UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549______________________

FORM 10-K

(Mark One)[ x
      ]
    
    ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For the
      fiscal year ended: September 30, 2009OR[   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934


For the transition period from
______to______Commission file number 0-18083________________

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

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

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

Securities registered pursuant to
Section 12(b) of the Act:None

Securities registered pursuant to
Section 12(g) of the Act:Common Stock
($.01 par value)

Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [    ] No [ X ]

Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.Yes [    ] No [ X ]



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 has
submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such
files).      Yes [    ] No
[    ]

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [   
]

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


Large
      accelerated filer [    ]
    Accelerated
      filer [    ]Non-accelerated
      filer [    ]
    Smaller
      reporting company [ X ]


Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Act)     Yes [    ] No [ X ]

---

The aggregate market value of voting
common shares (based upon the closing price of the shares as reported on the
NASDAQ Global Market) of Williams Controls, Inc. held by non-affiliates was
approximately $18,992,255 as of March 31, 2009.

As of December 1, 2009, there were
7,270,820 shares of Common Stock outstanding.

Documents Incorporated by
Reference

The Registrant has incorporated by
reference into Part III of this Form 10-K portions of itsProxy Statement for
the Annual Meeting of Stockholders to be held February 24, 2010.

---

Williams Controls,
Inc.

Index to 2009 Form
10-K

|               |  |                                                                                                   | **Page**
|-------------- |  | ------------------------------------------------------------------------------------------------- | --------
|Part I         |  |                                                                                                   |         
|Item 1.        |  | Business                                                                                          | 4-8     
|Item 1A.       |  | Risk Factors                                                                                      | 8-11    
|Item
      1B. |  | Unresolved Staff
      Comments                                                                   | 11      
|Item
      2.  |  | Properties                                                                                        | 11      
|Item
      3.  |  | Legal
      Proceedings                                                                           | 12      
|Item
      4.  |  | Submission of Matters to a Vote of Security Holders                                               | 12      
|              
|Part II        |  |                                                                                                   |         
|Item
      5.  |  | Market for
      Registrants Common Equity, Related Stockholder Matters and                      | 13      
|               |  | Issuer Purchases
      of Equity Securities                                                       |         
|Item
      6.  |  | Selected Financial Data                                                                           | 14      
|Item
      7.  |  | Managements
      Discussion and Analysis of Financial Condition and Results of
      Operations | 14-22   
|Item
      7A. |  | Quantitative and Qualitative Disclosures About Market
Risk                                        | 23      
|Item
      8.  |  | Financial
      Statements and Supplementary Data                                                 | 24      
|Item
      9.  |  | Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure        | 52      
|Item
      9A. |  | Controls and
      Procedures                                                                     | 52      
|Item
      9B. |  | Other Information                                                                                 | 52      
|              
|Part III       |  |                                                                                                   |         
|Item
      10. |  | Directors,
      Executive Officers and Corporate Governance                                      | 53      
|Item
      11. |  | Executive Compensation                                                                            | 53      
|Item
      12. |  | Security
      Ownership of Certain Beneficial Owners and Management and
Related                  | 53      
|               |  | Stockholder
      Matters                                                                         |         
|Item
      13. |  | Certain Relationships and Related Transactions, and Director
      Independence                   | 53      
|Item
      14. |  | Principal
      Accountant Fees and Services                                                      | 53      
|              
|Part IV        |  |                                                                                                   |         
|Item
      15. |  | Exhibits and
      Financial Statement Schedules                                                  | 54      
|              
|Signatures     |  | 55                                                                                               

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WILLIAMS CONTROLS, INC.FORM
10-K

PART I(Dollar amounts in thousands, unless otherwise indicated)

ITEM 1. BUSINESS

We are a Delaware
corporation formed in 1988. The following are our wholly-owned
subsidiaries:

***Active
Subsidiaries*** Williams Controls
Industries, Inc. (Williams); Williams (Suzhou) Controls Co. Ltd. (Williams
Controls Asia); Williams Controls Europe GmbH (Williams Controls Europe); and
Williams Controls India Private Limited (Williams Controls India).

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

General

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

Electronic sensors are a significant component of our electronic throttle
controls. We have been producing electronic sensors for use in our electronic
throttle control systems since 2005. Prior to 2005, we purchased contacting
sensors for use in our heavy truck, transit bus and off-road product lines from
third parties. In addition to internal use, we also have begun selling sensors
as separate product lines. The two principal sensor technologies are contacting
and non-contacting. As part of our sensor strategy, we have a license to use
certain non-contacting sensor technology from Moving Magnet Technology S.A.
During fiscal 2006 we began production of both contacting and non-contacting
sensors. During 2006 and 2007, we converted a majority of our sensor usage to
our internally produced sensors.

Adjustable foot pedals are devices which move the throttle, brake and, if
applicable, the clutch pedal, closer or further away from the vehicle driver to
compensate for driver heights. We have a licensing agreement for an adjustable
pedal technology, which allows us to sell adjustable pedals in the medium and
heavy truck and transit bus markets. We consider adjustable foot pedals to be a
value added adjunct to our primary electronic throttle control product
line.

We sell our products world-wide. During the year ended September 30,
2009, approximately 63% of our products were sold in the United States and an
additional 9% of our products were sold to customers in Canada and Mexico for
vehicles that are produced, in part, for the United States market. Approximately
28% of our products were sold to other international markets. We sell the
majority of our products directly to large heavy truck, transit bus and off-road
original equipment manufacturers worldwide. Our largest customers include The
Volvo Group, Paccar, Inc., Daimler Trucks NA, Navistar International
Corporation, Caterpillar, Inc., and Hyundai Motor, Co. We also sell our products
through a network of independent distributors and representatives, which sell to
smaller original equipment manufacturers and to truck and bus owners as
replacement parts.

4

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While we are a
leader in the market for electronic throttle control systems for heavy trucks,
transit buses and off-road equipment, the markets for our products are highly
competitive worldwide. The existing and developing world-wide heavy truck,
transit bus and off-road markets will require competitive world-wide
manufacturing capabilities. We believe our operating facilities in Portland,
Oregon and Suzhou, China have us well positioned to meet the needs of these
markets. In addition to our manufacturing facilities, we have sales offices in
Shanghai, China and Munich, Germany and exclusive distributor relationships in
Japan, Korea and India to serve those markets.

Realignment of
Operations

In fiscal 2006 and 2007, the
Company realigned its manufacturing operations as part of ongoing efforts to
focus on its core product competencies and improve its global competitiveness.
This realignment consisted of outsourcing all of our die casting and machining
operations from our Portland, Oregon manufacturing facility to high-quality
third party suppliers, primarily in Asia, and relocating of our assembly
operations for most of our pneumatic products from the Portland facility to our
manufacturing facility in Suzhou, China.

Competition

We are a worldwide market leader for electronic throttle control systems
for heavy trucks, transit buses and off-road vehicles. We also are the largest
domestic producer in the market. We have a much smaller portion of the European
and Asian markets. The markets for our products are highly competitive, with
many of our competitors having substantial financial resources and significant
technological capabilities. Our competitive position varies among our product
lines.

The major competitors for our electronic throttle controls include AB
Eletronik GmbH, Kongsberg Automotive, Siemens VDO Automotive AG, Felsted
Products, LLC, Hella KGaA Hueck & Co., Heinrich Kubler AG (KSR), Comesys,
Ltd., Alion and GoFa. Other companies, including Dura Automotive Systems, Inc.
and CTS Corporation compete in the passenger car and light truck market and may
attempt to compete in the heavy truck and transit bus market in the
future.

We also manufacture pneumatic control systems for the diesel heavy truck,
transit bus and off-road vehicle markets. The market for these pneumatic control
systems is highly competitive and characterized by many competitors. Many of the
customers for these products are the same customers as for our heavy truck and
transit bus electronic throttle control systems.

When choosing among competing electronic throttle control systems, we
believe purchasers of these systems focus on price, quality, value added
engineering and reputation. In addition, we believe attainment of the TS 16949
quality certification and the ISO 14001 Environmental Management System
certification are critical to qualifying as a supplier. Our manufacturing
facilities in Portland and Suzhou have attained the TS 16949 and ISO 14001
certifications and our entire product line is produced using these
standards.

Marketing and
Distribution

We sell our products to customers primarily in the heavy truck, transit
bus and off-road equipment industries. For the years ended September 30, 2009,
2008 and 2007, The Volvo Group accounted for 16%, 19% and 17%; Paccar, Inc.
accounted for 9%, 11% and 14%; and Daimler Trucks NA accounted for 9%, 9% and
13%. Approximately 37%, 46% and 41% of net sales in fiscal 2009, 2008 and 2007
respectively, were to customers outside of the United States, primarily in
Canada, Belgium, Sweden, Mexico and Korea, and, to a lesser extent, in other
European countries, South America, Pacific Rim nations and Australia. We market
our products from our sales facilities in Portland, Oregon, Shanghai, China,
Munich, Germany and through distributor networks.

In fiscal 2009, 2008 and 2007, approximately 83%, 86% and 84%,
respectively, of our sales were from sales of electronic throttle controls, with
the remainder being sales of pneumatic control systems.

5

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Environmental

We produce minimal quantities of hazardous waste in our operations and we
are subject to federal and state air, water and land pollution control laws and
regulations. Compliance with these laws generally requires operating costs and
capital expenditures. Substantial liability may result from the failure to
properly handle hazardous waste.

The soil and
groundwater at the Companys Portland, Oregon facility contains certain
contaminants, which were deposited from approximately 1968 through 1995. Some of
this contamination has migrated offsite to neighboring properties. The Company
has retained an environmental consulting firm to investigate the extent of the
contamination and to determine what remediation may be required and to assist
management in estimating the associated costs. During fiscal 2004, the Company
entered into the Oregon Department of Environmental Qualitys voluntary clean-up
program and during fiscal 2004 the Company established a liability of $950 for
this matter. At September 30, 2007, the Company recorded an additional liability
of $546 based on remaining costs estimates determined by the Company with the
help of an environmental consulting firm. As of September 30, 2009, the total
liability recorded is $1,001 and is recorded in accrued expenses in the
accompanying consolidated balance sheet. The Company asserted and settled a
contractual indemnity claim against Dana Corporation (Dana), from which it
acquired the property, and contribution claims against the other prior owner of
the property, as well as businesses previously located on the property
(including Blount, Inc. (Blount) and Rosan, Inc. (Rosan)) under the Federal
Superfund Act and the Oregon Cleanup Law. During 2008, the Company entered into
a settlement agreement with Dana, Blount and Rosan in which it received total
cash payments from Dana, Blount and Rosan of $735 and shares of Dana stock equal
to approximately $337 at the time of settlement, and assumed the full obligation
to, and risks associated with, completing the remediation.

Government
Regulation

Our vehicle component products must comply with the National Traffic and
Motor Vehicle Safety Act of 1966, as amended, and regulations promulgated there
under, which are administered by the National Highway Traffic Safety
Administration (NHTSA). If, after an investigation, NHTSA finds that we are
not in compliance with any of its standards or regulations, among other things,
it may require that we recall products found not to be in compliance, and repair
or replace such products. During fiscal 2009, we had no product recalls. We are
not aware of any instances of non-compliance with the statute and applicable
regulations.

Product Research and
Development

We conduct engineering, research and development and quality control
activities to maintain and improve the performance, reliability and
cost-effectiveness of our products. Our engineering staff works closely with our
customers to design and develop new products and to adapt existing products for
new applications. During fiscal 2009, 2008 and 2007, the Company spent $3,981,
$4,015 and $3,145, respectively, on these activities. We anticipate that these
expenses may increase with expansion into markets and new products.

Patents, Trademarks and
Licenses

We believe our products generally have strong name recognition in their
respective markets. We own numerous patents, primarily under the Williams
name, which expire at various times. We believe that, in the aggregate, the
rights under our patents are generally important to our operations. We do not,
however, consider any patent or group of patents to be of material importance to
our total business.

During fiscal 2003 the Company obtained an exclusive license agreement
for use in our adjustable pedal product lines. This initial agreement was for an
initial period of three years and contained annual renewal provisions if certain
sales thresholds were met. With the general economic decline in fiscal 2009 and
the significant decline in recreational vehicle sales, a primary market for
adjustable pedals, the contractual thresholds have not been met and the license
has reverted to a non-exclusive license. The Company is obligated to make
royalty payments based on the number of units it sells. Additionally, as part of
the sale of our passenger car and light truck product lines to Teleflex
Incorporated on September 30, 2003, we obtained the right to use certain of
Teleflexs (now Kongsberg Automotive) adjustable pedal patents in exchange for
Teleflex receiving fully paid licenses for certain of our patents.

6

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In fiscal 2005,
we entered into an agreement with Moving Magnet Technology SA (MMT) to license
non-contacting Hall effect sensor technology. We use this license to internally
produce non-contacting sensors for use in our electronic throttle controls. We
make royalty payments based on the number of units sold, which includes minimum
yearly royalties beginning in year three of this agreement. 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.

Raw Materials; Reliance on Single
Source Suppliers

We purchase certain of our component parts that are derived from raw
materials, including brass, aluminum, steel, plastic, rubber and zinc, which
currently are widely available at reasonable terms, but are subject to
volatility of prices due to fluctuations in the commodity markets. Although
prices for zinc, aluminum and energy commodities were relatively constant, and
in some cases declined, in fiscal 2009, future demand and other factors, such as
currency fluctuations, supply shortages or disruptions, may result in price
increases causing higher costs for some of our components. Although historically
commodities and component prices have increased, we have not been subject to
supply constraints as a result of these factors. We manufacture certain foot
pedals using a contact position sensor manufactured for Caterpillar, Inc., by a
third party sensor manufacturer, which is used on Caterpillar engines.
Caterpillar supplies this sensor and requires that its sensor be used on all
Caterpillar engines; therefore, we do not consider the Caterpillar sensor supply
to be at risk.

Product Warranty

We warrant our products to the first purchaser and subsequent owners
against malfunctions occurring during the warranty period resulting from defects
in material or workmanship, subject to specified limitations. The warranty on
vehicle components is limited to a specified time period, mileage or hours of
use, and varies by product, application and customer. We have established a
warranty liability based upon our estimate of the future cost of warranty and
related service costs. We regularly monitor our warranty liability for adequacy
in response to historical experience and other factors.

Employees

As of September 30, 2009, we employed approximately 115 employees in our
Portland, Oregon facility, of which approximately 46 were engaged in
manufacturing and approximately 69 were involved in sales, engineering and
administrative functions. As of September 30, 2009, we employed 95 employees in
China, of which approximately 58, were engaged in manufacturing and
approximately 37 were engaged in sales, engineering and administrative
functions. We also employed 2 employees in Europe as of September 30, 2009. Our
hourly employees engaged in manufacturing in the Portland, Oregon facility are
represented by the International Union, United Automobile Workers of America and
Amalgamated Local 492 (the UAW). In February 2009, we signed a new labor
agreement which will expire on August 31, 2013. As of September 30, 2009, we
employed a total of 34 people pursuant to this labor agreement.

Forward-Looking
Statements

This report on Form 10-K contains forward-looking statements within the
meaning of Section 21D of the Securities Exchange Act of 1934, as amended.
Forward-looking statements include all statements other than those that
expressly connote an assertion of historical fact. Among others, this report
includes forward looking statements that describe our plans and intentions
regarding future courses of action and the possible outcomes of those
intentions, and that set forth our expectations regarding our prospective
financial condition, results of operations, and cash flows. Forward-looking
statements can sometimes be identified by the use of forward-looking
terminology, such as may, will, should, expect, anticipate,
estimate, continue, plans and intends. Although we believe that the
expectations reflected in such forward-looking statements are reasonable, such
forward-looking statements are subject to risks and uncertainties that could
cause us to deviate from our current plans, and could cause our actual results
to differ materially from those indicated by the forward-looking statements.
Some of the factors that could cause our performance to differ from, or our
results to fall short of our expectations are described in the section of this
report entitled Section 1A: Risk Factors, and in our other reports to and
filings with the Securities and Exchange Commission from time to time. These
risks and uncertainties are beyond our control and, in many cases, we cannot
predict the risks and uncertainties that could cause our actual results to
differ materially from those indicated by the forward-looking
statements.

7

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

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

Available
Information

The Company maintains a website on
the Internet at www.wmco.com. The Company makes
available free of charge through its website its reports and other
communications filed or furnished pursuant to Sections 13 (a) and 14 (a) of the
Exchange Act. The information on our website is not part of this report and is
not otherwise to be considered filed with or furnished to the SEC.

ITEM 1A. RISK FACTORS

An investment in our common stock
involves a high degree of risk. You should carefully consider the risks
discussed below and the other information in this report on Form 10-K before
deciding whether to invest in our common stock.

Risks related to our business:

A significant portion of our sales
are derived from a limited number of customers, and results of operations could
be adversely affected and stockholder value harmed if we lose any of these
customers.

A significant portion of our
revenues historically have been derived from a limited number of customers.
Further, each of these customers is a manufacturer of heavy trucks or
components, and the world-wide truck and off-road industries have been subject
to significant financial stress and uncertainty in recent months. Were any of
these customers to place some or all of their business with one or more of our
competitors, we may face a material adverse impact upon our revenues, net
income, cash flows and financial condition.

Reduced consumer or corporate
spending due to weakness in the financial and credit markets and uncertainties
in the economy, domestically and internationally, may adversely affect our
revenues and operating results.

We depend on demand from the
original equipment manufacturer component of the heavy truck markets for the end
market applications that use our products. All of these markets have been and
may continue to be affected by the recent instability in global financial
markets that have caused extreme economic disruption in recent months.
Accordingly, our business may be adversely impacted by reductions in consumer or
corporate demand for our products as a result of uncertain conditions in the
macroeconomic environment, such as volatile energy prices, inflation,
fluctuations in interest rates, difficulty securing credit, volatility in
security prices and the corresponding uncertainties surrounding equity finance
markets, diminished liquidity and other economic factors. Demand for our
products declined significantly in fiscal 2009, which impacted overall sales and
net income.

Negative economic conditions also
may materially impact our customers, suppliers and other parties with which we
do business. Economic and financial market conditions that adversely affect our
customers may cause them to terminate existing purchase orders or to reduce the
volume of products they purchase from us in the future. In connection with the
sale of products, we normally do not require collateral as security for customer
receivables and do not purchase credit insurance. We may have significant
balances owing from customers who operate in cyclical industries or who may not
be able to secure sufficient credit in order to honor their obligations to us.
Failure to collect a significant portion of amounts due on those receivables
could have an adverse effect on our results of operations and financial
condition.

Adverse economic and financial
markets conditions also may cause our suppliers to be unable to provide
materials and components to us or may cause suppliers to make changes in the
credit terms they extend to us, such as shortening the required payment period
for our amounts owing them or reducing the maximum amount of trade credit
available to us. While we have not yet experienced changes of this type, they
could significantly affect our liquidity and could have an adverse effect on our
results of operations and financial condition. If we are unable to successfully
anticipate changing economic and financial markets conditions, we may be unable
to effectively plan for and respond to those changes, and our business could be
negatively affected.

8

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Demand for equipment on which our
products are installed may decrease, which could adversely affect our revenues
and stockholder value.

We sell our products primarily to
manufacturers of heavy trucks, transit buses and off-road equipment. If demand
for our customers vehicles or equipment decreases, demand for our products
would decrease as well. This decrease in demand would adversely impact our
revenues and stockholder value.

Our products could be recalled,
which could increase our costs and decrease our revenues.

Our vehicle component products must
comply with the National Traffic and Motor Vehicle Safety Act of 1966, as
amended, and regulations promulgated thereunder, which are administered by the
National Highway Traffic Safety Administration (NHTSA). If NHTSA finds that we
are not in compliance with its standards or regulations, it may, among other
things, require that we recall products found not to be in compliance, and
repair or replace such products. Such a recall could increase our costs and
adversely impact our reputation in our industry, both of which would adversely
affect our revenues, profit margins, results of operations and stockholder
value.

We purchase component parts from
suppliers and changes in the relationships with such suppliers, as well as
increases in the costs of raw materials that comprise our component and/or the
component parts, would adversely affect our ability to produce and market our
products, which would adversely affect our profit margins, results from
operations and stockholder value.

We purchase component parts from
suppliers to be used in the manufacturing of our products. If a supplier fails
to provide necessary component parts, we may be unable to produce, or may face
delays or cost increases in producing, certain products. These potentialities
could result in a decrease in revenue, a loss of timeliness in product
deliveries, and adverse impacts on our reputation in our industry. Also, if
prices of raw materials that comprise our component parts and/or the component
parts increase and we are not able to pass on such increase to our customers,
our profit margins would decrease. Finally, if our suppliers (or any alternative
suppliers from which we choose or are required to acquire components) delivers
products that do not meet our specifications or cause us to fail to meet our
product standards, we may face losses in revenues, reputational harm, and
potentially other adverse business consequences. The occurrence of any of these
events could adversely affect our results of operations and stockholder
value.

Our products could be subject to
product liability claims by customers and/or consumers, which would adversely
affect our profit margins, results of operations and stockholder value.

The majority of our products are
used on heavy trucks and transit buses. If our products are not properly
designed or built and/or personal injuries or property damages are attributed to
the performance of our equipment, we could be subject to claims for damages
based on theories of product liability and other legal theories. We maintain
liability insurance for these personal injury and property damage risks, but not
for claims that do not involve personal injury or property damage. The costs and
resources to defend such claims could be substantial, and if such claims are
successful, we could be responsible for paying some or all of the damages. Also,
our reputation could be adversely affected, regardless of whether such claims
are successful. Any of these results would adversely affect our profit margins,
results of operations and stockholder value. We are currently named as a
co-defendant in a product liability case that seeks class action, which is not
covered by our liability insurance. Refer toITEM 3  LEGAL PROCEEDINGS.

Our defined benefit pension plans
are under-funded and, therefore, we may be required to increase our
contributions to the plans, which would adversely affect our cash flows.

We maintain two defined benefit
pension plans among the retirement plans we sponsor. No new employees are being
admitted to participate in these two plans. Participants in these two plans are
entitled to a fixed formula benefit upon retirement. Although we make regular
contributions to these two plans in accordance with minimum ERISA funding
requirements, investment earnings may be less than expected, and we may be
required to increase contributions to the under-funded plan(s), which would
adversely affect our cash flows.

9

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The market price of our stock has
been and may continue to be volatile, which could result in losses for
stockholders.

Our common stock is currently listed
on the NASDAQ Global Market and is thinly traded. Volatility of thinly traded
stocks is typically higher than the volatility of more liquid stocks with higher
trading volumes. The market price of our common stock has been and, in the
future, could be subject to significant fluctuations as a result of the
foregoing, as well as variations in our operating results, announcements of
technological innovations or new products by us or our competitors,
announcements of new strategic relationships by us or our competitors, general
conditions in our industries or market conditions unrelated to our business and
operating results. Any of these results could adversely impact stockholder
value.

Current economic conditions could
adversely affect our operations.

Financial
markets in the United States and abroad have experienced extreme disruption,
including severely diminished liquidity and credit availability. These
conditions and the current economic downturn have impaired our ability to access
credit markets and there can be no assurance that these conditions will not
adversely affect our business in the future, particularly if there is further
deterioration in the world financial markets and major economies.

At September
30, 2009, we had on hand cash and cash equivalents of $9,245. During the fourth
quarter of fiscal 2009, we voluntarily cancelled our revolving loan facility
with GE Capital, which as of June 30, 2009 had a zero balance. We believe our
cash on hand will be sufficient to meet our working capital needs on a
short-term and longer-term basis without the necessity of borrowing, or
attempting to borrow from a revolving loan facility. However, were we to require
additional borrowing capacity, we may be unable to locate such capacity on
acceptable terms or at all.

Risks related to environmental laws:

The soil and groundwater at our
Portland, Oregon facility contains certain contaminants that may require us to
incur substantial expense to investigate and remediate, which would adversely
affect our profit margins, results from operations and stockholder
value.

The soil and groundwater at our
Portland, Oregon facility contain certain contaminants. Some of this
contamination has migrated offsite to neighboring properties and potentially to
other properties. We have retained an environmental consulting firm to
investigate the extent of the contamination and to determine what remediation
will be required and the associated costs. In fiscal 2004, we entered the Oregon
Department of Environmental Qualitys voluntary clean-up program and during
fiscal 2004 established a liability of $950 for this matter. At September 30,
2007, we recorded an additional liability of $546 and as of September 30, 2009,
this liability totaled $1,001. Our overall costs ultimately may exceed our
estimates, or we may be forced to increase the amount of our estimates, either
or both of which could adversely affect our financial condition, results of
operations or cash flows.

Risks related to foreign operations:

In addition
to our operations in the United States, we currently operate in China, and have
a sales presence in other countries such as Japan, Korea and a number of
countries in the European Union, and we market our products and technologies in
those and other international markets, including both industrialized and
developing countries. Our combined international operations are subject to
various risks common to international activities, such as:

- our
  ability to maintain good relations with our overseas employees and
  distributors and to collect amounts owed from our overseas
  customers;
- exposure to currency
  fluctuations;
- potential difficulties in enforcing
  contractual obligations;
- complying with a wide variety of laws
  and regulations, including product certification, environmental, and import
  and export laws;

10

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- the
  challenges of operating in disparate geographies and cultures;
- political and economic instability;
  and
- restrictions on our ability to
  repatriate dividends from our subsidiaries, particularly from our Chinese
  subsidiary.

Fluctuations in the value of
currencies could adversely affect our international sales, which would result in
reduced revenues and stockholder value.

We sell products in Canada, Belgium,
Sweden, Mexico, South America, the Pacific Rim nations, Australia, China and
certain member nations of the European Union; we purchase components from
suppliers in China, Mexico and Europe; we have a manufacturing and sales
operation in China; and we maintain a sales and technical center in Germany. For
the years ended September 30, 2009, 2008 and 2007, foreign sales were
approximately 37%, 46%, and 41% of net sales, respectively. Although currently a
majority of our sales and purchases are made in U.S. dollars, an increasing
amount of our purchases and sales are made in Chinese RMB and we anticipate that
over time more of our purchases of component parts and sales of our products
will be denominated in foreign currencies. We do not presently engage in any
hedging of foreign currency risk. In the future, our operations in the foreign
markets will likely become subject to fluctuations in currency values between
the U.S. dollar and the currency of the foreign markets. Our results of
operations and stockholder value could be adversely affected if currency of any
of the foreign markets increases in value relative to the U.S.
dollar.

Complying with the laws applicable
to the United States and foreign markets may become more difficult and expensive
in the future, which could adversely affect our results of operations and
stockholder value.

Our operations in the United States
and foreign markets are subject to the laws of such markets. Compliance with
these laws may become more difficult and costly in the future. In addition,
these laws may change and such change may require us to change our operations.
Any of these results could adversely affect our results from operations and
stockholder value by increasing expenses and reducing revenues, thereby reducing
profits.

Political and economic instability
in the foreign markets may make doing business there more difficult and costly,
which could adversely affect our results from operations and stockholder value.

Economic and political instability
may increase in the future in foreign markets. Such instability may make it more
difficult to do business in those countries, may make it more expensive to
operate and could disrupt supplies of components into our Portland or Suzhou
facilities. If our operations were nationalized by the government of China, this
could cause us to write off the value of our operations in such foreign markets
and eliminate revenues generated by such operations. Any of these results could
result in onetime charges or increased expenses as well as lower revenues, which
would adversely affect our results of operations and harm stockholder
value.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We own a 120,000 square foot
manufacturing facility and office building in Portland, Oregon. We believe the
Portland facility is adequate for our existing needs and the needs for the
foreseeable future. This manufacturing facility is equipped with the machinery
and equipment necessary to manufacture and assemble our products. We believe
that this facility has been maintained adequately.

We lease approximately 63,000 square
feet in Suzhou, China for our Williams Controls Asia operation, approximately
500 square feet for our Shanghai, China sales office, and approximately 1,400
square feet for our Williams Controls Europe sales operation. We believe that
these facilities will be adequate to meet our existing needs and our needs for
the foreseeable future.

11

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ITEM 3. LEGAL
PROCEEDINGS

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

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS

No matters were submitted to a vote
of security holders during the fourth quarter of fiscal 2009.

12

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PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Prices of Common
Stock

Our common
stock is traded on the NASDAQ Global Market under the symbol WMCO. The
following table sets forth the high and low closing prices of our common stock
for each fiscal quarter for the past two fiscal years as reported on the NASDAQ
Global Market:

|                     | 2009 |       | 2008
|-------------------- | ---- | ----- | ----
|                     | High |       | Low 
|First Quarter        | $    | 13.02 |     
|Second
      Quarter | $    | 7.81  |     
|Third Quarter        | $    | 7.25  |     
|Fourth
      Quarter | $    | 9.40  |     

Dividend
Policy

There were 356 record holders of our
common stock as of December 1, 2009. We have never paid a dividend with respect
to our common stock and currently have no plans to pay a dividend on our common
stock at this time.

Performance
Graph

The graph below compares the
cumulative total stockholder return of our common stock with the cumulative
total return of the NASDAQ Composite Index and a peer group of companies
primarily traded on the NASDAQ Stock Market in the Standard Industry
Classification Code 3714 (motor vehicle parts and accessories) (the Peer
Group). The graph shows the value for the period beginning October 1, 2004 and
ending September 30, 2009. The graph assumes that $100 was invested on September
30, 2004.

COMPARISON OF 5 YEAR CUMULATIVE
TOTAL RETURNAmong Williams Controls,
Inc., The NASDAQ Composite IndexAnd A Peer Group



|Total Return
      Analysis |         |        |         |   |         |  |         |        |         |   |         |  |   |        |  |   |       
|--------------------------- | ------- | ------ | ------- | - | ------- |  | ------- | ------ | ------- | - | ------- |  | - | ------ |  | - | ------
|                            | 9/30/04 |        | 9/30/05 |   | 9/30/06 |  | 9/30/07 |        | 9/30/08 |   | 9/30/09
|Williams Controls, Inc.     | $       | 100.00 |         | $ | 126.50  |  | $       | 211.17 |         | $ | 300.33  |  | $ | 214.67 |  | $ | 149.67
|NASDAQ
      Composite      | $       | 100.00 |         | $ | 113.78  |  | $       | 121.50 |         | $ | 143.37  |  | $ | 109.15 |  | $ | 112.55
|Peer Group                  | $       | 100.00 |         | $ | 101.65  |  | $       | 124.20 |         | $ | 193.02  |  | $ | 127.85 |  | $ | 131.58

13

---

ITEM 6. SELECTED FINANCIAL DATA(Dollars in thousands - except per
share amounts)

|Consolidated
      Statement of Operations Data:   | Year ended September
  30
|-------------------------------------------------- | -------------------------
|                                                   | 2009                     
|Net sales                                          | $                        
|Net income
      (loss)                            |                          
|Net income (loss) per common share  basic         |                          
|Net income
      (loss) per common share  diluted |                          
|Cash dividends per common share                    |                          

|Consolidated
      Balance Sheet Data: | September 30
|-------------------------------------- | ------------
|                                       | 2009        
|Current Assets                         | $           
|Current
      Liabilities              |             
|Working Capital                        |             
|Total
      Assets                     |             
|Long-Term Liabilities                  |             
|Stockholders
      Equity             |             

ITEM 7. 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 year period
ended September 30, 2009. This section should be read in conjunction with our
consolidated financial statements and related notes appearing elsewhere in this
document, and readers should note that dollar figures in this section, other
than per-share data, are presented in thousands. Statements in this report that
relate to future results and events are based on our current expectations.
Actual results in future periods may differ materially from those currently
expected or desired because of a number of risks and uncertainties. For a
discussion of factors affecting our business, see ITEM 1  BUSINESS in this Annual
Report on Form 10-K. Further, this section includes forward-looking statements
which should be read in conjunction with the section entitled Item 1A  Risk
Factors.

Overview

During fiscal 2009, the pervasive
and severe world-wide economic downturn had a material impact on our industry
and business. We saw our net sales decrease $26,972 or 41.0% as our customers
struggled with lower demand for their products and reducing inventory overhangs.
We experienced significant declines in sales to our NAFTA truck customers during
fiscal 2009, decreasing approximately 43% from the prior year. Sales to European
and Asian customers were down even more dramatically by 60% and 44%,
respectively.

Gross margin dollars declined during
fiscal 2009 due to the lower sales volumes and gross margin percentages declined
primarily because overhead costs did not decline as rapidly as sales volumes,
even though certain expense such as materials and labor generally fluctuated
with sales volumes. Sales prices for our products and component purchases
remained relatively constant during the year. Although the future remains
unclear, based on comments in the popular press and available industry forecast
data, it appears possible this industry downturn may continue for some time into
the future. In response to this significant negative shift in the world-wide
economic situation and demand for our products, during fiscal 2009 we reduced
operational costs at an annualized rate of approximately $2,200. In fiscal 2009,
our cash position has increased $185 over the prior year primarily through cost
management efforts and reductions in inventory to balance inventory levels with
sales volumes. We have not reduced our commitment to or spending on new product
development and technology for existing and new customers. Although no
assurances can be given, management believes that it is likely that our $9,245
in cash will be adequate to sustain the Company through this continuing economic
downturn.

14

---

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

Results of
Operations

Financial Summary(Dollars in
Thousands)

|                                                   |      |        |      |  |      |        |      |  |      |        |   |  | 2008 to |    | 2007 to
|-------------------------------------------------- | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | ------- | -- | -------
|                                                   | 2009 |        | 2008 |  | 2007 |        | 2009 |  | 2008
|Net sales                                          | $**  | 38,809 |      |  | $**  | 65,781 |      |  | $**  | 68,924 |   |  | (41.0   | %) |        
|Cost of
      sales                                |      | 30,173 |      |  |      | 42,960 |      |  |      | 45,152 |   |  | (29.8   | %) |        
|Gross profit                                       |      | 8,636  |      |  |      | 22,821 |      |  |      | 23,772 |   |  | (62.2   | %) |        
|Research and
      development                     |      | 3,981  |      |  |      | 4,015  |      |  |      | 3,145  |   |  | (0.8    | %) |        
|Selling                                            |      | 2,425  |      |  |      | 2,727  |      |  |      | 2,163  |   |  | (11.1   | %) |        
|Administration                                     |      | 5,522  |      |  |      | 5,500  |      |  |      | 5,898  |   |  | 0.4     | %  |        
|Gain from settlement of environmental claims       |      |       |      |  |      | (1,072 | )    |  |      |       |   |  | NM      |    |        
|Realignment of
      operations                    |      |       |      |  |      |       |      |  |      | 737    |   |  | NM      |    |        
|Operating income (loss)                            | $    | (3,292 | )    |  | $    | 11,651 |      |  | $    | 11,829 |   |  |         |    |        
|                                                   |      |        |      |  |      |        |      |  |      |        |   |  |         |    |        
|As a percentage of net sales:                      |      |        |      |  |      |        |      |  |      |        |   |  |         |    |        
|Cost of sales                                      |      | 77.7   | %    |  |      | 65.3   | %    |  |      | 65.5   | % |  |         |    |        
|Gross margin                                       |      | 22.3   | %    |  |      | 34.7   | %    |  |      | 34.5   | % |  |         |    |        
|Research and
      development                     |      | 10.3   | %    |  |      | 6.1    | %    |  |      | 4.6    | % |  |         |    |        
|Selling                                            |      | 6.2    | %    |  |      | 4.1    | %    |  |      | 3.1    | % |  |         |    |        
|Administration                                     |      | 14.2   | %    |  |      | 8.4    | %    |  |      | 8.6    | % |  |         |    |        
|Gain from settlement of
      environmental claims |      |       |      |  |      | (1.6   | %)   |  |      |       |   |  |         |    |        
|Realignment of
      operations                    |      |       |      |  |      |       |      |  |      | 1.1    | % |  |         |    |        
|Operating income
      (loss)                      |      | (8.5   | %)   |  |      | 17.7   | %    |  |      | 17.2   | % |  |         |    |        

NM  not meaningful

Comparative Years Ended September
30, 2009, 2008 and 2007

|                                       |  |      |        |      |   |        |  |      |        |      | Percent Change
|-------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | --------------
|                                       |  |      |        |      |   |        |  |      |        |      | 2008 to       
|For the Year Ended September
      30: |  | 2009 |        | 2008 |   | 2007   |  | 2009 |        | 2008
|Net sales                              |  | $    | 38,809 |      | $ | 65,781 |  | $    | 68,924 |      | (41.0         

Net sales decreased $26,972 for the
year ended September 30, 2009 as compared to the year ended September 30, 2008.
The decrease in sales results from volume reductions in essentially all of our
principal markets, which we believe were due to the continued declining world
economic climate and the impact that decline has had on our customers and the
end markets for their products. During fiscal 2009, we have seen a significant
reduction in the number of units of trucks, busses and off-road vehicles built
world-wide due to the significant recessionary pressures in the United States
and many parts of the rest of the world. All of our large truck OEM customers
have reduced build rates, and many have taken extensive down-time in 2009. It is
uncertain how protracted the current economic downturn in both the general
economy and the truck and off-road markets will be world-wide and the impact it
will have on us for fiscal 2010 and beyond although we do not anticipate volumes
returning to pre-fiscal 2009 levels in fiscal 2010.

In the North American market, sales
to heavy truck customers were down 43% compared to fiscal 2008, which is the
direct result of the overall reduction in truck build rates in North America.
Our share of that market and unit pricing remained essentially unchanged from
the prior year. The sales declines to our European truck customers were even
more dramatic, decreasing 64% over the prior year. On a year over year basis,
sales to Asia decreased 44%. Net sales to off-road customers decreased 39% as
that market also experienced reduced production rates in response to the lower
levels of construction activity world-wide. We expect that electronic throttle
control sales generally will continue to vary directly with future changes in
the economy in general and the economic climate affecting new purchases of heavy
trucks, transit buses and off-road vehicles in particular. These variations are
largely dependent upon, and are expected to vary directly with, production
volumes in the various geographic markets in which we serve. Additionally,
competitive pricing may reduce margins and gross sales.

15

---

Net sales decreased $3,143 for the
year ended September 30, 2008 as compared to the year ended September 30, 2007,
primarily due to an overall decrease in the build rates of heavy trucks in the
North American market. Sales to NAFTA truck customers declined 34% when compared
to the same period in fiscal 2007 due primarily to timing of truck sales in the
United States resulting from changes in emission standards for truck engines.
The Companys share of this market and unit pricing remained essentially
unchanged from the prior year. Sales to our Asian and European truck customers
increased approximately 51% and 8%, respectively, compared to the twelve months
ended September 30, 2007. World-wide sales in the off-road market declined
approximately 4%. The increases in sales to Asian and European truck customers
helped to offset a portion of the decline from the North American truck market
and world-wide off-road market.



|                                       |  |   |       |  |      |        |      |   |        |  | Percent Change
|-------------------------------------- |  | - | ----- |  | ---- | ------ | ---- | - | ------ |  | --------------
|                                       |  |   |       |  |      |        |      |   |        |  | 2008to        
|For the Year Ended September
      30: |  |   | 2009  |  | 2008 |        | 2007 |   | 2009   |  | 2008          
|Gross profit                           |  | $ | 8,636 |  | $    | 22,821 |      | $ | 23,772 |  | (62.2         

Gross profit was $8,636, or 22.3%,
of net sales for the year ended September 30, 2009, a decrease of $14,185 from
the gross profit of $22,821, or 34.7%, of net sales in the comparable fiscal
2008 period.

The gross profit decline in fiscal
2009 is primarily driven by the 41% net decrease in sales of electronic throttle
control systems to our heavy truck, transit bus and off-road customers. Our
business is not entirely scalable, which means that certain overhead costs will
not vary directly in proportion to sales volumes, particularly during periods of
declining sales revenues. However, direct production costs such as materials and
labor generally fluctuate with sales volumes. Additionally, gross profit was
negatively impacted in fiscal 2009 due to settlement of outstanding labor issues
and severance costs totaling approximately $320; recording a write down to the
value of our remaining capitalized license fee related to adjustable pedal
technology of $116 due to the significant decline in business in the
recreational vehicle industry; and an overall increase in warranty costs.
Offsetting some of these increases in costs were overall reductions in salary
cost related to our cost reduction program in fiscal 2009.

Gross profit was $22,821, or 34.7%,
of net sales for the year ended September 30, 2008, a decrease of $951 from the
gross profit of $23,772, or 34.5%, of net sales in the comparable fiscal 2007
period.

The 4% decrease in gross profit in
fiscal 2008 is primarily driven by the 34% net decrease in sales of electronic
throttle control systems to North American heavy truck customers offset in part
by higher European and Asian sales volumes. Beginning in late fiscal 2008, we
began to see a decline in the order rates from some of our principal truck OEMs
due to recessionary pressures in the United States and other portions of the
world. During fiscal 2007, we substantially completed our realignment of
operations, as discussed in Note 1 in the Notes to Consolidated Financial
Statements, and as a result of this realignment we experienced an overall
reduction in labor costs and net material costs due to continued efforts in
global sourcing and the production of our own internally developed contacting
and non-contacting sensors. Overhead expenses decreased between periods, but
increased slightly as a percentage of sales.



|                                       |  |   |       |  |      |       |      |   |       |  | Percent Change
|-------------------------------------- |  | - | ----- |  | ---- | ----- | ---- | - | ----- |  | --------------
|                                       |  |   |       |  |      |       |      |   |       |  | 2008to        
|For the Year Ended September
      30: |  |   | 2009  |  | 2008 |       | 2007 |   | 2009  |  | 2008          
|Research and development               |  | $ | 3,981 |  | $    | 4,015 |      | $ | 3,145 |  | (0.8          

Research and development expenses
were essentially unchanged when compared to the year ended September 30, 2008.
The Companys research and development expenditures generally will fluctuate
based on the programs and products under development at any given point in time,
and that fluctuation often does not coincide with sales cycles. Although our
sales are down 41%, our cash flows have been negatively impacted and we
instituted temporary Company-wide salary reductions in fiscal 2009, we feel it
remains important that we continue our commitment to and spending for new
product development and technology for existing and new customers and programs.
Overall, we expect research and development expenses to increase to more
normalized levels once the temporary cost reductions are eliminated.

16

---

Research and development expenses
increased $870 for the year ended September 30, 2008 compared to the same period
in fiscal 2007. The increase in research and development expense is primarily
attributable to operating our Conceptual Development Center, which was completed
in mid fiscal 2007.



|                                       |  |   |       |  |      |       |      |   |       |  | Percent Change
|-------------------------------------- |  | - | ----- |  | ---- | ----- | ---- | - | ----- |  | --------------
|                                       |  |   |       |  |      |       |      |   |       |  | 2008to        
|For the Year Ended September
      30: |  |   | 2009  |  | 2008 |       | 2007 |   | 2009  |  | 2008          
|Selling                                |  | $ | 2,425 |  | $    | 2,727 |      | $ | 2,163 |  | (11.1         

Selling expenses decreased $302 for
the year ended September 30, 2009 as compared to the same period in fiscal 2008
mainly due to lower overall travel expenses, reduction in salary costs as a
result of our cost reduction program and reductions in sales commission expenses
as a result of lower commission sales.

Selling expenses increased $564 in
fiscal 2008 as compared to the same period in fiscal 2007. The increase in
selling expenses is mainly due to higher overall salaries and expanded selling
and marketing efforts, including expenses associated with sales and marketing
related travel in the European, Russian, Chinese, South American and Australian
markets and increased emphasis in off-road markets world-wide.



|                                       |  |   |       |  |      |       |      |   |       |  | Percent Change
|-------------------------------------- |  | - | ----- |  | ---- | ----- | ---- | - | ----- |  | --------------
|                                       |  |   |       |  |      |       |      |   |       |  | 2008to        
|For the Year Ended September
      30: |  |   | 2009  |  | 2008 |       | 2007 |   | 2009  |  | 2008          
|Administration                         |  | $ | 5,522 |  | $    | 5,500 |      | $ | 5,898 |  | 0.4           

Administration expenses for the year
ended September 30, 2009 were essentially unchanged when compared to the same
period in fiscal 2008. Increases in administration expenses include a $297
non-cash compensation expense recognized in conjunction with our unfunded
deferred compensation plan during fiscal 2009 and an overall increase in bad
debt expense of $169. As the economic downturn progressed during fiscal 2009, we
have experienced more past due accounts and collection difficulties with certain
customers and accordingly have increased our collection efforts and bad debt
reserves. Off-setting some of these increases in administration expenses were
reductions in salary costs and director fees resulting from implementing certain
cost cutting measures during fiscal 2009, including temporary Company-wide
salary reductions and a 20% reduction in fees paid to the members of the
Companys Board of Directors. In addition, audit fees related to our compliance
with Section 404 of the Sarbanes-Oxley Act decreased. At September 30, 2009, we
are not required to be audited under the requirements of Section 404 of the
Sarbanes-Oxley Act due to our public float decreasing below the required level
for an audit, however we have maintained all of our internally generated
internal control measures. This change resulted in a corresponding decrease in
audit fees related to such services. Currently all companies will be required to
comply with Sarbanes-Oxley beginning with fiscal years ending on or after June
15, 2010 and based on those current regulations, we anticipate that our public
accountants will again be required to audit our system of internal controls over
financial reporting for fiscal 2010.

Administration expenses for the year
ended September 30, 2008 decreased $398 as compared to the same period in fiscal
2007. The decrease in administration expenses is primarily due to a reduction in
legal fees, including those associated with the class action lawsuit, which is
also discussed in Note 10 in the Notes to Consolidated Financial Statements.
Overall, legal fees decreased approximately 48%. Administration expense
increased for design changes to our compensation structure, employee recruitment
and relocation costs. Included in administration expenses for the year ended
September 30, 2007 was the recording of an additional $546 of environmental
liability as discussed in Note 10 in the Notes to Consolidated Financial
Statements.

17

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|                                             |  |   |      |  |      |        |      |  |      |   |      | Percent Change
|-------------------------------------------- |  | - | ---- |  | ---- | ------ | ---- |  | ---- | - | ---- | --------------
|                                             |  |   |      |  |      |        |      |  |      |   |      | 2008to        
|For the Year Ended September
      30:       |  |   | 2009 |  | 2008 |        | 2007 |  | 2009 |   | 2008
|Gain from settlement of environmental claims |  | $ |     |  | $    | (1,072 | )    |  | $    |  |      | *NM*          

As part of our contractual indemnity
claim against Dana and contribution claims against Blount and Rosan, as
described in Note 10 in the Notes to Consolidated Financial Statements, during
fiscal 2008 we received cash payments totaling $735 from Dana, Blount and Rosan
and shares in Dana equal to approximately $337 at the time of settlement. As of
September 30, 2008, we recorded a gain of $1,072 in operating expenses in the
accompanying consolidated financial statements.



|                                       |  |   |      |  |      |   |      |   |      |  | Percent Change
|-------------------------------------- |  | - | ---- |  | ---- | - | ---- | - | ---- |  | --------------
|                                       |  |   |      |  |      |   |      |   |      |  | 2008to        
|For the Year Ended September
      30: |  |   | 2009 |  | 2008 |   | 2007 |   | 2009 |  | 2008          
|Realignment of operations              |  | $ |     |  | $    |  |      | $ | 737  |  | *NM*          

We recorded expenses of $737 for the
year ended September 30, 2007 related to our realignment of operations as
discussed in Note 1 in the Notes to Consolidated Financial Statements. As the
realignment was complete in fiscal 2007, no realignment expense was recorded in
fiscal years 2009 and 2008.



|                                       |  |   |      |   |      |   |      |   |      |   |      |   |  | Percent Change
|-------------------------------------- |  | - | ---- | - | ---- | - | ---- | - | ---- | - | ---- | - |  | --------------
|                                       |  |   |      |   |      |   |      |   |      |   |      |   |  | 2008to        
|For the Year Ended September
      30: |  |   | 2009 |   | 2008 |   | 2007 |   | 2009 |   | 2008
|Interest income                        |  | $ | (26  | ) |      | $ | (64  | ) |      | $ | (136 | ) |  | (59.4         
|Interest expense                       |  | $ | 19   |   |      | $ | 140  |   |      | $ | 868  |   |  | (86.4         

Interest
expense has continued to decrease over the last three years due to the decrease
in overall borrowing. In fiscal 2009, interest expense decreased $121 compared
to the same period in fiscal 2008 and in fiscal 2008 was $728 lower than fiscal
2007. As of September 30, 2009, all of our debt has been fully paid off and we
have cancelled our revolving loan facility with GE Capital.



|                                       |  |   |      |  |      |   |      |   |      |  | Percent Change
|-------------------------------------- |  | - | ---- |  | ---- | - | ---- | - | ---- |  | --------------
|                                       |  |   |      |  |      |   |      |   |      |  | 2008to        
|For the Year Ended September
      30: |  |   | 2009 |  | 2008 |   | 2007 |   | 2009 |  | 2008          
|Loss on impairment of investments      |  | $ | 317  |  | $    |  |      | $ |     |  | *NM*          

Loss on
impairment of investments is a non-cash, other-than-temporary impairment charge
relating to common stock of Dana during the first quarter of fiscal 2009. The
impairment charge assumes no income tax benefit given the uncertainty of the
Companys ability to generate future taxable investment gains required to
utilize these investment losses. Prior to recording the impairment charge, the
decline in market value was carried net of tax in other comprehensive loss.
Following the recording of this impairment charge, all subsequent changes in
market value of our short-term investments is recorded net of tax in other
comprehensive income (loss).



|                                       |  |   |      |  |      |      |      |  |      |        |      |  | Percent Change
|-------------------------------------- |  | - | ---- |  | ---- | ---- | ---- |  | ---- | ------ | ---- |  | --------------
|                                       |  |   |      |  |      |      |      |  |      |        |      |  | 2008to        
|For the Year Ended September
      30: |  |   | 2009 |  | 2008 |      | 2007 |  | 2009 |        | 2008
|Other (income) expense, net            |  | $ | 84   |  | $    | (205 | )    |  | $    | (1,147 | )    |  | *NM*          

Other expense of $84 in fiscal 2009
primarily consisted of losses related to the disposal of certain fixed assets.
Other income of $205 in fiscal 2008 consisted primarily of a $109 gain related
to the sales and disposal of certain fixed assets and foreign currency gains.
Other income was $1,147 in fiscal 2007 and consisted primarily of a $769 gain
from the extinguishment of old outstanding accounts payable balances of various
insolvent subsidiaries as discussed in Note 5 in the Notes to Consolidated
Financial Statements and a $120 gain from the extinguishment of old and disputed
outstanding accounts payable balances related to an active subsidiary. Also
included in other income in fiscal 2007 is a $170 gain related to the sales and
disposal of certain fixed assets.

18

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|                                       |  |   |        |   |      |   |       |  |      |       |      | Percent Change
|-------------------------------------- |  | - | ------ | - | ---- | - | ----- |  | ---- | ----- | ---- | --------------
|                                       |  |   |        |   |      |   |       |  |      |       |      | 2008to        
|For the Year Ended September
      30: |  |   | 2009   |   | 2008 |   | 2007  |  | 2009 |       | 2008
|Income tax expense (benefit)           |  | $ | (1,677 | ) |      | $ | 3,950 |  | $    | 4,307 |      | (142.5        



In fiscal
2009, the Company recorded an income tax benefit of $1,677 compared to income
tax expense of $3,950 in fiscal 2008 and $4,307 in fiscal 2007. The overall tax
rate was 45.5% in fiscal 2009 compared to 33.5% and 35.2% in fiscal 2008 and
2007, respectively. The increase in the effective tax rate is primarily due to
the mix of pretax earnings/losses between domestic and foreign jurisdictions,
primarily in China. The mix of earnings combined with lower tax rates in our
foreign jurisdictions caused the tax rate to exceed prior year levels.
Additionally, a favorable R&D credit adjustment was recorded due to a change
in United States tax law and the initial recording of our Chinese deferred tax
assets during fiscal 2009 which combined to increase the tax rate by 4.0%. This
increase was partially offset by a valuation allowance against an unrealized
investment loss and an unfavorable Domestic Production Activities Deduction
adjustment related to the federal net operating loss carry-back. The decrease in
tax rate from fiscal 2008 to fiscal 2007 is primarily due to an increase in the
United States Domestic Production Activities Deduction and a larger percentage
of the Companys earnings being taxed at the lower Chinese tax rate. Refer to
Note 9 in the Notes to Consolidated Financial Statements for further details of
changes in our overall tax rate.

Financial Condition, Liquidity and
Capital Resources

At September 30, 2009, we had on
hand cash and cash equivalents of $9,245. During the fourth quarter of fiscal
2009, we cancelled our revolving loan facility with GE Capital, which as of the
day of termination had a zero balance. We believe our cash on hand will be
sufficient to meet our working capital needs on a short-term and longer-term
basis without the necessity of borrowing, or attempting to borrow from a
revolving credit facility. However, were we to require additional borrowing
capacity, we may be unable to locate such capacity on acceptable terms or at
all.

Cash
generated from operations was $4,238 for the year ended September 30, 2009, a
decrease of $5,708 from the cash generated from operations of $9,946 for the
year ended September 30, 2008. Net income (loss) plus non-cash charges for
depreciation and stock based compensation contributed cash of $719 in fiscal
2009 and contributed cash of $10,305 for the year ended September 30, 2008. The
decline in profitability due to the reduced sales volumes was the primary factor
in the reduced cash generated by operating activities.

Changes in
working capital items generated cash of $3,566 for the year ended September 30,
2009 compared to a $408 use of cash in the corresponding prior year period.
Timing of collections on receivables and lower sales levels resulted in lower
receivables, which increased cash by $1,876 during fiscal 2009, compared to a
use of cash of $1,563 in the prior year period. Inventories were reduced by
$2,676 for the year ended September 30, 2009 compared to $937 in fiscal 2008 to
match inventory volumes with lower sales volumes in fiscal 2009. Accounts
payable decreased in fiscal 2009, primarily due to the lower sales and inventory
purchases. Cash flows from operations for the years ended September 30, 2009 and
2008 included payments to fund our pension plans of $183 and $1,307,
respectively. Although we have made reductions to our cost structure during
fiscal 2009 in response to our lower sales volumes, due to the uncertain
world-wide economic market and product demand from our customers we may
experience periods of negative cash flow from operations.

Cash used in investing activities
was $1,861 for the year ended September 30, 2009 and $1,680 for the year ended
September 30, 2008 and was comprised primarily of purchases of equipment for
both periods. We expect our cash use for investing activities to at least remain
constant and potentially increase in the future as we continue to purchase
capital equipment to expand and support our operations worldwide. We currently
anticipate spending approximately $3,000 in capital expenditures for the year
ended September 30, 2010.

Cash used in financing activities
was $2,192 for the year ended September 30, 2009, compared to cash used in
financing activities of $827 for the year ended September 30, 2008. In October
2008, we announced a share repurchase plan whereby the Company can, but is under
no obligation, to repurchase up to $5 million of the Companys common stock.
Repurchases may be made in the open market or through bock trades, in compliance
with Securities and Exchange Commission guidelines, subject to market
conditions, applicable legal requirements and other factors. In fiscal 2009, we
purchased 310,893 shares of common stock at a total value of $2,357, which
comprises all of the cash usage for financing activities for the year. The use
of cash for financing activities for fiscal 2008 primarily relates to debt
payments of $1,000, slightly offset by cash proceeds of $173 from the exercise
of stock options.

19

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Contractual Obligations as of
September 30, 2009

At September 30, 2009, our
contractual obligations consisted of operating lease obligations and a license
agreement. We do not have any letters of credit or debt guarantees outstanding
at September 30, 2009. Maturities of these contractual obligations consist of
the following:

|                            |  | Payments due
      by period
|--------------------------- |  | ----------------------------
|                            |  |                             
|                            |  | Total                       
|Operating leases            |  | $                           
|MMT license -
      minimum |  |                             
|royalties                   |  |                             
|                            |  | $                           

Certain liabilities, including those
related to our pension and post-retirement benefit plans, are reported in the
accompanying consolidated balance sheets but are not reflected in the table
above due to the absence of stated maturities. We have net obligations at
September 30, 2009 related to our pension plans and post-retirement medical plan
of $5,703 and $2,819, respectively. We funded $183 to our pension plans in
fiscal 2009 and we expect to make payments of $747 in fiscal 2010 to fund our
pension plans.

A debtor can only relieve itself of
a liability if it has been extinguished and 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 year ended September 30, 2007, the Company was judicially
released from and reversed $889 of old accounts payable resulting in a gain,
which has been recorded in other (income) expense in the accompanying
consolidated statements of operations. No amounts were released and reversed
during fiscal 2009 and 2008. The Company expects to reverse amounts in future
periods based on the recognition of the liabilities being judicially released of
$90 in fiscal 2010; and a total of $65 in fiscal 2011  2016.

Critical Accounting Policies and
Estimates

Management's discussion and analysis
of our financial condition and results of operations are based on our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these 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 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.

20

---

Product Warranty

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

Legal

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

Environmental Costs

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

Pensions and Post-Retirement Benefit
Obligations

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

Our discount rate assumption is
intended to reflect the rate at which retirement benefits could be effectively
settled based upon the assumed timing of the benefit payments. To determine our
discount rate, we discounted the expected benefit payments using the Citigroup
Pension Liability Index yield curve. The equivalent level interest rate that
produces the same present value of benefits was then determined. Our assumed
rate does not differ significantly from this benchmark rate. We assumed a
discount rate of 5.50% to determine our pension benefit obligations at September
30, 2009 and a rate of 6.97% to determine our net periodic benefit cost in
fiscal 2009. A 1.0% decrease in these discount rates would have increased our
pension benefit obligations at the end of fiscal 2009 by $1,679 and increased
our net periodic benefit cost in 2009 by $126. A 1.0% increase in discount rates
would have decreased our pension obligations at September 30, 2009 by $1,395 and
decreased our net periodic benefit cost in 2009 by $109. To determine the
discount rate for our post-retirement benefit plan, we also discounted the
expected benefit payments using the Citigroup Pension Liability Index yield
curve and assumed a discount rate of 5.50% to determine our post-retirement
benefit obligations at September 30, 2009 and a rate of 6.80% to determine our
post-retirement benefit cots in fiscal 2009. A 1.0% decrease in discount rate
for our post-retirement benefit plan would have increased our post-retirement
benefit obligation at September 30, 2009 by $298 and increased our
post-retirement benefit expense in 2009 by $6. A 1.0% increase in discount rate
would have decreased our post-retirement benefit obligation at September 30,
2009 by $251 and decreased our post-retirement benefit expense in 2009 by
$6.

21

---

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. Information regarding our asset
allocations is included in Note 8 of the Notes to Consolidated Financial
Statements. A 1.0% increase or decrease in the assumed rate of return on plan
assets would have impacted net periodic benefit cost in fiscal 2009 by $114. Our
post-retirement plan does not contain any plan assets.

We assumed healthcare cost trend
rates for our post-retirement plan of 5.0% - 9.0% in 2009, decreasing gradually
to 5.0% in 2017 and remaining at 5.0% thereafter. A 1.0% increase in assumed
healthcare cost trend rates would have increased our post-retirement benefit
obligation at September 30, 2009 by $261 and increased post-retirement benefit
expense in 2009 by $18. A 1.0% decrease in assumed healthcare cost trend rates
would have decreased the post-retirement benefit obligation by $223 at the end
of fiscal 2009 and decreased post-retirement benefit expense in 2009 by
$15.

Share Based Compensation Expense

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

Income Taxes

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

Recently Issued Accounting
Standards

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

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

22

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ITEM 7A. 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 had a revolving loan
agreement with its primary lender GE Capital, which originally expired on
September 29, 2009; however, during the fourth quarter of fiscal 2009, the
Company cancelled this revolving loan agreement. As of September 30, 2009, there
was no balance outstanding on any loan or revolving loan agreements.

Foreign Currency
Risk

We sell our products to customers in
the heavy truck, transit bus and off-road equipment industries. For the fiscal
years ended September 30, 2009 and 2008, the Company had foreign sales of
approximately 37% and 46% of net sales, respectively. All worldwide sales in
fiscal 2009 and 2008, with the exception of $2,009 and $3,265, respectively,
were denominated in U.S. dollars. During fiscal 2005, we established a
manufacturing facility in Suzhou, China and we opened sales offices in Shanghai,
China and Munich, Germany. We purchase components internationally for use in
both our products whose sales are denominated in U.S. dollars and other
currencies. Although the Company is expanding its international exposure, it
does not believe that changes in future exchange rates would have a material
effect on its financial position, results of operations, or cash flows at this
time. As a result, the Company has not entered into forward exchange or option
contracts for transactions to hedge against foreign currency risk. The Company
will continue to assess its foreign currency risk as its international
operations, international purchases and sales increase.

Investment
Risk

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

23

---

ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

Williams Controls,
Inc.Index to Consolidated Financial
Statements

|                                                                                                                   |  | Page
|------------------------------------------------------------------------------------------------------------------ |  | ----
|Report
      of Independent Registered Public Accounting Firm                                                      |  | 25  
|Consolidated Balance
      Sheets at September 30, 2009 and 2008                                                   |  | 26  
|Consolidated Statements of Operations for the years ended September
      30, 2009, 2008 and 2007                  |  | 27  
|Consolidated Statements
      of Stockholders Equity for the years ended September 30, 2009, 2008 and
      2007  |  | 28  
|Consolidated Statements of Comprehensive Income (Loss) for the
      years ended September 30, 2009, 2008 and 2007 |  | 29  
|Consolidated Statements
      of Cash Flows for the years ended September 30, 2009, 2008 and
    2007              |  | 30  
|Notes
      to Consolidated Financial Statements                                                                   |  | 31  

See pages 56-57 for Index to
Exhibits

24

---

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors
ofWilliams Controls, Inc.:

We have
audited the accompanying consolidated balance sheets of Williams Controls, Inc.
as of September 30, 2009 and 2008 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended September 30, 2009. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted
our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement.The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Williams
Controls, Inc. as of September 30, 2009 and 2008, and the consolidated results
of its operations and its cash flows for each of the years in the three-year
period ended September 30, 2009, in conformity with accounting principles
generally accepted in the United States of America.

/s/ Moss Adams LLPPortland,
OregonDecember 15, 2009

25

---

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

|                                                                                |  | September 30, |        | September 30,
|------------------------------------------------------------------------------- |  | ------------- | ------ | -------------
|                                                                                |  | 2009          |        | 2008         
|ASSETS                                                                          |  |               |        |              
|Current
    Assets:                                                             |  |               |        |              
|Cash and cash
      equivalents                                                 |  | $             | 9,245  |              
|Short-term
    investments                                                      |  |               | 286    |              
|Trade accounts receivable,
      net                                            |  |               | 6,677  |              
|Other accounts
      receivable                                                 |  |               | 2,720  |              
|Inventories                                                                     |  |               | 5,539  |              
|Deferred income
taxes                                                           |  |               | 579    |              
|Prepaid expenses and other
      current assets                                 |  |               | 269    |              
|Total current assets                                                            |  |               | 25,315 |              
|                                                                                |  |               |        |              
|Property, plant and equipment, net                                              |  |               | 8,893  |              
|Deferred income
      taxes                                                     |  |               | 3,019  |              
|Other
      assets, net                                                         |  |               | 368    |              
|Total assets                                                                    |  | $             | 37,595 |              
|                                                                               
|LIABILITIES AND STOCKHOLDERS EQUITY                                            |  |               |        |              
|Current
      Liabilities:                                                      |  |               |        |              
|Accounts payable                                                                |  | $             | 2,990  |              
|Accrued expenses                                                                |  |               | 5,703  |              
|Current portion of employee
      benefit obligations                           |  |               | 225    |              
|Total current liabilities                                                       |  |               | 8,918  |              
|                                                                               
|Long-term Liabilities:                                                          |  |               |        |              
|Employee benefit
      obligations                                              |  |               | 8,297  |              
|Other long-term
      liabilities                                               |  |               | 290    |              
|                                                                               
|Commitments and contingencies                                                   |  |               |        |              
|                                                                               
|Stockholders Equity:                                                           |  |               |        |              
|Preferred stock ($.01 par
      value, 50,000,000 authorized)                   |  |               |        |              
|Series C (No shares were issued and outstanding at September 30,                |  |               |        |              
|2009 and 2008, respectively)                                                    |  |               |       |              
|Common stock ($.01 par value,
      12,500,000 authorized;                      |  |               |        |              
|7,270,820 and 7,534,642 issued and outstanding at                               |  |               |        |              
|September 30, 2009 and 2008, respectively)                                      |  |               | 73     |              
|Additional paid-in
      capital                                                |  |               | 36,643 |              
|Accumulated deficit                                                             |  |               | (6,776 | )            
|Treasury stock (332,593 and
      21,700 shares at September 30, 2009 and 2008) |  |               | (2,734 | )            
|Accumulated other
      comprehensive loss                                      |  |               | (7,116 | )            
|Total stockholders equity                                                      |  |               | 20,090 |              
|Total liabilities and stockholders equity                                      |  | $             | 37,595 |              

See accompanying notes to Consolidated
Financial Statements.

26

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

|                                                                      |  | For the year ended
      September 30,
|--------------------------------------------------------------------- |  | --------------------------------------
|                                                                      |  | 2009                                  
|Net sales                                                             |  | $                                     
|Cost of
      sales                                                   |  |                                       
|                                                                     
|Gross profit                                                          |  |                                       
|                                                                      |  |                                       
|Operating expenses                                                    |  |                                       
|Research and
      development                                        |  |                                       
|Selling                                                               |  |                                       
|Administration                                                        |  |                                       
|Gain from settlement of
      environmental claims                    |  |                                       
|Realignment of
      operations                                       |  |                                       
|Total operating expenses                                              |  |                                       
|                                                                      |  |                                       
|Operating income (loss)                                               |  |                                       
|                                                                      |  |                                       
|Other (income) expenses:                                              |  |                                       
|Interest
    income                                                   |  |                                       
|Interest
    expense                                                  |  |                                       
|Loss on impairment of
      investments                               |  |                                       
|Other (income) loss,
      net                                        |  |                                       
|Total other (income) expenses                                         |  |                                       
|                                                                      |  |                                       
|Income (loss) before income taxes                                     |  |                                       
|Income
      tax (benefit) expense                                    |  |                                       
|                                                                     
|Net income (loss)                                                     |  | $                                     
|                                                                     
|Net income (loss) per common share  basic                            |  | $                                     
|                                                                     
|Weighted average shares used in per share calculation 
      basic   |  |                                       
|                                                                     
|Net income (loss) per common share  diluted                          |  | $                                     
|                                                                     
|Weighted average shares used in per share calculation 
      diluted |  |                                       

See accompanying notes to Consolidated
Financial Statements.

27

---

Williams Controls,
Inc.Consolidated Statements of
Stockholders Equity(Dollars in thousands)

|                                             |  |                    |   |         |   |             |   |          |                |        |  |               |         |        |  |   |        |   |               | Other |        |   |  |  
|-------------------------------------------- |  | ------------------ | - | ------- | - | ----------- | - | -------- | -------------- | ------ |  | ------------- | ------- | ------ |  | - | ------ | - | ------------- | ----- | ------ | - |  | -
|                                             |  |                    |   |         |   |             |   |          | **Additional** |        |  |               |         |        |  |   |        |   | Comprehensive |       |        |   | 
|                                             |  | Common
      Stock |   | Paid-in |   | Accumulated |   | Treasury |                | Income |  | Stockholders
|                                             |  | Shares             |   | Amount  |   | Capital     |   | Deficit  |                | Stock  |  | (Loss)        |         | Equity
|Balance, September 30, 2006                  |  | 7,432,844          |   |         | $ | 74          |   |          | $              | 34,014 |  | $             | (20,414 | )      |  | $ | (377   | ) |               | $     | (5,035 | ) |  | $
|Net
      income                             |  |                   |   |         |   |            |   |          |                |       |  |               | 7,937   |        |  |   |       |   |               |       |       |   |  |  
|Exercise of stock options                    |  | 54,778             |   |         |   | 1           |   |          |                | 259    |  |               |        |        |  |   |       |   |               |       |       |   |  |  
|Share
      based compensation               |  | 7,860              |   |         |   |            |   |          |                | 626    |  |               |        |        |  |   |       |   |               |       |       |   |  |  
|Foreign currency translation adjustment      |  |                   |   |         |   |            |   |          |                |       |  |               |        |        |  |   |       |   |               |       | 54     |   |  |  
|Impact of
      implementing                 |  |                    |   |         |   |             |   |          |                |        |  |               |         |        |  |   |        |   |               |       |        |   |  |  
|authoritative
      guidance                 |  |                    |   |         |   |             |   |          |                |        |  |               |         |        |  |   |        |   |               |       |        |   |  |  
|regarding pension
      and                  |  |                    |   |         |   |             |   |          |                |        |  |               |         |        |  |   |        |   |               |       |        |   |  |  
|post-retirement
      benefits               |  |                   |   |         |   |            |   |          |                |       |  |               |        |        |  |   |       |   |               |       | (749   | ) |  |  
|Change in pension liability adjustment       |  |                   |   |         |   |            |   |          |                |       |  |               |        |        |  |   |       |   |               |       | 779    |   |  |  
|Balance,
      September 30, 2007            |  | 7,495,482          |   |         |   | 75          |   |          |                | 34,899 |  |               | (12,477 | )      |  |   | (377   | ) |               |       | (4,951 | ) |  |  
|Net income                                   |  |                   |   |         |   |            |   |          |                |       |  |               | 7,830   |        |  |   |       |   |               |       |       |   |  |  
|Exercise
      of stock options              |  | 37,198             |   |         |   |            |   |          |                | 173    |  |               |        |        |  |   |       |   |               |       |       |   |  |  
|Share based compensation                     |  | 1,962              |   |         |   |            |   |          |                | 672    |  |               |        |        |  |   |       |   |               |       |       |   |  |  
|Adjustment to record                         |  |                    |   |         |   |             |   |          |                |        |  |               |         |        |  |   |        |   |               |       |        |   |  |  
|uncertain tax
      positions                |  |                   |   |         |   |            |   |          |                |       |  |               | (82     | )      |  |   |       |   |               |       |       |   |  |  
|Foreign currency translation adjustment      |  |                   |   |         |   |            |   |          |                |       |  |               |        |        |  |   |       |   |               |       | 172    |   |  |  
|Change in
      pension liability adjustment |  |                   |   |         |   |            |   |          |                |       |  |               |        |        |  |   |       |   |               |       | (220   | ) |  |  
|Unrealized loss, net of tax                  |  |                   |   |         |   |            |   |          |                |       |  |               |        |        |  |   |       |   |               |       | (66    | ) |  |  
|Balance,
      September 30, 2008            |  | 7,534,642          |   |         |   | 75          |   |          |                | 35,744 |  |               | (4,729  | )      |  |   | (377   | ) |               |       | (5,065 | ) |  |  
|Net loss                                     |  |                   |   |         |   |            |   |          |                |       |  |               | (2,009  | )      |  |   |       |   |               |       |       |   |  |  
|Exercise
      of stock options              |  | 41,666             |   |         |   |            |   |          |                | 165    |  |               |        |        |  |   |       |   |               |       |       |   |  |  
|Share based compensation                     |  | 5,405              |   |         |   |            |   |          |                | 732    |  |               |        |        |  |   |       |   |               |       |       |   |  |  
|Repurchase of common stock                   |  | (310,893           | ) |         |   | (2          | ) |          |                | 2      |  |               |        |        |  |   | (2,357 | ) |               |       |       |   |  |  
|Foreign currency translation adjustment      |  |                   |   |         |   |            |   |          |                |       |  |               |        |        |  |   |       |   |               |       | 6      |   |  |  
|Change in
      pension liability adjustment |  |                   |   |         |   |            |   |          |                |       |  |               |        |        |  |   |       |   |               |       | (2,271 | ) |  |  
|Unrealized gain or loss of                   |  |                    |   |         |   |             |   |          |                |        |  |               |         |        |  |   |        |   |               |       |        |   |  |  
|available-for-sale
      securities          |  |                   |   |         |   |            |   |          |                |       |  |               |        |        |  |   |       |   |               |       | 214    |   |  |  
|Effect of
      changing pension             |  |                    |   |         |   |             |   |          |                |        |  |               |         |        |  |   |        |   |               |       |        |   |  |  
|plan measurement
      date                  |  |                   |   |         |   |            |   |          |                |       |  |               | (38     | )      |  |   |       |   |               |       |       |   |  |  
|Balance, September 30, 2009                  |  | 7,270,820          |   |         | $ | 73          |   |          | $              | 36,643 |  | $             | (6,776  | )      |  | $ | (2,734 | ) |               | $     | (7,116 | ) |  | $

See accompanying notes to Consolidated
Financial Statements.

28

---

Williams Controls,
Inc.Consolidated Statements of
Comprehensive Income (Loss)(Dollars in thousands)

|                                                                                          |  | For the year ended September
      30,
|----------------------------------------------------------------------------------------- |  | --------------------------------------
|                                                                                          |  | 2009                                  
|Net
      income (loss)                                                                   |  | $                                     
|Change in pension
      liability adjustment, net of tax of ($1,387),                     |  |                                       
|($384) and $455 in 2009, 2008
      and 2007, respectively                                |  |                                       
|Unrealized (gain) loss, net of tax of $126 and ($39) in 2009 and
      2008, respectively |  |                                       
|Foreign currency
      translation adjustments                                            |  |                                       
|                                                                                         
|Comprehensive income (loss)                                                               |  | $                                     

See accompanying notes to Consolidated
Financial Statements.

29

---

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

|                                                                                               |  | For the year ended September
      30,
|---------------------------------------------------------------------------------------------- |  | --------------------------------------
|                                                                                               |  | 2009                                  
|Cash
      flows from operating activities:                                                    |  |                                       
|Net income (loss)                                                                              |  | $                                     
|Adjustments to reconcile net income (loss) to net cash provided by
      operating activities: |  |                                       
|Depreciation and
      amortization                                                            |  |                                       
|Deferred income
taxes                                                                          |  |                                       
|Share based
    compensation                                                                   |  |                                       
|Loss on impairment of
      investments                                                        |  |                                       
|Gain on settlement of
      liabilities                                                        |  |                                       
|Gain from stock settlement of
      environmental claims                                       |  |                                       
|(Gain) loss from sale and
      disposal of fixed assets                                       |  |                                       
|Changes in operating assets
      and liabilities:                                             |  |                                       
|Receivables, net                                                                               |  |                                       
|Inventories                                                                                    |  |                                       
|Prepaid expenses and other current assets                                                      |  |                                       
|Accounts payable and accrued expenses                                                          |  |                                       
|Other                                                                                          |  |                                       
|                                                                                              
|Net
      cash provided by operating activities                                                |  |                                       
|                                                                                              
|Cash
      flows from investing activities:                                                    |  |                                       
|Payments for property, plant
      and equipment                                               |  |                                       
|Proceeds from sale of
      property, plant and equipment                                      |  |                                       
|                                                                                              
|Net
      cash used in investing activities                                                    |  |                                       
|                                                                                              
|Cash
      flows from financing activities:                                                    |  |                                       
|Repayments of debt                                                                             |  |                                       
|Repurchase of common
      stock                                                               |  |                                       
|Net proceeds from exercise of
      stock options                                              |  |                                       
|                                                                                              
|Net
      cash used in financing activities                                                    |  |                                       
|                                                                                              
|Net
      increase (decrease) in cash and cash equivalents                                     |  |                                       
|Cash and cash
      equivalents at beginning of year                                           |  |                                       
|                                                                                              
|Cash
      and cash equivalents at end of year                                                 |  | $                                     
|                                                                                              
|Supplemental disclosure of cash flow information:                                              |  |                                       
|Interest paid                                                                                  |  | $                                     
|Income taxes paid                                                                              |  |                                       
|                                                                                              
|Supplemental disclosure of non-cash investing and financing
      activities:                  |  |                                       
|Pension liability
      adjustment                                                             |  | $                                     

See accompanying notes to Consolidated
Financial Statements.

30

---

Notes to Consolidated Financial
StatementsYears Ended September 30, 2009, 2008 and 2007(Dollars in
thousands, except share and per share amounts)

Note 1. Organization and Basis of
Presentation

Organization:

Williams Controls, Inc., including its wholly-owned subsidiaries as
follows and hereinafter referred to as the Company, Registrant, we, our,
or us:

Active
SubsidiariesWilliams Controls Industries, Inc. (Williams); Williams
(Suzhou) Controls Co. Ltd. (Williams Controls Asia); Williams Controls Europe
GmbH (Williams Controls Europe); and Williams Controls India Private Limited
(Williams Controls India)

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

Basis of Presentation:

The consolidated
financial statements include all of the accounts of Williams Controls, Inc. and
its subsidiaries. All significant inter-company balances and transactions have
been eliminated in consolidation.

The preparation of consolidated financial statements in conformity with
US generally accepted accounting principles 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 issuance of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Management makes these estimates using the best information
available at the time the estimates are made; however, actual results could
differ materially from these estimates. Estimates are used in accounting for,
among other things, allowance for doubtful accounts, excess and obsolete
inventory, useful lives for depreciation and amortization, future cash flows
associated with impairment testing for long-lived assets, pension and
post-retirement benefit obligations, product warranty, share-based compensation
expense, income taxes and commitments and contingencies.

Concentration of Risk and Sales by
Customer:

For the years ended September 30, 2009, 2008 and 2007, The Volvo Group
accounted for 16%, 19% and 17%: Paccar, Inc. accounted for 9%, 11% and 14%: and
Daimler Trucks NA accounted for 9%, 9% and 13%, respectively. Approximately 37%,
46% and 41% of net sales in fiscal 2009, 2008 and 2007, respectively, were to
customers outside of the United States, primarily in Belgium, Canada, China,
France, Korea, Mexico and Sweden, and, to a lesser extent, in other European
countries, South America, Pacific Rim nations and Australia. At September 30,
2009 and 2008, The Volvo Group represented 28% and 25%, Bendix Commercial
Vehicle Systems represented 11% and 8%, Daimler Trucks NA represented 9% and 8%,
Navistar International Corporation represented 9% and 8%, and Paccar, Inc.
represented 4% and 9%, of trade accounts receivable, respectively.

Realignment of operations:

The realignment of operations (the Plan) which was begun in fiscal
2006, was essentially completed by the end of the Companys fiscal year ended
September 30, 2007. The Plan included realigning its manufacturing operations as
part of an ongoing effort to focus on its core product competencies and improve
its global competitiveness. The Plan consisted of outsourcing all of the
Companys die casting and machining operations from its Portland, Oregon
manufacturing facility to high-quality suppliers, primarily in Asia, and
relocating of the Companys assembly operations for the majority of its
pneumatic products from the Portland facility to its manufacturing facility in
Suzhou, China. The total costs of the plan were approximately $1.5 million and
included costs related to hourly and salaried termination benefits of $605;
supplier and parts qualification of $100; refurbishment of tools of $150;
accelerated depreciation on certain assets of $240; and general administrative
and other costs of $400. Certain of these costs are classified in financial
statement line items other than realignment of operations expense. The Company
recorded realignment expense of $737, for the twelve month period ended
September 30, 2007, which was recorded in operating expenses in the accompanying
consolidated statements of operations. No realignment expense was recorded in
fiscal 2009 or 2008.

31

---

Note 2. Significant Accounting
Policies

Cash and Cash
Equivalents:

Cash and cash
equivalents include highly liquid investments with original maturities of three
months or less.

Short-term
Investments:

Short-term investments consist of equity securities and are classified as
available-for-sale securities and recorded at fair value with any unrealized
gains and losses reported, net of tax, in other comprehensive income (loss). The
carrying value of available-for-sale securities approximates fair value due to
their short maturities.

Trade Accounts
Receivable:

The Company provides an allowance for doubtful accounts equal to the
estimated uncollectible amounts. The Companys estimate is based on historical
collection experience and a review of the current status of trade accounts
receivable. It is reasonably possible that the Companys estimate of the
allowance for doubtful accounts will change. Trade accounts receivable are
presented net of an allowance for doubtful accounts of $246 and $47 at September
30, 2009, and September 30, 2008, respectively.

Inventories:

Inventories are valued at the lower of cost or market. Cost is determined
using standard costs, which approximate the first in, first out, or FIFO method.
Cost includes the acquisition of purchased components, parts and subassemblies,
labor and overhead. Market with respect to raw materials is replacement cost
and, with respect to work-in-process and finished goods, is net realizable
value. The Company periodically reviews its inventories for excess or slow
moving items and makes provisions as necessary to properly reflect inventory
value.

Property, Plant and
Equipment:

Property, plant and equipment are stated at cost, net of accumulated
depreciation. Property, plant and equipment are depreciated using the
straight-line method over the estimated useful lives of the assets. The
principal estimated lives are: 31.5 years for buildings, 5 to 12 years for
machinery and equipment, and 3 to 5 years for office furniture and equipment.
Maintenance and repairs are expensed as incurred.

Impairment of Long-Lived
Assets:

Management reviews long-lived assets for impairment whenever events or
changes in circumstances indicate the carrying amount of such assets may not be
recoverable. Recoverability of these assets is determined by comparing the
estimated undiscounted future cash flows of the operation to which the assets
relate, to the carrying value of such assets. If the carrying value of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying value of the asset exceeds the fair value of
the asset. Assets to be disposed of are reported at the lower of the carrying
value or fair value less costs to sell.

Deferred Income
Taxes:

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
the consolidated statement of operations in the period that includes the
enactment date. Valuation allowances are established as necessary to reduce
deferred tax assets unless realization of the assets is considered more likely
than not.

32

---

Product Warranty:

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 on the accompanying
consolidated balance sheets. Warranty is limited to a specified time period,
mileage or hours of use, and varies by product, application and customer. The
Company has recorded a liability, which in the opinion of management, is
adequate to cover such warranty costs. Warranty payments can vary significantly
from year to year depending on the timing of the settlement of warranty claims
with various customers. Following is a reconciliation of the changes in the
Companys warranty liability for the years ended September 30, 2009, 2008 and
2007.

Year ended September
    30,
    
    2009
    
    2008
    
    2007Balance at beginning of period
    
    $
    762
    
    
    $
    1,712
    
    
    $
    1,720Payments
    
    
    (995
    )
    
    
    (1,359
    )
    
    
    (1,076
    )Warranty
      claims accrued
    
    
    984
    
    
    
    810
    
    
    
    1,228Adjustments
      and changes in estimates
    
    
    
    
    
    
    (401
    )
    
    
    (160
    )Balance at end of period
    
    $
    751
    
    
    $
    762
    
    
    $
    1,712


During
fiscal 2008, the Company recorded a reduction of warranty liability of $324
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 a reduction in liability was
necessary. This reduction in the liability has been recorded as a reduction of
cost of sales in the accompanying condensed consolidated statement of
operations. Warranty payments in fiscal 2008 were higher than historical rates
as the Company settled and paid a significant number of claims dating back to
fiscal 2006 with one customer.

During
fiscal 2007, the Company recorded an adjustment for 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 was recorded in cost of sales
in the accompanying condensed consolidated statement of operations. At September
30, 2007, the Company also made an adjustment to reverse the $400 warranty
liability related to is former passenger car and light truck product lines, as
the warranty return period had expired.

Environmental
Costs:

Liabilities for environmental
matters are recorded when it is probable that a liability has been incurred and
the amount of the liability can be reasonably estimated, or if an amount is
likely to fall within a range and no amount within that range can be determined
to be the better estimate, the minimum amount of the range is recorded.
Liabilities for environmental matters exclude claims for recoveries from prior
owners or operators until it is probable that such recoveries will be
realized.

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.

Research and Development
Costs:

Research and development costs are
expensed as incurred. Research and development costs consist primarily of
employee costs, cost of consumed materials, depreciation and engineering related
costs.

33

---

Pensions and Post-retirement Benefit
Obligations:

The Company
provides various benefits to certain current and former employees through
defined benefit plans and retirement healthcare benefit plans. For financial
reporting purposes, net periodic benefit cost and related obligations are
calculated using a number of significant actuarial assumptions, including a
discount rate assumption and a long-term rate of return on assets assumption.
Changes in net periodic benefit cost and funding status may occur in the future
due to changes in these assumptions. The funded status of defined pension and
postretirement plans recognized in the statement of financial position is
measured as the difference between the fair market value of the plan assets and
the benefit obligation. For a defined benefit pension plan, the benefit
obligation is the projected benefit obligation; for any other defined benefit
postretirement plan, such as a retiree health care plan, the benefit obligation
is the accumulated benefit obligation. Any over-funded status is recognized as
an asset and any underfunded status is recognized as a liability.

Projected benefit obligation is the actuarial present value as of the
measurement date of all benefits attributed by the plan benefit formula to
employee service rendered before the measurement date using assumptions as to
future compensation levels if the plan benefit formula is based on those future
compensation levels. Accumulated benefit obligation is the actuarial present
value of benefits (whether vested or unvested) attributed by the plan benefit
formula to employee service rendered before the measurement date and based on
employee service and compensation, if applicable, prior to that date.
Accumulated benefit obligation differs from projected benefit obligation in that
it includes no assumption about future compensation levels.

Earnings (Losses) 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:

|                                              |  | Year Ended                   |        | Year Ended        
|--------------------------------------------- |  | ---------------------------- | ------ | ------------------
|                                              |  | September 30, 2009           |        | September 30, 2008
|                                              |  |                              |        |                   
|                                              |  | Loss                         |        | Shares            
|Basic EPS                                    |  | $                            | (2,009 | )                 
|Effect of dilutive securities  Stock options |  |                              |       |                   
|                                             
|Diluted EPS                                  |  | $                            | (2,009 | )                 
|                                             
|                                              |  | **Year Ended**               |        |                   
|                                              |  | **September 30,
      2007** |        |                   
|                                              |  |                              |        |                   
|                                              |  | Income                       |        | Shares            
|Basic EPS                                    |  | $                            | 7,937  |                   
|Effect of dilutive securities  Stock options |  |                              |       |                   
|                                             
|Diluted EPS                                  |  | $                            | 7,937  |                   

At September 30, 2009, 2008 and 2007, the Company had options covering
598,769, 111,658 and 100,912 shares, respectively, which were not considered in
the diluted EPS calculation since they would have been antidilutive.

34

---

Share Based
Compensation:

The Company
uses the Black-Scholes option pricing model to value its stock option grants.
Share-based compensation expense is recognized on a straight-line basis over the
requisite service period, which equals the vestingperiod. When determining share-based compensation expense, the
Black-Scholes option pricing model takes into account highly subjective and
complex assumptions. The expected life of options granted is derived from the
vesting period of the award, as well as historical exercise behavior, and
represents the period of time that options granted are expected to be
outstanding. Expected volatilities are based on historical volatility looking
back over a period equal to the expected life. The risk-free interest rate is
equal to the U.S. Treasury constant maturity with a remaining term equal to the
expected life of the option on the date of grant. The Company is required to
estimate forfeitures in calculating the expense related to share-based
compensation. In addition, the Company is also required to reflect the benefits
of tax deductions in excess of recognized compensation cost to be reported as a
financing cash inflow.

Contingencies:

Certain conditions may exist as of
the date the financial statements are issued, which may result in a loss to the
Company but which will only be resolved when one or more future events occur or
fail to occur. The Companys management assesses such contingent liabilities,
and such assessment inherently involves an exercise of judgment. In assessing
loss contingencies related to legal proceedings that are pending against the
Company or unasserted claims that may result in such proceedings, the Companys
management and legal counsel evaluate the perceived merits of any legal
proceedings or unasserted claims as well as the perceived merits of the amount
of relief sought or expected to be sought therein. If the assessment of a
contingency indicates that it is probable that a material loss has been incurred
and the amount of the liability can be estimated, then the estimated liability
would be recorded in the Companys financial statements. If the assessment
indicates that a potentially material loss contingency is not probable but is
reasonably possible, or is probable but cannot be estimated, then the nature of
the contingent liability, together with an estimate of the range of possible
loss if determinable and material, would be disclosed. All legal costs to defend
against such contingent liabilities are expensed as incurred.

Fair Value of Financial
Instruments:

The carrying amounts reflected in
the accompanying consolidated balance sheet for cash and cash equivalents,
short-term investments, accounts receivable, other accounts receivable, prepaid
expenses and other current assets, accounts payable (excluding accounts payable
related to certain insolvent subsidiaries as discussed in Note 5), and accrued
expenses approximate fair value due to the short-term nature of the
instruments.

Foreign Currency
Translation:

Assets and liabilities of
non-domestic subsidiaries denominated in local currencies are translated into
U.S. dollars at the rate of exchange at the balance sheet date and income and
expenses are translated at the average rates of exchange prevailing during the
year. The resulting translation adjustments are reported as a component of
accumulated other comprehensive loss in stockholders equity.

Recently Adopted Accounting
Standards:

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

In May 2009,
the FASB issued authoritative guidance to establish general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. It
requires the disclosure of the date through which an entity has evaluated
subsequent events, whether that evaluation date is the date of issuance or the
date the financial statements were available to be issued, and alerts all users
of financial statements that an entity has not evaluated subsequent events after
that evaluation date in the financial statements being presented. The guidance
is effective for financial statements issued for fiscal years and interim
periods ending after June 15, 2009. The guidance became effective for the
Company on June 30, 2009. The adoption of this guidance had no impact on its
consolidated financial statements. Refer to Note 15 for disclosure of the
Companys subsequent events for the current reporting period.

35

---

In April
2009, the FASB issued authoritative guidance that principally requires publicly
traded companies to provide disclosures about fair value of financial
instruments in interim financial information. The adoption of this
disclosure-only guidance became effective for the Company beginning in the third
quarter of fiscal 2009 and the adoption of this guidance did not impact our
consolidated financial statements.

Also in
April 2009, the FASB issued authoritative guidance that amends the
other-than-temporary impairment guidelines in U.S. GAAP for debt securities to
make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements. This guidance does not amend existing recognition and
measurement guidance related to other-than-temporary impairment on equity
securities. This guidance became effective for the Company beginning in the
third quarter of fiscal 2009 and the adoption did not impact our consolidated
financial statements.

In September
2006, the FASB issued authoritative guidance which defines fair value,
establishes a framework for measuring fair value, and requires additional
disclosures about a companys financial assets and liabilities that are measured
at fair value. This guidance does not change existing guidance on whether or not
an instrument is carried at fair value. In February 2008, the FASB issued
authoritative guidance which delayed the effective date of this guidance for
nonfinancial assets and liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), to fiscal years, and interim periods within those fiscal years,
beginning after November 15, 2008. In October 2008, the FASB issued additional
authoritative guidance which clarifies the application of determining fair value
when the market for a financial asset is inactive. Specifically, this guidance
clarifies how (1) managements internal assumptions should be considered in
measuring fair value when observable data are not present, (2) observable market
information from an inactive market should be taken into account, and (3) the
use of broker quotes or pricing services should be considered in assessing the
relevance of observable and unobservable data to measure fair value. On October
1, 2008, the Company adopted the measurement and disclosure impact of this
guidance only with respect to financial assets and liabilities. The adoption
increased its fair value disclosures but had no impact on its financial position
or results of operations. Refer to Note 6 for disclosure of the Companys fair
value measurements.

On October
1, 2009, the Company adopted the measurement and disclosure of fair value with
respect to non-financial assets and liabilities. The adoption had no impact on
its financial position and results of operations and would have required no
additional disclosures in these consolidated financial statements if adopted as
of September 30, 2009.

Recently Issued Accounting
Standards:

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

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

36

---

Note 3. Inventories

Inventories
consist of the following at September 30:

2009
    
    2008Raw material
    
    $
    4,247
    
    $
    5,578Work in
      process
    
    
    39
    
    
    53Finished goods
    
    
    1,253
    
    
    2,584$
    5,539
    
    $
    8,215


Note 4. Property, Plant and
Equipment

Property, plant and equipment consist of the following at September
30:

2009
    
    2008Land and land improvements
    
    $
    828
    
    
    $
    828Buildings
    
    
    4,484
    
    
    
    4,009Machinery and equipment
    
    
    12,429
    
    
    
    11,889Office
      furniture, computers & software
    
    
    4,980
    
    
    
    4,689Construction in progress
    
    
    760
    
    
    
    67523,481
    
    
    
    22,090Less accumulated depreciation
    
    
    (14,588
    )
    
    
    (12,994
    )$
    8,893
    
    
    $
    9,096


Depreciation expense for the years ended September 30, 2009, 2008 and
2007 was $1,996, $1,763 and $1,793, respectively.

Note 5. Settlement of Accounts
Payable

Included in the accompanying consolidated balance sheet is approximately
$155 of accounts payable related to closed insolvent subsidiaries of the
Company. A debtor can only relieve itself of a liability if it has been
extinguished and 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 year ended September
30, 2007, the Company was judicially released from and reversed $889 of old
accounts payable resulting in a gain, which has been recorded in other (income)
expense in the accompanying consolidated statements of operations. No amounts
were released and reversed during fiscal year 2008 or 2009. The Company expects
to reverse amounts in future periods based on the recognition of the liabilities
being judicially released of $90 in fiscal 2010; and a total of $65 in fiscal
2011  2016.

Note 6. Fair Value
Measurement

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

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

37

---

The
following table presents information about financial assets and liabilities
measured at fair value on a recurring basis as of September 30, 2009:

|                                             |  | Fair Value as of   |       |         |   |         |  |         |   |  |  
|-------------------------------------------- |  | ------------------ | ----- | ------- | - | ------- |  | ------- | - |  | -
|                                             |  | September 30, 2009 |       | Level 1 |   | Level 2 |  | Level 3
|Cash and cash equivalents                    |  | $                  | 9,245 |         | $ | 9,245   |  | $       |  |  | $
|Short-term
      investments                 |  |                    | 286   |         |   | 286     |  |         |  |  |  
|Total financial assets and
      liabilities |  | $                  | 9,531 |         | $ | 9,531   |  | $       |  |  | $

We use a
market approach to determine the fair value of cash and cash equivalents and
short-term investments. Cash and cash equivalents include highly liquid
investments with original maturities of three months or less. Short-term
investments consist of available-for-sale securities. There were no assets and
liabilities measured at fair value on a nonrecurring basis as of September 30,
2009.

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

Note 7. Debt

During the fourth
quarter of fiscal 2009, the Company voluntarily cancelled its revolving loan
facility with GE Capital, which as of the day of termination had a zero
balance.

Note 8. Employee Benefit
Plans

The Company maintains two pension plans, an hourly employee plan and a
salaried employee plan. The hourly plan covers certain of the Companys union
employees. The salaried plan covers certain salaried employees. Annual net
periodic pension costs under the pension plans are determined on an actuarial
basis. The Companys policy is to fund these costs over 15 years and obligations
arising due to plan amendments over the period benefited. The assets and
liabilities are adjusted annually based on actuarial results.

The Company also provides health care and life insurance benefits for
certain of its retired employees (Post Retirement Plan). These benefits are
subject to deductibles, co-payment provisions and other limitations. The Company
may amend or change the Post Retirement Plan periodically. The Company has
elected to amortize the accumulated post retirement benefit obligation (APBO)
at October 1, 1993 over twenty years as a component of post retirement benefit
expense.

In 2003, the Company modified the provisions of the salaried plan to
limit the number of eligible employees to those currently in the plan at the
time of the modification and to limit benefits under the plan to those earned to
that date. As part of the 2003 contract and strike settlement agreement with the
union hourly workers, the hourly plan was also modified in 2003 to limit
participation in the plan to those employees in the plan at August 31,
2002.

On September 30, 2007, the Company adopted the authoritative guidance for
employee benefit plans which provides guidance on expense recognition for
employee benefit compensation. As part of the initial recognition of this
guidance, the Company was required to recognize the overfunded or underfunded
status of its defined benefit plans as an asset or liability, respectively, in
its consolidated balance sheet. For the Companys pension plans, the funded
status is measured as the difference between the projected benefit obligation
and the fair value of plan assets. For the Companys post retirement plan, the
funded status is measured as the difference between the accumulated
postretirement benefit obligation and the fair value of plan assets. Actuarial
gains or losses, and prior service costs or credits that have not yet been
included in net periodic benefit expense as of the adoption date are recognized
in stockholders equity as components of the ending balance of accumulated other
comprehensive income (loss), net of tax. In future periods, the Company will
recognize changes in the funded status that are not components of the
current-period net periodic benefit expense as a component of other
comprehensive income (loss) in the year the change occurs. This guidance also
requires plans assets and obligations to be measured as of the end of the
Companys fiscal year rather than at an earlier measurement date, as allowed
under previous accounting standards. The Company adopted this additional
guidance as of September 30, 2009 and has changed its measurement date from
August 31stto September
30thfor its plans. This change in
measurement date resulted in a reduction to retained earnings of $38, net of
tax.

38

---

Pension Plans

The following
table reports the changes in the projected benefit obligation, the fair value of
plan assets, and the determination of the amounts recognized in the consolidated
balance sheets for the Companys pension plans at September 30:

Salaried Plan
    
    Hourly PlanSeptember 30,
    
    
    2009
    
    2008
    
    2009
    
    2008Accumulated benefit obligation
    
    $
    5,254
    
    
    $
    4,695
    
    
    $
    9,146
    
    
    $
    7,641Change in projected benefit obligation:Benefit obligation at beginning of year
    
    $
    4,695
    
    
    $
    4,894
    
    
    $
    7,641
    
    
    $
    7,613Service cost
    
    
    
    
    
    
    
    
    
    
    59
    
    
    
    66Interest cost
    
    
    340
    
    
    
    296
    
    
    
    555
    
    
    
    460Actuarial (gain) loss
    
    
    591
    
    
    
    (153
    )
    
    
    1,518
    
    
    
    36Benefits paid
    
    
    (372
    )
    
    
    (342
    )
    
    
    (627
    )
    
    
    (534
    )Benefit obligation at end of year
    
    $
    5,254
    
    
    $
    4,695
    
    
    $
    9,146
    
    
    $
    7,641Change in plan assets:Fair value of plan assets at beginning of year
    
    $
    4,291
    
    
    $
    4,579
    
    
    $
    6,593
    
    
    $
    6,825Actual return on plan assets
    
    
    (552
    )
    
    
    (383
    )
    
    
    (819
    )
    
    
    (568
    )Employer contributions
    
    
    42
    
    
    
    437
    
    
    
    141
    
    
    
    870Benefits paid
    
    
    (372
    )
    
    
    (342
    )
    
    
    (627
    )
    
    
    (534
    )Fair value of plan assets at end of year
    
    $
    3,409
    
    
    $
    4,291
    
    
    $
    5,288
    
    
    $
    6,593Funded status at end of year
    
    $
    (1,845
    )
    
    $
    (404
    )
    
    $
    (3,858
    )
    
    $
    (1,048
    )


Weighted-average
assumptions used to determine benefit obligations at September 30:

Salaried Plan
    
    Hourly Plan2009
    
    2008
    
    2009
    
    2008Discount rate
    
    5.50
    %
    
    6.97
    %
    
    5.50
    %
    
    6.97
    %Rate of
      compensation increase
    
    
    
    
    
    
    
    
    
    
    


The amounts
included in accumulated other comprehensive losses that have not yet been
recognized in net periodic benefit cost as of September 30, 2009 and 2008
consist of the following:

Salaried Plan
    
    Hourly Plan2009
    
    2008
    
    2009
    
    2008Actuarial loss
    
    $
    3,206
    
    $
    1,875
    
    $
    5,343
    
    $
    2,883Prior service
      cost
    
    
    
    
    
    
    
    
    32
    
    
    49$
    3,206
    
    $
    1,875
    
    $
    5,375
    
    $
    2,932


39

---

Amounts in fiscal 2010 that will be amortized from accumulated other
comprehensive loss into net periodic benefit cost include the
following:

Salaried
    
    HourlyPlan
    
    PlanActuarial loss
    
    $
    131
    
    $
    179Prior service
      cost
    
    
    
    
    
    14$
    131
    
    $
    193


Net periodic benefit cost for the
years ended September 30 includes the following:

Salaried Plan
    
    Hourly PlanYear ended September
    30:
    
    
    2009
    
    2008
    
    2007
    
    2009
    
    2008
    
    2007Service cost
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    59
    
    
    $
    66
    
    
    $
    118Interest cost
    
    
    340
    
    
    
    296
    
    
    
    294
    
    
    
    555
    
    
    
    460
    
    
    
    447Expected return on plan assets
    
    
    (301
    )
    
    
    (310
    )
    
    
    (272
    )
    
    
    (464
    )
    
    
    (470
    )
    
    
    (401
    )Amortization of prior service cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    21
    
    
    
    47Curtailment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69Recognized net actuarial loss
    
    
    114
    
    
    
    64
    
    
    
    91
    
    
    
    341
    
    
    
    166
    
    
    
    249Net periodic benefit cost
    
    $
    153
    
    
    $
    50
    
    
    $
    113
    
    
    $
    508
    
    
    $
    243
    
    
    $
    529


Weighted-average assumptions used to
determine Net Periodic Benefit Cost for the years ended September 30:

Salaried Plan
    
    Hourly Plan2009
    
    2008
    
    2007
    
    2009
    
    2008
    
    2007Discount rate
    
    6.97
    %
    
    6.25
    %
    
    5.85
    %
    
    6.97
    %
    
    6.25
    %
    
    5.85
    %Expected return
      on plan assets
    
    6.75
    %
    
    6.75
    %
    
    6.75
    %
    
    6.75
    %
    
    6.75
    %
    
    6.75
    %Rate of compensation increase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    


The overall expected long-term rate
of return assumptions for fiscal 2009 were developed using historical and future
return expectations of multiple asset classes, which were analyzed to develop a
risk-free real rate of return and risk premiums for each asset class. The
overall rate for each asset class was developed by combining a long-term
inflation component, the risk-free real rate of return, and the associated risk
premium. The weighted average rate was developed based on those overall rates
and the target asset allocation of the plan.

***Plan Assets:***

The Companys pension plan
weighted-average asset allocations at September 30, 2009 and 2008, by asset
category are as follows:

Salaried Plan
    
    Hourly PlanTarget
    
    
    
    
    
    Target2009
    
    2008
    
    Allocation
    
    2009
    
    2008
    
    AllocationAsset Category:Equity securities
    
    43
    %
    
    45
    %
    
    39
    %
    
    43
    %
    
    45
    %
    
    39
    %Debt securities
    
    52
    %
    
    49
    %
    
    55
    %
    
    52
    %
    
    49
    %
    
    55
    %Real estate
    
    5
    %
    
    6
    %
    
    6
    %
    
    5
    %
    
    6
    %
    
    6
    %Total
    
    100
    %
    
    100
    %
    
    100
    %
    
    100
    %
    
    100
    %
    
    100
    %


The Companys investment strategy is
to build an efficient, well-diversified portfolio based on a long-term,
strategic outlook of the investment markets. The investment markets outlook
utilizes both historical-based and forward-looking return forecasts to establish
future return expectations for various asset classes. These return expectations
are used to develop a core asset allocation based on the specific needs of the
plan. The core asset allocation utilizes multiple investment managers in order
to maximize the plans return while minimizing risk.

***Cash Flows:***

The Company expects to recognize
$570 in expense in fiscal 2010 related to its pension plans and make payments of
$747 in fiscal 2010.

40

---

Based on current data and
assumptions, the following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid over the next 10 fiscal years:

Benefit PaymentsYear
      ending:
    
    Salaried Plan
    
    Hourly Plan2010
    
    $
    370
    
    $
    6202011
    
    
    360
    
    
    6002012
    
    
    360
    
    
    5902013
    
    
    350
    
    
    6102014
    
    
    340
    
    
    620Years 2015-2019
    
    
    1,830
    
    
    3,030


Post Retirement Plan

The following table sets forth the
changes in benefit obligation and the determination of the amounts recognized in
the consolidated balance sheets for the Post Retirement Plan at September 30:

September 30,
    
    
    2009
    
    2008Change in benefit obligation:Benefit obligation at beginning of year
    
    $
    3,155
    
    
    $
    3,988Service cost
    
    
    3
    
    
    
    5Interest cost
    
    
    222
    
    
    
    237Actuarial (gain) loss
    
    
    (141
    )
    
    
    (792
    )Benefits paid
    
    
    (350
    )
    
    
    (283
    )Other
    
    
    (70
    )
    
    
    Benefit obligation at end of year
    
    $
    2,819
    
    
    $
    3,155Change in plan assets:Fair
      value of plan assets at beginning of year
    
    $
    
    
    
    $
    Employer contributions
    
    
    350
    
    
    
    283Benefits paid
    
    
    (350
    )
    
    
    (283
    )Fair value of plan
      assets at end of year
    
    $
    
    
    
    $
    Funded status at end
      of year
    
    $
    (2,819
    )
    
    $
    (3,155
    )


Weighted-average assumptions used to
determine benefit obligations at September 30:

2009
    
    2008Discount rate
    
    5.50
    %
    
    6.80
    %Rate of
      compensation increase
    
    
    
    
    


The amounts included in accumulated
other comprehensive losses that have not yet been recognized in net periodic
benefit cost as of September 30, 2009 and 2008 consist of the following:

2009
    
    2008Actuarial loss
    
    $
    485
    
    
    $
    650Prior service
      credit
    
    
    (604
    )
    
    
    (675
    )Transition obligation
    
    
    79
    
    
    
    101Actuarial loss
    
    $
    (40
    )
    
    $
    76


41

---

Amounts in fiscal 2010 that will be
amortized from accumulated other comprehensive loss into net periodic benefit
cost include the following:

Actuarial loss
    
    $
    14Prior service
      credit
    
    
    (136
    )Transition obligation
    
    
    20$
    (102
    )


Net periodic post retirement benefit
cost for the years ended September 30 included the following:

Year ended September
    30:
    
    
    2009
    
    2008
    
    2007Service cost
    
    $
    3
    
    
    $
    5
    
    
    $
    6Interest cost
    
    
    222
    
    
    
    237
    
    
    
    220Amortization
    
    
    (95
    )
    
    
    (34
    )
    
    
    (22
    )Net
      periodic post retirement benefit cost
    
    $
    130
    
    
    $
    208
    
    
    $
    204


Weighted-average assumptions used to
determine net post retirement benefit cost for the years ended September 30:

2009
    
    2008
    
    2007Discount rate
    
    6.80
    %
    
    6.17
    %
    
    5.80
    %


Based on current data and
assumptions, the following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid over the next 10 fiscal years:

BenefitYear
      ending:
    
    Payments2010
    
    $
    2252011
    
    
    2232012
    
    
    2302013
    
    
    2252014
    
    
    209Years
2015-2019
    
    
    998


The assumed health care cost trend
rate used in measuring the benefit obligation ranged between 5.0%-9.0% in the
first year, declining gradually to 5.0% in 2017 and remaining at 5.0%
thereafter.

If the assumed medical costs trends
were increased by 1%, the benefit obligation as of September 30, 2009 would
increase by $261, and the aggregate of the services and interest cost components
of the net post retirement benefit cost would be increased by $18. If the
assumed medical costs trends were decreased by 1%, the benefit obligation as of
September 30, 2009 would decrease by $223, and the aggregate of the services and
interest cost components of the net post retirement benefit cost would be
decreased by $15.

As part of the strike
settlement agreement entered into in August 2003, the Company modified the
provisions of the Post Retirement Plan to limit the number of eligible employees
to those currently in the plan at August 31, 2002. The plan was further modified
so that the benefits for any plan participant who had not retired under the
union pension plan as of September 17, 2003 would be limited to a one-time lump
sum payment under the plan of $6 at the time of a qualified retirement under the
union pension plan.

Other Benefit Plans

The Company sponsors a matching
401(k) plan for salaried employees and certain union employees, in which
eligible employees may elect to contribute a portion of their compensation. The
Company suspended the employer match in March 2009 as part of its actions to
more closely align operating costs with reduced sales volumes. The employer
match was reinstated effective October 1, 2009. Employer matching contributions
in fiscal 2009, 2008 and 2007 were $129, $276 and $230, respectively.

In December 2008, the
Company adopted the 2008 Deferred Compensation Plan (the Plan). The purpose of
the Plan is to (i) provide deferred compensation to select senior management
employees of the Company (Eligible Executives) and members of the Companys
board of directors, (ii) permit Eligible Executives to elect to defer a
percentage of their base compensation and/or bonus compensation, and (iii)
permit members of the Companys board of directors to elect to defer a portion
of their board fees. The initial Eligible Executives are Patrick W. Cavanagh,
President and Chief Executive Officer, and Dennis E. Bunday, Executive Vice
President and Chief Financial Officer. As of September 30, 2009, Mr. Cavanagh
and Mr. Bunday have been awarded un-funded, fully-vested deferred compensation
of $200 and $75, respectively. Payment of the deferred compensation has not been
scheduled.

42

---

Note 9. Income Taxes

The provision for income tax expense
is as follows for the years ended September 30:

2009
    
    2008
    
    2007Current:Federal
    
    $
    (1,312
    )
    
    $
    2,957
    
    $
    3,208State
    
    
    (18
    )
    
    
    467
    
    
    445Foreign
    
    
    97
    
    
    
    31
    
    
    16(1,233
    )
    
    
    3,455
    
    
    3,669Deferred:Federal
    
    
    (69
    )
    
    
    428
    
    
    560State
    
    
    (233
    )
    
    
    67
    
    
    78Foreign
    
    
    (142
    )
    
    
    
    
    
    (444
    )
    
    
    495
    
    
    638Total
    
    $
    (1,677
    )
    
    $
    3,950
    
    $
    4,307


The reconciliation between the
effective tax rate and the statutory federal tax rate on income or loss as a
percent is as follows:

Provision
    
    
    2009
    
    2008
    
    2007Statutory federal income tax rate
    
    34.0
    %
    
    34.0
    %
    
    34.0
    %State
      taxes, net of federal income tax benefit
    
    3.6
    
    
    2.6
    
    
    2.8Change in deferred tax assets due to changein state tax
      law
    
    2.1
    
    
    
    
    
    4.8Abandonment of state net operating losses
    
    
    
    
    
    
    
    4.8Impact of foreign operations
    
    9.5
    
    
    (3.0
    )
    
    (0.4
    )Effect
      of change in valuation allowance
    
    (1.3
    )
    
    (0.5
    )
    
    (9.8
    )Share based compensation
    
    (3.7
    )
    
    1.1
    
    
    0.6Section 199 deduction
    
    (1.4
    )
    
    (1.5
    )
    
    (0.9
    )Extraterritorial income exclusion
    
    
    
    
    
    
    
    (0.8
    )Research and development credits
    
    2.1
    
    
    0.2
    
    
    (1.1
    )Other
    
    0.6
    
    
    0.6
    
    
    1.245.5
    %
    
    33.5
    %
    
    35.2
    %


At September 30, 2009, the Company
had recorded a federal and state income tax receivable of $1,188 and a foreign
income tax payable of $90, which are included in other accounts receivable and
accrued expenses, respectively, in the accompanying consolidated balance
sheets.

43

---

The tax effects of temporary
differences that give rise to significant portions of the deferred tax assets
and deferred tax liabilities at September 30, 2009 and 2008 are as follows:

2009
    
    2008Deferred tax
    assets:Inventories
    
    $
    104
    
    
    $
    147Warranty liability
    
    
    262
    
    
    
    265Accrual for compensated absences
    
    
    111
    
    
    
    149Share based compensation
    
    
    372
    
    
    
    256Accrual for retiree medical benefits
    
    
    990
    
    
    
    1,087Loss from investment in affiliate (Ajay Sports,
      Inc.)
    
    
    3,889
    
    
    
    3,845Tax
      gain on sale/leaseback
    
    
    655
    
    
    
    648Accrued environmental obligations
    
    
    373
    
    
    
    376Accrued other liabilities
    
    
    317
    
    
    
    293Pension plan comprehensive loss adjustment
    
    
    2,001
    
    
    
    501State
      net operating loss carryforwards
    
    
    207
    
    
    
    92Other
    
    
    133
    
    
    
    56Total
      deferred tax assets
    
    
    9,414
    
    
    
    7,715Less valuation allowance
    
    
    (5,241
    )
    
    
    (5,216
    )Deferred tax assets, net of valuation
allowance
    
    
    4,173
    
    
    
    2,499Deferred tax
      liabilities:Plant and equipment
    
    
    575
    
    
    
    625Net deferred income tax assets
    
    $
    3,598
    
    
    $
    1,874Current deferred income tax assets
    
    $
    1,280
    
    
    $
    1,316Long-term deferred income tax assets
    
    
    8,330
    
    
    
    6,412Long-term deferred income tax liabilities
    
    
    (771
    )
    
    
    (638
    )Valuation allowance
    
    
    (5,241
    )
    
    
    (5,216
    )$
    3,598
    
    
    $
    1,874


At September 30, 2009, the Company
has approximately $4,432 of state net operating loss carry-forwards, which are
available to the Company in certain state tax jurisdictions and begin to expire
in 2016, if not utilized. The Company has recorded a valuation allowance against
state net operating losses that it does not believe are more-likely-than-not to
be utilized.

As of
September 30, 2009, the Company had unrecognized tax benefits of $81, of which
$54 will favorably affect the effective tax rate, if recognized. Additionally,
at September 30, 2009, interest and penalties related to the unrecognized tax
benefits were $12. The Company recognizes interest and penalties related to
unrecognized tax benefits as a component of income tax expense. The Company
believes that it is reasonably possible that unrecognized tax benefits could
decrease by $12 within the 12 months of this reporting date.

Following is a reconciliation of the
Companys unrecognized tax benefits at September 30:

2009
    
    2008Beginning Balance
    
    $
    104
    
    
    $
    109Additions based on tax
      positions related to the current year
    
    
    
    
    
    
    6Additions
      based on tax positions of prior years
    
    
    
    
    
    
    63Reductions
      for tax positions of prior years
    
    
    (23
    )
    
    
    Settlements
    
    
    
    
    
    
    (74
    )Ending
      Balance
    
    $
    81
    
    
    $
    104


During the fourth quarter of fiscal
2008, the Company settled with the State of Oregon on all outstanding
examination issues for tax years September 30, 2006 and prior. The settlement
did not have a material adverse effect on the Companys results of operations.
The settlement liability was paid in October 2008. The Company is not currently
under examination in any other states or foreign jurisdictions.

44

---

The Company is subject to income
taxes in the United States and foreign jurisdictions, which are subject to
examination. The Company is no longer subject to U.S. federal, state or foreign
income tax examinations for tax years ended before September 30, 2006, September
30, 2005 and December 31, 2006, respectively. However, to the extent allowed by
law, the tax authorities may have the right to examine prior periods where net
operating losses or tax credits were generated and carried forward, and make
adjustments up to the amount of the net operating loss or credit carryforward
amount.

In the
ordinary course of the Companys business there are transactions where the
ultimate tax determination is uncertain. The Company believes that is has
adequately provided for income tax issues not yet resolved with federal, state,
local and foreign tax authorities. If an ultimate tax assessment exceeds the
Companys estimate of tax liabilities, an additional charge to expense would
result.

Earnings of a foreign subsidiary or
affiliate are subject to U.S. taxation when effectively repatriated. U.S. income
taxes and foreign withholding taxes have not been provided on undistributed
earnings of foreign subsidiaries. The Company intends to reinvest these earnings
indefinitely in its foreign subsidiaries. It is not practical to determine the
amount of income tax payable in the event the Company repatriated all
undistributed foreign earnings. However, if these earnings were distributed to
the U.S. in the form of dividends or otherwise, the Company would be subject to
additional U.S. income taxes and foreign withholding taxes.

The Companys subsidiary in China is
entitled to a five-year tax holiday, pursuant to which it was exempted from
paying the enterprise income tax for calendar 2007, the year in which it first
had positive earnings, and calendar 2008. Additionally, the Company is subject
to reduced enterprise income tax rates of 10%, 11% and 12% for the calendar
years 2009, 2010 and 2011, respectively.

Note 10. Commitments and
Contingencies

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

The soil and
groundwater at the Companys Portland, Oregon facility contains certain
contaminants, which were deposited from approximately 1968 through 1995. Some of
this contamination has migrated offsite to neighboring properties. The Company
has retained an environmental consulting firm to investigate the extent of the
contamination and to determine what remediation will be required and the
associated costs. During fiscal 2004, the Company entered into the Oregon
Department of Environmental Qualitys voluntary clean-up program and during
fiscal 2004 the Company established a liability of $950 for this matter. At
September 30, 2007, the Company recorded an additional liability of $546 based
on remaining costs estimates determined by the Company with the help of an
environmental consulting firm. As of September 30, 2009, the total liability
recorded is $1,001 and is recorded in accrued expenses in the accompanying
condensed consolidated balance sheet. The Company asserted and settled a
contractual indemnity claim against Dana Corporation (Dana), from which it
acquired the property, and contribution claims against the other prior owner of
the property as well as businesses previously located on the property (including
Blount, Inc. (Blount) and Rosan, Inc. (Rosan)) under the Federal Superfund
Act and the Oregon Cleanup Law. During 2008, the Company entered into a
settlement agreement with Dana, Blount and Rosan under which it received total
cash payments from Dana, Blount and Rosan of $735, and shares of Dana stock
equal to approximately $337 at the time of settlement, and assumed the full
obligation to, and risks associated with, completing the remediation. The
Company has recorded a total gain of $1,072 in the consolidated financial
statements for the receipt of the cash and stock in fiscal year 2008.

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

45

---

The Company leases certain
facilities under non-cancelable operating leases. In addition, the Company
leases certain equipment used in their operations. Future minimum lease payments
under all non-cancelable operating leases are approximately as follows for
annual periods ending September 30,

2010
    
    $
    5712011
    
    
    5712012
    
    
    4392013
    
    
    462014
    
    
    16Total
    
    $
    1,643


Rent expense under operating leases
was $623, $707 and $436 for the years ended September 30, 2009, 2008 and 2007,
respectively.

Note 11. Share Based Compensation

The Company currently has two
qualified stock option plans. The Restated 1993 Stock Option Plan (the 1993
Plan) reserves an aggregate of 870,000 shares of the Companys authorized
common stock for the issuance of stock options. These shares 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. At September 30, 2009 and 2008, the Company had 137,283 and 123,867
shares, respectively, available for future grants under the 1993 Plan. The
non-employee Director Plan (the 1995 Plan) reserves an aggregate of 86,666
shares of the Companys common stock for issuance of stock options. These shares
may be granted to non-employee directors of the Company. Under this plan the
non-employee directors are each automatically granted 1,666 options at a price
equal to the market value on the date of grant which is the date of the Annual
Meeting of Stockholders each year, exercisable for 10 years after the date of
the grant. These options are exercisable as to 25% of the shares thereby on the
date of grant and as to an additional 25%, cumulatively on the first, second and
third anniversaries of the date of grant. At September 30, 2009 and 2008 there
were 20,024 and 28,354 shares, respectively, available for grant under the 1995
Plan.

As of September 30, 2009, there was
$1,300 of total unrecognized compensation costs related to nonvested stock
options. That cost is expected to be recognized over a weighted average period
of 2.9 years.

The
Companys share-based compensation expenses were recorded in the following
expense categories for the years ended September 30, 2009, 2008 and 2007:

2009
    
    2008
    
    2007Cost of sales
    
    $
    124
    
    $
    111
    
    $
    74Research and
      development
    
    
    79
    
    
    73
    
    
    30Selling
    
    
    74
    
    
    76
    
    
    62Administration
    
    
    455
    
    
    412
    
    
    371Total share-based compensation expense
    
    $
    732
    
    $
    672
    
    $
    537Total
      share-based compensationexpense (net of tax)
    
    $
    620
    
    $
    572
    
    $
    454


Included in
the above breakdown of share-based compensation expense and as part of the
employment agreement with Patrick W. Cavanagh, President and Chief Executive
Officer, the Company has the option to pay Mr. Cavanagh up to 7% of his annual
base salary in shares of common stock of the Company and exercised that option
for each of fiscal years 2009, 2008 and 2007. In the third quarter of fiscal
2009, the Company elected to pay 7% of Mr. Cavanaghs fiscal 2009 salary in
common stock of the Company and issued 3,839 shares of restricted common stock
at $5.10 per share. In the third quarter of fiscal 2008, the Company elected to
pay 7% of Mr. Cavanaghs fiscal 2008 salary in common stock of the Company by
issuing him 1,364 shares of restricted common stock at $13.34 per share. In the
third quarter of fiscal 2007, the Company elected to pay 7% of Mr. Cavanaghs
fiscal 2007 salary in common stock of the Company by issuing him 989 shares of
restricted common stock at $16.98 per share.

46

---

Also during the third quarter of
fiscal 2009, the Company paid $5 of Dennis E. Bundays, Executive Vice President
and Chief Financial Officer, and $3 of Mark S. Koenens, Vice President of Sales
and Marketing, salary in common stock of the Company and issued 979 and 587
shares, respectively, of restricted common stock at $5.10 per share. All of the
payments of base salary in stock to Mr. Bunday and Mr. Koenen were pursuant to
each of their respective employment agreements. During the third quarter of
fiscal 2008, the Company paid $5 of Mr. Bundays and $3 of Mr. Koenens salary
in common stock of the Company by issuing them 374 and 224 shares, respectively,
of restricted common stock at $13.34 per share. During the third quarter of
fiscal 2007, the Company paid $5 of Mr. Bundays and $3 of Mr. Koenens salary
in common stock of the Company by issuing them 294 and 176 shares, respectively,
of restricted common stock at $16.98 per share.

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.

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 years ended September 30, 2009,
2008 and 2007.

2009
    
    2008
    
    2007Risk-free interest rate
    
    2.03%
    
    3.55%
    
    4.46%Expected
      dividend yield
    
    0%
    
    0%
    
    0%Expected term
    
    5.8 years
    
    6.4 years
    
    6.4 yearsExpected
      volatility
    
    46%
    
    68%
    
    80%


Using the
Black-Scholes methodology, the total value of options granted during the years
ended September 30, 2009, 2008 and 2007, was $23, $712 and $1,526, respectively,
which would be amortized over the vesting period of the options. The weighted
average grant date fair value of stock options granted during the years ended
September 30, 2009, 2008 and 2007 was $2.32, $8.79 and $12.40 per share,
respectively.

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.
Expected volatilities are based on the historical volatility of the Companys
common stock and fluctuate based on the changes in price of the Companys common
stock looking back over an equivalent period as the expected term of the new
option grant.

The following table summarizes stock
options outstanding as of September 30, 2009:

Weighted AverageShares
    
    Exercise PriceOutstanding at September 30, 2008
    
    645,521
    
    
    $
    9.17Granted
    
    9,996
    
    
    
    5.13Exercised
    
    (41,666
    )
    
    
    3.96Forfeited
    
    (15,082
    )
    
    
    11.48Outstanding at September 30, 2009
    
    598,769
    
    
    $
    9.40Exercisable at
      September 30, 2009
    
    417,629
    
    
    $
    7.76


47

---

At September
30, 2009, the weighted average remaining contractual term of options outstanding
and options exercisable was 5.9 years and 5.1 years, respectively.

The aggregate intrinsic value of
options outstanding and options exercisable at September 30, 2009 was $1,184 and
$1,090, 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 intrinsic value of all stock options exercised during the years
ended September 30, 2009, 2008 and 2007 was $138, $421 and $640, respectively.
Cash received from the exercise of stock options for the years ended September
30, 2009, 2008 and 2007 was $165, $173 and $260, respectively.

Stock option activity during the
periods indicated under the 1993 Plan is as follows:

Shares Available
    
    Shares SubjectFor Grant
    
    To Options
    
    Option PricesOutstanding at September 30, 2006
    138,449
    
    
    545,436
    
    
    $
    3.96  17.25Granted
    (113,068
    )
    
    113,068
    
    
    
    14.03 
      18.05Exercised
    
    
    
    (54,778
    )
    
    
    3.96  15.00Forfeited
    30,090
    
    
    (30,090
    )
    
    
    3.96  15.00Outstanding at September 30, 2007
    55,471
    
    
    573,636
    
    
    
    3.96  18.05Newly
      authorized
    120,000
    
    
    Granted
    (71,000
    )
    
    71,000
    
    
    
    13.17  15.46Exercised
    
    
    
    (37,198
    )
    
    
    3.96 
      14.03Forfeited
    19,396
    
    
    (19,396
    )
    
    
    3.96  17.25Outstanding at September 30, 2008
    123,867
    
    
    588,042
    
    
    
    3.96  18.05Exercised
    
    
    
    (41,666
    )
    
    
    3.96Forfeited
    13,416
    
    
    (13,416
    )
    
    
    3.96  14.03Outstanding at September 30, 2009
    137,283
    
    
    532,960
    
    
    $
    3.96 
18.05


Stock option activity during the
periods indicated under the 1995 Plan is as follows:

Shares Available
    
    Shares SubjectFor Grant
    
    To Options
    
    Option PricesOutstanding at September 30, 2006
    25,014
    
    
    40,819
    
    
    $
    3.96 16.13Granted
    (9,996
    )
    
    9,996
    
    
    
    17.69Forfeited
    1,666
    
    
    (1,666
    )
    
    
    15.94Outstanding at September 30, 2007
    16,684
    
    
    49,149
    
    
    
    3.96 17.69Newly
      authorized
    20,000
    
    
    Granted
    (9,996
    )
    
    9,996
    
    
    
    15.25Forfeited
    1,666
    
    
    (1,666
    )
    
    
    14.64Outstanding at September 30, 2008
    28,354
    
    
    57,479
    
    
    
    3.96 17.69Granted
    (9,996
    )
    
    9,996
    
    
    
    5.13Forfeited
    1,666
    
    
    (1,666
    )
    
    
    16.13Outstanding at September 30, 2009
    20,024
    
    
    65,809
    
    
    $
    3.96
17.69


48

---

The following table summarizes
information about stock options under both plans outstanding at September 30,
2009:

Options Outstanding
    
    Options ExercisableNumber
    
    WeightedOutstanding
    
    Average
    
    Weighted
    
    Number
    
    WeightedRange of
    
    at
    
    Remaining
    
    Average
    
    Exercisable
      at
    
    AverageExercise
    
    September
      30,
    
    Contractual
    
    Exercise
    
    September
      30,
    
    ExercisePrices
    
    2009
    
    Life  Years
    
    Price
    
    2009
    
    Price$
    3.96    5.13
    
    184,821
    
    4.3
    
    $
    4.33
    
    177,321
    
    $
    4.307.20 
      13.57
    
    277,822
    
    6.1
    
    
    9.08
    
    180,223
    
    
    8.1314.03  18.05
    
    136,126
    
    7.6
    
    
    16.94
    
    60,085
    
    
    16.89$
    3.96  18.05
    
    598,769
    
    5.9
    
    $
    9.40
    
    417,629
    
    $
    7.76


At September
30, 2008 and 2007, 362,833 and 316,655 options, respectively, were exercisable
at weighted average exercise prices of $6.80 and $6.01 per share,
respectively.

Note 12. Geographic Information

Geographic information for revenues
are allocated between the United States and International countries, depending
on whether the shipments are to customers within the United States or located
outside the United States. Revenues for each geographic location are as follows:

Year ended September
    30,
    
    
    2009
    
    2008
    
    2007North America (NAFTA):United States
    
    $
    24,289
    
    $
    35,240
    
    $
    40,545Canada
    
    
    2,146
    
    
    3,700
    
    
    5,280Mexico
    
    
    1,257
    
    
    2,817
    
    
    3,351$
    27,692
    
    $
    41,757
    
    $
    49,176Europe:Belgium
    
    $
    2,411
    
    $
    5,544
    
    $
    5,340France
    
    
    1,220
    
    
    3,256
    
    
    2,694Sweden
    
    
    1,290
    
    
    4,038
    
    
    4,219Other
    
    
    1,016
    
    
    1,924
    
    
    1,226$
    5,937
    
    $
    14,762
    
    $
    13,479Asia:Korea
    
    $
    1,961
    
    $
    3,800
    
    $
    2,743China
    
    
    2,086
    
    
    3,262
    
    
    1,270Other
    
    
    806
    
    
    1,539
    
    
    1,691$
    4,853
    
    $
    8,601
    
    $
    5,704Other:
    
    
    327
    
    
    661
    
    
    565Consolidated net sales
    
    $
    38,809
    
    $
    65,781
    
    $
    68,924Foreign sales
    
    $
    14,520
    
    $
    30,541
    
    $
    28,379United
      States sales
    
    
    24,289
    
    
    35,240
    
    
    40,545Consolidated net sales
    
    $
    38,809
    
    $
    65,781
    
    $
    68,924


49

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During the
years ended September 30, 2009, 2008 and 2007, the Company operated in two
geographic reportable segments as shown in the table below.

Year ended September
    30,
    
    
    2009
    
    2008
    
    2007Revenue  External Customers:United States
    
    $
    36,800
    
    
    $
    62,516
    
    
    $
    68,034China
    
    
    2,009
    
    
    
    3,265
    
    
    
    890$
    38,809
    
    
    $
    65,781
    
    
    $
    68,924Revenue  Intersegments:United States
    
    $
    480
    
    
    $
    1,472
    
    
    $
    3,288China
    
    
    7,217
    
    
    
    12,177
    
    
    
    9,452Other
    
    
    602
    
    
    
    626
    
    
    
    512Eliminations
    
    
    (8,299
    )
    
    
    (14,275
    )
    
    
    (13,252
    )$
    
    
    
    $
    
    
    
    $
    Income before income taxes:United States
    
    $
    (4,585
    )
    
    $
    10,642
    
    
    $
    12,059China
    
    
    860
    
    
    
    1,085
    
    
    
    143Other
    
    
    39
    
    
    
    53
    
    
    
    42$
    (3,686
    )
    
    $
    11,780
    
    
    $
    12,244Total assets:United
      States
    
    $
    31,745
    
    
    $
    34,579
    
    
    $
    27,945China
    
    
    5,723
    
    
    
    5,887
    
    
    
    4,242Other
    
    
    127
    
    
    
    142
    
    
    
    116$
    37,595
    
    
    $
    40,608
    
    
    $
    32,303Long-lived assets:United States
    
    $
    7,823
    
    
    $
    8,257
    
    
    $
    8,141China
    
    
    1,384
    
    
    
    1,316
    
    
    
    1,391Other
    
    
    54
    
    
    
    48
    
    
    
    44$
    9,261
    
    
    $
    9,621
    
    
    $
    9,576


Note 13. Employment
Agreements

In January 2008, the
Company entered into an employment agreement with Scott J. Thiel, Vice President
of Engineering and Development. The contract specifies an initial base salary
per year, plus a bonus based on parameters established by the board of
directors. The agreement also provides for a one-year severance payment under
certain circumstances in the event the Company terminates his
employment.

In March 2007, the
Company entered into employment agreements with Dennis E. Bunday, its Executive
Vice President and Chief Financial Officer, Mark S. Koenen, Vice President of
Sales and Marketing and Gary A. Hafner, Vice President of Manufacturing. The
contracts specify an initial base salary per year, plus bonuses based on
parameters established by the board of directors. The agreements also provide
for a one-year severance payment under certain circumstances in the event the
Company terminates their employment.

On October 1, 2004, the Company
entered into an employment agreement with Patrick W. Cavanagh for the position
of President and Chief Executive Officer. The contract specifies an initial base
salary per year, bonus parameters established by the board of directors,
relocation assistance and stock options grants to be made in fiscal 2005. The
agreement also provides for severance payments under certain circumstances in
the event the Company terminates his employment.

Note 14. Stock Repurchase Program

In October 2008, the
Companys Board of Directors authorized the purchase, from time to time, of up
to $5,000 of shares of the Companys common stock. Repurchases may be made in
the open market or through block trades, in compliance with Securities and
Exchange Commission guidelines, subject to market conditions, applicable legal
requirements and other factors. The Company has no obligation to repurchase
shares under the repurchase program and the timing, actual number and price of
shares to be purchased will depend on the performance of the Companys stock
price, general market conditions, and various other factors within the
discretion of management. As of September 30, 2009, the Company has repurchased
310,893 shares of common stock at a total value of $2,357. The Company purchased
no shares under the share repurchase program in the third and fourth quarters of
fiscal 2009.

Note 15. Subsequent Events

In May 2009, the FASB
issued authoritative guidance which requires disclosure of the date through
which subsequent events have been evaluated, as well as whether the date is the
date the financial statements were issued or the date the financial statements
were available to be issued. The Company has evaluated subsequent events through
December 15, 2009, the date the financial statements were issued. The Company
noted no significant subsequent events have occurred through this date requiring
adjustment to the financial statements or disclosures.

50

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Note 16. Quarterly Data (unaudited)

The
following table summarizes the Companys quarterly financial data for the past
two fiscal years ended September 30, 2009 and 2008:

First
    
    Second
    
    Third
    
    Fourth2009
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    AnnualNet sales
    
    $
    10,691
    
    
    $
    9,131
    
    
    $
    8,444
    
    
    $
    10,543
    
    $
    38,809Cost of sales
    
    
    8,137
    
    
    
    7,908
    
    
    
    6,536
    
    
    
    7,592
    
    
    30,173Gross profit
    
    $
    2,554
    
    
    $
    1,223
    
    
    $
    1,908
    
    
    $
    2,951
    
    $
    8,636Operating
    expenses
    
    $
    3,463
    
    
    $
    3,104
    
    
    $
    2,541
    
    
    $
    2,820
    
    $
    11,928Net income (loss)
    
    $
    (841
    )
    
    $
    (1,200
    )
    
    $
    (333
    )
    
    $
    365
    
    $
    (2,009
    )Earnings per
      common shareBasic
    
    $
    (0.11
    )
    
    $
    (0.17
    )
    
    $
    (0.05
    )
    
    $
    0.05
    
    $
    (0.27
    )Diluted
    
    $
    (0.11
    )
    
    $
    (0.17
    )
    
    $
    (0.05
    )
    
    $
    0.05
    
    $
    (0.27
    )  First
    
    Second
    
    Third
    
    Fourth2008
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    AnnualNet sales
    
    $
    14,972
    
    $
    16,484
    
    $
    17,137
    
    $
    17,188
    
    $
    65,781Cost of sales
    
    
    10,085
    
    
    10,858
    
    
    10,965
    
    
    11,052
    
    
    42,960Gross profit
    
    $
    4,887
    
    $
    5,626
    
    $
    6,172
    
    $
    6,136
    
    $
    22,821Operating
    expenses
    
    $
    3,089
    
    $
    2,004
    
    $
    3,010
    
    $
    3,067
    
    $
    11,170Net income
    
    $
    1,156
    
    $
    2,480
    
    $
    2,197
    
    $
    1,997
    
    $
    7,830Earnings per
      common shareBasic
    
    $
    0.15
    
    $
    0.33
    
    $
    0.29
    
    $
    0.27
    
    $
    1.04Diluted
    
    $
    0.15
    
    $
    0.32
    
    $
    0.28
    
    $
    0.26
    
    $
    1.01


51

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ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not
applicable.

ITEM 9A(T). CONTROLS AND
PROCEDURES

Evaluation of Disclosure Controls
and Procedures

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

Design and Evaluation of Internal
Controls Over Financial Reporting

Report of Management

Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting. All internal control systems, no matter how well designed,
have inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.

Under the supervision and with the
participation of our management, we assessed the effectiveness of our internal
control over financial reporting as of September 30, 2009. In making this
assessment, we used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control  Integrated
Framework. Based on our assessment we believe that, as of September 30, 2009,
the Companys internal control over financial reporting are effective based on
those criteria.

This annual report does not include
an attestation report of the Companys registered public accounting firm
regarding internal control over financial reporting. Managements report was not
subject to attestation by the Companys registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only managements report in this annual report.

There has been no change in the
Companys internal control over financial reporting that occurred during our
fiscal quarter ended September 30, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.

ITEM 9B. OTHER INFORMATION

Not applicable.

52

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE

Information with respect to our
directors and executive officers is incorporated herein by reference to the
sections entitled Election of Directors and Management in our proxy
statement for our 2010 Annual Meeting of Stockholders (the 2009 Proxy
Statement) to be filed with the Securities and Exchange Commission no later
than 120 days after the end of our fiscal year ended September 30,
2009.

ITEM 11. EXECUTIVE COMPENSATION

The section of our 2009 Proxy
Statement entitled Executive Compensation is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The section of our 2009 Proxy
Statement entitled Securities Ownership of Certain Beneficial Owners and
Management is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The section of our 2009 Proxy
Statement entitled Certain Relationships and Related Party Transactions is
incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES

The section of our 2009 Proxy
Statement entitled Independent Registered Public Accounting Firm is
incorporated herein by reference.

53

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES

(a) The following documents are
filed as part of this report:

| | (1)Financial Statements-See Index to Financial Statements
      at Item 8 on page 24 of this Annual Report on Form 10-K.
      (2)Financial Statement Schedules-All financial statement
      schedules are omitted either because they are not required, not applicable
      or the required information is included in the financial statements or
      notes thereto.
      (3)Exhibits-See Exhibit Index beginning on page
      56.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

54

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SIGNATURES

Pursuant to
the requirements of Section 13 or 15(d) 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:
    
    December 15,
      2009
    By
    
    / s / PATRICK W. CAVANAGHPatrick W.
      Cavanagh, Director, President and**Chief****Executive Officer**


Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.



|Date: |  | December 15,
      2009 | By |  | / s / R. EUGENE GOODSON                           
|----- |  | ----------------------- | -- |  | --------------------------------------------------
|      |  |                         |    |  | R. Eugene
      Goodson, Chairman of the Board    
|     
|Date: |  | December 15,
      2009 | By |  | / s / PATRICK W. CAVANAGH                         
|      |  |                         |    |  | Patrick W.
      Cavanagh, Director, President and
|      |  |                         |    |  | **Chief****Executive Officer**                    
|     
|Date: |  | December 15,
      2009 | By |  | / s / DENNIS E. BUNDAY                            
|      |  |                         |    |  | Dennis E.
      Bunday, Executive Vice President, 
|      |  |                         |    |  | **Chief****Financial Officer and**                
|      |  |                         |    |  | **Principal
      Accounting Officer**            
|     
|Date: |  | December 15,
      2009 | By |  | / s / H. SAMUEL
      GREENAWALT                  
|      |  |                         |    |  | H. Samuel
      Greenawalt, Director              
|     
|Date: |  | December 15,
      2009 | By |  | / s / DOUGLAS E. HAILEY                           
|      |  |                         |    |  | Douglas E.
      Hailey, Director                 
|     
|Date: |  | December 15,
      2009 | By |  | / s / CARLOS P. SALAS                             
|      |  |                         |    |  | Carlos P.
      Salas, Director                   
|     
|Date: |  | December 15,
      2009 | By |  | / s / PETER E. SALAS                              
|      |  |                         |    |  | Peter E.
      Salas, Director                    
|     
|Date: |  | December 15,
      2009 | By |  | / s / DONN J. VIOLA                               
|      |  |                         |    |  | Donn J.
      Viola, Director                     

55

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Williams Controls,
Inc.Exhibit Index

|**Exhibit** |          |                
|----------- | -------- | ---------------
|**Number**  |          | **Description**
|            | 3.01(a)  |                
|            |          |                
|            | 3.01(b)  |                
|            |          |                
|            | 3.01(c)  |                
|            |          |                
|            | 3.01(d)  |                
|            |          |                
|            | 3.01(e)  |                
|            |          |                
|            | 3.02     |                
|            |         
|            | 4.01     |                
|            |         
|            | 4.07     |                
|            |         
|            | 10.01(a) |                
|            |          |                
|            | 10.01(b) |                
|            |          |                
|            | 10.02    |                
|            |         
|            | 10.03    |                
|            |         
|            | 10.05    |                

56

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| | 10.10 |  | Credit Agreement,
      dated September 27, 2004, among Williams, Williams Controls Industries,
      Inc., a wholly-owned subsidiary of Williams, and Merrill Lynch Capital, a
      division of Merrill Lynch Business Financial Services, Inc.(Incorporated by reference to the
      Registrants report on Form 8-K, filed on September 29, 2004)
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |  |                                                                                                                                                                                                                                                                                                                                                       
| | 10.11 |  | Amended and
      Restated Management Services Agreement, dated September 30, 2004, among
      Williams, American Industrial Partners and Dolphin Advisors, LLC(Incorporated by reference to the
      Registrants report on Form 8-K, filed on September 29,
  2004)                                                                               
| |      
| | 10.12 |  | Employment
      Agreement with Dennis E. Bunday, Executive Vice President and Chief
      Financial Officer *(**Incorporated by reference to the Registrants report on Form 10-K,
      filed on December 14, 2007)*                                                                                                                                
| |      
| | 10.13 |  | Employment
      Agreement with Patrick W. Cavanagh, President and Chief Executive Officer
      (Incorporated by reference to the
      Registrants report on Form 10-K, filed on December 14,
  2006)                                                                                                                                              
| |      
| | 10.14 |  | Revised Code of
      Ethics *(**Incorporated by
      reference to the Registrants report on Form 8-K, filed on October 3,
      2006)*                                                                                                                                                                                                             
| |      
| | 10.15 |  | Employment
      Agreement with Mark S. Koenen, Vice President of Sales and Marketing
      *(**Incorporated by reference to
      the Registrants report on Form 10-K, filed on December 14,
      2007)*                                                                                                                                           
| |      
| | 10.16 |  | Employment
      Agreement with Gary A. Hafner, Vice President of Manufacturing
      *(**Incorporated by reference to
      the Registrants report on Form 10-K, filed on December 14,
      2007)*                                                                                                                                                 
| |      
| | 10.17 |  | Employment
      Agreement with Scott J. Thiel, Vice President of Engineering and
      Development *(**Filed
      Herewith)*                                                                                                                                                                                                                        
| |      
| | 21.01 |  | Schedule of
      Subsidiaries(Filed
    Herewith)                                                                                                                                                                                                                                                                                                    
| |      
| | 23.01 |  | Consent of Moss
      Adams LLP, Independent Registered Public Accounting Firm(Filed herewith)                                                                                                                                                                                                                                                        
| |      
| | 31.01 |  | Certification of
      Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a)(Filed herewith)                                                                                                                                                                                                                                           
| |      
| | 31.02 |  | Certification of
      Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)(Filed herewith)                                                                                                                                                                                                                                           
| |      
| | 32.01 |  | Certification of
      Patrick W. Cavanagh Pursuant to 18 U.S.C. Section 1350 as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                              
| |      
| | 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                                                                                                                                                                                                 

57

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