UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM
10-Q








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


SECURITIES
EXCHANGE ACT OF 1934





For
the quarterly period ended: March 31, 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
            
            84-1099587(State or other
      jurisdiction of
              incorporation or
      organization)
            
            (I.R.S. Employer
      Identification No.)14100 SW 72nd
      Avenue,
              Portland,
      Oregon
            
            97224(Address of
      principal executive office)
            
            (zip
      code)





(503)
684-8600


(Registrant's
telephone number, including area code)





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





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)


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


at April
30, 2008: 7,527,012




Table of Contents


Williams
Controls, Inc.


March
31, 2008


Table
of Contents











Page
              NumberPart
      I.  Financial InformationItem
      1. Financial Statements (unaudited)Condensed Consolidated Balance Sheets, March 31, 2008
      and
              September 30, 2007
            1Condensed Consolidated Statements of Operations, three
      and six months
              ended March 31, 2008 and 2007
            2Condensed Consolidated Statements of Cash Flows, six
      months
              ended March 31, 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
            22Item 4.  Controls and
    Procedures
            23Part
      II.  Other InformationItem 1.    Legal
      Proceedings
            24Item 1A.  Risk Factors
            24Item 2.    Unregistered Sales of Equity
      Securities and Use of Proceeds
            24Item 3.    Defaults Upon Senior
      Securities
            25Item 4.    Submission of Matters to a
      Vote of Security Holders
            25Item 5.    Other
      Information
            25Item 6.    Exhibits
            25Signature Page
            27





Table of Contents


PART
I – FINANCIAL INFORMATION





Item
1.  Financial Statements


Williams Controls, Inc.


Condensed
Consolidated Balance Sheets


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


(Unaudited)





March
      31,
              2008
            
            
            September
      30, 2007ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            3,250
            
            
            $
            1,621Short-term
      investments
            
            
            381
            
            
            
            -Trade
      accounts receivable, less allowance of
              $49
      and $33 at March 31, 2008 and September 30,
              2007,
      respectively
            
            
            10,629
            
            
            
            8,054Other
      accounts receivable
            
            
            645
            
            
            
            1,656Inventories
            
            
            8,069
            
            
            
            9,152Deferred
      income taxes
            
            
            544
            
            
            
            486Prepaid
      expenses and other current assets
            
            
            628
            
            
            
            297Total
      current assets
            
            
            24,146
            
            
            
            21,266Property,
      plant and equipment, net
            
            
            8,852
            
            
            
            8,953Deferred
      income taxes
            
            
            1,514
            
            
            
            1,461Other
      assets, net
            
            
            560
            
            
            
            623Total
      assets
            
            $
            35,072
            
            
            $
            32,303LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
            
            $
            3,787
            
            
            $
            3,811Accrued
      expenses
            
            
            4,975
            
            
            
            4,983Current
      portion of employee benefit obligations
            
            
            288
            
            
            
            288Current
      portion of long-term debt
            
            
            -
            
            
            
            1,000Total
      current liabilities
            
            
            9,050
            
            
            
            10,082Long-term
      Liabilities:Employee
      benefit obligations
            
            
            4,438
            
            
            
            4,803Other
      long-term liabilities
            
            
            259
            
            
            
            249Commitments
      and contingenciesStockholders’
      Equity:Preferred
      stock ($.01 par value, 50,000,000 authorized) Series C
              (0
      issued and outstanding at March 31, 2008 and September 30,
              2007)
            
            
            -
            
            
            
            -Common
      stock ($.01 par value, 12,500,000 authorized; 7,527,012
              and
      7,495,482 issued and outstanding at March 31, 2008
      and  September 30, 2007, respectively)
            
            
            75
            
            
            
            75Additional
      paid-in capital
            
            
            35,364
            
            
            
            34,899Accumulated
      deficit
            
            
            (8,923
            )
            
            
            (12,477
            )Treasury
      stock (21,700 shares at March 31, 2008 and September 30,
              2007)
            
            
            (377
            )
            
            
            (377
            )Accumulated
      other comprehensive loss
            
            
            (4,814
            )
            
            
            (4,951
            )Total
      stockholders’ equity
            
            
            21,325
            
            
            
            17,169Total
      liabilities and stockholders’ equity
            
            $
            35,072
            
            
            $
            32,303









1
 Table of Contents


Williams Controls, Inc.


Condensed
Consolidated Statements of Operations


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


(Unaudited)





Three
      Months Ended
              March
      31,
            
            
            Six
      Months Ended
              March
      31,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      sales
            
            $
            16,484
            
            
            $
            18,309
            
            
            $
            31,456
            
            
            $
            36,751Cost
      of sales
            
            
            10,858
            
            
            
            12,174
            
            
            
            20,943
            
            
            
            24,325Gross
      profit
            
            
            5,626
            
            
            
            6,135
            
            
            
            10,513
            
            
            
            12,426Operating
      expenses:Research
      and development
            
            
            992
            
            
            
            838
            
            
            
            2,001
            
            
            
            1,668Selling
            
            
            659
            
            
            
            572
            
            
            
            1,337
            
            
            
            1,092Administration
            
            
            1,363
            
            
            
            1,382
            
            
            
            2,765
            
            
            
            2,655Gain
      from settlement of environmental claims
            
            
            (1,010
            )
            
            
            -
            
            
            
            (1,010
            )
            
            
            -Realignment
      of operations
            
            
            -
            
            
            
            257
            
            
            
            -
            
            
            
            433Total
      operating expenses
            
            
            2,004
            
            
            
            3,049
            
            
            
            5,093
            
            
            
            5,848Operating
      income
            
            
            3,622
            
            
            
            3,086
            
            
            
            5,420
            
            
            
            6,578Other
      (income) expense:Interest
      income
            
            
            (11
            )
            
            
            (25
            )
            
            
            (32
            )
            
            
            (61
            )Interest
      expense
            
            
            42
            
            
            
            209
            
            
            
            131
            
            
            
            467Other
      income, net
            
            
            (73
            )
            
            
            (259
            )
            
            
            (108
            )
            
            
            (863
            )Total
      other income
            
            
            (42
            )
            
            
            (75
            )
            
            
            (9
            )
            
            
            (457
            )Income
      before income taxes
            
            
            3,664
            
            
            
            3,161
            
            
            
            5,429
            
            
            
            7,035Income
      tax expense
            
            
            1,184
            
            
            
            1,107
            
            
            
            1,793
            
            
            
            2,438Net
      income
            
            $
            2,480
            
            
            $
            2,054
            
            
            $
            3,636
            
            
            $
            4,597Net
      income per common share – basic
            
            $
            0.33
            
            
            $
            0.28
            
            
            $
            0.48
            
            
            $
            0.62Weighted
      average shares used in per share
              calculation
      – basic
            
            
            7,518,217
            
            
            
            7,460,709
            
            
            
            7,513,488
            
            
            
            7,450,112Net
      income per common share – diluted
            
            $
            0.32
            
            
            $
            0.27
            
            
            $
            0.47
            
            
            $
            0.60Weighted
      average shares used in per share
              calculation
      – diluted
            
            
            7,743,835
            
            
            
            7,735,525
            
            
            
            7,749,198
            
            
            
            7,718,489





2
 Table of Contents


Williams Controls, Inc.


Condensed
Consolidated Statements of Cash Flows


(Dollars
in thousands)


(Unaudited)








Six
      Months
              Ended
      March 31,2008
            
            
            2007Cash
      flows from operating activities:Net
      income
            
            $
            3,636
            
            
            $
            4,597Adjustments
      to reconcile net income to net cash provided by
              operating
      activities:Depreciation
      and amortization
            
            
            905
            
            
            
            971Deferred
      income taxes
            
            
            (69
            )
            
            
            (120
            )Share-based
      compensation
            
            
            318
            
            
            
            252Gain
      on settlement of liabilities
            
            
            -
            
            
            
            (840
            )Gain
      from settlement of environmental claims
            
            
            (327
            )
            
            
            -Gain
      from disposal of fixed assets
            
            
            (24
            )
            
            
            (1
            )Changes
      in operating assets and liabilitiesReceivables,
      net
            
            
            (1,564
            )
            
            
            437Inventories
            
            
            1,083
            
            
            
            (538
            )Prepaid
      expenses and other current assets
            
            
            (331
            )
            
            
            (345
            )Accounts
      payable and accrued expenses
            
            
            (156
            )
            
            
            (1,537
            )Other
            
            
            (338
            )
            
            
            (337
            )Net
      cash provided by operating activities
            
            
            3,133
            
            
            
            2,539Cash
      flows from investing activities:Purchases
      of property, plant and equipment
            
            
            (676
            )
            
            
            (1,269
            )Proceeds
      from sales of property, plant and equipment
            
            
            25
            
            
            
            -Net
      cash used in investing activities
            
            
            (651
            )
            
            
            (1,269
            )Cash
      flows from financing activities:Payments
      of debt
            
            
            (1,000
            )
            
            
            (2,468
            )Net
      proceeds from exercise of stock options
            
            
            147
            
            
            
            179Net
      cash used in financing activities
            
            
            (853
            )
            
            
            (2,289
            )Net
      increase (decrease) in cash and cash equivalents
            
            
            1,629
            
            
            
            (1,019
            )Cash
      and cash equivalents at beginning of period
            
            
            1,621
            
            
            
            2,530Cash
      and cash equivalents at end of period
            
            $
            3,250
            
            
            $
            1,511Supplemental
      disclosure of cash flow information:Interest
      paid
            
            $
            90
            
            
            $
            391Income
      taxes paid
            
            $
            307
            
            
            $
            1,925








3
 Table of Contents


Williams Controls, Inc.


Notes
to Condensed Consolidated Financial Statements


Three
and Six Months ended March 31, 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 March 31, 2008 and the results of operations and cash
flows for the three and six months ended March 31, 2008 and 2007.  The
results of operations for the three and six months ended March 31, 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, allowance for doubtful
accounts, useful lives for depreciation and amortization, future cash flows
associated with the evaluation of  impairment of long-lived assets,
deferred tax assets, stock options and commitments and
contingencies.





Note
3. 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 the second quarter of fiscal
year 2006, the Company initiated a plan for realignment (“the Plan”) of its
Portland, Oregon 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 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.





4
 Table of Contents


The total costs of the Plan were
approximately $1.5 million and include 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 $257 and $433, respectively, for both the three and six months ended
March 31, 2007, which were recorded in operating expenses in the accompanying
condensed consolidated statements of operations.   No realignment
expense was recorded during the three and six months ended March 31, 2008, as
the realignment was substantially complete as of September 30,
2007.  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
      March 31,
            
            
            Six
      Months
              Ended
      March 31,2008
            
            
            2007
            
            
            2008
            
            
            2007Balance
      at beginning of period
            
            $
            38
            
            
            $
            331
            
            
            $
            86
            
            
            $
            226Payments
            
            
            (36
            )
            
            
            -
            
            
            
            (84
            )
            
            
            -Additional
      accruals
            
            
            -
            
            
            
            151
            
            
            
            -
            
            
            
            256Balance
      at end of period
            
            $
            2
            
            
            $
            482
            
            
            $
            2
            
            
            $
            482





Note
4. 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.  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.





5
 Table of Contents


As of March 31, 2008, there was $1,718
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.  For the three and six months ended March
31, 2008, the Company’s total share-based compensation expense was $169 ($139
net of tax) and $318 ($265 net of tax), respectively.  For the three
months ended March 31, 2008, share-based compensation expense included $25 in
cost of sales, $17 in research and development, $16 in selling and the
remaining $111 in administration expense in the accompanying consolidated
statement of operations.  For the six months ended March 31, 2008,
share-based compensation expense included $50 in cost of sales, $33 in research
and development, $33 in selling and the remaining $202 in administration
expense.  For the three and six months ended March 31, 2007, the
Company’s total share-based compensation expense was $139 ($122 net of tax) and
$252 ($219 net of tax), respectively.  For the three months ended
March 31, 2007, share-based compensation expense included $11 in cost of
sales, $2 in research and development, $14 in selling and the remaining
$112 in administration expense.  For the six months ended March 31,
2007, share-based compensation expense included $26 in cost of sales, $11 in
research and development, $28 in selling and the remaining $187 in
administration expense.





The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants issued during the three and six months ended March
31, 2008 and 2007.





Three
      Months
              Ended
      March 31,
            
            Six
      Months
              Ended
      March 31,2008
            
            2007
            
            2008
            
            2007Risk-free
      interest rate
            
            3.07%
            
            4.53%
            
            3.07%
            
            4.55%Expected
      dividend yield
            
            0%
            
            0%
            
            0%
            
            0%Expected
      term
            
            5.8
      years
            
            6.3
      years
            
            5.8
      years
            
            6.4
      yearsExpected
      volatility
            
            68%
            
            82%
            
            68%
            
            84%





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 and is calculated using the simplified method under SAB 107,
which expresses the view of the SEC Staff regarding interaction between SFAS No.
123R and certain SEC rules and regulations and provides the Staff’s views
regarding the valuation of share-based payment arrangements for public
companies.  Expected volatilities are based on the historical
volatility of the Company’s common stock.





The
following table summarizes stock options outstanding as of March 31, 2008 as
well as activity during the six month period then ended.





Shares
            
            
            Weighted
      Average Exercise PriceOutstanding
      at September 30, 2007
            
            
            622,785
            
            
            $
            8.40Granted
            
            
            10,996
            
            
            
            15.27Exercised
            
            
            (31,530
            )
            
            
            4.66Forfeited
            
            
            (20,842
            )
            
            
            11.66Outstanding
      at March 31, 2008
            
            
            581,409
            
            
            
            8.61Exercisable
      at March 31, 2008
            
            
            355,919
            
            
            $
            6.44





At March
31, 2008, the weighted average remaining contractual term of options outstanding
and options exercisable was 6.7 years and 5.9 years, respectively.





The
aggregate intrinsic value of options outstanding and options exercisable at
March 31, 2008 was $3,416 and $2,653, 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 March 31, 2007 was
$6,140 and $3,481, respectively.  The weighted average grant date fair
value of stock options granted during the three months ended March 31, 2008 and
2007 was $9.47 and $13.10 per share, respectively.  The weighted
average grant date fair value of stock options granted during the six months
ended March 31, 2008 and 2007 was $9.47 and $12.18 per share,
respectively.  The intrinsic value of all stock options exercised
during the three and six months ended March 31, 2008 was $154 and $371,
respectively.  Cash received from the exercise of stock options for
the three and six months ended March 31, 2008 was $76 and $147,
respectively.




6
 Table of Contents


The
intrinsic value of all stock options exercised during the three and six months
ended March 31, 2007 was $303 and $411, respectively.  Cash received
from the exercise of stock options for the three and six months ended March 31,
2007 was $135 and $179, respectively.





Note
5. Comprehensive Income





SFAS No.
130, “Reporting Comprehensive Income," requires companies to report a measure of
all changes in equity except those resulting from investments by owners and
distributions to owners.  Total comprehensive income for the three
months ended March 31, 2008 and 2007 was $2,576 and $2,066, respectively, and
for the six months ended March 31, 2008 and 2007 was $3,773 and $4,621,
respectively, and consisted primarily of net income and foreign currency
translation adjustments.  As of March 31, 2008, accumulated other
comprehensive loss was $4,814 and consisted of accumulated benefit obligations
in excess of the plan assets for both the hourly employees pension plan and the
salaried employees pension plan, unrealized gains (losses) on available-for-sale
securities and the effect of foreign currency translation
adjustments.





Note
6. 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:





Three
      Months
              Ended
      March 31, 2008
            
            
            Three
      Months
              Ended
      March 31, 2007Income
            
            
            Shares
            
            
            Per
      Share Amount
            
            
            Income
            
            
            Shares
            
            
            Per
      Share AmountBasic
      EPS –
            
            $
            2,480
            
            
            
            7,518,217
            
            
            $
            0.33
            
            
            $
            2,054
            
            
            
            7,460,709
            
            
            $
            0.28Effect
      of dilutive securities –Stock
      options
            
            
            -
            
            
            
            225,618
            
            
            
            
            
            
            
            -
            
            
            
            274,816Diluted
      EPS –
            
            $
            2,480
            
            
            
            7,743,835
            
            
            $
            0.32
            
            
            $
            2,054
            
            
            
            7,735,525
            
            
            $
            0.27





Six
      Months
              Ended
      March 31, 2008
            
            
            Six
      Months
              Ended
      March 31, 2007Income
            
            
            Shares
            
            
            Per
      Share Amount
            
            
            Income
            
            
            Shares
            
            
            Per
      Share AmountBasic
      EPS –
            
            $
            3,636
            
            
            
            7,513,488
            
            
            $
            0.48
            
            
            $
            4,597
            
            
            
            7,450,112
            
            
            $
            0.62Effect
      of dilutive securities –Stock
      options
            
            
            -
            
            
            
            235,710
            
            
            
            
            
            
            
            -
            
            
            
            268,377Diluted
      EPS –
            
            $
            3,636
            
            
            
            7,749,198
            
            
            $
            0.47
            
            
            $
            4,597
            
            
            
            7,718,489
            
            
            $
            0.60





For the
three and six months ended March 31, 2008, the Company had options covering
111,658 and 100,662 shares, respectively, that were not considered in the
diluted EPS calculation since they would have been antidilutive.  For
the three and six months ended March 31, 2007, the Company had options and
warrants covering 46,912 shares that were not considered in the diluted EPS
calculation since they would have been antidilutive.

















7
 Table of Contents


Note
7. Inventories





Inventories,
net of reserves, consist of the following:





March
      31,
              2008
            
            
            September
      30,
              2007Raw
      materials
            
            $
            5,378
            
            
            $
            7,057Work
      in process
            
            
            63
            
            
            
            66Finished
      goods
            
            
            2,628
            
            
            
            2,029$
            8,069
            
            
            $
            9,152





Note
8. Settlement of Accounts Payable





Included
in the accompanying consolidated balance sheet is approximately $155 of accounts
payable related to closed insolvent subsidiaries of the Company.  In
accordance with SFAS No. 140 “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities,” a debtor can only relieve
itself of a liability if it has been extinguished.  A liability is
considered extinguished if (a) the debtor pays the creditor and is relieved of
its obligation for the liability or (b) the debtor is legally released from
being the primary obligor under the liability, either judicially or by the
creditor.  During the three and six months ended March 31, 2007, the
Company was judicially released from and reversed $251 and $840, respectively,
of old accounts resulting in a gain, which has been recorded in other (income)
expense in the accompanying condensed consolidated statements of
operations.  No amounts were released and reversed during the three
and six months ended March 31, 2008.  The Company will continue to
monitor its ability to reverse amounts in future periods based on the
recognition of the liabilities being judicially released in accordance with SFAS
No. 140.  If judicially released, the Company anticipates reversing
$90 in fiscal 2010; and a total of $65 in fiscal 2011 – 2016.





Note
9. Debt





As of March 31, 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 March 31, 2008 and September 30,
2007.





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





March
      31, 2008
            
            
            September
      30, 2007Revolving
      credit facility due September 29, 2009, bearing interest at a variable
      rate.
            
            $
            -
            
            
            $
            -Term
      loan due September 29, 2009, balance bearing
              interest
      at a variable rate.
            
            
            -
            
            
            
            1,000-
            
            
            
            1,000Less
      current portion
            
            
            -
            
            
            
            (1,000
            )$
            -
            
            
            $
            -




8
 Table of Contents


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 six months ended March 31, 2008
and 2007:





Three
      Months
              Ended
      March 31,
            
            
            Six
      Months
              Ended
      March 31,2008
            
            
            2007
            
            
            2008
            
            
            2007Balance
      at beginning of period
            
            $
            1,723
            
            
            $
            1,834
            
            
            $
            1,712
            
            
            $
            1,720Payments
            
            
            (713
            )
            
            
            (133
            )
            
            
            (891
            )
            
            
            (240
            )Warranty
      claims accrued
            
            
            253
            
            
            
            198
            
            
            
            442
            
            
            
            419Adjustments
      in estimates
            
            
            -
            
            
            
            239
            
            
            
            -
            
            
            
            239Balance
      at end of period
            
            $
            1,263
            
            
            $
            2,138
            
            
            $
            1,263
            
            
            $
            2,138





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 has been
recorded in cost of sales in the accompanying condensed consolidated statement
of operations.





Included
in the warranty liability at March 31, 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 Plan
            
            
            Hourly PlanThree
      Months
              Ended
      March 31,
            
            
            Three
      Months
              Ended
      March 31,2008
            
            
            2007
            
            
            2008
            
            
            2007Service
      cost
            
            $
            -
            
            
            $
            -
            
            
            $
            16
            
            
            $
            29Interest
      cost
            
            
            74
            
            
            
            73
            
            
            
            115
            
            
            
            112Expected
      return on plan assets
            
            
            (77
            )
            
            
            (68
            )
            
            
            (118
            )
            
            
            (100
            )Amortization
      of prior service cost
            
            
            -
            
            
            
            -
            
            
            
            5
            
            
            
            12Amortization
      of loss
            
            
            16
            
            
            
            23
            
            
            
            42
            
            
            
            62Net
      periodic benefit cost
            
            $
            13
            
            
            $
            28
            
            
            $
            60
            
            
            $
            115








9
 Table of Contents




Six
      Months
              Ended
      March 31,
            
            
            Six
      Months
              Ended
      March 31,2008
            
            
            2007
            
            
            2008
            
            
            2007Service
      cost
            
            $
            -
            
            
            $
            -
            
            
            $
            32
            
            
            $
            58Interest
      cost
            
            
            148
            
            
            
            146
            
            
            
            230
            
            
            
            224Expected
      return on plan assets
            
            
            (154
            )
            
            
            (136
            )
            
            
            (236
            )
            
            
            (200
            )Amortization
      of prior service cost
            
            
            -
            
            
            
            -
            
            
            
            10
            
            
            
            24Amortization
      of loss
            
            
            32
            
            
            
            46
            
            
            
            84
            
            
            
            124Net
      periodic benefit cost
            
            $
            26
            
            
            $
            56
            
            
            $
            120
            
            
            $
            230





The
Company expects total contributions to its pension plans in fiscal 2008 to be
$1,307.  During the six months ended March 31, 2008, the Company has
made contributions of $456.





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 six months ended March 31,
2008 and 2007.





Components
      of Net Periodic Benefit Cost:Post-Retirement
      PlanThree
      Months
              Ended
      March 31,
            
            
            Six
      Months
              Ended
      March 31,2008
            
            
            2007
            
            
            2008
            
            
            2007Service
      cost
            
            $
            1
            
            
            $
            2
            
            
            $
            2
            
            
            $
            4Interest
      cost
            
            
            59
            
            
            
            55
            
            
            
            118
            
            
            
            110Amortization
            
            
            (8
            )
            
            
            (6
            )
            
            
            (16
            )
            
            
            (12
            )Net
      periodic benefit cost
            
            $
            52
            
            
            $
            51
            
            
            $
            104
            
            
            $
            102





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
 Table of Contents


Note
13. Segment Information





The
Company accounts for its segments in accordance with SFAS No. 131 “Disclosures
about Segments of an Enterprise and Related Information”.  During the
three and six months ended March 31, 2008 and 2007, the Company operated in two
geographic reportable segments as shown in the table below.





Three
      Months
              Ended
      March 31,
            
            
            Six
      Months
              Ended
      March 31,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenue
      – External Customers:United
      States
            
            $
            16,012
            
            
            $
            18,184
            
            
            $
            30,747
            
            
            $
            36,486China
            
            
            472
            
            
            
            125
            
            
            
            709
            
            
            
            265$
            16,484
            
            
            $
            18,309
            
            
            $
            31,456
            
            
            $
            36,751Revenue
      – Intersegments:United
      States
            
            $
            478
            
            
            $
            861
            
            
            $
            642
            
            
            $
            1,344China
            
            
            3,189
            
            
            
            1,786
            
            
            
            6,011
            
            
            
            4,218Other
            
            
            166
            
            
            
            153
            
            
            
            304
            
            
            
            269Eliminations
            
            
            (3,833
            )
            
            
            (2,800
            )
            
            
            (6,957
            )
            
            
            (5,831
            )$
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Income
      before income taxes:United
      States
            
            $
            3,172
            
            
            $
            3,253
            
            
            $
            4,842
            
            
            $
            7,057China
            
            
            341
            
            
            
            (153
            )
            
            
            468
            
            
            
            41Other
            
            
            151
            
            
            
            61
            
            
            
            119
            
            
            
            (63
            )$
            3,664
            
            
            $
            3,161
            
            
            $
            5,429
            
            
            $
            7,035





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 March 31, 2008,
the total liability recorded is $1,018 (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 other prior owners 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.  The Company recorded these shares as available-for-sale
securities in short-term investments in the accompanying condensed consolidated
balance sheets.  A gain of $1,010 was recorded in operating expenses
in the condensed consolidated financial statements for the receipt of the cash
and stock.  On March 31, 2008, the value of the Dana shares was
reduced to $258 based on the share price on that date.  The Company
believes that even with this resolution of these claims against the prior
operators and owner of the property, the Company will be liable for some portion
of the ultimate costs and it believes that the liability recorded at March 31,
2008 will be sufficient to cover the remaining costs.





11
 Table of Contents


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).  During the second
quarter of fiscal 2007, the Oklahoma district court granted the plaintiffs class
action status.  The complaint seeks an unspecified amount of damages
on behalf of the class.  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”).  On March 21, 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
have filed for a re-hearing by the Appeals Court and on April 18, 2008 the
Appeals Court denied the motion for re-hearing.  Under Oklahoma law,
the plaintiffs have the right to appeal to the Oklahoma Supreme Court, however,
as of the date of this filing the plaintiffs have not done so.  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
 Table of Contents


Williams
Controls, Inc.





Item 2.  Management's Discussion and Analysis of Financial
Condition and Results of Operations


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





This
section summarizes the significant factors affecting our consolidated results of
operations, financial condition and liquidity position for the three and six
months ended March 31, 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 have announced
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
 Table of Contents


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
 Table of Contents


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
 Table of Contents


Results
of Operations





Financial
Summary


(Dollars in
Thousands)





Three
      Months
              Ended
      March 31,
            
            
            Six
      Months
              Ended
      March 31,2008
            
            
            2007
            
            
            %
      Change
            
            
            2008
            
            
            2007
            
            
            %
      ChangeNet
      sales
            
            $
            16,484
            
            
            $
            18,309
            
            
            
            (10.0%)
            
            
            $
            31,456
            
            
            $
            36,751
            
            
            
            (14.4%)Cost
      of sales
            
            
            10,858
            
            
            
            12,174
            
            
            
            (10.8%)
            
            
            
            20,943
            
            
            
            24,325
            
            
            
            (13.9%)Gross
      profit
            
            
            5,626
            
            
            
            6,135
            
            
            
            (8.3%)
            
            
            
            10,513
            
            
            
            12,426
            
            
            
            (15.4%)Research
      and development
            
            
            992
            
            
            
            838
            
            
            
            18.4%
            
            
            
            2,001
            
            
            
            1,668
            
            
            
            20.0%Selling
            
            
            659
            
            
            
            572
            
            
            
            15.2%
            
            
            
            1,337
            
            
            
            1,092
            
            
            
            22.4%Administration
            
            
            1,363
            
            
            
            1,382
            
            
            
            (1.4%)
            
            
            
            2,765
            
            
            
            2,655
            
            
            
            4.1%Gain
      from settlement of environmental claims
            
            
            (1,010
            )
            
            
            -
            
            
            NM
            
            
            
            (1,010
            )
            
            
            -
            
            
            NMRealignment
      of operations
            
            
            -
            
            
            
            257
            
            
            NM
            
            
            
            -
            
            
            
            433
            
            
            NMOperating
      income
            
            $
            3,622
            
            
            $
            3,086
            
            
            
            17.4%
            
            
            
            5,420
            
            
            
            6,578
            
            
            
            (17.6%)As
      a percentage of net sales:Cost
      of sales
            
            
            65.9%
            
            
            
            66.5%
            
            
            
            
            
            
            
            66.6%
            
            
            
            66.2%Gross
      margin
            
            
            34.1%
            
            
            
            33.5%
            
            
            
            
            
            
            
            33.4%
            
            
            
            33.8%Research
      and development
            
            
            6.0%
            
            
            
            4.6%
            
            
            
            
            
            
            
            6.4%
            
            
            
            4.5%Selling
            
            
            4.0%
            
            
            
            3.1%
            
            
            
            
            
            
            
            4.3%
            
            
            
            3.0%Administration
            
            
            8.3%
            
            
            
            7.5%
            
            
            
            
            
            
            
            8.8%
            
            
            
            7.2%Gain
      from settlement of
              environmental
      claims
            
            
            (6.1%)
            
            
            
            -
            
            
            
            
            
            
            
            (3.2%)
            
            
            
            -Realignment
      of operations
            
            
            -
            
            
            
            1.4%
            
            
            
            
            
            
            
            -
            
            
            
            1.2%Operating
      income
            
            
            22.0%
            
            
            
            16.9%
            
            
            
            
            
            
            
            17.2%
            
            
            
            17.9%





Comparative
      – Three months ended March 31, 2008 and
2007


NM
= Not Meaningful


Percent
      ChangeFor
      the Three Months Ended March 31:
            
            2008
            
            2007
            
            2007
      to 2008Net
      sales
            
            $16,484
            
            $18,309
            
            (10.0%)





Net sales
decreased $1,825 in the second quarter of fiscal 2008 compared to the second
quarter of fiscal 2007, primarily due to an overall decrease in the build rates
of heavy trucks in the North American market.  In that market, sales
were down 43% when compared to the same quarter in fiscal 2007.  The
Company’s share of this market and unit pricing remained essentially unchanged
from the prior year.  Sales to our European truck customers increased
approximately 35% over the prior year quarter and sales volumes in the Asia
market increased 84% on a quarter over quarter basis.  The combination
of these increases helped to offset a portion of the decline from the North
American truck market.  Net sales in the world-wide off-road market
declined approximately 13%.  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; however, competitive pricing may continue to reduce
per unit pricing.  A 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 into the
second quarter of fiscal 2008.  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
in line with the 2007 calendar year production levels.  As this
production decline has been attributed to the change in emission standards, the
Company anticipates that North American truck production volumes will increase
in subsequent years, although not until 2009 and potentially not to the 2006
levels.




16
 Table of Contents




Percent
      ChangeFor
      the Three Months Ended March 31:
            
            2008
            
            2007
            
            2007
      to 2008Gross
      profit
            
            $5,626
            
            $6,135
            
            (8.3%)





Gross
profit was $5,626, or 34.1% of net sales in the second quarter of 2008, a
decrease of $509 compared to the gross profit of $6,135, or 33.5% of net sales,
in the comparable fiscal 2007 period.





The
decrease in gross profit in the second quarter of fiscal 2008 is primarily
driven by the 43% 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 3 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 six months of fiscal
2008, gross profit was negatively impacted by higher purchase prices for certain
raw materials.  Gross profit was negatively impacted in the second
quarter of fiscal 2007 due to an increase in warranty liability of $239, as
noted in Note 10 to our unaudited condensed consolidated financial
statements.  Overhead expenses remained relatively flat between
quarters, but increased as a percentage of sales during the quarter ended March
31, 2008 due to lower sales volumes.





Percent
      ChangeFor
      the Three Months Ended March 31:
            
            2008
            
            2007
            
            2007
      to 2008Research
      and development
            
            $992
            
            $838
            
            18.4%





Research
and development expenses increased $154 for the second 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
second quarter over last year’s second 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 March 31:
            
            2008
            
            2007
            
            2007
      to 2008Selling
            
            $659
            
            $572
            
            15.2%





Selling
expenses increased $87 during the three months ended March 31, 2008 as compared
with the three months ended March 31, 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 March 31:
            
            2008
            
            2007
            
            2007
      to 2008Administration
            
            $1,363
            
            $1,382
            
            (1.4%)





Administration
expenses for the three months ended March 31, 2008 decreased $19 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 offset by an increase in expenses as
a result of designing changes to our compensation structure, employee
recruitment, relocation costs and increased expenses associated with our China
manufacturing facility.





Percent
      ChangeFor
      the Three Months Ended March 31:
            
            2008
            
            2007
            
            2007
      to 2008Gain
      from settlement of environmental claims
            
            ($1,010)
            
            $   -
            
            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
second quarter of fiscal 2008 the Company received cash payments totaling $683
from Dana and Blount and shares in Dana equal to approximately $327 at the time
of settlement.  The Company recorded a gain of $1,010 in operating
expenses in the condensed consolidated financial statements in the second
quarter of fiscal 2008.




17
 Table of Contents




Percent
      ChangeFor
      the Three Months Ended March 31:
            
            2008
            
            2007
            
            2007
      to 2008Realignment
      of operations
            
            $   -
            
            $257
            
            NM





The Company recorded expenses of $257
during the second quarter of fiscal 2007 related to its realignment of
operations as discussed in Note 3 of the unaudited condensed consolidated
financial statements.  No realignment expenses were recorded during
the second quarter of fiscal 2008 as the realignment was substantially complete
as of September 30, 2007.





Percent
      ChangeFor
      the Three Months Ended March 31:
            
            2008
            
            2007
            
            2007
      to 2008Interest
      income
            
            ($11)
            
            ($25)
            
            (56.0%)Interest
      expense
            
            $42
            
            $209
            
            (79.9%)





Interest
expense decreased $167 in the second quarter of fiscal 2008 as compared to the
second 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
March 31, 2008, all of our debt has been fully paid off.





Percent
      ChangeFor
      the Three Months Ended March 31:
            
            2008
            
            2007
            
            2007
      to 2008Other
      income
            
            ($73)
            
            ($259)
            
            (71.8%)





Included in other income for the three
months ended March 31, 2007 was a gain of $251 for the reversal of old accounts
payable as discussed in Note 8 of the unaudited condensed consolidated financial
statements.  No amounts were reversed in the second quarter of fiscal
2008.





Percent
      ChangeFor
      the Three Months Ended March 31:
            
            2008
            
            2007
            
            2007
      to 2008Income
      tax expense
            
            $1,184
            
            $1,107
            
            7.0%





Income
tax expense reflects an effective tax rate of 32.3% for the three months ended
March 31, 2008 compared to an effective tax rate of 35.0% 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
      – Six months ended March 31, 2007 and
2006


NM
= Not Meaningful


Percent
      ChangeFor
      the Six Months Ended March 31:
            
            2008
            
            2007
            
            2007
      to 2008Net
      sales
            
            $31,456
            
            $36,751
            
            (14.4%)





Net sales
decreased $5,295 in the first six months of fiscal 2008 compared to the first
six months of fiscal 2007, primarily due to an overall decrease in the build
rates of heavy trucks in the North American market.  In that market,
sales were down 51% 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 8%.  Sales to our European truck and
Asian customers increased approximately 31% and 36%, respectively, over the
first six 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; however, competitive pricing may
continue to reduce per unit pricing.  A 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 into the second quarter of fiscal 2008.  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.




18
 Table of Contents


These
same reports estimate that the 2008 calendar year heavy truck production levels
will remain in line with the 2007 calendar year production levels.  As
this production shift has been attributed to the change in emission standards,
the Company anticipates that North American truck production volumes will
increase in subsequent years, although not until 2009 and potentially not to the
2006 levels.





Percent
      ChangeFor
      the Six Months Ended March 31:
            
            2008
            
            2007
            
            2007
      to 2008Gross
      profit
            
            $10,513
            
            $12,426
            
            (15.4%)





Gross
profit was $10,513, or 33.4% of net sales in the first six months of 2008, a
decrease of $1,913 compared to gross profit of $12,426, or 33.8% of net sales,
in the comparable fiscal 2007 period.





The
decrease in gross profit in the second quarter of fiscal 2008 is primarily
driven by the 51% 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 3 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 six months of fiscal
2008, gross profit was negatively impacted by higher purchase prices for certain
raw materials.  Gross profit was negatively impacted in the second
quarter of fiscal 2007 due to an increase in warranty liability of $239, as
noted in Note 10 to our unaudited condensed consolidated financial
statements.





Percent
      ChangeFor
      the Six Months Ended March 31:
            
            2008
            
            2007
            
            2007
      to 2008Research
      and development
            
            $2,001
            
            $1,668
            
            20.0%





Research
and development expenses increased $333 during the first six months of fiscal
2008 when compared to the first six 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 six 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 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 and a full year of the Conceptual Development
Center.





Percent
      ChangeFor
      the Six Months Ended March 31:
            
            2008
            
            2007
            
            2007
      to 2008Selling
            
            $1,337
            
            $1,092
            
            22.4%





Selling
expenses increased $245 during the six months ended March 31, 2008 as compared
with the six months ended March 31, 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 Six Months Ended March 31:
            
            2008
            
            2007
            
            2007
      to 2008Administration
            
            $2,765
            
            $2,655
            
            4.1%





Administration
expenses for the first six months of fiscal 2008 increased $110 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
 Table of Contents




Percent
      ChangeFor
      the Six Months Ended March 31:
            
            2008
            
            2007
            
            2007
      to 2008Gain
      from settlement of environmental claims
            
            ($1,010)
            
            $   -
            
            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
second quarter of fiscal 2008 the Company received cash payments totaling $683
from Dana and Blount and shares in Dana equal to approximately $327 at the time
of settlement.  The Company recorded a gain of $1,010 in operating
expenses in the condensed consolidated financial statements.





Percent
      ChangeFor
      the Six Months Ended March 31:
            
            2008
            
            2007
            
            2007
      to 2008Realignment
      of operations
            
            $   -
            
            $433
            
            NM





The Company recorded expenses of $433
during the first six months of fiscal 2007 related to its realignment of
operations as discussed in Note 3 of the unaudited condensed consolidated
financial statements.  No realignment expenses were recorded during
the first six months of fiscal 2008 as the realignment was substantially
complete as of September 30, 2007.





Percent
      ChangeFor
      the Six Months Ended March 31:
            
            2008
            
            2007
            
            2007
      to 2008Interest
      income
            
            ($33)
            
            ($61)
            
            (45.9%)Interest
      expense
            
            $131
            
            $467
            
            (71.9%)





Interest
expense decreased $336 in the first six 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
March 31, 2008, all of our debt has been fully paid off.





Percent
      ChangeFor
      the Six Months Ended March 31:
            
            2008
            
            2007
            
            2007
      to 2008Other
      income
            
            ($108)
            
            ($863)
            
            (87.5%)





The decrease in other income is
primarily due the first six months of fiscal 2007 including a gain of $840
related to the reversal of old accounts payable related to closed insolvent
subsidiaries of the Company as discussed in Note 8 of the unaudited condensed
consolidated financial statements.   No amounts were reversed in
the second quarter of fiscal 2008.





Percent
      ChangeFor
      the Six Months Ended March 31:
            
            2008
            
            2007
            
            2007
      to 2008Income
      tax expense
            
            $1,793
            
            $2,438
            
            (26.5%)





Tax
expense reflects an effective tax rate of 33.0% for the first six months of
fiscal 2008 compared to an effective tax rate of 34.7% 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 $3,133 for the first six months of fiscal 2008, an increase of $594 from the
cash generated by operating activities of $2,539 during the first six months of
fiscal 2007.  Net income plus non-cash charges for depreciation and
stock based compensation contributed $4,859 in the first six months of fiscal
2008 and $5,820 in the first six months fiscal 2007.





Changes
in working capital items used cash of $1,306 in the first six months of fiscal
2008 and $2,320 in the first six months of 2007.  Timing of
collections on receivables and sales levels decreased cash by $1,564 in the
first six months of fiscal 2008 compared with generating cash of $437 in the
same period of fiscal 2007.




20
 Table of Contents


Inventories
were reduced by $1,083 in the first six months of fiscal 2008 compared to an
increase in inventories of $538 in the first six months of fiscal
2007.  Cash was used to increase inventory levels in the first six
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.  We feel that
inventory levels reached their maximum levels in mid fiscal 2007 and will
continue to decline.  Accounts payable and accrued expenses decreased
in the first six months of fiscal 2008 and 2007 from seasonal payments of
certain expenses.  Cash flows from operations for the six months ended
March 31, 2008 also included payments to our pension plans of
$456.  For the six months ended March 31, 2007, we contributed $612 to
our pension plans.  We believe we will continue to generate positive
cash from continuing operations.





Cash used
in investing activities was $651 for the six months ended March 31, 2008 and
$1,269 for the six months ended March 31, 2007 and was comprised solely 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 $853 for the six months ended March 31, 2008,
compared to cash used in financing activities of $2,289 for the six months ended
March 31, 2007.  The use of cash for financing activities for the
first six months of both fiscal 2008 and 2007 primarily relates to payments on
debt, slightly offset by proceeds from the exercise of stock
options.





At March
31, 2008, we had $8,000 available under our revolving credit facility with
Merrill Lynch plus cash and cash equivalents of $3,250.  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 March 31, 2008





At March 31, 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 March 31, 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
            
            $
            2,031
            
            
            $
            545
            
            
            $
            1,374
            
            
            $
            112
            
            
            $
            -MMT
      license - minimum royalties
            
            
            380
            
            
            
            80
            
            
            
            150
            
            
            
            150
            
            
            
            -$
            2,411
            
            
            $
            625
            
            
            $
            1,524
            
            
            $
            262
            
            
            $
            -





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 March 31, 2008 related
to its pension plans and post-retirement medical plan of $794 and $3,932,
respectively.  We funded $456 to our pension plans during the first
six months of fiscal 2008 compared to $612 during the first six months of fiscal
2007.  We expect to make payments to our pension plans of $851
throughout the rest of fiscal 2008.





Included
in the accompanying consolidated balance sheet is approximately $155 of accounts
payable related to closed insolvent subsidiaries of the Company.  In
accordance with SFAS No. 140 “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities,” a debtor can only relieve
itself of a liability if it has been extinguished.  A liability is
considered extinguished if (a) the debtor pays the creditor and is relieved of
its obligation for the liability or (b) the debtor is legally released from
being the primary obligor under the liability, either judicially or by the
creditor.  During the three and six months ended March 31, 2007, the
Company was judicially released from and reversed $251 and $840, respectively,
of old accounts resulting in a gain, which has been recorded in other (income)
expense in the accompanying condensed consolidated statements of
operations.  No amounts were released and reversed during the first
six months of fiscal 2008.  The Company will continue to monitor its
ability to reverse amounts in future periods based on the recognition of the
liabilities being judicially released in accordance with SFAS No.
140.  If judicially released, the Company anticipates reversing $90 in
fiscal 2010; and a total of $65 in fiscal 2011 – 2016.




21
 Table of Contents


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 is currently in the process of determining the effects of adopting this
statement in its consolidated financial statements.





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.  SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years.  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.





In June 2006, the FASB issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”),
an interpretation of SFAS No. 109, “Accounting for Income Taxes,” which
clarifies the accounting uncertainty in income taxes recognized in the financial
statements in accordance with SFAS No. 109.  The interpretation
prescribes a recognition threshold of more-likely-than-not and a measurement
attribute on all tax positions taken or expected to be taken in a tax return in
order to be recognized in the financial statements.  FIN 48 is
effective for fiscal years beginning after December 15,
2006.  Accordingly, the Company adopted FIN 48 on October 1, 2007 with
the cumulative effect of adoption being recorded in retained
earnings.  Refer to the discussion in Note 12 of the unaudited
condensed consolidated financial statements regarding the impact FIN 48 had on
the Company’s financial statements.





Item 3.  Quantitative and Qualitative Disclosures About
Market Risk





Market risk is the potential loss
arising from adverse changes in market rates and prices, such as interest rates,
foreign currency exchange rates and changes in the market value of
investments.  The Company’s primary market risk results from
fluctuations in interest rates.





Interest Rate Risk:


- The
  Company has a five-year revolving and term loan agreement with its primary
  lender Merrill Lynch.  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
  March 31, 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.

Foreign
Currency Risk:





- We sell
  our products to customers in the heavy truck, transit bus and off-road
  equipment industries.  For the six months ended March 31, 2008 and
  2007, the Company had foreign sales of approximately 46% and 38% of net sales,
  respectively.  All worldwide sales in the first six months of fiscal
  2008 and 2007, with the exception of $709 and $265, 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.



22
 Table of Contents


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.

Item 4.  Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





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





Changes
in Internal Controls





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





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


































23
 Table of Contents


Part II.  Other Information





Item 1.    Legal Proceedings





We are a
party to various pending judicial and administrative proceedings arising in the
ordinary course of business.  Our management and legal counsel have
reviewed the probable outcome of these proceedings, the costs and expenses
reasonably expected to be incurred, the availability and limits of our insurance
coverage, and our established liabilities.  While the outcome of the
pending proceedings cannot be predicted with certainty, based on our review, we
believe that any unrecorded liability that may result is not likely to have a
material effect on our liquidity, financial condition or results 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).  During the second
quarter of fiscal 2007, the Oklahoma district court granted the plaintiffs class
action status.  The complaint seeks an unspecified amount of damages
on behalf of the class.  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”).  On March 21, 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 have
filed for a re-hearing by the Appeals Court and on April 18, 2008 the Appeals
Court denied the motion for re-hearing.  Under Oklahoma law, the
plaintiffs have the right to appeal to the Oklahoma Supreme Court, however, as
of the date of this filing the plaintiffs have not done so.  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.





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 March 31, 2008,
the total liability recorded is $1,018 (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 other prior owners 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 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.  A gain of $1,010 was recorded in operating expenses in the
condensed consolidated financial statements for the receipt of the cash and
stock.  On March 31, 2008, the value of the Dana shares was reduced to
$258 based on the share price on that date.  The Company believes that
even with this resolution of these claims against the prior operators and owner
of the property, the Company will be liable for some portion of the ultimate
costs and it believes that the liability recorded at March 31, 2008 will be
sufficient to cover the remaining costs.





Item 1A.  Risk Factors





There have been no significant changes
in risk factors for the quarter ended March 31, 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.





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





None




24
 Table of Contents


Item 3.    Defaults Upon Senior
Securities





None





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





On
February 27, 2008, the Company held its annual stockholders’
meeting.  The following matters were submitted to a vote of
stockholders, with the results as follows:





1.
              The
      following individuals were elected to the Company’s Board of Directors to
      hold office for a one year term and to serve until the next annual
      stockholders’ meeting:





Nominee
            
            Votes For
            
            WithheldPatrick
      W. Cavanagh
            
            6,661,954
            
            117,422R.
      Eugene Goodson
            
            6,661,849
            
            117,527H.
      Samuel Greenawalt
            
            6,739,616
            
            39,760Douglas
      E. Hailey
            
            6,741,215
            
            38,161Carlos
      P. Salas
            
            6,657,383
            
            121,993Peter
      E. Salas
            
            6,659,933
            
            119,443Donn
      J. Viola
            
            6,741,215
            
            38,161





2.
              Approval
      of an amendment to the Company’s 1995 Stock Option Plan for Non-Employee
      Directors.  The stockholders adopted, by the votes indicated
      below, an amendment so as to increase the number of shares authorized
      under this plan from 66,666 shares to 86,666 shares.  This
      approval required the affirmative vote of a majority of the shares
      represented at the annual
meeting.





Votes For
            
            Against
            
            Abstentions
            
            Broker Non-Votes4,021,666
            
            274,238
            
            48,739
            
            2,434,733





3.
            Approval
      of an amendment to the Company’s Restated 1993 Stock Option
      Plan.  The stockholders adopted, by the votes indicated below,
      an amendment to increase the number of shares authorized under this plan
      from 750,000 shares to 870,000 shares.  This approval required
      the affirmative vote of a majority of the shares represented at the annual
      meeting.





Votes For
            
            Against
            
            Abstentions
            
            Broker Non-Votes4,013,743
            
            286,328
            
            44,572
            
            2,434,733





Item 5.    Other Information





None





Item 6.    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)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)




25
 Table of Contents




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)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)










































26
 Table of Contents


SIGNATURES








Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





WILLIAMS
      CONTROLS, INC.Date:  May
      9, 2008
              
              /s/ PATRICK
      W. CAVANAGHPatrick
      W. CavanaghPresident and
      Chief Executive OfficerDate:  May
      9, 2008
              
              /s/
      DENNIS E. BUNDAYDennis
      E. BundayChief
      Financial Officer


















































27