# 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: June 30, 2004

# Commission file number
0-18083

Williams Controls, Inc.(Exact name of registrant as specified in its charter)

|Delaware                                                      | 84-1099587                         
|------------------------------------------------------------- | -----------------------------------
|(State or other jurisdiction ofincorporation or organization) | (I.R.S. EmployerIdentification 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 [   ]

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

Yes [   ]     No [X]

The number of shares
outstanding of the registrants common stockat July 31, 2004: 23,019,175



# DISCLOSURE REGARDING
FORWARD LOOKING STATEMENTS

This report, including the Notes
to Unaudited Consolidated Financial Statements, contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include, without limitation, those statements relating to development of new
products, the financial condition of the Company, the ability to increase distribution of
the Companys products, integration of businesses the Company acquires, and
disposition of any current business of the Company. Forward-looking statements can be
identified by the use of forward-looking terminology, such as may,
will, should, expect, anticipate,
estimate, continue, plans, intends, or
other similar terminology. These forward-looking statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results may differ materially from what is
anticipated or forecasted in these forward-looking statements due to numerous factors,
including, but not limited to, the ability of the Company to generate or obtain sufficient
working capital to continue its operations, changes in demand for the Companys
products, the timing of customer orders and deliveries, and the impact of competitive
products and pricing. In addition, such statements could be affected by general industry
and market conditions and growth rates, and general domestic and international economic
conditions.



# Williams Controls, Inc.

# June 30, 2004

# Table of Contents

|                                                                       | PageNumber
|---------------------------------------------------------------------- | ----------
|Part I.  Financial Information                                         |           
|                                                                       |           
|Item 1. Financial Statements (unaudited)                               |           
|                                                                       |           
|Condensed Consolidated Balance Sheets, June 30, 2004 and               |           
|September 30, 2003                                                     |           
|                                                                       |           
|Condensed Consolidated Statements of Operations, three and nine months |           
|ended June 30, 2004 and 2003                                           |           
|                                                                       |           
|Condensed Consolidated Statements of Cash Flows, nine months ended     |           
|June 30, 2004 and 2003                                                 |           
|                                                                       |           
|Notes to Condensed Consolidated Financial Statements                   |           
|                                                                       |           
|Item 2.  Management's Discussion and Analysis of Financial Condition   |           
|and Results of Operations                                              |           
|                                                                       |           
|Item 3.  Quantitative and Qualitative Disclosures About Market Risk    |           
|                                                                       |           
|Item 4.  Controls and Procedures                                       |           
|                                                                       |           
|Part II.  Other Information                                            |           
|                                                                       |           
|Item 1.  Legal Proceedings                                             |           
|                                                                       |           
|Item 2.  Changes in Securities and Use of Proceeds                     |           
|                                                                       |           
|Item 3.  Defaults Upon Senior Securities                               |           
|                                                                       |           
|Item 4.  Submission of Matters to a Vote of Security Holders           |           
|                                                                       |           
|Item 5.  Other Information                                             |           
|                                                                       |           
|Item 6.  Exhibits and Reports on Form 8-K                              |           
|                                                                       |           
|Signature Page                                                         |           



# Part I

# Item 1. Financial
Statements

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

|                                                                | June 30,2004 |  | September 30,2003 |        
|--------------------------------------------------------------- | ------------ |  | ----------------- | -------
|ASSETS                                                          |              |  |                   |        
|Current Assets:                                                 |              |  |                   |        
|Cash and cash equivalents                                       |              |  | $                 | 6,049  
|Trade accounts receivable, less allowance of                    |              | 
|$49 and $26 at June 30, 2004 and September 30                   |              | 
|2003, respectively                                              |              |  |                   | 8,630  
|Other accounts receivable                                       |              |  |                   | 491    
|Inventories, net                                                |              |  |                   | 3,814  
|Prepaid expenses and other current assets                       |              |  |                   | 546    
|                                                                |              |  |                   |        
|Total current assets                                            |              |  |                   | 19,530 
|                                                                |              |  |                   |        
|Property, plant, and equipment, net                             |              |  |                   | 5,361  
|Other assets, net                                               |              |  |                   | 551    
|                                                                |              |  |                   |        
|Total assets                                                    |              |  | $                 | 25,442 
|                                                                |              |  |                   |        
|LIABILITIES AND SHAREHOLDERS' DEFICIT                           |              | 
|Current Liabilities:                                            |              | 
|Accounts payable                                                |              |  | $                 | 3,755  
|Accrued expenses                                                |              |  |                   | 3,938  
|Current portion of employee benefit obligations                 |              |  |                   | 2,949  
|Current portion of long-term debt and capital leases            |              |  |                   | 332    
|                                                                |              |  |                   |        
|Total current liabilities                                       |              |  |                   | 10,974 
|                                                                |              |  |                   |        
|Long-term Liabilities:                                          |              | 
|Long-term debt and capital lease obligations                    |              |  |                   | 151    
|Employee benefit obligations                                    |              |  |                   | 7,043  
|Mandatory redeemable Convertible Series B Preferred Stock, net  |              | 
|(153,550 issued and outstanding at June 30, 2004 and            |              | 
|September 30, 2003)                                             |              |  |                   | 18,454 
|                                                                |              |  |                   |        
|Commitments and contingencies                                   |              | 
|                                                                |              |  |                   |        
|Shareholders' Deficit:                                          |              | 
|Preferred stock ($.01 par value, 50,000,000 authorized)         |              | 
|Series A-1 (77,550 issued and outstanding at June 30,           |              | 
|2004 and September 30, 2003)                                    |              |  |                   | 1      
|Series A (0 and 150 issued and outstanding at June 30, 2004     |              | 
|and September 30, 2003)                                         |              |  |                   | --     
|Common stock ($.01 par value, 50,000,000 authorized; 23,019,175 |              | 
|and 20,125,492 issued and outstanding at June 30, 2004 and      |              | 
|September 30, 2003)                                             |              |  |                   | 230    
|Additional paid-in capital                                      |              |  |                   | 24,434 
|Accumulated deficit                                             |              |  |                   | (29,676
|Treasury stock (130,200 shares at June 30, 2004 and             |              | 
|September 30, 2003)                                             |              |  |                   | (377   
|Other comprehensive loss - Pension liability adjustment         |              |  |                   | (5,792 
|                                                                |              |  |                   |        
|Total shareholders' deficit                                     |              |  |                   | (11,180
|                                                                |              |  |                   |        
|Total liabilities and shareholders' deficit                     |              |  | $                 | 25,442 
|                                                                |              |  |                   |        

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 EndedJune 30, |  | Nine Months EndedJune 30, |           
|--------------------------------------------------------------------- | -------------------------- |  | ------------------------- | ----------
|
|Net sales                                                             |                            |  | $                         | 15,127    
|Cost of sales                                                         |                            |  |                           | 10,098    
|                                                                      |                            |  |                           |           
|Gross margin                                                          |                            |  |                           | 5,029     
|                                                                      |                            |  |                           |           
|Operating expenses (income):                                          |                            | 
|Research and development                                              |                            |  |                           | 858       
|Selling                                                               |                            |  |                           | 339       
|Administration                                                        |                            |  |                           | 1,186     
|Gain on settlement with customer                                      |                            |  |                           | --        
|                                                                      |                            |  |                           |           
|Total operating expenses                                              |                            |  |                           | 2,383     
|                                                                      |                            |  |                           |           
|Operating income from continuing operations                           |                            |  |                           | 2,646     
|                                                                      |                            |  |                           |           
|Other (income) expenses:                                              |                            | 
|Interest income                                                       |                            |  |                           | (1        
|Interest expense - Debt                                               |                            |  |                           | 17        
|Interest expense - Series B Preferred Stock dividends and             |                            | 
|accretion                                                             |                            |  |                           | 822       
|Other (income) expenses, net                                          |                            |  |                           | 253       
|                                                                      |                            |  |                           |           
|Total other expenses                                                  |                            |  |                           | 1,091     
|                                                                      |                            |  |                           |           
|Income from continuing operations before income taxes                 |                            |  |                           | 1,555     
|Income tax expense (benefit)                                          |                            | 
|                                                                      |                            |  |                           | 42        
|                                                                      |                            |  |                           |           
|Net income from continuing operations                                 |                            |  |                           | 1,513     
|Discontinued operations:                                              |                            | 
|(Income) loss from operations of discontinued operations              |                            |  |                           | 41        
|Loss from sale of discontinued operations                             |                            |  |                           | --        
|Gain from settlement of obligations                                   |                            |  |                           | --        
|                                                                      |                            |  |                           |           
|Total discontinued operations                                         |                            |  |                           | 41        
|                                                                      |                            |  |                           |           
|                                                                      |                            |  |                           |           
|Net income                                                            |                            |  |                           | 1,472     
|Preferred dividends and accretion of Series B Preferred Stock         |                            |  |                           | --        
|                                                                      |                            |  |                           |           
|                                                                      |                            |  |                           |           
|Net income (loss) allocable to common shareholders                    |                            |  | $                         | 1,472     
|                                                                      |                            |  |                           |           
|                                                                      |                            |  |                           |           
|Income (loss) per common share from continuing operations - basic     |                            |  | $                         | 0.04      
|Income (loss) per common share from discontinued operations - basic   |                            |  |                           | 0.00      
|                                                                      |                            |  |                           |           
|                                                                      |                            |  |                           |           
|Net income (loss) per common share - basic                            |                            |  | $                         | 0.04      
|                                                                      |                            |  |                           |           
|                                                                      |                            |  |                           |           
|Weighted average shares used in per share calculation - basic         |                            |  |                           | 34,769,175
|                                                                      |                            |  |                           |           
|                                                                      |                            |  |                           |           
|Income (loss) per common share from continuing operations - diluted   |                            |  | $                         | 0.04      
|Income (loss) per common share from discontinued operations - diluted |                            |  |                           | 0.00      
|                                                                      |                            |  |                           |           
|                                                                      |                            |  |                           |           
|Net income (loss) per common share - diluted                          |                            |  | $                         | 0.04      
|                                                                      |                            |  |                           |           
|                                                                      |                            |  |                           |           
|Weighted average shares used in per share calculation - diluted       |                            |  |                           | 59,048,884
|                                                                      |                            |  |                           |           

See accompanying notes
to Unaudited Condensed Consolidated Financial Statements.

2



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

|                                                                        | Nine Months EndedJune 30, | 
|----------------------------------------------------------------------- | ------------------------- | 
|
|Cash flows from operating activities:                                   |                           | 
|Net income                                                              |                           | 
|Adjustments to reconcile net income to net cash provided by             |                           | 
|operating activities:                                                   |                           | 
|(Gain) loss from discontinued operations                                |                           | 
|Loss from sale of fixed assets                                          |                           | 
|Depreciation  and amortization                                          |                           | 
|Interest expense - Series B Preferred Stock dividends and accretion     |                           | 
|Gain on settlement with customer                                        |                           | 
|Gain from settlement of liabilities                                     |                           | 
|Changes in operating assets and liabilities                             |                           | 
|Receivables, net                                                        |                           | 
|Inventories                                                             |                           | 
|Accounts payable and accrued expenses                                   |                           | 
|Other                                                                   |                           | 
|                                                                        |                           | 
|Net cash provided by operating activities                               |                           | 
|                                                                        |                           | 
|                                                                        |                           | 
|Cash flows from investing activities:                                   |                           | 
|Purchases of property, plant and equipment                              |                           | 
|Net proceeds received from sale of assets                               |                           | 
|Proceeds from collection on note receivable                             |                           | 
|                                                                        |                           | 
|Net cash provided by (used in) investing activities                     |                           | 
|                                                                        |                           | 
|                                                                        |                           | 
|Cash flows from financing activities:                                   |                           | 
|Net (payments) borrowings of debt and lease obligations                 |                           | 
|Net proceeds from exercise of warrants                                  |                           | 
|Net proceeds from issuance of common stock                              |                           | 
|Payment of Series A-1 dividends                                         |                           | 
|Redemption of Series A Preferred Stock and payment of dividends         |                           | 
|Repayment of subordinated debt                                          |                           | 
|Financing costs related to recapitalization                             |                           | 
|                                                                        |                           | 
|Net cash used in financing activities                                   |                           | 
|                                                                        |                           | 
|                                                                        |                           | 
|Net increase in cash and cash equivalents                               |                           | 
|                                                                        |                           | 
|Cash and cash equivalents at beginning of period                        |                           | 
|                                                                        |                           | 
|                                                                        |                           | 
|Cash and cash equivalents at end of period                              |                           | 
|                                                                        |                           | 
|                                                                        |                           | 
|Supplemental disclosure of cash flow information:                       |                           | 
|Interest paid                                                           |                           | 
|Income taxes paid (refund)                                              |                           | 
|Supplemental disclosure of non-cash investing and financing activities: |                           | 
|Preferred dividends accrued but not paid and Series B accretion         |                           | 
|Issuance of common stock for services previously accrued                |                           | 
|Issuance of notes receivable for sale of property                       |                           | 

See accompanying notes
to Unaudited Condensed Consolidated Financial Statements.

3



# Williams Controls, Inc. Notes to Condensed
Consolidated Financial Statements Three and Nine Months
ended June 30, 2004 and 2003 (Dollars in thousands,
except share and per share amounts) (Unaudited)

# Note 1. Organization

Williams Controls, Inc., including
its wholly-owned subsidiaries, Williams Controls Industries, Inc. (Williams);
Aptek Williams, Inc. (Aptek); Premier Plastic Technologies, Inc.
(PPT); ProActive Acquisition Corporation (ProActive); WMCO-Geo,
Inc. (GeoFocus); NESC Williams, Inc. (NESC); Williams
Technologies, Inc. (Technologies); Williams World Trade, Inc.
(WWT); Techwood Williams, Inc. (TWI); Agrotec Williams, Inc.
(Agrotec) and its 80% owned subsidiaries Hardee Williams, Inc.
(Hardee) and Waccamaw Wheel Williams, Inc. (Waccamaw) are
hereinafter referred to as the Company, we, our, or
us.

# Note 2. Basis of
Presentation

The accompanying unaudited interim
consolidated financial statements have been prepared by the Company and, in the opinion of
management, reflect all material normal recurring adjustments, which are necessary to
present fairly the Companys financial position as of June 30, 2004 and the results
of its operations for the three and nine months ended June 30, 2004 and 2003 and cash
flows for the nine months ended June 30, 2004. The results of operations for the three and
nine months ended June 30, 2004 are not necessarily indicative of the results to be
expected for the entire fiscal year.

Certain information and footnote
disclosures made in the last Annual Report on Form 10-K have been condensed or omitted for
the interim consolidated statements. Certain costs are estimated for the full year and
allocated to interim periods based on activity associated with the interim period.
Accordingly, such costs are subject to year-end adjustment. It is managements
opinion that, when the interim consolidated statements are read in conjunction with the
September 30, 2003 annual report on Form 10-K, the disclosures are adequate to make the
information presented not misleading. The interim consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.

The preparation of consolidated
financial statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reported periods. On an ongoing basis, the Company
evaluates its estimates, including those related to its allowance for doubtful accounts,
impairment of long-lived assets, warranties, pensions and post-retirement benefit
obligations, income taxes, and commitments and contingencies. Actual results could differ
from these estimates and assumptions.

Certain reclassifications of amounts
reported in the prior period financial statements have been made to conform to
classifications used in the current period financial statements.

# Note 3. Accounting for
stock based compensation

The Company has elected to account
for its stock-based compensation plans using the intrinsic value-based method under
Accounting Principles Board Opinion No. 25 (APB 25). Based on the provisions of Statement
of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, and SFAS No. 123, Accounting
for Stock-Based Compensation, the Company has computed, for pro forma disclosure
purposes, net income (loss) and net income (loss) per share as if the fair value based
method of accounting had been adopted.

During the three and nine months
ended June 30, 2004, the Company granted stock options to certain employees and directors.
As such, the Company computed, for pro forma disclosure purposes, the value of all options
granted during the three and nine months ended June 30, 2004, using the Black-Scholes
option pricing model as prescribed by SFAS No. 123 using the following weighted average
assumptions for grants. There were no option grants during the three and nine months ended
June 30, 2003.

4



|                        | Weighted Average
|----------------------- | ----------------
|Risk-free interest rate | 3.43%           
|Expected dividend yield | 0%              
|Expected lives          | 7 years         
|Expected volatility     | 100%            

Using the Black-Scholes methodology,
the total value of options granted during the three and nine months ended June 30, 2004
was $62 and $638, which would be amortized on a pro forma basis over the vesting period of
the options (typically five years). The weighted average per share fair value of options
granted during the three and nine months ended June 30, 2004 was $.66 and $.64,
respectively. If the Company had accounted for its stock-based compensation plans using
the fair value-based method in accordance with SFAS No. 123, the Companys net income
(loss) and net income (loss) per share would approximate the pro forma disclosures below:

|                                                                     | Three Months EndedJune 30 |               | Nine Months Ended June 30 |               
|-------------------------------------------------------------------- | ------------------------- | ------------- | ------------------------- | --------------
|
|Net income (loss) allocable to common shareholders as reported       |                           | $       1,472 |                           | $        (373)
|                                                                    
|Less: Total stock-based employee compensation expense                |                          
|determined under fair value based method, net of related tax effects |                           | (60)          |                           | (25)          
|                                                                     |                           |               |                           |               
|Pro forma net income (loss) allocable to common shareholders         |                           | $       1,412 |                           | $        (398)
|                                                                     |                           |               |                           |               
|Earnings per share:                                                  |                          
|Basic - as reported                                                  |                           | $        0.04 |                           | $       (0.02)
|                                                                     |                           |               |                           |               
|Basic - pro forma                                                    |                           | $        0.04 |                           | $       (0.02)
|                                                                     |                           |               |                           |               
|Diluted - as reported                                                |                           | $        0.04 |                           | $       (0.02)
|                                                                     |                           |               |                           |               
|Diluted - pro forma                                                  |                           | $        0.04 |                           | $       (0.02)
|                                                                     |                           |               |                           |               

# Note 4. Comprehensive
Income

SFAS No. 130, Reporting
Comprehensive Income, requires companies to report a measure of all changes in
equity except those resulting from investments by owners and distributions to owners.
Total comprehensive income for the three months ended June 30, 2004 and 2003 was $1,472
and $324, respectively, and for the nine months ended June 30, 2004 and 2003 was $3,724
and $1,844 respectively, and consisted solely of net income. As of June 30, 2004,
accumulated other comprehensive loss was $5,792 and consisted of accumulated benefit
obligations in excess of the plan assets for both the Hourly Employees Pension plan and
the Salaried Employees Pension Plan.

# Note 5. Income (Loss)
Per Share

Basic earnings per share
(EPS) and diluted EPS are computed using the methods prescribed by SFAS No.
128, 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 from continuing operations:

5



|                                      | Three Months EndedJune 30, 2004 |  | Three Months EndedJune 30, 2003 |      
|------------------------------------- | ------------------------------- |  | ------------------------------- | -----
|
|Net income from continuing operations |                                 |  | $                               | 1,513
|Less - Preferred dividends and        |                                 | 
|accretion of Series B preferred stock |                                 |  |                                 | --   
|                                      |                                 |  |                                 |      
|Basic EPS -                           |                                 | 
|Common Stock                          |                                 |  |                                 |      
|Preferred Stock - Series A-1          |                                 |  |                                 |      
|                                      |                                 |  |                                 |      
|Income (loss) allocable to common     |                                 | 
|shareholders from continuing          |                                 | 
|operations                            |                                 |  | $                               | 1,513
|                                      |                                 |  |                                 |      
|Effect of dilutive securities -       |                                 | 
|Stock options and warrants            |                                 |  |                                 | --   
|Preferred Stock - Series A            |                                 |  |                                 | --   
|Preferred Stock - Series B            |                                 |  |                                 | 822  
|                                      |                                 |  |                                 |      
|Diluted EPS -                         |                                 | 
|Income (loss) allocable to common     |                                 | 
|shareholders from continuing          |                                 | 
|operations                            |                                 |  | $                               | 2,335
|                                      |                                 |  |                                 |      

|                                      | Nine Months EndedJune 30, 2004 |  | Nine Months EndedJune 30, 2003 |      
|------------------------------------- | ------------------------------ |  | ------------------------------ | -----
|
|Net income from continuing operations |                                |  | $                              | 4,013
|Less - Preferred dividends and        |                                | 
|accretion of Series B preferred stock |                                |  |                                | --   
|                                      |                                |  |                                |      
|Basic EPS -                           |                                | 
|Commons Stock                         |                                |  |                                |      
|Preferred Stock - Series A-1          |                                |  |                                |      
|                                      |                                |  |                                |      
|Income allocable to common            |                                | 
|shareholders from continuing          |                                | 
|operations                            |                                |  | $                              | 4,013
|                                      |                                |  |                                |      
|Effect of dilutive securities -       |                                | 
|Stock options and warrants            |                                |  |                                | --   
|Preferred Stock - Series A            |                                |  |                                | --   
|Preferred Stock - Series B            |                                |  |                                | 2,382
|                                      |                                |  |                                |      
|Diluted EPS -                         |                                | 
|Income allocable to common            |                                | 
|shareholders from continuing          |                                | 
|operations                            |                                |  | $                              | 6,395
|                                      |                                |  |                                |      

For the three and nine months ended
June 30, 2004, the Company had options and warrants covering 1,825,687 and 2,817,354
shares, respectively, that were not considered in the dilutive EPS calculation since they
would have been antidilutive. For the three months ended June 30, 2003, the Company had
options, warrants, convertible preferred stock  Series A, convertible preferred
stock  Series A-1 and convertible preferred stock  Series B covering
41,066,532 shares that were not considered in the EPS calculation compared to 40,335,068
shares for the nine months ended June 30, 2003 that were not considered in the dilutive
EPS calculation since they would have been antidilutive.

6



The Company adopted Emerging Issues
Task Force (EITF) 03-06 Participating Securities and the Two-Class Method under FASB
Statement No. 128 in April 2004. EITF 03-06 requires the Company to include in the
calculation of basic EPS those securities that have dividend participation rights. As the
Series A-1 Preferred Stock has participation rights with the common shareholders, the
Series A-1 Preferred Stock had been included in the basic EPS calculation for the three
and nine months ended June 30, 2004. For the three and nine months ended June 30, 2003,
the Series A-1 Preferred Stock has not been included in the basic EPS calculation as the
Company was in a loss position and the Series A-1 Preferred Stock does not have a
contractual obligation to share in the losses with the common shareholders.

# Note 6. Inventories

Inventories
consist of the following:

|                | June 30, 2004 |               | September 30, 2003 |              
|--------------- | ------------- | ------------- | ------------------ | -------------
|                |               |               |                    |              
|Raw materials   |               | $       2,438 |                    | $       2,843
|Work in process |               | 332           |                    | 477          
|Finished goods  |               | 1,044         |                    | 733          
|                |               |               |                    |              
|                |               | $       3,814 |                    | $       4,053
|                |               |               |                    |              

# Note 7. Patent License
Agreements

During fiscal 2003, the Company
obtained a license agreement for use of an adjustable pedal design for our heavy truck and
transit bus product lines. This agreement required an initial payment of $125, which was
paid in fiscal 2003, $75 to be paid once the first product is sold and royalty payments
based on the number of units sold. As of June 30, 2004, no units of this pedal design have
been sold. The agreement is for a period of three years and is renewed annually if certain
sales thresholds are met. Additionally, as part of the sale of the Companys
passenger car and light truck product lines to Teleflex Incorporated, the Company obtained
the right to use certain of Teleflexs adjustable pedal patents in exchange for
Teleflex receiving licenses for certain of the Companys patents.

# Note 8. Settlement of
accounts payable and customer contingencies

In January 2003, the Company reached
a settlement with a prior customer on a cancelled supply contract from 1999. Under the
terms of the settlement, the Company received $900. Also included in this settlement was
the waiver of an accounts payable obligation with a certain vendor. The amount recorded on
the books for this obligation was $51. Based on this obligation being waived, this amount
is included in the overall gain recognized from this settlement. The gain of $951 is
reflected as Gain on settlement with customer within operating expenses of the
consolidated statements of operations for the nine months ended June 30, 2003.

During fiscal 2001, the Company had a
product recall related to weld failures on certain electronic throttle control systems. In
November 2002, the Company reached a $163 total release and settlement of its accounts
payable balance to one of its vendors to recover certain previously incurred costs of the
recall. The settlement was recorded as a reduction of cost of sales during the first
quarter ended December 31, 2002 and is included in the accompanying statement of
operations for the nine months ended June 30, 2003.

# Note 9. Debt

The Company has a five-year revolving
and term loan agreement with its primary lender Wells Fargo Credit, Inc.
(Wells) which provides for $12,200 in revolving and term loans. Interest rates
under this agreement are currently Wells prime rate plus 2.00% for the revolving debt and
Wells prime rate plus 2.25% for the term loans. Fees under the loan agreement include an
unused revolver fee of .25% on the unused portion, a term loan prepayment fee of 2% in the
first year and 1% thereafter, and a revolving loan termination fee of $200 in year 1 and
$100 thereafter. The revolver and term loan A mature on July 1, 2007 and term loan B had
an initial maturity of July 1, 2004. The loans are secured by essentially all of the
assets of the Company. On September 30, 2003 the Company completed the sale of its
passenger car and light truck electronic throttle control product lines. Proceeds from
this sale were received during the first quarter of fiscal 2004 and were used to reduce
the Companys bank debt obligations. Proceeds were used to pay off the entire
outstanding balance of the revolver, the outstanding balance of Term Loan B and a portion
of Term Loan A. The Company has available under its revolving credit facility $8,315 and
$3,854 at June 30, 2004 and September 30, 2003, respectively.

7



The Companys long-term debt
consists of the following:

|                                                         | June 30, 2004 |          | September 30,2003 |        
|-------------------------------------------------------- | ------------- | -------- | ----------------- | -------
|Bank revolving credit facility due July 1, 2007, bearing |               |          |                   |        
|interest at a variable rate, (6.00% at June 30, 2004)    |              
|included in current liabilities                          |               | $     -- |                   | $3,578 
|                                                        
|Bank Term Loan A due July 1, 2007, balance bearing       |              
|interest at a variable rate, (6.25% at June 30, 2004)    |              
|payable in monthly installments of $23                   |               | 388      |                   | 1,050  
|                                                        
|Bank Term Loan B due July 1, 2004, balance bearing       |              
|interest at a variable rate, (6.25% at June 30, 2004)    |              
|payable in monthly installments of $33.  Repaid during   |               | --       |                   | 300    
|the first quarter of fiscal 2004                         |              
|                                                        
|Capital leases                                           |               | 95       |                   | 132    
|                                                         |               |          |                   |        
|                                                         |               | 483      |                   | 5,060  
|                                                        
|Less current portion                                     |               | 332      |                   | 4,658  
|                                                         |               |          |                   |        
|                                                         |               | $   151  |                   | $   402
|                                                         |               |          |                   |        

# Note 10. Product
Warranties

The Company establishes a product
warranty reserve based on a percentage of product sales. The established reserve 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 consolidated balance
sheets. The warranty is limited to a specific time period, mileage or hours of use, and
varies by product and application. The Company has provided a reserve, which in the
opinion of management is adequate to cover such warranty costs. Following is a
reconciliation of the changes in the Companys warranty reserve for the three and
nine months ended June 30, 2004 and 2003:

|                              | Three and NineMonths Ended June 30,2004 |  |   | Three and NineMonths Ended June 30,2003 |  
|----------------------------- | --------------------------------------- |  | - | --------------------------------------- | -
|                              |                                         |  |   |                                         |  
|Balance at September 30, 2003 |                                         |  | $ | 2,432                                   |  
|                              |                                         |  |  
|Payments                      |                                         |  |   | (708                                    | )
|Additional accruals           |                                         |  |   | 230                                     |  
|Accrual adjustments           |                                         |  |   | --                                      |  
|                              |                                         |  |   |                                         |  
|Balance at December 31, 2003  |                                         |  | $ | 1,954                                   |  
|                              |                                         |  |   |                                         |  
|                              |                                         |  |  
|Payments                      |                                         |  |   | (962                                    | )
|Additional accruals           |                                         |  |   | 637                                     |  
|Accrual adjustments           |                                         |  |   | (47                                     | )
|                              |                                         |  |   |                                         |  
|Balance at March 31, 2004     |                                         |  | $ | 1,582                                   |  
|                              |                                         |  |   |                                         |  
|                              |                                         |  |  
|Payments                      |                                         |  |   | (441                                    | )
|Additional accruals           |                                         |  |   | 467                                     |  
|Accrual adjustments           |                                         |  |   | --                                      |  
|                              |                                         |  |   |                                         |  
|Balance at June 30, 2004      |                                         |  | $ | 1,608                                   |  
|                              |                                         |  |   |                                         |  

In January 2003, the Company was
notified of higher than normal warranty claims on one of its electronic throttle control
systems by one customer. Management estimates that the total potential units involved are
approximately 30,500 units and in the second quarter of fiscal 2003 recorded an accrual of
$985 for the estimated costs of the repairs. Based on continuing analysis, return
experience and the extension of this campaign to December 2004 , additional accruals were
made consisting of $336 during the fourth quarter of fiscal 2003, $165 during the second
quarter of fiscal 2004, and $94 in the third quarter of

8



fiscal 2004. The Company has made
modifications to the product. All the units that were in the customers inventory
have been returned or replaced. The remaining possible defective parts are installed on
vehicles and vehicle owners have been notified that the parts should be replaced. For the
nine months ended June 30, 2004, the Company made payments of $1,260 related to this
warranty reserve. At June 30, 2004, the accrual was $100 and is included in the amounts
above.

# Note 11. Pension Plans

The Company maintains two pension
plans. One of the plans, the hourly plan, covers certain of the Companys union
employees. The other plan, the salaried plan, covers certain salaried employees. The
participation in the salaried plan is limited to current participants and no additional
vesting or benefits are being accumulated by these participants. Annual net periodic
pension costs under the plans are determined on an actuarial basis. In December 2003, SFAS
No. 132 (revised) Employers Disclosures about Pensions and Other
Postretirement Benefits was issued. SFAS No. 132 (revised) requires additional
disclosures about assets, obligations, cash flows and net periodic benefit cost of defined
benefit pension plans and other postretirement plans. Disclosures regarding the components
of net periodic benefit cost and contributions of pension plans and other postretirement
plans are required for interim financial statements and are included below.

Components of Net
Periodic Benefit Cost:

|                                   | Salaried Employees PlanThree Months Ended June 30, |  | Hourly Employees PlanThree Months Ended June 30, |     
|---------------------------------- | -------------------------------------------------- |  | ------------------------------------------------ | ----
|
|                                   |                                                    |  |                                                  |     
|Service cost                       |                                                    |  | $                                                | 27  
|Interest cost                      |                                                    |  |                                                  | 70  
|Expected return on plan assets     |                                                    |  |                                                  | (34)
|Amortization of prior service cost |                                                    |  |                                                  | --  
|Amortization of loss               |                                                    |  |                                                  | 33  
|                                   |                                                    |  |                                                  |     
|Net periodic benefit cost          |                                                    |  | $                                                | 96  
|                                   |                                                    |  |                                                  |     

|                                   | Salaried Employees PlanNine Months Ended June 30, |  | Hourly Employees PlanNine Months Ended June 30, |      
|---------------------------------- | ------------------------------------------------- |  | ----------------------------------------------- | -----
|
|                                   |                                                   |  |                                                 |      
|Service cost                       |                                                   |  | $                                               | 81   
|Interest cost                      |                                                   |  |                                                 | 210  
|Expected return on plan assets     |                                                   |  |                                                 | (102)
|Amortization of prior service cost |                                                   |  |                                                 | --   
|Amortization of loss               |                                                   |  |                                                 | 99   
|                                   |                                                   |  |                                                 |      
|Net periodic benefit cost          |                                                   |  | $                                               | 288  
|                                   |                                                   |  |                                                 |      

The Company previously disclosed in
its financial statements for the year ended September 30, 2003, that it expected to
contribute $2,098 to its pension plans in fiscal 2004. As of June 30, 2004, $1,123 of
contributions have been made. The Company presently anticipates increasing its total
contributions to $2,352 for the year ended September 30, 2004 to fund its pension plan
obligations in fiscal 2004.

# Note 12. Preferred Stock

On July 14, 2002 the Company
exchanged newly authorized Series A-1 Preferred stock for approximately 99% of its Series
A Preferred stock in a transaction that involved the cancellation of all $1,413 of unpaid
dividends accrued on the Series A Preferred stock being exchanged. An equivalent amount of
dividends were accrued as a component of equity on the Series A-1 Preferred stock between
July 14, 2002 and September 30, 2002, after which the Series A-1 Preferred ceased to bear
dividends. The dividend was originally expected to be settled by the issuance of common
stock. At September 30, 2003, based on the unexpected change in the Companys
liquidity as a result of the sale of its passenger car and light truck product lines, the
Company elected to settle the dividend for cash and accordingly, the accrued dividend was
reclassified to current liabilities as of September 30, 2003. During the first quarter of
fiscal 2004, the entire amount of $1,413 of Series A-1 dividends was declared and paid. No
further dividends have accrued on Series A-1 Preferred Stock after the payment of the
previously accrued dividends.

9



In addition, during the first quarter
of fiscal 2004 the Company redeemed the remaining 150 shares of Series A Preferred Stock
for $22, which included accrued dividends of $7.

# Note 13. Warrants and
Common Stock

In February 2001, the Company issued
12% secured subordinated debentures. For each purchaser of debentures, the Company issued
a three year warrant to purchase common stock of the Company, par value $0.01 per share
with a price of $0.78 per share. The Company also issued the placement agent a three year
warrant to purchase shares of the Companys common stock equal to 7.0% of the number
of warrants issued to the purchasers. The exercise price of the placement agent warrants
was $0.78 per share. On March 1, 2004, certain warrant holders exercised 2,677,017
warrants at a price of $0.78 per share. The remaining warrants that were not exercised
expired on March 1, 2004.

In March 2004, the Company issued
216,667 shares of restricted common stock to certain employees at $0.75 per share, which
approximated the market value price at the date of the transaction. In addition, the
Company issued stock options to each employee that purchased common stock. The total
options granted were 866,667 which vest over a five year period from the date of grant.

# Note 14. Income Taxes

SFAS No. 109 Accounting for
Income Taxes, requires that tax benefits for federal and state net operating loss
carry-forwards and state tax credits be recorded as an asset to the extent that management
assesses the utilization of such assets to be more likely than not; otherwise
a valuation allowance is required to be recorded. Based on this guidance, the Company
reduced their valuation allowance by approximately $900 and $2,400, respectively, in the
three and nine months ended June 30, 2004, as the Companys current year earnings
have allowed the utilization of existing net operating loss carryforwards. At June 30,
2004, the valuation allowance for deferred tax assets was approximately $16,000. The
Company will continue to evaluate the need for the valuation allowance in the future,
considering estimates of future taxable income and other factors. This evaluation could
result in material changes in the valuation allowance.

The effective income tax rate is 3%
for the three and nine months ended June 30, 2004. The effective income tax rate for the
three and nine months ending June 30, 2004 varied from the combined state and federal
statutory rate principally because the Company reversed a portion of the valuation
allowance, for certain federal and state net operating loss carry-forwards and state tax
credits.

# Note 15. Discontinued
Operations

On February 13, 2004, the Company
sold substantially all of its assets associated with its NESC operations for $74. The
assets sold included inventories, property, plant and equipment and the right to a product
patent. In accordance with SFAS No. 144 Accounting for Impairment or Disposal of
Long-lived Assets, the Company recognized a loss from sale and loss from operations
in discontinued operations in the accompanying consolidated statement of operations
related to the sale of its NESC assets. During the first quarter of fiscal 2004, it was
determined the Company met the requirements of SFAS No. 144 to classify the assets to be
sold as Net Assets Held for Sale and accordingly the assets were written down
to their fair market value resulting in a $151 loss. The total loss of $183 from the sale
of discontinued operations for the nine months ended June 30, 2004 was calculated based on
the net proceeds of the assets sold less the current book value at the date of the sale.

Net sales for NESC during the three
and nine months ended June 30, 2004 were $0 and $181, respectively, and are not included
in total net sales in the accompanying consolidated statements of operations. NESC
incurred operating expenses of $41 for the third quarter of fiscal 2004, which are
reflected as a loss from operations of discontinued operations. For the first nine months
of fiscal 2004, NESC incurred negative gross margin of $16 and total operating expenses of
$89 resulting in a net loss of discontinued operations of $106.

Net sales for NESC during the three
and nine months ended June 30, 2003 were $252 and $503, respectively, and are not included
in total net sales in the accompanying consolidated statements of operations. NESC
generated gross margin of $63 and total operating expenses of $44, respectively, for the
third quarter of fiscal 2003, resulting in income from operations of discontinued
operations of $19. For the first nine months of fiscal 2003, NESC generated gross margin
of $51 and total operating expenses of $131 resulting in a loss from operations of
discontinued operations of $80.

10



During the second quarter of fiscal
2003, the Company settled a lease obligation of its previously discontinued Kenco Williams
business. A gain of $120 resulted from this settlement, which has been recorded in
discontinued operations for the nine months ended June 30, 2003 on the accompanying
consolidated statement of operations.

# Note 16. Segment
Information

The Company accounts for its segments
in accordance with SFAS No. 131 Disclosures about Segments of an Enterprise and
Related Information. The Company historically operated in two business segments: (1)
vehicle components and (2) electrical components. As a result of terminating and selling
certain product lines, the Company had no significant operations in the electrical
components segment at June 30, 2004 and 2003. Accordingly the operations for the three and
nine months ended June 30, 2004 and 2003 are presented as one segment in the accompanying
condensed consolidated statements of operations.

In December 2002, the Company
recorded a $100 gain from the release of escrow funds related to the sale of GeoFocus, the
Companys previously owned global positioning system business and part of the
electrical components segment. The gain has been recorded in other (income) expense on the
accompanying consolidated statement of operations for the nine months ended June 30, 2003.

# Note 17. Contingencies

The Company and its subsidiaries are
involved in various lawsuits incidental to their businesses. It is the opinion of
management that the ultimate outcome of these actions will not have a material effect on
the Companys financial position or its results of operations.

The soil and groundwater at the
Companys Portland Oregon facility contain contaminants that the Company believes
were released on the property by previous property owners. Some of this contamination has
migrated offsite to a neighboring property. The Company has retained an environmental
consulting firm to investigate the extent of the contamination and to determine what, if
any, remediation will be required and the associated costs. During the third quarter of
fiscal 2004 the Company entered the Oregon Department of Environmental Qualitys
voluntary clean-up program. The Company is not certain at this time what, if any, cleanup
activities will be required. Additionally, the ultimate costs to the Company for
investigation, remediation and monitoring, if necessary, cannot be predicted with
certainty due to the amount of cleanup that may be required, the varying costs of
alternative clean up methods and the amount of time necessary to accomplish such cleanups,
which would be paid over a number of years. The Company estimates that the investigation
costs will be approximately $250, for which the Company provided a liability in the second
quarter of fiscal 2004. As additional information becomes known, it is reasonably possible
that we will need to increase our accrual for this estimated liability. Investigation
costs, and remediation or monitoring costs, if any, will be charged against the reserves
as incurred. In the event that remediation is required in the future, the Company will
seek indemnification from the prior property owner for some or all of the costs under the
terms of the asset purchase agreement, which we expect the prior property owner to
dispute. At June 30, 2004, the accrual was $234.

On May 12, 2003, Mr. Ziegler, the
Companys former president and chief executive officer, filed suit against the
Company, American Industrial Partners, L.P.; American Industrial Partners Fund III, L.P.,
and American Industrial Partners Fund III Corporation in the Circuit Court of the
15th Judicial Circuit in and for Palm Beach County, Florida. In the suit, Mr.
Ziegler alleges that the Company breached an oral agreement with Mr. Ziegler
to pay him additional compensation, including a bonus of at least $500, for
certain tasks performed by Mr. Ziegler while he was the Companys president and chief
executive officer and seeks additional compensation to which he claims he is entitled. The
Company disputes the existence of an agreement and any liability to Mr. Ziegler.

Included in the accompanying
consolidated balance sheet are approximately $1,596 of old accounts payable related to
closed insolvent subsidiaries of the Company. The Company believes that these are liabilities
solely of the closed insolvent subsidiaries and management does not believe that they will
ultimately have to pay the full amount of these payables.

11



# Williams Controls, Inc.

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

# Overview

We primarily design, produce and sell
electronic throttle controls systems for heavy trucks and busses. We have a significant
portion of the United States market for these products and a minor portion of the
international markets for the same products. We also manufacture pneumatic and hydraulic
control systems for the diesel heavy truck, transit bus and off-highway vehicles market.
Many of the customers for pneumatic and hydraulic control systems are the same customers
as for our diesel heavy truck and transit bus electronic throttle control systems.

Until September 30, 2003 we also
produced a product line of electronic throttle controls for passenger cars and light
trucks. We completed the sale of the assets related to these product lines on September
30, 2003. During 2003, net sales of passenger car and light truck electronic throttle
controls constituted approximately 9% of our total revenues. Following the sale of the
assets related to the passenger car and light truck product lines, all of our products are
produced in our Portland, Oregon facility.

Demand for electronic throttle
control devices and pneumatic and hydraulic control systems generally follow the economic
cycles for heavy truck and transit bus manufacturing and sales. While we believe we are
the leader in the market for electronic throttle control systems for heavy trucks and
transit busses manufactured in the U.S., the markets for our products are highly
competitive in the U.S. and even more competitive in the international markets. Certain of
our competitors are suppliers with substantial financial resources and significant
technological capabilities. Major areas of focus for management of the Company are working
closely with our existing and potential customers to design and develop new products and
adapt existing products to new applications and improving the performance, reliability and
cost-effectiveness of our products.

The demand for electronic throttle
control systems is expanding into off-highway vehicles as the major producers of those
products begin to convert gasoline-powered vehicles to electronic throttle control
systems. The initial electronic throttle control conversion has been in larger off-highway
vehicles. Demand for electronic throttle controls will depend, in part, on how quickly
manufacturers proceed with the ongoing engine modifications that will require such systems
in all sizes and classes of off-highway vehicles.

# Critical Accounting
Policies and Estimates

We have identified the most critical
accounting principles upon which our financial statements depend. We have determined the
critical principles by considering accounting policies that involve the most complex
decisions or assessments. We identified the most critical accounting policies to be those
related to impairment of long-lived assets, warranty and product recall, pensions and
post-retirement benefit obligations, and income taxes.

Impairment of Long-Lived
Assets

We account for the impairment of
long-lived assets in accordance with FASB Statement No. 144. We test for impairment when
factors indicate that an asset group may not be recoverable from future undiscounted cash
flows and calculate the amount of impairment using discounted cash flows. Estimates of
future cash flows require judgment and may change based on, among other things, the market
for our products, technology advances, and customer relationships. For the nine months
ended June 30, 2004, a loss was recorded related to the sale of assets of our NESC
operations. Refer to Note 15 in the Notes to Unaudited Condensed Consolidated Financial
Statements for further information. For the three and nine months ended June 30, 2003
there were no impairments of long-lived assets.

Warranty and Product
Recall

We provide a warranty covering defects
arising from products sold. We have established a warranty reserve based on historical
return rates of products and amounts for significant and specific warranty issues. In
January 2003, the Company was notified of higher than normal warranty claims on one of its
electronic throttle control systems by one customer. Management estimates that the total
potential units involved are approximately 30,500 units and in the second quarter of
fiscal 2003 recorded an accrual of $985 for the estimated costs of the repairs. Based on
continuing analysis, return experience and the extension of this campaign to December
2004, additional accruals were made consisting of $336 during

12



the fourth quarter of fiscal
2003, $165 during the second quarter of fiscal 2004, and $94 in the third quarter of
fiscal 2004. Modifications have been made to the product and all units that were in the
customers inventory have been returned or replaced. At this time, the Company
believes its warranty accrual for issues with this customer is reasonable and we do not
expect any further increases for this accrual in the future. While we believe our
estimates are reasonable, they are subject to change and such change could be material.

Pensions and
Post-retirement Benefit Obligations

We account for pensions and
post-retirement benefits in accordance with SFAS No. 87, Employers Accounting
for Pensions, and SFAS No. 106, Employers Accounting for Postretirement
Benefits Other Than Pensions. SFAS No. 87 requires the Company to calculate its
pension expense and liabilities using actuarial assumptions, including a discount rate
assumption and a long-term asset rate return assumption. Changes in interest rates and
market performance can have a significant impact on the Companys pension expense and
future payments. SFAS No. 106 requires the Company to accrue the cost of post-retirement
benefit obligations. The accruals are based on interest rates and the costs of health
care. Changes in interest rates and health care costs could impact post-retirement
expenses and future payments.

The Company provides health care and
life insurance benefits for certain of its retired employees, which includes prescription
drug benefits (Post Retirement Plan). In December 2003, the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (Act) was passed
whereby a prescription drug benefit under Medicare was enacted as well as a federal
subsidy to sponsors of retiree health care plans. We are required to comply with this act
effective with the first interim or annual period beginning after June 15, 2004. The
Company plans to adopt the requirements of this act during the fourth quarter of fiscal
2004 and at this time we are unable to determine the impact of this law on our financial position
and results of operations.

Income Taxes

We record a valuation allowance to
reduce our deferred tax assets to the amount that is more likely than not to be realized.
The Company is currently in a net operating loss carry-forward position and is providing
for a 100% valuation allowance on all of our deferred tax assets. The Company will continue to
evaluate the need for the valuation allowance in the future, considering estimates of future taxable income
and other factors. This evaluation could result in material changes in the valuation allowance. An adjustment
to the valuation allowance would result in a credit to income tax expense in the period such determination was made.

Results of Operations  Three
months ended June 30, 2004 compared to the three months ended June 30, 2003.

The following table sets forth, for
the periods indicated, selected statements of operations data expressed as a percentage of
net sales.

|                                                                    | Three Months EndedJune 30, |      
|------------------------------------------------------------------- | -------------------------- | -----
|
|                                                                    |                            |      
|Net sales                                                           |                            | 100.0
|Cost of sales                                                       |                            | 66.8 
|                                                                    |                            |      
|Gross margin                                                        |                            | 33.2 
|Operating expenses:                                                 |                           
|Research and development                                            |                            | 5.7  
|Selling                                                             |                            | 2.2  
|Administration                                                      |                            | 7.8  
|                                                                    |                            |      
|Total operating expenses                                            |                            | 15.7 
|                                                                   
|Operating income from continuing operations                         |                            | 17.5 
|                                                                   
|Interest income                                                     |                            | 0.0  
|Interest expense - Debt                                             |                            | 0.1  
|Interest expense - Series B Preferred Stock dividends and accretion |                            | 5.4  
|Other (income) expenses, net                                        |                            | 1.7  
|                                                                    |                            |      
|Income from continuing operations before income taxes               |                            | 10.3 
|Income tax expense                                                  |                            | 0.3  
|                                                                    |                            |      
|Net income from continuing operations                               |                            | 10.0 
|                                                                    |                            |      

13



Net Sales

Net sales from continuing operations
increased $2,746 or 22.2% to $15,127 in the third quarter of fiscal 2004 from $12,381 in
the third quarter of fiscal 2003. The net increase is a combination of a $4,026 increase
in sales to our heavy truck and transit bus customers offset by a $1,280 sales decline
related to our passenger car and light truck product lines, which were sold on September
30, 2003. The 36.3% increase in net sales to our heavy truck and transit bus customers is
due to increased sales volume resulting from a general increase in truck production
throughout the industry and the addition of a new customer in the heavy truck product
line. All of the net sales for the quarter ended June 30, 2004 were from sales in our
heavy truck and transit bus product lines.

Gross margin

Gross margin was $5,029, or 33.2% of
net sales in the third quarter of 2004, an increase of $2,189 compared to the gross margin
of $2,840, or 22.9% of net sales in the comparable fiscal 2003 period. Included in the
third quarter of fiscal 2003 were negative gross margins of $264 from our passenger car
and light truck product lines, which were sold on September 30, 2003.

Electronic throttle, pneumatic and
hydraulic control systems for heavy trucks and transit busses gross margin percentages
increased 17.3% to 33.2% of net sales during the three months ended June 30, 2004 from
28.3% of net sales during the comparable period of fiscal 2003. Included in this gross
margin in the third quarter of fiscal 2004 is an increase in cost of sales related to
recording an additional $321 warranty accrual for product issues with one customer as
described in Note 10 and an increase in our general warranty accrual based on review of
product returns and increases in sales.

The overall increase in gross margin
during the third quarter of fiscal 2004 is primarily driven by a 36.3% increase in unit
sales of electronic throttle control systems to heavy truck and transit bus customers and
reductions in per unit labor and overhead costs. Labor costs as a percentage of sales
between periods improved primarily due to the elimination of inefficiencies caused by the
strike of our union employees during fiscal 2003. The strike of our union employees was
resolved in August 2003.

Operating expenses

Operating expenses for research and
development, selling and administration expenses were $2,383 for the three months ended
June 30, 2004 compared to $2,457 for the three months ended June 30, 2003, a decrease of
$74 or 3.0%. Operating expenses as a percentage of net sales, of 15.7% for the third
fiscal quarter of 2004, were lower than the 19.8% for the third fiscal quarter of 2003.

Research and development expenses
decreased $116 or 11.9% to $858 for the third fiscal quarter of 2004 compared to $974 for
the comparable period in 2003, and is largely attributable to a reduction of $431 of
research and development expenses associated with our passenger car and light truck
product lines, which were sold on September 30, 2003. This reduction is offset by a $315
increase in research and development expenses in our heavy truck and transit bus product
lines which is attributable to an increase in overall project expenses for new pedal and
adjustable pedal technology and an increase in personnel. The Companys research and
development expenditures will fluctuate based on the products under development at any
given point in time, however, overall we expect research and development expenses for our
heavy truck and transit bus product lines to remain at levels more consistent with the
third quarter of fiscal 2004 rather than the levels incurred in the third quarter of
fiscal 2003.

Selling expenses increased $9 or 2.7%
to $339 for the quarter ended June 30, 2004 compared to $330 for the comparable quarter
ended June 30, 2003. This increase is mainly due to a $110 increase in selling expenses
for our heavy truck and transit bus product lines due to an increase in wages and
significant increases in travel expenses to our European and Asian customers offset by the
sale of our passenger car and light truck product lines, which accounted for $101 of total
selling expenses in the third quarter of fiscal 2003. We expect to continue to incur
increased travel expenses associated with our foreign customers.

Administration expenses for the three
months ended June 30, 2004 of $1,186 remained essentially unchanged from the $1,153 for
the same fiscal period in 2003. Included in administrative expenses for the third quarter
of fiscal 2003 are expenses of $233 from our passenger car and light truck product lines,
which were sold on September 30, 2003. Excluding the passenger and light truck product
line expenses, administrative expenses increased in the third quarter of fiscal 2004
primarily as a result of increased legal, professional & consulting expenses of $136.
In addition to the increased legal,

14



professional & consulting expenses, there was an
increase of $59 in information technology expenses and corporate filing fees during the
third quarter of fiscal 2004 compared to the third quarter of fiscal 2003. Overall, we
expect administrative costs to be lower in fiscal 2004 when compared to fiscal 2003.

Interest Expense and
Other Income

Interest expense on debt decreased
$82 or 82.8% to $17 in the third quarter of fiscal 2004 from $99 in the third quarter of
fiscal 2003. This reduction is primarily the result of paying off our subordinated debt in
fiscal 2003 and using the proceeds from the sale of our passenger car and light truck
product lines to pay off the entire outstanding balance of our revolving credit facility,
the outstanding balance of Term Loan B and a portion of Term Loan A during the first
quarter of fiscal 2004. Interest expense related to subordinated debt was $22 during the
third quarter ended June 30, 2003 and $0 for the corresponding period in fiscal 2004.
Interest expense related to our outstanding bank debt decreased $49 to $7 for the third
quarter of fiscal 2004 compared to $56 during the third quarter of fiscal 2003.

Interest expense on preferred stock
relates to dividends accrued on the Series B Preferred Stock during the third quarter of
fiscal 2004 and the related accretion. Based on the guidelines of Statement of Financial
Accounting Standards No. 150 (SFAS No. 150), the Company must now record all accrued
dividends and accretion associated with the Series B Preferred Stock as a component of
interest expense. Prior to the fourth quarter of fiscal 2003, all accrued dividends on the
Series B Preferred Stock were recorded as a component of net loss allocable to common
shareholders.

Other (income) expense changed to
expense of $253 for the three months ended June 30, 2004 compared to income of $19 for the
comparable period in fiscal 2003. Included in other (income) expense for the three months
ended June 30, 2004 is $254 of professional services expenses related to the Company
exploring strategic alternative financing options.

Income Taxes

The Company is in a net operating
loss carry-forward position and is presently providing a 100% valuation allowance on all
deferred tax assets due to the uncertainty regarding their realization. The Company is
continuing to analyze the need for the valuation allowance in light of our improved
operating results. Federal net operating losses are subject to provisions of the Internal
Revenue Code, which restrict the utilization of this type of tax attribute in the event of
an ownership change (as defined in the Internal Revenue Code Section 382).
Changes in ownership resulting from a previous recapitalization transaction coupled with
other future changes in ownership may significantly defer the utilization of net operating
loss carry forwards in the future.

Tax expense of $42 was recorded
during the quarter ended June 30, 2004 related to federal AMT and state estimated tax
payments.

Discontinued Operations

During the second quarter ended March
31, 2004, the Company sold certain assets of its NESC operations. A loss of $41 from
discontinued operations was recorded in the third quarter of fiscal 2004 related to the
NESC third quarter operating loss. Refer to Note 15 of Notes to Unaudited Consolidated
Financial Statements for further discussion. The operations of NESC for the third quarter
ended June 30, 2003 generated income of $19.

Net income available to
common shareholders

Net income (loss) allocable to common
shareholders improved to $1,472 for the quarter ended June 30, 2004 compared to a loss of
$373 for the quarter ended June 30, 2003. This improvement in our results of operations is
due to the factors mentioned above, specifically, an increase in gross margin. The sale of
our passenger car and light truck product lines on September 30, 2003 also contributed to
all of these factors.

Results of Operations  Nine
months ended June 30, 2004 compared to the nine months ended June 30, 2003.

The following table sets forth, for
the periods indicated, selected statements of operations data expressed as a percentage of
net sales.

15



|                                                                    | Nine Months EndedJune 30, |      
|------------------------------------------------------------------- | ------------------------- | -----
|
|                                                                    |                           |      
|Net sales                                                           |                           | 100.0
|Cost of sales                                                       |                           | 68.4 
|                                                                    |                           |      
|Gross margin                                                        |                           | 31.6 
|Operating expenses (income):                                        |                          
|Research and development                                            |                           | 5.3  
|Selling                                                             |                           | 2.1  
|Administration                                                      |                           | 8.0  
|Gain on settlement with customer                                    |                           | --   
|                                                                    |                           |      
|Total operating expenses                                            |                           | 15.4 
|                                                                   
|Operating income from continuing operations                         |                           | 16.2 
|                                                                   
|Interest income                                                     |                           | 0.0  
|Interest expense - Debt                                             |                           | 0.1  
|Interest expense - Series B Preferred Stock dividends and accretion |                           | 5.7  
|Other (income) expenses, net                                        |                           | 0.6  
|                                                                    |                           |      
|Income from continuing operations before income taxes               |                           | 9.8  
|Income tax expense (benefit)                                        |                           | 0.3  
|                                                                    |                           |      
|Net income from continuing operations                               |                           | 9.5  
|                                                                    |                           |      

Net Sales

Net sales increased $4,726 or 12.6%
to $42,142 in the first nine months of fiscal 2004 from $37,416 in the first nine months
of fiscal 2003. The net increase is a combination of an $8,033 increase in sales to our
heavy truck and transit bus customers offset by a $3,307 sales decline related to our
passenger car and light truck product lines, which were sold on September 30, 2003. The
23.6% increase in net sales to our heavy truck and transit bus customers is due to
increased sales volume resulting from a general increase in truck production throughout
the industry and the addition in fiscal 2004 of a new customer in the heavy truck product
line. All of the net sales for the nine months ended June 30, 2004 were from sales in our
heavy truck and transit bus product lines.

Gross margin

Gross margin was $13,332, or 31.6% of
net sales in the first nine months of 2004, an increase of $5,227 compared to the gross
margin of $8,105, or 21.7% of net sales, in the comparable fiscal 2003 period. Included in
gross margin for the first nine months of fiscal 2003 were negative gross margins of
$1,105 from our passenger car and light truck product lines, which were sold on September
30, 2003.

Electronic throttle, pneumatic and
hydraulic control systems for heavy trucks and transit busses gross margin percentages
increased 19.2% to 32.3% of net sales during the nine months ended June 30, 2004 from
27.1% of net sales during the comparable period of fiscal 2003. Included in gross margin
for heavy trucks and transit busses in the first nine months of fiscal 2004 is an increase
in cost of sales related to recording an additional $509 warranty accrual for product
issues with one customer as described in Note 10 and an increase in our general warranty
accrual based on review of product returns and increased sales. Included in gross margin
for heavy trucks and transit busses in the nine months ended June 30, 2003 is a net
increase in cost of sales of $641 related to recording a $985 warranty accrual for product
issues with the one customer, as described in Note 10 offset by a $344 reduction in cost
of sales related to its assessment of the remaining obligation for a prior product recall
accrual. In addition, a reduction of cost of sales of $112 was recorded related to the
Companys obligations for certain union employee costs.

The overall increase in gross margin
during the first nine months of fiscal 2004 is primarily driven by a 23.6% increase in
sales of electronic throttle control systems to heavy truck and transit bus customers and
reductions in per unit labor and overhead costs. Labor costs as a percentage of sales
improved between periods mostly due to the elimination of inefficiencies caused by the
strike of our union employees during fiscal 2003. Overhead expenses decreased $174 from
the

16



prior year, due to the first nine months of fiscal 2003 including strike costs. The
strike of our union employees was resolved in August 2003.

Operating expenses

Operating expenses were $6,499 for
the nine months ended June 30, 2004 compared to $6,358 for the nine months ended June 30,
2003, an increase of $141 or 2.2%. Included in the first nine months of fiscal 2003
operating expenses was a $900 gain from cash received for settlement of a 1999 cancelled
supply contract claim with a prior customer. Also included in this settlement was the
waiver of an accounts payable obligation with a certain customer. The amount recorded on
the books for this obligation was $51. Based on this obligation being waived, this amount
is included in the overall gain recognized from this settlement. The entire gain of $951
is reflected as a separate line Gain on settlement with customer within
operating expenses of the consolidated statements of operations for the nine months ended
June 30, 2003.

Excluding the gain noted above in
fiscal 2003, research and development, selling and administration costs were $7,309 or
19.5% of net sales for the nine months ended June 30, 2003 compared to $6,499 or 15.4% of
net sales for the nine months ended June 30, 2004.

Research and development expenses
decreased $489 or 17.9% to $2,236 for the first nine months of 2004 compared to $2,725 for
the comparable period in 2003. The decrease in research and development spending is
primarily attributable to a reduction of $1,152 of research and development expenses
associated with our passenger car and light truck product lines, which were sold on
September 30, 2003. This reduction is offset by a $663 increase in research and
development expenses in our heavy truck and transit bus product lines. This increase is
attributable to an increase in overall project expenses for new pedal and adjustable pedal
technology and increases in personnel. The Companys research and development
expenditures will fluctuate based on the products under development at any given point in
time, however, overall we expect research and development expenses for our heavy truck and
transit bus product lines to remain at levels more consistent with the first nine months
of fiscal 2004 rather than the levels incurred in the first nine months of fiscal 2003.

Selling expenses decreased $92 or
9.3% to $901 for the nine months ended June 30, 2004 compared to $993 for the comparable
period ended June 30, 2003. This decrease is mainly due to the sale of our passenger car
and light truck product lines, which accounted for $302 of total selling expenses in the
first nine months of fiscal 2003 offset by a $210 increase in selling expenses for our
heavy truck and transit bus product lines due to an increase in wages and increases in
travel expenses to our European and Asian customers. We expect to continue to incur
increased travel expenses associated with our foreign customers.

Administration expenses for the nine
months ended June 30, 2004 decreased $229 or 6.4% to $3,362 compared to $3,591 for the
same fiscal period in 2003. Included in administrative expenses for the first nine months
of fiscal 2003 were expenses of $736 from our passenger car and light truck product lines,
which were sold on September 30, 2003. Excluding expenses of our passenger car and light
truck product lines, administrative expenses increased in the first nine months of fiscal
2004 primarily as a result of an increase of $250 related to recording an environmental
accrual during the second quarter of fiscal 2004, as discussed in Note 16. In addition,
there were increases in legal, professional & consulting expenses of $113 and an
increase of approximately $144 in information technology expenses and insurance premiums
for the first nine months of fiscal 2004 compared to the first nine months of fiscal 2003.
Excluding the costs associated with the environmental accrual, we expect administrative
costs to be lower in fiscal 2004 when compared to fiscal 2003.

Interest Expense and
Other Income

Interest expense on debt decreased
$370 or 86.9% to $56 in the first nine months of fiscal 2004 from $426 in the first nine
months of fiscal 2003. This reduction is primarily the result of paying off our
subordinated debt in fiscal 2003 and using the proceeds from the sale of our passenger car
and light truck product lines to pay off the entire outstanding balance of our revolving
credit facility, the outstanding balance of Term Loan B and a portion of Term Loan A
during the first quarter of fiscal 2004. Interest expense related to subordinated debt was
$0 during the nine months ended June 30, 2004 and $171 for the corresponding period in
fiscal 2003. Interest expense related to our outstanding bank debt decreased $149 to $23
for the first nine months of fiscal 2004 compared to $172 during the first nine months of
fiscal 2003.

Interest expense on preferred stock
relates to dividends accrued on the Series B Preferred Stock during the nine months ended
June 30, 2004 and the related accretion. Based on the guidelines of Statement of Financial
Accounting Standards No. 150 (SFAS No. 150), the Company must now record all accrued
dividends and accretion associated with the Series B Preferred

17



Stock as a component of
interest expense. Prior to the fourth quarter of fiscal 2003, all accrued dividends on the
Series B Preferred Stock were recorded as a component of net loss allocable to common
shareholders.

Other (income) expense changed to
expense of $248 for the nine months ended June 30, 2004 compared to income of $160 for the
first nine months of fiscal 2003. Included in other (income) expense for the nine months
ended June 30, 2004 is $254 of professional services expenses related to the Company
exploring strategic alternative financing options. In the first nine months of fiscal
2003, a gain of $100 was recorded related to the release of escrow funds from the sale of
GeoFocus in fiscal 2003 as described in Note 16 in the Notes to Unaudited Consolidated
Financial Statements.

Income Taxes

The Company is in a net operating
loss carry-forward position and is presently providing a 100% valuation allowance on all
deferred tax assets due to the uncertainty regarding their realization. The Company is
continuing to analyze the need for the valuation allowance in light of our improved
operating results. Federal net operating losses are subject to provisions of the Internal
Revenue Code, which restrict the utilization of this type of tax attribute in the event of
an ownership change (as defined in the Internal Revenue Code Section 382).
Changes in ownership resulting from a previous recapitalization transaction coupled with
other future changes in ownership may significantly defer the utilization of net operating
loss carry forwards in the future.

Tax expense of $136 was recorded
during the nine months ended June 30, 2004 related to federal AMT and state estimated tax
payments. A tax benefit of $300 was recorded in the nine months ended June 30, 2003
resulting from filing an amended federal 1998 tax return in the first quarter of fiscal
quarter 2003.

Discontinued Operations

During the second quarter ended March
31, 2004, the Company sold certain assets of its NESC operations. For the nine months
ended June 30, 2004, the Company recorded a total loss of $183 from the sale of
discontinued operations based on the difference between the proceeds received and the
recorded book value of assets sold at the date of the sale. In addition, a loss of $106
from the operations of NESC was recorded in discontinued operations for the nine months
ended June 30, 2004. Refer to Note 15 of Notes to Unaudited Consolidated Financial
Statements for further discussion.

During the second quarter of fiscal
2003, the Company settled a lease obligation of its previously discontinued Kenco Williams
business. A gain of $120 resulted from this settlement, which has been recorded in
discontinued operations for the nine months ended June 30, 2003 on the accompanying
condensed consolidated statements of operations. This gain was offset by an $80 loss from
discontinued operations of NESC for the nine months ended June 30, 2003.

Net income available to
common shareholders

Net income allocable to common
shareholders increased to $3,724 for the nine months ended June 30, 2004 compared to a
loss of $164 in the comparative prior year period. This improvement in our results of
operations is due to the factors mentioned above, specifically an increase in gross
margin. The sale of our passenger car and light truck product lines on September 30, 2003
contributed to all of these factors.

# Financial Condition,
Liquidity and Capital Resources

Cash generated from continuing
operations was $4,461 for the first nine months of 2004, an increase of $1,450 over the
cash generated from operations of $3,011 during the first nine months of fiscal 2003. Cash
flows from operations were reduced in the first nine months of fiscal 2004 due to warranty
payments exceeding warranty accruals by $824, which was almost entirely due to payments to
one customer for a warranty claim that was in excess of normal warranty as discussed in
Note 10. In future periods, we expect warranty payments to be more consistent with
warranty accruals. For the nine months ended June 30, 2003 warranty payments were
significantly lower than warranty accruals, primarily due to the recording of the accruals
associated with the one customer described above and in Note 10. In addition to
significant warranty payments, the Company also made contributions of $1,123 to its
pension plans during the first nine months of fiscal 2004 compared to $382 for the nine
months ended June 30, 2003. As anticipated, cash flows from continuing operations improved
with the sale of our passenger car and light truck product lines on September 30, 2003.

Cash flows from operations improved
through net income of $3,724 compared to net income of $1,844 for the nine months ended
June 30, 2003. Also during the first nine months of fiscal 2004 we expensed $2,382 of
non-cash interest expense on

18



preferred dividends and Series B
accretion. The Company expects non-cash interest expense on preferred dividends to
continue to increase throughout the year as we accrue dividends each month for the Series
B preferred stock.

We believe we will continue to
generate positive cash from continuing operations due to our improved financial condition
and due to the elimination of our passenger car and light truck product lines, which were
sold on September 30, 2003. These product lines generated negative gross margins in fiscal
2003. We expect operating expenses to decrease as a result of the sale of these product
lines and interest expense to decrease in the current year due to using the proceeds from
this sale to pay off the entire outstanding balance of the bank revolving credit facility,
the outstanding balance of Term Loan B and a portion of Term Loan A. Our remaining bank
debt after applying these proceeds was $388 at June 30, 2004. Availability under our
revolving credit facility improved to $8,315 at June 30, 2004 compared to $3,854 at
September 30, 2003. The increase in our availability is directly attributable to the
payoff of our revolving credit facility. In addition to the availability under our
revolving credit facility, we have $6,049 in cash resulting in total availability plus
cash of $14,364. This compared to availability and cash of $3,955 at September 30, 2003.

Cash provided by investing activities
was $5,245 for the nine months ended June 30, 2004 and was comprised of $6,010 of net
proceeds from the sale of assets from our passenger car and light truck product lines
offset by $778 of purchases of equipment. This compared to purchases of equipment of
$1,099 for the nine months ended June 30, 2003. Excluding net proceeds from the sale of
assets, we expect our cash use for investing activities to increase throughout the fiscal
year as we continue to make purchases of capital equipment. We currently anticipate
spending approximately $1,000 in capital expenditures for the entire fiscal year ended
September 30, 2004.

Cash used in financing activities was
$3,758 for the nine months ended June 30, 2004 compared to cash used in financing
activities of $1,899 for the nine months ended June 30, 2003. The increase in cash used in
financing activities primarily relates to the payoff of our revolving credit facility,
Term Loan B and a portion of Term Loan A during the first quarter of fiscal 2004. As noted
above, using the proceeds from the sale of our passenger car and light truck product
lines, we were able to significantly reduce our debt obligations. In addition, we paid
$1,413 of Series A-1 Preferred stock dividends during the first quarter of fiscal 2004.
During the second quarter of fiscal 2004, the Company received proceeds of $2,092 related
to the issuance of common stock from the exercise of warrants as discussed in Note 13.
Also as discussed in Note 13, the Company received proceeds of $162 from the issuance of
common stock to certain employees during the third quarter of fiscal 2004.

At June 30, 2004, our contractual
obligations consisted of bank debt of $388, capital leases of $95, and operating lease
commitments, which at June 30, 2004 are $12 due during the remainder of fiscal year 2004,
$36 due in 2005 and $17 in 2006. We do not have any material letters of credit, purchase
commitments, or debt guarantees outstanding at June 30, 2004.

Due to the reduction in interest
rates and reduction in the fair value of assets, cash payments to fund our pension
obligations will increase significantly in fiscal 2004 as compared to fiscal 2003.
However, we have $8,315 available under our revolving credit facility at June 30, 2004
plus cash at June 30, 2004 of $6,049, and we believe this availability along with cash
provided by operations will be adequate to meet our cash needs in fiscal 2004.

The Company has mandatory redeemable
convertible Series B Preferred Stock, which is mandatorily redeemable on July 1, 2009 for
$15,355 plus accrued dividends. Series B Preferred Stock dividends at June 30, 2004 of
$5,302 are reflected in mandatory redeemable convertible Series B Preferred Stock on the
accompanying consolidated balance sheet.

Included in the accompanying
consolidated balance sheet is approximately $1,596 of accounts payable incurred primarily
prior to 2001 related to closed insolvent subsidiaries of the Company. The Company believes that these are
liabilities solely of the closed insolvent subsidiaries and management does not believe that they will ultimately
have to pay the full amount of these payables.

Recent FASB Pronouncements

The Company adopted Emerging Issues
Task Force (EITF) 03-06 Participating Securities and the Two-Class Method under FASB
Statement No. 128 in April 2004. EITF 03-06 requires the Company to include in the
calculation of basic EPS those securities that have dividend participation rights. As the
Series A-1 Preferred Stock has participation rights with the common shareholders, the
Series A-1 Preferred Stock had been included in the basic EPS calculation for the three
and nine months ended June 30, 2004. For the three and nine months ended June 30, 2003,
the Series A-1 Preferred Stock has not been included in the basic EPS calculation as the
Company was in a loss position and the Series A-1 Preferred Stock does not have a
contractual obligation to share in the losses with the common shareholders.

19



In December 2003, the FASB issued
SFAS No. 132 (Revised 2003), Employers Disclosures about Pensions and Other
Postretirement Benefits  An Amendment of FASB Statements No. 87, 88, and 106".
This statement increases the existing GAAP disclosure requirements by requiring more
details about pension plan assets, benefit obligations, cash flows, benefit costs and
related information. Companies will be required to segregate plan assets by category, such
as debt, equity and real estate, and to provide certain expected rates of return and other
informational disclosures. This statement also requires companies to disclose various
elements of pension and postretirement benefit costs in interim period financial
statements for quarters beginning after December 15, 2003. The Company adopted the
disclosure provisions of this statement in the second quarter of fiscal 2004.

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. The Companys
primary market risk results from fluctuations in interest rates.

Interest Rate Risk

The Company has a five-year revolving
and term loan agreement with its primary lender Wells Fargo Credit, Inc.
(Wells) which provides for $12,000 in revolving and term loans. Interest rates
under this agreement are currently Wells prime rate plus 2.00% for the revolving
credit facility and Wells prime rate plus 2.25% for the term loans. Fees under the
loan agreement include a fee of .25% on the unused portion of the revolving credit
facility, a term loan prepayment fee of 2% in the first year and 1% thereafter, and a
revolving loan termination fee of $200 in year 1 and $100 thereafter.

As of June 30, 2004, the outstanding
balance on the term loans was $388. The effective annual interest rate on the term loans
for the three months ended June 30, 2004 was 6.25%. For the three months ended June 30,
2004, the Company recorded $7 of interest expense related to the term loans. The average
daily outstanding balance of the revolving credit facility during the three months ended
June 30, 2004 was $0. The Company does not believe that a hypothetical 10% percent 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 truck, transit bus and heavy equipment industries. For the three and nine months ended
June 30, 2004, the Company had foreign sales of approximately 32.5% and 33.2% of net
sales, respectively. The Company does not believe that changes in future exchange rates
would have a material effect on its financial position, results of operations, or cash
flows as all of its foreign sales transactions are denominated in US dollars. As a result,
the Company has not entered into forward exchange or option contracts for transactions to
hedge against foreign currency risk.

Investment Risk

The Company does not use derivative
financial or commodity instruments. The Companys financial instruments include cash
and cash equivalents, accounts and notes 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.

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.

20



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.

Part II. Other
Information

Item 1. Legal Proceedings

We are parties 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 reserves for uninsured liabilities. While the
outcome of the pending proceedings cannot be predicted with certainty, based on our
review, we believe that any liability that may result is not reasonably likely to have a
material effect on our liquidity, financial condition or results of operations.

Item 2. Changes in
Securities and Use of Proceeds

None

Item 3. Defaults Upon
Senior Securities

None

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

None

Item 5. Other Information

None

Item 6. Exhibits and
Reports on Form 8-K

| | (a) |  | Exhibits
| | --- |  | --------

| |  | 2.1 |  | Asset
Purchase Agreement, dated as of September 30, 2003, by and among the Company, Teleflex
Incorporated and Teleflex Automotive Incorporated (Incorporated by reference to
Exhibit 2.1 to the Registrants current reporton Form 8-K filed on December
9, 2003)
| |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 3.1 |  | Certificate
of Incorporation of the Registrant as amended. (Incorporated by reference to Exhibit
3.1 to the Registrantsannual report on form 10-K for the fiscal year ended
September 30, 1995).
| |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 3.2 |  | Certificate
to Provide for the Designation, Preferences, Rights, Qualifications, Limitations or
Restrictions Thereof, of the Series A Preferred Stock, 7 1/2% Redeemable Convertible
Series (Incorporated by reference to Exhibit 3.1 tothe Registrants
quarterly report on form 10-Q for the quarter ended March 31, 1998).
| |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 3.3 |  | Certificate
to Provide for the Designation, Preferences, Rights, Qualifications, Limitations or
Restrictions Thereof, of the Series A-1 Preferred Stock, Non-Redeemable Convertible
Series. (Incorporated by reference to Exhibit 3.3 tothe Registrants
quarterly report on form 10-Q for the quarter ended June 30, 2002).
| |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 3.4 |  | Certificate
to Provide for the Designation, Preferences, Rights, Qualifications, Limitations or
Restrictions Thereof, of the Series B Preferred Stock, 15% Redeemable Convertible Series
(Incorporated by reference to Exhibit (d)(v) tothe Schedule TO-I/A filed on
July 5, 2002).
| |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21



| |  | 3.5 |  | Certificate
of Elimination for Mandatory Preferred Stock (Incorporated by reference to Exhibit
(d)(vi) to the ScheduleTO-I/A filed on July 5, 2002).
| |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 3.6 |  | Restated
By-Laws of the Registrant as amended July 1, 2002. (Incorporated by reference to
Exhibit 3.6 to the Registrantsquarterly report on form 10-Q for the quarter
ended June 30, 2002).
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 4.1 |  | Series
B Preferred Stock Purchase Agreement, dated May 31, 2002. (Incorporated by reference to
Exhibit (d)(i) to the                            Schedule TO-I/A filed on June 11, 2002).
| |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 4.2 |  | Series
B Preferred Registration Rights Agreement, dated as of July 1, 2002, by and among the
Company, American Industrial Partners Capital Fund III, L.P., and Dolphin Offshore
Partners L.P. (Incorporated by reference to Exhibit(d)(vii) to the Schedule
TO-I/A filed on July 5, 2002).
| |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 4.3 |  | Series
B Preferred Shareholder Agreement, by and among the Company, American Industrial Partners
Capital Fund III, L.P.,                            Dolphin Offshore Partners L.P. and
Eubel, Brady & Suttman Asset Management, Inc. (Incorporated by reference
                           to Exhibit (d)(viii) to the Schedule TO-I/A filed on July 5,
2002).
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 4.4 |  | Series
A-1 Preferred Registration Rights Agreement, dated as of July 15, 2002, by and among the
Company and the holders of Series A-1 Preferred Stock. (Incorporated by reference to
Exhibit 4.5 to the Registrants quarterly report onForm 10-Q for the quarter
ended June 30, 2002).
| |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 4.5 |  | Form
of Amended and Restated Subordinated Debenture Due July 1, 2004 (Incorporated by
reference to Exhibit (d)(xii) to theSchedule TO-I/A filed on July 5, 2002).
| |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 4.6 |  | Form
of warrant (Incorporated by reference to Exhibit (d)(iii) to the Schedule TO-I/A filed
on June 11, 2002).
| |  | --- |  | --------------------------------------------------------------------------------------------------------------

| |  | 31.1 |  | Certification
of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) (Filed herewith).
| |  | ---- |  | -------------------------------------------------------------------------------------------------------

| |  | 31.2 |  | Certification
of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) (Filed herewith).
| |  | ---- |  | -------------------------------------------------------------------------------------------------------

| |  | 32.1 |  | Certification
of R. Eugene Goodson pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the                            Sarbanes-Oxley Act of 2002.
| |  | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 32.2 |  | 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.
| |  | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | Reports
on Form 8-K
| | --- |  | -------------------

| | On
May 3, 2004, the Company filed a current report on Form 8-K to provide under Item 7 and
12 a press release reporting the release of earnings for the second quarter of fiscal
2004. Such information shall not be deemed filed for purposes of Section 18
of the Securities Exchange Act of 1934.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 13, 2004, the Company filed a current report on Form 8-K to provide under Item 7 and
12 a revised press release reporting the release of earnings for the second quarter of
fiscal 2004. Such information shall not be deemed filed for purposes of
Section 18 of the Securities Exchange Act of 1934.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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: August 16,
2004 |                                                                              
|                      | /s/ R. EUGENE GOODSON                                                        
|                      | R. Eugene GoodsonChairman of the
Board, President and Chief Executive Officer
|                      |                                                                              
|                      |                                                                              
|                      | /s/ DENNIS E. BUNDAY                                                         
|                      | Dennis E. BundayChief Financial
Officer                                      

23