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 are suffering 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. At this point, it appears that the worldwide economic recession will continue throughout 2009. 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 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; claims, including, without limitation, warranty claims, field retrofit 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 March 31, 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 first 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                                         Three months
                              ended            Currency        Underlying          ended
(in millions)             March 31, 2008     fluctuation         change        March 31, 2009
Net sales                $          617.4   $        (30.5 ) $       (237.2 ) $          349.7
Gross profit                        147.7             (4.4 )          (85.3 )             58.0
% of Sales                           23.9 %                                               16.6 %

Selling, general and
administrative                       67.9             (5.7 )           (5.7 )             56.5
Research & development               19.3             (1.6 )           (1.0 )             16.7
Impairment Charge                       -                -             50.8               50.8
Loss (gain) on sale of
business and asset
disposals                            (1.2 )              -              4.8                3.6
Total operating costs                86.0             (7.3 )           48.9              127.6
Operating income
(Loss)                   $           61.7   $          2.9   $       (134.2 ) $          (69.6 )
% of Sales                           10.0 %                                              -19.9 %

Net sales for the first quarter 2009 decreased 38 percent over the first quarter 2008, excluding the effects of currency. Net sales decreased in all regions and segments. Excluding the impacts of currency, sales decreased 41 percent in Europe, 37 percent in the Americas, and 33 percent in the Asia-Pacific region. Sales in the Work Function segment were down 42 percent, while sales in the Propel and Controls segments decreased 37 percent.

Operating income decreased primarily due to a decrease in gross profit of 58 percent due to lower sales volumes, severance costs of $4.0 million, and $0.8 million of costs associated with the closure of the Hillsboro location. Other factors contributing to the reduction in operating income included the goodwill impairment charge of $50.8 million, $3.1 million of expense related to the exit from the electric drives business and the additional $1.5 million loss on sale of business related to the alternating current (AC) motor business to the material handling market during the first quarter of 2009. In the first quarter of 2008 the Company recognized a gain on sale of the LaSalle facility of $1.5 million. Offsetting the negative impact of these items were decreases in selling, general & administrative expenses due to a $5.4 million reduction in incentive plan costs and a $2.1 million reduction in costs related to the implementation of a common business system, offset by an increase of $5.3 million related to employee severance costs.

The Company determined that the continued decline in its market capitalization during the first quarter of 2009 was reflective of the increased uncertainty in the market place. The decrease in market capitalization was considered a triggering event and therefore the goodwill balances were tested for impairment at March 31, 2009. The goodwill impairment charge of $50.8 million was incurred as a result of lower forecasted profitability in the valves reporting unit, within the Controls segment, than previously expected due to the continued economic downturn being experienced in 2009.

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

Operating Results -Three Months Ended March 31, 2009 Compared to Three Months
Ended March 31, 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             (19 )%       5 %    (13 )%   (17 )%
Construction/Road Building        (64 )      (58 )    (69 )    (66 )
Specialty                         (68 )        1      (43 )    (46 )
Distribution                      (36 )      (24 )    (33 )    (33 )

Agriculture/Turf Care

Sales into the agriculture/turf care market decreased in the Americas and Europe during the first quarter of 2009, while Asia-Pacific experienced a slight increase. Agricultural sales in the Americas and Europe remained strong, but have slowed compared to record sales in 2008. The European agriculture market is beginning to feel the effects of the economic downturn, particularly in eastern and southern Europe. Sales in the turf care market experienced a sharp decline due to the depressed housing market, as well as reduced consumer spending. The Asia-Pacific region contributes less than 5 percent of the sales in the agriculture/turf care market, therefore the increase in the Asia-Pacific region does not significantly impact the total market.

Construction/Road Building

The construction/road building markets experienced decreased sales in all regions during the first quarter of 2009 compared to the first quarter of 2008. The construction market decreased in all regions due to the economic downturn, reduced housing starts, and customers' focus on reducing inventory levels. Non-residential construction in the Americas has declined sharply, while road building is at an extremely low level.

Specialty

Specialty vehicles are comprised of a variety of markets including forestry, material handling, marine, waste management and waste recycling. Overall sales in the specialty vehicle market decreased 46 percent compared to first quarter of 2008. Sales decreased in the Americas mainly due to the weakened sales of aerial lifts, reduced sales in Europe related to the material handling, forestry and mining markets. The Asia-Pacific region experienced a slight sales increase largely due to investments made by the Chinese government.

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 13 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, minority interest, 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                                      Three months
                                       ended           Currency       Underlying         ended
(in millions)                      March 31, 2008     fluctuation       change       March 31, 2009
Net sales
Propel                            $          311.7   $        (8.1 ) $     (115.8 ) $          187.8
Work Function                                160.5           (10.7 )        (67.1 )             82.7
Controls                                     145.2           (11.7 )        (54.3 )             79.2

Segment income (loss)
Propel                            $           65.4   $         0.4   $      (48.3 ) $           17.5
Work Function                                  4.4             2.1          (21.5 )            (15.0 )
Controls                                       4.9             4.3          (73.6 )            (64.4 )
Global Services and other
expenses, net                                (16.9 )           0.3           10.6               (6.0 )

Propel Segment

The Propel segment experienced a 37 percent decrease in sales, excluding the effects of currency fluctuations, during the first quarter 2009 compared to 2008, due to weakened economic conditions globally. Segment income decreased 74 percent during the quarter. The Propel segment experienced a 7 percentage point decrease in operating profit margin during the three months ended March 31, 2009 compared to the three months ended March 31, 2008, mainly due to reduced sales volume

resulting in less absorption of fixed production costs. Contributing to the decrease in segment income was recognition of $2.7 million of severance costs during the first quarter of 2009. In addition, in 2008 the Propel segment recognized a gain on sale of a building of $1.5 million. Operating expenses were reduced by $2.1 million primarily due to a reduction in annual incentive plan costs of $0.8 million.

Work Function Segment

Sales in the Work Function segment decreased 42 percent during the first quarter of 2009 compared with the same period in 2008, excluding the effects of currency fluctuations, due to depressed economic conditions worldwide. Reduced sales were the primary driver for the reduction in segment income (loss), which decreased $21.5 million compared to the first quarter of 2008, excluding the effects of currency fluctuations. Expedited freight costs were $2.7 million lower in 2009 and total operating expenses were reduced by $2.4 million. Offsetting these cost reductions was expense of $0.9 million related to employee severance recognized in 2009.

Controls Segment

Net sales in the Controls segment decreased 37 percent during the first quarter of 2009 compared with the same period in 2008, excluding the effects of currency fluctuations. Segment income (loss) decreased $73.6 million during the first quarter of 2009 due to decreased sales levels, a goodwill impairment charge of $50.8 million related to the valves reporting unit, and expense of $1.6 million related to employee severance. In addition, costs of $1.5 million related to the alternating current (AC) product line, which will be sold in the second quarter, and restructuring costs of $4.0 million related to the closure of the Hillsboro, Oregon facility and the exit of the electric drives were recognized in 2009.

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 $10.6 million excluding the impacts of currency. A $2.3 million reduction of expense for the long term incentive plan, and a $2.1 million reduction in costs associated with the implementation of a common business system contributed to the expense reduction. In addition, the Company recognized a $1.7 million gain on foreign currency transactions in 2009 compared to a $3.9 million loss in 2008.

Order Backlog



The following table shows the Company's order backlog at March 31, 2009 and 2008
and orders written in the three-month periods ended March 31, 2009 and 2008,
separately identifying the impact of currency fluctuations.



                                    Currency       Underlying
(in millions)           2008       fluctuation      decrease      2009
Backlog at March 31   $ 1,035.8   $       (37.5 ) $     (494.9 ) $ 503.4
Orders written            677.9            (8.5 )       (544.8 )   124.6

Total order backlog at March 31, 2009 was $503.4 million, compared to $1,035.8 million at March 31, 2008. On a comparable basis, excluding the impact of currency fluctuation, order backlog decreased 48 percent. Backlog information can vary as customers alter their sales order patterns.

New sales orders written during the three months ended March 31, 2009 were $124.6 million, a decrease of 80 percent compared to 2008, excluding the impact of currency fluctuations. The decrease in backlog and order entry is due to the global recession.

Income Taxes

The Company's effective tax rate was 10.4 percent for the first quarter of 2009 compared to 28.3 percent for the same period in 2008. The company recorded an $8.4 million tax benefit for the first quarter of 2009. The effective tax rate was negatively impacted by a non-deductible goodwill impairment of $50.8 million. The Company's effective tax rate can also vary significantly from quarter to quarter due to the mix of earnings between countries.

Market Risk

The Company is exposed to various market risks, including changes in foreign currency exchange rates, interest rates, and material purchase prices.

Foreign currency changes

The Company has operations and sells its products in many different countries of the world and therefore, conducts its business in various currencies. The Company's financial statements, which are presented in U.S. dollars, can be impacted by foreign exchange fluctuations through both translation exposure and transaction risk. Translation exposure is when the financial statements of the Company, for a particular period or as of a certain date, may be affected by changes in the exchange rates that are used to translate the financial statements of the Company's operations from foreign currencies into U.S. dollars. Transaction risk is the potential expense or income due to the Company receiving its sale proceeds or holding its assets in a currency different from that in which it pays its expenses and holds its liabilities. Foreign currency transaction related income of $1.7 million was recognized during the three months ended March 31, 2009, compared to expense of $3.9 million for the same period in 2008.

Fluctuations of currencies against the U.S. dollar can be substantial and therefore significantly impact comparisons with prior periods. The U.S. dollar strengthened compared to other currencies between December 31, 2008 and March 31, 2009.

The Company enters into forward contracts to minimize the impact of currency fluctuations on cash flows related to forecasted sales denominated in currencies other than the functional currency of the selling location. The forecasted sales represent sales to both external and internal parties. Any effects of the forward contracts related to sales to internal parties are eliminated in the consolidation process until the related inventory has been sold to an external party. The forward contracts qualify for hedge accounting and therefore are subject to effectiveness testing at the inception of the contract and throughout the life of the contract. The fair value of forward contracts outstanding at March 31, 2009 was a net liability of $6.1 million.

Interest Rates

The Company has used interest rate swap agreements on a limited basis to manage the interest rate risk on its total debt portfolio. During March, 2009, the Company settled both of its interest rate swap agreements due to repayment of the underlying debt agreements, resulting in a loss of $2.0 million recognized in the consolidated statement of operations as a component of loss on early retirement of debt.

Liquidity and Capital Resources

The Company's principal sources of liquidity have been cash flow from operations and from its various credit facilities. The Company historically has accessed diverse funding sources, including short-term and long-term unsecured bank lines of credit in the United States, Europe, and Asia.

The Company determined, following the close of its 2008 fiscal year, that it would likely be unable to continue to meet the leverage ratio covenants in its various credit agreements as of the end of the first quarter of 2009. To avoid a default under the credit agreements, the Company entered into a Credit Agreement with Danfoss A/S on March 12, 2009, pursuant to which the Company will have the ability to borrow up to $490 million (the Danfoss Credit Agreement). The Danfoss Credit Agreement matures on September 30, 2010. Danfoss A/S is the Company's majority stockholder. During the first quarter of 2009, the Company repaid certain borrowings prior to default under any of the Company's credit agreements and recognized a loss on early retirement of debt of $7.4 million. As a result of the Danfoss Credit Agreement, the Company expects to have sufficient sources of liquidity to meet its future funding needs.

Cash Flow from Operations

Cash flow from operations was $5.6 million during the three months ended March 31, 2009 compared to $14.3 million for the three months ended March 31, 2008.

Changes in operating assets and liabilities resulted in $5.8 million cash provided during the three months ended March 31, 2009 compared to $30.1 million of cash used during the three months ended March 31, 2008. The increase in cash provided in 2009 is primarily the result of a reduction in accounts receivable balances during the first quarter of 2009 compared with an increase during the first quarter of 2008. Also contributing to the increase in cash provided was a greater decrease in inventory balances during the first quarter of 2009 compared to the first quarter of 2008. A special contribution into the German and U.K. pension plans used $20.0 million in 2008.

Cash Used in Investing Activities

Capital expenditures in the first three months of 2009 were $16.8 million compared to $35.1 million in the first three months of 2008. The decrease in 2009 is related to lower capacity needs as sales are reduced due to the global economic downturn.

Cash Used in Financing Activities

The Company paid fourth quarter dividends of $8.7 million in the first quarter of both 2009 and 2008. Net borrowings provided approximately $68.2 million of cash in the first three months of 2009, and $36.9 million 2008. During the first quarter of 2009 the Company paid $8.6 million in debt origination fees related to the Danfoss Credit Agreement, and $6.8 million in debt extinguishment and interest rate swap settlement costs. In addition, the Company makes varying distributions to its minority interest partners from its various joint venture activities depending on the amount of undistributed earnings of the businesses and the needs of the partners.

Other Matters

Critical Accounting Estimates

In preparing its most recent annual report on Form 10-K, the Company disclosed information about critical accounting estimates the Company makes in applying its accounting policies. 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.

New Accounting Principles -

Statement of Financial Accounting Standards (SFAS) No. 141R "Business Combinations" replaces SFAS No. 141, and establishes requirements for recognition and measurement of identifiable assets acquired, liabilities assumed, noncontrolling interest of the acquiree, goodwill acquired, and gain from bargain purchase. SFAS No. 141R was issued in December 2007 and applies prospectively to business combinations for which the acquisition date is on or after the beginning of the annual reporting period beginning on or after December 15, 2008. The Company adopted SFAS No. 141R as of January 1, 2009 with no impact on the consolidated financial statements.

The Financial Accounting Standards Board (FASB) issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51" in December 2007. SFAS No. 160 was issued to improve the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. The Company adopted SFAS No. 160 in the first quarter of 2009. Upon adoption, certain prior period amounts have been reclassified to conform to the current period financial statement presentation. These reclassifications have no impact on previously . . .