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, 2005



[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the transition period from ________________ to ________________



Commission file number 0-18083



Williams Controls, Inc.

(Exact name of registrant as specified in its charter)





|Delaware                                                      |  | 84-1099587                         
|------------------------------------------------------------- |  | -----------------------------------
|(State or other jurisdiction 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.



YesxNo  o



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



Yes  oNox



The number of shares outstanding of the registrant's common stock

at July 31, 2005: 46,721,571











Williams Controls, Inc.



June 30, 2005



Table of Contents





|                                                                                                           | Page
Number
|---------------------------------------------------------------------------------------------------------- | -----------
|Part I.  Financial Information                                                                             |            
|                                                                                                           |            
|Item 1. Financial Statements (unaudited)                                                                   |            
|                                                                                                           |            
|Condensed Consolidated Balance Sheets, June 30, 2005 and
September 30, 2004                                | 1          
|                                                                                                           |            
|Condensed Consolidated Statements of Operations, three and nine month
periods ended June 30, 2005 and 2004 | 2          
|                                                                                                           |            
|Condensed Consolidated Statements of Cash Flows, nine month
periods ended June 30, 2005 and 2004           | 3          
|                                                                                                           |            
|Notes to Unaudited Condensed Consolidated Financial Statements                                             | 4          
|                                                                                                           |            
|Item 2.  Managements Discussion and Analysis of Financial Condition
and Results of Operations             | 14         
|                                                                                                           |            
|Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                        | 23         
|                                                                                                           |            
|Item 4.  Controls and Procedures                                                                           | 24         
|                                                                                                           |            
|Part II.  Other Information                                                                                |            
|                                                                                                           |            
|Item 1.  Legal Proceedings                                                                                 | 25         
|                                                                                                           |            
|Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                       | 25         
|                                                                                                           |            
|Item 3.  Defaults Upon Senior Securities                                                                   | 25         
|                                                                                                           |            
|Item 4.  Submission of Matters to a Vote of Security Holders                                               | 25         
|                                                                                                           |            
|Item 5.  Other Information                                                                                 | 25         
|                                                                                                           |            
|Item 6.  Exhibits                                                                                          | 25         
|                                                                                                           |            
|Signature Page                                                                                             | 28         
|                                                                                                           |            















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,
2005    |  | September 30,2004
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- |  | -----------------
|ASSETS                                                                                                                                                                                                                            |  |                  |  |                  
|Current Assets:                                                                                                                                                                                                                   |  |                  |  |                  
|Cash and cash equivalents                                                                                                                                                                                                         |  | $          4,054 |  | $          2,482 
|Trade accounts receivable, less allowance of
$43 and $20 at June 30, 2005 and September 30
2004, respectively                                                                                                                     |  | 8,401            |  | 8,193            
|Other accounts receivable                                                                                                                                                                                                         |  | 349              |  | 424              
|Inventories                                                                                                                                                                                                                       |  | 3,957            |  | 3,777            
|Deferred income taxes                                                                                                                                                                                                             |  | 2,116            |  | 2,116            
|Prepaid expenses and other current assets                                                                                                                                                                                         |  | 393              |  | 290              
|Total current assets                                                                                                                                                                                                              |  | 19,270           |  | 17,282           
|                                                                                                                                                                                                                                  |  |                  |  |                  
|Property, plant and equipment, net                                                                                                                                                                                                |  | 7,052            |  | 5,402            
|Deferred income taxes                                                                                                                                                                                                             |  | 4,200            |  | 7,247            
|Other assets, net                                                                                                                                                                                                                 |  | 1,252            |  | 1,194            
|Total assets                                                                                                                                                                                                                      |  | $        31,774  |  | $        31,125  
|                                                                                                                                                                                                                                  |  |                  |  |                  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                                                                                             |  |                  |  |                  
|Current Liabilities:                                                                                                                                                                                                              |  |                  |  |                  
|Accounts payable                                                                                                                                                                                                                  |  | $          5,172 |  | $          4,084 
|Accrued expenses                                                                                                                                                                                                                  |  | 5,166            |  | 4,969            
|Current portion of employee benefit obligations                                                                                                                                                                                   |  | 1,592            |  | 1,240            
|Current portion of long-term debt and capital lease obligations                                                                                                                                                                   |  | 3,443            |  | 3,454            
|Total current liabilities                                                                                                                                                                                                         |  | 15,373           |  | 13,747           
|                                                                                                                                                                                                                                  |  |                  |  |                  
|Long-term Liabilities:                                                                                                                                                                                                            |  |                  |  |                  
|Long-term debt and capital lease obligations                                                                                                                                                                                      |  | 11,050           |  | 16,640           
|Employee benefit obligations                                                                                                                                                                                                      |  | 7,158            |  | 7,440            
|Other long-term liabilities                                                                                                                                                                                                       |  | 10               |  | 333              
|                                                                                                                                                                                                                                  |  |                  |  |                  
|Commitments and contingencies                                                                                                                                                                                                     |  |                  |  |                  
|                                                                                                                                                                                                                                  |  |                  |  |                  
|Stockholders Deficit:                                                                                                                                                                                                            |  |                  |  |                  
|Series C Preferred Stock ($.01 par value, 100,000 authorized; 0
issued and outstanding at June 30, 2005 and September 30,
2004)                                                                                                   |  | -                |  | -                
|Common stock ($.01 par value, 75,000,000 and 50,000,000
authorized at June 30, 2005 and September 30, 2004,
respectively; 46,721,571 and 46,629,411 issued and outstanding
at June 30, 2005 and September 30, 2004, respectively) |  | 467              |  | 466              
|Additional paid-in capital                                                                                                                                                                                                        |  | 36,078           |  | 35,960           
|Accumulated deficit                                                                                                                                                                                                               |  | (32,359)         |  | (37,458)         
|Treasury stock (130,200 shares at June 30, 2005 and
September 30, 2004)                                                                                                                                                           |  | (377)            |  | (377)            
|Other comprehensive loss  Pension liability adjustment                                                                                                                                                                           |  | (5,626)          |  | (5,626)          
|Total stockholders deficit                                                                                                                                                                                                       |  | (1,817)          |  | (7,035)          
|Total liabilities and stockholders deficit                                                                                                                                                                                       |  | $        31,774  |  | $        31,125  



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 Month Period EndedJune 30, |  | Nine Month Period EndedJune 30, |           
|----------------------------------------------- | -------------------------------- |  | ------------------------------- | ----------
|
|Net sales                                       |                                  |  | $                               | 17,192    
|Cost of sales                                   |                                  |  |                                 | 11,348    
|Gross profit                                    |                                  |  |                                 | 5,844     
|                                                |                                  |  |                                 |           
|Operating expenses:                             |                                  | 
|Research and development                        |                                  |  |                                 | 855       
|Selling                                         |                                  |  |                                 | 364       
|Administration                                  |                                  |  |                                 | 1,577     
|Total operating expenses                        |                                  |  |                                 | 2,796     
|Operating income from continuing operations     |                                  |  |                                 | 3,048     
|Other (income) expenses:                        |                                  | 
|Interest income                                 |                                  |  |                                 | (13)      
|Interest expense - Debt                         |                                  |  |                                 | 312       
|Interest expense - Series B Preferred Stock     |                                  | 
|dividends and accretion                         |                                  |  |                                 | -         
|(Gain) loss on put/call option agreement        |                                  |  |                                 | 59        
|Other (income) expenses, net                    |                                  |  |                                 | 1         
|Total other expenses                            |                                  |  |                                 | 359       
|Income from continuing operations before        |                                  | 
|income taxes                                    |                                  |  |                                 | 2,689     
|Income tax expense                              |                                  |  |                                 | 1,079     
|Net income from continuing operations           |                                  |  |                                 | 1,610     
|Discontinued operations:                        |                                  | 
|Loss from operations of discontinued operations |                                  |  |                                 | -         
|Loss from sale of discontinued operations       |                                  |  |                                 | -         
|Total discontinued operations                   |                                  |  |                                 | -         
|Net income                                      |                                  |  | $                               | 1,610     
|Income per common share from continuing         |                                  | 
|operations - basic and diluted                  |                                  |  | $                               | 0.03      
|Loss per common share from discontinued         |                                  | 
|operations - basic and diluted                  |                                  |  |                                 | 0.00      
|Net income per common share - basic and diluted |                                  |  | $                               | 0.03      
|Weighted average shares used in per share       |                                  | 
|calculation - basic                             |                                  |  |                                 | 46,644,348
|Weighted average shares used in per share       |                                  | 
|calculation - diluted                           |                                  |  |                                 | 47,906,190



See accompanying notes to Unaudited Condensed Consolidated Financial Statements.





2







Williams Controls, Inc.

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)





|                                                                                  |  | Nine Month Period
Ended June 30,
|--------------------------------------------------------------------------------- |  | --------------------------------
|                                                                                  |  | 2005                            
|Cash flows from operating activities:                                             |  |                                 
|Net income                                                                        |  | $          5,099                
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                 
|Depreciation and amortization                                                     |  | 727                             
|Deferred income taxes                                                             |  | 3,047                           
|Gain on put/call option agreement                                                 |  | (323)                           
|Stock based compensation                                                          |  | 117                             
|Loss from discontinued operations                                                 |  | -                               
|Loss from sale of fixed assets                                                    |  | 36                              
|Interest expense  Series B Preferred Stock dividends and accretion               |  | -                               
|Changes in operating assets and liabilities                                       |  |                                 
|Receivables, net                                                                  |  | (133)                           
|Inventories                                                                       |  | (180)                           
|Accounts payable and accrued expenses                                             |  | 1,285                           
|Other                                                                             |  | (191)                           
|Net cash provided by operating activities                                         |  | 9,484                           
|Cash flows from investing activities:                                             |  |                                 
|Purchases of property, plant and equipment                                        |  | (2,311)                         
|Net proceeds received from sale of assets                                         |  | -                               
|Proceeds from collection on note receivable                                       |  | -                               
|Net cash provided by (used in) investing activities                               |  | (2,311)                         
|Cash flows from financing activities:                                             |  |                                 
|Net payments of debt and capital lease obligations                                |  | (5,601)                         
|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                                            |  | -                               
|Net cash used in financing activities                                             |  | (5,601)                         
|Net increase in cash and cash equivalents                                         |  | 1,572                           
|Cash and cash equivalents at beginning of period                                  |  | 2,482                           
|Cash and cash equivalents at end of period                                        |  | $          4,054                
|Supplemental disclosure of cash flow information:                                 |  |                                 
|Interest paid                                                                     |  | $          1,016                
|Income taxes paid                                                                 |  | $             309               



See accompanying notes to Unaudited Condensed Consolidated Financial Statements.











3







Williams Controls, Inc.

Notes to Condensed Consolidated Financial Statements

Three and Nine Month periods ended June 30, 2005 and 2004

(Dollars in thousands, except share and per share amounts)

(Unaudited)



Note 1. Organization



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



Active Subsidiaries Williams Controls Industries, Inc. ("Williams"); Williams (Suzhou) Controls Co. Ltd. (Williams Controls Asia); and Williams Controls Europe GmbH (Williams Controls Europe).



Inactive Subsidiaries 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").



Note 2. Basis of Presentation



The accompanying unaudited interim condensed consolidated financial statements have been prepared by the Company and, in the opinion of management, reflect all material normal recurring adjustments necessary to present fairly the Companys financial position as of June 30, 2005 and the results of operations and cash flows for the three and nine month periods ended June 30, 2005 and 2004.  The results of operations for the three and nine month periods ended June 30, 2005 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.  In the opinion of management, when the interim consolidated statements are read in conjunction with the September 30, 2004 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, put/call option agreement, 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 and net income per share as if the fair value based method of accounting had been adopted.



In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (Revised 2004), Share Based Payment.  This statement requires that compensation costs relating to share-based payment transactions be recognized in financial statements.  Compensation costs will be measured based on the fair value of the equity or liability instruments



4







issued.  Share-based compensation arrangements include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee stock purchase plans.  SFAS No. 123R replaces SFAS No. 123 and supercedes APB No. 25 and is effective at the beginning of a registrants first fiscal year that begins after June 15, 2005, at which time the Company will adopt the provisions of this statement.  Until such time, the Company will continue to account for its stock-based compensation plans in accordance with APB No. 25.



The Company has begun analyzing the effects of adopting SFAS No. 123R on its consolidated financial statements.  In March 2005 the SEC issued Staff Accounting Bulletin No. 107 (SAB 107), which expresses views of the SEC staff regarding interaction between SFAS No. 123R and certain SEC rules and regulations and provides the staffs views regarding the valuation of share-based payment arrangements for public companies.  The Company has evaluated assumptions it has historically used in the Black-Scholes option pricing model for determining the fair value of options granted in light of guidance provided in SFAS No. 123R and SAB 107, and has determined that following that guidance would result in refinement of assumptions it has historically used for determining the SFAS No. 123 pro-forma net income disclosures.  Under that guidance, the Company has refined its estimates of the
expected volatility of its share price to 65% for the three and nine month periods ended June 30, 2004, as compared to the 100% used in the Black-Scholes model, and the Company refined its estimates of the expected lives of options granted to 6.5 years as compared to the 7.0 years used in the Black-Scholes model.  The Company has calculated the effect of using these refined assumptions and has included these refined assumptions in the computations below.  The Company is in the process of determining the overall effects of adopting SFAS No. 123R on its financial statements, including deciding which option valuation model to use.



During the nine month period ended June 30, 2005, the Company granted 1,030,000 stock options to certain employees and directors.  There were no stock options issued during the three month period ended June 30, 2005.  The Company computed, for pro forma disclosure purposes, the value of all the options granted during the nine month period ended June 30, 2005 and the three and nine month periods 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.



|                        |  | Three MonthPeriod Ended |  | Nine Month PeriodEnded June 30,
|----------------------- |  | ----------------------- |  | -------------------------------
|                        |  | June 30, 2004           |  | 2005                           
|Risk-free interest rate |  | 4.34%                   |  | 3.86%                          
|Expected dividend yield |  | 0%                      |  | 0%                             
|Expected lives          |  | 6.5 years               |  | 6.5 years                      
|Expected volatility     |  | 65%                     |  | 65%                            



Using the Black-Scholes methodology, the total value of options granted during the three month period ended June 30, 2004 was $48, which would be amortized on a pro forma basis over the vesting period of the options (typically five years).  The total value of options granted during the nine month periods ended June 30, 2005 and 2004 was $624 and $486, respectively.  The weighted average per share fair value of options granted during the three month period ended June 30, 2004 was $.51.  The weighted average per share value of options granted during the nine month periods ended June 30, 2005 and 2004 was $.61 and $.49, 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 and net income per share would approximate the pro forma disclosures below:



|                                                                                                                            |  | Three Month Period Ended June 30, |  | Nine Month Period Ended June 30,
|--------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- |  | --------------------------------
|                                                                                                                            |  | 2005                              |  | 2004                            
|Net income as reported                                                                                                      |  | $  1,610                          |  | $  1,472                        
|                                                                                                                            |  |                                   |  |                                 
|Less:  Total stock-based employee compensation expense determined under fair value based method, net of related tax effects |  | (67)                              |  | (42)                            
|                                                                                                                            |  |                                   |  |                                 
|Pro forma net income                                                                                                        |  | $  1,543                          |  | $  1,430                        
|                                                                                                                            |  |                                   |  |                                 





5





|Earnings per share:   |  |           |  |           |  |           |  |          
|--------------------- |  | --------- |  | --------- |  | --------- |  | ---------
|Basic  as reported   |  | $    0.03 |  | $    0.04 |  | $    0.11 |  | $    0.11
|Basic  pro forma     |  | $    0.03 |  | $    0.04 |  | $    0.10 |  | $    0.11
|Diluted  as reported |  | $    0.03 |  | $    0.04 |  | $    0.11 |  | $    0.11
|Diluted  pro forma   |  | $    0.03 |  | $    0.04 |  | $    0.10 |  | $    0.11



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 month periods ended June 30, 2005 and 2004 was $1,610 and $1,472, respectively, and for the nine month periods ended June 30, 2005 and 2004 was $5,099 and $3,724, respectively, and consisted solely of net income.  As of June 30, 2005, accumulated other comprehensive loss was $5,626, net of tax of $104, and related to 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 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:



|                                                                   |  | Three Month Period Ended
June 30, 2005 |  | Three Month Period Ended
June 30, 2004
|------------------------------------------------------------------ |  | -------------------------------------- |  | --------------------------------------
|                                                                   |  | Income                                 |  | Shares                                
|Basic EPS                                                         |  |                                        |  |                                       
|Weighted average common shares
outstanding                         |  |                                        |  | 46,644,348                            
|Effect of participating securities:                                |  |                                        |  |                                       
|Preferred stock  Series A-1                                       |  |                                        |  | -                                     
|Income from continuing
operations allocable to common
stockholders |  | $ 1,610                                |  | 46,644,348                            
|Diluted EPS                                                       |  |                                        |  |                                       
|Effect of dilutive securities                                     |  |                                        |  |                                       
|Stock options                                                      |  | -                                      |  | 1,261,842                             
|Income from continuing
operations allocable to common
stockholders |  | $ 1,610                                |  | 47,906,190                            

















6









|                                                                   |  | Nine Month Period Ended
June 30, 2005 |  | Nine Month Period Ended
June 30, 2004
|------------------------------------------------------------------ |  | ------------------------------------- |  | -------------------------------------
|                                                                   |  | Income                                |  | Shares                               
|Basic EPS                                                         |  |                                       |  |                                      
|Weighted average common shares
outstanding                         |  |                                       |  | 46,634,390                           
|Effect of participating securities:                                |  |                                       |  |                                      
|Preferred stock  Series A-1                                       |  |                                       |  | -                                    
|Income from continuing
operations allocable to common
stockholders |  | $ 5,099                               |  | 46,634,390                           
|                                                                   |  |                                       |  |                                      
|Diluted EPS                                                       |  |                                       |  |                                      
|Effect of dilutive securities                                     |  |                                       |  |                                      
|Stock options                                                      |  | -                                     |  | 1,122,458                            
|Preferred stock  Series A                                         |  | -                                     |  | -                                    
|Income from continuing
operations allocable to common
stockholders |  | $ 5,099                               |  | 47,756,848                           



For the three and nine month periods ended June 30, 2005, the Company had options and warrants covering 372,250 and 402,250 shares, respectively, that were not considered in the diluted EPS calculation since they would have been antidilutive.  For the three and nine month periods 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 diluted EPS calculation since they would have been antidilutive.  In addition, for the three and nine month periods ended June 30, 2004, the Company had Series B Preferred Stock that was convertible into 24,002,821 and 23,131,682 of common shares, respectively, that were not considered in the diluted EPS calculation based on their classification under SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.



The Company adopted EITF 03-6, Participating Securities and the Two-Class Method under FASB Statement No. 128 during the quarter ended June 30, 2004.  EITF 03-6 requires that participating securities that are convertible into common stock be included in the computation of basic EPS if the effect is dilutive.  The Companys Series A-1 Preferred Stock stockholders were entitled to participate in the dividend rights equal to common stockholders for each share of common stock into which their preferred stock could be converted.  Therefore, in accordance with EITF 03-6, the Companys basic EPS reported for the three and nine month periods ended June 30, 2004 reflects the participation rights of the Series A-1 Preferred Stock stockholders in payment of dividends.



Note 6. Inventories



Inventories consist of the following:



|                |  | June 30,
2005                |  | September 30,
2004         
|--------------- |  | ---------------------------- |  | ---------------------------
|Raw materials   |  | $                      2,865 |  | $                     2,461
|Work in process |  | 248                          |  | 305                        
|Finished goods  |  | 844                          |  | 1,011                      
|                |  | $                      3,957 |  | $                     3,777



Note 7. Fiscal 2004 Recapitalization



On September 30, 2004, the Company completed a recapitalization.  As part of this recapitalization, the Company redeemed 98,114 shares of Series B Preferred Stock for approximately $26,436.  The remaining 55,436 shares of Series B Preferred Stock were converted into 11,761,495 shares of common stock.  In addition, as part of the recapitalization 77,550



7







shares of Series A-1 Preferred Stock outstanding were converted into 11,848,740 shares of common stock.  As a result of the 2004 recapitalization, the Company has no shares of preferred stock issued or outstanding.



In connection with the recapitalization, the Company also (i) entered into a new $25,000 five-year revolving and term loan agreement with Merrill Lynch Capital Corp. (Merrill Lynch); (ii) terminated the existing revolving and term loan agreement with Wells Fargo Credit, Inc. (Wells Fargo); (iii) amended and restated the Management Services Agreement with American Industrial Partners (AIP Advisor) and Dolphin Advisors, LLC (Dolphin Advisors); (iv) entered into a put/call option agreement with American Industrial Partners Capital Fund III, L.P. (AIP); and (v) restructured the composition of its Board of Directors



Note 8. Patent License Agreements



During fiscal 2003, the Company obtained a license agreement covering an adjustable pedal design for its heavy truck and transit bus product lines.  This agreement required an initial payment of $125, which was paid in fiscal 2003, and a $75 payment to be paid based on certain criteria, which was paid during the first quarter of fiscal 2005.  The Company will also make royalty payments based on the number of units sold.  The Company plans to begin selling these products in mid-fiscal 2006 and, consequently, has not begun amortizing the initial payments.  The agreement is for a period of three years and is automatically 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 on September 30, 2003, 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.



In fiscal 2005, the Company entered into a license agreement under which it licensed non-contacting Hall effect sensor technology to internally produce non-contacting sensors for use in electronic throttle controls.  The initial licensing fee of $140 was paid during the quarter ended June 30, 2005.  In addition, the Company will make royalty payments based on the number of units sold and will be subject to minimum yearly royalties beginning in year three of this agreement.  The Company will amortize the capitalized license fee once the Company begins selling units.  This agreement is for a period of ten years and is renewed annually based on written mutual agreement.  This agreement may be terminated by the licensor after four years if certain sales thresholds are not met.



Note 9. Settlement of accounts payable



Included in the accompanying consolidated balance sheet is approximately $1,333 of accounts payable related to closed insolvent subsidiaries of the Company.  In accordance with SFAS No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a debtor can only relieve itself of a liability if it has been extinguished.  A liability is considered extinguished if (a) the debtor pays the creditor and is relieved of its obligation for the liability or (b) the debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor.  During the three and nine month periods ended June 30, 2005, the Company was judicially released from and reversed $1 and $53, respectively, of accounts payable related to closed, insolvent subsidiaries of the Company resulting in a gain, which has been recorded in other
(income) expense in the accompanying condensed consolidated statements of operations.  The Company expects to reverse amounts in future periods based on the recognition of the liabilities being judicially released in accordance with SFAS No. 140 of $7 remaining in fiscal 2005; $561 in fiscal 2006; $731 in fiscal 2007; and $34 in fiscal 2010.



Note 10. Debt



As part of the fiscal 2004 recapitalization, on September 30, 2004, the Company entered into a new five-year senior secured loan and revolving credit facility with Merrill Lynch, which replaced the Company's prior loan facility with Wells Fargo.  At the time of the recapitalization transaction, the Company's existing term loan balance of $318 was paid off and the credit agreement with Wells Fargo was terminated.  The new loan facility with Merrill Lynch provides $25,000 in borrowing capacity, consisting of an $8,000 revolving loan facility and a $17,000 term loan.  The loans are secured by substantially all the assets of the Company.  Borrowings under the revolving loan facility are subject to a borrowing base equal to 85% of eligible accounts receivables and 60% of eligible inventories.  Interest rates under the new agreement are based on the election of the Company of either a LIBOR rate
or Prime rate.  Under the LIBOR rate option, the revolving loan facility will bear interest at the LIBOR rate plus 3.75% per annum for borrowings under the revolving credit facility and borrowings under the term loan facility will bear interest at the LIBOR rate plus 4.25%.  Under the Prime rate option, the revolving loan facility will bear interest at the Prime rate plus 2.75% per annum and the



8







term loan facility will bear interest at the Prime rate plus 3.25%.  Fees under the loan agreement include an unused line fee of .50% per annum on the unused portion of the revolving credit facility.



The Company is required to repay the term loan in equal quarterly scheduled payments of $850.  The Company is entitled to prepay the term loan, in whole or in part, in minimum amounts without penalty.  Mandatory prepayments of the loans under the term loan are required in amounts equal to 75% of the Companys excess cash flow, as defined in the agreement, for each fiscal year and 100% of (i) the insurance or condemnation proceeds received in connection with a casualty event, condemnation or other loss, less any proceeds reinvested by the Company up to $500 per fiscal year; (ii) the net proceeds from issuance of equity or debt securities and (iii) the net cash proceeds of asset sales or other dispositions subject to customary exceptions.  The revolving loan facility expires on September 29, 2009, at which time all outstanding amounts under the revolving loan facility are due and payable.
 The Company is subject to certain quarterly and annual financial covenants, commencing with the fiscal quarter ended December 31, 2004.  At June 30, 2005, the Company was in compliance with its debt covenants.



In connection with the new senior secured loan facility, the Company paid Merrill Lynch a commitment fee of $500.  In addition, the Company must pay Merrill Lynch an annual agency fee of $25 and reimburse Merrill Lynch for any costs and expenses incurred in connection with the completion of the new credit agreement.  The commitment fee and expenses incurred by Merrill Lynch and paid for by the Company have been capitalized in the accompanying consolidated balance sheet and are being amortized over the five-year life of the loan facility.



The Company had available under its revolving credit facility $8,000 and $4,989 at June 30, 2005 and September 30, 2004, respectively.



The Companys long-term debt and capital lease obligations consist of the following:



|                                                                                                                                                        | June 30,
2005         |  | September 30, 2004      
|------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- |  | ------------------------
|Bank revolving credit facility due September 29, 2009, bearing
interest at a variable rate.                                                             | $                   - |  | $                  3,011
|Bank term loan due September 29, 2009, balance bearing
interest at a variable rate, (7.93% at June 30, 2005)
payable in quarterly installments of $850. | 14,450                |  | 17,000                  
|                                                                                                                                                        |                       |  |                         
|Capital leases                                                                                                                                          | 43                    |  | 83                      
|                                                                                                                                                        | 14,493                |  | 20,094                  
|                                                                                                                                                        |                       |  |                         
|Less current portion                                                                                                                                    | 3,443                 |  | 3,454                   
|                                                                                                                                                        | $             11,050  |  | $              16,640   



Note 11.  Product Warranties



The Company establishes a product warranty liability based on a percentage of product sales.  The liability is based on historical return rates of products and amounts for significant and specific warranty issues, and is included in accrued expenses in the accompanying condensed consolidated balance sheets.  Warranty is limited to a specific time period, mileage or hours of use, and varies by product and application.  The Company has recorded a liability, 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 liability for the three and nine month periods ended June 30, 2005 and 2004:



|                              |  | Three and Nine Month Periods Ended
June 30, 2005 |  |                               |  | Three and Nine Month Periods Ended
June 30, 2004
|----------------------------- |  | ------------------------------------------------ |  | ----------------------------- |  | ------------------------------------------------
|Balance at September 30, 2004 |  | $                       1,393                    |  | Balance at September 30, 2003 |  | $                      2,432                    
|Payments                      |  | (164)                                            |  | Payments                      |  | (708)                                           
|Additional accruals           |  | 304                                              |  | Additional accruals           |  | 230                                             
|Balance at December 31, 2004  |  | $                       1,533                    |  | Balance at December 31, 2003  |  | $                      1,954                    
|                              |  |                                                  |  |                               |  |                                                 





9









|Payments                  |  | (510)                         |  | Payments                  |  | (962)                       
|------------------------- |  | ----------------------------- |  | ------------------------- |  | ----------------------------
|Additional accruals       |  | 374                           |  | Additional accruals       |  | 637                         
|Accrual adjustments       |  | -                             |  | Accrual adjustments       |  | (47)                        
|Balance at March 31, 2005 |  | $                       1,397 |  | Balance at March 31, 2004 |  | $                      1,582
|Payments                  |  | (159)                         |  | Payments                  |  | (441)                       
|Additional accruals       |  | 319                           |  | Additional accruals       |  | 467                         
|Balance at June 30, 2005  |  | $                       1,557 |  | Balance at June 30, 2004  |  | $                      1,608



In January 2003, the Company was notified by one customer of higher than normal warranty claims on one of the Companys electronic throttle control systems.  This customer entered into a campaign to address this specific warranty issue.  Management estimated that the total potential units involved were 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 and $322 during fiscal 2004.  The Company has made modifications to the product.  All units that were in the customers inventory were returned or replaced.  During the nine month periods ended June 30, 2005 and 2004, the Company made payments of $88 and
$1,260, respectively, related to this specific warranty claim.  As this campaign ended on December 31, 2004, the Company does not anticipate any further increases or adjustments related to this specific warranty claim.



Note 12. Pension Plans and Post-Retirement Benefits



The Company maintains two pension plans, an hourly employee plan and a salaried employee plan.  The hourly plan covers certain of the Companys union employees.  The salaried plan covers certain salaried employees.  During 2003, the Company modified the provisions of the salaried plan to limit the number of eligible employees to those in the plan at the time of modification and to limit the benefits under the plan to those earned to that date.  Annual net periodic pension costs under the plans are determined on an actuarial basis.  Disclosures regarding the components of net periodic benefit cost and contributions of pension plans are included below.



|Components of Net Periodic Benefit Cost: |  |                                   |  |                                   |  |                     | 
|---------------------------------------- |  | --------------------------------- |  | --------------------------------- |  | ------------------- | 
|                                         |  | Salaried Employees Plan           |  | Hourly Employees Plan            
|                                         |  | Three Month Period Ended
June 30, |  | Three Month Period Ended
June 30,
|                                         |  | 2005                              |  | 2004                              |  | 2005                | 
|Service cost                             |  | $                    -            |  | $                27               |  | $                37 | 
|Interest cost                            |  | 69                                |  | 70                                |  | 109                 | 
|Expected return on plan assets           |  | (51)                              |  | (34)                              |  | (65)                | 
|Amortization of prior service cost       |  | -                                 |  | -                                 |  | 14                  | 
|Amortization of loss                     |  | 25                                |  | 33                                |  | 92                  | 
|Net periodic benefit cost                |  | $                43               |  | $                96               |  | $            187    | 



|                                   |  | Salaried Employees Plan          |  | Hourly Employees Plan           
|---------------------------------- |  | -------------------------------- |  | --------------------------------
|                                   |  | Nine Month Period Ended
June 30, |  | Nine Month Period Ended
June 30,
|                                   |  | 2005                             |  | 2004                            
|Service cost                       |  | $                    -           |  | $                81             
|Interest cost                      |  | 207                              |  | 210                             
|Expected return on plan assets     |  | (153)                            |  | (102)                           
|Amortization of prior service cost |  | -                                |  | -                               
|Amortization of loss               |  | 75                               |  | 99                              
|Net periodic benefit cost          |  | $           129                  |  | $            288                



The Company expects total contributions to its pension plans in fiscal 2005 to be $1,193.  As of June 30, 2005, the Company has made contributions of $795 and will make further contributions of $398 in the fourth quarter of fiscal 2005.





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The Company also provides health care and life insurance benefits for certain of its retired employees.  These benefits are subject to deductibles, co-payment provisions and other limitations.  Disclosures regarding the components of net periodic benefit cost and contributions of the Companys post-retirement plan are required for interim financial statements and are included below.  The Company did not make any contributions to the post-retirement plan for the three and nine month periods ended June 30, 2005 and 2004.



|Components of Net Periodic Benefit Cost: |  |                                   |  |                                  |  |                        
|---------------------------------------- |  | --------------------------------- |  | -------------------------------- |  | -----------------------
|                                         |  | Post-Retirement Plan             
|                                         |  | Three Month Period Ended
June 30, |  | Nine Month Period Ended
June 30,
|                                         |  | 2005                              |  | 2004                             |  | 2005                   
|Service cost                             |  | $                    2            |  | $                   2            |  | $                     6
|Interest cost                            |  | 65                                |  | 54                               |  | 195                    
|Amortization                             |  | 6                                 |  | (7)                              |  | 18                     
|Net periodic benefit cost                |  | $                73               |  | $                49              |  | $             219      



Note 13. Related Parties



As part of the 2004 recapitalization transaction, the Company entered into a put/call option agreement with American Industrial Partners Capital Fund III, L.P. (AIP).  Under the option agreement, during the period commencing on September 30, 2006 and ending on September 30, 2007, AIP has a one-time right to require the Company to repurchase up to 7,000,000 shares of the Companys common stock then held by AIP (the Put).  The exercise price for the Put is the lesser of $1.00 per share or the average of the closing trading price of the Companys common stock for the 30 trading days immediately preceding the third business day before the notice of exercise of the Put is delivered by AIP.  If the Company fails to pay the price within 30 days after exercise of the Put by AIP, the Company must issue to AIP shares of the Companys Series C Preferred Stock.
The number of shares of Series C Preferred Stock to be issued to AIP would equal the aggregate price of the shares of common stock held by AIP that the Company was required to repurchase upon exercise of the Put divided by $100.  The Series C Preferred Stock would be senior to the Companys common stock and any other class or series of stock of the Company with respect to (i) the right to receive dividends, and (ii) the right to receive a distribution of assets upon the dissolution, winding up or other liquidation of the Company.  This liquidation preference would equal $100 per share, plus accrued but unpaid dividends.  The Series C Preferred Stock would accrue cumulative dividends on a daily basis at the rate of 15% per annum, with such rate increasing by 0.25% every three months, up to a maximum rate of 20% per annum.  In addition, the Company would have redemption rights to be able to redeem all or any portion of the Series C Preferred Stock at any time in minimum increments
of 500 shares at a price per share equal to $100 plus all accrued but unpaid dividends.  AIP may assign its rights to the Put to any person that holds at least 6,000,000 shares of the Companys common stock prior to such assignment.  Upon any such assignment, however, the Companys obligation to issue Series C Preferred Stock as described above terminates.  AIP may not assign the Put separately from the Call described below.



In exchange for the Put, AIP granted the Company a right to purchase from AIP on October 31, 2007 all of the shares of the Companys common stock then held by AIP, up to a maximum of 7,000,000 shares, at a price of $2.00 per share (the Call).  In order to exercise the Call, the Company is required to deliver to AIP a written notice of its election to exercise the Call.  Such notice must be provided no more than thirty nor fewer than ten days prior to the Call date.  The Company estimated the value of both the Put and Call under the option agreement, based in part on advice from a valuation firm.  The valuation as of June 30, 2005 resulted in a Put value of $367 and a Call value of $357.  The $10 difference between the value of the Put and the value of the Call has been recorded as a long-term liability in the accompanying condensed consolidated balance sheets at June 30,
2005.  As a result of the valuation at June 30, 2005, the Company recognized a loss of $59 from the change in the net value of the Put and Call from March 31, 2005 to June 30, 2005 and a total gain of $323 for the nine month period ended June 30, 2005.  The loss for the three month period ended June 30, 2005 and the gain for the nine month period ended June 30, 2005 have been recorded in other (income) expense in the accompanying condensed consolidated statements of operations.  The Company will continue to revalue both the Put and the Call on a quarterly basis, with the change recorded to other (income) expense.



Effective with the 2004 recapitalization transaction, the Company and AIP Advisors terminated the existing Management Service Agreement and entered into a new Management Services Agreement with each of AIP Advisors and Dolphin Advisors, LLC (Dolphin Advisors).  Under the new agreement, each of AIP Advisors and Dolphin Advisors will provide advisory and management services to the Company and its subsidiaries.  As consideration for such services, commencing October 1, 2004 the Company is required to pay (i) an annual management fee to AIP Advisors equal to $80, and (ii) an annual management fee to Dolphin Advisors equal to $120.  Such annual management fees are payable in



11







quarterly installments.  The Companys obligation to pay the annual fee to AIP Advisors and Dolphin Advisors will terminate automatically as of September 30, 2007, or earlier under certain circumstances.  The Company made no payments in fiscal 2004 under this agreement.  The Company recognized expense of $50 and $150 during the three and nine month periods ended June 30, 2005 for the Management Services Agreement.



Note 14. Preferred Stock



During the first quarter of fiscal 2004, the Company paid $1,413 of previously accrued Series A-1 Preferred Stock dividends.  After such payment, no further dividends existed for Series A-1 Preferred Stock.  As a result of the completion of the 2004 recapitalization transaction, all outstanding shares of Series A-1 Preferred Stock as of September 30, 2004 were converted into 11,848,740 shares of common stock.



Note 15. Warrants and Common Stock



In June 2005, the Company issued 76,336 shares of restricted common stock to its President and Chief Executive Officer at $1.31 per share.  As part of his employment agreement effective October 1, 2004, he was entitled to a one-time signing bonus payable in May 2005, of which $100 would be paid in shares of common stock, valued at the average trading price for the preceding 30 days and $100 payable in cash.  Additionally, this agreement grants the Company the option to pay up to 7% of his annual base salary in shares of common stock.  In June 2005, the Company elected to pay 7% of his fiscal 2005 salary in common stock of the Company and issued 12,824 shares of restricted common stock at $1.31 per share.



In February 2001, the Company issued $5,000 of 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 at $1.375 per share for each $2.00 of principal amount of debentures purchased.  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.  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 sold 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.  Cash from this transaction was received in April 2004.  In addition, the Company granted stock options to each employee that purchased common stock in consideration for future services to be rendered.  The total options granted were 866,667, which vest over a five-year period from the date of grant.  The exercise price for each option is $0.77.



In April 2000, the Company issued $2,139 of 7.5% convertible subordinated debentures.  The Company issued the placement agent in this transaction a five year warrant to purchase shares of the Companys common stock equal to 7.0% of the total shares of common stock issuable upon the conversion of the debentures.  The exercise price of the placement agent warrants was $2.40 per share.   The exercise price for the placement agent warrants was not adjustable.  During the third quarter ended June 30, 2005 these warrants expired unexercised.  At this time, the Company has no further warrants outstanding.



Note 16. Discontinued Operations



The Company accounts for the impairment of long-lived assets or a disposal group in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets.  The Company tests for impairment when factors indicate that an asset or disposal group may not be recoverable from future undiscounted cash flows.  The Company discontinued the operations of NESC in fiscal 2004 through the sale of certain assets.  The disposed assets consisted of property, plant and equipment, inventories and the right to a product patent.



In accordance with SFAS No. 144, the disposed assets were adjusted to their fair value, causing the Company to recognize a write down of assets of $183.  The total loss on the write down of assets of $183 and the results of operations during the three and nine month periods ended June 30, 2004 have been recorded as a component of discontinued operations on the accompanying condensed consolidated statement of operations.  Net sales for NESC during the three and nine month periods ended June 30, 2004 were $0 and $181, respectively, and were removed from total net sales in the accompanying condensed consolidated statements of operations.  NESC incurred operating expenses of $41 for the third quarter of fiscal 2004, which were reflected as a loss from operations of discontinued operations.  For the first nine months of fiscal 2004, NESC incurred negative gross profit of $16 and total operating
expenses of $90 resulting in a net loss from operations of $106.



12









Note 17. Segment Information



The Company accounts for its segments in accordance with SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information.  During the three and nine months ended June 30, 2005 and 2004, the Company operated in one segment: vehicle components.



Note 18. Contingencies



The Company is a party to various pending judicial and administrative proceedings arising in the ordinary course of business.  The Companys management and legal counsel have reviewed the probable outcome of these proceedings, the costs and expenses reasonably expected to be incurred, the availability and limits of the Companys insurance coverage, and its established reserves for uninsured liabilities.  While the outcome of the pending proceedings cannot be predicted with certainty, based on the Companys review, the Company believes that any liability that may result is not reasonably likely to have a material effect on the Companys consolidated financial statements.



The soil and groundwater at the Companys Portland, Oregon facility contain contaminants that the Company believes were released on the property by previous owners of the business.  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 into the Oregon Department of Environmental Qualitys voluntary clean-up program and during fiscal 2004 the Company recorded a loss of $950 for this matter, representing the low end of the reasonable range of estimated future investigation, remediation and monitoring costs.  As of June 30, 2005, this amount has been reduced to $703 to reflect expenditures made to complete portions
of the investigation.  The Company has a contractual indemnity claim against the prior owner of the business with respect to this contamination and notified the prior owner of this indemnity claim.  The Company also has contribution claims for investigation and remediation costs against other prior owners of the business and a former owner of the property under the federal Superfund act and the Oregon Cleanup Law.  The Company is exploring the possibility of cooperative settlement with these prior owners.  The Company intends to pursue legal action against these prior owners if settlements cannot be reached in a reasonable time.



On October 1, 2004, the Company was named as a co-defendant in a product liability case (Cuesta v. Ford, et al, District Court for Bryant, Oklahoma) that seeks class action status.  The complaint seeks an unspecified amount of damages on behalf of the class.   The Company believes the claims to be without merit and intends to vigorously defend against this action.  There can be no assurance, however, that the outcome of the lawsuit will be favorable to the Company or will not have a material adverse effect on the Companys business, consolidated financial condition and results of operations.  The Company cannon reasonably estimate the possible loss or range of loss at this time.  In addition, the Company has incurred and will continue to incur substantial litigation expenses in defending this litigation.



On May 12, 2003, Mr. Thomas Ziegler, the Companys former president and chief executive officer, sued 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 any such agreement and any resulting liability to Mr. Ziegler and is vigorously defending this action.  Subsequent to the quarter ended June 30, 2005, this case was dismissed without prejudice for failure to prosecute. Mr. Ziegler's attorneys have indicated that Mr. Ziegler intends to refile the case.





13







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, manufacture and sell electronic throttle control systems and pneumatic control systems for heavy trucks, transit busses and off-road equipment.  The majority of our customers are manufacturers of these vehicles and equipment.



During the nine month period ended June 30, 2005, we sold approximately 65% of our products in the United States and approximately 35% to foreign customers.  We sell the majority of our products directly to large original equipment manufacturers, such as Freightliner, LLC, The Volvo Group, Paccar, Inc. and Navistar International Corporation.  We also sell our products through a network of independent distributors, which sell to smaller original equipment manufacturers and to truck and transit bus owners as replacement parts.  To date, all of our products have been produced in our Portland, Oregon facility, although we have recently started production at our facility in Suzhou, China.



Electronic throttle controls send an electrical signal proportional to throttle position to adjust the speed of electronically controlled engines.
Electronically controlled engines produce lower emissions and require electronic throttle controls. The original applications were in heavy trucks and transit busses in the United States and Europe
in the early 1990's when electronically controlled engines were first introduced. As a result of the continuing implementation of more stringent engine emissions standards worldwide demand
demand for low emission electronically controlled engines and electronic throttle control systems is expanding. Both China and India have recently announced plans to require more stringent emissions standards for heavy trucks and buses over the next five years.
In addition, emission regulations are being enacted that also increase the use of electronic throttle controls in off-highway engine powered equipment.



We believe that the demand for our products will be driven by worldwide emissions legislation and the economic cycle for heavy trucks, busses, and off-road equipment.
We opened offices in China and Europe in the quarter ended March 31, 2005 to better address international markets.



While we believe we are the
leader in the market for electronic throttle control systems
for heavy trucks, transit busses, and off-road equipment, the markets for our products are highly competitive worldwide.
Certain of our competitors have substantial financial resources and significant technological capabilities.
We work closely with our existing and potential customers to design and develop new products and adapt existing
products to new applications, and to improve the performance, reliability and cost-effectiveness of our products.



Registration Statement Filed on June 7, 2005



The Company filed a Registration Statement on Form S-1 on June 7, 2005 (File No. 333-125590) (the Registration Statement).  The Registration Statement became effective on June 15, 2005.  The Registration Statement covers the resale from time to time of 17,189,117 shares of the Companys common stock held by certain stockholders of the Company.  These shares were registered pursuant to certain registration rights granted in (i) a registration rights agreement between the Company and the holders of the Companys Series A-1 Preferred Stock, dated July 15, 2002, and amended on September 30, 2004 (the Series A-1 Registration Rights Agreement), and (ii) a registration rights agreement between the Company and the holders of the Companys Series B Preferred Stock dated July 1, 2002, and amended on September 30, 2004 (the Series B Registration Rights
Agreement).  The Series A-1 Preferred Stock subject to the Series A-1 Registration Rights Agreement was converted to common stock in accordance with the Companys 2004 recapitalization transaction.  As part of this recapitalization transaction, some of the Series B Preferred Stock subject to the Series B Registration Rights Agreement were redeemed and the remaining shares of Series B Preferred Stock were converted to common stock.



Critical Accounting Policies and Estimates



Managements discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales, cost of sales and expenses and related disclosure of contingent assets and liabilities.  We evaluate our estimates on an on-going basis.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these
estimates under different assumptions or conditions.  We believe the following critical accounting policies and the related judgments and estimates affect the preparation of our consolidated financial statements.



14







Revenue recognition:



Revenue is recognized at the time of product shipment or delivery, depending on when title and risk of loss transfers to customers, and when all of the following have occurred: a firm sales agreement is in place, pricing is fixed or determinable, and collection is reasonably assured.  Revenues are reported net of estimated returns, rebates and customer discounts.  Discounts and rebates are recorded during the period they are earned by the customer.



Warranty:



We provide a
warranty covering defects arising from products sold.  The product warranty liability is based on historical
return rates of products and amounts for significant and specific warranty issues.  The warranty is limited to a
specified time period, mileage or hours of use, and varies by product, application and customer.  The Company has
recorded a liability that management believes is adequate to cover such warranty costs.  While we believe our
estimates are reasonable, they are subject to change and such change could be material.



Environmental:



We estimate the costs of investigation and remediation for certain soil and groundwater contaminants at our Portland, Oregon facility.  Our ultimate costs for the investigation, remediation and monitoring of this site cannot be predicted with certainty due to the often unknown magnitude of the pollution or the necessary cleanup, the varying costs of alternative cleanup methods, the amount of time necessary to accomplish such cleanups and the evolving nature of cleanup technologies and governmental regulations.  The Company has recognized a liability for environmental remediation costs for this site in an amount that management believes is probable and reasonably estimable.  When there is more than one estimate of a probable loss, and all such estimates are within a range, the minimum amount in the range is accrued when no estimate within the range is better than another.  In making these
judgments and assumptions, the Company considers, among other things, the activity to-date at the site and information obtained through consultation with applicable regulatory authorities and third party consultants and contractors.  The Company regularly monitors its exposure to environmental loss contingencies.  As additional information becomes known, it is at least reasonably possible that a change in the estimated liability accrual will occur in the near future.



Pensions and Post-retirement Benefit Obligations:



In calculating our obligations and expense for pensions and post-retirement benefits, we make certain actuarial assumptions, including those relating to a discount rate, expected long-term rate of return on plan assets and rates of increase in compensation and healthcare costs.  Our assumptions are determined based on current market conditions, historical information and consultation with and input from our actuaries.  Changes in interest rates and market performance could have a significant impact on our pension expense and future payments.



Accounting for Income Taxes:



For each jurisdiction in which we operate, we are required to estimate our current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes.  These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet.  We must also assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, a valuation allowance is established.  Our income tax provision on the consolidated statement of operations is impacted by changes in the valuation allowance.  This process is complex and involves significant management judgment in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowances recorded against our net deferred tax assets.



Forward-Looking Statements



This report on Form 10-Q, 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 and the ability to increase distribution of the Companys products.  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.  Although we believe that the expectations reflected in such forward-looking statements are reasonable, such forward-looking statements are subject to risks and
uncertainties that could cause actual



15







results to differ materially from those indicated by the forward-looking statements.  These risks and uncertainties are beyond our control and, in many cases, we cannot predict the risks and uncertainties that could cause our actual results to differ materially from those indicated by the forward-looking statements.



The forward-looking statements are made as of the date hereof, and, except as otherwise required by law, we disclaim any intention or obligation to update or revise any forward-looking statements or to update the reasons why the actual results could differ materially from those projected in the forward-looking statements, whether as a result of new information, future events or otherwise.



Investors are cautioned to consider the risk factors identified in our annual report on Form 10K for the fiscal year ended September 30, 2004 and the following items when considering forward-looking statements.  If any of these items actually occur, our business, results of operations, financial condition or cash flows could be materially adversely affected.  Such matters involve risks and uncertainties that include, without limitation, the following:



| |  |  | A
significant portion of our sales are derived from a limited number of customers, and
results from operations could be adversely affected and stockholder value harmed if we
lose any of these customers;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Demand
for equipment on which our products are installed may decrease, which could adversely
affect our revenues and stockholder value;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our
products could be recalled, which could increase our costs and decrease our revenues and
adversely affect stockholder value;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | We
purchase raw materials and component parts from suppliers and changes in the
relationships with such suppliers, as well as increases in the costs of such raw
materials and/or component parts, would adversely affect our ability to produce and
market our products, which would adversely affect our profit margins, results from
operations and stockholder value;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our
products could be subject to product liability claims by customers and/or consumers,
which would adversely affect our profit margins, results from operations and stockholder
value;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Work
stoppages or other changes in the relationship with our employees could make it difficult
for us to produce and effectively market our products, which would adversely affect our
profit margins, results from operations and stockholder value;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our
defined benefit pension plans are under-funded and, therefore, we may be required to
increase our contributions to the plans, which would adversely affect our cash flows;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The
soil and groundwater at our Portland, Oregon facility contains certain contaminants that
may require us to incur substantial expense to investigate and remediate, which would
adversely affect our profit margins, results from operations and stockholder value;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We
are required to comply with federal and state environmental laws, which could become
increasingly expensive and could result in substantial liability if we do not comply;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Fluctuations
in the value of currencies could adversely affect our international sales, which would
result in reduced revenues and stockholder value;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Complying
with the laws applicable to foreign markets may become more difficult and expensive in
the future, which could adversely affect our results from operations and stockholder
value;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Political
and economic instability in the foreign markets may make doing business there more
difficult and costly, which could adversely affect our results from operations and
stockholder value;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The
market price of our stock has been and may continue to be volatile, which could result in
losses for stockholders;
| | - |  | ----------------------------------------------------------------------------------------------------------------------





16









| |  |  | If
we are unable to adequately protect our intellectual property, both domestically and
internationally, third parties may be able to use our technology;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The
ability to elect our Board of Directors, and therefore to exercise substantial control
over us, rests in the hands of a few major stockholders.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



Results of Operations

Financial Summary

(Dollars in Thousands)



|                                            | Three Month Period
Ended June 30, |  | Nine Month Period
Ended June 30,
|------------------------------------------- | --------------------------------- |  | --------------------------------
|                                            | 2005                              |  | 2004                            
|Net sales                                   | $17,192                           |  | $15,127                         
|Cost of sales                               | 11,348                            |  | 10,098                          
|Gross profit                                | 5,844                             |  | 5,029                           
|Research and development                    | 855                               |  | 858                             
|Selling                                     | 364                               |  | 339                             
|Administration                              | 1,577                             |  | 1,186                           
|                                            |                                   |  |                                 
|Operating income from continuing operations | $ 3,048                           |  | $ 2,646                         
|                                            |                                   |  |                                 
|                                            |                                   |  |                                 
|                                            |                                   |  |                                 
|As a percentage of net sales:               |                                   |  |                                 
|Cost of sales                               | 66.0%                             |  | 66.8%                           
|Gross profit                                | 34.0%                             |  | 33.2%                           
|Research and development                    | 5.0%                              |  | 5.7%                            
|Selling                                     | 2.1%                              |  | 2.2%                            
|Administration                              | 9.2%                              |  | 7.8%                            
|Operating income from
continuing operations | 17.7%                             |  | 17.5%                           
|                                            |                                   |  |                                 
|                                            |                                   |  |                                 



Comparative  Three month periods ended June 30, 2005 and 2004



NM = Not Meaningful

|                                          |  |             |  |             |  | Percent Change
|----------------------------------------- |  | ----------- |  | ----------- |  | --------------
|For the Three Month Period Ended June 30: |  | 2005        |  | 2004        |  | 2005 to 2004  
|Net sales                                 |  | $    17,192 |  | $    15,127 |  | 13.7%         



Net sales to our heavy truck and transit bus customers increased $2,065 in the third quarter of fiscal 2005 and is primarily due to increased sales volumes of electronic throttle control systems resulting from a general increase in truck production throughout the industry, primarily in the North American and, to a lesser extent, in the European markets.



|                                          |  |              |  |              |  | Percent Change
|----------------------------------------- |  | ------------ |  | ------------ |  | --------------
|For the Three Month Period Ended June 30: |  | 2005         |  | 2004         |  | 2005 to 2004  
|Gross profit                              |  | $      5,844 |  | $      5,029 |  | 16.2%         



Gross profit was $5,844, or 34.0% of net sales, in the third quarter of 2005, an increase of $815 compared to the gross profit of $5,029, or 33.2% of net sales, in the comparable fiscal 2004 period.



The increase in gross profit during the third quarter of fiscal 2005 is primarily driven by a 13.7% increase in sales of electronic throttle and pneumatic control systems to heavy truck and transit bus customers combined with small reductions in



17





manufacturing overhead expenses.  Manufacturing overhead expenses decreased from the prior year, primarily due to reductions in group health costs and insurance costs offset by an overall increase in personnel costs.



|                                          |  |              |  |              |  | Percent Change
|----------------------------------------- |  | ------------ |  | ------------ |  | --------------
|For the Three Month Period Ended June 30: |  | 2005         |  | 2004         |  | 2005 to 2004  
|Research and development                  |  | $        855 |  | $        858 |  | (0.3%)        



Research and development expenses remained relatively constant between the third quarter of fiscal 2005 and the comparable period in 2004.  Increases in patent costs were offset by reductions in temporary personnel and other product development costs during the quarter.  The Companys research and development expenditures will fluctuate based on the products under development at any given point in time.  Overall, we expect research and development expenses to increase in fiscal 2005 compared to fiscal 2004 levels due to additional pedal design projects and sensor development efforts.



|                                          |  |              |  |              |  | Percent Change
|----------------------------------------- |  | ------------ |  | ------------ |  | --------------
|For the Three Month Period Ended June 30: |  | 2005         |  | 2004         |  | 2005 to 2004  
|Selling                                   |  | $        364 |  | $        339 |  | 7.4%          



Selling expenses increased $25 during the three month period ended June 30, 2005 as compared with the three month period ended June 30, 2004 mainly due to expanded selling and marketing efforts in the European and Asian markets.  We expect to continue to incur increased expenses associated with our current foreign customers and expanded selling and marketing efforts in foreign markets.



|                                          |  |                |  |                |  | Percent Change
|----------------------------------------- |  | -------------- |  | -------------- |  | --------------
|For the Three Month Period Ended June 30: |  | 2005           |  | 2004           |  | 2005 to 2004  
|Administration                            |  | $        1,577 |  | $        1,186 |  | 33.0%         



Administration expenses for the three month period ended June 30, 2005 increased $391 when compared with the same period in 2004.  The increase in administration expenses is primarily a result of increased legal and professional expenses, primarily in defense of the class action lawsuit discussed in Note 18 in the Notes to Unaudited Condensed Consolidated Financial Statements, and an increase in personnel expenses related to the addition of our new President and Chief Executive Officer, whose employment commenced in October 2004, and includes additional compensation costs.  Offsetting these increases in administration expenses were reductions in management fees and expenses related to our former passenger car and light truck product lines.



|                                                                    |  |                |  |                 |  | Percent Change
|------------------------------------------------------------------- |  | -------------- |  | --------------- |  | --------------
|For the Three Month Period Ended June 30:                           |  | 2005           |  | 2004            |  | 2005 to 2004  
|Interest income                                                     |  | $         (13) |  | $           (1) |  | NM            
|Interest expense  Debt                                             |  | 312            |  | 17              |  | NM            
|Interest expense  Series B Preferred Stock dividends and accretion |  | -              |  | 822             |  | NM            
|Total interest expense, net                                         |  | $         299  |  | $         838   |  | (64.3%)       



Interest expense on debt increased $295 to $312 in the third quarter of fiscal 2005 from $17 in the third quarter of fiscal 2004.  The increase in interest expense is the result of an increase in bank debt due to the fiscal 2004 recapitalization transaction, which was completed on September 30, 2004 and is described in the Notes to Unaudited Condensed Consolidated Financial Statements.  We expect interest expense on debt to continue to be higher in fiscal 2005 when compared with fiscal 2004 due to the increased debt levels resulting from the fiscal 2004 recapitalization transaction.



Interest expense on Series B Preferred Stock related 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 recorded all accrued dividends and accretion associated with the Series B Preferred Stock as a component of interest expense beginning with the fourth quarter of fiscal 2003.  Interest expense on Series B Preferred Stock for the quarter ended June 30, 2004 was $822.  Due to the fiscal 2004 recapitalization transaction, the Company will not have interest expense on Series B Preferred Stock subsequent to fiscal 2004.



18









|                                          |  |             |  |              |  | Percent Change
|----------------------------------------- |  | ----------- |  | ------------ |  | --------------
|For the Three Month Period Ended June 30: |  | 2005        |  | 2004         |  | 2005 to 2004  
|(Gain) loss on put/call option agreement  |  | $        59 |  | $          - |  | NM            



The $59 loss related to the change in the net value of the Put and Call option agreement from March 31, 2005 to June 30, 2005 as discussed in Note 13 of the Unaudited Condensed Consolidated Financial Statements.



|                                          |  |                |  |             |  | Percent Change
|----------------------------------------- |  | -------------- |  | ----------- |  | --------------
|For the Three Month Period Ended June 30: |  | 2005           |  | 2004        |  | 2005 to 2004  
|Income tax expense                        |  | $        1,079 |  | $        42 |  | NM            



Tax expense reflects an effective tax rate of 40.1% for the quarter ended June 30, 2005.  Prior to year-end fiscal 2004, the Company had provided for a full valuation allowance on its deferred tax assets, resulting in a minimal tax provision related to the income in the third quarter of fiscal 2004.  The Company reduced the valuation allowance $11,374 during the fourth quarter of fiscal 2004.  The valuation allowance was reduced based upon current and anticipated future taxable income generated by the Company and the conclusion that it was more likely than not that these deferred tax assets would be realized in the future.



The Company is currently in a net operating loss carry-forward position.  Federal net operating losses are subject to provisions of the Internal Revenue Code that potentially 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 associated with prior recapitalization transactions coupled with other past, present and future changes in ownership, may significantly defer the utilization of net operating loss carry forwards in the future.  The Company does not believe an ownership change occurred as of June 30, 2005.



|                                          |  |               |  |             |  | Percent Change
|----------------------------------------- |  | ------------- |  | ----------- |  | --------------
|For the Three Month Period Ended June 30: |  | 2005          |  | 2004        |  | 2005 to 2004  
|Discontinued operations                   |  | $           - |  | $        41 |  | NM            



The Company recorded a $41 loss from operations of discontinued operations during the three month period ended June 30, 2004 related to its NESC business.  Refer to Note 16 of the Notes to Unaudited Condensed Consolidated Financial Statements.



Comparative  Nine month periods ended June 30, 2005 and 2004



NM = Not Meaningful

|                                         |  |                 |  |                 |  | Percent Change
|---------------------------------------- |  | --------------- |  | --------------- |  | --------------
|For the Nine Month Period Ended June 30: |  | 2005            |  | 2004            |  | 2005 to 2004  
|Net sales                                |  | $        49,928 |  | $        42,142 |  | 18.5%         



Net sales to our heavy truck and transit bus customers increased $7,786 in the first nine months of fiscal 2005 as compared to the first nine months of fiscal 2004 and is primarily due to increased sales volumes of electronic throttle control systems resulting from a general increase in truck production throughout the industry, primarily in the North American and, to a lesser extent, in the European markets.



|                                         |  |                 |  |                 |  | Percent Change
|---------------------------------------- |  | --------------- |  | --------------- |  | --------------
|For the Nine Month Period Ended June 30: |  | 2005            |  | 2004            |  | 2005 to 2004  
|Gross profit                             |  | $        17,027 |  | $        13,332 |  | 27.7%         



Gross profit was $17,027, or 34.1% of net sales, in the first nine months of 2005, an increase of $3,695 compared to the gross profit of $13,332, or 31.6% of net sales, in the comparable fiscal 2004 period.



The increase in gross profit in fiscal 2005 is primarily driven by an 18.5% increase in sales of electronic throttle and pneumatic control systems to heavy truck and transit bus customers and small reductions in manufacturing overhead expenses.  Manufacturing overhead expenses decreased from the prior year, primarily due to reductions in group health costs



19







offset by an overall increase in personnel costs.  In addition, the first nine months of fiscal 2004 included $312 of depreciation expense related to certain property, plant and equipment from our passenger car and light truck product lines, which were sold on September 30, 2003.



|                                         |  |                |  |                |  | Percent Change
|---------------------------------------- |  | -------------- |  | -------------- |  | --------------
|For the Nine Month Period Ended June 30: |  | 2005           |  | 2004           |  | 2005 to 2004  
|Research and development                 |  | $        2,445 |  | $        2,236 |  | 9.3%          



Research and development expenses increased $209 for the first nine months of fiscal 2005 compared to the same period in fiscal 2004.  The increased research and development expense is largely attributable to additional products in development, which has resulted in higher staffing levels.  The Companys research and development expenditures will fluctuate based on the products under development at any given point in time.  Overall, we expect research and development expenses to increase over fiscal 2004 levels due to additional pedal design projects and sensor development efforts.



|                                         |  |              |  |              |  | Percent Change
|---------------------------------------- |  | ------------ |  | ------------ |  | --------------
|For the Nine Month Period Ended June 30: |  | 2005         |  | 2004         |  | 2005 to 2004  
|Selling                                  |  | $        974 |  | $        901 |  | 8.1%          



Selling expenses increased $73 for the nine month period ended June 30, 2005 compared to the nine month period in fiscal 2004.  The increase in selling expenses is mainly due to expanded selling and marketing efforts in the European and Asian markets.  We expect to continue to incur increased expenses associated with our current foreign customers and expanded selling and marketing efforts in foreign markets.



|                                         |  |                |  |                |  | Percent Change
|---------------------------------------- |  | -------------- |  | -------------- |  | --------------
|For the Nine Month Period Ended June 30: |  | 2005           |  | 2004           |  | 2005 to 2004  
|Administration                           |  | $        4,397 |  | $        3,362 |  | 30.8%         



Administration expenses for the nine month period ended June 30, 2005 increased $1,035 over the same period in 2004.  The increase in administration expenses is primarily a result of increased legal and professional expenses, primarily in defense of the class action lawsuit discussed in Note 18 in the Notes to Unaudited Condensed Consolidated Financial Statements, and an increase in personnel expenses related to the addition of our new President and Chief Executive Officer, whose employment commenced in October 2004, and includes additional compensation costs and relocation assistance expenses.  Offsetting these increases in administration expenses were reductions in management fees and expenses related to our former passenger car and light truck product lines.  In addition, during the nine month period ended June 30, 2004, the Company recorded $250 of costs related to our environmental
liability discussed in Note 18.



|                                                                    |  |                    |  |                      |  | Percent Change
|------------------------------------------------------------------- |  | ------------------ |  | -------------------- |  | --------------
|For the Nine Month Period Ended June 30:                            |  | 2005               |  | 2004                 |  | 2005 to 2004  
|Interest income                                                     |  | $             (33) |  | $                (2) |  | NM            
|Interest expense  Debt                                             |  | 1,134              |  | 56                   |  | NM            
|Interest expense  Series B Preferred Stock dividends and accretion |  | -                  |  | 2,382                |  | NM            
|Total interest expense, net                                         |  | $        1,101     |  | $        2,436       |  | (54.8%)       



Interest expense on debt increased $1,078 to $1,134 in the first nine months of fiscal 2005 from $56 in the first nine months of fiscal 2004.  The increase in interest expense is the result of an increase in bank debt due to the fiscal 2004 recapitalization transaction, which was completed on September 30, 2004 and is described in the Notes to Unaudited Condensed Consolidated Financial Statements.  We expect interest expense on debt to continue to be higher in fiscal 2005 when compared with fiscal 2004 due to the increased debt levels resulting from the fiscal 2004 recapitalization transaction.



Interest expense on Series B Preferred Stock related to dividends accrued on the Series B Preferred Stock during the first nine months of fiscal 2004 and the related accretion.  Based on the guidelines of SFAS No. 150, the Company recorded all accrued dividends and accretion associated with the Series B Preferred Stock as a component of interest expense beginning with the fourth quarter of fiscal 2003.  Interest expense on Series B Preferred Stock for the nine months ended June 30, 2004



20







was $2,382.  Due to the fiscal 2004 recapitalization transaction, the Company will not have interest expense on Series B Preferred Stock subsequent to fiscal 2004.



|                                         |  |        |  |              |  | Percent Change
|---------------------------------------- |  | ------ |  | ------------ |  | --------------
|For the Nine Month Period Ended June 30: |  | 2005   |  | 2004         |  | 2005 to 2004  
|Gain on put/call option agreement        |  | ($323) |  | $          - |  | NM            



The $323 gain related to the change in the net value of the Put and Call option agreement from September 30, 2004 to March 31, 2005 as discussed in Note 13 of the Unaudited Condensed Consolidated Financial Statements.



|                                         |  |                |  |              |  | Percent Change
|---------------------------------------- |  | -------------- |  | ------------ |  | --------------
|For the Nine Month Period Ended June 30: |  | 2005           |  | 2004         |  | 2005 to 2004  
|Income tax expense                       |  | $        3,357 |  | $        136 |  | NM            



Tax expense reflects an effective tax rate of 39.7% for the nine month period ended June 30, 2005.  Prior to year-end fiscal 2004, the Company had provided for a full valuation allowance on its deferred tax assets, resulting in a minimal tax provision related to the income in the first nine months of fiscal 2004.  The Company reduced the valuation allowance $11,374 during the fourth quarter of fiscal 2004.  The valuation allowance was reduced based upon current and anticipated future taxable income generated by the Company and the conclusion that it was more likely than not that these deferred tax assets would be realized in the future.



The Company is currently in a net operating loss carry-forward position.  Federal net operating losses are subject to provisions of the Internal Revenue Code that potentially 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 associated with prior recapitalization transactions coupled with other past, present and future changes in ownership, may significantly defer the utilization of net operating loss carry forwards in the future.  The Company does not believe an ownership change occurred as of June 30, 2005.



|                                         |  |               |  |              |  | Percent Change
|---------------------------------------- |  | ------------- |  | ------------ |  | --------------
|For the Nine Month Period Ended June 30: |  | 2005          |  | 2004         |  | 2005 to 2004  
|Discontinued operations                  |  | $           - |  | $        289 |  | NM            



The Company recorded a $289 loss from discontinued operations related to its NESC business.  The Company reviewed the requirements of SFAS No. 144 and determined that the disposed NESC assets should be adjusted to their fair value resulting in a write down of assets of $183.  The remaining loss from discontinued operations is the result of a loss on operations during the nine month period ended June 30, 2004 of $106.  Refer to Note 16 of the Notes to Unaudited Condensed Consolidated Financial Statements.



Financial Condition, Liquidity and Capital Resources



Cash generated by operating activities was $9,484 for the first nine months of fiscal 2005, an increase of $5,023 from the cash generated by operating activities of $4,461 during the first nine months of fiscal 2004.  Cash flows from operations for the nine month period ended June 30, 2005 included net income of $5,099, $3,047 from utilization of a portion of the deferred income tax net operating loss and an increase of cash related to changes in working capital of $781.  Cash flows from operations for the nine month period ended June 30, 2004 included net income of $3,724, a non-cash increase of $2,382 for interest expense on Series B Preferred Stock dividends and accretion and a use of cash for an increase in working capital of $3,016.  As a result of the 2004 recapitalization, the Company no longer has Series B Preferred Stock and will no longer record dividends and accretion associated
with the Series B Preferred Stock.



The $781 increase in cash generated by operating activities related to working capital changes included an increase in accounts payable resulting from the extension of payment terms offset by an increase in accounts receivable due to increased sales.  In addition, cash flows from operations for the nine month period ended June 30, 2005 included payments to our pension plans of $795 compared to $1,123 for the nine month period ended June 30, 2004.  Cash flows from operations for the first nine months of fiscal 2005 included a $164 increase in warranty accruals compared to warranty payments primarily due to increased sales volumes, whereas in the first nine months of fiscal 2004, warranty payments exceeded warranty accruals by $824, due almost entirely to payments to one customer for the warranty campaign discussed in Note 11 in the Notes to Unaudited Condensed Consolidated Financials
Statements.  At this time, we expect warranty payments to be more



21







consistent with warranty accruals, as we are not aware of and do not anticipate any further campaigns.  We believe we will continue to generate positive cash from continuing operations due to our positive results of operations.



Cash used in investing activities was $2,311 for the nine month period ended June 30, 2005 and was comprised solely of purchases of property, plant and equipment.  For the nine month period ended June 30, 2004, cash provided by investing activities was $5,245 and was comprised of $6,010 of net proceeds from the sale of assets from our passenger car and light truck product lines, which were sold on September 30, 2003, offset by $778 of purchases of property, plant and equipment.  We expect our cash use for investing activities to increase throughout the fiscal year as we continue to make purchases of capital equipment.



Cash used in financing activities was $5,601 for the nine month period ended June 30, 2005, compared to cash used in financing activities of $3,758 for the nine month period ended June 30, 2004.  The use of cash for financing activities for the first nine months of fiscal 2005 primarily relates to scheduled debt payments on our Merrill Lynch term loan and the payoff of our revolving credit facility with Merrill Lynch.  The cash used for financing activities in the first nine months of fiscal 2004 primarily relates to the payoff of certain debt obligations with our prior lender using proceeds received from the sale of our passenger car and light truck product lines on September 30, 2003.  In addition, we paid $1,413 of Series A-1 Preferred stock dividends during the first quarter of fiscal 2004.  Also during the second quarter of fiscal 2004, we received proceeds of $2,092 related to the
issuance of common stock from the conversion of warrants discussed in Note 15.



At June 30, 2005, our contractual obligations consisted of bank debt, capital leases and operating lease obligations, and a services agreement.  We do not have any material letters of credit, purchase commitments, or debt guarantees outstanding at June 30, 2005.  Maturities of these contractual obligations, excluding the mandatory excess cash flow payment requirements of the Term Loan as discussed in Note 10, consist of the following:



|                              |  | Payments Due as of June 30, 2005 for the Periods ending September 30,
|----------------------------- |  | ---------------------------------------------------------------------
|                              |  | 2005                                                                 
|Term loan                     |  | $      850                                                           
|Revolver                      |  | -                                                                    
|Capital leases                |  | 14                                                                   
|Operating leases              |  | 15                                                                   
|Management Services Agreement |  | 100                                                                  
|                              |  | $      979                                                           



Certain liabilities, including those related to our pension and post-retirement benefit plans, are reported in the accompanying condensed consolidated balance sheets but are not reflected in the table above due to the absence of stated maturities.  The Company had net obligations at June 30, 2005 related to its pension plans and post-retirement medical plan of $5,414 and $3,336, respectively.  Due to a change in legislation regarding funding of pension plans, cash payments to fund our pension obligations are expected to decrease in future periods compared to the amounts funded over the last few years.  The Company funded $795 to its pension plans during the first nine months of fiscal 2005 compared to contributions of $1,123 for the first nine months of fiscal 2004.  We expect to make payments of $398 throughout the rest of fiscal 2005.



At June 30, 2005, we had $8,000 available under our revolving credit facility plus cash and cash equivalents of $4,054.  We believe these resources, when combined with cash provided by operations, will be sufficient to meet our working capital needs on a short-term and long-term basis.



Included in the accompanying consolidated balance sheet is approximately $1,333 of accounts payable related to closed insolvent subsidiaries of the Company.  In accordance with SFAS No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a debtor can only relieve itself of a liability if it has been extinguished.  A liability is considered extinguished if (a) the debtor pays the creditor and is relieved of its obligation for the liability or (b) the debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor.  During the three and nine months ended June 30, 2005, the Company was judicially released from and reversed $1 and $53, respectively, of accounts payable related to closed, insolvent subsidiaries of the Company resulting in a gain, which has been recorded in other
(income) expense in the accompanying condensed consolidated statements of operations.  The Company expects to reverse amounts in future periods based on the recognition of the liabilities being judicially released in accordance with SFAS No. 140 of $7 remaining in fiscal 2005; $561 in fiscal 2006; $731 in fiscal 2007; and $34 in fiscal 2010.





22







Recently Issued Accounting Standards



In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154, Accounting Changes and Error Corrections  a replacement of APB Opinion No. 20 and FASB Statement No. 3.  This statement changes the requirements for the accounting for and reporting of a change in accounting principle and applies to all voluntary changes in accounting principle.  This statement requires retrospective application to prior periods financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change and is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005.  The Company is currently in the process of determining the effects of adopting this statement in its consolidated financial statements.



In December 2004, FASB issued SFAS No. 123 (Revised 2004), Share Based Payment.  This statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements.  Compensation cost will be measured based on the fair value of the equity or liability instruments issued.  Share-based compensation arrangements include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee stock purchase plans.  SFAS No. 123R replaces SFAS No. 123 and supercedes APB No. 25 and is effective at the beginning of a registrants first fiscal year that begins after June 15, 2005, upon which time the Company will adopt the provisions of this statement.  The Company is currently in the process of determining the effects of adopting SFAS No. 123R in its consolidated financial statements, including deciding
which option valuation model to use.



In November 2004, the FASB issued SFAS No. 151, Inventory Costs - an amendment of ARB No. 43, Chapter 4.  This statement clarifies the accounting for abnormal amounts of idle facility expenses, freight, handling costs, and wasted materials and requires that these items be recognized as current period charges.  In addition, this statement requires the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities.  This statement is effective for fiscal years beginning after June 15, 2005.  The Company does not expect this statement to have a material effect on the financial statements of the Company.



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 Merrill Lynch.
|- | ----------------------------------------------------------------------------------------------------



| | As of June 30, 2005, the outstanding balance on the term loan was $14,450 and there were no amounts outstanding on the revolving loan.  The effective annual interest rate on the term loan was 7.93% as of June 30, 2005.  The Company does not believe that a hypothetical 10% change in end of the 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.  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.  The Company will continue to assess its foreign currency risk as its international operations and sales increase.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Investment Risk:
|----------------



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





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Item 4.  Controls and Procedures



Evaluation of Disclosure Controls and Procedures



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



Changes in Internal Controls



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









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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 liabilities 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.  Unregistered Sales of Equity 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



|3.01 |  | Certificate of Incorporation of the Registrant as amended.(Incorporated by reference to Exhibit3.1 to the Registrants annual report on form 10-K for the fiscal year ended September30, 1995)                                                                                                                           
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.02 |  | Restated By-Laws of the Registrant as amended July 1, 2002.(Incorporated by reference to Exhibit3.6 to the Registrants quarterly report on Form 10-Q for the quarter ended June30, 2002)                                                                                                                                
|4.01 |  | Specimen Unit Certificate (including Specimen Certificate for shares of Common Stock and Specimen Certificate for the Warrants).(Incorporated by reference to Exhibits1.1 and 1.2 to the Registrants Registration Statement on Form 8-A, Commission File No. 0-18083, filed with the Commission on November1, 1989)     
|4.02 |  | Certificate to Provide for the Designation, Preferences, Rights, Qualifications, Limitations or Restrictions Thereof, of the Series A Preferred Stock, 71/2% Redeemable Convertible Series(Incorporated by reference to Exhibit3.1 to the Registrants quarterly report on form 10-Q for the quarter ended March31, 1998)
|4.03 |  | 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 Exhibit3.3 to the Registrants quarterly report on Form 10-Q for the quarter ended June30, 2002)
|4.04 |  | 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) to the Schedule TO-I/A filed on July5, 2002)                                         
|4.05 |  | Certificate of Elimination for Mandatory Preferred Stock(Incorporated by reference to Exhibit(d)(vi) to the Schedule TO-I/A filed on July5, 2002)                                                                                                                                                                        





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|4.06     |  | Certificate of Amendment to the Designation, Preferences, Rights, Qualifications, Limitations or Restrictions Thereof, of the Series A-1 Preferred Stock, Non-Redeemable Convertible Series(Incorporated by reference to the Registrants report on Form 8-K, filed on September 29, 2004)                                    
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.07     |  | Certificate to Provide for the Designation, Preferences, Rights, Qualifications, Limitations or Restrictions Thereof, of the Series C Preferred Stock, 15% Redeemable Non-Convertible Series(Incorporated by reference to the Registrants report on Form 8-K, filed on September 29, 2004)                                   
|4.08     |  | Certificate of Amendment to the 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 the Registrants report on Form 8-K, filed on September 29, 2004)       
|10.01(a) |  | Form of Indemnification Agreement for H. Samuel Greenawalt.(Incorporated by reference to Exhibit 10.1(c) to the Registrants annual report on Form 10-K for the fiscal year ended September 30, 1993)                                                                                                                         
|10.01(b) |  | Form of Indemnification Agreement for Douglas E. Hailey(Incorporated by reference to Exhibit 10.1(a) to the Registrants quarterly report on Form 10-Q for the quarter ended December31, 2001)                                                                                                                                
|10.02    |  | The Companys 1995 Stock Option Plan for Non-Employee Directors.(Incorporated by reference to Exhibit 10.3 to the Registrants quarterly report on Form 10-Q for the quarter ended March31, 1995)                                                                                                                             
|10.03    |  | The Registrants 1993 Stock Option Plan as amended to date.(Incorporated by reference to Exhibit 10.4(b) to the Registrants annual report on Form 10-k for the fiscal year ended September30,1998)                                                                                                                           
|10.05    |  | Master Services Agreement, dated as of July 1, 2002, by and among American Industrial Partners, a Delaware general partnership, and the Company(Incorporated by reference to Exhibit (d)(ix) to the Schedule TO-I/A filed on July5, 2002)                                                                                     
|10.06    |  | Dolphin Side Letter, dated as of July 1, 2002(Incorporated by reference to Exhibit (d)(xi) to the Schedule TO-I/A filed on July 5, 2002)                                                                                                                                                                                      
|10.07    |  | Form of Amended and Restated Subordinated Debenture Due July 1, 2004(Incorporated by reference to Exhibit (d)(xii) to the Schedule TO-I/A filed on July5, 2002)                                                                                                                                                               
|10.08    |  | Amended and Restated Credit Agreement, including Promissory Notes for the Revolving Credit Loan and Terms Loans A and B, dated July 1, 2002(Incorporated by reference to Exhibit (d)(xiii) to the Schedule TO-I/A filed on July5, 2002)                                                                                       
|10.09    |  | Put/Call Option Agreement, dated September 30, 2004, between Williams and American Industrial Partners Capital Fund III, L.P.(Incorporated by reference to the Registrants report on Form 8-K, filed on September 29, 2004)                                                                                                  
|10.10    |  | Credit Agreement, dated September 27, 2004, among Williams, Williams Controls Industries, Inc., a wholly-owned subsidiary of Williams, and Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services, Inc.(Incorporated by reference to the Registrants report on Form 8-K, filed on September 29, 2004)
|10.11    |  | Amended and Restated Management Services Agreement, dated September 30, 2004, among Williams, American Industrial Partners and Dolphin Advisors, LLC(Incorporated by reference to the Registrants report on Form 8-K, filed on September 29, 2004)                                                                           
|31.1     |  | Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) (Filed herewith)                                                                                                                                                                                                                        





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|31.2 |  | Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) (Filed herewith)                                      
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|32.1 |  | Certification of Patrick W. Cavanagh pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|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   







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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 9, 2005 | /s/ PATRICK W. CAVANAGH
|--------------------- | -----------------------

Patrick W. Cavanagh

President and Chief Executive Officer





|Date:  August 9, 2005 | /s/ DENNIS E. BUNDAY
|--------------------- | --------------------

Dennis E. Bunday

Chief Financial Officer





































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