**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**








**FORM
      10-Q**








**[
      x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
      THE**


**SECURITIES
      EXCHANGE ACT OF 1934**





**For
      the quarterly period ended: March 31, 2007**





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


**SECURITIES
      EXCHANGE ACT OF 1934**





**For
      the transition period from ____________ to
      ____________**





**Commission
      file number 0-18083**








**Williams
      Controls, Inc.**


(Exact
      name of registrant as specified in its charter)








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





**(503)
      684-8600**


(Registrant's
      telephone number, including area code)





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


Yes
      [ X
      ] No
      [    ]





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





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





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


Yes
      [    ] No [ X ]





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


at
      April
      30, 2007: 7,475,719





**Williams
      Controls, Inc.**


**March
      31, 2007**


**Table
      of Contents**











Page
              Number**Part
                I. Financial Information**Item
                1. Financial Statements (unaudited)Condensed
                Consolidated Balance Sheets, March 31, 2007
                and
              September
                30, 2006
            1Condensed
                Consolidated Statements of Operations, three
                and six month
              periods
                ended March 31, 2007 and
                2006
            2Condensed
                Consolidated Statements of Cash Flows, six
                month
              periods
                ended March 31, 2007 and
                2006
            3Notes
                to Unaudited Condensed Consolidated Financial
                Statements
            4Item
                2. Management’s Discussion and Analysis of Financial
                Condition
              and
                Results of Operations
            14Item
                3. Quantitative and Qualitative Disclosures About
                Market Risk
            23Item
                4. Controls and Procedures
            24**Part
                II. Other Information**Item
                1. Legal Proceedings
            25Item
                1A. Risk Factors
            25Item
                2. Unregistered Sales of Equity Securities and Use
                of Proceeds
            25Item
                3. Defaults Upon Senior
                Securities
            25Item
                4. Submission of Matters to a Vote of Security
                Holders
            25Item
                5. Other Information
            25Item
                6. Exhibits
            25Signature
                Page
            28









**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)**





**March
                31,**
              **2007**
            
            **September
                30,**
              **2006****ASSETS**Current
                Assets:Cash
                and cash equivalents
            
            $
            1,511
            
            $
            2,530Trade
                accounts receivable, less allowance of
              $50 and $35 at March 31, 2007 and September 30,
              2006, respectively
            
            
            8,747
            
            
            9,368Other
                accounts receivable
            
            
            1,415
            
            
            1,231Inventories
            
            
            10,456
            
            
            9,918Deferred
                income
                taxes
            
            
            657
            
            
            657Prepaid
                expenses and other current assets
            
            
            678
            
            
            333Total
                current assets
            
            
            23,464
            
            
            24,037Property,
                plant and equipment, net
            
            
            8,857
            
            
            8,457Deferred
                income taxes
            
            
            2,348
            
            
            2,228Other
                assets, net
            
            
            942
            
            
            1,027Total
                assets
            
            $
            35,611
            
            $
            35,749**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                Liabilities:Accounts
                payable
            
            $
            4,290
            
            $
            6,504Accrued
                expenses
            
            
            5,276
            
            
            5,528Current
                portion of employee benefit obligations
            
            
            1,827
            
            
            1,669Current
                portion of long-term debt
            
            
            2,429
            
            
            3,996Total
                current liabilities
            
            
            13,822
            
            
            17,697Long-term
                Liabilities:Long-term
                debt
            
            
            3,643
            
            
            4,544Employee
                benefit obligations
            
            
            4,478
            
            
            4,991Other
                long-term liabilities
            
            
            265
            
            
            255Commitments
                and contingenciesStockholders’
                Equity:Preferred
                stock
                ($.01 par value, 50,000,000 authorized) Series C
              (0
                issued and outstanding at March 31, 2007 and September 30,
              2006)
            
            
            -
            
            
            -Common
                stock ($.01 par value, 12,500,000 authorized; 7,475,719
              and 7,432,844 issued and outstanding at March 31, 2007 and September
                30,
                2006,
              respectively)
            
            
            75
            
            
            74Additional
                paid-in capital
            
            
            34,533
            
            
            34,014Accumulated
                deficit
            
            
            (15,817
            )
            
            (20,414
            )Treasury
                stock (21,700 shares at March 31, 2007 and September 30,
              2006)
            
            
            (377
            )
            
            (377
            )Accumulated
                other comprehensive loss
            
            
            (5,011
            )
            
            (5,035
            )Total
                stockholders’ equity
            
            
            13,403
            
            
            8,262Total
                liabilities and stockholders’ equity
            
            $
            35,611
            
            $
            35,749





See
      accompanying notes to Unaudited Condensed Consolidated Financial
      Statements.


**1**


**Williams
      Controls, Inc.**


**Condensed
      Consolidated Statements of Operations**


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


**(Unaudited)**





**Three
                Month Period Ended**
              **March
                31,**
            
            **Six
                Month Period Ended**
              **March
                31,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Net
                sales
            
            $
            18,309
            
            $
            18,796
            
            $
            36,751
            
            $
            34,928Cost
                of sales
            
            
            12,174
            
            
            11,995
            
            
            24,325
            
            
            22,782Gross
                profit
            
            
            6,135
            
            
            6,801
            
            
            12,426
            
            
            12,146Operating
                expenses:Research
                and
                development
            
            
            838
            
            
            814
            
            
            1,668
            
            
            1,662Selling
            
            
            572
            
            
            531
            
            
            1,092
            
            
            979Administration
            
            
            1,382
            
            
            1,486
            
            
            2,655
            
            
            2,789Realignment
                of
                operations
            
            
            257
            
            
            65
            
            
            433
            
            
            124Total
                operating expenses
            
            
            3,049
            
            
            2,896
            
            
            5,848
            
            
            5,554Operating
                income
            
            
            3,086
            
            
            3,905
            
            
            6,578
            
            
            6,592Other
                (income) expense:Interest
                income
            
            
            (25
            )
            
            (13
            )
            
            (61
            )
            
            (40
            )Interest
                expense
            
            
            209
            
            
            314
            
            
            467
            
            
            632Other
                income, net
            
            
            (259
            )
            
            (158
            )
            
            (863
            )
            
            (166
            )Total
                other (income) expenses
            
            
            (75
            )
            
            143
            
            
            (457
            )
            
            426Income
                before income taxes
            
            
            3,161
            
            
            3,762
            
            
            7,035
            
            
            6,166Income
                tax expense
            
            
            1,107
            
            
            1,324
            
            
            2,438
            
            
            2,201Net
                income
            
            $
            2,054
            
            $
            2,438
            
            $
            4,597
            
            $
            3,965Net
                income per common share - basic
            
            $
            0.28
            
            $
            0.33
            
            $
            0.62
            
            $
            0.53Weighted
                average shares used in per share
              calculation
                - basic
            
            
            7,460,709
            
            
            7,395,837
            
            
            7,450,112
            
            
            7,426,809Net
                income per common share - diluted
            
            $
            0.27
            
            $
            0.32
            
            $
            0.60
            
            $
            0.52Weighted
                average shares used in per share
              calculation - diluted
            
            
            7,735,525
            
            
            7,649,434
            
            
            7,718,489
            
            
            7,615,156





See
      accompanying notes to Unaudited Condensed Consolidated Financial
      Statements.


**2**


**Williams
      Controls, Inc.**


**Condensed
      Consolidated Statements of Cash Flows**


**(Dollars
      in thousands)**


**(Unaudited)**








**Six
                Month Period**
              **Ended
                March 31,****2007**
            
            **2006**Cash
                flows from operating activities:Net
                income
            
            $
            4,597
            
            $
            3,965Adjustments
                to reconcile net income to net cash provided by
              operating
                activities:Depreciation
                and amortization
            
            
            971
            
            
            614Deferred
                income
                taxes
            
            
            (120
            )
            
            760Stock
                based compensation
            
            
            252
            
            
            223(Gain)
                loss from disposal of fixed assets
            
            
            (1
            )
            
            4Changes in operating assets and liabilitiesReceivables,
                net
            
            
            437
            
            
            (1,186
            )Inventories
            
            
            (538
            )
            
            (1,371
            )Accounts
                payable and accrued expenses
            
            
            (2,377
            )
            
            (461
            )Other
            
            
            (682
            )
            
            (592
            )Net
                cash provided by operating activities
            
            
            2,539
            
            
            1,956Cash
                flows from investing activities:Purchases
                of
                property, plant and equipment
            
            
            (1,269
            )
            
            (1,195
            )Net
                cash used in investing activities
            
            
            (1,269
            )
            
            (1,195
            )Cash
                flows from financing activities:Net
                borrowings on revolving loan facility
            
            
            -
            
            
            1,512Payments
                of
                debt and capital lease obligations
            
            
            (2,468
            )
            
            (3,666
            )Repurchase
                of
                common stock
            
            
            -
            
            
            (3,200
            )Net
                proceeds from exercise of stock options
            
            
            179
            
            
            118Net cash used in financing activities
            
            
            (2,289
            )
            
            (5,236
            )Net decrease in cash and cash equivalents
            
            
            (1,019
            )
            
            (4,475
            )Cash and cash equivalents at beginning of period
            
            
            2,530
            
            
            5,052Cash and cash equivalents at end of period
            
            $
            1,511
            
            $
            577Supplemental disclosure of cash flow information:Interest
                paid
            
            $
            391
            
            $
            547Income
                taxes paid
            
            $
            1,925
            
            $
            1,352





See
      accompanying notes to Unaudited Condensed Consolidated Financial
      Statements.


**3**


**Williams
      Controls, Inc.**


**Notes
      to Condensed Consolidated Financial Statements**


**Three
      and Six month periods ended March 31, 2007 and 2006**


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


**(Unaudited)**





**Note
      1. Organization**





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





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





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





**Note
      2. Basis of Presentation**





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





Certain
      information and footnote disclosures made in the last Annual Report on Form
      10-K
      have been condensed or omitted for the interim consolidated statements. Certain
      costs are estimated for the full year and allocated to interim periods based
      on
      activity associated with the interim period. Accordingly, such costs are subject
      to year-end adjustment. In the opinion of management, when the interim
      consolidated statements are read in conjunction with the September 30, 2006
      annual report on Form 10-K, the disclosures are adequate to make the information
      presented not misleading. The interim consolidated financial statements include
      the accounts of the Company and its subsidiaries. All significant intercompany
      accounts and transactions have been eliminated.





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





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.





At
      the
      March 2, 2006 Annual Meeting of stockholders, the stockholders of the Company
      approved a one-for-six reverse stock split for each share of common stock
      outstanding on January 27, 2006. The Company’s share and per share amounts of
      common stock reflect the effect of the one-for-six reverse stock split for
      all
      periods presented. The reverse split was effective March 16, 2006.





**Note
      3. Realignment of Operations**





During
      the second quarter of fiscal year 2006, the Company announced a plan for
      realignment of its Portland, Oregon manufacturing operations as part of ongoing
      efforts to focus on its core product competencies and improve its global
      competitiveness.




**4**


The
      realignment plan consists of outsourcing all of the Company’s die casting and
      machining operations to high-quality suppliers, primarily in Asia, and
      relocating of the Company’s assembly operations for the majority of its
      pneumatic products to its manufacturing facility in Suzhou, China. In
      conjunction with the realignment, the Company expects to eliminate approximately
      47 hourly and 2 salaried positions from its Portland, Oregon headquarters during
      fiscal 2007. As part of this realignment plan, the Company will incur a one-time
      termination benefit with those employees affected by the realignment. In
      accordance with Statement of Financial Accounting Standards (“SFAS”) No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities” and related
      guidance, a one-time benefit arrangement must meet certain criteria in order
      for
      a Company to recognize a liability for such one-time benefits. The realignment
      plan must establish the terms of the benefit arrangement, including the benefits
      that employees will receive upon termination, in sufficient detail to enable
      employees to determine the type and amount of benefits they will receive if
      they
      are involuntarily terminated. That determination was reached when the Company
      began negotiations over the effects of the realignment related workforce
      reductions with the United Automobile Workers of America (UAW) during the third
      quarter of fiscal 2006, at which time an estimated liability for anticipated
      termination costs began to be recorded. The Company reached an agreement with
      the UAW regarding the effects of the realignment associated workforce reduction
      on April 6, 2007.





The
      Company's preliminary estimates of the total costs of the realignment are in
      the
      range of $1.5 million and include estimates for costs related to hourly and
      salaried termination benefits of $590; supplier and parts qualification of
      $100;
      refurbishment of tools of $150; accelerated depreciation on certain assets
      of
      $240; and general administrative and other costs of $400. Certain of these
      costs
      are being classified in financial statement line items other than realignment
      of
      operations expense. The Company recorded realignment expenses of $257 and $433,
      respectively, for both the three and six month periods ended March 31, 2007,
      which were recorded in operating expenses in the accompanying condensed
      consolidated statements of operations. For the three and six month periods
      ended
      March 31, 2006, the Company recorded realignment expenses of $65 and $124,
      respectively, which were recorded in operating expenses in the accompanying
      condensed consolidated statements of operations. Following is a reconciliation
      of the changes in the Company’s liability related to the employee termination
      benefits during fiscal 2007. No accrued employee termination benefit was
      recorded in the first six months of fiscal 2006.





**Three
                month period ended**
              **March
                31, 2007**
            
            **Six
                month period ended**
              **March
                31, 2007**Balance
                at beginning of period
            
            $
            331
            
            $
            226Payments
            
            
            -
            
            
            -Additional
                accruals
            
            
            151
            
            
            256Balance
                at end of period
            
            $
            482
            
            $
            482





**Note
      4. Accounting for Stock Based Compensation**





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





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





**5**


The
      Company currently has two qualified stock option plans. The Restated 1993 Stock
      Option Plan (the “1993 Plan”) reserves an aggregate of 750,000 shares of the
      Company’s common stock for the issuance of stock options, which may be granted
      to employees, officers and directors of and consultants to the Company. Under
      the terms of the 1993 Plan, the Company may grant “incentive stock options” or
“non-qualified options” with an exercise price of not less than the fair market
      value on the date of grant. Options granted under the 1993 Plan have a vesting
      schedule, which is typically five years, determined by the Compensation
      Committee of the Board of Directors and expire ten years after the date of
      grant. The non-employee Director Plan (the “1995 Plan”) reserves an aggregate of
      66,666 shares of the Company’s common stock for the issuance of stock options,
      which may be granted to non-employee directors of the Company. Under 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 stockholders’ meeting each year, exercisable for 10 years after the date
      of the grant. These options are exercisable as to 25% of the shares thereby
      on
      the date of grant and as to an additional 25%, cumulatively on the first, second
      and third anniversaries of the date of grant.





As
      of
      March 31, 2007, there was $1,619 of total unrecognized compensation costs
      related to nonvested stock options. That cost is expected to be recognized
      over
      a weighted average period of 3.6 years. For the three and six month periods
      ended March 31, 2007, the Company’s total stock-based compensation expense was
      $139 ($122 net of tax) and $252 ($219 net of tax), respectively. For the three
      month period ended March 31, 2007, stock-based compensation expense was recorded
      in cost of sales and operating expenses in the amounts of $11 and $128,
      respectively, in the accompanying consolidated statement of operations. For
      the
      six month period ended March 31, 2007, stock-based compensation expense was
      recorded in cost of sales and operating expenses in the amounts of $26 and
      $226,
      respectively. For the three and six month periods ended March 31, 2006, the
      Company’s total stock-based compensation expense was $119 ($102 net of tax) and
      $223 ($194 net of tax), respectively. For the three month period ended March
      31,
      2006, stock-based compensation expense was recorded in cost of sales and
      operating expenses in the amounts of $12 and $107, respectively, in the
      accompanying consolidated statement of operations. For the six month period
      ended March 31, 2006, stock-based compensation expense was recorded in cost
      of
      sales and operating expenses in the amounts of $23 and $200,
      respectively.





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 six month periods ended
      March 31, 2007 and 2006.





**Three
                Month Period**
              **Ended
                March 31,**
            
            **Six
                Month Period**
              **Ended
                March 31,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Risk-free
                interest rate
            
            4.53%
            
            4.61%
            
            4.55%
            
            4.57%Expected
                dividend yield
            
            0%
            
            0%
            
            0%
            
            0%Expected
                term
            
            6.3
                years
            
            6.1
                years
            
            6.4
                years
            
            6.3
                yearsExpected
                volatility
            
            82%
            
            89%
            
            84%
            
            88%





The
      Company uses the US Treasury (constant maturity) interest rate on the date
      of
      grant as the risk-free interest rate. The expected term of options granted
      represents the weighted average period the stock options are expected to remain
      outstanding and is calculated using the simplified method under SAB 107, which
      expresses the view of the SEC Staff regarding interaction between SFAS No.
      123R
      and certain SEC rules and regulations and provides the Staff’s views regarding
      the valuation of share-based payment arrangements for public companies. Expected
      volatilities are based on the historical volatility of the Company’s common
      stock.





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





**Shares**
            
            **Weighted
                Average Exercise Price**Outstanding
                at September 30, 2006
            
            586,255
            
            $
            5.85Granted
            
            69,064
            
            
            16.41Exercised
            
            (36,474)
            
            
            4.92Forfeited
            
            (17,767)
            
            
            7.03Outstanding
                at March 31, 2007
            
            601,078
            
            
            7.09Exercisable
                at March 31, 2007
            
            308,173
            
            $
            5.98






**6**


At
      March
      31, 2007, the weighted average remaining contractual term of options outstanding
      and options exercisable was 7.0 years and 6.1 years, respectively.





The
      aggregate intrinsic value of options outstanding and options exercisable at
      March 31, 2007 was $6,140 and $3,481, respectively (the intrinsic value of
      a
      stock option is the amount by which the market value of the underlying stock
      exceeds the exercise price of the option). The aggregate intrinsic value of
      options outstanding and options exercisable at March 31, 2006 was $4,576 and
      $1,895, respectively. The weighted average grant date fair value of stock
      options granted during the three month periods ended March 31, 2007 and 2006
      was
      $13.10 and $9.84 per share, respectively. The weighted average grant date fair
      value of stock options granted during the six month periods ended March 31,
      2007
      and 2006 was $12.18 and $8.22 per share, respectively. The intrinsic value
      of
      all stock options exercised during the three and six month periods ended March
      31, 2007 was $303 and $411, respectively. The intrinsic value of all stock
      options exercised during the three and six month periods ended March 31, 2006
      was $221 and $239, respectively.





**Note
      5. Comprehensive Income**





SFAS
      No.
      130, “Reporting Comprehensive Income," requires companies to report a measure of
      all changes in equity except those resulting from investments by owners and
      distributions to owners. Total comprehensive income for the three month periods
      ended March 31, 2007 and 2006 was $2,066 and $2,443, respectively, and for
      the
      six month periods ended March 31, 2007 and 2006 was $4,621 and $3,971,
      respectively, and consisted of net income and foreign currency translation
      adjustments. As of March 31, 2007, accumulated other comprehensive loss was
      $5,011 and consisted of accumulated benefit obligations in excess of the plan
      assets for both the hourly employees pension plan and the salaried employees
      pension plan and the effect of foreign currency translation
      adjustments.





**Note
      6. Earnings Per Share**





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





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





**Three
                Month Period Ended**
              **March
                31, 2007**
            
            **Three
                Month Period Ended**
              **March
                31, 2006**Income
            
            Shares
            
            Per
                Share Amount
            
            Income
            
            Shares
            
            Per
                Share AmountBasic
                EPS -
            
            $
            2,054
            
            
            7,460,709
            
            $
            0.28
            
            $
            2,438
            
            
            7,395,837
            
            $
            0.33Effect
                of dilutive securities -Stock
                options
            
            
            -
            
            
            274,816
            
            
            
            
            
            -
            
            
            253,597Diluted
                EPS -
            
            $
            2,054
            
            
            7,735,525
            
            $
            0.27
            
            $
            2,438
            
            
            7,649,434
            
            $
            0.32





**Six
                Month Period Ended**
              **March
                31, 2007**
            
            **Six
                Month Period Ended**
              **March
                31, 2006**Income
            
            Shares
            
            Per
                Share Amount
            
            Income
            
            Shares
            
            Per
                Share AmountBasic
                EPS -
            
            $
            4,597
            
            
            7,450,112
            
            $
            0.62
            
            $
            3,965
            
            
            7,426,809
            
            $
            0.53Effect
                of dilutive securities -Stock
                options
            
            
            -
            
            
            268,377
            
            
            
            
            
            -
            
            
            188,347Diluted
                EPS -
            
            $
            4,597
            
            
            7,718,489
            
            $
            0.60
            
            $
            3,965
            
            
            7,615,156
            
            $
            0.52






**7**


For
      the
      three and six month periods ended March 31, 2007, the Company had options
      covering 46,912 shares that were not considered in the diluted EPS calculation
      since they would have been antidilutive. For the three and six month periods
      ended March 31, 2006, the Company had options and warrants covering 49,365
      and
      69,987 shares, respectively, that were not considered in the diluted EPS
      calculation since they would have been antidilutive.





**Note
      7. Inventories**





Inventories
      consist of the following:




**March
                31,**
              **2007**
            
            **September
                30,**
              **2006**Raw
                materials
            
            $
            8,145
            
            $
            7,589Work
                in process
            
            
            131
            
            
            227Finished
                goods
            
            
            2,180
            
            
            2,102$
            10,456
            
            $
            9,918





**Note
      8. Patent License Agreements**





During
      fiscal 2003 the Company obtained a license agreement for use of an adjustable
      pedal design for product lines. This agreement is for a period of three years
      and is renewed annually if certain sales thresholds are met. Effective July
      2006, this agreement was extended for one year and will automatically be
      extended for another one year period if certain sales thresholds are met. The
      Company is obligated to make royalty payments based on the number of units
      it
      sells. During the three and six month periods ended March 31, 2007, the Company
      sold adjustable pedals and recorded an accrual for royalties related to these
      sales of $1 and $2, respectively. Additionally, the initial license payments
      of
      $200 that were capitalized will be amortized based on the projection of units
      sold over the next five years. Based on these projections, the Company
      anticipates amortizing four dollars for every adjustable pedal sold. During
      the
      three and six month periods ended March 31, 2007, the Company amortized
      approximately $1 and $2, respectively, related to the number of units sold.
      The
      Company has focused additional resources in the adjustable pedal market and
      expects sales of these products to continue to grow throughout the remainder
      of
      fiscal 2007 and beyond. During the second quarter of fiscal 2006, the Company
      sold its first adjustable pedals and recorded an accrual for royalties related
      to these sales of $1. During the same period, the Company amortized
      approximately $1 related to the number of units sold.





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





In
      fiscal
      2005, the Company entered into an agreement to license non-contacting Hall
      effect sensor technology. The Company is using this license to internally
      produce non-contacting sensors for use in its electronic throttle controls.
      The
      initial licensing fee of $140 was paid and capitalized during fiscal 2005.
      The
      Company amortizes this license fee over a five year period beginning once units
      are produced and sold. For the three and six month periods ended March 31,
      2007,
      the Company amortized $7 and $14, respectively, of this initial licensing fee.
      In addition, the Company will make royalty payments based on the number of
      units
      sold, which includes minimum yearly royalties beginning in year three of this
      agreement. As of March 31, 2007, the Company recorded royalty payments of $56
      related to units sold during fiscal 2007. The Company capitalized, as part
      of
      the license fee, $229 which is equal to the present value of the minimum royalty
      payment obligation. The Company will amortize the capitalized license fee once
      the Company begins selling units. This agreement is for a period of ten years
      and is renewed annually based on written mutual agreement. This agreement may
      be
      terminated by the licensor after four years if certain sales thresholds are
      not
      met.





**Note
      9. Settlement of Accounts Payable**





Included
      in the accompanying condensed consolidated balance sheet is approximately $204
      of old accounts payable related to closed insolvent subsidiaries of the Company.
      In accordance with SFAS No. 140 “Accounting for Transfers and Servicing of
      Financial Assets and Extinguishments of Liabilities”, a debtor can only relieve
      itself of a liability if it has been extinguished. Accordingly, a liability
      is
      considered extinguished if (a) the debtor pays the creditor and is relieved
      of
      its obligation for the liability or (b) the debtor is legally released from
      being the primary obligor under the liability, either judicially or by the
      creditor. During the three and six month periods ended March 31, 2007, the
      Company was judicially released from and reversed $251 and $840, respectively,
      of old accounts payable




**8**


related
      to closed insolvent subsidiaries of the Company resulting in a gain, which
      has
      been recorded in other (income) expense in the accompanying condensed
      consolidated statements of operations. During the three and six month periods
      ended March 31, 2006, the Company was judicially released from and reversed
      $164
      and $178, respectively. The Company expects to reverse amounts in future periods
      based on the recognition of the liabilities being judicially released in
      accordance with SFAS No. 140 of $49 remaining in fiscal 2007; $90 in fiscal
      2010; and $65 in fiscal 2011.





**Note
      10. Debt**





In
      September 2004, the Company entered into a $25,000 senior secured lending
      facility with Merrill Lynch, consisting of an $8,000 revolving loan facility
      and
      a $17,000 term loan. The loans are secured by substantially all the assets
      of
      the Company. Borrowings under the revolving loan facility are subject to a
      borrowing base equal to 85% of eligible accounts receivables and 60% of eligible
      inventories. Interest rates under the new agreement are based on the election
      of
      the Company of either a LIBOR rate or Prime rate. Under the LIBOR rate option,
      the revolving loan facility will bear interest at the LIBOR rate plus 3.75%
      per
      annum and borrowings under the term loan facility will bear interest at the
      LIBOR rate plus 4.25%. Under the Prime rate option, the revolving loan facility
      will bear interest at the Prime rate plus 2.75% per annum and the term loan
      facility will bear interest at the Prime rate plus 3.25%. Fees under the loan
      agreement include an unused line fee of .50% per annum on the unused portion
      of
      the revolving credit facility.





The
      Company is required to repay the term loan in equal quarterly scheduled payments
      which are computed to repay the loan by the end of the term. The Company is
      entitled to prepay the term loan, in whole or in part, in minimum amounts
      without penalty. Mandatory prepayments of the loans under the term loan are
      required in amounts equal to 75% of the Company’s excess cash flow, as defined
      in the agreement, for each fiscal year and 100% of (i) the insurance or
      condemnation proceeds received in connection with a casualty event, condemnation
      or other loss, less any proceeds reinvested by the Company up to $500 per fiscal
      year; (ii) the net proceeds from issuance of equity or debt securities and
      (iii)
      the net cash proceeds of asset sales or other dispositions subject to customary
      exceptions. The revolving loan facility expires on September 29, 2009, at which
      time all outstanding amounts under the revolving loan facility are due and
      payable. The Company is subject to certain quarterly and annual financial
      covenants. At March 31, 2007, the Company was in compliance with all of its
      financial covenants. During the first quarter of fiscal 2006, the Company
      repurchased $3,200 of its common stock from one investor as discussed in Note
      13. The Company obtained a required consent from Merrill Lynch to purchase
      the
      common stock and to include the repurchase payment in the calculation of excess
      cash flow for the year ended September 30, 2005. During the second quarter
      of
      fiscal 2006, the Company paid $2,074 related to the excess cash flow requirement
      for fiscal 2005 and the required quarterly scheduled principal payments were
      reduced from $850 to $712. During the second quarter of fiscal 2007, the Company
      paid an additional $1,149 related to the excess cash flow requirement of fiscal
      2006, and the prepayment reduced the Company’s future required quarterly
      scheduled payments from $712 to $607.





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





The
      Company had available under its revolving credit facility $8,000 at both March
      31, 2007 and September 30, 2006.





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





**March
                31, 2007**
            
            **September
                30, 2006**Revolving
                credit facility due September 29, 2009, bearing interest at a variable
                rate.
            
            $
            -
            
            $
            -Term
                loan due September 29, 2009, balance bearing
              interest
                at a variable rate, (9.7% at March 31, 2007)
            
            
            6,072
            
            
            8,5406,072
            
            
            8,540Less
                current portion
            
            
            (2,429
            )
            
            (3,996
            )$
            3,643
            
            $
            4,544




**9**


**Note
      11. Product Warranties**





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





**Three
                month periods ended**
            
            **Six
                month periods ended****March
                31, 2007**
            
            **March
                31, 2006**
            
            **March
                31, 2007**
            
            **March
                31, 2006**Balance
                at beginning of period
            
            $
            1,834
            
            $
            1,811
            
            $
            1,720
            
            $
            1,656Payments
            
            
            (133
            )
            
            (306
            )
            
            (240
            )
            
            (485
            )Additional
                accruals
            
            
            198
            
            
            252
            
            
            419
            
            
            586Accrual
                adjustments
            
            
            239
            
            
            (184
            )
            
            239
            
            
            (184
            )Balance
                at end of period
            
            $
            2,138
            
            $
            1,573
            
            $
            2,138
            
            $
            1,573





During
      the second quarter of fiscal 2007, the Company recorded an additional warranty
      liability of $239 related to warranty claims with one customer. The Company
      reviewed its assumptions for its warranty liability with this one customer,
      which covers a period in excess of one year, and determined an additional
      liability was required. This additional liability has been recorded in cost
      of
      sales in the accompanying condensed consolidated statement of
      operations.





In
      the
      second quarter of fiscal 2006, the Company settled certain warranty claims
      covering a period in excess of one year for less than was anticipated in the
      Company’s liability assumptions, which were based on historical return rates and
      prior settlements. Based on this, the Company reduced its warranty liability
      during the second quarter of fiscal 2006 by $184, which has been reflected
      in
      cost of sales in the accompanying condensed consolidated statement of
      operations.





Included
      in the warranty liability at March 31, 2007 and March 31, 2006 are warranty
      liabilities associated with our former passenger car and light truck product
      lines, which were sold on September 30, 2003. The Company recorded a $400
      warranty liability during 2003 related to products sold from our passenger
      car
      and light truck product lines in fiscal 2003. The Company’s obligation for
      products sold by these product lines relates only to products sold prior to
      September 30, 2003. The items related to this obligation remain covered under
      warranty as of March 31, 2007.




**Note
      12. Pension Plans and Post Retirement Benefits**





The
      Company maintains two pension plans, an hourly employee plan and a salaried
      employee plan. The hourly plan covers certain of the Company’s union employees.
      The salaried plan covers certain salaried employees. Modifications made to
      the
      salaried plan in 2003 limit participation to those eligible employees in the
      plan at the time of modification and limit the benefits under the plan to those
      earned to that date. Annual net periodic pension costs under the plans are
      determined on an actuarial basis. The Company’s policy is to fund these costs
      accrued over 15 years and obligations arising due to plan amendments over the
      period benefited. The assets and liabilities are adjusted annually based on
      actuarial results. Disclosures regarding the components of net periodic benefit
      cost and contributions of pension plans are required for interim financial
      statements and are included below.





**10**
 
  ***Components
          of Net Periodic Benefit Cost:***


**Salaried
                Employees Plan**
            
            **Hourly
                Employees Plan****Three
                Month Period Ended**
              **March
                31,**
            
            **Three
                Month Period Ended**
              **March
                31,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Service
                cost
            
            $
            -
            
            $
            -
            
            $
            29
            
            $
            36Interest
                cost
            
            
            73
            
            
            69
            
            
            112
            
            
            103Expected
                return on plan assets
            
            
            (68)
            
            
            (63)
            
            
            (100)
            
            
            (93)Amortization
                of prior service cost
            
            
            -
            
            
            -
            
            
            12
            
            
            13Amortization
                of loss
            
            
            23
            
            
            29
            
            
            62
            
            
            86Net
                periodic benefit cost
            
            $
            28
            
            $
            35
            
            $
            115
            
            $
            145





**Salaried
                Employees Plan**
            
            **Hourly
                Employees Plan****Six
                Month Period Ended**
              **March
                31,**
            
            **Six
                Month Period Ended**
              **March
                31,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Service
                cost
            
            $
            -
            
            $
            -
            
            $
            58
            
            $
            72Interest
                cost
            
            
            146
            
            
            138
            
            
            224
            
            
            206Expected
                return on plan assets
            
            
            (136)
            
            
            (126)
            
            
            (200)
            
            
            (186)Amortization
                of prior service cost
            
            
            -
            
            
            -
            
            
            24
            
            
            26Amortization
                of loss
            
            
            46
            
            
            58
            
            
            124
            
            
            172Net
                periodic benefit cost
            
            $
            56
            
            $
            70
            
            $
            230
            
            $
            290





The
      Company expects total contributions to its pension plans in fiscal 2007 to
      be
      $1,634. As of March 31, 2007, the Company has made contributions of $612. As
      a
      result of the realignment of operations discussed in Note 3, there will be
      a
      curtailment of certain pension obligations that will result in a gain when
      employees terminate.





The
      Company also provides health care and life insurance benefits for certain of
      its
      retired employees. These benefits are subject to deductibles, co-payment
      provisions and other limitations. Disclosures regarding the components of net
      periodic benefit cost and contributions of the Company’s post-retirement plan
      are required for interim financial statements and are included below. The
      Company did not make any contributions to the post-retirement plan for the
      three
      and six month periods ended March 31, 2007 and 2006.




***Components
        of Net Periodic Benefit Cost:***


**Post-Retirement
                Plan****Three
                Month Period Ended**
              **March
                31,**
            
            **Six
                Month Period Ended**
              **March
                31,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Service
                cost
            
            $
            2
            
            $
            1
            
            $
            4
            
            $
            2Interest
                cost
            
            
            55
            
            
            50
            
            
            110
            
            
            100Amortization
            
            
            (6)
            
            
            (7)
            
            
            (12)
            
            
            (14)Net
                periodic benefit cost
            
            $
            51
            
            $
            44
            
            $
            102
            
            $
            88




**Note
      13. Related Parties**





During
      the first quarter of fiscal 2006, American Industrial Partners Capital Fund
      III,
      L.P. (“AIP”) sold all of its shares of stock in the Company to three purchasers:
      (i) the Company; (ii) Dolphin Offshore Partners L.P. (“Dolphin”), an affiliate
      of Dolphin Advisors, LLC (“Dolphin Advisors”); and (iii) an investment group
      arranged by Taglich Brothers, Inc. The Company repurchased 416,666 shares at
      $7.68 per share. Dolphin purchased 355,420 shares at $7.68 per share. The
      investment group arranged by Taglich Brothers, Inc. purchased 355,420 shares
      also at $7.68 per share. Peter E. Salas, a member of the Board of Directors
      of
      the Company, is a member of Dolphin Advisors. Douglas E. Hailey, also a member
      of the Board of Directors of the Company, is the Vice President of the
      Investment Banking Division of Taglich Brothers, Inc.




Effective
      with the 2004 recapitalization transaction, the Company entered into an Amended
      and Restated Management Services Agreement (the “Agreement”) with American
      Industrial Partners (“AIP Advisor”) and Dolphin Advisors. AIP Advisor is an
      affiliate of AIP, and Dolphin Advisors is an affiliate of Dolphin Offshore
      Partners, L.P. and Dolphin Direct Equity Partners, L.P.




**11**


Under
      the
      restated management services agreement, the Company was required to pay annually
      $80 to AIP Advisor and $120 to Dolphin Advisors. The Company’s obligation to pay
      the annual fee to AIP Advisor or Dolphin Advisors was to terminate automatically
      as of August 1, 2007. In conjunction with AIP’s sale of stock, the obligation
      under the agreement to pay the management fee to AIP Advisor terminated as
      of
      October 1, 2005. Additionally, the Agreement with respect to Dolphin Advisors
      was amended to reduce the annual management fee to $60 and to extend the
      Agreement one year to August 1, 2008.





During
      the first quarter of fiscal 2007, the Company paid bonuses related to fiscal
      year 2006. As part of the employment agreement with Patrick W. Cavanagh,
      President and Chief Executive Officer, the Company has the option to pay Mr.
      Cavanagh a portion of his bonus in shares of common stock of the Company as
      approved by the board of directors. The Company paid $89 of Mr. Cavanagh’s bonus
      related to fiscal year 2006 in shares of common stock, consisting of 6,401
      shares at a price of $13.91 per share. During the first quarter of fiscal 2006,
      the Company paid $60 of Mr. Cavanagh’s bonus related to fiscal year 2005 in
      shares of common stock, consisting of 6,223 shares at a price of $9.66 per
      share.





**Note
      14. Segment Information**





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





**Three
                Month Periods Ended**
              **March
                31,**
            
            **Six
                Month Periods Ended**
              **March
                31,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Revenue
                - External Customers:United
                States
            
            $
            18,184
            
            $
            18,703
            
            $
            36,486
            
            $
            34,835China
            
            
            125
            
            
            93
            
            
            265
            
            
            93$
            18,309
            
            $
            18,796
            
            $
            36,751
            
            $
            34,928Revenue
                - Intersegments:United
                States
            
            $
            861
            
            $
            644
            
            $
            1,344
            
            $
            1,171China
            
            
            1,786
            
            
            667
            
            
            4,218
            
            
            1,084Other
            
            
            153
            
            
            78
            
            
            269
            
            
            142Eliminations
            
            
            (2,800
            )
            
            (1,389
            )
            
            (5,831
            )
            
            (2,397
            )$
            -
            
            $
            -
            
            $
            -
            
            $
            -Income
                before income taxes:United
                States
            
            $
            3,253
            
            $
            3,931
            
            $
            7,057
            
            $
            6,552China
            
            
            (153
            )
            
            (34
            )
            
            41
            
            
            (157
            )Other
            
            
            61
            
            
            (135
            )
            
            (63
            )
            
            (229
            )$
            3,161
            
            $
            3,762
            
            $
            7,035
            
            $
            6,166





**Note
      15. Contingencies**





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





The
      soil
      and groundwater at our Portland, Oregon facility contains certain contaminants,
      which were deposited from approximately 1968 through 1995. Some of this
      contamination has migrated offsite to a neighboring property. The Company has
      retained an environmental consulting firm to investigate the extent of the
      contamination and to determine what, if any, remediation will be required and
      the associated costs. During the third quarter of fiscal 2004, the Company
      entered into the Oregon Department of Environmental Quality’s voluntary clean-up
      program and during fiscal 2004 the Company established a liability of $950
      for
      this matter. As of March 31, 2007, this liability has been reduced to $546
      to
      reflect expenditures made to complete portions of the investigation and is
      recorded in accrued expenses in the accompanying condensed consolidated balance
      sheet. The Company has made contribution claims for investigation and
      remediation costs against both prior operators of the property and a former
      owner of the property under the Federal Superfund Act and the Oregon Cleanup
      Law.




**12**


The
      Company believes it also has a contractual right to indemnification from one
      of
      the prior operators of the property for a portion of the investigation and
      remediation costs and has notified the prior operator of this indemnity claim.
      The Company is exploring the possibility of cooperative settlement with both
      prior operators and the prior owner of the property. The Company intends to
      pursue legal action against the prior owner and these prior operators if
      settlements cannot be reached in a reasonable time. During the second quarter
      of
      fiscal 2006, Dana Corporation (“Dana”), a prior owner and operator from whom the
      Company has a contractual right to indemnification, filed a Chapter 11
      bankruptcy petition in the United States Bankruptcy Court for the Southern
      District of New York. The Company has filed a proof of Claim against Dana with
      the Court for the entire cost of the investigation and clean-up. At this time
      it
      is uncertain how this bankruptcy petition will impact the ultimate recovery
      from
      Dana, however, the Company has not previously reflected any potential recovery
      in its consolidated financial statements. The Company believes that even with
      a
      resolution of the claims against the prior operators and owner of the property,
      the Company will be liable for some portion of the ultimate costs.




On
      October 1, 2004, the Company was named as a co-defendant in a product liability
      case ( Cuesta
      v. Ford, et al, District Court for Bryant, Oklahoma ).
      During
      the second quarter of fiscal 2007, the Oklahoma district court granted the
      plaintiffs class action status. Both the Company and Ford are appealing this
      decision. The complaint seeks an unspecified amount of damages on behalf of
      the
      class. The Company continues to believe the claims to be without merit and
      intends to continue to vigorously defend against this action. There can be
      no
      assurance, however, that the outcome of the lawsuit will be favorable to the
      Company or will not have a material adverse effect on the Company’s business,
      consolidated financial condition and results of operations. The Company cannot
      reasonably estimate the possible loss or range of loss at this time. In
      addition, the Company has incurred and will continue to incur substantial
      litigation expenses in defending this litigation.





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




**13**


**Williams
      Controls, Inc.**





**Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of
      Operations**


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





This
      section summarizes the significant factors affecting our consolidated results
      of
      operations, financial condition and liquidity position for the three and six
      month periods ended March 31, 2007 and 2006. This section should be read in
      conjunction with our condensed consolidated financial statements and related
      notes appearing elsewhere in this document.





**Forward-Looking
      Statements**





Certain
      statements contained in this section, in Quantitative and Qualitative Disclosure
      About Market Risk, and elsewhere in this report are intended to be covered
      by
      the safe harbor provided for under Section 27A of the Securities Act of 1933,
      as
      amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
      Our
      forward-looking statements include our current expectations and projections
      about future results, development of new products, the ability to increase
      distribution of our products, performance and financial condition of the
      Company, results of litigation, prospects and opportunities. We have tried
      to
      identify these forward-looking statements by using words such as “may,” “will,”
“expect,” “anticipate,” “believe,” “intend,” “feel,” “plan,” “estimate” and
      similar expressions. These forward-looking statements are based on information
      currently available to us and are expressed in good faith and believed to have
      a
      reasonable basis. However, our forward-looking statements are subject to a
      number of risks, uncertainties and other factors that could cause our actual
      results, performance, prospects or opportunities to differ materially from
      those
      expressed in, or implied by, these forward-looking statements.





These
      risks, uncertainties and other factors include, but are not limited to, those
      set forth under Part II, Item 1A - “Risk Factors” in this report and Item 1 -
“Business” and Item 1A - “Risk Factors” in our annual report filed on Form 10-K
      for the year ended September 30, 2006. Given these risks and uncertainties,
      readers are cautioned not to place undue reliance on our forward-looking
      statements. All subsequent written and oral forward-looking statements
      attributable to the Company or to persons acting on our behalf are expressly
      qualified in their entirety by these cautionary statements. The forward-looking
      statements are made as of the date hereof, and except as required by law, we
      do
      not intend to update or review any forward-looking statements or to update
      the
      reasons why the actual results could differ materially from those projected
      in
      the forward-looking statements, whether as a result of new information, future
      events or otherwise.





**Overview**





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





As
      we
      move forward in fiscal 2007 and beyond, we will continue to work closely with
      our existing and potential customers to design and develop new products and
      adapt existing products to new applications, and to improve the performance,
      reliability and cost-effectiveness of our products.





**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.




**14**


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.





***Warranty***





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





***Legal***





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





***Environmental***





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




***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.




**15**


Actual
      results in any given year will often differ from actuarial assumptions because
      of economic and other factors.





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





***Stock-Based
      Compensation Expense***





As
      of
      October 1, 2006, we adopted SFAS No. 123R, which requires us to measure
      compensation cost for all outstanding unvested share-based awards, and awards
      we
      grant, modify, repurchase or cancel in the future, at fair value and recognize
      compensation over the requisite service period for awards expected to vest.
      The
      estimation of stock awards that will ultimately vest requires judgment, and
      to
      the extent actual results differ from our estimates, such amounts will be
      recorded as a cumulative adjustment in the period estimates are revised. We
      consider many factors when calculating fair value including estimated stock
      price volatility, expected term and expected forfeitures. Factors considered
      in
      estimating forfeitures include the types of awards, employee class, and
      historical experience. Actual results may differ substantially from these
      estimates. We recorded $139 and $252 of stock-based compensation expense for
      the
      three and six month periods ended March 31, 2007. Stock-based compensation
      expense recorded in the three month period ended March 31, 2007 included $11
      in
      cost of sales, $2 in research and development, $14 in selling and the remaining
      $112 in administration expense. Stock-based compensation expense recorded in
      the
      six month period ended March 31, 2007 included $26 in cost of sales, $11 in
      research and development, $28 in selling and the remaining $187 in
      administration expense. For the three and six month periods ended March 31,
      2006, we recorded stock-based compensation expense of $119 and $223,
      respectively. Stock-based compensation expense recorded in the three month
      period ended March 31, 2006 included $12 in cost of sales, $7 in research and
      development, $12 in selling and the remaining $88 in administration expense.
      Stock-based compensation expense recorded in the six month period ended March
      31, 2006 included $23 in cost of sales, $13 in research and development, $24
      in
      selling and the remaining $163 in administration expense.





***Income
      Taxes***





For
      each
      jurisdiction that we operate in, we are required to estimate our annual
      effective tax rate together with assessing temporary differences resulting
      from
      differing treatment of items for tax and accounting purposes. These differences
      result in deferred tax assets and liabilities, which are included in our
      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 deferred tax assets.





**Results
      of Operations**







**Financial
                Summary**
              **(Dollars
                in Thousands)****Three
                Month Period**
              **Ended
                March 31,**
            
            **Six
                Month Period**
              **Ended
                March 31,****2007**
            
            **2006**
            
            **%
                Change**
            
            **2007**
            
            **2006**
            
            **%
                Change**Net
                sales
            
            $
            18,309
            
            $
            18,796
            
            
            (2.6%)
            
            $
            36,751
            
            $
            34,928
            
            
            5.2%Cost
                of sales
            
            
            12,174
            
            
            11,995
            
            
            1.5%
            
            
            24,325
            
            
            22,782
            
            
            6.8%Gross
                profit
            
            
            6,135
            
            
            6,801
            
            
            (9.8%)
            
            
            12,426
            
            
            12,146
            
            
            2.3%Research
                and development
            
            
            838
            
            
            814
            
            
            2.9%
            
            
            1,668
            
            
            1,662
            
            
            0.4%Selling
            
            
            572
            
            
            531
            
            
            7.7%
            
            
            1,092
            
            
            979
            
            
            11.5%




**16**




Administration
            
            
            1,382
            
            
            1,486
            
            
            (7.0%)
            
            
            2,655
            
            
            2,789
            
            
            (4.8%)Realignment
                of operations
            
            
            257
            
            
            65
            
            
            295.4%
            
            
            433
            
            
            124
            
            
            249.2%Operating
                income
            
            $
            3,086
            
            $
            3,905
            
            
            (21.0%)
            
            
            6,578
            
            $
            6,592
            
            
            (0.2%)As
                a percentage of net sales:Cost
                of sales
            
            
            66.5%
            
            
            63.8%
            
            
            
            
            
            66.2%
            
            
            65.2%Gross
                margin
            
            
            33.5%
            
            
            36.2%
            
            
            
            
            
            33.8%
            
            
            34.8%Research
                and development
            
            
            4.6%
            
            
            4.3%
            
            
            
            
            
            4.5%
            
            
            4.8%Selling
            
            
            3.1%
            
            
            2.8%
            
            
            
            
            
            3.0%
            
            
            2.8%Administration
            
            
            7.5%
            
            
            7.9%
            
            
            
            
            
            7.2%
            
            
            8.0%Realignment
                of operations
            
            
            1.4%
            
            
            0.3%
            
            
            
            
            
            1.2%
            
            
            0.4%Operating
                income
            
            
            16.9%
            
            
            20.8%
            
            
            
            
            
            17.9%
            
            
            18.9%






**Comparative - Three month
              periods ended March 31, 2007 and
              2006**




**Percent
                Change****For
                the Three Month Period Ended March 31:**
            
            **2007**
            
            **2006**
            
            **2007
                to 2006**Net
                sales
            
            $
            18,309
            
            $
            18,796
            
            
            (2.6%)





Net
      sales
      to our heavy truck, transit bus and off-road customers decreased $487 in the
      second quarter of fiscal 2007 compared to the second quarter of fiscal 2006,
      primarily due to an overall decrease in sales volumes of electronic throttle
      control systems, specifically in the North American and Asian markets. These
      decreases in net sales were partially offset by an 18% increase in sales volumes
      in Europe and an increase in sales of our pneumatic control systems. Net sales
      to our customers in Asia decreased approximately 25% over the prior year quarter
      and net sales in North America decreased 6%. Sales to our Asian customers can
      fluctuate from one quarter to the next; however, the Company does not believe
      the decline in this quarter is indicative of a long-term weakness in sales
      to
      Asia. We expect that electronic throttle control sales will increase or decrease
      in the future in line with changes in heavy truck and transit bus production
      volumes in the various geographic markets in which we serve and when new product
      lines are established; however, competitive pricing may continue to reduce
      per
      unit pricing. A change in emissions regulations in the United States effective
      January 1, 2007 had a negative impact on truck sales in North America during
      the
      second quarter of fiscal 2007, and therefore the sales of our products to heavy
      truck manufacturers in the United States. The published estimates of the
      anticipated decline vary widely, and range from a decline in heavy truck sales
      in North America of 25% to 50% of the total calendar year 2007 production
      volumes.





**Percent
                Change****For
                the Three Month Period Ended March 31:**
            
            **2007**
            
            **2006**
            
            **2007
                to 2006**Gross
                profit
            
            $
            6,135
            
            $
            6,801
            
            
            (9.8%)





Gross
      profit was $6,135, or 33.5% of net sales in the second quarter of 2007, a
      decrease of $666 compared to the gross profit of $6,801, or 36.2% of net sales,
      in the comparable fiscal 2006 period.





The
      decrease in gross profit in the second quarter of fiscal 2007 is partially
      volume driven as sales of our products were 2.6% lower than last year’s second
      quarter. Gross profit was also negatively impacted due to an increase in
      warranty liability of $239 during the three months ended March 31, 2007, as
      compared to a reduction in warranty liability of $184 during three months
      ended March 31, 2006, as noted in Note 11 to our unaudited condensed
      consolidated financial statements. Overhead expenses for the quarter ended
      March
      31, 2007 also increased over the prior year as a result of costs associated
      with
      our manufacturing facility in Suzhou, China.





**Percent
                Change****For
                the Three Month Period Ended March 31:**
            
            **2007**
            
            **2006**
            
            **2007
                to 2006**Research
                and development
            
            $
            838
            
            $
            814
            
            
            2.9%





Research
      and development activity for the second fiscal quarter of 2007 remained
      relatively constant when compared to the comparable period in 2006, increasing
      by $24. The Company’s research and development expenditures will fluctuate based
      on the products under development at any given point in time. Overall, we expect
      research and development expenses to increase slightly over fiscal 2006 levels
      due to additional new product design projects.




**17**




**Percent
                Change****For
                the Three Month Period Ended March 31:**
            
            **2007**
            
            **2006**
            
            **2007
                to 2006**Selling
            
            $
            572
            
            $
            531
            
            
            7.7%





Selling
      expenses increased $41 during the three month period ended March 31, 2007 as
      compared with the three month period ended March 31, 2006 mainly due to expanded
      selling and marketing efforts in the European and Asian markets implemented
      during mid fiscal 2006. We expect that overall our selling expenses will
      increase in fiscal 2007 as we incur a full year of expenses for the higher
      activity associated with our expanded sales efforts worldwide.




**Percent
                Change****For
                the Three Month Period Ended March 31:**
            
            **2007**
            
            **2006**
            
            **2007
                to 2006**Administration
            
            $
            1,382
            
            $
            1,486
            
            
            (7.0%)





Administration
      expenses for the three month period ended March 31, 2007 decreased $104 when
      compared with the same period in fiscal 2006. The decrease in administration
      expenses is primarily a result of a decrease in legal fees associated with
      the
      class action lawsuit discussed in Note 15 to our unaudited condensed
      consolidated financial statements offset by increased expenses associated with
      our China manufacturing facility. Administration expenses are expected to
      increase for fiscal 2007 as the Company will be required to prepare for
      compliance with all of the requirements of Section 404 of the Sarbanes-Oxley
      Act
      for the first time during fiscal 2007. Legal costs are also expected to increase
      to defend against the class action lawsuit noted above.





**Percent
                Change****For
                the Three Month Period Ended March 31:**
            
            **2007**
            
            **2006**
            
            **2007
                to 2006**Realignment
                of operations
            
            $
            257
            
            $
            65
            
            
            295.4%





The
      Company recorded expenses of $257 during the second quarter of fiscal 2007
      related to its realignment of operations as discussed in Note 3 of the unaudited
      condensed consolidated financial statements. The realignment of operations
      expense for the second quarter of fiscal 2007 increased $192 compared to the
      second quarter of fiscal 2006, primarily due to $151 in employee termination
      benefits being accrued during the second quarter of fiscal 2007.





**Percent
                Change****For
                the Three Month Period Ended March 31:**
            
            **2007**
            
            **2006**
            
            **2007
                to 2006**Interest
                income
            
            $
            (25
            )
            $
            (13
            )
            
            92.3%Interest
                expense
            
            $
            209
            
            $
            314
            
            
            (33.4%)





Interest
      expense decreased $105 in the second quarter of fiscal 2007 as compared to
      the
      second quarter of fiscal 2006, primarily due to the reduction of debt levels
      resulting from the 2006 excess cash flow payment of $1,149 made during the
      second quarter of fiscal 2007 as discussed in Note 10 to our unaudited condensed
      consolidated financial statements, and due to our regularly scheduled debt
      payments each quarter.





**Percent
                Change****For
                the Three Month Period Ended March 31:**
            
            **2007**
            
            **2006**
            
            **2007
                to 2006**Other
                income
            
            $
            (259
            )
            $
            (158
            )
            
            63.9%





The
      increase in other income is primarily due to recording a gain of $251 during
      the
      three months ended March 31, 2007 compared to a gain of $164 during the three
      months ended March 31, 2006, for the reversal of old accounts payable related
      to
      closed insolvent subsidiaries of the Company as discussed in Note 9 of the
      unaudited condensed consolidated financials statements.





**18**




**Percent
                Change****For
                the Three Month Period Ended March 31:**
            
            **2007**
            
            **2006**
            
            **2007
                to 2006**Income
                tax expense
            
            $
            1,107
            
            $
            1,324
            
            
            (16.4%)





Tax
      expense reflects an effective tax rate of 35.0% for the three month period
      ended
      March 31, 2007 compared to an effective tax rate of 35.2% for the comparable
      three month period in fiscal 2006.




**Comparative - Six month periods
              ended March 31, 2007 and 2006**




*NM
      =
      Not Meaningful*


**Percent
                Change****For
                the Six month Period Ended March 31:**
            
            **2007**
            
            **2006**
            
            **2007
                to 2006**Net
                sales
            
            $
            36,751
            
            $
            34,928
            
            
            5.2%





Net
      sales
      increased $1,823 in the first six months of fiscal 2007 compared to the first
      six months of fiscal 2006, primarily due to increased sales volumes of
      electronic throttle control systems, specifically in the North American, Asian
      and European markets, and to a lesser extent increases in sales of our pneumatic
      control systems. Net sales to our customers in Europe increased approximately
      22% over the prior year six months, whereas net sales in North America and
      Asia
      increased 1% and 12%, respectively. We expect that electronic throttle control
      sales will increase or decrease in the future in line with changes in heavy
      truck and transit bus production volumes in the various geographic markets
      in
      which we serve and when new product lines are established; however, competitive
      pricing may continue to reduce per unit pricing. A change in emissions
      regulations in the United States effective January 1, 2007 had a negative impact
      on truck sales in North America during the second quarter of fiscal 2007, and
      therefore the sales of our products to heavy truck manufacturers in the United
      States. The published estimates of the anticipated decline in heavy truck sales
      in North America vary widely, and range from a decline of 25% to 50% of the
      total calendar year 2007 production volumes.





**Percent
                Change****For
                the Six month Period Ended March 31:**
            
            **2007**
            
            **2006**
            
            **2007
                to 2006**Gross
                profit
            
            $
            12,426
            
            $
            12,146
            
            
            2.3%





Gross
      profit was $12,426, or 33.8% of net sales in the first six months of 2007,
      an
      increase of $280 compared to gross profit of $12,146, or 34.8% of net sales,
      in
      the comparable fiscal 2006 period.





The
      increase in gross profit in fiscal 2007 is primarily driven by a 5.2% increase
      in sales of electronic throttle and pneumatic control systems to heavy truck
      and
      transit bus customers offset by an by an increase in warranty liability of
      $239
      during the six months ended March 31, 2007, as compared to a reduction in
      warranty liability of $184 during the six months ended March 31, 2006, as noted
      in Note 11 to our unaudited condensed consolidated financial statements. Gross
      profit was also negatively impacted by overhead expenses increasing over the
      prior year as a result of costs associated with our manufacturing facility
      in
      Suzhou, China; however, as a percentage of net sales overhead expenses remained
      relatively unchanged between periods.





**Percent
                Change****For
                the Six month Period Ended March 31:**
            
            **2007**
            
            **2006**
            
            **2007
                to 2006**Research
                and development
            
            $
            1,668
            
            $
            1,662
            
            
            0.4%





Research
      and development expenses were relatively unchanged for the first six months
      of
      fiscal 2007 compared to the first six months of fiscal 2006. The Company’s
      research and development expenditures will fluctuate based on the products
      under
      development at any given point in time. Overall, we expect fiscal 2007 research
      and development expenses to slightly increase over fiscal 2006 levels due to
      additional new product design projects.





**19**




**Percent
                Change****For
                the Six month Period Ended March 31:**
            
            **2007**
            
            **2006**
            
            **2007
                to 2006**Selling
            
            $
            1,092
            
            $
            979
            
            
            11.5%





Selling
      expenses increased $113 for the six month period ended March 31, 2007 as
      compared with the six month period ended March 31, 2006 mainly due to expanded
      selling and marketing efforts in the European and Asian markets implemented
      during mid fiscal 2006. We expect that overall our selling expenses will
      increase in fiscal 2007 as we incur a full year of expenses for the higher
      activity associated with our expanded sales efforts worldwide.





**Percent
                Change****For
                the Six month Period Ended March 31:**
            
            **2007**
            
            **2006**
            
            **2007
                to 2006**Administration
            
            $
            2,655
            
            $
            2,789
            
            
            (4.8%)





Administration
      expenses for the first six months of fiscal 2007 decreased $134 as compared
      to
      the same period in fiscal 2006. The decrease in administration expenses is
      primarily a result of a decrease in legal fees associated with the class action
      lawsuit discussed in Note 15 to our unaudited condensed consolidated financial
      statements offset by increased expenses associated with our China manufacturing
      facility. Administration expenses are expected to increase for fiscal 2007
      as
      the Company will be required to prepare for compliance with all of the
      requirements of Section 404 of the Sarbanes-Oxley Act for the first time during
      fiscal 2007. Legal costs are also expected to increase to defend against the
      class action lawsuit noted above.





**Percent
                Change****For
                the Six month Period Ended March 31:**
            
            **2007**
            
            **2006**
            
            **2007
                to 2006**Realignment
                of operations
            
            $
            433
            
            $
            124
            
            
            249.2%





The
      Company recorded expenses of $433 during the first six months of fiscal 2007
      related to its realignment of operations as discussed in Note 3 of the unaudited
      condensed consolidated financial statements. The realignment of operations
      expense for the first six months of fiscal 2007 increased $309 compared to
      the
      first six months of fiscal 2006, primarily due to $256 in employee termination
      benefits being accrued during the first six months of fiscal 2007.





**Percent
                Change****For
                the Six month Period Ended March 31:**
            
            **2007**
            
            **2006**
            
            **2007
                to 2006**Interest
                income
            
            $
            (61
            )
            $
            (40
            )
            
            52.5%Interest
                expense
            
            $
            467
            
            $
            632
            
            
            (26.1%)





Interest
      expense decreased $165 in the first six months of fiscal 2007 as compared to
      the
      same period in fiscal 2006 due to reductions in debt levels, partially offset
      by
      higher overall interest rates. We expect interest expense to continue to
      decrease in fiscal 2007 when compared to fiscal 2006 due to the continued
      reduction of debt levels resulting from scheduled debt payments each quarter.





**Percent
                Change****For
                the Six month Period Ended March 31:**
            
            **2007**
            
            **2006**
            
            **2007
                to 2006**Other
                income
            
            $
            (863
            )
            $
            (166
            )
            
            *NM*





The
      increase in other income is primarily due to recording a gain of $840 during
      the
      six months ended March 31, 2007 compared to a gain of $178 during the six months
      ended March 31, 2006, for the reversal of old accounts payable related to closed
      insolvent subsidiaries of the Company as discussed in Note 9 of the unaudited
      condensed consolidated financials statements.





**Percent
                Change****For
                the Six month Period Ended March 31:**
            
            **2007**
            
            **2006**
            
            **2007
                to 2006**Income
                tax expense
            
            $
            2,438
            
            $
            2,201
            
            
            10.8%





Tax
      expense reflects an effective tax rate of 34.7% for the first six months of
      fiscal 2007 compared to an effective tax rate of 35.7% for the comparable period
      in fiscal 2006. In December 2006 the research credit for 2006 was reinstated
      by
      Congress and included in tax expense for the first six months of fiscal 2007
      was
      a research credit of $42 related to fiscal 2006.




**20**


The
      Company was in a net operating loss carry-forward position during fiscal 2005.
      We utilized the remainder of our federal operating loss carry-forwards in the
      first quarter of fiscal 2006.





**Financial
      Condition, Liquidity and Capital Resources**





Cash
      generated by operating activities was $2,539 for the first six months of fiscal
      2007, an increase of $583 from the cash generated by operating activities of
      $1,956 during the first six months of fiscal 2006. Net income plus non-cash
      charges for depreciation and stock based compensation contributed $5,820 in
      the
      first six months of fiscal 2007 and $4,802 in the first six months fiscal 2006.
      Additionally in first six months of fiscal 2007, cash from operations included
      a
      $120 change in deferred taxes related to recording the tax effect for
      nonqualified stock options. Cash from operations for the first six months of
      fiscal 2006 included a $760 utilization of a deferred tax provision.




Changes
      in working capital items used cash of $3,160 in the first six months of fiscal
      2007 and $3,610 in the first six months of 2006. Timing of collections on
      receivables and sales levels generated cash of $437 in the first six months
      of
      fiscal 2007 compared with an increase of $1,186 of receivables in the same
      period of fiscal 2006. Cash was used to increase inventory levels in the first
      six months of both fiscal 2006 and 2007 to facilitate switching of suppliers
      to
      lower cost suppliers, primarily in China, our realignment efforts and to support
      increasing operations in our Suzhou, China manufacturing facility. We expect
      that inventory levels should have reached their maximum levels at the end of
      the
      second quarter of fiscal 2007 and as supplier switching and the realignment
      are
      completed, inventory will decline later in fiscal 2007 to levels lower than
      at
      the end of fiscal 2006. Accounts payable and accrued expenses decreased in
      the
      first six months of fiscal 2007 and 2006 from seasonal payments of certain
      expenses. Additionally, during the first six months of fiscal 2007, the Company
      was judicially released from and wrote off $840 of old accounts payable, which
      is reflected as a reduction of accounts payable. Cash flows from operations
      for
      the six month period ended March 31, 2007 also included payments to our pension
      plans of $612. For the six months ended March 31, 2006, we contributed $457
      to
      our pension plans. We believe we will continue to generate positive cash from
      continuing operations due to our improved results of operations.





Cash
      used
      in investing activities was $1,269 for the six month period ended March 31,
      2007
      and was comprised solely of purchases of property, plant and equipment. For
      the
      six month period ended March 31, 2006, cash used in investing activities was
      $1,195 and was comprised solely of purchases of property, plant and equipment.
      We expect our cash use for investing activities to increase throughout the
      fiscal year as we continue to make purchases of capital equipment.





Cash
      used
      in financing activities was $2,289 for the six month period ended March 31,
      2007, compared to cash used in financing activities of $5,236 for the six month
      period ended March 31, 2006. The use of cash for financing activities for the
      first six months of fiscal 2007 primarily relates to the payment of $1,149
      related to the excess cash flow requirement of our loan agreement with Merrill
      Lynch and scheduled quarterly debt payments on our Merrill Lynch term loan.
      The
      use of cash for financing activities for the first six months of fiscal 2006
      primarily relates to the repurchase of common stock from AIP of $3,200,
      scheduled quarterly debt payments and a $2,074 excess cash flow payment related
      to our Merrill Lynch term loan





**Contractual
      Obligations as of March 31, 2007**





At
      March
      31, 2007, our contractual obligations consisted of bank debt, operating lease
      obligations, a service agreement and a license agreement. We do not have any
      material letters of credit, or debt guarantees outstanding at March 31, 2007.
      During the first quarter of fiscal 2007, we entered into a purchase commitment
      to purchase inventory from one vendor during the fiscal year totaling $1,504.
      Maturities of these contractual obligations consist of the
      following:





**21**




**Payments
                due by period****Total**
            
            **Less
                than 1 year**
            
            **1
                - 3**
              **years**
            
            **3
                - 5**
              **years**
            
            **More
                than 5 years**Term
                loan
            
            $
            6,072
            
            $
            2,429
            
            $
            3,643
            
            $
            -
            
            $
            -Operating
                leases
            
            
            1,179
            
            
            345
            
            
            834
            
            
            -
            
            
            -MMT
                license - minimum royalties
            
            
            365
            
            
            25
            
            
            140
            
            
            150
            
            
            50Management
                Services Agreement
            
            
            60
            
            
            60
            
            
            -
            
            
            -
            
            
            -$
            7,676
            
            $
            2,859
            
            $
            4,617
            
            $
            150
            
            $
            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. The Company has net obligations at March 31, 2007 related to its
      pension plans and post-retirement medical plan of $3,120 and $3,186,
      respectively. The Company funded $612 to its pension plans during the first
      six
      months of fiscal 2007 compared to $457 during the first six months of fiscal
      2006. We expect to make payments to our pension plans of $1,022 throughout
      the
      rest of fiscal 2007.





At
      March
      31, 2007, we had $8,000 available under our revolving credit facility with
      Merrill Lynch plus cash and cash equivalents of $1,511. We believe these
      resources, when combined with cash provided by operations, will be sufficient
      to
      meet our working capital needs on a short-term and long-term basis.





Included
      in the accompanying consolidated balance sheet is approximately $204 of accounts
      payable related to closed insolvent subsidiaries of the Company. In accordance
      with SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets
      and Extinguishments of Liabilities,” a debtor can only relieve itself of a
      liability if it has been extinguished. A liability is considered extinguished
      if
      (a) the debtor pays the creditor and is relieved of its obligation for the
      liability or (b) the debtor is legally released from being the primary obligor
      under the liability, either judicially or by the creditor. During the three
      and
      six month periods ended March 31, 2007, the Company was judicially released
      from
      and reversed $251 and $840, respectively, of old accounts payable related to
      closed insolvent subsidiaries of the Company resulting in a gain, which has
      been
      recorded in other (income) expense in the accompanying condensed consolidated
      statements of operations. During the three and six month periods ended March
      31,
      2006, the Company was judicially released from and reversed $164 and $178,
      respectively. The Company expects to reverse amounts in future periods based
      on
      the recognition of the liabilities being judicially released in accordance
      with
      SFAS No. 140 of $49 remaining in fiscal 2007; $90 in fiscal 2010; and $65 in
      fiscal 2011.





**Recently
      Issued Accounting Pronouncements**




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





In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans - an Amendment of FASB Statements
      No. 87, 88, 106 and 132R.” This statement requires an employer to recognize the
      overfunded or underfunded status of a defined benefit postretirement plan as
      an
      asset or liability in its statement of financial position and to recognize
      changes in that funded status in the year in which the changes occur through
      comprehensive income. This statement also requires an employer to measure the
      funded status of a plan as of the date of its year-end statement of financial
      position, with limited exceptions. This statement also modifies the definition
      of current and non-current liabilities for purposes of presentation in the
      statement of financial position. An employer is required to initially recognize
      the funded status of a defined benefit postretirement plan and to provide the
      required disclosures as of the end of the fiscal year ending after December
      15,
      2006 whereas the requirement to measure plan assets and benefit obligations
      as
      of the date of the employer’s fiscal year-end statement of financial position is
      effective for fiscal years ending after December 15, 2008. The Company is
      currently in the process of determining the effects of adopting this statement
      in its consolidated financial statements.





**22**


In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This
      statement defines fair value, establishes a framework for measuring fair value
      in generally accepted accounting principles, and expands disclosures about
      fair
      value measurements. SFAS No. 157 is effective for financial statements issued
      for fiscal years beginning after November 15, 2007, and interim periods within
      those fiscal years. The Company is currently in the process of determining
      the
      effects of adopting this statement in its consolidated financial statements.





In
      September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108,
“Quantifying Financial Misstatements,” which expresses the Staff’s views
      regarding the process of quantifying financial statement misstatements.
      Registrants are required to quantify the impact of correcting all misstatements,
      including both the carryover and reversing effects of prior year misstatements,
      on the current year financial statements. The financial statements would require
      adjustment when either approach results in quantifying a misstatement that
      is
      material, after considering all relevant quantitative and qualitative factors.
      SAB No. 108 is effective for financial statements covering the first fiscal
      year
      ending after November 15, 2006. The Company is currently in the process of
      determining the effects, if any, SAB No. 108 will have on the Company’s
      consolidated financial statements.





In
      June
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes” (“FIN 48”), an interpretation of SFAS No. 109, “Accounting for
      Income Taxes,” which clarifies the accounting uncertainty in income taxes
      recognized in the financial statements in accordance with SFAS No. 109. The
      interpretation prescribes a recognition threshold of more-likely-than-not and
      a
      measurement attribute on all tax positions taken or expected to be taken in
      a
      tax return in order to be recognized in the financial statements. FIN 48 is
      effective for fiscal years beginning after December 15, 2006. Accordingly,
      the
      Company will adopt FIN 48 on October 1, 2007, and the Company is currently
      assessing the impact FIN 48 will have on its financial statements.




**Item
      3. Quantitative and Qualitative Disclosures About Market Risk**





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





***Interest
      Rate Risk:***





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





§
            As
                of March 31, 2007, the outstanding balance on the term loan was $6,072
                and
                there was no balance on the revolving loan. The effective annual
                interest
                rate on the term loan was 9.7% as of March 31, 2007. The Company
                does not
                believe that a hypothetical 10% change in end of the period interest
                rates
                or changes in future interest rates on these variable rate obligations
                would have a material effect on its financial position, results of
                operations, or cash flows. The Company has not hedged its exposure
                to
                interest rate fluctuations.





***Foreign
      Currency Risk:***





§
            We
                sell our products to customers in the heavy truck, transit bus and
                off-road equipment industries. For the six month periods ended March
                31,
                2007 and 2006, the Company had foreign sales of approximately 38%
                and 35%
                of net sales, respectively. All worldwide sales in the first six
                months of
                fiscal 2007 and 2006, with the exception of $265 and $93, respectively,
                were denominated in U.S. dollars. During fiscal 2005, we established
                a
                manufacturing facility in Suzhou, China and we opened sales offices
                in
                Shanghai, China and Ismaning (which is near Munich), Germany. The
                Company
                does not believe that changes in future exchange rates would have
                a
                material effect on its financial position, results of operations,
                or cash
                flows as the majority of its foreign sales transactions are currently
                denominated in US dollars and the investments in China and Germany
                are
                relatively small at this time in relation to our United States operations.
                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 and sales
                increase.




**23**




***Investment
      Risk:***





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





**Item
      4. Controls and Procedures**





*Evaluation
      of Disclosure Controls and Procedures*





The
      Company’s Chief Executive Officer and Chief Financial Officer have evaluated the
      effectiveness of our disclosure controls and procedures as of the end of the
      period covered by this report pursuant to Rule 13a-15(b) under the Securities
      Exchange Act of 1934 (the “Exchange Act”)). In designing and evaluating the
      disclosure controls and procedures, management recognizes that any controls
      and
      procedures, no matter how well designed and operated, can provide only
      reasonable assurance of achieving the desired control objectives. In addition,
      the design of disclosure controls and procedures must reflect the fact that
      there are resource constraints and that management is required to apply its
      judgment in evaluating the benefits of possible controls and procedures relative
      to their costs. 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.














**24**


**Part
      II. Other Information**





**Item
      1. Legal Proceedings**





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





**Item
      1A. Risk Factors**





There
      have been no significant changes in risk factors for the quarter ended March
      31,
      2007. See the information set forth in the section entitled “Risk Factors” in
      our Annual Report on Form 10-K for the fiscal year ended September 30,
      2006.





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





None





**Item
      3. Defaults Upon Senior Securities**





None





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





On
      February 28, 2007, the Company held its annual stockholders’ meeting. The
      following individuals were elected to the Company’s Board of Directors to hold
      office for a one year term and to serve until the next annual stockholders’
meeting:





**Nominee**
            
            **Votes
                For**
            
            **Withheld**Patrick
                W. Cavanagh
            
            6,770,079
            
            9,406R.
                Eugene Goodson
            
            6,770,079
            
            9,406H.
                Samuel Greenawalt
            
            6,776,883
            
            2,602Douglas
                E. Hailey
            
            6,777,232
            
            2,253Carlos
                P. Salas
            
            6,763,174
            
            16,311Peter
                E. Salas
            
            6,769,797
            
            9,688Donn
                J. Viola
            
            6,777,232
            
            2,253





**Item
      5. Other Information**





None





**Item
      6. Exhibits**





2.01
            
            Asset
                Purchase Agreement, dated as of September 30, 2003, by and among
                the
                Registrant, Teleflex Incorporated and Teleflex Automotive Incorporated.*(Incorporated
                by reference to Exhibit 2.1 to the Registrant’s current report on Form 8-K
                filed on December 9, 2003)*3.01(a)
            
            Certificate
                of Incorporation of the Registrant, as amended.*(Incorporated
                by reference to Exhibit 3.01 (a) to the Registrant’s quarterly report on
                Form 10-Q for the quarter ended December 31, 2006)*3.01(b)
            
            Certificate
                of Amendment to Certificate of Incorporation of the Registrant, dated
                February 27, 1995.*(Incorporated
                by reference to Exhibit 3.01 (b) to the Registrant’s quarterly report on
                Form 10-Q for the quarter ended December 31,
                2006)*




**25**




3.01(c)
            
            Certificate
                of Amendment to Certificate of Incorporation of the Registrant, dated
                October 28, 2004.*(Incorporated
                by reference to Exhibit 3.01 (c) to the Registrant’s quarterly report on
                Form 10-Q for the quarter ended December 31, 2006)*3.01(d)
            
            Certificate
                of Amendment to Certificate of Incorporation of the Registrant, dated
                February 22, 2005.*(Incorporated
                by reference to Exhibit 3.01 (d) to the Registrant’s quarterly report on
                Form 10-Q for the quarter ended December 31, 2006)*3.01(e)
            
            Certificate
                of Amendment to Certificate of Incorporation of the Registrant, dated
                March 2, 2006.*(Incorporated
                by reference to Exhibit 3.01 (e) to the Registrant’s quarterly report on
                Form 10-Q for the quarter ended December 31, 2006)*3.02
            
            Restated
                By-Laws of the Registrant, as amended July 1, 2002.*(Incorporated
                by reference to Exhibit 3.6 to the Registrant’s quarterly report on
                Form 10-Q for the quarter ended June 30, 2002*)4.01
            
            Specimen
                Unit Certificate (including Specimen Certificate for shares of Common
                Stock and Specimen Certificate for the Warrants).*(Incorporated
                by reference to Exhibits 1.1 and 1.2 to the Registrant’s Registration
                Statement on Form 8-A, Commission File No. 0-18083, filed with the
                Commission on November 1, 1989)*4.02
            
            Certificate
                to Provide for the Designation, Preferences, Rights, Qualifications,
                Limitations or Restrictions Thereof, of the Series A Preferred Stock,
                71/2%
                Redeemable Convertible Series*(Incorporated
                by reference to Exhibit 3.1 to the Registrant’s quarterly report on
                Form 10-Q, Commission File No. 000-18083, for the quarter ended
                March 31, 1998*)4.03
            
            Certificate
                to Provide for the Designation, Preferences, Rights, Qualifications,
                Limitations or Restrictions Thereof, of the Series A-1 Preferred
                Stock, Non-Redeemable Convertible Series.*(Incorporated
                by reference to Exhibit 3.3 to the Registrant’s quarterly report on
                Form 10-Q for the quarter ended June 30, 2002*)4.04
            
            Certificate
                to Provide for the Designation, Preferences, Rights, Qualifications,
                Limitations or Restrictions Thereof, of the Series B Preferred Stock,
                15% Redeemable Convertible Series*(Incorporated
                by reference to Exhibit (d)(v) to the Schedule TO-I/A filed on
                July 5, 2002*)4.05
            
            Certificate
                of Elimination for Mandatory Preferred Stock*(Incorporated
                by reference to Exhibit (d)(vi) to the Schedule TO-I/A filed on
                July 5, 2002*)4.06
            
            Certificate
                of Amendment to the Designation, Preferences, Rights, Qualifications,
                Limitations or Restrictions Thereof, of the Series A-1 Preferred
                Stock,
                Non-Redeemable Convertible Series*(Incorporated
                by reference to the Registrant’s report on Form 8-K, filed on September
                29, 2004)*4.07
            
            Certificate
                to Provide for the Designation, Preferences, Rights, Qualifications,
                Limitations or Restrictions Thereof, of the Series C Preferred Stock,
                15%
                Redeemable Non-Convertible Series*(Incorporated
                by reference to the Registrant’s report on Form 8-K, filed on September
                29, 2004)*4.08
            
            Certificate
                of Amendment to the Certificate to Provide for the Designation,
                Preferences, Rights, Qualifications, Limitations or Restrictions
                Thereof,
                of the Series B Preferred Stock, 15% Redeemable Convertible Series*(Incorporated
                by reference to the Registrant’s report on Form 8-K, filed on September
                29, 2004)*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)*




**26**




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)*








**27**


**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: May
              11,
              2007
            By:
            /s/ PATRICK
              W. CAVANAGHPatrick
              W. Cavanagh*President
              and
              Chief Executive Officer*  Date: May
              11, 2007
            By:
            /s/ DENNIS
              E. BUNDAYDennis
              E. Bunday*Chief
              Financial Officer*

















28