|                                                         
|---------------------------------------------------------
|UNITED
 STATES                                           
|SECURITIES AND EXCHANGE COMMISSION                       
|Washington,
 D.C. 20549                                  
|                                                         
|FORM 10-Q                                                
|                                                         
|xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
|SECURITIES EXCHANGE ACT OF 1934                          
|                                                         
|For the quarterly period ended: June 30,
 2010           
|                                                         
|oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|SECURITIES
 EXCHANGE ACT OF 1934                         
|                                                         
|For the transition period from
         to               
|                                                         
|Commission file number 0-18083                           
|                                                         
|Williams
 Controls, Inc.                                 
|(Exact name of registrant as specified in its charter)   

|                                                                                                                                                                                                                                                                                                                                                              |                                         |  |                     | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------- |  | ------------------- | 
|                                                                                                                                                                                                                                                                                                                                                              | Delaware                                |  | 84-1099587          | 
|                                                                                                                                                                                                                                                                                                                                                              | (State or other jurisdiction of         |  | (I.R.S. Employer    | 
|                                                                                                                                                                                                                                                                                                                                                              | incorporation or organization)          |  | Identification No.) | 
|                                                                                                                                                                                                                                                                                                                                                              |                                         |  |                     | 
|                                                                                                                                                                                                                                                                                                                                                              | 14100 SW 72nd Avenue,                   |  |                     | 
|                                                                                                                                                                                                                                                                                                                                                              | Portland, Oregon                        |  | 97224               | 
|                                                                                                                                                                                                                                                                                                                                                              | (Address of principal executive office) |  | (zip code)          | 
|                                                                                                                                                                                                                                                                                                                                                              |                                         |  |                     | 
|(503) 684-8600                                                                                                                                                                                                                                                                                                                                               
|(Registrants telephone number, including area code)                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                             
|Indicate
 by check mark whether the registrant (1) has filed all reports required to be
 filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
 the preceding 12 months (or for such shorter period that the registrant was
 required to file such reports), and (2) has been subject to such filing
 requirements for the past 90 days.
|Yes x No o                                                                                                                                                                                                                                                                                                                                                   

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

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

| |                           |                             | 
| | ------------------------- | --------------------------- | 
| | Large accelerated filer o | Accelerated filer o         | 
| |                           |                             | 
| | Non-accelerated filer o   | Smaller reporting company x | 

|                                                                                                                 
|-----------------------------------------------------------------------------------------------------------------
|Indicate
 by check mark whether the registrant is a shell company (as defined in Rule
 12b-2 of the Exchange Act)
|Yes o No x                                                                                                       

The number of shares outstanding of the
registrants common stock
as of July 31, 2010: 7,284,412







Williams Controls, Inc.June 30, 2010Table of Contents

|                                                                                                      |              | 
|----------------------------------------------------------------------------------------------------- | ------------ | 
|                                                                                                      | Page
 Number
|                                                                                                      |             
|Part I.
 Financial Information                                                                        |              | 
|                                                                                                      |              | 
|Item 1.
 Financial Statements (unaudited)                                                             |              | 
|                                                                                                      |              | 
|Condensed
 Consolidated Balance Sheets, June 30, 2010 and September 30, 2009                          | 1            | 
|                                                                                                      |              | 
|Condensed
 Consolidated Statements of Operations, three and nine months ended June 30,
 2010 and 2009 | 2            | 
|                                                                                                      |              | 
|Condensed
 Consolidated Statements of Cash Flows, nine months ended June 30, 2010 and
 2009           | 3            | 
|                                                                                                      |              | 
|Notes to
 Unaudited Condensed Consolidated Financial Statements                                       | 4            | 
|                                                                                                      |              | 
|Item 2. Managements Discussion and Analysis of Financial Condition
 and Results of Operations        | 13           | 
|                                                                                                      |              | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                    | 22           | 
|                                                                                                      |              | 
|Item 4. Controls and Procedures                                                                       | 23           | 
|                                                                                                      |              | 
|Part II. Other
 Information                                                                           |              | 
|                                                                                                      |              | 
|Item 1.    Legal Proceedings                                                                          | 24           | 
|                                                                                                      |              | 
|Item 1A. Risk Factors                                                                                 | 24           | 
|                                                                                                      |              | 
|Item 3.    Defaults Upon Senior Securities                                                            | 24           | 
|                                                                                                      |              | 
|Item 4.    Reserved                                                                                   | 24           | 
|                                                                                                      |              | 
|Item 5.    Other Information                                                                          | 24           | 
|                                                                                                      |              | 
|Item 6.    Exhibits                                                                                   | 24           | 
|                                                                                                      |              | 
|Signature Page                                                                                        | 26           | 

---



PART I  FINANCIAL INFORMATION

Item 1. Financial Statements

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

|                                                                                                                                                             |  |                |        |                     |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------- | ------ | ------------------- | - | ------ | -
|                                                                                                                                                             |  | June 30,
 2010 |        | September 30,
 2009 |  
|                                                                                                                                                             |  |                |        |                     |  
|ASSETS                                                                                                                                                       |  |                |        |                     |   |        |  
|Current Assets:                                                                                                                                              |  |                |        |                     |   |        |  
|Cash and cash equivalents                                                                                                                                    |  | $              | 9,841  |                     | $ | 9,245  |  
|Short-term investments                                                                                                                                       |  |                |       |                     |   | 286    |  
|Trade accounts receivable, net                                                                                                                               |  |                | 8,480  |                     |   | 6,677  |  
|Other accounts receivable                                                                                                                                    |  |                | 1,383  |                     |   | 1,509  |  
|Inventories                                                                                                                                                  |  |                | 6,520  |                     |   | 5,539  |  
|Deferred income taxes                                                                                                                                        |  |                | 668    |                     |   | 579    |  
|Prepaid expenses and other current assets                                                                                                                    |  |                | 472    |                     |   | 269    |  
|                                                                                                                                                             |  |                |        |                     |   |        |  
|Total current assets                                                                                                                                         |  |                | 27,364 |                     |   | 24,104 |  
|                                                                                                                                                             |  |                |        |                     |   |        |  
|Property, plant and equipment, net                                                                                                                           |  |                | 8,957  |                     |   | 8,893  |  
|Deferred income taxes                                                                                                                                        |  |                | 3,067  |                     |   | 3,019  |  
|Other assets, net                                                                                                                                            |  |                | 375    |                     |   | 368    |  
|                                                                                                                                                             |  |                |        |                     |   |        |  
|Total assets                                                                                                                                                 |  | $              | 39,763 |                     | $ | 36,384 |  
|                                                                                                                                                             |  |                |        |                     |   |        |  
|                                                                                                                                                             |  |                |        |                     |   |        |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                         |  |                |        |                     |   |        |  
|Current Liabilities:                                                                                                                                         |  |                |        |                     |   |        |  
|Accounts payable                                                                                                                                             |  | $              | 4,101  |                     | $ | 2,990  |  
|Accrued expenses                                                                                                                                             |  |                | 5,586  |                     |   | 4,492  |  
|Current portion of employee benefit
 obligations                                                                                                             |  |                | 225    |                     |   | 225    |  
|                                                                                                                                                             |  |                |        |                     |   |        |  
|Total current liabilities                                                                                                                                    |  |                | 9,912  |                     |   | 7,707  |  
|                                                                                                                                                             |  |                |        |                     |   |        |  
|Long-term Liabilities:                                                                                                                                       |  |                |        |                     |   |        |  
|Employee benefit obligations                                                                                                                                 |  |                | 8,159  |                     |   | 8,297  |  
|Other long-term liabilities                                                                                                                                  |  |                | 305    |                     |   | 290    |  
|                                                                                                                                                             |  |                |        |                     |   |        |  
|Commitments and contingencies                                                                                                                                |  |                |        |                     |   |        |  
|                                                                                                                                                             |  |                |        |                     |   |        |  
|Stockholders Equity:                                                                                                                                        |  |                |        |                     |   |        |  
|Preferred Stock ($.01 par value, 50,000,000
 authorized) Series C (No shares were issued and outstanding at June 30, 2010
 and September 30, 2009)           |  |                |       |                     |   |       |  
|Common stock ($.01 par value, 12,500,000
 authorized; 7,279,078 and 7,270,820 issued and outstanding at June 30, 2010
 and September 30, 2009, respectively) |  |                | 73     |                     |   | 73     |  
|Additional paid-in capital                                                                                                                                   |  |                | 37,214 |                     |   | 36,643 |  
|Accumulated deficit                                                                                                                                          |  |                | (5,910 | )                   |   | (6,776 | )
|Treasury stock (332,593 shares at June 30,
 2010 and September 30, 2009)                                                                                     |  |                | (2,734 | )                   |   | (2,734 | )
|Accumulated other comprehensive loss                                                                                                                         |  |                | (7,256 | )                   |   | (7,116 | )
|                                                                                                                                                             |  |                |        |                     |   |        |  
|Total stockholders equity                                                                                                                                   |  |                | 21,387 |                     |   | 20,090 |  
|                                                                                                                                                             |  |                |        |                     |   |        |  
|Total liabilities and stockholders equity                                                                                                                   |  | $              | 39,763 |                     | $ | 36,384 |  
|                                                                                                                                                             |  |                |        |                     |   |        |  

See accompanying notes to Unaudited Condensed
Consolidated Financial Statements.

1

---



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

|                                                                 |  |                               |           |                              |   |           |   |      |           |   |   |           |  
|---------------------------------------------------------------- |  | ----------------------------- | --------- | ---------------------------- | - | --------- | - | ---- | --------- | - | - | --------- | -
|                                                                 |  | Three
 Months Ended
 June 30, |           | Nine
 Months Ended
 June 30, |  
|                                                                 |  |                               |           |                              |  
|                                                                 |  | 2010                          |           | 2009                         |   | 2010      |   | 2009 |          
|                                                                 |  |                               |           |                              |   |           |   |      |          
|Net sales                                                        |  | $                             | 13,764    |                              | $ | 8,444     |   | $    | 38,122    |   | $ | 28,266    |  
|Cost of sales                                                    |  |                               | 9,714     |                              |   | 6,536     |   |      | 27,131    |   |   | 22,582    |  
|                                                                 |  |                               |           |                              |   |           |   |      |           |   |   |           |  
|                                                                 |  |                               |           |                              |   |           |   |      |           |   |   |           |  
|Gross profit                                                     |  |                               | 4,050     |                              |   | 1,908     |   |      | 10,991    |   |   | 5,684     |  
|                                                                 |  |                               |           |                              |   |           |   |      |           |   |   |           |  
|Operating
 expenses:                                             |  |                               |           |                              |   |           |   |      |           |   |   |           |  
|Research and development                                         |  |                               | 1,191     |                              |   | 844       |   |      | 3,406     |   |   | 3,000     |  
|Selling                                                          |  |                               | 695       |                              |   | 585       |   |      | 2,115     |   |   | 1,866     |  
|Administration                                                   |  |                               | 1,224     |                              |   | 1,112     |   |      | 4,020     |   |   | 4,242     |  
|Class action provision                                           |  |                               |          |                              |   |          |   |      | 775       |   |   |          |  
|                                                                 |  |                               |           |                              |   |           |   |      |           |   |   |           |  
|Total operating expenses                                         |  |                               | 3,110     |                              |   | 2,541     |   |      | 10,316    |   |   | 9,108     |  
|                                                                 |  |                               |           |                              |   |           |   |      |           |   |   |           |  
|Operating
 income (loss)                                         |  |                               | 940       |                              |   | (633      | ) |      | 675       |   |   | (3,424    | )
|                                                                 |  |                               |           |                              |   |           |   |      |           |   |   |           |  
|Other
 (income) expenses:                                        |  |                               |           |                              |   |           |   |      |           |   |   |           |  
|Interest income                                                  |  |                               | (4        | )                            |   | (5        | ) |      | (11       | ) |   | (21       | )
|Interest expense                                                 |  |                               | 4         |                              |   | 4         |   |      | 13        |   |   | 14        |  
|Loss on impairment of investments                                |  |                               |          |                              |   |          |   |      |          |   |   | 317       |  
|Gain on sale of investments                                      |  |                               | (441      | )                            |   |          |   |      | (441      | ) |   |          |  
|Other (income) expense, net                                      |  |                               | 9         |                              |   | (1        | ) |      | (48       | ) |   | 85        |  
|                                                                 |  |                               |           |                              |   |           |   |      |           |   |   |           |  
|Total other expenses                                             |  |                               | (432      | )                            |   | (2        | ) |      | (487      | ) |   | 395       |  
|                                                                 |  |                               |           |                              |   |           |   |      |           |   |   |           |  
|                                                                 |  |                               |           |                              |   |           |   |      |           |   |   |           |  
|Income
 (loss) before income taxes                               |  |                               | 1,372     |                              |   | (631      | ) |      | 1,162     |   |   | (3,819    | )
|Income tax
 expense (benefit)                                    |  |                               | 469       |                              |   | (298      | ) |      | 296       |   |   | (1,445    | )
|                                                                 |  |                               |           |                              |   |           |   |      |           |   |   |           |  
|                                                                 |  |                               |           |                              |   |           |   |      |           |   |   |           |  
|Net income (loss)                                                |  | $                             | 903       |                              | $ | (333      | ) | $    | 866       |   | $ | (2,374    | )
|                                                                 |  |                               |           |                              |   |           |   |      |           |   |   |           |  
|                                                                 |  |                               |           |                              |   |           |   |      |           |   |   |           |  
|Net income (loss) per common share  basic                       |  | $                             | 0.12      |                              | $ | (0.05     | ) | $    | 0.12      |   | $ | (0.32     | )
|                                                                 |  |                               |           |                              |   |           |   |      |           |   |   |           |  
|Weighted average shares used in per
 share calculation  basic   |  |                               | 7,275,559 |                              |   | 7,268,741 |   |      | 7,273,306 |   |   | 7,330,347 |  
|                                                                 |  |                               |           |                              |   |           |   |      |           |   |   |           |  
|                                                                 |  |                               |           |                              |   |           |   |      |           |   |   |           |  
|Net income (loss) per common share 
 diluted                    |  | $                             | 0.12      |                              | $ | (0.05     | ) | $    | 0.12      |   | $ | (0.32     | )
|                                                                 |  |                               |           |                              |   |           |   |      |           |   |   |           |  
|Weighted average shares used in per
 share calculation  diluted |  |                               | 7,399,032 |                              |   | 7,268,741 |   |      | 7,374,225 |   |   | 7,330,347 |  
|                                                                 |  |                               |           |                              |   |           |   |      |           |   |   |           |  

See accompanying notes to Unaudited Condensed
Consolidated Financial Statements.

2

---



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

|                                                                                          |  |                              |        |      |   |        |  
|----------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | ---- | - | ------ | -
|                                                                                          |  | Nine
 months ended
 June 30, |       
|                                                                                          |  |                              |       
|                                                                                          |  | 2010                         |        | 2009 |  
|                                                                                          |  |                              |        |      |  
|Cash flows from operating activities:                                                     |  |                              |        |      |   |        |  
|Net income (loss)                                                                         |  | $                            | 866    |      | $ | (2,374 | )
|Adjustments to reconcile net income (loss)
 to net cash provided by operating activities: |  |                              |        |      |   |        |  
|Depreciation and amortization                                                             |  |                              | 1,588  |      |   | 1,483  |  
|Deferred income taxes                                                                     |  |                              | (48    | )    |   | (22    | )
|Stock-based compensation                                                                  |  |                              | 547    |      |   | 557    |  
|Loss on impairment of investments                                                         |  |                              |       |      |   | 317    |  
|Gain on sale of investments                                                               |  |                              | (441   | )    |   |       |  
|(Gain) loss from sale and disposal of
 property, plant and equipment                      |  |                              | (16    | )    |   | 80     |  
|Changes in operating assets and liabilities                                               |  |                              |        |      |   |        |  
|Receivables, net                                                                          |  |                              | (1,677 | )    |   | 3,500  |  
|Inventories                                                                               |  |                              | (981   | )    |   | 2,285  |  
|Prepaid expenses and other current assets                                                 |  |                              | (203   | )    |   | (154   | )
|Accounts payable and accrued expenses                                                     |  |                              | 2,119  |      |   | (3,085 | )
|Other                                                                                     |  |                              | (153   | )    |   | 139    |  
|                                                                                          |  |                              |        |      |   |        |  
|Net cash provided by operating activities                                                 |  |                              | 1,601  |      |   | 2,726  |  
|                                                                                          |  |                              |        |      |   |        |  
|                                                                                          |  |                              |        |      |   |        |  
|Cash flows from investing activities:                                                     |  |                              |        |      |   |        |  
|Purchases of property, plant and equipment                                                |  |                              | (1,563 | )    |   | (1,607 | )
|Proceeds from sale of property, plant and
 equipment                                      |  |                              | 23     |      |   | 15     |  
|Proceeds from sale of investments                                                         |  |                              | 511    |      |   |       |  
|                                                                                          |  |                              |        |      |   |        |  
|Net cash used in investing activities                                                     |  |                              | (1,029 | )    |   | (1,592 | )
|                                                                                          |  |                              |        |      |   |        |  
|                                                                                         
|Cash flows from financing activities:                                                     |  |                              |        |      |   |        |  
|Net proceeds from exercise of stock options                                               |  |                              | 24     |      |   | 165    |  
|Repurchase of common stock                                                                |  |                              |       |      |   | (2,357 | )
|                                                                                          |  |                              |        |      |   |        |  
|Net cash provided by (used in) financing
 activities                                      |  |                              | 24     |      |   | (2,192 | )
|                                                                                          |  |                              |        |      |   |        |  
|                                                                                          |  |                              |        |      |   |        |  
|Net increase (decrease) in cash and cash
 equivalents                                     |  |                              | 596    |      |   | (1,058 | )
|Cash and cash equivalents at beginning of
 period                                         |  |                              | 9,245  |      |   | 9,060  |  
|                                                                                          |  |                              |        |      |   |        |  
|                                                                                          |  |                              |        |      |   |        |  
|Cash and cash equivalents at end of period                                                |  | $                            | 9,841  |      | $ | 8,002  |  
|                                                                                          |  |                              |        |      |   |        |  
|                                                                                          |  |                              |        |      |   |        |  
|Supplemental disclosure of cash flow
 information:                                        |  |                              |        |      |   |        |  
|Income taxes paid                                                                         |  | $                            | 283    |      | $ | 112    |  
|                                                                                          |  |                              |        |      |   |        |  
|Interest paid                                                                             |  | $                            |       |      | $ | 1      |  
|                                                                                          |  |                              |        |      |   |        |  

See accompanying notes to Unaudited Condensed
Consolidated Financial Statements.

3

---



Williams
Controls, Inc.
Notes to Condensed Consolidated Financial
Statements (Dollars
in thousands, except share and per share amounts)
(Unaudited)

Note 1.
Basis of Presentation

In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (which include normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows for the periods presented. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to the rules and regulations of the
United States Securities and Exchange Commission (SEC). These condensed
consolidated financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Williams
Controls, Inc. (the Company) Annual Report on Form 10-K for the year ended
September 30, 2009. The results of operations for the three and nine months
ended June 30, 2010 are not necessarily indicative of the results to be
expected for the entire fiscal year.

The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.

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

Note 2.
Recently Issued Accounting Pronouncements

In
April 2010, the Financial Accounting Standards Board (FASB) issued
authoritative guidance which establishes criteria for a milestone to be
considered substantive and allows revenue recognition when the milestone is
achieved in research and development arrangements. In addition, this guidance
requires disclosure of certain information with respect to arrangements that
contain milestones. This guidance is effective for the Company prospectively
beginning October 1, 2010. The Company has evaluated this guidance and does not
expect its adoption will have a significant impact on the Companys
consolidated results of operation, financial position and cash flows.

In
June 2009, the FASB established the FASB Accounting Standards Codification
(the Codification) as the single source of authoritative U.S. GAAP recognized
by the FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the SEC under authority of federal securities laws are also sources
of authoritative U.S. GAAP for SEC registrants. While the Codification did not
have a material impact on the Companys consolidated financial statements upon
adoption, our disclosures have been revised to describe accounting concepts and
policies rather than cite specific topics of U.S. GAAP.

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

In
December 2007, the FASB issued authoritative guidance to affirm that the
acquisition method of accounting (previously referred to as the purchase
method) be used for all business combinations and for an acquirer to be
identified for each business combination. This guidance requires certain
financial statement disclosures to enable users to evaluate and understand the
nature and financial effects of the business combination. This guidance must be
applied prospectively to business combinations that are consummated on or after
October 1, 2009. Accordingly, the Company will record and disclose
business combinations under the revised standard for transactions consummated,
if any, on or after October 1, 2009. The adoption of this guidance did not have
a material impact on the Companys consolidated financial statements.

4

---



In
February 2008, the FASB issued guidance which is effective for specified fair
value measures of non-financial assets and liabilities for financial statements
issued for fiscal years beginning after November 15, 2008. Adoption of this
guidance in the first quarter of fiscal 2010 did not have any impact on the
Companys consolidated financial statements.

Note 3.
Cash and Cash Equivalents

Cash
and cash equivalents include highly liquid investments with original maturities
of three months or less. At June 30, 2010, cash and cash equivalents primarily
consisted of cash deposits and an overnight sweep account held in one major
U.S. financial institution. At June 30, 2010, approximately 92% of the
Companys cash and cash equivalents were held with one major financial
institution in the United States with the remainder held in foreign banks or
foreign currency denominated accounts. The Company maintains cash balances in
bank accounts that normally exceed FDIC insured limits. As of June 30, 2010,
cash and cash equivalents held in the United States exceeded federally insured
limits by approximately $8,799. The Company has not experienced any losses
related to this cash concentration.

Note 4.
Trade Accounts Receivable

Trade
accounts receivable are presented net of an allowance for doubtful accounts of
$147 and $246 at June 30, 2010 and September 30, 2009, respectively. Activity
related to the allowance for doubtful accounts for the nine months ended June
30, 2010 and the full year ended September 30, 2009 consisted of the following:

| |                                         |  |                |      |                      |   |     |  
| | --------------------------------------- |  | -------------- | ---- | -------------------- | - | --- | -
| |                                         |  | June 30,
 2010 |      | September
 30,
 2009 |  
| |                                         |  |                |      |                      |  
| | Beginning balance                       |  | $              | 246  |                      | $ | 47  |  
| | Charges to bad debt expense             |  |                | 51   |                      |   | 233 |  
| | Write-offs, recoveries and
 adjustments |  |                | (150 | )                    |   | (34 | )
| |                                         |  |                |      |                      |   |     |  
| | Ending balance                          |  | $              | 147  |                      | $ | 246 |  
| |                                         |  |                |      |                      |   |     |  

Note 5.
Inventories

Inventories,
net of reserves, consist of the following:

| |                  |  |                |       |                      |   |       | 
| | ---------------- |  | -------------- | ----- | -------------------- | - | ----- | 
| |                  |  | June 30,
 2010 |       | September
 30,
 2009 |  
| |                  |  |                |       |                      |  
| | Raw
 materials   |  | $              | 4,886 |                      | $ | 4,247 | 
| | Work in
 process |  |                | 32    |                      |   | 39    | 
| | Finished
 goods  |  |                | 1,602 |                      |   | 1,253 | 
| |                  |  |                |       |                      |   |       | 
| |                  |  | $              | 6,520 |                      | $ | 5,539 | 
| |                  |  |                |       |                      |   |       | 

Note 6.
Accrued Expenses

Accrued
expenses consist of the following:

| |                                    |  |                |       |                      |   |       | 
| | ---------------------------------- |  | -------------- | ----- | -------------------- | - | ----- | 
| |                                    |  | June 30,
 2010 |       | September
 30,
 2009 |  
| |                                    |  |                |       |                      |  
| | Environmental
 liability           |  | $              | 999   |                      | $ | 1,001 | 
| | Accrued
 product warranty          |  |                | 1,294 |                      |   | 751   | 
| | Accrued
 compensation and benefits |  |                | 1,782 |                      |   | 1,830 | 
| | Class action
 provision            |  |                | 775   |                      |   |      | 
| | Other                              |  |                | 736   |                      |   | 910   | 
| |                                    |  |                |       |                      |   |       | 
| |                                    |  | $              | 5,586 |                      | $ | 4,492 | 
| |                                    |  |                |       |                      |   |       | 

For
further discussion related to the Companys environmental liability, class
action provision and product warranty liability, refer to Notes 15 and 7,
respectively.

5

---



Note 7.
Product Warranties

The
Company establishes a product warranty liability based on a percentage of
product sales. The liability is based on historical return rates of products
and amounts for significant and specific warranty issues, and is included in
accrued expenses in the accompanying condensed consolidated balance sheets.
Warranty is limited to a specified time period, mileage or hours of use, and
varies by product, application and customer. The Company has recorded a
liability, which in the opinion of management, is adequate to cover such
warranty costs. Warranty payments can vary significantly from year to year
depending on the timing of the settlement of warranty claims with various
customers. Following is a reconciliation of the changes in the Companys
warranty liability for the three months and nine months ended June 30, 2010 and
2009.

|                    |  |                                |       |                              |   |      |   |      |       |   |   |      |  
|------------------- |  | ------------------------------ | ----- | ---------------------------- | - | ---- | - | ---- | ----- | - | - | ---- | -
|                    |  | Three
 Months 
 Ended June 30, |       | Nine
 Months
 Ended June 30, |  
|                    |  |                                |       |                              |  
|                    |  | 2010                           |       | 2009                         |   | 2010 |   | 2009 |      
|                    |  |                                |       |                              |   |      |   |      |      
|Beginning
 balance  |  | $                              | 1,164 |                              | $ | 738  |   | $    | 751   |   | $ | 762  |  
|                    |  |                                |       |                              |   |      |   |      |       |   |   |      |  
|Payments            |  |                                | (92   | )                            |   | (287 | ) |      | (396  | ) |   | (888 | )
|Additional accruals |  |                                | 222   |                              |   | 153  |   |      | 939   |   |   | 730  |  
|                    |  |                                |       |                              |   |      |   |      |       |   |   |      |  
|                    |  |                                |       |                              |   |      |   |      |       |   |   |      |  
|Ending
 balance     |  | $                              | 1,294 |                              | $ | 604  |   | $    | 1,294 |   | $ | 604  |  
|                    |  |                                |       |                              |   |      |   |      |       |   |   |      |  

The
increase in the ending warranty liability balance between periods is primarily
due to accrued yet unpaid warranty claims related to one customer.

Note 8.
Debt

In June
2010, the Company entered into a revolving loan facility with U.S. Bank, which
expires on June 30, 2012. As of June 30, 2010, there was no balance outstanding
on the revolving loan facility.

The
revolving loan facility provides for $8,000 in borrowing capacity and is
secured by substantially all the assets of the Company. Borrowings under the
revolving loan facility are subject to a borrowing base equal to 75% of eligible
accounts receivables and 50% of eligible inventories. Interest rates under the
new agreement are based on the election of the Company of either a LIBOR rate
or at Prime rate. Under the LIBOR rate option, the revolving loan facility will
bear interest at the LIBOR rate plus 2.25% per annum for borrowings under the
revolving loan facility. Fees under the loan agreement include an unused line
fee of .15% per annum on the unused portion of the revolving loan facility.

The Company had available under its revolving
credit facility $5,746 at June 30, 2010.

Note 9.
Comprehensive Income (Loss)

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

|                             |  |                               |      |                              |   |      |   |      |      |   |   |        |  
|---------------------------- |  | ----------------------------- | ---- | ---------------------------- | - | ---- | - | ---- | ---- | - | - | ------ | -
|                             |  | Three
 Months
 Ended June 30, |      | Nine
 Months
 Ended June 30, |  
|                             |  |                               |      |                              |  
|                             |  | 2010                          |      | 2009                         |   | 2010 |   | 2009 |     
|                             |  |                               |      |                              |   |      |   |      |     
|Net income
 (loss)           |  | $                             | 903  |                              | $ | (333 | ) | $    | 866  |   | $ | (2,374 | )
|Translation
 adjustment      |  |                               | 8    |                              |   |     |   |      | 8    |   |   | 3      |  
|Unrealized
 gain or (loss)   |  |                               | (275 | )                            |   | 23   |   |      | (148 | ) |   | 102    |  
|                             |  |                               |      |                              |   |      |   |      |      |   |   |        |  
|Comprehensive
 income (loss) |  | $                             | 636  |                              | $ | (310 | ) | $    | 726  |   | $ | (2,269 | )
|                             |  |                               |      |                              |   |      |   |      |      |   |   |        |  

Note 10.
Earnings (Loss) Per Share

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

Following
is a reconciliation of basic EPS and diluted EPS:

6

---



|                                               |  |                                   |     |                                   |  |                    |  |      |      |        |   |                    |   |  |           |  |   |       |  
|---------------------------------------------- |  | --------------------------------- | --- | --------------------------------- |  | ------------------ |  | ---- | ---- | ------ | - | ------------------ | - |  | --------- |  | - | ----- | -
|                                               |  | Three Months
 Ended June 30, 2010 |     | Three Months
 Ended June 30, 2009 | 
|                                               |  |                                   |     |                                   | 
|                                               |  | Income                            |     | Shares                            |  | Per
 Share
 Amount |  | Loss |      | Shares |   | Per
 Share
 Amount |  
|                                               |  |                                   |     |                                   |  |                    |  |      |      |        |   |                    |  
|                                               |  |                                   |     |                                   |  |                    |  |      |      |        |   |                    |   |  |           |  |   |       |  
|Basic EPS                                     |  | $                                 | 903 |                                   |  | 7,275,559          |  | $    | 0.12 |        | $ | (333               | ) |  | 7,268,741 |  | $ | (0.05 | )
|                                               |  |                                   |     |                                   |  |                    |  |      |      |        |   |                    |   |  |           |  |   |       |  
|                                               |  |                                   |     |                                   |  |                    |  |      |      |        |   |                    |   |  |           |  |   |       |  
|Effect of dilutive securities  Stock
 options |  |                                   |     |                                   |  | 123,473            |  |      |      |        |   |                    |   |  |          |  |   |       |  
|                                               |  |                                   |     |                                   |  |                    |  |      |      |        |   |                    |   |  |           |  |   |       |  
|                                               |  |                                   |     |                                   |  |                    |  |      |      |        |   |                    |   |  |           |  |   |       |  
|Diluted EPS                                   |  | $                                 | 903 |                                   |  | 7,399,032          |  | $    | 0.12 |        | $ | (333               | ) |  | 7,268,741 |  | $ | (0.05 | )
|                                               |  |                                   |     |                                   |  |                    |  |      |      |        |   |                    |   |  |           |  |   |       |  
|                                               |  |                                   |     |                                   |  |                    |  |      |      |        |   |                    |   |  |           |  |   |       |  
|                                               |  | Nine
 Months
 Ended June 30, 2010 |     | Nine
 Months
 Ended June 30, 2009 | 
|                                               |  |                                   |     |                                   | 
|                                               |  | Income                            |     | Shares                            |  | Per
 Share
 Amount |  | Loss |      | Shares |   | Per
 Share
 Amount |  
|                                               |  |                                   |     |                                   |  |                    |  |      |      |        |   |                    |  
|                                               |  |                                   |     |                                   |  |                    |  |      |      |        |   |                    |   |  |           |  |   |       |  
|Basic EPS                                     |  | $                                 | 866 |                                   |  | 7,273,306          |  | $    | 0.12 |        | $ | (2,374             | ) |  | 7,330,347 |  | $ | (0.32 | )
|                                               |  |                                   |     |                                   |  |                    |  |      |      |        |   |                    |   |  |           |  |   |       |  
|                                               |  |                                   |     |                                   |  |                    |  |      |      |        |   |                    |   |  |           |  |   |       |  
|Effect of dilutive securities  Stock
 options |  |                                   |     |                                   |  | 100,919            |  |      |      |        |   |                    |   |  |          |  |   |       |  
|                                               |  |                                   |     |                                   |  |                    |  |      |      |        |   |                    |   |  |           |  |   |       |  
|                                               |  |                                   |     |                                   |  |                    |  |      |      |        |   |                    |   |  |           |  |   |       |  
|Diluted EPS                                   |  | $                                 | 866 |                                   |  | 7,374,225          |  | $    | 0.12 |        | $ | (2,374             | ) |  | 7,330,347 |  | $ | (0.32 | )
|                                               |  |                                   |     |                                   |  |                    |  |      |      |        |   |                    |   |  |           |  |   |       |  

For
the three and nine months ended June 30, 2010, the Company had options covering
215,122 and 364,952 shares, respectively, that were not considered in the
dilutive EPS calculation since they would have been antidilutive. For the three
and nine months ended June 30, 2009, the Company had options covering 598,769
shares not considered in the dilutive EPS calculation since they would have
been antidilutive.

Note 11.
Fair Value Measurement

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

| |           |                                                                                                                                                
| | --------- | -----------------------------------------------------------------------------------------------------------------------------------------------
| | Level 1  | observable
 inputs such as quoted prices in active markets for identical assets or
 liabilities;                                               
| |           |                                                                                                                                                
| | Level 2  | inputs,
 other than the quoted market prices in active markets, which are observable,
 either directly or indirectly; and                      
| |           |                                                                                                                                                
| | Level 3  | unobservable
 inputs for which there is little or no market data available, which require
 the reporting entity to develop its own assumptions.

The
following table presents information about financial assets and liabilities
measured at fair value on a recurring basis as of June 30, 2010:

|                                       |  |                                  |       |         |   |         |  |         |   |  |   |   | 
|-------------------------------------- |  | -------------------------------- | ----- | ------- | - | ------- |  | ------- | - |  | - | - | 
|                                       |  | Fair Value
 as of
 June 30, 2010 |       | Level 1 |   | Level 2 |  | Level 3 |  
|                                       |  |                                  |       |         |   |         |  |         |  
|                                       |  |                                  |       |         |   |         |  |         |   |  |   |  
|Cash and
 cash equivalents             |  | $                                | 9,841 |         | $ | 9,841   |  | $       |  |  | $ |  | 
|                                       |  |                                  |       |         |   |         |  |         |   |  |   |   | 
|                                       |  |                                  |       |         |   |         |  |         |   |  |   |   | 
|Total financial assets and liabilities |  | $                                | 9,841 |         | $ | 9,841   |  | $       |  |  | $ |  | 
|                                       |  |                                  |       |         |   |         |  |         |   |  |   |   | 

We
use a market approach to determine the fair value of cash and cash equivalents,
which include highly liquid investments with original maturities of three
months or less. There were no assets and liabilities measured at fair value on
a nonrecurring basis as of June 30, 2010.

7

---



During
the third quarter of fiscal 2010, the Company sold its short-term investments
for cash proceeds of $511 and recorded a $441 net gain related to the sale. The
majority of the shares sold related to the Companys investment in Dana Holding
CP (Dana) as part of the environmental settlement discussed in Note 16.

Before
the sale of short-term investments, all changes in market value of the
Companys short-term investments had been recorded net of tax in other
comprehensive income (loss), except that in the first quarter of fiscal 2009,
the Company recorded a non-cash, mark-to-market impairment charge of
approximately $317 relating to its investment in Dana. The decision to record
the impairment charge was based on the continued decline in the market value of
the Dana stock, as well as the contraction of the market in which Dana
operated.

Note 12. Employee
Benefit Plans

Pension Plans

Disclosures
regarding the components of net periodic benefit cost and contributions of
pension plans are required for interim financial statement purposes and are
included below:

Components of Net
Periodic Benefit Cost:

|                                   |  |                               |     |                              |   |      |   |      |      |   |   |      |  
|---------------------------------- |  | ----------------------------- | --- | ---------------------------- | - | ---- | - | ---- | ---- | - | - | ---- | -
|                                   |  | Salaried Employees Plan       |    
|                                   |  |                               |    
|                                   |  | Three Months 
 Ended June 30, |     | Nine Months 
 Ended June 30, |  
|                                   |  |                               |     |                              |  
|                                   |  | 2010                          |     | 2009                         |   | 2010 |   | 2009 |     
|                                   |  |                               |     |                              |   |      |   |      |     
|Service cost                       |  | $                             |    |                              | $ |     |   | $    |     |   | $ |     |  
|Interest cost                      |  |                               | 70  |                              |   | 79   |   |      | 210  |   |   | 237  |  
|Expected return on plan assets     |  |                               | (55 | )                            |   | (70  | ) |      | (165 | ) |   | (210 | )
|Amortization of prior service cost |  |                               |    |                              |   |     |   |      |     |   |   |     |  
|Amortization of loss               |  |                               | 33  |                              |   | 26   |   |      | 99   |   |   | 78   |  
|                                   |  |                               |     |                              |   |      |   |      |      |   |   |      |  
|Net periodic benefit cost          |  | $                             | 48  |                              | $ | 35   |   | $    | 144  |   | $ | 105  |  
|                                   |  |                               |     |                              |   |      |   |      |      |   |   |      |  
|                                   |  |                               |     |                              |   |      |   |      |      |   |   |      |  
|                                   |  | Hourly Employees Plan         |    
|                                   |  |                               |    
|                                   |  | Three Months 
 Ended June 30, |     | Nine Months 
 Ended June 30, |  
|                                   |  |                               |     |                              |  
|                                   |  | 2010                          |     | 2009                         |   | 2010 |   | 2009 |     
|                                   |  |                               |     |                              |   |      |   |      |     
|Service cost                       |  | $                             | 12  |                              | $ | 14   |   | $    | 36   |   | $ | 42   |  
|Interest cost                      |  |                               | 122 |                              |   | 128  |   |      | 366  |   |   | 384  |  
|Expected return on plan assets     |  |                               | (87 | )                            |   | (107 | ) |      | (261 | ) |   | (321 | )
|Amortization of prior service cost |  |                               | 3   |                              |   | 4    |   |      | 9    |   |   | 12   |  
|Amortization of loss               |  |                               | 45  |                              |   | 79   |   |      | 135  |   |   | 237  |  
|                                   |  |                               |     |                              |   |      |   |      |      |   |   |      |  
|Net periodic benefit cost          |  | $                             | 95  |                              | $ | 118  |   | $    | 285  |   | $ | 354  |  
|                                   |  |                               |     |                              |   |      |   |      |      |   |   |      |  

During
the nine months ended June 30, 2010 and 2009, the Company contributed $425 and
$92, respectively, to the pension plans. The Company expects total
contributions to its pension plans for the remainder of fiscal 2010 to be $146.

Post Retirement Plan

Disclosures
regarding the components of net periodic benefit cost and contributions of the
Companys post-retirement plan are required for interim financial statements
and are included below. The Company did not make any contributions to the
post-retirement plan for the three and nine months ended June 30, 2010 and 2009.

8

---



Components
of Net Periodic Benefit Cost:

|                           |  |                                |     |                               |   |      |   |      |     |   |   |     |  
|-------------------------- |  | ------------------------------ | --- | ----------------------------- | - | ---- | - | ---- | --- | - | - | --- | -
|                           |  | Post-Retirement
 Plan          |    
|                           |  |                                |    
|                           |  | Three
 Months 
 Ended June 30, |     | Nine
 Months 
 Ended June 30, |  
|                           |  |                                |     |                               |  
|                           |  | 2010                           |     | 2009                          |   | 2010 |   | 2009 |    
|                           |  |                                |     |                               |   |      |   |      |    
|Service cost               |  | $                              |    |                               | $ | 1    |   | $    |    |   | $ | 3   |  
|Interest
 cost             |  |                                | 37  |                               |   | 51   |   |      | 111 |   |   | 153 |  
|Amortization               |  |                                | (25 | )                             |   | (22  | ) |      | (75 | ) |   | (66 | )
|                           |  |                                |     |                               |   |      |   |      |     |   |   |     |  
|Net periodic
 benefit cost |  | $                              | 12  |                               | $ | 30   |   | $    | 36  |   | $ | 90  |  
|                           |  |                                |     |                               |   |      |   |      |     |   |   |     |  

Note 13.
Stock Repurchase Program

The
Company purchased no shares under the share repurchase program in the first
three quarters of fiscal 2010. As of June 30, 2009, the Company had repurchased
310,893 shares of common stock at a total acquisition cost of $2,357.

Note 14.
Income Taxes

The
Companys unrecognized tax benefits remained unchanged during the nine months
ended June 30, 2010. The Company believes that it is reasonably possible that
unrecognized tax benefits could decrease by $12 within the 12 months of this
reporting date.

The
Companys subsidiary in China is entitled to a five-year tax holiday, pursuant
to which it was exempted from paying the enterprise income tax for calendar
year 2007, the year in which it first had positive earnings, and calendar year
2008. Additionally, the Company is eligible for reduced enterprise income tax
rates of 10%, 11% and 12% for the calendar years 2009, 2010 and 2011,
respectively. The income tax benefit of the tax holiday for the
nine months ended June 30, 2010 and June 30, 2009 were $125 and $65, respectively. The per share effect of the tax holiday
on a fully diluted basis for the same period were $0.02 and $0.01,
respectively.

Note 15. Commitments
and Contingencies

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

The
soil and groundwater at the Companys Portland, Oregon facility contains
certain contaminants, which were deposited from approximately 1968 through
1995. Some of this contamination has migrated offsite to neighboring
properties. The Company has retained an environmental consulting firm to
investigate the extent of the contamination and to determine what remediation
will be required and the associated costs. During fiscal 2004, the Company
entered into the Oregon Department of Environmental Qualitys voluntary
clean-up program. As of June 30, 2010, the total liability recorded is $999 and
is recorded in accrued expenses in the accompanying condensed consolidated balance
sheet. The Company asserted and settled a contractual indemnity claim against
Dana, from which it acquired the property, and contribution claims against the
other prior owner of the property as well as businesses previously located on
the property (including Blount, Inc. (Blount) and Rosan, Inc. (Rosan))
under the Federal Superfund Act and the Oregon Cleanup Law. During 2008, the
Company entered into a settlement agreement with Dana, Blount and Rosan under
which it received total cash payments from Dana, Blount and Rosan of $735, and
shares of Dana stock equal to approximately $356 at the time of settlement, and
assumed the full obligation to, and risks associated with, completing the
remediation.

On
October 1, 2004, the Company was named as a co-defendant in a product liability
case (Cuesta v. Ford, et al), brought in the Oklahoma State District
Court in Bryant, Oklahoma. The complaint seeks an unspecified amount of damages
on behalf of the class based on allegations that certain of our products, as
incorporated into certain models of Ford motor vehicles, are in some way
defective. Management continues to believe the claim to be without merit;
however, the Company has entered into a settlement agreement between and among
Ford and the plaintiff group. During the second quarter of fiscal 2010, the
Company recorded a $775 provision for a full settlement and release of all

9

---



claims. The
settlement agreement involves settlements with both Ford and the Company, with
the Companys settlement costs to be $775. Such settlement will require court
approval, which the Company believes is probable.

Note 16.
Share-Based Compensation

The
Company currently has two qualified stock option plans. At the February 24,
2010 Annual Meeting, our stockholders approved the adoption of the 2010
Restated Stock Option Plan (the Employee Plan), which amends, restates and
renames the Companys 1993 Restated Stock Option Plan. The Employee Plan
reserves an aggregate of 1,170,000 shares of the Companys common stock for the
issuance of stock options, which includes a 300,000 share increase in
authorized shares approved by the stockholders at the 2010 Annual Meeting.
These shares may be granted to employees, officers and directors of and
consultants to the Company. Under the terms of the Employee 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 Employee Plan have a vesting schedule, which is typically
five years, determined by the Compensation Committee of the Board of Directors
and expire ten years after the date of grant. The Employee Plan also permits
the Compensation Committee to establish the terms of each award made under the
plan and allows the committee to vary from the plans standard terms under
circumstances the committee deems appropriate. Our stockholders also approved
the adoption of the 2010 Restated Formula Stock Option Plan for non-employee
Directors (the Formula Plan), which amends, restates and renames the
Companys 1995 Formula Stock Option Plan. The Formula Plan reserves an
aggregate of 106,666 shares of the Companys common stock for the issuance of
stock options, which includes a 20,000 share increase in authorized shares
approved by the stockholders at the 2010 Annual Meeting. These shares may be
granted to non-employee directors of the Company. Under this plan the
non-employee directors are each automatically granted 1,666 options at a price
equal to the market value on the date of grant which is the date of the Annual
Meeting of Stockholders each year, exercisable for 10 years after the date of
the grant. These options are exercisable as to 25% of the shares thereby on the
date of grant and as to an additional 25%, cumulatively on the first, second
and third anniversaries of the date of grant.

As
of June 30, 2010, there was $1,655 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.

The
Companys share-based compensation expenses were recorded in the following
expense categories for the three and nine months ended June 30, 2010 and 2009:

|                                                     |  |                                |     |                               |   |      |  |      |     |  |   |     | 
|---------------------------------------------------- |  | ------------------------------ | --- | ----------------------------- | - | ---- |  | ---- | --- |  | - | --- | 
|                                                     |  | Three
 Months 
 Ended June 30, |     | Nine
 Months 
 Ended June 30, |  
|                                                     |  |                                |     |                               |  
|                                                     |  | 2010                           |     | 2009                          |   | 2010 |  | 2009 |    
|                                                     |  |                                |     |                               |   |      |  |      |    
|Cost of sales                                        |  | $                              | 45  |                               | $ | 24   |  | $    | 102 |  | $ | 99  | 
|Research and development                             |  |                                | 38  |                               |   | 20   |  |      | 88  |  |   | 60  | 
|Selling                                              |  |                                | 29  |                               |   | 16   |  |      | 62  |  |   | 61  | 
|Administration                                       |  |                                | 141 |                               |   | 123  |  |      | 295 |  |   | 337 | 
|                                                     |  |                                |     |                               |   |      |  |      |     |  |   |     | 
|Total share-based compensation expense               |  | $                              | 253 |                               | $ | 183  |  | $    | 547 |  | $ | 557 | 
|                                                     |  |                                |     |                               |   |      |  |      |     |  |   |     | 
|                                                     |  |                                |     |                               |   |      |  |      |     |  |   |     | 
|Total share-based compensation expense (net
 of tax) |  | $                              | 236 |                               | $ | 131  |  | $    | 501 |  | $ | 449 | 
|                                                     |  |                                |     |                               |   |      |  |      |     |  |   |     | 

In
the third quarter of fiscal 2010, the Company elected to pay 7% of Patrick W.
Cavanaghs, President and Chief Executive Officer, fiscal 2010 salary in common
stock of the Company and issued 2,196 shares of restricted common stock at
$8.92 per share. Also during the third quarter of fiscal 2010, the Company paid
$5 of Dennis E. Bundays, Executive Vice President and Chief Financial Officer,
and $3 of Mark S. Koenens, Vice President of Sales and Marketing, salary in
common stock of the Company and issued 560 and 336 shares, respectively, of
restricted common stock at $8.92 per share. In the third quarter of fiscal
2009, the Company elected to pay 7% of Mr. Cavanaghs fiscal 2009 salary in
common stock of the Company and issued 3,839 shares of restricted common stock
at $5.10 per share. Also during the third quarter of fiscal 2009, the Company
paid $5 of Mr. Bundays and $3 of Mr. Koenens salary in common stock of the
Company and issued 979 and 587 shares, respectively, of restricted common stock
at $5.10 per share.

The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants issued during the three and nine months ended June
30, 2010 and 2009:

10

---



|                                                 |  |                               |           |                              |  |      |  |      |           |   |   |           |  
|------------------------------------------------ |  | ----------------------------- | --------- | ---------------------------- |  | ---- |  | ---- | --------- | - | - | --------- | -
|                                                 |  | Three
 Months Ended
 June 30, |           | Nine
 months ended
 June 30, | 
|                                                 |  |                               |           |                              | 
|                                                 |  | 2010                          |           | 2009 (1)                     |  | 2010 |  | 2009 |          
|                                                 |  |                               |           |                              |  |      |  |      |          
|Expected term                                    |  |                               | 6.5 years |                              |  |     |  |      | 6.5 years |   |   | 5.8 years |  
|Expected volatility                              |  |                               | 43        | %                            |  |     |  |      | 46        | % |   | 46        | %
|Risk-free interest rate                          |  |                               | 2.51      | %                            |  |     |  |      | 2.85      | % |   | 2.03      | %
|Expected dividend yield                          |  |                               | 0         | %                            |  |     |  |      | 0         | % |   | 0         | %
|Estimated average fair value per option
 granted |  | $                             | 4.04      |                              |  |     |  | $    | 4.10      |   | $ | 2.32      |  

(1)
There were no stock options granted during the three months ended June 30,
2009.

The
following table summarizes stock options outstanding as of June 30, 2010 as
well as activity during the nine months then ended:

|                                  |  |                    |         |                                     |   |                                                  |  |                             |           |  |   |       | 
|--------------------------------- |  | ------------------ | ------- | ----------------------------------- | - | ------------------------------------------------ |  | --------------------------- | --------- |  | - | ----- | 
|                                  |  | Number of 
 Shares |         | Weighted 
 Average 
 Exercise Price |   | Weighted
 Average 
 Remaining 
 Contractual Term |  | Aggregate 
 Intrinsic Value |          
|                                  |  |                    |         |                                     |   |                                                  |  |                             |          
|Outstanding at September 30, 2009 |  |                    | 598,769 |                                     | $ | 9.40                                             |  |                             | 5.9 years |  | $ | 1,184 | 
|                                  |  |                    |         |                                     |   |                                                  |  |                             |           |  |   |       | 
|Granted                           |  |                    | 216,996 |                                     |   | 8.31                                             |  |                             |           |  |   |       | 
|Exercised                         |  |                    | (5,166  | )                                   |   | 4.65                                             |  |                             |           |  |   |       | 
|Expired                           |  |                    | (2,999  | )                                   |   | 13.08                                            |  |                             |           |  |   |       | 
|Forfeited                         |  |                    | (2,166  | )                                   |   | 11.18                                            |  |                             |           |  |   |       | 
|                                  |  |                    |         |                                     |   |                                                  |  |                             |           |  |   |       | 
|Outstanding at June 30, 2010      |  |                    | 805,434 |                                     | $ | 9.12                                             |  |                             | 6.3 years |  | $ | 1,312 | 
|                                  |  |                    |         |                                     |   |                                                  |  |                             |           |  |   |       | 
|Exercisable at June 30, 2010      |  |                    | 475,860 |                                     | $ | 8.12                                             |  |                             | 4.6 years |  | $ | 1,144 | 
|                                  |  |                    |         |                                     |   |                                                  |  |                             |           |  |   |       | 

The
aggregate intrinsic value in the table above represents pre-tax intrinsic value
that would have been realized if all options had been exercised on the last
business day of the period indicated, based on the Companys closing stock
price on that day. The intrinsic value of all stock options exercised during
the three and nine months ended June 30, 2010 was $11 and $19, respectively.
The intrinsic value of all stock options exercised during the three and nine
months ended June 30, 2009 was $138. Cash received from the exercise of stock
options for the three and nine months ended June 30, 2010 was $12 and $24,
respectively. Cash received from the exercise of stock options for the three
and nine months ended June 30, 2009 was $165.

Note 17.
Enterprise-wide Information

During
the three and nine months ended June 30, 2010 and 2009, the Company operated in
two geographic reportable regions as shown in the table below.

|                              |  |                                |        |                               |   |        |   |      |         |   |   |        |  
|----------------------------- |  | ------------------------------ | ------ | ----------------------------- | - | ------ | - | ---- | ------- | - | - | ------ | -
|                              |  | Three
 Months 
 Ended June 30, |        | Nine
 Months 
 Ended June 30, |  
|                              |  |                                |        |                               |  
|                              |  | 2010                           |        | 2009                          |   | 2010   |   | 2009 |        
|                              |  |                                |        |                               |   |        |   |      |        
|Revenue  External Customers: |  |                                |        |                               |   |        |   |      |         |   |   |        |  
|United States                 |  | $                              | 12,748 |                               | $ | 7,734  |   | $    | 35,781  |   | $ | 26,797 |  
|China                         |  |                                | 1,016  |                               |   | 710    |   |      | 2,341   |   |   | 1,469  |  
|                              |  |                                |        |                               |   |        |   |      |         |   |   |        |  
|                              |  | $                              | 13,764 |                               | $ | 8,444  |   | $    | 38,122  |   | $ | 28,266 |  
|                              |  |                                |        |                               |   |        |   |      |         |   |   |        |  
|Revenue  Intercompany:       |  |                                |        |                               |   |        |   |      |         |   |   |        |  
|United States                 |  | $                              | 434    |                               | $ | 85     |   | $    | 939     |   | $ | 310    |  
|China                         |  |                                | 3,399  |                               |   | 1,487  |   |      | 8,699   |   |   | 5,102  |  
|Other                         |  |                                | 178    |                               |   | 151    |   |      | 576     |   |   | 455    |  
|Eliminations                  |  |                                | (4,011 | )                             |   | (1,723 | ) |      | (10,214 | ) |   | (5,867 | )
|                              |  |                                |        |                               |   |        |   |      |         |   |   |        |  
|                              |  | $                              |       |                               | $ |       |   | $    |        |   | $ |       |  
|                              |  |                                |        |                               |   |        |   |      |         |   |   |        |  
|Loss before income taxes:     |  |                                |        |                               |   |        |   |      |         |   |   |        |  
|United States                 |  | $                              | 1,050  |                               | $ | (876   | ) | $    | 283     |   | $ | (4,477 | )
|China                         |  |                                | 340    |                               |   | 235    |   |      | 889     |   |   | 653    |  
|Other                         |  |                                | (18    | )                             |   | 10     |   |      | (10     | ) |   | 5      |  
|                              |  |                                |        |                               |   |        |   |      |         |   |   |        |  
|                              |  | $                              | 1,372  |                               | $ | (631   | ) | $    | 1,162   |   | $ | (3,819 | )
|                              |  |                                |        |                               |   |        |   |      |         |   |   |        |  

11

---



Note 18. Subsequent
Events

On July 28,
2010, the Company paid a cash dividend of $1.00 per share on the Companys
outstanding common shares to shareholders of record as of the close of business
on July 14, 2010. The total dividend payment is $7,284.

12

---



Williams
Controls, Inc.

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

Forward-Looking
Statements

This
quarterly report on Form 10-Q contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements include all statements other than those that
expressly connote an assertion of historical fact. Among others, this report
includes forward looking statements that describe our plans and intentions
regarding future courses of action and the possible outcomes of those
intentions, and that set forth our expectations regarding our prospective financial
condition, results of operations, and cash flows. Forward-looking statements
can sometimes be identified by the use of forward-looking terminology, such as
may , will, should , expect, anticipate, estimate, continue,
plans and intends. Although we believe that the expectations reflected in
such forward-looking statements are reasonable, such forward-looking statements
are subject to risks and uncertainties that could cause us to deviate from our
current plans, and could cause our actual results to differ materially from
those indicated by the forward-looking statements. Some of the known factors
that could cause us to deviate from current plans or could cause our results to
fall short of expectations include: our ability to maintain positive
relationships with key customers; the concentration of our sales revenues among
a limited number of large customers; our status as a component manufacturer and
the resulting impact on our revenues of demand for vehicles in which our
products are installed; the effect of product liability lawsuits that directly
affect us and that indirectly impact us because of their effect on the
automotive and equipment industries generally; the impact of foreign currency
exchange rates on our gross income; the impact of federal monetary and trade
policies that impact the market for our products; and the status of our
relationships with our employees and organized labor force. 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. Some of the
factors that may cause our actual results in future periods to differ
materially from those currently expected or desired because of a number of
risks and uncertainties include, but are not limited to, those risks discussed
in the section entitled Risk Factors in our annual report on Form 10-K for
the fiscal year ended September 30, 2009.

The
forward-looking statements are made as of the date hereof, and, except as
otherwise required by law, we cannot undertake to update or revise these
statements.

Overview

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

As we move
forward in fiscal 2010 and beyond, we plan to continue to work closely with our
existing and potential customers to design and develop new products and adapt
existing products to new applications, and to improve the performance,
reliability and cost-effectiveness of our products.

13

---



Critical Accounting
Policies and Estimates

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

Revenue Recognition

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

Product
Warranty

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

Legal

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

Environmental
Costs

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

14

---



Pensions and Post-Retirement Benefit
Obligations

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

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

Share
Based Compensation Expense

We
measure compensation cost for all outstanding unvested share-based awards, and
awards we grant, modify, repurchase or cancel in the future, at fair value and
recognize compensation over the requisite service period for awards expected to
vest. The estimation of stock awards that will ultimately vest requires
judgment, and to the extent actual results differ from our estimates, such
amounts will be recorded as a cumulative adjustment in the period estimates are
revised. We consider many factors when calculating fair value including
estimated stock price volatility, expected term and expected forfeitures.
Factors considered in estimating forfeitures include the types of awards,
employee class, and historical experience. Actual results may differ
substantially from these estimates.

Income Taxes

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

15

---



Results of Operations

Financial
Summary
(Dollars in Thousands)

|                              |  |                                |        |                               |   |                 |    |      |       |      |   |                  |   |   |        |    |  |       |   
|----------------------------- |  | ------------------------------ | ------ | ----------------------------- | - | --------------- | -- | ---- | ----- | ---- | - | ---------------- | - | - | ------ | -- |  | ----- | --
|                              |  | Three
 Months 
 Ended June 30, |        | Nine Months
 
 Ended June 30, |  
|                              |  |                                |        |                               |  
|                              |  | 2010                           |        | 2009                          |   | Percent
 Change |    | 2010 |       | 2009 |   | Percent 
 Change |  
|                              |  |                                |        |                               |   |                 |    |      |       |      |   |                  |  
|Net sales                     |  | $                              | 13,764 |                               | $ | 8,444           |    |      | 63.0  | %    | $ | 38,122           |   | $ | 28,266 |    |  | 34.9  | % 
|Cost of sales                 |  |                                | 9,714  |                               |   | 6,536           |    |      | 48.6  | %    |   | 27,131           |   |   | 22,582 |    |  | 20.1  | % 
|                              |  |                                |        |                               |   |                 |    |      |       |      |   |                  |   |   |        |    |  |       |   
|                             
|Gross profit                  |  |                                | 4,050  |                               |   | 1,908           |    |      | 112.3 | %    |   | 10,991           |   |   | 5,684  |    |  | 93.4  | % 
|                             
|Research and development      |  |                                | 1,191  |                               |   | 844             |    |      | 41.1  | %    |   | 3,406            |   |   | 3,000  |    |  | 13.5  | % 
|Selling                       |  |                                | 695    |                               |   | 585             |    |      | 18.8  | %    |   | 2,115            |   |   | 1,866  |    |  | 13.3  | % 
|Administration                |  |                                | 1,224  |                               |   | 1,112           |    |      | 10.1  | %    |   | 4,020            |   |   | 4,242  |    |  | (5.2  | )%
|Class action provision        |  |                                |       |                               |   |                |    |      | NM    |      |   | 775              |   |   |       |    |  | NM    |   
|                              |  |                                |        |                               |   |                 |    |      |       |      |   |                  |   |   |        |    |  |       |   
|                              |  |                                |        |                               |   |                 |    |      |       |      |   |                  |   |   |        |    |  |       |   
|Operating income (loss)       |  | $                              | 940    |                               | $ | (633            | )  |      | 248.5 | %    | $ | 675              |   | $ | (3,424 | )  |  | 119.7 | % 
|                              |  |                                |        |                               |   |                 |    |      |       |      |   |                  |   |   |        |    |  |       |   
|                              |  |                                |        |                               |   |                 |    |      |       |      |   |                  |   |   |        |    |  |       |   
|As a percentage of net sales: |  |                                |        |                               |   |                 |    |      |       |      |   |                  |   |   |        |    |  |       |   
|Cost of sales                 |  |                                | 70.6   | %                             |   | 77.4            | %  |      |       |      |   | 71.2             | % |   | 79.9   | %  |  |       |   
|Gross margin                  |  |                                | 29.4   | %                             |   | 22.6            | %  |      |       |      |   | 28.8             | % |   | 20.1   | %  |  |       |   
|Research and development      |  |                                | 8.7    | %                             |   | 10.0            | %  |      |       |      |   | 8.9              | % |   | 10.6   | %  |  |       |   
|Selling                       |  |                                | 5.0    | %                             |   | 6.9             | %  |      |       |      |   | 5.5              | % |   | 6.6    | %  |  |       |   
|Administration                |  |                                | 8.9    | %                             |   | 13.2            | %  |      |       |      |   | 10.5             | % |   | 15.0   | %  |  |       |   
|Class action provision        |  |                                |       |                               |   |                |    |      |       |      |   | 2.0              | % |   |       |    |  |       |   
|Operating income (loss)       |  |                                | 6.8    | %                             |   | (7.5            | )% |      |       |      |   | 1.8              | % |   | (12.1  | )% |  |       |   

Net
sales increased to $13,764 for the third quarter of fiscal 2010, up 18% and 9%
when compared to the first quarter and second quarter of fiscal 2010,
respectively. The low point of the economic cycle relevant to our operations
appears to have occurred during our third fiscal quarter of 2009 and sales have
steadily increased since that time with third quarter 2010 sales being 63%
higher than the third quarter of fiscal 2009. Although we have seen improvement
from our low point in fiscal 2009, the heavy truck industry is still
significantly below levels prior to the economic downturn with our third
quarter sales run rate being approximately 16% below fiscal 2008 sales levels.
While we continue to closely monitor all of our costs, we remain committed to
spending on new product development and technology for existing and new
customers. At the end of the third quarter, the Company announced a cash
dividend of $1.00 per share of the Companys outstanding common shares as of
July 14, 2010. Although no assurances can be given, management believes that it
is likely that our estimated $2,557 in cash (after such dividend payment) plus
available borrowing of $5,746 under our revolving loan facility will be
adequate to sustain the Company through the foreseeable future.

Comparative  Three months ended June 30, 2010 and 2009


NM = Not Meaningful

|                                     |  |         |  |        |  |               
|------------------------------------ |  | ------- |  | ------ |  | --------------
|                                     |  |         |  |        |  | Percent Change
|                                     |  |         |  |        |  |               
|For the
 Three Months Ended June 30: |  | 2010    |  | 2009   |  | 2009 to 2010  
|                                     |  |         |  |        |  |               
|Net sales                            |  | $13,764 |  | $8,444 |  | 63.0%         

Net
sales increased $5,320 in the third quarter of fiscal 2010 compared to the
third quarter of fiscal 2009. The increase in sales results from volume
increases in all markets worldwide as the low point of the economic cycle
relevant to our operations appears to have occurred during the quarter of
fiscal 2009. NAFTA truck sales were up 51% when compared to the third quarter of
fiscal 2009 due to continued improvements in the economic environment and
freight hauling industry. It is possible NAFTA truck sales will slightly
improve over the next few quarters as the economic environment continues to
improve. Asian truck sales increased 47% over the prior year quarter primarily
due to increased sales volumes of heavy trucks in Korea and heavy trucks and
off-road vehicles in China. Increases in off-road volumes in China primarily
results from adoption of more stringent emissions standards in China which
require the types of products sold by the Company. European truck sales were up
113% over the same period in fiscal 2009 due to

16

---



our European
customers increasing their heavy truck build rates. In the third quarter of
fiscal 2009, most of our large truck OEM customers in Europe had reduced their
build rates due to the slowing economy resulting in significantly higher than
normal inventory levels. Worldwide off-road sales were up 101% for the quarter
ended June 30, 2010. The largest contributor to this increase in off-road sales
was attributable to the NAFTA market, where off-road sales were up 106%
primarily due to continued increases in sales related to United States military
vehicle applications.

|                                     |  |        |  |        |  |                | 
|------------------------------------ |  | ------ |  | ------ |  | -------------- | 
|                                     |  |        |  |        |  | Percent Change | 
|                                     |  |        |  |        |  |                | 
|For the
 Three Months Ended June 30: |  | 2010   |  | 2009   |  | 2009 to 2010   | 
|                                     |  |        |  |        |  |                | 
|Cost of
 sales                       |  | $9,714 |  | $6,536 |  | 48.6%          | 

The
types of expenses included in cost of sales include raw materials consumption;
freight and duty; warranty; wages and benefits; depreciation and amortization;
production utilities; shipping and production supplies; repairs and
maintenance; production facility property insurance; and other production
overhead. As a percent of sales, cost of sales decreased primarily due to
higher sales volumes across which we can distribute fixed overhead costs. Wage
related expenses increased slightly in fiscal 2010 as the third quarter of fiscal
2009 included temporary salary reductions as part of the cost reductions put
into place during the latter part of fiscal 2009. Warranty costs were up
slightly quarter over quarter as the Company increased its warranty accrual
related to warranty claims with one customer. Additionally, freight and duty
costs were up on a quarter over quarter basis.

|                                     |  |        |  |        |  |                | 
|------------------------------------ |  | ------ |  | ------ |  | -------------- | 
|                                     |  |        |  |        |  | Percent Change | 
|                                     |  |        |  |        |  |                | 
|For the
 Three Months Ended June 30: |  | 2010   |  | 2009   |  | 2009 to 2010   | 
|                                     |  |        |  |        |  |                | 
|Gross profit                         |  | $4,050 |  | $1,908 |  | 112.3%         | 

Gross
profit was $4,050, or 29.4% of net sales in the third quarter of fiscal 2010,
an increase of $2,142 compared to the gross profit of $1,908, or 22.6% of net
sales, in the comparable fiscal 2009 period.

The
increase in gross profit in the third quarter of fiscal 2010 is primarily
driven by the 63% net increase in sales of electronic throttle systems to our
heavy truck and off-road customers. When comparing the third quarter of fiscal
2010 with the comparable period in fiscal 2009, manufacturing overhead costs
were up in actual dollar value for the three months ended June 30, 2010, but
because of the aforementioned increase in sales volume, were 10% lower as a
percentage of sales than the third quarter of fiscal 2009.

|                                     |  |        |  |      |  |                | 
|------------------------------------ |  | ------ |  | ---- |  | -------------- | 
|                                     |  |        |  |      |  | Percent Change | 
|                                     |  |        |  |      |  |                | 
|For the
 Three Months Ended June 30: |  | 2010   |  | 2009 |  | 2009 to 2010   | 
|                                     |  |        |  |      |  |                | 
|Research and
 development            |  | $1,191 |  | $844 |  | 41.1%          | 

Research
and development expenses increased $347 for the third quarter of fiscal 2010
compared to the comparable period in fiscal 2009. This increase is primarily
due to increased resources, including additional headcounts, being committed to
new project development for sensors and joysticks. In addition, the third
quarter of fiscal 2009 included temporary wage reductions for all employees as
part of the Companys cost reduction program in fiscal 2009. The Companys
research and development expenditures generally will fluctuate based on the
programs and products under development at any given point in time, and that
fluctuation often does not coincide with sales cycles. Overall, we expect
research and development expenses to increase slightly over fiscal 2009 levels
due to the continued efforts related to additional new product design projects.

|                                     |  |      |  |      |  |                | 
|------------------------------------ |  | ---- |  | ---- |  | -------------- | 
|                                     |  |      |  |      |  | Percent Change | 
|                                     |  |      |  |      |  |                | 
|For the
 Three Months Ended June 30: |  | 2010 |  | 2009 |  | 2009 to 2010   | 
|                                     |  |      |  |      |  |                | 
|Selling                              |  | $695 |  | $585 |  | 18.8%          | 

Selling
expenses increased $110 when compared with the same period in fiscal 2009. The
increase in selling expenses is primarily driven by increases in wage expenses,
travel costs and sales commissions in relation with the increase in net sales
worldwide.

17

---



|                                     |  |        |  |        |  |                | 
|------------------------------------ |  | ------ |  | ------ |  | -------------- | 
|                                     |  |        |  |        |  | Percent Change | 
|                                     |  |        |  |        |  |                | 
|For the
 Three Months Ended June 30: |  | 2010   |  | 2009   |  | 2009 to 2010   | 
|                                     |  |        |  |        |  |                | 
|Administration                       |  | $1,224 |  | $1,112 |  | 10.1%          | 

Administration
expenses increased $112 for the third quarter of fiscal 2010 compared to the
same period in fiscal 2009. On a quarter over quarter basis, wage expenses
increased due to the third quarter of fiscal 2009 including temporary wage
reductions. In addition, expenses associated with the start-up of our India
operations increased, bad debt expense slightly increased, however; legal fees
remained consistent between periods.

|                                     |  |          |  |      |  |                | 
|------------------------------------ |  | -------- |  | ---- |  | -------------- | 
|                                     |  |          |  |      |  | Percent Change | 
|                                     |  |          |  |      |  |                | 
|For the
 Three Months Ended June 30: |  | 2010     |  | 2009 |  | 2009 to 2010   | 
|                                     |  |          |  |      |  |                | 
|Gain on sale
 of investments         |  | $
 (441) |  | $   |  | NM             | 

During
the third quarter of fiscal 2010, the Company sold its short-term investments
and recorded a $441 gain related to the sale. The majority of the shares sold
related to the Companys investment in Dana as part of the environmental
settlement discussed in Note 15 to our unaudited condensed consolidated
financial statements.

|                                     |  |      |  |          |  |                | 
|------------------------------------ |  | ---- |  | -------- |  | -------------- | 
|                                     |  |      |  |          |  | Percent Change | 
|                                     |  |      |  |          |  |                | 
|For the
 Three Months Ended June 30: |  | 2010 |  | 2009     |  | 2009 to 2010   | 
|                                     |  |      |  |          |  |                | 
|Income tax
 expense (benefit)        |  | $469 |  | $
 (298) |  | 257.4%         | 

Income
tax expense (benefit) reflects an effective tax rate of 34.2% for the quarter
ended June 30, 2010 compared to an effective tax rate of 47.2% for the quarter
ended June 30, 2009. The effective tax rate fluctuations are primarily due to
the jurisdictions in which pretax income (loss) is being earned and income tax
rate differences between the domestic and foreign jurisdictions. The decrease
in the tax rate from 2009 to 2010 is also partially due to a discrete tax
benefit recognized during the three months ended June 30, 2010 associated with
the sale of short-term investments.

Comparative  Nine months ended June 30, 2010 and 2009


NM = Not Meaningful

|                                    |  |         |  |         |  |                | 
|----------------------------------- |  | ------- |  | ------- |  | -------------- | 
|                                    |  |         |  |         |  | Percent Change | 
|                                    |  |         |  |         |  |                | 
|For the
 Nine Months Ended June 30: |  | 2010    |  | 2009    |  | 2009 to 2010   | 
|                                    |  |         |  |         |  |                | 
|Net sales                           |  | $38,122 |  | $28,266 |  | 34.9%          | 

Net
sales increased $9,856 in the first nine months of fiscal 2010 compared to the
first nine months of fiscal 2009. As was the case in the third quarter of
fiscal 2010, the overall increase in sales in 2010 was due to volume increases
in essentially all of the Companys principal markets. In fiscal 2009, we saw
significant reductions in the number of units of trucks, busses and off-road
vehicles built world-wide due to the significant recessionary pressures in the
United States and many parts of the rest of the world and as a result,
essentially all of our large truck OEM customers had reductions in build rates
and took extensive down-time throughout the year. As the economic climate has
improved worldwide in fiscal 2010 and as our truck OEM customers have increased
build rates, the result has been an overall increase in sales volumes in all
worldwide markets.

Net
sales to customers in Asia increased 73% over the prior year period primarily
due to increased sales volumes of heavy trucks in Korea and heavy trucks and off-road
vehicles in China. Increases in off-road volumes in China primarily results
from adoption of more stringent emissions standards in China, which mandate the
inclusion of electronic throttle controls on new vehicles, thus allowing us to
expand our customer base in this market. Korean sales have increased due to
improvements in the economic climate in Korea and an increase in the number of
truck sales. European truck sales were up 70% over the same period in fiscal
2009 due to our European customers increasing their heavy truck build rates and
working through the build up of inventory levels experienced in fiscal 2009.
Net sales to NAFTA truck customers were up 17% when compared to the first nine
months of fiscal 2009 due to continued improvements in the economic environment
and freight hauling, which more than offset the expected declines associated
with the emission standards enacted in North America in calendar 2010 which
would drive higher truck costs to comply with these new emission standards. We
anticipate that NAFTA truck sales may slightly improve over the next few
quarters as the economic environment continues to improve. Worldwide off-road
sales were up 60% for the first nine months ended June 30, 2010. The largest
contributor to this increase in off-road sales was seen in the NAFTA

18

---



market, where
off-road sales were up 50% primarily due to continued increases in sales
related to United States military vehicle applications.

|                                    |  |         |  |         |  |                | 
|----------------------------------- |  | ------- |  | ------- |  | -------------- | 
|                                    |  |         |  |         |  | Percent Change | 
|                                    |  |         |  |         |  |                | 
|For the
 Nine Months Ended June 30: |  | 2010    |  | 2009    |  | 2009 to 2010   | 
|                                    |  |         |  |         |  |                | 
|Cost of
 sales                      |  | $27,131 |  | $22,582 |  | 20.1%          | 

The
types of expenses included in cost of sales include raw materials consumption;
freight and duty; warranty; wages and benefits; depreciation and amortization;
production utilities; shipping and production supplies; repairs and
maintenance; production facility property insurance; and other production
overhead. As a percent of sales, cost of sales decreased primarily due to
higher sales volumes to distribute fixed overhead. Additionally, the first nine
months of fiscal 2009 included settlement of outstanding labor issues and
severance costs totaling $320 and a $116 write-down to our capitalized license
fee related to adjustable pedal technology due to the significant decline in
business in the recreational vehicle industry. Repairs and maintenance costs
and pension costs decreased $141 and $86, respectively, in first nine months of
fiscal 2010 from the comparable period in fiscal 2009. Slightly offsetting some
of these decreases was an increase in warranty costs of $211 during the first
nine months of fiscal 2010 when compared to the same period in fiscal 2009 and
primarily relates to warranty claims with one customer. In addition, freight
and duty costs increased $491 for the first nine months of fiscal 2010 when
compared to the same period in fiscal 2009.

|                                    |  |         |  |        |  |                | 
|----------------------------------- |  | ------- |  | ------ |  | -------------- | 
|                                    |  |         |  |        |  | Percent Change | 
|                                    |  |         |  |        |  |                | 
|For the
 Nine Months Ended June 30: |  | 2010    |  | 2009   |  | 2009 to 2010   | 
|                                    |  |         |  |        |  |                | 
|Gross profit                        |  | $10,991 |  | $5,684 |  | 93.4%          | 

Gross
profit was $10,991, or 28.8% of net sales in the first nine months of 2010, an
increase of $5,307 compared to gross profit of $5,684, or 20.1% of net sales,
in the comparable fiscal 2009 period.

The
increase in gross profit in the first nine months of fiscal 2010 is primarily
driven by the 34.9% net increase in sales of electronic throttle systems to our
heavy truck, bus and off-road customers. When comparing the first nine months
of fiscal 2010 with the comparable period in fiscal 2009, manufacturing
overhead costs were 9% lower as a percent of sales than the first nine months
of fiscal 2009, primarily due to the factors described above under cost of
sales.

|                                    |  |        |  |        |  |                | 
|----------------------------------- |  | ------ |  | ------ |  | -------------- | 
|                                    |  |        |  |        |  | Percent Change | 
|                                    |  |        |  |        |  |                | 
|For the
 Nine Months Ended June 30: |  | 2010   |  | 2009   |  | 2009 to 2010   | 
|                                    |  |        |  |        |  |                | 
|Research and
 development           |  | $3,406 |  | $3,000 |  | 13.5%          | 

Research
and development expenses increased $406 during the first nine months of fiscal
2010 when compared to the first nine months of fiscal 2009. This increase is
primarily due to increased resources, including additional headcounts, being
committed to new project development for sensors and joysticks. The Companys
research and development expenditures will fluctuate based on the products
under development at any given point in time, and that fluctuation often does
not coincide with sales cycles. Overall, we expect research and development
expenses to increase slightly over fiscal 2009 levels due to additional new
product design projects.

|                                    |  |        |  |        |  |                | 
|----------------------------------- |  | ------ |  | ------ |  | -------------- | 
|                                    |  |        |  |        |  | Percent Change | 
|                                    |  |        |  |        |  |                | 
|For the
 Nine Months Ended June 30: |  | 2010   |  | 2009   |  | 2009 to 2010   | 
|                                    |  |        |  |        |  |                | 
|Selling                             |  | $2,115 |  | $1,866 |  | 13.3%          | 

Selling
expenses increased $249 during the nine months ended June 30, 2010 as compared
with the nine months ended June 30, 2009 mainly due to an increase in travel
expenses and sales commissions, which tend to correlate with relatively higher
sales volumes.

|                                    |  |        |  |        |  |                | 
|----------------------------------- |  | ------ |  | ------ |  | -------------- | 
|                                    |  |        |  |        |  | Percent Change | 
|                                    |  |        |  |        |  |                | 
|For the
 Nine Months Ended June 30: |  | 2010   |  | 2009   |  | 2009 to 2010   | 
|                                    |  |        |  |        |  |                | 
|Administration                      |  | $4,020 |  | $4,242 |  | (5.2)%         | 

19

---



Administration
expenses for the first nine months of fiscal 2010 decreased $222 when compared
with the same period in fiscal 2009. The decrease in administration expenses is
primarily due to the a $275 non-cash compensation expense recognized in
conjunction with the Companys unfunded deferred compensation plan during the
first quarter of fiscal 2009, a decrease of $129 in bad debt expenses, reduced
stock option expense of $42 and a decrease in professional and consulting costs
of $84. Offsetting some of these decreases was a $264 increase in legal fees
primarily associated with the Cuesta class action lawsuit.

|                                    |  |      |  |      |  |                | 
|----------------------------------- |  | ---- |  | ---- |  | -------------- | 
|                                    |  |      |  |      |  | Percent Change | 
|                                    |  |      |  |      |  |                | 
|For the
 Nine Months Ended June 30: |  | 2010 |  | 2009 |  | 2009 to 2010   | 
|                                    |  |      |  |      |  |                | 
|Class action
 provision             |  | $775 |  | $   |  | NM             | 

During
the second quarter of fiscal 2010, the Company recorded a $775 liability which
represents the agreed upon amount for the Company per the settlement agreement related
to the Cuesta class action lawsuit discussed in Note 15 to our unaudited
condensed consolidated financial statements. During the third quarter of fiscal
2010, the settlement agreement was signed by all parties and the class has been
notified of the proposed settlement and we believe it is probable the court
will consider approval of this settlement after the notice period has elapsed.

|                                    |  |      |  |      |  |                | 
|----------------------------------- |  | ---- |  | ---- |  | -------------- | 
|                                    |  |      |  |      |  | Percent Change | 
|                                    |  |      |  |      |  |                | 
|For the
 Nine Months Ended June 30: |  | 2010 |  | 2009 |  | 2009 to 2010   | 
|                                    |  |      |  |      |  |                | 
|Loss on
 impairment of investments  |  | $   |  | $317 |  | NM             | 

Loss
on impairment of investments is a non-cash, other-than-temporary impairment
charge relating to the Companys investment in Dana Holding CP (Dana) during
the first quarter of fiscal 2009. Prior to the Company recording the impairment
charge, the decline in market value was carried net of tax in other
comprehensive loss.

|                                    |  |          |  |      |  |                | 
|----------------------------------- |  | -------- |  | ---- |  | -------------- | 
|                                    |  |          |  |      |  | Percent Change | 
|                                    |  |          |  |      |  |                | 
|For the
 Nine Months Ended June 30: |  | 2010     |  | 2009 |  | 2009 to 2010   | 
|                                    |  |          |  |      |  |                | 
|Gain on sale
 of investments        |  | $
 (441) |  | $   |  | NM             | 

During
the third quarter of fiscal 2010, the Company sold its short-term investments
and recorded a $441 gain related to the sale. The majority of the shares sold
related to the Companys investment in Dana as part of the environmental
settlement discussed in Note 15 to our unaudited condensed consolidated
financial statements.

|                                    |  |         |  |      |  |                | 
|----------------------------------- |  | ------- |  | ---- |  | -------------- | 
|                                    |  |         |  |      |  | Percent Change | 
|                                    |  |         |  |      |  |                | 
|For the
 Nine Months Ended June 30: |  | 2010    |  | 2009 |  | 2009 to 2010   | 
|                                    |  |         |  |      |  |                | 
|Other (income)
 expense             |  | $
 (48) |  | $85  |  | (156.5)%       | 

Other
(income) expense was income of $48 in the first nine months of fiscal 2010
compared to expense of $85 in the first nine months of fiscal 2009. Other
income in the first nine months of fiscal 2010 consisted of a $70 gain from the
extinguishment of old outstanding accounts payable balances of various
insolvent subsidiaries, whereas other expense in the first nine months of
fiscal 2009 primarily consisted of losses related to the disposal of certain
fixed assets.

|                                    |  |      |  |            |  |                | 
|----------------------------------- |  | ---- |  | ---------- |  | -------------- | 
|                                    |  |      |  |            |  | Percent Change | 
|                                    |  |      |  |            |  |                | 
|For the
 Nine Months Ended June 30: |  | 2010 |  | 2009       |  | 2009 to 2010   | 
|                                    |  |      |  |            |  |                | 
|Income tax
 expense (benefit)       |  | $296 |  | $
 (1,445) |  | 120.5%         | 

Tax benefit
reflects an effective tax rate of 25.5% for the first nine months of fiscal
2010 compared to an effective tax rate of 37.8% for the comparable period in
fiscal 2009. The effective tax rate fluctuations are primarily
due to the jurisdictions in which pretax income (loss) is being earned and
income tax rate differences between the domestic and foreign jurisdictions. The
decrease in the tax rate from 2009 to 2010 is primarily due to discrete tax
benefits recognized during the nine months ended June 30, 2010 associated with
the class action lawsuit and the sale of short-term investments.

Income
tax expense (benefit) was benefited by $125 and $65 as a result of a tax
holiday in the Peoples Republic of China during the nine months ended June 30,
2010 and 2009, respectively.

20

---



Financial
Condition, Liquidity and Capital Resources

At
June 30, 2010, we had cash and cash equivalents of $9,841. During the quarter,
the Company declared a $1.00 per share cash dividend to be paid to all
stockholders of record in July 2010. The cash dividend to be paid is $7,284.
Also during the third quarter of fiscal 2010, the Company entered into a
revolving loan facility with U.S. Bank and as of June 30, 2010 we had $5,746
available under our revolving loan facility. We believe our cash on hand and
our capacity under the new revolving loan facility will be sufficient to meet
our working capital needs on a short-term and longer-term basis.

Cash
generated by operating activities was $1,601 for the first nine months of
fiscal 2010, a decrease of $1,125 from the cash generated by operating
activities of $2,726 during the first nine months of fiscal 2009. Net income
plus non-cash charges for depreciation and stock based compensation contributed
$3,001 in the first nine months of fiscal 2010 compared to a charge of $334 in
the first nine months of fiscal 2009.

Changes in
working capital items used cash of $895 in the first nine months of fiscal 2010
compared to generating cash of $2,685 in the first nine months of fiscal 2009.
Changes in receivables for the first nine months of fiscal 2010 was a use of
cash of $1,677 compared to a $3,500 generation of cash in the first nine months
of fiscal 2009. The significant cash generation from the collection of
receivables in the first nine months of fiscal 2009 was due to the reduction in
sales and accounts receivable due to the deterioration of the general economy
during that quarter. The increase in receivables in fiscal 2010 is the result
of higher sales levels. Inventories increased $981 in the first nine months of
fiscal 2010 in relation to increased sales compared to a decrease of $2,285 in
the first nine months of fiscal 2009. Accounts payable and accrued expenses
increased in the first nine months of fiscal 2010 primarily due to increases in
purchases of inventory and supplies to remain in line with the significant
increase in sales volumes and the accrual of the Cuesta legal settlement,
whereas the decrease in accounts payable and accrued expenses in 2009 was
primarily due to the lower sales and inventory purchases. Cash flows from
operations for the nine months ended June 30, 2010 included payments to our
pension plans of $425 compared to contributions of $92 for the nine months
ended June 30, 2009. We believe it is likely we will continue to generate positive
cash from operations, however, depending on changes in the world-wide economic
market, we could experience periods of negative cash flow from operations.

Cash
used in investing activities was $1,029 for the nine months ended June 30, 2010
and $1,592 for the nine months ended June 30, 2009 and was comprised primarily
of purchases of equipment for both periods. Cash flows from investing
activities for the quarter ended June 30, 2010 included $511 of proceeds
related to the sale of investments. We expect our cash use for investing
activities to increase throughout the fiscal year as we continue to make
purchases of capital equipment. We anticipate spending no more that $3,500 in
fiscal 2010 related to the purchase of capital equipment.

Cash
generated in financing activities was $24 for the nine months ended June 30,
2010, compared to cash used in financing activities of $2,192 for the nine
months ended June 30, 2009. Cash generated for financing activities for the
first nine months of fiscal 2010 relates to proceeds from the exercise of stock
options. In October 2008, the Company announced a share repurchase plan whereby
the Company can, but is under no obligation to, repurchase up to $5,000 of the
Companys common stock. Repurchases may be made in the open market or through
block trades, in compliance with Securities and Exchange Commission guidelines,
subject to market conditions, applicable legal requirements and other factors.
During the first nine months of fiscal 2009, the Company purchased 310,893
shares of common stock at a total value of $2,357 and did not make any
repurchases during the first nine months of fiscal 2010. In addition, the first
nine months of fiscal 2009 included cash generation of $165 related to proceeds
from the exercise of stock options.

Contractual Obligations as of June 30, 2010

At
June 30, 2010, our contractual obligations consisted of operating lease
obligations and a license agreement. We did not have any material letters of
credit, or debt guarantees outstanding at June 30, 2010. Maturities of these
contractual obligations consist of the following:

21

---



|                                 |  |                         |       |                    |   |            |  |            |       |  |   |    | 
|-------------------------------- |  | ----------------------- | ----- | ------------------ | - | ---------- |  | ---------- | ----- |  | - | -- | 
|                                 |  | Payments
 due by period |      
|                                 |  |                         |      
|                                 |  | Total                   |       | Less than 
 1 year |   | 1  3years |  | 3  5years |      
|                                 |  |                         |       |                    |   |            |  |            |      
|Operating
 lease obligations     |  | $                       | 1,703 |                    | $ | 728        |  | $          | 975   |  | $ |   | 
|MMT license
 - minimum royalties |  |                         | 250   |                    |   | 50         |  |            | 150   |  |   | 50 | 
|                                 |  |                         |       |                    |   |            |  |            |       |  |   |    | 
|                                 |  | $                       | 1,953 |                    | $ | 778        |  | $          | 1,125 |  | $ | 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 June 30, 2010 related to our pension
plans and post-retirement medical plan of $5,702 and $2,682, respectively. We
funded $425 to our pension plans during the first nine months of fiscal 2010
compared to $92 during the first nine months of fiscal 2009. We expect to make
payments to our pension plans of $146 throughout the rest of fiscal 2010.

Item 3.        Quantitative and Qualitative Disclosures About
Market Risk

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

Interest Rate Risk

The
Company has a revolving loan facility with U.S. Bank, which expires on June 30,
2012.

As
of June 30, 2010, there was no balance outstanding on the revolving loan. The
Company does not believe a hypothetical 10% change in end of 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 nine months ended June 30, 2010 and 2009, the
Company had foreign sales of approximately 40% and 36% of net sales,
respectively. All worldwide sales in the first nine months of fiscal 2010 and
2009, with the exception of $2,341 and $1,469, respectively, were denominated
in U.S. dollars. During fiscal 2005, we established a manufacturing facility in
Suzhou, China and we opened sales offices in Shanghai, China and Munich,
Germany. During fiscal 2010, we are establishing a manufacturing facility in
Pune, India. 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
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.

22

---



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.

23

---



PART II  OTHER INFORMATION

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------
|Item 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Legal Proceedings              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                
|We
 are a party to various pending judicial and administrative proceedings
 arising in the ordinary course of business. Our management and legal counsel
 have reviewed the probable outcome of these proceedings, the costs and
 expenses reasonably expected to be incurred, the availability and limits of
 our insurance coverage, and our established liabilities. While the outcome of
 the pending proceedings cannot be predicted with certainty, based on our
 review, other than the Cuesta class action lawsuit discussed below, we
 believe that any unrecorded liability that may result is not likely to have a
 material effect on our liquidity, financial condition or results of
 operations.                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                
|On
 October 1, 2004, the Company was named as a co-defendant in a product
 liability case (Cuesta v. Ford, et al), brought in the Oklahoma State
 District Court in Bryant, Oklahoma. The complaint seeks an unspecified amount
 of damages on behalf of the class based on allegations that certain of our
 products, as incorporated into certain models of Ford motor vehicles, are in
 some way defective. Management continues to believe the claim to be without
 merit, however, the Company has entered into a settlement agreement between
 and among Ford and the plaintiff group. During the second quarter of fiscal
 2010, the Company recorded a $775 provision for a full settlement and release
 of all claims. The settlement agreement involves settlements with both Ford
 and the Company, with the Companys settlement costs to be $775. Such
 settlement will require court approval, which the Company believes is
 probable.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                
|Item 1A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Risk Factors                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                
|There have
 been no material changes in risk factors for the quarter ended June 30, 2010.
 See the information set forth in the section entitled Risk Factors in our
 Annual Report on Form 10-K for the fiscal year ended September 30, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                
|Item 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Defaults Upon Senior Securities
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                
|None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                
|Item 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Reserved                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                
|Item 5.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Other Information              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                
|None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                
|Item 6.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Exhibits                       

|              |     |             |                                                                                                                                                                                                                                                  
|------------- | --- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |     | Description
|              |     |            
|              |     |             |                                                                                                                                                                                                                                                  
|3.01          | (a) |             | Certificate
 of Incorporation of the Registrant, as amended (Incorporated by reference to Exhibit 3.01 (a) to
 the Registrants quarterly report on Form 10-Q for the quarter ended December
 31, 2006)                                          
|              |     |             |                                                                                                                                                                                                                                                  
|3.01          | (b) |             | Certificate
 of Amendment to Certificate of Incorporation of the Registrant, dated
 February 27, 1995 (Incorporated by reference to Exhibit 3.01 (b) to
 the Registrants quarterly report on Form 10-Q for the quarter ended December
 31, 2006)
|              |     |             |                                                                                                                                                                                                                                                  
|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                                         

24

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|      |  |  |                                                                                                                                                                                                                               
|----- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  |  | the quarter ended December 31, 2006)                                                                                                                                                                                          
|      |  |  |                                                                                                                                                                                                                               
|3.02  |  |  | Restated
 By-Laws of the Registrant as amended July 1, 2002 (Incorporated by reference to Exhibit 3.6 to
 the Registrants quarterly report on Form 10-Q, Commission File No.
 000-18083, for the quarter ended June 30, 2002)
|      |  |  |                                                                                                                                                                                                                               
|31.01 |  |  | Certification of Chief Executive Officer required by Rule 13a-14(a)
 or Rule 15d-14(a) (Filed herewith)                                                                                                                       
|      |  |  |                                                                                                                                                                                                                               
|31.02 |  |  | Certification of Chief Financial Officer required by Rule 13a-14(a)
 or Rule 15d-14(a) (Filed herewith)                                                                                                                       
|      |  |  |                                                                                                                                                                                                                               
|32.01 |  |  | Certification
 of Patrick W. Cavanagh Pursuant to 18 U.S.C. Section 1350 as
 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed
 herewith)                                                              
|      |  |  |                                                                                                                                                                                                                               
|32.02 |  |  | Certification
 of Dennis E. Bunday Pursuant to 18 U.S.C. Section 1350 as
 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed
 herewith)                                                                 

25

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SIGNATURES

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

|                      |                                      
|--------------------- | -------------------------------------
|                      | WILLIAMS CONTROLS, INC.              
|                      |                                      
|Date: August
 9, 2010 | /s/ PATRICK
 W. CAVANAGH             
|                      |                                      
|                      | Patrick W.
 Cavanagh                 
|                      | President and Chief Executive Officer
|                      |                                      
|Date: August
 9, 2010 | /s/ DENNIS
 E. BUNDAY                
|                      |                                      
|                      | Dennis E.
 Bunday                    
|                      | Chief
 Financial Officer             

26

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