# UNITED STATES SECURITIES AND
EXCHANGE COMMISSION Washington, D.C. 20549

# FORM 10-Q

# [ x ]   QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

# For the quarterly
period ended: December 31, 2004

# [   ]   TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

# For the transition
period from_____________to_____________

# Commission file number
0-18083

Williams Controls, Inc. 
(Exact name of registrant as specified in its charter)

|Delaware                                                      | 84-1099587                         
|------------------------------------------------------------- | -----------------------------------
|(State or other jurisdiction ofincorporation or organization) | (I.R.S. EmployerIdentification No.)

|14100 SW 72nd Avenue,Portland, Oregon   | 97224     
|--------------------------------------- | ----------
|(Address of principal executive office) | (zip code)

(503) 684-8600(Registrants
telephone number, including area code)

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

Yes [X]     No [   ]

Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Yes [   ]     No [X]

The number of shares
outstanding of the registrants common stock at January 31, 2005: 46,629,411



# Williams Controls, Inc.

# December 31, 2004

# Table of Contents

|                                                                     | PageNumber
|-------------------------------------------------------------------- | ----------
|Part I.  Financial Information                                       |           
|                                                                     |           
|Item 1. Financial Statements (unaudited)                             |           
|                                                                     |           
|Condensed Consolidated Balance Sheets, December 31, 2004 and         |           
|September 30, 2004                                                   |           
|                                                                     |           
|Condensed Consolidated Statements of Operations, three months ended  |           
|December 31, 2004 and 2003                                           |           
|                                                                     |           
|Condensed Consolidated Statements of Cash Flows, three months ended  |           
|December 31, 2004 and 2003                                           |           
|                                                                     |           
|Notes to Condensed Consolidated Financial Statements                 |           
|                                                                     |           
|Item 2.  Management's Discussion and Analysis of Financial Condition |           
|and Results of Operations                                            |           
|                                                                     |           
|Item 3.  Quantitative and Qualitative Disclosures About Market Risk  |           
|                                                                     |           
|Item 4.  Controls and Procedures                                     |           
|                                                                     |           
|Part II.  Other Information                                          |           
|                                                                     |           
|Item 1.  Legal Proceedings                                           |           
|                                                                     |           
|Item 2.  Changes in Securities and Use of Proceeds                   |           
|                                                                     |           
|Item 3.  Defaults Upon Senior Securities                             |           
|                                                                     |           
|Item 4.  Submission of Matters to a Vote of Security Holders         |           
|                                                                     |           
|Item 5.  Other Information                                           |           
|                                                                     |           
|Item 6.  Exhibits and Reports on Form 8-K                            |           
|                                                                     |           
|Signature Page                                                       |           



# Part I

# Item 1. Financial
Statements

# Williams Controls, Inc.
Condensed Consolidated Balance Sheets (Dollars in thousands,
except per share information) (Unaudited)

|                                                                           | December 31, 2004 |  | September 30, 2004 |        
|-------------------------------------------------------------------------- | ----------------- |  | ------------------ | -------
|ASSETS                                                                     |                   |  |                    |        
|Current Assets:                                                            |                   |  |                    |        
|Cash and cash equivalents                                                  |                   |  | $                  | 3,995  
|Trade accounts receivable, less allowance of                               |                   | 
|$28 and $20 at December 31, 2004 and September 30                          |                   | 
|2004, respectively                                                         |                   |  |                    | 7,081  
|Other accounts receivable                                                  |                   |  |                    | 461    
|Inventories                                                                |                   |  |                    | 3,502  
|Deferred income taxes                                                      |                   |  |                    | 2,116  
|Prepaid expenses and other current assets                                  |                   |  |                    | 690    
|                                                                           |                   |  |                    |        
|Total current assets                                                       |                   |  |                    | 17,845 
|Property, plant and equipment, net                                         |                   |  |                    | 6,054  
|Deferred income taxes                                                      |                   |  |                    | 6,300  
|Other assets, net                                                          |                   |  |                    | 1,181  
|                                                                           |                   |  |                    |        
|Total assets                                                               |                   |  | $                  | 31,380 
|                                                                           |                   |  |                    |        
|LIABILITIES AND STOCKHOLDERS' DEFICIT                                      |                   | 
|Current Liabilities:                                                       |                   | 
|Accounts payable                                                           |                   |  | $                  | 3,775  
|Accrued expenses                                                           |                   |  |                    | 4,437  
|Current portion of employee benefit obligations                            |                   |  |                    | 1,638  
|Current portion of long-term debt and capital lease obligations            |                   |  |                    | 3,455  
|                                                                           |                   |  |                    |        
|Total current liabilities                                                  |                   |  |                    | 13,305 
|Long-term Liabilities:                                                     |                   | 
|Long-term debt and capital lease obligations                               |                   |  |                    | 16,066 
|Employee benefit obligations                                               |                   |  |                    | 7,330  
|Other long-term liabilities                                                |                   |  |                    | -      
|Commitments and contingencies                                              |                   | 
|Stockholders' Deficit:                                                     |                   | 
|Series C Preferred Stock ($.01 par value, 100,000 authorized; 0 issued and |                   | 
|outstanding at December 31, 2004 and September 30, 2004,                   |                   | 
|respectively)                                                              |                   |  |                    | -      
|Common stock ($.01 par value, 50,000,000 authorized; 46,629,411            |                   | 
|issued and outstanding at December 31, 2004 and September 30,              |                   | 
|2004)                                                                      |                   |  |                    | 466    
|Additional paid-in capital                                                 |                   |  |                    | 35,960 
|Accumulated deficit                                                        |                   |  |                    | (35,744
|Treasury stock (130,200 shares at December 31, 2004 and                    |                   | 
|September 30, 2004)                                                        |                   |  |                    | (377   
|Other comprehensive loss - Pension liability adjustment                    |                   |  |                    | (5,626 
|                                                                           |                   |  |                    |        
|Total stockholders' deficit                                                |                   |  |                    | (5,321 
|                                                                           |                   |  |                    |        
|Total liabilities and stockholders' deficit                                |                   |  | $                  | 31,380 
|                                                                           |                   |  |                    |        

See accompanying notes
to Unaudited Condensed Consolidated Financial Statements.  1



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

|                                                                    | Three Months EndedDecember 31, | 
|------------------------------------------------------------------- | ------------------------------ | 
|
|Net sales                                                           |                                | 
|Cost of sales                                                       |                                | 
|                                                                    |                                | 
|Gross profit                                                        |                                | 
|                                                                   
|Operating expenses:                                                 |                                | 
|Research and development                                            |                                | 
|Selling                                                             |                                | 
|Administration                                                      |                                | 
|                                                                    |                                | 
|Total operating expenses                                            |                                | 
|                                                                   
|Operating income from continuing operations                         |                                | 
|                                                                   
|Other (income) expenses:                                            |                                | 
|Interest expense - Debt, net                                        |                                | 
|Interest expense - Series B Preferred Stock dividends and accretion |                                | 
|Gain on put/call option agreement                                   |                                | 
|Other income, net                                                   |                                | 
|                                                                    |                                | 
|Total other expenses                                                |                                | 
|                                                                   
|Income from continuing operations before income taxes               |                                | 
|Income tax expense                                                  |                                | 
|                                                                    |                                | 
|Net income from continuing operations                               |                                | 
|                                                                   
|Discontinued operations:                                            |                                | 
|Loss from discontinued operations                                   |                                | 
|                                                                    |                                | 
|Net income                                                          |                                | 
|                                                                    |                                | 
|Income per common share from continuing operations - basic          |                                | 
|Loss per common share from discontinued operations - basic          |                                | 
|                                                                    |                                | 
|Net income per common share - basic                                 |                                | 
|                                                                    |                                | 
|Weighted average shares used in per share calculation - basic       |                                | 
|                                                                    |                                | 
|Income per common share from continuing operations - diluted        |                                | 
|Loss per common share from discontinued operations - diluted        |                                | 
|                                                                    |                                | 
|Net income per common share - diluted                               |                                | 
|                                                                    |                                | 
|Weighted average shares used in per share calculation - diluted     |                                | 
|                                                                    |                                | 

See accompanying notes
to Unaudited Condensed Consolidated Financial Statements.  2



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

|                                                                      | Three Months EndedDecember 31, | 
|--------------------------------------------------------------------- | ------------------------------ | 
|
|Cash flows from operating activities:                                 |                                | 
|Net income                                                            |                                | 
|Adjustments to reconcile net income to net cash provided by operating |                                | 
|activities:                                                           |                                | 
|Depreciation and amortization                                         |                                | 
|Deferred income taxes                                                 |                                | 
|Gain on put/call option agreement                                     |                                | 
|Loss from discontinued operations                                     |                                | 
|Loss from disposal of fixed assets                                    |                                | 
|Interest expense - Series B Preferred Stock dividends and accretion   |                                | 
|Changes in operating assets and liabilities                           |                                | 
|Receivables, net                                                      |                                | 
|Inventories                                                           |                                | 
|Accounts payable and accrued expenses                                 |                                | 
|Other                                                                 |                                | 
|                                                                      |                                | 
|Net cash provided by operating activities                             |                                | 
|                                                                      |                                | 
|Cash flows from investing activities:                                 |                                | 
|Purchases of property, plant and equipment                            |                                | 
|Net proceeds received from sale of assets                             |                                | 
|                                                                      |                                | 
|Net cash provided by (used in) investing activities                   |                                | 
|                                                                      |                                | 
|Cash flows from financing activities:                                 |                                | 
|Net payments of debt and capital lease obligations                    |                                | 
|Payment of Series A-1 dividends                                       |                                | 
|Redemption of Series A Preferred Stock                                |                                | 
|                                                                      |                                | 
|Net cash used in financing activities                                 |                                | 
|                                                                      |                                | 
|Net increase in cash and cash equivalents                             |                                | 
|Cash and cash equivalents at beginning of period                      |                                | 
|                                                                      |                                | 
|Cash and cash equivalents at end of period                            |                                | 
|                                                                      |                                | 
|Supplemental disclosure of cash flow information:                     |                                | 
|Interest paid                                                         |                                | 
|                                                                      |                                | 
|Income taxes paid                                                     |                                | 
|                                                                      |                                | 

See accompanying notes
to Unaudited Condensed Consolidated Financial Statements.  3



# Williams Controls, Inc. Notes to Unaudited
Condensed Consolidated Financial Statements Three Months ended December
31, 2004 and 2003 (Dollars in thousands,
except share and per share amounts) (Unaudited)

# Note 1. Organization

Williams
Controls, Inc., including its wholly-owned subsidiaries, Williams Controls Industries,
Inc. (Williams); Aptek Williams, Inc. (Aptek); Premier Plastic
Technologies, Inc. (PPT); ProActive Acquisition Corporation
(ProActive); WMCO-Geo, Inc. (GeoFocus); NESC Williams, Inc.
(NESC); Williams Technologies, Inc. (Technologies); Williams World
Trade, Inc. (WWT); Techwood Williams, Inc. (TWI); Agrotec
Williams, Inc. (Agrotec) and its 80% owned subsidiaries Hardee Williams, Inc.
(Hardee) and Waccamaw Wheel Williams, Inc. (Waccamaw) are
hereinafter referred to as the Company, we, our, or
us.

# 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, 2004 and the results of operations and cash flows for the three months
ended December 31, 2004 and 2003. The results of operations for the three months ended
December 31, 2004 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 September 30, 2004 annual report on Form 10-K, 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 accounts and transactions have been eliminated.

The
preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosures 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. On an ongoing
basis, the Company evaluates its estimates, including those related to its allowance for
doubtful accounts, impairment of long-lived assets, warranties, pensions and
post-retirement benefit obligations, income taxes, and commitments and contingencies.
Actual results could differ from these estimates and assumptions.

# Note 3. Accounting for
stock based compensation

The
Company has elected to account for its stock-based compensation plans using the intrinsic
value-based method under Accounting Principles Board Opinion No. 25 (APB 25). Based on the
provisions of Statement of Financial Accounting Standards (SFAS) No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure, and SFAS No. 123,
Accounting for Stock-Based Compensation, the Company has computed, for pro
forma disclosure purposes, net income and net income per share as if the fair value based
method of accounting had been adopted.

In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123
(Revised 2004), Share Based Payment. This statement requires that compensation
cost relating to share-based payment transactions be recognized in financial statements.
Compensation cost will be measured based on the fair value of the equity or liability
instruments issued. Share-based compensation arrangements include stock options,
restricted stock plans, performance-based awards, stock appreciation rights, and employee
stock purchase plans. SFAS No. 123R replaces SFAS No. 123 and supercedes APB No. 25 and is
effective for the first interim or annual reporting period that begins after June 15,
2005, upon which time the Company will adopt the provisions of this statement. Until such
time, the Company will continue to account for its stock-based compensation plans in
accordance with APB No. 25.

For
the three months ended December 31, 2004, the Company granted stock options to one
employee. The Company computed, for pro forma disclosure purposes, the value of all the
options granted during the three months ended December

4



31, 2004, using the Black-Scholes
option pricing model as prescribed by SFAS No. 123 using the following weighted average
assumptions for grants. There were no option grants during the three months ended
December 31, 2003.

|                        | Weighted Average
|----------------------- | ----------------
|Risk-free interest rate | 3.85%           
|Expected dividend yield | 0%              
|Expected lives          | 7years          
|Expected volatility     | 97%             

Using
the Black-Scholes methodology, the total value of options granted during the three months
ended December 31, 2004 was $780, which would be amortized on a pro forma basis over the
five year vesting period of the options. The weighted average per share fair value of
options granted during the three months ended December 31, 2004 was $.78.

If
the Company had accounted for its stock-based compensation plans using the fair
value-based method in accordance with SFAS No. 123, the Companys net income and net
income per share would approximate the pro forma disclosures below:

|                                                                     | Three Months EndedDecember 31, | 
|-------------------------------------------------------------------- | ------------------------------ | 
|
|Net income allocable to common stockholders as reported              |                                | 
|                                                                     |                                | 
|Less:  Total stock-based employee compensation expense               |                                | 
|determined under fair value based method, net of related tax effects |                                | 
|                                                                     |                                | 
|Pro forma net income                                                 |                                | 
|                                                                     |                                | 
|Earnings per share:                                                  |                                | 
|Basic - as reported                                                  |                                | 
|                                                                     |                                | 
|Basic - pro forma                                                    |                                | 
|                                                                     |                                | 
|Diluted - as reported                                                |                                | 
|                                                                     |                                | 
|Diluted - pro forma                                                  |                                | 
|                                                                     |                                | 

# Note 4. Comprehensive
Income

Statement
of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, requires companies to report a measure of all changes in
equity except those resulting from investments by owners and distributions to owners.
Total comprehensive income for the three months ended December 31, 2004 and 2003 was
$1,714 and $1,090, respectively, and consisted solely of net income. As of December 31,
2004, accumulated other comprehensive loss was ($5,626) and consisted of accumulated
benefit obligations in excess of the plan assets for both the Hourly Employees pension
plan and the Salaried Employees pension plan.

# Note 5. Income Per Share

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

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

5



|                                    | Three Months EndedDecember 31, 2004 |   | Three Months EndedDecember 31, 2003 | 
|----------------------------------- | ----------------------------------- | - | ----------------------------------- | 
|
|Basic EPS -                         |                                     |   |                                     | 
|Weighted average common shares      |                                     |  
|outstanding                         |                                     |   |                                     | 
|Effect of participating securities: |                                     |  
|Preferred stock - Series A-1        |                                     |   |                                     | 
|                                    |                                     |   |                                     | 
|Income allocable to common          |                                     |  
|stockholders from continuing        |                                     |  
|operations                          |                                     | $ | 1,714                               | 
|                                    |                                     |   |                                     | 
|Diluted EPS -                       |                                     |  
|Effect of dilutive securities -     |                                     |  
|Stock options                       |                                     |   | -                                   | 
|Preferred stock - Series A          |                                     |   | -                                   | 
|                                    |                                     |   |                                     | 
|Income allocable to common          |                                     |  
|stockholders from continuing        |                                     |  
|operations                          |                                     | $ | 1,714                               | 
|                                    |                                     |   |                                     | 

For
the three months ended December 31, 2004, the Company had options and warrants covering
1,471,150 shares that were not considered in the dilutive EPS calculation since they would
have been antidilutive. For the three months ended December 31, 2003, the Company had
options and warrants covering 7,181,719 shares not considered in the dilutive EPS
calculation since they would have been antidilutive.

The
Company adopted EITF 03-6, Participating Securities and the Two-Class Method under
FASB Statement No. 128 during the quarter ended June 30, 2004. EITF 03-6 requires that participating securities that are convertible into common
stock be included in the computation of Basic EPS if the effect is dilutive. The
Companys Series A-1 Preferred Stock stockholders participate in the dividend
rights equal to common stockholders for each share of common stock their preferred stock
could be converted into. Therefore, in accordance with EITF 03-6, the Companys Basic
EPS reported for the three months ended December 31, 2003 has been retroactively restated
to $0.04 per share from $0.06 per share to reflect the participation rights of the Series
A-1 Preferred Stock stockholders in payment of dividends.

# Note 6. Inventories

Inventories
consist of the following:

|                | December 31,2004 |  | September 30,2004 |      
|--------------- | ---------------- |  | ----------------- | -----
|Raw materials   |                  |  | $                 | 2,238
|Work in process |                  |  |                   | 273  
|Finished goods  |                  |  |                   | 991  
|                |                  |  |                   |      
|                |                  |  | $                 | 3,502
|                |                  |  |                   |      

# Note 7. Fiscal 2004
Recapitalization

On
September 30, 2004, the Company completed a recapitalization transaction. In connection
with this transaction, the Company redeemed 98,114 shares of Series B Preferred stock for
$26,436. The redemption of the shares of Series B Preferred stock resulted in the
conversion of all outstanding shares of Series A-1 Preferred stock into a total of
11,848,740 shares of common stock. Immediately following the conversion of the Series A-1
Preferred stock, the remaining 55,436 shares of Series B Preferred stock not redeemed were
automatically converted into a total of 11,761,495 shares of common stock. Further, the
Company obtained a $25,000 five year senior secured loan and revolving credit facility
with Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services, Inc.
(Merrill Lynch). In connection with entering

6



into the credit facility with
Merrill Lynch, the Amended and Restated Credit Agreement between the Company and Wells
Fargo Credit, Inc. (Wells), dated July 1, 2002, was terminated by the
Company.

# Note 8. Patent License
Agreements

During
fiscal 2003 the Company obtained a license agreement for use of an adjustable pedal design
for its heavy truck and transit bus product lines. This agreement required an initial
payment of $125, which was paid in fiscal 2003, and a $75 payment to be paid based on
certain criteria, which was paid during the first quarter of fiscal 2005. The Company will
also make royalty payments based on the number of units sold. The Company plans to begin selling these
products in the fourth quarter of 2005 and, consequently, has not begun amortizing the
initial payments. The agreement is for a period of three years and is renewed annually if
certain sales thresholds are met.

Additionally,
as part of the sale of the Companys passenger car and light truck product lines to
Teleflex Incorporated on September 30, 2003, the Company obtained the right to use certain
of Teleflexs adjustable pedal patents in exchange for Teleflex receiving licenses
for certain of the Companys patents.

# Note 9. Settlement of
accounts payable

Included
in the accompanying consolidated balance sheet is approximately $1,377 of old accounts
payable related to closed insolvent subsidiaries of the Company. In accordance with SFAS
No. 140 Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, a debtor can only relieve itself of a liability if
it has been extinguished. A liability is considered extinguished if (a) the debtor pays
the creditor and is relieved of its obligation for the liability or (b) the debtor is
legally released from being the primary obligor under the liability, either judicially or
by the creditor. During the first quarter of fiscal 2005, the Company was judicially
released from and reversed $9 of old accounts payable related to closed insolvent
subsidiaries of the Company resulting in a gain, which has been recorded in other (income)
expense in the accompanying consolidated statements of operations. The Company expects to
reverse amounts in future periods based on the recognition of the liabilities being
judicially released in accordance with SFAS No. 140 of $51 remaining in fiscal 2005; $561
in fiscal 2006; $731 in fiscal 2007; and $34 in fiscal 2010.

# Note 10. Debt

As
part of the fiscal 2004 recapitalization transaction on September 30, 2004, the Company
entered into a new five-year senior secured loan and revolving credit facility with
Merrill Lynch, which replaced the Companys prior loan facility with Wells. At the
time of the recapitalization transaction, the Companys existing term loan balances
of $318 was paid off and the credit agreement with Wells was terminated. Upon termination,
the Company incurred and paid a termination fee to Wells of $103. The new loan facility
with Merrill Lynch provides for $25,000, consisting of an $8,000 revolving loan facility
and a $17,000 term loan. The loans are secured by substantially all the assets of the
Company. Borrowings under the revolving loan facility are subject to a borrowing base
equal to 85% of eligible accounts receivables and 60% of eligible inventories. Interest
rates under the new agreement are based on the election of the Company of either a LIBOR
rate or Prime rate. Under the LIBOR rate option, the revolving loan facility will bear
interest at the LIBOR rate plus 3.75% per annum for borrowings under the revolving credit
facility and borrowings under the term loan facility will bear interest at the LIBOR rate
plus 4.25%. Under the Prime rate option, the revolving loan facility will bear interest at
the Prime rate plus 2.75% per annum and the term loan facility will bear interest at the
Prime rate plus 3.25%. Fees under the loan agreement include an unused line fee of .50%
per annum on the unused portion of the revolving credit facility.

The
Company is required to repay the term loan in equal quarterly scheduled payments of $850.
The Company is entitled to prepay the term loan, in whole or in part, in minimum amounts
without penalty. Mandatory prepayments of the loans under the term loan are required in
amounts equal to 75% of the Companys excess cash flow, as defined in the agreement,
for each fiscal year and 100% of (i) the insurance or condemnation proceeds received in
connection with a casualty event, condemnation or other loss, less any proceeds reinvested
by the Company up to $500 per fiscal year; (ii) the net proceeds from issuance of equity
or debt securities and (iii) the net cash proceeds of asset sales or other dispositions
subject to customary exceptions. The revolving loan facility expires on September 29,
2009, at which time all outstanding amounts under the revolving loan facility are due and
payable. The Company is subject to certain quarterly and annual financial covenants,
commencing with the fiscal quarter ended December 31, 2004. At December 31, 2004 the
Company was in compliance with its debt covenants.

7



In
connection with the new senior secured loan facility, the Company was required to pay
Merrill Lynch a commitment fee of $500. In addition, the Company must pay Merrill Lynch an
annual agency fee of $25 and reimburse Merrill Lynch for any costs and expenses incurred
in connection with the completion of the new credit agreement. The commitment fee and
expenses incurred by Merrill Lynch and paid for by the Company have been capitalized in
the accompanying consolidated balance sheet and will be amortized over the five-year life
of the loan facility utilizing the effective interest method.

The
Company had available under its revolving credit facility $4,044 and $4,989 at December
31, 2004 and September 30, 2004, respectively.

The
Companys long-term debt and capital lease obligations consist of the following:

|                                                               | December 31, 2004 |  | September 30, 2004 |       
|-------------------------------------------------------------- | ----------------- |  | ------------------ | ------
|Bank revolving credit facility due September 29, 2009, bearing |                   |  |                    |       
|interest at a variable rate, (8.00% at December 31, 2004)      |                   |  | $                  | 3,301 
|                                                               |                   | 
|                                                              
|Bank term loan due September 29, 2009, balance bearing         |                   | 
|interest at a variable rate, (7.00% at December 31, 2004)      |                   | 
|payable in quarterly installments of $850                      |                   |  |                    | 16,150
|                                                              
|Capital leases                                                 |                   |  |                    | 70    
|                                                               |                   |  |                    |       
|                                                               |                   |  |                    | 19,521
|                                                              
|Less current portion                                           |                   |  |                    | 3,455 
|                                                               |                   |  |                    |       
|                                                               |                   |  | $                  | 16,066
|                                                               |                   |  |                    |       

# Note 11. Product
Warranties

The
Company establishes a product warranty reserve based on a percentage of product sales. The
established reserve 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 consolidated balance sheets. Warranty is limited to a specific time period,
mileage or hours of use, and varies by product and application. The Company has provided a
reserve, which, in the opinion of management, is adequate to cover such warranty costs.
Following is a reconciliation of the changes in the Companys warranty reserve for
the three months ended December 31, 2004 and 2003:

|                              | Three MonthsEndedDecember 31,2004 |  |   | Three MonthsEndedDecember 31,2004 |  
|----------------------------- | --------------------------------- |  | - | --------------------------------- | -
|Balance at September 30, 2004 |                                   |  | $ | 1,393                             |  
|                              |                                   |  |  
|Payments                      |                                   |  |   | (164                              | )
|Additional accruals           |                                   |  |   | 304                               |  
|Accrual adjustments           |                                   |  |   | -                                 |  
|                              |                                   |  |   |                                   |  
|                              |                                   |  |  
|Balance at December 31, 2004  |                                   |  | $ | 1,533                             |  
|                              |                                   |  |   |                                   |  

In
January 2003, the Company was notified by one customer of higher than normal warranty
claims on one of the Companys electronic throttle control systems. Management
estimated that the total potential units involved are approximately 30,500 units and in
the second quarter of fiscal 2003 recorded an accrual of $985 for the estimated costs of
the repairs. Based on continuing analysis, return experience and the extension of this
campaign to December 2004, additional accruals were made consisting of $336 during the
fourth quarter of fiscal 2003 and $322 during fiscal 2004. The Company has made
modifications to the product. All units that were in the customers inventory have
been returned or replaced. The remaining possible defective parts are installed on
vehicles and vehicle owners have been notified that the parts should be replaced. For the
three months ended December 31, 2004 and 2003, the Company made payments of $61 and $447,
respectively, related to this specific warranty claim. At December 31, 2004, the accrual
was $35 and is included in the amounts above. As this campaign is substantially complete
as of December 31, 2004, the Company does not anticipate any further increases or
adjustments to this specific warranty accrual.

8



# Note 12. Pension Plans
and Post Retirement Benefits

The
Company maintains two pension plans, an hourly employee plan and a salaried employee plan.
The hourly plan covers certain of the Companys union employees. The salaried plan
covers certain salaried employees. Annual net periodic pension costs under the plans are
determined on an actuarial basis. In December 2003, SFAS No. 132 (revised)
Employers Disclosures about Pensions and Other Postretirement Benefits
was issued. SFAS No. 132 (revised) requires additional disclosures about assets,
obligations, cash flows and net periodic benefit cost of defined benefit pension plans and
other postretirement plans. Disclosures regarding the components of net periodic benefit
cost and contributions of pension plans are required for interim financial statements and
are included below.

Components of Net
Periodic Benefit Cost:

|                                   | Salaried Employees PlanThree Months EndedDecember 31, |  | Hourly Employees PlanThree Months EndedDecember 31, |    
|---------------------------------- | ----------------------------------------------------- |  | --------------------------------------------------- | ---
|
|Service cost                       |                                                       |  | $                                                   | -  
|Interest cost                      |                                                       |  |                                                     | 69 
|Expected return on plan assets     |                                                       |  |                                                     | (51
|Amortization of prior service cost |                                                       |  |                                                     | -  
|Amortization of loss               |                                                       |  |                                                     | 25 
|                                   |                                                       |  |                                                     |    
|Net periodic benefit cost          |                                                       |  | $                                                   | 43 
|                                   |                                                       |  |                                                     |    

The
Company previously disclosed in its financial statements for the year ended September 30,
2004, that it expected to contribute $1,240 to its pension plans in fiscal 2005. As of
December 31, 2004, no contributions were required and none have been made for fiscal 2005.

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 quarters ended December 31, 2004 and 2003.

Components of Net
Periodic Benefit Cost:

|                          | Post Retirement PlanThree Months EndedDecember 31, | 
|------------------------- | -------------------------------------------------- | 
|
|Service cost              |                                                    | 
|Interest cost             |                                                    | 
|Amortization              |                                                    | 
|                          |                                                    | 
|Net periodic benefit cost |                                                    | 
|                          |                                                    | 

# Note 13. Put/Call Option
Agreement

On
September 30, 2004, the Company entered into a put/call option agreement with American
Industrial Partners Capital Fund III, L.P. (AIP). Under the option agreement,
during the period commencing on September 30, 2006 and ending on September 30, 2007, AIP
has a one-time right to require the Company to repurchase, in whole or in part, up to a
maximum of 7,000,000 shares of the Companys common stock held by AIP (the
Put). The price for any shares the Company is required to repurchase upon
exercise of the Put by AIP is the lesser of $1.00 per share or the average of the closing
trading prices of the Companys common stock for the 30 trading days immediately
preceding the third business day before delivery of the notice of exercise of the Put. If
the Company fails to pay the price of the Put for the shares required to be repurchased
within 30 days after exercise of the Put, the Company is required to issue to AIP shares
of the Companys newly designated Series C Preferred stock. The number of shares of
Series C Preferred stock to be issued to AIP will be determined by dividing the aggregate
price of the shares of common stock held by AIP that the Company was required to
repurchase upon exercise of the Put, but failed to do so, by $100. If shares of Series C
Preferred stock are issued due to the exercise of the Put by AIP, these preferred shares
will be senior to the Companys common stock and any other class or series of stock.
The Series C Preferred stock will accrue cumulative dividends on a daily basis at the rate
of 15% per annum. In addition the Company will have redemption rights to be able to redeem
all or any portion of the Series C Preferred stock at any time in

9



minimum increments of 500 shares, at
a price per share equal to $100 plus all accrued but unpaid dividends. Lastly, holders of
the Series C Preferred stock will have a liquidation preference equal to $100 per share,
plus accrued but unpaid dividends, in any liquidation of the Company. AIP also has the
right to assign its rights to the Put to any person that holds at least 6,000,000 shares
of the Companys common stock prior to such assignment; however upon any such
assignment, the right to the issuance of Series C Preferred stock terminates. In
addition, AIP may not assign the Put separately from the Call described below.

In
exchange for the Put, under the option agreement, AIP granted the Company a right to elect
to purchase from AIP (the Call) on October 31, 2007 all of the shares of the
Companys common stock then held by AIP, up to a maximum of 7,000,000 shares, at a
price of $2.00 per share. In order to exercise the Call, the Company is required to
deliver to AIP, not more than 30 nor fewer than ten days prior to the call date a written
notice of its election to exercise the Call. The Company used a valuation expert to value
both the Put and Call under the option agreement as of September 30, 2004 and December 31,
2004. The valuation resulted in a Put value of $398 and a Call value of $420. The $22
difference between the value of the Put and the value of the Call has been recorded as a
long-term asset in the accompanying consolidated balance sheets at December 31, 2004.
Based on the valuation as of December 31, 2004, the Company recognized a gain of $355 from
the change in the net value of the Put and Call from September 30, 2004 to December 31,
2004. This gain has been recorded in other (income) expense in the accompanying
consolidated statements of operations. The Company will continue to revalue both the Put
and the Call on a quarterly basis, with the change recorded to other (income) expense.

# Note 14. Preferred Stock

During
the first quarter of fiscal 2004, the Company paid $1,413 of previously accrued Series A-1
Preferred Stock dividends. After such payment, no further dividends existed for Series A-1
Preferred Stock. As a result of the completion of the fiscal 2004 recapitalization
transaction, all outstanding shares of Series A-1 Preferred Stock as of September 30, 2004
were converted into 11,848,740 shares of common stock.

# Note 15. Discontinued
Operations

The
Company accounts for the impairment of long-lived assets or a disposal group in accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived
Assets. The Company tests for impairment when factors indicate that an asset or
disposal group may not be recoverable from future undiscounted cash flows. The Company
discontinued the operations of NESC in fiscal 2004 through the sale of certain assets. The
disposed assets consisted of property, plant and equipment, inventories and the right to a
product patent.

In
accordance with SFAS No. 144, the disposed assets were adjusted to its fair value
resulting in the Company recognizing a write down of assets of $151. The total loss on the
write down of assets of $151 and the results of operations during the first quarter of
fiscal 2004 have been recorded as a component of discontinued operations on the accompany
consolidated statement of operations. Net sales for NESC during the first three months of
fiscal 2004 were $155 and were removed from total net sales in the accompanying
consolidated statements of operations. Gross margin and total operating expenses were $12
and $25, respectively, for the first three months of fiscal 2004, resulting in a net loss
on operations of $13.

# Note 16. Segment
Information

The
Company accounts for its segments in accordance with SFAS No. 131 Disclosures about
Segments of an Enterprise and Related Information. During the first quarter of both
fiscal 2005 and 2004, the Company operated in one segment  vehicle components.
Accordingly the operations for the three months ended December 31, 2004 and 2003 are
presented as one segment in the accompanying consolidated statement of operations.

# Note 17. Contingencies

The
Company and its subsidiaries are involved in various lawsuits incidental to their
businesses. In the opinion of management, the ultimate outcome of these actions will not
have a material effect on the Companys financial position or its results of
operations.

The
soil and groundwater at the Companys Portland, Oregon facility contain contaminants
that the Company believes were released on the property by previous property owners. Some
of this contamination has migrated offsite to a neighboring property. The Company has
retained an environmental consulting firm to investigate the extent of the contamination
and to determine what, if any, remediation will be required and the associated costs.
During the third quarter of fiscal 2004, the

10



Company entered into the Oregon
Department of Environmental Qualitys voluntary clean-up program and during fiscal
2004 the Company recorded $950 for this matter, representing the low end of the
reasonable range of estimated future investigation, remediation and monitoring costs. As
of December 31, 2004, the reserve was $866. The Company believes it has a contractual
right to indemnification from the prior owner of the property and has notified the prior
owner of this indemnity claim. The prior owner has disputed its liability and the Company
may seek judicial enforcement of the indemnity obligation.

On
October 1, 2004, the Company was named as a co-defendant in a product liability case
(Cuesta v. Ford, et al, District Court for Bryant, Oklahoma) that seeks class action
status. The complaint seeks an unspecified amount of damages on behalf of the class. The
Company believes the claims to be without merit and intends to vigorously defend against
this action. There can be no assurance, however, that the outcome of the lawsuit will be
favorable to the Company or will not have a material adverse effect on the Companys
business, consolidated financial condition and results of operations. In addition, the
Company may be forced to incur substantial litigation expenses in defending this
litigation.

On
May 12, 2003, Mr. Thomas Ziegler, the Companys former president and chief executive
officer, sued the Company, American Industrial Partners, L.P.; American Industrial
Partners Fund III, L.P., and American Industrial Partners Fund III Corporation in the
Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida. In the
suit, Mr. Ziegler alleges that the Company breached an oral agreement with Mr.
Ziegler to pay him additional compensation, including a bonus of at least $500
for certain tasks performed by Mr. Ziegler while he was the Companys president and
chief executive officer and seeks additional compensation to which he claims he is
entitled. The Company disputes the existence of any such agreement and any resulting
liability to Mr. Ziegler.

# Note 18. Employment
Agreement

During
the fourth quarter of fiscal 2004, the Company entered into an employment agreement with
Patrick W. Cavanagh for the position of President and Chief Executive Officer. Mr.
Cavanaghs employment commenced on October 4, 2004. The contract specifies an initial
base salary per year, bonus parameters established by the board of directors, relocation
assistance and stock options grants to be made in fiscal 2005. The agreement also provides
for severance payments under certain circumstances in the event the Company terminates the
agreement prior to the end of the contract period.

11



# Williams Controls, Inc.

|Item 2. |  | Management's
Discussion and Analysis of Financial Condition and Results of Operations
         (Dollars in thousands, except per share amounts)
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

# Overview

We
primarily design, produce and sell electronic throttle control systems for heavy trucks
and busses. We have a significant portion of the United States market for these products
and a lesser portion of the international markets for the same products. We also
manufacture pneumatic and hydraulic control systems for the diesel heavy truck, transit
bus and off-highway vehicles market. Many of the customers for pneumatic and hydraulic
control systems also are customers for our diesel heavy truck and transit bus electronic
throttle control systems.

Demand
for our electronic throttle control devices and pneumatic and hydraulic control systems
generally follow the economic cycles for heavy truck and transit bus manufacturing and
sales. While we believe we are the leader in the market for electronic throttle control
systems for heavy trucks and transit busses manufactured in the U.S., the markets for our
products are highly competitive in the U.S. and even more competitive in the international
markets. Certain of our competitors are suppliers with substantial financial resources and
significant technological capabilities. The Companys major areas of focus are
working closely with our existing and potential customers to design and develop new
products and adapt existing products to new applications, and improving the performance,
reliability and cost-effectiveness of our products.

The
demand for electronic throttle control systems is expanding into countries, primarily
outside of North America and Europe, that have not converted heavy truck and bus vehicles
to electronic throttle controls and further into off-highway vehicles. The initial
electronic throttle control conversion for off-highway vehicles has been in the larger
vehicles. Demand for electronic throttle controls will depend, in part, on how quickly
manufacturers proceed with ongoing engine modifications that will require such systems.

# Critical Accounting
Policies

In
response to the SECs Release No. 33-8040, Cautionary Advice Regarding
Disclosure About Critical Accounting Policies, we identified the most critical
accounting principles upon which our financial status depends and determined the critical
principles considering accounting policies that involve the most complex decisions or
assessments. Our critical accounting policies are as follows:

Revenue
recognition:

- Revenue is recognized at the time of product shipment or delivery, depending on 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.

Warranty:

- We provide a warranty covering defects arising from products sold. The product warranty
reserve is based on a percentage of product sales and is more specifically 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 and application. The Company has provided a reserve that management
believes is adequate to cover such warranty costs. While we believe our estimates are
reasonable, they are subject to change and such change could be material.

Environmental:

- We make estimates of 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 at this time due to the 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

12



| | recognized
a liability for environmental remediation costs for this site in an amount that it
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 possible changes in our
estimated liability accrual will occur in the near future.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Pensions
and Post-retirement Benefit Obligations:

- In calculating our obligations and expense for pensions and post-retirement benefits, we
make certain actuarial assumptions, including those relating to a discount rate, expected
long-term rate of return on plan assets and rates of increase in compensation and
healthcare costs. Our assumptions are determined based on current market conditions,
historical information and consultation with and input from our actuaries. Changes in
interest rates and market performance could have a significant impact on our pension
expense and future payments.

Accounting
for Income Taxes:

- For each jurisdiction in which we operate, we are required to estimate our current tax
expense together with assessing temporary differences resulting from differing treatment
of items for tax and accounting purposes. These differences result in deferred tax assets
and liabilities, which are included in our consolidated balance sheet. We must also assess
the likelihood that our deferred tax assets will be recovered from future taxable income
and, to the extent we believe that recovery is not likely, a valuation allowance is
established. Our income tax provision on the consolidated statement of operations is
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.

# Risk Factors

This
report on Form 10-Q, including the Notes to Unaudited Consolidated Financial Statements,
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, that involve a number of risks and uncertainties.
Forward-looking statements include, without limitation, those statements relating to
development of new products, the financial condition of the Company, the ability to
increase distribution of the Companys products, integration of businesses the
Company acquires, and disposition of any of current business of the Company.
Forward-looking statements can be identified by the use of forward-looking terminology,
such as may, will, should, expect,
anticipate, estimate, continue, plans,
intends, or other similar terminology. Although we believe that the
expectations reflected in such forward-looking statements are reasonable, such
forward-looking statements are subject to risks and uncertainties that could cause actual
results to differ materially from those indicated by the forward-looking statements. These
risks and uncertainties are beyond our control and, in many cases, we cannot predict the
risks and uncertainties that could cause our actual results to differ materially from
those indicated by the forward-looking statements.

The
forward-looking statements are made as of the date hereof, and, except as otherwise
required by law, we disclaim any intention or obligation to update or revise any
forward-looking statements or to update the reasons why the actual results could differ
materially from those projected in the forward-looking statements, whether as a result of
new information, future events or otherwise.

Investors
are cautioned to consider the risk factors identified in our annual report on Form 10K for
the fiscal year ended September 30, 2004 and the following items 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. Such
matters involve risks and uncertainties that include, without limitation, the following:

- Changes in business relationships with and purchases by or from major customers or suppliers, including delays or
      cancellations in shipments;
- Demand for and market acceptance of new and existing products;
- Competitive market conditions and resulting effects on sales and pricing;

13



- Increases in raw material costs that cannot be recovered in product pricing due to customer driven pricing pressures;
- Changes in volumes and the mix of products sold;
- The timing and extent of product development costs;
- Global economic factors, including difficulties entering new markets and general economic conditions such as interest rates;
- Reliance on major customers;
- Exposure to product liability claims from customers and consumers in the event that our
products fail to perform to specifications or result in personal injury or death;
- Work stoppages and other labor matters;
- The inability to obtain sufficient working capital to fund operations; and
- Changes in environmental laws and other regulations.

# Results of Operations

# Financial Summary (Dollars in Thousands)

|                                            | Three Months EndedDecember 31, |  |  
|------------------------------------------- | ------------------------------ |  | -
|
|Net sales                                   |                                |  | $
|Cost of sales                               |                                |  |  
|                                            |                                |  |  
|Gross profit                                |                                |  |  
|                                           
|Research and development                    |                                |  |  
|Selling                                     |                                |  |  
|Administration                              |                                |  |  
|                                            |                                |  |  
|Operating income from continuing operations |                                |  | $
|                                            |                                |  |  
|Expenses as a percentage of net sales:      |                                | 
|Cost of sales                               |                                |  |  
|Gross margin                                |                                |  |  
|Research and development                    |                                |  |  
|Selling                                     |                                |  |  
|Administration                              |                                |  |  
|Operating income from continuing operations |                                |  |  
|                                           
|NM - Not meaningful                         |                                | 

# Comparative - Three
months ended December 31, 2004 and 2003

|          |  |  |  |          | Percent Change | 
|--------- |  |  |  | -------- | -------------- | 
|
|Net sales |  |  |  | $ 15,169 |                | 

Net
sales increased $2,631 or 21.0% to $15,169 in the first quarter of fiscal 2005 from
$12,538 in the first quarter of fiscal 2004. The net sales increase to our heavy truck and
transit bus customers is primarily due to increased sales volumes of electronic throttle
control systems resulting from a general increase in truck production throughout the
industry, specifically in the North American and European markets.

14



|             |  |  |  |         | Percent Change | 
|------------ |  |  |  | ------- | -------------- | 
|
|Gross profit |  |  |  | $ 5,121 |                | 

Gross
profit was $5,121, or 33.8% of net sales in the first quarter of 2005, an increase of
$1,279 compared to the gross profit of $3,842, or 30.6% of net sales, in the comparable
fiscal 2004 period.

The
increase in gross profit in fiscal 2005 is primarily driven by a 21.0% increase in sales
of electronic throttle, pneumatic and hydraulic control systems to heavy truck and transit
bus customers and small reductions in overhead expenses. Overhead expenses decreased
from the prior year, primarily due to reductions in group health costs offset by an
overall increase in personnel costs. In addition, the first quarter of fiscal 2004
included $156 of depreciation expense related to certain property, plant and equipment
from our passenger car and light truck product lines, which were sold on September 30,
2003.

|                         |  |  |  |       | Percent Change | 
|------------------------ |  |  |  | ----- | -------------- | 
|
|Research and development |  |  |  | $ 730 |                | 

Research
and development expenses increased $120 or 19.7% to $730 for the first fiscal quarter of
2005 compared to $610 for the comparable period in 2004. The increased research and
development expense is largely attributable to an increase in product development efforts
resulting in higher staffing levels. The Companys research and development
expenditures will fluctuate based on the products under development at any given point in
time. Overall, however, we expect research and development expenses to increase over
fiscal 2004 levels due to additional pedal design projects and sensor development efforts.

|        |  |  |  |       | Percent Change | 
|------- |  |  |  | ----- | -------------- | 
|
|Selling |  |  |  | $ 316 |                | 

Selling
expenses increased $42 or 15.3% to $316 for the quarter ended December 31, 2004 compared
to $274 for the comparable quarter ended December 31, 2003. The increase in selling
expenses is mainly due to expanded selling and marketing efforts in the European and Asian
markets. We expect to continue to incur increased expenses associated with our current
foreign customers and expanded selling and marketing efforts in foreign markets.

|               |  |  |  |         | Percent Change | 
|-------------- |  |  |  | ------- | -------------- | 
|
|Administration |  |  |  | $ 1,283 |                | 

Administration
expenses for the three months ended December 31, 2004 of $1,283 were higher than the $879
for the same period in 2003, an increase of $404 or 46.0%. The increase in administration
expenses is primarily a result of increased legal and professional expenses and an
increase in personnel expenses related to the addition of our new President and Chief
Executive Officer, whose employment commenced in October 2004, and includes additional
compensation costs and relocation assistance expenses.

|                                                                    |  |  |  |       | Percent Change | 
|------------------------------------------------------------------- |  |  |  | ----- | -------------- | 
|
|Interest expense - Debt, net                                        |  |  |  | $ 462 |                | 
|                                                                   
|Interest expense - Series B Preferred Stock dividends and accretion |  |  |  | $ -   |                | 

Interest
expense on debt increased $441 to $462 in the first quarter of fiscal 2005 from $21 in the
first quarter of fiscal 2004. The increase in interest expense is the result of an
increase in bank debt due to the fiscal 2004 recapitalization transaction, which was
completed on September 30, 2004 and is described in the Notes to Unaudited Condensed
Consolidated Financial Statements. We expect interest expense on debt to continue to be
higher in fiscal

15



2005 when compared with fiscal 2004
due to the increased debt levels resulting from the fiscal 2004 recapitalization
transaction.

Interest
expense on Series B Preferred Stock related to dividends accrued on the Series B Preferred
Stock during the first quarter of fiscal 2004 and the related accretion. Based on the
guidelines of Statement of Financial Accounting Standards No. 150 (SFAS No. 150), the
Company recorded all accrued dividends and accretion associated with the Series B
Preferred Stock as a component of interest expense beginning with the fourth quarter of
fiscal 2003. Interest expense on Series B Preferred Stock for the quarter ended December
31, 2003 was $769. Due to the fiscal 2004 recapitalization transaction, the Company will
no longer record interest expense on Series B Preferred Stock subsequent to fiscal 2004.

|                                  |  |  |  |        | Percent Change | 
|--------------------------------- |  |  |  | ------ | -------------- | 
|
|Gain on put/call option agreement |  |  |  | ($355) |                | 

The
Company recorded a $355 gain in the first quarter of fiscal 2005 related to the change in
the net value of the Put and Call option agreement from September 30, 2004 to December 31,
2004 as discussed in Note 13 of the Unaudited Condensed Consolidated Financial Statements.

|                   |  |  |  |       | Percent Change | 
|------------------ |  |  |  | ----- | -------------- | 
|
|Income tax expense |  |  |  | $ 989 |                | 

Tax
expense of $989 was recorded during the quarter ended December 31, 2004 at an effective tax rate of 36.6%. Prior to
year-end
fiscal 2004, the Company had provided for a full valuation allowance on its deferred tax
assets, resulting in no tax provision related to income in the first quarter of fiscal 2004.
 The Company reduced the valuation allowance during the fourth
quarter of fiscal 2004.

The
Company is currently in a net operating loss carry-forward position. Federal net operating
losses are subject to provisions of the Internal Revenue Code that potentially restrict
the utilization of this type of tax attribute in the event of an ownership
change (as defined in the Internal Revenue Code Section 382). Changes in ownership
associated with the 2004 recapitalization transaction discussed in Note 7 in the Notes to
Unaudited Consolidated Financial Statements, coupled with other past, present and future
changes in ownership, may significantly defer the utilization of net operating loss carry
forwards in the future. The Company does not believe an ownership change has occurred as
of December 31, 2004.

|                        |  |  |  |     | Percent Change | 
|----------------------- |  |  |  | --- | -------------- | 
|
|Discontinued operations |  |  |  | $ - |                | 

During
the first quarter ended December 31, 2003, the Company recorded a $164 loss from
discontinued operations related to its NESC business. The Company reviewed the
requirements of SFAS No. 144 and determined that the disposed NESC assets should be
adjusted to their fair value resulting in a write down of assets of $151. The remaining
loss from discontinued operations is the result of a loss on operations during the quarter
of $13. Refer to Note 15 of Notes to Unaudited Consolidated Financial Statements.

# Financial Condition,
Liquidity and Capital Resources

Cash
generated by operating activities was $2,932 for the first fiscal quarter of 2005, an
increase of $1,953 from the cash generated by operating activities of $979 during the
first quarter of fiscal 2004. Cash flows from operations for the three months ended
December 31, 2004 included net income of $1,714, a non-cash increase of $947 due to
deferred income taxes and decreases in working capital of $398. Cash flows from operations
for the three months ended December 31, 2003 included net income of $1,090, a non-cash
increase of $769 for interest expense on Series B Preferred Stock dividends and accretion
and a use of cash for an increase in working capital of $1,449. As a result of the 2004
recapitalization transaction, the Company will no longer record dividends and accretion
associated with the Series B Preferred Stock.

16



Cash
flows from operations primarily increased in the three months ended December 31, 2004
compared to the corresponding period in the prior year due to an increase in collections
of accounts receivable. In addition, cash flows from operations for the three months ended
December 31, 2003 included payments to our pension plans of $275. For the three months
ended December 31, 2004, we did not make any payments to fund our pension plans. Cash
flows from operations for the first quarter of fiscal 2005 included a net increase in
warranty of $140 due to warranty accruals exceeding warranty payments, whereas in the
first quarter of fiscal 2004, warranty payments exceeded warranty accruals by $478, due
almost entirely to payments to one customer for a warranty claim that was in excess of
normal warranty as discussed in Note 11 in the Notes to Unaudited Condensed Consolidated
Financials Statements. In future periods, we expect warranty payments to be more
consistent with warranty accruals. We believe we will continue to generate positive cash
from continuing operations due to our improved results of operations.

Cash
used in investing activities was $846 for the three months ended December 31, 2004 and was
comprised solely of purchases of property, plant and equipment. For the three months ended
December 31, 2003, cash provided by investing activities was $5,808 and was comprised of
$6,010 of net proceeds from the sale of assets from our passenger car and light truck
product lines, which were sold on September 30, 2003, offset by $202 of purchases of
property, plant and equipment. We expect our cash use for investing activities to increase
throughout the fiscal year as we continue to make purchases of capital equipment.

Cash
used in financing activities was $573 for the quarter ended December 31, 2004, compared to
cash used in financing activities of $5,846 for the quarter ended December 31, 2003. The
first quarter of fiscal 2005 use of cash for financing activities primarily relates to
scheduled debt payments on our Merrill Lynch term loan. The cash used for financing
activities in the first quarter of fiscal 2004 primarily relates to the payoff of certain
debt obligations with our prior lender using proceeds received from the sale of our
passenger car and light truck product lines on September 30, 2003. In addition, we paid
$1,413 of Series A-1 Preferred stock dividends during the first quarter of fiscal 2004.

At
December 31, 2004, our contractual obligations consisted of bank debt, capital leases
obligations, and operating lease commitments. We do not have any material letters of
credit, purchase commitments, or debt guarantees outstanding at December 31, 2004.
Maturities of these contractual obligations consist of the following:

|                 | Payments Due for the Periods ending September 30, |  |   |      
|---------------- | ------------------------------------------------- |  | - | -----
|
|Term loan        |                                                   |  | $ | 2,550
|Revolver         |                                                   |  |   | -    
|Capital leases   |                                                   |  |   | 41   
|Operating leases |                                                   |  |   | 40   
|                 |                                                   |  |   |      
|                 |                                                   |  | $ | 2,631
|                 |                                                   |  |   |      

The
Company has net obligations at December 31, 2004 related to its pension plans and post
retirement medical plan of $5,643 and $3,325, respectively. Due to a change in legislation
regarding funding of pension plans, cash payments to fund our pension obligations are
expected to decrease in future periods compared to the amounts funded over the last
several years. The Company funded $275 to its pension plans during the first quarter of
fiscal 2004 compared to no contributions for the first quarter of fiscal 2005. We expect
to make payments of $1,240 throughout the rest of fiscal 2005. At December 31, 2004, we
had $4,044 available under our revolving credit facility with Merrill Lynch plus cash and
cash equivalents of $3,995. We believe these resources, when combined with cash provided
by operations, will be sufficient to meet our working capital needs on a short-term and
long-term basis.

Included
in the accompanying consolidated balance sheet is approximately $1,377 of old accounts
payable related to closed insolvent subsidiaries of the Company. In accordance with SFAS
No. 140 Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, a debtor can only relieve itself of a liability if
it has been extinguished. A liability is considered extinguished if (a) the debtor pays
the creditor and is relieved of its obligation for the liability or (b) the debtor is
legally released from being the primary obligor under the liability, either judicially or
by the creditor. During the first quarter of fiscal 2005, the Company was judicially
released from and reversed $9 of old accounts payable related to closed insolvent
subsidiaries of the Company resulting in a gain, which has been recorded in other (income)
expense in the accompanying consolidated statements of operations. The Company expects to
reverse amounts in future periods based on the recognition of the liabilities being
judicially released in accordance with SFAS No. 140 of $51 remaining in fiscal 2005; $561
in fiscal 2006; $731 in fiscal 2007; and $34 in fiscal 2010.

17



# Recent FASB
Pronouncements

In
November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151,
Inventory Costs  an amendment of ARB No. 43, Chapter 4". This statement
clarifies the accounting for abnormal amounts of idle facility expenses, freight, handling
costs, and wasted materials and requires that these items be recognized as current period
charges. In addition, this statement requires the allocation of fixed production overheads
to the costs of conversion be based on the normal capacity of the product facilities. This
statement is effective for fiscal years beginning after June 15, 2005. The Company does
not expect the impact of this statement to be material to the Company.

In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123
(Revised 2004), Share Based Payment. This statement requires that compensation
cost relating to share-based payment transactions be recognized in financial statements.
Compensation cost will be measured based on the fair value of the equity or liability
instruments issued. Share-based compensation arrangements include stock options,
restricted stock plans, performance-based awards, stock appreciation rights, and employee
stock purchase plans. SFAS No. 123R replaces SFAS No. 123 and supercedes APB No. 25 and is
effective for the first interim or annual reporting period that begins after June 15,
2005, upon which time the Company will adopt the provisions of this statement.

# Item 3. Quantitative and
Qualitative Disclosures About Market Risk

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

Interest
Rate Risk:

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

- As of December 31, 2004, the outstanding balances on the term loan and revolving loan were
$16,150 and $3,301, respectively. The effective annual interest rate on the term loan was
7.00% compared to 8.00% for the revolving loan as of December 31, 2004. The Company does
not believe that a hypothetical 10% change in end of the period interest rates or changes
in future interest rates on these variable rate obligations would have a material effect
on its financial position, results of operations, or cash flows. The Company has not
hedged its exposure to interest rate fluctuations.

Foreign
Currency Risk:

- We sell our products to customers in the truck, transit bus and heavy equipment
industries. The Company does not believe that changes in future exchange rates would have
a material effect on its financial position, results of operations, or cash flows as all
of its foreign sales transactions are denominated in US dollars. As a result, the Company
has not entered into forward exchange or option contracts for transactions to hedge
against foreign currency risk.

Investment
Risk:

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

# Item 4. Controls and
Procedures

Evaluation of Disclosure
Controls and Procedures

The
Companys Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act
of 1934 (the Exchange Act)). Based on that evaluation, the Companys
Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of
the period covered by this report, our disclosure controls and procedures are effective in
ensuring that information required to be disclosed in our Exchange Act reports is (1)
recorded,

18



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.

19



# Part II. Other
Information

# Item 1. Legal Proceedings

We
are parties 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 reserves for
uninsured liabilities. While the outcome of the pending proceedings cannot be predicted
with certainty, based on our review, we believe that any liability that may result is not
reasonably likely to have a material effect on our liquidity, financial condition or
results of operations.

# Item 2. Changes in
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 and
Reports on Form 8-K

|(a) |  | Exhibits
|--- |  | --------

|3.1 |  | Certificate
of Incorporation of the Registrant as amended. (Incorporated by reference to Exhibit
3.1 to theRegistrants annual report on form 10-K for the fiscal year ended
September 30, 1995).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.2 |  | Restated
By-Laws of the Registrant as amended July 1, 2002. (Incorporated by reference to
Exhibit 3.6 to theRegistrants quarterly report on form 10-Q for the quarter
ended June 30, 2002).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|31.1 |  | Certification
of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) (Filed herewith).
|---- |  | -------------------------------------------------------------------------------------------------------

|31.2 |  | Certification
of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) (Filed herewith).
|---- |  | -------------------------------------------------------------------------------------------------------

|32.1 |  | 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.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|32.2 |  | 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.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | Reports
on Form 8-K
|--- |  | -------------------

- Items 1.01, 1.02, 2.03, 3.02, 5.02, 5.03, 7.01 and 9.01, dated September 27, 2004, filed October 1, 2004.
- Items 8.01 and 9.01, dated October 5, 2004, filed October 5, 2004.
- Items 2.02 and 9.01, dated December 20, 2004, furnished December 20, 2004.
- Items 2.02 and 9.01, dated December 20, 2004, furnished December 21, 2004.
- Items 2.02 and 9.01, dated December 27, 2004, furnished December 28, 2004.

20



# 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 7, 2005 |  | /s/ PATRICK W. CAVANAGH
Patrick W. CavanaghPresident and Chief Executive Officer
|                        |  |                                                                                 
|Date:  February 7, 2005 |  | /s/ DENNIS E. BUNDAYDennis E. BundayChief Financial Officer                     
|                        |  |                                                                                 
|                        |  |                                                                                 

21