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, 2007





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


SECURITIES
EXCHANGE ACT OF 1934





For
the transition period
from            to





Commission
file number 0-18083








Williams
Controls, Inc.


(Exact
name of registrant as specified in its charter)










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





(503)
684-8600


(Registrant's
telephone number, including area code)





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


Yes  [X]   No  [  ]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.  (Check one):







Large Accelerated
      Filer [    ]
            Accelerated Filer [
      X ]
            Non-Accelerated
      Filer [    ]










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


Yes  [  
 ]  No  [ X
]





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


as of
January 31, 2008: 7,512,897








Williams
Controls, Inc.


December
31, 2007


Table
of Contents











Page
              NumberPart
      I.  Financial InformationItem
      1. Financial Statements (unaudited)Condensed
      Consolidated Balance Sheets, December 31, 2007 and
              September
      30, 2007
            1Condensed
      Consolidated Statements of Operations, three month periods
              ended
      December 31, 2007 and 2006
            2Condensed
      Consolidated Statements of Cash Flows, three month periods
              ended
      December 31, 2007 and 2006
            3Notes
      to Unaudited Condensed Consolidated Financial Statements
            4Item
      2.  Management’s Discussion and Analysis of Financial
      Condition
              and
      Results of Operations
            12Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk
            19Item
      4.  Controls and Procedures
            20Part
      II.  Other InformationItem
      1.    Legal Proceedings
            21Item
      1A.  Risk Factors
            21Item
      2.    Unregistered Sales of Equity Securities and Use
      of Proceeds
            21Item
      3.    Defaults Upon Senior Securities
            21Item
      4.    Submission of Matters to a Vote of Security
      Holders
            21Item
      5.    Other Information
            22Item
      6.    Exhibits
            22Signature
      Page
            23











PART
I – FINANCIAL INFORMATION





Item
1.  Financial Statements


Williams
Controls, Inc.


Condensed
Consolidated Balance Sheets


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


(Unaudited)





December
      31, 2007
            
            
            September
      30, 2007ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            1,373
            
            
            $
            1,621Trade
      accounts receivable, less allowance of$41
      and $33 at December 31, 2007 and September 302007,
      respectively
            
            
            8,599
            
            
            
            8,054Other
      accounts receivable
            
            
            827
            
            
            
            1,656Inventories
            
            
            8,760
            
            
            
            9,152Deferred
      income taxes
            
            
            543
            
            
            
            486Prepaid
      expenses and other current assets
            
            
            955
            
            
            
            297Total
      current assets
            
            
            21,057
            
            
            
            21,266Property,
      plant and equipment, net
            
            
            8,769
            
            
            
            8,953Deferred
      income taxes
            
            
            1,483
            
            
            
            1,461Other
      assets, net
            
            
            582
            
            
            
            623Total
      assets
            
            $
            31,891
            
            
            $
            32,303LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
            
            $
            2,668
            
            
            $
            3,811Accrued
      expenses
            
            
            4,866
            
            
            
            4,983Current
      portion of employee benefit obligations
            
            
            288
            
            
            
            288Current
      portion of long-term debt
            
            
            875
            
            
            
            1,000Total
      current liabilities
            
            
            8,697
            
            
            
            10,082Long-term
      Liabilities:Long-term
      debt
            
            
            -
            
            
            
            -Employee
      benefit obligations
            
            
            4,437
            
            
            
            4,803Other
      long-term liabilities
            
            
            254
            
            
            
            249Commitments
      and contingenciesStockholders’
      Equity:Preferred
      Stock ($.01 par value, 50,000,000 authorized) Series C(0
      issued and outstanding at December 31, 2007 and September 30,2007)
            
            
            -
            
            
            
            -Common
      stock ($.01 par value, 12,500,000 authorized; 7,511,647and
      7,495,482 issued and outstanding at December 31, 2007 andSeptember
      30, 2007, respectively)
            
            
            75
            
            
            
            75Additional
      paid-in capital
            
            
            35,118
            
            
            
            34,899Accumulated
      deficit
            
            
            (11,403
            )
            
            
            (12,477
            )Treasury
      stock (21,700 shares at December 31, 2007 andSeptember
      30, 2007)
            
            
            (377
            )
            
            
            (377
            )Accumulated
      other comprehensive loss
            
            
            (4,910
            )
            
            
            (4,951
            )Total
      stockholders’ equity
            
            
            18,503
            
            
            
            17,169Total
      liabilities and stockholders’ equity
            
            $
            31,891
            
            
            $
            32,303







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
      Month Period Ended
              December
      31,2007
            
            
            2006Net
      sales
            
            $
            14,972
            
            
            $
            18,442Cost
      of sales
            
            
            10,086
            
            
            
            12,150Gross
      profit
            
            
            4,886
            
            
            
            6,292Operating
      expenses:Research
      and development
            
            
            1,009
            
            
            
            830Selling
            
            
            678
            
            
            
            520Administration
            
            
            1,401
            
            
            
            1,273Realignment
      of operations
            
            
            -
            
            
            
            176Total
      operating expenses
            
            
            3,088
            
            
            
            2,799Operating
      income
            
            
            1,798
            
            
            
            3,493Other
      (income) expenses:Interest
      income
            
            
            (22
            )
            
            
            (36
            )Interest
      expense
            
            
            88
            
            
            
            258Other
      income, net
            
            
            (34
            )
            
            
            (603
            )Total
      other (income) expenses
            
            
            32
            
            
            
            (381
            )Income
      before income taxes
            
            
            1,766
            
            
            
            3,874Income
      tax expense
            
            
            610
            
            
            
            1,331Net
      income
            
            $
            1,156
            
            
            $
            2,543Net
      income per common share – basic
            
            $
            0.15
            
            
            $
            0.34Weighted
      average shares used in per share calculation – basic
            
            
            7,508,861
            
            
            
            7,439,746Net
      income per common share – diluted
            
            $
            0.15
            
            
            $
            0.33Weighted
      average shares used in per share calculation – diluted
            
            
            7,756,635
            
            
            
            7,693,601








See
accompanying notes to Unaudited Condensed Consolidated Financial
Statements.
 2


Williams
Controls, Inc.


Condensed
Consolidated Statements of Cash Flows


(Dollars
in thousands)


(Unaudited)








Three
      Month Period Ended
              December
      31,2007
            
            
            2006Cash
      flows from operating activities:Net
      income
            
            $
            1,156
            
            
            $
            2,543Adjustments
      to reconcile net income to net cash provided byoperating
      activities:Depreciation
      and amortization
            
            
            459
            
            
            
            501Deferred
      income taxes
            
            
            (37
            )
            
            
            -Stock
      based compensation
            
            
            149
            
            
            
            114Gain
      on settlement of liabilities
            
            
            -
            
            
            
            (589
            )Changes
      in operating assets and liabilitiesReceivables,
      net
            
            
            284
            
            
            
            1,356Inventories
            
            
            392
            
            
            
            (841
            )Accounts
      payable and accrued expenses
            
            
            (1,384
            )
            
            
            (1,010
            )Prepaid
      expenses and other current assets
            
            
            (658
            )
            
            
            (556
            )Other
            
            
            (341
            )
            
            
            (232
            )Net
      cash provided by operating activities
            
            
            20
            
            
            
            1,286Cash
      flows from investing activities:Purchases
      of property, plant and equipment
            
            
            (213
            )
            
            
            (687
            )Net
      cash used in investing activities
            
            
            (213
            )
            
            
            (687
            )Cash
      flows from financing activities:Payments
      of debt
            
            
            (125
            )
            
            
            (712
            )Net
      proceeds from exercise of stock options
            
            
            70
            
            
            
            44Net
      cash used in financing activities
            
            
            (55
            )
            
            
            (668
            )Net
      decrease in cash and cash equivalents
            
            
            (248
            )
            
            
            (69
            )Cash
      and cash equivalents at beginning of period
            
            
            1,621
            
            
            
            2,530Cash
      and cash equivalents at end of period
            
            $
            1,373
            
            
            $
            2,461Supplemental
      disclosure of cash flow information:Interest
      paid
            
            $
            42
            
            
            $
            221Income
      taxes paid
            
            $
            -
            
            
            $
            -








See
accompanying notes to Unaudited Condensed Consolidated Financial
Statements.
 3
 Williams
Controls, Inc.


Notes
to Unaudited Condensed Consolidated Financial Statements


Three
Month periods ended December 31, 2007 and 2006


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


(Unaudited)





Note
1. Organization





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





Active
Subsidiaries–Williams Controls Industries, Inc. (“Williams”); Williams (Suzhou)
Controls Co. Ltd. (“Williams Controls Asia”); and Williams Controls Europe GmbH
(“Williams Controls Europe”).





Inactive
Subsidiaries–Aptek
Williams, Inc. (“Aptek”); Premier Plastic Technologies, Inc. (“PPT”); ProActive
Acquisition Corporation (“ProActive”); WMCO-Geo (“GeoFocus”); NESC Williams,
Inc. (“NESC”); Williams Technologies, Inc. (“Technologies”); Williams World
Trade, Inc. (“WWT”); Techwood Williams, Inc. (“TWI”); Agrotec Williams, Inc.
(“Agrotec”) and our 80% owned subsidiaries Hardee Williams, Inc. (“Hardee”) and
Waccamaw Wheel Williams, Inc. (“Waccamaw”).





Note
2. Basis of Presentation





The
accompanying unaudited interim condensed consolidated financial statements have
been prepared by the Company and, in the opinion of management, reflect all
material normal recurring adjustments necessary to present fairly the Company’s
financial position as of December 31, 2007 and the results of operations and
cash flows for the three month periods ended December 31, 2007 and
2006.  The results of operations for the three month period ended
December 31, 2007 are not necessarily indicative of the results to be expected
for the entire fiscal year.





Certain
information and footnote disclosures made in the last Annual Report on Form 10-K
have been condensed or omitted for the interim consolidated
statements.  Certain costs are estimated for the full year and
allocated to interim periods based on activity associated with the interim
period.  Accordingly, such costs are subject to year-end
adjustment.  It is management’s opinion that, when the interim
consolidated statements are read in conjunction with the Company’s annual report
on Form 10-K, for the fiscal year ended September 30, 2007, the disclosures are
adequate to make the information presented not misleading.  The
interim consolidated financial statements include the accounts of the Company
and its subsidiaries.  All significant intercompany balances and
transactions have been eliminated in consolidation.





The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions, based upon all known facts and circumstances, that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reported
periods.  Management makes these estimates using the best information
available at the time the estimates are made; however, actual results could
differ materially from these estimates.  Estimates are used in
accounting for, among other things, pension and post-retirement benefits,
product warranty, excess and obsolete inventory, allowance for doubtful
accounts, useful lives for depreciation and amortization, future cash flows
associated with the evaluation of  impairment of long-lived assets,
deferred tax assets, stock options and commitments and
contingencies.





Note
3. Realignment of Operations





During the second quarter of fiscal
year 2006, the Company initiated a plan for realignment (“the Plan”) of its
Portland, Oregon manufacturing operations as part of ongoing efforts to focus on
its core product competencies and improve its global
competitiveness.  The Plan was essentially completed in fiscal
2007.  The Plan consisted of outsourcing all of the Company’s die
casting and machining operations to high-quality suppliers, primarily in Asia,
and relocating of the Company’s assembly operations for the majority of its
pneumatic products to its manufacturing facility in Suzhou, China.  In
conjunction with the realignment, the Company eliminated 50 hourly and 2
salaried positions from its Portland, Oregon headquarters during fiscal
2007.   As part of the Plan, the Company incurred a one-time
termination benefit with those employees affected by the Plan.





4


In accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs
Associated with Exit or Disposal Activities” and related guidance, a one-time
benefit arrangement must meet certain criteria in order for a Company to
recognize a liability for such one-time benefits.  The plan must
establish the terms of the benefit arrangement, including the benefits that
employees will receive upon termination, in sufficient detail to enable
employees to determine the type and amount of benefits they will receive if they
are involuntarily terminated.  That determination was reached when the
Company began negotiations over the effects of the realignment related workforce
reductions with the United Automobile Workers of America (“UAW”) during the
third quarter of fiscal 2006, at which time the Company began to record an
estimated liability for anticipated termination costs.  The Company
reached an agreement with the UAW regarding the effects of the realignment
associated workforce reduction on April 6, 2007.





The total costs of the Plan were
approximately $1.5 million and include costs related to hourly and salaried
termination benefits of $605; supplier and parts qualification of $100;
refurbishment of tools of $150; accelerated depreciation on certain assets of
$240; and general administrative and other costs of $400.  Certain of
these costs are classified in financial statement line items other than
realignment of operations expense.  The Company recorded realignment
expenses of $176 for the three month period ended December 31, 2006, which were
recorded in operating expenses in the accompanying condensed consolidated
statements of operations.  No realignment expense was recorded during
the three month period ended December 31, 2007, as the realignment was
substantially complete.  Following is a reconciliation of the changes
in the Company’s liability accrual related to the employee termination benefits
during fiscal 2008 and the comparable period in fiscal 2007.





Three
      month period ended December 31,2007
            
            
            2006Balance
      at beginning of period
            
            $
            86
            
            
            $
            226Payments
            
            
            (48
            )
            
            
            -Additional
      accruals
            
            
            -
            
            
            
            105Balance
      at end of period
            
            $
            38
            
            
            $
            331




The liability of $38 at December 31,
2007 represents the remaining employee termination benefits that have been
earned but have yet to be paid out.





Note
4. Accounting for Stock Based Compensation





The
Company uses SFAS No. 123R, “Share Based Payment,” which revises SFAS No. 123,
“Accounting for Stock-Based Compensation” to account for stock based
compensation.  Prior to fiscal year 2006, the Company accounted for
its stock-based compensation plans using the intrinsic value-based method under
Accounting Principles Board Opinion No. 25 (APB 25).  No compensation
expense was recorded for stock options granted to employees prior to October 1,
2005 under the intrinsic value method.





SFAS No.
123R applies to new awards and to awards modified, repurchased, or cancelled
after the required effective date, as well as to the unvested portion of awards
outstanding as of the required effective date.  The effective date for
the Company was October 1, 2005.  The Company uses the Black-Scholes
option pricing model to value its stock option grants under SFAS No. 123R,
applying the “modified prospective method” for existing grants which requires
the Company to value stock options prior to its adoption of SFAS No 123R under
the fair value method and expense the unvested portion over the remaining
vesting period.  Stock-based compensation expense is recognized on a
straight-line basis over the requisite service period, which equals the vesting
period.  Under SFAS No 123R, the Company is also required to estimate
forfeitures in calculating the expense related to stock-based
compensation.  In addition, SFAS No. 123R requires the Company to
reflect the benefits of tax deductions in excess of recognized compensation cost
to be reported as a financing cash inflow upon adoption.





The Company currently has two qualified
stock option plans.  The Restated 1993 Stock Option Plan (the “1993
Plan”) reserves an aggregate of 750,000 shares of the Company’s common stock for
the issuance of stock options, which may be granted to employees, officers and
directors of and consultants to the Company.  Under the terms of the
1993 Plan, the Company may grant “incentive stock options” or “non-qualified
options” with an exercise price of not less than the fair market value on the
date of grant.  Options granted under the 1993 Plan have a vesting
schedule, which is typically five years, determined by the Compensation
Committee of the Board of Directors and expire ten years after the date of
grant.




5


The
non-employee Director Plan (the “1995 Plan”) reserves an aggregate of 66,666
shares of the Company’s common stock for the issuance of stock options, which
may be granted to non-employee directors of the Company.  Under the
1995 Plan the non-employee directors are each automatically granted 1,666
options at a price equal to the market value on the date of grant which is the
date of the annual stockholders’ meeting each year, exercisable for 10 years
after the date of the grant.  These options are exercisable as to 25%
of the shares thereby on the date of grant and as to an additional 25%,
cumulatively on the first, second and third anniversaries of the date of
grant.





As of December 31, 2007 there was
$1,794 of total unrecognized compensation costs related to nonvested stock
options.  That cost is expected to be recognized over a weighted
average period of 3.3 years.  For the three month period ended
December 31, 2007, the Company’s total stock-based compensation expense was $149
($126 net of tax).  Stock-based compensation expense was recorded in
cost of sales and operating expenses in the amounts of $25 and $124,
respectively, in the accompanying condensed consolidated statement of
operations. For the three month period ended December 31, 2006, the Company’s
total stock-based compensation expense was $114 ($104 net of
tax).  Stock-based compensation expense was recorded in cost of sales
and operating expenses in the amounts of $16 and $98, respectively, in the
accompanying condensed consolidated statement of operations.





The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants issued during the three month period ended December
31, 2006.  No options were granted during the three month period ended
December 31, 2007.





Three
      Month Period Ended December 31,2006Risk-free
      interest rate
            
            
            4.60%Expected
      dividend yield
            
            
            0%Expected
      term
            
            6.5
      yearsExpected
      volatility
            
            
            86%





The
expected term of options granted represents the weighted average period the
stock options are expected to remain outstanding and is calculated using the
simplified method under SAB 107, which expresses the view of the Securities and
Exchange Commission (“SEC”) Staff regarding interaction between SFAS No. 123R
and certain SEC rules and regulations and provides the Staff’s views regarding
the valuation of share-based payment arrangements for public
companies.  Expected volatilities are based on the historical
volatility of the Company’s common stock.





The
following table summarizes stock options outstanding as of December 31, 2007 as
well as activity during the three month period then ended.




Shares
            
            
            Weighted
      Average Exercise PriceOutstanding
      at September 30, 2007
            
            
            622,785
            
            
            $
            8.40Granted
            
            
            -
            
            
            
            -Exercised
            
            
            (16,165
            )
            
            
            4.37Forfeited
            
            
            (7,686
            )
            
            
            7.80Outstanding
      at December 31, 2007
            
            
            598,934
            
            
            
            8.51Exercisable
      at December 31, 2007
            
            
            342,142
            
            
            $
            6.33





At
December 31, 2007, the weighted average remaining contractual term of options
outstanding and options exercisable was 6.7 years and 5.8 years,
respectively.





The
aggregate intrinsic value of options outstanding and options exercisable at
December 31, 2007 was $5,226 and $3,690, respectively (the intrinsic value of a
stock option is the amount by which the market value of the underlying stock
exceeds the exercise price of the option).  The aggregate intrinsic
value of options outstanding and options exercisable at December 31, 2006 was
$4,967 and $2,594, respectively. There were no stock options granted during the
three month period ended December 31, 2007. The weighted average grant date fair
value of stock options granted during the three month period ended December 31,
2006 was $10.45 per share.  The intrinsic value of all stock options
exercised during the three month period ended December 31, 2007 was
$217.  Cash received from the exercise of stock options for the three
month period ended December 31, 2007 was $70.




6


The
intrinsic value of all stock options exercised during the three month period
ended December 31, 2006 was $109.  Cash received from the exercise of
stock options for the three month period ended December 31, 2006 was
$44.





Note
5. Comprehensive Income





SFAS No.
130, “Reporting Comprehensive Income," requires companies to report a measure of
all changes in equity except those resulting from investments by owners and
distributions to owners.  Total comprehensive income for the three
month periods ended December 31, 2007 and 2006 was $1,197 and $2,555,
respectively, and consisted of net income and foreign currency translation
adjustments.  As of December 31, 2007, accumulated other comprehensive
loss was $4,910 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 and the effect of foreign currency translation
adjustments.





Note
6. Earnings Per Share





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





Following
is a reconciliation of basic EPS and diluted EPS:





Three
      Month Period Ended
              December
      31, 2007
            
            
            Three
      Month Period Ended
              December
      31, 2006Income
            
            
            Shares
            
            
            Per
      Share Amount
            
            
            Income
            
            
            Shares
            
            
            Per
      Share AmountBasic
      EPS –
            
            $
            1,156
            
            
            
            7,508,861
            
            
            $
            0.15
            
            
            $
            2,543
            
            
            
            7,439,746
            
            
            $
            0.34Effect
      of dilutive securities –Stock
      options
            
            
            
            
            
            
            247,774
            
            
            
            
            
            
            
            
            
            
            
            253,855Diluted
      EPS –
            
            $
            1,156
            
            
            
            7,756,635
            
            
            $
            0.15
            
            
            $
            2,543
            
            
            
            7,693,601
            
            
            $
            0.33





For the
three month period ended December 31, 2007, the Company had options covering
99,246 shares that were not considered in the dilutive EPS calculation since
they would have been antidilutive.  For the three month period ended
December 31, 2006, the Company had options and warrants covering 47,034 shares
not considered in the dilutive EPS calculation since they would have been
antidilutive.





Note
7. Inventories





Inventories,
net of reserves, consist of the following:





December
      31,
              2007
            
            
            September
      30,
              2007Raw
      materials
            
            $
            6,677
            
            
            $
            7,057Work
      in process
            
            
            37
            
            
            
            66Finished
      goods
            
            
            2,046
            
            
            
            2,029$
            8,760
            
            
            $
            9,152





Note
8. Settlement of Accounts Payable





Included
in the accompanying condensed consolidated balance sheet is approximately $155
of accounts payable related to closed insolvent subsidiaries of the
Company.  In accordance with SFAS No. 140 “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities”, a debtor
can only relieve itself of a liability if it has been
extinguished.  Accordingly, 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.




7


During
the first quarter of fiscal 2007, the Company was judicially released from and
reversed $589 of old accounts resulting in a gain, which has been recorded in
other (income) expense in the accompanying condensed consolidated statements of
operations.  No amounts were released and reversed during the first
quarter of fiscal 2008.  The Company will continue to monitor its
ability to reverse amounts in future periods based on the recognition of the
liabilities being judicially released in accordance with SFAS No.
140.  If judicially released, the Company would reverse $90 in fiscal
2010 and a total of $65 in fiscal 2011 – 2016.





Note
9. Debt





In September 2004, the Company entered
into a $25,000 senior secured lending facility with Merrill Lynch, consisting of
an $8,000 revolving loan facility and a $17,000 term loan.  The loans
are secured by substantially all the assets of the
Company.  Borrowings under the revolving loan facility are subject to
a borrowing base equal to 85% of eligible accounts receivables and 60% of
eligible inventories.  Interest rates under the agreement are based on
the election of the Company of either a LIBOR rate or Prime
rate.  Under the LIBOR rate option, the revolving loan facility will
bear interest at the LIBOR rate plus 3.75% per annum 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 0.50% 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 which are adjusted annually to
repay the remaining loan balance by the end of the term.  The Company
is entitled to prepay the term loan, in whole or in part, in minimum amounts
without penalty and through December 31, 2007 the Company has made prepayments
on the term loan so that on December 31, 2007 only $875 remained outstanding
under the term loan.  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.  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.





The Company had available under its
revolving credit facility $8,000 at December 31, 2007 and September 30,
2007.





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





December
      31, 2007
            
            
            September
      30, 2007Revolving
      credit facility due September 29, 2009, bearing interest at a variable
      rate.
            
            $
            -
            
            
            $
            -Term
      loan due September 29, 2009, balance bearing
              interest
      at a variable rate, (10.5% at December 31, 2007)
            
            
            875
            
            
            
            1,000875
            
            
            
            1,000Less
      current portion
            
            
            (875
            )
            
            
            (1,000
            )$
            -
            
            
            $
            -





Note
10.  Product Warranties





The
Company establishes a product warranty liability based on a percentage of
product sales.  The liability is based on historical return rates of
products and amounts for significant and specific warranty issues, and is
included in accrued expenses in the accompanying condensed consolidated balance
sheets.  Warranty is limited to a specified time period, mileage or
hours of use, and varies by product, application and customer.  The
Company has recorded a liability, which in the opinion of management, is
adequate to cover such warranty costs.  Following is a reconciliation
of the changes in the Company’s warranty liability for the three month periods
ended December 31, 2007 and 2006.





8




Three
      Month
              Period
      Ended
              December
      31,
              2007
            
            
            
            Three
      Month
              Period
      Ended
              December
      31,
              2006Balance
      at September 30, 2007
            
            $
            1,712
            
            Balance
      at September 30, 2006
            
            $
            1,720Payments
            
            
            (178
            )
            Payments
            
            
            (107
            )Additional
      accruals
            
            
            189
            
            Additional
      accruals
            
            
            221Balance
      at December 31, 2007
            
            $
            1,723
            
            Balance
      at December 31, 2006
            
            $
            1,834





Included
in the warranty liability at December 31, 2006 were $400 of warranty liabilities
associated with our former passenger car and light truck product lines, which
were sold on September 30, 2003.  At September 30, 2007, the Company
reversed this $400 warranty liability as the warranty return period had
expired.





Note
11. Pension Plans and Post-Retirement Benefits





The
Company maintains two pension plans, an hourly employee plan and a salaried
employee plan.  The hourly plan covers certain of the Company’s union
employees.  The salaried plan covers certain salaried
employees.  Annual net periodic pension costs under the plans are
determined on an actuarial basis.  The Company’s policy is to fund
these costs accrued over 15 years and obligations arising due to plan amendments
over the period benefited.  The assets and liabilities are adjusted
annually based on actuarial results.  Disclosures regarding the
components of net periodic benefit cost and contributions of pension plans are
required for interim financial statements and are included below.





Components
      of Net Periodic Benefit Cost:Salaried
      Employees Plan
            
            
            Hourly
      Employees PlanThree
      Month Period Ended
              December
      31,
            
            
            Three
      Month Period Ended
              December
      31,2007
            
            
            2006
            
            
            2007
            
            
            2006Service
      cost
            
            $
            -
            
            
            $
            -
            
            
            $
            16
            
            
            $
            29Interest
      cost
            
            
            74
            
            
            
            73
            
            
            
            115
            
            
            
            112Expected
      return on plan assets
            
            
            (77
            )
            
            
            (68
            )
            
            
            (118
            )
            
            
            (100
            )Amortization
      of prior service cost
            
            
            -
            
            
            
            -
            
            
            
            5
            
            
            
            12Amortization
      of loss
            
            
            16
            
            
            
            23
            
            
            
            42
            
            
            
            62Net
      periodic benefit cost
            
            $
            13
            
            
            $
            28
            
            
            $
            60
            
            
            $
            115





The
Company expects total contributions to its pension plans in fiscal 2008 to be
$1,344.  During the three month period ended December 31, 2007, the
Company has made contributions of $402.





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, 2007 and
2006.





Components
      of Net Periodic Benefit Cost:Post-Retirement
      PlanThree
      Month Periods Ended
              December
      31,2007
            
            
            2006Service
      cost
            
            $
            1
            
            
            $
            2Interest
      cost
            
            
            59
            
            
            
            55Amortization
            
            
            (8
            )
            
            
            (6
            )Net
      periodic benefit cost
            
            $
            52
            
            
            $
            51








9


Note
12. Income Taxes





In June,
2006 the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement No. 109” (“FIN
48”).  FIN 48 establishes a single model to address accounting for
uncertain tax positions.  FIN 48 clarifies the accounting for income
taxes by prescribing a minimum recognition threshold a tax position is required
to meet before being recognized in the financial statements.  FIN 48
also provides guidance on derecognition, measurement, classification, interest
and penalties, accounting in interim periods, disclosure and
transition.





The
Company adopted the provisions of FIN 48 on October 1, 2007.  As of
the date of adoption, the Company had unrecognized tax benefits of $109, of
which $72 will favorably affect the effective tax rate, if
recognized.  The adoption of FIN 48 resulted in a decrease of $82 to
retained earnings as a cumulative effect adjustment to stockholder’s
equity.  The amount of interest and penalties related to the
unrecognized tax benefits as of the date of adoption was $14.  The
Company will recognize interest and penalties related to unrecognized tax
benefits as a component of income tax expense.  The Company believes
that it is reasonably possible that all of it unrecognized tax benefits could be
recognized within the 12 months of this reporting date.





The
Company is subject to U.S. federal, state and foreign income
taxes.  The Company is no longer subject to U.S. federal, state or
foreign income tax examinations for fiscal years ended before September 30,
2004, September 30, 2003 and September 30, 2005,
respectively.  However, to the extent allowed by law, the tax
authorities may have the right to examine prior periods where net operating
losses or tax credits were generated and carried forward, and make adjustments
up to the amount of the net operating loss or credit carryforward
amount.





The
Company is not currently under Internal Revenue Service (“IRS”)
examination.  The Company is undergoing an Oregon tax examination for
the fiscal years ended September 30, 2004 through 2006.  The Company
is not currently under examination in any other states or foreign
jurisdictions.





Note
13. Segment Information





The
Company accounts for its segments in accordance with SFAS No. 131 “Disclosures
about Segments of an Enterprise and Related Information”.  During the
three month periods ended December 31, 2007 and 2006, the Company operated in
two geographic reportable segments as shown in the table below.





Three
      Month Periods Ended
              December
      31,2007
            
            
            2006Revenue
      – External Customers:United
      States
            
            $
            14,735
            
            
            $
            18,302China
            
            
            237
            
            
            
            140$
            14,972
            
            
            $
            18,442Revenue
      – Intersegments:United
      States
            
            $
            163
            
            
            $
            483China
            
            
            2,823
            
            
            
            2,432Other
            
            
            138
            
            
            
            115Eliminations
            
            
            (3,124
            )
            
            
            (3,030
            )$
            -
            
            
            $
            -Income
      before income taxes:United
      States
            
            $
            1,671
            
            
            $
            3,805China
            
            
            127
            
            
            
            194Other
            
            
            (32
            )
            
            
            (125
            )$
            1,766
            
            
            $
            3,874





Note
14. Contingencies





The Company and its subsidiaries are
parties to various pending judicial and administrative proceedings arising in
the ordinary course of business.  The Company’s management and legal
counsel have reviewed the probable outcome of these proceedings, the costs and
expenses reasonably expected to be incurred, the availability and limits of the
Company’s insurance coverage, and the Company’s established
liabilities.  While the outcome of the pending proceedings cannot be
predicted with certainty, based on its review, the Company believes that any
unrecorded liability that may result is not more than likely to have a material
effect on the Company’s liquidity, financial condition or results of
operations.





10


The soil
and groundwater at the Company’s Portland, Oregon facility contains certain
contaminants, which were deposited from approximately 1968 through
1995.  Some of this contamination has migrated offsite to neighboring
properties.  The Company has retained an environmental consulting firm
to investigate the extent of the contamination and to determine what remediation
will be required and the associated costs.  During fiscal 2004, the
Company entered into the Oregon Department of Environmental Quality’s voluntary
clean-up program and during fiscal 2004 the Company established a liability of
$950 for this matter.  At September 30, 2007, the Company recorded an
additional liability of $546 based on remaining costs estimates determined by
the Company’s environmental consulting firm.  As of December 31, 2007,
the total liability recorded is $1,025 (and excludes any potential claim
recovery as discussed below) and is recorded in accrued expenses in the
accompanying condensed consolidated balance sheet.  The Company has
asserted a contractual indemnity claim against Dana Corporation (“Dana”), from
which it acquired the property, and contribution claims against other prior
owners of the property as well as businesses previously located on the property
(including Blount, Inc. (“Blount”) under the Federal Superfund Act and the
Oregon Cleanup Law.  Dana is subject to a pending bankruptcy
petition.  On November 20, 2007, the Company and Blount executed a
settlement agreement with Dana with respect to these claims.  Dana is
submitting the settlement agreement to the bankruptcy court for approval; the
settlement agreement also is contingent on the court’s approval of Dana’s
proposed plan of reorganization in substantially the form described in Dana’s
disclosure statement in effect as of this same date.  If the
settlement agreement is approved by the bankruptcy court and the plan of
reorganization is approved, Blount will be obligated to pay the Company $625 and
the Company’s claim against Dana will be allowed as an unsecured general
creditor’s claim in the amount of $750.  The Company anticipates the
claim will be discounted and paid primarily in stock in the reorganized
corporation, all in accordance with Dana’s plan of reorganization.  At
this time, the Company is not able to reasonably estimate the net amount it may
be able to realize from this unsecured claim and has not recognized any asset in
the financial statements pertaining to any recovery from either Blount or
Dana.  The Company believes that even with a resolution of the claims
against the prior operators and owner of the property, the Company will be
liable for some portion of the ultimate costs and it believes that the liability
recorded at December 31, 2007 will be sufficient to cover these
costs.





On October 1, 2004, the Company was
named as a co-defendant in a product liability case (Cuesta v. Ford, et al,
District Court for Bryant, Oklahoma).  During the second
quarter of fiscal 2007, the Oklahoma district court granted the plaintiffs class
action status.  Both the Company and Ford are appealing this
decision.  The complaint seeks an unspecified amount of damages on
behalf of the class.   The Company continues to believe the
claims to be without merit and intends to continue 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.  The Company cannot reasonably estimate the possible
loss or range of loss at this time.  In addition, the Company has
incurred and will continue to incur substantial litigation expenses in defending
this litigation.





On August 1, 2005, Mr. Thomas Ziegler,
the Company’s former president and chief executive officer, filed a suit against
the Company, American Industrial Partners, L.P.; American Industrial Partners
Fund III, L.P., and American Industrial Partners Fund III Corporation in the
Circuit Court of the 15th Judicial Circuit in and for Palm Beach County,
Florida.  This suit is similar to a suit filed by Mr. Ziegler on May
12, 2003 against the same defendants.  The 2003 suit was dismissed
without prejudice for failure to prosecute.  In the suit, Mr. Ziegler
alleges the Company breached an “oral agreement” with Mr. Ziegler to pay him
additional compensation, including a bonus of "at least" $500 for certain tasks
performed by Mr. Ziegler while he was the Company's president and chief
executive officer and seeks additional compensation to which he claims he is
entitled.  The Company disputes the existence of any such agreement
and any resulting liability to Mr. Ziegler and is vigorously defending this
action.


11


Williams
Controls, Inc.





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





This
section summarizes the significant factors affecting our consolidated results of
operations, financial condition and liquidity position for the three month
periods ended December 31, 2007 and 2006.  This section should be read
in conjunction with our condensed consolidated financial statements and related
notes appearing elsewhere in this document.   Statements in this
report that relate to future results and events are based on our current
expectations.  Actual results in future periods may differ materially
from those currently expected or desired because of a number of risks and
uncertainties, including, but not limited to, those risks discussed in the
section entitled “Risk Factors” in our annual report on Form 10-K for the fiscal
year ended September 30, 2007.





Forward-Looking
Statements





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





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





Investors are cautioned to consider the
risk factors identified below when considering forward-looking
statements.  If any of these items actually occur, our business,
results of operations, financial condition or cash flows could be materially
adversely affected.





Overview





We design, manufacture and sell
electronic throttle and pneumatic control systems for heavy trucks, transit
busses and off-road equipment.  Electronic throttle controls send a
signal proportional to throttle position to adjust the speed of electronically
controlled engines.  The use of electronically controlled engines is
influenced primarily by emissions regulations, because these engines generally
produce lower emissions.  The original applications of electronic
engines and electronic throttle controls were in heavy trucks and transit busses
in the United States and Europe in the late 1980’s.  As a result of
the continuing implementation of more stringent emissions standards worldwide,
demand for electronically controlled engines and electronic throttle control
systems is expanding.  Both China and India have announced
requirements for more stringent emissions standards for heavy trucks and transit
busses.  Additionally, worldwide emissions regulations have been
enacted that increase the use of electronic throttle controls in off-road
equipment.  We also produce a line of pneumatic control products,
which are sold to the same customer base as our electronic throttle
controls.  These pneumatic products are used for vehicle control
system applications.  We believe that the demand for our products will
be driven by worldwide emissions legislation and the economic cycles for heavy
trucks, transit busses and off-road equipment.





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





12


Critical
Accounting Policies and Estimates





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





Revenue
Recognition





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





Warranty





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





Legal





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





Environmental





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





13


Pensions
and Post-Retirement Benefit Obligations





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





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





Stock-Based
Compensation Expense





We use SFAS No. 123R for computing
stock based compensation expense, which requires us to measure compensation cost
for all outstanding unvested share-based awards, and awards we grant, modify,
repurchase or cancel in the future, at fair value and recognize compensation
over the requisite service period for awards expected to vest.  The
estimation of stock awards that will ultimately vest requires judgment, and to
the extent actual results differ from our estimates, such amounts will be
recorded as a cumulative adjustment in the period estimates are
revised.  We consider many factors when calculating fair value
including estimated stock price volatility, expected term and expected
forfeitures.  Factors considered in estimating forfeitures include the
types of awards, employee class, and historical experience.  Actual
results may differ substantially from these estimates.  We recorded
$149 and $114 of stock-based compensation expense for the three month periods
ended December 31, 2007 and December 31, 2006
respectively.  Stock-based compensation expense recorded for the three
month period ended December 31, 2007 included $25 in cost of sales, $17 in
research and development, $17 in selling and the remaining $90 in administration
expense.  Stock-based compensation expense recorded for the three
month period ended December 31, 2006 included $16 in cost of sales, $9 in
research and development, $13 in selling and the remaining $76 in administration
expense.





Income
Taxes





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








14


Results
of Operations


Financial
Summary


(Dollars
in Thousands)





Three
      Month Periods Ended
              December
      31,2007
            
            
            2006
            
            
            2006
      to
              2007Net
      sales
            
            $
            14,972
            
            
            $
            18,442
            
            
            
            (18.8)%Cost
      of sales
            
            
            10,086
            
            
            
            12,150
            
            
            
            (17.0)%Gross
      profit
            
            
            4,886
            
            
            
            6,292
            
            
            
            (22.3)%Research
      and development
            
            
            1,009
            
            
            
            830
            
            
            
            21.6%Selling
            
            
            678
            
            
            
            520
            
            
            
            30.4%Administration
            
            
            1,401
            
            
            
            1,273
            
            
            
            10.1%Realignment
      of operations
            
            
            -
            
            
            
            176
            
            
            NMOperating
      income
            
            $
            1,798
            
            
            $
            3,493
            
            
            
            (48.5)%As
      a percentage of net sales:Cost
      of sales
            
            
            67.4%
            
            
            
            65.9%Gross
      margin
            
            
            32.6%
            
            
            
            34.1%Research
      and development
            
            
            6.7%
            
            
            
            4.5%Selling
            
            
            4.5%
            
            
            
            2.8%Administration
            
            
            9.4%
            
            
            
            6.9%Realignment
      of operations
            
            
            -
            
            
            
            1.0%Operating
      income
            
            
            12.0%
            
            
            
            18.9%





Comparative
– Three month periods ended December 31, 2007 and 2006





NM
= Not Meaningful


Percent
      ChangeFor
      the Three Month Period Ended December 31:
            
            2007
            
            
            2006
            
            
            2006
      to 2007Net
      sales
            
            $
            14,972
            
            
            $
            18,442
            
            
            
            (18.8)%





Net sales decreased $3,470 in the first
quarter of fiscal 2008 compared to the first quarter of fiscal
2007.  The major factor in the sales decline was a reduction in the
build rates of heavy trucks in the North American market.  In that
market, sales were down 58% compared to the first quarter of fiscal 2007, and is
representative of the overall reduction in the truck build rates.  The
Company’s share of that market and unit pricing remained essentially unchanged
from the prior year.  Sales to European truck customers increased 13%
on a quarter over quarter basis and helped offset a portion of the decline from
the North American truck market.  Net sales in Asia decreased 1% and
off-road decreased 3%.  We expect that electronic throttle control
sales will increase or decrease in the future in line with changes in heavy
truck and transit bus production volumes in the various geographic markets in
which we serve and when new product lines are established, however, competitive
pricing may continue to reduce per unit pricing.  A change in
emissions regulations in the United States effective January 1, 2007 had a
negative impact on truck sales in North America beginning in our second fiscal
quarter of 2007 and continued into the first quarter of fiscal
2008.  The published reports of the decline in North American heavy
truck production are that overall truck production volumes in North America in
calendar year 2007 declined approximately 35% over the calendar 2006 production
volumes.  As this production shift has been attributed to the change
in emission standards, the Company anticipates that North American truck
production volumes will increase in subsequent years, although potentially not
until 2009 and potentially not to the 2006 levels.





15





Percent
      ChangeFor
      the Three Month Period Ended December 31:
            
            2007
            
            
            2006
            
            
            2006
      to 2007Gross
      profit
            
            $
            4,886
            
            
            $
            6,292
            
            
            
            (22.3)%





Gross
profit was $4,886, or 32.6% of net sales in the first quarter of fiscal 2008, a
decrease of $1,406 compared to the gross profit of $6,292, or 34.1% of net
sales, in the comparable fiscal 2007 period.





The
decrease in gross profit in the first quarter of fiscal 2008 is primarily driven
by a 58% net decrease in sales of electronic throttle systems to North American
heavy truck customers.  During fiscal 2007, we substantially completed
our realignment of operations, as discussed in Note 3 in the Notes to
Consolidated Financial Statements, and as a result of this realignment we have
experienced an overall reduction in labor costs and net material costs due to
continued efforts in global sourcing and the production of our own internally
developed contacting and non-contacting sensors.  Throughout fiscal
2007 and the first quarter of fiscal 2008, gross profit was negatively impacted
by higher purchase prices for certain raw materials.





Percent
      ChangeFor
      the Three Month Period Ended December 31:
            
            2007
            
            
            2006
            
            
            2006
      to 2007Research
      and development
            
            $
            1,009
            
            
            $
            830
            
            
            
            21.6%





Research
and development expenses increased $179 for the first quarter of fiscal 2008
compared to the comparable period in 2007.  The Company’s research and
development expenditures will fluctuate based on the products under development
at any given point in time.  Expenses were up in the first quarter
over last year’s first quarter and were due to higher salary costs and costs
related to our Conceptual Development Center, which was completed in mid-fiscal
2007.  Overall, we expect research and development expenses to
increase slightly over fiscal 2007 levels due to additional new product design
projects





Percent
      ChangeFor
      the Three Month Period Ended December 31:
            
            2007
            
            
            2006
            
            
            2006
      to 2007Selling
            
            $
            678
            
            
            $
            520
            
            
            
            30.4%





Selling
expenses increased $158 during the three month period ended December 31, 2007 as
compared with the three month period ended December 31, 2006 mainly due to
higher overall salaries and expanded selling and marketing efforts, including
expenses associated with sales and marketing related travel in the European,
Asian, South American, Australian and off-road markets.





Percent
      ChangeFor
      the Three Month Period Ended December 31:
            
            2007
            
            
            2006
            
            
            2006
      to 2007Administration
            
            $
            1,401
            
            
            $
            1,273
            
            
            
            10.1%





Administration
expenses for the three month period ended December 31, 2007 increased $128 when
compared with the same period in fiscal 2007.  The increase in
administration expenses is primarily a result of designing changes to our
compensation structure, employee recruitment and relocation costs and continued
costs to comply with Sarbanes Oxley, slightly offset by a decrease in legal fees
associated with the class action lawsuit discussed in Note 14 to our unaudited
condensed consolidated financials statements.





Percent
      ChangeFor
      the Three Month Period Ended December 31:
            
            2007
            
            
            2006
            
            
            2006
      to 2007Realignment
      of operations
            
            $
            -
            
            
            $
            176
            
            
            
            NM





The Company recorded expenses of $176
during the three month period ended December 31, 2006, related to its
realignment of operations as discussed in Note 3 of the unaudited condensed
consolidated financial statements.  No realignment expenses were
recorded during the first quarter of fiscal 2008 as the realignment was
substantially complete as of September 30, 2007.




16




Percent
      ChangeFor
      the Three Month Period Ended December 31:
            
            2007
            
            
            2006
            
            
            2006
      to 2007Interest
      income
            
            $
            (
      22
            )
            
            $
            (
      36
            )
            
            
            (38.9)%Interest
      expense
            
            $
            88
            
            
            $
            258
            
            
            
            (65.9)%





Interest
expense decreased $170 in the first quarter of fiscal 2008 as compared to the
first quarter of fiscal 2007 due to significant reductions in debt levels
throughout fiscal 2007.  We expect interest expense to continue to
decrease in fiscal 2008 when compared with fiscal 2007 due to the continued
reduction of debt levels resulting from scheduled debt
payments.   Our outstanding debt balance at December 31, 2007 was
$875.





Percent
      ChangeFor
      the Three Month Period Ended December 31:
            
            2007
            
            
            2006
            
            
            
            2006
      to 2007Other
      income, net
            
            $
            (34
            )
            
            $
            (
      603
            )
            
            
            NM





Other
income was $34 in the first quarter of fiscal 2008 compared to other income of
$603 in the first quarter of fiscal 2007.  Included in other income
for the three month period ended December 31, 2006 was a gain of $589 for the
reversal of old accounts payable as discussed in Note 8 of the unaudited
condensed consolidated financials statements.





Percent
      ChangeFor
      the Three Month Period Ended December 31:
            
            2007
            
            
            2006
            
            
            2006
      to 2007Income
      tax expense
            
            $
            610
            
            
            $
            1,331
            
            
            
            (54.2)%





Income
tax expense reflects an effective tax rate of 34.5% for the quarter ended
December 31, 2007 compared to an effective tax rate of 34.4% for the quarter
ended December 31, 2006.




Financial
Condition, Liquidity and Capital Resources





Cash generated by operating activities
was $20 for the first quarter of fiscal 2008, a decrease of $1,266 from the cash
generated by operating activities of $1,286 during the first quarter of fiscal
2007.   Net income plus non cash charges for depreciation and
stock based compensation contributed $1,764 in the first quarter of fiscal 2008
and $3,158 in the first quarter of fiscal 2007.





Changes in working capital items used
cash of $1,707 in the first quarter of fiscal 2008 and $1,283 in the first
fiscal quarter of 2007.  Timing of collections on receivables
generated cash of $284 in fiscal 2008 and $1,356 in 2007.  Inventories
were reduced $392 in the first quarter of fiscal 2008 compared to an increase in
inventories of $841 in the first quarter of fiscal 2007.  Cash was
used to increase inventory levels in the first quarter of fiscal 2007 to
facilitate switching of suppliers to lower cost suppliers, primarily in China,
the realignment efforts and to support increasing operations in our Suzhou,
China manufacturing facility.  We feel that inventory levels reached
their maximum levels in mid fiscal 2007 and will continue to decline as supplier
switching is completed.  Accounts payable and accrued expenses
decreased in the first quarter of fiscal 2008 primarily due to the lower sales
and inventory levels plus seasonal payments of certain expenses.  In
the first quarter of fiscal 2007 accounts payable and accrued expenses declined
from seasonal payments of certain expenses.  Also during the first
quarter of fiscal 2007, the Company was judicially released from and wrote off
$589 of old accounts payable.  In addition, cash flows from operations
for the three month period ended December 31, 2007 included payments to our
pension plans of $402.  For the three month period ended December 31,
2006, we contributed $372 to our pension plans.  We believe we will
continue to generate positive cash from continuing operations.





Cash used
in investing activities was $213 for the three month period ended December 31,
2007 and $687 for the three months ended December 31, 2006 and was comprised
solely of purchases of equipment for both periods.  We expect our cash
use for investing activities to increase throughout the fiscal year as we
continue to make purchases of capital equipment.





17


Cash used
in financing activities was $55 for the quarter ended December 31, 2007,
compared to cash used in financing activities of $668 for the quarter ended
December 31, 2006.  The use of cash for financing activities for the
first quarter of fiscal 2008 primarily relates to scheduled debt payments on our
Merrill Lynch term loan, offset slightly by proceeds from the exercise of stock
options.  The use of cash for financing activities for the first
quarter of fiscal 2007 primarily relates to scheduled debt payments on our term
loan.





At
December 31, 2007, we had $8,000 available under our revolving credit facility
with Merrill Lynch plus cash and cash equivalents of $1,373.  We
believe these resources, when combined with cash provided by operations, will be
sufficient to meet our working capital needs on a short-term and long-term
basis.





Contractual
Obligations as of December 31, 2007





At December 31, 2007, our contractual
obligations consisted of bank debt, operating lease obligations, a service
agreement and a license agreement.  We did not have any material
letters of credit, or debt guarantees outstanding at December 31,
2007.  Maturities of these contractual obligations consist of the
following:





Payments
      due by periodTotal
            
            
            Less
      than 1 year
            
            
            1
      – 3
              years
            
            
            3
      – 5
              years
            
            
            More
      than 5 yearsTerm
      loan
            
            $
            875
            
            
            $
            875
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Revolver
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Operating
      leases
            
            
            2,090
            
            
            
            532
            
            
            
            1,337
            
            
            
            221
            
            
            
            -MMT
      license - minimum royalties
            
            
            385
            
            
            
            45
            
            
            
            140
            
            
            
            150
            
            
            
            50Management
      Services Agreement
            
            
            60
            
            
            
            60
            
            
            
            -
            
            
            
            -
            
            
            
            -$
            3,410
            
            
            $
            1,512
            
            
            $
            1,477
            
            
            $
            371
            
            
            $
            50





Certain liabilities, including those
related to our pension and post-retirement benefit plans, are reported in the
accompanying condensed consolidated balance sheets but are not reflected in the
table above due to the absence of stated maturities.  We have net
obligations at December 31, 2007 related to our pension plans and
post-retirement medical plan of $774 and $3,951, respectively.  We
funded $402 to our pension plans during the first quarter of fiscal 2008
compared to $372 contributed for the first quarter of fiscal 2007.  We
expect to make payments to our pension plans of $942 throughout the rest of
fiscal 2008.





Included
in the accompanying condensed consolidated balance sheet is approximately $155
of accounts payable related to closed insolvent subsidiaries of the
Company.  In accordance with SFAS No. 140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,” a debtor
can only relieve itself of a liability if it has been extinguished.  A
liability is considered extinguished if (a) the debtor pays the creditor and is
relieved of its obligation for the liability or (b) the debtor is legally
released from being the primary obligor under the liability, either judicially
or by the creditor.  During the first quarter of fiscal 2007, the
Company was judicially released from and reversed $589 of old accounts payable
resulting in a gain, which has been recorded in other (income) expense in the
accompanying condensed consolidated statements of operations.  No
amounts were released and reversed during the first quarter of fiscal
2008.  The Company will continue to monitor its ability to reverse
amounts in future periods based on the recognition of the liabilities being
judicially released in accordance with SFAS No. 140.   If
judicially released, the Company would reverse $90 in fiscal 2010 and a total of
$65 in fiscal 2011 – 2016.





Recently
Issued Accounting Pronouncements





In
February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
159, “The Fair Value Option for Financial Assets and Financial
Liabilities.”  This statement permits entities to choose to measure
many financial instruments and certain other items at fair value.  The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions.  This statement is expected to expand the use
of fair value measurement.  SFAS No. 159 is effective as of the
beginning of an entity’s first fiscal year that begins after November 15,
2007.  The Company is currently in the process of determining the
effects of adopting this statement in its consolidated financial
statements.





18


In September 2006, the FASB issued SFAS
No. 157, “Fair Value Measurements.”  This statement defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements.  SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years.  The Company is currently in the process of
determining the effects of adopting this statement in its consolidated financial
statements.  In November 2007, the FASB approved the deferral of the
effective date of SFAS No. 157 for one year for all nonfinancial assets and
nonfinancial liabilities, except for those items that are recognized or
disclosed at fair value in the financial statements on a recurring
basis.





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





Item
3.  Quantitative and Qualitative Disclosures About Market
Risk





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





Interest Rate Risk:




●
            The
      Company has a five-year revolving and term loan agreement with its primary
      lender Merrill Lynch.  Interest rates under the agreements are
      variable and are based on the election of the Company of either a LIBOR
      rate or Prime rate.




●
            As
      of December 31, 2007, the outstanding balance on the term loan was $875,
      and there was no balance on the revolving loan.  The effective
      annual interest rate on the term loan was 10.5% as of December 31,
      2007.  The Company does not believe that a hypothetical 10%
      change in end of the period interest rates or changes in future interest
      rates on these variable rate obligations would have a material effect on
      its financial position, results of operations, or cash
      flows.  The Company has not hedged its exposure to interest rate
      fluctuations.




Foreign
Currency Risk:




●
            We
      sell our products to customers in the heavy truck, transit bus and
      off-road equipment industries.  For the three month periods
      ended December 31, 2007 and 2006, the Company had foreign sales of
      approximately 44% and 39% of net sales, respectively.  All
      worldwide sales in the first quarter of fiscal 2008 and 2007, with the
      exception of $237 and $140, respectively, were denominated in U.S.
      dollars.  During fiscal 2005, we established a manufacturing
      facility in Suzhou, China and we opened sales offices in Shanghai, China
      and Ismaning (which is near Munich), Germany.  We purchase
      components internationally for use in both our products whose sales are
      denominated in U.S. dollars and other currencies.  Although the
      Company is expanding its international exposure, it does not believe that
      changes in future exchange rates would have a material effect on its
      financial position, results of operations, or cash flows at this
      time.  As a result, the Company has not entered into forward
      exchange or option contracts for transactions to hedge against foreign
      currency risk.  The Company will continue to assess its foreign
      currency risk as its international operations, international purchases and
      sales increase.




Investment Risk:




●
            The
      Company does not use derivative financial or commodity
      instruments.  The Company’s financial instruments include cash
      and cash equivalents, 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.




19


Item
4.  Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





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





Changes
in Internal Controls





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





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











































20


PART
II – OTHER INFORMATION











Item
1.    Legal Proceedings





We are a
party to various pending judicial and administrative proceedings arising in the
ordinary course of business.  Our management and legal counsel have
reviewed the probable outcome of these proceedings, the costs and expenses
reasonably expected to be incurred, the availability and limits of our insurance
coverage, and our established liabilities.  While the outcome of the
pending proceedings cannot be predicted with certainty, based on our review, we
believe that any unrecorded liability that may result is not likely to have a
material effect on our liquidity, financial condition or results of
operations.





The soil
and groundwater at the Company’s Portland, Oregon facility contains certain
contaminants, which were deposited from approximately 1968 through
1995.  Some of this contamination has migrated offsite to neighboring
properties.  The Company has retained an environmental consulting firm
to investigate the extent of the contamination and to determine what remediation
will be required and the associated costs.  During fiscal 2004, the
Company entered into the Oregon Department of Environmental Quality’s voluntary
clean-up program and during fiscal 2004 the Company established a liability of
$950 for this matter.  At September 30, 2007, the Company recorded an
additional liability of $546 based on remaining costs estimates determined by
the Company’s environmental consulting firm.  As of December 31, 2007,
the total liability recorded is $1,025 (and excludes any potential claim
recovery as discussed below) and is recorded in accrued expenses in the
accompanying condensed consolidated balance sheet.  The Company has
asserted a contractual indemnity claim against Dana Corporation (“Dana”), from
which it acquired the property, and contribution claims against other prior
owners of the property as well as businesses previously located on the property
(including Blount, Inc. (“Blount”) under the Federal Superfund Act and the
Oregon Cleanup Law.  Dana is subject to a pending bankruptcy
petition.  On November 20, 2007, the Company and Blount executed a
settlement agreement with Dana with respect to these claims.  Dana is
submitting the settlement agreement to the bankruptcy court for approval; the
settlement agreement also is contingent on the court’s approval of Dana’s
proposed plan of reorganization in substantially the form described in Dana’s
disclosure statement in effect as of this same date.  If the
settlement agreement is approved by the bankruptcy court and the plan of
reorganization is approved, Blount will be obligated to pay the Company $625 and
the Company’s claim against Dana will be allowed as an unsecured general
creditor’s claim in the amount of $750.  The Company anticipates the
claim will be discounted and paid primarily in stock in the reorganized
corporation, all in accordance with Dana’s plan of reorganization.  At
this time, the Company is not able to reasonably estimate the net amount it may
be able to realize from this unsecured claim and has not recognized any asset in
the financial statements pertaining to any recovery from either Blount or
Dana.  The Company believes that even with a resolution of the claims
against the prior operators and owner of the property, the Company will be
liable for some portion of the ultimate costs and it believes that the liability
recorded at December 31, 2007 will be sufficient to cover these
costs.





Item
1A.  Risk Factors





There have been no significant changes
in risk factors for the quarter ended December 31, 2007.  See the
information set forth in the section entitled “Risk Factors” in our Annual
Report on Form 10-K for the fiscal year ended September 30, 2007.





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





None





Item
3.    Defaults Upon Senior Securities





None





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





None








21


Item
5.    Other Information





None





Item
6.    Exhibits





2.01
            
            Asset
      Purchase Agreement, dated as of September 30, 2003, by and among the
      Registrant, Teleflex Incorporated and Teleflex Automotive Incorporated.
      (Incorporated by
      reference to Exhibit 2.1 to the Registrant’s current report on form 8-k
      filed on December 9, 2003)3.01(a)
            
            Certificate
      of Incorporation of the Registrant, as amended.  (Incorporated by reference to
      Exhibit 3.01(a) to the Registrant’s quarterly report on Form 10-Q for the
      quarter ended December 31, 2006)3.01(b)
            
            Certificate
      of Amendment to Certificate of Incorporation of the Registrant, dated
      February 27, 1995. (Incorporated by reference to
      Exhibit 3.01 (b) to the Registrant’s quarterly report on Form 10-Q for the
      quarter ended December 31, 2006)3.01(c)
            
            Certificate
      of Amendment to Certificate of Incorporation of the Registrant, dated
      October 28, 2004. (Incorporated by reference to
      Exhibit 3.01 (c) to the Registrant’s quarterly report on Form 10-Q for the
      quarter ended December 31,2006)3.01(d)
            
            Certificate
      of Amendment to Certificate of Incorporation of the Registrant, dated
      February 22, 2005. (Incorporated by reference to
      Exhibit 3.01 (d) to the Registrant’s quarterly report on Form 10-Q for the
      quarter ended December 31, 2006)3.01(e)
            
            Certificate
      of Amendment to Certificate of Incorporation of the Registrant, dated
      March 2, 2006. (Incorporated by reference to
      Exhibit 3.01 (e) to the Registrant’s quarterly report on Form 10-Q for the
      quarter ended December 31, 2006)3.02
            
            Restated
      By-Laws of the Registrant, as amended July 1, 2002. (Incorporated by reference to
      Exhibit 3.6 to the Registrant’s quarterly report on Form 10-Q,
      Commission File No. 000-18083,  for the quarter ended
      June 30, 2002)4.01
            
            Specimen
      Unit Certificate (including Specimen Certificate for shares of Common
      Stock and Specimen Certificate for the Warrants). (Incorporated by reference to
      Exhibits 1.1 and 1.2 to the Registrant’s Registration Statement on
      Form 8-A, Commission File No. 000-18083, filed with the Commission on
      November 1, 1989)31.01
            
            Certification
      of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a)
      (Filed
      herewith)31.02
            
            Certification
      of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)
      (Filed
      herewith)32.01
            
            Certification
      of Patrick W. Cavanagh pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed
      herewith)32.02
            
            Certification
      of Dennis E. Bunday pursuant to 18 U.S.C. Section 1350 as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed
      herewith)





22


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 8, 2008
            By:
            /s/ PATRICK
      W. CAVANAGHPatrick
      W. CavanaghPresident and Chief Executive
      OfficerDate:
      February 8, 2008
            By:
            /s/
      DENNIS E. BUNDAYDennis
      E. BundayChief Financial
      Officer






























23