This Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as other portions of this quarterly report, contain certain 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," "projects," "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. Readers should bear in mind that past experience may not be a good guide to anticipating actual future results. The economies in the U.S., Europe, and Asia-Pacific continue to suffer from the global recession and credit crisis, continued weakness in the housing and residential construction markets, weakness in the commercial and public-sector construction markets, mounting job losses, and uncertainty surrounding the effects of government fiscal stimulus plans, interest rates, and crude oil prices. Although the U.S. economy is showing signs of improvement, it appears that the worldwide economic recession will continue throughout 2009 and into 2010. A prolonged 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, material handling 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 significant customers; the Company's execution of internal performance plans; difficulties or delays in manufacturing; the effectiveness of the Company's cost-reduction and productivity improvement 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; the ability and willingness of Danfoss A/S, the Company's majority stockholder, to lend money to the Company at sufficient levels and on terms favorable enough to enable the Company to meet its capital needs; the Company's ability to access the capital markets or traditional credit sources to supplement or replace the Company's borrowings from Danfoss A/S if the need should arise; the Company's ability over time to reduce the relative level of debt compared to equity on its balance sheet;claims, including, without limitation, warranty claims, field recall claims, product liability 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 in 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, especially in light of the current credit crisis; 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; credit market disruptions and significant changes in capital market liquidity and funding costs affecting the Company and its customers; general economic conditions, including interest rates, the rate of inflation, and commercial and consumer confidence; energy prices; the impact of new or changed tax and other legislation and regulations in jurisdictions in which the Company and its affiliates operate; actions by the U.S. Federal Reserve Board and the central banks of other nations; actions by other regulatory agencies, including those taken in response to the global credit crisis; actions by rating agencies; changes in accounting standards; worldwide political stability; the effects of terrorist activities and resulting political or economic instability; natural catastrophes; U.S. military action overseas; and the effect of acquisitions, divestitures, restructurings, product withdrawals, and other unusual events.

The Company cautions the reader that this list of cautionary statements and risk factors is not exhaustive. The Company expressly disclaims any obligation or undertaking to release publicly any updates or changes to these forward-looking statements to reflect future events or circumstances. The foregoing risks and uncertainties are further described in Item1A (Risk Factors) in the Company's latest annual report on Form 10-K filed with the SEC, which should be reviewed in considering the forward-looking statements contained in this quarterly report.

About the Company

Sauer-Danfoss Inc. and subsidiaries (the Company) is a worldwide leader in the design, manufacture, and sale of engineered hydraulic and electronic systems and components 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, material handling, and specialty equipment. The Company designs, manufactures and markets its products in the Americas, Europe and the Asia-Pacific regions, and markets its products throughout the rest of the world either directly or through distributors.

Executive Summary - Three months ended September 30, 2009

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

The following table summarizes the Company's third quarter 2009 and 2008 results from operations, separately identifying the impact of currency fluctuations. This analysis is more consistent with how the Company internally evaluates its results.

                                   Three months
                                       ended                                              Three months
                                   September 30,        Currency        Underlying            ended
(in millions)                          2008           fluctuations        change       September 30, 2009
Net sales                         $         490.2    $         (6.8 )  $     (230.3 )  $             253.1
Gross profit                                111.9              (0.1 )         (96.8 )                 15.0
% of Sales                                   22.8 %                                                    5.9 %

Selling, general and
administrative                               64.6              (1.6 )         (15.7 )                 47.3
Research & development                       21.8              (0.4 )          (7.3 )                 14.1
Loss on sale of business and
asset disposals                               0.1                 -             3.0                    3.1
Total operating costs                        86.5              (2.0 )         (20.0 )                 64.5
Operating income (loss)           $          25.4    $          1.9    $      (76.8 )  $             (49.5 )
% of Sales                                    5.2 %                                                  -19.6 %

Net sales for the third quarter 2009 decreased 47 percent compared to the third quarter 2008, excluding the effects of currency. Net sales decreased in all regions and segments. Excluding the impact of currency, sales decreased 52 percent in Europe, 48 percent in the Americas and 23 percent in Asia-Pacific. Sales in the Work Function segment were down 53 percent, sales in the Controls segment decreased 47 percent, followed by a decrease of 43 percent in the Propel segment.

Gross profit decreased primarily due to an 87 percent decrease in gross profit due to lower sales volumes, inventory valuation allowances of $9.4 million, severance costs of $3.7 million, restructuring charges of $1.3 million related to the closure of the Lawrence location, increased field recall charges of $5.1 million, and accelerated depreciation of $1.1 million. Other factors contributing to the decrease in operating income included severance costs in operating costs of $3.6 million, $1.2 million of expense due an increase in the allowance for uncollectible accounts receivable, a $1.9 million loss on sale of the steering column business in Kolding, Denmark, $0.4 million of expense due to the closure of the Hillsboro location, $0.6 million of expense related to the exit from the electric drives business, and a loss on disposal of fixed assets of $1.6 million. Offsetting the negative impact of these items was a $1.6 million decrease in costs related to the implementation of a common business system and a $1.2 million reduction in incentive plan costs.

Following is a discussion of the Company's operating results by market, region, and business segment.

Operating Results -Three Months Ended September 30, 2009 Compared to Three
Months Ended September 30, 2008



Sales Growth by Market



The following table summarizes the Company's sales growth by market. The table
and following discussion is on a comparable basis, which excludes the effects of
currency fluctuations.



                                          Asia-
                             Americas    Pacific    Europe    Total

Agriculture/Turf Care             (28 )%     (21 )%    (43 )%   (34 )%
Construction/Road Building        (58 )      (34 )     (62 )    (54 )
Specialty                         (74 )       16       (54 )    (54 )
Distribution                      (55 )      (27 )     (44 )    (46 )

Agriculture/Turf Care

Sales into the agriculture/turf care market decreased in all regions during the third quarter of 2009. The Americas continued to experience a slowdown in the agricultural market due to decreasing commodity prices. Sales declined sharply during the third quarter despite improvement over the second quarter of 2009 in the Brazilian market due to government stimulus programs. Agricultural sales in Europe continued to decline in the third quarter as a result of the economic crisis and customers' efforts to reduce inventory levels. Turf care sales continue to suffer from the severely depressed housing market and reduced customer spending. The Asia-

Pacific region contributes less than 5 percent of the sales in the agriculture/turf care market, and therefore does not significantly impact the total.

Construction/Road Building

All regions experienced decreased sales into the construction/road building markets during the third quarter of 2009 compared to the third quarter of 2008. Reduced sales were driven by depressed economic conditions worldwide, reduced housing starts, and customers' focus on reducing inventory levels. Non-residential construction is slowing rapidly in the Americas, and state government budget problems are causing road building to remain at low levels. The Asia-Pacific region continued to experience strong sales in China, but this was more than offset by slow markets in Japan.

Specialty

Specialty vehicles are comprised of a variety of markets including forestry, material handling, marine, waste management and waste recycling. Overall sales into the specialty vehicle market decreased 54 percent compared to third quarter of 2008, despite a 16 percent increase in the Asia-Pacific region. The Americas experienced a significant sales decrease in the material handling market in response to the decline in non-residential construction, as well as reduced capital expenditures by rental companies. Sales in Europe were down as the material handling, forestry, mining, and marine markets followed the downward trend as a result of the depressed economy. Specialty sales in the Asia-Pacific region were helped by increased sales in China, including increased sales to the carrier business for railroad construction, however material handling sales were down in the region due to the weakened construction business.

Distribution

Products related to all of the above markets are also sold to distributors, who then serve smaller OEMs.

Business Segment Results

The following discussion of operating results by segment relates to information as presented in Note 15 in the Notes to the Consolidated Financial Statements. Segment income is defined as the respective segment's portion of the total Company's net income, excluding net interest expense, income taxes, and global services expenses. Propel products include hydrostatic transmissions and related products that transmit 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 drives and valves that control and direct the power of a vehicle. The following table provides a summary of each segment's sales and segment income, separately identifying the impact of currency fluctuations.

                                   Three months
                                       ended                                             Three months
                                   September 30,       Currency        Underlying            ended
(in millions)                          2008           fluctuation        change       September 30, 2009
Net sales
Propel                            $         228.8    $        (0.9 )  $      (98.4 )  $             129.5
Work Function                               137.0             (2.7 )         (73.0 )                 61.3
Controls                                    124.4             (3.2 )         (58.9 )                 62.3

Segment income (loss)
Propel                            $          31.8    $         0.4    $      (40.9 )  $              (8.7 )
Work Function                                 1.6              0.5           (25.7 )                (23.6 )
Controls                                      4.3             (0.1 )         (15.6 )                (11.4 )
Global Services and other
expenses, net                               (12.2 )            0.1             5.8                   (6.3 )

Propel Segment

The Propel segment experienced a 43 percent decrease in sales, excluding the effects of currency fluctuations, during the third quarter 2009 compared to 2008, due to weakened economic conditions globally. The Propel segment experienced a 13 percentage point decrease in operating profit margin during the three months ended September 30, 2009 compared to the three months ended September 30, 2008, mainly due to reduced sales volume resulting in less absorption of fixed production costs, as well as inventory valuation allowances of $4.9 million. Contributing to the decrease in segment income was recognition of $2.4 million of severance costs, $1.1 million of accelerated depreciation due to shortened useful lives of fixed assets, $1.4 million loss on disposal of fixed assets, and penalties of $0.7 million due to cancellation of orders for new fixed assets. Partially offsetting the negative impact of these items was a reduction in operating costs of $7.3 million.

Work Function Segment

Sales in the Work Function segment decreased 53 percent during the third quarter of 2009 compared with the same period in 2008,

excluding the effects of currency fluctuations, due to weakened economic conditions globally. Segment income was reduced by $25.7 million compared to the same period in 2008 mainly due to lower sales volume. Other factors included inventory valuation allowances of $2.8 million, restructuring costs of $3.1 million related to the closure of the Lawrence facility and the sale of the steering column business in Kolding, Denmark, and severance costs of $2.6 million. Expedited freight costs were $2.1 million lower in 2009 and total operating expenses were reduced by $5.4 million.

Controls Segment

Net sales in the Controls segment decreased 47 percent during the third quarter of 2009 compared with the same period in 2008, excluding the effects of currency fluctuations, due to weakened economic conditions globally. Segment income decreased $15.6 million during the third quarter of 2009 mainly due to decreased sales. Other factors contributing to the reduced segment income included field recall costs of $4.8 million, restructuring costs of $0.9 million related to the closure of the Hillsboro, Oregon facility and the exit of the electric drives business, and severance costs of $1.7 million related to employee headcount reductions. Excluding the restructuring and severance costs, operating expenses were reduced by $9.7 million.

Global Services and other expenses, net

Segment costs in Global Services and other expenses, net, relate to internal global service departments, along with the operating costs of the Company's executive office. Global services include such costs as consulting for special projects, tax and accounting fees paid to outside third parties, internal audit, certain insurance premiums, and the amortization of intangible assets from certain business combinations. Global services and other expenses decreased $5.8 million excluding the impacts of currency compared to the same period in 2008. This was largely due to the fact that 2008 costs included $1.6 million for an acquisition that was not consummated, $2.2 million for executive retirement, and $1.6 million related to the implementation of a common business system.

Income Taxes

The Company recorded $6.0 million of tax expense for the third quarter of 2009. The Company recognized tax expense on a pre-tax loss as a result of recording a valuation allowances of $28.5 million on net deferred tax assets in the U.S., Denmark, Italy and China.

During the second quarter of 2009 a valuation allowance was established to cover the net deferred tax assets in the U.S. and Denmark with a $78.5 million charge included in income tax expense for the second quarter. Subsequent to the release of the second quarter results, an additional deferred tax asset relating to Denmark and the U.S. of $8.5 million was discovered by the Company for which a valuation reserve should have been established in the second quarter. The Company made this correction in the third quarter as the error is an in-period 2009 error and was determined to be immaterial overall to the second and third quarter results. The remaining $20.0 million of valuation allowance recognized in the third quarter relates to net operating losses generated in the third quarter.

Executive Summary - Nine months ended September 30, 2009

The following table summarizes the Company's results from operations for the nine months ended September 30, 2009 and 2008, separately identifying the impact of currency fluctuations. This analysis is more consistent with how the Company internally evaluates its results.

                                      Nine months                                              Nine months
                                         ended              Currency        Underlying            ended
(in millions)                      September 30, 2008     fluctuations        change        September 30, 2009
Net sales                         $            1,719.1    $       (60.7 )  $     (778.2 )  $              880.2
Gross profit                                     397.6             (6.1 )        (287.7 )                 103.8
% of Sales                                        23.1 %                                                   11.8 %

Selling, general and
administrative                                   202.8            (12.9 )         (34.9 )                 155.0
Research & development                            62.2             (3.6 )         (12.7 )                  45.9
Impairment charge                                    -                -            50.8                    50.8
Loss (gain) on sale of
business and asset disposals                      (0.7 )              -            12.4                    11.7
Total operating costs                            264.3            (16.5 )          15.6                   263.4
Operating income (loss)           $              133.3    $        10.4    $     (303.3 )  $             (159.6 )

Net sales for the nine months ended September 30, 2009 decreased 45 percent compared to the nine months ended September 30, 2008, excluding the effects of currency. Net sales decreased in all regions and all segments. Excluding the impacts of currency, sales declined 50 percent in Europe, 44 percent in the Americas and 32 percent in Asia-Pacific. Sales in the Work Function segment decreased by 50 percent, sales in the Controls segment were down 47 percent, followed by a reduction of 41 percent in the Propel

segment.

Gross profit decreased 72 percent due to reduced sales volume, inventory valuation allowances of $9.4 million, severance costs of $12.4 million, accelerated depreciation of $1.1 million, and restructuring charges of $2.7 million related to the closure of the Hillsboro and Lawrence locations. Other factors contributing to the reduced operating income include restructuring costs of $4.5 million in operating costs related to the closure of the Hillsboro location and the exit from the electric drives business, severance expense of $12.8 million due to headcount reductions, an impairment charge of $50.8 million related to the valves reporting unit, a $5.6 million loss on sale of the alternating current (AC) motor business, a $1.9 million loss on sale of the steering column business in Kolding, Denmark, and a $2.5 million loss on disposal of fixed assets. In 2008 the company recognized a gain on sale of the LaSalle facility of $1.4 million, with no similar gain recognized in 2009. Offsetting the negative impact of these items were reductions related to incentive plan costs of $6.1 million, field recall costs of $1.8 million, and $5.5 million of costs related to the implementation of a common business system.

Following is a discussion of the Company's operating results by market, region, and business segment.

Operating Results -Nine Months Ended September 30, 2009 Compared to Nine Months
Ended September 30, 2008



Sales Growth by Market



The following table summarizes the Company's sales growth by market. The table
and following discussion is on a comparable basis, which excludes the effects of
currency fluctuations.



                                          Asia-
                             Americas    Pacific    Europe    Total

Agriculture/Turf Care             (23 )%     (12 )%    (29 )%   (25 )%
Construction/Road Building        (63 )      (47 )     (69 )    (63 )
Specialty                         (74 )       (3 )     (53 )    (54 )
Distribution                      (48 )      (30 )     (41 )    (42 )

Agriculture/Turf Care

Sales into the agriculture/turf care market decreased in all regions during the nine months ended September 30, 2009 compared to the same period in 2008. Sales into the agriculture market in the Americas remained strong during the first quarter, then declined sharply as commodity prices began a downward trend and customers focused on inventory reduction. The European agriculture market continued to decline due to falling commodity prices and the worldwide economic crisis. Turf care sales continue to suffer from the depressed housing market and reduced consumer spending. The Asia-Pacific region contributes less than 5 percent of the sales in the agriculture/turf care market, and therefore does not significantly impact the total.

Construction/Road Building

Construction/road building sales were down in all regions during the nine months ended September 30, 2009 compared to the same period in 2008. The sales decline was due to poor economic conditions worldwide, depressed housing and non-residential construction markets, and customers' focus on reducing inventory levels.

Specialty

Specialty vehicles are comprised of a variety of markets including forestry, material handling, marine, waste management and waste recycling. Overall sales into the specialty vehicle market decreased 54 percent compared to 2008. Material handling sales were down across all regions due to depressed economic conditions. Offsetting the reduced material handling sales in the Asia-Pacific region was an increase in specialty sales in China due to investments made by the Chinese government, as well as increased sales related to the carrier business for railroad construction. The divestiture of the electric drives business also had a negative impact on sales in Europe and Asia Pacific.

Distribution

Products related to all of the above markets are also sold to distributors, who then serve smaller OEMs.

Business Segment Results

The following discussion of operating results by segment relates to information as presented in Note 15 in the Notes to the Consolidated Financial Statements. Segment income is defined as the respective segment's portion of the total Company's net income,

excluding net interest expense, income taxes, and global services expenses.

The following table provides a summary of each segment's sales and segment income, separately identifying the impact of currency fluctuations.

                                      Nine months                                             Nine months
                                         ended             Currency        Underlying            ended
(in millions)                     September 30, 2008     fluctuations        change       September 30, 2009
Net sales
Propel                            $             833.6    $       (16.3 )  $     (345.1 )  $             472.2
Work Function                                   460.4            (21.7 )        (231.6 )                207.1
Controls                                        425.1            (22.8 )        (201.5 )                200.8

. . .