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: December 31, 2008





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


SECURITIES
EXCHANGE ACT OF 1934





For
the transition period from __________ to __________





Commission
file number 0-18083








Williams
Controls, Inc.


(Exact
name of registrant as specified in its charter)










Delaware
              
              84-1099587(State or other
      jurisdiction of incorporation or organization)
              
              (I.R.S. Employer
      Identification
      No.)14100 SW 72nd
      Avenue,
                Portland,
      Oregon
              
              97224(Address of
      principal executive office)
              
              (zip
      code)






(503)
684-8600


(Registrant's
telephone number, including area code)





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


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 [
      X ]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


as of
January 31, 2009: 7,234,501







Williams
Controls, Inc.





December
31, 2008





Table
of Contents








Page
                                          NumberPart
      I.  Financial InformationItem
      1.
                                        
                                        Financial
      Statements (unaudited)Condensed Consolidated Balance Sheets, December 31, 2008
      and
                                          September 30, 2008
                                        1Condensed Consolidated Statements of Operations, three
      months
                                          ended December 31, 2008 and 2007
                                        2Condensed Consolidated Statements of Cash Flows, three
      months
                                          ended December 31, 2008 and 2007
                                        3Notes to Unaudited Condensed Consolidated Financial
      Statements
                                        4Item
      2.
                                        
                                        Management’s Discussion and Analysis of Financial
      Condition
                                          and Results of Operations
                                        12Item
      3.
                                        
                                        Quantitative and Qualitative Disclosures About Market
      Risk
                                        18Item
      4.
                                        
                                        Controls and Procedures
                                        19Part
      II.  Other InformationItem
      1.
                                        
                                        Legal Proceedings
                                        20Item
      1A.
                                        
                                        Risk Factors
                                        20Item
      2.
                                        
                                        Unregistered Sales of Equity Securities and Use of
      Proceeds
                                        20Item
      3.
                                        
                                        Defaults Upon Senior Securities
                                        20Item
      4.
                                        
                                        Submission of Matters to a Vote of Security
      Holders
                                        20Item
      5.
                                        
                                        Other Information
                                        20Item
      6.
                                        
                                        Exhibits
                                        21Signature Page
                                        22








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)





December
      31, 2008
                        
                        
                        September
      30, 2008ASSETSCurrent
      Assets:Cash
      and cash equivalents
                        
                        $
                        6,382
                        
                        
                        $
                        9,060Short-term
      investments
                        
                        
                        127
                        
                        
                        
                        263Trade
      accounts receivable, less allowance of
                          $79
      and $47 at December 31, 2008 and September 30
                          2008,
      respectively
                        
                        
                        6,436
                        
                        
                        
                        10,438Other
      accounts receivable
                        
                        
                        1,500
                        
                        
                        
                        835Inventories
                        
                        
                        8,480
                        
                        
                        
                        8,215Deferred
      income taxes
                        
                        
                        353
                        
                        
                        
                        428Prepaid
      expenses and other current assets
                        
                        
                        1,049
                        
                        
                        
                        301Total
      current assets
                        
                        
                        24,327
                        
                        
                        
                        29,540Property,
      plant and equipment, net
                        
                        
                        9,322
                        
                        
                        
                        9,096Deferred
      income taxes
                        
                        
                        1,473
                        
                        
                        
                        1,446Other
      assets, net
                        
                        
                        515
                        
                        
                        
                        526Total
      assets
                        
                        $
                        35,637
                        
                        
                        $
                        40,608LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
                        
                        $
                        3,048
                        
                        
                        $
                        4,784Accrued
      expenses
                        
                        
                        4,785
                        
                        
                        
                        5,224Current
      portion of employee benefit obligations
                        
                        
                        285
                        
                        
                        
                        285Total
      current liabilities
                        
                        
                        8,118
                        
                        
                        
                        10,293Long-term
      Liabilities:Employee
      benefit obligations
                        
                        
                        4,359
                        
                        
                        
                        4,322Other
      long-term liabilities
                        
                        
                        352
                        
                        
                        
                        345Commitments
      and contingenciesStockholders’
      Equity:Preferred
      Stock ($.01 par value, 50,000,000 authorized) Series C
                          (0
      issued and outstanding at December 31, 2008 and September 30,
                          2008)
                        
                        
                        -
                        
                        
                        
                        -Common
      stock ($.01 par value, 12,500,000 authorized; 7,234,501
                          and
      7,534,642 issued and outstanding at December 31, 2008 and
                          September
      30, 2008, respectively)
                        
                        
                        75
                        
                        
                        
                        75Additional
      paid-in capital
                        
                        
                        35,927
                        
                        
                        
                        35,744Accumulated
      deficit
                        
                        
                        (5,570
                        )
                        
                        
                        (4,729
                        )Treasury
      stock (321,841 and 21,700 shares at December 31, 2008 and September 30,
      2008)
                        
                        
                        (2,665
                        )
                        
                        
                        (377
                        )Accumulated
      other comprehensive loss
                        
                        
                        (4,959
                        )
                        
                        
                        (5,065
                        )Total
      stockholders’ equity
                        
                        
                        22,808
                        
                        
                        
                        25,648Total
      liabilities and stockholders’ equity
                        
                        $
                        35,637
                        
                        
                        $
                        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
                                                December
      31,2008
                                              
                                              
                                              2007Net
      sales
                                              
                                              $
                                              10,691
                                              
                                              
                                              $
                                              14,972Cost
      of sales
                                              
                                              
                                              8,137
                                              
                                              
                                              
                                              10,086Gross
      profit
                                              
                                              
                                              2,554
                                              
                                              
                                              
                                              4,886Operating
      expenses:Research
      and development
                                              
                                              
                                              1,146
                                              
                                              
                                              
                                              1,009Selling
                                              
                                              
                                              651
                                              
                                              
                                              
                                              678Administration
                                              
                                              
                                              1,666
                                              
                                              
                                              
                                              1,401Total
      operating expenses
                                              
                                              
                                              3,463
                                              
                                              
                                              
                                              3,088Operating
      income (loss)
                                              
                                              
                                              (909
                                              )
                                              
                                              
                                              1,798Other
      (income) expenses:Interest
      income
                                              
                                              
                                              (13
                                              )
                                              
                                              
                                              (22
                                              )Interest
      expense
                                              
                                              
                                              5
                                              
                                              
                                              
                                              88Loss
      on impairment of investments
                                              
                                              
                                              317
                                              
                                              
                                              
                                              -Other
      (income) expense, net
                                              
                                              
                                              87
                                              
                                              
                                              
                                              (34
                                              )Total
      other expenses
                                              
                                              
                                              396
                                              
                                              
                                              
                                              32Income
      (loss) before income taxes
                                              
                                              
                                              (1,305
                                              )
                                              
                                              
                                              1,766Income
      tax expense (benefit)
                                              
                                              
                                              (464
                                              )
                                              
                                              
                                              610Net
      income (loss)
                                              
                                              $
                                              (841
                                              )
                                              
                                              $
                                              1,156Net
      income (loss) per common share – basic
                                              
                                              $
                                              (0.11
                                              )
                                              
                                              $
                                              0.15Weighted
      average shares used in per share calculation – basic
                                              
                                              
                                              7,463,409
                                              
                                              
                                              
                                              7,508,861Net
      income (loss) per common share – diluted
                                              
                                              $
                                              (0.11
                                              )
                                              
                                              $
                                              0.15Weighted
      average shares used in per share calculation – diluted
                                              
                                              
                                              7,463,409
                                              
                                              
                                              
                                              7,756,635








See
accompanying notes to Unaudited Condensed Consolidated Financial
Statements.
 2


Williams Controls, Inc.


Condensed
Consolidated Statements of Cash Flows


(Dollars
in thousands)


(Unaudited)





Three
      Months Ended
                                      December
      31,2008
                                    
                                    
                                    2007Cash
      flows from operating activities:Net
      income (loss)
                                    
                                    $
                                    (841
                                    )
                                    
                                    $
                                    1,156Adjustments
      to reconcile net income (loss) to net cash provided by
                                      operating
      activities:Depreciation
      and amortization
                                    
                                    
                                    479
                                    
                                    
                                    
                                    459Deferred
      income taxes
                                    
                                    
                                    48
                                    
                                    
                                    
                                    (37
                                    )Stock
      based compensation
                                    
                                    
                                    183
                                    
                                    
                                    
                                    149Losses
      on impairment of investments
                                    
                                    
                                    317
                                    
                                    
                                    
                                    -Loss
      from sale and disposal of property, plant and equipment
                                    
                                    
                                    89
                                    
                                    
                                    
                                    -Changes
      in operating assets and liabilitiesReceivables,
      net
                                    
                                    
                                    3,337
                                    
                                    
                                    
                                    284Inventories
                                    
                                    
                                    (265
                                    )
                                    
                                    
                                    392Prepaid
      expenses and other current assets
                                    
                                    
                                    (748
                                    )
                                    
                                    
                                    (658
                                    )Accounts
      payable and accrued expenses
                                    
                                    
                                    (2,175
                                    )
                                    
                                    
                                    (1,384
                                    )Other
                                    
                                    
                                    (38
                                    )
                                    
                                    
                                    (341
                                    )Net
      cash provided by operating activities
                                    
                                    
                                    386
                                    
                                    
                                    
                                    20Cash
      flows from investing activities:Purchases
      of property, plant and equipment
                                    
                                    
                                    (783
                                    )
                                    
                                    
                                    (213
                                    )Proceeds
      from sale of property, plant and equipment
                                    
                                    
                                    6
                                    
                                    
                                    
                                    -Net
      cash used in investing activities
                                    
                                    
                                    (777
                                    )
                                    
                                    
                                    (213
                                    )Cash
      flows from financing activities:Payments
      of debt
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (125
                                    )Net
      proceeds from exercise of stock options
                                    
                                    
                                    -
                                    
                                    
                                    
                                    70Repurchase
      of common stock
                                    
                                    
                                    (2,287
                                    )
                                    
                                    
                                    -Net
      cash used in financing activities
                                    
                                    
                                    (2,287
                                    )
                                    
                                    
                                    (55
                                    )Net
      decrease in cash and cash equivalents
                                    
                                    
                                    (2,678
                                    )
                                    
                                    
                                    (248
                                    )Cash
      and cash equivalents at beginning of period
                                    
                                    
                                    9,060
                                    
                                    
                                    
                                    1,621Cash
      and cash equivalents at end of period
                                    
                                    $
                                    6,382
                                    
                                    
                                    $
                                    1,373Supplemental
      disclosure of cash flow information:Interest
      paid
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    42Income
      taxes paid
                                    
                                    $
                                    111
                                    
                                    
                                    $
                                    -








See
accompanying notes to Unaudited Condensed Consolidated Financial
Statements.
 3


Williams Controls, Inc.


Notes
to Unaudited Condensed Consolidated Financial Statements


Three
Months ended December 31, 2008 and 2007


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


(Unaudited)





Note
1.  Organization





Williams Controls, Inc., including its
wholly-owned subsidiaries as follows, are hereinafter referred to as the
“Company,” “Registrant,” “we,” “our,” or “us.”





Active
Subsidiaries–Williams Controls Industries, Inc. (“Williams”); Williams (Suzhou)
Controls Co. Ltd. (“Williams Controls Asia”); and Williams Controls Europe GmbH
(“Williams Controls Europe”); 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 (“GeoFocus”); NESC Williams,
Inc. (“NESC”); Williams Technologies, Inc. (“Technologies”); Williams World
Trade, Inc. (“WWT”); Techwood Williams, Inc. (“TWI”); Agrotec Williams, Inc.
(“Agrotec”) and our 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
December 31, 2008 and the results of operations and cash flows for the three
months ended December 31, 2008 and 2007.  The results of operations
for the three months ended December 31, 2008 are not necessarily indicative of
the results to be expected for the entire fiscal year.





Certain
information and footnote disclosures made in the last Annual Report on Form 10-K
have been condensed or omitted for the interim consolidated
statements.  Certain costs are estimated for the full year and
allocated to interim periods based on activity associated with the interim
period.  Accordingly, such costs are subject to year-end
adjustment.  It is management’s opinion that, when the interim
consolidated statements are read in conjunction with the Company’s annual report
on Form 10-K, for the fiscal year ended September 30, 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, 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 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
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 May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.”  This standard is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in the preparation of financial
statements presented in conformity with generally accepted accounting principles
in the United States.  This statement is effective 60 days following
approval by the U.S. Securities and Exchange Commission (“SEC”).  The
Company does not expect SFAS No. 162 to have a material impact on the
preparation of its consolidated financial statements.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations.”  (“SFAS 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 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 December 31, 2008 there was
$1,979 of total unrecognized compensation costs related to nonvested stock
options.  That cost is expected to be recognized over a weighted
average period of 3.2 years.





The
Company’s share-based compensation expenses were recorded in the following
expense categories for the three months ended December 31, 2008 and
2007:








5




Three
      Months
                    Ended
      December 31,2008
                  
                  
                  2007Cost
      of sales
                  
                  $
                  36
                  
                  
                  $
                  25Research
      and development
                  
                  
                  21
                  
                  
                  
                  17Selling
                  
                  
                  21
                  
                  
                  
                  17Administration
                  
                  
                  105
                  
                  
                  
                  90Total
      share-basedcompensation
      expense
                  
                  $
                  183
                  
                  
                  $
                  149Total
      share-based compensation expense (net of tax)
                  
                  $
                  157
                  
                  
                  $
                  126





The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model.  No options were granted during
the three months ended December 31, 2008 or 2007.





The
following table summarizes stock options outstanding as of December 31, 2008 as
well as activity during the three months then ended.




Shares
                
                
                Weighted
      Average Exercise PriceOutstanding
      at September 30, 2008
                
                
                645,521
                
                
                $
                9.17Forfeited
                
                
                (9,266
                )
                
                
                13.03Outstanding
      at December 31, 2008
                
                
                636,255
                
                
                $
                9.11Exercisable
      at December 31, 2008
                
                
                396,281
                
                
                $
                6.78





At
December 31, 2008, 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
December 31, 2008 was $682 and $613, respectively (the intrinsic value of a
stock option is the amount by which the market value of the underlying stock
exceeds the exercise price of the option).  The aggregate intrinsic
value of options outstanding and options exercisable at December 31, 2007 was
$5,226 and $3,690, respectively.  There were no stock options
exercised during the three months ended December 31, 2008. The intrinsic value
of all stock options exercised during the three months ended December 31, 2007
was $217.  Cash received from the exercise of stock options for the
three months ended December 31, 2007 was $70.





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):





Three
      Months
                    Ended
      December 31,2008
                  
                  
                  2007Net
      income (loss)
                  
                  $
                  (841
                  )
                  
                  $
                  1,156Translation
      adjustment
                  
                  
                  1
                  
                  
                  
                  41Change
      of unrealized gain or loss
                  
                  
                  105
                  
                  
                  
                  -Comprehensive
      income (loss)
                  
                  $
                  (735
                  )
                  
                  $
                  1,197





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.





6


Following
is a reconciliation of basic EPS and diluted EPS:





Three
      Months Ended
                        December
      31, 2008
                      
                      
                      Three
      Months Ended
                        December
      31, 2007Loss
                      
                      
                      Shares
                      
                      
                      Per
      Share Amount
                      
                      
                      Income
                      
                      
                      Shares
                      
                      
                      Per
      Share AmountBasic
      EPS –
                      
                      $
                      (841
                      )
                      
                      
                      7,463,409
                      
                      
                      $
                      (0.11
                      )
                      
                      $
                      1,156
                      
                      
                      
                      7,508,861
                      
                      
                      $
                      0.15Effect
      of dilutive securities –Stock
      options
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      247,774Diluted
      EPS –
                      
                      $
                      (841
                      )
                      
                      
                      7,463,409
                      
                      
                      $
                      (0.11
                      )
                      
                      $
                      1,156
                      
                      
                      
                      7,756,635
                      
                      
                      $
                      0.15





For the
three months ended December 31, 2008, the Company had options covering 636,255
shares that were not considered in the dilutive EPS calculation since they would
have been antidilutive.  For the three months ended December 31, 2007,
the Company had options covering 99,246 shares not considered in the dilutive
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.




The
following table presents information about financial assets and liabilities
measured at fair value on a recurring basis as of December 31,
2008:




Fair
      Value as of
                            December
      31, 2008
                          
                          
                          Level
      1
                          
                          
                          Level
      2
                          
                          
                          Level
      3Cash
      and cash equivalents
                          
                          $
                          6,382
                          
                          
                          $
                          6,382
                          
                          
                          $
                          -
                          
                          
                          $
                          -Short-term
      investments
                          
                          
                          127
                          
                          
                          
                          127
                          
                          
                          
                          -
                          
                          
                          
                          -Total
      financial assets and liabilities
                          
                          $
                          6,509
                          
                          
                          $
                          6,509
                          
                          
                          $
                          -
                          
                          
                          $
                          -




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 December 31, 2008.






7


During
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 deteriorations of the market where 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 December 31, 2008, the Company has
repurchased 300,141 shares of common stock at a total value of
$2,287.





Note
10.  Inventories





Inventories,
net of reserves, consist of the following:





December
      31,
                      2008
                    
                    
                    September
      30,
                      2008Raw
      materials
                    
                    $
                    6,119
                    
                    
                    $
                    5,578Work
      in process
                    
                    
                    15
                    
                    
                    
                    53Finished
      goods
                    
                    
                    2,346
                    
                    
                    
                    2,584$
                    8,480
                    
                    
                    $
                    8,215





Note
11.  Debt





As of December 31, 2008, 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.





The revolving loan facility expires on
September 29, 2009, at which time all outstanding amounts under the revolving
loan facility are due and payable.  The Company is subject to certain
quarterly and annual financial covenants.  At December 31, 2008, 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.





The Company had available under its
revolving credit facility $6,847 at December 31, 2008 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 ended
December 31, 2008 and 2007.




8


Three
      Months Ended
                          December
      31,2008
                        
                        
                        2007Beginning
      balance
                        
                        $
                        719
                        
                        
                        $
                        1,712Payments
                        
                        
                        (242
                        )
                        
                        
                        (178
                        )Additional
      accruals
                        
                        
                        150
                        
                        
                        
                        189Ending
      balance
                        
                        $
                        627
                        
                        
                        $
                        1,723




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 Plan
                    
                    
                    Hourly
      Employees PlanThree
      Months Ended
                      December
      31,
                    
                    
                    Three
      Months Ended
                      December
      31,2008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007Service
      cost
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    14
                    
                    
                    $
                    16Interest
      cost
                    
                    
                    79
                    
                    
                    
                    74
                    
                    
                    
                    128
                    
                    
                    
                    115Expected
      return on plan assets
                    
                    
                    (70
                    )
                    
                    
                    (77
                    )
                    
                    
                    (107
                    )
                    
                    
                    (118
                    )Amortization
      of prior service cost
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4
                    
                    
                    
                    5Amortization
      of loss
                    
                    
                    26
                    
                    
                    
                    16
                    
                    
                    
                    79
                    
                    
                    
                    42Net
      periodic benefit cost
                    
                    $
                    35
                    
                    
                    $
                    13
                    
                    
                    $
                    118
                    
                    
                    $
                    60





The
Company expects total contributions to its pension plans in fiscal 2009 to be
$183.  During the three months ended December 31, 2008, 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
Company estimates that the value of plan assets for both plans at December 31,
2008 decreased approximately $2,760 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 plan for the three months ended December 31, 2008 and
2007.




Components
of Net Periodic Benefit Cost:


Post-Retirement
      PlanThree
      Months Ended
                      December
      31,2008
                    
                    
                    2007Service
      cost
                    
                    $
                    1
                    
                    
                    $
                    1Interest
      cost
                    
                    
                    51
                    
                    
                    
                    59Amortization
                    
                    
                    (22
                    )
                    
                    
                    (8
                    )Net
      periodic benefit cost
                    
                    $
                    30
                    
                    
                    $
                    52





9
 Note
14.  Income Taxes





The
Company’s unrecognized tax benefits remained unchanged during the three months
ended December 31, 2008.  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 months ended December 31, 2008 and
2007, the Company operated in two geographic regions as shown in the table
below.





Three
      Months Ended
                    December
      31,2008
                  
                  
                  2007Revenue
      – External Customers:United
      States
                  
                  $
                  10,348
                  
                  
                  $
                  14,735China
                  
                  
                  343
                  
                  
                  
                  237$
                  10,691
                  
                  
                  $
                  14,972Revenue
      – Intersegments:United
      States
                  
                  $
                  105
                  
                  
                  $
                  163China
                  
                  
                  2,405
                  
                  
                  
                  2,823Other
                  
                  
                  134
                  
                  
                  
                  138Eliminations
                  
                  
                  (2,644
                  )
                  
                  
                  (3,124
                  )$
                  -
                  
                  
                  $
                  -Income
      (loss) before income taxes:United
      States
                  
                  $
                  (1,508
                  )
                  
                  $
                  1,671China
                  
                  
                  217
                  
                  
                  
                  127Other
                  
                  
                  (14
                  )
                  
                  
                  (32
                  )$
                  (1,305
                  )
                  
                  $
                  1,766





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 costs estimates determined by
the Company with the help of an environmental consulting firm.  As of
December 31, 2008, the total liability recorded is $1,006, 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.




10


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, in a 3-to-0 decision, reversed the District Court’s
ruling and decertified the nationwide class. As
permitted under Oklahoma law, the plaintiffs filed for a re-hearing by the
Appeals Court and during the third quarter of fiscal 2008, the Appeals Court
denied the motion for re-hearing.  The plaintiffs have since appealed
the Court of Civil Appeals decision to the Oklahoma Supreme Court which has not
taken action yet.  The Company continues to believe the claim to be
without merit and intends to continue to vigorously defend against this
action.  Although the Appeals Court decision is favorable to the
Company, there can be no assurance that the ultimate outcome of the lawsuit will
be favorable to the Company or will not have a material adverse effect on the
Company’s business, consolidated financial condition and results of
operations.  The Company cannot reasonably estimate the possible loss
or range of loss at this time.  In addition, the Company has incurred
and may incur future litigation expenses in defending this
litigation.







































































11


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 months
ended December 31, 2008 and 2007.  This section should be read in
conjunction with our condensed consolidated financial statements and related
notes appearing elsewhere in this document.   Statements in this
report that relate to future results and events are based on our current
expectations.  Actual results in future periods may differ materially
from those currently expected or desired because of a number of risks and
uncertainties, including, but not limited to, those risks discussed in the
section entitled “Risk Factors” in our annual report on Form 10-K for the fiscal
year ended September 30, 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,
the portion of the heavy truck and off-road markets consisting of 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.











12


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.






13


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
stock 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 condensed 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 net
deferred tax assets.


















































14


Results
of Operations




Financial
Summary


(Dollars
in Thousands)





Three
      Months Ended
                              December
      31,2008
                            
                            
                            2007
                            
                            
                            2007
      to2008Net
      sales
                            
                            $
                            10,691
                            
                            
                            $
                            14,972
                            
                            
                            
                            (28.6)%Cost
      of sales
                            
                            
                            8,137
                            
                            
                            
                            10,086
                            
                            
                            
                            (19.3)%Gross
      profit
                            
                            
                            2,554
                            
                            
                            
                            4,886
                            
                            
                            
                            (47.7)%Research
      and development
                            
                            
                            1,146
                            
                            
                            
                            1,009
                            
                            
                            
                            13.6%Selling
                            
                            
                            651
                            
                            
                            
                            678
                            
                            
                            
                            (4.0)%Administration
                            
                            
                            1,666
                            
                            
                            
                            1,401
                            
                            
                            
                            18.9%Operating
      income (loss)
                            
                            $
                            (909
                            )
                            
                            $
                            1,798
                            
                            
                            
                            (150.6)%As
      a percentage of net sales:Cost
      of sales
                            
                            
                            76.1
                            %
                            
                            
                            67.4
                            %Gross
      margin
                            
                            
                            23.9
                            %
                            
                            
                            32.6
                            %Research
      and development
                            
                            
                            10.7
                            %
                            
                            
                            6.7
                            %Selling
                            
                            
                            6.1
                            %
                            
                            
                            4.5
                            %Administration
                            
                            
                            15.6
                            %
                            
                            
                            9.4
                            %Operating
      income (loss)
                            
                            
                            (8.5
                            )%
                            
                            
                            12.0
                            %





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 first
quarter of fiscal 2009.  The 28.6% revenue decline and the $841 net loss
incurred during the quarter were solely a result of that economic
downturn.  Gross margins declined in the first quarter 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, the Company is minimizing operational costs as a result of reduced
volumes and during the second quarter of fiscal 2009 the Company reduced
overhead and operating expenses at an annualized rate of approximately $1,500
while continuing to invest in product development and technology for the
future.  Although no assurances can be given, it appears likely that the
Company’s $6,382 in cash plus its borrowing capacity will be more than adequate
to sustain the Company through this economic downturn.





Comparative
      – Three months ended December 31, 2008 and
  2007


NM
= Not Meaningful


Percent
      ChangeFor
      the Three Months Ended December 31:
                
                2008
                
                
                2007
                
                
                2007
      to 2008Net
      sales
                
                $
                10,691
                
                
                $
                14,972
                
                
                
                (28.6)%





Net sales decreased $4,281 in the first
quarter of fiscal 2009 compared to the first 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
declining world economic climate and the impact that decline has had on our
customers and the end markets for their products.  In the first
quarter of fiscal 2009, we began to see a significant reduction in the number of
units of trucks, and to a lesser degree off-road vehicles, built world-wide due
to the significant recessionary pressures in the United States and portions of
the rest of the world.  A number of our large truck OEM customers have
publicly announced reductions in build rates.  These reductions
impacted our first fiscal quarter of 2009 and likely will impact our sales to
those customers in at least some portion of 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
throughout fiscal 2009.





15


In the North American market, sales to
heavy truck customers were down 24% compared to the first 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 and Asian customers both decreased 48% on a quarter over quarter
basis.  Net sales to off-road customers decreased 24%.  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 December 31:
                
                2008
                
                
                2007
                
                
                2007
      to 2008Gross
      profit
                
                $
                2,554
                
                
                $
                4,886
                
                
                
                (47.7)%





Gross
profit was $2,554, or 23.9% of net sales in the first quarter of fiscal 2009, a
decrease of $2,332 compared to the gross profit of $4,886, or 32.6% of net
sales, in the comparable fiscal 2008 period.





The
decrease in gross profit in the first quarter of fiscal 2009 is primarily driven
by the 29% net decrease in sales of electronic throttle systems to our heavy
truck and off-road customers.





Percent
      ChangeFor
      the Three Months Ended December 31:
                
                2008
                
                
                2007
                
                
                2007
      to 2008Research
      and development
                
                $
                1,146
                
                
                $
                1,009
                
                
                
                13.6%





Research
and development expenses increased $137 for the first quarter of fiscal 2009
compared to the comparable 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.  Expenses were up in the first
quarter over last year’s first quarter 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 Three Months Ended December 31:
                
                2008
                
                
                2007
                
                
                2007
      to 2008Selling
                
                $
                651
                
                
                $
                678
                
                
                
                (4.0)%





Selling
expenses decreased $27 during the three month period ended December 31, 2008 as
compared with the three month period ended December 31, 2007 mainly due to lower
overall travel expenses.





Percent
      ChangeFor
      the Three Months Ended December 31:
                
                2008
                
                
                2007
                
                
                2007
      to 2008Administration
                
                $
                1,666
                
                
                $
                1,401
                
                
                
                18.9%





Administration
expenses for the three month period ended December 31, 2008 increased $265 when
compared with the same period in fiscal 2008.  The increase in
administration expenses is primarily a result of non-cash compensation expense
recognized in conjunction with the Company’s unfunded deferred compensation
plan.





Percent
      ChangeFor
      the Three Months Ended December 31:
                  
                  2008
                  
                  
                  2007
                  
                  
                  2007
      to 2008Interest
      income
                  
                  $
                  (13
                  )
                  
                  $
                  (
      22
                  )
                  
                  
                  (40.9)%Interest
      expense
                  
                  $
                  5
                  
                  
                  $
                  88
                  
                  
                  
                  (94.3)%





16


Interest
expense decreased $83 in the first quarter of fiscal 2009 as compared to the
first quarter of fiscal 2008 due to significant reductions in debt
levels.  We expect interest expense to continue to remain at low
levels in fiscal 2009, and as of December 31, 2008 we do not have any
outstanding debt.




Percent
      ChangeFor
      the Three Months Ended December 31:
                          
                          2008
                          
                          
                          2007
                          
                          
                          2007
      to 2008Loss
      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 Three Months Ended December 31:
                        
                        2008
                        
                        
                        2007
                        
                        
                        2007
      to 2008Other
      (income) expense, net
                        
                        $
                        87
                        
                        
                        $
                        (34
                        )
                        
                        NM





Other
expense was $87 in the first quarter of fiscal 2009 compared to other income of
$34 in the first quarter of fiscal 2008.  Other expense in the first
quarter of fiscal 2009 primarily consisted of losses related to the disposal of
certain fixed assets.





Percent
      ChangeFor
      the Three Months Ended December 31:
                        
                        2008
                        
                        
                        2007
                        
                        
                        2007
      to 2008Income
      tax expense (benefit)
                        
                        $
                        (464
                        )
                        
                        $
                        610
                        
                        
                        NM





Income
tax expense (benefit) reflects an effective tax rate of 35.6% for the quarter
ended December 31, 2008 compared to an effective tax rate of 34.5% for the
quarter ended December 31, 2007.  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 $386 for the first quarter of fiscal 2009, an increase of $366 from the cash
generated by operating activities of $20 during the first quarter of fiscal
2008.   Net income (loss) plus non cash charges for depreciation
and stock based compensation contributed $179 in the first quarter of fiscal
2009 and $1,764 in the first quarter of fiscal 2008.





Changes in working capital items
generated cash of $111 in the first quarter of fiscal 2009 compared to a cash
use of $1,707 in the first quarter of fiscal 2008.  Collections on
receivables at September 30, 2008, with corresponding lower sales in the first
quarter of fiscal 2009, generated cash of $3,337 in fiscal
2009.  Inventories increased $265 in the first quarter of fiscal 2009
compared to a decrease in inventories of $392 in the first quarter of fiscal
2008.  Accounts payable and accrued expenses decreased in the first
quarter of fiscal 2009 and 2008 primarily due to the lower sales and inventory
purchases plus seasonal payments of certain expenses.  Cash flows from
operations for the three months ended December 31, 2007 included payments to our
pension plans of $402.  We did not make any contributions to our
pension plans for the three months ended December 31, 2008.  We
believe it is likely we will continue to generate positive cash from operations,
however, depending on the current uncertain world-wide economic market, we could
experience periods of negative cash flow from operations.





Cash used
in investing activities was $777 for the three months ended December 31, 2008
and $213 for the three months ended December 31, 2007 and was comprised
primarily of purchases of equipment for both periods.  We expect our
cash use for investing activities to increase throughout the fiscal year as we
continue to make purchases of capital equipment.




17


Cash used
in financing activities was $2,287 for the quarter ended December 31, 2008,
compared to cash used in financing activities of $55 for the quarter ended
December 31, 2007.  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 quarter, the Company purchased 300,141 shares of
common stock at a total value of $2,287.  The use of cash for
financing activities for the first quarter of fiscal 2008 primarily relates to
scheduled debt payments on our term loan, offset slightly by proceeds from the
exercise of stock options.





At
December 31, 2008, we had $6,847 available under our revolving credit facility
with GE Capital plus cash and cash equivalents of $6,382.  We were not
compliant with one financial covenant at September 30, 2008 and this non
compliance could limit our ability to borrow against the $6,847 available under
the revolving credit facility.  We have not yet obtained a waiver with
our lendor GE Capital as of the filing of these financial statements, however,
we believe when our cash on hand is combined with cash provided by operations,
it will be sufficient to meet our working capital needs on a short-term and
long-term basis.





Contractual
Obligations as of December 31, 2008





At December 31, 2008, 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 December 31, 2008.  Maturities of these
contractual obligations consist of the following:





Payments
      due by periodTotal
                  
                  
                  Less
      than 1 year
                  
                  
                  1
      – 3
                    years
                  
                  
                  3
      – 5
                    years
                  
                  
                  More
      than 5 yearsOperating
      leases
                  
                  $
                  1,695
                  
                  
                  $
                  565
                  
                  
                  $
                  1,080
                  
                  
                  $
                  50
                  
                  
                  $
                  -MMT
      license - minimum royalties
                  
                  
                  352
                  
                  
                  
                  52
                  
                  
                  
                  150
                  
                  
                  
                  150
                  
                  
                  
                  -$
                  2,047
                  
                  
                  $
                  617
                  
                  
                  $
                  1,230
                  
                  
                  $
                  200
                  
                  
                  $
                  -





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 December 31, 2008 related to our pension plans and
post-retirement medical plan of $1,604 and $3,040, respectively.  We
did not make any contributions to our pension plans during the first quarter of
fiscal 2009.  We contributed $402 in the first quarter of fiscal
2008.  We expect to make payments to our pension plans of $183
throughout the rest of fiscal 2009.  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 25% 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 may
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.





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 exchange rates of the Chinese RMB.





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 September 30, 2008, 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 three months ended December 31, 2008 and 2007, the Company had foreign sales
of approximately 35% and 44% of net sales, respectively.  All
worldwide sales in the first quarter of fiscal 2008 and 2007, with the exception
of $343 and $237, 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.




18


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, 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.





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.












19


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 of
operations.





Item 1A.  Risk Factors





There have been no significant changes
in risk factors for the quarter ended December 31, 2008.  See the
information set forth in the section entitled “Risk Factors” in our Annual
Report on Form 10-K for the fiscal year ended September 30, 2008.





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




During
the three months ended December 31, 2008, 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 ProgramsOctober 1,
      2008 – October 31, 2008
                
                
                4,400
                
                
                $
                12.29
                
                
                
                4,400
                
                
                $
                4,946November 1,
      2008 – November 30, 2008
                
                
                59,091
                
                
                
                11.46
                
                
                
                59,091
                
                
                
                4,269December 1,
      2008 – December 31, 2008
                
                
                236,650
                
                
                
                6.58
                
                
                
                236,650
                
                
                
                2,713Total
                
                
                300,141
                
                
                $
                7.62
                
                
                
                300,141
                
                
                $
                2,713





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 December 31, 2008, the
Company has repurchased 300,141 shares of common stock at a total value of
$2,287.  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





None





Item 5.  Other Information





None





20


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. 000-18083, 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)






21


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:  February
      11, 2009
                          By:
                          /s/ PATRICK W. CAVANAGHPatrick
      W. CavanaghPresident
      and Chief Executive OfficerDate:  February
      11, 2009
                          
                          /s/
      DENNIS E. BUNDAYDennis
      E. BundayChief Financial
      Officer





























































































22