Document:

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                                                                   Exhibit 10.35

               MODIFICATION TO LOAN AGREEMENT AND OTHER DOCUMENTS

         This Modification to Loan Agreement and Other Documents (this
"MODIFICATION"), dated as of December 20, 1999, is made by and among BURNHAM
PACIFIC OPERATING PARTNERSHIP, L.P., a Delaware limited partnership ("BPOP"),
BPP/Cameron Park, L.P., a California limited partnership and BPP/RILEY, L.P., a
California limited partnership (each, individually, a "BORROWER" and
collectively, "BORROWERS"), BURNHAM PACIFIC PROPERTIES, INC., a Maryland
corporation ("BPPI", and together with Borrowers, each, individually, a "LOAN
PARTY" and collectively, the "LOAN PARTIES"), and CMF CAPITAL COMPANY, LLC, a
Delaware limited liability company ("CMF"), successor-in-interest to General
Electric Capital Corporation, as Administrative Agent for the Lenders (as
hereinafter defined, and in such capacity, together with its successors and
assigns in such capacity, the "ADMINISTRATIVE AGENT") and the Lender.

                                R E C I T A L S :

         WHEREAS, Borrowers have (i) executed and delivered to the
Administrative Agent that certain Loan Agreement (the "ORIGINAL LOAN AGREEMENT";
capitalized terms used but not otherwise defined herein shall have the meanings
set forth in the Original Loan Agreement, as amended hereby), dated as of
November 19, 1999, among Borrowers, as borrowers, the Administrative Agent, as
administrative agent for itself and certain financial institutions signatory
thereto, as lenders (the "LENDERS") and the Lenders, pursuant to which the
Lenders have agreed to make certain loans (the "LOANS") to Borrowers, and (ii)
executed and delivered to each applicable Lender, Revolving Loan Notes (the
"ORIGINAL REVOLVING LOAN NOTES") and Term Loan Notes (the "ORIGINAL TERM LOAN
NOTES"), as the case may be, in the aggregate principal amount of $202,800,000
evidencing the Loans (collectively, the "ORIGINAL NOTES");

         WHEREAS, as additional security for the Loans, Burnham Pacific
Employees LLC, a Delaware limited liability company ("BPE"), BPAC Texas, Inc., a
Delaware corporation ("BPAC TEXAS", and together with BPE, individually, a "JV
PLEDGOR" and collectively, the "JV PLEDGORS") have executed and delivered to the
Administrative Agent that certain Pledge and Security Agreement (the "JV PLEDGE
AGREEMENT"), dated as of November 19, 1999, pursuant to which, among other
things, the JV Pledgors have granted to the Administrative Agent (on behalf of
the Lenders), a security interest in each JV Pledgor's rights to receive
distributions and proceeds from BPP Retail, LLC, a Delaware limited liability
company ("BPP RETAIL") and BPAC Texas GP, LLC, a Delaware limited liability
company ("BPAC TEXAS GP", and together with BPP Retail, the "JV ENTITIES");

         WHEREAS, as additional security for the Loans, BPOP and J. David
Martin, Daniel B. Platt, Joseph W. Byrne, James W. Gaube and Scott C. Verges
(collectively, the "KEY PERSONNEL" and together with BPOP, individually, a "BPE
PLEDGOR" and collectively, the "BPE

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PLEDGORS"), have executed and delivered to the Administrative Agent that certain
Pledge and Security Agreement (the "BPE PLEDGE AGREEMENT"), dated as of November
19, 1999, pursuant to which, among other things, the BPE Pledgors have granted
to the Administrative Agent (on behalf of the Lenders), a security interest in
all of the right, title and interest of each BPE Pledgor as a member or manager,
as the case may be, of BPE;

         WHEREAS, as additional security for the Loans, BPOP and BPPI (each,
individually, a "P&V PLEDGOR" and collectively, the "P&V PLEDGORS") have
executed and delivered to the Administrative Agent that certain Pledge and
Security Agreement (the "P&V SALE PLEDGE AGREEMENT"), dated as of November 19,
1999, pursuant to which, among other things, the P&V Pledgors have granted to
the Administrative Agent (on behalf of the Lenders), a security interest in each
P&V Pledgor's rights to receive, directly or indirectly, distributions and
proceeds from the P&V Owners and from the sale of the P&V Sale Properties;

         WHEREAS, in order to induce the Lenders to make the Loans, the JV
Pledgors executed and delivered to the Administrative Agent that certain
Guaranty Agreement (the "JV GUARANTY"), dated as of November 19, 1999, pursuant
to which, among other things, the JV Pledgors guaranteed on a nonrecourse basis,
all of Borrowers' obligations and liabilities under the Original Loan Agreement,
Original Notes and other Loan Documents;

         WHEREAS, in order to induce the Lenders to make the Loans, BPPI
executed and delivered to the Administrative Agent that certain Guaranty
Agreement (the "BPPI GUARANTY", and together with the JV Guaranty, the
"GUARANTIES"), dated as of November 19, 1999, pursuant to which, among other
things, BPPI guaranteed on a recourse basis, all of Borrowers' obligations and
liabilities under the Original Loan Agreement, Original Notes and other Loan
Documents;

         WHEREAS, Borrowers have informed the Lenders and the Administrative
Agent that BPP Retail desires to amend its operating agreement pursuant to a
certain Second Amendment to Operating Agreement (the "AMENDMENT"), dated as of
December 15, 1999, between the State of California Public Employees' Retirement
System and BPE, pursuant to which, among other things, (a) BPE's Percentage
Interest (as defined in the Operating Agreement) in BPP Retail shall be
decreased to 1%, (b) BPE shall transfer to BPOP all of its right, title and
interest with respect to the shopping center commonly known as Bell Gardens
located in the City of Bell Gardens, California (the "BELL GARDENS PROJECT") and
(c) BPP Retail shall make certain cash distributions to BPE (the "CASH
DISTRIBUTION");

         WHEREAS, subject to the terms and provisions of this Modification,
Borrowers desire to paydown the outstanding principal balance of the Revolving
Loans and a portion of the outstanding principal balance of the Term Loans
concurrently with the receipt of the proceeds of such Cash Distribution (the
"PREPAYMENT");

         WHEREAS, Borrowers and Lender desire to amend the Loan Agreement and
the other Loan Documents to reflect such Prepayment and certain other changes;
and

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         WHEREAS, in order to induce the Administrative Agent and the Lenders to
enter into this Modification, the Loan Parties have agreed to confirm and ratify
their respective obligations and liabilities under the Loan Documents as amended
hereby.

         NOW, THEREFORE, in consideration of Ten Dollars ($10.00) and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows, effective as of the date
hereof:

     1.  PREPAYMENT; REDUCTION IN TERM LOAN COMMITMENT AND INCREASE IN REVOLVING
LOAN COMMITMENT. (a) On the date hereof, Borrowers shall (i) repay a portion of
the outstanding principal balance of the Term Loans in an amount equal to
$25,000,000 and all interest outstanding thereon (the "TERM LOAN REPAYMENT
AMOUNT") and (ii) repay the entire outstanding principal balance of the
Revolving Loans and all interest outstanding thereon (the "REVOLVING LOAN
PREPAYMENT AMOUNT"). Borrowers covenant that any portion of the Cash
Distribution remaining after application toward the Term Loan Prepayment Amount,
the Revolving Loan Prepayment Amount and any other amounts required to be paid
by Borrowers under this Modification shall be used by Borrowers for working
capital prior to Borrowers requesting any Additional Advances of the Revolving
Loans.

         (b) Notwithstanding anything to the contrary contained in SECTION 2.01
of the Loan Agreement, the maximum aggregate principal amount available under
the Term Loan Commitments is hereby reduced to One Hundred Fifty-One Million Two
Hundred Sixty-Two Thousand Eight Hundred Sixty-Seven Dollars ($151,262,867). On
the date hereof, Borrowers shall execute and deliver to each applicable Lender
making a Term Loan Commitment, an Amended And Restated Term Loan Promissory
Note, dated the date hereof, amending and restating the Original Term Loan Notes
to reflect such permanent reduction in the Term Loan Commitments.
Notwithstanding anything to the contrary contained in SECTION 2.01 of the Loan
Agreement, but subject to Part E of SCHEDULE 2.1 of the Loan Agreement, the
maximum aggregate principal amount available under the Revolving Loan
Commitments is hereby increased from Twenty Million Dollars ($20,000,000) to
Twenty-Five Million Dollars ($25,000,000). On the date hereof, Borrowers shall
execute and deliver to each applicable Lender making a Revolving Loan
Commitment, an Amended and Restated Revolving Loan Promissory Note, dated the
date hereof, amending and restating the Original Revolving Loan Note to reflect
such increase in the Revolving Loan Commitments.

         (c) The Administrative Agent and the Lenders acknowledge and agree that
the Borrowers shall not be required to pay the repayment fee in the amount of
 .6% of the outstanding principal balance of the Loans set forth in SECTION
2.03(4) of the Credit Agreement in connection with the Prepayment.

     2.  ACQUISITION OF BELL GARDENS PROJECT. (a) Concurrently herewith, BPP
Retail shall transfer to BPOP all of its right, title and interest in the Bell
Gardens Project. Within a reasonable period of time after the date hereof, but
in no event later than February 29, 2000 (the "BELL GARDENS OUTSIDE CLOSING
DATE"), Borrowers shall (i) satisfy all of the conditions, deliveries

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and requests set forth on SCHEDULE 1 attached hereto with respect to the Bell
Gardens Project (the "BELL GARDENS CLOSING CONDITIONS") as determined by the
Administrative Agent (ii) execute and deliver to the Administrative Agent (on
behalf of the Lenders) to further evidence or secure or to otherwise support the
Loans, (A) a leasehold deed of trust, security agreement and fixture filing, in
form and substance similar to the Mortgages and constituting a Lien encumbering
BPOP's leasehold estate in the Bell Gardens Project (the "BELL GARDENS
MORTGAGE"), (B) an assignment of rents and leases, in form and substance similar
to the Assignment of Rents and pertaining to leases or subleases of space at the
Bell Gardens Project (the "BELL GARDENS ASSIGNMENT OF RENTS"), (C) an assignment
of contracts, licenses, permits, agreements, warranties and approvals, in form
and substance similar to the Assignments of Contracts and pertaining to an
assignment of all of BPOP's right, title and benefits under and otherwise
pertaining to any third party management agreement and all other operating and
service agreements, license agreements, permits (including, building and
occupancy permits), approvals, operating contracts, trade names, signage
agreements and all service, supply and maintenance contracts relating to the
Bell Gardens Project, unless prohibited by law, (D) a hazardous materials
indemnity agreement, in form and substance similar to the Hazardous Materials
Indemnity, (E) such other documents, instruments, certificates, assignments or
financing statements, requested by the Administrative Agent in order to further
evidence and secure the Loans or to protect any Liens or other security granted
to the Administrative Agent and the Lenders with respect to the Bell Gardens
Project and any other Project, and (F) amendments to the Loan Documents as
necessary or appropriate in connection with the addition of the Bell Gardens
Project as security for the Loans, including, without limitation, an amendment
to SCHEDULE 3 to the Loan Agreement to provide for an "Allocated Loan Amount"
for the Bell Gardens Project as determined by the Administrative Agent. All
documents required to be delivered under this paragraph (collectively, the "BELL
GARDENS CLOSING DOCUMENTS") shall be subject to the approval of the
Administrative Agent. In addition, based on its due diligence review (including
the review of any materials or deliveries set forth on SCHEDULE 1 attached
hereto) and underwriting of the Bell Gardens Project, the Administrative Agent
(on behalf of the Lenders) shall have the right to require the Borrowers to make
such additional representations, warranties and/or covenants as it may require,
or impose such additional conditions, deliveries and requirements in connection
with the addition of the Bell Gardens Project as additional security for the
Loans. All determinations, requirements and approvals made by the Administrative
Agent and the Lenders under this paragraph shall be made in the sole discretion
of the Administrative Agent and the Lenders.

         (b) Section E of SCHEDULE 2.1 of the Loan Agreement is hereby deleted
in its entirety and replaced with the following:

                     "PART E. UNSATISFIED CLOSING CONDITIONS

                  The maximum aggregate outstanding principal amount of the
         Revolving Loans shall not exceed $13,397,496 until satisfaction of the
         following conditions to the satisfaction of Administrative Agent in its
         sole discretion. Subject to paragraphs 3 and 4 below, the maximum
         outstanding amount under the Revolving Loans shall increase by the
         holdback amounts (each, a "HOLDBACK AMOUNT") indicated in the following
         conditions

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         upon satisfaction thereof; provided, however, that in no event shall
         the aggregate principal amount outstanding for the Revolving Loans at
         any time exceed $25,000,000. For any conditions that have not been
         satisfied prior to the date that is 6 months after the date hereof, the
         maximum availability under the Revolving Loans shall be reduced
         permanently by the applicable Holdback Amount set forth below.

                  1. Receipt by Administrative Agent of estoppel certificates
         from the landlords under the following Leasehold Property Leases and
         from the subtenants for the Projects described under clauses (b)
         through (d) below:

                           (a)      Mission Plaza. Holdback Amount: $2,841,474

                           (b)      Ernst-Bear Creek. Holdback Amount:
                                    $2,091,882

                           (c)      Ernst-James Village. Holdback Amount:
                                    $1,133,103

                           (d)      Ernst-Brickyard. Holdback Amount: $536,045

                  2. With respect to the Hilltop Plaza Project, receipt by
         Administrative Agent of satisfactory evidence in its sole discretion
         (i) that a lease with a cinema tenant has been fully executed and (ii)
         that the tenant under the Barnes and Noble Lease has entered into a
         written waiver of (A) the cotenancy covenants with respect to the
         cinema tenant and (B) the covenant giving the tenant the right to
         terminate its lease if it does not earn revenues from operations at the
         site of over $4,000,000 in the third year after the commencement date.
         Holdback Amount: $5,000,000.

                  3. In the event that the Administrative Agent (on behalf of
         the Lenders) determines in its sole discretion (a) in accordance with
         the Administrative Agent's customary underwriting practices in effect
         at the time of such determination for assets similar to the Bell
         Gardens Project, that the value of the Bell Gardens Project is at least
         $10,000,000 and (b) the Bell Gardens Closing Conditions and any other
         additional requirements, conditions and deliveries required by the
         Administrative Agent in its sole discretion as a result of its
         underwriting or due diligence review of the Bell Gardens Project
         (including, without limitation, the delivery of the Bell Gardens
         Closing Documents) have been satisfied by the Borrowers by the Bell
         Gardens Outside Closing Date, the maximum outstanding amount under the
         Revolving Loans shall increase by an amount equal to 50% of the
         Holdback Amounts remaining at such time, on a property by property
         basis. Notwithstanding anything to the contrary set forth in this
         Section E, in the event that (x) the Administrative Agent determines in
         its sole discretion (in accordance with the Administrative Agent's
         customary underwriting practices in effect at the time of such
         determination for assets similar to the Bell Gardens Project) that the
         value of the Bell Gardens Project is less than $10,000,000 or (y) the
         Bell Gardens Project is not included as additional collateral for the
         Loans by the Bell Gardens Outside Closing Date,

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         the maximum availability under the Revolving Loans shall be reduced
         permanently by $5,801,252.

                  4. Until such time as the Administrative Agent determines in
         its sole discretion (in accordance with the Administrative Agent's
         customary underwriting practices in effect at the time of such
         determination for assets similar to the Bell Gardens Project) that the
         value of the Bell Gardens Project is greater than $10,000,000 and the
         Bell Gardens Closing Conditions and any other additional requirements,
         conditions and deliveries required by the Administrative Agent in its
         sole discretion as a result of its underwriting or due diligence review
         of the Bell Gardens Project (including, without limitation, the
         delivery of the Bell Gardens Closing Documents) have been satisfied by
         the Borrowers, notwithstanding any contrary provision of this Section
         E, upon the satisfaction of the applicable conditions for release set
         forth in paragraphs 1 and 2 above, the maximum outstanding amount under
         the Revolving Loans shall only be increased by 50% of the applicable
         Holdback Amount with respect to any Project described in paragraphs 1
         or 2 above.

         (c) Without limiting the provisions of paragraph 2(a) above, the Bell
Gardens Mortgage shall be cross-defaulted and cross-collateralized with all
other Mortgages previously executed or hereafter made by any Borrower in favor
of the Administrative Agent (on behalf of the Lenders) in connection with the
Loans and the Bell Gardens Assignment of Rents shall be cross-defaulted and
cross-collateralized with all other Assignments of Rents and Leases previously
executed or hereafter made by any Borrower in favor of the Administrative Agent
(on behalf of the Lenders) in connection with the Loans.

     3.  TERMINATION OF JV COLLATERAL. Subject to the satisfaction of the
Modification Conditions, from and after the date hereof, the JV Pledge Agreement
and JV Guaranty shall be terminated and of no further force and effect and the
JV Pledgors shall be released of all liability and obligation thereunder except
as otherwise expressly set forth therein. Subject to the satisfaction of the
Modification Conditions, from and after the date hereof, the BPE Pledge
Agreement shall be terminated and of no further force and effect and the BPE
Pledgors shall be released of all liability and obligation thereunder except as
otherwise expressly set forth therein.

     4.  MODIFICATION CONDITIONS. This Modification shall not become effective
until the date on which all of the following conditions are satisfied in the
sole discretion of the Administrative Agent (collectively, THE "MODIFICATION
CONDITIONS"):

                  (a)      The Administrative Agent shall have received from
                           each Loan Party that is a party thereto executed
                           counterparts of this Modification, and, with respect
                           to each Project, and in recordable form, the
                           Modification of Deeds of Trust (hereafter defined)
                           and the Modification of Assignments of Rents
                           (hereafter defined).

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                  (b)      Borrowers' payment to the Administrative Agent of (i)
                           the Revolving Loan Prepayment Amount and the Term
                           Loan Prepayment Amount, together with any LIBOR
                           breakage costs, (ii) the Unused Line Fee due and
                           payable pursuant to the terms and provisions of
                           SECTION 2.03(4) of the Loan Agreement for the portion
                           of the calendar quarter in which such prepayment
                           occurs and (iii) all reasonable costs and expenses of
                           the Administrative Agent and the Lenders in
                           connection with, or arising out of the negotiation,
                           execution and delivery of this Modification
                           (including the reasonable fees and expenses of
                           counsel) and the consummation of the transactions
                           contemplated by this Modification (including all
                           title insurance charges and recording fees).

                  (c)      The Borrowers shall deliver to the Administrative
                           Agent (on behalf of the Lenders) such endorsements to
                           the existing Title Policies and amendments to the
                           Loan Documents as the Administrative Agent may
                           reasonably request to protect its interests or to
                           confirm the validity and priority of the Mortgages
                           and any other Liens or collateral granted to
                           Administrative Agent (on behalf of the Lenders) in
                           connection with the Loans.

                  (d)      The Administrative Agent shall have determined to its
                           satisfaction (provided, however, that such
                           determination shall be consistent with, and similar
                           in substance to, the determination of such
                           calculation as of the date of the Loan Agreement)
                           that the Projects generate an annualized Net
                           Operating Income sufficient to produce (a) an
                           aggregate Cash on Cash Return of at least 12%; (b) an
                           aggregate Debt Service Coverage of at least 1.25 to
                           1.00 and (c) a Portfolio LTV equal to, or less than,
                           77%.

                  (e)      The Administrative Agent shall have determined to its
                           satisfaction (provided, however, that such
                           determination shall be consistent with, and similar
                           in substance to, the determination of such
                           calculation as of the date of the Loan Agreement)
                           that the REIT Net Cash Flow Test and the REIT Net
                           Worth Test have been satisfied as of the date of this
                           Modification.

                  (f)      No event of default (or any event or condition which,
                           with the giving of notice, the passage of time or
                           both, would constitute an event of default) under the
                           Chase Loan Facility has occurred and is continuing.

                  (g)      The delivery by Borrowers to the Administrative Agent
                           of evidence satisfactory to the Administrative Agent
                           that the lenders under the Chase Loan Facility have
                           consented to the Amendment.

                  (h)      The Administrative Agent shall have received such
                           other documents and certificates (including opinions
                           from counsel to the Loan Parties) as the
                           Administrative Agent or its counsel may reasonably
                           request relating to the

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                           organization, existence and good standing of the Loan
                           Parties, the continued enforceability of the Loan
                           Documents as modified by this Modification, the
                           authorization of this Modification or the
                           consummation of the transactions described therein
                           and herein, all in form reasonably satisfactory to
                           the Administrative Agent.

By entering into this Modification, each Loan Party shall be deemed to represent
and warrant on the date hereof that each of the Modification Conditions has been
satisfied.

         5.  DEFINED TERMS; ADDITIONAL AMENDMENTS.

             5.1 The following definitions are hereby added and made a part of
SECTION 1.01 of the Loan Agreement:

             "Modification of Deeds of Trust" means those certain Modification
to Deeds of Trust, Security Agreement and Fixture Filing and Modification to
Leasehold Deeds of Trust, Security Agreement and Fixture Filing, dated as of
December 15, 1999, executed by the applicable Borrower in favor of the
Administrative Agent (on behalf of the Lenders), together with all future
amendments, modifications and supplements thereto."

             "Modification of Assignments of Rents" means those certain
Modification to Assignments of Rents and Leases and Modification to Assignment
of Rents and Subleases, dated as of December 15, 1999, executed by the
applicable Borrower in favor of the Administrative Agent (on behalf of the
Lenders), together with all future amendments, modifications and supplements
thereto."

             5.2 From and after the date hereof, the definition of "Mortgages"
shall be amended to refer to the Mortgages as amended by the applicable
Modification of Deeds of Trust.

             5.3 From and after the date hereof, the definition of "Assignments
of Rents and Leases" shall be amended to refer to the Assignments of Rents and
Leases as amended by the applicable Modification of Assignments of Rents.

             5.4 The following definitions shall be deleted in their entirety
from SECTION 1.01 of the Loan Agreement and all references to such terms in the
Loan Agreement and any other Loan Documents shall be amended accordingly to
reflect such deletion: "BPE", "JV Book Value", "JV Entities", "JV Pledge
Agreement", "JV Properties", "Key Personnel".

             5.5 The last sentence in the definition of "Revolving Loan
Commitment" set forth in SECTION 1.01 of the Loan Agreement is hereby deleted in
its entirety and replaced with the following: "The initial aggregate principal
amount of the Revolving Loan Commitments is $25,000,000."

             5.6 The last sentence in the definition of "Term Loan Commitment"
set forth in Section 1.01 of the Loan Agreement is hereby deleted in its
entirety and replaced with the

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following: "The initial aggregate principal amount of the Term Loan Commitments
is $151,262,867."

             5.7 The definition of "Maximum Loan Amount" is hereby deleted in
its entirety and replaced with the following:

             "MAXIMUM LOAN AMOUNT" means $176,262,867.

             5.8 SECTION 2.01(2)(a) of the Loan Agreement is hereby deleted in
its entirety and replaced with the following:

             "(a) An amount equal to interest to accrue at the rate of 7.94% per
annum for the period commencing on the Closing Date to the first Business Day of
the next succeeding month, plus all other sums owing to the Lenders and the
Administrative described in Part A of SCHEDULE 2.1 attached hereto, shall be
disbursed to the Lenders and the Administrative Agent in payment of such sums."

             5.9 SECTION 2.01(6)(e) of the Loan Agreement shall be deleted in
its entirety and replaced with the following:

             "(e) The Administrative Agent (on behalf of the Lenders) shall have
determined to its satisfaction (provided, however, that such determination shall
be consistent with, and similar in substance to, the determination of such
funding criteria calculations as of the date of this Agreement) based on
information and documentation provided by the Borrowers to the Administrative
Agent (on behalf of the Lenders) at least five (5) Business Days prior to the
proposed date of the funding of the requested Additional Advance that after
giving effect to such Additional Advance, the Projects will generate an
annualized Net Operating Income sufficient to produce (i) an aggregate Cash on
Cash Return of at least 12%, (ii) an aggregate Debt Service Coverage of at least
1.50 to 1.00 (or, with respect to Additional Advances of the Revolving Loans,
1.25 to 1.00) and (iii) a Portfolio LTV equal to, or less than, 77%, in each
case, calculated based on the assumption that (x) with respect to any Advance
made prior to the occurrence of any Partial Release pursuant to SECTION 2.04
hereof, the full amount of the Loans have been disbursed and are outstanding,
less any undisbursed amounts allocated to phase II of the Fremont Additional
Advance (as more particularly described on the Budget) and/or SCHEDULE 5 annexed
hereto, and (y) with respect to any Advance made after the occurrence of a
Partial Release pursuant to SECTION 2.04 hereof, the Required Release Paydown
Amount has not been paid and is outstanding; provided, however, that for the
purposes of determining satisfaction of this condition, but not for the purposes
of determining satisfaction of the condition set forth in Paragraph C.4 of
SCHEDULE 2.1, the parties shall use the annualized Net Operating Income
determined as of the end of the most recently ended fiscal quarter."

             5.10 SECTION 2.04(a)(4) of the Loan Agreement is hereby deleted in
its entirety and replaced with the following:

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             "(4) The Administrative Agent shall have determined to its
satisfaction (provided, however, that such determination shall be consistent
with, and similar in substance to, the determination of such calculations as of
the date of this Agreement) that after giving effect to such Partial Release,
the Projects will generate an annualized Net Operating Income sufficient to
produce (a) an aggregate Cash on Cash Return of at least 12%, (b) an aggregate
Debt Service Coverage of at least 1.50 to 1.00 and (c) a Portfolio LTV equal to,
or less than, 77%, in each case, calculated based on the assumption that, (i)
with respect to the first Partial Release made pursuant to this SECTION 2.04,
the full amount of the Loans have been disbursed (less any amounts allocated to
phase II of the Fremont Additional Advance) and (ii) with respect to all other
Partial Releases, the Required Release Paydown Amount with respect to such
Partial Release has not been paid and is outstanding;"

             5.11 Clause (d) of SECTION 3.02(2) is hereby deleted in its
entirety and replaced with the following:

         "(d) the Administrative Agent determines (based on leases which will
         remain in effect after restoration is complete) that after restoration
         (i) the Debt Service Coverage for the Projects will be at least equal
         to 1.50 to 1.00, (ii) the Cash on Cash Return for the Projects will be
         at least equal to 12% and (iii) the Portfolio LTV is equal to, or less
         than, 77%;"

             5.12 SECTION 7.11 of the Loan Agreement is hereby deleted in its
entirety and replaced with the following:

             "Section 7.11 PORTFOLIO COVENANTS. With respect to the Projects, as
of the end of each fiscal quarter (i) the Debt Service Coverage shall be at
least 1.25 to 1.00, (ii) the Cash on Cash Return shall be at least 12% and (iii)
the Portfolio LTV shall be equal to, or less than, 77%, in each case, as
determined by Administrative Agent (on behalf of the Lenders)."

             5.13 SECTION 7.12 of the Loan Agreement is hereby deleted in its
entirety.

             5.14 Paragraph C.4 of SCHEDULE 2.1 to the Loan Agreement is hereby
amended to delete the references to the phrase "eleven percent (11%)" and
substitute in lieu thereof the phrase "twelve percent (12%)."

             5.15 The Borrowers and the Lenders acknowledge and agree that
subject to the satisfaction of the Modification Conditions, SCHEDULE 3 to the
Loan Agreement is hereby deleted in its entirety and replaced with the schedule
attached hereto as SCHEDULE 3. From and after the date hereof, the term
"Allocated Loan Amount" as used in the Loan Agreement shall mean the Loan
amounts as set forth in the schedule attached to this Modification as SCHEDULE
3.

             5.16 EXHIBIT A-1 to the Loan Agreement is hereby deleted in its
entirety and replaced with the schedule attached hereto as EXHIBIT A-1.

             5.17 EXHIBIT A-2 to the Loan Agreement is hereby deleted in its
entirety.

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     6.  COVENANTS, REPRESENTATIONS AND WARRANTIES OF LOAN PARTIES.

         6.1 Each Loan Party hereby represents and warrants to the
Administrative Agent and the Lenders that (a) it has the legal power and
authority to enter into this Modification without consent or approval by any
third party and this Modification constitutes the legal, valid and binding
obligation of such Loan Party, enforceable against such Loan Party in accordance
with its terms, and (b) the execution and delivery by such Loan Party of this
Modification has been duly authorized by all requisite limited liability
company, partnership or corporate action, as the case may be, on the part of
such Loan Party, will not violate any provision of such Loan Party's
organizational documents, as applicable, does not contravene any law, rule or
regulation applicable to it or violate or create a default under any contractual
provision binding on it or affecting it or any of its properties or assets, and
(c) no consent of any Person is required in connection with the execution,
delivery and performance by the Loan Parties of this Modification (other than
any consents that have been obtained and are in full force and effect).

         6.2 Each Loan Party hereby represents and warrants to the
Administrative Agent and the Lenders that, as of the date hereof, (a) no
Potential Default or Event of Default has occurred and is continuing under any
applicable Loan Document executed by such Loan Party, (b) no Potential Default
or Event of Default will occur as a result of the execution, delivery and
performance by such Loan Party of this Modification, the Modification of Deeds
of Trust or Modification of Assignments of Rents to which such Loan Party is a
party, as applicable, (c) such Loan Party has not given any notice of any
uncured Potential Default to the Administrative Agent or any Lender, (d) there
are no legal proceedings commenced or threatened against the Administrative
Agent or any Lender by such Loan Party.

         6.3 Each Loan Party hereby confirms and acknowledges that such Loan
Party has no offsets, defenses, claims, counterclaims, setoffs, or other basis
for reduction with respect to any of Borrowers' indebtedness to the Lenders
under the Loans or any obligations or liabilities of such Loan Party to the
Administrative Agent and the Lenders under any Loan Document executed by such
Loan Party. Each Loan Party hereby confirms and acknowledges that all
representations and warranties made by such Loan Party in the Loan Documents to
which such Loan Party is a party to, are true and correct in all material
respects on and as of the date of this Modification.

         6.4 Each Borrower hereby agrees that a breach of any of the
representations warranties and covenants made herein (including, without
limitation, the covenants set forth in SECTION 3 hereof) shall constitute an
Event of Default under ARTICLE 9 of the Loan Agreement, subject to the notice
and cure provisions provided therein.

     7.  EFFECT UPON LOAN DOCUMENTS.

         7.1 Except as specifically set forth herein, the Loan Agreement and
Loan Documents shall remain in full force and effect and are hereby ratified and
confirmed by each applicable Loan Party signatory thereto. The parties hereto
acknowledge and agree that the

                                       11
<PAGE>

Original Loan Agreement, as hereby amended, is in full force and effect in
accordance with its terms and has not been supplemented, modified or otherwise
amended, canceled, terminated or surrendered, except pursuant to this
Modification. The Loan Agreement is binding and enforceable as against the
parties thereto in accordance with its terms. All references to the "Loan
Agreement" in the Loan Documents and to "this Agreement" in the Original Loan
Agreement shall mean and refer to the Original Loan Agreement as modified and
amended hereby.

         7.2 The execution, delivery and effectiveness of this Modification
shall not operate as a waiver of any right, power or remedy of the
Administrative Agent or the Lenders under the Loan Documents (except to the
extent expressly set forth herein), or any other document, instrument or
agreement executed and/or delivered in connection therewith.

     8.  GOVERNING LAW.

         8.1 THIS MODIFICATION SHALL BE CONSTRUED, INTERPRETED AND GOVERNED BY
THE LAW OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS CONFLICT OF LAWS
PRINCIPLES.

     9.  COUNTERPARTS.

         9.1 This Modification may be executed in any number of counterparts,
and all such counterparts shall together constitute the same agreement.

                     SIGNATURES COMMENCE ON FOLLOWING PAGE.

                                       12
<PAGE>

                  IN WITNESS WHEREOF, the parties hereto have caused this
Modification to be executed as of the day and year first above written.

                                 BURNHAM PACIFIC OPERATING
                                 PARTNERSHIP, L.P.,
                                 a Delaware limited partnership

                                 By: BURNHAM PACIFIC PROPERTIES,
                                      INC., a Maryland corporation,
                                      its general partner

                                      By:
                                         --------------------------------------
                                         Name:
                                         Title:

                                 BPP/CAMERON PARK, L.P.,
                                 a California limited partnership

                                 By: BURNHAM PACIFIC OPERATING
                                      PARTNERSHIP, L.P., a Delaware limited
                                      partnership, its managing member

                                      By:  BURNHAM PACIFIC PROPERTIES,
                                           INC., a Maryland corporation, its
                                           general partner

                                            By:
                                               --------------------------------
                                            Name:
                                            Title:

                                       13
<PAGE>

                                  BPP/RILEY, L.P.,
                                  a California limited partnership

                                  By: BURNHAM PACIFIC OPERATING
                                       PARTNERSHIP, L.P., a Delaware
                                       limited partnership, its general partner

                                       By:  BURNHAM PACIFIC PROPERTIES,
                                             INC., a Maryland
                                             corporation, its general partner

                                            By:
                                               ------------------------------
                                            Name:
                                               Title:

                                  BURNHAM PACIFIC PROPERTIES, INC., a
                                    Maryland corporation

                                  By:
                                     ------------------------------
                                      Name:
                                      Title:

                                  CMF CAPITAL COMPANY, LLC, a Delaware
                                      limited liability company, as
                                      Administrative Agent for the Lenders and
                                      as Lender

                                  By:
                                     --------------------------------
                                      Name:
                                      Title:

                                       14

<PAGE>

                                   SCHEDULE 1

                         Bell Gardens Closing Conditions

At Borrowers' sole cost and expense, Borrowers shall cause each of the following
to be executed, delivered, prepared, confirmed or issued to the Administrative
Agent (on behalf of the Lenders), each in form and content satisfactory to the
Administrative Agent (on behalf of the Lenders) in its sole discretion (unless
otherwise specified to the contrary):

         1. An ALTA (or equivalent) leasehold mortgagee policy of title
insurance in the maximum amount of the Allocated Loan Amount for the Bell
Gardens Project, with reinsurance or co-insurance and such endorsements as the
Administrative Agent may require, containing no exceptions to title (printed or
otherwise) which are unacceptable to the Administrative Agent, and insuring that
the Bell Gardens Mortgage is a first-priority Lien on the Bell Gardens Project
and related collateral. Without limitation, such policy shall (a) be in the 1970
ALTA (as amended 84) form or, if not available, ALTA 1992 form (deleting
arbitration and creditors' rights, if permissible) or, if not available, the
form commonly used in the state where the Bell Gardens Project is located,
insuring the Administrative Agent (on behalf of the Lenders) or any and its
successors and assigns; and (b) include the following endorsements and/or
affirmative coverages: (1) ALTA 9 Comprehensive, (2) Survey, (3) ALTA 3.1 Zoning
(with additional coverage for number and type of parking spaces), (4) Usury, (5)
Doing Business, (6) Access, (7) Separate Tax Lot, (8) Environmental Protection
Lien, (9) Subdivision, (10) Contiguity, (11) Tax Deed (as applicable), and (12)
Mortgage Recording Tax (as applicable).

         2. The Administrative Agent shall have received such endorsements to
the existing Title Policies and amendments to the existing Loan Documents as the
Administrative Agent may reasonably request to protect its interests or to
confirm the validity and priority of the Mortgages and any other Liens or
collateral granted to the Administrative Agent (on behalf of the Lenders) in
connection with the Loans.

         3. Documents and certificates evidencing the formation, organization,
valid existence, good standing, and due authorization of each Loan Party.
Evidence of each Loan Parties' qualification to do business in the state where
the Bell Gardens Project is located.

         4. Legal opinions issued by counsel for each Loan Party, opining as to
the due organization, valid existence and good standing of each Loan Party, and
the due authorization, execution, delivery, enforceability and validity of any
loan documents executed by such Loan Party (including any amendments or
modifications to any existing Loan Documents) and such other matters as the
Administrative Agent or its counsel reasonably may request.

         5. Current Uniform Commercial Code searches, and litigation, bankruptcy
and judgment reports as requested by the Administrative Agent, with respect to
the Borrowers, and any Loan Party, their principals, and such other persons
reasonably selected by the Administrative Agent.

                                       17
<PAGE>

         6. Evidence of insurance as required by the Loan Agreement for the Bell
Gardens Project, and conforming in all respects to the requirements of the
Administrative Agent.

         7. A current "as-built" survey of the Bell Gardens Project, dated or
updated to a date not earlier than thirty (30) days prior to the Bell Gardens
Outside Closing Date, certified to the Administrative Agent (on behalf of the
Lenders) and the issuer of the title insurance described in paragraph 1 above,
prepared by a licensed surveyor acceptable to the Administrative Agent and such
title insurance company, and conforming to the Administrative Agent's current
standard survey requirements, which may include certification to additional
participants, co-lenders and/or investors in a Secondary Market Transaction.
Without limitation, the minimum requirements for the survey shall be as set
forth in the 1997 Minimum Standard Detail Requirements for ALTA/ACSM Land Title
Surveys, "Urban Survey" classification, with the following additional items from
Table A, "Optional Survey Responsibilities and Specifications": "2" (vicinity
map showing nearby highway or major intersection), "3" (flood zone designation),
"4" (land area), "6" (setbacks, height and bulk restrictions), "8" (other
visible improvements), "9" (parking areas), "10" (access to public way, driveway
and curb cuts), "11" (utilities), and "13" (other significant observations).
Notwithstanding the foregoing, the Administrative Agent (on behalf of the
Lenders) shall accept the existing survey for the Bell Gardens Project provided
(a) such survey is recertified to the Administrative Agent and its successors
and assigns and the Title Company, (b) the title insurance policy described in
paragraph 1 above shall insure the Administrative Agent (on behalf of the
Lenders) for any state of facts not shown on any survey, (c) any indemnity
delivered by Borrowers to the Title Company with respect to the state of facts
not shown on any survey shall also be delivered to the Administrative Agent (on
behalf of the Lenders), (d) Borrowers shall certify to the Administrative Agent
(on behalf of the Lenders) and its successors and assigns and to the Title
Company that there has been no construction, demolition or other material
modification to the improvements located on the Bell Gardens Project since the
date of such survey other than tenant improvement work or such construction,
demolition or other material modification as to which such certificate shall
contain a detailed description of the nature, location and extent thereof, and
(e) the surveys were prepared by a licensed surveyor and would otherwise be
acceptable to a prudent lender upon the satisfaction of (a)-(d) above.

         8. A current engineering report or architect's certificate with respect
to the Bell Gardens Project, covering, among other matters, inspection of
heating and cooling systems, roof and structural details, showing no failure of
compliance in any material respect with building plans and specifications,
applicable legal requirements (including requirements of the Americans with
Disabilities Act) and fire, safety and health standards and reviewing and
approving, among other matters, soil tests, plans and specifications (including
heating, ventilation and cooling systems, roof and structural details,
mechanical and electrical systems), and compliance with local, state or federal
laws, regulations, codes, ETC., and containing a declaration satisfactory to the
Administrative Agent that there will be no asbestos in the Bell Gardens Project.
The engineer/architect preparing such report or certificate must be satisfied
that the Bell Gardens Project is in compliance with fire, safety and health
standards which such engineer/architect deems reasonable, in addition to
standards imposed by law, regulation or

                                       18
<PAGE>

codes. Such report shall also include an assessment of the Bell Gardens
Project's tolerance for earthquake and seismic activity.

         9. All Appraisals, environmental reports, building condition reports
and Site Assessments delivered to the Lenders with respect to the Bell Gardens
Project shall be certified to the Administrative Agent (on behalf of the Lenders
and their successors and assigns) without modification or change thereto in the
form reasonably requested by the Administrative Agent which may include
certification to additional participants, co-lenders and/or investors in a
Secondary Market Transaction.

         10. A current rent roll for the Bell Gardens Project, certified by the
Borrowers. Such rent roll shall include the following information: (a) tenant
names; (b) unit/suite numbers; (c) area of each demised premises and total area
of such Project (stated in net rentable square feet); (d) rental rate (including
escalations) (stated in gross amount and in amount per net rentable square foot
per year); (e) Lease term (commencement, expiration and renewal options); (f)
expense pass-throughs; (g) cancellation/termination provisions; (h) security
deposit; and (i) material operating covenants and co-tenancy clauses. In
addition, the Borrowers shall provide the Administrative Agent with a copy of
the standard lease form to be used by the Borrowers in leasing space at the Bell
Gardens Project, and, at the Administrative Agent's request, true and correct
copies of all Leases at the Bell Gardens Project. As requested by the
Administrative Agent, the Borrowers shall deliver to the Administrative Agent
for its review (on behalf of the Lenders), copies of all existing Leases and
material service contracts.

         11. A copy of the third-party management agreement for the Bell Gardens
Project, certified by the Borrowers as being true, correct and complete.

         12. The Borrowers' deposit with the Administrative Agent of the amount
required by the Administrative Agent with respect to any maintenance, repairs
and/or remedial or corrective work required to be performed by the
Administrative Agent at the Bell Gardens Project and to fund any other required
escrows or reserves.

         13. Evidence that (a) the Bell Gardens Project and the operation
thereof comply with all legal requirements, including that all requisite
certificates of occupancy, building permits, and other licenses, certificates,
approvals or consents required by any governmental authority have been issued
without variance or condition, (b) following any casualty, the improvements
which form a part of the Bell Gardens Project may be reconstructed and the
current use thereof restored, and (c) that there is no litigation, action,
citation, injunctive proceedings, or like matter pending or threatened with
respect to the validity of such matters. At the Administrative Agent's request,
the Borrowers shall furnish the Administrative Agent with a zoning endorsement
to the Administrative Agent's title insurance policy, zoning letters from
applicable municipal agencies, and utility letters from applicable service
providers.

         14. No change shall have occurred in the financial condition of any
Borrower, or BPPI or in the Net Operating Income of the Projects (including, the
Bell Gardens Project), or

                                       19
<PAGE>

P&V Sale Properties, or in the financial condition of any major or anchor
tenant, which would have, in the Administrative Agent's or any Lender's
judgment, a material adverse effect on any of the Projects or on any Borrower's
or any Borrower Party's ability to repay the Loan or otherwise perform its
obligations under the Loan Documents.

         15. No condemnation or adverse zoning or usage change proceeding shall
have occurred or shall have been threatened against any Project (including the
Bell Gardens Project); no Project (including the Bell Gardens Project) shall
have suffered any significant damage by fire or other casualty which has not
been repaired; no structural change shall have occurred to any of the
improvements located at any Project (including the Bell Gardens Project); no
law, regulation, ordinance, moratorium, injunctive proceeding, restriction,
litigation, action, citation or similar proceeding or matter shall have been
enacted, adopted, or threatened by any governmental authority, which would have,
in the Administrative Agent's or any Lender's good faith judgment, a material
adverse effect on any Borrower, any Borrower Party or any Project (including the
Bell Gardens Project).

         16. All fees and commissions payable to real estate brokers, mortgage
brokers, or any other brokers or agents in connection with the Amendment or the
acquisition of the Bell Gardens Project by BPOP have been paid, such evidence to
be accompanied by any waivers or indemnifications deemed reasonably necessary by
the Administrative Agent.

         17. Payment of the Administrative Agent's reasonable costs and expenses
in underwriting and documenting the Bell Gardens Project, including reasonable
fees and expenses of the Administrative Agent's inspecting engineers,
consultants, and outside counsel.

         18. Estoppel certificates and subordination, non-disturbance and
attornment agreements (in form and substance satisfactory to the Administrative
Agent) from tenants under Leases of space at the Bell Gardens Project of at
least 10,000 gross leaseable square feet or occupying at least 80% of the gross
leaseable area at such Project. The Borrowers shall deliver to the
Administrative Agent consent and estoppel certificates (in form and substance
satisfactory to the Administrative Agent) from all lessors under any Leasehold
Property Lease covering the Bell Gardens Project.

         19. No Potential Default or Event of Default shall have occurred or
exist including, without limitation any defaults under the Chase Loan Facility.
All such defaults, if any, must be cured to the Administrative Agent's
satisfaction.

         20. The Administrative Agent shall have determined to its satisfaction
that the Projects (including the Bell Gardens Project) generate an annualized
Net Operating Income sufficient to produce (a) an aggregate Cash on Cash Return
of at least 12%; (b) an aggregate Debt Service Coverage of at least 1.25 to 1.00
and (c) a Portfolio LTV equal to, or less than, 77%.

                                       20
<PAGE>

         21. The Administrative Agent shall have determined to its satisfaction
that the REIT Net Cash Flow Test and the REIT Net Worth Test have been satisfied
as of the date of this Modification.

                                       21<PAGE>

                                                                    Exhibit 10.1
SAUER INC.
EXECUTIVE EMPLOYMENT AGREEMENT

David L. Pfeifle

<PAGE>

CONTENTS

<TABLE>
<S>               <C>                                                                <C>
Section 1.        Employment                                                          1

Section 2.        Employment Period                                                   1

Section 3.        Compensation                                                        2

Section 4.        Expenses                                                            3

Section 5.        Employment Terminations                                             3

Section 6.        Change in Control                                                   6

Section 7.        Covenant Not to Compete                                             8

Section 8.        Disclosure of Confidential Information                              9

Section 9.        Nonsolicitation                                                     10

Section 10.       Injunctive Relief and Additional Remedy;
                  Essential and Independent Covenants                                 11

Section 11.       Arbitration                                                         11

Section 12.       Notices                                                             12

Section 13.       Successors                                                          12

Section 14.       Entire Agreement; Modification, Waiver, and Interpretation          12

Section 15.       Severability                                                        12

Section 16.       Counterparts                                                        12

Section 17.       Headings                                                            12
</TABLE>

<PAGE>

EMPLOYMENT AGREEMENT

         THIS EMPLOYMENT AGREEMENT has been entered into this 24th day of
February, 2000, between Sauer Inc., a Delaware corporation (the "Company"), and
DAVID L. PFEIFLE (the "Executive"). The Executive is employed as EXECUTIVE VICE
PRESIDENT AND CHIEF OPERATING OFFICER and will become PRESIDENT AND CHIEF
EXECUTIVE OFFICER upon the combination of the Company and the Fluid Power
Business of Danfoss A/S. The Company desires to assure the benefit of the
Executive's future services, and the Executive is willing to commit to render
such services, upon the terms and conditions set forth below.

         It is therefore mutually agreed as follows:

         1. EMPLOYMENT. The Company agrees to employ the Executive in an
executive capacity, and the Executive agrees to serve the Company, upon the
terms and conditions and for the period of employment hereinafter set forth.
Throughout the Employment Period (as hereinafter defined), unless otherwise
agreed in writing by the Executive and the Company, the Company shall neither
demote the Executive nor assign to the Executive any duties or responsibilities
that are inconsistent with his present position, duties, responsibilities, and
status. Executive may serve from time to time as a director of the Company
and/or as a director and/or officer of one or more subsidiaries of the Company.
Executive agrees to fulfill his duties as such director or officer without
additional compensation other than the compensation provided for in this
Agreement.

         The Executive agrees, that during the Employment Period (as hereinafter
defined) he will devote substantially all of his business time, attention,
skill, and energy to the business of the Company, will use his best efforts to
promote the success of the Company's business and will cooperate fully with the
Board of Directors in the advancement of the best interests of the Company.

         2. EMPLOYMENT PERIOD. The Initial Term of the Executive's employment
under this Agreement shall commence as of 1 January 2000 (the "Effective Date"),
and shall expire, subject to the earlier termination of the Executive's
employment as hereinafter provided, on 31 December 2001 (the "Initial Term").
The Initial Term of employment automatically shall be extended for one (1)
additional year at the end of the Initial Term, and then again after each
successive year thereafter (a "Successive Term"). The Initial Term and any
Successive Term are sometimes referred to in this Agreement as the "Employment
Period." However, either party may terminate this Agreement at the end of the
Initial Term or at the end of any Successive Term thereafter, by giving the
other party written notice of intent not to renew, delivered at least ninety
(90) calendar days prior to the end of such Initial Term or Successive Term.

         In the event such notice of intent not to renew is properly delivered
by either party, this Agreement, along with all corresponding rights, duties,
and covenants, shall automatically expire

<PAGE>

at the end of the Initial Term or Successive Term then in progress, with the
exception of the covenants provided in Sections 7, 8, and 9 herein (which shall
survive such expiration).

         However, regardless of the above, if at any time during the term of
this Agreement, a Change in Control of the Company occurs, then this Agreement
shall become immediately irrevocable for the greater of two (2) years from the
date of the Change in Control or for the amount of time remaining in the term of
this Agreement.

         3. COMPENSATION. Throughout the Employment Period, the Company shall
pay or provide the Executive with the following, and the Executive shall accept
the same, as compensation for the performance of his undertakings and the
services to be rendered by him under this Agreement:

                  (a)      A base salary at a rate of not less than 300,000
                           US-Dollar per year payable not less often than in
                           monthly installments. The annual rate of base salary
                           shall be reviewed at least annually while this
                           Agreement is in force, to ascertain whether, in the
                           judgment of the Board of Directors of the Company
                           (the "Board") or the Board's designee (currently the
                           Compensation Committee), such base salary should be
                           increased. Such judgment shall be based on such
                           criteria as the Board may determine in its sole
                           discretion, which criteria may include, without
                           limitation, the performance of the Executive during
                           the year, survey data representing average base pay
                           for executives employed in similar positions in
                           comparable industries, and the rate of inflation. If
                           so increased, the annual base salary as stated above
                           shall, likewise, be increased for all purposes of
                           this Agreement.

                  (b)      Participation in the Company's Bonus Plan as long as
                           such plan remains in effect, and participation in any
                           future incentive compensation or other bonus plan
                           (including annual and long-term incentive plans)
                           covering the Company's executive officers.

                  (c)      Participation in the Company's employee benefit
                           plans, policies, practices, and arrangements in which
                           the Executive is presently eligible to participate or
                           plans and arrangements substituted therefore or in
                           addition thereto, including the savings plan,
                           retirement plan, supplemental retirement plans,
                           health and dental plan, disability plan, survivor
                           income and life insurance plan or other arrangement
                           (collectively, the "Benefit Plans").

                  (d)      Paid vacations in accordance with the Company's
                           vacation policy as in effect from time to time, and
                           all paid holidays given by the Company to its
                           executive officers.

                                       2
<PAGE>

                  (e)      All fringe benefits and perquisites including without
                           limitation the use of an automobile and the payment
                           by the Company of initiation fees and dues for
                           country clubs, luncheon clubs, or similar facilities
                           in accordance with the Company's policy presently in
                           effect.

         4. EXPENSES. During the Employment Period, the Company shall promptly
pay or reimburse the Executive for all reasonable expenses incurred by the
Executive in the performance of duties hereunder.

         5.       EMPLOYMENT TERMINATIONS.

                  (a) TERMINATION DUE TO RETIREMENT. In the event the
Executive's employment is terminated during the Employment Period by reason of
Retirement (as defined in the retirement benefit plan provided for in Section
3(c)), the Executive's benefits shall be determined in accordance with the
Company's Benefit Plans then in effect as of the date of Retirement.

                  Upon the effective date of such termination, the Company's
obligation to pay and provide to the Executive annual base salary, bonuses, and
benefits (as provided in Section 3 herein, respectively), shall immediately
expire, except to the extent such rights and benefits are vested pursuant to,
and in accordance with, the Benefit Plans.

                  In the event of termination of employment as provided for in
this Section 5(a), the provisions of Sections 7, 8, 9, 10, and 11 herein shall
survive such termination.

                  (b) TERMINATION DUE TO DEATH. In the event of the death of the
Executive during the Employment Period, or during any period of Disability
during which he is receiving compensation pursuant to Section 5(c) herein, the
Executive's estate, heirs, and beneficiaries shall be entitled to receive the
full amount of his base salary for the month in which death occurs, and all
other benefits available to them under the Company's Benefit Plans (including,
but not limited to, the Executive Life Insurance Program covering the Executive)
then in effect as of the date of death of the Executive.

                  (c) TERMINATION DUE TO DISABILITY. In the event that during
the Employment Period the Executive becomes Disabled (as defined in the
Company's governing long-term disability plan then in effect) and is, therefore,
unable to perform his duties herein, the Company shall have the right to
terminate the Executive's active employment as provided in this Agreement by
delivering written notice to the Executive at least thirty (30) calendar days
prior to the effective date of such termination.

                  A termination for Disability shall become effective upon the
end of the thirty (30) calendar day notice period. Upon such effective date, the
Company's obligation to pay and provide to the Executive annual base salary,
bonuses, and benefits (as provided in Section 3 herein), shall immediately
expire except to the extent such rights and benefits are vested pursuant

                                       3
<PAGE>

to, and in accordance with, the Benefit Plans. Further, the Executive shall
receive all rights and benefits that he is vested in, pursuant to other plans
and programs of the Company, including, but not limited to, short- and long-term
disability benefits and retirement benefits as described in Section 3(c).

                  (d) VOLUNTARY TERMINATION BY THE EXECUTIVE WITHOUT GOOD
REASON. The Executive may terminate this Agreement at any time by giving the
Board of Directors of the Company written notice of intent to terminate,
delivered at least ninety (90) calendar days prior to the effective date of such
termination (such period not to include vacation). The termination automatically
shall become effective upon the expiration of the ninety (90) calendar days
notice period.

                  Upon the effective date of such termination, the Company shall
pay to the Executive his base salary through the effective date of termination,
plus all other rights and benefits to which the Executive has a vested right to
at that time including, but not limited to, accrued vacation pay. The Company
also shall provide to the Executive the retirement benefits, if any, set forth
in the Benefit Plans described in Section 3(c) herein. Further, in the event of
termination of employment as provided for in this Section 5(d), the provisions
of Sections 7, 8, 9, 10, and 11 herein shall survive such termination.

                  (e) TERMINATION FOR GOOD REASON. The Executive may terminate
this Agreement for Good Reason by giving the Board thirty (30) calendar days'
written notice of such intent to terminate which sets forth in reasonable detail
the facts and circumstances claimed to provide a basis for such termination.
Good Reason shall mean, without the Executive's prior written consent, the
occurrence of any one or more of the following:

                           (i)      The assignment to the Executive of any
                                    duties inconsistent in any respect with the
                                    Executive's position (including status,
                                    offices, titles, and reporting
                                    requirements), authorities, duties, or other
                                    responsibilities as contemplated by Section
                                    1 of this Agreement, or any other action of
                                    the Company which results in a diminishment
                                    in such position, authority, duties, or
                                    responsibilities, other than (A) an
                                    insubstantial and inadvertent action which
                                    is remedied by the Company within 30 days
                                    after receipt of notice thereof given by the
                                    Executive, or (B) Executive being removed as
                                    a director of the Company and/or as a
                                    director or officer of any subsidiary of the
                                    Company.

                           (ii)     The Company's requiring the Executive,
                                    without the Executive's consent, to relocate
                                    his principal residence at that time;

                           (iii)    A material reduction or elimination of any
                                    component of the Executive's compensation as
                                    provided for in Section 3 herein; or

                                       4
<PAGE>

                           (iv)     A breach by the Company of any provision of
                                    this Agreement which is not remedied by the
                                    Company within 30 days after receipt of
                                    notice thereof given by the Executive.

                  Upon the lapse of the thirty (30) calendar days' notice
period, the Good Reason termination shall take effect and the Executive's
obligation to serve the Company, and the Company's obligation to employ the
Executive, under the terms of this Agreement, shall terminate simultaneously,
and, (a) if such termination is prior to a Change in Control (as such term is
defined in Section 6(b) herein), then the Executive shall receive those benefits
similar to those had the Executive been terminated involuntarily by the Company
Without Cause, as provided in Section 5(f) herein, and (b) if such termination
is after a Change in Control, then the Executive shall receive those benefits as
provided in Section 6(a) herein.

                  The parties agree that, in such event, such payments and
benefits shall be deemed to constitute liquidated damages for the Company's
breach of this Agreement, and the Company agrees that the Executive shall not be
required to mitigate his damages (with the exception for participation in
Benefit Plans) by seeking other employment or otherwise.

                  In the event of termination of employment as provided for in
this Section 5(e), the provisions of Sections 7, 8, 9, 10, and 11 herein shall
survive such termination.

                  (f) INVOLUNTARY TERMINATION BY THE COMPANY WITHOUT CAUSE. The
Company may terminate the Executive's employment, as provided under this
Agreement, at any time, for any reason other than Death, Disability, Retirement,
or for Cause, by notifying the Executive in writing of the Company's intent to
terminate, at least thirty (30) calendar days prior to the effective date of
such termination. The termination automatically shall become effective upon the
expiration of the thirty (30) calendar day notice period; provided, however,
that the provisions of Sections 7, 8, 9, 10, and 11 herein shall survive such
termination.

                  For the greater of two (2) years or the remainder of the
Employment Period, the Company shall continue to make monthly payments to the
Executive equal to the Executive's then current annual base salary plus target
annual bonus divided by twelve (12). Further, during such period the Executive
shall continue to participate in all Benefit Plans (except retirement plans) of
the Company; provided, however, that such continued participation shall cease
upon the Executive becoming eligible for similar benefits from a subsequent
employer. Further, in the event the Executive violates any of the provisions of
Sections 7, 8, or 9, any such payments and benefits shall immediately cease.

                  The parties agree that, in such event, such payments and
benefits shall be deemed to constitute liquidated damages for the Company's
breach of this Agreement, and the Company agrees that Executive shall not be
required to mitigate his damages (with the exception for participation in
Benefit Plans) by seeking other employment or otherwise.

                                       5
<PAGE>

                  (g) TERMINATION FOR CAUSE. Nothing in this Agreement shall be
construed to prevent the Board from terminating the Executive's employment under
this Agreement for "Cause". In the event the Board determines that Cause exists,
the Board shall deliver written notice to the Executive of the facts and
circumstances leading to the Board's determination. Upon receipt of this written
notification, all provisions of this Agreement shall terminate, except for the
provisions of Sections 7, 8, 9, 10, and 11 herein (which shall survive such
termination). The Company shall pay the Executive his base salary and accrued
vacation time through the date notice of a for Cause termination is delivered to
the Executive, plus all other benefits to which the Executive has a vested right
to at that time. The Company and the Executive thereafter shall have no further
obligations under this Agreement.

                  "Cause" shall be determined by the Board in the exercise of
good faith and reasonable judgment, and shall mean (i) willful misconduct or
fraud; (ii) conviction of a felony; (iii) consistent gross neglect of duties or
wanton negligence by the Executive in the performance of his duties hereunder;
(iv) the material breach by the Executive of the terms of this Agreement; or (v)
other misconduct of such magnitude that the continued employment of the
Executive may reasonably be expected to adversely affect the business or
properties of the Company.

         6.       CHANGE IN CONTROL.

                  (a) EMPLOYMENT TERMINATIONS AFTER A CHANGE IN CONTROL. During
the term of this Agreement, in the event the Executive's employment with the
Company is terminated within two years following a Change in Control (as such
term is defined in Section 6(b) herein), unless such termination is (i) by the
Company for Cause (as provided in Section 5(g) herein), (ii) by reason of Death,
Disability, or Retirement, or (iii) by the Executive without Good Reason (as
such term is defined in Section 5(e) herein), then in lieu of all other benefits
provided to the Executive under the provisions of this Agreement, the Company
shall pay to the Executive and provide him with the following:

                           (i)      A lump-sum cash amount equal to the
                                    Executive's unpaid base salary, accrued
                                    vacation pay, unreimbursed business
                                    expenses, and all other items earned by and
                                    owed to the Executive through and including
                                    the date of termination (in full
                                    satisfaction for these amounts owed to the
                                    Executive).

                           (ii)     A lump-sum cash amount equal to the
                                    Executive's then current annual target bonus
                                    opportunity, established under the annual
                                    incentive plan for the bonus plan year in
                                    which the Executive's termination occurs,
                                    multiplied by a fraction, the numerator of
                                    which is the number of full completed days
                                    in the bonus plan year through the effective
                                    date of termination, and the denominator of
                                    which is 365 or, if greater, the full bonus
                                    earned at that time based on the level of
                                    goal achievement. This payment will be in
                                    lieu of

                                       6
<PAGE>

                                    any other payment to be made to the
                                    Executive under the annual bonus plan for
                                    the respective plan year.

                           (iii)    A lump-sum cash amount equal to the
                                    Executive's then current annual base salary
                                    and target annual bonus opportunity
                                    multiplied by three (3).

                           (iv)     A lump-sum cash amount equal to 15 percent
                                    of the Executive's then current base salary
                                    in lieu of health, dental, long-term
                                    disability, and life insurance continuation.
                                    The Executive's participation in these and
                                    all other such benefits including bonus,
                                    savings and retirement plans shall cease
                                    upon the termination of Executive's
                                    employment with the Company.

                  The parties agree that, in the event of such termination, such
payment and benefits (including an Excise Tax Payment provided in Section 6(c)
herein) shall be deemed to constitute liquidated damages for the Company's
breach of this Agreement, and the Company agrees that the Executive shall not be
required to mitigate his damages by seeking other employment or otherwise.

                  The parties also agree that, in the event of a termination of
employment that obligates the Company to make the payments set forth in this
Section 6(a), the provisions of Sections 7, 8, 9, 10 and 11 herein shall survive
such termination.

                  (b) DEFINITION OF "CHANGE IN CONTROL." "Change in Control" of
the Company means, and shall be deemed to have occurred upon any of the
following events taking place after the combination of the Company and the fluid
power business of Danfoss A/S:

                           (i)      Any person (other than those persons in
                                    control of the Company as of the date
                                    immediately following the date upon which
                                    the combination of the Company and the Fluid
                                    Power Business of Danfoss A/S is completed,
                                    or other than a trustee or other fiduciary
                                    holding securities under an employee benefit
                                    plan of the Company, or a corporation owned
                                    directly or indirectly by the stockholders
                                    of the Company in substantially the same
                                    proportions as their ownership of stock of
                                    the Company) becomes the beneficial owner,
                                    directly or indirectly, of securities of the
                                    Company representing thirty percent (30%) or
                                    more of the combined voting power of the
                                    Company's then outstanding securities; or

                           (ii)     During any period of two (2) consecutive
                                    years (not including any period prior to the
                                    Effective Date of the combination of the
                                    Company and the Fluid Power Business of
                                    Danfoss A/S), individuals who at the
                                    beginning of such period constitute the

                                       7
<PAGE>

                                    Board (and any new Director, whose election
                                    by the Company's stockholders was approved
                                    by a vote of at least two-thirds (2/3) of
                                    the Directors then still in office who
                                    either were Directors at the beginning of
                                    the period or whose election or nomination
                                    for election was so approved), cease for any
                                    reason to constitute a majority thereof; or

                           (iii)    The stockholders of the Company approve: (A)
                                    a plan of complete liquidation of the
                                    Company; or (B) an agreement for the sale or
                                    disposition of all or substantially all the
                                    Company's assets; or (C) a merger,
                                    consolidation, or reorganization of the
                                    Company with or involving any other
                                    corporation, other than a merger,
                                    consolidation, or reorganization that would
                                    result in the voting securities of the
                                    Company outstanding immediately prior
                                    thereto continuing to represent (either by
                                    remaining outstanding or by being converted
                                    into voting securities of the surviving
                                    entity) at least fifty percent (50%) of the
                                    combined voting power of the voting
                                    securities of the Company (or such surviving
                                    entity) outstanding immediately after such
                                    merger, consolidation, or reorganization.

                  However, in no event shall a "Change in Control" be deemed to
                  have occurred, with respect to the Executive, if the Executive
                  is part of a purchasing group which consummates the Change in
                  Control transaction. The Executive shall be deemed "part of a
                  purchasing group" for purposes of the preceding sentence if
                  the Executive is an equity participant in the purchasing
                  company or group (except for (i) passive ownership of less
                  than one percent (1%) of the stock of the purchasing company;
                  or (ii) ownership of equity participation in the purchasing
                  company or group which is otherwise not significant as
                  determined prior to the Change in Control by a majority of the
                  nonemployee continuing Directors).

                  (c) EXCISE TAX PAYMENT. In the event that any portion of the
severance benefits or any other payment under this Agreement or under any other
agreement with or plan of the Company (in the aggregate "Total Payments") would
constitute an "Excess Parachute Payment," such that an "Excise Tax" is due, the
Company shall provide to the Employee, in cash, an additional payment in an
amount equal to the excise tax divided by 0.329 to offset the excise tax and the
Employee's state and federal income and employment taxes on this excise tax
payment. This payment shall be made as soon as possible following the date of
the Employee's qualifying termination, but in no event later than thirty (30)
calendar days of such date.

                  For purposes of this Agreement, the terms "Excise Tax" and
"Excess Parachute Payment" shall have the meanings assigned to such terms in
Sections 280G and 4999 of the Internal Revenue Code of 1986, as amended.

                                       8
<PAGE>

                  (d) SUBSEQUENT RECALCULATION. In the event the Internal
Revenue Service subsequently adjusts the excise tax computation herein
described, the Company shall reimburse the Executive for the full amount of any
underpaid excise tax, and any related interest and/or penalties due to the
Internal Revenue Service.

         7. COVENANT NOT TO COMPETE. Without the consent of the Company, the
Executive shall not, directly or indirectly, anywhere in the world, at any time
during the Employment Period and for a period of two (2) years following the
termination of Executive's employment with the Company for any reason, be
associated or in any way connected as an owner, investor, partner, director,
officer, employee, agent, or consultant with any business entity directly
engaged in the manufacture and/or sale of products competitive with any material
product or product lines of the Company or any of its subsidiaries; provided,
however, that the Executive shall not be deemed to have breached this
undertaking if his sole relation with such entity consists of his holding,
directly or indirectly, an equity interest in such entity not greater than two
percent (2%) of such entity's outstanding equity interest, and the class of
equity in which the Executive holds an interest is listed and traded on a
broadly recognized national or regional securities exchange. For purposes
hereof, the term "material product or product line of the Company" shall mean
any product or product line of the Company or any of its subsidiaries, the gross
sales of which during any calendar year during the five (5) year period
preceding the Executive's undertaking such employment were at least $10 million.

         The Executive acknowledges that: (a) the services to be performed by
him under this Agreement are of a special, unique, unusual, extraordinary, and
intellectual character; (b) the business of the Company and its subsidiaries is
worldwide in scope and its products are marketed throughout the world; (c) the
Company and its subsidiaries compete with other businesses that are or could be
located in any part of the world; and (d) the provisions of this Section 7 are
reasonable and necessary to protect the Company's business.

         If any covenant in this Section 7 is held to be unreasonable,
arbitrary, or against public policy, such covenant will be considered to be
divisible with respect to scope, time, and geographic area, and such lesser
scope, time, or geographic area, or all of them, as a court of competent
jurisdiction may determine to be reasonable, not arbitrary, and not against
public policy, will be effective, binding, and enforceable against the
Executive.

         The period of time applicable to any covenant in this Section 7 will be
extended by the duration of any violation by the Executive of such covenant.

         The Executive will, while the covenants under this Section 7 are in
effect, give notice to the Company, within ten days after accepting any other
employment, of the identity of the Executive's employer. The Company may notify
such employer that the Executive is bound by this Agreement and, at the
Company's election, furnish such employer with a copy of this Agreement or
relevant portions thereof.

                                       9
<PAGE>

         8. DISCLOSURE OF CONFIDENTIAL INFORMATION. Without the consent of the
Company, the Executive shall not disclose to any other person Confidential
Information (as defined below) concerning the Company or any of its subsidiaries
or the Company's or any of its subsidiaries' trade secrets of which the
Executive has gained knowledge during his employment with the Company. Any trade
secrets of the Company or any of its subsidiaries will be entitled to all of the
protections and benefits under the Iowa Code Annotated Section 550.1 through
550.8 and any other applicable law. If any information that the Company deems to
be a trade secret is found by a court of competent jurisdiction not to be a
trade secret for purposes of this Agreement, such information will,
nevertheless, be considered Confidential Information for purposes of this
Agreement. The Executive hereby waives any requirement that the Company submit
proof of the economic value of any trade secret or post a bond or other
security. None of the foregoing obligations and restrictions apply to any part
of the Confidential Information that the Executive demonstrates was or became
generally available to the public other than as a result of a disclosure by the
Executive.

         The Executive will not remove from the premises of the Company or any
of its subsidiaries (except to the extent such removal is for purposes of the
performance of the Executive's duties at home or while traveling, or except as
otherwise specifically authorized by the Company), any document, record,
notebook, plan, model, component, device, or computer software or code, whether
embodied in a disk or in any other form, that contains Confidential Information
(collectively, the "Proprietary Items"). The Executive recognizes that, as
between the Company and the Executive, all of the Proprietary Items, whether or
not developed by the Executive, are the exclusive property of the Company or its
subsidiaries, as the case may be. Upon termination of this Agreement by either
party, or upon the request of the Company during the Employment Period, the
Executive will return to the Company all of the Proprietary Items in the
Executive's possession or subject to the Executive's control, and the Executive
shall not retain any copies, abstracts, sketches, or other physical embodiment
of any of the Proprietary Items.

         For purposes of this Agreement, Confidential Information shall include
any and all information concerning the business and affairs of the employer,
including, without limitation, product specifications, data, know-how, formulae,
compositions, processes, designs, sketches, photographs, graphs, drawings,
samples, inventions and ideas, past, current, and planned research and
development, current and planned distribution methods and processes, customer
lists, current and anticipated customer requirements, price lists, market
studies, business plans, computer software and programs (including object code
and source code), computer software and database technologies, systems,
structures, and architectures (and related formulae, compositions, processes,
improvements, devices, know-how, inventions, discoveries, concepts, ideas,
designs, methods and information), historical financial statements, financial
projections and budgets, historical and projected sales, capital spending
budgets and plans, the names and backgrounds of key personnel, agents, personnel
training and techniques and materials, insurance products, premium structures,
information relating to suppliers and supplies, sales and marketing information
and strategy, notes, analysis, compilations, studies, summaries, and other
material prepared by or for the Company or any of its subsidiaries containing or
based, in whole or in

                                       10
<PAGE>

part, on any information included in the foregoing, and any information, however
documented, that is a trade secret within the meaning of the Iowa Code Annotated
Section 550.1 through 550.8.

         9. NONSOLICITATION. Without the written consent of the Company, the
Executive shall not at any time during the Employment Period and for a period of
two (2) years following the termination of Executive's employment with the
Company for any reason (a) employ or retain or arrange to have any other person,
firm, or other entity employ or retain or otherwise participate in the
employment or retention of any person who is an employee or consultant of the
Company or its subsidiaries; or (b) solicit orders as a customer or arrange to
have any other person, firm, or other entity (where such entity is directly
engaged in the manufacture and/or sale of products competitive with any material
product or product lines of the Company or any of its subsidiaries) solicit
orders as a customer or otherwise participate in such solicitation of any entity
that was a customer of the Company or any of its subsidiaries during the time of
the Executive's employment, whether or not the Executive had personal contact
with such person.

         10. INJUNCTIVE RELIEF AND ADDITIONAL REMEDY; ESSENTIAL AND INDEPENDENT
COVENANTS.

                  (a) The Executive acknowledges that the injury that would be
         suffered by the Company as a result of a breach of the provisions of
         this Agreement (including any provision of Sections 7, 8, and 9) would
         be irreparable and that an award of monetary damages to the Company for
         such a breach would be an inadequate remedy. Consequently, the Company
         will have the right, in addition to any other rights it may have, to
         obtain injunctive relief to restrain any breach or threatened breach or
         otherwise to specifically enforce any provision of this Agreement, and
         the employer will not be obligated to post bond or other security in
         seeking such relief. Without limiting the Company's rights under this
         Section 10 or any other remedies of the Company, if the Executive
         breaches any of the provisions of Sections 7, 8, or 9, the Company will
         have the right to cease making any payments otherwise due to the
         Executive under this Agreement.

                  (b) The covenants by the Executive in Sections 7, 8, and 9 are
         essential elements of this Agreement, and without the Executive's
         agreement to comply with such covenants, the Company would not have
         entered into this Agreement with the Executive. The Company and the
         Executive have independently consulted their respective counsel and
         have been advised in all respects concerning the reasonableness and
         propriety of such covenants (including, without limitation, the time
         period of restriction and the geographical area of restriction set
         forth in Section 7), with specific regard to the nature of the business
         conducted by the Company and its subsidiaries. The Executive's
         covenants in Sections 7, 8, and 9 are independent covenants and the
         existence of any claim by the Executive against the Company under this
         Agreement or otherwise, will not excuse the Executive's breach of any
         covenant in Sections 7, 8, or 9.

                                       11
<PAGE>

         If the Executive's employment hereunder expires or is terminated, this
Agreement will continue in full force and effect as is necessary or appropriate
to enforce the covenants and agreements of the Executive in Sections 7, 8, 9,
10, and 11.

         11. ARBITRATION. All disputes, including, without limitation,
discrimination claims of all types and claims of sexual harassment, arising
under this Agreement between the Company and Executive, other than those
disputes relating to Executive's alleged violations of Sections 7, 8, and 9
herein, which cannot otherwise be resolved amicably, shall be submitted to
binding arbitration by the American Arbitration Association ("AAA") in Des
Moines, Iowa, pursuant to the rules and procedures of the AAA. The fee and
expense of the arbitrators shall be split equally between the Company and
Executive. The decision of the arbitrator shall be final and binding and there
shall be no appeal from any award rendered. In any judicial enforcement
proceeding, the losing party shall reimburse the prevailing party for its
reasonable costs and attorney's fees for enforcing its rights under this
Agreement, in addition to any damages or other relief granted. This Section 11
does not apply to any action by the Company to enforce Section 7, 8, or 9 of
this Agreement and does not in any way restrict the Company's rights under
Section 10(a) of this Agreement.

         12. NOTICES. Notices given pursuant to this Agreement shall be in
writing and shall be deemed given when received and if mailed shall be mailed by
United States registered or certified mail, return receipt requested, addressee
only, postage prepaid if to the Company, to the Board of Directors of Sauer
Inc., Attention Chairman, 2800 East 13th Street, Ames, Iowa 50010, U.S.A., or if
to the Executive, at 1071 E. Michener Way, Highlands Ranch, Colorado 80126 or to
such other address as either party may have previously designated by notice to
the other party given in the foregoing manner.

         13. SUCCESSORS. This Agreement may not be assigned by the Company, and
the obligations of the Company provided for in this Agreement shall be binding
legal obligations of any successor to the Company by purchase, merger,
consolidation, or otherwise. This Agreement may not be assigned by the Executive
during his life, and upon his death will be binding upon and inure to the
benefit of his heirs, legatees, and the legal representatives of his estate.

         14. ENTIRE AGREEMENT; MODIFICATION, WAIVER, AND INTERPRETATION. This
Agreement contains the entire agreement between the parties with respect to the
subject matter of this Agreement and supersedes all prior agreements and
understandings, oral or written, between the parties hereto with respect to the
subject matter of this Agreement. No provision of this Agreement may be
modified, waived, or discharged unless such waiver, modification, or discharge
is agreed to in a writing signed by the Executive and an appropriate officer of
the Company empowered to sign same by the Board. No waiver by either party at
any time of any breach by the other party of, or compliance with, any condition
or provision of this Agreement to be performed by the other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same
time or at any prior or subsequent time. This Agreement shall be deemed to have
been executed in Ames, Iowa and the validity, interpretation, construction, and

                                       12
<PAGE>

performance of this Agreement shall be governed by the laws of the State of Iowa
without regard to conflicts of laws principles.

         15. SEVERABILITY. If any provision of this Agreement is held invalid or
unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.

         16. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.

         17. HEADINGS. The headings contained herein are for reference purposes
only and shall not in any way affect the meaning or interpretation of any
provision of this Agreement.

                  IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the day and year first written above.

         THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.

                             SAUER INC.

                             By: /s/ K. H. Murmann
                                 --------------------------------------------

                                  K. H. Murmann, Chairman and CEO
                                 --------------------------------------------
                                            (print name and title of Officer)

                                 /s/ David L. Pfeifle
                                 --------------------------------------------
                                 Executive

                                       13

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