 3, 2000, the Company entered into several agreements with Danfoss A/S to purchase ongoing operational
services from Danfoss A/S. These services provide for rental of shared facilities, administrative support and information technology support. These fees are paid on a monthly basis. Total expense
recognized under these agreements for 2001 and 2000 was $8,573 and $5,354, respectively. Payments required under these agreements as of December 31, 2001,

49

---

during the years ending 2002 though 2006 and for years thereafter, are $7,850, $6,774, $6,087, $6,087, $6,087, and $33,455, respectively.

(14) Commitments and Contingencies:

The Company leases certain facilities and equipment under operating leases, many of which contain renewal options. Total rental expense on all operating leases
during 2001, 2000 and 1999 was $10,457, $7,840 and $5,986, respectively.

Minimum
future rental commitments under all noncancelable operating leases as of December 31, 2001, during the years ending 2002 through 2006 and for the years thereafter, are
$10,590, $9,556, $8,175, $7,580, $7,100, and $55,929, respectively.

The
Company, from time to time, is involved in various legal matters considered normal in the course of its business. The Company intends to vigorously defend against all such claims. It
is the Company's policy to accrue for amounts related to these matters if it is probable that a liability has been incurred and an amount can be reasonably estimated. Although the outcome of such
matters cannot be predicted with certainty and no assurances can be given with respect to such matters, the Company believes that the outcome of these matters in which it is currently involved will
not have a materially adverse effect on its results of operations, liquidity or financial position.

(15) Quarterly Financial Data (Unaudited):

|     |                                                      | Quarter
|---- | ---------------------------------------------------- | -------
|
|2001 |                                                      |        
|     | Net sales                                            |        
|     | Gross profit                                         |        
|     | Net income (loss)                                    |        
|     | Basic and diluted net income (loss) per common share |        
|2000 |                                                      |        
|     | Net sales                                            |        
|     | Gross profit                                         |        
|     | Net income                                           |        
|     | Basic and diluted net income per common share        |        

(16) Segment and Geographic Information:

The Company has two reportable segments defined by geographic region due to the difference in economic characteristics in which these segments operate. The
activities of each reportable segment consist of the design, manufacture and sale of hydraulic systems and other related components. The Company's segment called the "Americas" includes all operations
located in both North and South America.

The
accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates individual segment performance based on
net income.

50

---

Intersegment sales are made at established transfer prices. The following table presents the significant items by segment:

|                              |  | Americas |         | Europe |   | All Other |  | Eliminations |         | Total
|----------------------------- |  | -------- | ------- | ------ | - | --------- |  | ------------ | ------- | -----
|2001                          |  |          |         |        |   |           |  |              |         |      
|Trade sales                   |  | $        | 449,265 |        | $ | 378,435   |  | $            | 27,579  |      
|Intersegment sales            |  |          | 36,732  |        |   | 70,399    |  |              | 1,432   |      
|Interest income               |  |          | 2,507   |        |   | 3,392     |  |              | 552     |      
|Interest expense              |  |          | 11,135  |        |   | 12,678    |  |              | 15      |      
|Depreciation and amortization |  |          | 33,062  |        |   | 28,515    |  |              | 7,897   |      
|Net income (loss)             |  |          | (3,988  | )      |   | 10,560    |  |              | (1,842  | )    
|Total assets                  |  |          | 368,151 |        |   | 402,809   |  |              | 145,444 |      
|Capital expenditures          |  |          | 28,062  |        |   | 41,182    |  |              | 453     |      
|2000                          |  |          |         |        |   |           |  |              |         |      
|Trade sales                   |  | $        | 449,343 |        | $ | 327,410   |  | $            | 5,784   |      
|Intersegment sales            |  |          | 43,617  |        |   | 58,288    |  |              | 1,696   |      
|Interest income               |  |          | 3,402   |        |   | 3,536     |  |              | 935     |      
|Interest expense              |  |          | 8,983   |        |   | 9,941     |  |              | 143     |      
|Depreciation and amortization |  |          | 27,195  |        |   | 19,224    |  |              | 6,919   |      
|Net income (loss)             |  |          | 12,449  |        |   | 16,776    |  |              | (814    | )    
|Total assets                  |  |          | 353,814 |        |   | 429,782   |  |              | 109,817 |      
|Capital expenditures          |  |          | 35,086  |        |   | 32,646    |  |              | 199     |      
|1999                          |  |          |         |        |   |           |  |              |         |      
|Trade sales                   |  | $        | 341,859 |        | $ | 186,806   |  | $            | 5,717   |      
|Intersegment sales            |  |          | 36,029  |        |   | 31,155    |  |              | 399     |      
|Interest income               |  |          | 1,953   |        |   | 1,706     |  |              | 1,416   |      
|Interest expense              |  |          | 6,111   |        |   | 7,364     |  |              | 166     |      
|Depreciation and amortization |  |          | 20,878  |        |   | 13,588    |  |              | 1,072   |      
|Net income (loss)             |  |          | 17,021  |        |   | 2,463     |  |              | 1,023   |      
|Total assets                  |  |          | 239,895 |        |   | 200,927   |  |              | 31,035  |      
|Capital expenditures          |  |          | 33,496  |        |   | 23,139    |  |              | 514     |      

Eliminations:

2001

2000

1999Intersegment receivables

$
(20,027
)
$
(40,226
)
$
(27,757
)Intersegment profit in inventory and other


(11,396
)

(12,224
)

(1,585
)Total assets eliminations

$
(31,423
)
$
(52,450
)
$
(29,342
)


51

---

A
summary of the Company's net sales by product line is presented below:

Net Sales2001

2000

1999Hydrostatic transmissions

$
400,367

$
469,236

$
430,829Open circuit gear pumps and motors and piston pumps


270,992


143,283


67,622Electrohydraulics and controls


183,920


170,018


35,931Total

$
855,279

$
782,537

$
534,382


A
summary of the Company's net sales and long-lived assets by geographic area is presented below:

Net Sales (1)

Long-Lived
Assets (2)2001

2000

1999

2001

2000United States

$
411,881

$
409,807

$
314,291

$
238,122

$
218,251Germany


80,080


67,558


44,224


46,868


51,840Italy


55,350


48,002


26,968


8,783


8,032France


44,292


37,000


22,026


629


659United Kingdom


47,139


43,749


30,163


24,823


25,293Denmark (3)


14,678


11,890





160,669


160,770Slovakia (3)


992


469


1,656


35,431


33,317Other countries


200,867


164,062


95,054


42,998


19,857Totals

$
855,279

$
782,537

$
534,382

$
558,323

$
518,019


---

No
single customer accounted for 10% or more of total consolidated sales in any year presented.

(17) Subsequent Events (Unaudited):

On February 19, 2002, the Company announced that it had completed an agreement to purchase a minority interest in Comatrol S.p.A., effective
January 1, 2002, and to enter into a strategic alliance to develop and manufacture cartridge valves and hydraulic integrated circuits (HICs) under the Sauer-Danfoss brand label as well as
marketing, sales and support through the Sauer-Danfoss organization. Comatrol, located in Reggio Emilia, Italy, has 90 employees and approximately $16,000 in annual sales. The Company will own 45% of
Comatrol as a minority interest partner and will not consolidate the financial results.

52

---

Report of Management

The
management of Sauer-Danfoss Inc. is responsible for the integrity and accuracy of the financial information contained in this annual report. Management believes that the
consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and that the other information in this annual report is
consistent with those statements. In preparing the financial statements, management makes informed judgments and estimates, where necessary, to reflect the expected effects of events and transactions
that have not been completed. In management's opinion, the financial statements present fairly the financial position, results of operations and cash flows of the Company in conformity with accounting
principles generally accepted in the United States of America.

Management
of the Company is also responsible for maintaining a system of internal accounting controls and procedures designed to provide reasonable assurance at reasonable cost that
assets are safeguarded against loss or unauthorized use and that financial records are adequate and can be relied upon to produce financial statements in accordance with accounting principles
generally accepted in the United States of America. This system is augmented by written policies and procedures, careful selection and training of financial management personnel, a continuing
management commitment to the integrity of the system, and through examinations by an internal audit department which coordinates its activities with the Company's independent accountants.

KPMG
LLP has been retained to conduct an audit of the Company's consolidated financial statements in accordance with auditing standards generally accepted in the United States of America
and to provide an independent assessment that helps ensure fair presentation of the Company's consolidated results of operations, financial position and cash flows.

The
Audit Committee of the Board of Directors is composed entirely of independent outside directors. The Committee meets periodically with management, internal auditors and the
independent accountants, both separately and jointly, to discuss internal accounting controls and the quality of financial reporting. To ensure complete independence, the internal auditors and
representatives of KPMG LLP have full access to meet with the Audit Committee, with or without management representatives present, to discuss the results of their audits and their opinions on the
adequacy of internal controls and the quality of financial reporting.

|                                                       |                                                                     
|------------------------------------------------------ | --------------------------------------------------------------------
|David L. Pfeifle
President and Chief Executive Officer | Karl J. Schmidt
Executive Vice President and
Chief Financial Officer

53

---

Independent Auditors' Report

To
the Shareholders of Sauer-Danfoss Inc.:

We
have audited the accompanying consolidated balance sheets of SAUER-DANFOSS INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31, 2001 and 2000, and the
related consolidated statements of income, stockholders' equity and comprehensive income and cash flows for each of the years in the two year period ended December 31, 2001. These consolidated
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated
statements of income, stockholders' equity and comprehensive income and cash flows of SAUER-DANFOSS INC. (formerly SAUER INC. and SUBSIDIARIES) for the year ended December 31,
1999, were audited by other auditors whose report thereon dated February 16, 2000, expressed an unqualified opinion on those statements.

We
conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 audit provides a reasonable basis for our opinion.

In
our opinion, the 2001 and 2000 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of
SAUER-DANFOSS INC. AND SUBSIDIARIES as of December 31, 2001 and 2000, and the results of their operations and their cash
flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/
KPMG LLP

Des
Moines, Iowa
February 14, 2002

54

---

REPORT OF ARTHUR ANDERSEN LLP

To
the Shareholders of Sauer-Danfoss Inc. and Subsidiaries:

We
have audited the accompanying consolidated statements of income, stockholders' equity, comprehensive income, and cash flows of SAUER-DANFOSS INC. (a Delaware corporation) AND
SUBSIDIARIES (formerly SAUER INC. and SUBSIDIARIES) for the year ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audit.

We
conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated 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 audit provides a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of
SAUER-DANFOSS INC. AND SUBSIDIARIES (formerly SAUER INC. and SUBSIDIARIES) for the year ended December 31, 1999, in conformity with accounting principles generally accepted in the
United States.

Arthur
Andersen LLP
Chicago, Illinois
February 16, 2000

55

---



Schedule I  Sauer-Danfoss Inc. (Parent Only)  Condensed Balance Sheets  As of December 31, 2001 and 2000  (in thousands)

|                                                                                                                                                                                  |                            | 2001 |         | 2000    |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ---- | ------- | ------- | -
|Assets                                                                                                                                                                            |                            |      |         |         |  
|Current assets                                                                                                                                                                   |                            |      |         |         |  
|                                                                                                                                                                                  | Cash                       |      | $       | 25      |  
|                                                                                                                                                                                  | Other current assets       |      |         | 4,394   |  
|                                                                                                                                                                                  |                            |      |         |         |  
|                                                                                                                                                                                  | Total current assets       |      |         | 4,419   |  
|Receivables from subsidiaries                                                                                                                                                     |                            |      | 2,589   |         |  
|Intangible assets, net                                                                                                                                                            |                            |      | 89,991  |         |  
|Equity investment in subsidiaries*                                                                                                                                                |                            |      | 256,823 |         |  
|Other                                                                                                                                                                             |                            |      | 18,238  |         |  
|                                                                                                                                                                                  |                            |      |         |         |  
|                                                                                                                                                                                  |                            | $    | 372,060 |         | $
|                                                                                                                                                                                  |                            |      |         |         |  
|Liabilities and Stockholders' Equity                                                                                                                                              |                            |      |         |         |  
|Current liabilities                                                                                                                                                               |                            | $    | 3,979   |         | $
|Payables to subsidiaries                                                                                                                                                          |                            |      |        |         |  
|Other long-term liabilities                                                                                                                                                       |                            |      | 20,897  |         |  
|                                                                                                                                                                                  |                            |      |         |         |  
|Total liabilities                                                                                                                                                                 |                            |      | 24,876  |         |  
|                                                                                                                                                                                  |                            |      |         |         |  
|Stockholders' equity                                                                                                                                                             |                            |      |         |         |  
|Common stock, par value $.01 per share, authorized 75,000 in 2001 and 2000; issued 47,411 in 2001 and 46,483 in 2000; outstanding 47,411 shares in 2001 and 45,312 shares in 2000 |                            |      | 474     |         |  
|Additional paid-in capital                                                                                                                                                        |                            |      | 313,662 |         |  
|Retained earnings                                                                                                                                                                 |                            |      | 48,803  |         |  
|Accumulated other comprehensive income                                                                                                                                            |                            |      | (15,663 | )       |  
|Unamortized restricted stock compensation                                                                                                                                         |                            |      | (92     | )       |  
|Common stock in treasury (at cost), 0 shares in 2001 and 1,172 shares in 2000                                                                                                     |                            |      |        |         |  
|                                                                                                                                                                                  |                            |      |         |         |  
|                                                                                                                                                                                  | Total stockholders' equity |      |         | 347,184 |  
|                                                                                                                                                                                  |                            |      |         |         |  
|                                                                                                                                                                                  |                            | $    | 372,060 |         | $
|                                                                                                                                                                                  |                            |      |         |         |  

---

56

---

Schedule I (cont.)  Sauer-Danfoss Inc. (Parent Only)  Condensed Statements of Income  For the Years Ended December 31, 2001, 2000 and 1999  (in thousands, except per share data)

|                                              |                                     | 2001                                       |        | 2000   |        | 1999   |       
|--------------------------------------------- | ----------------------------------- | ------------------------------------------ | ------ | ------ | ------ | ------ | ------
|Equity earnings of subsidiaries               |                                     | $                                          | 15,467 |        | $      | 28,339 |       
|Expenses, net                                |                                     |                                            |        |        |        |        |       
|                                              | Selling, general and administrative |                                            |        | 14,512 |        |        | 9,541 
|                                              | Interest income                     |                                            |        | (546   | )      |        | (861  
|                                              | Other (income) expense, net         |                                            |        | (419   | )      |        | (8,245
|                                              |                                     |                                            |        |        |        |        |       
|                                              |                                     | Expenses, net                              |        |        | 13,547 |        |       
|                                              |                                     |                                            |        |        |        |        |       
|                                              |                                     | Income from operations before income taxes |        |        | 1,920  |        |       
|Provision for income taxes                    |                                     |                                            | 2,810  |        |        | (979   | )     
|                                              |                                     |                                            |        |        |        |        |       
|                                              | Net income                          |                                            | $      | 4,730  |        | $      | 26,925
|                                              |                                     |                                            |        |        |        |        |       
|Basic and diluted net income per common share |                                     | $                                          | 0.10   |        | $      | 0.69   |       
|                                              |                                     |                                            |        |        |        |        |       
|Weighted average basic shares outstanding     |                                     |                                            | 46,977 |        |        | 39,216 |       
|                                              |                                     |                                            |        |        |        |        |       
|Weighted average diluted shares outstanding   |                                     |                                            | 46,980 |        |        | 39,217 |       
|                                              |                                     |                                            |        |        |        |        |       

57

---

Schedule I (cont.)  Sauer-Danfoss Inc. (Parent Only)  Condensed Statements of Cash Flows  For the Years Ended December 31, 2001, 2000 and 1999  (in thousands)

|                                                                                   |                                                  | 2001                                      |       | 2000    |         | 1999   |        
|---------------------------------------------------------------------------------- | ------------------------------------------------ | ----------------------------------------- | ----- | ------- | ------- | ------ | -------
|Cash flows from operating activities                                              |                                                  |                                           |       |         |         |        |        
|Net income                                                                         |                                                  | $                                         | 4,730 |         | $       | 26,925 |        
|Adjustments to reconcile net income to net cash provided by operating activities  |                                                  |                                           |       |         |         |        |        
|                                                                                   |                                                  | Equity earnings of subsidiaries           |       |         | (15,467 | )      |        
|                                                                                   |                                                  | Dividends received from subsidiaries      |       |         | 8,166   |        |        
|                                                                                   |                                                  | Depreciation and amortization             |       |         | 7,228   |        |        
|                                                                                   |                                                  | Change in working capital                 |       |         | (2,549  | )      |        
|                                                                                   |                                                  | Other                                     |       |         | 6,654   |        |        
|                                                                                   |                                                  |                                           |       |         |         |        |        
|                                                                                   |                                                  | Net cash provided by operating activities |       |         | 8,762   |        |        
|                                                                                   |                                                  |                                           |       |         |         |        |        
|Cash flows used in investing activities                                           |                                                  |                                           |       |         |         |        |        
|                                                                                   | Cash paid for acquisitions, net of cash acquired |                                           |       | (3,500  | )       |        | (3,765 
|                                                                                   |                                                  |                                           |       |         |         |        |        
|                                                                                   |                                                  | Net cash used in investing activities     |       |         | (3,500  | )      |        
|                                                                                   |                                                  |                                           |       |         |         |        |        
|Cash flows from financing activities                                              |                                                  |                                           |       |         |         |        |        
|                                                                                   | Net financing from (to) subsidiaries             |                                           |       | 8,006   |         |        | (20,147
|                                                                                   | Cash dividends                                   |                                           |       | (13,275 | )       |        | (11,440
|                                                                                   | Repurchase of common stock                       |                                           |       |        |         |        | (5,722 
|                                                                                   |                                                  |                                           |       |         |         |        |        
|                                                                                   |                                                  | Net cash used in financing activities     |       |         | (5,269  | )      |        
|                                                                                   |                                                  |                                           |       |         |         |        |        
|Cash                                                                              |                                                  |                                           |       |         |         |        |        
|                                                                                   | Net increase (decrease) during the year          |                                           |       | (7      | )       |        | 2      
|                                                                                   | Beginning balance                                |                                           |       | 32      |         |        | 30     
|                                                                                   |                                                  |                                           |       |         |         |        |        
|                                                                                   | Ending balance                                   |                                           | $     | 25      |         | $      | 32     
|                                                                                   |                                                  |                                           |       |         |         |        |        

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Schedule II  Sauer-Danfoss Inc. and Subsidiaries  Valuation and Qualifying Accounts  Years Ended December 31, 1999, 2000 and 2001  (in thousands)

|                                      |  | Balance at
Beginning of
Year |       | Charged to Costs
and Expenses |       | Receivables
Written Off |        | Balance at End
of Year
|------------------------------------- |  | ---------------------------- | ----- | ----------------------------- | ----- | ----------------------- | ------ | ----------------------
|For the year ended December 31, 1999: |  |                              |       |                               |       |                         |        |                       
|Allowance for Doubtful Accounts       |  | $                            | 3,166 |                               | 307   |                         | (278   | )                     
|For the year ended December 31, 2000: |  |                              |       |                               |       |                         |        |                       
|Allowance for Doubtful Accounts       |  | $                            | 3,195 |                               | 621   |                         | (228   | )                     
|For the year ended December 31, 2001: |  |                              |       |                               |       |                         |        |                       
|Allowance for Doubtful Accounts       |  | $                            | 3,588 |                               | 4,350 |                         | (2,368 | )                     

59

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Report of KPMG LLP on Financial Statement Schedules

To
the Shareholders of Sauer-Danfoss Inc.:

Under
date of February 14, 2002, we reported on the consolidated balance sheets of Sauer-Danfoss Inc. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the two years then ended, which are included in this Form 10-K.
In connection with our audits of the aforementioned consolidated financial statements, we also audited the related 2001 and 2000 consolidated financial statement schedules as listed in Item 14.(a)(2)
of this Form 10-K. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these 2001 and 2000
financial statement schedules based on our audits.

In
our opinion, such 2001 and 2000 financial statement schedules, when considered in relation to the 2001 and 2000 basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.

KPMG LLP

Des
Moines, Iowa
February 14, 2002

Report of Arthur Andersen LLP on Financial Statement Schedules

To
the Shareholders of Sauer-Danfoss Inc. and Subsidiaries:

We
have audited in accordance with auditing standards generally accepted in the United States, the consolidated statements of income, shareholders' equity, comprehensive income, and cash
flows for the year ended December 31, 1999, included in Sauer-Danfoss Inc.'s (formerly Sauer Inc. and Subsidiaries) annual report to shareholders and included in this
Form 10-K (File No. 333-48299), and have issued our report thereon dated February 16, 2000. Our audit was made for the purpose of forming an opinion on
those statements taken as a whole. Schedules I and II listed in Item 14.(a)(2) are the responsibility of the company's management and are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements. The 1999 schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

Arthur Andersen LLP

Chicago,
Illinois
February 16, 2000

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