SAUER INC, S-1, 1998-03-20

SAUER INC
S-1, 1998-03-20
MISC INDUSTRIAL & COMMERCIAL MACHINERY & EQUIPMENT

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH [ ], 1998

REGISTRATION NO. 333-
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

SAUER INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------

<TABLE>
<S> <C> <C>
DELAWARE 3594 36-3482074
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>

2800 EAST 13TH STREET
AMES, IOWA 50010
(515) 239-6000
(ADDRESS, INCLUDING EACH ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
KENNETH D. MCCUSKEY

TREASURER AND SECRETARY
SAUER INC.
2800 EAST 13TH STREET
AMES, IOWA 50010
(515) 239-6364
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:

<TABLE>
<S> <C> <C>
LINDA C. QUINN, ESQ. JAMES W. KAPP, JR., ESQ. WILLIAM J. WILLIAMS, JR., ESQ.
SHEARMAN & STERLING SPENCER FANE BRITT & BROWNE LLP SULLIVAN & CROMWELL
599 LEXINGTON AVENUE 1010 GRAND BOULEVARD, SUITE 500 125 BROAD STREET
NEW YORK, NY 10022-6069 KANSAS CITY, MO 64106-2201 NEW YORK, NY 10004-2498
(212) 848-4000 (816) 474-8100 (212) 558-4000
</TABLE>

------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
================================================================================

<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AGGREGATE AMOUNT AGGREGATE OFFERING AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED TO BE REGISTERED(1) PRICE PER UNIT OFFERING PRICE REGISTRATION FEE(2)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $ per
share shares $ $50,000,000 $14,750
==============================================================================================================================
</TABLE>

(1) Includes shares of Common Stock which the U.S. Underwriters and
Managers have options to purchase to cover over-allotments, if any. The
shares of Common Stock are not being registered for the purpose of sales
outside the United States.

(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD, NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED , 1998
,000,000 Shares
SAUER INC.
[LOGO]

Common Stock
($ par value)
------------------

Sauer Inc. is issuing and selling [ ] shares of its Common Stock,
$ par value per share (the "Common Stock"), and certain stockholders
(the "Selling Stockholders") named herein under "Principal and Selling
Stockholders" are selling [ ] shares of Common Stock. Of the
[ ] shares of Common Stock being offered, [ ] shares are
initially being offered in the United States and Canada (the "U.S. Shares") by
the U.S. Underwriters (the "U.S. Offering") and [ ] shares are
initially being concurrently offered in Germany and elsewhere outside the United
States and Canada (the "International Shares") by the Managers (the
"International Offering" and, together with the U.S. Offering, the "Combined
Offering"). The final allocation of Common Stock between the U.S. Underwriters
and the Managers may differ from the amounts set forth above. See "The Combined
Offering." Shares of Common Stock are being reserved for sale to employees,
directors and certain other persons associated with the Company at the initial
public offering price. See "Underwriting." It is expected that such sales will
not exceed % of the Common Stock to be offered in the Combined Offering. It
is anticipated that the initial public offering price will be between
$ and $ per share. The public offering price, the underwriting
discounts and the commissions and concession and discount to dealers for the
International Offering will be the same as in the U.S. Offering, except that
purchasers will have the option to pay the public offering price of the
International Shares at the Deutsche mark equivalent thereof. Prior to the
Combined Offering there has been no public market for the Common Stock. For
information relating to the factors considered in determining the initial
offering price to the public, see "The Combined Offering -- Determination of
Offering Price" and "Underwriting." Application will be made to list the Common
Stock on the New York Stock Exchange under the symbol [ ] and on the
Frankfurt Stock Exchange under the symbol [ ]. Credit Suisse First Boston
Aktiengesellschaft will act as the sponsor for the application for listing on
the Frankfurt Stock Exchange.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" BEGINNING ON PAGE [ ]
HEREIN. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Per Share................................ $ $ $ $
Total(2)................................. $ $ $ $
</TABLE>

(1) Before deduction of expenses payable by the Company estimated at
$[ ].

(2) [Klaus H. Murmann], one of the Selling Stockholders, has granted the U.S.
Underwriters and the Managers options, exercisable [once] by Credit Suisse
First Boston Corporation for 30 days from the date of this Prospectus, to
purchase a maximum of [ ] additional shares of Common Stock to
cover over-allotments of shares. If the options are exercised in full, the
total Price to Public will be $[ ], Underwriting Discounts and
Commissions will be $[ ], Proceeds to the Company will be
$[ ] and Proceeds to the Selling Stockholders will be
$[ ].

Global Coordinator
CREDIT SUISSE FIRST BOSTON

The U.S. Shares are offered by the several U.S. Underwriters when, as and
if delivered to and accepted by the U.S. Underwriters and subject to their right
to reject orders in whole or in part. It is expected that the U.S. Shares will
be ready for delivery on or about [ ], 1998, against payment in
immediately available funds.

CREDIT SUISSE FIRST BOSTON
SALOMON SMITH BARNEY
DEUTSCHE MORGAN GRENFELL
Prospectus dated , 1998
<PAGE> 3

[INSIDE FRONT COVER]

[PHOTOGRAPHS]
<PAGE> 4

NO ACTION HAS BEEN OR WILL BE TAKEN IN ANY JURISDICTION BY THE COMPANY, THE
SELLING STOCKHOLDERS OR ANY UNDERWRITER THAT WOULD PERMIT A PUBLIC OFFERING OF
THE SHARES OF COMMON STOCK OR POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN
ANY JURISDICTION WHERE ACTION FOR THAT PURPOSE IS REQUIRED, OTHER THAN THE
UNITED STATES AND GERMANY. PERSONS INTO WHOSE POSSESSION THIS PROSPECTUS COMES
ARE REQUIRED BY THE COMPANY, THE SELLING STOCKHOLDERS AND THE UNDERWRITERS TO
INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THE OFFERING OF
THE SHARES OF COMMON STOCK AND THE DISTRIBUTION OF THIS PROSPECTUS.
------------------

CERTAIN OF THE INFORMATION CONTAINED IN THE "PROSPECTUS SUMMARY" AND IN
"BUSINESS" CONCERNING THE DEFINITION, SIZE AND DEVELOPMENT OF THE VARIOUS
PRODUCT MARKETS IN WHICH THE COMPANY PARTICIPATES, AND THE COMPANY'S GENERAL
EXPECTATIONS CONCERNING THE DEVELOPMENT OF SUCH PRODUCT MARKETS, ARE BASED ON
ESTIMATES PREPARED BY THE COMPANY USING DATA FROM VARIOUS SOURCES, WHICH DATA
THE COMPANY HAS NO REASON TO BELIEVE ARE UNRELIABLE, AND ON ASSUMPTIONS MADE BY
THE COMPANY, BASED ON SUCH DATA AND ITS KNOWLEDGE OF THE RELEVANT INDUSTRIES,
WHICH THE COMPANY BELIEVES TO BE REASONABLE. WHILE THE COMPANY IS NOT AWARE OF
ANY MISSTATEMENTS CONTAINED IN THESE SECTIONS, THE COMPANY'S ESTIMATES, IN
PARTICULAR AS THEY RELATE TO THE COMPANY'S GENERAL EXPECTATIONS CONCERNING THE
PRODUCT MARKETS IN WHICH THE COMPANY PARTICIPATES, INVOLVE RISKS AND
UNCERTAINTIES AND ARE SUBJECT TO CHANGE BASED ON VARIOUS FACTORS INCLUDING THOSE
DISCUSSED UNDER THE CAPTION "RISK FACTORS" IN THIS PROSPECTUS.

DATA CONTAINED IN THIS PROSPECTUS IN THE "PROSPECTUS SUMMARY," "BUSINESS"
AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" RELATING TO THE COMPANY'S SALES BY MARKET APPLICATION AND RELATED
MARKET SHARE DATA HAVE BEEN DERIVED FROM INTERNAL MANAGEMENT SOURCES. THE
DEVELOPMENT OF THIS DATA REQUIRES JUDGMENTS AS TO THE DEFINITION OF PRODUCT
CATEGORIES AND THE ALLOCATION OF SALES TO PARTICULAR CATEGORIES. THESE DATA ARE
NOT DERIVED FROM THE COMPANY'S ACCOUNTING RECORDS AND ARE NOT SUBJECT TO THE
CONTROLS PRESENT IN THE COMPANY'S ACCOUNTING SYSTEM. HOWEVER, MANAGEMENT
BELIEVES THAT THESE DATA HAVE BEEN DEVELOPED ON A REASONABLE BASIS AND
ACCURATELY REPRESENT THE COMPANY'S SALES BY PRODUCT CATEGORY IN ALL MATERIAL
RESPECTS.

BRAND NAMES AND TRADEMARKS APPEARING IN THIS PROSPECTUS ARE THE PROPERTY OF
THEIR HOLDERS.
------------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SHARES OF COMMON
STOCK OFFERED HEREBY, INCLUDING OVER-ALLOTMENTS, STABILIZING TRANSACTIONS,
SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and consolidated financial
statements (including the notes thereto) appearing elsewhere in this Prospectus.
As used herein, "Sauer" and "Company" refer to Sauer Inc. and its consolidated
subsidiaries. Unless otherwise indicated, the information in this Prospectus
does not give effect to the exercise of the over-allotment options. All share
and per share data contained in this Prospectus have been adjusted for a
[ ]-for-[ ] stock split effective on [ ], 1998.

Certain information contained in this summary and elsewhere in this
Prospectus, including information with respect to the Company's plans and
strategy for its business, outlook, capital expenditure program and new
products, consists of forward-looking statements that involve risks and
uncertainties. For a discussion of important factors that could cause actual
results to differ materially from the forward-looking statements contained
herein, see "Risk Factors."

THE COMPANY

Sauer is a worldwide leader in the design, manufacture and sale of highly
engineered hydraulic systems and components ("mobile hydraulics") for use
primarily in demanding applications of off-highway mobile equipment. Sauer's
products include hydrostatic transmissions, open circuit piston pumps, gear
pumps and motors, valves, mechanical gear boxes and controls. Sauer is the
worldwide leader in hydrostatic transmissions, with an estimated 35% share
(based on sales) of the world market. In addition, Sauer is a world leader in
the production of gear pumps and motors, with both special designs and a
standard range of high performance units.

The Company is a leader in the design and manufacture of high performance
mobile hydraulics components and has the ability to bring these components
together in a total vehicle system using electronic sensors and microprocessor
controls programmed with the Company's proprietary software. Increasingly, the
propulsion and work function systems are being integrated with all other
elements of vehicle performance, including engine management and safety and data
gathering for productivity and maintenance, to achieve optimum vehicle
performance. Customers are looking to consolidate their supplier base, devote
their engineering resources to overall vehicle design and use a supplier's
expertise to design and supply hydraulic systems to achieve the vehicle's
performance objective. Because the components and systems supplied by Sauer are
usually the most technically advanced and highest value products on a vehicle
(excluding the engine), the Company is in a leading position to be selected by
customers as a key supplier and systems integrator. To meet the full range of
vehicle propulsion and work function demands, Sauer is increasingly working with
customers, suppliers and other component manufacturers to develop total
hydraulic systems, including braking, steering, cooling and an overall
microprocessor control system. Sauer's strong market position, technology
leadership and systems expertise have led to, and are expected to continue to
lead to, close working relationships with its customers.

1
<PAGE> 6

Europe and Asia and through approximately 80 independent distributors. Sauer
also sells its products in Europe through sales subsidiaries in Belgium, France,
Holland, Italy, Slovakia, Spain, Sweden and the United Kingdom. With 13
manufacturing facilities in the United States, Europe and China, the Company can
adapt its products to local market needs and has significant flexibility to meet
customer delivery requirements. In addition, Sauer licenses its hydrostatic
transmission technology to manufacturers that operate in Brazil, India and
Japan.

INDUSTRY OVERVIEW

The United States, Europe and Japan are the primary markets in which mobile
hydraulic products are manufactured and sold. Over 80% of such products are
produced and incorporated into vehicles manufactured in these three regions.
International competition is primarily between large U.S. and German suppliers.
Historically Japanese companies have licensed mobile hydraulic power technology
from U.S. and German companies and have focused almost exclusively on the East
Asian market.

Sales of the Company's products and systems have grown at a faster rate
than the underlying mobile hydraulic markets. The Company's revenues have grown
at a compound annual growth rate over a five-year and ten-year period of 22.8%
and 13.3%, respectively, in the United States, 7.1% and 2.6%, respectively, in
Europe (or 9.0% and 3.0% excluding exchange rate effects), and 15.3% and 7.8%,
respectively, in total. In the United States, as reported by the National Fluid
Power Association ("NFPA"), the five-year and ten-year compound annual growth
rates for mobile hydraulics have been 17.1% and 8.8%, respectively. In Europe,
as reported by the European Committee for Oil Hydraulic & Pneumatic Transmission
("CETOP"), the rates have been 6.0% and 3.0%, respectively. The CETOP data are
for both mobile and industrial hydraulic production. The Company believes that
in Europe the mobile hydraulic market is growing somewhat faster than the
industrial hydraulic market. The Company expects overall market growth rates to
increase somewhat in Europe while moderating in the United States.

GROWTH STRATEGY

Sauer's strategy is to be the technology leader, market leader and total
quality leader in the manufacture and supply of components and systems to
transmit and control hydraulic power in mobile equipment in major world markets.
Sauer competes based on technological product innovation, quality and customer
service. The key components of Sauer's growth strategy are as follows:

Enhance Product Offering and Expand Content on Existing Vehicles. Sauer
has concentrated on significantly broadening and enhancing its product
offering. The Company's broader product line, including integrated
solutions utilizing microprocessor controls, provides a more complete
range of choice to the Company's OEM customers. Sauer intends to achieve
significant growth by increasing its sales content per vehicle to
existing customers.

Expand into New Mobile Hydraulic Vehicle Applications. Sauer plans to
develop mobile hydraulic products to enter into new vehicle markets,
such as industrial forklift trucks and agricultural and industrial
tractors, where hydrostatic transmissions have not been widely used. The
application of the Company's hydrostatic technology to previously
untapped markets represents a significant future growth opportunity for
the Company.

Capitalize on Global Presence; Build Asian Presence. Sauer is committed
to being a global company in order to serve the needs of its global
customers. The Company's customers manufacture and sell their products
throughout the world and require convenient access to their suppliers'
products and services. To meet this requirement, the Company has modern
manufacturing facilities in the United States and Europe and a network
of sales companies, licensees, distributors and authorized service
center locations around the world. The Company's presence in Asia is
currently limited. To expand its presence in the East Asian market, the
Company has recently established both a new manufacturing facility and
sales office in China.

2
<PAGE> 7

Improve Gross Margins Through Operating Effectiveness and Lower
Costs. The Company intends to improve margins by reducing overhead
costs, improving worker productivity, shortening production cycle times
and rationalizing its product mix. The Company is expanding and
equipping existing facilities and building new manufacturing facilities
to increase production capacity for new and existing products and to
enhance production efficiencies. The major expansion of investment in
Slovakia, where total employment cost is approximately 15% of that in
Germany, will also improve margins in Europe. In addition, the Company
believes that the most important contribution to cost reduction comes
from investment in a skilled workforce able to adapt to new technology
and equipment.

Make Selective Acquisitions. Sauer may make selective acquisitions that
broaden the products and systems offered by the Company and enhance
Sauer's technological leadership. In particular, Sauer seeks to take
advantage of the consolidation occurring in the electrohydraulics
industry. Such acquisitions are likely to involve smaller niche or
regional companies, and could also include larger acquisitions.

HISTORY AND ORGANIZATION

Sauer and its predecessor organizations have been active in the mobile
hydraulics industry since the 1960s. Established in 1987, the Company combined
the business of Sauer Getriebe AG ("Sauer Getriebe") in Europe and Sundstrand
Hydraulic Power Systems in North America. A predecessor to Sauer Getriebe was
founded in Germany in 1884. Sundstrand was founded in 1905 in the United States
and established its Hydro Transmission division in 1964. In 1967, Sauer
Getriebe, which was owned by Klaus H. Murmann, became a licensee of Sundstrand
to manufacture and sell hydrostatic transmissions in Europe. Recognizing the
need to serve their OEM customers on a more global basis, Sauer Getriebe and
Sundstrand combined their non-U.S. and U.S. hydrostatic transmission businesses
in an equal joint venture in 1987. In 1989, the Murmann family and certain of
the Company's executive officers bought Sundstrand's interest in the joint
venture. As a result of that transaction and a related restructuring in 1990,
Sauer Inc. became the holding company for its operations. The Company's United
States operations are conducted through Sauer-Sundstrand Company (the "U.S.
Operating Company"), a wholly owned subsidiary of Sauer Inc., and the Company's
German operations are conducted through Sauer-Sundstrand GmbH & Co., a German
partnership (the "German Operating Company"), of which Sauer Inc. is a general
partner.

Upon completion of the Combined Offering, the Murmann family will own
approximately [ ]% of the outstanding Common Stock of the Company (or
[ ]% if the U.S. Underwriters' and Managers' over-allotment options are
exercised in full). See "Principal and Selling Stockholders" and "Description of
Capital Stock." The Murmann family also owns separate limited partnership
interests in the German Operating Company. Under the limited partnership
agreement the German Operating Company is required to make an annual cash
payment to the limited partners of 8.3% ( % pro forma for the Combined
Offering) of the Company's consolidated income before taxes and before the
Murmann family's limited partnership interests. See "Relationship with Principal
Stockholder -- Murmann Family Limited Partnership Interests in the German
Operating Company."

The Company was incorporated under the name Sundstrand Venture Company in
Delaware on September 25, 1986. On January 22, 1990, the Company changed its
name to Sauer Inc. The Company's dual executive offices are located at 2800 East
13th Street, Ames, Iowa 50010, telephone number (515) 239-6000, and at Krokamp
35, 24539 Neumunster, Federal Republic of Germany, telephone number
011-49-4321-871-0.

3
<PAGE> 8

THE COMBINED OFFERING

Common Stock Offered:

U.S. Offering....................... [ ] Shares(1)(2)

International Offering.............. [ ] Shares(1)(2)

Employee Offering................... [ ] Shares

Total............................ [ ] Shares(1)

Offered by the Company.............. [ ] Shares

Offered by the Selling
Stockholders.......................... [ ] Shares(1)

Total............................ [ ] Shares(1)

Outstanding after the Combined
Offering.............................. [ ] Shares

Proposed New York Stock Exchange
symbol................................

Proposed Frankfurt Stock Exchange
symbol................................

Use of Proceeds....................... For general corporate purposes,
including the recent acquisition of
the real estate and building for the
Company's main facility in Germany
formerly owned by the Murmann family
and funding of a portion of the
Company's capital expenditure
program. Pending such application,
the net proceeds will be used to
reduce $ of short-term and $
of long-term indebtedness. The
Company will not receive any proceeds
from the sale of Common Stock by the
Selling Stockholders.

Dividend Policy....................... The Company currently intends to pay
regular quarterly cash dividends of
$ on its Common Stock
subject to declaration by the
Company's Board of Directors. See
"Dividend Policy."

Certain debt instruments to which the
Company or its subsidiaries are
parties restrict the ability of the
Company or the subsidiaries to pay
dividends or redeem or repurchase
capital stock. See "Management's
Discussion and Analysis of Financial
Condition and Results of
Operation -- Liquidity and Capital
Resources" and "Description of
Capital Stock -- Limitations on
Dividends and Other Financial
Restrictions on the Company and its
Subsidiaries."

Controlling Stockholder............... For information regarding the
Company's controlling stockholder,
see "Relationship with Principal
Stockholder."
- ---------------
(1) Excludes the [ ] shares of Common Stock that may be purchased from
[Klaus H. Murmann] pursuant to the over-allotment options.

(2) The final allocation of Common Stock between the U.S. Offering and the
International Offering may differ from the initial allocation set forth
above.

4
<PAGE> 9

For additional information concerning the Combined Offering, including
information relating to the determination of the initial public offering price,
see "The Combined Offering."

RISK FACTORS

Prospective investors should consider all the information contained in this
Prospectus before making an investment in the Common Stock. In particular,
prospective investors should consider carefully the factors discussed under
"Risk Factors."

5
<PAGE> 10

SUMMARY FINANCIAL DATA

The following summary consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements,
including the notes thereto, appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME AND LOSS DATA
Net sales......................................... $274,492 $362,482 $446,774 $467,566 $535,173
Cost of sales..................................... 217,374 272,342 334,580 352,044 402,345
Selling, general and administrative expense....... 38,046 43,934 48,128 51,856 52,575
Research and development expense.................. 14,573 16,068 18,796 20,505 20,655
-------- -------- -------- -------- --------
Operating income.................................. 4,499 30,138 45,270 43,161 59,598
Income (loss) before income taxes and minority
interest........................................ (3,683) 23,831 39,227 36,934 52,711
-------- -------- -------- -------- --------
Net income (loss)................................. $ (6,360) $ 11,847 $ 27,242 $ 19,646 $ 27,874
======== ======== ======== ======== ========
Basic and diluted net income (loss) per common
share........................................... $ (3,498) $ 6,157 $ 14,078 $ 10,137 $ 14,383
======== ======== ======== ======== ========
Pro forma basic and diluted net income (loss) per
common share(1)................................. $
========
Basic and diluted weighted average common shares
outstanding..................................... 1,818 1,924 1,935 1,938 1,938
======== ======== ======== ======== ========
OTHER DATA
Backlog (at year-end)............................. $100,700 $187,400 $235,600 $227,000 $277,500
Capital expenditures.............................. 13,334 21,350 45,689 56,284 66,750
Depreciation and amortization..................... 17,142 18,801 20,574 25,473 26,393
EBITDA(2)......................................... 20,713 45,006 61,112 62,563 78,793
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
--------------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA
Total assets................................................ $409,374 $
Dividend payable............................................ 16,994
Current liabilities......................................... 158,059
Long-term debt.............................................. 81,468
Stockholders' equity........................................ 78,745
</TABLE>

- ---------------
(1) Pro forma basic and diluted net income per share is computed based upon: i)
pro forma net income which gives effect to the elimination of interest
expense, net of income tax, related to $ long-term indebtedness and ii)
the basic and diluted weighted average common shares outstanding, as further
adjusted to reflect the following transactions as if they had occurred at
the beginning of fiscal year 1997: (a) the sale by the Company of
shares of Common Stock offered by it hereby and the application of the net
proceeds therefrom to pay a dividend to the Murmann family related to the
transaction described in "Use of Proceeds" and (b) the sale by the Company
of shares of Common Stock offered by it hereby and the application of
the net proceeds therefrom to repay $ long-term indebtedness as
described in "Use of Proceeds."

(2) EBITDA for any relevant period presented above represents net income (loss),
plus provision for income taxes and net interest expense, plus depreciation
and amortization. EBITDA may not be comparable to similarly titled measures
reported by other companies. While EBITDA should not be construed as a
substitute for operating income or a better indicator of liquidity than cash
flow from operating activities, which is determined in accordance with
generally accepted accounting principles, it is included herein to provide
additional information with respect to the ability of the Company to meet
its future debt service, capital expenditure and working capital
requirements. EBITDA is not necessarily a measure of the Company's ability
to fund its cash needs. See the Company's Financial Statements and the
related notes thereto appearing elsewhere in this Prospectus.

6
<PAGE> 11

(3) As adjusted to give effect to the issuance of shares of Common
Stock in the Combined Offering (assuming an initial public offering price of
$[ ] per share and after deducting the estimated expenses of the
Combined Offering payable by the Company, including underwriting commissions
on the Common Stock sold by the Company) and the application of the net
proceeds therefrom to pay the dividend recognized in connection with the
purchase of the German facilities from the Murmann family and to reduce
$ of short-term and $ of long-term indebtedness.

7
<PAGE> 12

RISK FACTORS

An investment in the shares of Common Stock offered hereby involves a
significant degree of risk. Prospective investors should consider carefully the
following factors, together with the other information contained in this
Prospectus, in evaluating whether to purchase the Common Stock.

COMPETITION

The mobile hydraulics industry is intensely competitive, with competition
principally based on breadth of product offerings, systems capability, product
performance, quality, price, durability and availability of skilled aftermarket
support. There are a relatively small number of competitors, usually divisions
of large companies such as Mannesmann (Rexroth division), Eaton,
Aeroquip-Vickers, Linde AG and Parker Hannifin, that offer broad product ranges
across international markets. In addition, the Company competes with a large
number of smaller companies that typically offer a single, specialized product
on a more limited geographic basis. Certain of the Company's competitors have
greater financial and other resources and may have lower cost structures than
the Company and can thus better withstand adverse economic or market conditions.
Companies not currently in direct competition with the Company may introduce
competing products in the future. For example, the Company may face competition
from current and prospective OEM customers, who evaluate the Company's products
against the merits of manufacturing components internally. To remain
competitive, the Company must continue to make capital and operational
expenditures, invest in research and development, maintain and enhance quality
levels, deliver finished products on a reliable basis and compete favorably on
the basis of price. Failure of the Company to continue to compete effectively
could have a material adverse effect on the Company's business, financial
condition and results of operations.

PRICING AND COMPETITIVE PRESSURES FROM OEM CUSTOMERS

Approximately 75% of the Company's sales are directly to OEM customers.
Increasingly, OEM customers are seeking to use their positions as volume
purchasers in the mobile hydraulics market to obtain preferential pricing and to
obtain substantial quality assurance protection from suppliers. To remain
competitive with others selling to these OEMs, the Company will continue to face
significant limitations on its ability to raise and, in some cases, maintain
current price levels on sales to such customers. In addition, the Company
expects that additional capital and operating expenditures will be required to
meet the enhanced quality assurance protection its OEM customers require. These
developments could have significant impact on the Company's operating results.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

CYCLICALITY; RISKS ASSOCIATED WITH GENERAL ECONOMIC CONDITIONS

The capital goods industry in general and the mobile hydraulics industry in
particular are subject to economic cycles. Cyclical downturns have in the past
had and could in the future have a material adverse effect on the demand for the
Company's products and, consequently, on the Company's business, financial
condition and results of operations. Demand for the Company's products is
dependent upon the general condition of the off-highway mobile equipment
industry which may be affected by numerous factors, including levels of
construction activity, weather conditions and interest rates. The Company's
results of operations are also subject to price competition and the cost of
supplies and labor, both of which are affected by general economic conditions.
The Company derives substantial sales from cyclical industries, including the
turf care, material handling, construction and agricultural equipment
industries. Periods of economic recession in the United States or Europe or any
other major industrial market could cause a substantial decrease in the
Company's net sales and have a material adverse effect on the Company's
business, financial condition and results of operations. Currently, markets in
the East Asia region in which the Company does business are experiencing an
economic disruption. In 1997, the Company had sales of $15.5 million in East
Asia or 3.0% of the Company's total revenues. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Other
Matters -- Asian Crisis Impact."

8
<PAGE> 13

RISKS RELATING TO GROWTH STRATEGY

A key element of the Company's growth strategy is its continued success in
developing new, enhanced hydraulic systems and components for its existing
markets and new applications of its technology to new market segments. The
Company may not be successful in developing these new products, or such products
may not compete successfully in the market.

In pursuing its growth strategy, the Company intends to expand its presence
in existing markets and to enter new product markets, both of which will require
significant increases in manufacturing capacity and research, engineering and
development efforts. The Company has commenced an expansion program requiring
capital expenditures to construct new facilities and expand existing operations.
The expansion program may take longer or require more capital than is currently
planned. The Company may finance these capital expenditures from cash flow from
operations, bank or institutional borrowings or the issuance of equity or debt
securities. The Company may not be able to obtain such financing or, if
available, such financing may not be on terms acceptable to the Company.

The Company's expansion program and product development efforts are
expected to require significant expenditures in advance of anticipated revenues.
This may have a negative effect on the Company's operating results until such
time as these expenses are offset by increased revenues.

DEPENDENCE ON SKILLED PERSONNEL

The Company's future operating results and its development of new
technologies and products depend to a significant degree upon the continued
contribution of its technical, engineering and research personnel and skilled
labor force. This segment of the labor market in the United States and in the
United Kingdom is currently experiencing very tight supply conditions. The
Company competes for qualified technical, engineering and research personnel
with numerous other employers, some of which have greater financial and other
resources than the Company. The Company's continued success depends on its
ability to attract and retain a skilled labor force at all its facilities. While
the Company has been successful in attracting and retaining skilled employees in
the past, the Company may not continue to be successful in attracting or
retaining the personnel it requires to develop, manufacture and market its
products and expand its operations in the future.

INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS

In 1997, approximately 62% of the Company's net sales were generated in
U.S. dollars, 37% in European currencies and 1% in Chinese currency. The Company
expects that sales outside the United States will continue to account for a
significant portion of its net sales in future periods. International sales are
subject to various risks, including the impact of possible recessionary
environments in various economies, unexpected changes in regulatory
requirements, tariffs and other trade barriers, potentially adverse tax
consequences, trade or currency restrictions and, particularly in emerging
economies, potential political and economic instability and regional conflicts.
Any or all of these factors could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

In 1997, approximately 38% of the Company's sales were made in currencies
other than the U.S. dollar, including 20% in Deutsche marks, 9% in British
pounds and 3% in Italian lira. The Company's financial statements, which are
presented in U.S. dollars, can be impacted by foreign exchange fluctuations
through both translation risk and transaction risk. Translation risk is the risk
that the financial statements of the Company for a particular period or as of a
certain date are affected by changes in the exchange rates that are used to
translate the financial statements of the Company's foreign operations from
foreign currency into U.S. dollars. Transaction risk is the risk of the Company
receiving its sales proceeds or holding its assets in a currency different from
that in which it pays its expenses and holds its liabilities. Transaction gains
and losses have not been significant given the Company's balanced global
manufacturing presence. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Impact of Currency Fluctuations."

9
<PAGE> 14

Since 1995, the Company has made substantial investments in two facilities
in Slovakia and has entered into a joint venture in Shanghai, China. Operations
in emerging economies such as Slovakia and China often are subject to numerous
risks and uncertainties, including political, economic and legal risks such as
unexpected changes in regulatory requirements, taxes, tariffs, customs, duties
and other trade barriers, difficulties in staffing and managing foreign
operations, foreign exchange controls that restrict or prohibit repatriation of
funds, and technology export and import restrictions or prohibitions. The
success of market reforms undertaken in these countries is also uncertain, and
further economic and political instability may occur. Legal systems in emerging
economies have limited experience with commercial transactions between private
parties. The extent to which contractual obligations will be honored and
enforced is uncertain.

CONCENTRATION OF SUPPLIERS

As part of the Company's strategy to cut costs, the Company looks to
concentrate its purchases to fewer suppliers. The Company believes this move to
a more limited number of suppliers results in closer working and technical
relationships with its suppliers that contribute to advances in technology. In
addition, these suppliers, as a result of the increased volume of the Company's
purchases, are expected to provide more efficient and reliable service and more
competitive prices when selected as the single supplier. While this reliance on
a reduced number of suppliers has not in the past resulted in any disruption in
deliveries of supplies that materially affected the Company's business or
results of operations, in the future one or more of the Company's suppliers'
operations could be disrupted or a supplier could decide to discontinue
supplying the Company, in which case the Company's operations or operating
results could be adversely affected. Although the Company believes that in such
case it would be able to find an acceptable replacement supplier, it may take
time to find a new supplier and for such supplier to provide the needed
material. The new supplier may not provide financial terms or services as
advantageous as the replaced supplier.

TECHNOLOGICAL CHANGE

The hydraulic industry and markets for component parts of mobile hydraulics
are subject to technological change, evolving industry standards, changing
customer requirements and improvements in and expansion of product offerings.
Although the Company believes that it has the technological capabilities to
remain competitive, technological advances or developments by competitors or
others could result in the Company making significant capital expenditures in
order to remain competitive and to avoid material adverse effects on its
business, financial condition and results of operations.

CONCENTRATION OF OWNERSHIP OF THE COMPANY; MURMANN FAMILY'S LIMITED PARTNERSHIP
INTERESTS

Upon completion of the Combined Offering, the Murmann family, the Company's
principal stockholders, will own approximately [ ]% of the outstanding
Common Stock of the Company (or [ ]% if the over-allotment options are
exercised in full). See "Relationship with Principal Stockholder." Accordingly,
persons purchasing Common Stock in the Combined Offering will not, either alone
or acting collectively, be able to elect any members of the Company's Board of
Directors or control any corporate actions.

The Murmann family also owns limited partnership interests in the German
Operating Company. Pursuant to the limited partnership agreement, the consent of
the limited partners is required for the German Operating Company to take
certain actions. In addition, under the limited partnership agreement, the
German Operating Company is required to make an annual cash payment to the
limited partners of 8.3% ( % pro forma for the Combined Offering) of the
Company's consolidated income before taxes and before the Murmann family's
limited partnership interests. See "Relationship with Principal
Stockholder -- Murmann Family Limited Partnership Interests in the German
Operating Company."

NO PRIOR TRADING MARKET FOR COMMON STOCK

Prior to the Combined Offering, there has been no public market for the
Common Stock. Although application has been made for the listing of the Common
Stock on the New York Stock Exchange and the Frankfurt Stock Exchange, an active
trading market may not develop or be sustained either in the United

10
<PAGE> 15

States or in Germany after the Combined Offering. The initial public offering
price will be negotiated among the Company, the representatives of the Selling
Stockholders and the representatives of the Underwriters and may not be
indicative of prices that will prevail in the trading market after the Combined
Offering, and the market price of shares of Common Stock after the Combined
Offering might fall below the initial public offering price. See "The Combined
Offering -- Determination of Offering Price" and "Underwriting" for a discussion
of factors to be used to determine the initial public offering price.

DILUTION

Purchasers of the shares of Common Stock offered hereby will experience
immediate dilution in the net tangible book value per share. See "Dilution."

SHARES ELIGIBLE FOR FUTURE SALE

Subject to applicable United States federal securities laws and the
agreement described below, after completion of the Combined Offering, the
Murmann family and management may sell or distribute any and all of the shares
of Common Stock they own. Sales or distribution by the Murmann family or
management of substantial amounts of Common Stock, or the perception that such
sales or distribution could occur, could adversely affect the prevailing market
price for the Common Stock. The Murmann family has advised the Company that its
current intent is to continue to hold at least 50.1% of the Common Stock
outstanding following the Combined Offering. However, the Murmann family is not
subject to any contractual obligation to retain any shares of Common Stock,
except that the Murmann family, as well as members of management, have agreed
not to sell or otherwise dispose of any shares of the Common Stock for a period
of 180 days after the date of this Prospectus without the prior written consent
of Credit Suisse First Boston Corporation, as representative of the U.S.
Underwriters and Managers, subject to certain exceptions. The Company has agreed
to register shares held by the Murmann family for future sales from time to time
upon request. See "Shares Eligible for Future Sale" and "Underwriting."

ANTI-TAKEOVER PROVISIONS

Certain provisions of the Company's Restated Certificate of Incorporation
and By-Laws may render more difficult or have the effect of discouraging
unsolicited takeover bids from third parties or the removal of incumbent
management of the Company. See "Description of Capital Stock -- Certain
Provisions of the Restated Certificate of Incorporation and By-Laws." Although
such provisions do not have a substantial practical significance to investors
while the Principal Stockholder controls the Company, such provisions could have
the effect of depriving stockholders of an opportunity to sell their shares at a
premium over prevailing market prices should the Principal Stockholder's voting
power decrease to less than 50%. In addition, certain of the Company's and its
subsidiaries' credit agreements contain default provisions with respect to
certain changes in control of Sauer. See "Description of Capital
Stock -- Limitations on Dividends and Other Financial Restrictions on the
Company and its Subsidiaries."

11
<PAGE> 16

THE COMBINED OFFERING

GENERAL

Of the [ ] shares of Common Stock being sold in the Combined
Offering, the Company is issuing and selling [ ] shares of Common Stock
and the Selling Stockholders are selling [ ] shares of Common Stock. In
addition, [Klaus H. Murmann] has granted the Underwriters and Managers options
to purchase up to an aggregate of [ ] additional shares of Common Stock
at the initial public offering price less underwriting discounts and commissions
for the purpose of covering over-allotments, if any. Upon completion of the
Combined Offering, the Murmann family will own approximately [ ]% of the
outstanding Common Stock (or [ ]% if the over-allotment options are
exercised in full). See "Principal and Selling Stockholders." The Company will
not receive any proceeds from the sale of the Common Stock by the Selling
Stockholders.

The Common Stock is being offered by the U.S. Underwriters in the U.S.
Offering and by the Managers in the International Offering.

The U.S. Underwriters and Managers have reserved for sale, at the initial
public offering price, up to shares of Common Stock (or % of the
shares offered in the Combined Offering, assuming the over-allotment options are
not exercised) for employees, directors and certain other persons associated
with the Company who have expressed an interest in purchasing such shares in the
Combined Offering. The number of shares available for sale to investors in the
Combined Offering will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares not so purchased will be offered by the
U.S. Underwriters or the Managers to investors on the same terms as the other
shares offered hereby.

The U.S. Offering

An offering of shares of Common Stock will be made by the U.S.
Underwriters to the public in the United States and on a private placement basis
in Canada. Credit Suisse First Boston Corporation, Smith Barney Inc. and
Deutsche Morgan Grenfell Inc. are the representatives of the U.S. Underwriters.
Application will be made to list the Common Stock on the New York Stock Exchange
under the symbol [ ].

The International Offering

An offering of shares of Common Stock will be made by the
Managers in Germany and elsewhere outside the United States and Canada. The
offering of shares of Common Stock in Germany will be a public
offering. Credit Suisse First Boston (Europe) Limited, Morgan Grenfell & Co.
Limited and Smith Barney Inc. are the Managers. Application will be made to list
the Common Stock on the Frankfurt Stock Exchange under the symbol [ ].
Credit Suisse First Boston Aktiengesellschaft will act as the sponsor for such
application.

The final allocation of Common Stock between the U.S. Underwriters and
Managers may differ from the amounts set forth above.

DETERMINATION OF OFFERING PRICE

Prior to the Combined Offering, there has not been any public market for
the Common Stock. The initial public offering price will be determined by
negotiation among the Company, the representatives of Selling Stockholders and
the representatives of U.S. Underwriters and Managers. In determining the
initial public offering price, consideration will be given to, among other
things, the current financial position and results and future prospects of the
Company, the general condition of the German, United States and other securities
markets, prices of similar securities of German and U.S. companies, market
conditions for initial public offerings and other relevant factors. The prices
at which the shares of Common Stock will trade in the public market could be
lower than the initial public offering price.

12
<PAGE> 17

USE OF PROCEEDS

The net proceeds to be received by the Company from the issuance of the
[ ] shares of Common Stock being sold by the Company in the Combined
Offering are estimated to be $[ ], assuming an initial public offering
price of $[ ] per share (the midpoint of the initial offering price
range), and after deducting the estimated expenses of the Combined Offering
payable by the Company, including underwriting commissions with respect to the
Common Stock sold by the Company. Such net proceeds will be used by the Company
for general corporate purposes, including the recent acquisition of the real
estate and building of its main facility in Germany formerly owned by the
Murmann family and funding of a portion of the Company's 1998-2000 capital
expenditure program. See "Relationship with Principal Stockholder" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

The Company presently expects capital expenditures to be in the range of
$150-$230 million during the 1998-2000 period. The Company expects these capital
expenditures to be used primarily for the construction of new manufacturing
facilities and the purchase of manufacturing equipment for all its business
units to increase production capacity for new and existing products, to increase
production efficiencies and for replacement purposes. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Pending such application, the
net proceeds will be used to reduce $ of short-term and $ of
long-term indebtedness.

DILUTION

The net tangible book value of the Company at December 31, 1997 was
$[ ] million, or $[ ] per share. Net tangible book value per share
is determined by dividing the net tangible book value of the Company (tangible
assets less liabilities) by the number of outstanding shares of Common Stock.
After giving effect to the issuance of [ ] shares of Common Stock being
sold by the Company in the Combined Offering (assuming an initial public
offering price of $[ ] per share and after deducting the estimated
expenses of the Combined Offering payable by the Company, including underwriting
commissions), at December 31, 1997, the pro forma net tangible book value of the
Company would have been $[ ], or $[ ] per share, representing an
immediate increase in net tangible book value of $[ ] per share to the
existing stockholders and an immediate dilution of $[ ] per share to the
new investors in the Combined Offering. The following table illustrates the per
share dilution to the new investors in the Combined Offering at December 31,
1997 (assuming an initial public offering price of $[ ] per share and
after deducting the estimated expenses payable by the Company including
underwriting commissions):

<TABLE>
<CAPTION>
PER SHARE
---------
<S> <C>
Assumed initial public offering price....................... $
Net tangible book value at December 31, 1997................
Increase in net tangible book value attributable to
purchasers in the Combined Offering.......................
Pro forma net tangible book value after the Combined
Offering..................................................
--------
Dilution in net tangible book value to purchasers of shares
of Common Stock in the Combined Offering.................. $
========
</TABLE>

The following table summarizes, as of December 31, 1997, the difference
between the number of shares of Common Stock purchased or to be purchased from
the Company, the total consideration paid or to be paid

13
<PAGE> 18

and the average consideration paid or to be paid by the existing stockholders
and the new investors in the Combined Offering, assuming an initial public
offering price of $[ ] per share:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing Stockholders.................... % $ % $
Purchasers of Common Stock in the
Combined Offering......................
----- ------ -----
Total.......................... 100.0% $ 100.0%
===== ====== =====
</TABLE>

DIVIDEND POLICY

The Company expects to pay dividends in the future consistent with its cash
requirements and growth needs. The amount of dividends will be dependent upon
the Company's current and expected future financial performance, general
business conditions and other relevant factors. The Company currently expects to
pay quarterly dividends of $ per share. This anticipated dividend
policy could be changed and the Company could pay no dividends. The Company is a
holding company with no business operations of its own. The Company is therefore
dependent upon payments, dividends and distributions from its operating
subsidiaries for funds to pay dividends to holders of Common Stock.

Certain of the financing agreements restrict Sauer's ability to pay
dividends to its stockholders or redeem or repurchase capital stock. In
addition, the Company's ability to pay dividends on the Common Stock is
effectively limited by certain restrictive covenants contained in the credit
agreements to which the U.S. Operating Company and the German Operating Company
are parties, which effectively limit the amount of dividends the U.S. Operating
Company or the German Operating Company can distribute to Sauer. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Liquidity and Capital Resources" and "Description of Capital
Stock -- Limitations on Dividends and Other Financial Restrictions on the
Company and its Subsidiaries."

14
<PAGE> 19

CAPITALIZATION

The following table sets forth the capitalization of the Company at
December 31, 1997. This table should be read in conjunction with "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements, including the notes thereto, appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
Dividend payable............................................ $ 16,994
========
Short-term debt (including current maturities of long-term
debt)..................................................... $ 62,993
========
Long-term debt.............................................. $ 81,468
--------
Minority interest in net assets of consolidated companies... 32,799
--------
Stockholders' equity:
Common Stock, $ par value........................ 9,960
Additional paid-in capital................................ 73,081
Cumulative translation adjustment......................... 9
Retained earnings......................................... (1,605)
Common Stock in treasury (at cost)........................ (2,700)
--------
Total stockholders' equity........................ 78,745
--------
Total capitalization........................................ $193,012
========
</TABLE>

- ---------------
(1) As adjusted to give effect to the issuance of shares of Common
Stock in the Combined Offering (assuming an initial public offering price of
$[ ] per share and after deducting the estimated expenses of the
Combined Offering payable by the Company, including underwriting commissions
on the Common Stock sold by the Company) and the application of the net
proceeds therefrom to pay the dividend recognized in connection with the
purchase of the German facilities from the Murmann family and to reduce
$ of short-term and $ of long-term indebtedness.

15
<PAGE> 20

SHARES ELIGIBLE FOR FUTURE SALE

Upon the completion of the Combined Offering, there will be
shares of Common Stock outstanding. Of the outstanding shares, shares
sold in the Combined Offering will be freely tradeable without restriction under
the Securities Act (except for any shares purchased by affiliates of the
Company). Beginning 90 days after the date of this Prospectus, an additional
shares (including those owned by the Murmann family) will be eligible
for sale in the U.S. public market subject to compliance with the applicable
provisions of Rule 144. In addition, the Murmann family has the right pursuant
to an agreement, dated May , 1998, to require the Company to register from
time to time upon request shares owned by the Murmann family for sale in the
U.S. public market. Sales or distributions of substantial amounts of Common
Stock by the Murmann family or management, or the perception that such sales or
distribution could occur, could adversely affect the prevailing market price for
the Common Stock.

The shares (including those owned by the Murmann family) may also
be sold on the Frankfurt Stock Exchange upon listing of the shares on the
Frankfurt Stock Exchange. The sale of shares of Common Stock over the Frankfurt
Stock Exchange may affect the market price of the securities on the Frankfurt
Stock Exchange, which in turn may affect the market price of the Common Stock in
the United States.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares of Common Stock
are required to be aggregated) who is deemed an affiliate is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of 1% of the then outstanding number of shares of such class
(approximately shares after the Combined Offering) or the average
weekly trading volume in composite trading on all national securities exchanges
during the four calendar weeks preceding the filing of the required notice of
such sale. As defined in Rule 144, an "affiliate" of an issuer is a person that
directly or indirectly, through one or more intermediaries, controls or is
controlled by, or is under common control with, such issuer. Klaus Murmann and
the Murmann family are affiliates of the Company.

While the Murmann family has advised the Company that its current intent is
to continue to hold at least 50.1% of the Common Stock outstanding following the
Combined Offering, it is not subject to any contractual obligation to retain any
shares of Common Stock. However, the Company, the Murmann family and members of
management have agreed not to offer, sell, contract to sell, announce their
intention to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the Securities and Exchange Commission a registration statement under
the Securities Act of 1933 relating to, any additional shares of Common Stock or
securities convertible into or exchangeable or exercisable for any shares of
Common Stock for a period of 180 days after the date of this Prospectus without
the prior written consent of Credit Suisse First Boston Corporation on behalf of
the U.S. Underwriters and the Managers, subject to certain exceptions, including
that any such restriction shall not apply to the issue or sale of shares of
Common Stock in a private placement by the Company as consideration for the
acquisition of another entity or all or substantially all of the assets of
another entity, provided the recipient of such shares has agreed in writing to
be bound by the terms of such restrictions for the remainder of its term and
issuances pursuant to the exercise of employee stock options outstanding on the
date hereof. See "Underwriting."

16
<PAGE> 21

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical consolidated financial statements
(including the notes thereto) appearing elsewhere in this Prospectus. The
selected consolidated financial data have been derived from the consolidated
financial statements of the Company for each of the fiscal years in the
five-year period ended December 31, 1997, which have been audited by Arthur
Andersen LLP, independent public accountants.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME AND LOSS DATA
Net sales.............................. $274,492 $362,482 $446,774 $467,566 $535,173
Costs and expenses:
Cost of sales........................ 217,374 272,342 334,580 352,044 402,345
Selling, general and
administrative.................... 38,046 43,934 48,128 51,856 52,575
Research and development............. 14,573 16,068 18,796 20,505 20,655
-------- -------- -------- -------- --------
Total costs and expenses.......... 269,993 332,344 401,504 424,405 475,575
-------- -------- -------- -------- --------
Operating income....................... 4,499 30,138 45,270 43,161 59,598
Nonoperating income (expenses):
Interest expense..................... (9,130) (7,812) (8,034) (7,364) (8,879)
Interest income...................... 884 989 275 564 698
Royalty income....................... 1,139 1,094 1,695 1,156 1,150
Other, net........................... (1,076) (579) 21 (583) 144
-------- -------- -------- -------- --------
Nonoperating expenses, net........... (8,183) (6,308) (6,043) (6,227) (6,887)
Income (loss) before income taxes and
minority interest.................... (3,683) 23,831 39,227 36,934 52,711
Provision for income taxes............. (1,685) (7,536) (5,538) (10,645) (16,345)
Income (loss) before minority
interest............................. (5,368) 16,295 33,689 26,289 36,366
Minority interest in income of
consolidated companies(1)............ (992) (4,448) (6,447) (6,643) (8,492)
Net income (loss)...................... $ (6,360) $ 11,847 $ 27,242 $ 19,646 $ 27,874
======== ======== ======== ======== ========
Basic and diluted net income (loss) per
common share......................... $ (3,498) $ 6,157 $ 14,078 $ 10,137 $ 14,383
======== ======== ======== ======== ========
Pro forma basic and diluted net income
(loss) per common share(2)........... $
========
Basic and diluted weighted average
common shares outstanding............ 1,818 1,924 1,935 1,938 1,938
======== ======== ======== ======== ========
Cash dividends declared per common
share................................ $ 0 $ 1,000 $ 4,000 $ 4,000 $ 4,000
======== ======== ======== ======== ========
Dividend recognized in connection with
purchase of German facilities(3)..... $ 16,994
========

OTHER DATA
Backlog (at year-end).................. $100,700 $187,400 $235,600 $227,000 $277,500
Capital expenditures................... 13,334 21,350 45,689 56,284 66,750
Depreciation and amortization.......... 17,142 18,801 20,574 25,473 26,393
EBITDA(4).............................. 20,713 45,006 61,112 62,563 78,793
</TABLE>

17
<PAGE> 22

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total assets........................... $215,947 $250,208 $318,624 $351,270 $409,374
Current liabilities.................... 82,629 92,705 144,557 126,944 158,059
Long-term debt......................... 48,344 45,935 37,516 65,021 81,468
Stockholders' equity................... 31,143 41,541 63,944 75,930 78,745
</TABLE>

- ---------------
(1) Includes Murmann family's limited partnership interests of $532, $(1,744),
$(2,954), $(2,707) and $(4,001) for 1993, 1994, 1995, 1996 and 1997,
respectively.

(2) Pro forma basic and diluted net income per share is computed based upon: i)
pro forma net income which gives effect to the elimination of interest
expense, net of income tax, related to $ long-term indebtedness and ii)
the basic and diluted weighted average common shares outstanding, as further
adjusted to reflect the following transactions as if they had occurred at
the beginning of fiscal year 1997: (a) the sale by the Company of
shares of Common Stock offered by it hereby and the application of
the net proceeds therefrom to pay a dividend to the Murmann family related
to the transaction described in "Use of Proceeds" and (b) the sale by the
Company of shares of Common Stock offered by it hereby and the
application of the net proceeds therefrom to repay $
long-term indebtedness as described in "Use of Proceeds."

(3) The amount relates to the dividend recognized in connection with purchase of
the German facilities from the Murmann family described in "Use of
Proceeds."

(4) EBITDA for any relevant period presented above represents net income (loss),
plus provision for income taxes and net interest expense, plus depreciation
and amortization. EBITDA may not be comparable to similarly titled measures
reported by other companies. While EBITDA should not be construed as a
substitute for operating income or a better indicator of liquidity than cash
flow from operating activities, which is determined in accordance with
generally accepted accounting principles, it is included herein to provide
additional information with respect to the ability of the Company to meet
its future debt service, capital expenditure and working capital
requirements. EBITDA is not necessarily a measure of the Company's ability
to fund its cash needs. See the Company's Financial Statements and the
related notes thereto appearing elsewhere in this Prospectus.

18
<PAGE> 23

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with
the Company's financial statements and notes thereto included elsewhere in this
Prospectus. The Company's financial statements are stated in U.S. dollars and
have been prepared in accordance with U.S. GAAP.

OVERVIEW

The Company designs, manufactures and sells its products in North America
and Europe and sells its products throughout the rest of the world either
directly or through distributors. Recently, the Company has begun to manufacture
its products in East Asia at its new manufacturing plant in Shanghai, China.

Sauer's products are used by original equipment manufacturers ("OEMs") of
off-highway mobile equipment, including construction, road building and
maintenance, agricultural, turf care, material handling and oil field equipment.
These markets are typically cyclical depending on general economic conditions,
interest rates and weather. The effect of cyclicality is moderated somewhat
because the Company has substantial sales and operations in North America and
Europe, markets whose economic cycles may vary. There have been, however, times
- -- as in 1991 -- when cycles coincided, resulting in losses for both the North
American and European operations of the Company. Over the last three years the
Company's sales have been stronger in North America than in Europe, reflecting
stronger economic and market conditions in North America than in Europe.
Likewise, the effect of cyclicality can be moderated somewhat by the Company
selling to different market segments. For example, the turf care market might be
strong while the agricultural market is weak.

The Company sells primarily the same components and systems in North
America and Europe, to many of the same large, global OEMs. The market segments
are also the same between North America and Europe with the exception of the
turf market, which is primarily a North American market segment.

While the Company's customers may be the same for North America and Europe,
they can have very different needs. For example, North American customers
typically require higher power transmissions than those required in Europe,
while European customers have historically demanded more sophisticated controls.

Operating profit margins during the past three years have differed between
North America and Europe. North American margins have been significantly higher
than those in Europe, which have been declining. North American margins have
benefited from the stronger market conditions mentioned above. European margins
have been hurt by the sluggish economic conditions and higher labor costs,
especially those in Germany. The European margins have also been hurt by the
start-up costs of moving production into Slovakia.

The Company expects overall market growth rates to increase somewhat in
Europe while moderating in North America. Sales growth is expected to come
primarily from volume increases as price increases are expected to be minimal,
reflecting the pressure on pricing from OEM customers.

In pursuing its growth strategy, the Company is making significant
investments in engineering, research and development as well as in manufacturing
processes and capacity. The Company expects these increased expenditures to have
an impact in the short term on operating margins.

IMPACT OF CURRENCY FLUCTUATIONS

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

19
<PAGE> 24

from the Company receiving its sale proceeds or holding its assets in a currency
different from that in which it pays its expenses and holds its liabilities.

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

<TABLE>
<CAPTION>
PERCENTAGE SALES GROWTH
OVER PRIOR YEAR
-------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
As Reported................................................. 23.3% 4.7% 14.5%
Without Currency Impact..................................... 18.9 6.1 18.9
</TABLE>

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

OTHER MATTERS

Year 2000 Compliance -- The Company is currently in the process of
evaluating its information technology infrastructure for Year 2000 compliance.
The Company has plans in place to upgrade its business systems software in the
U.S. and Europe that will modify the software to make it Year 2000 compliant.
The upgrades are obtained from the Company's software vendors under the normal
ongoing maintenance agreements. The upgrades will be implemented primarily by
the Company's information technology staff, with support from outside
contractors as needed. The cost of the Company's information technology staff to
upgrade the business systems software is not separately accounted for or
estimated. The cost of outside contractors is not expected to be material to the
Company's results of operations. The Company's manufacturing operations make
extensive use of computer controlled machine tools. The Company is currently
evaluating Year 2000 compliance impact on these machine tools and has determined
they will need to be upgraded to make them Year 2000 compliant. The Company does
not have an estimate of the cost of upgrading these machine tools. As part of
the evaluation the Company is working with the suppliers of the machine tools to
understand their plans. The Company's products are not affected by the Year 2000
issue. The Company does not currently have any information concerning the Year
2000 compliance status of its suppliers and customers. In the event that any of
the Company's significant suppliers or customers does not successfully and
timely achieve Year 2000 compliance, the Company's business or operations could
be adversely affected.

Euro Currency Conversion -- The Company has formed a team to evaluate and
plan for the Euro currency conversion. The Company's business systems are
multi-currency functional and the Company's European operations transact
business today in various European currencies. The Company does not have an
estimate of the cost to implement the Euro currency, but does not expect the
cost to have a material effect on the Company's financial condition or results
of operations.

Asian Crisis Impact -- Several countries in Asia are experiencing a severe
economic crisis, characterized by reduced economic activity, lack of liquidity,
highly volatile foreign currency exchange and interest rates and unstable stock
markets. The Company has a 60% interest in a joint venture located in Shanghai,
China, which manufactures and sells high power hydrostatic transmissions, and
the Company also has export sales into Asia. The joint venture business and
export sales will be affected by the economic crisis. However, with total assets
of only $10.5 million located in China and total Asian sales for 1997 of $15.5
million, the Company does not expect the crisis to have a material effect on its
financial condition or results of operations. Many of the Company's customers
also sell into Asia. Any impact on their sales could have an impact on the
Company's sales. The Company does not believe this impact will be material.

20
<PAGE> 25

NEW ACCOUNTING PRINCIPLES

During 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share" and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." These changes did not
have any impact on the Company's financial position or results of operations.

RESULTS OF OPERATIONS

The Company's net sales by product line and geographic area, showing the
percentage change from prior year, as reported and without the impact of
currency fluctuation, are set forth in the following table:

<TABLE>
<CAPTION>
1995 1996 1997
------ ---------------------------- ----------------------------
(U.S. DOLLARS IN MILLIONS, EXCEPT PERCENTAGES)
--------------------------------------------------------------------
% CHANGE % CHANGE
------------------- -------------------
NET NET AS W/O NET AS W/O
AMOUNT AMOUNT REPORTED CURRENCY AMOUNT REPORTED CURRENCY
------ ------ -------- -------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales by product line:
Hydrostatic Transmissions... $340.0 $350.9 3.2% 5.0% $408.8 16.5% 21.5%
Gear Pumps and Motors ...... 63.1 64.2 1.8 1.7 64.4 0.3 2.2
Electrohydraulics and
other.................... 43.7 52.5 20.0 21.6 62.0 18.0 21.5
------ ------ ------
Total............... $446.8 $467.6 4.7% 6.1% $535.2 14.5% 18.9%
====== ====== ======
Net sales by geographic area:*
North America............... $241.1 $263.5 9.3% 9.3% $323.0 22.6% 22.6%
Europe...................... 199.4 189.1 (5.2) (2.0) 196.7 4.0 14.8
East Asia................... 6.3 15.0 138.1 143.3 15.5 3.3 7.0
------ ------ ------
Total.................... $446.8 $467.6 4.7% 6.1% $535.2 14.5% 18.9%
====== ====== ======
</TABLE>

- ---------------
* Net sales are attributed to geographic area based on location of customer.

1997 COMPARED TO 1996

Net sales -- Net sales for 1997 of $535.2 million increased by $67.6
million, or 14.5%, from 1996 net sales of $467.6 million. Net sales increased by
18.9% excluding the impact of currency fluctuation. Unit volume growth accounts
for the majority of the growth in net sales, with net price increases accounting
for less than 1% of the growth. Sales of hydrostatic transmissions account for
the major portion of the growth in net sales, growing by 21.5%, excluding the
impact of currency fluctuation. This growth comes from the strong North American
and European growth of 22.6% and 14.8%, respectively. Gear pumps and motors
showed little growth in net sales, affected by the slower growing European
markets, the principal market for the Company's gear pumps and motors, compared
to the North America market. Electrohydraulics' and other products' net sales
grew by 21.5%, excluding the impact of currency fluctuation, reflecting the
strong growth of the Company's electrohydraulic valve business in North America.

Cost of sales -- Cost of sales for 1997 of $402.3 million was 75.2% of net
sales, compared to 75.3% of net sales for 1996. The slight improvement (decrease
in cost of sales as a percent of net sales) can be attributed to the favorable
impact of increased production volumes from net sales growth offsetting the
current year's unfavorable impact of increased capital investment in
manufacturing capacity. Cost of sales as a percentage of net sales improved in
North America, while those in Europe worsened in 1997 compared to 1996.

Selling, general and administrative expense -- Selling, general and
administrative expenses for 1997 of $52.6 million increased by $0.7 million, or
1.4%, from 1996 expenses of $51.9 million. The small increase reflects general
inflation, partially offset by the cost reduction efforts in Germany and the
favorable impact of currency fluctuations in translation. As a percent of net
sales, 1997 expenses were 9.8% compared to 11.1% for

21
<PAGE> 26

1996. This improvement is a result of the growth in net sales compared to the
relatively fixed nature of these expenses, along with the cost reduction efforts
referred to above.

Research and development expenses -- Research and development expenses for
1997 of $20.7 million increased by $0.2 million, or 1.0%, from 1996 expenses of
$20.5 million. Without the impact of currency fluctuation the increase was 4.2%.
This reflects normal increases in wage rates and other general inflation.

Nonoperating expenses, net -- Net nonoperating expenses for 1997 of $6.9
million increased by $0.7 million from 1996 net nonoperating expenses of $6.2
million. Net interest expense for 1997 of $8.2 million increased by $1.4 million
from 1996 net expense of $6.8 million due to the increase of 1% in the weighted
average interest rate for 1997 compared to 1996 and the increase of $4.1 million
in the average daily short-term borrowings for 1997 compared to 1996. Royalty
income continued to be depressed due to the Japanese licensees' lower sales in
Japan and the weak Japanese yen.

Provision for income taxes -- Provision for income taxes for 1997 of $16.3
million increased by $5.7 million from 1996 provision of $10.6 million. The
increase comes from the increase in net income before income taxes and minority
interest of $15.8 million and the increase in the effective tax rate for 1997 of
31.0% from the 1996 rate of 28.8%.

Net income -- Net income of $27.9 million increased by $8.3 million from
1996 net income of $19.6 million, reflecting the 14.5% increase in net sales.
North America accounted for the increase which was in line with its increase in
net sales. European 1997 net income remained unchanged compared to 1996, due to
level sales between years and the weaker Deutsche mark which had a negative
impact on U.S. dollar intersegment purchases from North America, but from which
North America benefited on intersegment purchases from Europe.

1996 COMPARED TO 1995

Net sales -- Net sales for 1996 of $467.6 million increased by $20.8
million, or 4.7%, from 1995 net sales of $446.8 million. Net sales increased by
6.1% excluding the impact of currency fluctuation. Unit volume growth accounted
for the majority of the growth in net sales. Hydrostatics sales grew by 5.0%,
excluding the impact of currency fluctuation, with the North American market
growth of 9.3% being offset by the decrease in European sales of 2.0%. Gear
pumps and motors showed little growth in net sales due to the decrease in
European sales, the principal market for the Company's gear pumps and motors.
Electrohydraulics' and other products' net sales grew by 21.6%, excluding the
impact of currency fluctuation, attributable primarily to a new product
introduction by the Company's United Kingdom business unit.

Cost of sales -- Cost of sales for 1996 of $352.0 million were 75.3% of net
sales, compared to 74.9% of net sales for 1995. The slight increase in cost of
sales as a percent of net sales is attributed to the Company's European business
and was caused by the negative impact on cost of sales from a reduction of
inventories causing lower production volumes in 1996 compared to the 1995
positive impact on cost of sales from an increase in inventories resulting in
higher production volumes. Cost of sales as a percent of net sales improved in
North America for 1997 compared to 1996.

Selling, general and administrative expenses -- Selling, general and
administrative expenses for 1996 of $51.9 million increased by $3.8 million, or
7.9%, from 1995 expenses of $48.1 million. As a percent of net sales, 1996
expenses were 11.1% compared to 10.8% for 1995. The increase in 1996 expenses
was due to normal increases in wage rates and general inflation and a $1.5
million write-off of goodwill relating to the 1994 acquisition of Control
Concepts, Inc.

Research and development expenses -- Research and development expenses for
1996 of $20.5 million increased by $1.7 million, or 9.0%, from 1995 expenses of
$18.8 million. Without the impact of currency fluctuation the increase was
11.3%. The increase relates primarily to the U.S. and is the result of increased
investment in product development by adding engineers.

Nonoperating expenses, net -- Net nonoperating expenses for 1996 of $6.2
million increased by $0.2 million from 1995 net nonoperating expenses of $6.0
million. Net interest expense for 1996 of $6.8 million

22
<PAGE> 27

decreased by $1.0 million from 1995 net expense of $7.8 million, reflecting the
decrease of 2.4% in the weighted average interest rates from 1995 to 1996 more
than offsetting the increase in the average daily short-term borrowings from
1995 to 1996. Royalty income for 1996 of $1.2 million decreased by $0.5 million
from 1995 income of $1.7 million. A major part of the royalty income comes from
the Company's Japanese licensee and is a percentage of the licensee's sales,
primarily made in Japan in Japanese yen. The decrease in royalty income reflects
the decrease in the licensee's sales made in Japan, and unfavorable currency
fluctuations in the yen.

Provision for income taxes -- Provision for income taxes for 1996 of $10.6
million increased by $5.1 million from 1995 provision of $5.5 million. The
increase comes from the increase in the effective tax rate for 1996 of 28.8%
from the 1995 rate of 14.1%. The low 1995 rate resulted from the use of $7.2
million of operating loss and foreign tax credit carryforwards to lower the 1995
tax provision.

Net income -- Net income of $19.6 million decreased by $7.6 million from
1995 net income of $27.2 million. The decrease was related to the European
business, with North America showing a slight increase in 1996 net income
compared to 1995. European 1995 net income was strong due to the increased
production levels from increases in inventories mentioned above and due to the
benefit of the strong Deutsche mark in 1995 in making U.S. dollar intersegment
purchases from North America. The use of operating loss and foreign tax credit
carryforwards to lower the 1995 income tax provision (as mentioned above) also
contributed to the inflated 1995 net income.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal sources of liquidity have been from internally
generated funds and borrowings under its credit facilities. Net cash provided by
operating activities has been $38.0 million, $49.1 million and $44.0 million for
1995, 1996 and 1997, respectively. Net borrowing increases under short and long
term credit facilities have been $20.4 million, $17.3 million and $34.4 million
for 1995, 1996 and 1997, respectively. The cash provided by operating activities
and borrowings have funded capital expenditures of $45.7 million, $56.3 million
and $66.7 million for 1995, 1996 and 1997, respectively, along with a dividend
for each of the three years of $7.8 million.

Net cash provided by operating activities for 1997 of $44.0 million
decreased $5.1 million from $49.1 million for 1996. The decrease comes from
increases in inventories and accounts receivable being partially offset by an
increase in accounts payable and net income. Net cash provided by operating
activities for 1996 of $49.1 million increased by $11.1 million from $38.0
million for 1995. The increase relates primarily to decreases in inventories in
1996 compared to the increases in inventories and accounts receivable in 1995.

Capital expenditures for the years 1995-1997 totaled $168.7 million. These
expenditures were primarily for investments in machine tools for all of the
Company's manufacturing plants, including the new leased plants in Slovakia and
China, and the building of a new plant in West Branch, Iowa for the manufacture
of gear pumps and motors. These investments have been made to increase
production capacity, flexibility and efficiency, to improve product quality and
for replacement purposes.

The Company believes that increased levels of capital expenditures will be
required over the next three years to expand capacity, improve efficiency and
remain competitive. As a result, the Company expects capital expenditures to be
in the range of $150-$230 million during 1998-2000. Capital expenditures will be
applied primarily to the building of a new manufacturing facility in the United
States, to the acquisition of the real estate and building of its main facility
in Germany currently leased, to the purchase of manufacturing equipment for each
of its manufacturing plants to increase production capacity for new and existing
products, to increase production efficiencies, to improve product quality and
for replacement purposes. The new U.S. manufacturing plant will produce medium
power hydrostatic transmissions. The additional plant will free up capacity at
the Company's Ames facility which will be used to expand the production of high
power hydrostatic transmissions. The Company's manufacturing plants in Slovakia
and China, which started production in 1995 and 1997 respectively, are still
under development and will require further investment in production machinery to
increase their operating capacity and efficiency.

23
<PAGE> 28

The Company plans to fund this increased level of capital expenditures from
internally generated funds, increased borrowings under its credit facilities and
funds obtained by the sale of company shares in a public offering. These sources
of funds are expected to be sufficient to support the planned capital
expenditures and the Company's working capital requirements.

At December 31, 1997 the Company had $52.0 million of unused lines of
credit, consisting primarily of committed U.S. lines of credit and uncommitted
European lines of credit. The Company's credit facility restricts the Company's
ability to pay dividends to its stockholders or to redeem or repurchase its
capital stock, except from executive officers. Pursuant to such agreement, $18.1
million of dividends could be paid by the Company as of December 31, 1997. In
addition, the Company's ability to pay dividends is effectively limited by
certain restrictive covenants contained in the U.S. Operating Company's and
German Operating Company's credit agreements, which limit the amount of
dividends the U.S. Operating Company and German Operating Company can distribute
to the Company. During 1997 the U.S. Operating Company made distributions to the
Company of $19.5 million. At December 31, 1997, an additional $2.9 million was
not restricted as to payments of dividends by the U.S. Operating Company. The
German Operating Company did not make distributions to the Company during 1997.
At December 31, 1997, $2.7 million were not restricted as to the payment of
dividends.

24
<PAGE> 29

BUSINESS

THE COMPANY

Mobile hydraulics are used in two critical vehicle systems: propulsion
drive systems, which transmit and control power for the propulsion of a vehicle,
and work function systems, which provide power for the work performed by the
vehicle. The function of mobile hydraulics is to transmit power from an engine,
usually diesel or gasoline fueled, to the location on the vehicle where it is
required, i.e., the propulsion or work function. Mobile hydraulics offer greater
flexibility of layout, more compact design, a higher performance-to-weight ratio
and greater productivity and reliability than other forms of motion control,
such as mechanical or electrical systems. Mobile hydraulics also allow the
vehicle to perform functions which could be difficult and costly to perform
using mechanical shafts, gear boxes, clutches, belts and pulleys such as
rotating the drum on a concrete transit mixer at variable speed independent of
the vehicle engine speed. As a result, mobile hydraulics are the dominant
technology for the propulsion and work function of off-highway equipment as well
as for the work function of on-highway special purpose vehicles.

The Company is a leader in the design and manufacture of high performance
mobile hydraulics components and has the ability to bring these components
together in a total vehicle system using electronic sensors and microprocessor
controls programmed with the Company's proprietary software. Increasingly, the
propulsion and work function systems are being integrated with all other
elements of vehicle performance including engine management and safety and data
gathering for productivity and maintenance to achieve optimum vehicle
performance. Customers are looking to consolidate their supplier base, devote
their engineering resources to overall vehicle design and use a supplier's
expertise to design and supply hydraulic systems to achieve the vehicle's
performance objective. Because the components and systems supplied by Sauer are
usually the most technically advanced and highest value products on a vehicle
(excluding the engine), the Company is in a leading position to be selected by
customers as a key supplier and systems integrator. To meet the full range of
vehicle propulsion and work function demands, Sauer is increasingly working with
customers, suppliers and other component manufacturers to develop total
hydraulic systems, including braking, steering, cooling and an overall
microprocessor control system. Sauer's strong market position, technology
leadership and systems expertise have led to, and are expected to continue to
lead to, close working relationships with its customers.

Sauer sells to original equipment manufacturers ("OEMs") of off-highway
mobile equipment, including agricultural, construction, turf care, road building
and maintenance, material handling and oil field equipment. The Company's
principal OEM customers include AGCO Corp., Bomag GmbH, Case Corp., Caterpillar
Inc., Claas KGaA, Deere & Company, Ingersoll-Rand Company and its Melroe unit,
JCB Ltd., Liebherr GmbH, New Holland N.V., Svedala Industri AB and its Dynapac
Division and the Toro Company, most of which are customers in both North America
and Europe. Sauer sells its products directly to OEMs in North America, Europe
and Asia, and through approximately 80 independent distributors. Sauer also
sells its products in Europe through sales subsidiaries in Belgium, France,
Holland, Italy, Slovakia, Spain, Sweden and the United Kingdom. With 13
manufacturing facilities in the United States, Europe and China, the Company can
adapt its products to local market needs and has significant flexibility to meet
customer delivery requirements. In addition, Sauer licenses its hydrostatic
transmission technology to manufacturers that operate in Brazil, India and
Japan.

25
<PAGE> 30

The following table sets forth the Company's net sales by product line in
dollars and as a percentage of total net sales for the years indicated:

<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---------------- ---------------- ---------------- ---------------- ----------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hydrostatic
Transmissions(1)...... $216,534 78.9% $280,254 77.3% $339,945 76.0% $350,847 75.0% $408,802 76.4%
Gear Pumps and Motors... 41,724 15.2 49,827 13.7 63,094 14.1 64,218 13.7 64,414 12.0
Electrohydraulics and
Other(2).............. 16,234 5.9 32,401 9.0 43,735 9.9 52,501 11.3 61,957 11.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total........... $274,492 100.0% $362,482 100.0% $446,774 100.0% $467,566 100.0% $535,173 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>

- ---------------
(1) Includes certain electrohydraulic products.
(2) Includes open circuit piston pumps and mechanical gear boxes.

The following table sets forth the Company's net sales by market
application, in dollars and as a percentage of total net sales, for the years
indicated:

<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---------------- ---------------- ---------------- ---------------- ----------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Agriculture.............. $ 41,298 15.0% $ 65,424 18.0% $ 76,596 17.1% $ 84,183 18.0% $ 99,925 18.7%
Construction............. 38,125 13.9 53,749 14.8 69,955 15.7 71,335 15.3 76,441 14.3
Turf care................ 48,105 17.5 69,828 19.3 81,532 18.2 85,017 18.2 104,578 19.5
Road-building and
maintenance............ 41,687 15.2 49,960 13.8 65,983 14.8 56,333 12.0 67,972 12.7
Other.................... 17,748 6.5 19,537 5.4 28,540 6.4 31,964 6.8 34,334 6.4
Distribution and
aftermarket............ 87,529 31.9 103,984 28.7 124,168 27.8 138,734 29.7 151,923 28.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total............ $274,492 100.0% $362,482 100.0% $446,774 100.0% $467,566 100.0% $535,173 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>

The United States, Europe and Japan are the primary markets in which mobile
hydraulic products are manufactured and purchased. Over 80% of such products are
produced and incorporated into vehicles manufactured in these three regions.
International competition is primarily between large U.S. and German suppliers.
Historically, Japanese companies have licensed mobile hydraulic power technology
from U.S. and German companies and have focused almost exclusively on the East
Asian market.

Sales of the Company's products and systems have grown at a faster rate
than the underlying mobile hydraulic markets. The Company's revenues have grown
at a compound annual growth rate over five- and ten-year periods of 22.8% and
13.3%, respectively, in the United States, 7.1% and 2.6%, respectively, in
Europe (or 9.0% and 3.0% excluding exchange rate effects) and 15.3% and 7.8%,
respectively, in total. In the United States, as reported by the National Fluid
Power Association ("NFPA"), the five- and ten-year compound annual growth rates
for mobile hydraulics have been 17.1% and 8.8%, respectively. In Europe, as
reported by the European Committee for Oil Hydraulic & Pneumatic Transmission
(CETOP), the respective rates have been 6.0% and 3.0%, respectively. The CETOP
data are for both mobile and industrial hydraulic production. The Company
believes the mobile market is growing somewhat faster than the industrial
market. The Company expects overall market growth rates to increase somewhat in
Europe while moderating in the United States.

The following table sets forth the Company's net sales by customers'
geographic market, in dollars and as a percentage of total net sales, for the
years indicated:

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COMPETITIVE ADVANTAGES

Sauer believes it has a strong competitive position in the mobile
hydraulics industry that reflects the Company's core strengths.

Technology Leadership

Sauer has a long-standing tradition of developing industry
leading-technology and is committed to continue to enhance the capabilities of
its products. The Company provides superior, highly engineered hydraulic systems
and components that address the most demanding applications of its target
end-user markets. In the past, Sauer's customers have been willing to pay a
premium for the Company's industry-leading, highly engineered systems and
components. The Company's design principles for hydrostatic transmissions are
now the worldwide standard for almost all new product development in this area
and Sauer's vast experience, with production of more than [five] million
hydrostatic pump and motor units since 1964, provides a significant advantage
over competitors that have more recently changed to Sauer's type of design. The
Company has reinvested a significant percentage of net sales in engineering,
research and development in recent years and plans to continue doing so to
remain on the leading technological edge in its markets. The Company's
engineering, research and development efforts have included the development of
new products and testing, evaluation and improvement of existing products and
the development of proprietary software for its microprocessor-based systems. To
meet its customers' needs, Sauer has developed systems that integrate
hydraulics, hydrostatics and mechanics with electronic sensors and controls
utilizing the Company's proprietary software. These systems are designed to work
effectively and more efficiently by performing more vehicle propulsion and work
functions at economical cost and increasingly integrating all vehicle functions,
including engine management and safety.

Customization and Integration with Customers

Many of the products which the Company designs and manufactures are
customized to meet customers' specifications. By providing high performance and
customized products, the Company has distinguished itself from the commodity
segment of the hydraulic components market and achieved, for many of its
products, higher operating margins than its competitors. The Company has the
ability to adjust its production cycle to manufacture products in large or small
quantities according to customers' demands. This allows the Company to
"mass-customize" its products without incurring additional costs, thus providing
value-added services to its customers. The Company's design engineers work
closely with its customers in providing product proposals and prototypes and in
developing high quality, specialized products. The design of a Company product
or system is often created in collaboration with the design of the customer's
vehicle of which the Company's product or system will be a component part.

Strong U.S. and European Presence

The Company's ability to design and manufacture mobile hydraulic products
in both the United States and Europe provides it with a competitive advantage.
This dual manufacturing and engineering capability permits the Company to adapt
its products to meet market needs in North America and Europe and provides
flexibility to meet OEM customers' delivery requirements. In addition, the dual
manufacturing capability allows the Company to manufacture and sell in Europe
and in North America on the basis of local currencies, thereby reducing the
impact on the Company's operating income of exchange rate fluctuations between
those currencies. The Company is expanding its presence in East Asia through a
100% owned sales and marketing office in Shanghai and a 60% owned manufacturing
facility in the Pudong area of Shanghai. Management believes that the Company
enjoys a competitive advantage through its ability to supply and service the
international requirements of its customers directly to the locations where they
are doing business.

Customer, Market and Geographic Diversification

During 1997, no single customer accounted for more than 10% of the
Company's net sales. In 1997, net sales in North America, Europe and the East
Asia region accounted for approximately 60%, 37% and 3%,

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<PAGE> 32

respectively, of the Company's total net sales. In addition to the Company's
geographically diversified customer base, the Company has been able to adapt and
sell its products for use in a wide range of applications and industries. These
applications include construction, road repair and maintenance, agricultural,
turf care, material handling, oil field equipment and an extensive range of
specialized machinery. This diversification reduces the Company's dependence on
any one customer, any one market or any one geographic market.

Stable Aftermarket Sales

A further source of income support is the Company's diversified aftermarket
service. The large installed base of components, in particular hydrostatic
transmissions, provides the Company with a relatively stable source of revenues
which exhibits countercyclical tendencies. The aftermarket services provided
include service and repair of products at the Company's own manufacturing and
sales facilities and sales of service parts to more than 100 independent
authorized service centers. With direct end-user support on a convenient
worldwide basis, margins on aftermarket service and parts sales are higher than
those on new unit sales to OEMs.

Reputation for Quality and Service

Sauer and its predecessor organizations have been active in the mobile
hydraulics market since the 1960s. The Company believes it has a widely
recognized reputation in the mobile hydraulics market for engineering
innovation, customized solutions, industry leading performance, product
reliability and durability and aftermarket service. Sauer's OEM customers are
increasingly seeking to use their positions as volume purchasers in the
hydraulic market to require quality assurance protection. To meet this demand,
the Company is investing in product development and in new manufacturing
technology and facilities. A key focus of these efforts is to reduce cycle time,
in both the development and production stages. Response to customers is being
significantly enhanced by integrating order processing with production
scheduling in many of the Company's facilities. The Company intends to leverage
its strong name recognition to attract new customers requiring high-performance,
specialty hydraulic systems and components.

GROWTH STRATEGY

Sauer's strategy is to be the technology leader, market leader and total
quality leader in the manufacture and supply of components and systems to
transmit and control hydraulic power in mobile equipment in major world markets.
The key components of Sauer's growth strategy are as follows:

Enhance Product Offering and Expand Content of Existing Vehicles

Over the last several years, Sauer has significantly broadened and enhanced
its mobile hydraulics product offering. The Company's broader product line,
including integrated solutions utilizing microprocessor controls, provides a
more complete range of choice to the Company's OEM customers. Mobile hydraulics
are growing at a higher rate than the machinery and equipment markets they serve
as hydraulics replace other power transmission types and existing hydraulic
systems grow in scope and sophistication. For example, the high power
transmission line of products introduced by Sundstrand has been replaced by two
new lines, Series 90 and Series 42. Both new series are more compact, have added
features, a broader range of control types and superior controllability than the
products they replace. These enhancements have allowed the Company to achieve
higher unit selling prices and, together with similar advances in electronic
controls, sensors and microprocessors, reach new sectors of the market such as
small bulldozers, industrial forklift trucks and forestry equipment.

Sauer intends to achieve significant growth by increasing the sales content
to existing customers. The move by Sauer's customers to fewer suppliers and the
benefits of Sauer's integrated systems to these customers open opportunities for
the Company to both add existing products and to design new products to increase
sales content per customer vehicle. Because the components and systems supplied
by Sauer are usually the most technically advanced and highest value products on
a vehicle (excluding the engine), the Company is in a leading position to be
selected by customers as a key supplier and systems integrator. The

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<PAGE> 33

Company's reputation for technical excellence and close working relationships
with its customers' engineers enhances these opportunities. For example, in
1995, the Company sold only a hydrostatic transmission to U.S. manufacturers of
concrete transit mixer trucks. Today, the Company sells four additional products
on the same vehicle with a more than fourfold increase in dollar content per
vehicle.

Expand into New Mobile Hydraulic Vehicle Applications

Sauer plans to develop mobile hydraulic products to enter into new vehicle
markets. Potential new vehicle markets include industrial forklift trucks and
agricultural and industrial tractors, where hydrostatic transmissions have not
been widely used. Entering these new vehicle markets would also provide the
Company with the opportunity to sell related products. For example, Sauer is in
the forefront of developing new proprietary hydro-mechanical propulsion drives
for tractors. Hydro-mechanical transmissions offer the benefits of hydrostatic
transmissions (e.g., infinitely variable speed and controllability) with the
benefits of mechanical transmissions (e.g., efficiency at constant vehicle speed
at high power levels). The Company is working with several major OEMs to further
develop the application of the Company's hydro-mechanical technology. Already
one tractor manufacturer, Fendt in Germany, has introduced new tractor designs
using the Company's hydro-mechanical technology and has received favorable
response from customers.

Capitalize on Global Presence; Build Asian Presence

Sauer is committed to being a global company in order to serve the needs of
its global customers. The Company's customers manufacture and sell their
products throughout the world and require convenient access to their suppliers'
products and services. To meet this requirement, the Company has modern
manufacturing facilities in the United States, Europe and East Asia and a
network of sales companies, licensees, distributors and authorized service
center locations around the world. The Company believes that a significant
factor in its market share growth has been its reputation for on-time delivery
to meet rapidly expanding demand.

In increasing its global operations, the Company intends to expand its
presence in East Asia, one of the three leading geographic markets for hydraulic
systems products. To capitalize on this market, the Company has established a
100% owned sales and marketing office in Shanghai and a 60% owned manufacturing
facility in the Pudong area of Shanghai and has developed strong licensee
relationships such as with Daikin, the Company's licensee in Japan. The Company
intends to make a long-term investment of management resources and capital to
build up its East Asian presence.

Improve Gross Margins Through Operating Efficiencies and Lower Costs

The Company intends to improve margins by reducing overhead costs,
improving worker productivity, shortening production cycle times and
rationalizing its products mix. The Company is expanding and equipping existing
facilities and building new manufacturing facilities to increase production
capacity for new and existing products and to enhance production efficiencies.
New equipment investment incorporates the latest advances in metal cutting
technology, robotics and computerized assembly and testing equipment. These
technologies reduce labor cost, reduce the cost of quality and reduce
inventories. A major reduction in the number of material suppliers gives the
Company more purchasing advantage with each supplier in terms of advanced
technology, improved quality of supplies and lower administrative purchasing
costs. The Company's experience with manufacturing cells and flexible
manufacturing systems, well established in U.S. operations, is now in the
process of adoption in Europe and will aid margins. The major expansion in
Slovakia, where total employment cost is approximately 15% of that in Germany
and where there is more flexibility in manning high capital cost machinery, will
also improve margins in Europe.

Finally, the Company believes that the most important contribution to cost
reduction comes from investment in a skilled workforce able to adapt to new
technology and equipment.

Make Selective Acquisitions

Sauer may make selective acquisitions that broaden the products and systems
offered by the Company and to enhance Sauer's technological leadership. In
particular, Sauer seeks to take advantage of the
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<PAGE> 34

consolidation occurring in the electrohydraulics industry. See
"Business -- Competition." Such acquisitions are likely to involve smaller niche
or regional companies, like Control Concepts, Inc. ("CCI"), and could also
include larger acquisitions.

HISTORY AND ORGANIZATION

Sauer and its predecessor organizations have been active in the mobile
hydraulics industry since the 1960s. Established in 1987, the Company combined
the business of Sauer Getriebe in Europe and Sundstrand Hydraulic Power Systems
in North America. A predecessor to Sauer Getriebe was founded in Germany in
1884. Sundstrand was founded in 1905 in the United States and established its
Hydro Transmission division in 1964. In 1967, Sauer Getriebe, which was owned by
Klaus H. Murmann, became a licensee of Sundstrand to manufacture and sell
hydrostatic transmissions in Europe. Recognizing the need to serve their OEM
customers on a more global basis, Sauer Getriebe and Sundstrand combined their
non-U.S. and U.S. mobile hydraulics businesses in an equal joint venture in
1987. In 1989, the Murmann family and certain executive officers bought
Sundstrand's interest in the joint venture. As a result of that transaction and
a related restructuring in 1990, Sauer Inc. became the holding company for its
operations. Sauer does not currently derive any sales from, or conduct any
material business with, Sundstrand. Sundstrand does, however, license the
Sundstrand name to the Company. The license expires in 2004. Klaus H. Murmann is
a director of Sundstrand. See "Management -- Directors and Executive Officers."

Sauer operates on a worldwide basis through its U.S. and German Operating
Companies. The Company's operations are fully integrated but managed on a
decentralized basis in order to promote a worldwide operating philosophy. The
Company maintains dual corporate headquarters and locates its senior managers at
major operating sites.

In 1991, the Company and Agri-Fab, Inc. formed a joint venture, Hydro-Gear,
to manufacture integrated hydrostatic transmissions and axles for sale to OEMs
in the turf care equipment market. Sauer has a 60% interest in the joint
venture. See "-- Products and Services -- Hydrostatic Transmissions --
Hydro-Gear."

PRODUCTS AND SERVICES

Hydrostatic Transmissions

Sauer designs, manufactures and sells a range of closed-circuit axial
piston hydrostatic transmissions for both the propulsion and work functions of
off-highway mobile equipment in the United States, Europe and East Asia. The
function of a transmission is to transmit power from an engine, diesel or
gasoline fueled, to the location on the vehicle where it is required (i.e., the
propulsion or work function), and to do so in the most useful form in terms of
speed, torque and controllability. Hydrostatic transmissions permit equipment to
operate efficiently by providing infinitely variable speeds (up to a certain
maximum) in both forward and reverse at a given engine throttle setting and by
acting as a brake. By eliminating gear shifting, they permit the operator to
concentrate on the work at hand and reduce the likelihood of damage to the
transmission due to operator error. Hydrostatic transmissions provide advantages
over mechanical transmissions in terms of control and coordination of vehicle
function and flexibility in installation and vehicle design. However, they are
typically more expensive and may require more frequent routine maintenance than
mechanical transmissions.

High power (typically over 50 horsepower) and medium power (typically 25-50
horsepower) applications for hydrostatic transmissions manufactured by the
Company include construction and agricultural mobile equipment. Light power
(typically 15-25 horsepower) and bantam power (typically under 15 horsepower)
applications for hydrostatic transmissions manufactured by the Company include
light agricultural and turf care mobile equipment. However, any one vehicle may
include applications at all four power levels depending on the specific vehicle
functions. Hydrostatic transmissions have, over the past 30 years, become the
dominant type of propulsion drive train for off-highway mobile equipment with
the exception of industrial forklift trucks in North America and agricultural
and industrial wheel tractors. The Company expects both these types of vehicles
to be sources of market growth. Success in these sectors will come from recently
developed microprocessor controls and matching control features of the new
Series 42 products and from the compactness and high power density of new
hydrostatic pumps and motor elements utilized in hydro-

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<PAGE> 35

mechanical transmissions. All these developments evolve from the Company's
leading technology base and extensive application experience.

MAJOR APPLICATIONS

<TABLE>
<CAPTION>
ROAD BUILDING
AGRICULTURAL CONSTRUCTION TURF CARE AND MAINTENANCE OTHER
- ---------------- ------------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C>
Ag Tractors Bulldozers Commercial Mowers Chip Spreaders Aerial Lifts
Air Seeders Concrete Mixers General Turf Concrete Saws Industrial
Combines Concrete Pumps Maintenance Oil Distributors Sweepers
Cotton Pickers Ditchers/Trenchers Lawn Tractors Pavers Logging
Cotton Strippers Excavators Sand Trap Rakes Planers Marine
Detasselers Grinders Rollers Mining
Harvesters Industrial Lift Transit Mixers Oil Field
Sprayers Trucks R T Fork Lifts
Windrowers Landfill Compactors Railway
Skid Steer Loaders Maintenance
Utility Tractors Snowgroomers
Wheel Loaders Truck and Bus
Generator
Drives
</TABLE>

In each of the last five years, sales of hydrostatic transmissions have
accounted for a majority of the Company's net sales. Approximately 75% of 1997
net sales of hydrostatic transmissions were made directly to OEMs of off-highway
mobile equipment, which were primarily large OEMs, and the remaining 25% were to
independent distributors. The Company sells to approximately 80 of these
independent distributors, which operate over 200 service centers. These
independent distributors generally sell transmissions manufactured by the
Company to smaller OEMs and also sell transmissions and parts manufactured by
the Company to end-users for replacement purposes.

Approximately 10% of net sales of hydrostatic transmissions in each of the
past five years were of aftermarket service parts. Sales of aftermarket service
parts are typically made in the United States to independent distributors that
repair and rebuild transmissions originally manufactured by the Company.
Aftermarket service part sales are primarily service parts for high and medium
power hydrostatic transmissions. High power transmissions in off-highway mobile
equipment are typically rebuilt once during the life of the equipment. While the
Company and its independent distributors repair and rebuild transmissions, there
are a number of service centers unaffiliated with the Company, primarily in
North America, that repair and rebuild transmissions originally manufactured by
the Company, sometimes using service parts not made by the Company. In Europe,
this market is predominantly serviced by the Company's own sales companies.

The Company's principal OEM customers for hydrostatic transmissions include
AGCO Corp., Bomag GmbH, Case Corp., Caterpillar Inc., Claas KGaA, Deere &
Company, Ingersoll Rand Company and its Melroe unit, JCB Ltd., Liebherr GmbH,
New Holland N.V., Svedala Industri AB and its Dynapac Division and the Toro
Company, most of which are customers in both North America and Europe. The
Company sells to a number of divisions within these OEMs, many of which make
independent purchasing decisions. No individual customer, OEM or other,
accounted for 10% or more of the Company's overall net sales during 1997.

The product life cycle of the Company's hydrostatic transmissions generally
has been from 15 to 25 years. A key aspect of the Company's development process
has been modifying an original product design using new materials, new
manufacturing techniques and engineering development in order to increase the
life of a product while maintaining the original outside housing. This "design
stretch" process happens over a period of years and allows optimal return on
initial product development and manufacturing investment. In the future, the
Company expects the life cycle of its hydrostatic transmissions to be shorter.
The high power hydrostatic transmission line of products introduced by
Sundstrand in 1964 was replaced by the Company's new range of Series 90
transmissions in the period from 1988 through 1996 and Series 42 transmissions
beginning in 1996. Both are smaller, lighter and have more control features than
the Company's earlier line of transmissions. The

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<PAGE> 36

Company believes that OEM customers will increasingly demand smaller, lighter,
higher performance transmissions with more advanced control features to be used
in complete system applications.

Hydro-Gear. The U.S. Operating Company is a 60% partner in the Hydro-Gear
joint venture with Agri-Fab, Inc. The U.S. Operating Company supplied Hydro-Gear
with the technology and equipment to produce bantam power hydrostatic
transmissions, while Agri-Fab, Inc. supplied the technology and equipment to
produce mechanical axles. Hydro-Gear, located in Sullivan, Illinois,
manufactures these combined components to produce bantam power hydrostatic
transmissions integrated with mechanical axles primarily for use in turf care
equipment as an infinitely variable forward and reverse transmission to replace
a five speed mechanical transmission and clutch package. Hydro-Gear's primary
product and the reason for the joint venture company is the Integrated
Hydrostatic Transaxle ("IHT"). The IHT is a completely integrated hydrostatic
transmission and transaxle package that is lightweight, delivered ready to
install and has 3-15 horsepower capabilities.

Since its formation in 1991, the Hydro-Gear joint venture has achieved
substantial growth and helped fuel an industry transformation from using
mechanical transmissions to using IHTs. Hydro-Gear's IHTs tend to have lower
prices and gross profit margins than the Company's other hydrostatic
transmissions. However, higher volume levels, lower marketing costs and a lower
cost of investment make these products attractive to the Company. The Hydro-Gear
joint venture has provided the Company the opportunity to meet certain
customers' vehicle transmission and work function needs on a broader basis.
Customers of Hydro-Gear include MTD, the manufacturer of Yardman and Cub Cadet,
Toro, the manufacturer of Wheelhorse, and Frigidaire Home Products, a
manufacturer of lawn tractors, primarily for Sears.

Electrohydraulics

Sauer designs and manufactures electrohydraulic valves and electronic
controls, including microprocessor-based controls and electronic sensors through
its electrohydraulics operations in the United States and also designs
electrohydraulic products in Germany. Electrohydraulic controls and sensors
integrate hydraulics, hydrostatic transmissions and mechanical components with
electronic controls and are used by OEMs of off-highway mobile equipment to
control both the Company's hydraulic systems as well as the hydraulic systems of
other manufacturers. The electrohydraulic products bring together the propulsion
function and the work function by providing standard or custom designed
controls. These easy-to-use, cost-effective systems are designed to allow
vehicles to work effectively and more efficiently by performing more vehicle
functions at an economical cost. The Company is able to design and sell systems
to fit particular vehicle needs.

Increasingly, the Company's hydrostatic transmission sales include controls
made by the Company's electrohydraulics unit. The Company's electrohydraulic
products include electrohydraulic servo valves, electrohydraulic directional
control valves, microprocessor controls and software, analog control boards, joy
sticks and sensors. Common applications of the Company's electrohydraulic
products have been for the work function of agricultural combine harvesters and
road building equipment. While electrohydraulics' net sales are not a
significant part of the Company's overall net sales, the Company believes that
OEM customers increasingly prefer purchasing hydraulic products from
manufacturers, such as the Company, that can provide a sophisticated integrated
system for both the propulsion and work functions, together with an electronic
control system. Certain of the Company's OEM customers, however, also design and
manufacture their own electronic controls for use with the Company's, as well as
other manufacturers', hydraulic systems. Certain of the Company's
electrohydraulic products are purchased by customers for use with other
manufacturers' hydraulic systems.

In February 1994, the Company acquired CCI in order to further expand into
the electrohydraulic valve market. CCI manufactures and designs electrohydraulic
valves primarily for combine harvesters. Electrohydraulic valves are used to
direct the hydraulic power to the various parts of the vehicle that require
power.

Gear Pumps and Motors

The Company designs, manufactures and sells custom designed gear pumps as
well as a broad range of high performance standard gear pumps and motors. Gear
pumps and motors are the most widely used type of
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<PAGE> 37

mobile hydraulic pump and motor in the industry. They are the basic "workhorse"
product for numerous work functions across a broad range of mobile equipment,
because they are sturdy in design and able to withstand dirt and contamination
in poorly maintained equipment. They are also very cost-effective components in
replacing mechanical work-function devices. The disadvantages of gear pumps and
motors are their limited controllability compared to open circuit piston pumps
and the limited oil pressure levels and horsepower at which they operate. As
OEMs seek higher performance, there is a trend to replace mechanical devices
with gear pumps and motors, as well as a steady transition from gear pumps to
open circuit piston pumps. One such area is the hydraulic drive of engine
cooling fans on buses and recreational vehicles. Using gear pumps and motors and
electronic temperature sensors and valves, the hydraulic drive allows the
cooling system to operate independently of engine speed, both saving energy and
more efficiently using engine power.

At its Swindon, England facility, special purpose, customized gear pumps
are designed primarily for agricultural and construction applications.
Increasingly, these gear pumps integrate hydraulic control devices that were
previously located elsewhere in the work function system. This reduces the
number of interconnecting hydraulic tubes and hoses in the system, thereby
reducing cost and improving system reliability.

Sauer's range of standard gear pumps and motors offers higher oil pressure
and power levels and better performance and reliability than the products of the
Company's competitors. Most of the Company's gear pump and motor sales have been
made in Europe. Until 1997, the Company produced standard gear pumps and motors
only in Bologna, Italy. In 1997, it started the production of standard gear
pumps and motors at the West Branch, Iowa facility. With the 1997 commencement
of gear pump production in West Branch, Iowa, the Company expects to increase
sales of these products in the United States.

Open Circuit Piston Pumps

Open circuit piston pumps are used to transform mechanical power from the
engine to hydraulic power for the work functions 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. In addition, open circuit
piston pumps are able to operate at higher power levels. Increasingly, OEMs, in
particular agricultural tractor manufacturers, demand the advantages of open
circuit piston pumps as work functions transition to integrated electrohydraulic
controls, despite the premium price of an open circuit piston pump, typically
more than twice the price for a gear or vane pump.

Sauer designs and manufactures open circuit piston pumps in the United
States and Europe. The design and manufacture of open circuit piston pumps has a
certain commonality with the design and manufacture of closed circuit piston
pumps used in hydrostatic transmissions. Drawing on its vast experience in the
design of hydrostatic products, the Company's new Series 45 open circuit piston
pumps have been well received by the market because of their compact size, high
performance and reliability.

At its Swindon, England facility, the Company designs and manufactures
special purpose open circuit piston pumps, which combine general features of a
work function system, with oil filtration, main transmission actuation and
steering pump, into one assembly. Used primarily by agricultural tractor
manufacturers, an integrated package assembly allows the OEM to increase work
function performance, improve vehicle reliability, reduce total hydraulic system
cost by eliminating other hydraulic components and reduce the labor costs to
install the system. The sale of a typical integrated package more than doubles
the dollar content of Sauer's products in an agricultural tractor.

Mechanical Gear Boxes

In Europe, the Company designs and manufactures a range of special purpose
mechanical gear boxes. The gear boxes are used in both propulsion and work
function systems to reduce the output speed of a hydraulic motor down to the
desired final speed of the wheel or track of a vehicle or the final speed of the
work function. The gear boxes are complementary to the Company's hydrostatic
transmission product line and sold almost exclusively as components within a
system.

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MANUFACTURING

Sauer operates 13 manufacturing facilities in the United States, Europe and
China. The Company's decentralized manufacturing capabilities allow it to adapt
its products to local market needs and meet customer delivery requirements on a
timely basis. It is the Company's view that the optimum size for a stand-alone
manufacturing facility is in the range of 200 to 300 employees. Beyond this
level it is more difficult to develop the work structure and communication lines
that the Company believes are important to achieving its goals.

In North America, the Company manufactures hydrostatic transmissions at its
Ames, Iowa facility and at its La Salle and Freeport, Illinois facilities. A new
manufacturing facility is planned for Lawrence, Kansas, to be in operation in
late 1998 to produce medium power hydrostatic transmissions. The new facility
will free operating capacity at Ames to allow expanded production of the Series
90 high power hydrostatic transmission. Sauer has several flexible manufacturing
systems ("FMS") at the Ames facility for machining iron housings and components.
The systems, which are fully automated and computer controlled, operate an
average of 20 hours per day, seven days a week. The Company has extensive
experience with this type of equipment, and expects that future machinery
investment will be heavily oriented toward FMS to meet customers' "just in time"
needs and to minimize inventories. The La Salle facility is primarily used to
machine iron housings and components. The Freeport facility is primarily used to
machine steel and brass components from barstock. Both facilities utilize
computer controlled and special purpose equipment, including robotics. Housings
and components machined at the La Salle and Freeport facilities are transported
by common carriers to the Ames facility for assembly and testing.

In Europe, the Company produces hydrostatic transmissions at its
Neumunster, Germany facility. Iron housings and components are machined on
special purpose equipment and standard computer controlled equipment with
specially adapted features. The Neumunster facility also employs automated
material handling equipment designed specifically for the manufacture of the
Company's hydrostatic transmissions. In addition, the Company has begun
manufacturing hydrostatic transmissions and components and mechanical gear boxes
at two facilities in Slovakia. The Slovakia facilities supply components to the
Neumunster and Ames facilities, and produce mechanical gear boxes, at much lower
cost levels than the Company's other manufacturing locations. In East Asia, the
Company produces hydrostatic transmissions at the Pudong, Shanghai facility.

The Company designs and manufactures open circuit piston pumps at its Ames,
Iowa and Swindon, England facilities. The Company designs and manufactures
electrohydraulic valves and electronic controls, including microprocessor-based
controls and electronic sensors, at its Minneapolis, Minnesota and Newtown,
Pennsylvania facilities and also designs electrohydraulic products at the
Neumunster facility. Custom-designed gear pumps and motors are manufactured at
the Swindon, England facility and standard-designed gear pumps and motors are
manufactured at the Bologna, Italy and West Branch, Iowa facilities. The West
Branch gear pump plant was completed and put into production in 1997. In
addition to using special purpose equipment and standard computer controlled
machines similar to the Ames and Neumunster facilities, all gear pump plants
utilize high precision gear-making machinery with automated material handling.

The Company uses common computer aided design and manufacturing systems in
its Ames and Neumunster facilities. This permits engineering and development
work carried out at one facility to be used by the other facility and helps
ensure that parts made at both facilities are identical and interchangeable. In
the near future, all the Company's engineering and manufacturing locations will
be connected into the same system.

In addition to its engineering, research and development staff, the Company
employs in its manufacturing departments a number of engineers and technicians
who are responsible for the development of new manufacturing techniques and
processes and providing technical services for manufacturing.

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MARKETING AND SALES

In North America, the Company sells and distributes its products directly
to large OEMs and through independent distributors to smaller OEMs. In Europe,
the Company sells and distributes its products either directly or through sales
subsidiaries located in Belgium, France, Holland, Italy, Slovakia, Spain, Sweden
and the United Kingdom. Sales and marketing efforts include advertising and
participation in trade shows, but the Company relies primarily on direct contact
between the Company's technically qualified sales and engineering staff and its
customers' engineering and manufacturing departments.

Sauer seeks to develop a close working relationship with its principal OEM
customers. The Company's engineers work directly with those OEMs from initial
product design and specifications to field testing. In some instances, the
Company has a design engineer resident within the customer's engineering
department to facilitate and accelerate customized product development. The
Company also provides service support and service parts to further develop
strong and close working relationships with its customers. Sales and marketing
to smaller OEMs in North America are conducted primarily by independent
distributors in the United States. The independent distributors receive Company
training, including factory training for their service engineers, and handle
sales support and service of the Company's products. Total North American
employment for marketing, sales and service was 136 persons at December 31,
1997. In Europe, the networks of independent distributors do not exist to the
same extent as in North America. Therefore, the Company sells directly to both
large and small OEMs and employs a relatively larger number of sales and
services engineers in Europe. Total European employment for marketing, sales and
service was approximately 175 persons at December 31, 1997.

In order to secure long-term production orders, the Company first must
convince prospective OEMs that it has the technical capabilities, production
facilities and quality products that they require. After a period of time during
which the prospective OEM customer assesses the technical capabilities and other
attributes of various manufacturers, one of the competing manufacturers usually
is selected to begin work on developing prototype offerings. After the
development and testing phase is completed, the manufacturer selected for
prototype development is typically selected by the OEM to be the supplier for
long-term production orders during the production life of the equipment.
Changing to an alternative manufacturer at this point would be very costly to
the OEM and is therefore highly unusual. It can be up to a four-year process
from initial assessment to commencement of purchases by the OEM. By producing
highly specialized, made to order products, the Company has been able to develop
long-term relationships with many of its customers.

In response to recent desires of many of its OEM customers to reduce the
number of their suppliers by purchasing more components from fewer suppliers,
the Company has expanded its production of systems that integrate hydraulics,
hydrostatics and mechanics with electronic controls. The Company carries this
integration process even further, in some cases by joining forces with an engine
manufacturer and steering system supplier. The Company at times combines its
components with those of others in completely integrated assemblies. Such
ventures are cost effective, because they help the Company to work at the system
level and provide an opportunity to meet customer vehicle propulsion and work
function needs on a broader basis.

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

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

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 does not

35
<PAGE> 40

design its products specifically according to government standards and usually
only enters into contracts for the supply of commercial products. There are no
government contracts of material value to the Company.

ENGINEERING, RESEARCH AND DEVELOPMENT

The engineering and technical personnel employed in engineering, research
and development activities of the Company constitute approximately 7.4% of its
total work force, 152 in the United States and 124 in Europe. The Company's
engineering, research and development efforts have included development of new
products, testing, evaluation and improvement of existing products and the
development of proprietary software for its microprocessor-based systems.
Engineering, research and development are coordinated between Europe and the
United States so as to avoid duplication and to focus expenditures on the most
productive market developments. The Company also works on basic developments
with a number of universities and technical institutes and believes that its
access to technical developments in the United States, Europe, Japan and
elsewhere around the world through its business units and licensing arrangements
will enable it to remain competitive on a technological basis.

Recent engineering, research and development projects have included
hydro-mechanical products, a new line of microprocessor controls and new sizes
of open circuit piston pumps. The Company's research and development
expenditures during 1995, 1996 and 1997 were approximately $18.8 million, $20.5
million and $20.7 million, respectively.

The Company's research and development efforts provide many products,
including software, that are specifically designed for a customer. The Company's
products are very technical in nature, and its design team is a key component of
the sales effort. Design team members work closely with the customer's design
team to develop prototypes and specialized products that are specific to a
particular application. The design of a Company product or system is often
created in collaboration with the design of the customer's vehicle of which the
Company's product or system will be a component part.

The Company has been able to use technology in order to reduce development
times. Each product prototype is designed using Computer Assisted Design ("CAD")
to create a three-dimensional design that can be electronically transmitted to
Company suppliers. Because of the enhanced design techniques, the supplier can
often prepare a sample part in a short period of time that can be tested in the
Company's manufacturing facility. As a result, the average development time of
new products has been reduced from four years in the early 1980s to 18 months
currently.

LICENSING

To ensure worldwide availability of the Company's design of products, the
Company and its predecessors have licensed its technology to companies in
certain countries. The Company licenses all its open and closed circuit piston
pumps and motor and electrohydraulic valve technology to a subsidiary of Daikin
Industries Ltd. in Japan and licenses its original hydrostatic transmission
technology to Power Transmission Industries in Brazil and Larsen & Toubro Ltd.
in India. These licenses generally are exclusive licenses to manufacture and
sell hydrostatic transmissions using the Company's technology in the territory
covered by the license. In each license agreement, the Company reserves the
right to sell products based on the licensed technology in the territory covered
by the license but primarily relies on the licensee to supply the market needs
in the territory. These licenses generally provide for annual royalty payments
based on the licensee's net sales. Royalty income generated by these licenses
during 1995, 1996 and 1997 was approximately $1.7 million, $1.2 million and $1.2
million, respectively.

Sauer and its predecessors have had a longstanding working relationship
with the Company's principal licensee, Daikin. The Daikin license, first granted
by one of the Company's predecessors in 1967, has been renewed for successive
ten-year periods and currently expires in 2008. All the Company's open and
closed circuit piston pump and motor and electrohydraulic valve technology is
licensed to Daikin under an agreement which allows the Company to benefit from
any improvements to the technology made by Daikin and vice versa. The Company
and Daikin jointly design and market products to meet worldwide needs and
frequently cooperate in the manufacture of components and complete products so
as to optimize the utilization of
36
<PAGE> 41

manufacturing capacity. Daikin enjoys the leading position in the noncaptive
market for closed circuit hydrostatic transmissions in Japan with a market share
in excess of 70%.

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

COMPETITION

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

Closed Circuit Hydrostatic Transmission Industry

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

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

In terms of global supply of closed circuit hydrostatic transmissions, the
Company, together with its licensees, is the world leader in terms of product
range, market share and geographic coverage. Only the Rexroth unit of Mannesmann
offers similar geographic coverage.

Open Circuit Work Function Industry

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

Electrohydraulics Industry

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

RAW MATERIALS AND OTHER SUPPLIES

The Company purchases iron housings and components from various U.S. and
European foundries. The principal materials used by the Company are iron, steel,
brass and aluminum. All materials used by the
37
<PAGE> 42

Company are generally available from a number of domestic and foreign sources in
sufficient quantities to meet current requirements. Over the past five years,
the Company has reduced the number of suppliers with which it does business from
1632 in 1993 to 479 in 1997. The Company believes this move to a reduced number
of suppliers results in a closer working and technical relationship with its
suppliers that contributes to advances in technology. Further, these suppliers
are expected to provide more efficient, reliable service and more competitive
prices when selected as the single supplier.

BACKLOG

The amount of the Company's backlog is significant because, among other
factors, customer orders typically involve long lead times and specific model
types. At December 31, 1997, the Company's backlog (consisting of accepted but
unfilled customer orders primarily scheduled for delivery during the remainder
of 1998) was $277.5 million, as compared with $227.0 million at December 31,
1996. However, orders can be cancelled or rescheduled by customers. Thus, the
level of orders currently in backlog could decline because of cancellation or
rescheduling.

EMPLOYEES

As of December 31, 1997, the Company had approximately 3,750 employees. The
Company's 1,800 employees in the United States are not represented by labor
unions, except for the 190 employees at the Company's La Salle, Illinois
facility. These employees are covered by a collective bargaining agreement with
the United Auto Workers which expires in the fall of 2001. Almost all 1,900
employees of the Company in Europe, other than managerial and professional
employees, are represented by labor unions. The Company has not experienced any
significant strike or work stoppage during the last three years. Management
believes its relationship with employees is good.

Sauer is committed to the continuous development of employee skills at all
levels to achieve the required innovation, flexibility, productivity and total
quality needs of customers. Known within the Company as "Reaching for
Excellence," this process of continuing investment in skills has led to
widespread recognition by customers and suppliers that the Company can carry
through with the type of major developments, in all areas of operation, required
of a world class company.

PROPERTIES

Sauer conducts its manufacturing operations at thirteen locations, seven in
the United States, one in Germany, two in Slovakia and one each in Italy, the
United Kingdom and China. As discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Capital Expenditure Program," to support its growth
strategy the Company plans to substantially increase its manufacturing capacity
in the United States and Europe.

38
<PAGE> 43

The following table sets forth certain information relating to the
Company's principal facilities:

<TABLE>
<CAPTION>
APPROX.
AREA IN
LOCATION PRINCIPAL PRODUCTS SQ. FT. OWNED/LEASED
-------- ------------------ -------- ------------
<S> <C> <C> <C>
UNITED STATES
Ames, Iowa............................... Hydrostatic transmissions 330,000 Owned
La Salle, Illinois....................... Hydrostatic transmissions 240,000 Owned
Freeport, Illinois....................... Hydrostatic transmissions 183,000 Owned
Minneapolis, Minnesota................... Electrohydraulics 75,000 Leased
West Branch, Iowa........................ Gear pumps and motors 99,000 Owned
Newtown, Pennsylvania.................... Electrohydraulics 96,000 Leased
Sullivan, Illinois....................... Hydrostatic transmissions 141,000 Owned
EUROPE
Neumunster, Germany...................... Hydrostatic transmissions 463,000 Owned (1)
and electrohydraulics
Povazska-Bystrica, Slovakia.............. Hydrostatic transmissions 315,000 Owned
and mechanical gear boxes
Dubnica, Slovakia........................ Hydrostatic transmissions 230,000 Leased
Swindon, England......................... Gear pumps 222,000 Leased
Bologna, Italy........................... Gear pumps and motors 246,000 Owned
ASIA
Shanghai/Pudong, China................... Hydrostatic transmissions 105,000 Leased
</TABLE>

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

(1) See "Relationship with Principal Shareholder -- Lease Agreement for and
Purchase of Neumunster Facilities."

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. The Company is not
currently subject to any governmental remediation order nor is the Company aware
of any environmental problems that would have a material adverse effect on the
Company.

PATENTS AND TRADEMARKS

The Company owns or licenses rights to approximately 200 patents and
trademarks relating to its business. While the Company considers its patents and
trademarks important in the operation of its business and in protecting its
technology from being used by competitors, its business is not dependent on any
single patent or trademark or group of related patents or trademarks. The
Company licenses the use of the Sundstrand name from Sundstrand under agreements
that extend to March 31, 2004. The Company does not expect to seek renewal of
the license.

LEGAL PROCEEDINGS

The Company is involved in certain legal proceedings in the ordinary course
of its business. Management believes that the outcome of such proceedings will
not have a material adverse effect upon the Company.

39
<PAGE> 44

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information regarding the directors
and executive officers of the Company as of December 31, 1997:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Klaus H. Murmann...... 66 Chairman and Chief Executive Officer and Director
Tonio P. Barlage...... 46 President and Chief Operating Officer and Director
David L. Pfeifle...... 52 Executive Vice President and General Manager -- United
States and Director
David J. 50 Vice President, Sales and Marketing -- United States
Anderson(1).........
Thomas K. Kittel(2)... 49 Vice President, Operations -- Germany and Slovakia
Wolfgang Weisser(2)... 54 Vice President, Sales and Marketing -- Europe
James R. Wilcox(1).... 51 Vice President and General Manager -- Hydrostatics U.S.
Kenneth D. McCuskey... 43 Treasurer and Secretary
Nicola Keim........... 37 Director
Johannes F. 40 Director
Kirchhoff...........
Sven Murmann.......... 30 Director
Agustin A. Ramirez.... 51 Director
Richard M. 60 Director
Schilling...........
</TABLE>

- ---------------
(1) David J. Anderson and James R. Wilcox are Vice Presidents of the U.S.
Operating Company, not Sauer Inc.

(2) Thomas K. Kittel and Wolfgang Weisser are Vice Presidents of the German
Operating Company, not Sauer Inc.

The Company's Board of Directors is divided into three classes with the
initial term of the first class expiring at the annual meeting of the
stockholders to be held in 1999 (Messrs. [ ]), the second class
expiring at the annual meeting of stockholders to be held in 2000 (Messrs.
[ ]), and the third class expiring at the annual meeting of
stockholders to be held in 2001 (Messrs. [ ]). The executive officers
of the Company are elected annually and serve at the discretion of the Board of
Directors.

Klaus H. Murmann has served as Chairman and Chief Executive Officer of
Sauer and its predecessor since 1987. Mr. Murmann founded Sauer Getriebe in 1969
which, as a licensee of and later joint venture partner with Sundstrand, has
been involved in hydrostatics since 1967. He is a member of the supervisory
boards of Fried. Krupp AG, Hoesch-Krupp, Essen, a German industrial company;
Gildemeister AG, Bielefeld, a German manufacturer of machine tools, and
PreussenElektra AG, Hannover, a German utility. He is Chairman of the Board of
Gothaer Insurance Group, Gottingen/Cologne, a German insurance company, Chairman
of the Board of PSVaG, a national pension fund, a member of the board of
Bankgesellschaft Berlin AG, Berlin, a German bank, a member of the advisory
board of Landesbank Schleswig-Holstein Girozentrale, a bank owned principally by
institutions belonging to various States of Germany, and a director of GKN PLC,
United Kingdom, a manufacturing company. Mr. Murmann is also a director of
Sundstrand. For a description of transactions with the Company, see
"Relationship with Principal Stockholder."

Tonio P. Barlage has been President and Chief Operating Officer of the
Company since 1994. Prior to attaining his current position in 1994, Mr. Barlage
was the Chief Financial Officer of the Company and its predecessor from 1987 to
1994. From 1986 to 1987, Mr. Barlage was also Chief Financial Officer of Sauer
Getriebe. Prior to joining the Company in 1986, Mr. Barlage was with Arthur
Andersen & Co.

David L. Pfeifle has been Executive Vice President of Sauer and President
of the U.S. Operating Company since 1994. Mr. Pfeifle joined Sundstrand in 1971
and held various management positions with

40
<PAGE> 45

increasing responsibility until 1994. Mr. Pfeifle is a member of the board of
the Construction Industry Manufacturers Association and of the National Fluid
Power Association.

David J. Anderson has been Vice President, Sales and Marketing, United
States of the U.S. Operating Company since November 1997. Mr. Anderson joined
Sundstrand in 1984 and has held various management positions within sales and
marketing with increasing responsibility until 1997. Prior to joining the
Company, Mr. Anderson was Director of Business Development and Manager of Sales
with Dyneer Corporation.

Thomas K. Kittel has been Vice President, Operations of the German
Operating Company since January 1997. He joined the German Operating Company as
Director of Information Technology in 1988 and later became Director of
Production and Logistics. In 1994, he also undertook responsibility for
Engineering and the Slovakian operations.

Wolfgang Weisser has been Vice President Sales and Marketing, Europe of the
German Operating Company since January 1997. Between 1991 and 1997 Mr. Weisser
was Director of Marketing. Mr. Weisser joined Sauer Getriebe in 1967 and held
various management positions with increasing responsibility until 1991.

James R. Wilcox has been Vice President and General Manager -- Hydrostatics
U.S. of the U.S. Operating Company since 1995. From 1992 to 1995, Mr. Wilcox was
Vice President of Operations. Prior to joining the Company, Mr. Wilcox was Vice
President, Operations and Plant Manager with Borg Warner Automotive, Inc.

Kenneth D. McCuskey has been the Treasurer and Secretary of Sauer since
1989. He was International Controller of the Company from 1988 to 1989. Mr.
McCuskey has also been the Director of Finance of the U.S. Operating Company
since 1991.

Nicola Keim has been a Director of the Company since April 1990. Ms. Keim
served as a Member of the Supervisory Board of Sauer Getriebe, a predecessor of
the German Operating Company, from November 1990 through June 1997. Ms. Keim is
the daughter of Klaus H. Murmann.

Johannes F. Kirchhoff has been a Director of the Company since April 1997.
Mr. Kirchhoff has been owner and Managing Director of the FAUN Umwelttechnik
GmbH & Co., a manufacturer of vehicles for waste disposal, since December 1994.
From November 1989 through November 1994, Mr. Kirchhoff served as a Managing
Director of Edelhoff Polytechnik GmbH & Co., a manufacturer of vehicles for
waste disposal. Mr. Kirchhoff also served on the Board of Directors of Edelhoff
AG & Co., the holding company of Edelhoff Polytechnik GmbH & Co., from June 1993
through November 1994; from June 1993 through December 1993, he served as deputy
member of the Board of Directors and thereafter as a Member of the Board of
Directors.

Sven Murmann has been a Director of the Company since April 1994. Mr.
Murmann has served as an Assistant Professor at the University of Zurich since
October 1997. He was a research assistant at Ludwig-Maximilians University in
Munich from April 1994 through August 1995. Mr. Murmann is the son of Klaus H.
Murmann.

Agustin A. Ramirez has been a Director of the Company since December 1997.
Since 1987, Mr. Ramirez has served as President, Chief Executive Officer and
Chairman of HUSCO International, Inc., a manufacturer of hydraulic controls for
mobile equipment applications with operations in North America and Europe. He
serves as past Chairman of the Board of the National Fluid Power Association and
as a member of the Advisory Board of Bank One Wisconsin.

Richard M. Schilling has been a Director of the Company since 1985. He
began his career at Sundstrand Corporation in March 1968 as a corporate attorney
and assistant secretary. In 1978, he was named General Counsel and Vice
President and, in 1988, he was elected Secretary of Sundstrand Corporation. Mr.
Schilling retired from Sundstrand Corporation in March 1998.

Directors who are not employees of the Company receive annual retainers of
$12,000 plus expenses relating to their duties as directors.

41
<PAGE> 46

COMMITTEES OF THE BOARD

Audit Committee. The Audit Committee is composed of three directors, none
of whom is an employee of the Company. The Audit Committee makes recommendations
to the Board of Directors regarding the independent auditors to be nominated for
election by the stockholders, reviews the scope of the annual audit activities
of the independent auditors and the Company's internal auditors and reviews
audit results. R. Schilling, J. Kirchhoff and A. Ramirez are the current members
of the Audit Committee.

Compensation Committee. The Compensation Committee is composed of three
directors none of whom is an employee of the Company. The Compensation Committee
reviews and determines the salaries of the executive officers of the Company. J.
Kirchhoff, A. Ramirez and R. Schilling are the current members of the
Compensation Committee. The Compensation Committee administers the Company's
Bonus Plan.

Executive Committee. The Executive Committee is composed of three
directors. Subject to certain exceptions, the Executive Committee is empowered
to exercise all powers of the Board of Directors. The Executive Committee
administers the Company's Phantom Share Plan and the Company's Management
Incentive Plan. K. Murmann, T. Barlage and D. Pfeifle are the current members of
the Executive Committee.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION(8)
--------------------------------------------- ---------------
OTHER ANNUAL LTIP
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) PAYOUTS ($)
- --------------------------- ---- ---------- --------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Klaus H. Murmann............ 1997 $475,000 $410,400(2) -- --
Chairman and CEO
Tonio P. Barlage............ 1997 375,000 319,200(2) -- --
President and COO 200,000(3)
David L. Pfeifle............ 1997 246,981 182,412(2) 5,760(6) 46,400(7)
Executive Vice President
and General
Manager -- U.S.
James R. Wilcox............. 1997 157,546 77,494(4) 6,000(6) --
Vice President of U.S.
Operating Company
Thomas K. Kittel............ 1997 158,785(1) 20,476(4)(5) 3,560(6) 17,400(7)
Vice President of German
Operating Company
</TABLE>

- ---------------
(1) Payment to Mr. Kittel was made in Deutsche marks which amount has been
converted to U.S. dollars for this table using a weighted average annual
exchange rate for 1997.

(2) Bonus amounts earned in 1996 and paid in 1997. Bonus amounts earned in 1997
and to be paid in 1998 have not been calculated. These bonuses are paid
under the 1990 Sauer Inc. Bonus Plan pursuant to which the Chairman and CEO,
the President and COO, and the Executive Vice President are entitled to
receive payments if the Company achieves targeted financial results as
specified in the plan.

(3) A one-time bonus paid to Mr. Barlage for 1997 and awarded by the Company's
Compensation Committee for his efforts related to establishing the Company's
Slovakian operations.

(4) Amounts were earned in 1996 and paid in 1997 pursuant to the Company's
Management Incentive Plan ("MIP"). Amounts earned in 1997 and to be paid in
1998 have not been calculated. Under the MIP, officers and management
personnel selected by the Executive Committee (other than officers who
receive bonuses under the Company's Bonus Plan) are entitled to receive
payments if the Company, the employee's business unit, and the employee each
achieve specified targets, respectively.

(5) Payment was made in Deutsche marks and converted to U.S. dollars using the
exchange rate for the end of April 1997.

(6) Quarterly payments under the Company's Phantom Share Plan (the "Phantom
Share Plan"). Messrs. Murmann and Barlage do not participate in the Phantom
Share Plan.

42
<PAGE> 47

(7) Payments made upon the lapsing of restrictions as to certain phantom share
rights granted under the Phantom Share Plan.

(8) During 1997, no awards have been granted.

Phantom Share Plan. Under the Company's Phantom Share Plan (the "Phantom
Share Plan"), certain officers and other key employees have been granted phantom
share rights ("Phantom Share Rights"). Each Phantom Share Right entitles the
grantee to the market value of a share of Common Stock as of the December 31
immediately prior to the date the restrictions on such Phantom Share Right lapse
and, until the restrictions lapse, a quarterly payment in an amount determined
by the Board of Directors. It is anticipated that such quarterly payment will
equal the quarterly dividend, if any, declared by the Board of Directors on a
share of Common Stock. The Phantom Share Plan is administered by the Executive
Committee of Sauer.

The restrictions on Phantom Share Rights lapse as to 20% of the aggregate
number of such rights granted on any particular date on the expiration of the
fifth, sixth, seventh, eighth, and ninth years after their grant, provided the
grantee remains continuously in the employ of the Company. If a grantee's
employment is terminated by reason of retirement at or after age 65, death, or,
with the consent of the Executive Committee, early retirement, the restrictions
on such grantee's Phantom Share Rights will lapse as of the date of such
termination. Upon termination of a grantee's employment for any other reason,
unless the Executive Committee determines otherwise, all Phantom Share Rights
granted to such grantee shall automatically be canceled.

A total of 400,000 Phantom Share Rights may be granted under the Phantom
Share Plan, but the Executive Committee is currently authorized to grant up to
an aggregate of 200,000 Phantom Share Rights. At December 31, 1997, there were
13 employees of the Company participating in the Phantom Share Plan. There were
then 110,400 Phantom Share Rights outstanding, of which Messrs. Pfeifle, Kittel,
and Wilcox held 13,600, 8,600, and 15,000, respectively. The quarterly payments
made under this Plan to those executive officers are set forth in the Summary
Compensation Table under "Other Annual Compensation" and the payments made upon
lapse of restrictions on Phantom Share Rights are set forth under "LTIP Payouts"
in the Summary Compensation Table. No grants of Phantom Share Rights were made
in 1997 to officers named in the Summary Compensation Table. Messrs. Murmann and
Barlage do not participate in the Phantom Share Plan.

Management Incentive Plan. Under the Company's Management Incentive Plan
(the "Management Incentive Plan"), executive officers and management personnel
of the Company selected by the Executive Committee are entitled to receive
payments if the Company, the employee's division and/or business unit and the
employee each achieve targeted financial and operating results and personal
objectives. Payments under the Management Incentive Plan are determined in
relation to a return on net assets ("RONA") at the Company and the employee's
division and business unit levels, as applicable. Attaining certain levels of
RONA equal to established benchmarks under the Management Incentive Plan and as
compared to the budget will result in a payment equal to a percentage, as
calculated under the Management Incentive Plan, of annual base compensation,
provided that no payment will be made unless a minimum threshold is achieved. At
December 31, 1997, there were 60 employees participating in the Management
Incentive Plan. Total payments to be made under this plan in respect of the 1997
fiscal year to all executive officers as a group (excluding the Chairman, the
President and the Executive Vice President who do not participate in the
Management Incentive Plan) were $[ ].

Bonus Plan. Under the Company's Bonus Plan (the "Bonus Plan"), the
Chairman and Chief Executive Officer, the President and Chief Operating Officer
and the Executive Vice President are entitled to receive cash payments if the
Company achieves targeted financial results. The bonuses are measured in
relation to RONA as defined under the Bonus Plan. If RONA is negative or zero,
no bonus will be paid; attaining specified levels of RONA will result in a bonus
equal to a specified percentage of annual base compensation, and achievement of
a RONA of 25% or more will result in a maximum bonus of 100% of annual base
compensation. Occasionally, a special lump sum bonus may be awarded by the
Compensation Committee to reflect extraordinary achievements of the recipient.

43
<PAGE> 48

BENEFIT AND RETIREMENT PLANS

U.S. Retirement Plan. The following table sets forth the estimated annual
benefits payable under the Sauer-Sundstrand Employees' Retirement Plan (the
"U.S. Retirement Plan") to participants retiring at a normal retirement date of
January 1, 1998, for the specified average annual earnings and years of
participation. The benefits have been calculated on the basis of a straight-life
annuity.

RETIREMENT PLAN TABLE

<TABLE>
<CAPTION>
YEARS OF PARTICIPATION
----------------------------------------
REMUNERATION 15 20 25 30
- ------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
150,000..................................... $38,112 $50,816 $63,520 $76,224
175,000..................................... 42,437 56,583 70,728 84,874
200,000..................................... 42,798 57,065 71,331 85,597
225,000..................................... 42,798 57,065 71,331 85,597
250,000..................................... 42,798 57,065 71,331 85,597
275,000..................................... 42,798 57,065 71,331 85,597
</TABLE>

The U.S. Retirement Plan is a defined benefit pension plan intended to be
qualified under Section 401(a) of the Internal Revenue Code. Benefits are based
only on salary and any sales commissions (the Company currently pays no sales
commissions). The current compensation covered by the U.S. Retirement Plan for
Messrs. Pfeifle and Wilcox are the amounts set forth under "Salary" in the
Summary Compensation Table. No other executive officer named in the Summary
Compensation Table participated in the U.S. Retirement Plan.

Under the U.S. Retirement Plan, the monthly amount of a participant's
retirement benefit at the participant's normal retirement age (generally the
participant's 65th birthday) is calculated pursuant to a formula based on (i)
the average of the participant's highest five-year annual earnings less an
offset for Social Security benefits, and (ii) the participant's years of
participation in the Retirement Plan. Messrs. Pfeifle and Wilcox have completed
26 and 6 years of participation, respectively[, and their estimated annual U.S.
Retirement Plan benefits at their normal retirement dates, assuming their
present salaries and present Social Security benefits remain unchanged, would be
$85,597 and $55,076, respectively].

U.S. Supplemental Plans. The Internal Revenue Code generally limits to
$130,000, as indexed for inflation, the amount of any annual benefit that may be
paid from the U.S. Retirement Plan. Moreover, the Retirement Plan may consider
no more than $160,000, as indexed for inflation, of a participant's annual
compensation in determining that participant's retirement benefit. In
recognition of these two limitations, the Company has adopted two Supplemental
Retirement Benefit Plans (the "U.S. Supplemental Plans"). Both of these U.S.
Supplemental Plans are designed to provide supplemental retirement benefits to
the extent that a participant's benefits under the Retirement Plan are limited
by either the $130,000 annual benefit limitation or the $160,000 annual
compensation limitation.

One of these two U.S. Supplemental Plans has an additional purpose. It
provides supplemental retirement benefits equal to the difference between the
benefit the participant would have received under the applicable Sundstrand
pension plan for former employees of Sundstrand (if the participant's earnings
and service with the Company had been taken into account under that Sundstrand
plan) and the benefit payable under the U.S. Retirement Plan. Under both U.S.
Supplemental Plans, however, the actual payment of supplemental benefits is
entirely at the discretion of the Company.

At January 1, 1998, Messrs. Pfeifle and Wilcox participated in the U.S.
Supplemental Plans, but only Mr. Pfeifle was entitled to the supplement for
benefits that would have been payable under the Sundstrand plan. The estimated
annual supplemental retirement benefits for Messrs. Pfeifle and Wilcox, at their
normal retirement dates at age 65, assuming their present salaries until
retirement, would be $85,823 and $2,814, respectively. No other executive
officer of the Company named in the Summary Compensation Table under
"-- Executive Compensation" is entitled to benefits under the U.S. Supplemental
Plans.

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<PAGE> 49

European Pension Plans. Messrs. Murmann and Barlage are entitled to
retirement benefits from the Company equal to 60% of their annual base salary
immediately prior to retirement. These benefits are payable as a straight-life
annuity, commencing at the normal retirement age of 60. In the event either
executive leaves a surviving spouse, that spouse would be entitled to a
straight-life annuity benefit equal to 60% of the benefit payable to the
deceased executive. Based on his 1997 base salary and an assumed 6% compounded
annual salary growth rate during the 14 years remaining until he attains age 60,
Mr. Barlage would be entitled to an estimated annual retirement benefit of
$508,703 at his normal retirement age. Mr. Murmann has already attained his
normal retirement age, and could therefore receive an annual retirement benefit
of $285,000 if he were to retire immediately.

Mr. Kittel participates in the pension plan covering most of the Company's
German employees. The plan is similar in nature to a defined contribution plan
in the United States, with the exception that the plan is unfunded. Under the
plan, a monthly pension is paid to employees who retire after attaining the age
of 65, calculated pursuant to a formula based on (i) a percentage of each
employee's base monthly salary as of the end of October of each year, and (ii)
the participant's years of service. Mr. Kittel completed ten years of service as
of December 31, 1997, and assuming that his present salary remains unchanged and
that he will retire at age 65, his pension will be DM 34,240 per year ($19,043,
using the exchange rate as of December 31, 1997). Mr. Kittel does not
participate in the arrangement covering Messrs. Murmann and Barlage.

No other executive officer of the Company named in the Summary Compensation
Table is entitled to benefits under a European pension plan.

U.S. Savings Plan. The Company also maintains the Sauer-Sundstrand
Employees' Savings and Retirement Plan (the "U.S. Savings Plan"). The U.S.
Savings Plan is a defined contribution plan, which is intended to be qualified
under Section 401(a) of the Internal Revenue Code and includes a Section 401(k)
feature. Substantially all U.S. employees of the Company who are not represented
for collective bargaining purposes, are eligible to participate in the U.S.
Savings Plan.

Subject to a number of limitations and nondiscrimination rules,
participants in the U.S. Savings Plan may elect to contribute from 1% to 10%
(or, in the case of nonhighly compensated employees, 1% to 20%) of their
compensation to the U.S. Savings Plan. These contributions are limited to
$10,000 per year (as indexed for inflation), are made on a tax-deferred basis,
and are 100% vested at all times. The Company makes certain matching and other
contributions to the U.S. Savings Plan on behalf of participants working at its
West Branch, Iowa facility, who are not covered by the U.S. Retirement Plan. At
January 1, 1998, approximately 1,098 employees were eligible to participate in
the U.S. Savings Plan, of whom 871 employees (including Messrs. Pfeifle and
Wilcox) were contributing to the Plan. Messrs. Pfeifle and Wilcox were not
entitled to a Company contribution during 1997. No other executive officer named
in the Summary Compensation Table was eligible to participate in the U.S.
Savings Plan.

New Plans. The Company is in the process of establishing a new long-term
incentive plan. It is anticipated that such plan will permit the grant of stock
options, restricted stock, stock appreciation rights, performance shares and
performance units, and other incentive awards. It is contemplated that this plan
will be in effect by [May 1, 1998].

EMPLOYMENT ARRANGEMENTS

The Company has employment contracts with Messrs. Murmann and Barlage
providing for annual salaries of not less than $450,000 and $360,000,
respectively. The employment contracts with Messrs. Murmann and Barlage provide
that each shall participate in the Company's benefits plans for which each is
presently eligible and in any plans substituted therefor, and each shall be
entitled to certain retirement benefits. See "Executive Compensation -- Benefit
and Retirement Plans -- European Plans." In the event the Company terminates the
employment of Messrs. Murmann or Barlage in violation of the contract, such
person would be entitled to receive all compensation and benefits provided for
under the contract until such time as his employment would otherwise terminate
pursuant to the contract. The employment contracts with Messrs. Murmann and
Barlage expire on December 31, 2001, and contain agreements not to compete
during the period of the employment contract. The German Operating Company has
an employment contract with
45
<PAGE> 50

Mr. Kittel that provides for an annual salary of DM 300,000 ($166,852, using the
exchange rate as of December 31, 1997), which contract expires on December 31,
2002 and does not contain an agreement not to compete. No other executive
officer named in the Summary Compensation Table is a party to an employment
contract with the Company.

RELATIONSHIP WITH PRINCIPAL STOCKHOLDER

Ownership of Sauer Common Stock. Immediately prior to the Combined
Offering, the Murmann family beneficially owned % of the outstanding Common
Stock of the Company. Upon completion of the Combined Offering, the Murmann
family will beneficially own % of the outstanding Common Stock (or %
if the over-allotment options are exercised in full). In addition, the Murmann
family owns limited partnership interests in the German Operating Company as
described below. See "-- Murmann Family Limited Partnership Interests in the
German Operating Company." For as long as the Murmann family continues to
beneficially own shares of Common Stock representing more than 50% of the
combined voting power of the Company's Common Stock and votes those shares as a
group, the Murmann family will be able to direct the election of all members of
the Company's Board of Directors and exercise a controlling influence over the
business and affairs of the Company, including any determinations with respect
to mergers or other business combinations involving the Company. Similarly, the
Murmann family will have the power to determine matters submitted to a vote of
the Company's stockholders without the consent of the Company's other
stockholders, will have the power to prevent a change of control of the Company
and could take other actions that might be favorable to the Murmann family.

The Murmann family has advised the Company of its current intention to
continue to own beneficially no less than 50.1% of the outstanding Common Stock
of the Company following the Combined Offering; however, it is under no
obligation to retain its controlling interest. The Company has agreed to
register the Murmann family's shares of Common Stock from time to time upon
request.

Murmann Family Limited Partnership Interests in the German Operating
Company. Sauer conducts its German operations through the German Operating
Company, a German partnership; Sauer Inc. and Sauer Sundstrand GmbH, a company
wholly owned by Sauer Inc., are the general partners of the German Operating
Company. Sauer GmbH and Klaus H. Murmann & Co. K.G. -- as holding company for
Sauer GmbH & Co. Hydraulik KG -- have limited partnership interests (the
"Limited Partners") in the German Operating Company. The Limited Partners are
owned entirely by the Murmann Family. The creation of the limited partnership
interests as opposed to the acquisition of the entire share capital of the
Company was a result of tax considerations in connection with the formation of
the Company in 1989. The limited partnership interests remained essentially
unchanged since that date. The German Operating Company is required to pay
annually to the Limited Partners an amount in cash (the "Annual Cash Payment")
equal to a percentage of Sauer's consolidated income before taxes and the
Limited Partners' interests ("Percentage"). The Percentage is subject to
adjustment based on changes in the number of outstanding shares of Common Stock
during the applicable year. The Percentage is equal to the ratio of 180 shares
divided by the sum of 180 shares plus the number of outstanding shares of Common
Stock plus 50 shares representing an adjustment for the Neumunster facility
acquisition. See "Use of Proceeds." As of the date of this Prospectus, the
Percentage is equal to 180/(180 + 1,938 + 50), or 8.3%. After the Combined
Offering, the Percentage will decrease to approximately [ ]%.

The Annual Cash Payment is based on the overall income of Sauer in order to
avoid any potential conflicts between Sauer and the Limited Partners regarding
whether, for example, sales should be made by the U.S. Operating Company or the
German Operating Company and the pricing of intercompany sales between the U.S.
Operating Company and the German Operating Company.

46
<PAGE> 51

Sauer has the right to elect by the action of its independent directors or
the holders of its Common Stock other than the Murmann family, to terminate the
limited partnership interests in exchange for 180 shares of Common Stock of
Sauer Inc. (subject to antidilution adjustment) and the balance of the current
account at any time after notice to the Limited Partners as specified in the
limited partnership agreement. The dissolution of the German Operating Company
will be deemed an election to terminate the limited partner interests. Unless
Sauer's election to terminate the limited partnership is related to (i) a
decline in the Murmann family beneficial ownership (economic or voting) of Sauer
Common Stock to less than 50.1%; (ii) a sale of a majority in book value of the
consolidated assets of Sauer and its subsidaries or assets that generated a
majority of the consolidated revenues of Sauer and its subsidiaries in the prior
fiscal year; (iii) a transfer of the beneficial ownership of the limited
partnership interest (or any voting rights in respect thereof) outside the
Murmann family; (iv) a merger or other business combination in which Sauer is
not the survivor or the acquisition of at least 50.1% of the outstanding Common
Stock of Sauer pursuant to a tender or exchange offer; or (v) the withholding of
the consent of the Limited Partner in a manner adverse to holders of Sauer
Common Stock, or is effected after December 31, 2017, in addition to the
issuance of Common Stock in exchange for and in complete satisfaction of all
Limited Partners' claims with respect to the German Operating Company, Sauer
will pay the Limited Partners an amount in cash equal to the [income] tax
payable as a result of the exchange of the Sauer shares of Common Stock for the
limited partnership interests. In no event, will the payment with respect to the
tax exceed [$ ]. The right to receive the payment in respect of the
taxes is not transferable to persons or companies outside the Murmann family and
its [majority owned] subsidiaries.

The Limited Partners may elect to terminate the limited partnership
interests at any time upon six months' notice to Sauer and to the German
Operating Company. In such case, the Limited Partners will receive the balance
of their current account and Sauer will issue 180 shares of Sauer Common Stock
(subject to antidilution adjustment) in exchange for, and in complete
satisfaction of, all claims of the Limited Partners. No tax reimbursement will
be payable by Sauer in such event.

The consent of the Limited Partners is required, among other things to (i)
change the business purpose of the German Operating Company, (ii) admit
additional limited partners, (iii) authorize the German Operating Company to
take actions out of the ordinary course of business of the German Operating
Company, (iv) change the basis on which the Annual Cash Payment is computed or
the method of allocating profits and losses, and (v) partially or wholly
dissolve the German Operating Company. Klaus H. Murmann on behalf of the Limited
Partners has agreed that they will not unreasonably withhold such consent.

Klaus H. Murmann, on behalf of the Murmann family, has agreed with the
Underwriters not to cause the Company and the Limited Partners to amend the
German limited partnership agreement to increase the Percentage, to change the
basis on which the Annual Cash Payment is computed in a way that is less
favorable to the Company or to increase the percentage of distributed assets
that the Limited Partners are entitled to receive upon liquidation or
disposition of the German Operating Company or in any other way adversely affect
the rights of the Company or the Sauer shareholders. The Limited Partners may
not transfer the limited partnership interests in the German Operating Company
without the consent of the Company.

Lease Agreement for and Purchase of Neumunster Facilities. Since 1987, the
German Operating Company has leased the real estate and building of the
Company's facility in Neumunster, Germany from the Murmann family. The lease was
renewed in December 1996 and expires on December 31, 2006. The lease can be
extended through December 31, 2016 by the German Operating Company by giving
notice thereof prior to December 31, 2005. The lease agreement is between the
German Operating Company and Sauer GmbH & Co. Hydraulik KG ("Sauer Hydraulik"),
which is wholly owned by the Murmann family. If neither of the parties to the
lease gives notice of termination at least one year prior to any expiration date
of the lease, the lease will automatically extend for an additional term of five
years. The lease payments are DM 3,960,000 per annum plus value added tax at
prevailing rates.

Under the lease agreement, the German Operating Company assumes full
responsibility for the premises and agrees to bear all costs associated with the
premises and the conduct of its business, including, but not

47
<PAGE> 52

limited to, the costs of repairs, insurance and all overhead. The German
Operating Company is obligated to fully indemnify Sauer Hydraulik against all
liabilities incurred in connection with the premises and the conduct of the
business, including environmental liabilities, whether or not incurred by a
previous owner of the premises. In addition, Sauer Hydraulik can hold the German
Operating Company liable for all environmental damages to the premises, and the
German Operating Company is fully responsible for the clean-up of such damages
at its own expense, whether or not those damages result from the usage of a
previous owner.

The German Operating Company has an option to purchase and Sauer Hydraulik
has the right to require the German Operating Company to purchase the property
at any time during the term of the lease agreement. Any such purchase will be
"as is" without warranties and at the fair market value of the property. In
connection with the Combined Offering, Sauer-Sundstrand GmbH, a wholly owned
subsidiary of the Company, has elected to purchase the facility from Sauer
Hydraulik under this clause of the lease agreement. See "Use of Proceeds."

48
<PAGE> 53

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information regarding the beneficial
ownership of the Common Stock as of December 31, 1997, and as adjusted to
reflect the sale of Common Stock in the Combined Offering, by (i) each director
of the Company, (ii) each person known or believed by the Company to own
beneficially 5% or more of the Common Stock, (iii) each Selling Stockholder and
(iv) all directors and executive officers as a group. Unless otherwise
indicated, each person has sole voting and dispositive power with respect to
such shares.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED(1) OWNED(1)
PRIOR TO COMBINED AFTER THE COMBINED
OFFERING NUMBER OF OFFERING
NAME AND ADDRESS -------------------- SHARES BEING --------------------
OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------- --------- ------- ------------ -------- --------
<S> <C> <C> <C> <C> <C>
Klaus H. Murmann(2).....................
Tonio P. Barlage........................
David L. Pfeifle........................
James R. Wilcox.........................
Thomas K. Kittel........................
Nicola Keim(3)..........................
Johannes F. Kirchhoff...................
Sven Murmann(3).........................
Agustin A. Ramirez......................
Richard M. Schilling....................
[ADDITIONAL SELLING STOCKHOLDERS TO BE
ADDED]
All directors and executive officers as
a group...............................
</TABLE>

- ---------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission.
(2) Shares held either directly or through wholly-owned companies. In addition,
Klaus H. Murmann exercises the voting rights of the shares held by his
immediate family according to a voting trust agreement.
(3) The voting rights of these shares are exercised by Klaus H. Murmann
according to a voting trust agreement.

49
<PAGE> 54

DESCRIPTION OF CAPITAL STOCK

GENERAL

The total amount of authorized capital stock of the Company is 3,300
shares, consisting of 3,000 shares of Common Stock, par value $ per share,
and [300] shares of Preferred Stock, par value $.01 per share ("Preferred
Stock"). As of , 1998, there were [ ] shares of Common Stock
outstanding. Upon completion of the Combined Offering, [ ] shares of
Common Stock and no shares of Preferred Stock will be issued and outstanding.

Prior to the Combined Offering, there has been no public market for the
Common Stock. See "Risk Factors -- No Prior Trading Market for Common Stock."

The following summary of the rights, privileges, restrictions and
conditions of the Company's capital stock does not purport to be complete and is
subject to the detailed provisions of, and qualified in its entirety by
reference to, the Restated Certificate of Incorporation of the Company and its
By-laws and the Delaware General Corporation Law (the "DGCL").

COMMON STOCK

All outstanding shares of Common Stock are validly issued, fully paid and
nonassessable. The [ ] shares of Common Stock being issued and sold by
the Company in the Combined Offering, when issued and sold by the Company and
paid for, will be validly issued, fully paid and nonassessable.

Holders of the shares of Common Stock are entitled to one vote for each
share held of record on each matter properly submitted for a vote by such
holders, including election of directors. There is no cumulative voting. See
"Risk Factors -- Concentration of Ownership of the Company." Subject to the
rights of any then outstanding shares of Preferred Stock, holders of shares of
Common Stock are entitled to receive their pro rata share of (i) any dividends
that may be declared by the Board of Directors of the Company (the "Board") out
of assets legally available therefor and (ii) any assets available upon the
liquidation, dissolution or winding-up of the Company. See "Dividend Policy" and
"Description of Capital Stock -- Limitations on Dividends and other Financial
Restrictions on the Company and its Subsidiaries."

The shares of Common Stock are not convertible and the holders thereof have
no preemptive or subscription rights to purchase any securities of the Company.

Application will be made to list the Common Stock on the New York Stock
Exchange under the symbol [ ] and on the Frankfurt Stock Exchange under the
symbol [ ].

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock in the United States
is First Chicago Trust Company of New York (the "U.S. Transfer Agent").

BOOK-ENTRY-ONLY ISSUANCE OF COMMON STOCK TRADING ON FRANKFURT STOCK EXCHANGE

In general, the Common Stock will trade on the Frankfurt Stock Exchange
only through transfers of beneficial interests therein held through Deutsche
Borse Clearing AG ("DBC"). However, any investor who did not receive a
beneficial interest, but an actual certificate representing shares of Common
Stock and who desires to sell such shares of Common Stock on the Frankfurt Stock
Exchange will be required to deposit, through a DBC participant, such shares
with DBC, or with The Depository Trust Company ("DTC") for credit to DBC's
account as described below, and receive a beneficial interest therein that is
reflected on DBC's books and records. Certificates representing shares of Common
Stock held through DBC will not be issued unless such shares are withdrawn from
DBC, in which case the shares will not be eligible to trade on the Frankfurt
Stock Exchange unless redeposited as described above. DBC will not hold actual
Common Stock, but will hold beneficial interests therein through its account
with The Depository Trust Company in New

50
<PAGE> 55

York. DTC, or its nominee, will be the registered owner of all shares of Common
Stock that are held by investors through DBC.

Investors who are beneficial owners of Common Stock held through DBC will
receive confirmations and statements of their holdings only from DBC (through
their brokers or other financial institutions). DBC will register all transfers
of such Common Stock on its books and records through its book-entry system.
Common Stock held by DTC will be registered in the name of DTC's nominee, Cede &
Co. DTC will not know the beneficial owners of the Common Stock that is held
through DBC because DTC's records will reflect only that such shares are
credited to DBC's account. DBC will be responsible for keeping account of its
Common Stock holdings on behalf of its customers.

Any communications by DTC to DBC and by DBC to beneficial owners will be
governed by arrangements between DTC and DBC and by the general rules and
practices of DTC and DBC, subject to any statutory or regulatory requirements
that may be in effect from time to time.

Neither DTC nor Cede & Co. will consent or vote with respect to any Common
Stock held through DBC. Under its usual procedures, DTC will mail an Omnibus
Proxy to the Company as soon as possible after the applicable record date. The
Omnibus Proxy will assign Cede & Co.'s consenting or voting rights to DBC for
all Common Stock credited to DBC's account on the record date. DBC will consent
or vote with respect to such shares on behalf of beneficial owners thereof in
accordance with its standard rules and procedures.

Any dividend or other payments on Common Stock held through DBC will be
made by the Company to Cede & Co., as nominee of DTC. DTC, upon receipt of such
payments, will credit DBC's account at DTC for the amount of such payments.
Payments by DBC to the beneficial owners of Common Stock will be governed by
standing instructions and DBC's customary practices, and will be the sole
responsibility of DBC, subject to any statutory or regulatory requirements as
may be in effect from time to time. The dividends will be converted into
Deutsche marks and distributed by DBC.

PREFERRED STOCK

The Company's Restated Certificate of Incorporation provides that shares of
Preferred Stock may be issued in one or more series from time to time by the
Board. Subject to the provisions of the Company's Restated Certificate of
Incorporation and limitations prescribed by law, the Board is expressly
authorized to adopt resolutions to issue the shares, to fix the number of shares
and to change the number of shares constituting any series and to provide for
the voting powers, designations, preferences and relative participating,
optional or other special rights, qualifications, limitations or restrictions,
including dividend rights (including whether dividends are cumulative), dividend
rates, terms of redemption (including sinking fund provisions), redemption
prices, conversion rights and liquidation preferences of the shares constituting
any series of the Preferred Stock, in each case without any further action or
vote by the stockholders. The Company has no current plans to issue any shares
of Preferred Stock.

One of the effects of undesignated Preferred Stock may be to enable the
Board to render more difficult or to discourage an attempt to obtain control of
the Company by means of a tender offer, proxy contest, merger or otherwise and
to protect the continuity of the Company's management. The issuance of shares of
the Preferred Stock pursuant to the Board's authority described above may
adversely affect the rights of the holders of Common Stock. For example,
Preferred Stock issued by the Company may rank prior to the Common Stock as to
dividend rights, liquidation preference or both, may have full or limited voting
rights and may be convertible into shares of Common Stock. Accordingly, the
issuance of shares of Preferred Stock may discourage bids for the Common Stock
or may otherwise adversely affect the market price of the Common Stock.

CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS THAT
MAY HAVE AN ANTI-TAKEOVER EFFECT

Certain provisions of the Company's Restated Certificate of Incorporation
and By-Laws summarized below may be deemed to have an anti-takeover effect and
may delay, deter or prevent a tender offer or

51
<PAGE> 56

takeover attempt that a stockholder might consider to be in its best interest,
including attempts that might result in a premium being paid over the market
price for the shares held by stockholders. In addition, the Company's and its
subsidiaries' credit agreements contain default provisions related to changes in
control of Sauer. See "Description of Capital Stock -- Limitations on Dividends
and Other Financial Restrictions on the Company and its Subsidiaries."

Classified Board of Directors. Following the Combined Offering, the Board
will consist of 8 members. The Restated Certificate of Incorporation provides
that the directors of the Company will be divided into three classes, as nearly
equal in number as reasonably possible, as determined by the Board. The initial
term of office of Class I directors will expire at the first annual meeting of
stockholders following the Combined Offering, the initial term of office of
Class II directors will expire at the second annual meeting of stockholders
following the Combined Offering, and the initial term of office of Class III
directors will expire at the third annual meeting of stockholders following the
Combined Offering, with each class of directors to hold office until their
successors have been duly elected and qualified. At each annual meeting of
stockholders, directors elected to succeed the directors whose terms expire at
such annual meeting shall be elected to hold office for a term expiring at the
annual meeting of stockholders in the third year following the year of their
election and until their successors have been duly elected and qualified. Two
annual meetings of stockholders, instead of one, generally would be required to
change a majority of the directors. The classification of the Board will have
the effect of making the removal of incumbent directors more time consuming and
difficult, and may have the effect of discouraging an unsolicited takeover
attempt or an attempt to gain control of the Board through a proxy solicitation.

Number of Directors; Removal; Filling Vacancies. The Restated Certificate
of Incorporation provides that the number of directors constituting the Board
will be determined from time to time by the Board. The Restated Certificate of
Incorporation provides that in the event of any increase or decrease in the
authorized number of directors, (a) each director then serving as such shall
nevertheless continue as a director of the class of which he is a member until
the expiration of his current term, or his earlier death, retirement,
resignation, or removal, and (b) the newly created or eliminated directorships
resulting from such increase or decrease shall be apportioned by the Board among
the three classes of directors so as to maintain such classes as nearly equal in
number as reasonably possible. The Restated Certificate of Incorporation
provides that directors may be removed only for cause upon the vote of the
holders of 80% of the outstanding shares of the capital stock of the Company
entitled to vote generally in the election of directors. Preventing removal of
directors other than for cause may impede the sudden removal of directors,
making it more difficult to change the composition or take control of the Board.
The Restated Certificate also provides that vacancies, whether arising through
death, retirement, resignation or removal of a director or through an increase
in the authorized number of directors of any class, may only be filled by a
majority vote of the remaining directors, or by the sole remaining director. A
director elected to fill a vacancy shall serve for the remainder of the then
present term of office of the class to which he is elected. These provisions
would prevent any stockholder from enlarging the Board and then filling the new
directorships with such stockholder's own nominees.

No Stockholder Action by Written Consent; Special Meetings. Pursuant to
the Restated Certificate of Incorporation, any action required or permitted to
be taken by the stockholders of the Company must be duly effected at a duly
called annual or special meeting of stockholders and may not be taken or
effected by any written consent of stockholders in lieu thereof. The By-Laws
provide that special meetings of stockholders of the Company may be called only
by the Chairman of the Board, the President or a majority of the Board pursuant
to a resolution stating the purpose or purposes thereof, and any power of
stockholders to call a special meeting is specifically denied. No business other
than that stated in the notice shall be transacted at any special meeting. These
provisions will have the effect of delaying consideration of a stockholder
proposal until the next annual meeting unless a special meeting is called by the
Chairman, President or the Board for consideration of such proposal.

Advance Notice for Stockholder Nominations and Proposals of New
Business. The By-Laws require notice of any proposal to be presented by any
stockholder at an annual meeting of stockholders or the name of any person to be
nominated by any stockholder for election as a director of the Company at a
meeting of stockholders to be delivered to the Secretary of the Company not less
than 120 calendar days in advance of the
52
<PAGE> 57

date that the Company's proxy statement was released to the stockholders in
connection with the previous year's annual meeting of stockholders. Accordingly,
failure by a stockholder to act in compliance with the notice provisions will
mean that the stockholder will not be able to nominate directors or propose new
business. These provisions may discourage or deter a third party from conducting
a solicitation of proxies to elect its own slate of directors or otherwise
attempting to obtain control of the Company.

Amendments. The Restated Certificate of Incorporation provides that the
affirmative vote of the holders of at least 80% of the stock entitled to vote
generally in the election of directors, voting together as a single class, is
required to amend, alter or repeal the By-Laws or the provisions of the Restated
Certificate of Incorporation relating to stockholder action without a meeting;
the number, election and term of the Company's directors; the filling of
vacancies; and the removal of directors.

CERTAIN PROVISIONS RELATING TO ACQUISITIONS

Delaware Takeover Statute. The Company is subject to Section 203 of the
DGCL ("Section 203"), which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any "interested
stockholder," unless: (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (a) by persons who are directors and also
officers and (b) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.

Section 203 defines "business combination" to include: (i) any merger or
consolidation involving the corporation or any majority-owned subsidiary and the
interested stockholder; (ii) any sale, transfer, lease, pledge or other
disposition of 10% or more of the assets of the corporation involving the
interested stockholder; (iii) subject to certain exceptions, any transaction
that results in the issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder; (iv) any transaction involving the
corporation that has the effect of increasing the proportionate share of the
stock of any class or series of the corporation beneficially owned by the
interested stockholder; or (v) the receipt by the interested stockholder of the
benefit of any loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation. In general, Section 203 defines an
interested stockholder as any entity or person beneficially owning 15% or more
of the outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.

INDEMNIFICATION AND LIMITATION OF LIABILITY

The Company's Restated Certificate of Incorporation requires the Company to
indemnify its officers and directors to the fullest extent permitted by Delaware
law, including some instances in which indemnification is otherwise
discretionary under Delaware law, and to advance expenses of defending against
claims arising out of an officer's or director's service as such, against an
undertaking by the officer or director to repay such advances if it is
ultimately determined that the person is not entitled to indemnification. The
Company believes these provisions are essential to attracting and retaining
qualified persons as directors and officers.

In addition, the Company has entered into Indemnification Agreements with
its directors and certain officers pursuant to which the Company generally is
obligated to indemnify its directors and such officers to the maximum extent
permitted by law. The Company also maintains directors and officers liability
insurance.

The Company's Restated Certificate of Incorporation provides that, pursuant
to Delaware law, the Company's directors shall not be liable for monetary
damages for breach of the director's fiduciary duty of care to the Company and
its stockholders. This provision does not eliminate the duty of care, and in
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appropriate circumstances equitable remedies such as an injunction or other
forms of non-monetary relief would remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Company, for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefit to the director and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.

At present there is no pending litigation or proceeding involving a
director or officer of the Company as to which indemnification is being sought,
nor is the Company aware of any threatened litigation that may result in claims
for indemnification by any director or officer.

LIMITATIONS ON DIVIDENDS AND OTHER FINANCIAL RESTRICTIONS ON THE COMPANY AND ITS
SUBSIDIARIES

Certain of the Company's financing agreements place limitations on its
ability to pay cash dividends and impose other financial restrictions.

Limitations on Dividends. Sauer's Revolving Credit Agreement (the
"Revolving Credit Agreement") provides that it shall not declare or pay
dividends in any year in excess of 65% of its consolidated net income for the
prior year. Pursuant to such Agreement, $18.1 million of dividends could be paid
by Sauer in 1998. In addition, Sauer's ability to pay dividends is effectively
limited by certain restrictive covenants contained in the U.S. Operating
Company's Credit Agreement (the "Credit Agreement"), which limit the amount of
dividends the U.S. Operating Company can distribute to Sauer. The German
Operating Company also is a party to credit agreements that effectively limit
its ability to distribute dividends to Sauer. Under these provisions, at
December 31, 1997, $2.9 million were unrestricted as to the payment of dividends
by the U.S. Operating Company. The German Operating Company did not make
distributions to the Company during 1997. At December 31, 1997, $2.7 million
were not restricted as to the payment of dividends. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation -- Liquidity and
Capital Resources."

Financial Restrictions and Covenants. Sauer's Revolving Credit Agreement
and the U.S. Operating Company's Credit Agreement and Senior Notes (the "Senior
Notes") contain customary restrictive covenants. One or more of these financing
agreements impose restrictions on Sauer or the U.S. Operating Company and their
subsidiaries with respect to, among other things, (i) sales of substantial
assets, (ii) merger or consolidation with another entity, (iii) substantial
acquisitions or investments, (iv) incurrence of additional indebtedness or
guarantees or other contingent obligations, (v) creation of liens or entering
into transactions with affiliates and (vi) changing the conduct of their
business. In addition, Sauer's Revolving Credit Agreement prohibits it from
redeeming or repurchasing its capital stock except from executive officers of
Sauer.

Under the Revolving Credit Agreement and the U.S. Operating Company's
Credit Agreement or the Senior Notes, Sauer and/or the U.S. Operating Company
are required to meet certain financial and operating tests, including (i) a
maximum leverage ratio, (ii) a minimum consolidated net worth and tangible net
worth, (iii) a minimum interest coverage ratio and (iv) a minimum cash flow. At
December 31, 1997, Sauer and the U.S. Operating Company were in compliance with
these tests.

Sauer's Revolving Credit Agreement and the U.S. Operating Company's Credit
Agreement and Senior Notes contain customary default provisions. In addition,
Sauer would be in default under the Revolving Credit Agreement if the Murmann
family owns less than 51% of the capital stock of Sauer or of Sauer Getriebe.
Also, the U.S. Operating Company would be in default under its Credit Agreement
if (a) any person or persons acting in concert other than (i) the Murmann family
or any trust or other entity owned by them, (ii) Tonio P. Barlage, President of
Sauer, and/or (iii) David L. Pfeifle, Executive Vice President of Sauer, acquire
ownership of 50% or more of the outstanding shares of voting stock of Sauer or
(b) Sauer shall cease to own, free and clear of all liens or any other
encumbrances, 75% of the outstanding shares of voting stock of the U.S.
Operating Company on a fully diluted basis. Upon a default under any of Sauer's
or the U.S.

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Operating Company's financing agreements, the financing institution may
accelerate the maturity of any indebtedness outstanding under such financing
agreement.

The German Operating Company's credit agreements contain similar covenants.
These covenants restrict the German Operating Company in two ways: First, the
"Equity" of the German Operating Company must always exceed 15% of its total
assets. "Equity" is defined as partner capital accounts, capital reserves,
retained earnings, and profit for the respective period, together with those
shareholder loans where the shareholder has given an assurance not to demand
repayment, less any loans to shareholders, accumulated losses or losses for the
respective period. Secondly, the operating cashflow of the German Operating
Company, before capital investments, must be positive.

CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
FOR NON-U.S. HOLDERS

The following is a summary of the principal U.S. federal income and estate
tax considerations with respect to the ownership and disposition of Common Stock
by "Non-U.S. Holders" (as defined below). This summary is based on the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury
regulations thereunder and administrative and judicial interpretations thereof
(all as of the date hereof and all of which are subject to change, possibly with
retroactive effect). This summary does not address all U.S. federal income and
estate tax consequences that may be relevant to a Non-U.S. Holder in light of
its particular circumstances or to certain Non-U.S. Holders that may be subject
to special treatment under U.S. federal income tax laws, such as banks,
insurance companies, tax-exempt entities and certain U.S. expatriates.
Furthermore, the following summary does not discuss any aspects of foreign,
state or local taxation. As used herein, the term "Non-U.S. Holder" means a
holder of Common Stock that for U.S. federal income tax purposes is not (i) a
citizen or individual resident of the United States; (ii) a corporation or
partnership created or organized in or under the laws of the United States or
any political subdivision thereof; (iii) an estate the income of which is
subject to United States federal income tax regardless of its source; or (iv) a
trust if both: (A) a court within the United States is able to exercise primary
supervision over the administration of the trust and (B) one or more United
States persons have the authority to control all substantial decisions of the
trust. EACH PROSPECTIVE NON-U.S. HOLDER IS URGED TO CONSULT ITS OWN TAX ADVISER
WITH RESPECT TO THE UNITED STATES FEDERAL INCOME AND ESTATE TAX CONSEQUENCES OF
OWNING AND DISPOSING OF SHARES OF COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES
ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR OTHER TAXING JURISDICTION.

DIVIDENDS

Dividends that are paid to a Non-U.S. Holder and that are not effectively
connected with a trade or business carried on by such Non-U.S. Holder in the
United States (or, if one or more of certain tax treaties apply, are
attributable to a permanent establishment in the United States maintained by the
Non-U.S. Holder) generally are subject to a 30% U.S. withholding tax, unless
reduced to the extent provided by a tax treaty between the United States and the
country of which the Non-U.S. Holder is a resident for tax purposes.

In order to claim the benefit of an applicable tax treaty, a Non-U.S.
Holder may have to file with the Company or its dividend paying agent an
exemption or reduced treaty rate certificate or letter in accordance with the
terms of such treaty. Under Treasury regulations currently in effect, for
purposes of determining whether tax is to be withheld at a 30% rate or at a
reduced rate as specified by an income tax treaty, the Company ordinarily will
presume that dividends paid to an address in a foreign country are paid to a
resident of such country absent knowledge that such presumption is not
warranted. However, under recently issued Treasury regulations (the "Final
Regulations") that will generally be effective for distributions after December
31, 1998, a Non-U.S. Holder seeking a reduced rate of withholding under an
income tax treaty generally would be required to provide to the Company a valid
Internal Revenue Service Form W-8 certifying

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that such Non-U.S. Holder is entitled to benefits under an income tax treaty.
The Final Regulations also provide special rules for determining whether, for
purposes of assessing the applicability of an income tax treaty, dividends paid
to a Non-U.S. Holder that is an entity should be treated as being paid to the
entity itself or to the persons holding an interest in that entity. A Non-U.S.
Holder that is eligible for a reduced withholding rate may obtain a refund of
any excess amounts withheld by filing an appropriate claim for a refund with the
Internal Revenue Service.

In the case of dividends that are effectively connected with the Non-U.S.
Holder's conduct of a trade or business within the United States or, if an
income tax treaty applies, attributable to a U.S. permanent establishment of the
Non-U.S. Holder, the Non-U.S. Holder will generally be subject to regular U.S.
federal income tax in the same manner as if the Non-U.S. Holder were a U.S.
resident, and will be exempt from U.S. withholding tax provided that the
Non-U.S. Holder complies with the requirements for the exemption from
withholding described above. A non-U.S. corporation receiving effectively
connected dividends also may be subject to an additional "branch profits tax"
which is imposed, under certain circumstances, at a rate of 30% (or such lower
rate as may be specified by an applicable treaty) on the non-U.S. corporation's
"effectively connected earnings and profits," subject to certain adjustments.

GAIN ON DISPOSITION OF COMMON STOCK

A Non-U.S. Holder generally will not be subject to U.S. federal income tax
with respect to gain realized on a sale or other disposition of Common Stock
unless (i) the gain is effectively connected with a trade or business conducted
by the Non-U.S. Holder in the United States, (ii) in the case of a Non-U.S.
Holder who is an individual and holds Common Stock as a capital asset, such
individual is present in the United States for 183 or more days in the taxable
year of the disposition and either (a) such individual has a "tax home" (as
defined for U.S. federal income tax purposes) in the United States or (b) the
gain is attributable to an office or other fixed place of business maintained by
such individual in the United States, (iii) the Non-U.S. Holder is subject to
tax, pursuant to the provisions of the U.S. tax law applicable to certain U.S.
expatriates whose loss of U.S. citizenship has as one of its principal purposes
the avoidance of U.S. taxes or (iv) under certain circumstances if the Company
is or has been during certain time periods a "United States real property
holding corporation" within the meaning of Section 897(c)(2) of the Code and,
assuming that the Common Stock is regularly traded on an established securities
market for U.S. federal income tax purposes and the Non-U.S. Holder held,
directly or indirectly at any time within the five-year period preceding such
disposition, more than 5% of the outstanding Common Stock. The Company is not,
and does not anticipate becoming, a United States real property holding
corporation.

INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING

Under the Treasury regulations, the Company must report annually to the
Internal Revenue Service and to each Non-U.S. Holder the amount of dividends
paid to such holder and any tax withheld with respect to such dividends. These
information reporting requirements apply regardless of whether withholding is
required because the dividends were effectively connected with a trade or
business in the United States of the Non-U.S. Holder or withholding was reduced
or eliminated by an applicable income tax treaty. Copies of the information
returns reporting such dividends and withholding may also be made available to
the tax authorities in the country in which the Non-U.S. Holder is a resident
under the provisions of an applicable income tax treaty or agreement.

U.S. backup withholding (which is imposed at the rate of 31% on certain
payments to persons that fail to furnish information under the U.S. information
reporting requirements) generally will not apply to dividends paid to Non-U.S.
Holders that are subject to the 30% withholding discussed above (or that are not
so subject because a tax treaty applies that reduces such 30% withholding) or,
under current law, dividends paid to a Non-U.S. Holder at an address outside of
the United States. However, under the Final Regulations, a Non-U.S. Holder
generally will be subject to backup withholding tax on dividends paid after
December 31, 1998 unless certain certification procedures (or, in the case of
payments made outside the United States with respect to an offshore account,
certain documentary procedures) are satisfied, directly or through a foreign
intermediary. Backup withholding and information reporting generally will apply
to dividends paid to
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addresses inside the United States to beneficial owners that are not "exempt
recipients" and that fail to provide, in the manner required, certain
identifying information.

Non-U.S. Holders should consult their tax advisers regarding the
application of information reporting and backup withholding in their particular
situations, the availability of an exemption therefrom, and the procedure for
obtaining such an exemption, if available. Backup withholding does not
constitute an additional tax. Any amounts withheld from a payment to a Non-U.S.
Holder under the backup withholding rules will be allowed as a credit against
such Holder's U.S. federal income tax liability and may entitle such Holder to a
refund, provided that the required information is furnished to the Internal
Revenue Service.

FEDERAL ESTATE TAX

An individual Non-U.S. Holder who is treated as the owner of or has made
certain lifetime transfers of an interest in the Common Stock will be required
to include the value thereof in his gross estate for U.S. federal estate tax
purposes and may be subject to U.S. federal estate tax unless an applicable
estate tax treaty provides otherwise.

THE FOREGOING DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS TAX ADVISER WITH
RESPECT TO THE UNITED STATES FEDERAL INCOME TAX AND FEDERAL ESTATE TAX
CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF COMMON STOCK, INCLUDING THE
APPLICATION AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN, OR OTHER TAX
JURISDICTION.

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UNDERWRITING

Under the terms and subject to the conditions contained in the Underwriting
Agreement dated , 1998 (the "U.S. Underwriting Agreement"), the
underwriters named below (the "U.S. Underwriters"), for whom Credit Suisse First
Boston Corporation, Smith Barney Inc. and Deutsche Morgan Grenfell are acting as
representatives (the "Representatives"), have severally but not jointly agreed
to purchase the following number of U.S. Shares:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER U.S. SHARES
----------- -----------
<S> <C>
Credit Suisse First Boston Corporation......................
Smith Barney Inc. ..........................................
Deutsche Morgan Grenfell Inc. ..............................

---------
Total.............................................
=========
</TABLE>

The U.S. Underwriting Agreement provides that the obligations of the U.S.
Underwriters are subject to certain conditions precedent and that the U.S.
Underwriters will be obligated to purchase all the U.S. Shares offered hereby
(other than those shares covered by the over-allotment options described below)
if any are purchased. The U.S. Underwriting Agreement provides that, in the
event of a default by a U.S. Underwriter, in certain circumstances the purchase
commitments of non-defaulting U.S. Underwriters may be increased or the U.S.
Underwriting Agreement may be terminated.

[Klaus H. Murmann] has granted to the U.S. Underwriters and the Managers
options, exercisable [once] by Credit Suisse First Boston Corporation, expiring
at the close of business on the 30th day after the date of this Prospectus, to
purchase up to additional shares at the initial offering price, less
the underwriting discounts and commissions, all as set forth on the cover page
of this Prospectus. Such options may be exercised only to cover over-allotments
in the sale of the shares of Common Stock offered hereby. To the extent that
these options to purchase are exercised, each U.S. Underwriter and each Manager
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of additional shares being sold to the U.S. Underwriters and
to the Managers as the number of U.S. Shares set forth next to such U.S.
Underwriter's name in the preceding table and as the number set forth next to
such Manager's name in the corresponding table in the Prospectus relating to the
International Offering bears to the sum of the total number of shares of Common
Stock in such tables.

The Company has been advised by the Representatives that the U.S.
Underwriters propose to offer the U.S. Shares to the public in the United States
and on a private placement basis in Canada initially at the offering price set
forth on the cover page of this Prospectus and, through the Representatives, to
certain dealers at such price less a concession of $ per share, and the
U.S. Underwriters and such dealers may allow a discount of $ per share
on sales to certain other dealers. After the initial public offering, the
offering price and concession and discount to dealers may be changed by the
Representatives.

The Company has entered into a Subscription Agreement with the managers of
the International Offering (the "Managers") providing for the concurrent offer
and sale of the International Shares outside of the United States and Canada.
The closing of the International Offering is a condition to the closing of the
U.S. Offering and vice versa. The public offering price, the underwriting
discounts and commissions and concession and discount to dealers for the
International Offering will be the same as the U.S. Offering, except that
purchasers will have the option to purchase International Shares at the Deutsche
mark equivalent thereof.

Pursuant to an agreement between the U.S. Underwriters and Managers (the
"Intersyndicate Agreement") relating to the Common Stock Offering, changes in
the public offering price, concession and discount to dealers will be made only
upon the mutual agreement of Credit Suisse First Boston Corporation, as

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representative of the U.S. Underwriters, and Credit Suisse First Boston (Europe)
Limited ("CSFBL"), on behalf of the Managers.

Pursuant to the Intersyndicate Agreement, each U.S. Underwriter has agreed
that, as part of the distribution of the U.S. Shares and subject to certain
exceptions, it has not offered or sold, and will not offer or sell, directly or
indirectly, any shares of Common Stock or distribute any prospectus relating to
the Common Stock to any person outside the United States or Canada or to any
other dealer who does not so agree. Each of the Managers has agreed or will
agree that, as part of the distribution of the International Shares and subject
to certain exceptions, it has not offered or sold, and will not offer or sell,
directly or indirectly, any shares of Common Stock or distribute any prospectus
relating to the Common Stock in the United States or Canada or to any other
dealer who does not so agree. The foregoing limitations do not apply to
stabilization transactions or to transactions between the U.S. Underwriters and
the Managers pursuant to the Intersyndicate Agreement. As used herein, "United
States" means the United States of America (including the States and the
District of Columbia), its territories, possessions and other areas subject to
its jurisdiction, "Canada" means Canada, its provinces, territories, possessions
and other areas subject to its jurisdiction, and an offer or sale shall be in
the United States or Canada if it is made to (i) any individual resident in the
United States or Canada or (ii) any corporation, partnership, pension,
profit-sharing or other trust or entity (including such entity acting as an
investment adviser with discretionary authority) whose office most directly
involved with the purchase is located in the United States or Canada.

Pursuant to the Intersyndicate Agreement, sales may be made between the
U.S. Underwriters and the Managers of such number of shares of Common Stock as
may be mutually agreed upon. The price of any shares so sold will be the public
offering price, less such amount as may be mutually agreed upon by Credit Suisse
First Boston Corporation, as representative of the U.S. Underwriters, and CSFBL,
on behalf of the Managers, but not exceeding the selling concession applicable
to such shares. To the extent there are sales between the U.S. Underwriters and
the Managers pursuant to the Intersyndicate Agreement, the number of shares of
Common Stock initially available for sale by the U.S. Underwriters or by the
Managers may be more or less than the amount appearing on the cover page of the
Prospectus. Neither the U.S. Underwriters nor the Managers are obligated to
purchase from the other any unsold shares of Common Stock.

The Company, the Selling Stockholders and certain other stockholders have
agreed that they will not offer, sell, contract to sell, announce their
intention to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the Securities and Exchange Commission a registration statement under
the Securities Act of 1933 (the "Securities Act") relating to, any additional
shares of Common Stock or securities convertible into or exchangeable or
exercisable for any shares of Common Stock without the prior written consent of
Credit Suisse First Boston Corporation for a period of 180 days after the date
of this Prospectus, except the issuance or sale of shares of Common Stock in a
private placement by the Company as consideration for the acquisition of another
entity or all or substantially all the assets of another entity, provided the
recipient of such shares has agreed in writing to be bound by the terms of such
restrictions for the remainder of its term and issuances pursuant to the
exercise of employee stock options outstanding on the date hereof.

At the request of the Company, the Underwriters are reserving shares of
Common Stock from the Offering for sale to certain persons identified by the
Company. Any sales to such persons will be at the public offering price. Any
shares not purchased in this reserve program will be sold to the general public
in the Combined Offering.

The Representatives have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the number of shares of
Common Stock being offered hereby.

The Company has agreed to indemnify the U.S. Underwriters and the Managers
against certain liabilities, including civil liabilities under the Securities
Act, or to contribute to payments that the U.S. Underwriters and the Managers
may be required to make in respect thereof.

Application will be made to list the shares of Common Stock on the New York
Stock Exchange and the Frankfurt Stock Exchange. Credit Suisse First Boston
Aktiengesellschaft will act as the sponsor for the application for listing on
the Frankfurt Stock Exchange. In connection with the listing of the Common Stock

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on the New York Stock Exchange, the Underwriters will undertake to sell round
lots of 100 shares or more to a minimum of 2,000 beneficial owners.

Prior to the Combined Offering, there has been no public market for the
Common Stock. Accordingly, the initial public offering price for the shares has
been determined by negotiation between the Company and the Representatives. In
determining such price, consideration was given to various factors, including
market conditions for initial public offerings, the history of and prospects for
the Company's business, the Company's past and present operations, its past and
present earnings and current financial position, an assessment of the Company's
management, the market for securities of companies in businesses similar to
those of the Company, the general condition of the securities markets and other
relevant factors. There can be no assurance, however, that the initial public
offering price will correspond to the price at which the Common Stock will trade
in the public market subsequent to the Combined Offering or that an active
trading market for the Common Stock will develop and continue after the Combined
Offering.

The Representatives, on behalf of the U.S. Underwriters and Managers, may
engage in over-allotment, stabilizing transactions, syndicate covering
transactions and penalty bids. Over-allotment involves syndicate sales in excess
of the offering size, which creates a syndicate short position. Stabilizing
transactions are bids to purchase the securities being distributed at prices
that may not exceed a specified maximum. Syndicate covering transactions involve
purchases of the Common Stock in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
Representatives to reclaim a selling concession from a syndicate member when the
Common Stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the Common Stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the New
York Stock Exchange, the Frankfurt Stock Exchange or otherwise and, if
commenced, may be discontinued at any time.

NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of the "Common Stock" in Canada is being made only on a
private placement basis exempt from the requirement that the Company and the
Selling Stockholders prepare and file a prospectus with the securities
regulatory authorities in each province where trades of Common Stock are
effected. Accordingly, any resale of the Common Stock in Canada must be made in
accordance with applicable securities laws, which will vary depending on the
relevant jurisdiction and may require resales to be made in accordance with
available statutory exemptions or pursuant to a discretionary exemption granted
by the applicable Canadian securities regulatory authority. Purchasers are
advised to seek legal advice prior to any resale of the Common Stock.

REPRESENTATIONS OF PURCHASERS

Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company, the Selling
Stockholders and the dealer from whom such purchase confirmation is received
that (i) such purchaser is entitled under applicable provincial securities laws
to purchase such Common Stock without the benefit of a prospectus qualified
under such securities laws, (ii) where required by law, such purchaser is
purchasing as principal and not as agent and (iii) such purchaser has reviewed
the text above under "Resale Restrictions."

RIGHTS OF ACTION (ONTARIO PURCHASERS)

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of

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<PAGE> 65

action for damages or rescission or rights of action, if any, under the civil
liability provisions of the U.S. federal securities laws.

ENFORCEMENT OF LEGAL RIGHTS

All the issuer's directors and officers as well as the experts named herein
and the Selling Stockholders may be located outside Canada and, as a result, it
may not be possible for Canadian purchasers to effect service of process within
Canada upon the issuer or such persons. All or a substantial portion of the
assets of the issuer and such persons may be located outside Canada and, as a
result, it may not be possible to satisfy a judgment against the issuer or such
persons in Canada or to enforce a judgment obtained in Canadian courts against
such issuer or persons outside of Canada.

NOTICE TO BRITISH COLUMBIA RESIDENTS

A purchaser of Common Stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of Common Stock acquired on the same date
and under the same prospectus exemption.

TAXATION AND ELIGIBILITY FOR INVESTMENT

Canadian purchasers of Common Stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the Common Stock for investment by the purchaser under relevant Canadian
legislation.

LEGAL OPINIONS

The validity of the Common Stock being sold by the Company will be passed
upon for the Company by Shearman & Sterling, New York, New York and Spencer Fane
Britt & Browne, Kansas City, Missouri, and for the Underwriters by Sullivan &
Cromwell, New York, New York.

EXPERTS

The consolidated financial statements and schedule of Sauer Inc. and
subsidiaries as of December 31, 1996 and 1997 and for each of the fiscal years
in the three-year period ended December 31, 1997, included in this Prospectus
and elsewhere in the Registration Statement of which this Prospectus forms a
part, have been audited by Arthur Andersen LLP, independent public accountants,
as indicated in their reports with respect thereto, and are included herein and
therein in reliance upon the authority of said firm as experts in accounting and
auditing in giving such reports.

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include any amendments
thereto) on Form S-1 under the Securities Act with respect to the shares of
Common Stock offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock, reference is made to the
Registration Statement, including exhibits and schedules thereto, copies of
which may be examined without charge at the Commission's principal office at 450
Fifth Street, N.W., Washington, D.C. 20549 and the regional offices of the
Commission located at 7 World Trade Center, New York, New York 10048 and

61
<PAGE> 66

500 West Madison Street, 14th Floor, Chicago, Illinois 60661. Copies of such
material may be obtained from the Public Reference Section of the Commission,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at its
public reference facilities in New York, New York and Chicago, Illinois at
prescribed rates, or on the Internet at http://www.sec.gov. Statements contained
in this Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each statement being qualified in all respects by such reference. Copies of
materials filed with the Commission may also be inspected at the offices of the
National Association of Securities Dealers, Inc., 1801 K Street, N.W., 8th
Floor, Washington, D.C. 20006.

Upon completion of the Combined Offering, the Company will be subject to
the informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and in accordance therewith, will file reports,
proxy and information statements and other information with the Commission. Such
reports, proxy and information statements and other information can be inspected
and copied at the addresses set forth above.

62
<PAGE> 67

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

SAUER INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-3
Consolidated Statements of Income for the years ended
December 31, 1995, 1996, and 1997......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 68

After the transaction discussed in Note 16 to the consolidated financial
statements of SAUER INC. is effected, we expect to be in a position to render
the following audit report.

/s/ ARTHUR ANDERSEN LLP

Chicago, Illinois
February 27, 1998

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of SAUER INC. AND SUBSIDIARIES:

We have audited the accompanying consolidated balance sheets of SAUER INC.
(a Delaware corporation) AND SUBSIDIARIES as of December 31, 1996 and 1997, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
SAUER INC. AND SUBSIDIARIES as of December 31, 1996 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.

Chicago, Illinois

F-2
<PAGE> 69

SAUER INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 12,029 $ 7,363
Accounts receivable (net of allowance for doubtful
accounts of $2,690 and $3,195 in 1996 and 1997,
respectively).......................................... 65,655 77,170
Inventories............................................... 78,273 89,031
Other current assets...................................... 9,794 9,557
-------- --------
Total current assets.............................. 165,751 183,121
-------- --------
PROPERTY, PLANT AND EQUIPMENT, net.......................... 166,064 206,379
-------- --------
OTHER ASSETS
Intangible assets, net.................................... 3,323 2,964
Deferred income taxes..................................... 8,761 12,413
Other..................................................... 7,371 4,497
-------- --------
Total other assets................................ 19,455 19,874
-------- --------
$351,270 $409,374
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and bank overdrafts......................... $ 50,366 $ 60,278
Long-term debt due within one year........................ 1,932 2,715
Accounts payable.......................................... 36,329 46,392
Accrued salaries and wages................................ 6,279 6,385
Accrued warranty.......................................... 7,289 9,398
Dividend payable.......................................... -- 16,994
Other accrued liabilities................................. 24,749 15,897
-------- --------
Total current liabilities......................... 126,944 158,059
-------- --------
LONG-TERM DEBT.............................................. 65,021 81,468
-------- --------
OTHER LIABILITIES:
Long-term pension liability............................... 28,633 28,959
Postretirement benefits other than pensions............... 11,920 11,989
Deferred income taxes..................................... 3,381 4,018
Other..................................................... 14,286 13,337
-------- --------
Total other liabilities........................... 58,220 58,303
-------- --------
MINORITY INTEREST IN NET ASSETS OF CONSOLIDATED COMPANIES... 25,155 32,799
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, par value $5,000 per share, authorized 3,000
shares in 1996 and 1997; issued 1,992 and outstanding
1,938 shares in 1996 and 1997.......................... 9,960 9,960
Additional paid-in capital................................ 72,156 73,081
Cumulative translation adjustment......................... 5,029 9
Retained earnings (deficit)............................... (8,515) (1,605)
Common stock in treasury (at cost), 54 shares in 1996 and
1997................................................... (2,700) (2,700)
-------- --------
Total stockholders' equity............................. 75,930 78,745
-------- --------
$351,270 $409,374
======== ========
</TABLE>

The accompanying notes are an integral part of these statements.
F-3
<PAGE> 70

SAUER INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
NET SALES................................................... $446,774 $467,566 $535,173
-------- -------- --------
COSTS AND EXPENSES:
Cost of sales............................................. 334,580 352,044 402,345
Selling, general and administrative....................... 48,128 51,856 52,575
Research and development.................................. 18,796 20,505 20,655
-------- -------- --------
Total costs and expenses............................... 401,504 424,405 475,575
-------- -------- --------
Operating income....................................... 45,270 43,161 59,598
-------- -------- --------
NONOPERATING INCOME (EXPENSES):
Interest expense.......................................... (8,034) (7,364) (8,879)
Interest income........................................... 275 564 698
Royalty income............................................ 1,695 1,156 1,150
Other, net................................................ 21 (583) 144
-------- -------- --------
Nonoperating expenses, net............................. (6,043) (6,227) (6,887)
-------- -------- --------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST............ 39,227 36,934 52,711
PROVISION FOR INCOME TAXES.................................. (5,538) (10,645) (16,345)
-------- -------- --------
INCOME BEFORE MINORITY INTEREST............................. 33,689 26,289 36,366
MINORITY INTEREST IN INCOME OF CONSOLIDATED COMPANIES....... (6,447) (6,643) (8,492)
-------- -------- --------
Net income............................................. $ 27,242 $ 19,646 $ 27,874
======== ======== ========
Basic and diluted net income per common share............. $ 14,078 $ 10,137 $ 14,383
======== ======== ========
Basic and diluted weighted average common shares
outstanding............................................ 1,935 1,938 1,938
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these statements.
F-4
<PAGE> 71

SAUER INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL CUMULATIVE RETAINED COMMON
SHARES COMMON PAID-IN TRANSLATION EARNINGS STOCK IN
OUTSTANDING STOCK CAPITAL ADJUSTMENT (DEFICIT) TREASURY TOTAL
----------- ------ ---------- ----------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Beginning balance............ 1,924 $9,620 $67,915 $ 3,774 $(39,768) -- $ 41,541
Net income................... -- -- -- -- 27,242 -- 27,242
Cash dividends, ($4,000 per
share).................... -- -- -- -- (7,738) -- (7,738)
Sale of common stock......... 68 340 3,060 -- -- -- 3,400
Purchase of common stock..... (54) -- -- -- -- (2,700) (2,700)
Contribution from Sauer
Hydraulik................. -- -- 212 -- -- -- 212
Pension adjustment........... -- -- 1,061 -- -- -- 1,061
Translation adjustment....... -- -- -- 926 -- -- 926
----- ------ ------- ------- -------- ------- --------
Ending Balance....... 1,938 9,960 72,248 4,700 (20,264) (2,700) 63,944

YEAR ENDED DECEMBER 31, 1996:
Net income................... -- -- -- -- 19,646 -- 19,646
Cash dividends, ($4,000 per
share).................... -- -- -- -- (7,752) -- (7,752)
Cash dividend to Sauer
Hydraulik................. -- -- -- -- (145) -- (145)
Pension adjustment........... -- -- (92) -- -- -- (92)
Translation adjustment....... -- -- -- 329 -- -- 329
----- ------ ------- ------- -------- ------- --------
Ending balance....... 1,938 9,960 72,156 5,029 (8,515) (2,700) 75,930

YEAR ENDED DECEMBER 31, 1997:
Net income................... -- -- -- -- 27,874 -- 27,874
Cash dividends, ($4,000 per
share).................... -- -- -- -- (7,752) -- (7,752)
Contribution from Sauer
Hydraulik................. -- -- 1,102 -- -- -- 1,102
Cash dividend to Sauer
Hydraulik................. -- -- -- -- (13,212) -- (13,212)
Pension adjustment........... -- -- (177) -- -- -- (177)
Translation adjustment....... -- -- -- (5,020) -- -- (5,020)
----- ------ ------- ------- -------- ------- --------
Ending balance....... 1,938 $9,960 $73,081 $ 9 $ (1,605) $(2,700) $ 78,745
===== ====== ======= ======= ======== ======= ========
</TABLE>

The accompanying notes are an integral part of these statements.
F-5
<PAGE> 72

SAUER INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 27,242 $ 19,646 $ 27,874
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization......................... 20,574 25,473 26,393
Minority interest in income of consolidated
companies........................................... 6,447 6,643 8,492
(Increase) decrease in working capital --
Accounts receivable, net............................ (9,313) (428) (16,620)
Inventories......................................... (18,378) 4,719 (17,260)
Accounts payable.................................... 11,149 (7,126) 13,174
Accrued liabilities................................. 5,419 2,930 (6,394)
Other............................................... (5,108) (2,796) 8,388
-------- -------- --------
Net cash provided by operating activities........ 38,032 49,061 44,047
-------- -------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............... (45,689) (56,284) (66,750)
Purchase of minority interest............................ -- -- (3,959)
Proceeds from sales of property, plant and equipment..... 145 86 398
-------- -------- --------
Net cash used in investing activities............ (45,544) (56,198) (70,311)
-------- -------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on notes payable and bank
overdrafts............................................ 20,319 (19,313) 9,251
Net borrowings of long-term debt......................... 116 36,647 25,171
Sale of common stock..................................... 3,400 -- --
Purchase of common stock................................. (2,700) -- --
Cash dividends........................................... (7,738) (7,752) (7,752)
Cash dividend to Sauer Hydraulik......................... -- (145) --
Distribution to minority interest partners............... (1,500) (1,560) (4,623)
-------- -------- --------
Net cash provided by financing activities........ 11,897 7,877 22,047
-------- -------- --------

EFFECT OF EXCHANGE RATE CHANGES............................ (145) (524) (449)
-------- -------- --------

CASH AND CASH EQUIVALENTS:
Net increase (decrease) during the year.................. 4,240 216 (4,666)
Beginning balance........................................ 7,573 11,813 12,029
-------- -------- --------
Ending balance................................... $ 11,813 $ 12,029 $ 7,363
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these statements.
F-6
<PAGE> 73

SAUER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(1) THE COMPANY AND ITS OPERATIONS:

Sauer Inc., a U.S. corporation, and subsidiaries (the "Company") is a
leading international manufacturer of components and systems that generate,
transmit and control fluid power in mobile equipment. The Company's products are
used by original equipment manufacturers of mobile equipment, including
construction, agricultural and turf care equipment. The Company's products are
sold throughout North America, Europe and East Asia.

The Company, which is a holding company, conducts its business in North
America as Sauer-Sundstrand Company (the "U.S. Operating Company"), and in
Germany as Sauer-Sundstrand GmbH & Co. (the "German Operating Company"). The
Company also has manufacturing plants in the United Kingdom, Italy, Slovakia,
and China, as well as trading companies in other locations. Sauer-Sundstrand
GmbH (the "German Holding Company"), which is wholly owned by the Company,
functions as a management and holding company on behalf of the Company.

The Company is majority owned by Mr. Klaus H. Murmann and certain of his
family members, directly and through Sauer GmbH and other wholly owned
companies. Sauer GmbH and Sauer GmbH and Co. Hydraulik K.G. ("Sauer Hydraulik")
("Murmann Limited Partners") hold limited partnership interests (the "Murmann
Limited Partnership Interests") in the German Operating Company as described
below. Sauer GmbH and Sauer Hydraulik, a German corporation and a German
partnership, respectively, are wholly owned by the Murmann family.

(2) JOINT VENTURES:

During 1991, the U.S. Operating Company and Agri-Fab, Inc. formed a joint
venture organized as a U.S. limited partnership under the name Hydro-Gear
Limited Partnership ("Hydro-Gear"). The U.S. Operating Company contributed
inventories and machinery and equipment with a carrying amount of $4,066 for a
60% interest in Hydro-Gear. The principal business of Hydro-Gear is the
manufacture, sale and distribution of hydrostatic and axle products to the turf
care market.

On November 29, 1994, the German Holding Company and Povazske Strojarne,
a.s. formed a joint venture organized as a Slovakian corporation under the name
Sauer Mechanika, a.s. The German Holding Company contributed approximately
$6,000 of cash, technology, and machinery and equipment for a 65% interest in
Sauer Mechanika. During 1997, the German Holding Company purchased the 35%
interest held by its partner, Povazske Strojarne, a.s., for $3,959. The
principal business of Sauer Mechanika is the manufacture of gear boxes for
transit mixers.

On February 16, 1995, the Company and Shanghai Hydraulics and Pneumatics
formed a joint venture organized as a Chinese Limited Liability Foreign
Investment Enterprise under the name Sauer Shanghai Hydraulic Transmission
Company, Ltd. ("SHC"). The Company contributed $5,400 of cash, machinery and
equipment and technology for a 50% interest in SHC. Operations commenced during
1996. During 1997, the Company contributed an additional $2,700 of cash to
increase its interest in SHC to 60%. The principal business of SHC is the
manufacture, sale and distribution of high power hydrostatic transmissions to
the Chinese market.

On December 30, 1996, the German Holding Company and ZTS, a.s. formed a
joint venture organized as a Slovakian corporation under the name Sauer ZTS,
a.s. The German Holding Company contributed approximately $5,800 of cash and
technology for a 65% interest in Sauer ZTS, a.s. The principal business of Sauer
ZTS, a.s. is the manufacture of high power hydrostatic transmissions.

F-7
<PAGE> 74
SAUER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation and Principles of Consolidation --

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

Use of Estimates --

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

New Accounting Principles --

During 1997, the Company adopted Statement of Financial Accounting
Standards, ("SFAS"), No. 128, "Earnings per Share" and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". These
changes did not have any impact on the Company's financial position or results
of operations.

Reclassification --

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

Minority Interest --

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

(a) The Murmann Limited Partners, as holders of limited partnership
interests, in the results of the German Operating Company equal to 8.3% of
the income of Sauer Inc. and subsidiaries before taxes and the Murmann
Limited Partnership Interests for 1995, 1996 and 1997.

(b) A minority interest held by Agri-Fab, Inc. in a U.S. limited
partnership for 1995, 1996 and 1997.

(d) A minority interest held by Shanghai Hydraulics and Pneumatics in
a Chinese equity joint venture for 1996 and 1997.

(e) A minority interest held by ZTS, a.s. in a Slovakian corporation
for 1997.

F-8
<PAGE> 75
SAUER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table sets forth the components of minority interest in the
consolidated balance sheets and consolidated statements of income and loss:

MINORITY INTEREST REFLECTED IN
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
German Operating Company................................. $ 9,230 $11,203
Hydro-Gear............................................... 12,797 15,216
Sauer Mechanika, a.s..................................... 3,128 --
SHC...................................................... -- 3,438
Sauer ZTS, a.s........................................... -- 2,942
------- -------
Total.......................................... $25,155 $32,799
======= =======
</TABLE>

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
German Operating Company...................... $(2,954) $(2,707) $(4,001)
Hydro-Gear.................................... (3,681) (4,345) (6,339)
Sauer Mechanika, a.s.......................... 188 168 291
SHC........................................... -- 241 1,480
Sauer ZTS, a.s................................ -- -- 77
------- ------- -------
Total............................... $(6,447) $(6,643) $(8,492)
======= ======= =======
</TABLE>

In the event of liquidation or disposition of the German Operating Company,
the Murmann Limited Partners are entitled to the amounts credited to their
partnership account plus 20% of the gain or loss, if any, on liquidation or
disposition. The Murmann Limited Partners have no other property rights in the
assets of the Company, the U.S. Operating Company, the German Operating Company
or any other related entity, notwithstanding the distribution which is computed
with respect to the worldwide income of the Company. The Murmann Limited
Partners have no voting rights, except that the consent of the holders thereof
is required for certain actions of the German Operating Company.

Translation of Foreign Currencies --

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

Cash and Cash Equivalents --

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

F-9
<PAGE> 76
SAUER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Inventories --

Inventories are valued at the lower of cost or market, using various cost
methods, and include the cost of material, labor and factory overhead. The
percentage of year end inventory using each of the methods was as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- ----
<S> <C> <C>
Average Cost................................................ 62% 61%
Last-in, first-out ("LIFO")................................. 30% 32%
First-in, first-out ("FIFO")................................ 8% 7%
</TABLE>

Property, Plant and Equipment and Depreciation --

Property, plant and equipment are stated at historical cost, net of
accumulated depreciation. Assets under capital lease are stated at the lower of
fair market value or the present value of future minimum lease payments, net of
accumulated depreciation. Depreciation is based on the straight-line method.
Additions and improvements that substantially extend the useful life of a
particular asset are capitalized. Repair and maintenance costs ($11,305, $13,110
and $15,184 in 1995, 1996 and 1997, respectively) are charged to expense. Upon
the sale of property, plant and equipment, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is included in
income.

Intangible Assets and Amortization --

Intangible assets include goodwill, patents and other intangibles. These
assets are stated at cost, net of accumulated amortization, and are being
amortized over the lesser of 20 years or the specific remaining identifiable
life on a straight-line basis. Goodwill was $1,629 and $1,201 as of December 31,
1996 and 1997, net of accumulated amortization of $7,260 and $4,950,
respectively. Amortization of goodwill and other intangibles was $1,649 for
1995, $2,449 for 1996 and $756 for 1997.

Impairment of Long-Lived Assets --

Consistent with the requirements of SFAS 121, the Company periodically
assesses whether events or circumstances have occurred that may indicate the
carrying value of its long-lived tangible and intangible assets may not be
recoverable. The carrying value of long-lived tangible and intangible assets is
evaluated based on the expected future non-discounted operating cash flows. When
such events or circumstances indicate the carrying value of an asset may be
impaired, the Company recognizes an impairment loss. Based upon its most recent
analysis, the Company believes that no impairment exists at December 31, 1997.

Revenue Recognition --

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

Income Taxes --

The provision for income taxes has been determined using the asset and
liability approach of accounting for income taxes. Under this approach, deferred
taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax bases of the Company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. Valuation

F-10
<PAGE> 77
SAUER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

allowances are recorded to reduce deferred taxes when it is more likely than not
that a tax benefit will not be realized.

Basic and Diluted Per Share Data --

Basic and diluted income per common share data have been computed by
dividing net income by the basic and diluted weighted average number of shares
of common stock outstanding.

(4) INVENTORIES:

The composition of inventories is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Raw materials............................................ $34,735 $41,851
Work in process.......................................... 12,053 13,101
Finished goods and parts................................. 37,327 40,461
LIFO allowance........................................... (5,842) (6,382)
------- -------
Total.......................................... $78,273 $89,031
======= =======
</TABLE>

(5) PROPERTY, PLANT AND EQUIPMENT:

The estimated useful lives used in computing depreciation are as follows:

<TABLE>
<CAPTION>
DESCRIPTION LIFE
- ----------- --------
<S> <C>
Land improvements........................................... 20 years
Buildings................................................... 37 years
Building improvements....................................... 10 years
Building equipment.......................................... 20 years
Machinery and equipment..................................... 12 years
Durable tools............................................... 3 years
Automobiles and trucks...................................... 4 years
Office equipment............................................ 10 years
Information systems and data-handling devices............... 5 years
</TABLE>

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

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
--------- ---------
<S> <C> <C>
Cost --
Land and improvements............................ $ 3,138 $ 3,771
Buildings and improvements....................... 52,288 63,941
Machinery and equipment.......................... 289,487 307,364
Construction in progress......................... 15,184 27,485
Plant and equipment under capital lease............ 1,447 638
--------- ---------
Total cost.................................... 361,544 403,199
Less -- Accumulated depreciation................... (195,480) (196,820)
--------- ---------
Net property, plant and equipment............. $ 166,064 $ 206,379
========= =========
</TABLE>

Depreciation expense for 1995, 1996 and 1997 was $18,925, $23,024, and
$25,637, respectively.

F-11
<PAGE> 78
SAUER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) PENSION BENEFITS:

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

Pension expense for 1995, 1996 and 1997 for these defined benefit plans
consists of the following components:

<TABLE>
<CAPTION>
1995 1996 1997
-------- ------- -------
<S> <C> <C> <C>
Service cost................................. $ 2,560 $ 2,846 $ 3,042
Interest on projected benefit obligation..... 6,065 6,181 7,422
Actual return on assets...................... (10,014) (7,418) (9,305)
Net amortization and deferral................ 5,495 3,250 3,511
-------- ------- -------
Net pension expense..................... $ 4,106 $ 4,859 $ 4,670
======== ======= =======
</TABLE>

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

<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
-------------------------- --------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Obligations --
Vested benefit.................. $12,484 $ 50,148 $13,085 $ 57,837
Nonvested benefit............... -- 7,787 -- 4,726
------- -------- ------- --------
Accumulated benefit obligation.... 12,484 57,935 13,085 62,563
Effect of projected salary
increases....................... 2,887 12,377 2,834 13,279
------- -------- ------- --------
Projected benefit obligation...... 15,371 70,312 15,919 75,842
Plan assets at fair value......... 20,127 45,167 22,560 50,527
------- -------- ------- --------
Projected benefit obligation (in
excess of) less than plan
assets.......................... 4,756 (25,145) 6,641 (25,315)
Unrecognized transition asset..... (1,487) -- (1,479) --
Unrecognized prior year service
cost............................ 646 1,549 567 1,285
Other unrecognized gain........... (1,396) (4,005) (2,753) (5,596)
Adjustment to recognize minimum
liability....................... -- (1,604) -- (71)
------- -------- ------- --------
Net pension asset (liability)..... 2,519 (29,205) 2,976 (29,697)
Less -- Current portion........... -- 572 -- 738
------- -------- ------- --------
Net pension asset (liability),
long-term....................... $ 2,519 $(28,633) $ 2,976 $(28,959)
======= ======== ======= ========
</TABLE>

F-12
<PAGE> 79
SAUER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Discount rates --
United States......................................... 7.5% 7.5% 7.5%
Germany............................................... 7.5 7.5 7.5
United Kingdom........................................ 9.0 9.0 9.0
Rates of increase in compensation levels --
United States......................................... 5.0 5.0 5.0
Germany............................................... 3.5 3.5 3.5
United Kingdom........................................ 8.0 8.0 8.0
Expected long-term rate of return on assets --
United States......................................... 8.5 8.5 8.5
United Kingdom........................................ 9.0 9.0 9.0
</TABLE>

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

(7) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS:

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

The components of the postretirement benefit provisions of the Company
sponsored plans for 1995, 1996 and 1997 were as follows:

<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Service cost......................................... $ 326 $ 323 $ 365
Interest cost........................................ 886 948 997
Net deferral and amortization........................ -- 22 20
------ ------ ------
Postretirement benefit provision..................... $1,212 $1,293 $1,382
====== ====== ======
</TABLE>

F-13
<PAGE> 80
SAUER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Accumulated postretirement benefit obligations:
Retirees............................................. $ (5,074) $ (4,995)
Eligible active plan participants.................... (3,237) (3,472)
Other active plan participants....................... (5,292) (5,163)
-------- --------
Accumulated postretirement benefit obligation.......... (13,603) (13,630)
Unrecognized net loss.................................. 1,683 1,641
-------- --------
Postretirement benefit liability....................... $(11,920) $(11,989)
======== ========
</TABLE>

The assumed weighted average annual rate of increase in the per capita cost
of medical benefits is 7.0% for 1998 and is assumed to decrease gradually in
1999 and 2000 and remain level at 5.5% thereafter.

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

A one percent increase in the annual health care trend rates would have
increased the accumulated postretirement benefit obligation at December 31, 1997
by $1,625, and increased postretirement benefit expense for 1997 by $177. The
weighted average discount rate used to estimate the accumulated postretirement
benefit obligation was 7.5% for 1996 and 1997.

(8) PHANTOM SHARE PLAN:

Under the Company's Phantom Share Plan, the Board of Directors may grant up
to 400,000 Phantom Share Rights to eligible employees. Each Phantom Share Right
entitles the grantee to the market value of a common share as of the December 31
immediately prior to the date the restrictions on such Phantom Share Right lapse
and, until the restrictions lapse, a quarterly payment in an amount determined
by the Board of Directors. Restrictions on Phantom Share Rights consist of the
vesting schedule under which such rights vest 20% in each of the fifth through
ninth years after grant date. If no stock price quotation is available upon the
lapse of restrictions with respect to a Phantom Share Right, the amount of the
payment is determined pursuant to a formula set forth in the Phantom Share Plan
based on the earnings and book value of the Company as adjusted to account for
stock market trends. At December 31, 1996 and 1997, 91,400 and 110,400 Phantom
Share Rights, respectively, were outstanding. Compensation expense is recognized
ratably over the period from the date of grant to the date the restrictions on a
right lapse. Earnings are also charged or credited for the aggregate
appreciation or depreciation of the rights during the period as well as any
quarterly payment to the grantees. Phantom share compensation expense was
$1,162, $902, and $955 for 1995, 1996 and 1997, respectively. The total value of
the Phantom Shares outstanding as of December 31, 1996 and 1997 was $2,651 and
$3,257, respectively.

F-14
<PAGE> 81
SAUER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(9) INCOME TAXES:

The Company's income before income taxes and minority interest are as
follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
United States................................. $22,981 $31,308 $43,370
Europe and other.............................. 16,246 5,626 9,341
------- ------- -------
Total............................... $39,227 $36,934 $52,711
======= ======= =======
</TABLE>

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

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Current:
United States
Federal................................ $(4,355) $ (4,994) $(11,476)
State.................................. (851) (877) (1,261)
European and other........................ (3,434) (4,498) (3,844)
------- -------- --------
Total current............................. (8,640) (10,369) (16,581)
------- -------- --------
Deferred:
United States
Federal................................ 711 400 1,593
State.................................. 1,667 (67) (204)
European and other........................ 724 (609) (1,153)
------- -------- --------
Total deferred............................ 3,102 (276) 236
------- -------- --------
Total income tax provision.................. $(5,538) $(10,645) $(16,345)
======= ======== ========
</TABLE>

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
United States income tax provision at the
statutory rate of 35%.................... $(13,729) $(12,926) $(18,448)
Deferred tax benefit not previously
recognized from U.S. loss carryforwards,
foreign tax credits and other............ 9,176 2,069 1,923
European and Asian locations' losses not
tax benefited............................ (305) (1,367) (1,686)
Taxes on European locations' income at
rates which differ from the U.S. rate.... 89 443 (270)
State income taxes, net of U.S. federal tax
benefit.................................. (724) (614) (871)
Taxes on minority interest................. 1,568 1,289 3,518
Other...................................... (1,613) 461 (511)
-------- -------- --------
Total income tax provision................. $ (5,538) $(10,645) $(16,345)
======== ======== ========
</TABLE>

F-15
<PAGE> 82
SAUER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's foreign deferred income tax liability results from temporary
differences relating principally to pension benefits and to property, plant and
equipment.

The components of the Company's net deferred tax asset are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
U.S. tax credit carryforwards............................ $ 1,944 $ 1,575
Tax basis step-ups....................................... 5,224 4,473
Deferred compensation, post-retirement and accrued
pension benefits....................................... 10,854 11,407
Tax over book depreciation............................... (3,437) (1,273)
Inventory and warranty reserves not deducted for tax..... 5,111 5,283
Other items.............................................. 1,500 2,125
------- -------
Gross deferred tax asset................................. 21,196 23,590
Valuation allowance...................................... (3,734) (3,187)
------- -------
Net deferred tax asset................................... 17,462 20,403
Less -- current portion.................................. (8,701) (7,990)
------- -------
Deferred income tax asset, long-term..................... $ 8,761 $12,413
======= =======
</TABLE>

During 1997 the valuation allowance relating to the Company's deferred
income tax asset decreased by $547. The decrease was due to the realization in
the current period of certain tax benefits for which a valuation allowance had
been previously provided.

As of December 31, 1997, the Company had not provided federal income taxes
on $3,018 of undistributed earnings recorded by certain subsidiaries outside the
United States, since these earnings were deemed permanently invested. Although
it is not practicable to determine the deferred tax liability on the unremitted
earnings, foreign tax credits would be available to reduce any U.S. tax
liability if these foreign earnings were remitted.

The Company had the following tax return carryforwards available to offset
future years' taxes at December 31, 1997:

<TABLE>
<CAPTION>
EXPIRATION
AMOUNT DATES
------- ----------
<S> <C> <C>
German net operating losses........................... $48,030 None
U.S. foreign tax credits.............................. $ 4,292 1998-2002
</TABLE>

The German net operating losses do not produce a deferred tax asset on a
consolidated basis due to the treatment of the German Operating Company as a
partnership combined with the impact of foreign tax credits.

The Company and its subsidiaries paid net income taxes of $8,008, $7,625
and $18,495 in 1995, 1996 and 1997, respectively.

F-16
<PAGE> 83
SAUER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(10) NOTES PAYABLE AND LONG-TERM DEBT:

Long-term debt consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Company's Revolving Credit Agreement, due August, 2001... $15,000 $15,000
U.S. Operating Company's Revolving Credit Facility, due
March, 2002............................................ 28,000 24,000
U.S. Operating Company's Senior Notes due through
December, 2007......................................... -- 25,000
U.S. Operating Company's Industrial Development Revenue
Bonds, due May, 2026................................... 9,000 9,000
European and other borrowings............................ 14,953 11,183
------- -------
Total debt..................................... 66,953 84,183
Less scheduled current maturities........................ (1,932) (2,715)
------- -------
Total long-term debt........................... $65,021 $81,468
======= =======
</TABLE>

The Company's Revolving Credit Agreement ("Agreement") allows the Company
to borrow up to $15,000 at an interest rate based on the London interbank
offered rate ("LIBOR"). At December 31, 1996 and 1997, the interest rate on
outstanding borrowings under the Agreement was 7.0% and 7.05%, respectively.

The Agreement requires the maintenance of certain financial results
including maintaining minimum levels of net worth and cash flow and contains
limitations on the payment of cash dividends. At December 31, 1997 the Company
was in compliance with these requirements and $18,100 of dividends could be paid
by the Company.

The U.S. Operating Company's Revolving Credit Facility, dated November 6,
1997, permits the U.S. Operating Company to choose between two interest rate
options and to specify what portion of the loan is covered by a specific
interest rate option and the applicable funding period to which the interest
rate option is to apply. The interest rate options are based on the bank's prime
lending rate and LIBOR. The U.S. Operating Company's Revolving Credit Facility
permits borrowings up to $45,000. At December 31, 1996 and 1997, the weighted
average interest rate on outstanding borrowings was approximately 6.6% and 6.73%
respectively.

The U.S. Operating Company's Revolving Credit Facility contains certain
restrictions and requires the U.S. Operating Company to maintain certain
financial ratios, including limitations on the payment of cash dividends and
maintaining profit before interest and taxes at least 2.5 times interest
expense. Additionally, the U.S. Operating Company's revolving credit facility
requires the maintenance of net worth (as defined). The U.S. Operating Company
was in compliance with the requirements at December 31, 1997 and restricted net
worth was $56,307.

On May 1, 1996, the U.S. Operating Company issued $9,000 of Industrial
Development Revenue Bonds ("Bonds"). The Bonds are at variable interest rates.
At December 31, 1996 and 1997, the interest rate on the bonds was 5.1% and 4.7%,
respectively. The Bonds are secured by a bank letter of credit. The bonds
contain certain covenants and restrictions similar to those included in the U.S.
Operating Company's Revolving Credit Facility. At December 31, 1997, the U.S.
Operating Company was in compliance with these requirements.

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

F-17
<PAGE> 84
SAUER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Payments required on long-term debt outstanding as of December 31, 1997,
during the years ending 1998 through 2002 and for years thereafter, are $2,715,
$1,278, $1,206, $18,488, $27,000 and $33,496, respectively.

The Company from time to time employs off-balance sheet financial
instruments to reduce its exposure to fluctuations in interest rates. These
instruments include interest rate caps and swaps. The Company designates
interest rate swaps as hedges of LIBOR-based bank debt, and accrues as interest
expense the differential to be paid or received under the agreements as rates
change over the lives of the contracts.

The Company continually monitors its positions with, and the credit quality
of, the financial institutions which are counterparties to its off-balance sheet
financial instruments and does not expect non-performance by the counterparties.

At December 31, 1996, the Company had $20,000 (notional amount) of interest
rate contracts outstanding. At December 31, 1996, the carrying value was $0, and
the estimated fair value was approximately $108. There were no interest rate
contracts outstanding as of December 31, 1997. The fair market value is
calculated by an independent party and is the amount that would be received if
the contract was terminated.

The Company also maintains revolving credit facilities, notes payable and
bankers' acceptances for its European and other operations. The German Operating
Company's credit agreement contains restrictions similar to those in the U.S.
Operating Company's agreements. The German Operating Company was in compliance
with the requirements at December 31, 1997 and restricted net worth was $10,915.
At December 31, 1997, accounts receivable, inventories, property, plant and
machinery and equipment in the amount of $27,688 were pledged as collateral
under these European and other operations credit facilities.

The weighted average interest rates on short-term borrowings at year-end
were 7.5% in 1995, 6.6% in 1996 and 6.8% in 1997.

The status of lines of credit as of December 31, 1996, and 1997, is
summarized below:

<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Lines of credit
Used................................... $42,283 $50,696
Unused................................. 51,501 51,975
</TABLE>

Interest paid was $6,707, $6,826 and $8,107 for 1995, 1996 and 1997,
respectively.

The fair market value of long-term debt at December 31, 1996 and 1997
approximates the amounts recorded in the balance sheet based on information
available to the Company with respect to interest rates and terms for similar
financial instruments.

(11) STOCKHOLDERS' EQUITY:

On May 17, 1995 the Company sold 68 newly issued shares to a group of
management. The net proceeds of $3,400 were used to reduce borrowings. On May
30, 1995 the Company purchased 54 of its shares from an existing shareholder for
$2,700.

(12) COMMITMENTS AND CONTINGENCIES:

The Company leases certain facilities and equipment under operating leases,
many of which contain renewal options. Total rental expense on all operating
leases during 1995, 1996 and 1997 was $4,855, $5,484 and $5,835, respectively.

F-18
<PAGE> 85
SAUER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Minimum future rental commitments under all non-cancelable leases as of
December 31, 1997, are as follows:

<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1998............................................... $ 5,365
1999............................................... 4,608
2000............................................... 4,322
2001............................................... 4,164
2002............................................... 3,900
2003 and after..................................... 10,745
-------
$33,104
=======
</TABLE>

The Company is involved in certain legal proceedings in the ordinary course
of its business. Management does not believe that the outcome of such
proceedings will have a material adverse effect upon the Company's financial
position or results of operations.

(13) QUARTERLY FINANCIAL DATA (UNAUDITED):

<TABLE>
<CAPTION>
QUARTER
--------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1996 --
Net sales................. $133,981 $125,064 $ 99,093 $109,428 $467,566
Gross profit.............. 35,032 30,873 23,032 26,585 115,522
Net income................ $ 6,077 $ 6,258 $ 3,257 $ 4,054 $ 19,646
Basic and diluted net
income per common
share --............... $ 3,136 $ 3,229 $ 1,681 $ 2,091 $ 10,137
1997 --
Net sales................. $135,860 $146,273 $118,906 $134,134 $535,173
Gross profit.............. 34,950 39,573 30,453 27,852 132,828
Net income................ $ 7,788 $ 10,020 $ 5,540 $ 4,526 $ 27,874
Basic and diluted net
income per common
share --............... $ 4,018 $ 5,170 $ 2,859 $ 2,336 $ 14,383
</TABLE>

F-19
<PAGE> 86
SAUER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(14) SEGMENT AND GEOGRAPHIC INFORMATION:

The Company has two reportable segments defined by geographic region due to
the difference in economic characteristics in which these segments operate. The
activities of each reportable segment consists of the design, manufacture and
sale of hydraulic systems and other related components.

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates individual
segment performance based on net income. Intersegment sales are made at
established transfer prices. The following table presents the significant items
by segment:

<TABLE>
<CAPTION>
NORTH AMERICA EUROPE ALL OTHER ELIMINATIONS TOTAL
------------- -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
1995
Trade sales............. $247,380 $199,394 $ -- $ -- $446,774
Intersegment sales...... 30,588 21,640 -- (52,228)(1) --
Interest income......... 747 341 112 (925)(2) 275
Interest expense........ 1,864 5,664 1,431 (925)(2) 8,034
Depreciation and
amortization......... 10,846 9,272 456 -- 20,574
Net income (loss)....... 17,238 15,057 (1,698) (3,355)(3) 27,242
Total assets............ 144,718 181,595 129,632 (137,321)(4) 318,624
Capital expenditures.... 26,504 19,185 -- -- 45,689

1996
Trade sales............. $272,780 $194,627 $ 159 $ -- $467,566
Intersegment sales...... 25,343 28,344 -- (53,687)(1) --
Interest income......... 1,377 212 411 (1,436)(2) 564
Interest expense........ 2,760 4,705 1,335 (1,436)(2) 7,364
Depreciation and
amortization......... 13,358 11,636 479 -- 25,473
Net income (loss)....... 18,471 7,291 (3,094) (3,022)(3) 19,646
Total assets............ 173,325 187,398 133,287 (142,740)(4) 351,270
Capital expenditures.... 24,556 31,550 178 -- 56,284

1997
Trade sales............. $332,974 $201,130 $ 1,069 $ -- $535,173
Intersegment sales...... 36,557 32,424 582 (69,563)(1) --
Interest income......... 1,441 518 228 (1,489)(2) 698
Interest expense........ 3,692 5,602 1,074 (1,489)(2) 8,879
Depreciation and
amortization......... 13,834 11,788 771 -- 26,393
Net income (loss)....... 26,873 6,887 (1,500) (4,386)(3) 27,874
Total assets............ 202,335 203,004 159,223 (155,188)(4) 409,374
Capital expenditures.... 41,781 24,851 118 -- 66,750
</TABLE>

Reconciliations:

(1) Elimination of intersegment sales.

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

F-20
<PAGE> 87
SAUER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3) Net income eliminations:

<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Minority interest in German Operating
Company............................... $ (2,954) $ (2,707) $ (4,001)
Intersegment profit on intersegment
sales................................. (401) (315) (385)
--------- --------- ---------
Total net income eliminations........... $ (3,355) $ (3,022) $ (4,386)
========= ========= =========
</TABLE>

(4) Total assets eliminations:

<TABLE>
<S> <C> <C> <C>
Investment in subsidiaries.............. $(121,873) $(127,415) $(137,095)
Intersegment receivables................ (16,058) (13,783) (16,230)
Intersegment profit in inventory........ 610 (1,542) (1,863)
--------- --------- ---------
Total assets eliminations............... $(137,321) $(142,740) $(155,188)
========= ========= =========
</TABLE>

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

<TABLE>
<CAPTION>
NET SALES
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Hydrostatic transmissions.................. $339,945 $350,847 $408,802
Gear pumps and motors...................... 63,094 64,218 64,414
Electrohydraulics and others............... 43,735 52,501 61,957
-------- -------- --------
Total............................ $446,774 $467,566 $535,173
======== ======== ========
</TABLE>

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

<TABLE>
<CAPTION>
LONG-LIVED
NET SALES(1) ASSETS(2)
-------------------------------- --------------------
1995 1996 1997 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
United States........ $227,264 $247,339 $272,783 $ 75,974 $106,120
Germany.............. 48,294 45,909 49,931 42,368 41,206
United Kingdom....... 41,043 39,428 39,050 18,577 19,400
Other countries...... 130,173 134,890 173,409 32,940 44,067
-------- -------- -------- -------- --------
Total...... $446,774 $467,566 $535,173 $169,859 $210,793
======== ======== ======== ======== ========
</TABLE>

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

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

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

F-21
<PAGE> 88
SAUER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(15) SAUER INC. (PARENT ONLY) FINANCIAL STATEMENTS:

The condensed financial statements of Sauer Inc. (the parent company) are
presented below:

SAUER INC. (PARENT ONLY)

CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997

<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets --
Cash................................................. $ 546 $ 19
Other current assets................................. -- 2,116
-------- --------
Total current assets......................... 546 2,135
Receivables from subsidiaries.......................... 3,896 4,669
Intangible assets, net................................. 812 391
Equity investment in subsidiaries*..................... 94,414 95,368
Other.................................................. 619 4,479
-------- --------
$100,287 $107,042
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities.................................... $ 6,212 $ 1,913
Long-term debt......................................... 15,000 15,000
Payables to subsidiaries............................... 3,145 3,023
Other long term liabilities............................ -- 8,361
-------- --------
Total liabilities............................ 24,357 28,297
-------- --------
Stockholders' equity --
Common stock, par value $5,000 per share, authorized
3,000 in 1996 and 1997; issued 1,992 and
outstanding 1,938 shares in 1996 and 1997......... 9,960 9,960
Additional paid-in capital........................... 72,156 73,081
Cumulative translation adjustment.................... 5,029 9
Retained earnings (deficit).......................... (8,515) (1,605)
Common stock in treasury (at cost), 54 shares in 1996
and 1997.......................................... (2,700) (2,700)
-------- --------
Total stockholders' equity................... 75,930 78,745
-------- --------
$100,287 $107,042
======== ========
</TABLE>

- ---------------
* Equity investment in subsidiaries, net, reported in the above condensed
balance sheet as of December 31, 1997, includes $59,254 and $21,905 of net
worth related to the U.S. and German Operating Companies, respectively. The
U.S. Operating Company is subject to financial covenants related to its
Revolving Credit Facility that, among other things, require that the U.S.
Operating Company maintain net worth (as defined) of not less than the sum of
$46,800, plus 35% of the U.S. Operating Company's quarterly net income, if
positive, for each fiscal quarter ending on or after March 31, 1997. At
December 31, 1997, restricted net worth was $56,307. The German Operating
Company is subject to similar financial covenants that require the German
Operating Company to maintain net worth of not less than 15% of total assets.
At December 31, 1997, restricted net worth was $10,915.

F-22
<PAGE> 89
SAUER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SAUER INC. (PARENT ONLY)

CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Equity earnings of subsidiaries....................... $27,424 $17,738 $29,312
Expenses, net --
Selling, general and administrative................. 4,988 3,298 5,921
Interest expense.................................... 1,319 927 735
Other expense, net.................................. (108) 389 (31)
------- ------- -------
Expenses, net.................................... 6,199 4,614 6,625
------- ------- -------
Income from operations before income taxes....... 21,225 13,124 22,687
Benefit for income taxes.............................. 6,017 6,522 5,187
------- ------- -------
Net income....................................... $27,242 $19,646 $27,874
======= ======= =======
Basic and diluted net income per common share......... $14,078 $10,137 $14,383
======= ======= =======
Basic and diluted weighted average common shares
outstanding......................................... 1,935 1,938 1,938
======= ======= =======
</TABLE>

F-23
<PAGE> 90
SAUER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SAUER INC. (PARENT ONLY)

CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities --
Net income....................................... $ 27,242 $ 19,646 $ 27,874
Adjustments to reconcile net income to net cash
provided by operating activities --
Equity earnings of subsidiaries............... (27,424) (17,738) (29,312)
Dividends received from subsidiaries.......... 14,805 16,200 21,879
Depreciation and amortization................. 456 422 421
Change in working capital..................... 3,990 (3,522) (6,415)
Other......................................... (3,707) (272) 3,353
-------- -------- --------
Net cash provided by operating activities... 15,362 14,736 17,800
-------- -------- --------
Cash flows used in investing activities --
Contributions to subsidiaries.................... (2,091) (4,442) (9,680)
-------- -------- --------
Cash flows from financing activities --
Repayments of long-term debt..................... -- (5,000) --
Net financing from (to) subsidiaries............. (6,212) 2,982 (895)
Sale of common stock............................. 3,400 -- --
Purchase of common stock......................... (2,700) -- --
Cash dividends................................... (7,738) (7,752) (7,752)
-------- -------- --------
Net cash used in financing activities....... (13,250) (9,770) (8,647)
-------- -------- --------
Cash --
Net increase (decrease) during the year.......... 21 524 (527)
Beginning balance................................ 1 22 546
-------- -------- --------
Ending balance................................... $ 22 $ 546 $ 19
======== ======== ========
</TABLE>

(16) SUBSEQUENT EVENTS:

On , 1998 Sauer Hydraulik sold property, plant and equipment, at
fair market value, to the German Holding Company, which was previously leased,
in exchange for a note payable (the "Note"). This transaction has been accounted
for as a transaction by entities under common control. As a result, the
property, plant and equipment, mortgage and its related operating costs have
been reflected retroactively in the Company's financial statements. Differences
between building operating costs and mortgage payments and amounts paid under
the previous lease agreement are reflected in the financial statements as
capital contributions from or cash dividends paid to Sauer Hydraulik. The Note
has been reflected in the December 31, 1997 financial statements as a dividend
payable to Sauer Hydraulik.

F-24
<PAGE> 91

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE SUCH DATE.
------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 1
Risk Factors............................ 8
The Combined Offering................... 12
Use of Proceeds......................... 13
Dilution................................ 13
Dividend Policy......................... 14
Capitalization.......................... 15
Shares Eligible for Future Sale......... 16
Selected Consolidated Financial Data.... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 19
Business................................ 25
Management.............................. 40
Relationship with Principal
Stockholder........................... 46
Principal and Selling Stockholders...... 49
Description of Capital Stock............ 50
Certain United States Federal Tax
Consequences for Non-U.S. Holders..... 55
Underwriting............................ 58
Notice to Canadian Residents............ 60
Legal Opinions.......................... 61
Experts................................. 61
Available Information................... 61
Index to Consolidated Financial
Statements............................ F-1
</TABLE>

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

UNTIL [ ], 1998 (25 DAYS AFTER THE DATE OF THE COMBINED
OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

======================================================
SAUER INC.

[ ] Shares
Common Stock

PROSPECTUS
CREDIT SUISSE FIRST BOSTON
SALOMON SMITH BARNEY
DEUTSCHE MORGAN GRENFELL
- ------------------------------------------------------
<PAGE> 92

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the various expenses payable in connection
with the offering of the shares being registered hereby, other than underwriting
discounts and commissions. All the amounts shown are estimates, except the
Securities and Exchange Commission registration fee and the NASD filing fee. All
of such expenses are being borne by the Company.

<TABLE>
<S> <C>
SEC registration fee........................................ $
NASD filing fee.............................................
NYSE listing fee............................................
FSE listing fee.............................................
Accounting fees and expenses................................
Legal fees and expenses.....................................
Blue Sky fees and expenses..................................
Printing and engraving expenses.............................
Registrar and transfer agent's fees.........................
Miscellaneous fees and expenses.............................
--------
Total............................................. $
========
</TABLE>

The Selling Stockholders are not paying any portion of such expenses.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL")
permits a provision in the certificate of incorporation of each corporation
organized thereunder, eliminating or limiting, with certain exceptions, the
personal liability of a director to the corporation or its stockholders for
monetary damages for certain breaches of fiduciary duty as a director. The
Certificate of Incorporation of the Company eliminates the personal liability of
directors to the fullest extent permitted by Delaware law.

Section 145 of the DGCL ("Section 145"), in summary, empowers a Delaware
corporation, within certain limitations, to indemnify its officers, directors,
employees and agents against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement, actually and reasonably incurred by them
in connection with any suit or proceeding other than by or on behalf of the
corporation, if they acted in good faith and in a manner reasonably believed to
be in or not opposed to the best interest of the corporation, and, with respect
to a criminal action or proceeding, had no reasonable cause to believe their
conduct was unlawful.

With respect to actions by or on behalf of the corporation, Section 145
permits a corporation to indemnify its officers, directors, employees and agents
against expenses (including attorneys' fees) actually and reasonably incurred in
connection with the defense or settlement of such action or suit, provided such
person meets the standard of conduct described in the preceding paragraph,
except that no indemnification is permitted in respect of any claim where such
person has been found liable to the corporation, unless the Court of Chancery or
the court in which such action or suit was brought approves such indemnification
and determines that such person is fairly and reasonably entitled to be
indemnified.

Article Ninth of the Restated Certificate of Incorporation of the Company
provides for the indemnification of officers and directors and certain other
parties of the Company to the fullest extent permitted by law. In addition, the
Company has entered into Indemnification Agreements with its directors and
certain officers pursuant to which the Company generally is obligated to
indemnify its directors and officers to the maximum extent permitted by law. The
Company also maintains directors and officers liability insurance.

The Underwriting Agreement provides for indemnification by the Underwriters
of the Company, the Selling Stockholders, the Company's directors and officers,
and persons who control the Company within the meaning of Section 15 of the
Securities Act for certain liabilities.

II-1
<PAGE> 93

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Within the past year the U.S. Operating Company issued securities which
were not registered under the Securities Act of 1933, as amended (the
"Securities Act") as follows:

On December 15, 1997, Sauer-Sundstrand Company issued and sold $25,000,000
aggregate principal amount of its 6.68% Senior Notes due December 15, 2007. The
Notes were sold at 100% of the principal amount to Massachusetts Mutual Life
Insurance Company and CM Life Insurance Company, institutions which are
qualified institutional buyers as defined in Rule 144A under the Securities Act.
Exemption from registration for the issuance of the Notes was claimed under Rule
144A of the Securities Act.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1(a)+ Form of Underwriting Agreement among the Company, the
Selling Stockholders and the U.S. Underwriters............
1.1(b)+ Form of Subscription Agreement among the Company, the
Selling Stockholders, and the Managers....................
3.1* Restated Certificate of Incorporation of the Company........
3.2* Restated By-laws of the Company.............................
4.1+ Form of Certificate of the Company's Common Stock, $5,000
par value.................................................
5.1+ Opinion of Shearman & Sterling re legality..................
5.2+ Opinion of Spencer Fane Britt & Browne re legality..........
10.1(a)+ German Limited Partnership Agreement........................
10.1(b)+ Registration Rights Agreement...............................
10.1(c)+ Sale Agreement For Neumunster, Germany Facility.............
10.1(d)+ Lease Agreement For Neumunster, Germany Facility............
10.1(e)+ Lease Agreement For Dubnica, Slovakia Facility..............
10.1(f)+ Lease Agreement For Swindon, England Facility...............
10.1(g)+ Lease Agreement For Minneapolis, Minnesota Facility.........
10.1(h)+ Lease Agreement For Newtown, Pennsylvania Facility..........
10.1(i)+ Lease Agreement For Shanghai/Pudong China Facility..........
10.1(j)+ Employment Contract With Klaus Murmann......................
10.1(k)+ Employment Contract With Tonio Barlage......................
10.1(l)+ Employment Contract With Thomas Kittel......................
10.1(m)+ Sauer Inc. Phantom Share Plan...............................
10.1(n)+ Sauer Inc. Bonus Plan.......................................
10.1(o)+ Sauer Inc. Management Incentive Plan........................
10.1(p)+ Sauer-Sundstrand Employees' Retirement Plan.................
10.1(q)+ Sauer-Sundstrand Company Supplemental Retirement Benefit
Plan For Certain Key Executives...........................
10.1(r)+ Sauer-Sundstrand Company Supplemental Retirement Benefit
Plan For Certain Key Executives Previously Employed By The
Sundstrand Corporation....................................
10.1(s)+ Sauer-Sundstrand Employees' Savings & Retirement Plan.......
10.1(t)+ Retirement Benefits Agreement for Klaus Murmann.............
</TABLE>

II-2
<PAGE> 94

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.1(u)+ Retirement Benefits Agreement for Tonio Barlage.............
10.1(v)+ European Employees' Pension Plan............................
21.1+ Subsidiaries of the Company.................................
23.1* Consent of Arthur Andersen LLP..............................
23.2(a)+ Consent of Shearman & Sterling (included in Exhibit 5.1)....
23.2(b)+ Consent of Spencer Fane Britt & Browne (included in Exhibit
5.2)......................................................
24.1 Power of Attorney (included on page II-4)...................
27.1+ Financial Data Schedule.....................................
</TABLE>

- ---------------
* Filed herewith

+ To be filed by amendment

(b) Financial Statement Schedule

The following financial statement schedule is filed as part of this
Registration Statement:

Report of Independent Public Accountants with respect to Financial
Statement Schedule

Schedule II: Valuation and Qualifying Accounts

All other schedules except those listed are omitted because they are either
not required, not applicable or the required information is included in the
financial statements or notes thereto.

ITEM 17. UNDERTAKINGS

The Company hereby undertakes to provide to the underwriters at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

The Company hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-3
<PAGE> 95

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Ames, State of Iowa, on
the 20th day of March, 1998.

SAUER INC.

By: /s/ KENNETH D. MCCUSKEY
------------------------------------
Name: Kenneth D. McCuskey
Title: Treasurer-Secretary

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Tonio P. Barlage and Kenneth D. McCuskey
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities (until revoked in writing), to sign any and all
amendments, including post-effective amendments, and supplements to this
Registration Statement, and any registration statement relating to the same
offering as this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) and the Securities Act of 1933, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, or his or their
substitute may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated below, on this 20th day of March, 1998.

<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>

/s/ KLAUS H. MURMANN Chairman and Chief Executive Officer
- -----------------------------------------------------
Klaus H. Murmann

/s/ TONIO P. BARLAGE President and Chief Operating Officer
- -----------------------------------------------------
Tonio P. Barlage

/s/ DAVID L. PFEIFLE Executive Vice President
- -----------------------------------------------------
David L. Pfeifle

/s/ KENNETH D. MCCUSKEY Treasurer-Secretary
- -----------------------------------------------------
Kenneth D. McCuskey

/s/ NICOLA KEIM Director
- -----------------------------------------------------
Nicola Keim

/s/ JOHANNES F. KIRCHHOFF Director
- -----------------------------------------------------
Johannes F. Kirchhoff

/s/ SVEN MURMANN Director
- -----------------------------------------------------
Sven Murmann
</TABLE>

II-4
<PAGE> 96

After the transaction discussed in Note 16 to the consolidated financial
statements of SAUER INC. is effected, we expect to be in a position to render
the following audit report.

/s/ ARTHUR ANDERSEN, LLP

Chicago, Illinois
February 27, 1998

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
WITH RESPECT TO FINANCIAL STATEMENT SCHEDULE

To the Shareholders of SAUER INC. AND SUBSIDIARIES:

We have audited in accordance with generally accepted auditing standards,
the financial statements of SAUER INC. AND SUBSIDIARIES included in this
registration statement and have issued our report thereon dated ,
1998. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index in Item
16(b) is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. The schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

Chicago, Illinois
<PAGE> 97

SCHEDULE II
SAUER INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
CHARGED
BALANCE AT TO BALANCE AT
BEGINNING COSTS AND RECEIVABLES END OF
OF YEAR EXPENSES WRITTEN OFF YEAR
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
For the year ended December 31, 1995:
Allowance for Doubtful Accounts.............. $2,685 $ 924 $(203) $3,406
For the year ended December 31, 1996:
Allowance for Doubtful Accounts.............. $3,406 $ (429) $(287) $2,690
For the year ended December 31, 1997:
Allowance for Doubtful Accounts.............. $2,690 $1,110 $(605) $3,195
</TABLE>
<PAGE> 98

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<C> <S> <C>
1.1(a)+ Form of Underwriting Agreement among the Company, the
Selling Stockholders and the U.S. Underwriters............
1.1(b)+ Form of Subscription Agreement among the Company, the
Selling Stockholders and the Managers.....................
3.1* Restated Certificate of Incorporation of the Company........
3.2* Restated By-laws of the Company.............................
4.1+ Form of Certificate of the Company's Common Stock, $5,000
par value.................................................
5.1+ Opinion of Shearman & Sterling re legality..................
5.2+ Opinion of Spencer Fane Britt & Browne re legality..........
10.1(a)+ German Limited Partnership Agreement........................
10.1(b)+ Registration Rights Agreement...............................
10.1(c)+ Sale Agreement For Neumunster, Germany Facility.............
10.1(d)+ Lease Agreement For Neumunster, Germany Facility............
10.1(e)+ Lease Agreement For Dubnica, Slovakia Facility..............
10.1(f)+ Lease Agreement For Swindon, England Facility...............
10.1(g)+ Lease Agreement For Minneapolis, Minnesota Facility.........
10.1(h)+ Lease Agreement For Newtown, Pennsylvania Facility..........
10.1(i)+ Lease Agreement For Shanghai/Pudong China Facility..........
10.1(j)+ Employment Contract With Klaus Murmann......................
10.1(k)+ Employment Contract With Tonio Barlage......................
10.1(l)+ Employment Contract With Thomas Kittel......................
10.1(m)+ Sauer Inc. Phantom Share Plan...............................
10.1(n)+ Sauer Inc. Bonus Plan.......................................
10.1(o)+ Sauer Inc. Management Incentive Plan........................
10.1(p)+ Sauer-Sundstrand Employees' Retirement Plan.................
10.1(q)+ Sauer-Sundstrand Company Supplemental Retirement Benefit
Plan For Certain Key Executives...........................
10.1(r)+ Sauer-Sundstrand Company Supplemental Retirement Benefit
Plan For Certain Key Executives Previously Employed By The
Sundstrand Corporation....................................
10.1(s)+ Sauer-Sundstrand Employees' Savings & Retirement Plan.......
10.1(t)+ Retirement Benefits Agreement for Klaus Murmann.............
10.1(u)+ Retirement Benefits Agreement for Tonio Barlage.............
10.1(v)+ European Employees' Pension Plan............................
21.1+ Subsidiaries of the Company.................................
23.1* Consent of Arthur Andersen LLP..............................
23.2(a)+ Consent of Shearman & Sterling (included in Exhibit 5.1)....
23.2(b)+ Consent of Spencer Fane Britt & Browne (included in Exhibit
5.2)......................................................
24.1 Power of Attorney (included on page II-4)...................
</TABLE>
<PAGE> 99

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<C> <S> <C>
27.1+ Financial Data Schedule.....................................
</TABLE>

- ---------------
* Filed herewith

+ To be filed by amendment

<PAGE> 1

Exhibit 3.1

RESTATED

CERTIFICATE OF INCORPORATION

SAUER INC.

SAUER INC., a corporation organized and existing under the laws of the
State of Delaware (the "Corporation"), hereby certifies as follows:

1. The present name of the corporation is Sauer Inc. Sauer Inc. was
originally incorporated under the name Sundstrand Venture Company, and the
original Certificate of Incorporation was filed with the Secretary of State of
the State of Delaware on September 25, 1986.

2. This Restated Certificate of Incorporation amends and restates the
provisions of the Certificate of Incorporation of this Corporation, and was duly
adopted in accordance with Sections 245 and 228 of the General Corporation Law
of the State of Delaware by the directors and all of the stockholders of the
Corporation by written consent.

3. The text of the Certificate of Incorporation is amended and restated to
read in its entirety as set forth below:

First: The name of the corporation is Sauer Inc. (hereinafter, the
"Corporation").

Second: Its registered office in the State of Delaware is to be located at
1209 Orange Street, in the City of Wilmington, County of New Castle, Delaware
19801. The name of its registered agent at such address is The Corporation Trust
Company.

Third: The nature of the business or purposes to be conducted or promoted
is to engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.

Fourth: The total number of shares of all classes of stock which the
Corporation shall have authority to issue shall be 3,300, of which 3,000 shares
are to be Common Stock, having a par value of $5,000 per share, and 300 shares
are to be Preferred Stock, having a par value of $.01 per share.

Authority is hereby expressly granted to the Board of Directors from time
to time to issue Preferred Stock, for such consideration and on such terms as it
may determine, as Preferred Stock of one or more series and in connection with
the creation of any such series to fix by the resolution or resolutions
providing for the issue of shares thereof the designation, powers and relative
participating, optional, or other special rights of such series, and the
qualifications, limitations, or restrictions thereof. Such authority of the
Board of Directors with respect to each such series shall include, but not be
limited to, the determination of the following:

<PAGE> 2

(a) the distinctive designation of, and the number of shares comprising,
such series, which number may be (except where otherwise provided by the Board
of Directors in creating such series) increased or decreased (but not below the
number of shares thereof then outstanding) from time to time by like action of
the Board of Directors;

(b) the dividend rate or amount for such series, the conditions and dates
upon which such dividends shall be payable, the relation which such dividends
bear to the dividends payable on any other class or classes or any other series
of any class or classes of stock, and whether such dividends shall be
cumulative, and if so, from which date or dates for such series;

(c) whether or not the shares of such series shall be subject to
redemption by the Corporation and the times, prices, and other terms and
conditions of such redemption;

(d) whether or not the shares of such series shall be subject to the
operation of a sinking fund or purchase fund to be applied to the redemption or
purchase of such shares and if such a fund be established, the amount thereof
and the terms and provisions relative to the application thereof;

(e) whether or not the shares of such series shall be convertible into or
exchangeable for shares of any other class or classes, or of any other series of
any class or classes, of stock of the Corporation and, if provision be made for
conversion or exchange, the times, prices, rates, adjustments, and other terms
and conditions of such conversion or exchange;

(f) whether or not the shares of such series shall have voting rights, in
addition to the voting rights provided by law, and if they are to have such
additional voting rights, the extent thereof;

(g) the rights of the shares of such series in the event of any
liquidation, dissolution, or winding up of the Corporation or upon any
distribution of its assets; and

(h) any other powers, preferences, and relative, participating, optional,
or other special rights of the shares of such series, and the qualifications,
limitations, or restrictions thereof, to the full extent now or hereafter
permitted by law and not inconsistent with the provisions hereof.

Fifth: The number of directors shall initially be eight (8) and,
thereafter, shall be fixed from time to time by resolution adopted by the
affirmative vote of a majority of the directors then in office; provided,
however, that the number of directors shall not be reduced so as to shorten the
term of any director at the time in office. The Board of Directors shall be
divided into three classes, as nearly equal in number as the then total number
of directors constituting the entire Board permits. The term of the Class I
directors shall terminate on the date of the 1999 annual meeting of
stockholders; the term of the Class II directors shall terminate on the date of
the 2000 annual meeting of stockholders; and the term of the Class III directors
shall terminate on the date of the 2001 annual meeting of stockholders. At each
annual meeting of stockholders beginning in 1999, successors to the class of
directors whose term expires at that annual meeting shall be elected to hold
office for a term expiring at the third succeeding annual meeting of the
stockholders. If the number of directors is changed, any

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<PAGE> 3

increase or decrease shall be apportioned among the classes so as to maintain
the number of directors in each class as nearly equal as possible, but in no
event will a decrease in the number of directors shorten the term of any
incumbent director. A director shall hold office until the annual meeting for
the year in which his or her term expires and until his or her successor shall
be elected and shall qualify, subject. however, to prior death, resignation,
retirement, disqualification or removal from office. Any vacancy on the Board of
Directors resulting from an increase in the number of directors may be filled
by the Board of Directors, acting by a majority of the directors then in
office, provided that a quorum is present, and any other vacancy on the Board of
Directors may be filled by the Board of Directors, acting by a majority of the
directors then in office, even if less than a quorum, or by a sole remaining
director. Any director elected to fill a vacancy resulting from an increase in
such class shall hold office for a term that shall coincide with the remaining
term of that class. Any director elected to fill a vacancy not resulting from
an increase in the number of directors shall have the same remaining term as
that of his or her predecessor.

Notwithstanding any other provisions of this Certificate of Incorporation
or the Bylaws of the Corporation, any director or the entire Board of Directors
of the Corporation may be removed at any time, but only for cause, by the
affirmative vote of the holders of not less than 80% of the outstanding shares
of capital stock of the Corporation entitled to vote generally in the election
of directors (considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose.

Sixth: The Board of Directors shall have power to make, and from time to
time alter, amend, or repeal the Bylaws of the Corporation; provided, however,
that (a) the stockholders shall have the paramount power to alter, amend and
repeal the Bylaws or adopt new Bylaws, exercisable by the affirmative vote of
the holders of not less than 80% of the outstanding shares of the capital stock
of the Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class), and (b) if and to the extent the
stockholders exercise such power, the Board of Directors shall not thereafter
suspend, alter, amend or repeal the Bylaws, or portions thereof, adopted by the
stockholders, unless, in adopting such Bylaws, or portions thereof, the
stockholders otherwise provide.

Seventh: A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (a) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) under the provisions of Section 174 of the Delaware
General Corporation Law and amendments thereto, or (d) for any transaction from
which the director derived an improper personal benefit. If the Delaware General
Corporation Law is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a director
of the Corporation shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended. No amendment,
repeal or adoption of any provision of this Certificate of Incorporation
inconsistent with this Article Seventh shall apply or have any effect on the
liability of

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<PAGE> 4

any director of the Corporation for or with respect to any acts or omissions of
such director occurring prior to such amendment, repeal, or adoption of any
inconsistent provision.

Eighth: The stockholders of the Corporation may not take action by
written consent in lieu of a meeting, but must take any such action at a duly
called annual or special meeting.

Ninth:

(a) Each person who was or is made a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative ("proceeding"), by reason of the fact
that he or she, or a person of whom he or she is the legal representative, is or
was a director or officer of the Corporation, or is, or was serving, at the
request of the Corporation as a director or officer of another corporation, or
of a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director or officer or in any other
capacity while serving as a director or officer, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by the Delaware
General Corporation Law, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment permits
the Corporation to provide broader indemnification rights than said laws
permitted the Corporation to provide prior to such amendment), against any and
all expense, liability loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid or to be paid in settlement and
amounts expended in seeking indemnification granted to such person under
applicable law, this Article Ninth or any agreement with the Corporation)
reasonably incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that, except as provided in paragraph (b) of
this Article Ninth, the Corporation shall indemnify any such person seeking
indemnity in connection with an action, suit or proceeding (or part thereof)
initiated by such person only if (a) such indemnification is expressly required
to be made by law, (b) the action, suit or proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation, (c) such
indemnification is provided by the Corporation, in its sole discretion, pursuant
to the powers vested in the Corporation under the Delaware General Corporation
Law, or (d) the action, suit or proceeding (or part thereof) is brought to
establish or enforce a right to indemnification under an indemnity agreement or
any other statute or law or otherwise as required under Section 145 of the
Delaware General Corporation Law. Such right shall be a contract right and shall
include the right to be paid by the Corporation expenses incurred in defending
any such proceeding in advance of its final disposition; provided, however,
that, unless the Delaware General Corporation Law then so prohibits, the
payment of such expenses incurred by a director or officer of the Corporation
in his or her capacity as a director or officer (and in any other capacity in
which service was or is tendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of such proceeding shall be made only upon delivery to
the Corporation of an undertaking, by or on behalf of such director of officer,
to repay any amounts so advanced if it should be determined

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<PAGE> 5

ultimately that such director or officer is not entitled to be indemnified under
this Article Ninth or otherwise.

(b) If a claim under paragraph (a) of this Article Ninth is not paid in
full by the Corporation within thirty (30) days after a written claim has been
received by the Corporation, the claimant may at any time thereafter bring
suit against the Corporation to recover the unpaid amount of the claim and, if
such suit is not frivolous or brought in bad faith, the claimant shall be
entitled to be paid also the expense of prosecuting such claim. The burden of
proving such claim shall be on the claimant. It shall be a defense to any such
action (other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the required
undertaking, if any, has been tendered to this Corporation) that the claimant
has not met the standards of conduct which make it permissible under the
Delaware General Corporation Law for the Corporation to indemnify the claimant
for the amount claimed. Neither the failure of the Corporation (including its
Board of Directors, independent legal counsel, or its stockholders) to have made
a determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel or its stockholders) that the claimant has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that claimant has not met the applicable standard of
conduct.

(c) The rights conferred on any person in paragraphs (a) and (b) of this
Article Ninth shall not be exclusive of any other right which such persons may
have or hereafter acquire under any statute, provision of this Certificate of
Incorporation, the Bylaws of the Corporation, agreement, vote of stockholders or
disinterested directors or otherwise.

(d) The Board of Directors is authorized to enter into a contract with any
director, officer, employee or agent of the Corporation, or any person serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
including employee benefit plans, providing for indemnification rights
equivalent to or, if the Board of Directors so determines, greater than, those
provided for in this Article Ninth.

(e) The Corporation may maintain insurance to the extent reasonably
available, at its expense, to protect itself and any such director, officer,
employee or agent of the Corporation or another corporation, partnership, joint
venture, trust or other enterprise against any such expense, liability or loss,
whether or not the Corporation would have the power to indemnify such person
against such expense, liability or loss under the Delaware General Corporation
Law.

(f) Any amendment, repeal or modification of any provision of this Article
Ninth by the stockholders or the directors of the Corporation shall not
adversely affect any right or protection of a director or officer of the
Corporation existing at the time of such amendment, repeal or modification.

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Tenth: Notwithstanding any other provision of this Certificate of
Incorporation or the Bylaws of the Corporation (and in addition to any other
vote that may be required by law, this Certificate of Incorporation, or the
Bylaws of the Corporation), the affirmative vote of the holders of not less than
80% of the outstanding shares of the capital stock of the Corporation entitled
to vote generally in the election of directors (considered for this purpose as
one class) shall be required to amend, alter, or repeal any provision of this
Article Tenth or Articles Fifth, Sixth, Seventh, Eighth, and Ninth of this
Certificate of Incorporation.

IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
executed on behalf of the Corporation this _____ day of March, 1998.

SAUER, INC.

By: ______________________________
Tonio P. Barlage, President

ATTEST: ________________________________
Kenneth D. McCuskey, Secretary

STATE OF ___________)
)ss.
COUNTY OF __________)

BE IT REMEMBERED that on this _____ day of March, 1998, personally came
before me, a Notary Public for the State of________, Tonio P. Barlage, to me
personally known to be the same person who executed the foregoing Certificate,
and acknowledged that he signed as his free act and deed the foregoing document
and declared that the statements therein contained are true to his best
knowledge and belief.

IN WITNESS WHEREOF, I have hereunto set my hand and seal the day and year
above written.

________________________________
Notary Public

My commission expires:

______________________

<PAGE> 1
Exhibit 3.2

RESTATED

BYLAWS

SAUER INC.

EFFECTIVE MARCH __, 1998

ARTICLE I

Offices

Section 1. The registered office shall be at 1209 Orange Street, in the
City of Wilmington, County of New Castle, State of Delaware.

Section 2. The corporation may also have offices at such other places both
within and without the State of Delaware, as the Board of Directors may from
time to time determine or the business of the corporation may require.

ARTICLE II

Meetings of Stockholders

Section 1. All meetings of the stockholders shall be held at such place
within or without the State of Delaware as may be designated from time to time
by the Board of Directors.

Section 2. Annual meetings of stockholders, commencing with the year
1990, shall be held on the third Tuesday in April if not a legal holiday, and if
a legal holiday, then on the next business day following, at 9:00 a.m., or at
such other date and time as shall be designated from time to time by the Board
of Directors and stated in the notice of the meeting, at which they shall elect
by a plurality vote the Board of Directors, and transact such other business as
may properly be brought before the meeting.

Section 3. Written notice of the annual meeting stating the place, date
and hour of the meeting shall be given to each stockholder entitled to vote at
such meeting not less than ten nor more than sixty days before the date of the
meeting.

Section 4. No business may be transacted at an annual meeting of
stockholders, other than business that is either (a) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board of
Directors (or any duly authorized committee thereof), (b) otherwise properly
brought before the annual meeting by or at the direction of the Board of
Directors (or any

<PAGE> 2

duly authorized committee thereof), or (c) otherwise properly brought before the
annual meeting by any stockholder of the Company (i) who is a stockholder of
record on the date of the giving of the notice provided for in this Section 4
and on the record date for the determination of stockholders entitled to vote at
such annual meeting and (ii) who complies with the notice procedure set forth in
this Section 4.

In addition to any other applicable requirements, for business to be properly
brought before an annual meeting by a stockholder, such stockholder must have
given timely notice thereof in proper written form to the Secretary of the
corporation. To be timely, a stockholder proposal to be presented at an annual
meeting shall be received at the corporation's principal executive offices not
less than 120 calendar days in advance of the date that the corporation's proxy
statement was released to stockholders in connection with the previous year's
annual meeting of stockholders, except that if no annual meeting was held in the
previous year or the date of the annual meeting has been changed by more than 30
calendar days from the date contemplated at the time of the previous year's
proxy statement, notice by the stockholder to be timely must be received not
later than the close of business on the tenth day following the day on which
such notice of the date of the meeting was mailed or such public disclosure was
made. To be in proper written form, a stockholder's notice to the Secretary
shall set forth as to each matter the stockholder proposes to bring before the
annual meeting (a) a brief description of the business desired to be brought
before the annual meeting, (b) the name and address, as they appear on the
corporation's books, of the stockholder proposing such business, (c) the class
and number of shares of the Corporation which are beneficially owned by the
stockholder, (d) any material interest of the stockholder in such business, and
(e) a representation that such stockholder intends to appear in person or by
proxy at the annual meeting to bring such business before the meeting.

No business shall be conducted at the annual meeting of shareholders except
business brought before the annual meeting in accordance with the procedures set
forth in this Section 4, provided, however, that, once business has been
properly brought before the annual meeting in accordance with such procedures,
nothing in this Section 4 shall be deemed to preclude discussion by any
stockholder of any such business. If the Chairman of a meeting determines that
business was not properly brought before the meeting in accordance with the
foregoing procedures, the Chairman shall declare to the meeting that the
business was not properly brought before the meeting and such business shall not
be transacted.

Section 5. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept

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at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.

Section 6. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the Certificate of
Incorporation, may only be called by the Chairman, by the President, or at the
request in writing of a majority of the Board of Directors. Such request shall
state the purpose or purposes of the proposed meeting.

Section 7. Written notice of a special meeting stating the place, date and
hour of the meeting and the purpose or purposes for which the meeting is called,
shall be given not less than ten nor more than sixty days before the date of the
meeting, to each stockholder entitled to vote at such meeting.

Section 8. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.

Section 9. The holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business, except as otherwise provided by statute or by the Certificate of
Incorporation. If, however, such quorum shall not be present or represented at
any meeting of the stockholders, the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.

Section 10. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the Certificate of Incorporation, a different vote is required in which case
such express provision shall govern and control the decision of such question.

Section 11. Unless otherwise provided in the Certificate of Incorporation,
each stockholder shall at every meeting of the stockholders be entitled to one
vote in person or by proxy for each share of the capital stock having voting
power held by such stockholder, but no proxy shall be voted on after three years
from its date, unless the proxy provides for a longer period.

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ARTICLE III

Board of Directors

Section 1. The property, business and affairs of the corporation shall be
controlled and managed by a Board of Directors. The number of directors to
constitute the Board of Directors shall be as set forth in the Certificate of
Incorporation.

Section 2. The business of the corporation shall be managed by its Board
of Directors, which may exercise all such powers of the corporation and do all
such lawful acts and things as are not by statute or by the Certificate of
Incorporation or by these bylaws directed or required to be exercised or done by
the stockholders.

Meetings of the Board of Directors

Section 3. The Board of Directors of the corporation may hold meetings,
both regular and special, either within or without the State of Delaware.

Section 4. The first meeting of each newly elected Board of Directors
shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.

Section 5. Regular meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be determined
by the Board.

Section 6. Special meetings of the Board may be called by the Chairman or
the President on two days' notice to each director, either personally or by
mail, telegram, telex, telecopy, or other form of facsimile transmission setting
forth the time, place and purpose of the meeting; special meetings shall be
called by the Chairman, President, or Secretary in like manner and on like
notice on the written request of two directors.

Section 7. At all meetings of the Board, a majority of directors shall
constitute a quorum for the transaction of business and the act of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the Board of Directors, except as may otherwise be specifically provided by
statute or by the Certificate of Incorporation. If a quorum shall not be present
at any meeting of the Board of Directors, the directors present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.

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Section 8. Unless otherwise restricted by the Certificate of
Incorporation, any action required or permitted to be taken at any meeting of
the Board of Directors or of any committee thereof may be taken without a
meeting, if all members of the Board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board or committee.

Section 9. Unless otherwise restricted by the Certificate of
Incorporation, members of the Board of Directors or of any committee thereof,
may participate in a meeting of the Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
by use of such equipment shall constitute presence in person at such meeting.

Committees of Directors

Section 10. The Board of Directors may, by resolution passed by a majority
of the whole Board, designate one or more committees, each committee to consist
of one or more of the directors of the corporation. The Board may designate one
or more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the Certificate of Incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution or the Certificate of Incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.

Section 11. Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.

Compensation of Directors

Section 12. Unless otherwise restricted by the Certificate of
Incorporation, the Board of Directors shall have the authority to fix the
compensation of directors. The directors may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors and may be paid a

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<PAGE> 6

fixed sum for attendance at each meeting of the Board of Directors and a stated
salary as a director. No such payment shall preclude any director from serving
the corporation in any other capacity and receiving compensation therefor.
Members of special or standing committees may be allowed like compensation for
attending committee meetings.

Nomination of Directors

Section 13. Subject to the rights of holders of any class or series of
Preferred Stock then outstanding, nominations for the election of Directors may
be made by the Board of Directors or a proxy committee appointed by the Board of
Directors or by any stockholder entitled to vote in the election of directors
generally. However, any stockholder entitled to vote in the election of
directors generally may nominate one or more persons for election as directors
at a meeting only if timely notice of such stockholder's intent to make such
nomination or nominations has been given in writing to the Secretary of the
corporation. To be timely, a stockholder nomination for a director to be elected
at an annual meeting shall be received at the corporation's principal executive
offices not less than 120 calendar days in advance of the date that the
corporation's proxy statement was released to stockholders in connection with
the previous year's annual meeting of stockholders, except that if no annual
meeting was held in the previous year or the date of the annual meeting has been
changed by more than 30 calendar days from the date contemplated at the time of
the previous year's proxy statement, or in the event of a nomination for
director to be elected at a special meeting, notice by the stockholders to be
timely must be received not later than the close of business on the tenth day
following the day on which such notice of the date of the special meeting was
mailed or such public disclosure was made. Each such notice shall set forth (a)
the name and address of the stockholder who intends to make the nomination and
of the person or persons to be nominated, (b) a representation that the
stockholder is a holder of record of stock of the corporation entitled to vote
for the election of directors on the date of such notice and intends to appear
in person or by proxy at the meeting to nominate the person or persons specified
in the notice, (c) a description of all arrangements or understandings between
the stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the stockholder, (d) such other information regarding each nominee
proposed by such stockholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission, had the nominee been nominated, or intended to be nominated, by the
Board of Directors, and (e) the consent of each nominee to serve as a director
of the corporation if so elected.

No person shall be eligible for election as a director of the Company unless
nominated in accordance with the procedures set forth in this Section 13. If the
Chairman of the meeting determines that a nomination was not made in accordance
with the foregoing procedures, the Chairman shall declare to the meeting that
the nomination was defective and such defective nomination shall be disregarded.

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ARTICLE IV

Notices

Section 1. Whenever, under the provisions of the statutes or of the
Certificate of Incorporation or of these bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given three days after the time when the same shall be deposited in the United
States mail. Notice to directors may also be given by telegram, telex, telecopy
or other form of facsimile transmission if not given later than two days before
the meeting of the directors or stockholders is to be held.

Section 2. Whenever any notice is required to be given under the
provisions of the statutes or of the Certificate of Incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.

ARTICLE V

Officers

Section 1. The officers of the corporation shall be chosen by the Board of
Directors and shall be a Chairman (if one shall be elected by the Board of
Directors), a President, a Vice President, a Secretary and a Treasurer. The
Board of Directors may also choose additional Vice Presidents, and one or more
Assistant Secretaries and Assistant Treasurers. Any number of offices may be
held by the same person, unless the Certificate of Incorporation or these
bylaws otherwise provide.

Section 2. The Board of Directors at its first meeting after each annual
meeting of stockholders shall choose a Chairman (if they so desire), a
President, one or more Vice Presidents, a Secretary and a Treasurer.

Section 3. The Board of Directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the Board.

Section 4. The salaries of all officers and agents of the corporation
shall be fixed by the Board of Directors. Any payments made to an officer of the
corporation as compensation, salary, commission, bonus, interest, or rent, or in
reimbursement of entertainment or travel expense incurred by him, which shall be
disallowed in whole or in part as a deductible expense of the corporation for
federal income tax purposes for the reason that it does not constitute an
ordinary and necessary business expense, shall be reimbursed by such officer to
the corporation to the full extent of such disallowance. The Board of Directors
shall enforce payment of each such amount disallowed. In

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lieu of payment by the officer, subject to the discretion of the Board of
Directors, proportionate amounts may be withheld from the officer's future
compensation payments until the amount owed to the corporation has been
recovered.

Section 5. The officers of the corporation shall hold office until their
successors are chosen and qualify. Any officer elected or appointed by the
Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
corporation shall be filled by the Board of Directors.

The Chairman

Section 6. The Chairman (if one shall be elected by the Board of
Directors) shall preside at all meetings of the shareholders and at all meetings
of the Board of Directors. He shall perform all the duties incident to the
office of Chairman and such other duties as the Board of Directors may from time
to time determine or as may be prescribed by these bylaws. He shall be the chief
executive officer and, in the absence of the President, the chief operating and
administrative officer and acting President of the corporation. The Chairman may
execute all bonds, deeds, mortgages, conveyances, contracts, and other
instruments, except in cases where the signing and execution thereof shall be
expressly delegated by the Board of Directors or these bylaws to some other
officer or agent of the corporation, or shall be required by law otherwise to be
signed or executed. He shall have the power to appoint, determine the duties and
fix the compensation of such agents and employees as in his judgment may be
necessary or proper for the transaction of the business of the corporation. The
Chairman may delegate any of his powers or duties to the President.

The President

Section 7. The President shall be the chief operating and administrative
officer of the corporation, shall have general supervision of the business of
the corporation, shall see that all orders and resolutions of the Board of
Directors are carried into effect and shall, in the absence of the Chairman
preside at all meetings of the shareholders and directors subject, however, to
the right of the directors to delegate any specific powers to any other officer
or officers of the corporation except such as may be by statute exclusively
conferred upon the President. The President may execute all bonds, deeds,
mortgages, conveyances, contracts and other instruments to the extent authorized
by the Chairman or the Board of Directors, except in cases where the signing and
execution thereof shall be expressly delegated by the Board of Directors or by
these bylaws to some other officer or agent of the corporation, or shall be
required by law otherwise to be signed or executed. To the extent authorized by
the Chairman or the Board of Directors he shall have the power to appoint,
determine the duties and fix the compensation of such agents and employees as in
his judgment may be necessary or proper for the transaction of the business of
the corporation. In general, he shall perform all authorized duties incident to
the office of President and such other duties as may from time to time be
assigned to him by the Chairman or the Board of Directors.

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The Vice Presidents

Section 8. The Vice Presidents shall perform such duties as shall be
assigned to them and shall exercise such powers as may be granted to them by the
Board of Directors or by the Chairman or by the President of the corporation. In
the absence of the President and the Chairman, the Vice Presidents, in order of
their seniority, may perform the duties and exercise the powers of the President
with the same force and effect as if performed by the President. Any Vice
President may sign and execute in the name of the corporation deeds, mortgages,
bonds, contracts or other instruments authorized by the Board of Directors or by
any duly authorized committee of directors, except in cases where the signing
and execution thereof shall be expressly delegated by the Board of Directors or
by any duly authorized committee of directors or by these bylaws to some other
officer or agent of the corporation, or shall be required by law otherwise to be
signed or executed.

The Chief Financial Officer

Section 9. The Chief Financial Officer shall be responsible for
supervision of the finances of the corporation, including all accounting
matters, and shall perform such other duties and exercise such other powers as
may be granted to him by the Board of Directors, the Chairman, or by the
President of the corporation. The Chief Financial Officer may sign all bonds,
deeds, mortgages, conveyances, contracts and other instruments to the extent
authorized by the Chairman, the President, or the Board of Directors, except in
cases where the signing thereof shall be expressly delegated by the Board of
Directors or these bylaws to some other officer or agent of the corporation, or
shall be required by law otherwise to be signed.

The Secretary and Assistant Secretary

Section 10. The Secretary shall attend all meetings of the Board of
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
President, under whose supervision he shall be. He shall have custody of the
corporate seal of the corporation and he, or an Assistant Secretary, shall have
authority to affix the same to any instrument requiring it and when so affixed,
it may be attested by his signature or by the signature of such Assistant
Secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the corporation and to attest the affixing by his
signature.

Section 11. The Assistant Secretary, or if there be more than one, the
Assistant Secretaries in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election), shall, in
the absence of the Secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the Secretary and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.

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The Treasurer and Assistant Treasurers

Section 12. The Treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.

Section 13. He shall disburse the funds of the corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the Chief Financial Officer, Chairman,
President, and the Board of Directors, at its regular meetings, or when the
Board of Directors so requires, an account of all his transactions as Treasurer
and of the financial condition of the corporation.

Section 14. If required by the Board of Directors, he shall give the
corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of his office and for the restoration to
the corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.

Section 15. The Assistant Treasurer, or if there shall be more than one,
the Assistant Treasurers in the order determined by the Board of Directors (or
if there be no such determination, then in the order of their election), shall,
in the absence of the Treasurer or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the Treasurer and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.

ARTICLE VI

Certificates of Stock

Section 1. Every holder of stock in the corporation shall be entitled to
have a certificate, signed by, or in the name of the corporation by the
Chairman, or the President or a Vice President and the Treasurer or an Assistant
Treasurer, or the Secretary or an Assistant Secretary of the corporation,
certifying the number of shares owned by him in the corporation. Any or all of
the signatures on the certificate may be a facsimile.

Section 2. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the corporation with the same effect as if he
were such officer, transfer agent or registrar at the date of issue.

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Lost Certificates

Section 3. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.

Transfers of Stock

Section 4. Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment, or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books;
provided, however, that the corporation shall refuse to register any transfer of
shares purchased pursuant to an exemption from registration under Regulation S
unless such transfer is made in accordance with the provisions of Regulation S
or pursuant to a registration statement under the Securities Act of 1933 or
other exemption from registration and the corporation receives an opinion of
counsel to such effect reasonably satisfactory to it.

Fixing Record Date

Section 5. In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for
the adjourned meeting.

Registered Stockholders

Section 6. The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on

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the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of Delaware.

ARTICLE VII

General Provisions

Dividends

Section 1. Dividends upon the capital stock of the corporation, subject to
the provisions of the Certificate of Incorporation, if any, may be declared by
the Board of Directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the Certificate of Incorporation.

Section 2. Before payment of any dividend, there may be set aside out of
any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.

Annual Statement

Section 3. The Board of Directors shall present at each annual meeting,
and at any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.

Checks and Deposits

Section 4. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate. All funds of the
corporation not otherwise employed may be deposited to the credit of the
corporation in such banks, trust companies or other depositories as the Board of
Directors may from time to time select.

Fiscal Year

Section 5. The fiscal year of the corporation shall be fixed by resolution
of the Board of Directors.

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Seal

Section 6. The corporate seal shall have inscribed thereon the name of the
corporation and the words "Corporate Seal, Delaware." The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.

ARTICLE VIII

Amendments

Section 1. These bylaws may be altered, amended or repealed or new bylaws
may be adopted by the stockholders (by the affirmative vote of the holders of
not less than 80% of the outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of directors, considered
for this purpose as one class) or by the Board of Directors, when such power is
conferred upon the Board of Directors by the Certificate of Incorporation, at
any regular meeting of the stockholders or of the Board of Directors or at any
special meeting of the stockholders or of the Board of Directors if notice of
such alteration, amendment, repeal or adoption of new bylaws be contained in the
notice of such special meeting.

--------------------------------------
Kenneth D. McCuskey, Secretary

DATED: March __,1998

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the inclusion in
this registration statement on Form S-1 of our reports on our audit of the
consolidated financial statements of SAUER INC. AND SUBSIDIARIES and on the
financial statement schedule and to all references to our firm included in this
registration statement.

/s/ ARTHUR ANDERSEN LLP

Chicago, Illinois
March 18, 1998