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, 2008





[    ]
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
              (State or other
      jurisdiction of incorporation or organization)
            84-1099587
              (I.R.S. Employer
      Identification No.)14100 SW 72nd Avenue,Portland,
      Oregon
              (Address
      of principal executive office)
            97224
              (zip
      code)(503)
      684-8600
              (Registrant's telephone number, including area
  code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes  [X] No  [ 
 ]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.  (Check one):


Large
Accelerated Filer
[   ]                                                                Accelerated
Filer
[X]                                                      Non-Accelerated
Filer [   ]





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


Yes  [ 
 ] No  [X]





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


at July
31, 2008: 7,534,308









Williams
Controls, Inc.





June
30, 2008





Table
of Contents


Page
              NumberPart
      I.  Financial InformationItem
      1. Financial Statements (unaudited)Condensed Consolidated Balance Sheets, June 30, 2008
      and
              September 30, 2007
            1Condensed Consolidated Statements of Operations, three
      and nine months
              ended June 30, 2008 and 2007
            2Condensed Consolidated Statements of Cash Flows, nine
      months
              ended June 30, 2008 and 2007
            3Notes to Unaudited Condensed Consolidated Financial
      Statements
            4Item 2.  Management’s Discussion and Analysis of
      Financial Condition
              and Results of Operations
            13Item 3.  Quantitative and Qualitative Disclosures
      About Market Risk
            21Item 4.  Controls and
    Procedures
            22Part
      II.  Other InformationItem 1.    Legal
      Proceedings
            23Item 1A. Risk Factors
            23Item 2.    Unregistered Sales of Equity
      Securities and Use of Proceeds
            23Item 3.    Defaults Upon Senior
      Securities
            23Item 4.    Submission of Matters to a
      Vote of Security Holders
            23Item 5.    Other
      Information
            23Item 6.    Exhibits
            23Signature Page
            25










PART
I – FINANCIAL INFORMATION





Item
1.  Financial Statements


Williams
Controls, Inc.


Condensed Consolidated Balance Sheets


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


(Unaudited)





June
      30,
              2008
            
            
            September
      30, 2007ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            6,937
            
            
            $
            1,621Short-term
      investments
            
            
            264
            
            
            
            -Trade
      accounts receivable, less allowance of
              $56
      and $33 at June 30, 2008 and September 30,2007,
      respectively
            
            
            9,650
            
            
            
            8,054Other
      accounts receivable
            
            
            824
            
            
            
            1,656Inventories
            
            
            7,850
            
            
            
            9,152Deferred
      income taxes
            
            
            545
            
            
            
            486Prepaid
      expenses and other current assets
            
            
            472
            
            
            
            297Total
      current assets
            
            
            26,542
            
            
            
            21,266Property,
      plant and equipment, net
            
            
            8,872
            
            
            
            8,953Deferred
      income taxes
            
            
            1,537
            
            
            
            1,461Other
      assets, net
            
            
            547
            
            
            
            623Total
      assets
            
            $
            37,498
            
            
            $
            32,303LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
            
            $
            4,110
            
            
            $
            3,811Accrued
      expenses
            
            
            5,183
            
            
            
            4,983Current
      portion of employee benefit obligations
            
            
            288
            
            
            
            288Current
      portion of long-term debt
            
            
            -
            
            
            
            1,000Total
      current liabilities
            
            
            9,581
            
            
            
            10,082Long-term
      Liabilities:Employee
      benefit obligations
            
            
            4,003
            
            
            
            4,803Other
      long-term liabilities
            
            
            263
            
            
            
            249Commitments
      and contingenciesStockholders’
      Equity:Preferred
      stock ($.01 par value, 50,000,000 authorized) Series C
              (0
      issued and outstanding at June 30, 2008 and September 30,
              2007)
            
            
            -
            
            
            
            -Common
      stock ($.01 par value, 12,500,000 authorized; 7,534,308
              and
      7,495,482 issued and outstanding at June 30, 2008 and
              September
      30, 2007, respectively)
            
            
            75
            
            
            
            75Additional
      paid-in capital
            
            
            35,569
            
            
            
            34,899Accumulated
      deficit
            
            
            (6,726
            )
            
            
            (12,477
            )Treasury
      stock (21,700 shares at June 30, 2008 and
              September
      30, 2007)
            
            
            (377
            )
            
            
            (377
            )Accumulated
      other comprehensive loss
            
            
            (4,890
            )
            
            
            (4,951
            )Total
      stockholders’ equity
            
            
            23,651
            
            
            
            17,169Total
      liabilities and stockholders’ equity
            
            $
            37,498
            
            
            $
            32,303





See
accompanying notes to Unaudited Condensed Consolidated Financial
Statements.
 1




Williams
Controls, Inc.


Condensed Consolidated Statements of Operations


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


(Unaudited)





Three
      Months Ended
              June
      30,
            
            
            Nine
      Months Ended
              June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      sales
            
            $
            17,137
            
            
            $
            15,822
            
            
            $
            48,593
            
            
            $
            52,573Cost
      of sales
            
            
            10,965
            
            
            
            10,117
            
            
            
            31,908
            
            
            
            34,441Gross
      profit
            
            
            6,172
            
            
            
            5,705
            
            
            
            16,685
            
            
            
            18,132Operating
      expenses:Research
      and development
            
            
            1,005
            
            
            
            797
            
            
            
            3,006
            
            
            
            2,465Selling
            
            
            700
            
            
            
            560
            
            
            
            2,037
            
            
            
            1,653Administration
            
            
            1,315
            
            
            
            1,394
            
            
            
            4,080
            
            
            
            4,049Gain
      from settlement of environmental claims
            
            
            (10
            )
            
            
            -
            
            
            
            (1,020
            )
            
            
            -Realignment
      of operations
            
            
            -
            
            
            
            210
            
            
            
            -
            
            
            
            643Total
      operating expenses
            
            
            3,010
            
            
            
            2,961
            
            
            
            8,103
            
            
            
            8,810Operating
      income
            
            
            3,162
            
            
            
            2,744
            
            
            
            8,582
            
            
            
            9,322Other
      (income) expense:Interest
      income
            
            
            (12
            )
            
            
            (34
            )
            
            
            (44
            )
            
            
            (95
            )Interest
      expense
            
            
            5
            
            
            
            185
            
            
            
            136
            
            
            
            651Other
      income, net
            
            
            (97
            )
            
            
            (150
            )
            
            
            (205
            )
            
            
            (1,012
            )Total
      other (income) expense
            
            
            (104
            )
            
            
            1
            
            
            
            (113
            )
            
            
            (456
            )Income
      before income taxes
            
            
            3,266
            
            
            
            2,743
            
            
            
            8,695
            
            
            
            9,778Income
      tax expense
            
            
            1,069
            
            
            
            919
            
            
            
            2,862
            
            
            
            3,357Net
      income
            
            $
            2,197
            
            
            $
            1,824
            
            
            $
            5,833
            
            
            $
            6,421Net
      income per common share – basic
            
            $
            0.29
            
            
            $
            0.24
            
            
            $
            0.78
            
            
            $
            0.86Weighted
      average shares used in per share
              calculation
      – basic
            
            
            7,530,053
            
            
            
            7,480,287
            
            
            
            7,519,009
            
            
            
            7,460,170Net
      income per common share – diluted
            
            $
            0.28
            
            
            $
            0.24
            
            
            $
            0.75
            
            
            $
            0.83Weighted
      average shares used in per share
              calculation
      – diluted
            
            
            7,730,143
            
            
            
            7,743,778
            
            
            
            7,745,893
            
            
            
            7,730,619







See
accompanying notes to Unaudited Condensed Consolidated Financial
Statements.
 2




Williams
Controls, Inc.


Condensed Consolidated Statements of Cash Flows


(Dollars
in thousands)


(Unaudited)








Nine
      Months
              Ended
      June 30,2008
            
            
            2007Cash
      flows from operating activities:Net
      income
            
            $
            5,833
            
            
            $
            6,421Adjustments
      to reconcile net income to net cash provided by
              operating
      activities:Depreciation
      and amortization
            
            
            1,347
            
            
            
            1,452Deferred
      income taxes
            
            
            (93
            )
            
            
            (139
            )Share-based
      compensation
            
            
            498
            
            
            
            413Gain
      on settlement of liabilities
            
            
            -
            
            
            
            (877
            )Gain
      from stock settlement of environmental claims
            
            
            (337
            )
            
            
            -Gain
      from disposal of fixed assets
            
            
            (55
            )
            
            
            (71
            )Changes
      in operating assets and liabilitiesReceivables,
      net
            
            
            (764
            )
            
            
            1,485Inventories
            
            
            1,302
            
            
            
            24Prepaid
      expenses and other current assets
            
            
            (175
            )
            
            
            -Accounts
      payable and accrued expenses
            
            
            375
            
            
            
            (1,368
            )Other
            
            
            (729
            )
            
            
            (862
            )Net
      cash provided by operating activities
            
            
            7,202
            
            
            
            6,478Cash
      flows from investing activities:Purchases
      of property, plant and equipment
            
            
            (1,115
            )
            
            
            (1,693
            )Proceeds
      from sales of property, plant and equipment
            
            
            57
            
            
            
            82Net
      cash used in investing activities
            
            
            (1,058
            )
            
            
            (1,611
            )Cash
      flows from financing activities:Payments
      of debt
            
            
            (1,000
            )
            
            
            (4,549
            )Net
      proceeds from exercise of stock options
            
            
            172
            
            
            
            207Net
      cash used in financing activities
            
            
            (828
            )
            
            
            (4,342
            )Net
      increase in cash and cash equivalents
            
            
            5,316
            
            
            
            525Cash
      and cash equivalents at beginning of period
            
            
            1,621
            
            
            
            2,530Cash
      and cash equivalents at end of period
            
            $
            6,937
            
            
            $
            3,055Supplemental
      disclosure of cash flow information:Interest
      paid
            
            $
            90
            
            
            $
            548Income
      taxes paid
            
            $
            1,559
            
            
            $
            2,900







See
accompanying notes to Unaudited Condensed Consolidated Financial
Statements.
 3




Williams
Controls, Inc.


Notes to Condensed Consolidated Financial Statements


Three
and Nine Months ended June 30, 2008 and 2007


(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”); Williams Controls Europe GmbH (“Williams
Controls Europe”); and Williams Controls India Private Limited (“Williams
Controls India”).





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, 2008 and the results of operations and cash
flows for the three and nine months ended June 30, 2008 and 2007.  The
results of operations for the three and nine months ended June 30, 2008 are not
necessarily indicative of the results to be expected for the entire fiscal
year.





Certain
information and footnote disclosures made in the last Annual Report on Form 10-K
have been condensed or omitted for the interim consolidated
statements.  Certain costs are estimated for the full year and
allocated to interim periods based on activity associated with the interim
period.  Accordingly, such costs are subject to year-end
adjustment.  It is management’s opinion that, when the interim
consolidated statements are read in conjunction with the Company’s annual report
on Form 10-K, for the fiscal year ended September 30, 2007, 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 balances and
transactions have been eliminated in consolidation.





The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions, based upon all known facts and circumstances, that
affect the reported amounts of assets and liabilities, disclosure 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.  Management makes these estimates using the best information
available at the time the estimates are made; however, actual results could
differ materially from these estimates.  Estimates are used in
accounting for, among other things, pension and post-retirement benefits,
product warranty, excess and obsolete inventory, deferred tax assets, stock
options and commitments and contingencies.





Note
3. Recently Issued Accounting Pronouncements





In February 2007, the Financial
Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities.”  This statement
permits entities to choose to measure many financial instruments and certain
other items at fair value.  The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions.  This
statement is expected to expand the use of fair value
measurement.  SFAS No. 159 is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007.  The
Company expects to adopt SFAS No. 159 during the first quarter of fiscal
2009.  The Company is currently in the process of determining the
effects of adopting this statement in its consolidated financial
statements.





4




In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.”  This statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements.  The Company is
currently in the process of determining the effects of adopting this statement
in its consolidated financial statements.  In November 2007, the FASB
approved the deferral of the effective date of SFAS No. 157 for one year for all
nonfinancial assets and nonfinancial liabilities, except for those items that
are recognized or disclosed at fair value in the financial statements on a
recurring basis.  SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years.





Note
4. Realignment of Operations





The realignment of operations was
essentially completed as of the date of the Company’s last fiscal year end on
September 30, 2007.





During fiscal 2006, the Company
initiated a plan for realignment (“the Plan”) of its manufacturing operations as
part of ongoing efforts to focus on its core product competencies and improve
its global competitiveness.  The Plan consisted of outsourcing all of
the Company’s Portland, Oregon die casting and machining operations to
high-quality suppliers, primarily in Asia, and relocating of the Company’s
assembly operations for the majority of its pneumatic products to its
manufacturing facility in Suzhou, China.  In conjunction with the
realignment, the Company eliminated 50 hourly and 2 salaried positions from its
Portland, Oregon manufacturing facility during fiscal 2007.   As
part of the Plan, the Company incurred a one-time termination benefit with those
employees affected by the Plan.




The total costs of the Plan were
approximately $1.5 million and included costs related to hourly and salaried
termination benefits of $605; supplier and parts qualification of $100;
refurbishment of tools of $150; accelerated depreciation on certain assets of
$240; and general administrative and other costs of $400.  Certain of
these costs are classified in financial statement line items other than
realignment of operations expense.  The Company recorded realignment
expenses of $210 and $643, respectively, for the three and nine months ended
June 30, 2007, which were recorded in operating expenses in the accompanying
condensed consolidated statements of operations.   No realignment
expense was recorded during the three and nine months ended June 30,
2008.  Following is a reconciliation of the changes in the Company’s
liability accrual related to the employee termination benefits during fiscal
2008 and the comparable period in fiscal 2007.





Three
      Months
              Ended
      June 30,
            
            
            Nine
      Months
              Ended
      June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Balance
      at beginning of period
            
            $
            2
            
            
            $
            482
            
            
            $
            86
            
            
            $
            226Payments
            
            
            (2
            )
            
            
            (207
            )
            
            
            (86
            )
            
            
            (207
            )Additional
      accruals
            
            
            -
            
            
            
            94
            
            
            
            -
            
            
            
            350Balance
      at end of period
            
            $
            -
            
            
            $
            369
            
            
            $
            -
            
            
            $
            369





Note
5. Accounting for Share-Based Compensation





The Company uses SFAS No. 123R, “Share
Based Payment,” to account for its share-based compensation
plans.   The Company uses the Black-Scholes option pricing model
to value its stock option grants under SFAS No. 123R, applying the “modified
prospective method” for existing grants which requires the Company to value
stock options prior to its adoption of SFAS No 123R under the fair value method
and expense the unvested portion over the remaining vesting
period.  Share-based compensation expense is recognized on a
straight-line basis over the requisite service period, which equals the vesting
period.  Under SFAS No 123R, the Company is also required to estimate
forfeitures in calculating the expense related to share-based
compensation.  In addition, SFAS No. 123R requires the Company to
reflect the benefits of tax deductions in excess of recognized compensation cost
to be reported as a financing cash inflow.





The Company currently has two qualified
stock option plans.  The Restated 1993 Stock Option Plan (the “1993
Plan”) reserves an aggregate of 870,000 shares of the Company’s common stock for
the issuance of stock options, which includes the 120,000 share increase in
authorized shares approved by the stockholders at the February 28, 2008 Annual
Meeting of Stockholders.  These shares may be granted to employees,
officers and directors of and consultants to the Company.  Under the
terms of the 1993 Plan, the Company may grant “incentive stock options” or
“non-qualified options” with an exercise price of not less than the fair market
value on the date of grant.




5




Options
granted under the 1993 Plan have a vesting schedule, which is typically five
years, determined by the Compensation Committee of the Board of Directors and
expire ten years after the date of grant. The non-employee Director Plan (the
“1995 Plan”) reserves an aggregate of 86,666 shares of the Company’s common
stock for the issuance of stock options, which includes the 20,000 share
increase in authorized shares approved by the stockholders at the February 28,
2008 Annual Meeting of Stockholders.  These shares may be granted to
non-employee directors of the Company.  Under this plan the
non-employee directors are each automatically granted 1,666 options at a price
equal to the market value on the date of grant which is the date of the annual
stockholders’ meeting each year, exercisable for 10 years after the date of the
grant.  These options are exercisable as to 25% of the shares thereby
on the date of grant and as to an additional 25%, cumulatively on the first,
second and third anniversaries of the date of grant.





As of
June 30, 2008, there was $1,912 of total unrecognized compensation costs related
to nonvested stock options.  That cost is expected to be recognized
over a weighted average period of 3.5 years.





The
Company’s share-based compensation expenses were recorded in the following
expense categories for the three and nine months ended June 30, 2008 and
2007:





Three
      Months
              Ended
      June 30,
            
            
            Nine
      Months
              Ended
      June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Cost
      of sales
            
            $
            27
            
            
            $
            12
            
            
            $
            77
            
            
            $
            38Research
      and development
            
            
            18
            
            
            
            10
            
            
            
            51
            
            
            
            21Selling
            
            
            20
            
            
            
            20
            
            
            
            54
            
            
            
            48Administration
            
            
            115
            
            
            
            118
            
            
            
            316
            
            
            
            306Total
      share-based
              compensation
      expense
            
            $
            180
            
            
            $
            160
            
            
            $
            498
            
            
            $
            413Total
      share-based compensation expense (net of tax)
            
            $
            131
            
            
            $
            116
            
            
            $
            396
            
            
            $
            324





In the third quarter of fiscal 2008,
the Company elected to pay 7% of Mr. Cavanagh’s fiscal 2008 salary in common
stock of the Company and issued 1,364 shares of restricted common stock at
$13.34 per share.  Also during the third quarter of fiscal 2008, the
Company paid $5 of Dennis E. Bunday’s, Executive Vice President and Chief
Financial Officer, and $3 of Mark S. Koenen’s, Vice President of Sales and
Marketing, salary in common stock of the Company and issued 374 and 224 shares,
respectively, of restricted common stock at $13.34 per share.  During
the third quarter of fiscal 2007, the Company elected to pay 7% of Mr.
Cavanagh’s fiscal 2007 salary in common stock of the Company and issued 989
shares of restricted common stock at $16.98 per share.  Also during
the third quarter of fiscal 2007, the Company paid $5 of Dennis E. Bunday’s,
Executive Vice President and Chief Financial Officer, and $3 of Mark S.
Koenen’s, Vice President of Sales and Marketing, salary in common stock of the
Company and issued 294 and 176 shares, respectively, of restricted common stock
at $16.98 per share.





The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants issued during the three months ended June 30,
2008.  There were no stock options granted during the three months
ended June 30, 2007.





Three
      Months
              Ended
      June 30, 2008Risk-free
      interest rate
            
            3.83%Expected
      dividend yield
            
            0%Expected
      term
            
            6.5
      yearsExpected
      volatility
            
            71%





The
Company uses the US Treasury (constant maturity) interest rate on the date of
grant as the risk-free interest rate.  The expected term of options
granted represents the weighted average period the stock options are expected to
remain outstanding.  Expected volatilities are based on the historical
volatility of the Company’s common stock.




6




The
following table summarizes stock options outstanding as of June 30, 2008 as well
as activity during the nine month period then ended:




Shares
            
            
            Weighted
      Average Exercise PriceOutstanding
      at September 30, 2007
            
            
            622,785
            
            
            $
            8.40Granted
            
            
            50,996
            
            
            
            13.94Exercised
            
            
            (36,864
            )
            
            
            4.66Forfeited
            
            
            (21,062
            )
            
            
            11.63Outstanding
      at June 30, 2008
            
            
            615,855
            
            
            
            8.97Exercisable
      at June 30, 2008
            
            
            351,867
            
            
            $
            6.46





At June
30, 2008, the weighted average remaining contractual term of options outstanding
and options exercisable was 6.7 years and 5.6 years, respectively.





The
aggregate intrinsic value of options outstanding and options exercisable at June
30, 2008 was $2,911 and $2,276, respectively (the intrinsic value of a stock
option is the amount by which the market value of the underlying stock exceeds
the exercise price of the option).  The aggregate intrinsic value of
options outstanding and options exercisable at June 30, 2007 was $6,135 and
$3,458, respectively.  The weighted average grant date fair value of
stock options granted during the three months ended June 30, 2008 was $8.90 per
share.  There were no options granted during the three months ended
June 30, 2007.  The weighted average grant date fair value of stock
options granted during the nine months ended June 30, 2008 and 2007 was $9.02
and $12.18 per share, respectively.  The intrinsic value of all stock
options exercised during the three and nine months ended June 30, 2008 was $47
and $418, respectively.  Cash received from the exercise of stock
options for the three and nine months ended June 30, 2008 was $25 and $172,
respectively.  The intrinsic value of all stock options exercised
during the three and nine months ended June 30, 2007 was $72 and $483,
respectively.  Cash received from the exercise of stock options for
the three and nine months ended June 30, 2007 was $27 and $207,
respectively.





Note
6. 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.  The following table summarizes the
components of comprehensive income:





Three
      Months
              Ended
      June 30,
            
            
            Nine
      Months
              Ended
      June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      income
            
            $
            2,197
            
            
            $
            1,824
            
            
            $
            5,833
            
            
            $
            6,421Translation
      adjustment
            
            
            51
            
            
            
            13
            
            
            
            165
            
            
            
            37Unrealized
      gain (loss)
            
            
            (127
            )
            
            
            -
            
            
            
            (104
            )
            
            
            -Comprehensive
      income
            
            $
            2,121
            
            
            $
            1,837
            
            
            $
            5,894
            
            
            $
            6,458





Note
7. Earnings 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:





7




Three
      Months
              Ended
      June 30, 2008
            
            
            Three
      Months
              Ended
      June 30, 2007Income
            
            
            Shares
            
            
            Per
      Share Amount
            
            
            Income
            
            
            Shares
            
            
            Per
      Share AmountBasic
      EPS –
            
            $
            2,197
            
            
            
            7,530,053
            
            
            $
            0.29
            
            
            $
            1,824
            
            
            
            7,480,287
            
            
            $
            0.24Effect
      of dilutive securities –Stock
      options
            
            
            -
            
            
            
            200,090
            
            
            
            
            
            
            
            -
            
            
            
            263,491Diluted
      EPS –
            
            $
            2,197
            
            
            
            7,730,143
            
            
            $
            0.28
            
            
            $
            1,824
            
            
            
            7,743,778
            
            
            $
            0.24





Nine
      Months
              Ended
      June 30, 2008
            
            
            Nine
      Months
              Ended
      June 30, 2007Income
            
            
            Shares
            
            
            Per
      Share Amount
            
            
            Income
            
            
            Shares
            
            
            Per
      Share AmountBasic
      EPS –
            
            $
            5,833
            
            
            
            7,519,009
            
            
            $
            0.78
            
            
            $
            6,421
            
            
            
            7,460,170
            
            
            $
            0.86Effect
      of dilutive securities –Stock
      options
            
            
            -
            
            
            
            226,884
            
            
            
            
            
            
            
            -
            
            
            
            270,449Diluted
      EPS –
            
            $
            5,833
            
            
            
            7,745,893
            
            
            $
            0.75
            
            
            $
            6,421
            
            
            
            7,730,619
            
            
            $
            0.83





For the
three and nine months ended June 30, 2008, the Company had options covering
187,958 and 101,662 shares, respectively, that were not considered in the
diluted EPS calculation since they would have been antidilutive.  For
the three and nine months ended June 30, 2007, the Company had options covering
45,246 and 46,912 that were not considered in the diluted EPS calculation
since they would have been antidilutive.





Note
8. Inventories





Inventories,
net of reserves, consist of the following:





June
      30,
              2008
            
            
            September
      30,
              2007Raw
      materials
            
            $
            5,326
            
            
            $
            7,057Work
      in process
            
            
            39
            
            
            
            66Finished
      goods
            
            
            2,485
            
            
            
            2,029$
            7,850
            
            
            $
            9,152





Note
9. Debt





As of June 30, 2008, the Company has
paid off its entire term loan debt and has no amounts outstanding under its
revolving loan facility.





In September 2004, the Company entered
into a $25,000 senior secured lending facility with Merrill Lynch, consisting of
an $8,000 revolving loan facility and a $17,000 term loan.  The term
loan has been repaid in its entirety.  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 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.  Under the Prime rate option, the revolving loan facility will
bear interest at the Prime rate plus 2.75% per annum.  Fees under the
loan agreement include an unused line fee of 0.50% per annum on the unused
portion of the revolving credit facility.





The Company had available under its
revolving credit facility $8,000 at both June 30, 2008 and September 30,
2007.




8




Note
10.  Product Warranties





The
Company establishes a product warranty liability based on a percentage of
product sales.  The liability is based on historical return rates of
products and amounts for significant and specific warranty issues, and is
included in accrued expenses in the accompanying condensed consolidated balance
sheets.  Warranty is limited to a specified time period, mileage or
hours of use, and varies by product, application and customer.  The
Company has recorded a liability, which in the opinion of management, is
adequate to cover such warranty costs.  Warranty payments can vary
significantly from year to year and quarter to quarter depending on the timing
of the settlement of warranty claims with various
customers.  Following is a reconciliation of the changes in the
Company’s warranty liability for the three and nine months ended June 30, 2008
and 2007:





Three
      Months
              Ended
      June 30,
            
            
            Nine
      Months
              Ended
      June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Balance
      at beginning of period
            
            $
            1,263
            
            
            $
            2,138
            
            
            $
            1,712
            
            
            $
            1,720Payments
            
            
            (352
            )
            
            
            (120
            )
            
            
            (1,243
            )
            
            
            (360
            )Warranty
      claims accrued
            
            
            259
            
            
            
            213
            
            
            
            701
            
            
            
            632Adjustments
      in estimates
            
            
            (174
            )
            
            
            -
            
            
            
            (174
            )
            
            
            239Balance
      at end of period
            
            $
            996
            
            
            $
            2,231
            
            
            $
            996
            
            
            $
            2,231





During
the third quarter of fiscal 2008, the Company adjusted an estimated warranty
liability by $174 related to warranty claims with one customer.  The
Company reviewed its assumptions for its warranty liability with this one
customer, which covers a period in excess of one year, and determined a decrease
in liability would more accurately reflect our estimated warranty costs for this
customer.  This reduction in liability has been recorded in cost of
sales in the accompanying condensed consolidated statement of
operations.





During
the second quarter of fiscal 2007, the Company recorded an additional warranty
liability of $239 related to warranty claims with one customer.  The
Company reviewed its assumptions for its warranty liability with this one
customer, which covers a period in excess of one year, and determined an
additional liability was required.  This additional liability was
recorded in cost of sales in the accompanying condensed consolidated statement
of operations.





Included
in the warranty liability at June 30, 2007 were $400 of warranty liabilities
associated with our former passenger car and light truck product lines, which
were sold on September 30, 2003.  At September 30, 2007, the Company
reversed this $400 warranty liability as the warranty return period had
expired.





Note
11. 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.  Annual net periodic pension costs under the plans are
determined on an actuarial basis.  The Company’s policy is to fund
these costs accrued over 15 years and obligations arising due to plan amendments
over the period benefited.  The assets and liabilities are adjusted
annually based on actuarial results.  Disclosures regarding the
components of net periodic benefit cost and contributions of pension plans are
required for interim financial statements and are included below.





Components
      of Net Periodic Benefit Cost:Salaried
      PlanThree
      Months
              Ended
      June 30,
            
            
            Nine
      Months
              Ended
      June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Service
      cost
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Interest
      cost
            
            
            74
            
            
            
            73
            
            
            
            222
            
            
            
            219Expected
      return on plan assets
            
            
            (77
            )
            
            
            (68
            )
            
            
            (231
            )
            
            
            (204
            )Amortization
      of prior service cost
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Amortization
      of loss
            
            
            16
            
            
            
            23
            
            
            
            48
            
            
            
            69Net
      periodic benefit cost
            
            $
            13
            
            
            $
            28
            
            
            $
            39
            
            
            $
            84





9





Hourly
      PlanThree
      Months
              Ended
      June 30,
            
            
            Nine
      Months
              Ended
      June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Service
      cost
            
            $
            16
            
            
            $
            29
            
            
            $
            48
            
            
            $
            87Interest
      cost
            
            
            115
            
            
            
            112
            
            
            
            345
            
            
            
            336Expected
      return on plan assets
            
            
            (118
            )
            
            
            (100
            )
            
            
            (354
            )
            
            
            (300
            )Amortization
      of prior service cost
            
            
            5
            
            
            
            12
            
            
            
            15
            
            
            
            36Amortization
      of loss
            
            
            42
            
            
            
            62
            
            
            
            126
            
            
            
            186Net
      periodic benefit cost
            
            $
            60
            
            
            $
            115
            
            
            $
            180
            
            
            $
            345





During
the nine months ended June 30, 2008, the Company has made contributions of
$949.  The Company expects total contributions to its pension plans in
fiscal 2008 to be $1,307.





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 health care plan for the three and nine months ended June 30,
2008 and 2007.





Components
      of Net Periodic Benefit Cost:Post-Retirement
      PlanThree
      Months
              Ended
      June 30,
            
            
            Nine
      Months
              Ended
      June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Service
      cost
            
            $
            1
            
            
            $
            2
            
            
            $
            3
            
            
            $
            6Interest
      cost
            
            
            59
            
            
            
            55
            
            
            
            177
            
            
            
            165Amortization
            
            
            (8
            )
            
            
            (6
            )
            
            
            (24
            )
            
            
            (18
            )Net
      periodic benefit cost
            
            $
            52
            
            
            $
            51
            
            
            $
            156
            
            
            $
            153





Note
12. Income Taxes





In June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement No. 109” (“FIN
48”).  FIN 48 establishes a single model to address accounting for
uncertain tax positions.  FIN 48 clarifies the accounting for income
taxes by prescribing a minimum recognition threshold a tax position is required
to meet before being recognized in the financial statements.  FIN 48
also provides guidance on derecognition, measurement, classification, interest
and penalties, accounting in interim periods, disclosure and
transition.





The
Company adopted the provisions of FIN 48 on October 1, 2007.  As of
the date of adoption, the Company had unrecognized tax benefits of $109, of
which $72 will favorably affect the effective tax rate, if
recognized.  The adoption of FIN 48 resulted in a decrease of $82 to
retained earnings as a cumulative effect adjustment to stockholder’s
equity.  The amount of interest and penalties related to the
unrecognized tax benefits as of the date of adoption was $14.  There
have not been any significant changes in the Company’s uncertain tax benefits
since adoption.  The Company will recognize interest and penalties
related to unrecognized tax benefits as a component of income tax
expense.  The Company believes that it is reasonably possible that all
of it unrecognized tax benefits could be recognized within the 12 months of this
reporting date.





The
Company is subject to U.S. federal, state and foreign income
taxes.  The Company is no longer subject to U.S. federal, state or
foreign income tax examinations for fiscal years ended before September 30,
2004, September 30, 2003 and September 30, 2005,
respectively.  However, to the extent allowed by law, the tax
authorities may have the right to examine prior periods where net operating
losses or tax credits were generated and carried forward, and make adjustments
up to the amount of the net operating loss or credit carryforward
amount.





The
Company is not currently under Internal Revenue Service (“IRS”)
examination.  The Company is undergoing an Oregon tax examination for
the fiscal years ended September 30, 2004 through 2006.  The Company
is not currently under examination in any other states or foreign
jurisdictions.





10




Note
13. Geographic Information





The
Company accounts for its segments in accordance with SFAS No. 131 “Disclosures
about Segments of an Enterprise and Related Information”.  The Company
operates in one segment: vehicle components.  During the three and
nine months ended June 30, 2008 and 2007, the Company operated in two geographic
reportable segments as shown in the table below.





Three
      Months
              Ended
      June 30,
            
            
            Nine
      Months
              Ended
      June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenue
      – External Customers:United
      States
            
            $
            15,688
            
            
            $
            15,487
            
            
            $
            46,435
            
            
            $
            51,973China
            
            
            1,449
            
            
            
            335
            
            
            
            2,158
            
            
            
            600$
            17,137
            
            
            $
            15,822
            
            
            $
            48,593
            
            
            $
            52,573Revenue
      – Intersegments:United
      States
            
            $
            578
            
            
            $
            746
            
            
            $
            1,220
            
            
            $
            2,090China
            
            
            2,778
            
            
            
            1,856
            
            
            
            8,789
            
            
            
            6,075Other
            
            
            147
            
            
            
            139
            
            
            
            451
            
            
            
            407Eliminations
            
            
            (3,503
            )
            
            
            (2,741
            )
            
            
            (10,460
            )
            
            
            (8,572
            )$
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Income
      before income taxes:United
      States
            
            $
            2,449
            
            
            $
            2,718
            
            
            $
            7,290
            
            
            $
            9,775China
            
            
            733
            
            
            
            1
            
            
            
            1,202
            
            
            
            42Other
            
            
            84
            
            
            
            24
            
            
            
            203
            
            
            
            (39
            )$
            3,266
            
            
            $
            2,743
            
            
            $
            8,695
            
            
            $
            9,778





Note
14. Contingencies





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





The soil
and groundwater at the Company’s Portland, Oregon facility contains certain
contaminants, which were deposited from approximately 1968 through
1995.  Some of this contamination has migrated offsite to neighboring
properties.  The Company has retained an environmental consulting firm
to investigate the extent of the contamination and to determine what remediation
will be required and the associated costs.  During fiscal 2004, the
Company entered into the Oregon Department of Environmental Quality’s voluntary
clean-up program and during fiscal 2004 the Company established a liability of
$950 for this matter.  At September 30, 2007, the Company recorded an
additional liability of $546 based on remaining costs estimates determined by
the Company’s environmental consulting firm.  As of June 30, 2008, the
total liability recorded is $983 (and excludes any claim recovery as discussed
below) and is recorded in accrued expenses in the accompanying condensed
consolidated balance sheet.  The Company asserted a contractual
indemnity claim against Dana Corporation (“Dana”), from which it acquired the
property, and contribution claims against the other prior owner of the property
as well as businesses previously located on the property (including Blount, Inc.
(“Blount”) under the Federal Superfund Act and the Oregon Cleanup
Law.  During the second quarter of fiscal 2008, the Company entered
into a settlement agreement with Dana and Blount.  In connection with
the settlement agreement, the Company received cash payments of $683 and shares
of Dana stock equal to approximately $327 at the time of settlement and assumed
the full obligation to, and risks associated with, completing the
remediation.  During the third quarter of fiscal 2008, the Company
received additional shares of Dana stock equal to approximately $10 at the time
of settlement.  The Company recorded these shares as
available-for-sale securities in short-term investments in the accompanying
condensed consolidated balance sheets.  As of June 30, 2008 the
Company has recorded a total gain of $1,020, which was recorded in operating
expenses in the condensed consolidated financial statements for the receipt of
the cash and stock.





11




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).  The complaint
seeks an unspecified amount of damages on behalf of the class.  During
the second quarter of fiscal 2007, the Oklahoma district court granted the
plaintiffs class action status.  The Company and Ford appealed the
District Court’s class certification ruling to the Court of Civil Appeals of the
State of Oklahoma (“Appeals Court”) and during the second quarter of fiscal
2008, the Appeals Court, in a 3-to-0 decision, reversed the District Court’s
ruling and decertified the nationwide class.  As permitted under
Oklahoma law, the plaintiffs filed for a re-hearing by the Appeals Court and
during the third quarter of fiscal 2008, the Appeals Court denied the motion for
re-hearing.  The plaintiffs have since appealed the Court of Civil
Appeals decision to the Oklahoma Supreme Court.  The Company continues
to believe the claim to be without merit and intends to continue to vigorously
defend against this action.  Although the Appeals Court decision is
favorable to the Company, there can be no assurance that the ultimate 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 cannot reasonably estimate the possible
loss or range of loss at this time.  In addition, the Company has
incurred and may incur future litigation expenses in defending this
litigation.





On August 1, 2005, Mr. Thomas Ziegler,
the Company’s former president and chief executive officer, filed a suit against
the Company, American Industrial Partners, L.P.; American Industrial Partners
Fund III, L.P., and American Industrial Partners Fund III Corporation in the
Circuit Court of the 15th Judicial Circuit in and for Palm Beach County,
Florida.  This suit is similar to a suit filed by Mr. Ziegler on May
12, 2003 against the same defendants.  The 2003 suit was dismissed
without prejudice for failure to prosecute.  In the suit, Mr. Ziegler
alleges 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.











































12





Williams
Controls, Inc.




Item2.  Management's Discussion and Analysis of
Financial Condition and Results of Operations


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





This
section summarizes the significant factors affecting our consolidated results of
operations, financial condition and liquidity position for the three and nine
months ended June 30, 2008 and 2007.  This section should be read in
conjunction with our condensed consolidated financial statements and related
notes appearing elsewhere in this document.   Statements in this
report that relate to future results and events are based on our current
expectations.  Actual results in future periods may differ materially
from those currently expected or desired because of a number of risks and
uncertainties, including, but not limited to, those risks discussed in the
section entitled “Risk Factors” in our annual report on Form 10-K for the fiscal
year ended September 30, 2007.





Forward-Looking
Statements





This report on Form 10-Q 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 our 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 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
section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal
year ended September 30, 2007 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.





Overview





We design, manufacture and sell
electronic throttle and pneumatic control systems for heavy trucks, transit
busses and off-road equipment.  Electronic throttle controls send a
signal proportional to throttle position to adjust the speed of electronically
controlled engines.  The use of electronically controlled engines is
influenced primarily by emissions regulations, because these engines generally
produce lower emissions.  The original applications of electronic
engines and electronic throttle controls were in heavy trucks and transit busses
in the United States and Europe in the late 1980’s.  As a result of
the continuing implementation of more stringent emissions standards worldwide,
demand for electronically controlled engines and electronic throttle control
systems is expanding.  Both China and India are enacting requirements
for more stringent emissions standards for heavy trucks and transit
busses.  Additionally, worldwide emissions regulations have been
enacted that increase the use of electronic throttle controls in off-road
equipment.  We also produce a line of pneumatic control products,
which are sold to the same customer base as our electronic throttle
controls.  These pneumatic products are used for vehicle control
system applications.  We believe that the demand for our products will
be driven by worldwide emissions legislation and the economic cycles for heavy
trucks, transit busses and off-road equipment.





As we
move forward in fiscal 2008 and beyond, we will continue to work closely with
our existing and potential customers to design and develop new products and
adapt existing products to new applications, and to improve the performance,
reliability and cost-effectiveness of our products.





13





Critical
Accounting Policies and Estimates





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





Revenue
Recognition





Revenue is recognized at the time of
product delivery, which is 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 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 warranty liability, which in the
opinion of management is adequate to cover such costs.  While we
believe our estimates are reasonable, they are subject to change and such change
could be material.





Legal





We are involved in various claims,
lawsuits and other proceedings from time to time.  Such litigation
involves uncertainty as to possible losses we may ultimately realize when one or
more future events occur or fail to occur.  In connection with such
claims and lawsuits, we estimate the probability of losses based on advice of
legal counsel, the outcomes of similar litigation, legislative development and
other factors.  Due to the numerous variables associated with these
judgments and assumptions, both the precision and reliability of the resulting
estimates of the related loss contingencies are subject to substantial
uncertainties.  We regularly monitor our estimated exposure to these
contingencies and, as additional information becomes known, may change our
estimates significantly.  A significant change in our estimates, or a
result that materially differs from our estimates, could have a significant
impact on our financial position, results of operations and cash
flows.





Environmental





We estimate the costs of investigation
and remediation for certain soil and groundwater contaminants at our Portland,
Oregon facility.  The ultimate costs to the Company 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 the
estimate of a probable loss is 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.





14




Pensions
and Post-Retirement Benefit Obligations





Pension and post-retirement benefit
obligations and net period benefit cost are calculated using actuarial
models.  The most important assumptions that affect these computations
are the discount rate, expected long-term rate of return on plan assets, and
healthcare cost trend rates.  We evaluate these assumptions at least
annually.  Other assumptions involve demographic factors such as
retirement, mortality and turnover.  These assumptions are evaluated
at least annually and are updated to reflect our experience.  Actual
results in any given year will often differ from actuarial assumptions because
of economic and other factors.





Our discount rate assumption is
intended to reflect the rate at which retirement benefits could be effectively
settled based upon the assumed timing of the benefit payments.  To
determine our discount rate, we discount the expected benefit payments using the
Citigroup Pension Discount Liability Index yield curve.  The
equivalent level interest rate that produces the same present value of benefits
is then determined.  Our assumed rate does not differ significantly
from this benchmark rate. To determine the expected long-term rate of return on
pension plan assets, we consider the current asset allocations and the
historical and expected returns on various categories of plan assets obtained
from our investment portfolio manager.  Our post-retirement plan does
not contain any plan assets.





Share-Based
Compensation Expense





We use SFAS No. 123R for computing
share-based compensation expense, which requires us to measure compensation cost
for all outstanding unvested share-based awards, and awards we grant, modify,
repurchase or cancel in the future, at fair value and recognize compensation
over the requisite service period for awards expected to vest.  The
estimation of stock awards that will ultimately vest requires judgment, and to
the extent actual results differ from our estimates, such amounts will be
recorded as a cumulative adjustment in the period estimates are
revised.  We consider many factors when calculating fair value
including estimated stock price volatility, expected term and expected
forfeitures.  Factors considered in estimating forfeitures include the
types of awards, employee class, and historical experience.  Actual
results may differ substantially from these estimates.





Income
Taxes





For each jurisdiction that we operate
in, we are required to estimate our annual effective tax rate 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 unless we believe that
recovery is more likely than not, a valuation allowance is
established.  Our income tax provision on the consolidated statement
of operations would be 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
deferred tax assets.




15




Results
of Operations





Financial
Summary


(Dollars in
Thousands)





Three
      Months
              Ended
      June 30,
            
            
            Nine
      Months
              Ended
      June 30,2008
            
            
            2007
            
            
            %
      Change
            
            
            2008
            
            
            2007
            
            
            %
      ChangeNet
      sales
            
            $
            17,137
            
            
            $
            15,822
            
            
            
            8.3%
            
            
            $
            48,593
            
            
            $
            52,573
            
            
            
            (7.6%)Cost
      of sales
            
            
            10,965
            
            
            
            10,117
            
            
            
            8.4%
            
            
            
            31,908
            
            
            
            34,441
            
            
            
            (7.4%)Gross
      profit
            
            
            6,172
            
            
            
            5,705
            
            
            
            8.2%
            
            
            
            16,685
            
            
            
            18,132
            
            
            
            (8.0%)Research
      and development
            
            
            1,005
            
            
            
            797
            
            
            
            26.1%
            
            
            
            3,006
            
            
            
            2,465
            
            
            
            21.9%Selling
            
            
            700
            
            
            
            560
            
            
            
            25.0%
            
            
            
            2,037
            
            
            
            1,653
            
            
            
            23.2%Administration
            
            
            1,315
            
            
            
            1,394
            
            
            
            (5.7%)
            
            
            
            4,080
            
            
            
            4,049
            
            
            
            0.8%Gain
      from settlement of environmental claims
            
            
            (10
            )
            
            
            -
            
            
            NM
            
            
            
            (1,020
            )
            
            
            -
            
            
            NMRealignment
      of operations
            
            
            -
            
            
            
            210
            
            
            NM
            
            
            
            -
            
            
            
            643
            
            
            NMOperating
      income
            
            $
            3,162
            
            
            $
            2,744
            
            
            
            15.2%
            
            
            
            8,582
            
            
            $
            9,322
            
            
            
            (7.9%)As
      a percentage of net sales:Cost
      of sales
            
            
            64.0
            %
            
            
            63.9
            %
            
            
            
            
            
            
            65.7
            %
            
            
            65.5
            %Gross
      margin
            
            
            36.0
            %
            
            
            36.1
            %
            
            
            
            
            
            
            34.3
            %
            
            
            34.5
            %Research
      and development
            
            
            5.9
            %
            
            
            5.0
            %
            
            
            
            
            
            
            6.2
            %
            
            
            4.7
            %Selling
            
            
            4.1
            %
            
            
            3.5
            %
            
            
            
            
            
            
            4.2
            %
            
            
            3.1
            %Administration
            
            
            7.7
            %
            
            
            8.8
            %
            
            
            
            
            
            
            8.4
            %
            
            
            7.7
            %Gain
      from settlement of
              environmental
      claims
            
            
            (0.1
            %)
            
            
            -
            
            
            
            
            
            
            
            (2.1
            %)
            
            
            -Realignment
      of operations
            
            
            -
            
            
            
            1.3
            %
            
            
            
            
            
            
            -
            
            
            
            1.2
            %Operating
      income
            
            
            18.5
            %
            
            
            17.3
            %
            
            
            
            
            
            
            17.7
            %
            
            
            17.7
            %





Comparative
      – Three months ended June 30, 2008 and
  2007


NM
= Not Meaningful


Percent
      ChangeFor
      the Three Months Ended June 30:
            
            2008
            
            
            2007
            
            
            2007
      to 2008Net
      sales
            
            $
            17,137
            
            
            $
            15,822
            
            
            
            8.3%





Net sales
increased $1,315 in the third quarter of fiscal 2008 compared to the third
quarter of fiscal 2007, primarily due to an increase in the build rates of heavy
trucks in the Asian market.  In that market, sales were up 85% when
compared to the same quarter in fiscal 2007.  Sales of heavy trucks in
the North American market increased approximately 7% over the prior year quarter
whereas sales to our European truck customers decreased 2% on a quarter over
quarter basis.  The increase in sales of heavy trucks in the North
American market is the first increase in this market on a quarter over quarter
basis since the new emission standards went into effect on January 1,
2007.  Net sales in the world-wide off-road market declined
approximately 6%.





We expect
that electronic throttle control sales will increase or decrease in the future
in part in line with changes in heavy truck, transit bus and off-road production
volumes in the various geographic markets in which we serve and increase or
decrease when product applications change.  Additionally, competitive
pricing may continue to reduce per unit pricing.  The change in
emissions regulations in the United States, effective January 1, 2007, had a
negative impact on truck sales in North America beginning in our second quarter
of fiscal 2007 and continued up to the second quarter of fiscal
2008.  In addition, higher fuel costs and other negative economic
factors in the United States in 2008 appear to be negatively influencing the
NAFTA heavy truck market.  The published reports of the decline in
North American heavy truck production are that overall truck production volumes
in North America in calendar year 2007 declined approximately 35% over the
calendar year 2006 production volumes.  These same reports estimate
that the 2008 calendar year heavy truck production levels will remain generally
in line with the 2007 calendar year production levels.




16




Percent
      ChangeFor
      the Three Months Ended June 30:
            
            2008
            
            
            2007
            
            
            2007
      to 2008Gross
      profit
            
            $
            6,172
            
            
            $
            5,705
            
            
            
            8.2%





Gross
profit was $6,172, or 36.0% of net sales in the third quarter of 2008, an
increase of $467 compared to the gross profit of $5,705, or 36.1% of net sales,
in the comparable fiscal 2007 period.





The
increase in gross profit in the third quarter of fiscal 2008 is primarily driven
by the 85% and 7% net increases in sales of electronic throttle control systems
to Asian and North American heavy truck customers,
respectively.  During fiscal 2007, we substantially completed our
realignment of operations, as discussed in Note 4 to our unaudited condensed
consolidated financial statements, and as a result of this realignment we have
experienced an overall reduction in labor costs and net material costs due to
continued efforts in global sourcing and the production of our own internally
developed contacting and non-contacting sensors.  During the third
quarter of fiscal 2008, gross profit was negatively impacted by higher purchase
prices for certain raw materials, which has resulted in gross profit margins as
a percent of sales during the quarter to be essentially at the same level as the
fiscal 2007 third quarter.  Overhead expenses remained relatively flat
between quarters, but decreased as a percentage of sales during the quarter
ended June 30, 2008.  Gross profit for the three months ended June 30,
2008 also included a reduction in warranty liability of $174 compared to a
negative impact of increasing our warranty liability by $239 in the
corresponding quarter in fiscal 2007, as noted in Note 10 to our unaudited
condensed consolidated financial statements.





Percent
      ChangeFor
      the Three Months Ended June 30:
            
            2008
            
            
            2007
            
            
            2007
      to 2008Research
      and development
            
            $
            1,005
            
            
            $
            797
            
            
            
            26.1%





Research
and development expenses increased $208 for the third quarter of fiscal 2008
when compared to the same period in fiscal 2007.  The Company’s
research and development expenditures will fluctuate based on the products under
development at any given point in time.  Expenses were up in the third
quarter over last year’s third quarter, primarily due to higher salary costs and
costs related to our Conceptual Development Center, which was completed in mid
fiscal 2007 and a higher level of new product development.  Overall,
we expect research and development expenses to increase slightly over fiscal
2007 levels due to additional new product design projects.





Percent
      ChangeFor
      the Three Months Ended June 30:
            
            2008
            
            
            2007
            
            
            2007
      to 2008Selling
            
            $
            700
            
            
            $
            560
            
            
            
            25.0%





Selling
expenses increased $140 during the three months ended June 30, 2008 as compared
with the three months ended June 30, 2007 mainly due to higher overall salaries
and expanded selling and marketing efforts, including expenses associated with
sales and marketing related travel in the European, Asian, and off-road
markets.





Percent
      ChangeFor
      the Three Months Ended June 30:
            
            2008
            
            
            2007
            
            
            2007
      to 2008Administration
            
            $
            1,315
            
            
            $
            1,394
            
            
            
            (5.7%)





Administration
expenses for the three months ended June 30, 2008 decreased $79 when compared
with the same period in fiscal 2007.  The decrease in administration
expenses is primarily a result of a decrease in all legal fees, including those
associated with the class action lawsuit discussed in Note 14 to our unaudited
condensed consolidated financial statements.





Percent
      ChangeFor
      the Three Months Ended June 30:
            
            2008
            
            
            2007
            
            
            2007
      to 2008Gain
      from settlement of environmental claims
            
            $
            (10
            )
            
            $
            -
            
            
            NM





As part of its contractual indemnity
claim against Dana and contribution claim against Blount, as described in Note
14 to our unaudited condensed consolidated financial statements, during the
third quarter of fiscal 2008 the Company received additional shares in Dana
equal to approximately $10 at the time of settlement and recorded this as a gain
in operating expenses in the condensed consolidated financial statements in the
third quarter of fiscal 2008.




17




Percent
      ChangeFor
      the Three Months Ended June 30:
            
            2008
            
            
            2007
            
            
            2007
      to 2008Realignment
      of operations
            
            $
            -
            
            
            $
            210
            
            
            NM





The Company recorded expenses of $210
during the third quarter of fiscal 2007 related to its realignment of operations
as discussed in Note 4 of the unaudited condensed consolidated financial
statements.  No realignment expenses were recorded during the third
quarter of fiscal 2008 as the realignment was substantially complete as of
September 30, 2007.





Percent
      ChangeFor
      the Three Months Ended June 30:
            
            2008
            
            
            2007
            
            
            2007
      to 2008Interest
      income
            
            $
            (12
            )
            
            $
            (34
            )
            
            
            (64.7%)Interest
      expense
            
            $
            5
            
            
            $
            185
            
            
            
            (97.3%)





Interest
expense decreased $180 in the third quarter of fiscal 2008 as compared to the
third quarter of fiscal 2007 due to the significant reductions in debt levels
throughout late fiscal 2007 and the first half of fiscal 2008.  As of
June 30, 2008, all of our debt has been fully paid off.





Percent
      ChangeFor
      the Three Months Ended June 30:
            
            2008
            
            
            2007
            
            
            2007
      to 2008Other
      income
            
            $
            (97
            )
            
            $
            (150
            )
            
            
            (35.3%)





Included in other income for the three
months ended June 30, 2008 and 2007 was a gain of $31 and $70, respectively,
related to the disposal of certain fixed assets.  Also included in the
three months ended June 30, 2007 was a gain of $37 for the reversal of old
accounts payable related to closed insolvent subsidiaries of the
Company.  No amounts were reversed in the third quarter of fiscal
2008.





Percent
      ChangeFor
      the Three Months Ended June 30:
            
            2008
            
            
            2007
            
            
            2007
      to 2008Income
      tax expense
            
            $
            1,069
            
            
            $
            919
            
            
            
            16.3%





Income
tax expense reflects an effective tax rate of 32.7% for the three months ended
June 30, 2008 compared to an effective tax rate of 33.5% for the comparable
three month period in fiscal 2007.  The rate reduction in 2008 is due
primarily to an increase in the United States Domestic Manufacturing Credit and
a larger percentage of the Company’s earnings being taxed at the lower Chinese
tax rate.




Comparative
      – Nine months ended June 30, 2008 and
  2007




NM
= Not Meaningful


Percent
      ChangeFor
      the Nine Months Ended June 30:
            
            2008
            
            
            2007
            
            
            2007
      to 2008Net
      sales
            
            $
            48,593
            
            
            $
            52,573
            
            
            
            (7.6%)





Net sales
decreased $3,980 in the first nine months of fiscal 2008 compared to the first
nine months of fiscal 2007, primarily due to an overall decrease in the build
rates of heavy trucks in the North American market during the first six months
of the fiscal year.  In that market, sales were down 39% when compared
to the same period in fiscal 2007.  The Company’s share of this market
and unit pricing remained essentially unchanged from the prior
year.  Net sales in the off-road market declined approximately
7%.  Sales to our European truck and Asian customers increased
approximately 20% and 56%, respectively, over the first nine months of the prior
year.  The combination of these increases helped to offset a portion
of the decline from the North American truck market and world-wide off-road
market.





We expect
that electronic throttle control sales will increase or decrease in the future
in part in line with changes in heavy truck, transit bus and off-road production
volumes in the various geographic markets in which we serve and increase or
decrease when product applications change.  Additionally, competitive
pricing may continue to reduce per unit pricing.  The change in
emissions regulations in the United States, effective January 1, 2007, had a
negative impact on truck sales in North America beginning in our second quarter
of fiscal 2007 and continued up to the second quarter of fiscal
2008.  In addition, higher fuel costs and other negative economic
factors in the United States in 2008 appear to be negatively influencing the
NAFTA heavy truck market.  The published reports of the decline in
North American heavy truck production are that overall truck production volumes
in North America in calendar year 2007 declined approximately 35% over the
calendar year 2006 production volumes.  These same reports estimate
that the 2008 calendar year heavy truck production levels will remain generally
in line with the 2007 calendar year production levels.




18




Percent
      ChangeFor
      the Nine Months Ended June 30:
            
            2008
            
            
            2007
            
            
            2007
      to 2008Gross
      profit
            
            $
            16,685
            
            
            $
            18,132
            
            
            
            (8.0%)





Gross
profit was $16,685, or 34.3% of net sales in the first nine months of 2008, a
decrease of $1,447 compared to gross profit of $18,132, or 34.5% of net sales,
in the comparable fiscal 2007 period.





The
decrease in gross profit in the first nine months of fiscal 2008 is primarily
driven by the 39% net decrease in sales of electronic throttle control systems
to North American heavy truck customers.  During fiscal 2007, we
substantially completed our realignment of operations, as discussed in Note 4 to
our unaudited condensed consolidated financial statements, and as a result of
this realignment we have experienced an overall reduction in labor costs and net
material costs due to continued efforts in global sourcing and the production of
our own internally developed contacting and non-contacting
sensors.  Throughout fiscal 2007 and the first nine months of fiscal
2008, gross profit was negatively impacted by higher purchase prices for certain
raw materials.  Overhead expenses decreased between periods, but
remained relatively flat as a percentage of sales.  Gross profit for
the nine months ended June 30, 2008 also included a reduction in warranty
liability of $174 compared to a negative impact of increasing our warranty
liability by $239 in the corresponding period in fiscal 2007, as noted in Note
10 to our unaudited condensed consolidated financial statements.





Percent
      ChangeFor
      the Nine Months Ended June 30:
            
            2008
            
            
            2007
            
            
            2007
      to 2008Research
      and development
            
            $
            3,006
            
            
            $
            2,465
            
            
            
            21.9%





Research
and development expenses increased $541 during the first nine months of fiscal
2008 when compared to the first nine months of fiscal 2007.  The
Company’s research and development expenditures will fluctuate based on the
products under development at any given point in time.  Expenses were
up in the first nine months of 2008 when compared to the same period in the
prior year, primarily due to higher salary costs and costs related to our
Conceptual Development Center, which was completed in mid fiscal
2007.  Overall, we expect research and development expenses to
increase slightly over fiscal 2007 levels due to additional new product design
projects and a full year of the Conceptual Development Center.





Percent
      ChangeFor
      the Nine Months Ended June 30:
            
            2008
            
            
            2007
            
            
            2007
      to 2008Selling
            
            $
            2,037
            
            
            $
            1,653
            
            
            
            23.2%





Selling
expenses increased $384 during the nine months ended June 30, 2008 as compared
with the nine months ended June 30, 2007 mainly due to higher overall salaries
and expanded selling and marketing efforts, including expenses associated with
sales and marketing related travel in the European, Asian, South American,
Australian and off-road markets.





Percent
      ChangeFor
      the Nine Months Ended June 30:
            
            2008
            
            
            2007
            
            
            2007
      to 2008Administration
            
            $
            4,080
            
            
            $
            4,049
            
            
            
            0.8%





Administration
expenses for the first nine months of fiscal 2008 increased $31 when compared
with the same period in fiscal 2007.  The increase in administration
expenses is primarily a result of designing changes to our compensation
structure, employee recruitment, relocation costs and increased expenses
associated with our China manufacturing facility offset by a decrease in all
legal fees, including those associated with the class action lawsuit discussed
in Note 14 to our unaudited condensed consolidated financial
statements.




19





Percent
      ChangeFor
      the Nine Months Ended June 30:
            
            2008
            
            
            2007
            
            
            2007
      to 2008Gain
      from settlement of environmental claims
            
            $
            (1,020
            )
            
            $
            -
            
            
            NM





As part of its contractual indemnity
claim against Dana and contribution claim against Blount, as described in Note
14 to our unaudited condensed consolidated financial statements, in the first
nine months of fiscal 2008 the Company received cash payments totaling $683 from
Dana and Blount and shares in Dana equal to approximately $337 at the time of
settlement.  As of June 30, 2008, the Company recorded a gain of
$1,020 in operating expenses in the condensed consolidated financial
statements.





Percent
      ChangeFor
      the Nine Months Ended June 30:
            
            2008
            
            
            2007
            
            
            2007
      to 2008Realignment
      of operations
            
            $
            -
            
            
            $
            643
            
            
            NM





The Company recorded expenses of $643
during the first nine months of fiscal 2007 related to its realignment of
operations as discussed in Note 4 of the unaudited condensed consolidated
financial statements.  No realignment expenses were recorded during
the first nine months of fiscal 2008 as the realignment was substantially
complete as of September 30, 2007.





Percent
      ChangeFor
      the Nine Months Ended June 30:
            
            2008
            
            
            2007
            
            
            2007
      to 2008Interest
      income
            
            $
            (44
            )
            
            $
            (95
            )
            
            
            (53.7%)Interest
      expense
            
            $
            136
            
            
            $
            651
            
            
            
            (79.1%)





Interest
expense decreased $515 in the first nine months of fiscal 2008 as compared to
the same period in fiscal 2007 due to the significant reductions in debt levels
throughout late fiscal 2007 and the first half of fiscal 2008.  As of
June 30, 2008, all of our debt has been fully paid off.





Percent
      ChangeFor
      the Nine Months Ended June 30:
            
            2008
            
            
            2007
            
            
            2007
      to 2008Other
      income
            
            $
            (205
            )
            
            $
            (1,012
            )
            
            
            (79.7%)





The decrease in other income is
primarily due the first nine months of fiscal 2007 including a gain of $877
related to the reversal of old accounts payable related to closed insolvent
subsidiaries of the Company.   No amounts were reversed in the
first nine months of fiscal 2008.  Also included in other income for
the three months ended June 30, 2008 and 2007 was a gain of $55 and $71,
respectively, related to the disposal of certain fixed assets.





Percent
      ChangeFor
      the Nine Months Ended June 30:
            
            2008
            
            
            2007
            
            
            2007
      to 2008Income
      tax expense
            
            $
            2,862
            
            
            $
            3,357
            
            
            
            (14.7%)





Tax
expense reflects an effective tax rate of 32.9% for the first nine months of
fiscal 2008 compared to an effective tax rate of 34.3% for the comparable period
in fiscal 2007.  The rate reduction in 2008 is due primarily to an
increase in the United States Domestic Manufacturing Credit and a larger
percentage of the Company’s earnings being taxed at the lower Chinese tax
rate.





Financial
Condition, Liquidity and Capital Resources





Cash generated by operating activities
was $7,202 for the first nine months of fiscal 2008, an increase of $724 from
the cash generated by operating activities of $6,478 during the first nine
months of fiscal 2007.  Net income plus non-cash charges for
depreciation and stock based compensation contributed $7,678 in the first nine
months of fiscal 2008 and $8,286 in the first nine months fiscal
2007.




20




Changes
in working capital items generated cash of $9 in the first nine months of fiscal
2008 compared to a use of cash of $721 in the first nine months of
2007.  Timing of collections on receivables and sales levels decreased
cash by $764 in the first nine months of fiscal 2008 compared with generating
cash of $1,485 in the same period of fiscal 2007.  Inventories were
reduced by $1,302 in the first nine months of fiscal 2008 compared to a
reduction in inventories of $24 in the first nine months of fiscal
2007.  Cash was used to increase inventory levels in the first nine
months of fiscal 2007 to facilitate switching of suppliers to lower cost
suppliers, primarily in China, the realignment efforts and to support increasing
operations in our Suzhou, China manufacturing facility.  Cash flows
from operations for the nine months ended June 30, 2008 also included payments
to our pension plans of $949.  For the nine months ended June 30,
2007, we contributed $1,232 to our pension plans.  We believe we will
continue to generate positive cash from operations.





Cash used
in investing activities was $1,058 for the nine months ended June 30, 2008 and
$1,611 for the nine months ended June 30, 2007 and was comprised primarily of
purchases of equipment for both periods.  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 $828 for the nine months ended June 30, 2008,
compared to cash used in financing activities of $4,342 for the nine months
ended June 30, 2007.  The use of cash for financing activities for the
first nine months of both fiscal 2008 and 2007 primarily relates to payments on
debt, slightly offset by proceeds from the exercise of stock
options.





At June
30, 2008, we had $8,000 available under our revolving credit facility with
Merrill Lynch plus cash and cash equivalents of $6,937.  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.





Contractual
Obligations as of June 30, 2008





At June 30, 2008, our contractual
obligations consisted of operating lease obligations and a license
agreement.  We do not have any material letters of credit or debt
guarantees outstanding at June 30, 2008.  Maturities of these
contractual obligations consist of the following:





Payments
      due by periodTotal
            
            
            Less
      than 1 year
            
            
            1
      – 3
              years
            
            
            3
      – 5
              years
            
            
            More
      than 5 yearsOperating
      leases
            
            $
            1,970
            
            
            $
            548
            
            
            $
            1,416
            
            
            $
            6
            
            
            $
            -MMT
      license - minimum royalties
            
            
            336
            
            
            
            36
            
            
            
            150
            
            
            
            150
            
            
            
            -$
            2,306
            
            
            $
            584
            
            
            $
            1,566
            
            
            $
            156
            
            
            $
            -





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 has net obligations at June 30, 2008 related
to its pension plans and post-retirement medical plan of $374 and $3,917,
respectively.  We funded $949 to our pension plans during the first
nine months of fiscal 2008 compared to $1,232 during the first nine months of
fiscal 2007.  We expect to make payments to our pension plans of $358
throughout the rest of fiscal 2008.





Item3.  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.  Interest rates under the agreements are
  variable and are based on the election of the Company of either a LIBOR rate
  or Prime rate.

- As of
  June 30, 2008, there were no outstanding balances on both the term loan and
  the revolving loan.  The Company does not believe that 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.



21




Foreign
Currency Risk:


- We sell
  our products to customers in the heavy truck, transit bus and off-road
  equipment industries.  For the nine months ended June 30, 2008 and
  2007, the Company had foreign sales of approximately 46% and 40% of net sales,
  respectively.  All worldwide sales in the first nine months of
  fiscal 2008 and 2007, with the exception of $2,158 and $600, respectively,
  were denominated in U.S. dollars.  During fiscal 2005, we
  established a manufacturing facility in Suzhou, China and we opened sales
  offices in Shanghai, China and Ismaning (which is near Munich),
  Germany.  We purchase components internationally for use in both our
  products whose sales are denominated in U.S. dollars and other
  currencies.  Although the Company is expanding its international
  exposure, it does not believe that changes in future exchange rates would have
  a material effect on its financial position, results of operations, or cash
  flows at this time.  As a result, the Company has not entered into
  forward exchange or option contracts for transactions to hedge against foreign
  currency risk.  The Company will continue to assess its foreign
  currency risk as its international operations 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, short-term investments, accounts receivable, accounts
  payable and long-term obligations.  The Company’s cash and cash
  equivalents, accounts receivable and accounts payable balances are short-term
  in nature, and, thus, the Company believes they are not exposed to material
  investment risk.

Item4.  Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





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





Changes
in Internal Controls





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





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





22




Part
II.  Other Information





Item1.    Legal Proceedings





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





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).  The complaint seeks an
unspecified amount of damages on behalf of the class.  During the
second quarter of fiscal 2007, the Oklahoma district court granted the
plaintiffs class action status.  The Company and Ford appealed the
District Court’s class certification ruling to the Court of Civil Appeals of the
State of Oklahoma (“Appeals Court”) and during the second quarter of fiscal
2008, the Appeals Court, in a 3-to-0 decision, reversed the District Court’s
ruling and decertified the nationwide class.  As permitted under
Oklahoma law, the plaintiffs filed for a re-hearing by the Appeals Court and
during the third quarter of fiscal 2008, the Appeals Court denied the motion for
re-hearing.  The plaintiffs have since appealed the Court of Civil
Appeals decision to the Oklahoma Supreme Court.  The Company continues
to believe the claim to be without merit and intends to continue to vigorously
defend against this action.  Although the Appeals Court decision is
favorable to the Company, there can be no assurance that the ultimate 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 cannot reasonably estimate the possible
loss or range of loss at this time.  In addition, the Company has
incurred and may incur future litigation expenses in defending this
litigation.





Item1A.  Risk Factors





There have been no significant changes
in risk factors for the quarter ended June 30, 2008.  See the
information set forth in the section entitled “Risk Factors” in our Annual
Report on Form 10-K for the fiscal year ended September 30, 2007.





Item2.    Unregistered Sales of Equity
Securities and Use of Proceeds





None





Item3.    Defaults Upon Senior
Securities





None





Item4.    Submission of Matters to a Vote
of Security Holders





None





Item5.    Other Information





None





Item6.    Exhibits





2.01
            
            Asset
      Purchase Agreement, dated as of September 30, 2003, by and among the
      Registrant, Teleflex Incorporated and Teleflex Automotive Incorporated.
      (Incorporated by
      reference to Exhibit 2.1 to the Registrant’s current report on Form 8-K
      filed on December 9, 2003)3.01(a)
            
            Certificate
      of Incorporation of the Registrant, as amended. (Incorporated by reference to
      Exhibit 3.01 (a) to the Registrant’s quarterly report on Form 10-Q for the
      quarter ended December 31,
2006)




23




3.01(b)
            
            Certificate
      of Amendment to Certificate of Incorporation of the Registrant, dated
      February 27, 1995. (Incorporated by reference to
      Exhibit 3.01 (b) to the Registrant’s quarterly report on Form 10-Q for the
      quarter ended December 31, 2006)3.01(c)
            
            Certificate
      of Amendment to Certificate of Incorporation of the Registrant, dated
      October 28, 2004. (Incorporated by reference to
      Exhibit 3.01 (c) to the Registrant’s quarterly report on Form 10-Q for the
      quarter ended December 31, 2006)3.01(d)
            
            Certificate
      of Amendment to Certificate of Incorporation of the Registrant, dated
      February 22, 2005. (Incorporated by reference to
      Exhibit 3.01 (d) to the Registrant’s quarterly report on Form 10-Q for the
      quarter ended December 31, 2006)3.01(e)
            
            Certificate
      of Amendment to Certificate of Incorporation of the Registrant, dated
      March 2, 2006. (Incorporated by reference to
      Exhibit 3.01 (e) to the Registrant’s quarterly report on Form 10-Q for the
      quarter ended December 31, 2006)3.02
            
            Restated
      By-Laws of the Registrant, as amended July 1, 2002. (Incorporated by reference to
      Exhibit 3.6 to the Registrant’s quarterly report on Form 10-Q,
      Commission File No. 000-18083,  for the quarter ended
      June 30, 2002)4.01
            
            Specimen
      Unit Certificate (including Specimen Certificate for shares of Common
      Stock and Specimen Certificate for the Warrants). (Incorporated by reference to
      Exhibits 1.1 and 1.2 to the Registrant’s Registration Statement on
      Form 8-A, Commission File No. 0-18083, filed with the Commission on
      November 1, 1989)10.01
            
            The Restated 1993 Stock Option Plan of the
      Registrant (Filed
      herewith)31.01
            
            Certification of Chief Executive Officer
      required by Rule 13a-14(a) or Rule 15d-14(a) (Filed
      herewith)31.02
            
            Certification of Chief Financial Officer
      required by Rule 13a-14(a) or Rule 15d-14(a) (Filed
      herewith)32.01
            
            Certification of Patrick W. Cavanagh pursuant
      to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 (Filed
      herewith)32.02
            
            Certification of Dennis E. Bunday pursuant to
      18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 (Filed
      herewith)





24





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 7,
      2008
            
            /s/ PATRICK W.
      CAVANAGHPatrick W.
      CavanaghPresident
      and Chief Executive OfficerDate: August 7,
      2008
            
            /s/ DENNIS E
      BUNDAYDennis E.
      BundayChief
      Financial Officer





































25