<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                            ------------------------

                                   FORM 10-K

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15() OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                       COMMISSION FILE NUMBER: 333-48299
                            ------------------------

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

<TABLE>
<S>                                         <C>
                 DELAWARE                         36-3482074
     (State or other jurisdiction of           (I.R.S. Employer
      incorporation or organization)         Identification No.)
    2800 EAST 13TH STREET, AMES, IOWA             50010-8600
 (Address of principal executive offices)         (Zip Code)
</TABLE>

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

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

<TABLE>
<S>                                            <C>
                                                          New York Stock Exchange
   Common Stock, par value $0.01 per share          Frankfurt (Germany) Stock Exchange
            (Title of each class)               (Name of each exchange on which registered)
</TABLE>

          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 /X/  No / /

    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:  /X/

    The aggregate market value of the voting stock of the Registrant held by
nonaffiliates at March 26, 2001, was $97,739,498. As of March 26, 2001, there
were 47,402,768 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 16, 2001 are incorporated by reference into Parts II and III.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
                                     PART I

ITEM 1. BUSINESS.

    (A)  GENERAL DEVELOPMENT OF 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 primarily off-highway 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. The Company conducts its business globally under the Sauer-Danfoss
name.

    On January 24, 2000, the Company acquired Custom Design Electronics of
Sweden AB, which owns all of the outstanding shares of NOB Electronik AB, a
Swedish company that designs and manufactures electronic control systems both in
mobile hydraulics and other areas. The Company paid $3.6 million and issued
103,256 shares of its common stock. The acquisition was accounted for under the
purchase method of accounting and accordingly, the consolidated statements of
income include the results of NOB beginning January 24, 2000.

    On May 3, 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 electrohydraulics 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 3, 2000. As a result of the Company's acquisition
of DFP, the Company changed its name from Sauer Inc. to Sauer-Danfoss Inc.

    On December 5, 2000, the Company announced that it had completed the
acquisition of Integrated Control Technologies ("ICT") Ltd. in an all-cash
transaction for approximately $2.3 million. Headquartered in the United Kingdom,
ICT is well known for its production of electronic controls and related software
in mobile hydraulics, as well as other areas. The purchase was accounted for
under the purchase method of accounting and accordingly, the consolidated
statements of income include the results of ICT beginning December 5, 2000

    In January 2001, the Company announced it had 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 will be accounted for under the
purchase method of accounting during the first quarter of 2001.

    Also in January 2001, the Company announced that it had 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 will be accounted for under the purchase
method of accounting.

    On January 29, 2001, the Company announced its intention to establish a
marketing and distribution base in India by signing a letter of intent to
acquire certain assets of Dantal Hydraulics Ltd. Dantal had previously been a
distributor for DFP in India since 1989. Headquartered in New Delhi, Dantal also
has branch offices in Ahmedabad, Mumbai, Bangalore, Chennai and Calcutta. The
Company anticipates closing the transaction during the second quarter of 2001.

                                       1
<PAGE>
    On February 2, 2001, the Company announced it had entered into an agreement
with Topcon Laser Systems, Inc. to create a new joint venture company. The new
company, to be called TSD Integrated Controls, ("TSD") will focus on the
development and marketing of electronic systems used to control work functions
of off-highway vehicles. The Company anticipates TSD will begin operations on
April 1, 2001.

    On March 15, 2001, the Company announced it had acquired all of the assets
and business operations of portions of the fluid power business of Danfoss A/S
effective January 4, 2001. 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 shares of its common stock and the acquisition
will be accounted for under the purchase method of accounting for business
combinations in the first quarter of 2001.

    During the first quarter of 1999, the Company commenced operations at its
new manufacturing plant constructed in Lawrence, Kansas, to produce medium-power
hydrostatic transmissions. The Company has been gradually phasing production
into this facility based on product demand. The facility is currently staffed
with approximately 130 employees.

    In 1998, the Company moved its Minneapolis operations to a new leased
facility nearly doubling the available capacity. In addition, the Company
continued to develop and expand its Slovakian operations. The Company also
completed an expansion of over 30,000 square feet to its Hydro-Gear, Inc. plant
in Sullivan, Illinois, which manufactures hydrostatic transmissions for the turf
care market.

    On December 2, 1998, the Company entered into agreements to terminate its
Brazilian licensee and to purchase certain machinery, equipment, and inventory
from the former licensee. The Company established a Brazilian limited liability
company, Sauer-Sundstrand Ltda., to conduct the sale and distribution of
hydrostatic transmissions and gear pumps and motors to the South American
market.

    The Company completed an initial public offering of its Common Stock in
May 1998, which resulted in net proceeds of approximately $48.1 million. The
proceeds were used to repay long-term indebtedness, to fund the purchase of the
Company's main manufacturing facility in Germany, and to fund other capital
expenditures.

    (B)  FINANCIAL INFORMATION ABOUT SEGMENTS

    Information about the Company's two reportable segments defined by
geographic region is set forth in Note 17 of the Notes to Consolidated Financial
Statements on pages 41-42 of this report, and is incorporated herein by
reference.

    (C)  DESCRIPTION OF BUSINESS

    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 17 of the Notes to Consolidated Financial Statements
on page 42, and is incorporated herein by reference. No individual customer, OEM
or other, accounted for 10% or more of the Company's overall net sales during
2000.

HYDROSTATIC TRANSMISSIONS

    Sauer-Danfoss designs, manufactures, and sells a range of closed-circuit and
open circuit axial piston hydrostatic transmissions for both the propulsion and
work functions of off-highway 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.

                                       2
<PAGE>
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 and Denmark.
Electrohydraulic controls and sensors integrate hydraulics, hydrostatic
transmissions, and mechanical components with electronic controls and are used
by OEMs of off-highway 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.

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 pump and
motor 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 their customer's 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 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
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
<PAGE>
                         MAJOR MARKETS AND APPLICATIONS

<TABLE>
<CAPTION>
CONSTRUCTION AND ROAD
      BUILDING           AGRICULTURE             TURF CARE                SPECIALTY VEHICLES
---------------------   --------------  ---------------------------  ----------------------------
<S>                     <C>             <C>                          <C>
Chip spreaders          Combines        Commercial-wide area, walk-  Fruit pickers
Concrete pumps          Cotton pickers  behind mowers                Industrial lift trucks
Concrete saws           Detasselers     Commercial zero-turn mowers  Logging equipment
Crawler dozers          Seeders         General turf maintenance     Marine equipment
Crawler loaders         Sprayers        Lawn and garden tractors     Mining equipment
Ditchers/trenchers      Tractors                                     Oil field equipment
Excavators              Windrowers                                   Railway maintenance
Grinders                                                             Rough terrain fork lifts
Landfill compactors                                                  Self-propelled boom aerial
                                                                       lifts
Oil distributors                                                     Self-propelled scissor
                                                                       aerial
Pavers                                                               lifts
Planers                                                              Snow groomers
Rollers                                                              Sweepers
Skid steer loaders                                                   Tree shakers
Transit mixers                                                       Truck and bus fan drives
Utility tractors
Wheel loaders
</TABLE>

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 six years for
a major new machine.

    Sauer-Danfoss operates 20 manufacturing facilities in the United States,
Europe, and China. 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 the Americas, the Company sells and
distributes its products directly to large OEMs and through independent
distributors to smaller OEMs. In Europe and the Pacific Rim area, the Company
sells and distributes its products either directly or through sales subsidiaries
located in Australia, Belgium, Denmark, Finland, France, Germany, Holland,
Italy, Japan, Norway, Poland, Portugal, Singapore, Slovakia, Spain, Sweden, and
the United Kingdom. In addition, Sauer-Danfoss licenses its hydrostatic
transmission technology to a Japanese manufacturer.

    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 1.5%
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 in both
the United States and Europe. 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 consist
primarily of raw materials and machined iron housings and components. Only small
amounts of assembled finished units are maintained in inventory.

                                       4
<PAGE>
    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 domestic and foreign 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 Technolologies, 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 licensed its technology to companies in certain countries. The
Company licenses all its open- and closed-circuit piston pumps and motor and
electrohydraulic valve technology to a subsidiary of Daikin Industries Ltd. in
Japan and licenses its original hydrostatic transmission technology to Larsen &
Toubro Ltd. in India. These licenses generally are exclusive licenses to
manufacture and sell hydrostatic transmissions using the Company's technology in
the territory covered by the license. In each license agreement, the Company
reserves the right to sell products based on the licensed technology in the
territory covered by the license, but primarily relies on the licensee to supply
the market needs in the territory. These licenses generally provide for annual
royalty payments based on the licensees' net sales. Royalty income generated by
these licenses during 2000, 1999, and 1998 was approximately $1.3 million,
$1.0 million, and $1.0 million, respectively.

    Sauer-Danfoss and its predecessors have had a long-standing working
relationship with the Company's principal licensee, Daikin. The Daikin license,
first granted by one of the Company's predecessors in 1967, has been renewed for
successive 10-year periods and currently expires in 2008. All the Company's
open- and closed-circuit piston pump and motor and electrohydraulic valve
technology is licensed to Daikin under an agreement which allows the Company to
benefit from any improvements to the technology made by Daikin and vice versa.
The Company and Daikin jointly design and market products to meet worldwide
needs and frequently cooperate in the manufacture of components and complete
products so as to optimize the utilization of manufacturing capacity.

    Through these licensing arrangements, the Company is able to serve its
Americas, Asia Pacific and European OEM customers as they expand their
manufacturing operations to other parts of the world. Management believes that
the worldwide availability of the Company's products and the local manufacturing
capabilities of its licensees play an important part in the decision of an OEM
as to which supplier to use.

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, 2000,

                                       5
<PAGE>
the Company's backlog (consisting of accepted but unfilled customer orders
primarily scheduled for delivery during 2001) was $279.6 million as compared
with $252.4 million at December 31, 1999. 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 higher year-end 2000
backlog amount was impacted by especially strong orders received in the fourth
quarter by the Company's Sullivan, Illinois, facility, which serves the consumer
turf care market. These orders can vary significantly from month to month, and
as a result, quarter-over-quarter comparisons may not reflect the trends in
orders. When viewed over a more representative period and adjusted for this,
order backlog at the December 31, 2000, was level with the prior year.

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 off-highway vehicle
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.

    CLOSED-CIRCUIT HYDROSTATIC TRANSMISSION MARKET

    The closed-circuit hydrostatic transmission market is highly concentrated
and intensely competitive. There is a small number of manufacturers of
hydrostatic transmissions with which the Company 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, together with its licensees, is the world leader in terms of product
range, market share, and geographic coverage. Only Rexroth offers similar
geographic coverage.

    OPEN-CIRCUIT WORK FUNCTION MARKET

    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 which 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.

    ELECTROHYDRAULICS 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

                                       6
<PAGE>
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.

    CONTROL VALVES

    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, Walvoil, and Oil Control, plus many others. Complete
global control valve line competitors are limited to Parker-Hannifin and
Rexroth/Robert Bosch Group.

    MOTORS

    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.

    STEERING

    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 we lead the industry in this direction for steering.

RESEARCH AND DEVELOPMENT

    The Company's research and development expenditures during 2000, 1999, and
1998 were approximately $29.9 million, $23.3 million, and $22.1 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 material adverse effect on the Company.

EMPLOYEES

    As of December 31, 2000 and 1999 the Company had 6,733 and 3,836 employees,
respectively.

                                       7
<PAGE>
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

    Information regarding the Company's net sales and long-lived assets by
geographic area is set forth in Note 17 of the Notes to Consolidated Financial
Statements on page 42 of this report, and is incorporated herein by reference.

ITEM 2. PROPERTIES.

    Sauer-Danfoss Inc. conducts its manufacturing operations at 20 locations,
eleven in the United States, one in Germany, two in Slovakia, and one each in
Denmark, Italy, Poland, Sweden, the United Kingdom, and China. The following
table sets forth certain information relating to the Company's principal
manufacturing facilities:

<TABLE>
<CAPTION>
                                                                           APPROX.
                                                                           AREA IN
              LOCATION                     PRINCIPAL PRODUCTS              SQ. FT.        OWNED/LEASED
              --------                -----------------------------       ---------       ------------
<S>                                   <C>                                 <C>             <C>
UNITED STATES
  Ames, Iowa........................  Hydrostatic transmissions             330,000          Owned
  LaSalle, Illinois.................  Hydrostatic transmissions             325,000          Owned
  Freeport, Illinois................  Hydrostatic transmissions             183,000          Owned
  Lawrence, Kansas..................  Hydrostatic transmissions             162,000          Owned
  Easley, South Carolina............  Valves                                184,000          Owned
  Hillsboro, Oregon.................  Valves                                 60,000         Leased
  Racine, Wisconsin.................  Gear pumps and motors                 189,500          Owned
  Sturtevant, Wisconsin.............  Steering units                         25,000         Leased
  Minneapolis, Minnesota............  Electrohydraulics                      75,000         Leased
  West Branch, Iowa.................  Gear pumps and motors                 105,000          Owned
  Sullivan, Illinois................  Hydrostatic transmissions             176,000          Owned
EUROPE
  Neumunster, Germany...............  Hydrostatic transmissions and         463,000          Owned
                                      electrohydraulics
  Nordborg, Denmark.................  Steering units, gear pumps            680,000         Leased
                                      and motors, and valves
  Wroclaw, Poland...................  Steering motors and pumps              41,000          Owned
  Povazska-Bystrica, Slovakia.......  Hydrostatic transmissions and         351,500          Owned
                                      mechanical gear boxes
  Dubnica, Slovakia.................  Hydrostatic transmissions             236,000         Leased
  Swindon, England..................  Gear pumps                            229,000         Leased
  Bologna, Italy....................  Gear pumps and motors                 246,000          Owned
  Almhult, Sweden...................  Electrohydraulics                      20,000          Owned
ASIA
  Shanghai/Pudong, China............  Hydrostatic transmissions             105,000         Leased
                                                                          ---------
    Total                                                                 4,186,000
                                                                          =========
</TABLE>

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.

                                       8
<PAGE>
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 2000.

                       EXECUTIVE OFFICERS OF THE COMPANY

    The following table sets forth certain information regarding the executive
officers of the Company:

<TABLE>
<CAPTION>
                                                                                          YEAR
NAME                      AGE                           POSITION                        APPOINTED
----                    --------   ---------------------------------------------------  ---------
<S>                     <C>        <C>                                                  <C>
Klaus H. Murmann           69      Chairman and Director
(1)(2)................                                                                    1989

Jrgen M. Clausen           52      Vice Chairman and Director
(3)...................                                                                    2000

David L. Pfeifle           56      President, Chief Executive Officer and Director
(1)...................                                                                    2000

Niels Erik Hansen          52      Executive Vice President and Chief Operating
(4)...................             Officer                                                2000

David J. Anderson          53      Vice President -- Sales and Marketing -- Americas
(1)...................             and East Asia                                          2000

Hans J. Cornett (4)...     50      Vice President -- Sales and Marketing -- Europe        2000

Per Have (4)..........     44      Vice President -- Information Technology               2000

Richard Jarboe (5)....     58      Vice President -- Open Circuit                         2000

Thomas K. Kittel           52      Vice President -- Hydrostatics -- Europe
(1)...................                                                                    2000

Henrik Krabsen (4)....     39      Vice President -- Valves                               2000

Finn Lyhne (4)........     46      Vice President -- Motors and Steering                  2000

Kenneth D. McCuskey        46      Vice President -- Finance, Treasurer and Secretary
(1)...................                                                                    2000

James R. Wilcox (7)...     55      Vice President and General Manager of Global
                                   Hydrostatics                                           2000

Albert Zahalka (6)....     49      Vice President -- Electrohydraulics                    2000
</TABLE>

------------------------

(1) These executive officers have served in various capacities with the Company
    or its subsidiaries for more than the past five years.

(2) Klaus Murmann is the father of Nicola Keim and Sven Murmann, who are
    directors of the Company.

(3) Mr. Clausen's principal occupation is serving as the President and Chief
    Executive Officer and a member of the Executive Committee of Danfoss A/S for
    more than the past five years.

(4) Prior to being appointed to a position with the Company, each of these
    executive officers served in various capacities with Danfoss A/S or its
    subsidiaries for more than the past five years.

(5) Prior to joining the Company, Mr. Jarboe was employed by Danfoss Fluid Power
    as Vice President, Sales and Marketing for North America. Prior to joining
    Danfoss Fluid Power Mr. Jarboe was employed by Aeroquip Vickers as Vice
    President Sales, Marketing and Engineering.

(6) Prior to joining the Company, Mr. Zahalka was employed by Emerson Electric
    in various executive capacities.

(7) Prior to joining the Company, Mr. Wilcox was employed by Omniquip -- Textron
    as President -- Material Handling unit from October 1999 through
    October 2000. Prior to being employed by Omniquip, Mr. Wilcox served as the
    Vice President and General Manager for the Company's U.S. Hydrostatics
    business.

                                       9
<PAGE>
                                    PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.

    MARKET AND DIVIDEND INFORMATION

    The Company's Common Stock is traded on the New York Stock Exchange and the
Frankfurt (Germany) Stock Exchange. As of March 26, 2001, there were
approximately 154 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 2001 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 --
Liquidity and Capital Resources, on page 53 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, 1999, and the quarterly
cash dividends paid in 2000 and 1999:

<TABLE>
<CAPTION>
                                                                                    FULL
                                        1ST        2ND        3RD        4TH        YEAR
                                      --------   --------   --------   --------   --------
<S>                                   <C>        <C>        <C>        <C>        <C>
2000
  High..............................   $11.70     $11.00     $10.91     $10.05     $11.70
  Low...............................     7.28       8.19       8.80       6.76       6.76
  Dividends.........................   $ 0.07     $ 0.07     $ 0.07     $ 0.07     $ 0.28

1999
  High..............................   $10.38     $11.58     $17.13     $14.94     $17.13
  Low...............................     5.25       8.31       8.88       8.94       5.25
  Dividends.........................   $ 0.07     $ 0.07     $ 0.07     $ 0.07     $ 0.28
</TABLE>

                                       10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.

                            SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                            2000 (1)      1999       1998       1997       1996
                                            ---------   --------   --------   --------   --------
                                                    (IN THOUSANDS EXCEPT PER SHARE DATA)
<S>                                         <C>         <C>        <C>        <C>        <C>
OPERATING DATA:
Net sales.................................  $782,537    $534,382   $564,524   $535,173   $467,566
Gross profit..............................   201,011     125,932    136,213    131,108    113,532
Marketing.................................    40,874      24,727     24,942     23,256     23,523
Research and development..................    29,874      23,311     22,089     20,655     20,505
Administration............................    57,302      33,655     29,571     29,319     28,333
Total operating expenses..................   128,050      81,693     76,602     73,230     72,361
Earnings before interest and taxes........    55,347      37,625     50,527     50,680     35,100
Total interest expense, net...............    11,194       8,566      8,814      7,607      5,959
Net income................................    26,925      18,120     26,334     27,129     18,898
PER SHARE DATA:
Income per common share, basic and
  diluted.................................  $   0.69    $   0.67   $   1.01   $   1.12   $   0.78
Cash dividends per share..................  $   0.28    $   0.28   $   0.29   $   0.32   $    .32
Weighted average basic shares
  outstanding.............................    39,216      27,225     26,148     24,225     24,225
Weighted average diluted shares
  outstanding.............................    39,217      27,240     26,150     24,225     24,225
BALANCE SHEET DATA:
Inventories...............................  $146,232    $ 73,977   $ 89,195   $ 89,031   $ 78,273
Property, plant & equipment, net..........   422,986     269,485    262,527    191,690    152,321
Total assets..............................   840,963     442,515    459,771    388,735    337,527
Total debt................................   245,739     131,855    151,027    136,428    108,632
Stockholder's equity......................   342,397     150,752    148,904     85,301     70,874
Debt to debt-equity.......................      39.8%       41.7%      45.0%      53.6%      53.1%
OTHER DATA:
Backlog (at year-end).....................  $375,052    $252,400   $261,700   $227,500   $277,000
Depreciation and amortization.............    53,338      35,538     30,635     25,835     24,830
Capital expenditures......................    67,931      57,149     98,582     66,750     56,284
EBITDA*...................................   108,685      73,163     81,162     76,515     59,930
Cash flows from (used in):
  Operating activities....................    81,859      77,786     63,535     42,744     47,670
  Investing activities....................   (62,305)    (56,779)   (98,950)   (70,311)   (56,198)
  Financing activities....................     5,406     (22,940)    35,077     23,351      9,268
Number of employees (at year-end).........     6,733       3,836      3,710      3,751      3,055
Sales/total compensation expense..........     3.32x       3.49x      3.68x      3.66x      3.46x
</TABLE>

------------------------

*   EBITDA represents net income, plus provision for income taxes and net
    interest expense, plus depreciation and amortization. EBITDA may not be
    comparable to similarly titled measures reported by other companies. While
    EBITDA should not be construed as a substitute for operating income or a
    better indicator of liquidity than cash flow from operating activities,
    which is determined in accordance with accounting principles generally
    accepted in the United States, it is included herein to provide additional
    information with respect to the ability of the Sauer-Danfoss to meet its
    future debt service, capital expenditures and working capital requirements.

(1) Includes results of Danfoss Fluid Power since May 3, 2000.

                                       11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS.

    This information is set forth on pages 47-53 of this report and is
incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

    Certain market risks are discussed on page 48 and page 49 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, Report of
Independent Auditors', and Management's Discussion and Analysis are presented on
pages 19-53 of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
  FINANCIAL DISCLOSURE.

    Information regarding the change in the Company's independent public
accountants is set forth under "Ratification of Appointment of Independent
Public Accountants" on page 19 of the Company's Proxy Statement for the annual
meeting of stockholders to held May 16, 2001, and is incorporated herein by
reference.

                                    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 6-8 of the Company's Proxy Statement for the annual
meeting of stockholders to be held May 16, 2001, 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 16, 2001, 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 2-5 of the
Company's Proxy Statement for the annual meeting of stockholders to be held
May 16, 2001, and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    Information as to certain relationships and related transactions is set
forth under "Certain Relationships and Related Transactions" on page 18 of the
Company's Proxy Statement for the annual meeting of stockholders to be held
May 16, 2001, and is incorporated herein by reference.

                                       12
<PAGE>
                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) The following documents are filed as a part of this report.

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

           Consolidated Statements of Income for the years ended December 31,
           2000, 1999, and 1998, on page 19.

           Consolidated Balance Sheets as of December 31, 2000, and 1999, on
           page 20.

           Consolidated Statements of Stockholders' Equity and Comprehensive
           Income for the years ended December 31, 2000, 1999, and 1998, on page
           21.

           Consolidated Statements of Cash Flows for the years ended
           December 31, 2000, 1999, and 1998, on page 22.

           Notes to Consolidated Financial Statements, December 31, 2000, 1999,
           and 1998, on pages 23-43.

           Report of Management and Reports of KPMG LLP and Arthur Andersen LLP
           as independent public accountants, on pages 44-46.

           Management's Discussion and Analysis of Financial Condition and
           Results of Operations, on pages 47-53.

    (2) The following financial statements and schedules:

           Schedule I

               Sauer-Danfoss Inc. (Parent Only) Condensed Balance Sheets as of
               December 31, 2000 and 1999 on page 54.

               Sauer-Danfoss Inc. (Parent Only) Condensed Statements of Income
               for the Years Ended December 31, 2000, 1999, and 1998 on
               page 55.

               Sauer-Danfoss Inc. (Parent Only) Condensed Statements of Cash
               Flows for the Years Ended December 31, 2000, 1999, and 1998 on
               page 56.

           Schedule II, Valuation and Qualifying Accounts, on page 57.

           Reports of KPMG LLP and Arthur Andersen LLP, independent public
           accountants, on Schedules I and II, on page 58.

           All other schedules for which provision is made in Regulation S-X of
           the Securities and Exchange Commission, are not required under the
           related instructions or are inapplicable and, therefore, have been
           omitted.

    (3) Exhibits

<TABLE>
<CAPTION>
       EXHIBIT
         NO.                              DESCRIPTION OF DOCUMENT
       -------          ------------------------------------------------------------
<S>                     <C>
 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.
</TABLE>

                                       13
<PAGE>

<TABLE>
<CAPTION>
       EXHIBIT
         NO.                              DESCRIPTION OF DOCUMENT
       -------          ------------------------------------------------------------
<S>                     <C>
 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.

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.
</TABLE>

                                       14
<PAGE>

<TABLE>
<CAPTION>
       EXHIBIT
         NO.                              DESCRIPTION OF DOCUMENT
       -------          ------------------------------------------------------------
<S>                     <C>
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-Sundstrand Employees' Retirement Plan is attached
                         as Exhibit 10.1(s) 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(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 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.

10.1(t)                 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(u)                 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(v)                 The Amendment, effective May 3, 2000 to the Sauer-Danfoss
                         Inc. 1998 Long-Term Incentive Plan referred to in 10.1(u)
                         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(w)                 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(x)                 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(w) 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(y)                 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(z)                 The Amendment, effective May 3, 2000, to the 1999
                         Sauer-Danfoss Inc. Bonus Plan referred to in 10.1(y) 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(aa)                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(ab)                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.
</TABLE>

                                       15
<PAGE>

<TABLE>
<CAPTION>
       EXHIBIT
         NO.                              DESCRIPTION OF DOCUMENT
       -------          ------------------------------------------------------------
<S>                     <C>
10.1(ac)                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(ad)                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(ae)                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(af)                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(ag)                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.

10.1(ah)                The Indenture of Lease agreement for the Company's Norborg,
                         Denmark, facility effective May 3, 2000, is attached
                         hereto.

10.1(ai)                The Lease Agreement for the Company's Hillsboro, Oregon,
                         facility effective January 19, 2001, is attached hereto.

21                      Subsidiaries of the Registrant, on page 59.

23.1                    Consent of KPMG LLP on page 60.

23.2                    Consent of Arthur Andersen LLP on page 61.
</TABLE>

(b) REPORTS ON FORM 8-K.

    On November 13, 2000 the Company filed a Current Report on Form 8-K for the
    purpose of disclosing one press release dated November 7, 2000 announcing
    the Company's third quarter 2000 financial results.

    On January 8, 2001 the Company filed a Current Report on Form 8-K for the
    purpose of disclosing two press releases. The first press release dated
    December 5, 2000 announced the Company's acquisition of Integrated Control
    Technologies Ltd. The second press release dated December 11, 2000 announced
    the fourth quarter dividend.

    On January 22, 2001 the Company filed a Current Report on Form 8-K for the
    purpose of disclosing five press releases. The first press release dated
    January 22, 2001 announced the Company's completion of the acquisition of
    Compact Controls, Inc. The second press release dated January 24, 2001
    announced the Company's acquisition of Italdigit S.R.L.. The third press
    release dated
    January 29, 2001 announced that the Company had signed a Letter of Intent to
    acquire certain assets of Dantal Hydraulics Ltd., a former distributor of
    former Danfoss Fluid Power products. The fourth press release dated
    February 2, 2001 announced that the Company had entered into an agreement
    with Topcon Laser Systems, Inc. to create a new joint venture company. The
    fifth press release dated February 6, 2001 announced the date and time of
    the Company's fourth quarter conference call.

    On February 22, 2001 the Company filed a Current Report on Form 8-K for the
    purpose of disclosing one press release announcing the Company's fourth
    quarter 2000 financial results.

    (c) The exhibits which are listed under Item 14(a)(3) are filed or
incorporated by reference hereunder.

                                       16
<PAGE>
                                   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.

<TABLE>
<S>                                                    <C>  <C>
                                                       SAUER-DANFOSS INC.

                                                       By:             KENNETH D. MCCUSKEY
                                                            -----------------------------------------
                                                                       Kenneth D. McCuskey
                                                              VICE PRESIDENT -- FINANCE, TREASURER,
                                                                            SECRETARY,
                                                                   PRINCIPAL FINANCIAL OFFICER,
                                                                   PRINCIPAL ACCOUNTING OFFICER
</TABLE>

Date: March 30, 2001

    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.

<TABLE>
<CAPTION>
                      SIGNATURE                                    TITLE                    DATE
                      ---------                                    -----                    ----
<C>                                                    <S>                             <C>
                /s/ KLAUS H. MURMANN
     -------------------------------------------       Director and Chairman           March 30, 2001
                  Klaus H. Murmann

                /s/ DAVID L. PFEIFLE
     -------------------------------------------       Director and President and      March 30, 2001
                  David L. Pfeifle                       Chief Executive Officer

                                                       Vice President -- Finance,
               /s/ KENNETH D. MCCUSKEY                   Treasurer, Secretary,
     -------------------------------------------         Principal Financial Officer,  March 30, 2001
                 Kenneth D. McCuskey                     Principal Accounting Officer

                   /s/ NICOLA KEIM
     -------------------------------------------       Director                        March 30, 2001
                     Nicola Keim

                  /s/ SVEN MURMANN
     -------------------------------------------       Director                        March 30, 2001
                    Sven Murmann
</TABLE>

                                       17
<PAGE>

<TABLE>
<CAPTION>
                      SIGNATURE                                    TITLE                    DATE
                      ---------                                    -----                    ----
<C>                                                    <S>                             <C>
                /s/ JRGEN M. CLAUSEN
     -------------------------------------------       Director                        March 30, 2001
                  Jrgen M. Clausen

               /s/ OLE STEEN ANDERSEN
     -------------------------------------------       Director                        March 30, 2001
                 Ole Steen Andersen

                    /s/ HANS KIRK
     -------------------------------------------       Director                        March 30, 2001
                      Hans Kirk

              /s/ JOHANNES F. KIRCHHOFF
     -------------------------------------------       Director                        March 30, 2001
                Johannes F. Kirchhoff

               /s/ F. JOSEPH LOUGHREY
     -------------------------------------------       Director                        March 30, 2001
                 F. Joseph Loughrey

              /s/ RICHARD M. SCHILLING
     -------------------------------------------       Director                        March 30, 2001
                Richard M. Schilling
</TABLE>

                                       18
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME

             FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                2000       1999       1998
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
NET SALES                                                     $782,537   $534,382   $564,524
                                                              --------   --------   --------
COSTS AND EXPENSES:
  Cost of sales.............................................   581,526    408,450    428,311
  Selling, general and administrative.......................    98,176     58,382     54,513
  Research and development..................................    29,874     23,311     22,089
  Restructuring charges and impairments.....................    11,232         --         --
                                                              --------   --------   --------
      Total costs and expenses..............................   720,808    490,143    504,913
                                                              --------   --------   --------
      Operating income......................................    61,729     44,239     59,611
                                                              --------   --------   --------
NONOPERATING INCOME (EXPENSES):
  Interest expense..........................................   (15,499)    (8,844)    (9,244)
  Interest income...........................................     4,305        278        430
  Royalty income............................................     1,255        976        986
  Other, net................................................     2,023     (1,064)      (576)
                                                              --------   --------   --------
      Nonoperating expenses, net............................    (7,916)    (8,654)    (8,404)
                                                              --------   --------   --------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST............    53,813     35,585     51,207
PROVISION FOR INCOME TAXES..................................   (17,228)   (10,939)   (15,379)
                                                              --------   --------   --------
INCOME BEFORE MINORITY INTEREST.............................    36,585     24,646     35,828
MINORITY INTEREST IN INCOME OF CONSOLIDATED COMPANIES.......    (9,660)    (6,526)    (9,494)
                                                              --------   --------   --------
      Net income............................................  $ 26,925   $ 18,120   $ 26,334
                                                              ========   ========   ========
Basic and diluted net income per common share...............  $   0.69   $   0.67   $   1.01
                                                              ========   ========   ========
Weighted average basic shares outstanding...................    39,216     27,225     26,148
                                                              ========   ========   ========
Weighted average diluted shares outstanding.................    39,217     27,240     26,150
                                                              ========   ========   ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       19
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                       AS OF DECEMBER 31, 2000, AND 1999

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................  $ 24,754   $  5,061
  Accounts receivable (net of allowance for doubtful
    accounts of $3,588 and $3,195 in 2000 and 1999,
    respectively)...........................................   134,349     73,305
  Inventories...............................................   146,232     73,977
  Other current assets......................................     9,823      9,242
                                                              --------   --------
      Total current assets..................................   315,158    161,585
                                                              --------   --------
PROPERTY, PLANT AND EQUIPMENT, net..........................   422,986    269,485
                                                              --------   --------
OTHER ASSETS:
  Goodwill, net.............................................    85,317      1,782
  Other intangible assets, net..............................     3,023        881
  Deferred income taxes.....................................     7,786      4,273
  Other.....................................................     6,693      4,509
                                                              --------   --------
      Total other assets....................................   102,819     11,445
                                                              --------   --------
                                                              $840,963   $442,515
                                                              ========   ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Notes payable and bank overdrafts.........................  $ 42,902   $ 19,312
  Long-term debt due within one year........................     4,205      1,609
  Accounts payable..........................................    73,814     39,064
  Accrued salaries and wages................................    19,535      8,901
  Accrued warranty..........................................    12,026      7,640
  Other accrued liabilities.................................    36,417     13,744
                                                              --------   --------
      Total current liabilities.............................   188,899     90,270
                                                              --------   --------
LONG-TERM DEBT..............................................   198,632    110,934
                                                              --------   --------
OTHER LIABILITIES:
  Long-term pension liability...............................    29,828     31,342
  Postretirement benefits other than pensions...............    15,687     14,361
  Deferred income taxes.....................................    25,956      5,448
  Other.....................................................     9,711      5,647
                                                              --------   --------
      Total other liabilities...............................    81,182     56,798
                                                              --------   --------
MINORITY INTEREST IN NET ASSETS OF CONSOLIDATED COMPANIES...    29,853     33,761
                                                              --------   --------
STOCKHOLDERS' EQUITY:
  Common stock, par value $.01 per share, authorized 75,000
    shares in 2000 and 45,000 shares in 1999; issued 46,483
    in 2000 and 28,074 in 1999; outstanding 45,312 in 2000
    and 27,399 in 1999......................................       465        281
  Additional paid-in capital................................   303,304    120,053
  Retained earnings.........................................    57,348     41,863
  Accumulated other comprehensive loss......................   (10,654)    (7,038)
  Unamortized restricted stock compensation.................       (57)    (1,707)
  Common stock in treasury (at cost), 1,172 shares in 2000
    and 675 shares in 1999..................................    (8,009)    (2,700)
                                                              --------   --------
      Total stockholders' equity............................   342,397    150,752
                                                              --------   --------
  Commitments and contingencies
                                                              $840,963   $442,515
                                                              ========   ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       20
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME

             FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                ACCUMULATED    UNAMORTIZED     COMMON
                               NUMBER OF               ADDITIONAL                  OTHER        RESTRICTED     STOCK
                                SHARES       COMMON     PAID-IN     RETAINED   COMPREHENSIVE      STOCK          IN
                              OUTSTANDING    STOCK      CAPITAL     EARNINGS   INCOME (LOSS)   COMPENSATION   TREASURY    TOTAL
                              -----------   --------   ----------   --------   -------------   ------------   --------   --------
<S>                           <C>           <C>        <C>          <C>        <C>             <C>            <C>        <C>
YEAR ENDED DECEMBER 31,
  1998:
  Beginning balance.........     24,225       $249      $ 75,098    $ 12,773      $   (119)      $    --      $(2,700)   $ 85,301
  Comprehensive income:
    Net income..............         --         --            --      26,334            --            --           --          --
    Pension adjustment......         --         --            --          --           157            --           --          --
    Translation
      adjustment............         --         --            --          --         1,775            --           --          --
  Total comprehensive
    income..................         --         --            --          --            --            --           --      28,266
  Sale of common stock under
    initial public offering,
    net of expenses.........      3,000         30        48,070          --            --            --           --      48,100
  Restricted stock grant....        172          2         2,697          --            --        (2,699)          --          --
  Restricted stock
    compensation............         --         --            --          --            --           701           --         701
  Cash dividends ($.29 per
    share)..................         --         --            --      (7,691)           --            --           --      (7,691)
  Purchase of Neumunster
    facility................         --         --        (5,773)         --            --            --           --      (5,773)
                                 ------       ----      --------    --------      --------       -------      -------    --------
      Ending balance........     27,397        281       120,092      31,416         1,813        (1,998)      (2,700)    148,904
YEAR ENDED DECEMBER 31,
  1999:
  Comprehensive income:
    Net income..............         --         --            --      18,120            --            --           --          --
    Pension adjustment......         --         --            --          --          (150)           --           --          --
    Translation
      adjustment............         --         --            --          --        (8,701)           --           --          --
  Total comprehensive
    income..................         --         --            --          --            --            --           --       9,269
  Restricted stock grant....         13         --           126          --            --          (126)          --          --
  Restricted stock
    compensation............         --         --            --          --            --           252           --         252
  Forfeitures of restricted
    stock...................        (11)        --          (165)         --            --           165           --          --
  Cash dividends ($.28 per
    share)..................         --         --            --      (7,673)           --            --           --      (7,673)
                                 ------       ----      --------    --------      --------       -------      -------    --------
      Ending balance........     27,399        281       120,053      41,863        (7,038)       (1,707)      (2,700)    150,752
YEAR ENDED DECEMBER 31,
  2000:
  Comprehensive income:
    Net income..............         --         --            --      26,925            --            --           --          --
    Pension adjustment......         --         --            --          --          (134)           --           --          --
    Translation
      adjustment............         --         --            --          --        (3,482)           --           --          --
  Total comprehensive
    income..................         --         --            --          --            --            --           --      23,309
  Treasury shares issued for
    Acquisition.............        103         --           768          --            --            --          413       1,181
  Shares issued for
    acquisition.............     16,150        161       180,070          --            --            --           --     180,231
  Repurchase of common
    stock...................       (600)        --            --          --            --            --       (5,722)     (5,722)
  Shares issued to minority
    interest partner........      2,250         23        19,665          --            --            --           --      19,688
  Common control -- deemed
    dividend................         --         --       (17,337)         --            --            --           --     (17,337)
  Restricted stock grant....         10         --            85          --            --           (85)          --          --
  Restricted stock
    compensation............         --         --            --          --            --         1,735           --       1,735
  Cash dividends ($.28 per
    share)..................                                         (11,440)                                             (11,440)
                                 ------       ----      --------    --------      --------       -------      -------    --------
      Ending balance........     45,312       $465      $303,304    $ 57,348      $(10,654)      $   (57)     $(8,009)   $342,397
                                 ======       ====      ========    ========      ========       =======      =======    ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       21
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

             FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                2000       1999       1998
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income................................................  $ 26,925   $ 18,120   $ 26,334
  Adjustments to reconcile net income to net cash provided
    by operating activities:
    Depreciation and amortization...........................    53,338     35,538     30,635
    Minority interest in income of consolidated companies...     9,660      6,526      9,494
    (Increase) decrease in working capital, excluding
     effects of acquisitions --
      Accounts receivable, net..............................    15,433     (5,060)     5,723
      Inventories...........................................   (20,928)     8,654      2,514
      Accounts payable......................................    (8,229)     4,135     (8,915)
      Accrued liabilities...................................    17,845      2,325     (2,988)
    Other...................................................   (12,185)     7,548        738
                                                              --------   --------   --------
        Net cash provided by operating activities...........    81,859     77,786     63,525
                                                              --------   --------   --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property, plant and equipment................   (67,931)   (57,149)   (98,582)
  Purchase of minority interest.............................      (138)        --       (693)
  Payments for acquisitions, net of cash acquired...........     5,386         --         --
  Proceeds from sales of property, plant and equipment......       378        370        325
                                                              --------   --------   --------
        Net cash used in investing activities...............   (62,305)   (56,779)   (98,950)
                                                              --------   --------   --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net borrowings (repayments) on notes payable and bank
    overdrafts..............................................    16,976    (18,395)   (11,363)
  Net borrowings of long-term debt..........................    12,411      9,867     13,916
  Sale of common stock......................................        --         --     48,100
  Repurchase of common stock................................    (5,722)        --         --
  Cash dividends............................................   (11,440)    (7,673)    (7,691)
  Distribution to minority interest partners................    (6,819)    (6,739)    (7,885)
                                                              --------   --------   --------
        Net cash provided by (used in) financing
        activities..........................................     5,406    (22,940)    35,077
                                                              --------   --------   --------
EFFECT OF EXCHANGE RATE CHANGES.............................    (5,267)    (1,897)     1,866
                                                              --------   --------   --------
CASH AND CASH EQUIVALENTS:
  Net increase (decrease) during the year...................    19,693     (3,830)     1,528
  Beginning balance.........................................     5,061      8,891      7,363
                                                              --------   --------   --------
        Ending balance......................................  $ 24,754   $  5,061   $  8,891
                                                              ========   ========   ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
  Interest paid.............................................  $ 13,513   $  9,186   $  9,447
  Income taxes paid.........................................  $ 20,444   $  8,047   $ 14,846
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
  ACTIVITIES:
  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.................................  $180,232         --         --
        Long-term debt assumed..............................    81,180         --         --
        Other liabilities assumed...........................    65,520         --         --
                                                              --------   --------   --------
                                                              $326,932         --         --
      Allocated to:
        Cash acquired.......................................  $ 12,563         --         --
        Inventory...........................................    48,786         --         --
        Other current assets................................    42,735         --         --
        Property, plant & equipment.........................   141,255         --         --
        Goodwill and other intangibles......................    81,593         --         --
                                                              --------   --------   --------
                                                              $326,932         --         --
  During 1998 the Company purchased the real estate and
    building of its main facility in Germany for $23,470. In
    conjunction with the acquisition, liabilities were
    assumed as follows:
      Fair value of assets acquired.........................        --         --   $ 23,470
      Cash paid for the real estate and building............        --         --    (15,680)
                                                              --------   --------   --------
          Liabilities assumed...............................        --         --   $  7,790
                                                              ========   ========   ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       22
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

(1) 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. OHG (the "German Operating
Company") as well as through various other operating companies throughout the
world. The Company has manufacturing plants in China, Denmark, Germany, Italy,
Poland, Slovakia, Sweden, the United Kingdom and the United States, as well as
sales companies in other locations. Sauer-Danfoss (Neumunster) GmbH (the "German
Holding Company"), which is wholly owned by the Company, functions as a
mangement 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.

(2) BUSINESS VENTURES:

    On December 30, 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%. The principal business of Sauer ZTS, a.s. is the
manufacture of high power hydrostatic transmissions.

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION --

    The accounts of the Company are stated in accordance with accounting
principles generally accepted in the U.S. The consolidated financial statements
include the accounts of Sauer-Danfoss Inc. and subsidiaries on a consolidated
basis for all periods presented. All significant intercompany balances and
transactions have been eliminated in consolidation.

USE OF ESTIMATES --

    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results likely differ from those estimates, but
management believes that such differences are immaterial.

                                       23
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
NEW ACCOUNTING PRINCIPLES --

    In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133". SFAS No. 137 delayed the required implementation of SFAS
No. 133 to be effective for all fiscal quarters beginning after June 15, 2000.
The Company has evaluated its significant agreements with customers and
suppliers and does not feel that it has any significant imbedded derivatives,
nor does it have any other formal types of derivative instruments or hedging
activities as of December 31, 2000.

RECLASSIFICATIONS --

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

TRANSLATION OF FOREIGN CURRENCIES --

    Assets and liabilities of consolidated foreign subsidiaries are translated
into U.S. dollars at exchange rates in effect at year-end, while revenues and
expenses are translated at average exchange rates prevailing during the year.
The resulting translation adjustments are included in stockholders' equity.
Gains or losses on transactions denominated in foreign currencies and the
related tax effects are reflected in net income.

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 23%, 30% and 47%, respectively,
for 2000 and 59%, 34% and 7%, respectively, for 1999.

PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION --

    Property, plant and equipment are stated at historical cost, net of
accumulated depreciation. Assets under capital lease are stated at the lower of
fair market value or the present value of future minimum lease payments, 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 ($22,059, $13,004 and $15,410 in 2000, 1999 and
1998, respectively) are charged to expense. Upon the sale of property, plant and
equipment, the cost and related accumulated depreciation are removed from the
accounts and any gain or loss is included in nonoperating income or expense.

                                       24
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 over the lesser of 40 years or the
specific remaining identifiable life on a straight-line basis. Goodwill was
$85,317 and $1,782 as of December 31, 2000 and 1999, net of accumulated
amortization of $5,974 and $5,184, respectively. Amortization of goodwill and
other intangibles was $2,499 for 2000, $414 for 1999 and $644 for 1998.

IMPAIRMENT OF LONG-LIVED ASSETS --

    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 is
evaluated based on the expected future undiscounted operating cash flows. When
events or circumstances indicate the carrying value of an asset may be impaired,
the Company recognizes an impairment loss. Based upon its most recent analysis,
the Company believes that no impairments existed at December 31, 2000.

REVENUE RECOGNITION --

    Net sales are recorded at the time of shipment to customers along with
related expenses including estimates for warranty expense.

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 are 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.

                                       25
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS --

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

    The carrying value of cash and cash equivalents, accounts and other
receivables, notes payable, 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, 2000, the Company estimated the fair value
of its long-term debt as $204,419.

    Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. Because no
market exists for a portion of the Company's financial instruments, fair value
estimates are based on judgments regarding current economic conditions, risk
characteristics of various financial instruments, and other factors. 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.

(4) ACQUISITIONS:

    On January 24, 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 was accounted
for under the purchase method of accounting.

    On May 3, 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 off-highway mobile equipment. The
acquisition was accounted for under the purchase method of accounting and,
accordingly, the consolidated balance sheets, statements of income,
stockholders' equity and comprehensive income, and cash flows include the
results of DFP beginning May 3, 2000. 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 preliminary independent
appraisals of the fair values of acquired property, plant and equipment, and
identifiable intangible assets, and their remaining useful lives. The Company is
also completing the review and determination of the fair values of the other
assets acquired and liabilities assumed. Accordingly, the allocation of the
purchase price is subject to revision, which is not expected to be material,
based on the final determination of appraised and other values.

    Unaudited pro forma results of operations for the year ended December 31,
2000 and 1999, as if Sauer and DFP had been combined as of the beginning of the
year, follow. The pro forma results include estimates and assumptions which
management believes are reasonable. However, pro forma results do not include
any anticipated cost savings or other effects of the planned integration of
Sauer and DFP, and are

                                       26
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

(4) ACQUISITIONS: (CONTINUED)
not necessarily indicative of the results which would have occurred if the
business combination had been in effect on the dates indicated, or which may
result in the future.

<TABLE>
<CAPTION>
                                                                PRO FORMA
                                                         YEAR ENDED DECEMBER 31,
                                                         ------------------------
                                                           2000           1999
                                                         ---------      ---------
<S>                                                      <C>            <C>
Net sales..............................................  $888,106       $843,234
Net income.............................................    33,963         30,839
Net income per common share -- basic and diluted.......  $   0.75       $   0.68
</TABLE>

(5) RESTRUCTURING CHARGES AND IMPAIRMENTS:

    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 Sauer. 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
expense. The components of the acquisition liabilities included in the purchase
price allocation for DFP are as follows:

<TABLE>
<CAPTION>
                                                                    BALANCE REMAINING AT
                                        ORIGINAL COSTS   UTILIZED    DECEMBER 31, 2000
                                        --------------   --------   --------------------
<S>                                     <C>              <C>        <C>
Workforce reductions..................     $ 3,902        $2,572           $1,330
Asset impairments.....................       3,522         2,131            1,391
Other.................................       4,653         3,390            1,263
                                           -------        ------           ------
                                           $12,077        $8,093           $3,984
                                           =======        ======           ======
</TABLE>

    The acquisition integration liabilities are based on the Company's current
integration plan which focuses 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 represent the expected termination of 158 DFP
employees, primarily production personnel. As of December 31, 2000, 78 have been
terminated. The balance remaining at December 31, 2000, is expected to be
utilized in the first half of 2001 and will be funded through cash flows from
the combined operations.

    Certain aspects of the integration plan will be refined as additional
studies are completed, including the evaluation of capacity of existing and
acquired facilities to accommodate new manufacturing and administrative
processes and the appropriate positioning of the sales and marketing
organizations.

                                       27
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

(5) RESTRUCTURING CHARGES AND IMPAIRMENTS: (CONTINUED)
Adjustments to the estimated acquisition integration liabilities based on these
refinements will 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 will 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 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 relate 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. A $1,500
restructuring charge was recorded for the 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:

<TABLE>
<CAPTION>
                                                                                              PLANT
                                                       WORKFORCE    INVENTORY AND OTHER   CONSOLIDATION
                                           EMPLOYEES   REDUCTIONS    ASSET IMPAIRMENTS      AND OTHER      TOTAL
                                           ---------   ----------   -------------------   -------------   --------
<S>                                        <C>         <C>          <C>                   <C>             <C>
2000.....................................     70         $1,500            $5,590            $4,142       $11,232
Utilized in 2000.........................     70          1,500             4,090             2,479         8,069
                                              --         ------            ------            ------       -------
Balance remaining at December 31, 2000...      0         $    0            $1,500            $1,663       $ 3,163
                                              ==         ======            ======            ======       =======
</TABLE>

(6) MINORITY INTERESTS:

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

    a)  A 40% minority interest held by Agri-Fab, Inc. in Hydro-Gear Limited
       Partnership, a U.S. limited partnership for 2000, 1999 and 1998.

    b)  The Murmann Limited Partners, as holders of limited partnership
       interests, in the results of the German Operating Company equal to 7.6%
       of the income of Sauer Inc. and subsidiaries before taxes and the Murmann
       Limited Partnership Interests through May 3, 2000 for 2000, 7.6% for 1999
       and 7.9% for 1998.

    c)  A 40% minority interest held by Shanghai Hydraulics and Pneumatics in
       Sauer Shanghai Hydraulic Transmission Company Ltd., a Chinese equity
       business venture for 2000, 1999, and 1998.

    d)  A minority interest held by ZTS, a.s. in Sauer ZTS a.s., a Slovakian
       corporation, equal to 11.6% for 2000, and 12.2% for 1999 and 1998.

                                       28
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

(6) MINORITY INTERESTS: (CONTINUED)
    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

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                            -------------------
                                                              2000       1999
                                                            --------   --------
<S>                                                         <C>        <C>
Hydro-Gear Limited Partnership............................  $26,514    $20,280
German Operating Company..................................       --      9,127
Sauer Shanghai Hydraulic Transmission Company.............    2,470      3,512
Sauer ZTS, a.s............................................      869        842
                                                            -------    -------
        Total.............................................  $29,853    $33,761
                                                            =======    =======
</TABLE>

   MINORITY INTEREST IN (INCOME) LOSS REFLECTED IN CONSOLIDATED STATEMENTS OF
                                     INCOME

<TABLE>
<CAPTION>
                                                       YEARS ENDED DECEMBER 31,
                                                    ------------------------------
                                                      2000       1999       1998
                                                    --------   --------   --------
<S>                                                 <C>        <C>        <C>
Hydro-Gear Limited Partnership....................  $(9,180)   $(4,914)   $(7,631)
German Operating Company..........................   (1,486)    (2,387)    (3,573)
Sauer Shanghai Hydraulic Transmission Company.....    1,042        417      1,319
Sauer ZTS, a.s....................................      (36)       358        391
                                                    -------    -------    -------
        Total.....................................  $(9,660)   $(6,526)   $(9,494)
                                                    =======    =======    =======
</TABLE>

    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 accounting. Included in the deemed dividend, 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

                                       29
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

(6) MINORITY INTERESTS: (CONTINUED)
for the limited partnership interests, but not to exceed 23,354 Deutsche marks.
As of December 31, 2000, the Company has accrued $3,254 toward this tax
liability.

(7) INVENTORIES:

    The composition of inventories is as follows:

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                           -------------------
                                                             2000       1999
                                                           --------   --------
<S>                                                        <C>        <C>
Raw materials............................................  $ 52,779   $36,362
Work in process..........................................    26,005     9,557
Finished goods and parts.................................    75,385    35,497
LIFO allowance...........................................    (7,937)   (7,439)
                                                           --------   -------
        Total............................................  $146,232   $73,977
                                                           ========   =======
</TABLE>

(8) PROPERTY, PLANT AND EQUIPMENT:

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

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                        ---------------------
                                                          2000        1999
                                                        ---------   ---------
<S>                                                     <C>         <C>
Cost --
  Land and improvements...............................  $   8,224   $   5,957
  Buildings and improvements..........................     99,898      72,482
  Machinery and equipment.............................    604,916     414,794
  Construction in progress............................     41,793      15,225
                                                        ---------   ---------
        Total cost....................................    754,831     508,458
  Less -- accumulated depreciation....................   (331,845)   (238,973)
                                                        ---------   ---------
        Net property, plant and equipment.............  $ 422,986   $ 269,485
                                                        =========   =========
</TABLE>

    Depreciation expense for 2000, 1999 and 1998 was $50,839, $35,124, and
$29,991, respectively.

(9) 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 in the United
States is to contribute annually an amount that falls within the range
determined to be deductible for federal income tax purposes. For employees
participating in government-sponsored plans, generally in Europe, the Company's
funding policy is in accordance with statutory requirements. The net pension
liabilities reflected in the accompanying consolidated balance sheets result

                                       30
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

(9) PENSION BENEFITS: (CONTINUED)
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 2000, 1999 and 1998 for these defined benefit plans
consists of the following components:

<TABLE>
<CAPTION>
                                                      2000       1999       1998
                                                    --------   --------   --------
<S>                                                 <C>        <C>        <C>
Service cost......................................  $ 3,298    $ 3,691    $ 3,307
Interest cost.....................................    6,820      6,972      6,774
Expected return on plan assets....................   (6,892)    (5,842)    (5,277)
Amortization of prior service cost................      426        452        454
Amortization of net loss..........................       46         57         93
Amortization of transition obligation.............     (262)      (280)      (287)
                                                    -------    -------    -------
        Net pension expense.......................  $ 3,436    $ 5,050    $ 5,064
                                                    =======    =======    =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                    DECEMBER 31, 2000           DECEMBER 31, 1999
                                                -------------------------   -------------------------
                                                  ASSETS      ACCUMULATED     ASSETS      ACCUMULATED
                                                  EXCEED       BENEFITS       EXCEED       BENEFITS
                                                ACCUMULATED     EXCEED      ACCUMULATED     EXCEED
                                                 BENEFITS       ASSETS       BENEFITS       ASSETS
                                                -----------   -----------   -----------   -----------
<S>                                             <C>           <C>           <C>           <C>
Benefit obligation at January 1...............    $(17,333)     $(83,278)     $(18,256)     $(87,712)
Service cost..................................        (713)       (2,585)         (873)       (2,797)
Interest cost.................................      (1,105)       (5,715)       (1,212)       (5,691)
Plan participant contributions................        (309)           --          (370)           --
Plan amendments...............................          --         1,366            --            --
Actuarial gain (loss).........................        (545)          631         1,944         4,667
Benefit payments..............................         924         2,566           947         4,823
Effect of exchange rate changes...............       1,334         1,202           487         3,432
                                                  --------      --------      --------      --------
Benefit obligation at December 31.............     (17,747)      (85,813)      (17,333)      (83,278)
                                                  --------      --------      --------      --------
Reconciliation of fair value of plan assets
Fair value of plan assets at January 1........      31,011        59,223        25,002        57,524
Actual return on plan assets..................        (635)        1,904         6,621         3,880
Employer contributions........................         514         2,045           682         2,091
Effect of exchange rate changes...............      (2,334)           --          (669)           --
Plan participants' contributions..............         309            --           322            --
Benefit payments..............................        (924)       (2,566)         (947)       (4,272)
                                                  --------      --------      --------      --------
Fair value of plan assets at December 31......      27,941        60,606        31,011        59,223
                                                  --------      --------      --------      --------
Funded status at December 31..................      10,194       (25,207)       13,678       (24,055)
Unrecognized prior service cost...............         366         1,560           449         1,936
Unrecognized actuarial gain...................      (5,337)       (6,658)       (9,653)       (9,219)
Unrecognized net transition obligation........        (264)           --          (565)           --
                                                  --------      --------      --------      --------
Net amount recognized.........................    $  4,959      $(30,305)     $  3,909      $(31,338)
                                                  ========      ========      ========      ========
</TABLE>

                                       31
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

(9) PENSION BENEFITS: (CONTINUED)
    Amounts recognized in the balance sheet as of December 31:

<TABLE>
<CAPTION>
                                    DECEMBER 31, 2000           DECEMBER 31, 1999
                                -------------------------   -------------------------
                                  ASSETS      ACCUMULATED     ASSETS      ACCUMULATED
                                  EXCEED       BENEFITS       EXCEED       BENEFITS
                                ACCUMULATED     EXCEED      ACCUMULATED     EXCEED
                                 BENEFITS       ASSETS       BENEFITS       ASSETS
                                -----------   -----------   -----------   -----------
<S>                             <C>           <C>           <C>           <C>
Long-term pension asset
  (liability).................     $4,959       $(31,086)      $3,909       $(31,342)
Current pension liability.....         --             --           --           (569)
Intangible asset..............         --             --           --              8
Accumulated other
  comprehensive income........         --            781           --            565
                                   ------       --------       ------       --------
Net amount recognized.........     $4,959       $(30,305)      $3,909       $(31,338)
                                   ======       ========       ======       ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                             ------------------------------
                                                               2000       1999       1998
                                                             --------   --------   --------
<S>                                                          <C>        <C>        <C>
Discount rates --
  United States............................................    7.5%       7.5%       7.0%
  Germany..................................................    6.5        6.5        6.5
  United Kingdom...........................................    7.0        7.0        7.0
Rates of increase in compensation levels --
  United States............................................    4.5        4.5        4.5
  Germany..................................................    2.5        2.5        2.5
  United Kingdom...........................................    5.0        5.0        5.0
Expected long-term rate of return on assets --
  United States............................................    8.5        8.5        8.5
  United Kingdom...........................................    7.0        7.0        7.0
</TABLE>

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

(10) 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.

                                       32
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

(10) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: (CONTINUED)
    The components of the postretirement benefit provisions of the
Company-sponsored plans for 2000, 1999 and 1998 were as follows:

<TABLE>
<CAPTION>
                                                        2000       1999       1998
                                                      --------   --------   --------
<S>                                                   <C>        <C>        <C>
Service cost........................................   $  413     $  429     $  402
Interest cost.......................................    1,186      1,058      1,085
Net deferral and amortization.......................       24         31         49
                                                       ------     ------     ------
Postretirement benefit provision....................   $1,623     $1,518     $1,536
                                                       ======     ======     ======
</TABLE>

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

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                          -------------------
                                                            2000       1999
                                                          --------   --------
<S>                                                       <C>        <C>
Reconciliation of benefit obligation:
  Accumulated postretirement benefit liability at
    January 1...........................................  $(16,440)  $(16,714)
  Service cost..........................................      (413)      (429)
  Interest cost.........................................    (1,186)    (1,058)
  Actuarial gain........................................       114        996
  Benefit payments......................................       852        765
                                                          --------   --------
  Accumulated postretirement benefit liability at
    December 31.........................................   (17,073)   (16,440)
                                                          --------   --------
Reconciliation of fair value of plan assets:
  Fair value of plan assets at January 1................        --         --
  Employer contributions................................       852        765
  Benefit payments......................................      (852)      (765)
                                                          --------   --------
  Fair value of plan assets at December 31..............        --         --
                                                          --------   --------
  Funded status.........................................   (17,073)   (16,440)
  Unrecognized actuarial loss...........................     1,940      2,079
                                                          --------   --------
  Postretirement benefit liability......................  $(15,133)  $(14,361)
                                                          ========   ========
</TABLE>

    The assumed weighted average annual rate of increase in the per capita cost
of medical benefits is 7.5% for 2001 and is assumed to decrease ratably in 2002
and 2003 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.

    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, 2000, by $1,385, and increased or decreased
postretirement benefit expense for 2000 by $169. The weighted average discount
rate used to estimate the accumulated postretirement benefit obligation was 7.5%
for 2000 and 1999.

                                       33
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

(11) 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 grant 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 2000, the Company awarded 8 shares of restricted stock to
non-employee directors and 165 performance units to employees. During 1999, the
Company awarded 5 shares of restricted stock to non-employee directors and 8
shares of restricted stock 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 full dividend and voting rights and vest after three years.

    Unearned compensation is shown as a reduction of stockholders' equity in the
accompanying consolidated balance sheets and is being amortized ratably over the
life of the grant. Unearned compensation was computed based on the market value
of the restricted shares. Compensation expense recognized in conjunction with
the restricted stock outstanding in 2000 and 1999 amounted to $1,735 and $252,
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.

(12) INCOME TAXES:

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

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                                   ------------------------------
                                                     2000       1999       1998
                                                   --------   --------   --------
<S>                                                <C>        <C>        <C>
United States....................................  $17,693    $24,265    $37,838
European and other...............................   26,460      4,794      3,875
                                                   -------    -------    -------
        Total....................................  $44,153    $29,059    $41,713
                                                   =======    =======    =======
</TABLE>

    The Company's primary German operation is structured as a partnership. This
operation is subject to United States as well as German income tax regulations.
The above analysis of pretax income and the following analysis of the income tax
provision by taxing jurisdiction are therefore not directly related.

                                       34
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

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

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                                   ------------------------------
                                                     2000       1999       1998
                                                   --------   --------   --------
<S>                                                <C>        <C>        <C>
Current:
  United States
    Federal......................................  $ 6,544    $ 4,936    $ 8,029
    State........................................      346        625        957
  European and other.............................    9,154      2,733      3,230
                                                   -------    -------    -------
  Total current..................................   16,044      8,294     12,216
                                                   -------    -------    -------
Deferred:
  United States
    Federal......................................      554      2,283      2,168
    State........................................     (445)       (95)       310
  European and other.............................    1,075        457        685
                                                   -------    -------    -------
  Total deferred.................................    1,184      2,645      3,163
                                                   -------    -------    -------
Total income tax provision.......................  $17,228    $10,939    $15,379
                                                   =======    =======    =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                                         YEARS ENDED
                                                                         DECEMBER 31,
                                                             ------------------------------------
                                                               2000          1999          1998
                                                             --------      --------      --------
<S>                                                          <C>           <C>           <C>
U. S. statutory tax rate...............................        35.0%         35.0%         35.0%
Deferred tax benefit not previously recognized.........        (0.6)         (6.4)         (4.0)
Goodwill and nondeductible expenses....................         2.7           1.7           0.7
European and Asian locations' losses not tax
  benefited............................................         1.2           7.0           5.1
U.S. tax on distributed foreign earnings...............         1.8            --            --
Taxes on European locations' income at rates which
  differ from the U.S. rate............................        (1.9)           --          (1.6)
State income taxes, less federal income tax benefits...         0.8           2.1           1.7
Other..................................................          --          (1.8)           --
                                                               ----          ----          ----
Effective income tax rate..............................        39.0%         37.6%         36.9%
                                                               ====          ====          ====
</TABLE>

                                       35
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

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

<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                        -----------------------------------------------
                                                                 2000                     1999
                                                        ----------------------   ----------------------
                                                         ASSETS    LIABILITIES    ASSETS    LIABILITIES
                                                        --------   -----------   --------   -----------
<S>                                                     <C>        <C>           <C>        <C>
Tax loss carryforwards................................  $ 22,290    $     --     $    --     $     --
Internal Revenue Code Section 743 and Other
  Tax Basis Step-Ups..................................     2,949          --       4,280           --
Deferred compensation, postretirement and accrued
  pension benefits....................................     2,851       8,310       2,742        8,367
Fixed asset basis differences.........................    (2,259)    (33,684)      2,980      (14,576)
Restructuring accruals................................     2,896         525          --           --
Inventory and warranty accruals.......................     7,317        (842)      5,500          517
Other items...........................................     3,264        (265)      1,304           --
U.S. tax on unremitted earnings of foreign
  subsidiaries........................................    (1,970)         --      (2,650)         244
                                                        --------    --------     -------     --------
Gross deferred tax assets/(liabilities)...............    37,338     (25,956)     14,156       (5,448)
Valuation allowance...................................   (21,564)         --      (2,595)          --
                                                        --------    --------     -------     --------
Net deferred tax assets/(liabilities).................    15,774     (25,956)     11,561       (5,448)
Less-current portion..................................    (7,988)         --      (7,288)          --
                                                        --------    --------     -------     --------
Net deferred tax assets/(liabilities), long-term......  $  7,786    $(25,956)    $ 4,273     $ (5,448)
                                                        ========    ========     =======     ========
</TABLE>

    The net change in the valuation allowance for the years ended December 31,
2000 and 1999, increased (decreased) by $18,969 and $(462), respectively. The
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, 2000, the Company had not provided federal income taxes
on $35,968 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, 2000:

<TABLE>
<CAPTION>
                                                       AMOUNT    EXPIRATION DATES
                                                      --------   ----------------
<S>                                                   <C>        <C>
German net operating losses.........................  $52,380         None
U.S. net operating losses...........................  $57,153      2001-2018
U.S. foreign tax credits............................  $    92      2001-2002
</TABLE>

                                       36
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

(12) INCOME TAXES: (CONTINUED)
    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.

    The Company's 1997 and 1998 tax year returns are currently under review by
the Internal Revenue Service (IRS). 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 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.

(13) NOTES PAYABLE AND LONG-TERM DEBT:

    Long-term debt consisted of the following:

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                          -------------------
                                                            2000       1999
                                                          --------   --------
<S>                                                       <C>        <C>
U.S. Revolving Credit Note, due 2003....................  $ 30,400   $     --
U.S. Revolving Credit Facility, due March 2002..........        --     29,200
U.S. 1997 Senior Notes, due 2007........................    25,000     25,000
U.S. 2000 Senior Notes, due 2010........................    35,000         --
U.S. Industrial Development Revenue Bonds, due May
  2026..................................................     8,530      8,530
German Long-Term Bank Facilities maturing through June
  2018..................................................    34,339     38,175
Danish Long-Term Facilities, due January 2002...........    59,947         --
Other borrowings........................................     9,621     11,638
                                                          --------   --------
    Total debt..........................................   202,837    112,543
Less -- scheduled current maturities....................    (4,205)    (1,609)
                                                          --------   --------
    Total long-term debt................................  $198,632   $110,934
                                                          ========   ========
</TABLE>

    The U.S. Revolving Credit Note, 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
permits unsecured borrowings up to $90,000. At December 31, 2000 and 1999, the
weighted average interest rate on outstanding borrowings was approximately 7.8%
and 7.5%, respectively.

    The U.S. Revolving Credit Facility contains certain restrictions, including
limitations on the payment of dividends. The U.S. Revolving Credit also requires
the U.S. Operating Company profit before interest and taxes to be at least 3.0
times interest expense. Finally, the U.S. Revolving Credit requires the
maintenance of minimum tangible net worth (as defined). The U.S. Operating
Company was in compliance with the requirements at December 31, 2000.

                                       37
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

(13) NOTES PAYABLE AND LONG-TERM DEBT: (CONTINUED)
    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 scheduled annual
repayments starting on December 15, 2001, 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. At
December 31, 2000, 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. In addition,
the 2000 Senior Notes require the maintenance of a fixed charge ratio of
1.75:1.0 (as defined). At December 31, 2000, 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, 2000 and 1999, the
interest rate on the bonds was 5.05% and 5.45%, 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. At
December 31, 2000, 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 $34,339 at December 31, 2000. These
facilities generally carry fixed rates of interest, ranging from 4.13% to 7.09%.
These facilities contain a variety of repayment schedules and have final
maturities ranging from December 2001 through June 2018.

    The Danish Long-Term Facilities represent the drawn portion, $59,947, of a
total available credit facility of $88,425. The drawn portion of the facility
bears interest at a rate of 5.57% at December 31, 2000.

    Payments required on long-term debt outstanding as of December 31, 2000,
during the years ending 2001 through 2005 and for years thereafter, are $4,205,
$68,398, $41,260, $9,459, $6,887 and $72,628, respectively.

    The Company from time to time employs off-balance sheet financial
instruments to reduce its exposure to fluctuations in interest rates. These
instruments include interest rate caps and swaps. The Company designates
interest rate swaps as hedges of LIBOR-based bank debt, and accrues as interest
expense the differential to be paid or received under the agreements as rates
change over the lives of the contracts. The Company continually monitors its
positions with, and the credit quality of, the financial institutions which are
counter-parties to its off-balance sheet financial instruments. There were no
interest rate contracts outstanding as of December 31, 2000 and 1999.

    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, 2000. At December 31, 2000, accounts
receivable, inventories, property, plant and machinery and equipment in the
amount of $11,292 were pledged as collateral under these European and other
operations credit facilities.

                                       38
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

(13) NOTES PAYABLE AND LONG-TERM DEBT: (CONTINUED)
    The weighted average interest rates on short-term borrowings at year-end
were 7.1% in 2000 and 1999, and 6.1% in 1998.

    The status of lines of credit as of December 31, 2000, and 1999, is
summarized below:

<TABLE>
<CAPTION>
                                                              2000       1999
                                                            --------   --------
<S>                                                         <C>        <C>
Lines of credit --
  Used....................................................  $73,302    $48,512
  Unused..................................................   93,502     66,221
</TABLE>

(14) 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 on-going
operational services from Danfoss A/S. These services provide for rental of
shared facilities, administrative support and information technology support.
Services are paid on a monthly basis. Total expense recognized under these
agreements for 2000 was $5,354.

    On May 1, 1998, the Company acquired the real estate and building of its
main facility in Germany, which was previously leased, from Sauer Hydraulik,
which is owned by the Murmann family. The transaction was accounted for under
the rules governing transactions occurring between entities under common
control. As such, the assets were recorded at their historical cost basis of
$17,697, debt outstanding of $7,790 was assumed, cash of $15,680 was paid to
Sauer Hydraulik and $5,773 was recorded as a reduction in additional
paid-in-capital. The reduction to additional paid-in-capital was computed as the
excess of the facility's fair market value, as determined by an independent
appraisal, over the seller's historical cost basis in accordance with common
control accounting. Rent expense associated with the property while under the
lease agreement was $0, $0 and $751 for 2000, 1999 and 1998, respectively.

(15) 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 2000, 1999 and 1998 was $7,840, $5,986 and $4,322, respectively.

    Minimum future rental commitments under all non-cancelable operating leases
as of December 31, 2000, during the years ending 2001 through 2005 and for the
years thereafter, are $10,137, $9,685, $8,594, $8,020, $7,893, and $72,266,
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.

                                       39
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

(16) QUARTERLY FINANCIAL DATA (UNAUDITED):

<TABLE>
<CAPTION>
                                                                  QUARTER
                                            ----------------------------------------------------
                                             FIRST      SECOND     THIRD      FOURTH     TOTAL
                                            --------   --------   --------   --------   --------
<S>                                         <C>        <C>        <C>        <C>        <C>
2000
Net sales.................................  $163,479   $225,772   $197,366   $195,920   $782,537
Gross profit..............................  $ 42,906   $ 60,288   $ 50,263   $ 47,554   $201,011
Net income................................  $  8,167   $ 10,128   $  5,331   $  3,299   $ 26,925
Basic and diluted net income per common
  share...................................  $   0.30   $   0.26   $   0.12   $   0.07   $   0.69
1999
Net sales.................................  $153,097   $147,964   $115,068   $118,253   $534,384
Gross profit..............................  $ 39,015   $ 37,509   $ 27,409   $ 21,999   $125,932
Net income (loss).........................  $  8,064   $  7,796   $  3,634   $ (1,374)  $ 18,120
Basic and diluted net income (loss) per
  common share............................  $   0.30   $   0.28   $   0.14   $  (0.05)  $   0.67
</TABLE>

(17) 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 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.

                                       40
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

(17) SEGMENT AND GEOGRAPHIC INFORMATION: (CONTINUED)
Intersegment sales are made at established transfer prices. The following table
presents the significant items by segment:

<TABLE>
<CAPTION>
                                          NORTH AMERICA    EUROPE    ALL OTHER   ELIMINATIONS        TOTAL
                                          -------------   --------   ---------   ------------       --------
<S>                                       <C>             <C>        <C>         <C>                <C>
2000
Trade sales.............................     $449,343     $327,410   $  5,784     $      --         $782,537
Intersegment sales......................       43,617       58,288      1,696      (103,601)(1)           --
Interest income.........................        3,402        3,536        935        (3,568)(2)        4,305
Interest expense........................        8,983        9,941        143        (3,568)(2)       15,499
Depreciation and amortization...........       27,195       19,224      6,919            --           53,338
Net income (loss).......................       12,449       16,776       (814)       (1,486)(3)       26,925
Total assets............................      353,814      429,782    407,931      (350,564)(4)      840,963
Capital expenditures....................       35,086       32,646        199            --           67,931
1999
Trade sales.............................     $341,859     $186,806   $  5,717     $      --         $534,382
Intersegment sales......................       36,029       31,155        399       (67,583)(1)           --
Interest income.........................        1,953        1,706      1,416        (4,797)(2)          278
Interest expense........................        6,111        7,364        166        (4,797)(2)        8,844
Depreciation and amortization...........       20,878       13,588      1,072            --           35,538
Net income..............................       17,021        2,463      1,023        (2,387)(3)       18,120
Total assets............................      239,895      200,927    189,185      (187,492)(4)      442,515
Capital expenditures....................       33,496       23,139        514            --           57,149
1998
Trade sales.............................     $360,641     $201,991   $  1,892     $      --         $564,524
Intersegment sales......................       32,255       37,996        685       (70,936)(1)           --
Interest income.........................        1,592        1,458      1,381        (4,001)(2)          430
Interest expense........................        5,128        7,437        680        (4,001)(2)        9,244
Depreciation and amortization...........       16,422       13,168      1,045            --           30,635
Net income (loss).......................       25,346        5,688     (1,127)       (3,573)(3)       26,334
Total assets............................      227,920      220,172    198,116      (186,437)(4)      459,771
Capital expenditures....................       51,728       46,331        523            --           98,582
</TABLE>

Reconciliations:

    (1) Elimination of intersegment sales.

    (2) Elimination of intersegment interest income and expense from borrowings
       made between segments.

    (3) Net income eliminations--minority interest in German operating company.

                                       41
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

(17) SEGMENT AND GEOGRAPHIC INFORMATION: (CONTINUED)
    (4) Total assets eliminations:

<TABLE>
<CAPTION>
                                                2000        1999        1998
                                              ---------   ---------   ---------
<S>                                           <C>         <C>         <C>
Investment in subsidiaries..................  $(298,114)  $(158,150)  $(144,391)
Intersegment receivables....................    (40,226)    (27,757)    (40,244)
Intersegment profit in inventory and
  other.....................................    (12,224)     (1,585)     (1,802)
                                              ---------   ---------   ---------
Total assets eliminations...................  $(350,564)  $(187,492)  $(186,437)
                                              =========   =========   =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                          NET SALES
                                                ------------------------------
                                                  2000       1999       1998
                                                --------   --------   --------
<S>                                             <C>        <C>        <C>
Hydrostatic transmissions.....................  $469,236   $430,829   $445,585
Open circuit gear pumps and motors and piston
  pumps.......................................   143,283     67,622     78,384
Electrohydraulics and controls................   170,018     35,931     40,555
                                                --------   --------   --------
      Total...................................  $782,537   $534,382   $564,524
                                                ========   ========   ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                       LONG-LIVED
                                          NET SALES (1)                ASSETS (2)
                                  ------------------------------   -------------------
                                    2000       1999       1998       2000       1999
                                  --------   --------   --------   --------   --------
<S>                               <C>        <C>        <C>        <C>        <C>
United States...................  $409,807   $314,291   $335,606   $218,251   $153,921
Germany.........................    67,558     44,224     47,400     51,840     45,460
Italy...........................    48,002     26,968     24,669      8,032      7,712
France..........................    37,000     22,026     24,166        659        718
United Kingdom..................    43,749     30,163     35,718     25,293     24,896
Denmark (3).....................    11,890         --         --    160,770         --
Slovakia (3)....................       469      1,656      4,740     33,317     36,092
Other countries.................   164,062    117,080     92,225     19,857      7,858
                                  --------   --------   --------   --------   --------
        Total...................  $782,537   $534,382   $564,524   $518,019   $276,657
                                  ========   ========   ========   ========   ========
</TABLE>

------------------------

(1) Net sales are attributed to countries based on location of customer.

(2) Long-lived assets include property, plant and equipment net of accumulated
    depreciation, intangible assets net of accumulated amortization and certain
    other long-term assets.

(3) Majority of this country's sales are shipped outside of the home country
    where the product is produced.

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

                                       42
<PAGE>
                      SAUER-DANFOSS INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 2000, 1999, AND 1998

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

(18) SUBSEQUENT EVENTS:

    On January 19, 2001, the Company acquired all of the outstanding shares of
Compact Controls Inc. ("CCI") for approximately $36,000 in cash. CCI, located in
Hillsboro, Oregon, is a manufacturer of cartridge valves and hydraulic
integrated circuit manifolds. The acquisition will be accounted for under the
purchase method of accounting for business combinations in fiscal 2001. The
purchase price will be allocated to the assets acquired and liabilities assumed
based upon their estimated fair market values. The purchase price allocation
will be determined during 2001 and results of operations of CCI will be included
with those of the Company beginning in fiscal 2001.

    During January 2001, the Company also announced the acquisition of Italdigit
s.r.l., an Italian manufacturer of electronic controls and wiring harnesses. In
addition, the Company has signed a letter of intent to acquire certain assets of
Dantal Hydraulics Ltd. which relate to the distribution of former Danfoss Fluid
Power products. Finally, the Company has entered into an agreement with Topcon
Laser Systems, Inc. to create a new joint venture company. This new company will
focus on the development and marketing of electronic systems used to control the
work functions of off-highway vehicles.

    On March 15, 2001, the Company announced it had acquired all of the assets
and business operations of portions of the fluid power business of Danfoss A/S
effective January 4, 2001. 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 shares of its common stock and the acquisition
will be accounted for under the purchase method of accounting for business
combinations in the first quarter of 2001.

                                       43
<PAGE>
                              REPORT OF MANAGEMENT

    The consolidated financial statements and other financial information of
Sauer-Danfoss Inc. in this report were prepared by management, which is
responsible for their contents. They reflect amounts based upon management's
best estimates and informed judgments. 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.

    The Company maintains a system of internal accounting controls and
procedures which is intended, consistent with reasonable cost, to provide
reasonable assurance that transactions are executed as authorized, that they are
included in the financial records in all material respects, and that
accountability for assets is maintained. This system is augmented by written
policies and procedures, careful selection and training of personnel,
examinations by an internal auditing department and a continuing management
commitment to the integrity of the system.

    The financial statements have been audited by KPMG LLP and other auditors,
independent public accountants, to the extent required by auditing standards
generally accepted in the United States. The independent public accountants have
evaluated the Company's internal control structure and performed tests of
procedures and accounting records in connection with the issuance of their
report on the fairness of the financial statements.

    The Board of Directors, through its Audit Committee composed entirely of
outside directors, oversees management's responsibilities in the preparation of
the financial statements and selects the independent auditors, subject to
stockholder ratification. The Audit Committee meets regularly with the
independent auditors, representatives of management, and the internal auditors,
both separately and jointly, to review the activities of each and to assure that
each is properly discharging its responsibilities. 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.

<TABLE>
<S>                                                         <C>
David L. Pfeifle                                            Kenneth D. McCuskey
President and Chief Executive Officer                       Vice President -- Finance,
                                                            Secretary and Treasurer
</TABLE>

                                       44
<PAGE>
                               REPORT OF KPMG LLP

To the Shareholders of Sauer-Danfoss Inc.:

    We have audited the accompanying consolidated balance sheet of
SAUER-DANFOSS INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31,
2000, and the related consolidated statements of income, stockholders' equity
and comprehensive income and cash flows for the year then ended. 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 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, 2000, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.

/s/ KPMG LLP

Des Moines, Iowa
February 14, 2001

                                       45
<PAGE>
                         REPORT OF ARTHUR ANDERSEN LLP

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

    We have audited the accompanying consolidated balance sheets of
SAUER-DANFOSS INC. (a Delaware corporation) AND SUBSIDIARIES (formerly SAUER
INC. and SUBSIDIARIES) as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and comprehensive income
and cash flows for the years then ended. 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.

    We conducted our audits 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
audits provide a reasonable basis for our opinion.

    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
SAUER-DANFOSS INC. AND SUBSIDIARIES (formerly SAUER INC. and SUBSIDIARIES) as of
December 31, 1999 and 1998, 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.

Arthur Andersen LLP
Chicago, Illinois
February 16, 2000

                                       46
<PAGE>
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, 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. (the "Company") designs, manufactures and sells its
products in North America and Europe and sells its products throughout the rest
of the world either directly or through distributors. The Company also
manufactures and sells its products in East Asia through its manufacturing plant
and sales office in Shanghai, China, and sells its products in South America
through its sales office in Sao Paulo, Brazil. The Company's products are used
by original equipment manufacturers ("OEMs") of off-highway mobile equipment,
including construction, road building, agriculture, turf care and specialty
markets.

    The year 2000 proved to be a significant year for the Company on its
continuing growth path. The Company completed several acquisitions during the
year, the most notable of which was the acquisition of Danfoss Fluid Power. The
markets that the Company serves were varied in 2000 with most markets showing
increased sales over 1999 except the road building market in North America and
the turf care market in Europe. Overall, excluding the effects of acquisitions,
the Company's worldwide sales increased by 8.5% over 1999, achieving record
levels. Looking forward to 2001, the Company is guarded with respect to the
North American market. Economic indicators have begun to show a weakening in the
North American economy in the fourth quarter of 2000 and this trend is
continuing into the early part of 2001. These economic changes will challenge
the Company to balance its response to current conditions with its ongoing need
for investment for future growth. In this regard, the Company is focused on
reducing capital spending, managing inventory levels and aggressively managing
costs, while pursuing further efficiency gains through various quality and
supply management initiatives. At the same time, the Company fully intends to
maintain its commitment to key product development projects and look for
selective acquisitions that support its plans for global growth and long-term
market share gain.

    On May 3, 2000, Sauer Inc. acquired Danfoss Fluid Power ("DFP"), the largest
acquisition in the Company's history. This significant acquisition, as discussed
in the Notes to Consolidated Financial Statements, builds upon the Company's
position of being the world's largest focused supplier in the mobile hydraulics
industry. The combined company of Sauer-Danfoss Inc. has greater hydraulic
systems capability to serve its customers throughout the world.

                                       47
<PAGE>
    The Company now turns its attention to 2001 with the substantial challenges
ahead. However, with much of the integration activities of the DFP acquisition
completed, the Company feels that the synergies and cost savings from the
acquisition will help offset some of the economic conditions that are prevalent.

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 and interest rates.

    FOREIGN CURRENCY -- The Company does not currently enter into any type of
foreign currency hedging contracts. 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 currency 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.

    INTEREST RATES -- The Company does not currently enter into any type of
interest rate hedging agreements to manage its exposure to interest rate
changes. The following table summarizes the maturity of the Company's debt
obligations:

<TABLE>
<CAPTION>
                                                            FIXED     VARIABLE
                                                          RATE DEBT   RATE DEBT
                                                          ---------   ---------
<S>                                                       <C>         <C>
2001....................................................  $  3,073     $ 1,132
2002....................................................    67,668         730
2003....................................................    36,230       5,030
2004....................................................     7,421       2,038
2005....................................................     5,397       1,490
Thereafter..............................................    57,618      15,010
                                                          --------     -------
Total...................................................  $177,407     $25,430
                                                          ========     =======
</TABLE>

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 a reporting consideration only and does not
affect the underlying results of operations.

                                       48
<PAGE>
As shown in the table below, the translation impact on making prior period
comparisons with respect to the Company's net sales can be material. However,
historically the translation impact on net income has not been significant.

<TABLE>
<CAPTION>
                                              PERCENTAGE SALES GROWTH/
                                                     (DECLINE)
                                                  OVER PRIOR YEAR
                                        ------------------------------------
                                        2000 (1)        1999          1998
                                        --------      --------      --------
<S>                                     <C>           <C>           <C>
As Reported...........................     8.5%         (5.3%)        5.5%
Without Currency Impact...............    12.6%         (3.7%)        5.7%
</TABLE>

------------------------

(1) Excludes the effects of the DFP sales since May 3, 2000 for comparison
    purposes.

    With respect to transaction risk, the impact on the Company's operating
results is not 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.

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 dollars (000's) and as a percentage of total
Sauer-only net sales for the years ended December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                        DECEMBER 31,
                                       -----------------------------------------------
                                                2000                     1999
                                       ----------------------   ----------------------
                                       (DOLLARS)   % OF TOTAL   (DOLLARS)   % OF TOTAL
                                       ---------   ----------   ---------   ----------
<S>                                    <C>         <C>          <C>         <C>
Agriculture..........................  $ 94,525        16.3     $ 85,087        15.9
Construction.........................    89,904        15.5       85,218        16.0
Turf care............................   137,357        23.7      110,585        20.7
Road building........................    63,294        10.9       69,494        13.0
Specialty............................    50,308         8.7       45,556         8.5
Distribution and aftermarket.........   144,211        24.9      138,442        25.9
                                       --------       -----     --------       -----
                                       $579,599       100.0     $534,382       100.0
                                       ========       =====     ========       =====
</TABLE>

    COST OF SALES -- Cost of sales for 2000 of $581.5 million was 74.3% of net
sales, slightly lower than the 76.4% of net sales for 1999. The lower cost of
sales 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. Cost of sales as a percentage of net sales for the former
DFP companies was comparable to that of Sauer for the year.

                                       49
<PAGE>
    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 3.9%
of total net sales for 2000. The inclusion 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, 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.

                                       50
<PAGE>
1999 COMPARED TO 1998

    NET SALES -- Net sales for 1999 of $534.4 million decreased by
$30.1 million, or 5.3%, from 1998 net sales of $564.5 million. Net sales
decreased by 3.7% excluding the impact of currency fluctuations. Sales declines
in agriculture of $17.9 million and in turf care of $15.1 million accounted for
the majority of the decline. The Company's specialty market experienced an
increase of $6.8 million over 1998 levels, and construction saw sales increase
by $7.4 million. Each of the Company's product lines experienced decreased sales
levels from 1998 with hydrostatics down $14.7 million, open circuit gear
products and piston pumps down $10.8 million and electrohydraulics and controls
down $4.6 million. Net sales in North America of $377.9 million and in Europe of
$218.0 million in 1999 declined from 1998 by 3.8% and 9.2%, respectively.

    COST OF SALES -- Cost of sales for 1999 of $408.5 million was 76.4% of net
sales, slightly higher than the 75.9% of net sales for 1998. Higher cost of
sales was due to the initial start-up costs of the Lawrence, Kansas, facility
coupled with higher overall fixed costs related to the Company's recent high
levels of capital investments, but was partially offset by the Company's efforts
to reduce and control costs in all locations during 1999 in light of the decline
in the agriculture and turf care markets.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses for 1999 of $58.4 million increased by $3.9 million, or
7.2%, from 1998 expenses of $54.5 million, resulting from patent claim costs and
higher legal fees at the Company's Sullivan, Illinois, facility in addition to
higher fixed costs related to past investments in information technology
equipment.

    RESEARCH AND DEVELOPMENT EXPENSES -- Research and development expenses of
$23.3 million increased by $1.2 million, or 5.4%, from 1998 and represent 4.4%
of total net sales for 1999 as compared to 3.9% in 1998. This continued high
level of spending on research and development reflects the Company's ongoing
development of new customer programs and demonstrates the Company's emphasis on
being a technology leader.

    NONOPERATING EXPENSES, NET -- Net nonoperating expenses for 1999 of
$8.7 million were $0.3 million higher than 1998 net expenses of $8.4 million.
Net interest expense for 1999 of $8.6 million decreased by $0.2 million from
1998 net expense of $8.8 million, reflecting lower overall bank borrowings due
to significantly reduced capital expenditures and decreases in working capital.
Other, net expenses for 1999 increased by $0.5 million from 1998's other, net
income relating to a loss on disposal of fixed assets at the Ames, Iowa,
facility of $0.4 million and numerous immaterial items.

    PROVISION FOR INCOME TAXES -- Provision for income taxes for 1999 of
$10.9 million decreased by $4.5 million from 1998 provision for income taxes of
$15.4 million. The decrease is a result of the decline in income before income
taxes of $12.7 million offset by an increase in the effective tax rate for 1999
of 37.7% compared to an effective tax rate for 1998 of 36.9%.

    NET INCOME -- Net income fell in 1999 to $18.1 million from $26.3 million in
1998, a decrease of $8.2 million or 31.2%. Declines in agriculture and turf care
sales of 17.3% and 12.7%, respectively, coupled with pre-merger costs and the
patent claim costs mentioned above led to the net income decline. As a result,
North American 1999 net income of $17.0 million decreased by $8.3 million, or
32.8%, from 1998 net income of $25.3 million. Europe's 1999 net income of
$2.5 million was down $3.2 million, or 56.1%, from 1998 net income of
$5.7 million.

    ORDER BACKLOG -- Total order backlog at the end of 1999 was $252.4 million,
compared to $261.7 million at the end of 1998, a decrease of 3.6%. During the
fourth quarter of 1999, $142.8 million in new orders were written, an increase
of 9.6% compared to the fourth quarter of 1998, or an increase of 15.1%
excluding the impact of currency fluctuations.

                                       51
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

    The Company's principal sources of liquidity have been from internally
generated funds and from borrowings under its credit facilities in 2000, 1999
and 1998. In addition, a principal source of liquidity for 1998 was proceeds
from the Company's initial public offering.

    Net cash provided by operating activities for 2000 of $81.9 million
increased by $4.1 million from $77.8 million for 1999. The increase arose
primarily from improved management of accounts receivable offset by increases in
inventory and accounts payable. Net borrowings under short- and long-term credit
facilities increased in 2000 by $29.4 million compared to a decrease in 1999 of
$8.5 million and an increase in 1998 of $2.6 million. The increase in net
borrowings in 2000 reflects debt assumed in the DFP acquisition along with cash
used for increased inventories. Net borrowings for 1998 showed little net change
due to the net proceeds from the Company's initial public offering of
$48.1 million during the second quarter.

    Capital expenditures for 2000 of $67.9 million increased by $10.8 million
from 1999 capital expenditures of $57.1 million. On a comparable basis,
Sauer-only capital expenditures for 2000 were $45.1 million, a decrease of
$12.0 million from 1999. In 1999, the Company began to substantially reduce its
amount of capital expenditures in light of the weak agriculture and turf care
markets in particular and due to the reduced sales levels worldwide in general.
The Company has continued to control the level of capital expenditures to
emphasize production capacity, flexibility and efficiency, and to improve
product quality. In all, approximately 52% of 2000 capital expenditures occurred
in North America, while 48% were in Europe and some small amounts in Asia.

    The cash provided by operating activities funded 2000 capital expenditures
of $67.9 million, dividends of $11.4 million, repurchase of common stock of
$5.7 million and distributions to minority interest partners of $6.8 million.
The Company used borrowings of $29.4 million to fund the balance of these cash
outlays.

OTHER MATTERS

    ACQUISITIONS -- On January 29, 2001, the Company completed its acquisition
of Compact Controls Inc. ("CCI") by acquiring all of the outstanding stock of
CCI in exchange for approximately $36.0 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 will be accounted
for under the purchase method of accounting during the first quarter of 2001.

    The Company announced on January 24, 2001, that it has acquired Italdigit
s.r.l. in an all-cash transaction of approximately $0.5 million. Headquartered
in Italy, Italdigit manufactures electronic controls and wiring harnesses in
mobile hydraulics as well as other areas. The purchase will be accounted for
under the purchase method of accounting.

    On January 29, 2001, the Company announced its intention to establish a
marketing and distribution base in India by signing a letter of intent to
acquire certain assets of Dantal Hydraulics Ltd. Dantal had previously been a
distributor for DFP in India since 1989. Headquartered in New Delhi, Dantal also
has branch offices in Ahmadabad, Mumbai, Bangalore, Chennai and Calcutta. The
Company expects to pay approximately $2.1 million in cash and anticipates
closing the transaction during the second quarter of 2001.

    On February 2, 2001, the Company announced it has entered into an agreement
with Topcon Laser Systems, Inc. to create a new joint venture company. The new
company, to be called TSD Integrated Controls, ("TSD") will focus on the
development and marketing of electronic systems used to control work functions
of off-highway vehicles. The Company anticipates TSD will begin operations on
April 1, 2001.

    On March 15, 2001, the Company announced that it had completed the
acquisition of the net assets and business operations of portions of the fluid
power distribution business of Danfoss A/S. The asset

                                       52
<PAGE>
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, Spain, and Singapore. The Company issued
2.1 million share of its common stock and the purchase will be accounted for
under the purchase method of accounting.

    DIVIDEND RESTRICTIONS -- At December 31, 2000, the Company had
$93.5 million of unused lines of credit, consisting primarily of committed U.S.
lines of credit and uncommitted European lines of credit. The Company's ability
to pay dividends to its stockholders is effectively limited by certain
restrictive covenants contained in the U.S. Revolving Credit and German credit
agreements, which limit the amount of dividends the U.S. operating company and
German operating company can distribute to the Company. During 2000, the U.S.
operating company made distributions to the Company of $21.0 million. At
December 31, 2000, an additional $4.0 million was not restricted as to payment
of dividends by the U.S. operating company. The German operating company did not
make distributions to the Company during 2000 and at December 31, 2000,
$9.7 million was not restricted as to the payment of dividends.

    OUTLOOK -- In light of the economic softening mentioned in the "Overview"
section above, the Company is taking an aggressive stance on controlling
expenses in all areas of its operations. The U.S. economy began to experience a
slowdown during the fourth quarter of 2000 and all major U.S. economic
indicators point to the manufacturing sector reducing output and controlling
inventories. The Company is also focusing efforts on reducing inventories and
adjusting its capital expenditure plans to coincide with slower sales growth. On
a positive note, the Company's customers continue to award new program
development opportunities which will continue to drive growth in this
challenging economic environment. This, coupled with the expected synergies and
cost savings from the DFP acquisition, leaves the Company optimistic that
comparable ongoing sales and net income will increase slightly over 2000 levels.

                                       53
<PAGE>
                                   SCHEDULE I
                        SAUER-DANFOSS INC. (PARENT ONLY)
                            CONDENSED BALANCE SHEETS
                        AS OF DECEMBER 31, 2000 AND 1999
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
ASSETS
Current assets --
  Cash......................................................  $     32   $     30
  Other current assets......................................     1,551      2,511
                                                              --------   --------
  Total current assets......................................     1,583      2,541
Receivables from subsidiaries...............................    14,455     15,446
Intangible assets, net......................................    80,471        950
Equity investment in subsidiaries*..........................   261,426    138,886
Other.......................................................    20,109         53
                                                              --------   --------
                                                              $378,044   $157,876
                                                              ========   ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities.........................................  $  3,685   $    923
Payables to subsidiaries....................................     3,860      3,171
Other long-term liabilities.................................     9,778      3,030
                                                              --------   --------
Total liabilities...........................................    17,323      7,124
                                                              --------   --------
Stockholders' equity --
Common stock, par value $.01 per share, authorized 75,000 in
  2000 and 45,000 in 1999; issued 46,483 in 2000 and 28,074
  in 1999; outstanding 45,312 shares in 2000 and 27,399
  shares in 1999............................................       465        281
Additional paid-in capital..................................   308,013    120,053
Retained earnings...........................................    69,975     41,863
Accumulated other comprehensive income......................    (9,666)    (7,038)
Unamortized restricted stock compensation...................       (57)    (1,707)
Common stock in treasury (at cost), 1,172 shares in 2000 and
  675 shares in 1999........................................    (8,009)    (2,700)
                                                              --------   --------
  Total stockholders' equity................................   360,721    150,752
                                                              --------   --------
                                                              $378,044   $157,876
                                                              ========   ========
</TABLE>

------------------------

*   Equity investment in subsidiaries, net, reported in the above condensed
    balance sheet as of December 31, 2000, includes $120,032 and $22,678 of net
    worth related to the U.S. and German Operating Companies, respectively. The
    U.S. Operating Company is subject to financial covenants related to its
    Revolving Credit Facility that, among other things, require that the U.S.
    Operating Company maintain net worth (as defined) of not less than the sum
    of $116,000, plus 35% of the U.S. Operating Company's quarterly net income,
    if positive, for each fiscal quarter ending on or after September 30, 2000.
    At December 31, 2000, restricted net worth was $116,000. The German
    Operating Company is subject to similar financial covenants that require the
    German Operating Company to maintain net worth of not less than 15% of total
    assets. At December 31, 2000, restricted net worth was $12,941.

                                       54
<PAGE>
                               SCHEDULE I (CONT.)
                        SAUER-DANFOSS INC. (PARENT ONLY)
                         CONDENSED STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                2000       1999       1998
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Equity earnings of subsidiaries.............................  $28,339    $20,022    $24,859
Expenses, net --
  Selling, general and administrative.......................    9,541      5,461      2,857
  Interest (income) expense.................................     (861)    (1,390)      (900)
  Other (income) expense, net...............................   (8,245)        85        112
                                                              -------    -------    -------
    Expenses, net...........................................      435      4,156      2,069
                                                              -------    -------    -------
    Income from operations before income taxes..............   27,904     15,866     22,790
Benefit for income taxes....................................     (979)     2,254      3,544
                                                              -------    -------    -------
  Net income................................................  $26,925    $18,120    $26,334
                                                              =======    =======    =======
Basic and diluted net income per common share...............  $  0.69    $  0.67    $  1.01
                                                              -------    -------    -------
Weighted average basic shares outstanding...................   39,216     27,225     26,148
                                                              =======    =======    =======
Weighted average diluted shares outstanding.................   39,217     27,240     26,150
                                                              =======    =======    =======
</TABLE>

                                       55
<PAGE>
                               SCHEDULE I (CONT.)
                        SAUER-DANFOSS INC. (PARENT ONLY)
                       CONDENSED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                2000       1999       1998
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Cash flows from operating activities --
Net income..................................................  $26,925    $18,120    $26,334
Adjustments to reconcile net income to net cash provided by
  operating activities --
    Equity earnings of subsidiaries.........................  (28,339)   (20,022)   (24,859)
    Dividends received from subsidiaries....................   27,335      5,300     12,000
    Depreciation and amortization...........................    4,230         81        360
    Change in working capital...............................    3,722      2,283     (1,979)
    Other...................................................    7,203     (4,265)        70
                                                              -------    -------    -------
    Net cash provided by operating activities...............   41,076      1,497     11,926
                                                              -------    -------    -------
Cash flows used in investing activities --
  Contributions to subsidiaries.............................       --         --     (6,595)
  Cash paid for acquisitions, net of cash acquired..........   (3,765)        --         --
                                                              -------    -------    -------
    Net cash used in investing activities...................   (3,765)        --     (6,595)
                                                              -------    -------    -------
Cash flows from financing activities --
  Repayments of long-term debt..............................       --         --    (15,000)
  Net financing from (to) subsidiaries......................  (20,147)     6,171    (30,724)
  Sale of common stock......................................       --         --     48,100
  Cash dividends............................................  (11,440)    (7,673)    (7,691)
  Repurchase of common stock................................   (5,722)        --         --
                                                              -------    -------    -------
    Net cash used in financing activities...................  (37,309)    (1,502)    (5,315)
                                                              -------    -------    -------
Cash --
  Net increase (decrease) during the year...................        2         (5)        16
  Beginning balance.........................................       30         35         19
                                                              -------    -------    -------
  Ending balance............................................  $    32    $    30    $    35
                                                              =======    =======    =======
</TABLE>

                                       56
<PAGE>
                                  SCHEDULE II

                      SAUER-DANFOSS INC. AND SUBSIDIARIES
                       VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                     BALANCE AT
                                                     BEGINNING    CHARGED TO                 BALANCE AT
                                                         OF       COSTS AND    RECEIVABLES     END OF
                                                        YEAR       EXPENSES    WRITTEN OFF      YEAR
                                                     ----------   ----------   -----------   ----------
<S>                                                  <C>          <C>          <C>           <C>
For the year ended December 31, 1998:
Allowance for Doubtful Accounts....................    $3,195         128          (157)       $3,166

For the year ended December 31, 1999:
Allowance for Doubtful Accounts....................    $3,166         307          (278)       $3,195

For the year ended December 31, 2000:
Allowance for Doubtful Accounts....................    $3,195         621          (228)       $3,588
</TABLE>

                                       57
<PAGE>
              REPORT OF KPMG LLP ON FINANCIAL STATEMENT SCHEDULES

To the Shareholders of Sauer-Danfoss Inc.:

    Under date of February 14, 2001, we reported on the consolidated balance
sheet of Sauer-Danfoss Inc. and subsidiaries as of December 31, 2000 and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for the year then ended, which are included
in this Form 10-K. In connection with our audit of the aforementioned
consolidated financial statements, we also audited the related 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 2000 financial
statement schedules based on our audit.

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

                                          /s/ KPMG LLP

Des Moines, Iowa
February 14, 2001

         REPORT OF ARTHUR ANDERSEN LLP ON FINANCIAL STATEMENT SCHEDULES

    We have audited in accordance with auditing standards generally accepted in
the United States, the financial statements as of December 31, 1999 and 1998 and
for the years then ended, 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 audits were made for purposes 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. These schedules have been subjected to the
auditing procedures applied in the audits 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.

/s/ Arthur Andersen LLP

Chicago, Illinois
February 16, 2000

                                       58
<PAGE>
                                                                      EXHIBIT 21

                         SUBSIDIARIES OF THE REGISTRANT
                                   MARCH 2001

<TABLE>
<CAPTION>
             SAUER-DANFOSS INC.                  U.S. CORPORATION         HOLDING COMPANY
             ------------------               -----------------------  ----------------------
<S>                                           <C>                      <C>
Sauer-Danfoss (US) Company..................  U.S. Corporation         Manufacturing
Sauer-Danfoss (NA) Company..................  U.S. Corporation         Manufacturing
Control Concepts, Inc.......................  U.S. Corporation         Manufacturing
Compact Controls, Inc.......................  U.S. Corporation         Manufacturing
SUSA Holding of LaSalle County, Inc.........  U.S. Corporation         Real Property Holding
SUSA Holding of Story County, Inc...........  U.S. Corporation         Real Property Holding
SUSA Holding of Stephenson County, Inc......  U.S. Corporation         Real Property Holding
Hydro-Gear, Inc.............................  U.S. Corporation         Partner
Hydro-Gear Limited Partnership..............  U.S. Partnership         Manufacturing
Sauer-Danfoss Pty Ltd.......................  Australian Corporation   Sales Company
Sauer-Danfoss NV............................  Belgium Corporation      Sales Company
Sauer-Danfoss Ltda..........................  Brazil Limited           Sales Company
                                              Liability Company
Sauer Shanghai Hydrostatic Transmission Co.
 Ltd........................................  China Corporation        Manufacturing
Sauer-Danfoss (Nordborg) A/S................  Denmark Corporation      Manufacturing
Sauer-Danfoss A/S...........................  Denmark Corporation      Sales Company
Oy Sauer-Danfoss AB.........................  Finland Corporation      Sales Company
Sauer-Danfoss (Bologna) SpA.................  Italy Corporation        Manufacturing
Sauer-Danfoss S.r.l.........................  Italy Corporation        Sales Company
Sauer-Danfoss (Swindon) Ltd.................  U.K. Corporation         Manufacturing
Sauer-Danfoss (Holdings) Ltd................  U.K. Corporation         Holding Company
Sauer-Danfoss Limited.......................  U.K. Corporation         Sales Company
Sauer-Danfoss (Neumunster) GmbH & Co. OHG...  Germany Partnership      Manufacturing
Sauer Bibus GmbH............................  Germany Corporation      Sales Company
Sauer-Danfoss (Neumunster) GmbH.............  Germany Corporation      Holding Company/
                                                                        Management
Sauer-Danfoss Informatik GmbH...............  Germany Corporation      Information Services
Sauer-Danfoss GmbH..........................  Germany Corporation      Sales Company
Custom Design Electronics of Sweden AB......  Sweden Corporation       Holding Company
Sauer-Danfoss (Almhult) AB..................  Sweden Corporation       Manufacturing
Sauer-Danfoss AB............................  Sweden Corporation       Sales Company
Sauer-Danfoss BV............................  Netherlands Corporation  Sales Company
Danfoss Fluid Power sarl....................  France Corporation       Sales Company
Sauer-Danfoss s.r.o.........................  Slovakia Corporation     Sales Company
Sauer-Danfoss (Povaska Bystrica) a.s........  Slovakia Corporation     Manufacturing
Sauer ZTS a.s...............................  Slovakia Corporation     Manufacturing
Sauer Hydratec GmbH.........................  Germany Corporation      Sales Company-Inactive
Sauer-Danfoss SA............................  Spain Corporation        Sales Company
Sauer-Danfoss India Private Limited.........  India Corporation        Sales Company
Sauer-Danfoss K.K...........................  Japan Corporation        Sales Company
Sauer-Danfoss A/S...........................  Norway Corporation       Sales Company
Sauer-Danfoss sp.z.o.o......................  Poland Corporation       Manufacturing
Sauer-Danfoss Pte. Ltd......................  Singapore Corporation    Sales Company
Merkur Hydraulika a.s.......................  Slovakia Corporation     Manufacturing
Danfoss Fluid Power AB......................  Sweden Corporation       Sales Company-Inactive
Integrated Control Technologies Ltd.........  U.K. Corporation         Sales Company-Inactive
Italdigit s.r.l.............................  Italy Corporation        Manufacturing
</TABLE>

                                       59