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|                                                           
|-----------------------------------------------------------
|UNITED STATES                                              
|SECURITIES AND EXCHANGE COMMISSION                         
|Washington,
 D.C. 20549                                    
|                                                           
|FORM 10-Q                                                  
|                                                           
|x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 THE 
|SECURITIES EXCHANGE ACT OF 1934                            
|                                                           
|For the quarterly period ended: March 31, 2011             
|                                                           
|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 0-18083                             
|                                                           
|Williams Controls, Inc.                                    
|(Exact
 name of registrant as specified in its charter)    

|                                         |                     
|---------------------------------------- | --------------------
|Delaware                                 | 84-1099587          
|(State
 or other jurisdiction of         | (I.R.S.
 Employer   
|incorporation
 or organization)          | Identification
 No.)
|                                         |                     
|14100 SW 72nd Avenue,                    |                     
|Portland, Oregon                         | 97224               
|(Address
 of principal executive office) | (zip
 code)         

(503) 684-8600(Registrants telephone
number, including area code)

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 x No o


Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate web site, if any, every Interactive Data File required to be
submitted and posted to Rule 405 of Regulation S-T (section 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yeso   Noo

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act

| |                           |                            
| | ------------------------- | ---------------------------
| | Large
 accelerated filero | Accelerated
 filero        
| |                           |                            
| | Non-accelerated
 filero   | Smaller
 reporting companyx

Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)


Yes o No x


The number of shares outstanding of the registrants common stock 
as of April 30, 2011: 7,297,922

---

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Williams Controls, Inc.

March 31, 2011

Table of Contents

|                              |                                                                                                 |                                                                                                       |             
|----------------------------- | ----------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ------------
|                              |                                                                                                 |                                                                                                       | Page
 Number
|                              |                                                                                                 |                                                                                                       |             
|Part I. Financial Information |                                                                                                
|                              |                                                                                                 |                                                                                                       |             
|                              | Item
 1. Financial Statements (unaudited)                                                       |                                                                                                      
|                              |                                                                                                 |                                                                                                       |             
|                              |                                                                                                 | Condensed
 Consolidated Balance Sheets, March 31, 2011 and September 30, 2010                         | 1           
|                              |                                                                                                 |                                                                                                       |             
|                              |                                                                                                 | Condensed
 Consolidated Statements of Operations, three and six months ended March 31,
 2011 and 2010 | 2           
|                              |                                                                                                 |                                                                                                       |             
|                              |                                                                                                 | Condensed
 Consolidated Statements of Cash Flows, six months ended March 31, 2011 and
 2010           | 3           
|                              |                                                                                                 |                                                                                                       |             
|                              |                                                                                                 | Notes
 to Unaudited Condensed Consolidated Financial Statements                                       | 4           
|                              |                                                                                                 |                                                                                                       |             
|                              | Item
 2. Managements Discussion and Analysis of Financial Condition and Results of
 Operations | 12                                                                                                   
|                              |                                                                                                 |                                                                                                       |             
|                              | Item
 3. Quantitative and Qualitative Disclosures About Market Risk                             | 19                                                                                                   
|                              |                                                                                                 |                                                                                                       |             
|                              | Item
 4. Controls and Procedures                                                                | 20                                                                                                   
|                              |                                                                                                 |                                                                                                       |             
|Part II. Other Information    |                                                                                                
|                              |                                                                                                 |                                                                                                       |             
|                              | Item
 1. Legal Proceedings                                                                      | 21                                                                                                   
|                              |                                                                                                 |                                                                                                       |             
|                              | Item
 1A. Risk Factors                                                                          | 21                                                                                                   
|                              |                                                                                                 |                                                                                                       |             
|                              | Item
 2. Unregistered Sales of Equity Securities and Use of Proceeds                            | 21                                                                                                   
|                              |                                                                                                 |                                                                                                       |             
|                              | Item
 3. Defaults Upon Senior Securities                                                        | 21                                                                                                   
|                              |                                                                                                 |                                                                                                       |             
|                              | Item
 4. Reserved                                                                               | 21                                                                                                   
|                              |                                                                                                 |                                                                                                       |             
|                              | Item
 5. Other Information                                                                      | 21                                                                                                   
|                              |                                                                                                 |                                                                                                       |             
|                              | Item
 6. Exhibits                                                                               | 22                                                                                                   
|                              |                                                                                                 |                                                                                                       |             
|                              | Signature
 Page                                                                                 | 23                                                                                                   

---



PART I 
FINANCIAL INFORMATION

Item 1. Financial
Statements

Williams Controls, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share and per share information)
(Unaudited)

|                                                                                                                                                              |  |                 |         |                     |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | ------------------- | - | ------- | -
|                                                                                                                                                              |  | March 31,
 2011 |         | September 30,
 2010 |  
|                                                                                                                                                              |  |                 |         |                     |  
|ASSETS                                                                                                                                                        |  |                 |         |                     |   |         |  
|Current Assets:                                                                                                                                               |  |                 |         |                     |   |         |  
|Cash and cash equivalents                                                                                                                                     |  | $               | 1,158   |                     | $ | 3,016   |  
|Trade accounts receivable, net                                                                                                                                |  |                 | 9,814   |                     |   | 8,854   |  
|Other accounts receivable                                                                                                                                     |  |                 | 595     |                     |   | 599     |  
|Inventories                                                                                                                                                   |  |                 | 8,659   |                     |   | 7,512   |  
|Deferred income taxes                                                                                                                                         |  |                 | 928     |                     |   | 927     |  
|Prepaid expenses and other current assets                                                                                                                     |  |                 | 834     |                     |   | 341     |  
|                                                                                                                                                              |  |                 |         |                     |   |         |  
|Total current assets                                                                                                                                          |  |                 | 21,988  |                     |   | 21,249  |  
|                                                                                                                                                              |  |                 |         |                     |   |         |  
|Property, plant and equipment, net                                                                                                                            |  |                 | 9,551   |                     |   | 9,025   |  
|Deferred income taxes                                                                                                                                         |  |                 | 3,521   |                     |   | 3,493   |  
|Other assets, net                                                                                                                                             |  |                 | 351     |                     |   | 438     |  
|                                                                                                                                                              |  |                 |         |                     |   |         |  
|Total assets                                                                                                                                                  |  | $               | 35,411  |                     | $ | 34,205  |  
|                                                                                                                                                              |  |                 |         |                     |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                          |  |                 |         |                     |   |         |  
|Current Liabilities:                                                                                                                                          |  |                 |         |                     |   |         |  
|Accounts payable                                                                                                                                              |  | $               | 4,336   |                     | $ | 4,593   |  
|Accrued expenses                                                                                                                                              |  |                 | 4,945   |                     |   | 5,698   |  
|Dividends payable                                                                                                                                             |  |                 | 883     |                     |   |        |  
|Revolving loan facility                                                                                                                                       |  |                 | 1,240   |                     |   |        |  
|Current portion of employee benefit
 obligations                                                                                                              |  |                 | 212     |                     |   | 212     |  
|                                                                                                                                                              |  |                 |         |                     |   |         |  
|Total current liabilities                                                                                                                                     |  |                 | 11,616  |                     |   | 10,503  |  
|                                                                                                                                                              |  |                 |         |                     |   |         |  
|Long-term Liabilities:                                                                                                                                        |  |                 |         |                     |   |         |  
|Employee benefit obligations                                                                                                                                  |  |                 | 8,265   |                     |   | 8,694   |  
|Other long-term liabilities                                                                                                                                   |  |                 | 254     |                     |   | 244     |  
|                                                                                                                                                              |  |                 |         |                     |   |         |  
|Commitments and contingencies                                                                                                                                 |  |                 |         |                     |   |         |  
|                                                                                                                                                              |  |                 |         |                     |   |         |  
|Stockholders Equity:                                                                                                                                         |  |                 |         |                     |   |         |  
|Preferred Stock ($.01 par value, 50,000,000
 authorized) Series C (No shares were issued and outstanding at March 31, 2011
 and September 30, 2010)           |  |                 |        |                     |   |        |  
|Common stock ($.01 par value, 12,500,000
 authorized; 7,293,309 and 7,289,745 issued and outstanding at March 31, 2011
 and September 30, 2010, respectively) |  |                 | 73      |                     |   | 73      |  
|Additional paid-in capital                                                                                                                                    |  |                 | 38,073  |                     |   | 37,623  |  
|Accumulated deficit                                                                                                                                           |  |                 | (12,692 | )                   |   | (12,677 | )
|Treasury stock (332,593 shares at March 31,
 2011 and September 30, 2010)                                                                                     |  |                 | (2,734  | )                   |   | (2,734  | )
|Accumulated other comprehensive loss                                                                                                                          |  |                 | (7,444  | )                   |   | (7,521  | )
|                                                                                                                                                              |  |                 |         |                     |   |         |  
|Total stockholders equity                                                                                                                                    |  |                 | 15,276  |                     |   | 14,764  |  
|                                                                                                                                                              |  |                 |         |                     |   |         |  
|Total liabilities and stockholders equity                                                                                                                    |  | $               | 35,411  |                     | $ | 34,205  |  
|                                                                                                                                                              |  |                 |         |                     |   |         |  

See accompanying notes to Unaudited Condensed Consolidated Financial
Statements.

1

---



Williams Controls, Inc.
Condensed Consolidated Statements of Operations
(Dollars in thousands, except share and per share information)
(Unaudited)

|                                                                 |  |                                |           |                             |   |           |   |      |           |   |   |           |  
|---------------------------------------------------------------- |  | ------------------------------ | --------- | --------------------------- | - | --------- | - | ---- | --------- | - | - | --------- | -
|                                                                 |  | Three Months Ended 
 March 31, |           | Six Months Ended
 March 31, |  
|                                                                 |  |                                |           |                             |  
|                                                                 |  | 2011                           |           | 2010                        |   | 2011      |   | 2010 |          
|                                                                 |  |                                |           |                             |   |           |   |      |          
|Net sales                                                        |  | $                              | 14,786    |                             | $ | 12,649    |   | $    | 28,335    |   | $ | 24,358    |  
|Cost of sales                                                    |  |                                | 10,372    |                             |   | 9,294     |   |      | 19,641    |   |   | 17,416    |  
|                                                                 |  |                                |           |                             |   |           |   |      |           |   |   |           |  
|                                                                 |  |                                |           |                             |   |           |   |      |           |   |   |           |  
|Gross profit                                                     |  |                                | 4,414     |                             |   | 3,355     |   |      | 8,694     |   |   | 6,942     |  
|                                                                 |  |                                |           |                             |   |           |   |      |           |   |   |           |  
|Operating expenses:                                              |  |                                |           |                             |   |           |   |      |           |   |   |           |  
|Research and development                                         |  |                                | 1,138     |                             |   | 1,160     |   |      | 2,322     |   |   | 2,216     |  
|Selling                                                          |  |                                | 706       |                             |   | 761       |   |      | 1,376     |   |   | 1,419     |  
|Administration                                                   |  |                                | 2,075     |                             |   | 1,451     |   |      | 3,622     |   |   | 2,796     |  
|Class action provision                                           |  |                                |          |                             |   | 775       |   |      |          |   |   | 775       |  
|                                                                 |  |                                |           |                             |   |           |   |      |           |   |   |           |  
|Total operating expenses                                         |  |                                | 3,919     |                             |   | 4,147     |   |      | 7,320     |   |   | 7,206     |  
|                                                                 |  |                                |           |                             |   |           |   |      |           |   |   |           |  
|                                                                 |  |                                |           |                             |   |           |   |      |           |   |   |           |  
|Operating income (loss)                                          |  |                                | 495       |                             |   | (792      | ) |      | 1,374     |   |   | (264      | )
|                                                                 |  |                                |           |                             |   |           |   |      |           |   |   |           |  
|Other (income) expenses:                                         |  |                                |           |                             |   |           |   |      |           |   |   |           |  
|Interest income                                                  |  |                                | (1        | )                           |   | (4        | ) |      | (2        | ) |   | (7        | )
|Interest expense                                                 |  |                                | 16        |                             |   | 4         |   |      | 25        |   |   | 9         |  
|Other (income) expense, net                                      |  |                                | 3         |                             |   | (64       | ) |      | 41        |   |   | (57       | )
|                                                                 |  |                                |           |                             |   |           |   |      |           |   |   |           |  
|Total other expenses                                             |  |                                | 18        |                             |   | (64       | ) |      | 64        |   |   | (55       | )
|                                                                 |  |                                |           |                             |   |           |   |      |           |   |   |           |  
|                                                                 |  |                                |           |                             |   |           |   |      |           |   |   |           |  
|Income (loss) before income taxes                                |  |                                | 477       |                             |   | (728      | ) |      | 1,310     |   |   | (209      | )
|Income tax expense (benefit)                                     |  |                                | 253       |                             |   | (296      | ) |      | 442       |   |   | (172      | )
|                                                                 |  |                                |           |                             |   |           |   |      |           |   |   |           |  
|                                                                 |  |                                |           |                             |   |           |   |      |           |   |   |           |  
|Net income (loss)                                                |  | $                              | 224       |                             | $ | (432      | ) | $    | 868       |   | $ | (37       | )
|                                                                 |  |                                |           |                             |   |           |   |      |           |   |   |           |  
|                                                                 |  |                                |           |                             |   |           |   |      |           |   |   |           |  
|Net income (loss) per common share  basic                       |  | $                              | 0.03      |                             | $ | (0.06     | ) | $    | 0.12      |   | $ | (0.01     | )
|                                                                 |  |                                |           |                             |   |           |   |      |           |   |   |           |  
|Weighted average shares used in per
 share calculation  basic   |  |                                | 7,293,187 |                             |   | 7,273,320 |   |      | 7,291,638 |   |   | 7,272,180 |  
|                                                                 |  |                                |           |                             |   |           |   |      |           |   |   |           |  
|                                                                 |  |                                |           |                             |   |           |   |      |           |   |   |           |  
|Net income (loss) per common share 
 diluted                    |  | $                              | 0.03      |                             | $ | (0.06     | ) | $    | 0.12      |   | $ | (0.01     | )
|                                                                 |  |                                |           |                             |   |           |   |      |           |   |   |           |  
|Weighted average shares used in per
 share calculation  diluted |  |                                | 7,465,390 |                             |   | 7,273,320 |   |      | 7,452,047 |   |   | 7,272,180 |  
|                                                                 |  |                                |           |                             |   |           |   |      |           |   |   |           |  

See accompanying notes to Unaudited Condensed
Consolidated Financial Statements.

2

---



Williams Controls, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)

|                                                                                                    |  |                             |        |      |   |        |  
|--------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------ | -
|                                                                                                    |  | Six Months Ended
 March 31, |       
|                                                                                                    |  |                             |       
|                                                                                                    |  | 2011                        |        | 2010 |  
|                                                                                                    |  |                             |        |      |  
|Cash flows from operating activities:                                                               |  |                             |        |      |   |        |  
|Net income (loss)                                                                                   |  | $                           | 868    |      | $ | (37    | )
|Adjustments to reconcile net income (loss)
 to net cash provided by (used in) operating activities: |  |                             |        |      |   |        |  
|Depreciation and amortization                                                                       |  |                             | 1,109  |      |   | 1,055  |  
|Deferred income taxes                                                                               |  |                             | (26    | )    |   | (31    | )
|Stock-based compensation                                                                            |  |                             | 421    |      |   | 294    |  
|Gain from sale and disposal of property,
 plant and equipment                                       |  |                             |       |      |   | (10    | )
|Changes in operating assets and liabilities                                                         |  |                             |        |      |   |        |  
|Receivables, net                                                                                    |  |                             | (956   | )    |   | (1,736 | )
|Inventories                                                                                         |  |                             | (1,147 | )    |   | (20    | )
|Prepaid expenses and other current assets                                                           |  |                             | (493   | )    |   | (303   | )
|Accounts payable and accrued expenses                                                               |  |                             | (961   | )    |   | 1,956  |  
|Other                                                                                               |  |                             | (280   | )    |   | 116    |  
|                                                                                                    |  |                             |        |      |   |        |  
|Net cash provided by (used in) operating
 activities                                                |  |                             | (1,465 | )    |   | 1,284  |  
|                                                                                                    |  |                             |        |      |   |        |  
|Cash flows from investing activities:                                                               |  |                             |        |      |   |        |  
|Purchases of property, plant and equipment                                                          |  |                             | (1,662 | )    |   | (998   | )
|Proceeds from sale of property, plant and
 equipment                                                |  |                             |       |      |   | 17     |  
|                                                                                                    |  |                             |        |      |   |        |  
|Net cash used in investing activities                                                               |  |                             | (1,662 | )    |   | (981   | )
|                                                                                                    |  |                             |        |      |   |        |  
|Cash flows from financing activities:                                                               |  |                             |        |      |   |        |  
|Borrowings on revolving loan facility                                                               |  |                             | 1,240  |      |   |       |  
|Net proceeds from exercise of stock options                                                         |  |                             | 29     |      |   | 12     |  
|                                                                                                    |  |                             |        |      |   |        |  
|Net cash provided by financing activities                                                           |  |                             | 1,269  |      |   | 12     |  
|                                                                                                    |  |                             |        |      |   |        |  
|                                                                                                    |  |                             |        |      |   |        |  
|Net increase (decrease) in cash and cash
 equivalents                                               |  |                             | (1,858 | )    |   | 315    |  
|Cash and cash equivalents at beginning of period                                                    |  |                             | 3,016  |      |   | 9,245  |  
|                                                                                                    |  |                             |        |      |   |        |  
|Cash and cash equivalents at end of period                                                          |  | $                           | 1,158  |      | $ | 9,560  |  
|                                                                                                    |  |                             |        |      |   |        |  
|Supplemental disclosure of cash flow
 information:                                                  |  |                             |        |      |   |        |  
|Income taxes paid                                                                                   |  | $                           | 723    |      | $ | 261    |  
|                                                                                                    |  |                             |        |      |   |        |  

See accompanying notes to Unaudited Condensed
Consolidated Financial Statements.

3

---



Williams Controls, Inc.
Notes to Unaudited Condensed Consolidated Financial
Statements
Three and Six Months ended March 31, 2011 and 2010
(Dollars in thousands, except share and per share amounts)
(Unaudited)

Note 1.
Organization and Basis of Presentation

Williams
Controls, Inc., including its wholly-owned subsidiaries as follows, are
hereinafter referred to as the Company, Registrant, we, our, or us.

The
following are the Companys active wholly-owned subsidiaries: Williams Controls
Industries, Inc.; Williams (Suzhou) Controls Co. Ltd.; Williams Controls Europe
GmbH; and Williams Controls India Private Limited.

In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (which include normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows for the periods presented. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
of America (GAAP) have been condensed or omitted pursuant to the rules and
regulations of the United States Securities and Exchange Commission (SEC).
These condensed consolidated financial statements should be read in conjunction
with the audited financial statements and notes thereto included in the
Companys Annual Report on Form 10-K for the year ended September 30, 2010. The
results of operations for the three and six months ended March 31, 2011 are not
necessarily indicative of the results to be expected for the entire fiscal
year.

The
preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions, based upon all know
facts and circumstances, that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
issuance of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting periods. Management makes these
estimates using the best information available at the time the estimates are
made; however, actual results could differ materially from these estimates.
Estimates are used in accounting for, among other things, allowance for
doubtful accounts, excess and obsolete inventory, useful lives for depreciation
and amortization, future cash flows associated with impairment testing for long-lived
assets, pension and post-retirement medical benefit obligations, product
warranty, share-based compensation expense, income taxes and commitments and
contingencies.

The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.

Note 2.
Cash and Cash Equivalents

Cash
and cash equivalents include highly liquid investments with original maturities
of three months or less. At March 31, 2011, approximately 14% of the Companys
cash and cash equivalents were held with one major financial institution in the
United States with the remainder held in foreign banks or foreign currency
denominated accounts. The Company maintains cash balances in bank accounts that
normally exceed FDIC insured limits. As of March 31, 2011, cash and cash
equivalents held in the United States did not exceed federally insured limits.
The Company has not experienced any losses related to its cash concentration.

Note 3.
Trade Accounts Receivable

Trade
accounts receivable are presented net of an allowance for doubtful accounts of
$173 and $150 at March 31, 2011 and September 30, 2010, respectively. Activity
related to the allowance for doubtful accounts for the six months ended March
31, 2011 and the full year ended September 30, 2010 consisted of the following:

4

---



|                                        |  |                 |     |                     |   |      |  
|--------------------------------------- |  | --------------- | --- | ------------------- | - | ---- | -
|                                        |  | March 31,
 2011 |     | September 30,
 2010 |  
|                                        |  |                 |     |                     |  
|Beginning balance                       |  | $               | 150 |                     | $ | 246  |  
|Charges to bad debt expense             |  |                 | 38  |                     |   | 69   |  
|Write-offs, recoveries and
 adjustments |  |                 | (15 | )                   |   | (165 | )
|                                        |  |                 |     |                     |   |      |  
|Ending balance                          |  | $               | 173 |                     | $ | 150  |  
|                                        |  |                 |     |                     |   |      |  

Note 4.
Inventories

Inventories,
net of reserves, consist of the following:

|                |  |                 |       |                     |   |       | 
|--------------- |  | --------------- | ----- | ------------------- | - | ----- | 
|                |  | March 31,
 2011 |       | September 30,
 2010 |  
|                |  |                 |       |                     |  
|Raw materials   |  | $               | 6,494 |                     | $ | 5,767 | 
|Work in process |  |                 | 60    |                     |   | 55    | 
|Finished goods  |  |                 | 2,105 |                     |   | 1,690 | 
|                |  |                 |       |                     |   |       | 
|                |  | $               | 8,659 |                     | $ | 7,512 | 
|                |  |                 |       |                     |   |       | 

Note 5.
Accrued Expenses

Accrued expenses consist of the following:

|                                  |  |                 |       |                     |   |       | 
|--------------------------------- |  | --------------- | ----- | ------------------- | - | ----- | 
|                                  |  | March 31,
 2011 |       | September 30,
 2010 |  
|                                  |  |                 |       |                     |  
|Environmental liability           |  | $               | 873   |                     | $ | 900   | 
|Accrued product warranty          |  |                 | 1,139 |                     |   | 1,578 | 
|Accrued compensation and benefits |  |                 | 1,759 |                     |   | 1,962 | 
|Income tax payable                |  |                 | 268   |                     |   | 522   | 
|Other                             |  |                 | 906   |                     |   | 736   | 
|                                  |  |                 |       |                     |   |       | 
|                                  |  | $               | 4,945 |                     | $ | 5,698 | 
|                                  |  |                 |       |                     |   |       | 

For
further discussion related to the Companys environmental liability and product
warranty liability, refer to Notes 13 and 6, respectively.

Note 6.
Product Warranties

The
Company establishes a product warranty liability based on a percentage of
product sales. The liability is based on historical return rates of products
and amounts for significant and specific warranty issues, and is included in
accrued expenses in the accompanying condensed consolidated balance sheets. Warranty
is limited to a specified time period, mileage or hours of use, and varies by
product, application and customer. The Company has recorded a liability, which
in the opinion of management, is adequate to cover such warranty costs.
Warranty payments can vary significantly from year to year depending on the
timing of the settlement of warranty claims with various customers. Following
is a reconciliation of the changes in the Companys warranty liability for the
six months ended March 31, 2011 and the year ended September 30, 2010.

|                    |  |                 |       |                     |   |       |  
|------------------- |  | --------------- | ----- | ------------------- | - | ----- | -
|                    |  | March 31,
 2011 |       | September 30,
 2010 |  
|                    |  |                 |       |                     |  
|Beginning balance   |  | $               | 1,578 |                     | $ | 751   |  
|                    |  |                 |       |                     |   |       |  
|Payments            |  |                 | (787  | )                   |   | (557  | )
|Additional accruals |  |                 | 348   |                     |   | 1,384 |  
|                    |  |                 |       |                     |   |       |  
|                    |  |                 |       |                     |   |       |  
|Ending balance      |  | $               | 1,139 |                     | $ | 1,578 |  
|                    |  |                 |       |                     |   |       |  

The
increase in payments during the six months ended March 31, 2011 primarily
relates to warranty claim payments related to one customer, which were accrued
during fiscal 2010.

5

---



Note 7.
Debt

In
June 2010, the Company entered into a revolving loan facility with U.S. Bank,
which matures on June 30, 2012. As of March 31, 2011, our balance on the
revolving loan facility is $1,000. In January 2011, the Company became a
guarantor for its subsidiary in India for a one year line of credit of up to
$584, of which $240 was outstanding as of March 31, 2011. This guarantee
reduces the Companys borrowing capacity under the revolving loan with U.S.
Bank by the same amount.

The
revolving loan facility provides for $8,000 in borrowing capacity and is
secured by substantially all the assets of the Company. Borrowings under the
revolving loan facility are subject to a borrowing base equal to 75% of
eligible accounts receivables and 50% of eligible inventories. Interest rates
under the new agreement are based on the election of the Company of either a
LIBOR rate or at Prime rate. Under the LIBOR rate option, the revolving loan
facility will bear interest at the LIBOR rate plus 2.25% per annum for
borrowings under the revolving loan facility. Fees under the loan agreement
include an unused line fee of 0.15% per annum on the unused portion of the
revolving loan facility. The Company is subject to a specific quarterly
financial covenant under the revolving loan facility and as of March 31, 2011,
the Company was in compliance with such covenant.

The Company had available under its revolving
credit facility $5,298 at March 31, 2011.

Note 8.
Comprehensive Income (Loss)

The
following table summarizes the components of comprehensive income (loss):

|                            |  |                                |     |                              |   |      |   |      |     |  |   |     |  
|--------------------------- |  | ------------------------------ | --- | ---------------------------- | - | ---- | - | ---- | --- |  | - | --- | -
|                            |  | Three Months 
 Ended March 31, |     | Six Months 
 Ended March 31, |  
|                            |  |                                |     |                              |  
|                            |  | 2011                           |     | 2010                         |   | 2011 |   | 2010 |    
|                            |  |                                |     |                              |   |      |   |      |    
|Net income (loss)           |  | $                              | 224 |                              | $ | (432 | ) | $    | 868 |  | $ | (37 | )
|Translation adjustment      |  |                                | 34  |                              |   |     |   |      | 77  |  |   |    |  
|Change in unrealized gain   |  |                                |    |                              |   | 30   |   |      |    |  |   | 127 |  
|                            |  |                                |     |                              |   |      |   |      |     |  |   |     |  
|Comprehensive income (loss) |  | $                              | 258 |                              | $ | (402 | ) | $    | 945 |  | $ | 90  |  
|                            |  |                                |     |                              |   |      |   |      |     |  |   |     |  

Note 9.
Earnings Per Share

Basic
EPS is based on the weighted-average number of common shares outstanding during
the period. Diluted EPS is based on the weighted-average number of common
shares outstanding and the dilutive impact of common equivalent shares
outstanding.

Following
is a reconciliation of basic EPS and diluted EPS:

|                                 |  |                                     |     |                                     |  |                  |  |      |      |        |   |                  |   |  |           |  |   |       |  
|-------------------------------- |  | ----------------------------------- | --- | ----------------------------------- |  | ---------------- |  | ---- | ---- | ------ | - | ---------------- | - |  | --------- |  | - | ----- | -
|                                 |  | Three Months 
 Ended March 31, 2011 |     | Three Months 
 Ended March 31, 2010 | 
|                                 |  |                                     |     |                                     | 
|                                 |  | Income                              |     | Shares                              |  | Per Share Amount |  | Loss |      | Shares |   | Per Share Amount |  
|                                 |  |                                     |     |                                     |  |                  |  |      |      |        |   |                  |  
|                                
|Basic EPS                       |  | $                                   | 224 |                                     |  | 7,293,187        |  | $    | 0.03 |        | $ | (432             | ) |  | 7,273,320 |  | $ | (0.06 | )
|                                 |  |                                     |     |                                     |  |                  |  |      |      |        |   |                  |   |  |           |  |   |       |  
|                                
|Effect of dilutive securities   |  |                                     |     |                                     |  |                  |  |      |      |        |   |                  |   |  |           |  |   |       |  
|Stock options & restricted stock |  |                                     |    |                                     |  | 172,203          |  |      |      |        |   |                 |   |  |          |  |   |       |  
|                                 |  |                                     |     |                                     |  |                  |  |      |      |        |   |                  |   |  |           |  |   |       |  
|                                
|Diluted EPS                     |  | $                                   | 224 |                                     |  | 7,465,390        |  | $    | 0.03 |        | $ | (432             | ) |  | 7,273,320 |  | $ | (0.06 | )
|                                 |  |                                     |     |                                     |  |                  |  |      |      |        |   |                  |   |  |           |  |   |       |  

6

---



|                                                                  |  |                                  |     |                                  |           |                   |   |      |  |        |     |                   |           |  |   |       |  
|----------------------------------------------------------------- |  | -------------------------------- | --- | -------------------------------- | --------- | ----------------- | - | ---- |  | ------ | --- | ----------------- | --------- |  | - | ----- | -
|                                                                  |  | Six Months
 Ended March 31, 2011 |     | Six Months
 Ended March 31, 2010 |          
|                                                                  |  |                                  |     |                                  |          
|                                                                  |  | Income                           |     | Shares                           |           | Per Share
 Amount |   | Loss |  | Shares |     | Per Share
 Amount |          
|                                                                  |  |                                  |     |                                  |           |                   |   |      |  |        |     |                   |          
|                                                                  |  |                                  |     |                                  |           |                   |   |      |  |        |     |                   |           |  |   |       |  
|Basic EPS                                                        |  | $                                | 868 |                                  | 7,291,638 |                   | $ | 0.12 |  | $      | (37 | )                 | 7,272,180 |  | $ | (0.01 | )
|                                                                  |  |                                  |     |                                  |           |                   |   |      |  |        |     |                   |           |  |   |       |  
|                                                                  |  |                                  |     |                                  |           |                   |   |      |  |        |     |                   |           |  |   |       |  
|Effect of dilutive securities  Stock
 options & restricted stock |  |                                  |    |                                  | 160,409   |                   |   |      |  |        |    |                   |          |  |   |       |  
|                                                                  |  |                                  |     |                                  |           |                   |   |      |  |        |     |                   |           |  |   |       |  
|                                                                  |  |                                  |     |                                  |           |                   |   |      |  |        |     |                   |           |  |   |       |  
|Diluted EPS
                                                     |  | $                                | 868 |                                  | 7,452,047 |                   | $ | 0.12 |  | $      | (37 | )                 | 7,272,180 |  | $ | (0.01 | )
|                                                                  |  |                                  |     |                                  |           |                   |   |      |  |        |     |                   |           |  |   |       |  

For
the three and six months ended March 31, 2011, the Company had options and
restricted stock covering 242,318 and 272,518 shares that were not considered
in the dilutive EPS calculation since they would have been antidilutive. For
the three and six months ended March 31, 2010, the Company had options covering
805,392 shares not considered in the dilutive EPS calculation since they would
have been antidilutive.

Note 10.
Fair Value Measurement

Financial
assets and liabilities recorded at fair value in the consolidated balance sheet
are categorized based upon a fair value hierarchy established by U.S. GAAP,
which prioritizes the inputs used to measure fair value into the following
levels:

| |           |                                                                                                                                                
| | --------- | -----------------------------------------------------------------------------------------------------------------------------------------------
| | Level 1  | observable
 inputs such as quoted prices in active markets for identical assets or
 liabilities;                                               
| |           |                                                                                                                                                
| | Level 2  | inputs,
 other than the quoted market prices in active markets, which are observable,
 either directly or indirectly; and                      
| |           |                                                                                                                                                
| | Level 3  | unobservable
 inputs for which there is little or no market data available, which require
 the reporting entity to develop its own assumptions.

As
of March 31, 2011, the Company had cash and cash equivalents of $1,158 that
were measured based on a level 1 fair value basis. There were no assets and
liabilities measured at fair value on a nonrecurring basis as of March 31,
2011.

Note 11. Employee
Benefit Plans

Pension Plans

Disclosures
regarding the components of net periodic benefit cost and contributions of
pension plans are required for interim financial statement purposes and are
included below:

Components of Net
Periodic Benefit Cost:

|                                |  |                                |     |                             |   |      |   |      |      |   |   |      |  
|------------------------------- |  | ------------------------------ | --- | --------------------------- | - | ---- | - | ---- | ---- | - | - | ---- | -
|                                |  | Salaried
 Employees Plan       |    
|                                |  |                                |    
|                                |  | Three
 Months
 Ended March 31, |     | Six Months
 Ended March 31, |  
|                                |  |                                |     |                             |  
|                                |  | 2011                           |     | 2010                        |   | 2011 |   | 2010 |     
|                                |  |                                |     |                             |   |      |   |      |     
|Interest
 cost                  |  | $                              | 66  |                             | $ | 70   |   | $    | 132  |   | $ | 140  |  
|Expected
 return on plan assets |  |                                | (51 | )                           |   | (55  | ) |      | (102 | ) |   | (110 | )
|Amortization
      of loss      |  |                                | 34  |                             |   | 33   |   |      | 68   |   |   | 66   |  
|                                |  |                                |     |                             |   |      |   |      |      |   |   |      |  
|Net periodic
 benefit cost      |  | $                              | 49  |                             | $ | 48   |   | $    | 98   |   | $ | 96   |  
|                                |  |                                |     |                             |   |      |   |      |      |   |   |      |  

7

---



|                                    |  |                                |     |                             |   |      |   |      |      |   |   |      |  
|----------------------------------- |  | ------------------------------ | --- | --------------------------- | - | ---- | - | ---- | ---- | - | - | ---- | -
|                                    |  | Hourly
 Employees Plan         |    
|                                    |  |                                |    
|                                    |  | Three
 Months
 Ended March 31, |     | Six Months
 Ended March 31, |  
|                                    |  |                                |     |                             |  
|                                    |  | 2011                           |     | 2010                        |   | 2011 |   | 2010 |     
|                                    |  |                                |     |                             |   |      |   |      |     
|Service cost                        |  | $                              | 13  |                             | $ | 12   |   | $    | 26   |   | $ | 24   |  
|Interest
 cost                      |  |                                | 120 |                             |   | 122  |   |      | 240  |   |   | 244  |  
|Expected
 return on plan assets     |  |                                | (81 | )                           |   | (87  | ) |      | (162 | ) |   | (174 | )
|Amortization
 of prior service cost |  |                                | 3   |                             |   | 3    |   |      | 6    |   |   | 6    |  
|Amortization
 of loss               |  |                                | 50  |                             |   | 45   |   |      | 100  |   |   | 90   |  
|                                    |  |                                |     |                             |   |      |   |      |      |   |   |      |  
|Net periodic
 benefit cost          |  | $                              | 105 |                             | $ | 95   |   | $    | 210  |   | $ | 190  |  
|                                    |  |                                |     |                             |   |      |   |      |      |   |   |      |  

During
the six months ended March 31, 2011 and 2010, the Company contributed $614 and
$142, respectively, to the pension plans. The Company expects total
contributions to its pension plans for the remainder of fiscal 2011 to be $429.

Post Retirement
Medical Plan

Disclosures
regarding the components of net periodic benefit cost and contributions of the
Companys post-retirement medical plan are required for interim financial
statements and are included below. The Company did not make any contributions
to the post-retirement plan for the six months ended March 31, 2011 and 2010.

Components of Net
Periodic Benefit Cost:

|                           |  |                                |     |                             |   |      |   |      |     |   |   |     |  
|-------------------------- |  | ------------------------------ | --- | --------------------------- | - | ---- | - | ---- | --- | - | - | --- | -
|                           |  | Post-Retirement
 Plan          |    
|                           |  |                                |    
|                           |  | Three
 Months
 Ended March 31, |     | Six Months
 Ended March 31, |  
|                           |  |                                |     |                             |  
|                           |  | 2011                           |     | 2010                        |   | 2011 |   | 2010 |    
|                           |  |                                |     |                             |   |      |   |      |    
|Interest
 cost             |  | $                              | 31  |                             | $ | 37   |   | $    | 62  |   | $ | 74  |  
|Amortization               |  |                                | (27 | )                           |   | (25  | ) |      | (54 | ) |   | (50 | )
|                           |  |                                |     |                             |   |      |   |      |     |   |   |     |  
|Net periodic
 benefit cost |  | $                              | 4   |                             | $ | 12   |   | $    | 8   |   | $ | 24  |  
|                           |  |                                |     |                             |   |      |   |      |     |   |   |     |  

Note 12. Income Taxes

The
Companys unrecognized tax benefits remained unchanged during the six months
ended March 31, 2011. The Company believes that it is reasonably possible that
unrecognized tax benefits could decrease by $69 within the 12 months of this
reporting date.

The
Companys subsidiary in China is entitled to a five-year tax holiday, pursuant
to which it was exempted from paying the enterprise income tax for calendar
year 2007, the year in which it first had positive earnings, and calendar year
2008. Additionally, the Company is eligible for reduced enterprise income tax
rates of 10%, 11% and 12% for the calendar years 2009, 2010 and 2011,
respectively. The income tax benefit of the tax holiday for the
six months ended March 31, 2011 and March 31, 2010 were $98 and $209, respectively. The per share effect of the tax holiday
on a fully diluted basis for the same periods were $0.01 and $0.03,
respectively.

Note 13. Commitments
and Contingencies

The
Company and its subsidiaries are parties to various pending judicial and
administrative proceedings arising in the ordinary course of business. The
Companys management and legal counsel have reviewed the probable outcome of
these proceedings, the costs and expenses reasonably expected to be incurred,
the availability and limits of the Companys insurance coverage, and the
Companys established liabilities. While the outcome of the pending proceedings
cannot be predicted with certainty, based on its review, the Company believes
that any unrecorded liability that may result is not more than likely to have a
material effect on the Companys liquidity, financial condition or results of
operations.

The
soil and groundwater at the Companys Portland, Oregon facility contains
certain contaminants, which were deposited from approximately 1968 through
1995. Some of this contamination has migrated offsite to neighboring
properties. The Company has retained an environmental consulting firm to
investigate the extent of the contamination and to determine what remediation
will be required and the associated costs. During fiscal 2004, the Company
entered into the Oregon Department of Environmental Qualitys voluntary
clean-up program. As of March 31, 2011, the total

8

---



liability
recorded is $873 and is recorded in accrued expenses in the accompanying
condensed consolidated balance sheet.

During
the second quarter of fiscal 2011, the Company entered into a complete and
final settlement agreement regarding a lawsuit brought by a former Chief
Executive Officer of the Company. The total cost of the settlement was $250 and
consisted of a cash payment of $200 and issuance of 4,613 shares of common
stock. The stock was issued and payment was made during the third quarter of
fiscal 2011. The impact of this settlement on the fiscal 2011 condensed
consolidated statement of operations is approximately $100.

Note 14.
Share Based Compensation

The
Company currently has two qualified stock plans: the 2010 Restated Stock Option
Plan (the Employee Plan) and the 2010 Restated Formula Stock Option Plan for
non-employee Directors (the Formula Plan). Under the terms of the Employee
Plan, the Company may grant incentive stock options, non-qualified options,
both of which must have an exercise price of not less than the fair market
value on the date of grant, or restricted stock. Under the terms of the Formula
plan, non-employee directors are each automatically granted 1,666 options at a
price equal to the market value on the date of grant, which is the date of the
Annual Meeting of Stockholders each year.

Stock Options

Information
regarding outstanding stock options as of March 31, 2011 is as follows:

|                                   |  |                   |   |                                   |       |                                                |           |                            |   |      
|---------------------------------- |  | ----------------- | - | --------------------------------- | ----- | ---------------------------------------------- | --------- | -------------------------- | - | -----
|                                   |  | Number of
 Shares |   | Weighted
 Average
 Exercise Price |       | Weighted
 Average
 Remaining
 Contractual Term |           | Aggregate
 Intrinsic Value
|                                   |  |                   |   |                                   |       |                                                |           |                           
|Outstanding
 at September 30, 2010 |  | 874,777           |   | $                                 | 9.17  |                                                | 6.5 years |                            | $ | 1,342
|                                   |  |                   |   |                                   |       |                                                |           |                            |   |      
|Granted                            |  | 9,996             |   |                                   | 11.11 |                                                |           |                            |   |      
|Exercised                          |  | (3,564            | ) |                                   | 8.00  |                                                |           |                            |   |      
|Cancelled/Forfeited                |  | (21,176           | ) |                                   | 12.08 |                                                |           |                            |   |      
|                                   |  |                   |   |                                   |       |                                                |           |                            |   |      
|Outstanding
 at March 31, 2011     |  | 860,033           |   | $                                 | 9.13  |                                                | 6.0 years |                            | $ | 2,586
|                                   |  |                   |   |                                   |       |                                                |           |                            |   |      
|Exercisable
 at March 31, 2011     |  | 595,350           |   | $                                 | 8.68  |                                                | 4.9 years |                            | $ | 2,067
|                                   |  |                   |   |                                   |       |                                                |           |                            |   |      

The
aggregate intrinsic value in the table above represents pre-tax intrinsic value
that would have been realized if all options had been exercised on the last
business day of the period indicated, based on the Companys closing stock
price on that day. The aggregate intrinsic value of options outstanding and
options exercisable at March 31, 2010 was $865 and $835, respectively. The
intrinsic value of all stock options exercised during the three and six months
ended March 31, 2011 was $9 and the cash received from these exercises was $29.
The intrinsic value of all stock options exercised during the three and six
months ended March 31, 2010 was $8 and the cash received from these exercises
was $12.

The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants issued during the three and six months ended March
31, 2011 and 2010:

|                                                 |  |                                |   |                              |   |           |   |           |  
|------------------------------------------------ |  | ------------------------------ | - | ---------------------------- | - | --------- | - | --------- | -
|                                                 |  | Three
 Months Ended
 March 31, |   | Six Months
 Ended
 March 31, |  
|                                                 |  |                                |   |                              |  
|                                                 |  | 2011                           |   | 2010                         |   | 2011      |   | 2010      |  
|                                                 |  |                                |   |                              |   |           |   |           |  
|Expected
 term                                   |  | 7.4 years                      |   | 6.4 years                    |   | 7.4 years |   | 6.5 years |  
|Expected
 volatility                             |  | 45                             | % | 45                           | % | 45        | % | 46        | %
|Risk-free
 interest rate                         |  | 2.91                           | % | 2.93                         | % | 2.91      | % | 2.86      | %
|Expected
 dividend yield                         |  | 4.32                           | % | 0                            | % | 4.32      | % | 0         | %
|Estimated
 average fair value per option granted |  | $3.48                          |   | $3.87                        |   | $3.48     |   | $4.10     |  

9

---



Restricted Stock

Information
regarding outstanding restricted stock awards as of March 31, 2011 is as
follows:

|                                   |  |        |  |                                          |       | 
|---------------------------------- |  | ------ |  | ---------------------------------------- | ----- | 
|                                   |  | Shares |  | Weighted
 Average Grant
 Date Fair Value |      
|                                   |  |        |  |                                          |      
|Outstanding
 at September 30, 2010 |  |       |  | $                                        |      | 
|Granted                            |  | 58,400 |  |                                          | 11.08 | 
|                                   |  |        |  |                                          |       | 
|Outstanding
 at March 31, 2011     |  | 58,400 |  | $                                        | 11.08 | 
|                                   |  |        |  |                                          |       | 
|Vested at
 March 31, 2011          |  |       |  | $                                        |      | 
|                                   |  |        |  |                                          |       | 

During
the six months ended March 31, 2011, the Company issued 58,400 restricted
shares to employees under the Employee Plan. These restricted shares vest over
a four year period from the date of grant. No restricted stock was issued
during the six months ended March 31, 2010.

Expense Information

The
Companys share-based compensation expenses were recorded in the following
expense categories for the three and six months ended March 31, 2011 and 2010:

|                                                     |  |                                |     |                             |   |      |  |      |     |  |   |     | 
|---------------------------------------------------- |  | ------------------------------ | --- | --------------------------- | - | ---- |  | ---- | --- |  | - | --- | 
|                                                     |  | Three
 Months
 Ended March 31, |     | Six Months
 Ended March 31, |  
|                                                     |  |                                |     |                             |  
|                                                     |  | 2011                           |     | 2010                        |   | 2011 |  | 2010 |    
|                                                     |  |                                |     |                             |   |      |  |      |    
|Cost of
 sales                                       |  | $                              | 100 |                             | $ | 29   |  | $    | 134 |  | $ | 57  | 
|Research and
 development                            |  |                                | 29  |                             |   | 26   |  |      | 62  |  |   | 50  | 
|Selling                                              |  |                                | 23  |                             |   | 17   |  |      | 44  |  |   | 33  | 
|Administration                                       |  |                                | 100 |                             |   | 85   |  |      | 181 |  |   | 154 | 
|                                                     |  |                                |     |                             |   |      |  |      |     |  |   |     | 
|Total
 share-based compensation expense              |  | $                              | 252 |                             | $ | 157  |  | $    | 421 |  | $ | 294 | 
|                                                     |  |                                |     |                             |   |      |  |      |     |  |   |     | 
|Total
 share-based compensation expense (net of tax) |  | $                              | 224 |                             | $ | 139  |  | $    | 372 |  | $ | 265 | 
|                                                     |  |                                |     |                             |   |      |  |      |     |  |   |     | 

As
of March 31, 2011, there was $1,208 of total unrecognized compensation costs
related to non-vested stock options and $551 related to non-vested restricted
stock. The unrecognized compensation costs are expected to be recognized over a
weighted average period of 2.7 years for non-vested stock options and 3.8 years
for non-vested restricted stock.

Note 15.
Enterprise-wide Information

During
the three and six months ended March 31, 2011 and 2010, the Company operated in
two geographic reportable regions as shown in the table below.

10

---



|                                    |  |                                |        |                             |   |        |   |      |        |   |   |        |  
|----------------------------------- |  | ------------------------------ | ------ | --------------------------- | - | ------ | - | ---- | ------ | - | - | ------ | -
|                                    |  | Three
 Months
 Ended March 31, |        | Six Months
 Ended March 31, |  
|                                    |  |                                |        |                             |  
|                                    |  | 2011                           |        | 2010                        |   | 2011   |   | 2010 |       
|                                    |  |                                |        |                             |   |        |   |      |       
|Revenue 
 External Customers:      |  |                                |        |                             |   |        |   |      |        |   |   |        |  
|United States                       |  | $                              | 14,100 |                             | $ | 11,888 |   | $    | 26,795 |   | $ | 23,033 |  
|China                               |  |                                | 686    |                             |   | 761    |   |      | 1,540  |   |   | 1,325  |  
|                                    |  |                                |        |                             |   |        |   |      |        |   |   |        |  
|                                    |  | $                              | 14,786 |                             | $ | 12,649 |   | $    | 28,335 |   | $ | 24,358 |  
|                                    |  |                                |        |                             |   |        |   |      |        |   |   |        |  
|Revenue 
 Intersegments:           |  |                                |        |                             |   |        |   |      |        |   |   |        |  
|United States                       |  | $                              | 250    |                             | $ | 268    |   | $    | 440    |   | $ | 506    |  
|China                               |  |                                | 3,628  |                             |   | 2,683  |   |      | 7,472  |   |   | 5,300  |  
|Other                               |  |                                | 131    |                             |   | 207    |   |      | 261    |   |   | 397    |  
|Eliminations                        |  |                                | (4,009 | )                           |   | (3,158 | ) |      | (8,173 | ) |   | (6,203 | )
|                                    |  |                                |        |                             |   |        |   |      |        |   |   |        |  
|                                    |  | $                              |       |                             | $ |       |   | $    |       |   | $ |       |  
|                                    |  |                                |        |                             |   |        |   |      |        |   |   |        |  
|Income
 (loss) before income taxes: |  |                                |        |                             |   |        |   |      |        |   |   |        |  
|United States                       |  | $                              | 237    |                             | $ | (1,127 | ) | $    | 524    |   | $ | (765   | )
|China                               |  |                                | 440    |                             |   | 401    |   |      | 1,105  |   |   | 549    |  
|Other                               |  |                                | (200   | )                           |   | (2     | ) |      | (319   | ) |   | 7      |  
|                                    |  |                                |        |                             |   |        |   |      |        |   |   |        |  
|                                    |  | $                              | 477    |                             | $ | (728   | ) | $    | 1,310  |   | $ | (209   | )
|                                    |  |                                |        |                             |   |        |   |      |        |   |   |        |  

Note 16. Subsequent
Events

On
February 24, 2011, the Company announced that its Board of Directors had
initiated a cash dividend policy and authorized a dividend of $0.12 per
outstanding share of the Companys common stock payable on May 12, 2011 to
stockholders of record as of May 2, 2011. The total dividend payment is $883
and has been recorded as a liability in the accompanying condensed
consolidation balance sheet as of March 31, 2011.

11

---



Williams Controls,
Inc.

|        |                                                                                                                                                   
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of
 Financial Condition and Results of Operations
 (Dollars in thousands, except share and per share amounts)

Forward-Looking
Statements

This
quarterly report on Form 10-Q contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements include all statements other than those that expressly
connote an assertion of historical fact. Among others, this report includes
forward looking statements that describe our plans and intentions regarding
future courses of action and the possible outcomes of those intentions, and
that set forth our expectations regarding our prospective financial condition,
results of operations, and cash flows. Forward-looking statements can sometimes
be identified by the use of forward-looking terminology, such as may, will,
should, expect, anticipate, estimate, continue, plans, and
intends. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, such forward-looking statements are
subject to risks and uncertainties that could cause us to deviate from our
current plans, and could cause our actual results to differ materially from
those indicated by the forward-looking statements. Some of the known factors
that could cause us to deviate from current plans or could cause our results to
fall short of expectations include: our ability to maintain positive
relationships with key customers; the concentration of our sales revenues among
a limited number of large customers; our status as a component manufacturer and
the resulting impact on our revenues of demand for vehicles and equipment in
which our products are installed; the effect of products liability lawsuits
that directly affect us and that indirectly impact us because of their effect
on the automotive and equipment industries generally; the impact of foreign
currency exchange rates on our gross income; the impact of federal monetary and
trade policies that impact the market for our products; and the status of our
relationships with our employees and organized labor force. These risks and
uncertainties are beyond our control and, in many cases; we cannot predict the
risks and uncertainties that could cause our actual results to differ
materially from those indicated by the forward-looking statements. Some of the
factors that may cause our actual results in future periods to differ
materially from those currently expected or desired because of a number of
risks and uncertainties include, but are not limited to, those risks discussed
in the section entitled Risk Factors in our Annual Report on Form 10-K for the
fiscal year ended September 30, 2010.

The
forward-looking statements are made as of the date hereof, and, except as
otherwise required by law, we cannot undertake to update or revise these
statements.

Overview

We
design, manufacture and sell electronic throttle controls, pneumatic controls
and electronic sensors for heavy trucks, transit busses and off-road equipment.
Electronic throttle controls send a signal proportional to throttle position to
adjust the speed of electronically controlled engines. The use of
electronically controlled engines is influenced primarily by emissions
regulations, because these engines generally produce lower emissions. The
original applications of electronic engines and electronic throttle controls were
in heavy trucks and transit busses in the United States and Europe in the late
1980s. As a result of the continuing implementation of more stringent
emissions standards worldwide, demand for electronically controlled engines and
electronic throttle control systems is expanding both geographically and into
lower horsepower engines. China, India and Russia are implementing more
stringent emissions standards for heavy trucks and transit busses, which we
believe will increase the penetration of electronic throttle controls
worldwide. Additionally, countries around the world have adopted emissions
regulations that we expect will continue to increase the use of electronic
throttle controls in off-road equipment. We also produce pneumatic controls and
electronic hand controls, which are generally sold to the same customer base as
our electronic throttle controls. These pneumatic products are used for vehicle
control system applications such as power take-offs, or PTOs, and air-control
applications. We believe that the demand for our products will be driven
primarily by emissions legislation and treaties, and by the economic cycles for
heavy trucks, transit busses and off-road equipment.

As
we move forward in fiscal 2011 and beyond, we plan to continue to work closely
with our existing and potential customers to design and develop new products
and adapt existing products to new applications, and to improve the
performance, reliability and cost-effectiveness of our products.

12

---



Critical Accounting
Policies and Estimates

Managements
discussion and analysis of our financial condition and results of operations
are based on our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these condensed consolidated financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, sales, cost of sales and expenses and related
disclosure of contingent assets and liabilities. We evaluate our estimates on
an on-going basis. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. There have been no significant changes to the
Companys significant accounting policies as described in the Companys Annual
Report on Form 10-K for the year ended September 30, 2010.

There
have been no recent accounting pronouncements expected to have a material
impact on the Companys financial condition, results of operations or cash
flows.

Results
of Operations
Financial Summary
(Dollars in Thousands)

|                              |  |                               |        |                            |   |                  |    |      |       |      |   |                  |   |   |        |    |  |       |   
|----------------------------- |  | ----------------------------- | ------ | -------------------------- | - | ---------------- | -- | ---- | ----- | ---- | - | ---------------- | - | - | ------ | -- |  | ----- | --
|                              |  | Three
 MonthsEnded March
 31, |        | Six MonthsEnded March
 31, |  
|                              |  |                               |        |                            |  
|                              |  | 2011                          |        | 2010                       |   | Percent 
 Change |    | 2011 |       | 2010 |   | Percent 
 Change |  
|                              |  |                               |        |                            |   |                  |    |      |       |      |   |                  |  
|Net sales                     |  | $                             | 14,786 |                            | $ | 12,649           |    |      | 16.9  | %    | $ | 28,335           |   | $ | 24,358 |    |  | 16.3  | % 
|Cost of sales                 |  |                               | 10,372 |                            |   | 9,294            |    |      | 11.6  | %    |   | 19,641           |   |   | 17,416 |    |  | 12.8  | % 
|                              |  |                               |        |                            |   |                  |    |      |       |      |   |                  |   |   |        |    |  |       |   
|                              |  |                               |        |                            |   |                  |    |      |       |      |   |                  |   |   |        |    |  |       |   
|Gross profit                  |  |                               | 4,414  |                            |   | 3,355            |    |      | 31.6  | %    |   | 8,694            |   |   | 6,942  |    |  | 25.2  | % 
|                              |  |                               |        |                            |   |                  |    |      |       |      |   |                  |   |   |        |    |  |       |   
|Research and development      |  |                               | 1,138  |                            |   | 1,160            |    |      | (1.9  | )%   |   | 2,322            |   |   | 2,216  |    |  | 4.8   | % 
|Selling                       |  |                               | 706    |                            |   | 761              |    |      | (7.2  | )%   |   | 1,376            |   |   | 1,419  |    |  | (3.0  | )%
|Administration                |  |                               | 2,075  |                            |   | 1,451            |    |      | 43.0  | %    |   | 3,622            |   |   | 2,796  |    |  | 29.5  | % 
|Class action provision        |  |                               |       |                            |   | 775              |    |      | NM    |      |   |                 |   |   | 775    |    |  | NM    |   
|                              |  |                               |        |                            |   |                  |    |      |       |      |   |                  |   |   |        |    |  |       |   
|                              |  |                               |        |                            |   |                  |    |      |       |      |   |                  |   |   |        |    |  |       |   
|Operating income (loss)       |  | $                             | 495    |                            | $ | (792             | )  |      | 162.5 | %    | $ | 1,374            |   | $ | (264   | )  |  | 620.5 | % 
|                              |  |                               |        |                            |   |                  |    |      |       |      |   |                  |   |   |        |    |  |       |   
|                              |  |                               |        |                            |   |                  |    |      |       |      |   |                  |   |   |        |    |  |       |   
|As a percentage of net sales: |  |                               |        |                            |   |                  |    |      |       |      |   |                  |   |   |        |    |  |       |   
|Cost of sales                 |  |                               | 70.1   | %                          |   | 73.5             | %  |      |       |      |   | 69.3             | % |   | 71.5   | %  |  |       |   
|Gross margin                  |  |                               | 29.9   | %                          |   | 26.5             | %  |      |       |      |   | 30.7             | % |   | 28.5   | %  |  |       |   
|Research and development      |  |                               | 7.7    | %                          |   | 9.2              | %  |      |       |      |   | 8.2              | % |   | 9.1    | %  |  |       |   
|Selling                       |  |                               | 4.8    | %                          |   | 6.0              | %  |      |       |      |   | 4.9              | % |   | 5.8    | %  |  |       |   
|Administration                |  |                               | 14.0   | %                          |   | 11.5             | %  |      |       |      |   | 12.8             | % |   | 11.5   | %  |  |       |   
|Class action provision        |  |                               |       |                            |   | 6.1              | %  |      |       |      |   |                 |   |   | 3.2    | %  |  |       |   
|Operating income (loss)       |  |                               | 3.3    | %                          |   | (6.3             | )% |      |       |      |   | 4.8              | % |   | (1.1   | )% |  |       |   

NM = Not Meaningful

Net
sales increased to $14,786 for the second quarter of fiscal 2011, up 16.9%
compared to the second quarter of fiscal 2010 and up 9.1% compared to the first
quarter of fiscal 2011. Although we have continued to see improvement from our
low point in the third fiscal quarter of 2009, the heavy truck industry is
still significantly below levels prior to the economic downturn, and as a
result, our first six months annualized sales run rate was approximately 14%
below fiscal 2008 sales levels. While we continue to closely monitor all of our
costs, we remain committed to spending on new product development and
technology for existing and new customers. Although no assurances can be given,
management believes that it is likely that our $1,158 in cash plus available
borrowing of $5,298 under our revolving loan facility will be adequate to
sustain the Company throughout the fiscal year.

13

---



|                                                              
|--------------------------------------------------------------
|                                                              
|Comparative  Three months ended March 31,
      2011 and 2010
|                                                              

|                                      |  |      |        |      |   |              |  |                |       | 
|------------------------------------- |  | ---- | ------ | ---- | - | ------------ |  | -------------- | ----- | 
|                                      |  |      |        |      |   |              |  | Percent Change |      
|                                      |  |      |        |      |   |              |  |                |      
|For the
 Three Months Ended March 31: |  | 2011 |        | 2010 |   | 2010 to 2011 | 
|                                      |  |      |        |      |   |              | 
|Net sales                             |  | $    | 14,786 |      | $ | 12,649       |  |                | 16.9% | 

Net
sales increased $2,137 in the second quarter of fiscal 2011 compared to the
second quarter of fiscal 2010. The increase in sales results from volume
increases primarily in the European and NAFTA truck markets. European truck
sales increased 107% over the prior year second quarter primarily due to our
European customers continuing to increase their heavy truck and off-road build
rates. In addition, European sales were low during the second quarter of fiscal
2010 as these customers were working through high inventory levels from fiscal
2009. NAFTA truck sales increased 37% when compared to the second quarter of
fiscal 2010 due to continued improvements in the economic environment. Asian
truck sales were down 6% primarily due to timing of customer orders, whereas
sales to Asian off-road customers increased 41% when compared to the second
quarter of fiscal 2010. Worldwide off-road sales increased 9% for the
quarter ended March 31, 2011; however, sales related to specific military applications declined approximately 50% during the second quarter of fiscal 2011 as compared to the prior year second quarter as two prominent military programs have been completed and one replacement program has yet to be started.

We
expect that electronic throttle control sales generally will continue to vary
directly with future changes in the overall economy and the demand for heavy
trucks, transit buses and off-road vehicles in particular. These variations are
largely dependent upon, and are expected to vary directly with, production
volumes in the various geographic markets in which we serve. Additionally,
competitive pricing may reduce margins and gross sales.

|                                      |  |      |        |      |   |              |  |                |       | 
|------------------------------------- |  | ---- | ------ | ---- | - | ------------ |  | -------------- | ----- | 
|                                      |  |      |        |      |   |              |  | Percent Change |      
|                                      |  |      |        |      |   |              |  |                |      
|For the
 Three Months Ended March 31: |  | 2011 |        | 2010 |   | 2010 to 2011 | 
|                                      |  |      |        |      |   |              | 
|Cost of
 sales                        |  | $    | 10,372 |      | $ | 9,294        |  |                | 11.6% | 

The
types of expenses included in cost of sales include raw materials, freight and
duties, warranty, wages and benefits, depreciation and amortization, production
utilities, shipping and production supplies, repairs and maintenance,
production facility property insurance, and other production overhead. As a
percent of sales, cost of sales decreased primarily due to higher sales volumes
to distribute fixed overhead costs. Although sales volumes increased, freight
and duty costs decreased slightly on a quarter over quarter basis. Purchased
component costs were lower for certain components in the second quarter of
fiscal 2011 as production volumes continue to increase for recently introduced
new products. Warranty costs decreased $308 quarter over quarter as the second
quarter of fiscal 2010 included higher warranty costs related to warranty
claims with one customer. As sales volumes continue to improve from the lows
experienced in fiscal 2009, we are selectively adding to our manufacturing
support staff to accommodate the higher volumes. This decision resulted in
overhead wage expenses increasing $113 in the second quarter of fiscal 2011 as
compared to the second quarter of fiscal 2010. In addition, the second quarter
of fiscal 2011 included higher stock option expense of $71 and costs associated
with our India manufacturing facility which was opened during the third quarter
of fiscal 2010.

|                                      |  |      |       |      |   |              |  |                |       | 
|------------------------------------- |  | ---- | ----- | ---- | - | ------------ |  | -------------- | ----- | 
|                                      |  |      |       |      |   |              |  | Percent Change |      
|                                      |  |      |       |      |   |              |  |                |      
|For the
 Three Months Ended March 31: |  | 2011 |       | 2010 |   | 2010 to 2011 | 
|                                      |  |      |       |      |   |              | 
|Gross profit                          |  | $    | 4,414 |      | $ | 3,355        |  |                | 31.6% | 

Gross
profit was $4,414, or 29.9% of net sales in the second quarter of fiscal 2011,
an increase of $1,059 compared to the gross profit of $3,355, or 26.5% of net
sales, in the comparable fiscal 2010 period.

The
increase in gross profit in the second quarter of fiscal 2011 is primarily
driven by the 17% net increase in sales of electronic throttle systems to our
heavy truck, bus and off-road customers. When comparing the second quarter of
fiscal 2011 with the comparable period in fiscal 2010, manufacturing overhead
costs increased in actual dollar value; however, were improved as a percent of
sales.

|                                      |  |      |       |      |   |              |  |                |        | 
|------------------------------------- |  | ---- | ----- | ---- | - | ------------ |  | -------------- | ------ | 
|                                      |  |      |       |      |   |              |  | Percent Change |       
|                                      |  |      |       |      |   |              |  |                |       
|For the
 Three Months Ended March 31: |  | 2011 |       | 2010 |   | 2010 to 2011 | 
|                                      |  |      |       |      |   |              | 
|Research and
 development             |  | $    | 1,138 |      | $ | 1,160        |  |                | (1.9)% | 

Research
and development expenses were essentially unchanged when compared to the
comparable period in fiscal 2010. The Companys research and development
expenditures generally will fluctuate based on the programs and products under
development at any given point in time and that fluctuation often does not
necessarily coincide with

14

---



sales cycles.
Overall, we expect research and development expenses to increase slightly over
fiscal 2010 levels due to continued efforts to design new products.

|                                      |  |      |     |      |   |              |  |                |        | 
|------------------------------------- |  | ---- | --- | ---- | - | ------------ |  | -------------- | ------ | 
|                                      |  |      |     |      |   |              |  | Percent Change |       
|                                      |  |      |     |      |   |              |  |                |       
|For the
 Three Months Ended March 31: |  | 2011 |     | 2010 |   | 2010 to 2011 | 
|                                      |  |      |     |      |   |              | 
|Selling                               |  | $    | 706 |      | $ | 761          |  |                | (7.2)% | 

Selling
expenses decreased $55 when compared with the same period in fiscal 2010. The
decrease in selling expenses is primarily driven by a reduction in wage
expenses in our European sales office.

|                                      |  |      |       |      |   |              |  |                |       | 
|------------------------------------- |  | ---- | ----- | ---- | - | ------------ |  | -------------- | ----- | 
|                                      |  |      |       |      |   |              |  | Percent Change |      
|                                      |  |      |       |      |   |              |  |                |      
|For the
 Three Months Ended March 31: |  | 2011 |       | 2010 |   | 2010 to 2011 | 
|                                      |  |      |       |      |   |              | 
|Administration                        |  | $    | 2,075 |      | $ | 1,451        |  |                | 43.0% | 

Administration
expenses increased $624 for the second quarter of fiscal 2011 when compared to
the second quarter of fiscal 2010. Administration expenses in the second
quarter of fiscal 2011 include $204 in legal fees associated with settlement of
an old outstanding claim against the Company by a former employee, whereas the
second quarter of fiscal 2010 includes $136 in legal fees associated with the
Cuesta class action lawsuit, which was settled in the fourth quarter of fiscal
2010. In the current quarter, administration expenses included $248 related to
a potential acquisition that the Company considered but ultimately terminated
during due diligence in the second quarter of fiscal 2011, as well as costs
associated with our India facility which was opened during the third quarter of
fiscal 2010. As sales volumes continue to improve, we are filling positions
left vacant during the economic downturn experienced in late 2009 through 2010
resulting in administration wage expenses increasing $53 in the second quarter
of fiscal 2011 as compared to the second quarter of fiscal 2010.

|                                      |  |      |   |      |   |              |  |                |    | 
|------------------------------------- |  | ---- | - | ---- | - | ------------ |  | -------------- | -- | 
|                                      |  |      |   |      |   |              |  | Percent Change |   
|                                      |  |      |   |      |   |              |  |                |   
|For the
 Three Months Ended March 31: |  | 2011 |   | 2010 |   | 2010 to 2011 | 
|                                      |  |      |   |      |   |              | 
|Class action
 provision               |  | $    |  |      | $ | 775          |  |                | NM | 

During
the second quarter of fiscal 2010, the Company recorded a $775 liability which
represented the Companys best estimate at that time of the ultimate liability
related to the Cuesta class action lawsuit discussed in Note 13 to our
unaudited condensed consolidated financial statements. During the fourth
quarter of fiscal 2010, the $775 was paid for full settlement and release of
any future obligations related to this lawsuit.

|                                      |  |      |   |      |   |              |   |                |    | 
|------------------------------------- |  | ---- | - | ---- | - | ------------ | - | -------------- | -- | 
|                                      |  |      |   |      |   |              |   | Percent Change |   
|                                      |  |      |   |      |   |              |   |                |   
|For the
 Three Months Ended March 31: |  | 2011 |   | 2010 |   | 2010 to 2011 |  
|                                      |  |      |   |      |   |              |  
|Other
 (income) expense               |  | $    | 3 |      | $ | (64          | ) |                | NM | 

Other
expense was $3 in the second quarter of fiscal 2011, compared to other income
of $64 in the second quarter of fiscal 2010, which solely consisted of a gain from
the extinguishment of old outstanding accounts payable balances of various
insolvent subsidiaries.

|                                      |  |      |     |      |   |              |   |                |        | 
|------------------------------------- |  | ---- | --- | ---- | - | ------------ | - | -------------- | ------ | 
|                                      |  |      |     |      |   |              |   | Percent Change |       
|                                      |  |      |     |      |   |              |   |                |       
|For the
 Three Months Ended March 31: |  | 2011 |     | 2010 |   | 2010 to 2011 |  
|                                      |  |      |     |      |   |              |  
|Income tax
 (benefit) expense         |  | $    | 253 |      | $ | (296         | ) |                | 185.5% | 

Income
tax (benefit) expense reflects an effective tax rate of 53.0% for the quarter
ended March 31, 2011 compared to an effective tax rate of 40.7% for the quarter
ended March 31, 2010. The effective tax rate fluctuations are primarily due to
the jurisdictions in which pretax income (loss) is being earned and income tax
rate differences between the domestic and foreign jurisdictions. The increase
in the tax rate from 2010 to 2011 is also due to the recognition of a valuation
allowance against the Companys Indian subsidiarys deferred tax assets during
the quarter ended March 31, 2011, that the Company determined did not meet the
more-likely-than-not recognition threshold.

The
income tax (benefit) expense was positively affected by $52 and $124 as a
result of a tax holiday in the Peoples Republic of China during the three
months ended March 31, 2011 and March 31, 2010, respectively.

15

---



|                                                       
|-------------------------------------------------------
|                                                       
|Comparative  Six months ended March 31,
 2011 and 2010
|                                                       

|                                    |  |      |        |      |   |              |  |                |       | 
|----------------------------------- |  | ---- | ------ | ---- | - | ------------ |  | -------------- | ----- | 
|                                    |  |      |        |      |   |              |  | Percent Change |      
|                                    |  |      |        |      |   |              |  |                |      
|For the
 Six Months Ended March 31: |  | 2011 |        | 2010 |   | 2010 to 2011 | 
|                                    |  |      |        |      |   |              | 
|Net sales                           |  | $    | 28,335 |      | $ | 24,358       |  |                | 16.3% | 

Net
sales increased $3,977 in the first six months of fiscal 2011 compared to the
first six months of fiscal 2010. The increase in sales results from volume
increases in essentially all of the Companys principal markets. Each market
benefitted from the general increase in the condition of the global economy.

Overall
net sales to customers in Asia increased 23% over the prior year period
primarily due to increased sales volumes of heavy trucks and off-road vehicles.
 European truck sales were up 79% over the same period in fiscal
2010 due to our European customers increasing their heavy truck build rates. In
addition, European truck sales were low during the first six months of fiscal
2010 as these customers were working through the build up of inventory levels
experienced in fiscal 2009. NAFTA truck sales were up 24% when compared to the
first six months of fiscal 2010 due to general improvements in the economic
environment. Various industry forecasts indicate that truck sales volumes in
NAFTA may continue to increase due to the economic recovery and the overall
advanced age of the NAFTA truck fleet. Lastly, worldwide off-road sales were up
12% for the first six months ended March 31, 2011. The largest impact of this
increase in off-road sales was seen in the Asian and European markets, whereas in the NAFTA off-road market, sales related to specific military applications decreased approximately 50% as two prominent military programs have been completed and one replacement program has yet to be started.

|                                    |  |      |        |      |   |              |  |                |       | 
|----------------------------------- |  | ---- | ------ | ---- | - | ------------ |  | -------------- | ----- | 
|                                    |  |      |        |      |   |              |  | Percent Change |      
|                                    |  |      |        |      |   |              |  |                |      
|For the
 Six Months Ended March 31: |  | 2011 |        | 2010 |   | 2010 to 2011 | 
|                                    |  |      |        |      |   |              | 
|Cost of
 sales                      |  | $    | 19,641 |      | $ | 17,416       |  |                | 12.8% | 

The
types of expenses included in cost of sales include raw materials, freight and
duties, warranty, wages and benefits, depreciation and amortization, production
utilities, shipping and production supplies, repairs and maintenance,
production facility property insurance, and other production overhead. As a
percent of sales, cost of sales decreased primarily due to higher sales volumes
to distribute fixed overhead costs. Although sales volumes increased, freight
and duty costs decreased slightly between periods. Purchase component costs
were lower for certain components in the first six months of fiscal 2011 and
production volumes continue to increase for recently introduced new products.
Warranty costs decreased $375 when comparing the first six months of fiscal
2011 and 2010, as the first six months of fiscal 2010 included higher warranty
costs related to warranty claims with one customer. As sales volumes continue
to improve from the lows experienced in fiscal 2009, we are selectively adding
to our manufacturing support staff to accommodate the higher volumes resulting
in overhead wage and benefit expenses increasing $249 in the first six months
of fiscal 2011 as compared to the first six months of fiscal 2010. In addition,
the first six months of fiscal 2011 included higher stock option expense of $76
and costs associated with our India manufacturing facility which was opened during
the third quarter of fiscal 2010.

|                                    |  |      |       |      |   |              |  |                |       | 
|----------------------------------- |  | ---- | ----- | ---- | - | ------------ |  | -------------- | ----- | 
|                                    |  |      |       |      |   |              |  | Percent Change |      
|                                    |  |      |       |      |   |              |  |                |      
|For the
 Six Months Ended March 31: |  | 2011 |       | 2010 |   | 2010 to 2011 | 
|                                    |  |      |       |      |   |              | 
|Gross profit                        |  | $    | 8,694 |      | $ | 6,942        |  |                | 25.2% | 

Gross
profit was $8,694, or 30.7% of net sales in the first six months of 2011, an
increase of $1,752 compared to gross profit of $6,942, or 28.5% of net sales,
in the comparable fiscal 2010 period.

The
increase in gross profit in the first six months of fiscal 2010 is primarily
driven by the 16% net increase in sales of electronic throttle systems to our
heavy truck, bus and off-road customers. When comparing the first six months of
fiscal 2011 with the comparable period in fiscal 2010, manufacturing overhead
costs increased in actual dollar value; however, were improved as a percent of
sales.

|                                    |  |      |       |      |   |              |  |                |      | 
|----------------------------------- |  | ---- | ----- | ---- | - | ------------ |  | -------------- | ---- | 
|                                    |  |      |       |      |   |              |  | Percent Change |     
|                                    |  |      |       |      |   |              |  |                |     
|For the
 Six Months Ended March 31: |  | 2011 |       | 2010 |   | 2010 to 2011 | 
|                                    |  |      |       |      |   |              | 
|Research and
 development           |  | $    | 2,322 |      | $ | 2,216        |  |                | 4.8% | 

16

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Research
and development expenses increased $106 during the first six months of fiscal
2011 when compared to the first six months of fiscal 2010. The Companys
research and development expenditures will fluctuate based on the products
under development at any given point in time and that fluctuation often does
not necessarily coincide with sales cycles. Research and development expenses
have increased as we continue to have a record number of engineering projects
under development and to meet the higher demand; we have added three additional
engineers who are working on customer specific projects. Overall, we expect
research and development expenses to increase slightly over fiscal 2010 levels
due to additional new product design projects.

|                                    |  |      |       |      |   |                |  |  |        | 
|----------------------------------- |  | ---- | ----- | ---- | - | -------------- |  |  | ------ | 
|                                    |  |      |       |      |   | Percent Change | 
|                                    |  |      |       |      |   |                | 
|For the
 Six Months Ended March 31: |  | 2011 |       | 2010 |   | 2010 to 2011   | 
|                                    |  |      |       |      |   |                | 
|Selling                             |  | $    | 1,376 |      | $ | 1,419          |  |  | (3.0)% | 

Selling
expenses decreased $43 during the six months ended March 31, 2011 as compared
with the six months ended March 31, 2010 mainly due to reduction in wage
expenses in our European sales office.

|                                    |  |      |       |      |   |                |  |  |       | 
|----------------------------------- |  | ---- | ----- | ---- | - | -------------- |  |  | ----- | 
|                                    |  |      |       |      |   | Percent Change | 
|                                    |  |      |       |      |   |                | 
|For the
 Six Months Ended March 31: |  | 2011 |       | 2010 |   | 2010 to 2011   | 
|                                    |  |      |       |      |   |                | 
|Administration                      |  | $    | 3,622 |      | $ | 2,796          |  |  | 29.5% | 

Administration
expenses for the first six months of fiscal 2011 increased $826 when compared
with the same period in fiscal 2010. Administration expenses in the first six
months of fiscal 2011 include $219 in legal fees associated with settlement of
an old outstanding claim against the Company by a former employee, whereas the
first six months of fiscal 2010 includes $380 in legal fees associated with the
Cuesta class action lawsuit, which was settled in the fourth quarter of fiscal
2010. In the first six months of fiscal 2011, administration expenses included
$409 related to a potential acquisition that the Company considered but
ultimately decided to terminate during due diligence, as well as costs
associated with our India facility which was opened during the third quarter of
fiscal 2010. As sales volumes continue to improve, we are filling positions
left vacant during the economic downturn experienced in late 2009 through 2010
resulting in administration wage expenses increasing $134 in the first six
months of fiscal 2011 as compared to the same period in fiscal 2010.

|                                    |  |      |   |      |   |                |  |  |    | 
|----------------------------------- |  | ---- | - | ---- | - | -------------- |  |  | -- | 
|                                    |  |      |   |      |   | Percent Change | 
|                                    |  |      |   |      |   |                | 
|For the
 Six Months Ended March 31: |  | 2011 |   | 2010 |   | 2010 to 2011   | 
|                                    |  |      |   |      |   |                | 
|Class action
 provision             |  | $    |  |      | $ | 775            |  |  | NM | 

During
the second quarter of fiscal 2010, the Company recorded a $775 liability which
represents the Companys best estimate of the ultimate liability related to the
Cuesta class action lawsuit discussed in Note 13 to our unaudited condensed
consolidated financial statements. During the fourth quarter of fiscal 2010,
the $775 was paid for full settlement and release of any future obligations
related to this lawsuit.

|                                    |  |      |    |      |   |                |   |  |        | 
|----------------------------------- |  | ---- | -- | ---- | - | -------------- | - |  | ------ | 
|                                    |  |      |    |      |   | Percent Change |  
|                                    |  |      |    |      |   |                |  
|For the
 Six Months Ended March 31: |  | 2011 |    | 2010 |   | 2010 to 2011   |  
|                                    |  |      |    |      |   |                |  
|Other
 (income) expense             |  | $    | 41 |      | $ | (57            | ) |  | 171.9% | 

Other
expense was $41 in the first six months of fiscal 2011, compared to other
income of $57 in the first six months of fiscal 2010. Other income in the first
six months of fiscal 2010 consisted of a $64 gain from the extinguishment of
old outstanding accounts payable balances of various insolvent subsidiaries.

|                                    |  |      |     |      |   |                |   |  |        | 
|----------------------------------- |  | ---- | --- | ---- | - | -------------- | - |  | ------ | 
|                                    |  |      |     |      |   | Percent Change |  
|                                    |  |      |     |      |   |                |  
|For the
 Six Months Ended March 31: |  | 2011 |     | 2010 |   | 2010 to 2011   |  
|                                    |  |      |     |      |   |                |  
|Income tax
 (benefit) expense       |  | $    | 442 |      | $ | (172           | ) |  | 357.0% | 

Tax (benefit) expense reflects an effective tax rate of 33.7% for the
first six months of fiscal 2011 compared to an effective tax rate of 82.3% for
the comparable period in fiscal 2010. The effective tax rate
fluctuations are primarily due to the jurisdictions in which pretax income
(loss) is being earned and income tax rate differences between the domestic and
foreign jurisdictions. The decrease in the tax rate from 2010 to 2011 is also
due to a discrete tax benefit recognized during the six months ended March 31,
2010 associated with the class action lawsuit, partially offset by the

17

---



recognition of
a valuation allowance against the Companys Indian subsidiarys deferred tax
assets during the six months ended March 31, 2011, that the Company determined
did not meet the more-likely-than-not recognition threshold.

The
income tax (benefit) expense was positively affected by $98 and $209 as a
result of a tax holiday in the Peoples Republic of China during the six months
ended March 31, 2011 and March 31, 2010, respectively.

Financial
Condition, Liquidity and Capital Resources

At
March 31, 2011, we had cash and cash equivalents of $1,158. During the third
quarter of fiscal 2010 we entered into a revolving loan facility with U.S. Bank
and as of March 31, 2011 we had $5,298 available under such revolving loan
facility. Although no assurances can be given, we believe that our $1,158 in
cash plus available borrowings of $5,298 under our revolving loan facility will
be adequate to sustain the Company throughout the fiscal year.

The first
six months of fiscal 2011 operating activities used cash of $1,465, whereas the
first six months of fiscal 2010 generated cash from operating activities of
$1,284. Net income plus non cash charges for depreciation and stock based
compensation contributed $2,398 in the first six months of fiscal 2011 compared
to $1,312 in the first six months of fiscal 2010.

Changes in
working capital items used cash of $3,837 in the first six months of fiscal
2011 compared to a generation of cash of $13 in the first six months of fiscal
2010. Changes in receivables for the first six months of fiscal 2011 was a use
of cash of $956 compared to a use of cash of $1,736 for the first six months of
fiscal 2010. Changes in receivables between periods are primarily impacted by
changes in sales volumes from period to period and timing of collections.
Inventories increased $1,147 in the first six months of fiscal 2011 from the
fourth fiscal quarter in 2010 compared to inventories remaining relatively flat
in the first six months of fiscal 2010 when compared to the fourth fiscal
quarter in 2009. The fiscal 2011 increase primarily relates to increasing
inventory levels in line with anticipated sales volumes increases throughout
fiscal 2011 as compared to fiscal 2010 and building inventories at our India
facility ahead of the start of production at that facility. Accounts payable
and accrued expenses decreased in the first six months of fiscal 2011 from the
fourth quarter of fiscal 2010, primarily due to timing of payments on accounts
payable, increased seasonal payments over the fourth fiscal quarter of 2010 and
a reduction in our warranty provision of $392 related to payments to one
customer for prior warranty claims. Accounts payable and accrued expenses
increased in the first six months of fiscal 2010 from the fourth quarter of
fiscal 2009, primarily due to increases in purchases of inventory in line with
increased sales levels over those in the fourth quarter of fiscal 2009,
increases in our warranty provision related to claims with one customer and the
accrual of the Cuesta legal settlement, which was paid during the fourth
quarter of fiscal 2010. These increases in accounts payable and accrued
expenses were partially offset by reductions due to increased seasonal payments
over the fourth fiscal quarter of 2009. Cash flows from operations for the six
months of fiscal 2011 included payments to our pension plans of $614 compared
to $142 for the first six months of fiscal 2010. We believe it is likely we
will continue to generate positive cash from operations during fiscal 2011,
however, depending on the continued uncertainty in the world-wide economic
market, we could experience periods of negative cash flow from operations.

Cash
used in investing activities was $1,662 for the first six months of fiscal 2011
and $981 for the six months ended March 31, 2010 and was comprised primarily of
purchases of equipment for both periods. We expect our cash use for investing
activities to increase throughout fiscal year 2011 as we continue to make
purchases of capital equipment. We currently anticipate spending approximately
$4,000 in capital expenditures in fiscal 2011. This is a higher capital
spending level than what we experienced last year as we have a number of new
projects and we are expanding our test and development facilities to handle the
increased activity. In addition, with the opening of our Pune, India manufacturing
facility, we will incur higher than normal capital expenditures during the
year.

Cash
generated from financing activities was $1,269 for the first six months of
fiscal 2011 and $12 for the first six months of fiscal 2010. Cash generated for
financing activities for the first six months of fiscal 2011 primarily relates
to net borrowings on our revolving loan facility of $1,240 and proceeds from
the exercise of stock options of $29. Cash generated from financing activities
for the first six months of fiscal 2010 relates to proceeds from the exercise
of stock options of $12. In the second quarter of fiscal 2011, the Company
announced a quarterly dividend policy. The first dividend of $0.12 per common
share under this new policy was declared in the second quarter and is payable
on May 12, 2011 to stockholders of record on May 2, 2011. This policy is
subject to review and adjustment by the Board of Directors and may be modified
or cancelled at any time.

18

---



Contractual Obligations as of March 31, 2011

At
March 31, 2011, our contractual obligations consisted of operating lease
obligations and a license agreement. We did not have any material letters of
credit, or debt guarantees outstanding at March 31, 2011. Maturities of these
contractual obligations consist of the following:

|                             |  |                         |       |                    |   |              |  |              |     |  |   |   | 
|---------------------------- |  | ----------------------- | ----- | ------------------ | - | ------------ |  | ------------ | --- |  | - | - | 
|                             |  | Payments
 due by period |      
|                             |  |                         |      
|                             |  | Total                   |       | Less than
 1
 year |   | 1  3
 years |  | 3  5
 years |    
|                             |  |                         |       |                    |   |              |  |              |    
|Operating
 lease obligations |  | $                       | 1,256 |                    | $ | 666          |  | $            | 590 |  | $ |  | 
|MMT license
 - minimum       |  |                         |       |                    |   |              |  |              |     |  |   |   | 
|royalties                    |  |                         | 235   |                    |   | 85           |  |              | 150 |  |   |  | 
|                             |  |                         |       |                    |   |              |  |              |     |  |   |   | 
|                             |  | $                       | 1,491 |                    | $ | 751          |  | $            | 740 |  | $ |  | 
|                             |  |                         |       |                    |   |              |  |              |     |  |   |   | 

Certain
liabilities, including those related to our pension and post-retirement benefit
plans, are reported in the accompanying condensed consolidated balance sheets
but are not reflected in the table above due to the absence of stated
maturities. We have net obligations at March 31, 2011 related to our pension
plans and post-retirement medical plan of $5,969 and $2,508, respectively. We
funded $614 to our pension plans during the first six months of fiscal 2011 and
$142 during the first six months of fiscal 2010. We expect to make payments to
our pension plans of $429 throughout the rest of fiscal 2011.

Item 3. Quantitative and Qualitative Disclosures About
Market Risk

Market
risk is the potential loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates and changes in
the market value of investments.

Interest Rate Risk

The
Company has a revolving loan facility with U.S. Bank, which expires on June 30,
2012.

As
of March 31, 2011, there was an outstanding balance of $1,240 on the revolving
loan. The Company does not believe a hypothetical 10% change in end of period
interest rates or changes in future interest rates on these variable rate
obligations would have a material effect on its financial position, results of
operations, or cash flows. The Company has not hedged its exposure to interest
rate fluctuations.

Foreign Currency
Risk:

We
sell our products to customers in the heavy truck, transit bus and off-road
equipment industries. For the first six months of fiscal 2011 and 2010, the
Company had foreign sales of approximately 46% and 39% of net sales,
respectively. All worldwide sales in the first six months of fiscal 2011 and
2010, with the exception of $1,540 and $1,325, respectively, were denominated
in U.S. dollars. We have a manufacturing facility in Suzhou, China and sales
offices in Shanghai, China and Munich, Germany and during fiscal 2010; we
established a manufacturing facility in Pune, India. We purchase components
internationally for use in both our products whose sales are denominated in
U.S. dollars and other currencies. Although the Company is expanding its
international exposure, it does not believe that changes in future exchange
rates would have a material effect on its financial position, results of
operations, or cash flows at this time. As a result, the Company has not
entered into forward exchange or option contracts for transactions to hedge
against foreign currency risk. The Company will continue to assess its foreign
currency risk as its international operations, international purchases and
sales increase.

Investment Risk:

The
Company does not use derivative financial or commodity instruments. The
Companys financial instruments include cash and cash equivalents, accounts
receivable, accounts payable and long-term obligations. The Companys cash and
cash equivalents, accounts receivable and accounts payable balances are
short-term in nature, and, thus, the Company believes they are not exposed to
material investment risk.

19

---



Item 4. Controls and Procedures

Evaluation of Disclosure Controls and
Procedures

The
Companys Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of our disclosure controls and procedures as of the end of
the period covered by this report pursuant to Rule 13a-15(b) under the
Securities Exchange Act of 1934 (the Exchange Act). Based on that evaluation,
the Companys Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures are effective in ensuring that information
required to be disclosed in our Exchange Act reports is (1) recorded,
processed, summarized and reported in a timely manner, and (2) accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.

Changes in Internal Controls

There
has been no change in the Companys internal controls over financial reporting
that occurred during our last fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal controls over financial
reporting.

Internal
control systems, no matter how well designed and operated, have inherent
limitations. Therefore, even a system which is determined to be effective
cannot provide absolute assurance that all control issues have been detected or
prevented. Our systems of internal controls are designed to provide reasonable
assurance with respect to financial statement preparation and presentation.

20

---



PART II  OTHER
INFORMATION

Item 1. Legal Proceedings

We
are a party to various pending judicial and administrative proceedings arising
in the ordinary course of business. Our management and legal counsel have
reviewed the probable outcome of these proceedings, the costs and expenses
reasonably expected to be incurred, the availability and limits of our
insurance coverage, and our established liabilities. While the outcome of the
pending proceedings cannot be predicted with certainty, based on our review, we
believe that any unrecorded liability that may result is not likely to have a
material effect on our liquidity, financial condition or results of operations.

During
the second quarter of fiscal 2011, we entered into a complete and final
settlement agreement regarding a lawsuit brought by a former Chief Executive
Officer of the Company. The total cost of the settlement was $250 and consisted
of a cash payment of $200 and issuance of 4,613 shares of common stock. The
stock was issued and payment was made during the third quarter of fiscal 2011.

Item 1A. Risk Factors

There
have been no significant changes in risk factors for the quarter ended March
31, 2011. See the information set forth in the section entitled Risk Factors
in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.

Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior
Securities

None

Item 4. Reserved

Item 5. Other Information

None

21

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Item 6. Exhibits

|                |  |                                                                                                                                                                                                                                                 
|--------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
 Number |  | Description                                                                                                                                                                                                                                     
|                |  |                                                                                                                                                                                                                                                 
|                |  |                                                                                                                                                                                                                                                 
|3.01(a)         |  | Certificate of
 Incorporation of the Registrant, as amended (Incorporated
 by reference to Exhibit 3.01 (a) to the Registrants quarterly report on Form
 10-Q for the quarter ended December 31, 2006)                                         
|                |  |                                                                                                                                                                                                                                                 
|3.01(b)         |  | Certificate of Amendment to
 Certificate of Incorporation of the Registrant, dated February 27, 1995 (Incorporated by reference to Exhibit 3.01 (b) to
 the Registrants quarterly report on Form 10-Q for the quarter ended December
 31, 2006)
|                |  |                                                                                                                                                                                                                                                 
|3.01(c)         |  | Certificate of Amendment to
 Certificate of Incorporation of the Registrant, dated October 28, 2004 (Incorporated by reference to Exhibit 3.01 (c) to
 the Registrants quarterly report on Form 10-Q for the quarter ended December
 31, 2006) 
|                |  |                                                                                                                                                                                                                                                 
|3.01(d)         |  | Certificate of Amendment to
 Certificate of Incorporation of the Registrant, dated February 22, 2005 (Incorporated by reference to Exhibit 3.01 (d) to
 the Registrants quarterly report on Form 10-Q for the quarter ended December
 31, 2006)
|                |  |                                                                                                                                                                                                                                                 
|3.01(e)         |  | Certificate of Amendment to
 Certificate of Incorporation of the Registrant, dated March 2, 2006 (Incorporated by reference to Exhibit 3.01 (e) to
 the Registrants quarterly report on Form 10-Q for the quarter ended December
 31, 2006)    
|                |  |                                                                                                                                                                                                                                                 
|3.02            |  | Restated By-Laws of the
 Registrant as amended July 1, 2002 (Incorporated
 by reference to Exhibit 3.6 to the Registrants quarterly report on Form
 10-Q, Commission File No. 000-18083, for the quarter ended June 30, 2002)                  
|                |  |                                                                                                                                                                                                                                                 
|31.01           |  | Certification of Chief
 Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) (Filed herewith)                                                                                                                                         
|                |  |                                                                                                                                                                                                                                                 
|31.02           |  | Certification of Chief
 Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) (Filed herewith)                                                                                                                                         
|                |  |                                                                                                                                                                                                                                                 
|32.01           |  | Certification of Patrick W.
 Cavanagh Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
 906 of the Sarbanes-Oxley Act of 2002 (Filed
 herewith)                                                                                
|                |  |                                                                                                                                                                                                                                                 
|                |  |                                                                                                                                                                                                                                                 
|32.02           |  | Certification of Dennis E.
 Bunday Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906
 of the Sarbanes-Oxley Act of 2002 (Filed
 herewith)                                                                                   

22

---



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.

|      |              |                                        | 
|----- | ------------ | -------------------------------------- | 
|      |              | WILLIAMS
 CONTROLS, INC.              
|      |              |                                       
|Date: | May 12, 2011 | /s/ PATRICK W. CAVANAGH               
|      |              |                                        | 
|      |              | Patrick W. Cavanagh                   
|      |              | President
 and Chief Executive Officer
|      |              |                                       
|      |              |                                       
|Date: | May 12, 2011 | /s/ DENNIS E. BUNDAY                  
|      |              |                                        | 
|      |              | Dennis E. Bunday                      
|      |              | Chief
 Financial Officer              

23

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