<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

    |X|    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                                EXCHANGE ACT OF 1934

                   For the fiscal year ended DECEMBER 31, 2005

                                       OR

    |_|   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: 1-14182

                             TB WOODS'S CORPORATION

             (Exact name of registrant as specified in its charter)


                DELAWARE                                   25-1771145
    (State or other jurisdiction of                     (I.R.S. Employer
     incorporation or organization)                   Identification No.)


440 NORTH FIFTH AVENUE, CHAMBERSBURG, PA                     17201
(Address of principal executive offices)                   (Zip Code)

                                 (717) 264-7161

              (Registrant's telephone number, including area code)

                                     [NONE]

              (Former name, former address and former fiscal year,
                         if changed since last report)

           Securities registered pursuant to Section 12(b) of the Act:


    Title of each class             Name of each exchange on which registered
  -----------------------          -------------------------------------------
          None


           Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $.01 par value

                                       1

<PAGE>

     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 Exchange 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 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, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]   Accelerated filer [ ]   Non-accelerated filer [X]

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

                                Yes [ ]     No [ X]

     As of March 3, 2006, the aggregate market value of the registrant's common
stock held by non-affiliates of the registrant was $22,310,872 based on the
closing sale price as reported on the National Association of Securities Dealers
Automated Quotation System National Market System.

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.


                  Class                                    March 3, 2006
 ----------------------------------------               ------------------
  Common Stock, $.01 par value per share                 3,722,662 shares


                       DOCUMENTS INCORPORATED BY REFERENCE

<TABLE>
<CAPTION>

                               Document                                            Parts Into Which Incorporated
                             -----------                                          -------------------------------
<S>                                                                               <C>
Proxy Statement for the Annual Meeting of  Stockholders to be held                 Part III
April 27, 2006 (Proxy Statement)
</TABLE>

                                       2

<PAGE>

                              TB WOOD'S CORPORATION

                    FISCAL YEAR 2005 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS
<TABLE>
<S>               <C>                                                                                           <C>
PART I........................................................................................................    4
      Item 1.     Business....................................................................................    4
      Item 1A.    Risk Factors................................................................................    9
      Item 1B.    Unresolved Staff Comments ..................................................................   12
      Item 2.     Properties..................................................................................   12
      Item 3.     Legal Proceedings...........................................................................   12
      Item 4.     Submission of Matters to a Vote of Security Holders.........................................   12

PART II.......................................................................................................   13
      Item 5.     Market for Registrant's Common Equity and Related Stockholder Matters, and Issuer
                  Purchases of Equity Securities .............................................................   13
      Item 6.     Selected Financial Data.....................................................................   13
      Item 7.     Management's Discussion and Analysis of Financial Condition and Results of Operation........   14
      Item 7A.    Quantitative and Qualitative Disclosures about Market Risk..................................   22
      Item 8.     Financial Statements and Supplementary Data.................................................   24
      Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........   42
      Item 9A.    Evaluation of Controls and Procedures.......................................................   42
      Item 9B.    Other Information...........................................................................   42

PART III......................................................................................................   42
      Item 10.    Directors and Executive Officers of the Registrant..........................................   42
      Item 11.    Executive Compensation......................................................................   42
      Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
                  Matters.....................................................................................   42
      Item 13.    Certain Relationships and Related Transactions..............................................   42
      Item 14.    Principal Accountant Fees and Services......................................................   42

PART IV.......................................................................................................   43
      Item 15.  Exhibits and Financial Statement Schedules....................................................   43

SIGNATURES....................................................................................................   47

Exhibits......................................................................................................   48
</TABLE>

                                       3

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SAFE HARBOR STATEMENT

Certain information included or incorporated by reference in this document may
be deemed to be "forward looking statements" within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act. All statements, other
than statements of historical facts, that address activities, events or
developments that the Company intends, expects, projects, believes or
anticipates will or may occur in the future are forward looking statements. Such
statements are characterized by terminology such as "believe," "anticipate,"
"should," "intend," "plan," "will," "expects," "estimates," "projects,"
"positioned," "strategy," and similar expressions. These statements are based on
assumptions and assessments made by the Company's management in light of its
experience and its perception of historical trends, current conditions, expected
future developments and other factors it believes to be appropriate. These
forward looking statements are subject to a number of risks and uncertainties,
including but not limited to continuation of the Company's longstanding
relationships with major customers, the Company's ability to integrate acquired
businesses into its operations and realize planned synergies, the extent to
which acquired businesses are able to meet the Company's expectations and
operate profitably, ability to obtain financing, changes in regulations that
could affect demand for products, and unanticipated developments that could
occur with respect to contingencies such as environmental matters and
litigation. In addition the Company is subject to risks and uncertainties that
affect the manufacturing sector generally, including, but not limited to,
economic, competitive, governmental and technological factors affecting the
Company's operations, markets, products, services and prices. Please refer to
Item 1A "Risk Factors", of this Form 10-k for a further discussion on risks. Any
such forward looking statements are not guarantees of future performances and
actual results, developments and business decisions may differ from those
envisaged by such forward looking statements. The Company disclaims any duty to
update any forward-looking statements, all of which are expressly qualified by
the foregoing.

ITEM 1. BUSINESS

GENERAL

TB Wood's Corporation (the "Company" or "TB Wood's") is an established designer,
manufacturer and marketer of electronic and mechanical industrial power
transmission products. The Company's products are sold to North American and
international manufacturers and users of industrial equipment. Headquartered in
Chambersburg, Pennsylvania, the 149 year-old business operates seven
manufacturing and seven distribution facilities with approximately 830 employees
in the United States, Canada, Mexico, Germany, Italy, and India. The Company has
a network of more than 1,000 select independent and multi-branch distributors
with over 3,000 locations in North America.

The Company's Internet website address is WWW.TBWOODS.COM. The Company makes
available free of charge through its website its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after such documents are
electronically filed with, or furnished to, the SEC. In addition, you can access
the Company's SEC filings from www.sec.gov.

HISTORY

TB Wood's Incorporated, the Company's principal operating subsidiary which was
founded in 1857, entered the power transmission industry in 1900 and was
incorporated in 1906 in Pennsylvania as T.B. Wood's Sons Company. TB Wood's
Corporation was incorporated in 1995 to acquire the outstanding common stock of
TB Wood's Incorporated. The Company classifies its industrial power transmission
business into two segments, mechanical and electronics. Since 1992, the Company
has introduced ten new mechanical products and product line extensions,
including three mechanical belted drive products, four new coupling products,
and gearboxes as a component of its mechanical business segment.

Since entering the electronics industrial power transmission business segment in
1968 the Company has introduced new electronic products and product line
extensions and currently has 14 active electronic product families. Three of
these introductions have occurred within the last four years. Most of these
include extensions to our line of full-featured electronic variable frequency
drives ("VFD") for controlling the speed of alternating current ("AC") induction
motors. In 2001, the Company introduced a National Sanitation Foundation
certified drive for use in Food Area Splash Zone applications and micro-sized
VFD was introduced in 2003. In 2005, the Company introduced the "X4", a
replacement product for certain of the Company's existing product lines. The
Company remains focused on cost-effective VFDs for industrial Original Equipment
Manufacturer ("OEM") applications and has continued to emphasize the National
Electrical Manufacturers Association (NEMA) 4 industrial wash-down drive
enclosure targeted for challenging plant environments.


                                       4

<PAGE>

The Company has used acquisitions and strategic alliances to enhance product
offerings, gain access to technology and products, leverage fixed costs, and
extend the Company's global reach. The Company's mechanical industrial power
transmission business acquisitions include several lines of flexible couplings,
gear couplings, and variable speed drives and Grupo Blaju S.A. de C.V., the
leading Mexican manufacturer and marketer of belted drives. In the electronics
industrial power transmission business segment the Company acquired Plant
Engineering Consultants, Inc. ("PEC"), an established supplier of integrated
electronic control systems for the fibers industry. In December 1997, the
Company acquired Berges electronic GmbH in Germany, and its subsidiary Berges
electronic S.r.l. in Italy, well-established VFD developers, manufacturers and
marketers, serving primarily the European market. In 2003, the Company entered
into an agreement with a European company to distribute its micro-drive products
in North America.

INDUSTRY OVERVIEW

The industrial power transmission industry provides mechanical and electronic
products used in manufacturing and material processing activities that transfer
controlled power from an electric motor or internal combustion engine to a
machine. The industrial power transmission industry consists of the following
product categories: mechanical power transmission components, including belted
drives, couplings, and gearboxes, and electronic drives. The Company now
competes in belted drives ,couplings and electronic drives product categories.

The markets for some of the Company's products are cyclical, generally following
changes in the overall economy. Consequently, during periods of economic
expansion, the Company has experienced increased demand for its products, and
during periods of economic contraction, the Company has experienced decreased
demand for its products. Such changes in the general economy affect the
Company's results of operations in relevant fiscal periods.

PRODUCTS

The products manufactured by the Company are classified into two segments for
financial reporting purposes, mechanical and electronics industrial power
transmission businesses. The mechanical business segment includes belted drives
and couplings. The electronics business segment includes electronic drives and
electronic drive systems. Products of these segments are sold to distributors,
original equipment manufacturers, and end users for manufacturing and commercial
applications. Net sales, in millions of dollars, for our primary business
segments are provided below.

For further information on the Company's operating segments, refer to the
consolidated financial statements and footnote No. 9 included in this Form 10-K.

<TABLE>
<CAPTION>


                                           2005                         2004                         2003
                                ------------------------     -------------------------    -------------------------
                                 Net Sales        %           Net Sales         %          Net Sales         %
                                -----------   ----------     -----------    -----------   -----------    ----------
<S>                             <C>           <C>            <C>            <C>           <C>            <C>
Mechanical                           $ 72.4        65.3%          $ 63.7          62.8%       $  58.3         60.5%
Electronics                            38.5        34.7%            37.8          37.2%          38.1         39.5%
                                -----------   ----------     -----------    -----------   -----------    ----------
           Totals                   $ 110.9       100.0%         $ 101.5         100.0%        $ 96.4        100.0%
                                ===========   ==========     ===========    ===========   ===========    ==========

</TABLE>

MECHANICAL PRODUCT OFFERING

The Company's mechanical product offering includes a full line of stock and
made-to-order products including V-belt drives, synchronous drives, variable
speed drives, and a broad line of flexible couplings, as well as hydrostatic
drives, clutches, and brakes. These products are used in a variety of industrial
applications to transmit power from electric motors and internal combustion
engines to machines. The primary markets for these products are the
construction, oilfield, specialized industrial machinery, food processing,
material handling, pumps, compressors, mining, pulp and paper, and agricultural
equipment industries.

ELECTRONIC PRODUCT OFFERING

The Company designs and manufactures AC electronic VFDs, Direct Current ("DC")
electronic motor controllers, and integrated electronic drive systems that are
marketed throughout North America and internationally. These products are used
to control the speed, acceleration and other operating characteristics of
electric motors in manufacturing processes. The Company's standard AC electronic
VFD products, which represent most of its net sales of electronic drive
products, are programmable to meet the needs of specific applications with
particular strengths in food and beverage processing, materials handling, HVAC,
oil production, textile/fibers, packaging, furniture making, and general
machinery applications. The Company's electronic products are designed to meet
both North American and European electrical standards. In 2005, the Company
introduced the "X4", a replacement product for certain of the Company's existing
product lines. Considerable investment was made in the development of this
drive. In 2004, the Company introduced a new line of SE1/SW1 "micro-drive"
products to complement our existing product line. The Company's integrated
electronic drive systems consist of uniquely configured AC and/or DC electronic
VFDs, programmable logic controllers, in-house custom designed printed circuit
boards, and software. These systems are built in custom enclosures to meet the
requirements of specific applications.

                                       5

<PAGE>

MARKETING AND DISTRIBUTION

The Company's products are sold principally throughout North America and to a
lesser extent internationally. In North America, the Company sells to more than
1,000 authorized independent and multi-branch industrial distributors with over
3,000 locations that resell the Company's products to industrial consumers and
OEMs. The Company also sells directly to over 300 OEMs. The Company's marketing
alliances include licensing agreements and distribution agreements with
distributors and manufacturers who, in some cases, market the Company's products
under private label agreements. In North America, the Company has its own
technical sales force of more than 40 people and several specialized
manufacturers' representatives.

The Company operates distribution centers in Chambersburg, Pennsylvania; Reno,
Nevada; Stratford, Ontario; Montreal, Quebec; Edmonton, Alberta; Mexico City,
Mexico and Marienheide, Germany.

The Company's products are manufactured to maintain stock inventories and to
meet forecasts from specific customers. On-time delivery is important. Order
backlogs are generally less than one month's customer shipments and are not
considered to be material in amount.

CUSTOMERS

The OEM market is served directly by the Company and through industrial
distributors. The replacement market for the Company's products is served
primarily through industrial distributors. The Company's distributors include,
among others, Motion Industries and Kaman Industrial Technologies, who are among
the largest distributors in the industrial power transmission industry. The
Company's OEM customers include a number of Fortune 500 companies. Management
believes that the Company is one of the leading suppliers of power transmission
products, based on sales volume, to its distributors. The Company's five largest
customers accounted for approximately 32%, 33% and 35% of the Company's
consolidated revenue for fiscal years 2005, 2004 and 2003, respectively. One
such customer, an industrial distributor with a large diversified customer base,
accounted for approximately 18%, 15% and 18% of the Company's consolidated
revenue for fiscal 2005, 2004 and 2003, respectively.

COMPETITION

The industrial power transmission industry is highly competitive. Competition in
the AC and DC electronic drive product categories is based on product
performance, physical size of the product, tolerance for hostile environments,
application support, availability, and price. The Company's competitors in these
electronic product categories include large multi-national companies in North
America, Europe, and Asia, as well as many small, domestic niche manufacturers.
The integrated electronic drive system market is driven by increased demand from
end users for greater productivity and process control. This market includes
sales of products used in the maintenance and replacement of existing systems,
upgrades to existing systems, and new capacity expansion. Competition is based
on process knowledge and engineering, software design, product durability, and
price. Major VFD and systems competitors include Asea Brown Boveri (ABB),
Rockwell Automation (Allen Bradley and Reliance Electric), Siemens Corp., and
Yaskawa. The Company competes with several divisions of large industrial
companies as well as many small to mid-sized independent companies in the
mechanical product category. Competition in the mechanical product offering is
based on availability, quality, price, product line breadth, engineering, and
customer support. The Company's most significant competitors in the mechanical
product category include Rockwell Automation, Inc. (Dodge), Emerson Electric Co.
(Browning), Martin Sprocket & Gear, Inc., Poulies Maska, Inc., Rexnord
Industries, Inc., and Lovejoy, Inc. Management believes that there are few
significant foreign competitors in the North American mechanical product market
because of a fragmented customer base, prohibitive freight costs as compared to
selling price, and difficult access to existing distribution channels.

                                       6

<PAGE>

RESEARCH AND DEVELOPMENT

The Company's research and development efforts include the development of new
products, the testing of products, and the enhancement of manufacturing
techniques and processes. The Company's annual expenditures for research and
development (including royalties and payments to third parties) were $3.1
million for 2005, $3.2 million for 2004, and $3.4 million for 2003, which, as a
percent of net sales during the last three fiscal years, have been 2.8% for
2005, 3.1% for 2004, and 3.5% for 2003. The Company utilizes its Technology
Center located in its Chambersburg facility to make the research and development
investment more productive by making it easier for engineers to share insights
and collaborate on projects. Electronic drive research is also conducted at its
subsidiary in Italy.

RAW MATERIALS

The principal raw materials used in the Company's mechanical manufacturing
operations are various types of scrap steel, including pig iron, metal
stampings, castings, forgings and powdered metal components. The Company also
designs, tools and out-sources special components made of aluminum, powdered
metal, and polymers. The Company purchases the materials used in its mechanical
manufacturing operations from a number of suppliers, and management believes
that the availability of its materials is adequate and not significantly
dependent on any one supplier. Scrap metal prices, which had escalated
dramatically throughout 2004 rising to $420 per ton at December 31, 2004,
decreased throughout 2005 to close the year at $300 per ton. In 2005 and 2004,
scrap metal costs averaged approximately $320 per ton, significantly above
historical levels. As a result, the Company implemented price increases for its
mechanical products during 2004 and 2005 to partially offset these higher costs.

The Company generally uses standard purchased components in all of its
electronic products. The Company also purchases specialized components designed
by its engineers. Purchased components include power transistors, capacitors,
printed circuit boards, microprocessors and associated semiconductor integrated
circuits, aluminum heat sinks, plastic enclosures and sheet metal stampings.
These electronic parts and components are purchased from a number of suppliers
and management has taken steps to qualify multiple sources for key items, where
possible.

PATENTS AND TRADEMARKS

The Company owns patents relating to its coupling, composite, synchronous drive,
open belted variable speed drive, electronic drive, and clutch/brake product
lines. The Company also owns several patents relating to the design of its
products. From time to time, the Company will grant licenses to others to use
certain of its patents and will obtain licenses under the patents of others. In
addition, the Company owns or has the right to use, registered United States
trademarks for the following principal products among others: Sure-Flex(R),
Formflex(R), Ultra-V(R), E-trAC(R), Ultracon(R), Dura-Flex(R), E-Trol(R),
Petro-trAC(R), Sure-Grip(R), All-Pro(R), Wood's@Work(R), QT Power Chain(R),
Win-Trac(R) and PDA-Trac(R).

EMPLOYEES

As of December 31, 2005, the Company employed 830 people. The National Metal
Workers' Union of Mexico represents approximately 140 production employees in
the Company's Mexican facilities pursuant to collective bargaining agreements
that are subject to annual renewals. At the Company's Stratford, Ontario
facility four employees are represented by the United Steelworkers of America
pursuant to a collective bargaining agreement that expires in January 2007. The
Company offers training programs to improve employees' operating, management and
team-building skills.

ENVIRONMENTAL MATTERS

As with most industrial companies, the Company's operations and properties are
required to comply with, and are subject to liability under federal, state,
local, and foreign laws, regulations, and ordinances relating to the use,
storage, handling, generation, treatment, emission, release, discharge, and
disposal of certain materials, substances, and wastes. The nature of the
Company's operations exposes it to the risk of claims with respect to
environmental matters and there can be no assurance that material costs will not
be incurred in connection with such liabilities or claims.

When the Company acquired its Mt. Pleasant Facility from Dana Corporation in
1993, the Asset Purchase Agreement (the "Asset Purchase Agreement") included an
environmental indemnity provision. Pursuant to this provision, Dana Corporation
agreed to indemnify the Company with respect to any environmental liabilities to
the extent they arose out of environmental conditions first occurring on or
before the closing date, including the presence or release of any hazardous
substances at, in, or under the Mt. Pleasant Facility and with respect to the
identification of the Mt. Pleasant Facility on the Michigan list of inactive
hazardous waste sites. The Dana Corporation is conducting a limited remediation
with respect to volatile organic compounds found in soils and groundwater. The
Company has not been notified by the Michigan Department of Natural Resources or
any other governmental agency or person that it has any responsibility for
investigating or remediating such environmental conditions. Although the Company
has no reason to believe Dana Corporation cannot or will not fulfill its
remediation and indemnification obligations under the Asset Purchase Agreement,
even after its March 2006 bankruptcy filing, if Dana Corporation is unable to
fulfill such commitments, the Company may incur additional costs.

                                       7

<PAGE>

The Company believes that its facilities are in substantial compliance with
current regulatory standards applicable to air emissions under the Clean Air Act
Amendments of 1990 ("CAAA"). At this time, the Company cannot estimate when
other new air standards will be imposed or what technologies or changes in
processes the Company may have to install or undertake to achieve compliance
with any applicable new requirements at its facilities. The Company has no
reason to believe that such expenditures are likely to be material. Similarly,
based upon the Company's experience to date, the Company believes that the
future cost of currently anticipated compliance with existing environmental laws
relating to wastewater, hazardous waste, and employee and community
right-to-know should not have a material adverse effect on the Company's
financial condition.

GEOGRAPHICAL INFORMATION

See footnote 9 "Business Segment Information" to the consolidated financial
statements for information on sales and long lived assets by geographical area.

RECENT DEVELOPMENTS

In October 2005, the Company purchased 1.5 million shares of its common stock in
a "Dutch Auction" self-tender at a purchase price of $7.50 per share, which was
funded through issuance of $15.0 million of new senior subordinated notes with
detachable warrants. In January 2005, the Company entered into a new senior
secured lending arrangement, which was further amended in July 2005 to permit
the self-tender. All these transactions are more fully described in footnotes 4
"Debt" and 6 "Shareholders' Equity" to the consolidated financial statements.

The Company continues to evaluate its operating locations to ensure that it can
achieve the maximum amount of efficiencies. As noted below, the Company has
closed manufacturing facilities that it believed were no longer necessary and
consolidated its manufacturing operations located at Stratford, Ontario, Canada,
Mexico City, Mexico and Trenton, Tennessee facility ("Trenton") to other
locations, principally its San Luis Potosi, Mexico facility where it has
recently enhanced its manufacturing capabilities in a new state of the art
manufacturing facility.

In September 2004, the Company closed its manufacturing plant located in Trenton
as part of its cost reduction plan for its Mechanical Division. Substantially
all of the equipment used in the operations of the Trenton facility has been
transferred to other machining facilities operated by the Company. Management
believes this relocation has had a positive competitive effect on the Company's
ability to produce certain of its Mechanical Division product offerings. Costs
incurred in connection with this plant shutdown approximated $1.5 million and
were principally recognized during the second half of 2004. These costs
primarily consisted of "stay-pay" incentives, equipment relocation expenses, and
additional costs associated with the relocation of operations, including
training and technical assistance for new employees.

During 2003, the Company relocated its manufacturing operations formerly
conducted in Mexico City to San Luis Potosi, Mexico. It continues to maintain
its finished goods warehouse, sales, and customer service operations for the
Latin American market in Mexico City. Certain of the manufacturing activities
associated with the Mexico City operations have been outsourced to local
suppliers. The closure costs of the Mexico City operations approximated $0.3
million.

In February 2006, Thomas Foley was elected Chairman of the Board of Directors, a
position he previously held from the inception of the Company in 1995 and before
that with TB Wood's Incorporated since 1985, until August 2003, when he took a
leave of absence from the Company. Mr. Foley rejoined the Board in April 2004
prior to his election as Chairman.

In April 2004, the Company appointed William T. Fejes, Jr. President and Chief
Executive Officer and a Company director. Upon Mr. Fejes' employment, James R.
Swenson was appointed to the position of Chairman of the Board of Directors.

In November 2003, Michael L. Hurt, the Company's former President and Chief
Executive Officer, retired from the Company and James R. Swenson, a director of
the Company was appointed Interim President and Chief Executive Officer. In
September 2003, Joseph C. Horvath was appointed as Vice President and Chief
Financial Officer of the Company, succeeding Thomas F. Tatarczuch, who retired
as the Company's Vice President, Finance.

                                       8

<PAGE>

ITEM 1A. RISK FACTORS

Investing in our securities involves risks. You should carefully consider the
following risk factors and the other information in this prospectus, including
our consolidated financial statements and related notes, before you decide to
purchase our common stock. If any of the following risks occur, our business,
financial condition and operating results could be adversely affected. As a
result, the trading price of our common stock could decline and you could lose
part or all of your investment. We may amend or supplement the risk factors
described below from time to time by other reports we file with the SEC in the
future.

RISKS RELATED TO OUR COMPANY

CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING EXECUTIVES, DIRECTORS AND
PRINCIPAL STOCKHOLDERS MAY PREVENT NEW INVESTORS FROM INFLUENCING SIGNIFICANT
CORPORATE DECISIONS.

Our executives, directors and principal stockholders beneficially own, in the
aggregate, securities representing approximately 51% of the voting power of our
outstanding common stock. Accordingly, these stockholders can exercise
significant influence over our business policies and affairs, including the
composition of our board of directors and any action requiring the approval of
our stockholders, including the adoption of amendments to our certificate of
incorporation and the approval of significant corporate transactions, including
mergers or sales of substantially all of our assets. This concentration of
ownership will limit your ability to influence corporate actions. The
concentration of ownership may also delay, defer or even prevent a change in
control of our Company and may make some transactions more difficult or
impossible without the support of these stockholders. We cannot assure that the
interests of these stockholders will not conflict with your interests. In
addition, our interests may conflict with these stockholders in a number of
areas relating to our past and ongoing relationships, including the timing and
manner of any sales or distributions by these stockholders of all or any portion
of their ownership interest in us, and the evaluation of, and activities
concerning, business opportunities that may be presented to TB us and our
affiliates and to our directors associated with TB Wood's.

THE PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE.

Historically, the market price of our common stock has fluctuated over a wide
range. In fiscal year 2005, our common stock traded in a range from $ 4.77 to $
8.87 and at March 3, 2006 our stock price was $ 12.12. It is likely that the
price of our common stock will fluctuate in the future. The market price of
companies with small-capitalization like ours may from time to time experience
significant price and volume fluctuations unrelated to the operating
performance. In particular, the market price of our common stock may fluctuate
significantly due to a variety of factors, including the sale or purchase of a
significant block of shares, or overall movement of stock market indices. In
addition, the occurrence of any of the other risks described in Item 1A could
have a material and adverse impact on the market price of our common stock.

WE HAVE REPORTED LOSSES IN THE PAST AND MAY REPORT LOSSES IN FUTURE PERIODS.

Although we have reported operating income for fiscal years 2001 through 2005,
we have reported net losses for fiscal years 2002 and 2003. In addition, 2004
operating results would have reflected a net loss had the Company not recognized
a non-recurring, non-cash gain related to the termination of a post-retirement
benefit plan. Although 2005 was profitable, we cannot assure you that we will
continue to operate profitability, and if we do not, we may not be able to meet
our debt service requirement, working capital requirements, capital expenditure
plans or other cash needs. Our inability to meet those needs could have a
material adverse effect on our business, results of operations and financial
condition.

WE MAY NOT PAY DIVIDENDS ON OUR COMMON STOCK AT ANY TIME IN THE FORESEEABLE
FUTURE.

Our ability to declare and pay dividends is restricted by covenants in our
senior secured credit facility and the purchase agreement governing our senior
subordinated notes, and may be further limited by instruments governing future
outstanding indebtedness we or our subsidiaries may incur. Any decision to
declare and pay dividends in the future will be made at the discretion of our
board of directors and will depend on, among other things, our results of
operations, financial conditions, cash requirement, contractual restrictions and
other factors that our board of directors may deem relevant.

                                       9

<PAGE>

OUR SENIOR SECURED CREDIT FACILITY AND THE PURCHASE AGREEMENT GOVERNING OUR
SENIOR SUBORDINATED NOTES IMPOSE CERTAIN RESTRICTIONS. A FAILURE TO COMPLY WITH
THESE RESTRICTIONS COULD LEAD TO AN EVENT OF DEFAULT, RESULTING IN AN
ACCELERATION OF INDEBTEDNESS, WHICH MAY AFFECT OUR ABILITY TO FINANCE FUTURE
OPERATIONS OR CAPITAL NEEDS, OR TO ENGAGE IN OTHER BUSINESS ACTIVITIES.

The operating and financial restrictions in our debt agreements, including our
senior secured credit facility and the purchase agreement governing our senior
subordinated notes, may adversely affect our ability to finance future
operations or capital needs or to engage in other business activities. Our debt
agreements contain certain covenants and financial tests that limit the way we
conduct business, including covenants limiting our ability to incur or guarantee
additional indebtedness, pay dividends and make other distributions, pre-pay any
subordinated indebtedness, make investments and other restricted payments, make
capital expenditures, make acquisitions and sell assets. These covenants may
prevent us from raising additional financing, competing effectively or taking
advantage of new business opportunities. Under our debt agreements, we are also
required to maintain specific financial ratios and satisfy certain financial
tests. If we cannot comply with these covenants or meet these ratios and other
tests, it could result in a default under one or more of our debt agreements,
and unless we are able to negotiate an amendment, forbearance or waiver, we
could be required to repay all amounts then outstanding, which could have a
material adverse effect on our business, results of operations and financial
condition depending upon our outstanding balance at the time.

WE MAY BE ADVERSELY IMPACTED BY CHANGES IN INTEREST RATES.

The effective interest rate payable on approximately half of our borrowings is
variable and may be influenced by our operating performance and degree of
leverage, as well as by actions of the Federal Reserve Bank Board in
establishing from time to time the Federal Funds Interest rate that underlies
the cost of funds borrowed by the Company. Refer to Item 7A of this Form 10-k
for additional discussion of the interest risks.

RISKS RELATED TO OUR BUSINESS

WE OPERATE IN THE HIGHLY COMPETITIVE ELECTRONIC AND MECHANICAL INDUSTRIAL
TRANSMISSION INDUSTRY.

The industrial power transmission industry is highly competitive. Our
competitors include both large multi-national companies in North American,
Europe and Asia as well as many small domestic niche manufacturers. Our
operating results depend in part on continued successful research, development
and marketing of new and or improved products and services, particularly in the
electronics business, and there can be no assurance that we will continue to
successfully introduce new products and services. We are small compared to many
of our competitors, which are divisions of large, multi-national corporations,
and may not have the same access to resources.

OUR BUSINESS IS CYCLICAL.

Our business is dependent on macro-economic factors, including industrial and
consumer spending, and is therefore impacted by the cyclical strength of the
economy generally, interest rates and other factors. Economic factors adversely
affecting original equipment manufacturer production and consumer spending could
adversely impact us. During periods of expansion in original equipment
manufacturer production, we generally have benefited from increased demand for
our products. Conversely, during recessionary periods, we have been adversely
affected by reduced demand for our products.

The markets for some of our products are cyclical, generally following changes
in the overall economy. Consequently during periods of economic expansion, we
have experienced increased demand for its products and during periods of
economic contraction, we have experienced decreased demand for its products.
Such changes in the general economy affect our results of operations in relevant
fiscal periods.

A SIGNIFICANT PORTION OF OUR REVENUES ARE GENERATED FROM A LIMITED NUMBER OF
CUSTOMERS AND THE TERMINATION OF ONE OR MORE OF OUR RELATIONSHIPS WITH ANY OF
THESE CUSTOMERS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

We depend on revenues from several significant customers, and any loss,
cancellation, or reduction of, or delay in, purchases by these customers could
harm our business. Several significant customers represent a significant portion
of our revenues. Our success will depend on our continued ability to develop and
manage relationships with these customers. We expect that significant customer
concentration will continue for the foreseeable future.

Several of our customers are distributors to a broad number of end users which
helps to mitigate risk; however, a distributor could elect to discontinue using
the Company as a supplier source.

                                       10

<PAGE>

THE RELOCATION OF CUSTOMERS TO OFF-SHORE LOCATIONS COULD RESULT IN INCREASED
COSTS OF PRODUCTION AND SUBJECT US TO INCREASED ECONOMIC RISK IF WE SHIFT
OPERATIONS TO MEET CUSTOMER DEMANDS.

Off-shore customers and the relocating of our customers' operating facilities
away from our production source could lead us to being a higher cost producer.
In addition, some of our operations depend on production facilities located
abroad. Operations that are located outside of the United States may be subject
to increased risks of disrupted production which could cause delays in shipments
and loss of customers and revenues. Our manufacturing facilities abroad may be
more susceptible to changes in laws and policies in host countries and economic
and political upheaval than our domestic facilities. Any such disruption could
cause delays in shipments of products and the loss of sales and customers, and
insurance proceeds may not adequately compensate us.

OUR DEPENDENCE ON, AND THE PRICE OF, RAW MATERIALS MAY ADVERSELY AFFECT OUR
PROFITS.

We use a variety of raw materials and components in our business and significant
shortages or price increases could increase our operating costs and adversely
impact the competitive position of our products. We have experienced significant
volatility and upward cost pressure for scrap steel and ancillary steel-based
components, our primary raw materials. If we are unable to pass on raw materials
price increases to our customers, our future profitability may be materially
adversely affected.

WE MAY BE ADVERSELY AFFECTED BY ENVIRONMENTAL, HEALTH AND SAFETY LAWS AND
REGULATIONS.

Our operations and properties are subject to federal, state, and local laws,
regulations, and ordinances relating to environmental, health and safety risks.
The nature of our operations exposes us to the risk of claims with respect to
environmental, health and safety matters and any failure to comply with any
environmental, health and safety regulations could subject us to future
liability, including, fines, penalties and the suspension of production.

OUR OPERATIONS ABROAD SUBJECT US TO FOREIGN CURRENCY FLUCTUATIONS.

Our consolidated financial statements are denominated in U.S. dollars and
accordingly, changes in the exchange rates between our subsidiaries' local
currency and the U.S. dollar will affect the translation of such subsidiaries
financial results into U.S. dollars for the purposes of reporting consolidated
financial results.

The net assets, net earnings and cash flows from our operations in Mexico,
Canada, Germany, Italy and India are based on the U.S. dollar equivalent of such
amounts measured in the applicable functional currency. These foreign operations
have the potential to impact our financial position due to fluctuations in the
local currency arising from the process of re-measuring the local functional
currency in the U.S. dollar. Refer to Item 7A of this Form 10-k for additional
discussion on exchange rate risks.

OUR INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR FUTURE SUCCESS.

Our future success depends to a significant extent upon the continued service of
our executive officers and other key management and technical personnel and on
our ability to continue to attract, retain and motivate qualified personnel.
Recruiting and retaining skilled personnel has become even more competitive as
the domestic economy has improved in recent years. The loss of services of one
or more of our key employees or our failure to attract, retain and motivate
qualified personnel could have a material adverse effect on our business,
financial condition and results of operations.

WHILE WE BELIEVE OUR CONTROL SYSTEMS ARE EFFECTIVE, THERE ARE INHERENT
LIMITATIONS IN ALL CONTROL SYSTEMS, AND MISSTATEMENTS DUE TO ERROR OR FRAUD MAY
OCCUR AND NOT BE DETECTED.

We continue to take action to assure compliance with the internal controls,
disclosure controls and other requirements of the Sarbanes-Oxley Act of 2002.
Our management, including our Chief Executive Officer and Chief Financial
Officer, cannot guarantee that our internal controls and disclosure controls
will prevent all possible errors or all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. In addition, the
design of a control system must reflect the fact that there are resource
constraints and the benefit of controls must be relative to their costs. Because
of the inherent limitations in all control systems, no system of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Further, controls can
be circumvented by individual acts of some persons, by collusion of two or more
persons, or by management override of the controls. The design of any system of
controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Over time, a
control may become inadequate because of changes in conditions or the degree of
compliance with policies or procedures may deteriorate. Because of inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and may not be detected.

                                       11

<PAGE>

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

The Company owns and operates the following facilities:

<TABLE>
<CAPTION>

Location                                  Operations                                                       Sq. Feet
----------------------------            ----------------------------------------------------------     ----------------
<S>                                     <C>                                                            <C>
Chambersburg, Pennsylvania                Foundry production of iron; manufacturing, engineering            440,000
                                            and central distribution of mechanical and electronic
                                            products; and corporate headquarters.
Scotland, Pennsylvania                    Manufacturing of electronic products.                              51,300
Stratford, Ontario, Canada                Central distribution and administrative offices for                46,000
                                            Canada.
San Marcos, Texas                         Manufacturing and engineering of mechanical products.              51,000
Mt. Pleasant, Michigan                    Manufacturing of mechanical products.                              30,000
Chattanooga, Tennessee                    Manufacturing, engineering, and sales of integrated                60,000
                                            electronic drive systems.

</TABLE>

In addition, the Company leases manufacturing facilities in San Luis Potosi,
Mexico (71,800 sq. ft.); Naturns, Italy (19,500 sq. ft.); and Bangalore, India
(5,000 sq. ft.). The Company also leases distribution facilities in Reno,
Nevada; Marienheide, Germany; Montreal, Quebec; Edmonton, Alberta; and Mexico
City, Mexico. The Company believes that its facilities are adequate for its
current needs.

ITEM 3. LEGAL PROCEEDINGS

The Company is a party to various legal actions arising in the ordinary course
of business. The Company does not believe that the outcome of any of these
actions will have a materially adverse affect on the consolidated financial
position of the Company.

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

No matter was submitted for a vote of the security holders during the fiscal
quarter ended December 31, 2005.

                                       12

<PAGE>

                                     PART II

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

The Company is traded on NASDAQ under the symbol "TBWC". The high and low prices
as reported by the NASDAQ National Market for the Common Stock, and dividends
paid on Common Stock, during the period from January 3, 2004 through December
31, 2005 were as follows:

<TABLE>
<CAPTION>

                                                                   Price                         Dividends
                                                         --------------------------    -------------------------
                                                           High             Low         Declared            Paid
                                                         --------        ---------     -----------        --------
<S>                             <C>                      <C>             <C>           <C>                <C>
Fiscal Year 2004                1st quarter                $ 9.00           $ 8.09           $ .09            $.09
                                2nd quarter                  9.00             6.21             .09             .09
                                3rd quarter                  8.04             5.27             .09             .09
                                4th quarter                  6.78             5.10              --              --

Fiscal Year 2005                1st quarter                $ 7.00           $ 5.10            $ --            $ --
                                2nd quarter                  8.87             5.00              --              --
                                3rd quarter                  7.39             4.77              --              --
                                4th quarter                  8.00             6.09              --              --

</TABLE>

On March 3, 2006, there were 150 shareholders of record of the Company's Common
Stock and the closing sales price was $12.12 per share.

On October 20, 2005, Company accepted for payment 1,500,000 shares of its Common
Stock, at a price of $7.50 per share, pursuant to its "Dutch Auction"
self-tender offer. As a result of the completion of the self-tender offer, the
Company then had 3,700,647 shares of common stock issued and outstanding. The
shares of common stock accepted for purchase represent approximately 28.84% of
TB Wood's 5,200,647 shares of common stock issued and outstanding prior to the
completion of the self-tender offer.

The Company suspended the payment of dividends for the fourth quarter of 2004.
The declaration of any dividend, including the amount thereof, is at the
discretion of the Board of Directors of the Company, and will depend on the
Company's then current financial condition, results of operations, capital
requirements, compliance with loan agreements and such other factors as the
Board of Directors deems relevant.

There were no sales of unregistered securities during the period of January 1,
2005 through December 31, 2005.

Information regarding the Company's equity compensation plans is set forth in
the Company's Proxy Statement for the 2006 Annual Meeting in the Section
entitled "Other Forms of Compensation" and is incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA

The following tables set forth selected historical financial and operating data
for the Company for each of the five years through fiscal year 2005 and have
been derived from the Company's financial statements which have been audited by
the Company's independent registered public accounting firm. The information set
forth below should be read in conjunction with the Company's Consolidated
Financial Statements and notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operation."

In 2004, the Company adopted a policy to change its fiscal year to a calendar
year, effective with the calendar year commencing January 1, 2005. Prior to
fiscal year 2005, the Company's 52/53-week fiscal year ended on the Friday
closest to the last day of December. This change is not expected to have a
material affect on the Company's reported results of operations. Fiscal year
ends 2005 and 2004 were 52 week years while fiscal year 2003 was a 53 week year.
Fiscal year-ends were as follows:

<TABLE>

<S>                     <C>
2005                    December 31, 2005
2004                    December 31, 2004
2003                    January 2, 2004
2002                    December 27, 2002
2001                    December 28, 2001

</TABLE>

                                       13

<PAGE>

SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                 Fiscal Year                       2005         2004            2003          2002          2001
----------------------------------------------- -----------  ------------    -----------   -----------   -----------
<S>                                             <C>          <C>             <C>           <C>           <C>
Net sales                                        $  110,897     $ 101,515       $ 96,415     $ 104,383     $ 108,805

Gross profit                                         33,705        27,723         29,397        33,145        37,037
Selling, general and administrative expense          27,717        28,371         28,635        29,178        31,010
Non- recurring gain on termination of benefit
    plan                                                 --         9,258             --            --            --
Minority interest                                        --            --             --           151         1,147
Operating income                                      5,988         8,610            762         3,816         4,880

Net income (loss)                                $    2,380     $   4,618       $   (360)    $  (1,050)    $   2,906
                                                ===========  ============    ===========   ===========   ===========
Cash Flow
   Cash provided by operations                   $   12,285     $   4,200       $  2,589     $  12,450     $  13,291
   Capital expenditures                          $    3,062     $   2,009       $  2,227     $   3,481     $   4,110

Adjusted working capital (1)                     $   20,709     $  23,789       $ 24,834     $  20,955     $  26,315
Total assets                                     $   67,753     $  69,370       $ 76,407     $  77,576     $  87,632

Current portion of long-term debt                $    4,138     $   7,605       $     53     $  18,363     $    843
Long-term debt, less current portion                 25,829        16,708         25,371         5,436        27,802
                                                -----------  ------------    -----------   -----------   -----------
Total debt                                       $   29,967     $  24,313       $ 25,424     $  23,799     $  28,645
                                                ===========  ============    ===========   ===========   ===========
Shareholders' equity                             $   21,518     $  29,735       $ 25,418     $  26,413     $  28,445
Per Share Data
   Net income (loss)                             $     0.48     $    0.89       $  (0.07)    $   (0.20)    $    0.54
   Cash dividends paid                           $     0.00     $    0.27       $   0.36     $    0.36     $    0.36
Weighted average shares outstanding                   4,961         5,166          5,180         5,232         5,355

</TABLE>

(1) Adjusted working capital is total current assets less current liabilities
excluding the current portion of long-term debt shown above.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The Company is a worldwide manufacturer of mechanical and electronic products
used in the process of power transmission for industrial and other commercial
applications. Fiscal year 2005 continued to reflect strong demand in the
Company's marketplace, particularly for its Mechanical Division products,
following a prolonged slump in the industrial markets that began in the second
half of 2000. Sales to the Company's largest distribution customer increased by
$5.0 million in 2005 as a result of the strong economic climate, and the gap
between such sales and the customer's sale-through of the Company's product was
reduced considerably to $1.2 million compared to approximately $5.0 million
during 2004.

The significant volatility and upward cost pressure for the Company's primary
raw materials that occurred in 2004, principally the costs of scrap steel and
ancillary steel-based components used in the manufacture of its mechanical
products, began to moderate in 2005, with unit costs ending lower than the
preceding year. This enabled the Company to restore a substantial portion of
margins lost due to lagging price increases in previous periods. Overall, the
average cost for such materials was comparable in both periods.

The Company continued to address other cost reduction activities through
expanded lean manufacturing initiatives. In 2004 the Company recognized
approximately $1.5 million of closure costs associated with the closure of its
Trenton, Tennessee facility while no similar costs were incurred in 2005.
Management remains focused on ways to better utilize the Company's worldwide
productive capacity, as well as leverage its technical capabilities to add more
value to the Company's products and services.

The following tables, derived from the Company's audited consolidated financial
statements, present selected elements of the Company's operating results, and
the changes thereto, for each of the two most recent years compared to the
results for the immediately preceding year.

                                       14

<PAGE>

YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
(in thousands)

<TABLE>
<CAPTION>

                                                        2005          2004        Dollar Change      % Change
                                                     -----------   -----------    -------------     -----------
<S>                                                  <C>           <C>            <C>              <C>
SALES
  Mechanical Business                                   $ 72,361     $  63,732         $  8,629           13.5%
  Electronics Business                                    38,536        37,783              753            2.0%
                                                     -----------   -----------    -------------     -----------
   Total Sales                                          $110,897      $101,515         $  9,382            9.2%

COST OF SALES
  Mechanical Business                                   $ 52,213     $  47,788         $  4,425            9.3%
  Electronics Business                                    24,979        26,004           (1,025)          (3.9%)
                                                     -----------   -----------    -------------     -----------
   Total Cost of Sales                                  $ 77,192     $  73,792         $  3,400            4.6%

GROSS PROFIT
   Mechanical Business                                  $ 20,148     $  15,944         $  4,204           26.4%
   Electronics Business                                   13,557         11,779           1,778           15.1%
                                                     -----------   -----------    -------------     -----------
    Total Gross Profit                                  $ 33,705     $  27,723         $  5,982           21.6%

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES            $ 27,717     $  28,371         $   (654)          (2.3%)

SALES AS A PERCENTAGE OF TOTAL SALES
   Mechanical Business                                      65.3%         62.8%
   Electronics Business                                     34.7%         37.2%
                                                     -----------   -----------
    Total Sales                                            100.0%        100.0%

COST OF SALES AS A PERCENTAGE OF SALES
   Mechanical Business                                      72.2%         75.0%
   Electronics Business                                     64.8%         68.8%
    Total Cost of Sales                                     69.6%         72.7%

GROSS PROFIT AS A PERCENTAGE OF SALES
   Mechanical Business                                      27.8%         25.0%
   Electronics Business                                     35.2%         31.2%
    Total Gross Profit                                      30.4%         27.3%

SG&A EXPENSE AS A PERCENTAGE OF TOTAL SALES                 25.0%         27.9%

</TABLE>

The continuing strength in general economic conditions helped the Company
experience a $9.4 million increase in revenues in 2005. The revenue growth can
be attributed to three major factors: increased demand or volume for the
Company's products, increased prices for those products, and foreign currency
fluctuations relative to the United States dollar and the local currency
utilized by the Company's foreign subsidiaries.

The Company's Mechanical Division experienced increased selling volume of $5.8
million, nearly two-thirds of its total revenue growth. The Company believes
that the strong economic recovery, buoyed in part by the market for the
Company's products used in oil production, contributed substantially to this
increased demand. The Company was also able to increase prices in 2005 for
certain of its Mechanical products, contributing approximately $2.1 million to
increased revenues for the year. The remainder of the Mechanical Division sales
growth related to a stronger Canadian dollar. The Company also experienced a
$0.6 million increase in sales of its electronic products attributable to
increased sales of products used to produce petroleum and the successful
introduction of the Company's new "X-4" AC drive. The remaining increase in
sales revenues related to minor price changes and currency fluctuations.

Overall gross profit as a percent of net sales increased to 30.4% in 2005
compared to 27.3 % in 2004. This gain can be attributed to $2.0 million of price
increases, or 1.9 points, and the absence in 2005 of $1.5 million in
non-recurring closure costs associated with the closure of the Trenton facility
incurred in 2004, or 1.4 points. Gains from currency of approximately $0.3
million and reduced LIFO costs of $0.8 million were largely offset by the higher
cost of goods sold for products produced in previous years being recognized in
2005, as the Company made substantial reductions in its inventories from year
ago levels.

                                       15

<PAGE>

Gross profits of the Company's Mechanical Division increased approximately $4.2
million, to 27.8% of sales in 2005 compared to 25.0% of sales in 2004,
principally due to selling price increases, higher sales volume levels and the
elimination of the non-recurring costs described above, offset by the effects of
increased sales of lower margin products, and higher unit costs of goods sold in
the current period attributable to goods made in previous years. 2005 production
levels were kept lower than sales volume in order to reduce investment in
inventory, which declined by $3.4 million. The Electronic Business gross profit
increased $1.8 million, to 35.2% of sales compared to 31.2% of sales in 2004.
The 4.0 points of margin improvement can be attributable primarily to a lower
overall production cost structure, as the Company realized a full year of
reduced unit costs attributable to cost savings initiatives undertaken in the
second half of 2004. In addition, minor sales volume and product mix gains
contributed approximately 1.0 point to this margin improvement.

Selling, general and administrative expenses declined $0.7 million in 2005
compared to the previous fiscal year. Due to increased revenue levels, the above
decline in these costs resulted in selling, general and administrative expenses
being 25.0% of sales in 2005 compared to 27.9% of sales in 2004. The primary
reason for the lower costs in 2005 was the $1.1 million decrease in salaries and
benefit costs in 2005 principally resulting from restructuring of corporate
sales and marketing costs in the second half of 2004, and a $0.3 million
decrease in insurance costs. The effects of these cost savings initiatives were
offset by the elimination of $0.6 million of amortized gains recognized in 2004
prior to the termination of the Company's post-employment healthcare insurance
program in the fourth quarter of 2004, and to a lesser extent $0.3 million in
management incentive expense recognized in 2005 related to overall improved
operating performance.

In 2004, the Company continued steps to maintain total healthcare spending at
affordable levels. In connection with these efforts, when the Company announced
the termination of its post-employment healthcare benefit plan in the fourth
quarter of 2004, the Company recognized a pre-tax gain aggregating $9.3 million.
This item is presented as a non-recurring gain in the Company's income statement
for the year ended December 31, 2004. The Company also recorded $3.6 million
deferred tax expense arising from the reduction of a previously recognized
deferred tax asset associated with these benefits, resulting in a $1.09 increase
in earnings per share in 2004 associated with the plan termination gain.

Interest expense increased to $2.3 million in 2005 compared to $1.6 million in
2004. In January 2005, the Company refinanced its variable rate secured
revolving credit and term loan agreement, and amended the agreement in July
2005, when the Company extended the agreement for an additional two years to
April 2009. This new agreement carries higher stated interest rates. In
addition, in October 2005, the Company completed a self tender offer to acquire
1.5 million shares of the Company's then outstanding common stock. This
transaction was funded under the terms of a securities purchase agreement
whereby the Company obtained $15.0 million from the sale of 12% fixed rate
unsecured notes and detachable warrants to acquire shares of Company's common
stock. Approximately $0.4 million of increased interest costs can be
attributable to the higher secured credit agreement stated rates, as well as
general market rate interest cost changes. The remaining $0.3 million increase
in interest costs can be attributable to the terms of the unsecured credit
agreement.

The Company's effective tax rate increased to 35% of pre-tax income in 2005,
compared to a rate of 34% for 2004, each approximating the statutory rates.

After taking into consideration all of the above matters, net income for 2005
was $2.4 million, or $0.48 per share on both a basic and diluted basis. This
compares to a net income for 2004 of $4.6 million, or $0.89 per share. After
taking into account $5.7 million of non-recurring gain related to the
termination of the Company's post-employment healthcare benefit plan, described
above, the Company would have had a net loss of $1.1 million in 2004 on a
proforma basis.

                                       16

<PAGE>

YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED JANUARY 2, 2004

(in thousands)

<TABLE>
<CAPTION>

                                                         2004           2003       Dollar Change     % Change
                                                     -----------   -------------   -------------     ---------
<S>                                                  <C>           <C>            <C>                <C>
SALES
  Mechanical Business                                    $63,732         $58,343         $ 5,389           9.2%
  Electronics Business                                    37,783          38,072            (289)         (0.8%)
                                                     -----------   -------------   -------------     ---------
   Total Sales                                           101,515          96,415           5,100           5.3%

COST OF SALES
  Mechanical Business                                     47,788          40,942           6,846          16.7%
  Electronics Business                                    26,004          26,076             (72)         (0.3%)
                                                     -----------   -------------   -------------     ---------
  Total Cost of Sales                                     73,792          67,018           6,774          10.1%

GROSS PROFIT
   Mechanical Business                                    15,944          17,401          (1,457)         (8.4%)
   Electronics Business                                   11,779          11,996            (217)         (1.8%)
                                                     -----------   -------------   -------------     ---------
   Total Gross Profit                                     27,723          29,397          (1,674)         (5.7%)

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES              28,371          28,635            (264)         (0.9%)

SALES AS A PERCENTAGE OF TOTAL SALES
   Mechanical Business                                     62.8%           60.5%
   Electronics Business                                    37.2%           39.5%
                                                     -----------   -------------
   Total Sales                                            100.0%          100.0%

COST OF SALES AS A PERCENTAGE OF SALES
   Mechanical Business                                     75.0%           70.2%
   Electronics Business                                    68.8%           68.5%
   Total Cost of Sales                                     72.7%           69.5%

GROSS PROFIT AS A PERCENTAGE OF SALES
   Mechanical Business                                     25.0%           29.8%
   Electronics Business                                    31.2%           31.5%
   Total Gross Profit                                      27.3%           30.5%

SG&A EXPENSE AS A PERCENTAGE OF SALES                      27.9%           29.7%

</TABLE>

The improvement in general economic conditions and corresponding increased
demand for its Mechanical Division products helped the Company experience a $5.1
million increase in revenues in 2004. The increased demand enabled the Company
to increase prices in 2004, contributing approximately $3.4 million to increased
revenues for the year. In addition, the continued strengthening of the Euro, and
to a lesser extent, the Canadian dollar, contributed approximately $1.8 million
of the increased revenues, principally in the Company's Electronics Business.
Volume was relatively flat with higher Mechanical Products sales being offset by
lower demand for Electronics Products. Overall volume was affected by the
inventory management practices of the Company's largest distribution customer
who reduced its inventories of the Company's products approximately $5.0 million
during 2004, and reduced its total purchases approximately $0.5 million compared
to the prior year.

Mechanical Business sales increased by $5.4 million in 2004 due to $2.5 million
of improved volume, $2.5 million from price increases, and $0.4 million of
favorable currency fluctuation. The increased Mechanical Division revenues were
offset by a slight decline in total Electronics Division revenues. The
Electronics Division reported lower sales volumes totaling approximately $2.6
million, offset by $0.9 million of price increases and $1.4 million of favorable
currency translation.

Overall gross profit as a percent of net sales decreased to 27.3 % in 2004 from
30.5 % in the previous year as the price increases implemented in 2004 ($3.4
million) and favorable currency fluctuations on gross profits ($0.6 million)
were offset by sharply increased manufacturing costs. This was particularly true
in the Company's Mechanical Products business. During 2004, in addition to the
incremental costs associated with higher volumes, the Company experienced
significant raw material cost increases, including $1.7 million of scrap iron
costs associated with the Company's foundry operations and approximately $1.5
million in non-recurring costs were incurred in connection with the closure of
the Company's Trenton, Tennessee manufacturing facility.

                                       17
<PAGE>

Gross profits of the Mechanical Business declined approximately $1.5 million,
from 29.8% of sales in 2003 to 25.0% of sales in 2004, principally due to
increases in raw material costs and the non-recurring costs described above and
the $0.7 million effect of lower production levels, particularly in the second
half of the year, as compared to the prior year. The Electronic Business gross
profit declined slightly from 31.5% of sales in 2003 to 31.2% of sales in 2004,
or $0.2 million, as favorable currency fluctuations and nominal price increases
were more than offset by reduced fixed cost absorption as a result of reduced
sales and related production volumes.

Selling, general and administrative expenses declined $0.3 million in 2004
compared to the previous fiscal year. Due to increased revenue levels, the above
decline in these costs resulted in selling, general and administrative expenses
being 27.9% of sales in 2004 compared to 29.7% of sales in 2003. Reasons
contributing to this decline include the recognition of approximately $1.0
million of costs associated with the change in the Company's chief executive and
financial officers and recognition of $0.5 million of credit losses related to
business activities in Latin America during the second half of fiscal 2003. The
non-recurrence of these costs in 2004 was offset in part by higher salary and
benefit costs for the Company's administrative force and increased freight costs
related to higher Mechanical products volume and fuel price increases. In
addition, in 2004 the Company recognized approximately $0.5 million of
non-recurring costs associated with restructuring its corporate sales and
marketing structure.

In 2004, the Company continued to take steps to maintain spending for employee
and retiree healthcare at affordable levels. In connection with these efforts,
as communicated to retirees in the fourth quarter of 2004, increased insurance
costs effective with the 2005 plan enrollment would be passed on to retirees. As
a result, a substantial number of the retirees opted to participate in an
insurance program independent of the Company's offering and for which the
Company bears no future funding obligation. Accordingly, the remaining
accumulated plan benefit obligation, as determined by the plan's actuary, was
substantially reduced from $2.6 million at December 31, 2003 to $0.4 million at
December 31, 2004 and the plan was terminated. Therefore, the Company has
recognized a pre-tax gain aggregating $9.26 million, equivalent to the reduction
in the accumulated plan benefit obligation together with the recognition of
unrecognized prior service benefits and actuarial net gains arising from similar
actions taken in previous years. This item is presented as a non-recurring gain
in the Company's income statement for the year ended December 31, 2004. The
Company also recorded $3.61 million deferred tax expense arising from the
reduction of a previously recognized deferred tax asset associated with these
benefits, resulting in a $1.09 increase in earnings per share in 2004 associated
with the termination gain.

Interest expense is the primary component of other expenses and was $1.6 million
for 2004, an increase of $0.6 million compared to 2003. This increase reflects
higher effective interest rates, increased borrowings to fund operating costs,
and increased amortization of debt agreement costs incurred in connection with a
loan amendment taking place in the first quarter of 2004. As more fully
described in Note 4 "Debt" to the Company's consolidated financial statements,
effective January 7, 2005, the Company entered into a new two year secured
revolving credit agreement. The new agreement carries higher interest rates.

The Company's effective tax rate approximated the statutory rate in 2004 and
income tax expense increased to $2.4 million from $0.3 million in the prior year
when the Company incurred income tax expense associated with the profitability
of operations in Europe and Canada. Start up costs and losses associated with
Mexico manufacturing facility during both 2004 and 2003 have not provided an
income tax benefit, but are available to be carried forward and offset future
income in Mexico.

After taking into consideration all of the above matters, net income for 2004
was $4.6 million, or $0.89 per share on both a basic and diluted basis. This
compares to a net loss for 2003 of $(0.4) million, or $(0.07) per share.

CRITICAL ACCOUNTING POLICIES

Management's discussion and analysis of the Company's financial statements and
results of operations are based upon the Company's Consolidated Financial
Statements included as part of this document. The preparation of these
Consolidated Financial Statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosures of contingent assets and liabilities. On an
ongoing basis, the Company evaluates these estimates, including those related to
bad debts, inventories, intangible assets, post-retirement benefits, income
taxes, and contingencies and litigation. The Company bases these estimates on
historical experiences 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 values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

                                       18

<PAGE>

The Company believes the following critical accounting policies affect
management's more significant judgments and estimates used in the preparation of
its Consolidated Financial Statements. For a detailed discussion on the
application of these and other accounting policies see Note 2 to the attached
Consolidated Financial Statements. Certain of our accounting policies require
the application of significant judgement by management in selecting the
appropriate assumptions for calculating financial estimates. By their nature,
these judgments are subject to an inherent degree of uncertainty and actual
results could differ from these estimates. These judgements are based on our
historical experience, terms of existing contracts, current economic trends in
the industry, information provided by our customers, and information available
from outside sources, as appropriate. Our critical accounting policies include:

Allowance for Doubtful Accounts: The majority of the Company's accounts
receivable are due from selected authorized industrial distributors who resell
the Company's products to OEMs and end users for replacement parts. Accounts
receivable potentially subject the Company to concentrations of credit risk.
Credit is extended based on evaluation of a customer's financial condition and,
generally, collateral is not required. Accounts receivable are generally due
within 30 days and are stated at amounts due from the customers net of an
allowance for doubtful accounts. Accounts receivable outstanding longer than the
contractual payment terms are considered past due. The Company determines its
allowance considering a number of factors, including the length of time trade
accounts receivable are past due, the Company's previous loss history, the
customer's current ability to pay its obligations to the Company, and the
condition of the general economy and the industry as a whole. The Company writes
off accounts receivable when they become uncollectible, and payments
subsequently received on such receivables are credited to the allowances for
doubtful accounts.

Product Warranty: In the ordinary course of business, the Company warrants its
products against defect in design, materials, and workmanship over various time
periods. Warranty reserve and allowance for product returns is established based
upon management's best estimates of amounts necessary to settle future and
existing claims on products sold as of the balance sheet date. The warranty
reserve and allowance for product returns is not significant to the financial
position of the Company for all periods presented.

Inventory: Inventories are valued at the lower of cost or market. Cost is
determined on the last-in first-out basis for a majority of US inventories and
the first-in first-out method for all remaining inventories. The Company has
recorded a reserve for obsolete or otherwise unmarketable inventory equal to the
difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.

Impairment of Goodwill and Long Lived Assets: The Company periodically evaluates
the realizable value of long-lived assets including property, plant and
equipment, relying on a number of factors including operating results, budgets,
economic projections and anticipated future cash flows. The Company's past
business acquisitions resulted in the recognition of goodwill, which may result
in future impairment expenses. The Company's other intangible assets which
primarily consist of product application software, affects the amount of future
period amortization expense. The determination of the value of such intangible
assets requires management to make estimates and assumptions that affect the
Company's Consolidated Financial Statements.

Revenue Recognition: The Company's revenue recognition policies are in
compliance with Staff Accounting Bulletin No. 104 "Revenue Recognition in
Financial Statements" issued by the Securities and Exchange Commission. Revenue
is recognized at the time product is shipped and title passes pursuant to the
terms of the agreement with the customer, the amount due from the customer is
fixed and collectibility of the related receivable is reasonably assured. The
Company establishes allowances to cover anticipated doubtful accounts, sales
discounts, product warranty, and returns based upon historical experience.
Shipping and handling costs charged to customers are included as a component of
net sales.

Postretirement Benefit Obligation: For periods prior to 2005, the Company, in
consultation with an actuarial firm specializing in the valuation of
postretirement benefit obligations, selected certain actuarial assumptions to
base the actuarial valuation of the Company's post retirement benefit
obligation, such as the discount rate (interest rate used to determine present
value of obligations payable in the future), initial health care cost trend
rate, the ultimate care cost trend rate, and mortality tables to determine the
expected future mortality of plan participants. As a result of actions to
terminate its post-retirement benefit plans, the Company does not expect that
any future costs or cash contributions related to post-retirement benefits for
retirees or former employees to be material.

Income Taxes: Under the requirements of SFAS No. 109, "Accounting for Income
Taxes," we record deferred tax assets and liabilities for the future tax
consequences attributable to differences between financial statements 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. Management judgment is
required in determining the Company's provision for income taxes, deferred tax
assets and liabilities, which, if actual experience varies, could result in
material adjustments to deferred tax assets and liabilities.

                                       19

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Company's contractual obligations as of December 31, 2005 are as follows
(dollars in thousands):

<TABLE>
<CAPTION>

                                                       Less                            More
       Contractual Obligations in                     Than 1       1-3       3-5      Than 5
               Thousands                    Total      Year       Years     Years      Years
---------------------------------------   --------   --------   --------   -------   -------
<S>                                       <C>        <C>        <C>        <C>       <C>
Long-Term Debt Obligations                 $30,716    $ 4,138     $3,199    $2,957    $20,422
Operating Lease Obligations                  5,770      1,225      1,851     1,157      1,537
                                          --------   --------   --------   -------    -------
Total                                      $36,486    $ 5,363     $5,050    $4,114    $21,959
                                          ========   ========   ========   =======    =======

</TABLE>

At December 31, 2005, current and long-term debt totaled approximately $30.0
million, compared to $24.3 million at December 31, 2004, and was comprised of
$1.0 million and $8.8 million in revolving and term debt, respectively, under a
senior secured credit facility; $5.3 million in tax-exempt revenue bonds; and
$0.6 million of principally foreign revolving and term credits, together with
$14.3 million of unsecured subordinated term debt. The Company's effective
borrowing rates at December 31, 2005 and 2004 for its long-term obligations were
approximately 9.49% and 4.58% respectively.

On January 7, 2005, the Company entered into a new senior secured loan and
security agreement (the "Loan Agreement") that provided for up to an $18.3
million revolving line of credit and two term loans totaling $13.0 million (Term
Loan A--$10.0 million and Term Loan B--$3.0 million). The proceeds were used to
retire amounts outstanding under the Company's outstanding revolving line of
credit as well as to fund existing letters of credit that support $5.3 million
of industrial revenue bonds and certain obligations under various self-insured
workers compensation insurance policies. The borrowings under the Loan Agreement
are secured by substantially all of the Company's domestic assets and pledges of
65% of the outstanding stock of the Company's Canadian, German and Mexican
subsidiaries. The Loan Agreement was amended on July 29, 2005 to extend the term
for an additional two years through April 2009 and permit the Company to borrow
up to $15.0 million to fund the purchase of up to 1.5 million shares of
outstanding common stock and repay Term Loan B, the outstanding balance of which
was approximately $2.0 million.

All borrowings under the Loan Agreement bear variable interest of a margin plus
LIBOR or U.S. Prime Rate, and the remaining Term Loan A is repayable in monthly
principal installments totaling $0.13 million. The average borrowing rates for
the Company's short-term borrowings under the senior secured credit arrangement
at December 31, 2005 and 2004 were 7.97% and 5.38% respectively. Based on the
2005 operating results, the interest rates for both the revolving and term loans
are expected to be reduced by 50 basis points beginning in the second quarter of
2006. At December 31, 2005 the Company had remaining borrowing capacity of $9.3
million. Had the Loan Agreement been in place at December 31, 2004, the unused
borrowing capacity available to the Company would have been approximately $2.4
million.

The Loan Agreement contains restrictive financial covenants that require the
Company to comply with certain financial tests including, among other things,
maintaining minimum tangible net worth, having a minimum earnings before
interest, taxes and depreciation and amortization ("EBITDA"), and meeting
certain specified leverage and operating ratios, all as defined in the Loan
Agreement. The Loan Agreement also contains other restrictive covenants that
restrict outside investments, capital expenditures, and dividends. While the
Company was in compliance with the debt covenants at December 31, 2005, the
limitation on dividends is such that the first quarter dividend for 2006 would
be the earliest dividend that could be declared.

The Company previously borrowed approximately $3.0 million and $2.3 million by
issuing Variable Rate Demand Revenue Bonds under the authority of the industrial
development corporations of the City of San Marcos, Texas and City of
Chattanooga, Tennessee, respectively. These bonds bear variable interest rates
(3.49% at December 31, 2005) and mature in April 2024 and April 2022. The bonds
were issued to finance production facilities for the Company's manufacturing
operations located in those cities, and are secured by letters of credit issued
under the terms of the Company's senior secured borrowing agreement.

                                       20

<PAGE>

On October 20, 2005 the Company entered into a Securities Purchase Agreement in
exchange for the issuance of $15.0 million of senior subordinated notes valued
at $14.24 million and detachable warrants, valued at $0.76 million, to purchase
174,000 shares of the company's common stock. The senior subordinated notes have
a stated rate of 12% (effective rate of 12.64%), are due on October 12, 2012,
and contain customary financial covenants similar to, but less restrictive than
the Company's senior secured bank indebtedness described above. The proceeds
from the sale of the notes and detachable warrants were used to acquire 1.5
million shares of the Company's common stock at a purchase price of $11.25
million, repay approximately $2.0 million of term debt under the Company's
senior secured borrowing agreement, pay $1.0 million of transaction costs
related to the stock purchase and related financing transaction, with the
balance providing additional working capital.

The Company has generated positive cash flows from operations in each of the
last five years. During 2005, the Company generated $12.3 million cash from
operating activities, which compares to $4.2 million for the same period in the
prior year. The primary reason for this fluctuation was $4.3 of increased cash
flow from operating results, together with $3.8 of increased cash flow from
reduced investment in net operating assets in 2005 compared to 2004. The major
reason for the 2005 improvement in cash generated from operating results was the
Company generating $4.8 million of positive cash flow from continued focus on
inventory reduction, compared to $1.2 million in 2004. Management currently
expects that inventory will grow moderately in 2006 in line with demand, while
at the same time the Company works to further improve inventory turns through
better processes and lean manufacturing initiatives. In addition, cash generated
from operating activities relative to reported earnings, increased in 2005 as
net income in 2004 included a $5.7 million non-cash after-tax gain related to
the termination of the Company's post-retirement health care benefits plan. The
Company's total working capital was $16.6 million at December 31, 2005, compared
to $16.2 million on December 31, 2004.

The Company used $2.5 million and $2.7 million for investing activities during
the years ended December 31, 2005 and 2004, respectively. This spending was
primarily for capital expenditures of $3.1 million in 2005 and $2.0 million in
2004. The Company's capital investments have been at maintenance levels to
support new product introductions, improve product quality, and reduce operating
costs. Following a period of limited capital investment, in 2006 the Company
plans to spend $5.0 million on capital improvements for expanded machine tool
capacity, improved operating efficiencies and normal capital maintenance
projects. While this is currently in excess of the $3.25 million permitted under
its borrowing agreements, management believes its lenders to be supportive of
this capital plan. The amount of commitments for capital expenditures at
December 31, 2005 was not significant.

Cash used in financing activities increased to $6.7 million in 2005 compared to
$2.5 million in 2004 as the Company expended $11.5 million in purchase and
transaction costs to acquire 1.5 million shares of its common stock in a
self-tender auction and repay approximately $2.0 million of amounts previously
borrowed under its secured revolving credit term loans, all funded through a new
unsecured borrowing with detachable warrants that totaled $15.0 million. In
addition, with its earlier refinancing on January 7, 2005 described above, the
Company borrowed $18.3 million of revolving debt and $13.0 million of term
financing that was used to repay previously outstanding revolving credit. During
2005, $2.4 million of such term debt was repaid as scheduled. The Company did
not pay any dividends in 2005 compared to $1.4 million of dividends paid in
2004. In the fourth quarter of 2004, the Company suspended its dividend pending
the negotiation of its new credit facility, which restricted dividend payments
throughout 2005. The Company's future ability to declare and pay dividends is
ultimately dependent upon its ability to operate at profitable levels and
demonstrate compliance with its borrowing agreements.

The effect of changes in foreign currency rates reduced cash by $0.2 million in
2005 compared to generating an increase in cash of $0.8 million in 2004 as the
dollar strengthened compared to the Euro, offset by a continued weakening
against the Canadian dollar and to a lesser extent, the Mexican peso. As a
result of all of the above items, the Company generated a net increase in cash
of $2.9 million in 2005 compared to the net decrease in cash of $0.2 million
experienced in 2004. The Company believes that the combination of cash generated
by operations and available borrowing capacity is adequate to finance the
Company's operations for the foreseeable future.

OFF-BALANCE SHEET ARRANGEMENTS

The Company had no "Off-Balance Sheet" arrangements as of December 31, 2005 and
2004 as that term is described by the Securities and Exchange Commission.

INFLATION AND CHANGING PRICES

Inflation during the last three years has not had a significant effect on
operations. The use of the last-in, first-out (LIFO) method of accounting for
the majority of inventories and accelerated depreciation methods for financial
reporting and income tax purposes result in a substantial recognition of the
effects of inflation in the financial statements.

                                       21

<PAGE>

The major impact of inflation is on buildings and improvements, where the gap
between historic cost and replacement cost continues for these long-lived
assets. The related depreciation expense associated with these assets increases
if adjustments were to be made for the cumulative effect of inflation.

The Company believes the most positive means to combat inflation and advance the
interests of investors lies in the continued application of basic business
principles, which include improving productivity, increasing working capital
turnover and offering products and services which can command appropriate prices
in the marketplace.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued Statement of Accounting Standards No. 123
(revised 2004) "Share-Based Payment", a revision of FASB Statement No. 123
"Accounting for Stock Based Compensation" which the Company adopted in the third
quarter of 2005. This statement did not have any significant effect on the
Company's 2005 financial statements as the Company had previously adopted FASB
Statement No. 123 to account for stock-based compensation cost using the fair
value method in 2003. As the Company has already adopted FASB Statement No. 123
the only effects of the revised Statement No. 123 upon the Company are expanded
disclosure related to its stock based compensation plan.

In November 2004, the FASB issued Statement of Accounting Standards No. 151
"Inventory Costs, an amendment of Accounting Research Bulletin No. 43, Chapter
4" to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) which the Company is
required to adopt for the fiscal year ending December 31, 2006. The Statement
introduces the concept of "normal capacity" and requires the allocation of fixed
production overheads to inventory based upon the normal capacity of the
production facilities. Unallocated overheads must be recognized as an expense in
the period in which they are incurred. The Company does not expect this
statement to have any significant effect upon its 2006 consolidated financial
statements based on current operating and product demand levels.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the potential change in an asset's or financial instrument's
value caused, for example, by fluctuations in interest and currency exchange
rates. The Company's primary market risk exposures are unfavorable movements in
exchange rates between the U.S. dollar and each of the Euro, Canadian dollar and
Mexican peso, and the interest rate. Monitoring and managing these risks is a
continual process carried out by senior management. Market risk is managed based
on an ongoing assessment of trends in interest rates, foreign exchange rates,
and economic developments, giving consideration to possible effects on both
total return and reported earnings. The Company's financial advisors, both
internal and external, provide ongoing advice regarding trends that affect
management's assessment. Management does not currently hedge its interest or
foreign currency exchange risks.

Foreign Currency Exchange Rate Sensitivity

The Company has operations in several foreign countries, and approximately $28.5
million of the Company's revenue from continuing operations was derived from the
Company's operations outside the United States. Accordingly, exposure exists to
potentially adverse movements in foreign currency rates. No foreign exchange
forward contracts to hedge the risk of change in foreign currency exchange rates
were entered into during 2005 and 2004. The Company used a foreign exchange
forward contract with regard to the Canadian dollar in 2003.

The Company's consolidated financial statements are denominated in U.S. dollars
and accordingly, changes in the exchange rates between Company subsidiaries'
local currency and the U.S. dollar will affect the translation of such
subsidiaries financial results into U.S. dollars for the purposes of reporting
the consolidated financial results. The Company does not hedge these matters
because cash flows from international operations are generally re-invested
locally. It is estimated that a 10% change in foreign exchange rates would
impact reported net income by less than $0.1 million.

                                       22

<PAGE>

Interest Rate Sensitivity

The effective interest rate payable on the Company's borrowings is influenced by
the Company's operating performance and degree of leverage, LIBOR, as well as by
actions of the Federal Reserve Bank Board in establishing from time to time the
Federal Funds Interest Rate that underlies the cost of funds borrowed by the
Company. In 2005 as in 2004, in response to improved economic conditions and
inflationary tendencies, the Federal Reserve took several actions to increase
interest rates. This, along with similar actions of other central banks, led to
a rise in LIBOR. As a result the effective interest rate that the Company paid
on its borrowings under its revolving and term secured credit facility increased
in 2005. This, coupled with the Company's separate borrowings under the terms of
a higher rate subordinated debt in October 2005, contributed to a corresponding
increase in the Company's interest expense. To the extent that the Federal Funds
Interest Rate and LIBOR continue to rise in the future, the effective interest
rate on Company's revolving and term secured facility will increase, and the
Company's interest expense will increase accordingly if borrowing levels remain
constant. Based on the balance outstanding under the Company's secured credit
facility at December 31, 2005, a 1% change in the effective interest rate would
have changed interest expense by $0.1 million.

                                       23

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>

                                                                                                               Page
                                                                                                              ------
<S>                                                                                                           <C>
Report of Independent Registered Public Accounting Firm......................................................    25

Consolidated Balance Sheets as of December 31, 2005 and December 31, 2004....................................    26

Consolidated Statements of Operations for the Years Ended December 31, 2005,
     December 31, 2004, and January 2, 2004..................................................................    27

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2005,
     December 31, 2004, and January 2, 2004..................................................................    27

Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2005,
     December 31, 2004, and January 2, 2004..................................................................    28

Consolidated Statements of Cash Flows for the Years Ended  December 31, 2005,
     December 31, 2004, and January 2, 2004..................................................................    29

Notes to Consolidated Financial Statements...................................................................    30
</TABLE>

                                       24

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors and Shareholders of TB Wood's Corporation:

We have audited the accompanying consolidated balance sheets of TB Wood's
Corporation and subsidiaries ("the Company") as of December 31, 2005 and 2004
and the related consolidated statements of operations, comprehensive income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2005. These 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 misstatements. The Company is not
required to have, nor were we engaged to perform an audit of internal control
over financial reporting. Our audits 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 also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 financial position of TB Wood's
Corporation and subsidiaries as of December 31, 2005 and December 31, 2004, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America.

We have also audited schedule II for each of the three years in the period ended
December 31, 2005. In our opinion, this schedule when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information therein.

Grant Thornton LLP

Baltimore, Maryland
March 9, 2006.

                                       25

<PAGE>

                     TB WOOD'S CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

(in thousands, except per share and share amounts)                                   2005                2004
---------------------------------------------------------                       ---------------     ---------------
<S>                                                                             <C>                 <C>
ASSETS
Current Assets:
   Cash and cash equivalents                                                         $    3,419          $      556
   Accounts receivable, less allowances of $495 and $880                                                     13,353
                                                                                         14,827
   Inventories at current costs                                                          21,620              26,500
    less LIFO reserve                                                                    (6,041)             (6,082)
                                                                                ---------------     ---------------
                                                                                         15,579              20,418
    Other Current Assets                                                                  3,061               3,742
                                                                                ---------------     ---------------
          Total Current Assets                                                           36,886              38,069
Property, Plant, and Equipment:
   Machinery and equipment                                                               60,732              60,445
   Land, buildings, and improvements                                                     19,684              21,680
                                                                                ---------------     ---------------
                                                                                         80,416              82,125
   Less accumulated depreciation                                                         57,361              57,666
                                                                                ---------------     ---------------
           Total Property, Plant and Equipment                                           23,055              24,459
                                                                                ---------------     ---------------
Other Assets:
   Goodwill                                                                               5,676               5,902
   Loan issue costs, net of amortization                                                  1,564                 316
     Other                                                                                  572                 624
                                                                                ---------------     ---------------
          Total Other Assets                                                              7,812               6,842
                                                                                ---------------     ---------------
                                                                                       $ 67,753            $ 69,370
                                                                                ===============     ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
   Accounts payable                                                                       8,465               7,803
   Accrued expenses                                                                       6,996               6,343
   Current maturities of long-term debt                                                   4,138               7,605
   Deferred income taxes                                                                    716                 134
                                                                                ---------------    ----------------
         Total current liabilities                                                       20,315              21,885

Long-term debt, less current maturities                                                  25,829              16,708
Postretirement benefit obligation, less current portion                                      --                 235
Deferred income taxes                                                                        91                 807
Commitments and contingencies (Note 8)                                                       --                  --

Shareholders' Equity:
   Preferred stock, $.01 par value; 100 shares authorized; no shares issued                  --                  --
   Common stock, $.01 par value; 10,000,000 shares authorized; 5,639,798 issued;
      and 3,703,386 and 5,172,690 outstanding at December 31, 2005
      and December 31, 2004                                                                  57                  57
   Additional paid-in capital                                                            28,153              27,095
   Retained earnings                                                                      9,216               6,943
   Accumulated other comprehensive (loss) income                                           (151)                158
   Treasury  stock at cost;  1,936,412 and 467,108 shares at December 31, 2005
      and December 31, 2004                                                             (15,757)             (4,518)
                                                                                ---------------    ----------------
      Total shareholders' equity                                                         21,518              29,735
                                                                                ---------------    ----------------
                                                                                       $ 67,753            $ 69,370
                                                                                ===============    ================

</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                       26

<PAGE>

                     TB WOOD'S CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

(in thousands, except per share amounts)                                       2005          2004           2003
------------------------------------------------------------                -----------   -----------    -----------
<S>                                                                         <C>           <C>            <C>
Net sales                                                                      $110,897      $101,515        $96,415
Cost of sales                                                                    77,192        73,792         67,018
                                                                            -----------   -----------    -----------
   Gross profit                                                                  33,705        27,723         29,397
Selling, general, and administrative expenses                                    27,717        28,371         28,635
Gain on termination of post-retirement benefit plan (Note 7)                         --         9,258             --
                                                                            -----------   -----------    -----------
   Operating income                                                               5,988         8,610            762
Other income (expense):
   Interest and other finance costs                                              (2,319)       (1,585)          (952)
   Other, net                                                                        --            --            148
                                                                            -----------   -----------    -----------
   Other (expense), net                                                          (2,319)       (1,585)          (804)
                                                                            -----------   -----------    -----------

Income (loss) before income taxes                                                 3,669           7,025          (42)
Income taxes                                                                      1,289         2,407            318
                                                                            -----------   -----------    -----------
Net income (loss)                                                              $  2,380      $  4,618       $   (360)
                                                                            ===========   ===========    ===========

INCOME (LOSS) PER SHARE OF  COMMON STOCK
Basic:
 Net income (loss)                                                                $0.48         $0.89         $(0.07)
                                                                            ===========   ===========    ===========
 Weighted average shares of common stock and equivalents                          4,933         5,164          5,180
                                                                            ===========   ===========    ===========

Diluted:
 Net income (loss)                                                                $0.48         $0.89         $(0.07)
                                                                            ===========   ===========    ===========
 Weighted average shares of common stock and equivalents                          4,961         5,166          5,180
                                                                            ===========   ===========    ===========

</TABLE>

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

<TABLE>
<CAPTION>


(in thousands)                                                                2005           2004            2003
----------------------------------------                                    ----------    -----------    -----------
<S>                                                                         <C>           <C>            <C>
Net income (loss)                                                              $ 2,380       $  4,618    $      (360)
Other comprehensive income:
Foreign currency translation adjustment                                           (309)           768          1,601
----------------------------------------                                    ----------    -----------    -----------
Comprehensive income                                                           $ 2,071       $  5,386     $    1,241
                                                                            ==========    ===========    ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                       27

<PAGE>

                     TB WOOD'S CORPORATION AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                                                              Accumulated
                                                                        Additional               Other
                                                  Common      Common     Paid-In    Retained  Comprehensive    Treasury
(in thousands, except share amounts)              Shares       Stock     Capital    Earnings  Income (Loss)    Stock
---------------------------------------        -----------   --------   ---------   --------- -------------   ---------
<S>                                            <C>           <C>        <C>         <C>         <C>           <C>
Balance at December 27, 2002                     5,240,869        $57     $26,726      $6,029     $ (2,211)     $(4,188)
                                                                                                                     --
Net (loss)                                              --         --          --        (360)          --           --
Stock issued for employee benefit plans             19,133         --           2         (34)          --          143
Dividends declared                                      --         --          --      (1,871)          --           --
Treasury stock purchases                          (106,449)        --          --          --           --         (658)
Stock options granted                                   --         --         182          --           --           --
Foreign currency translation adjustment                 --         --          --          --        1,601           --
                                              ------------ ---------- ----------- ----------- ------------- -----------

Balance at December January 2, 2004              5,153,553         57      26,910       3,764         (610)      (4,703)

Net (loss)                                              --         --          --       4,618           --           --
Stock issued for employee benefit plans             19,137         --          --         (46)          --          185
Dividends declared                                      --         --          --      (1,393)          --           --
Stock options granted                                   --         --         185          --           --           --
Foreign currency translation adjustment                 --         --          --          --          768           --
                                             ------------- ---------- ----------- ----------- ------------- -----------

Balance at December 31, 2004                     5,172,690         57      27,095       6,943          158       (4,518)

Net income                                              --         --          --       2,380           --           --
Stock issued for employee benefit plans             30,696         --          --        (107)          --          293
Dividends declared                                      --         --          --          --           --           --
Treasury Stock purchases                        (1,500,000)        --          --          --           --      (11,532)
Stock options granted                                              --         303          --           --
Warrants issued                                         --         --         755          --           --           --
Foreign currency translation adjustment                 --         --          --          --         (309)          --
                                             ------------- ---------- ----------- ----------- ------------- -----------
Balance at December 31, 2005                     3,703,386         $57    $28,153      $9,216     $   (151)    $(15,757)
                                             ============= ========== =========== =========== ============= ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                       28

<PAGE>

                     TB WOOD'S CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands)                                                            2005             2004             2003
-------------------------------------------------------------------- ---------------- ---------------- ---------------
<S>                                                                  <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                       $   2,380        $   4,618          $  (360)
Adjustments to reconcile net income (loss) to net cash provided by
   operating activities:
   Depreciation and amortization                                            4,765            5,423            5,840
   Change in deferred income taxes                                           (228)           1,755            1,483
   Stock options and employee stock benefit expense                           429              270              242
   Gain on termination of post-retirement plan                               (270)          (9,258)               -
   Other, net                                                                (247)             (10)              46
   Changes in operating assets and liabilities:
      Accounts receivable                                                  (1,474)             714              152
      Inventories                                                           4,839            1,216           (1,677)
      Other current assets                                                    681             (152)            (789)
      Accounts payable                                                        662              634           (1,250)
      Accrued and other liabilities                                           748           (1,010)          (1,098)
                                                                    -------------    -------------     ------------
Net cash provided by operating activities                                  12,285            4,200            2,589

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures                                                       (3,062)          (2,009)          (2,227)
Proceeds from sales of fixed assets                                           428               69              182
Other, net                                                                    137             (803)            (847)
                                                                    -------------    -------------     ------------
   Net cash used in investing activities                                   (2,497)          (2,743)          (2,892)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities                                 111,551           37,739           45,270
Repayments of revolving credit facilities                                (128,794)         (38,870)         (44,157)
Proceeds from term loans                                                   12,200               33              584
Repayments of term loans                                                   (4,395)             (14)             (72)
Proceeds from subordinated debt and detachable warrants, net of
   issue costs                                                             14,260               --               --
Payment of dividends                                                            -           (1,393)          (1,871)
Treasury Stock (Purchased) Issued, net                                    (11,532)              55             (606)
                                                                    -------------    -------------     ------------
   Net cash used in financing activities                                   (6,710)          (2,450)            (852)

Effect of changes in foreign exchange rates                                  (215)             768            1,601
                                                                    -------------    -------------     ------------
Increase (decrease) in cash and cash equivalents                            2,863             (225)             446
Cash and cash equivalents at beginning of year                                556              781              335
                                                                    -------------    -------------     ------------
Cash and cash equivalents at end of year                              $     3,419     $        556        $     781
                                                                    =============    =============     ============
Income taxes paid (refunded), net                                    $        245     $          22       $    (225)
                                                                    =============    =============     ============
Interest paid during the year                                         $     2,466      $     1,564       $     983
                                                                    =============    =============     ============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                       29

<PAGE>

                     TB WOOD'S CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share amounts)

1. NATURE OF BUSINESS AND PRINCIPLES OF CONSOLIDATION

TB Wood's Corporation and subsidiaries (collectively "TB Wood's" or the
"Company") is an established designer, manufacturer, and marketer of electronic
and mechanical industrial power transmission products that are sold to
distributors, domestic and international Original Equipment Manufacturers
("OEMs"), and end users of industrial equipment. Principal products of the
Company include electronic drives, integrated electronic drive systems,
mechanical belted drives, and flexible couplings. The Company has operations in
the United States, Canada, Mexico, Germany, Italy and India. The accompanying
consolidated financial statements include the accounts of TB Wood's Corporation,
its wholly owned subsidiaries, and its majority-owned joint venture. All
inter-company accounts and transactions have been eliminated in consolidation.

Prior to fiscal year 2005, the Company's 52/53-week fiscal year ended on the
Friday closest to the last day of December. Effective in 2005, the Company
changed to a calendar fiscal year ending on December 31. Fiscal years ended on
December 31, 2005 and 2004 were 52 week fiscal years, and the fiscal year ended
January 2, 2004 was a 53 week fiscal year.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH EQUIVALENTS

The Company considers all highly liquid investments with an original maturity of
three months or less, and all bond instruments which are readily convertible to
known amounts of cash, to be cash equivalents. Cash equivalents of $1,110 and
$401 were held in foreign bank accounts of our subsidiaries and joint venture as
at December 31, 2005 and 2004 respectively.

ACCOUNTS RECEIVABLE

The majority of the Company's accounts receivable are due from selected
authorized industrial distributors who resell the Company's products to OEMs and
end users for replacement parts. Accounts receivable potentially subject the
Company to concentrations of credit risk. Credit is extended based on evaluation
of a customer's financial condition and, generally, collateral is not required.
Accounts receivable are generally due within 30 days and are stated at amounts
due from the customers net of an allowance for doubtful accounts. Accounts
receivable outstanding longer than the contractual payment terms are considered
past due. The Company determines its allowances considering a number of factors,
including the length of time trade accounts receivable are past due, the
Company's previous loss history, the customer's current ability to pay its
obligations to the Company, and the condition of the general economy and the
industry as a whole. The Company believes that its allowance for doubtful
accounts is adequate to cover any potential losses on its credit risk exposure.
The Company writes off accounts receivable when they become uncollectible, and
payments subsequently received on such receivables are credited to the
allowances for doubtful accounts.

INVENTORIES

Inventories located in the United States are stated at the lower of current cost
or market, principally using the last-in, first-out ("LIFO") method. Inventories
for foreign operations are stated at the lower of cost or market using the
first-in, first-out ("FIFO") method. Market is defined as net realizable value.
Cost includes raw materials, direct labor, and manufacturing overhead. A summary
of inventories at December 31, 2005 and 2004 follows:

<TABLE>
<CAPTION>
                                                                                  2005               2004
                                                                              -------------      -------------
<S>                                                                           <C>                <C>
Finished goods                                                                      $11,159            $14,296
Work in process                                                                       3,452              3,714
Raw materials                                                                         7,009              8,490
                                                                              -------------      -------------
                                                                                     21,620             26,500
less LIFO reserve                                                                    (6,041)            (6,082)
                                                                              -------------      -------------
Total                                                                               $15,579            $20,418
                                                                              =============      =============
</TABLE>

                                       30
<PAGE>

Approximately 71% and 74% of total inventories at December 31, 2005 and 2004,
respectively, were valued using the LIFO method. In the year ended December 31,
2005, the LIFO reserve decreased by ($41), which decreased the Cost of Goods
Sold by the same amount. In the year ended December 31, 2004 the LIFO reserve
increased by $749 which increased the Cost of Goods Sold by the same amount.

The Company writes down inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of the inventory and the
estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. The Company depreciates its
property, plant, and equipment, including any equipment acquired under the terms
of capital leases, principally using the straight-line method over the estimated
useful lives of the assets. Major renewals and improvements to property, plant
and equipment that extend the useful life of the assets are capitalized while
maintenance and repair costs are charged to expense as incurred. The depreciable
lives of the major classes of property, plant and equipment are summarized as
follows:
<TABLE>
<CAPTION>
        Asset Type                            Lives
---------------------------         -------------------------
<S>                                 <C>
Machinery and equipment                   3 - 15 years
Buildings and improvements               10 - 40 years
</TABLE>

LONG-LIVED ASSETS, INCLUDING GOODWILL

Goodwill and other intangible assets deemed to have an indefinite life are
subject to an annual impairment test to determine if any adjustment for
diminution in value is necessary. The Company conducts its impairment tests by
reviewing whether events or changes in circumstances have occurred that could
indicate that the carrying amount of an asset may not be recoverable and the
value of its long-lived assets may be impaired. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of the assets
to the expected future net cash flows generated by the assets. If the assets are
considered to be impaired, the impairment is recognized by the amount by which
the carrying amount of the asset exceeds its fair value. A reconciliation of the
Goodwill account is as follows:
<TABLE>
<CAPTION>
                                                    Mechanical    Electronics      Total
                                                  -------------- -------------  -------------
<S>                                               <C>            <C>               <C>
Goodwill, balance at December 27, 2002                    $3,389        $1,783         $5,172
    Addition due to earn out payment                         114            --            114
    Change due to foreign currency translation                --           368           368
                                                  -------------- -------------  -------------
Goodwill, balance at January 2, 2004                       3,503          2,151         5,654
    Addition due to earn out payment                          94             --            94
    Adjustment for impairment                                 --            (24)          (24)
    Change due to foreign currency translation                --            178           178
                                                  -------------- -------------  -------------
Goodwill, balance at December 31, 2004                    $3,597         $2,305        $5,902
     Addition due to earn out payment                         67             --            67
      Change due to foreign currency translation              --           (293)         (293)
                                                  -------------- -------------  -------------
Goodwill balance at December 31, 2005                     $3,664         $2,012        $5,676
                                                  ============== ============== =============
</TABLE>

REVENUE RECOGNITION

The Company's revenue recognition policies are in compliance with Staff
Accounting Bulletin No. 104 "Revenue Recognition in Financial Statements" issued
by the Securities and Exchange Commission. Revenue is recognized at the time
product is shipped and title passes pursuant to the terms of the agreement with
the customer, the amount due from the customer is fixed and collectibility of
the related receivable is reasonably assured. The Company establishes allowances
to cover anticipated doubtful accounts, sales discounts, product warranty, and
returns based upon historical experience. Shipping and handling costs charged to
customers are included as a component of net sales. Shipping and handling costs
incurred in the delivery of products to customers were $6,402, $6,747 and $5,907
for fiscal 2005, 2004 and 2003, respectively, and are included as a component of
selling, general and administrative expenses.

                                       31

<PAGE>

MAJOR CUSTOMERS

The Company's five largest customers accounted for approximately 32%, 33%, and
35% of net sales for fiscal years 2005, 2004, and 2003, respectively. Of these
customers, one accounted for approximately 18%, 15%, and 18% of net sales for
2005, 2004, and 2003, respectively. The loss of one or more of these customers
could have an adverse effect on the Company's performance and operations.
Foreign and export sales accounted for 26%, 27%, and 29% of total sales in
fiscal years 2005, 2004, and 2003, respectively.

PRODUCT WARRANTY

In the ordinary course of business, the Company warrants its products against
defect in design, materials, and workmanship over various time periods. Warranty
reserve and allowance for product returns are established based upon
management's best estimates of amounts necessary to settle future and existing
claims on products sold as of the balance sheet date.

SELF-INSURANCE

Beginning in fiscal 2001, the Company's workers' compensation insurance policies
have the potential for retrospective premium adjustments based upon actual
claims incurred. Insurance administrators assist the Company in estimating the
fully developed workers' compensation liability insurance reserves that are
accrued by the Company. In the opinion of management, adequate provision has
been made for all incurred claims. At December 31, 2005, the Company's bank had
issued letters of credit totaling $1,532 to cover incurred but unpaid claims and
other costs related to its workers' compensation liability.

POST RETIREMENT BENEFITS OBLIGATIONS

Prior to terminating is post-retirement benefits for healthcare and life
insurance, the Company, in consultation with an actuarial firm specializing in
the valuation of postretirement benefit obligations, selected certain actuarial
assumptions to base the actuarial valuation of the Company's post retirement
benefit obligation, such as the discount rate (interest rate used to determine
present value of obligations payable in the future), initial health care cost
trend rate, the ultimate care cost trend rate, and mortality tables to determine
the expected future mortality of plan participants. As a result of actions to
terminate its post-retirement benefit plans, the Company does not expect that
any future costs or cash contributions related to post-retirement benefits for
retirees or former employees to be material

FOREIGN CURRENCY TRANSLATION

The financial statements of the Company's foreign subsidiaries have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation" and SFAS
No. 130, "Reporting Comprehensive Income." Translation adjustments are included
in other comprehensive income. All balance sheet accounts of foreign
subsidiaries are translated into U.S. dollars at the current exchange rate at
the balance sheet date. Statement of operations items are translated at the
average foreign currency exchange rates. The resulting foreign currency
translation adjustment is recorded in accumulated other comprehensive income
(loss). The Company has no other components of comprehensive income (loss).
Gains and losses from foreign currency transactions are included in the
consolidated statements of income.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of financial instruments classified as current assets or
liabilities, including cash and cash equivalents, accounts receivable, and
accounts payable, approximate carrying value due to the short-term maturity of
the instruments. The fair value of secured short-term and long-term debt amounts
approximate their carrying value and are based on their effective interest rates
compared to current market rates. The Company's unsecured subordinated term-debt
carries a fixed stated rate. Adjusted for changes in the interest rate for
5-year U.S. Treasury Bill from the time that the stated rate was determined to
December 31, 2005, the current fair value of such securities would be reduced by
$0.2 million.

RESEARCH AND DEVELOPMENT COST

Research and development costs consist substantially of projects related to new
product development within the electronics business and are expensed as
incurred. Total research and development costs were $3,090 in 2005, $3,150 in
2004, and $3,381 in 2003.

STOCK BASED COMPENSATION

The Company adopted Financial Accounting Standards Board (FASB) Statement of
Accounting Standard (SFAS) No. 123 as amended by SFAS No. 148, as of December
28, 2002 (beginning of fiscal 2003) to account for stock-based compensation cost
using the fair value method. The Company selected the modified prospective
method of accounting for this cost, and uses the Black-Scholes option-pricing
model to calculate the fair value of its stock-based compensation plan.

                                       32

<PAGE>

INCOME TAXES

The Company records deferred tax assets and liabilities for the future tax
consequences attributable to differences between financial statements 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.

NET INCOME PER SHARE

Basic Earnings Per Share ("EPS") is computed by dividing net income (loss) by
weighted average shares outstanding. No dilution for any potentially dilutive
securities is included in basic EPS. Diluted EPS is computed by dividing net
income (loss) by weighted average shares and common equivalent shares
outstanding. The computation of weighted average shares outstanding for fiscal
years 2005, 2004 and 2003 is as follows:
<TABLE>
<CAPTION>
                                                                          2005          2004         2003
                                                                      -----------   -----------  -----------
<S>                                                                   <C>           <C>          <C>
Common shares outstanding for basic EPS                                     4,933         5,164       5,180
Shares issued upon assumed exercise of outstanding
 stock options and warrants                                                    28             2          --
                                                                      -----------   -----------  -----------
Weighted average number of common and common
 equivalent shares outstanding for diluted EPS                              4,961         5,166        5,180
                                                                      ===========   ============ ============
</TABLE>

Outstanding options of 649,418, 675,928 and 874,050 shares for fiscal 2005, 2004
and 2003, respectively, are excluded from the calculation of weighted average
shares outstanding because they are anti-dilutive.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities, the disclosures of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

RECLASSIFICATIONS

Certain prior period amounts have been reclassified to conform to the current
year presentation.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued Statement of Accounting Standards No. 123
(revised 2004) "Share-Based Payment", a revision of FASB Statement No. 123
"Accounting for Stock Based Compensation" which the Company adopted in the third
quarter of 2005. This statement did not have any significant effect on the
Company's 2005 financial statements as the Company had previously adopted FASB
Statement No. 123 to account for stock-based compensation cost using the fair
value method in 2003. As the Company has already adopted FASB Statement No. 123
the only effects of the revised Statement No. 123 upon the Company are expanded
disclosure related to its stock based compensation plan.

In November 2004, the FASB issued Statement of Accounting Standards No. 151
"Inventory Costs, an amendment of Accounting Research Bulletin No. 43, Chapter
4" to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) which the Company is
required to adopt for the fiscal year ending December 31, 2006. The Statement
introduces the concept of "normal capacity" and requires the allocation of fixed
production overheads to inventory based upon the normal capacity of the
production facilities. Unallocated overheads must be recognized as an expense in
the period in which they are incurred. The Company does not expect this
statement to have any significant effect upon its 2006 consolidated financial
statements based on current operating and product demand levels.

                                       33

<PAGE>

3. OTHER CURRENT ASSETS AND ACCRUED LIABILITIES

Components of other current assets at December 31, 2005 and 2004 were as
follows:
<TABLE>
<CAPTION>
                                                                                    2005             2004
                                                                                --------------   -------------
<S>                                                                             <C>              <C>
Refundable foreign value added tax                                                      $  970       $   1,606
Maintenance and repair supplies                                                            597             572
Prepaid insurance and deposits                                                             505             236
Prepaid expenses and other                                                                 989           1,328
                                                                                --------------   -------------
Total                                                                                  $ 3,061         $ 3,742
                                                                                ==============   =============
</TABLE>

Components of accrued expenses at December 31, 2005 and 2004 were as follows:
<TABLE>
<CAPTION>
                                                                                    2005             2004
                                                                                --------------   -------------
<S>                                                                             <C>              <C>
Accrued payroll and other compensation                                                  $2,339         $ 2,468
Accrued income taxes                                                                     1,672             886
Accrued workers' compensation                                                              195             286
Accrued customer rebates                                                                 1,116             851
Accrued warranty reserves                                                                  564             478
Accrued professional fees                                                                  270             574
Other accrued liabilities                                                                  840             800
                                                                                --------------   -------------
Total                                                                                   $6,996          $6,343
                                                                                ==============   =============
</TABLE>

4. DEBT

Debt obligations at December 31, 2005 and December 31, 2004 were as follows:
<TABLE>
<CAPTION>
                                                                                    2005             2004
                                                                                --------------   -------------
<S>                                                                             <C>              <C>
Revolving line of credit--secured                                                       $1,035        $ 18,200
Term Loans--secured                                                                      8,805              --
Industrial revenue bonds--secured                                                        5,290           5,290
Other revolving and term loans, principally with foreign banks                             586             823
Senior Subordinated Notes, net of unamortized discount--unsecured                       14,251              --
                                                                                --------------   -------------
                                                                                        29,967          24,313
Less current maturities                                                                 (4,138)         (7,605)
                                                                                --------------   -------------
                                                                                       $25,829         $16,708
                                                                                ==============   =============
</TABLE>

At December 31, 2005 current and long-term debt totaled approximately $30.0
million, compared to $24.3 million at December 31, 2004, and was comprised of
$1.0 million and $8.8 million in revolving and term debt, respectively, under a
senior secured credit facility; $5.3 million in tax-exempt revenue bonds; and
$0.6 million of principally foreign revolving and term credits, together with
$14.3 million of unsecured subordinated term debt. The Company's effective
borrowing rates at December 31, 2005 and 2004 for its long-term obligations were
approximately 9.49% and 4.58% respectively.

On January 7, 2005, the Company entered into a new senior secured loan and
security agreement (the "Loan Agreement") that provided for up to an $18.3
million revolving line of credit and two term loans totaling $13.0 million (Term
Loan A--$10.0 million and Term Loan B--$3.0 million). The proceeds were used to
retire amounts outstanding under the Company's outstanding revolving line of
credit as well as to fund existing letters of credit that support $5.3 million
of industrial revenue bonds and certain obligations under various self-insured
workers compensation insurance policies. The borrowings under the Loan Agreement
are secured by substantially all of the Company's domestic assets and pledges of
65% of the outstanding stock of the Company's Canadian, German and Mexican
subsidiaries. The Loan Agreement was amended on July 29, 2005 to extend the term
for an additional two years through April 2009 and permit the Company to borrow
up to $15.0 million to fund the purchase of up to 1.5 million shares of
outstanding common stock and repay Term Loan B, the outstanding balance of which
was approximately $2.0 million.

                                       34

<PAGE>

All borrowings under the Loan Agreement bear variable interest of a margin plus
LIBOR or U.S. Prime Rate, and the remaining Term Loan A is repayable in monthly
principal installments totaling $0.13 million. The average borrowing rates for
the Company's short-term borrowings under the senior secured credit arrangement
at December 31, 2005 and 2004 were 7.97% and 5.38% respectively. Based on the
2005 operating results, the interest rates for both the revolving and term loans
are expected to be reduced by 50 basis points beginning in the second quarter of
2006. At December 31, 2005 the Company had remaining borrowing capacity of $9.3
million. Had the Loan Agreement been in place at December 31, 2004, the unused
borrowing capacity available to the Company would have been approximately $2.4
million.

The Loan Agreement contains restrictive financial covenants that require the
Company to comply with certain financial tests including, among other things,
maintaining minimum tangible net worth, having a minimum earnings before
interest, taxes and depreciation and amortization ("EBITDA"), and meeting
certain specified leverage and operating ratios, all as defined in the Loan
Agreement. The Loan Agreement also contains other restrictive covenants that
restrict outside investments, capital expenditures, and dividends. While the
Company was in compliance with the debt covenants at December 31, 2005, the
limitation on dividends is such that the first quarter dividend for 2006 would
be the earliest dividend that could be declared.

The Company previously borrowed approximately $3.0 million and $2.3 million by
issuing Variable Rate Demand Revenue Bonds under the authority of the industrial
development corporations of the City of San Marcos, Texas and City of
Chattanooga, Tennessee, respectively. These bonds bear variable interest rates
(3.49% at December 31, 2005) and mature in April 2024 and April 2022. The bonds
were issued to finance production facilities for the Company's manufacturing
operations located in those cities, and are secured by letters of credit issued
under the terms of the Company's senior secured borrowing agreement.

On October 20, 2005 the Company entered into a Securities Purchase Agreement in
exchange for the issuance of $15.0 million of senior subordinated notes valued
at $14.24 million and detachable warrants, valued at $0.76 million, to purchase
174,000 shares of the company's common stock. The senior subordinated notes have
a stated rate of 12% (effective rate of 12.64%), are due on October 12, 2012,
and contain customary financial covenants similar to, but less restrictive than
the Company's senior secured bank indebtedness described above. The proceeds
from the sale of the notes and detachable warrants were used to acquire 1.5
million shares of the Company's common stock at a purchase price of $11.25
million, repay approximately $2.0 million of term debt under the Company's
senior secured borrowing agreement, pay $1.0 million of transaction costs
related to the stock purchase and related financing transaction, with the
balance providing additional working capital.

In addition to the above borrowing arrangements, $0.5 million at December 31,
2005 and $0.7 million at December 31, 2004 were outstanding under the terms of
an unsecured revolving credit facility and a term loan, each borrowed by the
Company's Italian subsidiary. Interest only was payable on the term loan during
2004, and principal repayments commenced beginning in 2005. The rates for these
loans ranged from 1.3% to 3.2%.

Aggregate future maturities of debt as of December 31, 2005 are as follows:

2006                                           $  4,138
2007                                              1,599
2008                                              1,600
2009                                              2,892
2010                                                 65
Thereafter                                       20,422
                                           ------------
                                                 30,716
Less: Unamortized discount                         (749)
                                           ------------
                                                $29,967
                                           ============


5. INCOME TAXES

The components of the income tax provision (benefit) for fiscal years 2005,
2004, and 2003 are shown below:
<TABLE>
<CAPTION>
                                                               2005               2004               2003
                                                           --------------    --------------     --------------
<S>                                                        <C>               <C>                <C>
Current:
 Federal and state                                          $       1,069        $      103         $   (1,209)
 Foreign                                                              448               549                 44
                                                           --------------    --------------     --------------
                                                                    1,517               652             (1,165)
Deferred income tax (benefit) provision                              (228)            1,755              1,483
                                                           --------------    --------------     --------------
Total provision for income taxes                             $      1,289        $    2,407         $      318
                                                           ==============    ==============     ==============
</TABLE>

                                       35

<PAGE>

A reconciliation of the provision for income taxes on income before cumulative
effect of change in accounting principle at the statutory federal income tax
rate to the Company's tax provision as reported in the accompanying consolidated
statements of operations is shown below:

<TABLE>
<CAPTION>
                                                               2005               2004               2003
                                                           --------------    --------------     --------------
<S>                                                        <C>               <C>                <C>
Federal statutory income tax (benefit) expense                  $   1,247        $    2,388          $     (14)
State income taxes, net of federal income tax benefit                (115)              211                 (2)
Foreign taxes, net of related credits                                 473               107                645
Research and development credits                                     (295)             (207)                --
Change in estimate with respect to federal and state
liabilities                                                          (140)             (143)              (311)
Other                                                                 119                51                 --
                                                           --------------    --------------     --------------
                                                                $   1,289        $    2,407         $      318
                                                           ==============    ==============     ==============
</TABLE>

In 2005, 2004, and 2003 earnings (loss) before income taxes included $831, $952,
and $(1,003), respectively, of earnings or losses generated by the Company's
foreign operations. No federal or state income tax benefit or provision has been
provided on the undistributed earnings of certain of these foreign operations,
as the earnings will continue to be indefinitely reinvested. It is not practical
to estimate the additional income taxes, including any foreign withholding taxes
that might be payable with the eventual remittance of such earnings.

The provision for income taxes in fiscal 2003 includes a tax benefit related to
revised estimates of the Company's income tax liability as well as certain
income tax credits. The Company has not recognized any income tax benefit
related to the income tax losses incurred by its Mexican subsidiary currently
because there is uncertainty as to whether that subsidiary will realize those
benefits in the future. As the Mexican subsidiary realizes these income tax
benefits in the future, a reduction of income taxes will be recognized.

Under SFAS No. 109, deferred tax assets or liabilities at the end of each period
are determined by applying the current tax rate to temporary difference between
the financial reporting and income tax bases of assets and liabilities. The
components of deferred income taxes at December 31, 2005 and 2004 are as
follows:
<TABLE>
<CAPTION>
                                                              2005               2004
                                                          -------------      -------------
<S>                                                       <C>                <C>
Deferred income tax liabilities:
    Book basis in long-lived assets over tax basis              $  (839)           $(1,283)
    LIFO inventory basis difference                              (1,426)            (2,486)
    Other                                                           (17)                --
                                                          -------------      -------------
Total deferred income tax liabilities                            (2,282)            (3,769)
Deferred income tax assets:
    Accrued liabilities not currently deductible                    458                801
    Allowance for doubtful accounts and inventory
      reserves                                                      460                759
    Net operating loss and tax credit carryforwards                 557              1,189
    Other                                                            --                 79
                                                          -------------      -------------
Total deferred income tax assets                                  1,475              2,828
                                                          -------------      -------------
Net deferred income tax (liability)                             $  (807)           $  (941)
                                                          =============      ==============
</TABLE>

As of December 31, 2005, the Company has net operating loss and foreign tax
credit carryforwards totaling approximately $166, and $391, respectively. These
credits expire beginning 2014 through 2025. The ability of the Company to
benefit from the carryforwards is dependent on the Company's ability to generate
sufficient taxable income prior to the expiration dates.

                                       36

<PAGE>

6.  SHAREHOLDERS' EQUITY

The table below summaries the transactions in the Company's Common Stock held in
the treasury in numbers of shares during fiscal 2005 and 2004.

<TABLE>
<CAPTION>
                                                              2005               2004
                                                          -------------      -------------
<S>                                                       <C>                <C>
Balance at beginning of year, number of shares                  467,108            486,245
Purchases during the year                                     1,500,000                 --
Transfers to 401(k) Profit Sharing Plan                         (18,673)           (10,290)
Transfers to Employee Stock Purchase Plan                       (12,023)            (8,847)
                                                          -------------       -------------
Balance at end of year, number of shares                      1,936,412            467,108
                                                          =============       =============
</TABLE>

On October 20, 2005, Company accepted for payment 1,500,000 shares of its Common
Stock, at a price of $7.50 per share, pursuant to its "Dutch Auction"
self-tender offer. As a result of the completion of the self-tender offer, the
Company had 3,700,647 shares of common stock issued and outstanding. The shares
of common stock accepted for purchased represent approximately 28.84% of TB
Wood's 5,200,647 shares of common stock issued and outstanding as of October 20,
2005. The total share purchase price was $11.25 million, together with $0.28
million of transaction cost, and was funded through the issuance of 12% senior
subordinated notes in the amount of $15.0 million and detachable warrants to
purchase 174,000 shares of the Company's common stock, valued at $0.76 million.

7. BENEFIT PLANS

COMPENSATION PLANS

The Company maintains a discretionary compensation plan for certain salaried
employees that provides for incentive awards based on certain levels of
earnings, as defined. In 2005, the Company accrued $0.35 million for such
incentives, which were paid in 2006. No amounts were accrued under the plan in
fiscal years 2004 and 2003.

PROFIT-SHARING PLANS

The Company maintains a defined contribution 401(k) profit-sharing plan covering
substantially all United States employees. Under this plan, the Company, on a
discretionary basis, matches a specified percentage of each eligible employee's
contribution and, at the election of the employee, the matching contribution may
be in the form of either cash, shares of the Company's common stock, or a
combination thereof. The Company contributed cash of approximately $448, $302,
and $207 for fiscal years 2005, 2004 and 2003, respectively, and contributed
18,673 shares of common stock held in treasury in 2005, 10,290 shares in 2004,
and 7,887 shares in 2003. During portions of 2003 and 2002, the Company
suspended the matching portion. In addition, the Company has a noncontributory
profit-sharing plan covering its Canadian employees for which $28, $24, and $23
was charged to expense for fiscal years 2005, 2004, and 2003, respectively.

EMPLOYEE STOCK PURCHASE PLAN

The Company's Employee Stock Purchase Plan ("ESPP") enables employees of the
Company to subscribe for shares of common stock on quarterly offering dates, at
a purchase price which is the lesser of 85% of the fair value of the shares on
either the first or last day of the quarterly period. Pursuant to the ESPP,
12,023 shares were issued to employees during 2005, 8,847 during 2004, and
11,246 during 2003. Employee contributions to the ESPP were $59, $55, and $50
for fiscal years 2005, 2004 and 2003, respectively. As of December 31, 2005,
406,389 shares remain available for future issuance.

STOCK OPTIONS

The Company has a stock-based incentive compensation plan (the "Plan"), the
purpose of which is to assist the Company in attracting and retaining valued
personnel by offering them a greater stake in the Company's success and a closer
identity with the Company, and to encourage ownership of the Company's common
stock by such personnel. The Plan is administered by a committee (the
"Committee") designated by the board of directors. Awards under the Plan may be
made to all officers and key employees of the Company through January 31, 2006.

                                       37
<PAGE>

The Committee may grant stock options and shares of common stock in the form of
either deferred stock or restricted stock, as defined in the Plan. Options
granted under the Plan may be either incentive stock options ("ISOs") or
nonqualified stock options. ISOs are intended to qualify as incentive stock
options within the meaning of Section 422 of the Internal Revenue Code. Unless
an option is specifically designated at the time of the grant as an ISO, options
under the Plan will be nonqualified. The Committee determines the exercise price
of the options. The maximum term of an option granted under the Plan shall not
exceed ten years from the date of grant or, in the case of an ISO, five years
from the date of grant if the recipient on the date of grant owns directly, or
indirectly, shares possessing more than 10% of the total combined voting power
of all classes of stock of the Company. No option may be exercisable sooner than
six months from the date the option is granted. Stock option activity for the
fiscal years 2005, 2004 and 2003 is as follows:

<TABLE>
<CAPTION>
                                                                           Number of shares     Weighted average
                                                                           subject to option     exercise price
                                                                          ------------------    ----------------
<S>                                                                       <C>                   <C>
Options outstanding at December 27, 2002                                             783,000              $13.25
    Granted                                                                          197,550                8.62
    Canceled                                                                        (106,500)              22.73
    Exercised                                                                             --                  --
                                                                          ------------------    ----------------
Options outstanding at January 2, 2004                                               874,050               11.73
    Granted                                                                          187,800                9.75
    Canceled                                                                        (383,399)              11.91
    Exercised                                                                             --                  --
                                                                          ------------------    ----------------
Options outstanding at December 31, 2004                                             678,451               11.08
    Granted                                                                          184,000                7.08
    Canceled                                                                        (197,000               12.82
    Exercised                                                                             --                  --
                                                                          ------------------    ----------------
Options outstanding at December 31, 2005                                             665,451              $ 9.46
                                                                          ==================    ================
</TABLE>

In January 2006, the Company awarded additional options for 87,000 shares at a
weighted exercise price of $8.88 per share.

The following table sets forth the range of exercise price, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
similar price and grant dates as of December 31, 2005.
<TABLE>
<CAPTION>

              Options Outstanding                                        Options Exercisable
--------------------------------------------------------    ----------------------------------------------
                                              Weighted           Weighted                       Weighted
     Range of                Number of         average            average         Number of      average
  exercise price              shares        exercise price    contractual life     shares     exercise price
------------------          -----------    --------------    ----------------   ----------   --------------
<S>                         <C>            <C>               <C>                <C>          <C>
$ 4.80 -    $ 7.50              158,217            $ 6.18          10.0 years       16,034           $ 6.21
$ 7.51 -    $ 9.00              182,550            $ 8.23          10.0 years      104,214           $ 8.19
$ 9.01 -    $11.00              113,183            $ 9.46          7.88 years       48,818           $ 9.38
$11.01 -    $13.00              159,351            $12.11          6.80 years      136,519           $12.14
$13.01  -   $21.00               52,150            $15.68          10.0 years       35,816           $16.87
                            -----------                                         ----------
Total Options Outstanding       665,451            $ 9.46          8.03 years      341,401           $10.76
                            ===========                                         ==========
</TABLE>

Following the fair value method to account for stock-based compensation cost,
the Company employs the modified prospective method of accounting to calculate
the fair value of its stock-based compensation plan, applying the following
weighted-average assumptions to the Black-Scholes option-pricing model for
grants in 2005, 2004, and 2003:

<TABLE>
<CAPTION>
                                                              2005             2004             2003
                                                       ------------------ ---------------- ----------------
<S>                                                    <C>                <C>              <C>
Risk free interest rate                                        4.50%           4.40%            4.25%
Expected lives                                               10 years      5 & 10 years      5 & 10 years
Expected volatility                                           28.8%           30.3%             28.8%
Dividend yield                                                 0.0%            4.3%              5.1%
</TABLE>

The fair value, net of tax, of options granted in 2005, 2004 and 2003 using the
Black-Scholes method was $313, $211, and $219, respectively, which is being
recognized as expense ratably over the three year vesting period of the options.

                                       38
<PAGE>

POSTRETIREMENT BENEFITS

As of December 31, 2005, the Company has terminated all of its post-retirement
benefit programs. In the second quarter of 2005, the Company announced to
employees that it was discontinuing its sponsorship of an unfunded defined
benefit post employment group term life insurance plan that provided life
insurance coverage for active employees and retirees. As a result the company
recognized a non-recurring gain of $270 in the second quarter from the
termination of this program, which was recorded as a reduction of selling,
general and administrative expense.

In 2004 the Company continued to take steps to maintain spending for healthcare
benefits at affordable levels. In order to achieve this, the Company terminated
its post-retirement healthcare benefit program, as communicated to retirees in
the fourth quarter of 2004. As a result, the Company recognized a pre-tax gain
aggregating $9.26 million, equivalent to the reduction in the accumulated plan
benefit obligation together with the recognition of unrecognized prior service
benefits and actuarial net gains arising from similar actions taken in previous
years. This item is presented as a non-recurring gain in the Company's income
statement for the year ended December 31, 2004. The Company also recorded $3.61
million deferred tax expense arising from the reduction of a previously
recognized deferred tax asset associated with these benefits, resulting in a
$1.09 increase in earnings per share in 2004 associated with the termination
gain. Prior to the termination of the aforementioned benefit plan and resulting
non-recurring gain, selling, general and administrative expenses included a net
credit reducing such costs principally relating to the amortization of actuarial
gains and deferred credits arising during the operation of the benefit plan in
the amounts of $0.78 million and $0.49 million in 2004 and 2003, respectively.

At December 31, 2004, the total obligation for all post-retirement benefits was
$0.39 million, relating principally to life insurance program that was
terminated in 2005. At December 31, 2005, remaining commitments for any
post-employment obligations are immaterial, and relate principally to
commitments under certain severance obligations.

8. COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

The Company is subject to a number of legal actions arising in the ordinary
course of business. In management's opinion, the ultimate resolution of these
actions will not materially affect the Company's financial position or results
of operations.

ENVIRONMENTAL RISKS

The Company's operations and properties are subject to federal, state, and local
laws, regulations, and ordinances relating to certain materials, substances, and
wastes. The nature of the Company's operations exposes it to the risk of claims
with respect to environmental matters. Based on the Company's experience to
date, management believes that the future cost of compliance with existing
environmental requirements will not have a material adverse effect on the
Company's operations or financial position.

OPERATING LEASE COMMITMENTS

The Company leases warehouse and office space, office equipment, and other items
under non-cancelable operating leases. The expense for non-cancelable operating
leases was approximately $1,289, $1,304, and $1,239 for fiscal 2005, 2004 and
2003, respectively. At December 31, 2005 future minimum lease payments under
non-cancelable operating leases are as follows:

<TABLE>
<S>                                              <C>
2006                                                  $ 1,225
2007                                                    1,062
2008                                                      789
2009                                                      578
2010                                                      579
2011 and thereafter                                     1,537
                                                 ------------
                                                      $ 5,770
                                                 ============
</TABLE>

                                       39
<PAGE>

9. BUSINESS SEGMENT INFORMATION

DESCRIPTION OF THE TYPES OF PRODUCTS FROM WHICH EACH SEGMENT DERIVES ITS
REVENUES

The Company is engaged principally in the design, manufacture, and sale of
industrial power transmission products. The products manufactured by the Company
are classified into two segments, mechanical business and electronics business.
The mechanical business segment includes belted drives, couplings, gear motors
and gearboxes. The electronics business segment includes electronic drives and
electric drive systems. Products of these segments are sold to distributors,
OEM's, and end users for manufacturing and commercial applications.

MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS

The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes. The accounting policies of the
reportable segments are the same as described in the summary of significant
accounting policies. Inter-segment sales are not material.

FACTORS MANAGEMENT USED TO IDENTIFY THE COMPANY'S REPORTABLE SEGMENTS

The Company's reportable segments are business units that manufacture and market
separate and distinct products and are managed separately because each business
requires different processes, technologies, and market strategies. The following
table summarizes revenues, operating income, depreciation and amortization,
total assets, and expenditures for long-lived assets by business segment for
fiscal 2005, 2004, and 2003:
<TABLE>
<CAPTION>
                                                                       2005              2004             2003
                                                                   -----------        -----------      -----------
<S>                                                                <C>                <C>              <C>
SALES
  Mechanical Business                                                $  72,361          $  63,732        $  58,343
  Electronics Business                                                  38,536             37,783           38,072
                                                                   -----------        -----------      -----------
                                                                       110,897            101,515           96,415
                                                                   -----------        -----------      -----------
OPERATING INCOME (LOSS), EXCLUSIVE OF GAIN ON BENEFIT PLAN
TERMINATION
  Mechanical Business                                                    4,885                951            2,155
  Electronics Business                                                   1,103             (1,599)          (1,393)
                                                                   -----------        -----------      -----------
                                                                         5,988               (648)             762
                                                                   -----------        -----------      -----------
DEPRECIATION AND AMORTIZATION
  Mechanical Business                                                    2,578              2,884            2,940
  Electronics Business                                                   1,158              1,443            2,023
  Corporate (before divisional allocation)                               1,029              1,096              877
                                                                   -----------        -----------      -----------
                                                                         4,765              5,423            5,840
                                                                   -----------        -----------      -----------
ASSETS
   Mechanical Business                                                  42,097             43,541           44,241
   Electronics Business                                                 20,760             22,136           26,207
   Corporate                                                             4,896              3,693            5,959
                                                                   -----------        -----------      -----------
                                                                        67,753             69,370           76,407
                                                                   -----------        -----------      -----------
EXPENDITURES FOR LONG-LIVED ASSETS
   Mechanical Business                                                   1,002              1,652            1,114
   Electronics Business                                                  1,398                254              400
   Corporate                                                               662                103              713
                                                                   -----------        -----------      -----------
                                                                     $   3,062          $   2,009         $  2,227
                                                                   ===========        ===========      ===========
</TABLE>

The following table reconciles segment profit to consolidated income before
income taxes and extraordinary items:

<TABLE>
<CAPTION>
                                                                       2005              2004             2003
                                                                   -----------        -----------      -----------
<S>                                                                <C>                <C>              <C>
Total operating profit (loss) for reportable segments                 $  5,988            $  (648)         $   762
Interest expense, net                                                   (2,319)            (1,585)            (952)
Gain on benefit plan termination/other unallocated amounts                   -              9,258              148
                                                                   -----------        -----------      -----------
Income (loss) before income taxes                                      $ 3,669          $   7,025            $ (42)
                                                                   ===========        ===========      ===========
</TABLE>

                                       40
<PAGE>

The following table reconciles segment assets to consolidated total assets as of
December 31, 2005 and December 31, 2004:

<TABLE>
<CAPTION>
                                                                  2005              2004
                                                              ------------       -----------
<S>                                                           <C>                <C>
Total assets for reportable segments                             $  62,857         $  65,677
Corporate fixed assets                                               3,739             3,818
Deferred taxes                                                          --                --
Interdivision elimination                                            1,157              (125)
                                                              ------------       -----------
Consolidated total                                                $ 67,753          $ 69,370
                                                              ============       ===========
</TABLE>

Information regarding the Company's domestic and foreign operations is as
follows:
<TABLE>
<CAPTION>
                                                                                    Long-Lived
                                                                   Net Sales          Assets
                                                                 ------------      ------------
<S>                                                              <C>               <C>
2005
United States                                                         $82,402           $22,896
Canada                                                                 10,291               308
Germany                                                                 4,561             2,024
Italy                                                                   9,940               381
Mexico                                                                  2,803             3,084
India                                                                     900                38
                                                                 ------------      ------------
Consolidated                                                         $110,897           $28,731
                                                                 ============      ============
2004
United States                                                         $74,186           $23,670
Canada                                                                  8,937               328
Germany                                                                 4,627             2,320
Italy                                                                   9,980               674
Mexico                                                                  2,878             3,326
India                                                                     907                43
                                                                 ------------      ------------
Consolidated                                                         $101,515           $30,361
                                                                 ============      ============
2003
United States                                                       $  70,390           $27,525
Canada                                                                  8,235               322
Germany                                                                 5,084             2,139
Italy                                                                   9,257               840
Mexico                                                                  2,803             1,960
India                                                                     646                70
                                                                 ------------      ------------
Consolidated                                                          $96,415           $32,856
                                                                 ============      ============
</TABLE>

11. QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
2005                                             First              Second               Third              Fourth
                                               ---------           ---------           ---------           ---------
<S>                                            <C>                 <C>                 <C>                 <C>
Sales                                            $27,711            $27,844              $27,673            $27,669
Gross Profit                                       8,153              8,276                8,254              9,022
Gross Profit %                                      29.4%              29.7%                29.8%              32.6%
Net income                                           372                497                  565                946
Basic and diluted net income per share            $ 0.07             $ 0.10                $0.11             $ 0.23
Dividends declared and paid per share                 --                 --                   --                 --
</TABLE>

<TABLE>
<CAPTION>
2004                                             First              Second               Third              Fourth
                                               ---------           ---------           ---------           ---------

<S>                                            <C>                 <C>                 <C>                 <C>
Sales                                            $26,081            $25,459              $25,279            $24,696
Gross Profit                                       7,514              8,248                6,229              5,732
Gross Profit %                                      28.8%              32.4%                24.6%              23.2%
Net income (loss)                                    134                 95               (1,346)             5,735
Basic and diluted net income (loss) per
      share                                       $ 0.03             $ 0.02              $( 0.26)           $  1.11
Dividends declared and paid per share             $ 0.09             $ 0.09               $ 0.09            $    --
</TABLE>

                                       41
<PAGE>

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

None.

ITEM 9A.  EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company's Principal Executive Officer and Principal Financial Officer
evaluated the Company's disclosure controls and procedures as of December 31,
2005. This evaluation determined that the disclosure controls and procedures in
place at the Company ensure that material information relating to the
registrant, including consolidated subsidiaries, is made known to the Principal
Executive and Principal Financial Officers by others within the entities for the
period ended December 31, 2005 to ensure disclosure on a timely basis in
conformance with applicable rules and regulations. It should be noted that the
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.

ITEM 9B. OTHER INFORMATION

None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information called for by this Item regarding directors and executive
officers is set forth in the Company's Proxy Statement for the 2006 Annual
Meeting in the Sections entitled "Election of Directors," "Management" and
"Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated
herein by reference.

The Company has adopted a Code of Conduct that applies to all of our directors
and employees including, our principal executive officer and principal financial
officer and all of our employees performing financial and accounting functions.
The Code of Conduct is posted to the Company's website www.tbwoods.com and may
be found under the "Corporate Governance" section. The Company intends to
satisfy the disclosure requirement under Item 10 of Form 8-K regarding an
amendment to, or waiver from, a provision of our Code of Conduct by posting such
information on our website at the location specified above.

ITEM 11. EXECUTIVE COMPENSATION

The information called for by this Item is set forth in the Company's Proxy
Statement for the 2006 Annual Meeting in the Section entitled "Executive
Compensation and Report of the Compensation Committee" and is incorporated
herein by reference.

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

The information called for by this Item is set forth in the Company's Proxy
Statement for the 2006 Annual Meeting in the Section entitled "Security
Ownership of Certain Beneficial Owners and Management" and is incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by this Item is set forth in the Company's Proxy
Statement for the 2006 Annual Meeting in the Section entitled "Executive
Compensation and Report of the Compensation Committee" and is incorporated
herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information called for by this Item is set forth in the Company's Proxy
Statement for the 2006 Annual Meeting in the Section entitled "Ratification of
Appointment of Independent Registered Public Accounting Firm" and is
incorporated herein by reference.

                                       42
<PAGE>

                                     PART IV

ITEM      15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

NUMBER    DESCRIPTION

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

(1)       All financial statements;

          The consolidated financial statements of the Company and its
          subsidiaries on pages 26 through 39 hereof and the report thereon of
          Grant Thornton LLP appearing on page 25 hereof.

(2)       Financial Statement Schedule

          Schedule II for the fiscal year ended December 31, 2005 on page 48
          hereof and the report thereon of Grant Thornton LLP appearing on page
          25 hereof. All other schedules have been omitted because they are not
          applicable or are not required. All other required schedules are
          included in the Consolidated Financial Statements or notes therein.

(3)       Exhibits

3.1       Restated Certificate of Incorporation of the Company (incorporated by
          reference to Form 10-Q for quarter ended June 28, 2002, Exhibit 3.1)

3.2       Amended and Restated By-laws of the Company (incorporated by reference
          to Form S-1 Exhibit 3.2).

10.1      Asset Purchase Agreement between T. B. Wood's Sons Company and Dana
          Corporation dated March 31, 1993 (includes Schedule 7.11 On-Site
          Environmental Procedures) (incorporated by reference to Form S-1
          Exhibit 10.38).

10.2      TB Wood's Corporation 1996 Stock-Based Incentive Compensation Plan
          (the "1996 Plan") (incorporated by reference to Form S-1 Exhibit
          10.39).

10.3      Amendments to the Non-Qualified Stock Option Agreements between TB
          Wood's Incorporated (formerly known as "T. B. Wood's Sons Company")
          and Joseph S. Augustine, Michael H. Iversen, David H. Halleen, Stanley
          L. Mann, Lee J. McCullough, Carl R. Christenson, Harold L. Coder, III
          and James E. Williams (incorporated by reference to Form S-1 Exhibit
          10.40).

10.4      Second Addendum dated July 1, 1995 to the Non-Qualified Stock Option
          Agreement dated as of March 15, 1991 between TB Wood's Incorporated
          (formerly known as "T. B. Wood's Sons Company") and Michael L. Hurt
          (incorporated by reference to Form S-1 Exhibit 10.41).

10.5      Stock Purchase Agreement by and among TB Wood's Incorporated and Grupo
          Blaju, S.A. de C.V. and Jorge R. Kiewek, Ninfa D. de Callejas and
          Marcela Kiewek G., dated February 14, 1996 (incorporated by reference
          to Form 10-K, for fiscal year 1995, Exhibit 10.43).

10.6      TB Wood's Employee Stock Purchase Plan, dated March 1, 1997
          (incorporated by reference to Form 10-K, for fiscal year 1996, Exhibit
          10.45).

10.7      Form of the Non-Qualified Stock Option Agreements issued under the
          1996 Plan between TB Wood's Corporation and Thomas C. Foley, Michael
          L. Hurt, Carl R. Christenson, Michael H. Iversen, Willard C.
          Macfarland, Jr., and other key employees dated June 17, 1997 and
          between TB Wood's Corporation and Robert J. Dole dated July 29, 1997
          (incorporated by reference to Form 10-K, for fiscal year 1997, Exhibit
          10.48).

10.8      Form of the Non-Qualified Stock Option Agreements issued under the
          1996 Plan between TB Wood's Corporation and Thomas C. Foley, Michael
          L. Hurt, Carl R. Christenson, Michael H. Iversen, Willard C.
          Macfarland, Jr., and other key employees dated January 29, 1998
          (incorporated by reference to Form 10-K, for fiscal year 1997, Exhibit
          10.49).

10.9      Form of the Non-Qualified Stock Option Agreements issued under the
          1996 Plan between TB Wood's Corporation and Thomas C. Foley, Michael
          L. Hurt, Carl R. Christenson, Michael H. Iversen, Willard C.
          Macfarland, Jr., and other key employees dated January 26, 1999
          (incorporated by reference to Form 10-K, for fiscal year 1998 Exhibit
          10.18).

10.10     Form of the Non-Qualified Stock Option Agreements issued under the
          1996 Plan between TB Wood's Corporation and Thomas C. Foley, Michael
          L. Hurt, Carl R. Christenson, Michael H. Iversen, Willard C.
          Macfarland, Jr., and other key employees dated January 26, 1999
          (incorporated by reference to Form 10-K, for fiscal year 1998 Exhibit
          10.19).

                                       43
<PAGE>

10.11     Form of the Non-Qualified Stock Option Agreements issued under the
          1996 Plan between TB Wood's Corporation and Thomas C. Foley, Michael
          L. Hurt, Carl R. Christenson, Michael H. Iversen, Willard C.
          Macfarland, Jr. and other key employees dated February 8, 2000
          (incorporated by reference to Form 10-K for fiscal year 2000 Exhibit
          10.20).

10.12     Form of the Non-Qualified Stock Option Agreements issued under the
          1996 Plan between TB Wood's Corporation and Thomas C. Foley, Michael
          L. Hurt, Carl R. Christenson, Michael H. Iversen, Willard C.
          Macfarland, Jr. and other key employees dated February 8, 2000
          (incorporated by reference to Form 10-K for fiscal 2000 Exhibit
          10.21).

10.13     Form of the Non-Qualified Stock Option Agreements issued under the
          1996 Plan between TB Wood's Corporation and Thomas C. Foley, Michael
          L. Hurt, Carl R. Christenson, Thomas F. Tatarczuch, Michael H.
          Iversen, Willard C. Macfarland, Jr. and other key employees dated
          January 25, 2001 (incorporated by reference to Form 10-K for fiscal
          2000 Exhibit 10.22).

10.14     Form of the Non-Qualified Stock Option Agreements issued under the
          1996 Plan between TB Wood's Corporation and Thomas C. Foley, Michael
          L. Hurt, Carl R. Christenson, Thomas F. Tatarczuch, Michael H.
          Iversen, Willard C. Macfarland, Jr. and other key employees dated
          January 25, 2001 (incorporated by reference to Form 10-K for fiscal
          2000 Exhibit 10.23).

10.15     Form of the Non-Qualified Stock Option Agreements issued under the
          1996 Plan between TB Wood's Corporation and Preben H. Petersen dated
          February 26, 2001 (incorporated by reference to Form 10-K for fiscal
          2000 Exhibit 10.24).

10.16     Form of the Non-Qualified Stock Option Agreements issued under the
          1996 Plan between TB Wood's Corporation and Preben H. Petersen dated
          February 26, 2001 (incorporated by reference to Form 10-K for fiscal
          2000 Exhibit 10.25).

10.17     Form of the Non-Qualified Stock Option agreements issued under the
          1996 Plan between TB Wood's Corporation and Thomas C. Foley, Michael
          L. Hurt, Preben H. Petersen, Thomas F. Tatarczuch, Michael H. Iversen,
          Willard C. Macfarland, Jr. and other key employees dated January 31,
          2002. (incorporated by reference to Form 10-K for fiscal year 2001,
          Exhibit 10.58)

10.18     Form of the Non-Qualified Stock Option agreements issued under the
          1996 Plan between TB Wood's Corporation and Thomas C. Foley, Michael
          L. Hurt, Preben H. Petersen, Thomas F. Tatarczuch, Michael H. Iversen,
          Willard C. Macfarland, Jr. and other key employees dated January 31,
          2002. (incorporated by reference to Form 10-K, for fiscal year 2001,
          Exhibit 10.59)

10.19     TB Wood's Corporation 1996 Stock Based Incentive Compensation Plan as
          amended. (incorporated by reference to Form 10-K, for fiscal year
          2001, Exhibit 10.60)

10.20     Form of the Non-Qualified Stock Option agreements issued under the
          1996 Plan between TB Wood's Corporation and Thomas C. Foley, Michael
          L. Hurt, Preben H. Petersen, Thomas F. Tatarczuch, Michael H. Iversen,
          Willard C. Macfarland, Jr. and other key employees dated January 31,
          2003. (incorporated by reference to Form 10-K, for fiscal year 2002,
          Exhibit 10.62)

10.21     Form of the Non-Qualified Stock Option agreements issued under the
          1996 Plan between TB Wood's Corporation and Thomas C. Foley, Michael
          L. Hurt, Preben H. Petersen, Thomas F. Tatarczuch, Michael H. Iversen,
          Willard C. Macfarland, Jr. and other key employees dated January 31,
          2003. (incorporated by reference to Form 10-K, for fiscal year 2002,
          Exhibit 10.63)

10.22     Separation Agreement by and between Michael L. Hurt and TB Wood's
          Incorporated dated November 7, 2003. (incorporated by reference to
          Form 10-K, for fiscal year 2002, Exhibit 10.65)

10.23     Employment agreement between Joseph C. Horvath and TB Wood's
          Incorporated dated November 14, 2003. (incorporated by reference to
          Form 10-K, for fiscal year 2002, Exhibit 10.66)

10.24     Form of the Non-Qualified Stock Option Agreements issued under the
          1996 Plan between TB Wood's Corporation and Preben H. Petersen,
          Willard C. Macfarland, Jr., Joseph C. Horvath, Michael H. Iversen, and
          Harold L. Coder III and other key employees dated February 5, 2004.
          (incorporated by reference to Form 10-K, for fiscal year 2002, Exhibit
          10.67)

10.25     Form of the Non-Qualified Stock Option Agreements issued under the
          1996 Plan between TB Wood's Corporation and Preben H. Petersen,
          Willard C. Macfarland, Jr., Joseph C. Horvath, Michael H. Iversen, and
          Harold L. Coder III and other key employees dated February 5, 2004.
          (incorporated by reference to Form 10-K, for fiscal year 2002, Exhibit
          10.68)

                                       44
<PAGE>

10.26     Form of the Non-Qualified Stock Option Agreements issued under the
          1996 Plan between TB Wood's Corporation and William T. Fejes, Jr., and
          Thomas C. Foley dated April 27, 2004

10.27     Form of the Non-Qualified Stock Option Agreements issued under the
          1996 Plan between TB Wood's Corporation and William T. Fejes, Jr., and
          Thomas C. Foley dated April 27, 2004

10.28     Employment agreement between William T. Fejes, Jr., and TB Wood's
          Incorporated dated April 27, 2004

10.29     Employment Agreement between Thomas C. Foley and TB Wood's Corporation
          dated August 19, 2004. (incorporated by reference to Form 8-K dated
          August 25, 2004, Exhibit 10.1)

10.30     Employment Agreement between James R. Swenson and TB Wood's
          Corporation dated August 19, 2004. (incorporated by reference to Form
          8-K, dated August 25, 2004, Exhibit 10.2)

10.31     Loan and Security Agreement by and among Manufacturers and Traders
          Trust Company (Collateral and Funding Agent), PNC Bank, National
          Association (Administrative Agent), TB Wood's Incorporated, Plant
          Engineering Consultants,LLC, and TB Wood's Enterprises, Inc.
          (Borrowers), and TB Wood's Corporation and T.B.Wood's Canada.Ltd
          (Guarantors), dated January 7, 2005.

10.32     Form of the Non-Qualified Stock Option Agreements issued under the
          1996 Plan between TB Wood's Corporation and James R. Swenson, William
          T. Fejes, Jr., Thomas C. Foley, Joseph C. Horvath, and Harold L. Coder
          III, and other key employees dated February 11, 2005

10.33     Form of the Non-Qualified Stock Option Agreements issued under the
          1996 Plan between TB Wood's Corporation and James R. Swenson, William
          T. Fejes, Jr., Thomas C. Foley, Joseph C. Horvath, and Harold L. Coder
          III, and other key employees dated February 11, 2005

10.34     First Amendment to Loan and Security Agreement, dated July 29, 2005,
          by and among Manufacturers and Traders Trust Company (Collateral and
          Funding Agent), PNC Bank, National Association (Administrative Agent),
          TB Wood's Incorporated, Plant Engineering Consultants, LLC, and TB
          Wood's Enterprises, Inc. (Borrowers), and TB Wood's Corporation and
          T.B. Wood's Canada, Ltd (Guarantors) (incorporated by reference to
          Schedule TO, dated August 9, 2005, Exhibit (b)(2))

10.35     Securities Purchase Agreement dated October 12, 2005 among TB Wood's
          Incorporated, a Pennsylvania corporation, Plant Engineering
          Consultants, LLC, a Tennessee limited liability company, and TB Wood's
          Enterprises, Inc., a Delaware corporation (as borrowers), AEA
          Mezzanine Funding LLC, a Delaware limited liability company, AEA
          Mezzanine Fund LP, a Delaware limited partnership, and AEA Mezzanine
          (Unleveraged) Fund LP, a Delaware limited partnership (as purchasers),
          the Company and T.B. Wood's Canada Ltd., an Ontario corporation (as
          Guarantors) (incorporated by reference to Amendment No. 4 to Schedule
          TO, dated October 12, 2005, Exhibit (b)(3))

10.36     12% Senior Subordinated Promissory Note, due October 11, 2012, between
          TB Wood's Incorporated, Plant Engineering Consultants, LLC and TB
          Wood's Enterprises, Inc. (as borrowers) and AEA Mezzanine Funding LLC
          (holder)

10.37     12% Senior Subordinated Promissory Note, due October 11, 2012, between
          TB Wood's Incorporated, Plant Engineering Consultants, LLC and TB
          Wood's Enterprises, Inc. (as borrowers) and AEA Mezzanine
          (Unleveraged) Fund LP (holder)

10.38     Common Stock Purchase Warrant, dated October 27, 2005, between TB
          Wood's Corporation and AEA Mezzanine Fund LP.

10.39     Common Stock Purchase Warrant, dated October 27, 2005, between TB
          Wood's Corporation and AEA Mezzanine (Unleveraged) Fund LP.

10.40     Guaranty, dated October 27, 2005, by TB Wood's Corporation

10.41     Registration Rights Agreement, dated October 27, 2005, between TB
          Wood's Corporation, AEA Mezzanine Fund LP and AEA Mezzanine
          (Unleveraged) Fund LP

10.42     Subordination and Intercreditor Agreement, dated October 12, 2005,
          between Manufacturers and Traders Trust Company, AEA Mezzanine Funding
          LLC and AEA Mezzanine (Unleveraged) Fund LP and the Borrowers as
          defined therein.

21        Subsidiaries and Joint Venture of Registrant

23.1      Consent of Independent Public Accountants

                                       45
<PAGE>

31.1      Certification of Principal Executive Officer required by 13a-14(a)

31.2      Certification of Principal Financial Officer required by 13a-14(a)

32        Section 1350 Certification of Principal Executive Officer and
          Principal Financial Officer

                                       46
<PAGE>

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, in the City of
Chambersburg and Commonwealth of Pennsylvania, on March 24, 2006.

                                                     TB WOOD'S CORPORATION

                                                     By: /s/Joseph C. Horvath
                                                         -----------------------
                                                         Joseph C. Horvath
                                                         Chief Financial Officer

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

<TABLE>
<S>                                       <C>                                     <C>
/s/ THOMAS C. FOLEY                       Chairman & Director                     March 24, 2006
-------------------------
Thomas C. Foley

/s/ WILLIAM T. FEJES, JR.                 President and CEO                       March 24, 2006
-------------------------
William T. Fejes, Jr.                     (Principal Executive Officer)

/s/ JAMES R. SWENSON                      Director                                March 24, 2006
-------------------------
James R. Swenson

/s/ RICK LAZIO                            Director                                March 24, 2006
-------------------------
Rick Lazio

/s/ FRANK D. OSBORN                       Director                                March 24, 2006
-------------------------
Frank D. Osborn

/s/MICHAEL R. ZIMMERMAN                   Director                                March 24, 2006
-------------------------
Michael  R. Zimmerman

/s/ JOSEPH C. HORVATH                     Chief Financial Officer                 March 24, 2006
-------------------------                 (Principal Financial Officer and
Joseph C. Horvath                         Principal Accounting Officer)
</TABLE>

                                       47

<PAGE>

                     TB WOOD'S CORPORATION AND SUBSIDIARIES

                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
                Column A                    Column B             Column C              Column D       Column E
                                                                 Additions
                                                        ----------------------------
                                           Balance at     Charged to      Charged
                                            beginning     costs and      to other                    Balance at
               Description                  of period      expenses      accounts     Deductions    end of period
---------------------------------------    ----------     ----------     --------     ----------    -------------
<S>                                        <C>            <C>            <C>          <C>           <C>
Year ended January 2, 2004:
  Allowance for doubtful accounts                 509        $   644         $(25)          (140)        $    988
  Allowance for discounts and claims              136                                                         136
  Allowance for inventory obsolescence (1)      2,368           (155)          62           (620)           1,655
                                           ----------     ----------     --------     ----------    -------------
                                              $3,013            $489         $ 37          $(760)          $2,779
                                           ==========     ==========     ========     ==========    =============
Year ended December 31, 2004:
  Allowance for doubtful accounts                 988          $  89         $ (8)          (234)         $   835
  Allowance for discounts and claims              136            (91)                                          45
  Allowance for inventory obsolescence
  (1)                                           1,655            358           28           (203)           1,838
                                           ----------     ----------     --------     ----------    -------------
                                               $2,779         $  356         $ 20       $   (437)          $2,718
                                           ===========    ===========    ========     ==========    =============
Year ended December 31, 2005
  Allowance for doubtful accounts              $   835         $  143        $ 13           (541)        $   450
  Allowance for discounts and claims                45              -                         --              45
  Allowance for inventory obsolescence
                                                 1,838            576          (30)       (1,199)          1,185
                                            ----------     ----------     --------    ----------   -------------
                                                $2,718         $  719        $ (17)   $   (1,740)         $1,680
                                            ==========     ==========     ========    ==========   =============
</TABLE>

(1) Beginning and end of period balances reported for 2003 have been adjusted
to reflect a reclassification of a previously omitted reserve account.