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, 2009





[    ]
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.


Yes  [
X ] No  [    
]





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






Large accelerated
      filer [     ]
              
              Accelerated filer
      [     ]Non-accelerated
      filer [     ]
              
              Smaller reporting
      company [ X ]





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


Yes  [    
] No  [ X
]





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


at April
30, 2009: 7,265,415











Williams
Controls, Inc.





March
31, 2009





Table
of Contents







Page
                NumberPart
      I.  Financial InformationItem
      1. Financial Statements (unaudited)Condensed
      Consolidated Balance Sheets, March 31, 2009 andSeptember
      30, 2008
              1Condensed
      Consolidated Statements of Operations, three and six monthsended
      March 31, 2009 and 2008
              2Condensed
      Consolidated Statements of Cash Flows, six monthsended
      March 31, 2009 and 2008
              3Notes
      to Unaudited Condensed Consolidated Financial Statements
              4Item
      2.  Management’s Discussion and Analysis of Financial Conditionand
      Results of Operations
              13Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk
              22Item
      4.  Controls and Procedures
              22Part
      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
              24Item
      4.    Submission of Matters to a Vote of Security
      Holders
              24Item
      5.    Other Information
              25Item
      6.    Exhibits
              25Signature
      Page
              26











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,
                        2009
                      
                      
                      September
      30,
                        2008ASSETSCurrent
      Assets:Cash
      and cash equivalents
                      
                      $
                      6,835
                      
                      
                      $
                      9,060Short-term
      investments
                      
                      
                      71
                      
                      
                      
                      263Trade
      accounts receivable, less allowance of
                        $246
      and $47 at March 31, 2009 and September 30,
                        2008,
      respectively
                      
                      
                      5,535
                      
                      
                      
                      10,438Other
      accounts receivable
                      
                      
                      2,167
                      
                      
                      
                      835Inventories
                      
                      
                      7,242
                      
                      
                      
                      8,215Deferred
      income taxes
                      
                      
                      383
                      
                      
                      
                      428Prepaid
      expenses and other current assets
                      
                      
                      600
                      
                      
                      
                      301Total
      current assets
                      
                      
                      22,833
                      
                      
                      
                      29,540Property,
      plant and equipment, net
                      
                      
                      9,379
                      
                      
                      
                      9,096Deferred
      income taxes
                      
                      
                      1,501
                      
                      
                      
                      1,446Other
      assets, net
                      
                      
                      512
                      
                      
                      
                      526Total
      assets
                      
                      $
                      34,225
                      
                      
                      $
                      40,608LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
                      
                      $
                      2,388
                      
                      
                      $
                      4,784Accrued
      expenses
                      
                      
                      4,866
                      
                      
                      
                      5,224Current
      portion of employee benefit obligations
                      
                      
                      285
                      
                      
                      
                      285Total
      current liabilities
                      
                      
                      7,539
                      
                      
                      
                      10,293Long-term
      Liabilities:Employee
      benefit obligations
                      
                      
                      4,456
                      
                      
                      
                      4,322Other
      long-term liabilities
                      
                      
                      359
                      
                      
                      
                      345Commitments
      and contingenciesStockholders’
      Equity:Preferred
      stock ($.01 par value, 50,000,000 authorized) Series C
                        (0
      issued and outstanding at March 31, 2009 and September 30,
                        2008)
                      
                      
                      -
                      
                      
                      
                      -Common
      stock ($.01 par value, 12,500,000 authorized; 7,265,415
                        and
      7,534,642 issued and outstanding at March 31, 2009
      and  September 30, 2008, respectively)
                      
                      
                      73
                      
                      
                      
                      75Additional
      paid-in capital
                      
                      
                      36,285
                      
                      
                      
                      35,744Accumulated
      deficit
                      
                      
                      (6,770
                      )
                      
                      
                      (4,729
                      )Treasury
      stock (332,593 and 21,700 shares at March 31, 2009 and
                        September
      30, 2008)
                      
                      
                      (2,734
                      )
                      
                      
                      (377
                      )Accumulated
      other comprehensive loss
                      
                      
                      (4,983
                      )
                      
                      
                      (5,065
                      )Total
      stockholders’ equity
                      
                      
                      21,871
                      
                      
                      
                      25,648Total
      liabilities and stockholders’ equity
                      
                      $
                      34,225
                      
                      
                      $
                      40,608







See
accompanying notes to Unaudited Condensed Consolidated Financial
Statements.
 1


Williams
Controls, Inc.


Condensed
Consolidated Statements of Operations


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


(Unaudited)





Three
      Months Ended
                                        March
      31,
                                      
                                      
                                      Six
      Months Ended
                                        March
      31,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2009
                                      
                                      
                                      2008Net
      sales
                                      
                                      $
                                      9,131
                                      
                                      
                                      $
                                      16,484
                                      
                                      
                                      $
                                      19,822
                                      
                                      
                                      $
                                      31,456Cost
      of sales
                                      
                                      
                                      7,908
                                      
                                      
                                      
                                      10,858
                                      
                                      
                                      
                                      16,045
                                      
                                      
                                      
                                      20,943Gross
      profit
                                      
                                      
                                      1,223
                                      
                                      
                                      
                                      5,626
                                      
                                      
                                      
                                      3,777
                                      
                                      
                                      
                                      10,513Operating
      expenses:Research
      and development
                                      
                                      
                                      1,010
                                      
                                      
                                      
                                      992
                                      
                                      
                                      
                                      2,156
                                      
                                      
                                      
                                      2,001Selling
                                      
                                      
                                      630
                                      
                                      
                                      
                                      659
                                      
                                      
                                      
                                      1,281
                                      
                                      
                                      
                                      1,337Administration
                                      
                                      
                                      1,464
                                      
                                      
                                      
                                      1,363
                                      
                                      
                                      
                                      3,130
                                      
                                      
                                      
                                      2,765Gain
      from settlement of environmental claims
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,010
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,010
                                      )Total
      operating expenses
                                      
                                      
                                      3,104
                                      
                                      
                                      
                                      2,004
                                      
                                      
                                      
                                      6,567
                                      
                                      
                                      
                                      5,093Operating
      income (loss)
                                      
                                      
                                      (1,881
                                      )
                                      
                                      
                                      3,622
                                      
                                      
                                      
                                      (2,790
                                      )
                                      
                                      
                                      5,420Other
      (income) expenses:Interest
      income
                                      
                                      
                                      (3
                                      )
                                      
                                      
                                      (11
                                      )
                                      
                                      
                                      (16
                                      )
                                      
                                      
                                      (32
                                      )Interest
      expense
                                      
                                      
                                      5
                                      
                                      
                                      
                                      42
                                      
                                      
                                      
                                      10
                                      
                                      
                                      
                                      131Loss
      on impairment of investments
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      317
                                      
                                      
                                      
                                      -Other
      income, net
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (73
                                      )
                                      
                                      
                                      87
                                      
                                      
                                      
                                      (108
                                      )Total
      other (income) expenses
                                      
                                      
                                      2
                                      
                                      
                                      
                                      (42
                                      )
                                      
                                      
                                      398
                                      
                                      
                                      
                                      (9
                                      )Income
      (loss) before income taxes
                                      
                                      
                                      (1,883
                                      )
                                      
                                      
                                      3,664
                                      
                                      
                                      
                                      (3,188
                                      )
                                      
                                      
                                      5,429Income
      tax expense (benefit)
                                      
                                      
                                      (683
                                      )
                                      
                                      
                                      1,184
                                      
                                      
                                      
                                      (1,147
                                      )
                                      
                                      
                                      1,793Net
      income (loss)
                                      
                                      $
                                      (1,200
                                      )
                                      
                                      $
                                      2,480
                                      
                                      
                                      $
                                      (
      2,041
                                      )
                                      
                                      $
                                      3,636Net
      income (loss) per common share – basic
                                      
                                      $
                                      (0.17
                                      )
                                      
                                      $
                                      0.33
                                      
                                      
                                      $
                                      (0.28
                                      )
                                      
                                      $
                                      0.48Weighted
      average shares used in per share
                                        calculation
      – basic
                                      
                                      
                                      7,256,206
                                      
                                      
                                      
                                      7,518,217
                                      
                                      
                                      
                                      7,361,286
                                      
                                      
                                      
                                      7,513,488Net
      income (loss) per common share – diluted
                                      
                                      $
                                      (0.17
                                      )
                                      
                                      $
                                      0.32
                                      
                                      
                                      $
                                      (0.28
                                      )
                                      
                                      $
                                      0.47Weighted
      average shares used in per share
                                        calculation
      – diluted
                                      
                                      
                                      7,256,206
                                      
                                      
                                      
                                      7,743,835
                                      
                                      
                                      
                                      7,361,286
                                      
                                      
                                      
                                      7,749,198






See
accompanying notes to Unaudited Condensed Consolidated Financial
Statements.
 2


Williams
Controls, Inc.


Condensed
Consolidated Statements of Cash Flows


(Dollars
in thousands)


(Unaudited)








Six
      Months
                                    Ended
      March 31,2009
                                  
                                  
                                  2008Cash
      flows from operating activities:Net
      income (loss)
                                  
                                  $
                                  (2,041
                                  )
                                  
                                  $
                                  3,636Adjustments
      to reconcile net income (loss) to net cash provided by
                                    operating
      activities:Depreciation
      and amortization
                                  
                                  
                                  983
                                  
                                  
                                  
                                  905Deferred
      income taxes
                                  
                                  
                                  (10
                                  )
                                  
                                  
                                  (69
                                  )Share-based
      compensation
                                  
                                  
                                  374
                                  
                                  
                                  
                                  318Loss
      on impairment of investments
                                  
                                  
                                  317
                                  
                                  
                                  
                                  -Gain
      from settlement of environmental claims
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (327
                                  )Loss
      (gain) from sale and disposal of property, plant and
    equipment
                                  
                                  
                                  80
                                  
                                  
                                  
                                  (24
                                  )Changes
      in operating assets and liabilitiesReceivables,
      net
                                  
                                  
                                  3,571
                                  
                                  
                                  
                                  (1,564
                                  )Inventories
                                  
                                  
                                  973
                                  
                                  
                                  
                                  1,083Prepaid
      expenses and other current assets
                                  
                                  
                                  (299
                                  )
                                  
                                  
                                  (331
                                  )Accounts
      payable and accrued expenses
                                  
                                  
                                  (2,754
                                  )
                                  
                                  
                                  (156
                                  )Other
                                  
                                  
                                  104
                                  
                                  
                                  
                                  (338
                                  )Net
      cash provided by operating activities
                                  
                                  
                                  1,298
                                  
                                  
                                  
                                  3,133Cash
      flows from investing activities:Purchases
      of property, plant and equipment
                                  
                                  
                                  (1,346
                                  )
                                  
                                  
                                  (676
                                  )Proceeds
      from sales of property, plant and equipment
                                  
                                  
                                  15
                                  
                                  
                                  
                                  25Net
      cash used in investing activities
                                  
                                  
                                  (1,331
                                  )
                                  
                                  
                                  (651
                                  )Cash
      flows from financing activities:Payments
      of debt
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,000
                                  )Repurchase
      of common stock
                                  
                                  
                                  (2,357
                                  )
                                  
                                  
                                  -Net
      proceeds from exercise of stock options
                                  
                                  
                                  165
                                  
                                  
                                  
                                  147Net
      cash used in financing activities
                                  
                                  
                                  (2,192
                                  )
                                  
                                  
                                  (853
                                  )Net
      increase (decrease) in cash and cash equivalents
                                  
                                  
                                  (2,225
                                  )
                                  
                                  
                                  1,629Cash
      and cash equivalents at beginning of period
                                  
                                  
                                  9,060
                                  
                                  
                                  
                                  1,621Cash
      and cash equivalents at end of period
                                  
                                  $
                                  6,835
                                  
                                  
                                  $
                                  3,250Supplemental
      disclosure of cash flow information:Interest
      paid
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  90Income
      taxes paid
                                  
                                  $
                                  111
                                  
                                  
                                  $
                                  307








See
accompanying notes to Unaudited Condensed Consolidated Financial
Statements.
 3


Williams
Controls, Inc.


Notes
to Condensed Consolidated Financial Statements


Three
and Six Months ended March 31, 2009 and 2008


(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, 2009 and the results of operations and cash
flows for the three and six months ended March 31, 2009 and 2008.  The
results of operations for the three and six months ended March 31, 2009 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, 2008, 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. Recently Adopted Accounting Standards





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157, “Fair Value
Measurements” (“SFAS No. 157”).  SFAS No. 157 clarifies the principle
that fair value should be based on the assumptions market participants would use
when pricing an asset or liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions.  Under
SFAS No. 157, fair value measurements would be separately disclosed by level
within the fair value hierarchy.  On October 1, 2008, the Company
adopted the provisions of SFAS No. 157 and it did not have a material effect on
the Company’s consolidated financial position, results of operations, or cash
flows.  In February 2008, FASB Staff Position FAS No. 157-2,
“Effective Date of FASB Statement No. 157” was issued and delayed the
application of SFAS No. 157 for non-financial assets and liabilities until
fiscal years beginning after November 15, 2008 (see Note 8—Fair Value
Measurements).





4


Also
effective October 1, 2008, the Company adopted SFAS No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities.” (“SFAS No.
159”)  This statement permits entities to choose to measure many
financial instruments and certain other items at fair value.  As of
December 31, 2008, the Company did not elect to apply the fair value option to
any financial instruments or other items upon adoption of SFAS No.
159.





Note
4. Recently Issued Accounting Standards




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations.”  (“SFAS No. 141R”) SFAS No. 141R changes the accounting
for business combinations in a number of areas including the treatment of
contingent consideration, preacquisition contingencies, transaction costs,
in-process research and development and restructuring costs.  In
addition, under SFAS No. 141R, changes in an acquired entity’s deferred tax
assets and uncertain tax positions after the measurement period will impact
income tax expense.  This statement will be effective as of the
beginning of an entity’s first fiscal year that begins after December 15,
2008.  This statement, when adopted, will change the Company’s
accounting treatment for business combinations on a prospective
basis.





Note
5. Accounting for Share Based Compensation





The
Company uses SFAS No. 123R, “Share Based Payment,” (“SFAS No. 123R”) 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.  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 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 may be granted to non-employee directors of the
Company.  Under the 1995 Plan the non-employee directors are each
automatically granted 1,666 options at a price equal to the market value on the
date of grant which is the date of the annual stockholders’ meeting each year,
exercisable for 10 years after the date of the grant.  These options
are exercisable as to 25% of the shares thereby on the date of grant and as to
an additional 25%, cumulatively on the first, second and third anniversaries of
the date of grant.





As of March 31, 2009, there was $2,009
of total unrecognized compensation costs related to nonvested stock
options.  That cost is expected to be recognized over a weighted
average period of 3 years.





The
Company’s share-based compensation expenses were recorded in the following
expense categories for the three and six months ended March 31, 2009 and
2008:





5




Three
      Months
                  Ended
      March 31,
                
                
                Six
      Months
                  Ended
      March 31,2009
                
                
                2008
                
                
                2009
                
                
                2008Cost
      of sales
                
                $
                39
                
                
                $
                25
                
                
                $
                75
                
                
                $
                50Research
      and development
                
                
                19
                
                
                
                17
                
                
                
                40
                
                
                
                33Selling
                
                
                23
                
                
                
                16
                
                
                
                45
                
                
                
                33Administration
                
                
                109
                
                
                
                111
                
                
                
                214
                
                
                
                202Total
      share-based
                  compensation
      expense
                
                $
                190
                
                
                $
                169
                
                
                $
                374
                
                
                $
                318Total
      share-based compensation expense (net of tax)
                
                $
                162
                
                
                $
                139
                
                
                $
                319
                
                
                $
                265





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, 2009 and 2008.





Three
      and Six Months
                  Ended
      March 31,2009
                
                
                2008Risk-free
      interest rate
                
                
                2.03%
                
                
                
                3.07%Expected
      dividend yield
                
                
                0%
                
                
                
                0%Expected
      term
                
                5.8
      years
                
                
                5.8
      yearsExpected
      volatility
                
                
                46%
                
                
                
                68%





The
following table summarizes stock options outstanding as of March 31, 2009 as
well as activity during the six month period then ended.





Shares
              
              
              Weighted
      Average Exercise PriceOutstanding
      at September 30, 2008
              
              
              645,521
              
              
              $
              9.17Granted
              
              
              9,996
              
              
              
              5.13Exercised
              
              
              (41,666
              )
              
              
              3.96Forfeited
              
              
              (13,582
              )
              
              
              12.12Outstanding
      at March 31, 2009
              
              
              600,269
              
              
              $
              9.39Exercisable
      at March 31, 2009
              
              
              393,496
              
              
              $
              7.28





At March
31, 2009, the weighted average remaining contractual term of options outstanding
and options exercisable was 6.4 years and 5.4 years, respectively.





The
aggregate intrinsic value of options outstanding and options exercisable at
March 31, 2009 was $125 (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, 2008 was $3,416 and $2,653,
respectively.  The intrinsic value of all stock options exercised
during the three and six months ended March 31, 2009 was $138.  Cash
received from the exercise of stock options for the three and six months ended
March 31, 2009 was $165.  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.





Note
6. Comprehensive Income (Loss)





SFAS No.
130, “Reporting Comprehensive Income," requires companies to report a measure of
all changes in equity except those resulting from investments by owners and
distributions to owners.  The following table summarizes the
components of comprehensive income (loss):





6








Three
      Months
                  Ended
      March 31,
                
                
                Six
      Months
                  Ended
      March 31,2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      income (loss)
                
                $
                (1,200
                )
                
                $
                2,480
                
                
                $
                (2,041
                )
                
                $
                3,636Translation
      adjustment
                
                
                2
                
                
                
                73
                
                
                
                3
                
                
                
                114Change
      of unrealized gain or loss
                
                
                (26
                )
                
                
                23
                
                
                
                79
                
                
                
                23Comprehensive
      income (loss)
                
                $
                (1,224
                )
                
                $
                2,576
                
                
                $
                (1,959
                )
                
                $
                3,773





Note
7. Earnings (Loss) Per Share





Basic
earnings per share ("EPS") and diluted EPS are computed using the methods
prescribed by SFAS No. 128, "Earnings Per Share."  Basic EPS is based
on the weighted-average number of common shares outstanding during the
period.  Diluted EPS is based on the weighted-average number of common
shares outstanding and the dilutive impact of common equivalent shares
outstanding.





Following
is a reconciliation of basic EPS and diluted EPS from continuing
operations:





Three
      Months
                                    Ended
      March 31, 2009
                                  
                                  
                                  Three
      Months
                                    Ended
      March 31, 2008Loss
                                  
                                  
                                  Shares
                                  
                                  
                                  Per
      Share Amount
                                  
                                  
                                  Income
                                  
                                  
                                  Shares
                                  
                                  
                                  Per
      Share AmountBasic
      EPS –
                                  
                                  $
                                  (1,200
                                  )
                                  
                                  
                                  7,256,206
                                  
                                  
                                  $
                                  (0.17
                                  )
                                  
                                  $
                                  2,480
                                  
                                  
                                  
                                  7,518,217
                                  
                                  
                                  $
                                  0.33Effect
      of dilutive securities –Stock
      options
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  225,618Diluted
      EPS –
                                  
                                  $
                                  (1,200
                                  )
                                  
                                  
                                  7,256,206
                                  
                                  
                                  $
                                  (0.17
                                  )
                                  
                                  $
                                  2,480
                                  
                                  
                                  
                                  7,743,835
                                  
                                  
                                  $
                                  0.32





Six
      Months
                                    Ended
      March 31, 2009
                                  
                                  
                                  Six
      Months
                                    Ended
      March 31, 2008Loss
                                  
                                  
                                  Shares
                                  
                                  
                                  Per
      Share Amount
                                  
                                  
                                  Income
                                  
                                  
                                  Shares
                                  
                                  
                                  Per
      Share AmountBasic
      EPS –
                                  
                                  $
                                  (2,041
                                  )
                                  
                                  
                                  7,361,286
                                  
                                  
                                  $
                                  (0.28
                                  )
                                  
                                  $
                                  3,636
                                  
                                  
                                  
                                  7,513,488
                                  
                                  
                                  $
                                  0.48Effect
      of dilutive securities –Stock
      options
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  235,710Diluted
      EPS –
                                  
                                  $
                                  (2,041
                                  )
                                  
                                  
                                  7,361,286
                                  
                                  
                                  $
                                  (0.28
                                  )
                                  
                                  $
                                  3,636
                                  
                                  
                                  
                                  7,749,198
                                  
                                  
                                  $
                                  0.47





For the
three and six months ended March 31, 2009, the Company had options covering
600,269 shares that were not considered in the diluted EPS calculation since
they would have been antidilutive.  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.





Note
8. Fair Value Measurement





The
Company adopted the provisions of SFAS No. 157 effective October 1,
2008 as discussed in Note 3—Recently Adopted Accounting
Standards.  SFAS 157 established a three-tier hierarchy of valuation
techniques based on whether the inputs to those valuation techniques are
observable or unobservable as follows:





Level 1 –
            observable
      inputs such as quoted prices in active markets for identical assets or
      liabilities;




Level 2 –
            inputs,
      other than the quoted market prices in active markets, which are
      observable, either directly or indirectly;
and




Level 3 –
            unobservable
      inputs for which there is little or no market data available, which
      require the reporting entity to develop its own
    assumptions.




7


The
following table presents information about financial assets and liabilities
measured at fair value on a recurring basis as of March 31, 2009:




Fair
      Value as of
                          March
      31, 2009
                        
                        
                        Level
      1
                        
                        
                        Level
      2
                        
                        
                        Level
      3Cash
      and cash equivalents
                        
                        $
                        6,835
                        
                        
                        $
                        6,835
                        
                        
                        $
                        -
                        
                        
                        $
                        -Short-term
      investments
                        
                        
                        71
                        
                        
                        
                        71
                        
                        
                        
                        -
                        
                        
                        
                        -Total
      financial assets and liabilities
                        
                        $
                        6,906
                        
                        
                        $
                        6,906
                        
                        
                        $
                        -
                        
                        
                        $
                        -




We use a
market approach to determine the fair value of cash and cash equivalents and
short-term investments. Cash and cash equivalents include highly liquid
investments with original maturities of three months or
less.  Short-term investments consist of available-for-sale
securities.  There were no assets and liabilities measured at fair
value on a nonrecurring basis as of March 31, 2009.





In the
first quarter ended December 31, 2008, the Company recorded a non-cash,
mark-to-market impairment charge of approximately $317 relating to its
investment in Dana Holding CP (“Dana”).  The decision to record the
impairment charge was based on the continued decline in the market value of the
Dana stock, as well as the contraction of the market in which Dana
operates.  The Company recorded no income tax benefit on this
impairment charge given the uncertainty of the Company’s ability to generate
future taxable investment gains required to utilize these investment
losses.  Prior to the Company recording the impairment charge, the
decline in market value was carried net of tax in other comprehensive
loss.





Note
9. Stock Repurchase Program





In October 2008, the Company’s Board of
Directors authorized the purchase, from time to time, of up to $5,000 of shares
of the Company’s common stock.  Repurchases may be made in the open
market or through block trades, in compliance with Securities and Exchange
Commission guidelines, subject to market conditions, applicable legal
requirements and other factors.  The Company has no obligation to
repurchase shares under the repurchase program and the timing, actual number and
price of shares to be purchased will depend on the performance of the Company’s
stock price, general market conditions, and various other factors within the
discretion of management.  As of March 31, 2009, the Company has
repurchased 310,893 shares of common stock at a total value of
$2,357.





Note
10. Inventories





Inventories,
net of reserves, consist of the following:





March
      31,
                    2009
                  
                  
                  September
      30,
                    2008Raw
      materials
                  
                  $
                  5,346
                  
                  
                  $
                  5,578Work
      in process
                  
                  
                  7
                  
                  
                  
                  53Finished
      goods
                  
                  
                  1,889
                  
                  
                  
                  2,584$
                  7,242
                  
                  
                  $
                  8,215





Note
11. Debt





As of March 31, 2009, the Company has
paid off its entire term loan debt and has no amounts outstanding under its
revolving loan facility.





The Company has a revolving loan
facility with GE Capital.  The revolving loan facility is 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.





8


The
revolving loan facility expires on September 29, 2009, at which time any
outstanding amounts under the revolving loan facility are due and
payable.  The Company is subject to certain quarterly and annual
financial covenants.  At March 31, 2009, the Company was in compliance
with all of its quarterly covenants.  At September 30, 2008, the
Company was in compliance with all but one of its financial covenants, and as of
the filing of these financial statements, the Company has not yet obtained a
waiver from GE Capital with respect to such covenant.  The Company is
continuing to work with GE Capital to resolve this item; however, if this item
cannot be resolved satisfactorily, the Company will terminate this loan
agreement.   The Company believes its cash on hand will be
sufficient to meet its working capital needs on a short-term and longer-term
basis without the necessity of borrowing, or attempting to borrow, from this
revolving credit facility.





Subject to the limitations that may be
imposed by GE Capital due to the covenant violation, the Company had available
under its revolving credit facility $6,203 at March 31, 2009 and $8,000 at
September 30, 2008.





Note
12.  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.  Following is a reconciliation
of the changes in the Company’s warranty liability for the three months and six
months ended March 31, 2009 and 2008.





Three
      Months
                        Ended
      March 31,
                      
                      
                      Six
      Months
                        Ended
      March 31,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Beginning
      balance
                      
                      $
                      627
                      
                      
                      $
                      1,723
                      
                      
                      $
                      719
                      
                      
                      $
                      1,712Payments
                      
                      
                      (356
                      )
                      
                      
                      (713
                      )
                      
                      
                      (598
                      )
                      
                      
                      (891
                      )Additional
      accruals
                      
                      
                      422
                      
                      
                      
                      253
                      
                      
                      
                      572
                      
                      
                      
                      442Ending
      balance
                      
                      $
                      693
                      
                      
                      $
                      1,263
                      
                      
                      $
                      693
                      
                      
                      $
                      1,263








Note
13. 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
      Employees PlanThree
      Months
                  Ended
      March 31,
                
                
                Six
      Months
                  Ended
      March 31,2009
                
                
                2008
                
                
                2009
                
                
                2008Service
      cost
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Interest
      cost
                
                
                79
                
                
                
                74
                
                
                
                158
                
                
                
                148Expected
      return on plan assets
                
                
                (70
                )
                
                
                (77
                )
                
                
                (140
                )
                
                
                (154
                )Amortization
      of prior service cost
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Amortization
      of loss
                
                
                26
                
                
                
                16
                
                
                
                52
                
                
                
                32Net
      periodic benefit cost
                
                $
                35
                
                
                $
                13
                
                
                $
                70
                
                
                $
                26





9




Hourly
      Employees PlanThree
      Months
                  Ended
      March 31,
                
                
                Six
      Months
                  Ended
      March 31,2009
                
                
                2008
                
                
                2009
                
                
                2008Service
      cost
                
                $
                14
                
                
                $
                16
                
                
                $
                28
                
                
                $
                32Interest
      cost
                
                
                128
                
                
                
                115
                
                
                
                256
                
                
                
                230Expected
      return on plan assets
                
                
                (107
                )
                
                
                (118
                )
                
                
                (214
                )
                
                
                (236
                )Amortization
      of prior service cost
                
                
                4
                
                
                
                5
                
                
                
                8
                
                
                
                10Amortization
      of loss
                
                
                79
                
                
                
                42
                
                
                
                158
                
                
                
                84Net
      periodic benefit cost
                
                $
                118
                
                
                $
                60
                
                
                $
                236
                
                
                $
                120





The
Company expects total contributions to its pension plans in fiscal 2009 to be
$183.  During the six months ended March 31, 2009, the Company did not
make any contributions.  At September 30, 2008, the Company had total
benefit obligations for both plans of $12,336 and a fair value of assets for
both plans of $10,884.  Since year end, asset values have declined as
a result of recent volatility in the capital markets.  The value of
plan assets for both plans at March 31, 2009 decreased $3,593 when compared to
the value of plan assets at the August 31, 2008 measurement date.





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,
2009 and 2008.




Components
of Net Periodic Benefit Cost:


Post-Retirement
      PlanThree
      Months
                    Ended
      March 31,
                  
                  
                  Six
      Months
                    Ended
      March 31,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Service
      cost
                  
                  $
                  1
                  
                  
                  $
                  1
                  
                  
                  $
                  2
                  
                  
                  $
                  2Interest
      cost
                  
                  
                  51
                  
                  
                  
                  59
                  
                  
                  
                  102
                  
                  
                  
                  118Amortization
                  
                  
                  (22
                  )
                  
                  
                  (8
                  )
                  
                  
                  (44
                  )
                  
                  
                  (16
                  )Net
      periodic benefit cost
                  
                  $
                  30
                  
                  
                  $
                  52
                  
                  
                  $
                  60
                  
                  
                  $
                  104





Note
14. Income Taxes





The
Company’s unrecognized tax benefits remained unchanged during the six months
ended March 31, 2009.  The Company believes that it is reasonably possible
that unrecognized tax benefits could decrease by $23 within the 12 months of
this reporting date.





During
the fourth quarter of fiscal 2008, the Company settled with the State of Oregon
on all outstanding examination issues.  The settlement did not have a
material adverse effect on the Company’s results of operations.  The
settlement liability was paid in October 2008.  The Company is not
currently under examination in any other states or foreign
jurisdictions.





Note
15. Geographic Information





The
Company accounts for its geographic information in accordance with SFAS No. 131
“Disclosures about Segments of an Enterprise and Related
Information”.  During the three and six months ended March 31, 2009
and 2008, the Company operated in two geographic regions as shown in the table
below.





10




Three
      Months
                  Ended
      March 31,
                
                
                Six
      Months
                  Ended
      March 31,2009
                
                
                2008
                
                
                2009
                
                
                2008Revenue
      – External Customers:United
      States
                
                $
                8,715
                
                
                $
                16,012
                
                
                $
                19,063
                
                
                $
                30,747China
                
                
                416
                
                
                
                472
                
                
                
                759
                
                
                
                709$
                9,131
                
                
                $
                16,484
                
                
                $
                19,822
                
                
                $
                31,456Revenue
      – Intersegments:United
      States
                
                $
                121
                
                
                $
                478
                
                
                $
                225
                
                
                $
                642China
                
                
                1,210
                
                
                
                3,189
                
                
                
                3,615
                
                
                
                6,011Other
                
                
                169
                
                
                
                166
                
                
                
                304
                
                
                
                304Eliminations
                
                
                (1,500
                )
                
                
                (3,833
                )
                
                
                (4,144
                )
                
                
                (6,957
                )$
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Income
      (loss) before income taxes:United
      States
                
                $
                (2,116
                )
                
                $
                3,172
                
                
                $
                (3,624
                )
                
                $
                4,842China
                
                
                130
                
                
                
                341
                
                
                
                348
                
                
                
                468Other
                
                
                103
                
                
                
                151
                
                
                
                88
                
                
                
                119$
                (1,883
                )
                
                $
                3,664
                
                
                $
                (3,188
                )
                
                $
                5,429





Note
16. 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 cost estimates determined by the
Company with the help of an environmental consulting firm.  As of
March 31, 2009, the total liability recorded is $1,005, and such liability is
recorded in accrued expenses in the accompanying condensed consolidated balance
sheet.  The Company asserted and settled a contractual indemnity claim
against Dana Corporation (“Dana”), from which it acquired the property, and
contribution claims against the other prior owner of the property as well as
businesses previously located on the property (including Blount, Inc. (“Blount”)
and Rosan, Inc. (“Rosan”)) under the Federal Superfund Act and the Oregon
Cleanup Law.  During 2008, the Company entered into a settlement
agreement with Dana, Blount and Rosan under which it received total cash
payments from Dana, Blount and Rosan of $735, and shares of Dana stock equal to
approximately $337 at the time of settlement.  In exchange for such
cash payments and Dana stock, the Company assumed the full obligation to, and
risks associated with, completing the remediation.  The Company
recorded the shares received as available-for-sale securities in short-term
investments in the accompanying condensed consolidated balance
sheets.





On October 1, 2004, the Company was
named as a co-defendant in a product liability case (Cuesta v. Ford, et al,
District Court for Bryant, Oklahoma).  The complaint seeks an
unspecified amount of damages on behalf of the class.   During
the second quarter of fiscal 2007, the Oklahoma district court granted the
plaintiffs class action status.  The Company and Ford appealed the
District Court’s class certification ruling to the Court of Civil Appeals of the
State of Oklahoma (“Appeals Court”), and during the second quarter of fiscal
2008, the Appeals Court reversed the District Court’s ruling and decertified the
nationwide class.  The plaintiffs appealed the Court of Civil Appeals
decision to the Oklahoma Supreme Court (“OSC”).  Subsequent to the end
of the Company’s second fiscal quarter the OSC granted class status and affirmed
in part and denied in part the District Court’s decisions and remanded the case
back to the District Court.




11


Although
the Company continues to believe the claim to be without merit and intends to
continue to vigorously defend against this action, 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 against this litigation.
























































































12


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, 2009 and 2008.  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, 2008.





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, 2008 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 2009 and beyond, we will continue to work closely with
our existing and potential customers to design and develop new products and
adapt existing products to new applications, and to improve the performance,
reliability and cost-effectiveness of our products.





13


Critical
Accounting Policies and Estimates





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





Revenue
Recognition





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





Warranty





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





Legal





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





Environmental





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







14


Pensions
and Post-Retirement Benefit Obligations





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





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





Share-Based
Compensation Expense





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





Income
Taxes





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






































15


Results
of Operations





Financial
Summary


(Dollars in
Thousands)





Three
      Months
                                  Ended
      March 31,
                                
                                
                                Six
      Months
                                  Ended
      March 31,2009
                                
                                
                                2008
                                
                                
                                %
      Change
                                
                                
                                2009
                                
                                
                                2008
                                
                                
                                %
      ChangeNet
      sales
                                
                                $
                                9,131
                                
                                
                                $
                                16,484
                                
                                
                                
                                (44.6%
                                )
                                
                                $
                                19,822
                                
                                
                                $
                                31,456
                                
                                
                                
                                (37.0%
                                )Cost
      of sales
                                
                                
                                7,908
                                
                                
                                
                                10,858
                                
                                
                                
                                (27.2%
                                )
                                
                                
                                16,045
                                
                                
                                
                                20,943
                                
                                
                                
                                (23.4%
                                )Gross
      profit
                                
                                
                                1,223
                                
                                
                                
                                5,626
                                
                                
                                
                                (78.3%
                                )
                                
                                
                                3,777
                                
                                
                                
                                10,513
                                
                                
                                
                                (64.1%
                                )Research
      and development
                                
                                
                                1,010
                                
                                
                                
                                992
                                
                                
                                
                                1.8%
                                
                                
                                
                                2,156
                                
                                
                                
                                2,001
                                
                                
                                
                                7.7%Selling
                                
                                
                                630
                                
                                
                                
                                659
                                
                                
                                
                                (4.4%
                                )
                                
                                
                                1,281
                                
                                
                                
                                1,337
                                
                                
                                
                                (4.2%
                                )Administration
                                
                                
                                1,464
                                
                                
                                
                                1,363
                                
                                
                                
                                7.4%
                                
                                
                                
                                3,130
                                
                                
                                
                                2,765
                                
                                
                                
                                13.2%Gain
      from settlement of environmental claims
                                
                                
                                -
                                
                                
                                
                                (1,010
                                )
                                
                                NM
                                
                                
                                
                                -
                                
                                
                                
                                (1,010
                                )
                                
                                NMOperating
      income (loss)
                                
                                $
                                (1,881
                                )
                                
                                $
                                3,622
                                
                                
                                
                                (151.9%
                                )
                                
                                $
                                (2,790
                                )
                                
                                
                                5,420
                                
                                
                                
                                (151.5%
                                )As
      a percentage of net sales:Cost
      of sales
                                
                                
                                86.6%
                                
                                
                                
                                65.9%
                                
                                
                                
                                
                                
                                
                                
                                80.9%
                                
                                
                                
                                66.6%Gross
      margin
                                
                                
                                13.4%
                                
                                
                                
                                34.1%
                                
                                
                                
                                
                                
                                
                                
                                19.1%
                                
                                
                                
                                33.4%Research
      and development
                                
                                
                                11.1%
                                
                                
                                
                                6.0%
                                
                                
                                
                                
                                
                                
                                
                                10.9%
                                
                                
                                
                                6.4%Selling
                                
                                
                                6.9%
                                
                                
                                
                                4.0%
                                
                                
                                
                                
                                
                                
                                
                                6.5%
                                
                                
                                
                                4.3%Administration
                                
                                
                                16.0%
                                
                                
                                
                                8.3%
                                
                                
                                
                                
                                
                                
                                
                                15.8%
                                
                                
                                
                                8.8%Gain
      from settlement of
                                  environmental
      claims
                                
                                
                                -
                                
                                
                                
                                (6.1%
                                )
                                
                                
                                
                                
                                
                                
                                -
                                
                                
                                
                                (3.2%
                                )Operating
      income (loss)
                                
                                
                                (20.6%
                                )
                                
                                
                                22.0%
                                
                                
                                
                                
                                
                                
                                
                                (14.1%
                                )
                                
                                
                                17.2%





The rapid
and significant decline in the domestic and world-wide economic situation has
had a significant impact on the Company’s results of operations in the second
quarter and first six months of fiscal 2009.  Gross margins declined in the
first six months of fiscal 2009 primarily as overhead costs did not decline as
rapidly as sales volumes while materials and labor generally fluctuated with
sales volumes.  Although the future remains unclear, based on comments in
the popular press it appears possible this economic downturn will continue for
some time into the future. In response to this significant negative shift in the
world-wide economic situation, during the second quarter of fiscal 2009 the
Company reduced operational costs in response to the reduced customer demand at
an annualized rate of approximately $1,500.  During the second fiscal
quarter of 2009 demand from our customers further declined from first fiscal
quarter levels and in response the Company initiated additional reductions in
overhead and operating expenses that will begin to take effect during the third
quarter of fiscal 2009.  The Company currently intends to invest in
new product development and technology for existing and new
customers.  Taken together these reductions will help the Company
lower its cash break-even point.  Although no assurances can be given,
it appears likely that the Company’s $6,835 in cash will be adequate to sustain
the Company through this economic downturn.




Comparative
      – Three months ended March 31, 2009 and
  2008




NM
= Not Meaningful


Percent
      ChangeFor
      the Three Months Ended March 31:
                
                2009
                
                
                2008
                
                
                2008
      to 2009Net
      sales
                
                $
                9,131
                
                
                $
                16,484
                
                
                
                (44.6%
                )





Net sales
decreased $7,353 in the second quarter of fiscal 2009 compared to the second
quarter of fiscal 2008.  The decrease results from volume reductions
in essentially all of the Company’s principal markets, which the Company
believes were due to the continued declining world economic climate and the
impact that decline has had on our customers and the end markets for their
products.  In the first six months of fiscal 2009, we have seen a
significant reduction in the number of units of trucks, busses and off-road
vehicles built world-wide due to the significant recessionary pressures in the
United States and many parts of the rest of the world.  A number of
our large truck OEM customers have publicly announced reductions in build rates
and have taken extensive down-time.




16


These
reductions impacted our second fiscal quarter of 2009 and likely will impact our
sales to those customers to various degrees for the remainder of our fiscal
2009.  It is uncertain how protracted or severe the current financial
situation will be world-wide and the impact it may have on the Company for the
remainder of fiscal 2009 and beyond.





In the
North American market, sales to heavy truck customers were down 49% compared to
the second quarter of fiscal 2008, and are representative of the overall
reduction in the truck build rates.  The Company’s share of that
market and unit pricing remained essentially unchanged from the prior
year.  Sales to European truck customers was where we saw the largest
decline, decreasing 65% over the prior year quarter.  In the Asian
market, net sales decreased 43% on a quarter over quarter basis.  Net
sales to off-road customers decreased 34%.  We expect that electronic
throttle control sales will increase or decrease in the future in line with
changes in heavy truck and transit bus production volumes in the various
geographic markets in which we serve.  When new product lines are
established, however, competitive pricing may continue to reduce per unit
pricing.





Percent
      ChangeFor
      the Three Months Ended March 31:
                
                2009
                
                
                2008
                
                
                2008
      to 2009Gross
      profit
                
                $
                1,223
                
                
                $
                5,626
                
                
                
                (78.3%
                )





Gross
profit was $1,223, or 13.4% of net sales in the second quarter of 2009, a
decrease of $4,403 compared to the gross profit of $5,626, or 34.1% of net
sales, in the comparable fiscal 2008 period.





The
decrease in gross profit in the second quarter of fiscal 2009 is primarily
driven by the 45% net decrease in sales of electronic throttle systems to our
heavy truck and off-road customers.  Gross profit was also negatively
impacted in the second quarter of fiscal 2009 due to several
factors:  we recorded settlement of outstanding labor issues and
severance costs totaling approximately $275; we assessed the value of our
remaining capitalized license fee related to adjustable pedal technology and
determined that a write-down of $116 was necessary due to the significant
decline of business in the recreational vehicle industry; and we experienced an
increase in warranty costs.





Percent
      ChangeFor
      the Three Months Ended March 31:
                
                2009
                
                
                2008
                
                
                2008
      to 2009Research
      and development
                
                $
                1,010
                
                
                $
                992
                
                
                
                1.8%





Research
and development expenses were essentially unchanged for the second quarter of
fiscal 2009 when compared to the same period in fiscal 2008.  The
Company’s research and development expenditures will fluctuate based on the
products under development at any given point in time.  Overall, we
expect research and development expenses to increase slightly over fiscal 2008
levels due to additional new product design projects.





Percent
      ChangeFor
      the Three Months Ended March 31:
                
                2009
                
                
                2008
                
                
                2008
      to 2009Selling
                
                $
                630
                
                
                $
                659
                
                
                
                (4.4%
                )





Selling
expenses decreased $29 during the three months ended March 31, 2009 as compared
with the three months ended March 31, 2008 mainly due to lower overall travel
expenses and reductions in sales commission expenses.





Percent
      ChangeFor
      the Three Months Ended March 31:
                
                2009
                
                
                2008
                
                
                2008
      to 2009Administration
                
                $
                1,464
                
                
                $
                1,363
                
                
                
                7.4%





Administration
expenses for the three months ended March 31, 2009 increased $101 when compared
with the same period in fiscal 2008.  The increase in administration
expenses during the quarter is primarily due to an increase in our bad debt
reserve.  With the economic downturn, we have begun to see our
collection efforts with certain customers increase.  Slightly
off-setting this increase in administration expenses were reductions resulting
from implementing certain cost cutting measures that were implemented during the
second quarter of fiscal 2009.





17




Percent
      ChangeFor
      the Three Months Ended March 31:
                                  
                                  2009
                                  
                                  
                                  2008
                                  
                                  
                                  2008
      to 2009Gain
      from settlement of environmental claims
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  (1,010
                                  )
                                  
                                  
                                  NM





The
Company recorded a gain of $1,010 in operating expenses in the condensed
consolidated financial statements in the second quarter of fiscal
2008.  As described in Note 16 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 related to settlement of environmental
claims.





Percent
      ChangeFor
      the Three Months Ended March 31:
                  
                  2009
                  
                  
                  2008
                  
                  
                  2008
      to 2009Interest
      income
                  
                  $
                  (3
                  )
                  
                  $
                  (11
                  )
                  
                  
                  (72.7%
                  )Interest
      expense
                  
                  $
                  5
                  
                  
                  $
                  42
                  
                  
                  
                  (88.1%
                  )





Interest
expense decreased $37 in the second quarter of fiscal 2009 as compared to the
second quarter of fiscal 2008 due to the significant reductions in debt
levels.  We expect interest expense to continue to remain at low
levels in fiscal 2009, and as of March 31, 2009 we do not have any outstanding
debt.




Percent
      ChangeFor
      the Three Months Ended March 31:
              
              2009
              
              
              2008
              
              
              2008
      to 2009Other
      income
              
              $
              -
              
              
              $
              (73
              )
              
              
              NM




Other
income was $73 in the second quarter of fiscal 2008 and primarily consisted of
foreign exchange gains offset by losses related to the disposal of certain fixed
assets.





Percent
      ChangeFor
      the Three Months Ended March 31:
                
                2009
                
                
                2008
                
                
                2008
      to 2009Income
      tax expense (benefit)
                
                $
                (683
                )
                
                $
                1,184
                
                
                
                (157.7%
                )





Income
tax expense (benefit) reflects an effective tax rate of 36.3% for the quarter
ended March 31, 2009 compared to an effective tax rate of 32.3% for the quarter
ended March 31, 2008.  The effective tax rate fluctuations are primarily
due to the jurisdictions in which pretax income (loss) is being earned and
income tax rate differences between the domestic and foreign
jurisdictions.  The increase in tax rate from fiscal 2008 to fiscal
2009 is primarily due to the elimination of the United States Domestic
Manufacturing Credit due to our net loss position and taxes associated with our
operations in China.




Comparative
      – Six months ended March 31, 2009 and
2008


NM
= Not Meaningful


Percent
      ChangeFor
      the Six Months Ended March 31:
                
                2009
                
                
                2008
                
                
                2008
      to 2009Net
      sales
                
                $
                19,822
                
                
                $
                31,456
                
                
                
                (37.0%
                )





Net sales
decreased $11,634 in the first six months of fiscal 2009 compared to the first
six months of fiscal 2008.  As was the case in the second quarter of
fiscal 2009, the overall decrease in sales in the first six months of 2009
results from volume reductions in essentially all of the Company’s principal
markets.  We have continued to see significant reductions in the
number of units of trucks, busses and off-road vehicles built world-wide due to
the significant recessionary pressures in the United States and many parts of
the rest of the world.  As a result, a number of our large truck OEM
customers have publicly announced reductions in build rates and have taken
extensive down-time.  These reductions impacted our first six months
of fiscal 2009 and likely will impact our sales to those customers to various
degrees for the remainder of our fiscal 2009.  It is uncertain how
protracted or severe the current financial situation will be world-wide and the
impact it may have on the Company for the remainder of fiscal 2009 and
beyond.





Net sales
in the North American truck market were down 37% in the first six months of
fiscal 2009 compared to the same period in fiscal 2008, and are representative
of the overall reduction in the truck build rates.  The largest sales
decline in the first six months of fiscal 2009 were to our European truck
customers, which declined 57% over the prior year
period.




18


In the
Asian market, net sales decreased 45% on a period over period
basis.  Although not to the same levels as the reductions to our truck
and bus customers, net sales to off-road customers also decreased
29%.  We expect that electronic throttle control sales will increase
or decrease in the future in line with changes in heavy truck and transit bus
production volumes in the various geographic markets in which we
serve.  When new product lines are established, however, competitive
pricing may continue to reduce per unit pricing.





Percent
      ChangeFor
      the Six Months Ended March 31:
                
                2009
                
                
                2008
                
                
                2008
      to 2009Gross
      profit
                
                $
                3,777
                
                
                $
                10,513
                
                
                
                (64.1%
                )





Gross
profit was $3,777, or 19.1% of net sales in the first six months of 2009, a
decrease of $6,736 compared to gross profit of $10,513, or 33.4% of net sales,
in the comparable fiscal 2008 period.





The
decrease in gross profit in the first six months of fiscal 2009 is primarily
driven by the 37% net decrease in sales of electronic throttle systems to our
heavy truck, bus and off-road customers.  Gross profit was also
negatively impacted in the second quarter of fiscal 2009 due to several
factors:  we recorded settlement of outstanding labor issues and
severance costs totaling approximately $320; we assessed the value of our
remaining capitalized license fee related to adjustable pedal technology and
determined that a write-down of $116 was necessary due to the significant
decline of business in the recreational vehicle industry; and we experienced an
increase in warranty costs.





Percent
      ChangeFor
      the Six Months Ended March 31:
                
                2009
                
                
                2008
                
                
                2008
      to 2009Research
      and development
                
                $
                2,156
                
                
                $
                2,001
                
                
                
                7.7%





Research
and development expenses increased $155 during the first six months of fiscal
2009 when compared to the first six months of fiscal 2008.  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 fiscal 2009 due to more new product introductions
in process.  Overall, we expect research and development expenses to
increase slightly over fiscal 2008 levels due to additional new product design
projects





Percent
      ChangeFor
      the Six Months Ended March 31:
                
                2009
                
                
                2008
                
                
                2008
      to 2009Selling
                
                $
                1,281
                
                
                $
                1,337
                
                
                
                (4.2%
                )





Selling
expenses decreased $56 during the six months ended March 31, 2009 as compared
with the six months ended March 31, 2008 mainly due to lower overall travel
expenses and reductions in sales commission expenses.





Percent
      ChangeFor
      the Six Months Ended March 31:
                
                2009
                
                
                2008
                
                
                2008
      to 2009Administration
                
                $
                3,130
                
                
                $
                2,765
                
                
                
                13.2%





Administration
expenses for the first six months of fiscal 2009 increased $365 when compared
with the same period in fiscal 2008.  The increase in administration
expenses is primarily due to a $275 non-cash compensation expense recognized in
conjunction with the Company’s unfunded deferred compensation plan during the
first quarter of fiscal 2009 and an overall increase in the Company’s bad debt
reserve.  With the economic downturn, we have begun to see our
collection efforts with certain customers increase and accordingly have
continued to assess our bad debt reserve position.  Slightly
off-setting these increases in administration expenses were reductions resulting
from implementing certain cost cutting measures during the second quarter of
fiscal 2009.




Percent
      ChangeFor
      the Six Months Ended March 31:
              
              2009
              
              
              2008
              
              
              2008
      to 2009Gain
      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
16 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 2008.




19




Percent
      ChangeFor
      the Six Months Ended March 31:
                      
                      2009
                      
                      
                      2008
                      
                      
                      2008
      to 2009Interest
      income
                      
                      $
                      (16
                      )
                      
                      $
                      (33
                      )
                      
                      
                      (51.5%
                      )Interest
      expense
                      
                      $
                      10
                      
                      
                      $
                      131
                      
                      
                      
                      (92.4%
                      )





Interest
expense decreased $121in the first six months of fiscal 2009 as compared to the
same period in fiscal 2008 due to the significant reductions in debt levels
throughout late fiscal 2008 and the first half of fiscal 2009.  As of
March 31, 2009, all of our debt has been fully paid off.




Percent
      ChangeFor
      the Six Months Ended March 31:
            
            2009
            
            
            2008
            
            
            2008
      to 2009Loss
      on impairment of investments
            
            $
            317
            
            
            $
            -
            
            
            
            NM




Loss on
impairment of investments is a non-cash, other-than-temporary impairment charge
relating to the Company’s investment in Dana Holding CP (“Dana”) during the
first quarter of fiscal 2009.  The impairment charge assumes no income
tax benefit given the uncertainty of the Company’s ability to generate future
taxable investment gains required to utilize these investment
losses.  Prior to the Company recording the impairment charge, the
decline in market value was carried net of tax in other comprehensive
loss.





Percent
      ChangeFor
      the Six Months Ended March 31:
                
                2009
                
                
                2008
                
                
                2008
      to 2009Other
      (income) expense
                
                $
                87
                
                
                $
                (108
                )
                
                
                (180.6%
                )





Other
expense was $87 in the first six months of fiscal 2009 compared to other income
of $108 in the first six months of fiscal 2008.  Other expense in the
first six months of fiscal 2009 primarily consisted of losses related to the
disposal of certain fixed assets.  Other income in fiscal 2008
primarily consisted of foreign exchange gains offset by losses related to the
disposal of certain fixed assets.





Percent
      ChangeFor
      the Six Months Ended March 31:
                
                2009
                
                
                2008
                
                
                2008
      to 2009Income
      tax expense (benefit)
                
                $
                (1,147
                )
                
                $
                1,793
                
                
                
                (164.0%
                )





Tax
expense reflects an effective tax rate of 36.0% for the first six months of
fiscal 2009 compared to an effective tax rate of 33.0% for the comparable period
in fiscal 2008.  The effective tax rate fluctuations are primarily due
to the jurisdictions in which pretax income (loss) is being earned and income
tax rate differences between the domestic and foreign
jurisdictions.  The increase in tax rate from fiscal 2008 to fiscal
2009 is primarily due to the elimination of the United States Domestic
Manufacturing Credit due to our net loss position and taxes associated with our
operations in China.





Financial
Condition, Liquidity and Capital Resources





Cash generated by operating activities
was $1,298 for the first six months of fiscal 2009, a decrease of $1,835 from
the cash generated by operating activities of $3,133 during the first six months
of fiscal 2008.  Net income (loss) plus non-cash charges for
depreciation and stock based compensation used cash of $684 in the first six
months of fiscal 2009 and contributed $4,859 in the first six months fiscal
2008.





Changes
in working capital items generated cash of $1,595 in the first six months of
fiscal 2009 compared to a cash use of $1,306 in the first six months of
2008.  Timing of collections on receivables and lower sales levels,
which resulted in lower receivables, increased cash by $3,571 in the first six
months of fiscal 2009 compared to a use of cash of $1,564 in the same period of
fiscal 2008.  Inventories were reduced by $973 in the first six months
of fiscal 2009 compared to $1,083 in the first six months of fiscal
2008.  Accounts payable and accrued expenses decreased in the first
six months of fiscal 2009 and 2008 primarily due to the lower sales and
inventory purchases plus seasonal payments of certain
expenses.




20


For the
six months ended March 31, 2008, we contributed $456 to our pension
plans.  We did not make any contributions to our pension plans for the
six months ended March 31, 2009.  Although we have made reductions to
our cost structure during fiscal 2009, due to the uncertain world-wide economic
market and product demand from our customers we may experience periods of
negative cash flow from operations.  However, overall we believe in
the near term we will either continue to generate a small amount of positive
cash from operations or break even.





Cash used
in investing activities was $1,331 for the six months ended March 31, 2009 and
$651 for the six months ended March 31, 2008 and was comprised primarily of
purchases of equipment for both periods.  We expect our cash use for
investing activities to increase somewhat throughout the fiscal year as we
continue to make purchases of capital equipment; however, we are limiting our
capital spending to new product development and safety related items until the
markets improve.





Cash used
in financing activities was $2,192 for the six months ended March 31, 2009,
compared to cash used in financing activities of $853 for the six months ended
March 31, 2008.  In October 2008, the Company announced a share
repurchase plan whereby the Company can, but is under no obligation to,
repurchase up to $5 million of the Company’s common
stock.  Repurchases may be made in the open market or through block
trades, in compliance with Securities and Exchange Commission guidelines,
subject to market conditions, applicable legal requirements and other
factors.  During the first six months of fiscal 2009, the Company
purchased 310,893 shares of common stock at a total value of
$2,357.  The use of cash for financing activities for the first six
months of fiscal 2008 primarily relates to scheduled debt payments on our term
loan, offset slightly by proceeds from the exercise of stock
options.





At March
31, 2009, we had  cash and cash equivalents of $6,835.  We
were not compliant with one financial covenant at September 30, 2008 and this
non compliance could limit our ability to borrow against the $6,203 available
under the revolving credit facility.  Unless we can satisfactorily
resolve this issue we will terminate our loan agreement with GE
Capital.  We have not obtained a waiver from GE Capital as of the
filing of these financial statements; however, our revolving credit facility
expires at the end of fiscal 2009.  We believe our cash on hand will
be sufficient to meet our working capital needs on a short-term and longer-term
basis without the necessity of borrowing, or attempting to borrow, from this
revolving credit facility.





Contractual
Obligations as of March 31, 2009





At March 31, 2009, our contractual
obligations consisted of operating lease obligations and a license
agreement.  We did not have any material letters of credit or debt
guarantees outstanding at March 31, 2009.  Maturities of these
contractual obligations consist of the following:





Payments
      due by periodTotal
                    
                    
                    Less
      than
                      1
      year
                    
                    
                    1
      – 3
                      years
                    
                    
                    3
      – 5
                      years
                    
                    
                    More
      than
                      5
      yearsOperating
      leases
                    
                    $
                    1,828
                    
                    
                    $
                    567
                    
                    
                    $
                    1,222
                    
                    
                    $
                    39
                    
                    
                    $
                    -MMT
      license - minimum royalties
                    
                    
                    318
                    
                    
                    
                    68
                    
                    
                    
                    150
                    
                    
                    
                    100
                    
                    
                    
                    -$
                    2,146
                    
                    
                    $
                    635
                    
                    
                    $
                    1,372
                    
                    
                    $
                    139
                    
                    
                    $
                    -





Certain
liabilities, including those related to our pension and post-retirement benefit
plans, are reported in the accompanying condensed consolidated balance sheets
but are not reflected in the table above due to the absence of stated
maturities.  We have net obligations at March 31, 2009 related to its
pension plans and post-retirement medical plan of $1,757 and $2,984,
respectively.  We did not make any contributions to our pension plans
during the first six months of fiscal 2009; however, we expect to make payments
to our pension plans of $183 throughout the rest of fiscal 2009.  We
funded $456 to our pension plans during the first six months of fiscal
2008.  The recent decline in the overall world economy and stock
markets has resulted in the portfolio assets of the Company’s pension plans to
decline approximately 33% since the last measurement date of August 31,
2008.  This market decline will not impact the Company’s contribution
requirements under ERISA in fiscal 2009; however, it most likely will increase
the required contributions to the Company’s pension plans in future
periods.  In addition, the economic downturn has had a significant
impact on interest rates and as such could have a significant impact on the
discount rate used in valuation of our pension liabilities at our next
measurement date of September 30, 2009.  If discount rates continue to
decrease this will have an impact of increasing our pension
liabilities.





21


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 revolving loan
agreement with its primary lender GE Capital, which expires on September 29,
2009.  Interest rates under the agreement are variable and are based
on the election of the Company of either a LIBOR rate or Prime
rate.





As of March 31, 2009, there was no
balance outstanding on the term loan and the revolving loan.  The
Company does not believe that a hypothetical 10% change in end of the period
interest rates or changes in future interest rates on these variable rate
obligations would have a material effect on its financial position, results of
operations, or cash flows.  The Company has not hedged its exposure to
interest rate fluctuations.





Foreign Currency
Risk:





We sell our products to customers in
the heavy truck, transit bus and off-road equipment industries.  For
the six months ended March 31, 2009 and 2008, the Company had foreign sales of
approximately 35% and 46% of net sales, respectively.  All worldwide
sales in the first six months of fiscal 2009 and 2008, with the exception of
$759 and $709, 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, international purchases and sales
increase.





Investment
Risk:





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





Item
4.  Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





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








22


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


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.





Item
1A.  Risk Factors





There have been no significant changes
in risk factors for the quarter ended March 31, 2009.  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, 2008.





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







During
the three months ended March 31, 2009, the Company repurchased the following
shares:




Total Number
                of
      Shares
                Purchased
              
              
              Average
                Price Paid
                per
      Share
              
              
              Total
      Number of
                Shares Purchased as
                Part
      of Publicly
                Announced
      Plans or
                Programs
              
              
              Approximate
                Dollar Value of
                Shares that May Yet Be
      Purchased Under the Plans or ProgramsJanuary 1,
      2009 – January 31, 2009
              
              
              3,352
              
              
              $
              7.29
              
              
              
              3,352
              
              
              $
              2,688February 1,
      2009 – February 28, 2009
              
              
              5,900
              
              
              
              6.53
              
              
              
              5,900
              
              
              
              2,650March 1,
      2009 – March 31, 2009
              
              
              1,500
              
              
              
              4.48
              
              
              
              1,500
              
              
              
              2,643Total
              
              
              10,752
              
              
              $
              6.48
              
              
              
              10,752
              
              
              $
              2,643





In
October 2008, the Company’s Board of Directors authorized the purchase up to
$5,000 of shares of the Company’s common stock.  Repurchases may be
made in the open market or through block trades, in compliance with Securities
and Exchange Commission guidelines, subject to market conditions, applicable
legal requirements and other factors.  The Company has no obligation
to repurchase shares under the repurchase program and the timing, actual number
and price of shares to be purchased will depend on the performance of the
Company’s stock price, general market conditions, and various other factors
within the discretion of management.  As of March 31, 2009, the
Company has repurchased 310,893 shares of common stock at a total value of
$2,357.  All repurchases were made using cash resources.





Item
3.    Defaults Upon Senior Securities





None





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





On
February 24, 2009, the Company held its annual stockholders’
meeting.  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:





24




Nominee
                
                Votes For
                
                WithheldPatrick
      W. Cavanagh
                
                6,565,983
                
                18,952R.
      Eugene Goodson
                
                6,511,639
                
                73,296H.
      Samuel Greenawalt
                
                6,452,652
                
                132,283Douglas
      E. Hailey
                
                6,566,103
                
                18,832Carlos
      P. Salas
                
                6,474,524
                
                110,411Peter
      E. Salas
                
                6,550,561
                
                34,734Donn
      J. Viola
                
                6,566,169
                
                18,766





Item
5.    Other Information





None





Item
6.    Exhibits





3.01(a)
            
            Certificate
      of Incorporation of the Registrant, as amended. (Incorporated by reference to
      Exhibit 3.01 (a) to the Registrant’s quarterly report on Form 10-Q for the
      quarter ended December 31, 2006)3.01(b)
            
            Certificate
      of Amendment to Certificate of Incorporation of the Registrant, dated
      February 27, 1995. (Incorporated by reference to
      Exhibit 3.01 (b) to the Registrant’s quarterly report on Form 10-Q for the
      quarter ended December 31, 2006)3.01(c)
            
            Certificate
      of Amendment to Certificate of Incorporation of the Registrant, dated
      October 28, 2004. (Incorporated by reference to
      Exhibit 3.01 (c) to the Registrant’s quarterly report on Form 10-Q for the
      quarter ended December 31, 2006)3.01(d)
            
            Certificate
      of Amendment to Certificate of Incorporation of the Registrant, dated
      February 22, 2005. (Incorporated by reference to
      Exhibit 3.01 (d) to the Registrant’s quarterly report on Form 10-Q for the
      quarter ended December 31, 2006)3.01(e)
            
            Certificate
      of Amendment to Certificate of Incorporation of the Registrant, dated
      March 2, 2006. (Incorporated by reference to
      Exhibit 3.01 (e) to the Registrant’s quarterly report on Form 10-Q for the
      quarter ended December 31, 2006)3.02
            
            Restated
      By-Laws of the Registrant, as amended July 1, 2002. (Incorporated by reference to
      Exhibit 3.6 to the Registrant’s quarterly report on Form 10-Q,
      Commission File No. 000-18083,  for the quarter ended
      June 30, 2002)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)









25


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
      6, 2009
                  
                  /s/ PATRICK
      W. CAVANAGHPatrick
      W. CavanaghPresident and Chief Executive
      Officer


Date:  May
      6, 2009
                    
                    /s/ DENNIS
      E. BUNDAYDennis
      E. BundayChief Financial
      Officer





































26