10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 29, 2003
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from               to

Commission File Number 333-48299

SAUER-DANFOSS INC.
(Exact name of registrant as specified in its charter)
Delaware	36-3482074
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
250 Parkway Drive, Lincolnshire, Illinois	61069
(Address of principal executive office)	(Zip Code)
Registrant’s telephone number, including area code        (515) 239-6000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ý   No  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  ý   No  o

As of August 7, 2003, 47,432,268 shares of Sauer-Danfoss Inc. common stock, $.01 par value, were outstanding.

Table of Contents

PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Statements of Income: Thirteen Weeks and Twenty-Six Weeks Ended June 29, 2003 and June 30, 2002
	Consolidated Balance Sheets: As of June 29, 2003 and December 31, 2002
	Consolidated Statements of Stockholders’ Equity and Comprehensive Income: As of June 29, 2003 and December 31, 2002
	Consolidated Statements of Cash Flows: Twenty-Six Weeks Ended June 29, 2003 and June 30, 2002
	Notes to Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risks
Item 4.	Controls and Procedures
PART II	OTHER INFORMATION
Item 4.	Submission of Matters to a Vote of Security Holders
Item 6.	Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS

2

Sauer-Danfoss Inc. and Subsidiaries

Consolidated Statements of Income

(in thousands, except per share data)

(Unaudited)

	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	June 29, 2003			June 30, 2002			June 29, 2003			June 30, 2002
Net Sales	$	308,462		$	264,117		$	608,887		$	507,165
Costs and Expenses:
Cost of sales	231,167			196,024			459,918			380,031
Selling, general and administrative	38,252			34,488			74,759			64,848
Research and development	10,953			9,677			21,333			19,036
Total costs and expenses	280,372			240,189			556,010			463,915
Operating income	28,090			23,928			52,877			43,250
Nonoperating Expenses:
Interest expense, net	(4,412		)	(4,443		)	(8,529		)	(8,686		)
Other, net	(2,053		)	(1,732		)	(3,402		)	(1,430		)
Nonoperating expenses, net	(6,465		)	(6,175		)	(11,931		)	(10,116		)
Income Before Income Taxes and Minority Interest	21,625			17,753			40,946			33,134
Minority Interest in Income of Consolidated Companies	(4,985		)	(3,895		)	(9,847		)	(7,527		)
Equity in Net Earnings of Affiliates	22			216			397			265
Income Before Income Taxes	16,662			14,074			31,496			25,872
Provision for Income Taxes	(5,400		)	(4,680		)	(10,069		)	(9,028		)
Net income Before Cumulative Effect of Change in Accounting Principle	$	11,262		$	9,394		$	21,427		$	16,844
Cumulative effect of change in accounting principle	—			—			—			(695		)
Net income	$	11,262		$	9,394		$	21,427		$	16,149
Basic and diluted net income per common share, before cumulative effect of change in accounting principle	$	0.24		$	0.20		$	0.45		$	0.36
Cumulative effect of change in accounting principle	—			—			—			(0.02		)
Basic and diluted net income per common share	$	0.24		$	0.20		$	0.45		$	0.34
Dividends declared per common share	$	0.07		$	0.07		$	0.14		$	0.14

See accompanying notes to consolidated financial statements.

3

Sauer-Danfoss Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except per share data)

	(Unaudited)
	June 29, 2003			December 31, 2002
Assets
Current Assets:
Cash and cash equivalents	$	14,519		$	12,397
Accounts receivable, less allowances	213,404			153,643
Inventories	166,142			164,686
Other current assets	20,246			23,057
Total current assets	414,311			353,783
Property, Plant and Equipment, net	446,781			443,147
Other Assets:
Goodwill	119,511			105,288
Other intangible assets, net	30,760			28,274
Investments in unconsolidated affiliates	1,635			9,347
Deferred income taxes	18,029			18,071
Other	15,514			13,183
Total other assets	185,449			174,163
	$	1,046,541		$	971,093
Liabilities and Stockholders’ Equity
Current Liabilities:
Notes payable and bank overdrafts	$	52,926		$	56,010
Long-term debt due within one year	26,697			27,085
Accounts payable	81,894			69,441
Accrued salaries and wages	29,440			22,833
Accrued warranty	13,174			14,242
Other accrued liabilities	40,515			25,226
Total current liabilities	244,646			214,837
Long-Term Debt	237,418			235,198
Other Liabilities:
Long-term pension liability	43,243			42,747
Postretirement benefits other than pensions	16,782			16,782
Deferred income taxes	46,887			44,778
Other	22,854			20,674
Total other liabilities	129,766			124,981
Minority Interest in Net Assets of Consolidated Companies	35,702			27,118
Stockholders’ Equity:
Common stock, par value $.01 per share, authorized 75,000 shares in 2003 and 2002; issued and outstanding 47,432 in 2003 and 47,419 in 2002;	474			474
Additional paid-in capital	314,029			313,760
Retained earnings	63,664			49,498
Accumulated other comprehensive income	21,053			5,346
Unamortized restricted stock compensation	(211		)	(119		)
Total stockholders’ equity	399,009			368,959
	$	1,046,541		$	971,093

See accompanying notes to consolidated financial statements.

4

Sauer-Danfoss Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

(in thousands, except per share data)

	Number of Shares Outstanding	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income			Unamortized Restricted Stock Compensation			Total
Beginning Balance, December 31, 2002	47,419	$	474	$	313,760	$	49,498		$	5,346		$	(119	)	$	368,959
Period Ended June 29, 2003 (Unaudited):
Comprehensive income:
Net income	—	—		—		21,427			—			—			—
Unrealized losses on foreign currency exchange contracts	—	—		—		—			(265		)	—			—
Translation adjustment	—	—		—		—			15,972			—			—
Total comprehensive income	—	—		—		—			—			—			37,134
Stock option expense	—	—		133		—			—			—			133
Restricted stock grant	13	—		136		—			—			(136		)	—
Restricted stock compensation	—	—		—		—			—			44			44
Deemed dividend	—	—		—		(621		)	—			—			(621		)
Cash dividends, ($0.14 per share)	—	—		—		(6,640		)	—			—			(6,640		)
Ending balance	47,432	$	474	$	314,029	$	63,664		$	21,053		$	(211	)	$	399,009

See accompanying notes to consolidated financial statements.

5

Sauer-Danfoss Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

	Twenty-Six Weeks Ended
	June 29, 2003			June 30, 2002
Cash Flows From Operating Activities:
Net income	$	21,427		$	16,149
Adjustments to reconcile net income to net cash provided by operating activities
Cumulative effect of change in accounting principle	—			695
Depreciation and amortization	41,303			35,178
Minority interest in income of consolidated companies	9,847			7,527
Equity in net earnings of affiliates	(397		)	(265		)
(Increase) decrease in working capital, excluding effects of acquisitions:
Accounts receivable, net	(38,351		)	(32,404		)
Inventories	11,182			20,700
Accounts payable	(2,713		)	1,297
Accrued liabilities	17,956			7,145
Other	36			(3,053		)
Net cash provided by operating activities	60,290			52,969
Cash Flows From Investing Activities :
Purchases of property, plant and equipment	(25,181		)	(14,120		)
Proceeds from sales of property, plant and equipment	171			532
Payments for acquisitions, net of cash acquired	(5,824		)	(22,312		)
Net cash used in investing activities	(30,834		)	(35,900		)
Cash Flows From Financing Activities:
Net repayments on notes payable and bank overdrafts	(6,437		)	(5,261		)
Net (repayments) borrowings of long-term debt	(11,870		)	15,941
Cash dividends	(6,640		)	(6,637		)
Distributions to minority interest partners	(3,841		)	(6,647		)
Net cash used in financing activities	(28,788		)	(2,604		)
Effect of Exchange Rate Changes	1,454			(968		)
Cash and Cash Equivalents:
Net increase during the period	2,122			13,497
Beginning balance	12,397			14,324
Ending balance	$	14,519		$	27,821
Supplemental Cash Flow Disclosures:
Interest paid	$	5,069		$	6,103
Income taxes paid	$	5,352		$	3,650

See accompanying notes to consolidated financial statements.

6

Sauer-Danfoss Inc. and Subsidiaries

Notes To Consolidated Financial Statements

(in thousands except per share data)

(Unaudited)

1)            Basis of Presentation and Use of Estimates -

The consolidated financial statements of Sauer-Danfoss Inc. and subsidiaries (the Company) included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and represent the consolidation of all companies in which the Company has a controlling interest.  Certain information and disclosures normally included in comprehensive financial statements, prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.  In the opinion of management, the statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows at the dates and for the periods presented.  It is suggested that these interim financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest annual report on Form 10-K as filed with the Securities and Exchange Commission on March 12, 2003.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Actual results may differ from those estimates.

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

2)            Business Combinations: Changes in Goodwill –

During the second quarter 2003, the Company exercised its option to acquire an additional 40% of the outstanding shares of Comatrol for approximately $10,200.  With this purchase, the Company now owns 85% of Comatrol and has consolidated the financial results of this business beginning with the second quarter of 2003.  Prior to purchasing its controlling interest in Comatrol, the Company accounted for the results of its ownership interest under the equity method of accounting.  The combined transactions resulted in $13,408 of goodwill.

The Company has the option to acquire the remaining ownership interest (15%) in Comatrol for approximately 3,700 euros, $4,229 at June 29, 2003, using an exchange rate of 0.8749 euros to the U.S. dollar.  The option period runs from April 1, 2004 through April 30, 2004.  Should the Company not elect to exercise this option, the minority owners of Comatrol could exercise their option requiring the Company to acquire the remaining 15% of Comatrol for the amount disclosed above.  This put option period runs from May 1, 2004 through May 31, 2004.  Should neither party exercise their respective options, all such options expire after May 31, 2004.

The changes in the carrying amount of goodwill for the twenty-six weeks ended June 29, 2003 are as follows:

	Propel Segment		Work Function Segment		Controls Segment			Total
Balance as of December 31, 2002	$	32,030	$	19,121	$	54,137		$	105,288
Purchase price allocation to other intangibles	—		—		(2,554		)	(2,554		)
Goodwill acquired during period	—		—		13,408			13,408
Translation adjustments	1,152		688		1,529			3,369
Balance as of June 29, 2003	$	33,182	$	19,809	$	66,520		$	119,511

During the first quarter of 2003, the Company completed its allocation of purchase price related to the acquisition of the low-voltage motor business of Thrige Electric (TE) completed in the second quarter of 2002.  As a result of this purchase price allocation, an intangible asset for customer relationships of $2,554 was identified and will be amortized over 15 years.  This amount has been reclassed from goodwill to other intangible assets.

3)            New Accounting Principles –

Effective January 1, 2002 the Company adopted Statement of Financial Accounting Standard (SFAS) No. 141, “Business Combinations,” and No. 142, “Goodwill and Other Intangible Assets” and performed an impairment analysis of goodwill as of that date.  The results of this analysis indicated that goodwill related to the open circuit reporting unit within the Work Function segment was impaired.  The performance of this reporting unit has not met management’s original expectations, primarily due to economic factors and the competitive nature of this commodity-type product.  The Company measured the amount of impairment based on a comparison of the fair value to its carrying value.  Fair value was determined using a discounted cash flow methodology by applying an appropriate weighted average cost of capital.  The Company recognized a $695 noncash after-tax charge as a cumulative effect of change in accounting principle for the write-off of goodwill related to the open circuit reporting unit in the first quarter of 2002.  The Company expects the performance of the open circuit business to improve over the next few years as a result of product rationalization and the moving of manufacturing into lower-cost countries.  The Company remains committed to this business.

7

During the first quarter of 2003, the Company completed its annual test for goodwill impairment consistent with the methodology applied upon adoption in 2002.  No impairment was indicated as of January 1, 2003 as a result of this test.

In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  SFAS No. 146 requires companies to recognize liabilities and costs associated with exit or disposal activities initiated after December 31, 2002, in the period in which they are incurred, rather than when management commits to a plan to exit an activity.  The Company is undergoing a number of activities to restructure its sales and distribution activities in Europe and to rationalize certain production facilities and products in the future.  During the second quarter of 2003, approximately $1,200 of costs related to these activities were recognized in the consolidated financial results under SFAS No. 146.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure” amending SFAS No. 123 to provide alternative methods of transition for companies that voluntarily change to the fair value based method of accounting for stock-based compensation.  In particular, SFAS No. 148 allows entities that adopt the recognition provisions of SFAS No. 123 for stock-based compensation in a fiscal year beginning before December 16, 2003 to use one of three methods for application.  As noted in Note 5 below, the Company adopted the recognition provisions of SFAS No. 123 as of January 1, 2003.  Under SFAS No. 148, the Company has selected the prospective method of reporting this change in accounting principle.  The prospective method allows the Company to apply the recognition provisions to all employee awards granted, modified or settled after the beginning of the fiscal year in which the recognition provisions are first applied.

The FASB recently issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” The interpretation addresses consolidation of variable interest entities. It requires variable interest entities to be consolidated by an entity if the entity is determined to be the primary beneficiary. A primary beneficiary of a variable interest entity is the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected residual returns, or both, as a result of holding the variable interest. This interpretation applies immediately to variable interest entities created after January 31, 2003 and the first fiscal year or interim period beginning after June 15, 2003 for variable interest entities in which a company holds a variable interest that it acquired before February 1, 2003. The Company does not expect the interpretation to have a material effect on its financial position or results of operations.  However, the Company is evaluating this interpretation and will make a determination of the applicability of this interpretation as it relates to the Company’s unconsolidated affiliate during the third quarter.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.”  SFAS No. 150 requires companies to classify certain financial instruments as liabilities that may previously have been classified as equity and is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for the first interim period beginning after June 15, 2003.  The implementation of this accounting pronouncement will not have a material effect on the Company’s results of operations, financial position or cash flows.

8

4)            Basic and Diluted Per Share Data -

Basic net income per common share data has been computed by dividing net income by the weighted average number of shares of common stock outstanding for the period less those restricted stock shares issued in connection with the Company’s long-term incentive plan and subject to risk of forfeiture.  The dilutive effect of the restricted stock shares and stock options is calculated using the treasury stock method, which applies the unamortized compensation expense to repurchase shares of common stock.  The reconciliation of basic net income per common share to diluted net income per common share is shown in the following table for the thirteen week and twenty-six week periods ending June 29, 2003, and June 30, 2002:

	June 29, 2003					June 30, 2002
	Net Income		Shares	EPS		Net Income		Shares	EPS
Thirteen Weeks:
Basic net income	$	11,262	47,400	$	0.24	$	9,394	47,395	$	.20
Effect of dilutive
Securities—
Stock options			227	—		—		—	—
Restricted stock	—		9	—		—		10	—
Diluted net income	$	11,262	47,636	$	0.24	$	9,394	47,405	$	.20
Twenty-Six Weeks:
Basic net income	$	21,427	47,398	$	0.45	$	16,149	47,395	$	.34
Effect of dilutive
Securities—
Stock options	—		115	—		—		—	—
Restricted stock	—		38	—		—		9	—
Diluted net income	$	21,427	47,551	$	0.45	$	16,149	47,404	$	.34

5)            Long-Term Incentive Plans –

Under the 1998 Long-Term Incentive Plan, the Board of Directors is authorized to grant non-qualified stock options, incentive stock options, performance units, stock appreciation rights, restricted stock and performance shares to employees.  Please refer to Note 9 of the Notes to Consolidated Financial Statements in the Company’s 2002 annual report filed on Form 10-K.

On March 5, 2003, the Board granted approximately 339 stock options to certain members of management under that plan.  The options become exercisable over a three-year vesting period with the ultimate number of options granted determined based on performance of the Company over the period as defined in the stock option agreements.  These options expire ten years from the date of grant.  The performance units entitle the participants to an amount equal to the Company’s dividends and vest after three years.  The Company recognizes compensation expense for stock options over the vesting periods based on its best estimate of the number of options that will ultimately vest.

The Company utilized the Black-Scholes option-pricing model to determine the fair value of stock options on the date of grant.  The following table sets forth key assumptions used in determining fair value:

Weighted average fair value per share of options granted	$	3.55
Dividend yield	3.0		%
Expected volatility	49.0		%
Risk-free interest rate	3.9		%
Expected lives	10 years

Prior to 2003, the Company accounted for stock options under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees.”  Effective January 1, 2003, the Company adopted the fair value recognition provisions of FASB Statement No. 123 (FAS 123), “Accounting for Stock-Based Compensation” prospectively to all employee awards granted, modified, or settled after January 1, 2003.  Awards previously made under the Non-employee Director Stock Option and Restricted Stock plan vest over a three-year period and the effect of applying the fair value recognition provisions of FAS 123 are not considered significant.

9

As noted in Note 3 above, the Company has selected the prospective method under SFAS No. 148 for reporting this change in accounting principle.  At June 29, 2003, these are the only stock options outstanding and none of the options were exercisable. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period.

	June 29, 2003				June 30, 2002
	Net Income		EPS		Net Income		EPS
Thirteen Weeks:
As reported	$	11,262	$	0.24	$	9,394	$	0.20
Add: Stock-based compensation expense included in reported net income, net of related tax effects	101		—		8		—
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects	(101)		—		(8)		—
Pro forma	$	11,262	$	0.24	$	9,394	$	0.20
Twenty-Six Weeks:
As reported	$	21,427	$	0.45	$	16,149	$	0.34
Add: Stock-based compensation expense included in reported net income, net of related tax effects	115		—		20		—
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects	(115)		—		(20)		—
Pro forma	$	21,427	$	0.45	$	16,149	$	0.34

Additionally, on March 5, 2003 the Board granted 306 performance units to certain members of management under the Plan.  The ultimate dollar value of the performance units award, which may be paid in stock or cash, at the discretion of the Board, will be determined based on the performance of the Company over the three year vesting period.  The Company accrues its best estimate as of the end of each reporting period.

6)            Segment and Geographic Information -

The Company’s operating segments are organized around its various product lines of Propel, Work Function and Controls.  Propel products include hydrostatic transmissions and related products that transmit the power from the engine to the wheel to propel a vehicle.  Work Function products include steering motors as well as gear pumps and motors that transmit power for the work functions of the vehicle.  Controls products include electrohydraulic controls, microprocessors, electric motors, and valves that control and direct the power of a vehicle.

The following table presents the significant items by operating segment for the results of operations for each of the thirteen and twenty-six week periods ending June 29, 2003 and June 30, 2002, and balance sheet data as of June 29, 2003 and June 30, 2002, respectively:

Thirteen Weeks Ended:

	Propel		Work Function		Controls		Global Services			Total
June 29, 2003
Trade sales	$	141,262	$	90,700	$	76,500	$	—		308,462
Segment income (loss)	22,390		6,047		5,636		(8,036		)	26,037
Depreciation expense	9,061		6,008		3,714		1,768			20,551
Capital expenditures	3,624		2,887		4,017		6,735			17,263
June 30, 2002
Trade sales	$	125,955	$	77,304	$	60,858	$	—		$	264,117
Segment income (loss)	17,747		8,284		3,547		(7,382		)	22,196
Depreciation expense	8,047		4,410		2,715		1,832			17,004
Capital expenditures	2,136		3,892		1,680		396			8,104

Twenty-Six Weeks Ended:

	Propel		Work Function		Controls		Global Services			Total
June 29, 2003
Trade sales	$	283,703	$	179,130	$	146,054	$	—		$	608,887
Segment income (loss)	36,830		15,031		12,560		(14,946		)	49,475
Depreciation expense	17,524		11,697		7,042		3,766			40,029
Capital expenditures	6,743		5,237		5,878		7,323			25,181
Total assets	354,024		294,074		237,965		160,478			1,046,541
June 30, 2002
Trade sales	$	249,910	$	150,116	$	107,139	$	—		$	507,165
Segment income (loss)	31,661		15,456		6,527		(11,824		)	41,820
Depreciation expense	15,583		8,839		4,952		3,661			33,035
Capital expenditures	4,531		6,283		2,688		618			14,120
Total assets	359,586		262,009		179,788		166,160			967,543

Segment income (loss) is defined as the respective segment’s portion of the total Company’s operating income less net nonoperating income (expenses).

10

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

	Net Sales (1)								Long-Lived Assets (2)
	Thirteen Weeks Ended				Twenty-Six Weeks Ended				June 29,		June 30,
	2003		2002		2003		2002		2003		2002
United States	$	124,641	$	120,212	$	257,485	$	241,337	$	206,453	$	228,166
Germany	32,971		23,788		62,719		44,012		64,067		58,941
Italy	23,660		19,032		45,197		35,220		25,313		9,221
France	17,492		12,760		32,229		23,000		568		272
United Kingdom	12,903		12,169		25,362		24,161		24,243		24,630
Japan	7,186		8,716		15,613		16,012		410		375
Denmark (3)	7,861		3,833		16,393		7,676		183,078		160,599
Slovakia (3)	267		249		492		525		48,154		36,913
Other countries	81,481		63,358		153,397		115,222		60,280		54,903
Total	$	308,462	$	264,117	$	608,887	$	507,165	$	612,566	$	574,020

(1)	Net sales are attributed to countries based on location of customer.
(2)	Long-lived assets include property, plant and equipment net of accumulated depreciation, intangible assets net of accumulated amortization and certain other long-term assets.
(3)	Majority of this country’s sales are shipped outside of the home country where the product is produced.
	No single customer accounted for 10% or more of total consolidated sales in any period presented.

7)Related Party Transactions –

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

In connection with the Danfoss Fluid Power acquisition, the Company elected, by the action of its independent directors, to terminate the limited partnership interests.  Pursuant to the terms of the agreement creating the limited partnership, in exchange for the termination of the limited partnership interests, the Company issued 2,250 shares of its common stock and paid the balance of the current accounts of the Limited Partners of $3,873.  The difference between the fair market value of the shares issued and the historical basis of the limited partnership interest was considered to be a deemed dividend of $17,337 under common control accounting.  In addition, the agreement required the Company to pay an amount in cash equal to the income tax payable as a result of the exchange of the shares of common stock of the Company for the limited partnership interests, but not to exceed 11,942 euros, $12,539 at December 31, 2002, using an exchange rate of 1.05 euros to the U.S. dollar.  As of December 31, 2002, the Company has paid $3,254 toward this tax liability.  However, as of that date, the Murmann Limited Partners were in dispute in the German tax courts over the total amount of tax liability related to this transaction.  During the second quarter of 2003, the Murmann Limited Partners incurred an additional tax liability of $621 which the Company, pursuant to the terms of the agreement, will pay to the Murmann Limited Partners.  The Company recorded this amount as a deemed dividend in the quarter ended June 29, 2003 and the amount is included in Other Accrued Liabilities as of the end of the quarter.

11

8)Subsequent Event –

On August 12, 2003, the Company announced to its employees the planned closing of the West Branch, Iowa facility that manufactures gear pumps and motors within the Work Function segment.  The Company plans to move production to other existing facilities or outsource certain processes.  Based on initial estimates, the Company anticipates incurring approximately $5,000 - $7,000 in charges related to the closing of this facility.  The targeted closing date is February 1, 2004.

12

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Sauer-Danfoss Inc. and Subsidiaries (the Company)

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

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

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

Overview

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

Results of Operations

Thirteen Weeks Ended June 29, 2003 Compared to Thirteen Weeks Ended June 30, 2002

Consolidated Results

Net income in the second quarter of 2003 was $11.3 million, or $0.24 per diluted share, compared with net income of $9.4 million, or $0.20 per diluted share in the second quarter 2002.  The primary drivers for this improvement have

13

been led by the increased sales in 2003 over 2002 and by the Company’s broad-based cost control initiatives, particularly in the areas of selling, general and administrative expenses, and research and development expenses.

Net sales for the second quarter of 2003 of $308.5 million increased by $44.4 million, or 17%, over the second quarter 2002 net sales of $264.1 million.  Excluding the impact of currency exchange fluctuations, net sales increased 6% (i.e. net sales of the Company’s operations located outside the United States measured in U.S. dollars would have been lower had currency exchange/translation rates remained at the same levels as the rates that prevailed during 2002.)  Excluding the impact of both currency exchange fluctuations and acquisitions, net sales increased 4% over second quarter 2002.  Sales increased 3% in the Americas and 2% in Europe, excluding the impact of acquisitions and currency exchange fluctuations.  The Asia-Pacific region accounted for $5.3 million of increased sales, or an increase of 34%.  All operating segments contributed to the sales increase period over period as discussed below.

Gross profit for the second quarter of 2003 of $77.3 million increased $9.2 million or 14% from second quarter 2002 gross profit of $68.1 million.  Gross profit as a percentage of sales for the second quarter of 2003 was 25%, compared to 26% for 2002.  While fixed production costs (i.e. depreciation, property taxes, insurance expense, etc.) were $10.3 million higher in 2003 compared to 2002, the Company has been focusing for the past several quarters on holding the line or reducing overall fixed production costs.  Excluding the impact of currency exchange fluctuations and acquisitions, fixed production costs actually increased $4.5 million in the second quarter of 2003, or 13%.  Of this increase, $0.7 million was related to restructuring costs associated with the closing of the Company’s Sturtevant, Wisconsin, plant.  The remaining increase is being driven primarily by higher depreciation expense compared to the prior year.

The Company’s selling, general and administrative expenses of $38.3 million increased $3.8 million, or 11%, over the second quarter 2002 reported amount of $34.5 million.  Excluding the impact of currency exchange fluctuations and acquisitions, selling, general and administrative expenses increased $0.1 million over second quarter 2002.  The Company’s efforts focused on controlling these fixed expenses has been successful in absorbing the general inflationary impact to these costs and is also beginning to offset the significant increases being incurred in the areas of increased pension, health care and insurance costs.

Research and development expenses for the second quarter of 2003 of $11.0 million increased by $1.3 million, or 13%, over second quarter 2002 as reported.  However, excluding the impact of currency exchange fluctuations and acquisitions, these expenses actually increased only $0.1 million over the 2002 levels.  While the Company was focused on reducing fixed costs in all areas of the business, the Company remains committed to investing in new technology and product development.  Much of the Company’s product development activities continue to be driven by ongoing customer inquiries.

Net nonoperating expenses for second quarter 2003 increased $0.3 million over second quarter 2002 due primarily to foreign currency exchange losses and losses on disposals of property, plant and equipment.  Net interest expense is level with the prior year period.

The Company’s effective tax rate for the second quarter of 2003 of 32% was lower than the 2002 second quarter effective tax rate of 33%.  The primary drivers for the lower effective rate in 2003 is related to the mix of the Company’s net income with a higher portion of the Company’s net income being generated in countries with lower effective tax rates.  In addition, a year ago the Company was incurring losses in countries that could not recognize a tax benefit at that time.

Business Segment Results

Propel Segment

Net sales for the Propel segment of $141.3 million increased $15.3 million, or 12%, from second quarter 2002 net sales of $126.0 million.  Excluding the impact of currency exchange fluctuations, net sales increased $7.0 million, or 6%.  Approximately $5.8 million of the increase in net sales was driven by the Company’s joint venture located in Sullivan, Illinois, which produces product for the turf care market.

14

Propel segment income for the second quarter of 2003 of $22.4 million increased $4.7 million, or 27%, over segment income of $17.7 million in 2002.  Excluding the impact of currency exchange fluctuations, Propel segment income increased $3.4 million, with substantially all of this increase being driven by the turf care market.

Work Function Segment

Net sales in the Work Function segment of $90.7 million for second quarter 2003 increased $13.4 million, or 17%, over 2002 second quarter net sales of $77.3 million.  Excluding the impact of currency exchange fluctuations, net sales increased $2.1 million, or 3%, from 2002.

Work Function segment income for the second quarter 2003 of $6.0 million decreased $2.3 million, or 28%, from 2002 second quarter segment income of $8.3 million.  Excluding the impact of currency exchange fluctuations, Work Function segment income decreased $3.2 million from 2002.  The Work Function segment was impacted by a charge of $0.7 million in 2003 related to the Sturtevant, Wisconsin, plant closing mentioned above.  Excluding this restructuring charge and the impact of currencies, segment income for the Work Function segment decreased $2.5 million, or 30%, from 2002.  The Work Function segment is expected to incur approximately $1.0 million of additional plant closing costs related to the plant closing mentioned above during the third quarter of 2003 and an additional $5.0 to $7.0 million of plant closing costs related to the closure of the West Branch, Iowa, facility over the next three quarters.

Controls Segment

Net sales in the Controls segment for second quarter 2003 of $76.5 million increased $15.6 million, or 26%, over 2002 second quarter segment net sales of $60.9 million.  Excluding acquisitions and the impact of currency exchange fluctuations, net sales for second quarter 2003 increased $2.1 million, or 3%, from the comparable 2002 levels.

Controls segment income for second quarter 2003 of $5.6 million increased $2.1 million, or 60%, from 2002 second quarter segment income of $3.5 million.  Excluding the impact of acquisitions and currency exchange fluctuations, the Controls segment income increased $0.3 million, or 9%, from 2002.

Global Services and Other Expenses, net

The Company’s Global Services function incurs costs that relate to worldwide services such as worldwide tax and accounting fees paid to outside third parties, certain insurance premiums, the amortization of intangible assets from certain business combinations, and internal global services departments, along with the operating costs of the Company’s executive office.  For second quarter 2003, total corporate charges amounted to $8.0 million, or an increase of $0.6 million from the 2002 charges of $7.4 million.  Approximately $0.7 million of higher costs were incurred during the second quarter of 2003 for some of the Company’s strategic initiatives that were started in early 2003.  Please refer to the message to shareholders in the Company's most recent annual report to shareholders for discussion of these strategic initiatives.

Twenty-Six Weeks Ended June 29, 2003 Compared to Twenty-Six Weeks Ended June 30, 2002

Consolidated Results

Net income for the first half of 2003 was $21.4 million, or $0.45 per diluted share, compared with net income of $16.1 million, or $0.34 per diluted share in the first half of 2002.  The primary drivers for this improvement have been led by the increased sales in 2003 over 2002 and by the Company’s broad-based cost control initiatives, particularly in the areas of selling, general and administrative expenses, and research and development expenses.

Net sales for the first half of 2003 of $608.9 million increased by $101.7 million, or 20%, over the first half 2002 net sales of $507.2 million.  Excluding the impact of currency exchange fluctuations, net sales increased 10% (i.e. net sales of businesses outside the United States measured in U.S. dollars would have been lower had currency exchange/translation rates remained at the same levels as the rates that prevailed during 2002.)  Excluding the impact of both currency exchange fluctuations and acquisitions, net sales increased 6% over the first half of 2002.  Sales increased 6% in the Americas and 4% in Europe, excluding the impact of acquisitions and currency exchange

15

fluctuations.  The Asia-Pacific region accounted for $9.4 million of increased sales, or an increase of 35%.  All operating segments contributed to the sales increase period over period as discussed below.

Gross profit for the first half of 2003 of $149.0 million increased $21.9 million or 17% from the first half of 2002 gross profit of $127.1 million.  Gross profit as a percentage of sales for the first half of 2003 was 24%, compared to 25% for 2002.  While fixed production costs were $18.3 million higher in 2003 compared to 2002, the Company has been focusing for the past several quarters on holding the line or reducing overall fixed production costs.  Excluding the impact of currency exchange fluctuations and acquisitions, fixed production costs actually increased $6.3 million in the first half of 2003, or 9%.  Higher depreciation expense and the one-time pre-tax charge of $0.7 million related to the plant closing mentioned above are the primary drivers for this increase compared to the prior year.  The Company's global procurement initiative has identified key areas for cost savings that should begin to improve the Company's contribution margin during the second half of 2003.  These savings will begin to offset some of the higher fixed production costs being incurred.

The Company’s selling, general and administrative expenses of $74.8 million increased $10.0 million, or 15%, over the first half 2002 reported amount of $64.8 million.  Excluding the impact of currency exchange fluctuations and acquisitions, selling, general and administrative expenses increased $1.9 million, or 3%, over the first half of 2002.  The Company’s efforts focused on controlling these fixed expenses has been successful in absorbing the general inflationary impact to these costs and to begin to offset the significant increases being incurred in the areas of increased pension, health care and insurance costs.

Research and development expenses for the first half of 2003 increased by $2.3 million over the first half of 2002 as reported.  However, excluding the impact of currency exchange fluctuations and acquisitions, these expenses actually decreased $0.2 million from the 2002 levels.  Much of the Company’s product development activities continue to be driven by ongoing customer inquiries.

Net nonoperating expenses for the first half of 2003 increased $1.8 million over 2002 due primarily to foreign currency exchange losses and losses on disposals of property, plant and equipment.  Net interest expense was down $0.2 million from the first half of 2002 reflecting reduced borrowing levels and favorable interest rates.

The Company’s effective tax rate for the first half of 2003 of 32% was lower than the 2002 first half effective tax rate of 35%.  The primary drivers for the lower effective rate in 2003 are discussed above.

Business Segment Results

Propel Segment

Net sales for the Propel segment of $283.7 million increased $33.8 million, or 14%, from the first half 2002 net sales of $249.9 million.  Excluding the impact of currency exchange fluctuations, net sales increased $18.4 million, or 7%.  Approximately $14.1 million of the increase in net sales was driven by the Company’s joint venture located in Sullivan, Illinois, which produces product for the turf care market.

Propel segment income for the first half of 2003 of $36.8 million increased $5.1 million, or 16%, over segment income of $31.7 million in 2002.  Excluding the impact of currency exchange fluctuations, Propel segment income increased $3.7 million, with substantially all of this increase being driven by the turf care market.

Work Function Segment

Net sales in the Work Function segment of $179.1 million for the first half of 2003 increased $29.0 million, or 19%, over 2002 first half net sales of $150.1 million.  Excluding the impact of currency exchange fluctuations, net sales increased $7.3 million, or 5%, from 2002.

Work Function segment income for the first half of 2003 of $15.0 million decreased $0.5 million, or 3%, from 2002 first half segment income of $15.5 million.  Excluding the impact of currency exchange fluctuations, Work Function segment income decreased $2.6 million from 2002.  The Work Function segment was impacted by a restructuring charge of $0.7 million in 2003 related to the Sturtevant, Wisconsin, plant closing mentioned in the second quarter discussion above.  Excluding this restructuring charge and the impact of currencies, segment income for the Work Function segment decreased $1.9 million, or 12%, from 2002.  The Work Function segment is expected to incur approximately $1.0 million of additional plant closing costs related to the plant closing mentioned above during the third quarter of 2003 and an additional

16

$5.0 to $7.0 million of plant closing costs related to the closure of the West Branch, Iowa, facility over the next three quarters.

Controls Segment

Net sales in the Controls segment for the first half of 2003 of $146.1 million increased $39.0 million, or 36%, over the first half 2002 net sales of $107.1 million.  Excluding acquisitions and the impact of currency exchange fluctuations, net sales for the first half of 2003 increased $5.4 million, or 5%, from the comparable 2002 levels.

Controls segment income for the first half of 2003 of $12.6 million increased $6.1 million, or 94%, from 2002 first half segment income of $6.5 million.  Excluding the impact of acquisitions and currency exchange fluctuations, the Controls segment income increased $2.5 million, or 38%, from 2002.

Global Services and Other Expenses, net

For the first half of 2003, total Global Services charges amounted to $14.9 million, an increase of $3.1 million from the 2002 charges of $11.8 million.  Approximately $1.3 million of the higher year-to-date costs incurred during 2003 relate to the Company’s efforts to move all business systems to a common platform.  Additional drivers for this increase relate to the Company’s new executive office location in Lincolnshire, Illinois, that was not in place until June 2002, along with higher insurance and outside service costs driven by the increased regulatory requirements in the U.S.

Liquidity and Capital Resources

The Company’s principal sources of liquidity have been from internally generated funds and from borrowings under its credit facilities.  The Company is presently in the final stages of negotiating a new $250.0 million syndicated multi-currency revolving credit facility that is expected to close during the third quarter of 2003 which will replace certain existing credit facilities and provide additional sources of liquidity to the Company.  The syndication includes many international and domestic banks with which the Company has existing relationships, as well as a number of additional banks.  In the aggregate, these banks have offered to subscribe to amounts that exceed the total requested subscription amount.  The Company has existing credit facilities in place that are adequate to fund its ongoing liquidity needs in the event the new $250.0 million syndicated multi-currency revolving credit facility does not close by the end of the third quarter 2003.

Net cash provided by operating activities for the first half of 2003 of $60.3 million increased by $7.3 million from the first half of 2002 of $53.0 million.  The increase in operating cash flow resulted primarily from ongoing better working capital management, in particular related to continued reduction of inventories.

Net repayments under short and long-term credit facilities for the first half of 2003 were $18.3 million compared to the first half of 2002 net borrowings of $10.7 million.  This reflects the fact that the Company had lower cash paid for acquisitions in 2003 than in 2002 and utilized excess operating cash flow to reduce its borrowings.  Further information regarding all of the Company’s future commitments under contractual obligations is set forth in the Company’s most recent annual report filed on Form 10-K.  Other than the net borrowings discussed above, there has been no material change in this information.

The cash provided by operating activities of $60.3 million have funded 2003 capital expenditures of $25.2 million, acquisitions of $5.8 million, dividends of $6.6 million, distributions to minority interest partners of $3.8 million, and the net repayments of short and long-term credit facilities of $18.3 million.

Capital expenditures for the first half of 2003 of $25.2 million increased by $11.1 million from the first half 2002 capital expenditures of $14.1 million.  Of this increase, approximately $6.3 million relates to the investment in business system software in support of the Company’s strategic initiative to move all business systems to a common platform.  The Company expects that capital expenditures for the remainder of 2003 will continue to be substantially lower than depreciation expense due to the continued economic weakness in the markets it serves and due to the fact that the Company feels it has adequate capacity to handle short-term market increases.  The Company plans to continue to fund its capital expenditures from internally generated funds and increased borrowings under its credit facilities.  These sources of funds are expected to be sufficient to support the planned capital expenditures and the Company’s working capital requirements for at least the next twelve months.

17

Dividend Restrictions

The Company’s ability to pay dividends to its stockholders is effectively limited by certain restrictive covenants in the U.S. Revolving Credit Facility and German credit agreements, which limit the amount of dividends the U.S operating company and German operating company can distribute to the Company.  At June 29, 2003, $1.7 million and $2.5 million was not restricted as to the payment of dividends from the U.S. operating company and German operating company, respectively.  Further information disclosing these agreements and their restrictions is set forth in the Company’s most recent annual report filed on Form 10-K.  There has been no material change in this information.

Other Matters

The Company’s Critical Accounting Policies – In preparing its most recent annual report on Form 10-K, the Company disclosed what it feels are its most critical accounting policies due to the type of industry in which it operates and the manufacturing nature of its business.  The Company has made no changes to the methods of application or the assumptions used in applying these policies from what was disclosed in its most recent annual report on Form 10-K which are not otherwise disclosed in this Form 10-Q.

New Accounting Principles - In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.”  SFAS No. 150 requires companies to classify certain financial instruments as liabilities that may previously have been classified as equity and is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for the first interim period beginning after June 15, 2003.  The implementation of this accounting pronouncement will not have a material effect on the Company’s results of operations, financial position or cash flows.

Acquisitions - During the second quarter 2003, the Company exercised its option to acquire an additional 40% of the outstanding shares of Comatrol for approximately $10.2 million.  With this purchase, the Company now owns 85% of Comatrol and has consolidated the financial results of this business beginning with the second quarter of 2003.  The transactions resulted in $13.4 million of goodwill.

The Company has the option to acquire the remaining ownership interest (15%) in Comatrol for approximately 3,700 euros, $4,229 as of June 29, 2003, using an exchange rate of 0.8749 euros to the U.S. dollar.  The option period runs from April 1, 2004 through April 30, 2004.  Should the Company not elect to exercise this option, the minority owners of Comatrol could exercise their option requiring the Company to acquire the remaining 15% of Comatrol for the amount disclosed above.  This put option period runs from May 1, 2004 through May 31, 2004.  Should neither party exercise their respective options, all such options expire after May 31, 2004.

Non-Audit Services of Independent Auditors - Our auditors, KPMG LLP, perform the following non-audit services that have been preapproved by the Audit Committee of the Board of Directors:  statutory audits; benefit plan audits; quarterly reviews and related accounting advice and consultation; international and U.S. tax planning and compliance services; tax and financial due diligence for acquisitions; and expatriate tax services.

Subsequent Event - On August 12, 2003, the Company announced to its employees the planned closing of the West Branch, Iowa facility that manufactures gear pumps and motors within the Work Function segment.  The Company plans to move production to other existing facilities or outsource certain processes.  Based on initial estimates, the Company anticipates incurring approximately $5.0 - $7.0 million in charges related to the closing of this facility.  The targeted closing date is February 1, 2004.

Outlook – While the Company’s first half 2003 results were very strong, the Company continues to be cautious in its outlook for 2003.  While sales increased overall, the individual markets that the Company serves reflected mixed results.  New orders received have actually decreased by 1% from the first half of 2002, excluding the effects of currency exchange fluctuations and acquisitions.  The backlog of orders continues to remain at a relatively high overall level; however, within the various regions, the backlog picture is mixed.  Excluding the impact of currencies

18

and acquisitions, backlog in the Americas is up 3%, but down 9% in Europe.  Asia-Pacific backlog has increased 47%, however, this region continues to be a relative small percentage of the total company.

Despite the uncertainty relative to the economic conditions, the Company continues to make progress on some of its strategic initiatives outlined in its most recent annual report filed on Form 10-K.  The global procurement initiative continues to identify key areas for cost savings that are expected to improve the Company’s contribution margin by 1% - 2% points in 2003, with greater savings expected in subsequent years.

Secondly, the Company is progressing with moving selected lower margin, lower volume product lines within the Work Function segment to outside manufacturing sources.  Eliminating these low-volume, infrequent production runs will reduce costs by improving the overall operating efficiencies in the affected plants.  Efforts are also underway to move certain production from high-cost to low-cost countries.  During the second quarter of 2003, the Company successfully moved the production of mini-steering units from its Sturtevant, Wisconsin, facility to its facility in Poland and closed the Wisconsin facility.

Finally, the Company continues to make progress on the initiative to reorganize the sales and marketing structure in Europe, achieving synergies by consolidating many of the warehousing, service and administrative functions within the European region.  While the Company expects to incur approximately $4.0 million of costs in this restructuring, the benefits are expected to begin being realized towards the end of 2003 and at a significantly higher rate in 2004 and beyond.

Item 3.  Quantitative and Qualitative Disclosures About Market Risks

Information disclosing market risk is set forth in the Company’s most recent annual report filed on Form 10-K (Item 7A), and is incorporated herein by reference.  There has been no material change in this information.

Item 4.    Controls and Procedures

Within 90 days prior to the date of this report, the Registrant carried out an evaluation under the supervision and with the participation of the Registrant’s management, including the Registrant’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Registrant’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Registrant’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Registrant files or submits under the Exchange Act is recorded, processed, summarized, and reported as require and within the time periods specified in the Securities and Exchange Commission’s rules and forms.  There have been no significant changes in the Registrant’s internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation discussed in this Item 4.

PART II.  OTHER INFORMATION

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

The Company held its Annual Meeting of Stockholders on June 4, 2003, at which stockholders re-elected ten directors and ratified the appointment of KPMG LLP as the Company’s independent auditors for 2003.  Results of the voting in connection with each issue were as follows:

	For	Withheld	Total
Voting on Directors:
Ole Steen Andersen	44,914,386	184,466	45,098,852
David J. Anderson	44,922,892	175,960	45,098,852
Jorgen M. Clausen	43,065,485	2,033,367	45,098,852
Nicola Keim	44,912,392	186,460	45,098,852
Johannes F. Kirchhoff	44,961,434	137,418	45,098,852
Hans Kirk	44,913,366	185,466	45,098,852
F. Joseph Loughrey	44,961,892	136,960	45,098,852
Klaus H. Murmann	42,749,230	2,349,622	45,098,852
Sven Murmann	44,912,498	186,354	45,098,852
Steven H. Wood	44,961,392	137,460	45,098,852
Ratification of Independent Auditors:
For			45,053,187
Against			43,515
Abstain			2,150
Total			45,098,852

19

Item 6.  Exhibits and Reports on Form 8-K.

(a)  Exhibits

Exhibit No.	Description of Document
3.1	The Amended and Restated Certificate of Incorporation of the Company dated May 3, 2000, is attached as Exhibit 3.1 to the Company’s Form 10-Q filed on August 16, 2000, and is incorporated herein by reference.
3.2	The Amended and Restated Bylaws of the Company dated June 4, 2003, is attached hereto.
4	The form of Certificate of the Company’s Common Stock, $.01 Par Value, is attached as Exhibit 4 to the Company’s Form 10-Q filed on August 16, 2000 and is incorporated herein by reference.
10.1(a)	The Termination Agreement and Release dated May 3, 2000 relating to the termination of a Silent Partnership Agreement is attached as Exhibit 10.1(a) to the Company’s Form 10-Q filed on August 16, 2000, and is incorporated herein by reference.
10.1(b)	The Registration Rights Agreement is attached as Exhibit 10.1(b) to Amendment No. 1 to the Company’s Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.
10.1(c)	The form of Indemnification Agreement entered into between the Company and each of its directors and certain officers is attached as Exhibit 10.1(c) to Amendment No. 1 to the Company’s Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.
10.1(d)	The Lease Agreement for the Company’s Dubnica nad Váhom, Slovakia facility is attached as Exhibit 10.1(f) to Amendment No. 1 to the Company’s Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.
10.1(e)	The Lease Agreement for the Company’s Swindon, England facility is attached as Exhibit 10.1(g) to Amendment No. 1 to the Company’s Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.
10.1(f)	The Lease Agreement for the Company’s Minneapolis, Minnesota, facility is attached as Exhibit 10.1(h) to Amendment No. 1 to the Company’s Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.
10.1(g)	The Lease Agreement for the Company’s Berching, Germany, facility dated November 15, 1996, is attached as Exhibit 10.1(g) to the Company’s Form 10-K filed on March 12, 2003, and is incorporated herein by reference.
10.1(h)	The Lease Agreement for the Company’s Shanghai/Pudong, China, facility is attached as Exhibit 10.1(j) to Amendment No. 1 to the Company’s Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.
10.1(i)	The Lease Agreement for the Company’s Odense, Denmark, facility dated November 15, 1996, is attached as Exhibit 10.1(h) to the Company’s Form 10-K filed on March 12, 2003, and is incorporated herein by reference.
10.1(j)	The Indenture of Lease agreement for the Company’s Norborg, Denmark, facility effective May 3, 2000, is attached as Exhibit 10.1(ah) to the Company’s Form 10-K filed on March 30, 2001, and is incorporated herein by reference.
10.1(k)	The Lease Agreement for the Company’s Hillsboro, Oregon, facility effective January 19, 2001, is attached as Exhibit 10.1(ai) to the Company’s Form 10-K filed on March 30, 2001, and is incorporated herein by reference.
10.1(l)	The Lease Agreement for the Company’s leased facility in Ames, Iowa, effective April 1, 2002, is attached as Exhibit 10.1(am) to the Company’s Form 10-Q filed on May 15, 2002, and is incorporated herein by reference.
10.1(m)	The Office Lease for the Company’s Chicago, Illinois, Executive Office effective June 1, 2002, is attached as Exhibit 10.1(an) to the Company’s Form 10-Q filed on May 15, 2002, and is incorporated herein by reference.

20

10.1(n)	The Amended and Restated Separation Agreement and Release of All Claims entered into as of June 24, 2002 with Niels Erik Hansen is attached as Exhibit 10.1(k) to the Company’s Form 10-Q filed on November 14, 2002, and is incorporated herein by reference.
10.1(o)	The Executive Employment Agreement with David J. Anderson dated January 1, 2003, is attached as Exhibit 10.1(m) to the Company’s Form 10-K filed on March 12, 2003, and is incorporated herein by reference.
10.1(p)	The Executive Employment Agreement with Karl J. Schmidt dated January 1, 2003, is attached as Exhibit 10.1(n) to the Company’s Form 10-K filed on March 12, 2003, and is incorporated herein by reference.
10.1(q)	The Executive Employment Agreement with James R. Wilcox dated January 1, 2003, is attached as Exhibit 10.1(o) to the Company’s Form 10-K filed on March 12, 2003, and is incorporated herein by reference.
10.1(r)	The Executive Employment Agreement with Hans J. Cornett dated January 1, 2003, is attached as Exhibit 10.1(p) to the Company’s Form 10-K filed on March 12, 2003, and is incorporated herein by reference.
10.1(s)	The Executive Employment Agreement with Thomas Kittel dated January 1, 2003, is attached as Exhibit 10.1(q) to the Company’s Form 10-K filed on March 12, 2003, and is incorporated herein by reference.
10.1(t)	The Addendum to Executive Employment Agreement, dated December 1, 2002, relating to the Executive Employment Agreement referred to in 10.1(s) above with Thomas Kittel is attached as Exhibit 10.1(r) to the Company’s Form 10-K filed on March 12, 2003, and is incorporated herein by reference.
10.1(u)	The Executive Employment Agreement with Finn Lyhne dated January 1, 2003, is attached as Exhibit 10.1(s) to the Company’s Form 10-K filed on March 12, 2003, and is incorporated herein by reference.
10.1(v)	The Addendum to Executive Employment Agreement, dated December 1, 2002, relating to the Executive Employment Agreement referred to in 10.1(u) above with Finn Lyhne is attached as Exhibit 10.1(t) to the Company’s Form 10-K filed on March 12, 2003, and is incorporated herein by reference.
10.1(w)	The Executive Employment Agreement with Richard Jarboe dated January 1, 2003, is attached as Exhibit 10.1(u) to the Company’s Form 10-K filed on March 12, 2003, and is incorporated herein by reference.
10.1(x)	The Executive Employment Agreement with Henrik Krabsen dated January 1, 2003, is attached as Exhibit 10.1(v) to the Company’s Form 10-K filed on March 12, 2003, and is incorporated herein by reference.
10.1(y)	The Executive Employment Agreement with Kenneth D. McCuskey dated January 1, 2003, is attached as Exhibit 10.1(w) to the Company’s Form 10-K filed on March 12, 2003, and is incorporated herein by reference.
10.1(z)	The Executive Employment Agreement with Albert Zahalka dated January 1, 2003, is attached as Exhibit 10.1(x) to the Company’s Form 10-K filed on March 12, 2003, and is incorporated herein by reference.
10.1(aa)	The Amended and Restated Post-Retirement Care Agreement for Klaus Murmann, effective May 3, 2000, is attached as Exhibit 10.1 (s) to the Company’s Form 10-Q filed on August 16, 2000, and is incorporated herein by reference.
10.1(ab)	The Sauer-Danfoss Inc. Annual Management Performance Incentive Plan restated as of January 1, 2002, is attached as Exhibit 10.1(ao) to the Company’s Form 10-Q filed on May 15, 2002, and is incorporated herein by reference.
10.1(ac)	The Sauer-Sundstrand Company Supplemental Retirement Benefit Plan for Certain Key Executives is attached as Exhibit 10.1(t) to Amendment No. 1 to the Company’s Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.
10.1(ad)	The Sauer-Sundstrand Company Supplemental Retirement Benefit Plan for Certain Key Executives Previously Employed by the Sundstrand Corporation is attached as Exhibit 10.1(u) to Amendment No. 1 to the Company’s Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.
10.1(ae)	The Sauer-Sundstrand Employees’ Savings & Retirement Plan is attached as Exhibit 10.1(v) to Amendment No. 1 to the Company’s Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.
10.1(af)	The Amendment Number One, effective December 15, 2000, to the Sauer-Sundstrand Employees’ Savings and Retirement Plan referred to in Exhibit 10.1(ae) above, is attached as Exhibit 10.1(aj) to the Company’s Form 10-Q filed on August 15, 2001, and is incorporated herein by reference.
10.1(ag)	The Amendment Number Two, effective January 1, 2002, to the Sauer-Danfoss Employees’ Savings Plan, (formerly the Sauer-Sundstrand Employees’ Savings and Retirement Plan), referred to in Exhibit 10.1(af) above, is attached as Exhibit 10.1(t) to the Company’s Form 10-K filed on March 29, 2002, and is incorporated herein by reference.

21

10.1(ah)	The European Employees’ Pension Plan is attached as Exhibit 10.1(y) to Amendment No. 1 to the Company’s Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.
10.1(ai)	The Sauer-Danfoss Inc. 1998 Long-Term Incentive Plan is attached as Exhibit 10.1(p) to Amendment No. 1 to the Company’s Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.
10.1(aj)	The Amendment, effective May 3, 2000, to the Sauer-Danfoss Inc. 1998 Long-Term Incentive Plan referred to in 10.1(ai) above is attached as Exhibit 10.1 (v) to the Company’s Form 10-Q filed on August 16, 2000, and is incorporated herein by reference.
10.1(ak)	The Amendment to the Sauer-Danfoss Inc. 1998 Long-Term Incentive Plan effective December 4, 2002, is attached as Exhibit 10.1(bd) to the Company’s Form 10-K filed on march 12, 2003, and is incorporated herein by reference.
10.1(al)	The Sauer-Danfoss Inc. Non-employee Director Stock Option and Restricted Stock Plan is attached as Exhibit 10.1(q) to Amendment No. 1 to the Company’s Registration Statement filed on April 23, 1998, and is incorporated herein by reference.
10.1(am)	The Amendment, effective May 3, 2000, to the Sauer-Danfoss Inc. Non-Employee Director Stock Option and Restricted Stock Plan referred to in 10.1(al) above is attached as Exhibit 10.1 (x) to the Company’s Form 10-Q filed on August 16, 2000, and is incorporated herein by reference.
10.1(an)	The Amendment to the Sauer-Danfoss Inc. Non-Employee Director Stock Option and Restricted Stock Plan effective December 4, 2002, is attached as Exhibit 10.1 (ak) to the Company’s Form 10-K filed on March 12, 2003, and is incorporated herein by reference.
10.1(ao)	The Trademark and Trade Name Agreement dated May 3, 2000, between the Company and Danfoss A/S is attached as Exhibit 10.1 (ac) to the Company’s Form 10-Q filed on August 16, 2000, and is incorporated herein by reference.
10.1(ap)	The Stock Exchange Agreement dated January 22, 2000, by and among the Registrant, Danfoss A/S, Danfoss Murmann Holding A/S. and K. Murmann Verwaltungsgesellschaft mbH is attached as Annex A to the Company’s Proxy Statement filed on March 28, 2000, and is incorporated herein by reference.
10.1(aq)	The Sauer-Danfoss Employees’ Retirement Plan as amended and restated, effective January 1, 2000, and renamed as of May 3, 2000, is attached as Exhibit 10.1(ah) to the Company’s Form 10-Q filed on November 15, 2000, and is incorporated herein by reference.
10.1(ar)	The Amendment Number One, effective December 15, 2000, to the Sauer-Danfoss Employees’ Retirement Plan referred to in Exhibit 10.1(aq) above, is attached as Exhibit 10.1(ai) to the Company’s Form 10-Q filed on August 15, 2001, and is incorporated herein by reference.
10.1(as)	The Second Amendment, effective March 26, 2001, to the Sauer-Danfoss Employees’ Retirement Plan, (formerly the Sauer-Sundstrand Employees’ Savings and Retirement Plan), referred to in Exhibit 10.1(aq) above, is attached as Exhibit 10.1(ag) to the Company’s Form 10-Q filed on August 15, 2001, and is incorporated herein by reference.
10.1(at)	The Third Amendment to the Sauer-Danfoss LaSalle Factory Employee Savings Plan, effective January 1, 2001, is attached as Exhibit 10.1(al) to the Company’s Form 10-Q filed on November 14, 2001, and is incorporated herein by reference.
10.1(av)	Amendment Number Four to the Sauer-Danfoss LaSalle Factory Employee Savings Plan, effective February 8, 2002, is attached as Exhibit 10.1(ap) to the Company’s Form 10-K filed on March 29, 2002, and is incorporated herein by reference.
10.1(aw)	The Fifth Amendment to the Sauer-Danfoss LaSalle Factory Employee Savings Plan, effective February 25, 2002, is attached as Exhibit 10.1(aq) to the Company’s Form 10-K filed on March 29, 2002, and is incorporated herein by reference.
10.1(ax)	The Sauer-Danfoss Racine Employees’ Savings Plan, effective December 1, 2000, is attached as Exhibit 10.1(am) to the Company’s Form 10-Q filed on November 14, 2001, and is incorporated herein by reference.
10.1(ay)	The Sauer-Danfoss Inc. Annual Officer Performance Incentive Plan (formerly known as the 1999 Sauer-Danfoss Inc. Bonus Plan) restated as of January 1, 2002, is attached as Exhibit 10.1(ap) to the Company’s Form 10-Q filed on May 15, 2002, and is incorporated herein by reference.
10.1(az)	The Sauer-Danfoss Inc. Annual Officer Performance Incentive Plan amended and restated as of March 4, 2003, is attached as Exhibit 10.1(bc) to the Company’s Form 10-K filed on March 12, 2003, and is incorporated herein by reference.
10.1(bb)	The Separation Agreement and Release of All Claims entered into as of January 27, 2003 with Don O’Grady, is attached as Exhibit 10.1(ay) to the Company’s Form 10-K filed on March 12, 2003, and is incorporated herein by reference.

22

(b)Reports on Form 8-K

On April 16, 2003 the Company filed a Current Report on Form 8-K for the purpose of disclosing one press release dated April 14, 2003 announcing the acquisition of a majority interest in Comatrol, S.p.A

On May 2, 2003 the Company filed a Current Report on Form 8-K for the purpose of disclosing one press release dated April 29, 2003 announcing the Company’s first quarter 2003 financial results.

23

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Sauer-Danfoss Inc.
	By	/s/  Kenneth D. McCuskey
	Kenneth D. McCuskey, Vice President- Finance and Chief Accounting Officer Sauer-Danfoss Inc.
August 13, 2003

24

CERTIFICATION

I, David J. Anderson, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Sauer-Danfoss Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c)   presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:

(a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could

25

significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  August 13, 2003
	/s/ David J. Anderson
	David J. Anderson
	President and Chief Executive Officer

26

CERTIFICATION

I, Karl J. Schmidt, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Sauer-Danfoss Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c)   presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:

(a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could

27

significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  August 13, 2003
	/s/ Karl J. Schmidt
	Karl J. Schmidt
	Executive Vice President and Chief Financial Officer

28

EX-3.2

Exhibit 3.2

AMENDED AND

RESTATED

BYLAWS

OF

SAUER-DANFOSS INC.

EFFECTIVE JUNE 4, 2003

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 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 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, or other officer presiding at a meeting in the absence of the Chairman, determines that business was not properly brought before the meeting in accordance with the foregoing procedures, the Chairman, or other officer presiding at a meeting in the absence of 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 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 Vice-Chairman, by the Chief Executive Officer and President, at the request in writing of a majority of the stock issued and outstanding and entitled to vote thereat, or at the request in writing of a majority of the Board of Directors.  Any such written request delivered pursuant to this Section 6 of Article II shall state the purpose or purposes of the proposed meeting.

1

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.

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 ten.  Vacancies on the Board of Directors may be filled by a majority of the directors then in office, although less than a quorum.

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.

Section 3.        Except as provided in this Section 3, no director shall be eligible to serve after the annual meeting of stockholders following his or her seventieth birthday.  Klaus Murmann shall

2

be eligible to serve until the second annual meeting of stockholders following the date when he no longer serves as Chairman.

Meetings of the Board of Directors

Section 4.        The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware.

Section 5.        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 6.        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 7.        Special meetings of the Board may be called by the Chairman, by the Vice-Chairman or by the Chief Executive Officer and 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, by the Vice-Chairman, by the Chief Executive Officer and President, or by the Secretary in like manner and on like notice on the written request of two directors.

Section 8.        (a)  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, by the Certificate of Incorporation or by these bylaws.  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.

(b)           Notwithstanding Section 8(a) above, the following acts shall require the approval of at least 80% of the fully constituted Board of Directors in order for such act to be an act of the Board of Directors:

(i)            the acquisition or sale of any entity or the businesses, operations or assets thereof, for consideration having a value in excess of 1% of net sales for the immediately preceding fiscal year;

(ii)           the issuance by the corporation of any common stock or other voting securities or any incurrence of in excess of $10,000,000 principal amount of debt, other than borrowings under previously approved credit facilities;

3

(iii)          any modification or amendment to these bylaws or any recommendation by the Board of Directors to the stockholders of the corporation with respect to a proposed modification or amendment to the Certificate of Incorporation;

(iv)          any action having a material adverse effect on the Nordborg operations;

(v)           any other material change in the lines of business operated by the corporation;

(vi)          any increase or decrease in the number of directors comprising the Board of Directors;

(vii)         election or removal of the director members, or alternative director members, of the nominating committee;

(viii)        election or removal of  the Chairman and election or removal of the Vice-Chairman;

(ix)           election or removal of the Chief Executive Officer and President, the Chief Financial Officer and one or more Chief Operating Officers; and

(x)            approval of the Annual Business Plan (as defined below) or any action that materially deviates from the Annual Business Plan.

(c)           Prior to January 1 of each calendar year, the Chief Executive Officer and President shall submit to the Board of Directors a business plan (the “Annual Business Plan”) for the corporation for the calendar year immediately following such calendar year.  The Annual Business Plan shall include, without limitation, the overall corporate strategy, detailed operating assumptions relating to pricing and product costing, proposed major investments, innovations and other development decisions, capital requirements and all other appropriate or significant items.  The Annual Business Plan shall be approved in its entirety, and only in its entirety, by the Board of Directors by the affirmative vote of at least 80% of the fully constituted Board of Directors.  In the event that 80% of the fully constituted Board of Directors does not approve of the Annual Business Plan as submitted by the Chief Executive Officer and President, then the entire Annual Business Plan shall be rejected and disapproved and, within the number of calendar days determined by the Board of Directors, a revised Annual Business Plan shall be submitted to the Board of Directors by the Chief Executive Officer and President for approval as described above.  In the event that the Annual Business Plan is not approved by the affirmative vote of at least 80% of the Board of Directors prior to December 31 of the calendar year immediately preceding the calendar year to which such Annual Business Plan pertains, then the corporation shall continue to operate thereafter in accordance with the Annual Business Plan then in effect until such time as a revised Annual Business Plan is approved by the affirmative vote of at least 80% of the fully constituted Board of Directors.

4

Section 9.        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 10.      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 11.      Subject to Section 11 below, the Board of Directors may, by resolution passed by a majority of the fully constituted Board of Directors, 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 12.      The Board of Directors, in addition to any committees established pursuant to Section 11 of this Article IV, shall establish a standing nominating committee.  The nominating committee shall have exclusive power and authority to evaluate and recommend all director candidates to the Board of Directors.  The nominating committee shall be comprised of two directors; each such director member requiring approval of at least 80% of the fully constituted Board of Directors. The Board of Directors may designate alternate directors as members of the nominating committee; provided, however, that any alternate director must be approved by at least 80% of the fully constituted Board of Directors.  The number of directors comprising the nominating committee shall be neither increased nor decreased.  All acts of the nominating committee must be unanimous.  Members of the nominating committee shall hold office until their successors are chosen and qualify and shall not be removed by the Board of Directors without the affirmative vote of at least 80% of the fully constituted Board of Directors.

5

Section 13.      Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required.

Compensation of Directors

Section 14.      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 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 15.      Subject to the rights of holders of any class or series of Preferred Stock then outstanding, nominations for the election of Directors shall be made by the Board of Directors from the director candidates recommended by the nominating committee 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 15. If the Chairman, or other officer presiding at a meeting in the absence of the Chairman, determines that a nomination was not made in accordance with the foregoing procedures, the Chairman, or other officer presiding at a meeting in

6

the absence of the Chairman, shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded.

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, a Chief Executive Officer and President, a Vice President, a Secretary and a Treasurer and such other officers as the Board of Directors deems necessary or appropriate. 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 an Chairman, a Vice-Chairman, a Chief Executive Officer and 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 lieu of payment by the officer, subject to the discretion of the Board of Directors, proportionate amounts

7

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.  Except as otherwise provided in Section 7(b) of Article III of these bylaws, 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 shall preside at, and determine the agenda for, all meetings of the stockholders 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.  In the absence of the Chief Executive Officer and President, he shall be the chief operating and administrative officer and acting Chief Executive Officer and 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 Vice-Chairman or the Chief Executive Officer and President. Prior to determining the agenda for any meeting of stockholders or any meeting or the Board of Directors, the Chairman shall consult with the Vice-Chairman with respect to such agenda.

The Vice-Chairman

Section 7.        The Vice-Chairman shall assist the Chairman in his duties, perform all the duties incident to the office of Vice-Chairman and such other duties as the Board of Directors may from time to time determine or as may be prescribed by these bylaws. In the absence of the Chairman, the Vice-Chairman shall preside at all meetings of the stockholders 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 Vice Chairman. Prior to the Chairman determining the agenda for any meeting of stockholders or any meeting or the Board of Directors, the Vice-Chairman shall consult with the Chairman with respect to such agenda.

The Chief Executive Officer and President

Section 8.        The Chief Executive Officer and 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 and the Vice-Chairman preside at all meetings of the stockholders 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 Chief Executive Officer and President. The Chief Executive Officer

8

and President may execute all bonds, deeds, mortgages, conveyances, contracts and other instruments to the extent authorized by the Chairman, the  Vice-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, the  Vice-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 Chief Executive Officer and President and such other duties as may from time to time be assigned to him by the Chairman, the  Vice-Chairman or the Board of Directors.

The Honorary Chairman

Section 9.        The Honorary Chairman shall be entitled to attend all meetings of the Board of Directors, notwithstanding the fact that he may not be a director and shall have such duties as the Board of Directors may from time to time determine.

The Vice Presidents

Section 10.      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, the  Vice-Chairman or by the Chief Executive Officer and President of the corporation. In the absence of the Chief Executive Officer and President and the Chairman and the  Vice-Chairman, the Vice Presidents, in order of their seniority, may perform the duties and exercise the powers of the Chief Executive Officer and President with the same force and effect as if performed by the Chief Executive Officer and 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 11.      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, the  Vice-Chairman, or by the Chief Executive Officer and 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  Vice-Chairman, the Chief Executive Officer and 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.

9

The Secretary and Assistant Secretary

Section 12.      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 Chief Executive Officer and 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 13.      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.

The Treasurer and Assistant Treasurers

Section 14.      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 15.      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,  Vice-Chairman, Chief Executive Officer and 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 16.      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 17.      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.

10

ARTICLE VI

Capital Stock

Section 1.        The shares of the corporation shall be represented by certificates, provided that the Board of Directors of the corporation may provide by resolution that some or all of any or all classes or series of its stock shall be uncertificated shares.  Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation.  Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates and upon request of every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the Chairman or the Vice-Chairman, or the Chief Executive Officer and President or a Vice President and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the corporation, representing the number of shares registered in certificate form. 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.

Lost Certificates

Section 3.        The Board of Directors may direct a new certificate of stock or uncertificated shares to be issued in place of any certificate 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, 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 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 alleged loss, theft or destruction of such certificate or the issuance of such new certificate or uncertificated shares.

Transfers of Stock

Section 4.        Transfers of shares of stock of the corporation shall be made on the record of stockholders of the corporation only upon authorization by the registered holder thereof, or by an attorney authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, or 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; 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.

11

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 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.

12

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.

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 and in accordance with these bylaws, 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.

	/s/ Kenneth D. McCuskey
	Kenneth D. McCuskey, Secretary
DATED:  June 4, 2003

13