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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
COMMISSION FILE NUMBER: 333-48299

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

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

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

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

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ý No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act): Yes ý No o

        The aggregate market value of the voting stock of the Registrant held by nonaffiliates at February 17, 2004, was $152,438,818. As of February 17, 2004, there were 47,432,268 shares of common stock, $0.01 par value, of the Registrant outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Proxy Statement for the annual meeting of stockholders to be held May 5, 2004 are incorporated by reference into Parts II and III.

PART I

Item 1.    Business.

(a)    General Development of Business

        Sauer-Danfoss Inc., a U.S. Delaware corporation, and its predecessor organizations have been active in the mobile hydraulics industry since the 1960s. Sauer-Danfoss is a global manufacturer of components and integrated hydraulic, electric, and electronic systems that generate, transmit, and control power in mobile equipment. Principal products are hydrostatic transmissions, gear pumps and motors, orbital motors, hydrostatic steering units, proportional load-sensing valves, microprocessor controls, electric drives, and electrohydraulics. The Company sells its products to original equipment manufacturers (OEMs) who use Sauer-Danfoss products to provide the hydraulic and electronic power for the propel, work, and control functions of their vehicles. The Company's products are sold primarily to the construction, road building, agriculture, turf care, and specialty vehicle markets. The Company conducts its business globally under the Sauer-Danfoss name.

        The Company exercised its option to acquire an additional 40 percent of the outstanding shares of Comatrol S.p.A during the second quarter 2003 for approximately $10.3 million. With this purchase, the Company now owns 85 percent of Comatrol and has consolidated the financial results of the business for the last three quarters of 2003. Prior to purchasing its controlling interest in Comatrol, the Company accounted for the results of its ownership interest under the equity method of accounting. The Company has the option to acquire the remaining ownership interest (15 percent) in Comatrol for approximately 3.7 million euros, which equates to $4.7 million at December 31, 2003, using an exchange rate of 0.795 euros to the U.S. dollar. The option period runs from April 1, 2004 through April 30, 2004. Should the Company not elect to exercise this option, the minority owners of Comatrol could exercise their option requiring the Company to acquire the remaining 15 percent of Comatrol for the amount disclosed above. This put option period runs from May 1, 2004 through May 31, 2004. Should neither party exercise their respective options, all such options expire after May 31, 2004.

        In 2003 the Company relocated the operations of its Sturtevant, Wisconsin, and West Branch, Iowa, locations to other existing facilities and outsourced certain processes to reduce costs and increase efficiencies. The Company has also undertaken projects to reorganize its European sales and distribution operations, and to implement a common business system. See further discussion of these projects in Management's Discussion and Analysis presented in Item 7.

        In connection with the closing of the West Branch location, accounting errors were identified which resulted in restating the 2002, 2001 and 2000 financial statement amounts. The errors relate to an unreconciled account and unrecognized depreciation associated with a purchase accounting fair value adjustment related to fixed assets. Both originated in 2000 in connection with the closing of the Racine, Wisconsin, facility and relocation of its operations to the West Branch location. The total impact of the restatement, net of tax, over the three-year period is $1.6 million, or $0.04 per share. The restatement is not material to any one year. See Note 17 in the Notes to Consolidated Financial Statements for further discussion. The Company will file an amended Form 10-Q for the third quarter of 2003 to reflect the restatement of the financial information for such period. The Company does not plan to file amended Forms 10-Q for the first and second quarters of 2003 and does not plan to file amended Form 10-Ks or Form 10-Qs for 2002, 2001 and 2000.

(b)    Financial Information about segments

        The Company reports its operating segments based on its various product lines of Propel, Work Function and Controls. Propel products include hydrostatic transmissions and related products that transmit the power from the engine to the wheel to propel a vehicle. Work Function products include steering motors as well as gear pumps and motors that transmit power for the work functions of the

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vehicle. Controls products include electrohydraulic controls, microprocessors, and valves that control and direct the power of a vehicle. Information about the Company's reportable segments defined by product lines is set forth in Note 16 in the Notes to Consolidated Financial Statements on pages 69-71 of this report, and is incorporated herein by reference.

(c)    Description of Business

        Information regarding the Company's principal products, by segment, and the business in general is presented below. Information regarding sales by the Company's segments and geographic regions is set forth in Note 16 in the Notes to Consolidated Financial Statements on pages 69-71, and is incorporated herein by reference. No individual customer, OEM or other, accounted for 10 percent or more of the Company's overall net sales for 2003.

Propel Segment

Hydrostatic Transmissions

        Sauer-Danfoss designs, manufactures, and markets a range of closed circuit axial piston hydrostatic transmissions for the propulsion of mobile equipment in the Americas, Europe, and Asia-Pacific region. High-power (typically over 50 HP) and medium-power (typically 25 to 50 HP) applications for hydrostatic transmissions manufactured by the Company include construction and agricultural mobile equipment. Light-power (typically 15 to 25 HP) and bantam-power (typically under 15 HP) applications for hydrostatic transmissions manufactured by the Company include light agricultural and turf care mobile equipment. The Company manufactures these hydrostatic transmissions at its facilities in Ames, Iowa; Lawrence, Kansas; Sullivan, Illinois; Neumunster, Germany; Dubnica nad Vahom, Slovakia; Povazská Bystrica, Slovakia; Shanghai, China; and Osaka, Japan.

Work Function Segment

Gear Pumps and Motors

        Sauer-Danfoss designs, manufactures, and markets custom-designed gear pumps, as well as a broad range of high-performance standard gear pumps and motors. Gear pumps and motors are the most widely used type of mobile hydraulic pumps and motors in the industry. The Company manufactures gear pumps and motors at its Swindon, England; Lawrence, Kansas; Bologna, Italy; and Povazská Bystrica, Slovakia facilities.

Open Circuit Piston Pumps

        Sauer-Danfoss designs, manufactures, and markets custom-designed open circuit piston pumps used to transform mechanical power from the engine to hydraulic power for the work function of the vehicle. The advantages of open circuit piston pumps compared to other types of pumps, such as vane or gear pumps, are the high degree of control within the work function hydraulic system and the more efficient use of engine power. These products are designed and manufactured at facilities in Ames, Iowa, and Povazská Bystrica, Slovakia.

Low Speed High Torque Motors

        Sauer-Danfoss designs, manufactures, and markets a complete line of geroller and gerotor motors at its Nordborg, Denmark, facility. These motors are used for both the propel and work functions in all served markets.

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Steering Units

        Sauer-Danfoss designs, manufactures, and markets hydrostatic steering units to customers throughout the world. The Company manufactures steering units in Nordborg, Denmark, and Wroclaw, Poland. These steering units convert steering wheel motion into hydraulic flow and pressure to provide steering motion for agriculture tractors, combines, turf care, and earthmoving equipment.

Controls Segment

Mobile Electronics

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

        Additionally, the Company designs and manufactures both alternating current (AC) and direct current (DC) electric motors, electronic motor controllers, inverters, and power units through its Electric Drives operations in Denmark and Germany.

Control Valves

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

        The Company also designs, manufactures and markets a complete line of cartridge valves and hydraulic integrated circuits in facilities located in Reggio Emilia, Italy; Hillsboro, Oregon; and Easley, South Carolina. Aerial lift platforms and road building equipment are examples of significant users of cartridge valves.

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Major Markets and Applications

General Characteristics

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

        Sauer-Danfoss operates 25 manufacturing facilities in the Americas, Europe, and the Asia-Pacific region. The Company's decentralized manufacturing capabilities allow it to adapt its products to local market needs and to provide flexibility to meet customer delivery requirements. In North America, the Company sells and distributes its products directly to large OEMs and through independent distributors to smaller OEMs. In Europe, South America, and the Asia-Pacific region, the Company sells and distributes its products either directly or through subsidiaries.

        In accordance with standard industry practice for the mobile equipment industry, the Company warrants its products to be free from defects in material and workmanship. The warranty period varies from one to three years from the date of first use or date of manufacture, depending on the type of product or, in some cases, the application. The Company's warranty expense has been less than 1.5 percent of net sales in each of the past three years.

        Because many of its products are designed and developed in conjunction with its customers' design teams to fit their specific needs and to minimize inventory levels, the Company primarily manufactures products to order. The Company typically machines components with long lead times according to a sales forecast and machines certain unique components for specific customers according to firm orders. Inventories at the Company's manufacturing sites consist primarily of raw materials and machined iron housings and components. Only small amounts of assembled finished units are maintained in inventory at the manufacturing sites. Historically, inventories at the Company's sales locations consisted mainly of finished units manufactured specifically for distribution to customers in those locations. As discussed in Management's Discussion and Analysis on page 15 of this report, the Company has begun the process to streamline its sales and distribution operations in Europe to reduce expenses and improve customer

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service and delivery. One result of this process will be to reduce the amount of inventory held at the sales and distribution operations.

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

Raw Materials

        The Company purchases iron housings and components from various U.S., European, and Asian foundries. The principal materials used by the Company are iron, steel, brass, and aluminum. All materials used by the Company are generally available from a number of sources in quantities sufficient to meet current requirements. The Company has in place a Global Supplier Quality Program called "Partners in Quality" (PIQ) that is the primary program used by the Company to ensure that all suppliers meet the Company's quality expectations.

Patents, Trademarks, and Licenses

        The Company owns or licenses rights to approximately 610 patents and trademarks relating to its business. While the Company considers its patents and trademarks important in the operation of its business and in protecting its technology from being used by competitors, its business is not dependent on any single patent or trademark or group of related patents or trademarks.

        To ensure worldwide availability of the Company's design of products, the Company has, in the past, licensed its technology to companies in certain countries. The Company currently has one license agreement in place to manufacture or distribute its technology with the Sauer-Danfoss-Daikin LTD. joint venture in Japan.

Backlog

        The amount of the Company's backlog is significant because, among other factors, customer orders have historically involved long lead times and specific model types. At December 31, 2003 the Company's backlog (consisting of accepted but unfilled customer orders primarily scheduled for delivery during 2004) was $409 million as compared with $383 million at December 31, 2002. However, orders can be canceled or rescheduled by customers. Thus, the level of orders currently in backlog could decline because of cancellation or rescheduling. Additionally, the level of reported backlog can be impacted by currency translation fluctuations and acquisitions. Excluding the impact of currency and acquisition, backlog at December 31, 2003 was $379 million. Customers' ordering patterns can also impact the level of reported backlog. For example, the Company's U.S. distributor customers are placing orders with shorter lead times due to the Company's ability to fulfill such orders.

Competition

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

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Hydrostatic Transmission Market

        The closed circuit hydrostatic transmission market is highly concentrated and intensely competitive. There are a small number of manufacturers of hydrostatic transmissions with which the Company competes worldwide that are not captive suppliers of OEMs. These include Bosch Rexroth AG, Eaton Corporation, and Linde AG. In addition, the Company competes with alternative products, such as mechanical transmissions of other manufacturers.

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

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

Open Circuit Piston Pumps and Gear Pumps and Motors Market

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

Low Speed High Torque Motor Market

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

Steering Unit Market

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

Mobile Electronics Market

        In the mobile electronics market, which covers both propulsion and work function systems, there are few suppliers of propulsion system controls and only three are worldwide competitors. The main competition in this area comes from major OEMs, who produce controls for their own use. In work function electrohydraulic valves, electronic sensors, and controls, there is a wide range of niche suppliers in limited geographic markets. In recent years, larger companies have increasingly acquired these niche or regional suppliers and thereby have improved their ability to offer integrated systems. The Company has closely watched the needs for electric drives grow in the low power market segments. With the Company's addition of alternating current (AC) and direct current (DC) motors and controls it is now well equipped to serve our customers in these segments with either a hydraulic solution or an electric solution for their propel and work function needs. The Company believes it is well positioned to establish itself as a

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technology leader in the work function and propel segments, as there is no clearly established technology in this sector that is deemed to be an industry standard.

Control Valves Market

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

Research and Development

        The Company's research and development expenditures during 2003, 2002, and 2001 were approximately $43.5 million, $37.8 million, and $38.1 million, respectively.

Environmental Matters

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

Employees

        As of December 31, 2003, 2002, and 2001 the Company had 7,200, 7,207, and 6,790 employees, respectively. Of its full time employees at December 31, 2003, approximately 2,300 were located in the Americas with the remaining located in Europe and Asia. From time to time, the Company also retains consultants, independent contractors, and temporary and part-time workers.

Financial Information about Geographic Areas

        Information regarding the Company's net sales and long-lived assets by geographic area is set forth in Note 16 in the Notes to Consolidated Financial Statements on pages 69-71 of this report, and is incorporated herein by reference.

Available Information

        The Company maintains an Internet Website and the address of that site is http://www.sauer-danfoss.com. The Company provides access to its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 on its Internet website as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission.

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Item 2.    Properties.

        Sauer-Danfoss Inc. conducts its manufacturing operations at 25 locations; eight in the United States, three each in Italy and Germany, two each in the United Kingdom, Denmark, and Slovakia, and one each in Brazil, China, Japan, Poland, and Sweden. The Company leases approximately 15,000 square feet of office space in Lincolnshire, Illinois, where its principal executive offices are located. The following table sets forth certain information relating to the Company's principal manufacturing facilities:

Item 3.    Legal Proceedings.

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

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

        The Company did not submit any matter to a vote of security holders, through a solicitation of proxies or otherwise, during the fourth quarter of 2003.

EXECUTIVE OFFICERS OF THE COMPANY

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

(1)

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

(2)

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

(3)

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

(4)

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

(5)

Prior to joining the Company, Mr. Schmidt was employed by Degussa-Huls Corporation as Vice President and Chief Financial Officer.

(6)

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

(7)

Prior to joining the Company, Mr. Hanson was employed by Maytag Corporation as Vice President, Human Resources from January 2001 through January 2003. Prior to being employed by Maytag, Mr. Hanson served as the Director of Human Resources for the Company's U.S. operations.

(8)

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

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PART II

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

Market and Dividend Information

        The Company's Common Stock is traded on the New York Stock Exchange and the Frankfurt (Germany) Stock Exchange. As of February 25, 2004, there were approximately 220 stockholders of record.

        The Company is currently paying a quarterly dividend of $0.07 per share, which is subject to Board of Directors approval.

        The following table sets forth the high and low prices on the New York Stock Exchange for the Company's Common Stock since January 1, 2002, and the quarterly cash dividends paid in 2003 and 2002:

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Item 6.    Selected Financial Data.

SELECTED FINANCIAL DATA

(1)

As restated — see Note 17 in the Notes to Consolidated Financial Statements for further discussion.

(2)

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

(3)

The debt to debt plus equity ratio represents the ratio of total capital attributable to external financing. As such, the denominator of the ratio includes the total debt and total stockholders' equity shown here as well as the minority interest presented on the balance sheet.

(4)

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

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

Safe Harbor Statement

        This Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as other portions of this annual report on Form 10-K, contain statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. All statements regarding future performance, growth, sales and earnings projections, conditions or developments are forward-looking statements. Words such as "anticipates," "in the opinion," "believes," "intends," "expects," "may," "will," "should," "could," "plans," "forecasts," "estimates," "predicts," "potential," "continue," and similar expressions may be intended to identify forward-looking statements.

        Actual future results may differ materially from those described in the forward-looking statements due to a variety of factors, including the fact that the economy generally, and the agriculture, construction, road building, turf care and specialty vehicle markets specifically, have recently been in varying states of uncertainty, making it difficult to determine if past experiences are a good guide to the future. A continuing downturn in the Company's business segments could adversely affect the Company's revenues and results of operations. Other factors affecting forward-looking statements include, but are not limited to, the following: specific economic conditions in the agriculture, construction, road building, turf care and specialty vehicle markets and the impact of such conditions on the Company's customers in such markets; the cyclical nature of some of the Company's businesses; the ability of the Company to win new programs and maintain existing programs with its original equipment manufacturer (OEM) customers; the highly competitive nature of the markets for the Company's products as well as pricing pressures that may result from such competitive conditions; the continued operation and viability of the Company's major customers; the Company's execution of internal performance plans; difficulties or delays in manufacturing; cost-reduction and productivity efforts; competing technologies and difficulties entering new markets, both domestic and foreign; changes in the Company's product mix; future levels of indebtedness and capital spending; claims, including, without limitation, warranty claims, charges or dispute resolutions; ability of suppliers to provide materials as needed and the Company's ability to recover any price increases for materials and product pricing; the Company's ability to attract and retain key technical and other personnel; labor relations; the failure of customers to make timely payment; any inadequacy of the Company's intellectual property protection or the potential for third-party claims of infringement; global economic factors, including currency exchange rates; general economic conditions, including interest rates, the rate of inflation, and commercial and consumer confidence; energy prices; governmental laws and regulations affecting domestic and foreign operation, including tax obligations; changes in accounting standards; worldwide political stability; the effects of terrorist activities and resulting political or economic instability; U.S. military action overseas; and the effect of acquisitions, divestitures, restructurings, product withdrawals, and other unusual events.

        The Company cautions the reader that these lists of cautionary statements and risk factors may not be exhaustive. The Company expressly disclaims any obligation or undertaking to release publicly any updates or changes to these forward-looking statements that may be made to reflect any future events or circumstances.

About the Company

        Sauer-Danfoss Inc. and subsidiaries (the Company) is a leading international supplier of components and systems that generate, transmit and control fluid power in mobile equipment. The Company's products are used by original equipment manufacturers (OEMs) of mobile equipment, including construction, road building, agricultural, turf care and specialty equipment. The Company designs, manufactures and markets its products in the Americas, Europe and the Asia-Pacific region, and markets its products throughout the rest of the world either directly or through distributors.

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About Management's Discussion

        In December 2003 the SEC released guidance regarding management's discussion and analysis of financial condition and results of operations. The following discussion has been prepared on the basis of the guidelines in the SEC release. Management's discussion and analysis is designed to provide the reader of the financial statements with information that is transparent and necessary to understand the Company's results of operations, financial condition and changes in financial condition. The format of this discussion for comparing the 2003 results from operations and financial condition to 2002 has been enhanced from the format used in prior years in order to accomplish the following objectives:

•

Enable investors to see the Company through the eyes of management;



•

Enhance the overall financial disclosure and provide the context within which the Company's financial information should be analyzed; and



•

Provide information about the quality of, and potential variability of, the Company's earnings and cash flow, so that investors can assess the likelihood that past performance is indicative of future performance.

        The discussion comparing 2002 results from operations to 2001 has not been reformatted.

Prior Period Restatement

        The 2002 and 2001 financial statement amounts have been restated due to accounting errors identified during the closing of the West Branch, Iowa, operations. The errors relate to an unreconciled account and unrecognized depreciation associated with a purchase accounting fair value adjustment related to fixed assets. Both originated in 2000 in connection with the closing of the Racine, Wisconsin, facility and relocation of its operations to the West Branch location. The total impact of the restatement, net of tax, over the three-year period is $1.6 million, or $0.04 per share. The restatement is not material to any one year and impacted only the Work Function segment. Refer to Note 17 in the Notes to Consolidated Financial Statements for further discussion.

Executive Summary of 2003 Compared to 2002

        The nature of the Company's operations as a global producer and supplier in the fluid power industry means the Company is impacted by changes in the local economies, including currency exchange rate fluctuations. In order to gain a better understanding of the Company's base results, a financial statement user needs to understand the impact of those currency exchange rate fluctuations as well as changes resulting from strategic acquisitions. The following table summarizes the Company's 2003 and 2002 results

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from operations on a comparable basis, by excluding acquisitions and the impact of currency fluctuations. This analysis is more consistent with how the Company internally evaluates its results.