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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington,
D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: December 31,
2009

oTRANSITION 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         |  | (I.R.S. Employer   
|incorporation or organization)          |  | 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 o


Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate web site, if any, every Interactive Data File required to be
submitted and posted to Rule 405 of Regulation S-T (section 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o

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 o | Accelerated filer o          | 
|
| | Non-accelerated
 filer o   | 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 o No x


The number of shares outstanding of the
registrants common stock
as of January 31, 2010: 7,273,320

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Williams Controls, Inc.

December 31, 2009

Table of Contents

|                                                                                                |  |             | 
|----------------------------------------------------------------------------------------------- |  | ----------- | 
|                                                                                                |  | Page
Number
|                                                                                                |  |            
|Part I. Financial Information                                                                   |  |             | 
|                                                                                                |  |             | 
|Item 1. Financial Statements (unaudited)                                                        |  |             | 
|                                                                                                |  |             | 
|Condensed Consolidated Balance Sheets,
 December 31, 2009 and September 30, 2009                |  | 1           | 
|                                                                                                |  |             | 
|Condensed Consolidated Statements of
 Operations, three months ended December 31, 2009 and 2008 |  | 2           | 
|                                                                                                |  |             | 
|Condensed Consolidated Statements
 of Cash Flows, three months ended December 31, 2009 and 2008 |  | 3           | 
|                                                                                                |  |             | 
|Notes to Unaudited Condensed Consolidated
 Financial Statements                                 |  | 4           | 
|                                                                                                |  |             | 
|Item 2. Managements Discussion and
 Analysis of Financial Condition and Results of Operations  |  | 12          | 
|                                                                                                |  |             | 
|Item 3. Quantitative and Qualitative
 Disclosures About Market Risk                             |  | 18          | 
|                                                                                                |  |             | 
|Item 4. Controls and Procedures                                                                 |  | 19          | 
|                                                                                                |  |             | 
|Part II. Other Information                                                                      |  |             | 
|                                                                                                |  |             | 
|Item 1. Legal Proceedings                                                                       |  | 20          | 
|                                                                                                |  |             | 
|Item 1A. Risk Factors                                                                           |  | 20          | 
|                                                                                                |  |             | 
|Item 2. Unregistered Sales of Equity
 Securities and Use of Proceeds                            |  | 20          | 
|                                                                                                |  |             | 
|Item 3. Defaults Upon Senior Securities                                                         |  | 20          | 
|                                                                                                |  |             | 
|Item 4. Submission of Matters to a Vote of
 Security Holders                                    |  | 20          | 
|                                                                                                |  |             | 
|Item 5. Other Information                                                                       |  | 20          | 
|                                                                                                |  |             | 
|Item 6. Exhibits                                                                                |  | 20          | 
|                                                                                                |  |             | 
|Signature Page                                                                                  |  | 22          | 

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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,
 2009 |        | September 30,
 2009 |  
|                                                                                                                                                                 |  |                    |        |                     |  
|ASSETS                                                                                                                                                           |  |                    |        |                     |   |        |  
|Current Assets:                                                                                                                                                  |  |                    |        |                     |   |        |  
|Cash and cash equivalents                                                                                                                                        |  | $                  | 9,045  |                     | $ | 9,245  |  
|Short-term investments                                                                                                                                           |  |                    | 393    |                     |   | 286    |  
|Trade accounts receivable, less allowance
 of $258 and $246 at December 31, 2009 and September 30 2009, respectively                                             |  |                    | 7,010  |                     |   | 6,677  |  
|Other accounts receivable                                                                                                                                        |  |                    | 1,426  |                     |   | 1,509  |  
|Inventories                                                                                                                                                      |  |                    | 5,632  |                     |   | 5,539  |  
|Deferred income taxes                                                                                                                                            |  |                    | 540    |                     |   | 579    |  
|Prepaid expenses and other current assets                                                                                                                        |  |                    | 817    |                     |   | 269    |  
|                                                                                                                                                                 |  |                    |        |                     |   |        |  
|Total current assets                                                                                                                                             |  |                    | 24,863 |                     |   | 24,104 |  
|                                                                                                                                                                 |  |                    |        |                     |   |        |  
|Property, plant and equipment, net                                                                                                                               |  |                    | 8,740  |                     |   | 8,893  |  
|Deferred income taxes                                                                                                                                            |  |                    | 3,032  |                     |   | 3,019  |  
|Other assets, net                                                                                                                                                |  |                    | 342    |                     |   | 368    |  
|                                                                                                                                                                 |  |                    |        |                     |   |        |  
|Total assets                                                                                                                                                     |  | $                  | 36,977 |                     | $ | 36,384 |  
|                                                                                                                                                                 |  |                    |        |                     |   |        |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                             |  |                    |        |                     |   |        |  
|Current Liabilities:                                                                                                                                             |  |                    |        |                     |   |        |  
|Accounts payable                                                                                                                                                 |  | $                  | 3,351  |                     | $ | 2,990  |  
|Accrued expenses                                                                                                                                                 |  |                    | 4,068  |                     |   | 4,492  |  
|Current portion of employee benefit
 obligations                                                                                                                 |  |                    | 225    |                     |   | 225    |  
|                                                                                                                                                                 |  |                    |        |                     |   |        |  
|Total current liabilities                                                                                                                                        |  |                    | 7,644  |                     |   | 7,707  |  
|                                                                                                                                                                 |  |                    |        |                     |   |        |  
|Long-term Liabilities:                                                                                                                                           |  |                    |        |                     |   |        |  
|Employee benefit obligations                                                                                                                                     |  |                    | 8,305  |                     |   | 8,297  |  
|Other long-term liabilities                                                                                                                                      |  |                    | 295    |                     |   | 290    |  
|                                                                                                                                                                 |  |                    |        |                     |   |        |  
|Commitments and contingencies                                                                                                                                    |  |                    |        |                     |   |        |  
|                                                                                                                                                                 |  |                    |        |                     |   |        |  
|Stockholders Equity:                                                                                                                                            |  |                    |        |                     |   |        |  
|Preferred Stock ($.01 par value, 50,000,000
 authorized) Series C (No shares were issued and outstanding at December 31,
 2009 and September 30, 2009)           |  |                    |       |                     |   |       |  
|Common stock ($.01 par value, 12,500,000
 authorized; 7,273,320 and 7,270,820 issued and outstanding at December 31,
 2009 and September 30, 2009, respectively) |  |                    | 73     |                     |   | 73     |  
|Additional paid-in capital                                                                                                                                       |  |                    | 36,793 |                     |   | 36,643 |  
|Accumulated deficit                                                                                                                                              |  |                    | (6,380 | )                   |   | (6,776 | )
|Treasury stock (332,593 shares at December
 31, 2009 and September 30, 2009)                                                                                     |  |                    | (2,734 | )                   |   | (2,734 | )
|Accumulated other comprehensive loss                                                                                                                             |  |                    | (7,019 | )                   |   | (7,116 | )
|                                                                                                                                                                 |  |                    |        |                     |   |        |  
|Total stockholders equity                                                                                                                                       |  |                    | 20,733 |                     |   | 20,090 |  
|                                                                                                                                                                 |  |                    |        |                     |   |        |  
|Total liabilities and stockholders equity                                                                                                                       |  | $                  | 36,977 |                     | $ | 36,384 |  
|                                                                                                                                                                 |  |                    |        |                     |   |        |  

See accompanying notes to Unaudited Condensed
Consolidated Financial Statements.

1

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Williams
Controls, Inc.Condensed Consolidated Statements of Operations 
(Dollars in thousands, except share and per share information) 
(Unaudited)

|                                                                 |  |                                  |           |      |   |           |  
|---------------------------------------------------------------- |  | -------------------------------- | --------- | ---- | - | --------- | -
|                                                                 |  | Three Months Ended
 December 31, |          
|                                                                 |  |                                  |          
|                                                                 |  | 2009                             |           | 2008 |  
|                                                                 |  |                                  |           |      |  
|Net sales                                                        |  | $                                | 11,709    |      | $ | 10,691    |  
|Cost of
 sales                                                   |  |                                  | 8,123     |      |   | 8,137     |  
|                                                                 |  |                                  |           |      |   |           |  
|                                                                 |  |                                  |           |      |   |           |  
|Gross profit                                                     |  |                                  | 3,586     |      |   | 2,554     |  
|                                                                 |  |                                  |           |      |   |           |  
|Operating expenses:                                              |  |                                  |           |      |   |           |  
|Research and development                                         |  |                                  | 1,056     |      |   | 1,146     |  
|Selling                                                          |  |                                  | 658       |      |   | 651       |  
|Administration                                                   |  |                                  | 1,345     |      |   | 1,666     |  
|                                                                 |  |                                  |           |      |   |           |  
|Total operating expenses                                         |  |                                  | 3,059     |      |   | 3,463     |  
|                                                                 |  |                                  |           |      |   |           |  
|Operating income (loss)                                          |  |                                  | 527       |      |   | (909      | )
|                                                                 |  |                                  |           |      |   |           |  
|Other (income) expenses:                                         |  |                                  |           |      |   |           |  
|Interest income                                                  |  |                                  | (4        | )    |   | (13       | )
|Interest expense                                                 |  |                                  | 5         |      |   | 5         |  
|Loss on impairment of investments                                |  |                                  |          |      |   | 317       |  
|Other expense, net                                               |  |                                  | 7         |      |   | 87        |  
|                                                                 |  |                                  |           |      |   |           |  
|Total other expenses                                             |  |                                  | 8         |      |   | 396       |  
|                                                                 |  |                                  |           |      |   |           |  
|Income (loss) before income taxes                                |  |                                  | 519       |      |   | (1,305    | )
|Income tax expense (benefit)                                     |  |                                  | 123       |      |   | (464      | )
|                                                                 |  |                                  |           |      |   |           |  
|                                                                 |  |                                  |           |      |   |           |  
|Net income (loss)                                                |  | $                                | 396       |      | $ | (841      | )
|                                                                 |  |                                  |           |      |   |           |  
|                                                                 |  |                                  |           |      |   |           |  
|Net income (loss) per common share  basic                       |  | $                                | 0.05      |      | $ | (0.11     | )
|                                                                 |  |                                  |           |      |   |           |  
|Weighted average shares used in per share
 calculation  basic   |  |                                  | 7,271,065 |      |   | 7,463,409 |  
|                                                                 |  |                                  |           |      |   |           |  
|                                                                 |  |                                  |           |      |   |           |  
|Net income (loss) per common share 
 diluted                    |  | $                                | 0.05      |      | $ | (0.11     | )
|                                                                 |  |                                  |           |      |   |           |  
|Weighted average shares used in per share
 calculation  diluted |  |                                  | 7,375,680 |      |   | 7,463,409 |  
|                                                                 |  |                                  |           |      |   |           |  

See accompanying notes to Unaudited Condensed
Consolidated Financial Statements.

2

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Williams
Controls, Inc.Condensed Consolidated Statements of Cash Flows(Dollars in thousands)(Unaudited)

|                                                                                          |  |                                  |       |      |   |        |  
|----------------------------------------------------------------------------------------- |  | -------------------------------- | ----- | ---- | - | ------ | -
|                                                                                          |  | Three Months Ended
 December 31, |      
|                                                                                          |  |                                  |      
|                                                                                          |  | 2009                             |       | 2008 |  
|                                                                                          |  |                                  |       |      |  
|Cash flows from operating activities:                                                     |  |                                  |       |      |   |        |  
|Net income (loss)                                                                         |  | $                                | 396   |      | $ | (841   | )
|Adjustments to reconcile net income (loss)
 to net cash provided by operating activities: |  |                                  |       |      |   |        |  
|Depreciation and amortization                                                             |  |                                  | 524   |      |   | 479    |  
|Deferred income taxes                                                                     |  |                                  | (14   | )    |   | 48     |  
|Stock based compensation                                                                  |  |                                  | 138   |      |   | 183    |  
|Losses on impairment of investments                                                       |  |                                  |      |      |   | 317    |  
|Loss from sale and disposal of property,
 plant and equipment                             |  |                                  | 1     |      |   | 89     |  
|Changes in operating assets and liabilities                                               |  |                                  |       |      |   |        |  
|Receivables, net                                                                          |  |                                  | (250  | )    |   | 3,415  |  
|Inventories                                                                               |  |                                  | (93   | )    |   | (265   | )
|Prepaid expenses and other current assets                                                 |  |                                  | (548  | )    |   | (748   | )
|Accounts payable and accrued expenses                                                     |  |                                  | (63   | )    |   | (2,253 | )
|Other                                                                                     |  |                                  | 69    |      |   | (38    | )
|                                                                                          |  |                                  |       |      |   |        |  
|Net cash provided by operating activities                                                 |  |                                  | 160   |      |   | 386    |  
|                                                                                          |  |                                  |       |      |   |        |  
|                                                                                          |  |                                  |       |      |   |        |  
|Cash flows from investing activities:                                                     |  |                                  |       |      |   |        |  
|Purchases of property, plant and equipment                                                |  |                                  | (372  | )    |   | (783   | )
|Proceeds from sale of property, plant and
 equipment                                      |  |                                  |      |      |   | 6      |  
|                                                                                          |  |                                  |       |      |   |        |  
|Net cash used in investing activities                                                     |  |                                  | (372  | )    |   | (777   | )
|                                                                                          |  |                                  |       |      |   |        |  
|                                                                                          |  |                                  |       |      |   |        |  
|Cash flows from financing activities:                                                     |  |                                  |       |      |   |        |  
|Net proceeds from exercise of stock options                                               |  |                                  | 12    |      |   |       |  
|Repurchase of common stock                                                                |  |                                  |      |      |   | (2,287 | )
|                                                                                          |  |                                  |       |      |   |        |  
|Net cash provided by (used in) financing
 activities                                      |  |                                  | 12    |      |   | (2,287 | )
|                                                                                          |  |                                  |       |      |   |        |  
|                                                                                          |  |                                  |       |      |   |        |  
|Net decrease in cash and cash equivalents                                                 |  |                                  | (200  | )    |   | (2,678 | )
|Cash and cash equivalents at beginning of
 period                                         |  |                                  | 9,245 |      |   | 9,060  |  
|                                                                                          |  |                                  |       |      |   |        |  
|                                                                                          |  |                                  |       |      |   |        |  
|Cash and cash equivalents at end of period                                                |  | $                                | 9,045 |      | $ | 6,382  |  
|                                                                                          |  |                                  |       |      |   |        |  
|                                                                                          |  |                                  |       |      |   |        |  
|Supplemental disclosure of cash flow
 information:                                        |  |                                  |       |      |   |        |  
|Income taxes paid                                                                         |  | $                                | 42    |      | $ | 111    |  
|                                                                                          |  |                                  |       |      |   |        |  

See accompanying notes to Unaudited Condensed
Consolidated Financial Statements.

3

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Williams Controls, Inc.Notes to Unaudited Condensed Consolidated Financial Statements
Three Months ended December 31, 2009 and 2008
(Dollars in thousands, except share and per share amounts)
(Unaudited)

Note 1. Organization

Williams
Controls, Inc., including its wholly-owned subsidiaries as follows, 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, 2009 and the results of operations and
cash flows for the three months ended December 31, 2009 and 2008. The results
of operations for the three months ended December 31, 2009 are not necessarily
indicative of the results to be expected for the entire fiscal year.

Certain
information and footnote disclosures made in the last Annual Report on Form
10-K have been condensed or omitted for the interim consolidated statements.
Certain costs are estimated for the full year and allocated to interim periods
based on activity associated with the interim period. Accordingly, such costs
are subject to year-end adjustment. It is managements opinion that, when the
interim consolidated statements are read in conjunction with the Companys
annual report on Form 10-K for the fiscal year ended September 30, 2009 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.

Certain
reclassifications of amounts reported in the prior period financial statements
have been made to conform to classifications used in the current period
financial statements. This reclassification was to change the presentation of
certain foreign VAT accounts from a gross basis to a net basis. This
reclassification did not have any impact on the Companys results of operations
or net cash provided by operating activities for the periods presented.

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,
allowance for doubtful accounts, excess and obsolete inventory, useful lives
for depreciation and amortization, future cash flows associated with impairment
testing for long-lived assets, pension and post-retirement benefit obligations,
product warranty, share-based compensation expense, income taxes and
commitments and contingencies.

Note 3. Recently Adopted Accounting Standards

In
June 2009, the Financial Accounting Standards Board (FASB) established the
FASB Accounting Standards Codification (the Codification) as the single
source of authoritative U.S. GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the United States
Securities and Exchange

4

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Commission
(SEC) under authority of federal securities laws are also sources of
authoritative U.S. GAAP for SEC registrants. While the Codification did not
have a material impact on the Companys consolidated financial statements upon
adoption, our disclosures have been revised to describe accounting concepts and
policies rather than cite specific topics of U.S. GAAP.

In
December 2008, the FASB issued authoritative guidance to require employers to
provide additional disclosures about plan assets of a defined benefit pension
or other post-retirement plan. These disclosures should principally include
information detailing investment policies and strategies, the major categories
of plan assets, the inputs and valuation techniques used to measure the fair
value of plan assets and an understanding of significant concentrations of risk
within plan assets. This guidance is effective for the Company beginning in
fiscal 2010 (October 1, 2009). Upon initial application, this guidance is not
required to be applied to earlier periods that are presented for comparative
purposes. The adoption of this guidance did not have a material impact on the
Companys consolidated financial statements.

In
December 2007, the FASB issued authoritative guidance to affirm that the
acquisition method of accounting (previously referred to as the purchase
method) be used for all business combinations and for an acquirer to be
identified for each business combination. This guidance defines the acquirer as
the entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the acquirer
achieves control. Among other requirements, this guidance requires the
acquiring entity in a business combination to recognize the identifiable assets
acquired, liabilities assumed and any noncontrolling interest in the acquiree
at their acquisition-date fair values, with limited exceptions,
acquisition-related costs generally will be expensed as incurred. This guidance
requires certain financial statement disclosures to enable users to evaluate
and understand the nature and financial effects of the business combination.
This guidance must be applied prospectively to business combinations that are
consummated on or after October 1, 2009. Accordingly, the Company will record
and disclose business combinations under the revised standard for transactions
consummated, if any, on or after October 1, 2009. In addition, adjustments of
certain income tax balances related to acquired deferred assets, including
those acquired prior to the adoption of this new authoritative guidance, shall
be reported as an increase or decrease to income tax expense.

In
September 2006, the FASB issued authoritative guidance which defines fair
value, establishes a framework for measuring fair value, and requires
additional disclosures about a companys financial assets and liabilities that
are measured at fair value. This guidance does not change existing guidance on
whether or not an instrument is carried at fair value. In February 2008, the
FASB issued authoritative guidance which delayed the effective date of this
guidance for nonfinancial assets and liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually), to fiscal years, and interim periods
within those fiscal years, beginning after November 15, 2008. In October 2008,
the FASB issued additional authoritative guidance which clarifies the
application of determining fair value when the market for a financial asset is
inactive. Specifically, this guidance clarifies how (1) managements internal
assumptions should be considered in measuring fair value when observable data
are not present, (2) observable market information from an inactive market
should be taken into account, and (3) the use of broker quotes or pricing
services should be considered in assessing the relevance of observable and
unobservable data to measure fair value. On October 1, 2008, the Company
adopted the measurement and disclosure impact of this guidance only with
respect to financial assets and liabilities. The adoption increased its fair
value disclosures but had no impact on its financial position or results of
operations. Refer to Note 8 for disclosure of the Companys fair value
measurements.

On
October 1, 2009, the Company adopted the measurement and disclosure of fair
value with respect to non-financial assets and liabilities. The adoption had no
impact on its financial position and results of operations.

Note 4. Inventories

Inventories, net of reserves, consist of the following:

|                 |  |                    |       |                     |   |       | 
|---------------- |  | ------------------ | ----- | ------------------- | - | ----- | 
|                 |  | December 31,
 2009 |       | September 30,
 2009 |  
|                 |  |                    |       |                     |  
|Raw
 materials   |  | $                  | 4,287 |                     | $ | 4,247 | 
|Work in
 process |  |                    | 14    |                     |   | 39    | 
|Finished
 goods  |  |                    | 1,331 |                     |   | 1,253 | 
|                 |  |                    |       |                     |   |       | 
|                 |  | $                  | 5,632 |                     | $ | 5,539 | 
|                 |  |                    |       |                     |   |       | 

5

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Note 5. Product Warranties

The
Company establishes a product warranty liability based on a percentage of
product sales. The liability is based on historical return rates of products
and amounts for significant and specific warranty issues, and is included in
accrued expenses in the accompanying condensed consolidated balance sheets.
Warranty is limited to a specified time period, mileage or hours of use, and
varies by product, application and customer. The Company has recorded a
liability, which in the opinion of management, is adequate to cover such
warranty costs. Warranty payments can vary significantly from year to year
depending on the timing of the settlement of warranty claims with various
customers. Following is a reconciliation of the changes in the Companys
warranty liability for the three months ended December 31, 2009 and 2008.

|                    |  |                                  |      |      |   |      |  
|------------------- |  | -------------------------------- | ---- | ---- | - | ---- | -
|                    |  | Three Months Ended
 December 31, |     
|                    |  |                                  |     
|                    |  | 2009                             |      | 2008 |  
|                    |  |                                  |      |      |  
|Beginning balance   |  | $                                | 751  |      | $ | 762  |  
|                    |  |                                  |      |      |   |      |  
|Payments            |  |                                  | (165 | )    |   | (243 | )
|Additional accruals |  |                                  | 248  |      |   | 152  |  
|                    |  |                                  |      |      |   |      |  
|                    |  |                                  |      |      |   |      |  
|Ending balance      |  | $                                | 834  |      | $ | 671  |  
|                    |  |                                  |      |      |   |      |  

Note 6. Comprehensive Income (Loss)

The
following table summarizes the components of comprehensive income (loss):

|                                  |  |                                  |     |      |   |      |  
|--------------------------------- |  | -------------------------------- | --- | ---- | - | ---- | -
|                                  |  | Three Months
 Ended December 31, |    
|                                  |  |                                  |    
|                                  |  | 2009                             |     | 2008 |  
|                                  |  |                                  |     |      |  
|Net income (loss)                 |  | $                                | 396 |      | $ | (841 | )
|Translation adjustment            |  |                                  |    |      |   | 1    |  
|Change of unrealized gain or loss |  |                                  | 97  |      |   | 105  |  
|                                  |  |                                  |     |      |   |      |  
|Comprehensive income (loss)       |  | $                                | 493 |      | $ | (735 | )
|                                  |  |                                  |     |      |   |      |  

Note 7. Earnings (Loss) Per Share

Basic
EPS is based on the weighted-average number of common shares outstanding during
the period. Diluted EPS is based on the weighted-average number of common
shares outstanding and the dilutive impact of common equivalent shares
outstanding.

Following
is a reconciliation of basic EPS and diluted EPS:

|                                               |  |                                       |     |                                       |  |                    |  |      |      |        |   |                    |   |  |           |  |   |       |  
|---------------------------------------------- |  | ------------------------------------- | --- | ------------------------------------- |  | ------------------ |  | ---- | ---- | ------ | - | ------------------ | - |  | --------- |  | - | ----- | -
|                                               |  | Three Months Ended
 December 31, 2009 |     | Three Months Ended
 December 31, 2008 | 
|                                               |  |                                       |     |                                       | 
|                                               |  | Income                                |     | Shares                                |  | Per
 Share
 Amount |  | Loss |      | Shares |   | Per
 Share
 Amount |  
|                                               |  |                                       |     |                                       |  |                    |  |      |      |        |   |                    |  
|                                               |  |                                       |     |                                       |  |                    |  |      |      |        |   |                    |   |  |           |  |   |       |  
|Basic EPS                                     |  | $                                     | 396 |                                       |  | 7,271,065          |  | $    | 0.05 |        | $ | (841               | ) |  | 7,463,409 |  | $ | (0.11 | )
|                                               |  |                                       |     |                                       |  |                    |  |      |      |        |   |                    |   |  |           |  |   |       |  
|                                               |  |                                       |     |                                       |  |                    |  |      |      |        |   |                    |   |  |           |  |   |       |  
|Effect of dilutive securities  Stock
 options |  |                                       |     |                                       |  | 104,615            |  |      |      |        |   |                    |   |  |          |  |   |       |  
|                                               |  |                                       |     |                                       |  |                    |  |      |      |        |   |                    |   |  |           |  |   |       |  
|                                              
|Diluted EPS                                   |  | $                                     | 396 |                                       |  | 7,375,680          |  | $    | 0.05 |        | $ | (841               | ) |  | 7,463,409 |  | $ | (0.11 | )
|                                               |  |                                       |     |                                       |  |                    |  |      |      |        |   |                    |   |  |           |  |   |       |  

For
the three months ended December 31, 2009, the Company had options covering
364,784 shares that were not considered in the dilutive EPS calculation since
they would have been antidilutive. For the three months ended December 31,
2008, the Company had options covering 636,255 shares not considered in the
dilutive EPS calculation since they would have been antidilutive.

6

---



Note 8. Fair Value Measurement

Financial
assets and liabilities recorded at fair value in the consolidated balance sheet
are categorized based upon a fair value hierarchy established by U.S. GAAP,
which prioritizes the inputs used to measure fair value into the following
levels:

| |           |                                                                                                                                                
| | --------- | -----------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 2009:

|                                       |  |                                     |       |         |   |         |  |         |   |  |   |   | 
|-------------------------------------- |  | ----------------------------------- | ----- | ------- | - | ------- |  | ------- | - |  | - | - | 
|                                       |  | Fair Value as of
 December 31, 2009 |       | Level 1 |   | Level 2 |  | Level 3 |  
|                                       |  |                                     |       |         |   |         |  |         |  
|                                       |  |                                     |       |         |   |         |  |         |   |  |   |   | 
|Cash and cash equivalents              |  | $                                   | 9,045 |         | $ | 9,045   |  | $       |  |  | $ |  | 
|                                       |  |                                     |       |         |   |         |  |         |   |  |   |   | 
|Short-term investments                 |  |                                     | 393   |         |   | 393     |  |         |  |  |   |  | 
|                                       |  |                                     |       |         |   |         |  |         |   |  |   |   | 
|                                       |  |                                     |       |         |   |         |  |         |   |  |   |   | 
|Total financial assets and liabilities |  | $                                   | 9,438 |         | $ | 9,438   |  | $       |  |  | $ |  | 
|                                       |  |                                     |       |         |   |         |  |         |   |  |   |   | 

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,
2009.

In
the first quarter of fiscal 2009, the Company recorded a non-cash,
mark-to-market impairment charge of approximately $317 relating to its
investment in Dana Holding CP (Dana). The decision to record the impairment
charge was based on the continued decline in the market value of the Dana
stock, as well as the contraction of the market in which Dana operates. The
Company recorded no income tax benefit on this impairment charge given the
uncertainty of the Companys ability to generate future taxable investment
gains required to utilize these investment losses. Prior to the Company
recording the impairment charge, the decline in market value was carried net of
tax in other comprehensive loss. Following the recording of this impairment
charge, all subsequent changes in market value of the Companys short-term
investments have been recorded net of tax in other comprehensive income (loss).

Note 9. Employee Benefit Plans

Pension Plans

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 pension plans are determined on an actuarial basis. The
Companys policy is to fund these costs over 15 years and to fund obligations
arising due to plan amendments over the period benefited by those plan
amendments. 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 statement
purposes and are included below:

7

---



|                                         |  |                                                           |     |                                                         |   |      |   |      |     |   |   |      |  
|---------------------------------------- |  | --------------------------------------------------------- | --- | ------------------------------------------------------- | - | ---- | - | ---- | --- | - | - | ---- | -
|Components of Net Periodic Benefit Cost: | 
|                                         |  |                                                           |     |                                                         |  
|                                         |  | Salaried Employees Plan
 Three Months Ended
 December 31, |     | Hourly Employees Plan
 Three Months Ended
 December 31, |  
|                                         |  |                                                           |     |                                                         |  
|                                         |  | 2009                                                      |     | 2008                                                    |   | 2009 |   | 2008 |    
|                                         |  |                                                           |     |                                                         |   |      |   |      |    
|Service cost                             |  | $                                                         |    |                                                         | $ |     |   | $    | 12  |   | $ | 14   |  
|Interest
 cost                           |  |                                                           | 70  |                                                         |   | 79   |   |      | 122 |   |   | 128  |  
|Expected
 return on plan assets          |  |                                                           | (55 | )                                                       |   | (70  | ) |      | (87 | ) |   | (107 | )
|Amortization
 of prior service cost      |  |                                                           |    |                                                         |   |     |   |      | 3   |   |   | 4    |  
|Amortization
 of loss                    |  |                                                           | 33  |                                                         |   | 26   |   |      | 45  |   |   | 79   |  
|                                         |  |                                                           |     |                                                         |   |      |   |      |     |   |   |      |  
|Net periodic
 benefit cost               |  | $                                                         | 48  |                                                         | $ | 35   |   | $    | 95  |   | $ | 118  |  
|                                         |  |                                                           |     |                                                         |   |      |   |      |     |   |   |      |  

The
Company expects total contributions to its pension plans for the remainder of
fiscal 2010 to be $504. During the three months ended December 31, 2009, the
Company contributed $71 to the pension plans.

Post Retirement Plan

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, 2009 and 2008.

|                                         |  |                                                        |     |      |   |     |  
|---------------------------------------- |  | ------------------------------------------------------ | --- | ---- | - | --- | -
|Components of Net Periodic Benefit Cost:
|                                         |  |                                                        |     |      |   |     |  
|                                         |  | Post-Retirement Plan
 Three Months Ended
 December 31, |    
|                                         |  |                                                        |    
|                                         |  | 2009                                                   |     | 2008 |  
|                                         |  |                                                        |     |      |  
|Service cost                             |  | $                                                      |    |      | $ | 1   |  
|Interest
 cost                           |  |                                                        | 37  |      |   | 51  |  
|Amortization                             |  |                                                        | (25 | )    |   | (22 | )
|                                         |  |                                                        |     |      |   |     |  
|Net periodic
 benefit cost               |  | $                                                      | 12  |      | $ | 30  |  
|                                         |  |                                                        |     |      |   |     |  

Note 10. 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. The Company
purchased no shares under the share repurchase program in the first quarter of
fiscal 2010. During the first quarter of fiscal 2009, the Company repurchased
300,141 shares of common stock at a total value of $2,287.

Note 11. Income Taxes

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

Note 12. Commitments and 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, other than the Cuesta
class action lawsuit discussed

8

---



below, 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 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, 2009, the total liability
recorded is $1,001 and is recorded in accrued expenses in the accompanying
condensed consolidated balance sheet. The Company asserted and settled a
contractual indemnity claim against Dana Corporation (Dana), from which it
acquired the property, and contribution claims against the other prior owner of
the property as well as businesses previously located on the property
(including Blount, Inc. (Blount) and Rosan, Inc. (Rosan)) under the Federal
Superfund Act and the Oregon Cleanup Law. During 2008, the Company entered into
a settlement agreement with Dana, Blount and Rosan under which it received
total cash payments from Dana, Blount and Rosan of $735, and shares of Dana
stock equal to approximately $337 at the time of settlement, and assumed the
full obligation to, and risks associated with, completing the remediation.

On
October 1, 2004, the Company was named as a co-defendant in a product liability
case (Cuesta v. Ford, et al), brought in the Oklahoma State District
Court in Bryant, Oklahoma. The complaint seeks an unspecified amount of damages
on behalf of the class based on allegations that certain of our products, as
incorporated into certain models of Ford motor vehicles, are in some way
defective. Following a number of procedural and appellate actions, the court
has certified a class action, but no trial date has yet been set. Management
believes the claim to be without merit and intends to continue to defend
vigorously against this action, but there can be no assurance that the ultimate
outcome of the lawsuit will be favorable to the Company or that the defense of
the suit or its outcome will not have a material adverse effect on the
Companys business, financial condition and results of operations. The Company
cannot reasonably estimate the possible loss or range of loss at this time. In
addition, the Company has incurred and may incur future litigation expenses in
defending against this litigation.

Note 13. Share Based Compensation

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
this plan the non-employee directors are each automatically granted 1,666
options at a price equal to the market value on the date of grant which is the
date of the Annual Meeting of Stockholders 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, 2009 there was $1,685 of total unrecognized compensation costs
related to nonvested stock options. That cost is expected to be recognized over
a weighted average period of 3.7 years.

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

9

---



|                                                     |  |                                  |     |      |   |     | 
|---------------------------------------------------- |  | -------------------------------- | --- | ---- | - | --- | 
|                                                     |  | Three Months
 Ended December 31, |    
|                                                     |  |                                  |    
|                                                     |  | 2009                             |     | 2008 |  
|                                                     |  |                                  |     |      |  
|Cost of
 sales                                       |  | $                                | 28  |      | $ | 36  | 
|Research and
 development                            |  |                                  | 24  |      |   | 21  | 
|Selling                                              |  |                                  | 16  |      |   | 21  | 
|Administration                                       |  |                                  | 70  |      |   | 105 | 
|                                                     |  |                                  |     |      |   |     | 
|Total
 share-based compensation expense              |  | $                                | 138 |      | $ | 183 | 
|                                                     |  |                                  |     |      |   |     | 
|Total
 share-based compensation expense (net of tax) |  | $                                | 125 |      | $ | 157 | 
|                                                     |  |                                  |     |      |   |     | 

The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants issued during the three months ended December 31,
2009 and 2008:

|                                                 |  |                                  |           |         |  |   | 
|------------------------------------------------ |  | -------------------------------- | --------- | ------- |  | - | 
|                                                 |  | Three Months Ended
 December 31, |          
|                                                 |  |                                  |          
|                                                 |  | 2009                             |           | 2008(1) | 
|                                                 |  |                                  |           |         | 
|Expected
 term                                   |  |                                  | 6.5 years |         |  |  | 
|Expected
 volatility                             |  |                                  | 47%       |         |  |  | 
|Risk-free
 interest rate                         |  |                                  | 2.81%     |         |  |  | 
|Expected
 dividend yield                         |  |                                  | 0%        |         |  |  | 
|Estimated
 average fair value per option granted |  |                                  | $4.25     |         |  |  | 

(1)There were no stock options granted during the three months ended
December 31, 2008.

The
following table summarizes stock options outstanding as of December 31, 2009 as
well as activity during the three months then ended.

|                                   |  |        |         |                                   |   |      | 
|---------------------------------- |  | ------ | ------- | --------------------------------- | - | ---- | 
|                                   |  | Shares |         | Weighted
 Average Exercise
 Price |  
|                                   |  |        |         |                                   |  
|                                  
|Outstanding
 at September 30, 2009 |  |        | 598,769 |                                   | $ | 9.40 | 
|Granted                            |  |        | 125,000 |                                   |   | 8.54 | 
|Exercised                          |  |        | (2,500  | )                                 |   | 4.68 | 
|                                   |  |        |         |                                   |   |      | 
|Outstanding
 at December 31, 2009  |  |        | 721,269 |                                   | $ | 9.27 | 
|                                   |  |        |         |                                   |   |      | 
|Exercisable
 at December 31, 2009  |  |        | 456,488 |                                   | $ | 7.80 | 
|                                   |  |        |         |                                   |   |      | 

At
December 31, 2009, the weighted average remaining contractual term of options
outstanding and options exercisable was 6.4 years and 4.9 years, respectively.

The
aggregate intrinsic value of options outstanding and options exercisable at
December 31, 2009 was $769 and $749, 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, 2008 was $682 and
$613, respectively. The intrinsic value of all stock options exercised during
the three months ended December 31, 2009 was $8 and the cash received from
these exercises was $12. There were no stock options exercised during the three
months ended December 31, 2008.

Note 14. Geographic Information

During
the three months ended December 31, 2009 and 2008, the Company operated in two
geographic reportable regions as shown in the table below.

10

---



|                                    |  |                                  |        |      |   |        |  
|----------------------------------- |  | -------------------------------- | ------ | ---- | - | ------ | -
|                                    |  | Three Months Ended
 December 31, |       
|                                    |  |                                  |       
|                                    |  | 2009                             |        | 2008 |  
|                                    |  |                                  |        |      |  
|Revenue 
 External Customers:      |  |                                  |        |      |   |        |  
|United States                       |  | $                                | 11,145 |      | $ | 10,348 |  
|China                               |  |                                  | 564    |      |   | 343    |  
|                                    |  |                                  |        |      |   |        |  
|                                    |  | $                                | 11,709 |      | $ | 10,691 |  
|                                    |  |                                  |        |      |   |        |  
|Revenue 
 Intersegments:           |  |                                  |        |      |   |        |  
|United States                       |  | $                                | 238    |      | $ | 105    |  
|China                               |  |                                  | 2,617  |      |   | 2,405  |  
|Other                               |  |                                  | 190    |      |   | 134    |  
|Eliminations                        |  |                                  | (3,045 | )    |   | (2,644 | )
|                                    |  |                                  |        |      |   |        |  
|                                    |  | $                                |       |      | $ |       |  
|                                    |  |                                  |        |      |   |        |  
|Income
 (loss) before income taxes: |  |                                  |        |      |   |        |  
|United States                       |  | $                                | 371    |      | $ | (1,508 | )
|China                               |  |                                  | 241    |      |   | 217    |  
|Other                               |  |                                  | (93    | )    |   | (14    | )
|                                    |  |                                  |        |      |   |        |  
|                                    |  | $                                | 519    |      | $ | (1,305 | )
|                                    |  |                                  |        |      |   |        |  

Note 15. Subsequent Events

In
May 2009, the FASB issued authoritative guidance which requires disclosure of
the date through which subsequent events have been evaluated, as well as
whether the date is the date the financial statements were issued or the date
the financial statements were available to be issued. The Company has evaluated
subsequent events through February 5, 2010, the date the financial statements
were issued. The Company noted no significant subsequent events have occurred
through this date requiring adjustment to the financial statements or
disclosures.

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, 2009 and 2008. This section should be read in conjunction
with our condensed consolidated financial statements and related notes appearing
elsewhere in this document. Statements in this report that relate to future
results and events are based on our current expectations. Actual results in
future periods may differ materially from those currently expected or desired
because of a number of risks and uncertainties, including, but not limited to,
those risks discussed in the section entitled Risk Factors in our annual
report on Form 10-K for the fiscal year ended September 30, 2009.

Forward-Looking Statements

This
quarterly report on Form 10-Q contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements include all statements other than those that
expressly connote an assertion of historical fact. Among others, this report
includes forward looking statements that describe our plans and intentions
regarding future courses of action and the possible outcomes of those
intentions, and that set forth our expectations regarding our prospective
financial condition, results of operations, and cash flows. Forward-looking
statements can sometimes be identified by the use of forward-looking
terminology, such as may , will, should , expect, anticipate,
estimate, continue, plans and intends. 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 us to deviate from our current plans, and could cause our 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 cannot undertake to update or revise these
statements.

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, 2009 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 controls, pneumatic controls
and electronic hand controls, and we have begun selling electronic sensors for
heavy trucks, transit busses and off-road equipment. Electronic throttle
controls send a signal proportional to throttle position to adjust the speed of
electronically controlled engines. The use of electronically controlled engines
is influenced primarily by emissions regulations, because these engines
generally produce lower emissions. The original applications of electronic
engines and electronic throttle controls were in heavy trucks and transit
busses in the United States and Europe in the late 1980s. As a result of the
continuing implementation of more stringent emissions standards worldwide,
demand for electronically controlled engines and electronic throttle control
systems is expanding both geographically and into lower horsepower engines.
China, India and Russia are in the process of implementing more stringent
emissions standards for heavy trucks and transit busses. Additionally,
worldwide emissions regulations have been enacted that continue to increase the
use of electronic throttle controls in off-road equipment. We also produce
pneumatic controls and electronic hand controls, which are sold to the same
customer base as our electronic throttle controls. These products are used for
vehicle control system applications such as power take-offs and air-control
applications. We believe that the demand for our products will be driven
primarily by worldwide emissions legislation and the economic cycles for heavy
trucks, transit busses and off-road equipment.

As
we move forward in fiscal 2010 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 shipment, 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 estimated
returns, rebates and customer discounts. Discounts and rebates are recorded
during the period they are earned by the customer.

Product 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. We expense legal expenses related to
claims in the period incurred. 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 Costs

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
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 EndedDecember 31, |        |      |   |              
|                               |  |                                |        |      |   |              
|                               |  | 2009                           |        | 2008 |   | PercentChange |   
|                               |  |                                |        |      |   |               |   
|Net sales                      |  | $                              | 11,709 |      | $ | 10,691        |    |  | 9.5   | % 
|Cost of sales                  |  |                                | 8,123  |      |   | 8,137         |    |  | (0.2  | )%
|                               |  |                                |        |      |   |               |    |  |       |   
|                               |  |                                |        |      |   |               |    |  |       |   
|Gross profit                   |  |                                | 3,586  |      |   | 2,554         |    |  | 40.4  | % 
|                               |  |                                |        |      |   |               |    |  |       |   
|Research and development       |  |                                | 1,056  |      |   | 1,146         |    |  | (7.9  | )%
|Selling                        |  |                                | 658    |      |   | 651           |    |  | 1.1   | % 
|Administration                 |  |                                | 1,345  |      |   | 1,666         |    |  | (19.3 | )%
|                               |  |                                |        |      |   |               |    |  |       |   
|Operating income (loss)        |  | $                              | 527    |      | $ | (909          | )  |  | 158.0 | % 
|                               |  |                                |        |      |   |               |    |  |       |   
|                               |  |                                |        |      |   |               |    |  |       |   
|As a percentage of net
 sales: |  |                                |        |      |   |               |    |  |       |   
|Cost of sales                  |  |                                | 69.4   | %    |   | 76.1          | %  |  |       |   
|Gross margin                   |  |                                | 30.6   | %    |   | 23.9          | %  |  |       |   
|Research and development       |  |                                | 9.0    | %    |   | 10.7          | %  |  |       |   
|Selling                        |  |                                | 5.6    | %    |   | 6.1           | %  |  |       |   
|Administration                 |  |                                | 11.5   | %    |   | 15.6          | %  |  |       |   
|Operating income (loss)        |  |                                | 4.5    | %    |   | (8.5          | )% |  |       |   

Net
sales increased to $11,709 for the first quarter of fiscal 2010. The trough of
the economic cycle appears to have occurred during our third fiscal quarter of
2009 and sales have steadily increased since that time with first quarter 2010
sales being 11% higher than the fourth quarter of fiscal 2009 and 39% higher
than the third quarter of fiscal 2009. Although we have seen improvement from
our low point in fiscal 2009, the heavy truck industry is still significantly
below levels prior to the economic downturn with our first quarter sales run
rate being approximately 30% below fiscal 2008 sales levels. While we continue
to closely monitor all of our costs, we remain committed to spending on new
product development and technology for existing and new customers. Although no
assurances can be given, management believes that it is likely that our $9,045
in cash will be adequate to sustain the Company through the foreseeable future.

Comparative  Three months ended December 31,
2009 and 2008

NM = Not Meaningful

|                                         |  |      |        |      |   |                 |  |  |     |  
|---------------------------------------- |  | ---- | ------ | ---- | - | --------------- |  |  | --- | -
|                                         |  |      |        |      |   | Percent
 Change | 
|                                         |  |      |        |      |   |                 | 
|For the Three Months Ended December
 31: |  | 2009 |        | 2008 |   | 2008 to
 2009   | 
|                                         |  |      |        |      |   |                 | 
|Net sales                                |  | $    | 11,709 |      | $ | 10,691          |  |  | 9.5 | %

Net
sales increased $1,018 in the first quarter of fiscal 2010 compared to the
first quarter of fiscal 2009. The increase in sales results from volume
increases in both the Asian and European truck markets offset slightly by a
decline in the NAFTA truck market. Asian truck sales increased 132% over the
prior year quarter and European truck sales were up 58% over the same period.
NAFTA truck sales were down 10% when compared to the first quarter of fiscal
2009; however NAFTA truck sales were up 13% when compared to the fourth quarter
of fiscal 2009. In addition, worldwide off-road sales were up 11% for the
quarter ended December 31, 2009.

15

---



|                                         |  |      |       |      |   |               |  |                 |     
|---------------------------------------- |  | ---- | ----- | ---- | - | ------------- |  | --------------- | ----
|                                         |  |      |       |      |   |               |  | Percent
 Change |     
|                                         |  |      |       |      |   |               |  |                 |     
|For the Three Months Ended December
 31: |  | 2009 |       | 2008 |   | 2008 to
 2009 | 
|                                         |  |      |       |      |   |               | 
|Gross profit                             |  | $    | 3,586 |      | $ | 2,554         |  |                 | 40.4

Gross
profit was $3,586, or 30.6% of net sales in the first quarter of fiscal 2010,
an increase of $1,032 compared to the gross profit of $2,554, or 23.9% of net
sales, in the comparable fiscal 2009 period.

The
increase in gross profit in the first quarter of fiscal 2010 is partially
driven by the 10% net increase in sales of electronic throttle systems to our
heavy truck and off-road customers and in part due to cost reduction efforts
implemented in mid-fiscal 2009. In response to the economic downturn in 2009,
during the second quarter of fiscal 2009, we implemented cost management
efforts to reduce our operational costs to be more in line with the reduced
sales volumes we were experiencing. When comparing the first quarter of fiscal
2010 with the comparable period in fiscal 2009, manufacturing overhead costs in
the three months ended December 31, 2009 were 14% lower than the first quarter
of fiscal 2009.

|                                         |  |      |       |      |   |                   |  |  |      |   
|---------------------------------------- |  | ---- | ----- | ---- | - | ----------------- |  |  | ---- | --
|                                         |  |      |       |      |   | Percent
 
 Change | 
|                                         |  |      |       |      |   |                   | 
|For the Three Months Ended December
 31: |  | 2009 |       | 2008 |   | 2008 to
 2009     | 
|                                         |  |      |       |      |   |                   | 
|Research and
 development                |  | $    | 1,056 |      | $ | 1,146             |  |  | (7.9 | )%

Research
and development expenses decreased $90 for the first quarter of fiscal 2010
compared to the comparable period in fiscal 2009. The Companys research and
development expenditures generally will fluctuate based on the programs and
products under development at any given point in time, and that fluctuation
often does not coincide with sales cycles. Overall, we expect research and
development expenses to increase slightly over fiscal 2009 levels due to
additional new product design projects.

|                                         |  |      |     |      |   |               |  |                   |     |  
|---------------------------------------- |  | ---- | --- | ---- | - | ------------- |  | ----------------- | --- | -
|                                         |  |      |     |      |   |               |  | Percent
 
 Change |    
|                                         |  |      |     |      |   |               |  |                   |    
|For the Three Months Ended December
 31: |  | 2009 |     | 2008 |   | 2008 to
 2009 | 
|                                         |  |      |     |      |   |               | 
|Selling                                  |  | $    | 658 |      | $ | 651           |  |                   | 1.1 | %

Selling
expenses were essentially unchanged when compared with the three month period
ended December 31, 2008.

|                                        |  |      |       |      |   |               |  |                   |       |   
|--------------------------------------- |  | ---- | ----- | ---- | - | ------------- |  | ----------------- | ----- | --
|                                        |  |      |       |      |   |               |  | Percent
 
 Change |      
|                                        |  |      |       |      |   |               |  |                   |      
|For the Three Months Ended December 31: |  | 2009 |       | 2008 |   | 2008 to
 2009 | 
|                                        |  |      |       |      |   |               | 
|Administration                          |  | $    | 1,345 |      | $ | 1,666         |  |                   | (19.3 | )%

Administration
expenses for the first fiscal quarter of 2010 decreased $321 when compared with
the same period in fiscal 2009. The decrease in administration expense is
primarily a result of non-cash compensation expense recognized in conjunction
with the Companys unfunded deferred compensation plan that was recorded in the
first quarter of fiscal 2009. In addition, the three months ended December 31,
2009 included cost reductions put into place during 2009 in response to the
economic downturn whereas these reductions had not yet been implemented as of
the first quarter of fiscal 2009. Offsetting these cost reductions were
increases in legal fees, specifically those associated with the Cuesta class
action lawsuit.

|                                         |  |      |   |      |   |               |  |                 |    | 
|---------------------------------------- |  | ---- | - | ---- | - | ------------- |  | --------------- | -- | 
|                                         |  |      |   |      |   |               |  | Percent
 Change |   
|                                         |  |      |   |      |   |               |  |                 |   
|For the Three Months Ended December
 31: |  | 2009 |   | 2008 |   | 2008 to
 2009 | 
|                                         |  |      |   |      |   |               | 
|Loss 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

16

---



gains required
to utilize these investment losses. Prior to and subsequent to the Company
recording the impairment charge, changes in market value are carried net of tax
in other comprehensive income (loss).

|                                         |  |      |     |      |   |                  |   |  |    | 
|---------------------------------------- |  | ---- | --- | ---- | - | ---------------- | - |  | -- | 
|                                         |  |      |     |      |   | Percent 
 Change |  
|                                         |  |      |     |      |   |                  |  
|For the
 Three Months Ended December 31: |  | 2009 |     | 2008 |   | 2008 to 2009     |  
|                                         |  |      |     |      |   |                  |  
|Income tax
 expense (benefit)            |  | $    | 123 |      | $ | (464             | ) |  | NM | 

Income
tax expense (benefit) reflects an effective tax rate of 23.7% for the quarter
ended December 31, 2009 compared to an effective tax rate of 35.6% for the
quarter ended December 31, 2008. The effective tax rate fluctuations are
primarily due to the jurisdictions in which pretax income (loss) is being
earned and income tax rate differences between the domestic and foreign
jurisdictions. The decrease in tax rate from fiscal 2009 to fiscal 2010 is also
due in part to a provision for the United States Domestic Manufacturing
Deduction in fiscal 2010.

Financial
Condition, Liquidity and Capital Resources

At
December 31, 2009, we had cash and cash equivalents of $9,045. During fiscal
2009 we cancelled our revolving loan facility with GE Capital. We believe our
cash on hand will be sufficient to meet our working capital needs on a
short-term and longer-term basis without the necessity of establishing a new
revolving credit facility. However, were we to require additional borrowing
capacity, we may be unable to locate such capacity on acceptable terms or at
all.

Cash
generated by operating activities was $160 for the first quarter of fiscal
2010, a decrease of $226 from the cash generated by operating activities of
$386 during the first quarter of fiscal 2009. Net income (loss) plus non cash
charges for depreciation and stock based compensation contributed $1,058 in the
first quarter of fiscal 2010 compared to a charge of $179 in the first quarter
of fiscal 2009.

Changes in
working capital items used cash of $885 in the first quarter of fiscal 2010
compared to generating cash of $111 in the first quarter of fiscal 2009.
Changes in receivables for the first quarter of fiscal 2010 was a use of
cash of $250 compared to a $3,415 generation of cash in the first quarter of
fiscal 2009. The significant cash generation from the collection of receivables
in the first quarter of fiscal 2009 was due to the reduction in sales and
accounts receivable due to the deterioration of the general economy during that
quarter. Inventories increased $93 in the first quarter of fiscal 2010 compared
to an increase of $265 in the first quarter of fiscal 2009. Accounts payable
and accrued expenses decreased in the first quarter of fiscal 2010 primarily
due to seasonal payments of certain expenses, whereas the decrease in accounts
payable and accrued expenses in 2009 was 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, 2009 included payments to
our pension plans of $71. We were not required to make any contributions 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 $372 for the three months ended December 31,
2009 and $777 for the three months ended December 31, 2008 and was comprised
primarily of purchases of equipment for both periods. We expect our cash use
for investing activities to increase throughout the fiscal year as we continue
to make purchases of capital equipment.

Cash
generated in financing activities was $12 for the quarter ended December 31,
2009, compared to cash used in financing activities of $2,287 for the quarter
ended December 31, 2008. Cash generated for financing activities for the first
quarter of fiscal 2010 relates to proceeds from the exercise of stock options.
In October 2008, the Company announced a share repurchase plan whereby the
Company can, but is under no obligation to, repurchase up to $5,000 of the
Companys common stock. Repurchases may be made in the open market or through
block trades, in compliance with Securities and Exchange Commission guidelines,
subject to market conditions, applicable legal requirements and other factors.
During the first quarter of fiscal 2009, the Company purchased 300,141 shares
of common stock at a total value of $2,287 and did not make any repurchases
during the first quarter of fiscal 2010.

17

---



Contractual Obligations as of December 31,
2009

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

|                                 |  |                         |       |                    |   |               |  |               |       |  |   |     | 
|-------------------------------- |  | ----------------------- | ----- | ------------------ | - | ------------- |  | ------------- | ----- |  | - | --- | 
|                                 |  | Payments
 due by period |      
|                                 |  |                         |      
|                                 |  | Total                   |       | Less than 
 1 year |   | 1  3 
 years |  | 3  5 
 years |      
|                                 |  |                         |       |                    |   |               |  |               |      
|Operating
 leases                |  | $                       | 1,500 |                    | $ | 565           |  | $             | 931   |  | $ | 4   | 
|MMT license
 - minimum royalties |  |                         | 300   |                    |   | 50            |  |               | 150   |  |   | 100 | 
|                                 |  |                         |       |                    |   |               |  |               |       |  |   |     | 
|                                 |  | $                       | 1,800 |                    | $ | 615           |  | $             | 1,081 |  | $ | 104 | 
|                                 |  |                         |       |                    |   |               |  |               |       |  |   |     | 

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, 2009 related to our pension
plans and post-retirement medical plan of $2,755 and $5,775, respectively. We
funded $71 to our pension plans during the first quarter of fiscal 2010. We
didnt make any contribution during the first quarter of fiscal 2009. We expect
to make payments to our pension plans of $504 throughout the rest of fiscal
2010.

|        |                                                            
|------- | -----------------------------------------------------------
|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

As
of December 31, 2009, there are no balances outstanding on any loan or
revolving loan. The Companys prior revolving loan agreement expired during the
fourth quarter of fiscal 2009.

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, 2009 and 2008,
the Company had foreign sales of approximately 42% and 35% of net sales,
respectively. All worldwide sales in the first quarter of fiscal 2010 and 2009,
with the exception of $564 and $343, 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 Munich, Germany. We
purchase components internationally for use in both our products whose sales
are denominated in U.S. dollars and other currencies. Although the Company is
expanding its international exposure, it does not believe that changes in
future exchange rates would have a material effect on its financial position,
results of operations, or cash flows at this time. As a result, the Company has
not entered into forward exchange or option contracts for transactions to hedge
against foreign currency risk. The Company will continue to assess its foreign
currency risk as its international operations, international purchases and
sales increase.

Investment Risk:

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

18

---



|        |                        
|------- | -----------------------
|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,
other than the Cuesta class action lawsuit discussed below, 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.

On
October 1, 2004, the Company was named as a co-defendant in a product liability
case (Cuesta v. Ford, et al), brought in the Oklahoma State District
Court in Bryant, Oklahoma. The complaint seeks an unspecified amount of damages
on behalf of the class based on allegations that certain of our products, as
incorporated into certain models of Ford motor vehicles, are in some way
defective. Following a number of procedural and appellate actions, the court
has certified a class action, but no trial date has yet been set. Management
believes the claim to be without merit and intends to continue to defend
vigorously against this action, but there can be no assurance that the ultimate
outcome of the lawsuit will be favorable to the Company or that the defense of
the suit or its outcome will not have a material adverse effect on the
Companys business, financial condition and results of operations. The Company
cannot reasonably estimate the possible loss or range of loss at this time. In
addition, the Company has incurred and may incur future litigation expenses in
defending against this litigation.

|         |             
|-------- | ------------
|Item 1A. | Risk Factors

There
have been no significant changes in risk factors for the quarter ended December
31, 2009. See the information set forth in the section entitled Risk Factors
in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009.

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

None

|        |                                
|------- | -------------------------------
|Item 3. | Defaults Upon Senior Securities

None

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

None

|        |                  
|------- | -----------------
|Item 5. | Other Information

None

|        |         
|------- | --------
|Item 6. | Exhibits

|                |  |                                                                                                                                                                                                                                                  
|--------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
 Number |  | Description                                                                                                                                                                                                                                      
|                |  |                                                                                                                                                                                                                                                  
|               
|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)

20

---



|        |  |                                                                                                                                                                                                                                                  
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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)                   
|        |  |                                                                                                                                                                                                                                                  
|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

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SIGNATURES

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

|                        |                                       | 
|----------------------- | ------------------------------------- | 
|                        | WILLIAMS CONTROLS, INC.              
|                        |                                      
|Date:
 February 5, 2009 | /s/ PATRICK
 W. CAVANAGH              | 
|                        |                                       | 
|                        | Patrick W.
 Cavanagh                 
|                        | President and Chief Executive Officer
|                        |                                      
|Date:
 February 5, 2009 | /s/ DENNIS
 E. BUNDAY                 | 
|                        |                                       | 
|                        | Dennis E.
 Bunday                    
|                        | Chief Financial Officer              

22

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