<PAGE>

                       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 January 1, 1999
                                       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 Wood'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)

Registrant's telephone number, including area code   (717) 264-7161

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

                                                      Name of each Exchange on
               Title of each class                       Which Registered

           Common Stock, $.01 par value                New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: NONE

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. [ ]

The aggregate market value of voting stock held by non-affiliates of the
registrant based on the closing price on February 26, 1999, was $70,652,376. On
February 26, 1999, there were 5,887,698 shares of the registrant's common stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1999 Annual Meeting of Shareholders are
incorporated by reference into Part III hereof. Only those specific portions so
incorporated are to be deemed filed as part of this Form 10-K.


<PAGE>


                              TB WOOD'S CORPORATION
                    FISCAL YEAR 1998 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S>                                                                                                  <C> 
PART I................................................................................................. 3

         Item 1. Business.............................................................................. 3
         Item 2. Properties............................................................................ 8
         Item 3. Legal Proceedings..................................................................... 8
         Item 4. Submission of Matters to a Vote of Security Holders................................... 8

PART II................................................................................................ 9

         Item 5. Market for Registrant's Common Equity and Related Shareholder Matters................. 9
         Item 6. Selected Financial Data............................................................... 9
         Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation..10
         Item 8. Financial Statements and Supplementary Data...........................................14
         Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..35

PART III...............................................................................................36

         Item 10. Directors and Executive Officers of the Registrant...................................36
         Item 11. Executive Compensation...............................................................36
         Item 12. Security Ownership of Certain Beneficial Owners and Management.......................36
         Item 13. Certain Relationships and Related Transactions.......................................36

PART IV................................................................................................37

         Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....................37

SIGNATURES.............................................................................................40
</TABLE>


<PAGE>

                                     PART I

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 142 year-old business operates eleven
production facilities with over 1,100 employees in the United States, Canada,
Mexico, Germany, and Italy. The Company has a network of more than 700 select
independent distributors with over 1,900 locations in North America.

History

         TB Wood's Incorporated was founded in 1857, and entered the power
transmission industry at the turn of the century. The Company was incorporated
in 1995. In January 1996, a subsidiary of the Company merged with TB Wood's
Incorporated ("TBW"), the original Pennsylvania Corporation that was formed in
1857, with TBW as the surviving corporation in the merger.

         Since 1992, the Company has introduced 23 new electronic products or
product line extensions, including ten such introductions in the most recent two
years. These include a new line of full-featured drives which improve motor
performance; extension to 20 horsepower of the Company's successful line of
micro-inverters; and drives for motor sizes up to 700 horsepower. In 1998, the
Company introduced a unique and high performance integrated motor-drive
combination; and a line of customizable, cost-effective drives targeted for
industrial Original Equipment Manufacturer ("OEM") applications. Since 1992, the
company has introduced nine new mechanical products and product line extensions,
including three mechanical belted drive products and four new coupling products.

         The Company uses acquisitions and strategic alliances to enhance
product offerings, gain access to technology and products, leverage fixed costs,
and extend the Company's global reach. Since 1993 the company has completed
eight acquisitions. In the electronics business the company acquired Plant
Engineering Consultants, Inc., an established supplier of integrated drive
systems for the fibers industry; Ambi-Tech Industries, Inc., a leading
manufacturer of electronic brakes; and Graseby Controls Inc., a supplier of
high-frequency drives for machine tool applications. In December 1997, the
Company acquired Berges electronic GmbH in Germany, and it's subsidiary Berges
electronic S.r.l. in Italy. The Berges companies are well-established drive
developers, manufacturers and marketers, and are located in the two most
important machinery markets in Europe. The Company's mechanical business
acquisitions include several lines of flexible couplings and variable speed
drives from Dana Corporation; Grupo Blaju S.A. de C.V., the leading Mexican
manufacturer and marketer of belted drives; and Deck Manufacturing, a producer
of gear couplings. The Company has strategic alliances with companies in
Finland, France, Switzerland, Australia and Japan.

Industry Overview

         The power transmission industry provides electronic and mechanical
products used in manufacturing and material processing activities that transfer
controlled power from a motor or engine to a machine. The power transmission
industry consists of three product categories: mechanical power transmission
components, gear boxes and electronic drives. The Company competes in the
electronic drives and mechanical power transmission component's product
categories.

                                       3

<PAGE>

Products

         The products manufactured by the Company are classified into two
segments, mechanical business and electronics business. 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.

         For further product information, refer to the consolidated financial 
statements and footnote No. 9 included in this Form 10-K.
<TABLE>
<CAPTION>
                                            1998                        1997                       1996
                                            ----                        ----                       ----

                                       Net Sales      %            Net Sales      %         Net Sales      %
                                       ---------      -            ---------      -         ---------      -   
<S>                                     <C>          <C>           <C>          <C>           <C>         <C>
Electronic power                         $57.0      42.6%            $44.0      35.5%         $32.9      32.1%
transmission
products

Mechanical power                          76.9      57.4%             80.0      64.5%          69.6      67.9%
transmission
products
                                        $133.9     100.0%           $124.0     100.0%        $102.5     100.0%
</TABLE>

Electronic Product Offering

         The Company designs and manufactures Alternating Current ("AC") and
Direct Current ("DC") electronic drives 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 drive products, which represent most of its electronic drive product
offering net sales, are programmable to meet the needs of specific applications
with particular strengths in food processing, materials handling, packaging and
general machinery applications. The Company's electronic products are designed
to meet both North American and European standards. The Company's integrated
electronic drive systems consist of uniquely configured AC and/or DC electronic
drives, programmable logic controllers and in-house designed custom software.
These systems are packaged in custom enclosures to meet the requirements of
specific applications.

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, open
belted 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 motors and engines to machines.
The primary markets for these products are the construction, oil field and
specialized industrial machinery, food processing, material handling, pumps,
compressors, mining, pulp and paper and agricultural equipment industries.

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
selected, authorized, industrial distributors who resell the Company's products
to industrial consumers and Original Equipment Manufacturers ("OEMs"). The
Company also sells directly to approximately 1,150 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

                                       4

<PAGE>

under private label agreements. The Company has its own technical sales force in
North America of more than 40 people and several specialized manufacturers'
representatives.

         The Company operates central distribution centers in Chambersburg,
Pennsylvania; Stratford, Ontario and Mexico City, Mexico and regional
distribution centers in Atlanta, Georgia; Elk Grove, Illinois; Dallas, Texas;
Los Angeles, California; Portland, Oregon; Montreal, Quebec; Edmonton, Alberta
and Marienheide, Germany.

         The Company's products are manufactured to maintain stock inventories
and 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 Company's products are consumed principally by industrial users.
The Company's OEM customers include a number of Fortune 500 companies. The
Company's distributor customers include, among others, Motion Industries and
Kaman Industrial Technologies who are among the largest distributors in the
power transmission industry. In addition, the Company's distributors also sell
to OEMs. 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 25% of the
Company's net sales in 1998.

Competition

         The power transmission industry is highly competitive. Competitive
factors in the AC and DC electronic drive product categories include product
performance, physical size of the product, tolerance for hostile environments,
application support, availability and price. The Company's competitors in these
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 speed and process control. This market includes maintenance
and replacement of existing systems, upgrades to existing systems and new
capacity expansion. Competitive factors include process knowledge and
engineering, software design, product durability and price. Major systems
competitors include Asea Brown Boveri, Allen Bradley and Siemens Corp. 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. Competitive factors include availability, quality, price, size
capability, engineering and customer support. The Company's most significant
competitors in the mechanical product category include Dodge, Emerson Electric
Co. Inc., Martin Sprocket and Gear, Rexnord Corp. and Lovejoy Industries Inc.
Management believes that there are no 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.

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) as a percent of
net sales during the last three fiscal years have been 2.6% for 1998, 3.0% for
1997 and 3.2% for 1996, with a substantially higher percentage being spent on
the electronics business. (For further information, refer to footnote No. 9 of
the consolidated financial statements included in this Form 10-K.) A new
Technology Center is being completed at the Chambersburg facility and is
designed to make the research and development investment more productive by
making it easier for engineers to share insights and collaborate on projects.

                                       5

<PAGE>


Raw Materials

         The Company uses purchased standard components in all of its
electronics products. The Company also purchases components designed by its
engineers. These purchased components include power transistors, capacitors,
printed circuit boards, 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. The principal raw materials used in the Company's mechanical
manufacturing operations are various types of steel, including pig iron, metal
stampings, castings, forging 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.

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:
Sure-Flex(R), Formflex(R), Ultra-V(R), Roto-Cone(R), Var-A-Cone(TM), True
Tube(TM), E-trAC(R), Ultracon(R), Fiberlink(TM), Dura-Flex, Disc-O-Torque, DST,
E-Trol, HST, IST, NLS, Roto-Cam, Softron, and Sure-Grip.

Employees  

         As of January 1, 1999, the Company employed over 1,100 people.
Approximately 33 of the Company's hourly employees located at its Stratford,
Ontario, Canada facility are represented by the United Steelworkers of Canada
pursuant to a collective bargaining agreement dated January 20, 1998 that
expires on January 19, 2001. Approximately 115 of the Company's employees
located at its Mexico City, Mexico facility are represented by the National
Metal Workers' Union of Mexico pursuant to a collective bargaining agreement
that expires on January 31, 2000. The Company has created the TB Wood's
Institute, which 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.

         Both the Mt. Pleasant, Michigan (the "Mt. Pleasant Facility") and the
Chambersburg, Pennsylvania (the "Chambersburg Facility") facilities had been
listed on the Comprehensive Environmental Response, Compensation, and Liability
Information System ("CERCLIS") (a list of sites maintained by the United States
Environmental Protection Agency ("USEPA") for which a determination was to be
made concerning whether investigation or remediation under CERCLA would be
required). Both have been designated by USEPA as requiring no further action
under CERCLA; therefore, the Company does not believe that material expenditures
for these sites will be incurred under the CERCLA program. However, this does
not assure that such expenditures would not be required under other federal
and/or state programs.

         The Mt. Pleasant Facility is currently listed on Michigan's inactive
hazardous waste site list pursuant to the Michigan version of CERCLA (formerly
known as "Act 307", amended and recodified on June 5, 1995 as Part 201 

                                       6

<PAGE>

of the Natural Resources and Environmental Protection Act ("Part 201")). The Mt.
Pleasant Facility was first placed on the Michigan hazardous waste site list in
1991, when the Facility was owned by Dana Corporation. When the Company acquired
the Mt. Pleasant Facility from Dana Corporation, the Asset Purchase Agreement
dated March 31, 1993 (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 completing its investigation of
the property and has proposed to the Michigan Department of National Resource
that it conduct a limited remediation with respect to the 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 fulfill its remediation and indemnification obligations under
the Asset Purchase Agreement, if Dana Corporation is unable to fulfill such
commitments, then the Company may incur additional costs.

         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.

                                       7

<PAGE>


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, and manufacturing and engineering                 440,000
                              of mechanical products. Central distribution, administrative
                              offices and corporate headquarters.

Scotland, Pennsylvania        Manufacturing and engineering of electronic products.                          51,300

Trenton, Tennessee            Manufacturing of mechanical products.                                          60,000

Stratford, Ontario            Manufacturing of mechanical products.  Central distribution and                46,000
                              administrative offices for Canada.

San Marcos, Texas             Manufacturing and engineering of mechanical products.                          31,000*

Mt. Pleasant, Michigan        Manufacturing of mechanical products.                                          30,000

Chattanooga, Tennessee        Manufacturing , engineering and sales of integrated electronic                 60,000
                              drive systems. Headquarters of PEC.

Greensboro, North Carolina    Manufacturing of electrical products                                           18,000

Marienheide, Germany          Manufacturing , engineering and sales of electronic products.                   9,800*
                              Central distribution and administrative offices
                              for Berges electronic GmbH.

Naturns, Italy                Manufacturing of electrical products.                                          19,500*

Elk Grove, Illinois           Distribution center.                                                           21,700
</TABLE>

------------------------------
*Includes certain leased space

         In addition, the Company leases manufacturing facilities in: Mexico
City, Mexico, and distribution facilities in: Atlanta, Georgia; Dallas, Texas;
Montreal, Quebec; Edmonton, Alberta; Los Angeles, California and Portland,
Oregon.


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 January 1, 1999.

                                       8

<PAGE>


                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Shareholder Matters.

         The Company consummated the Initial Public Offering ("IPO") of its
common stock on February 8, 1996 and its Common Stock is listed on the New York
Stock Exchange. The high and low prices for the Common Stock, and dividends paid
on Common Stock, during the period from January 3, 1997 though January 1, 1999
were as follows:
<TABLE>
<CAPTION>
                                                  Sales Price                            Dividends
                                                  -----------                            ---------
                                             High              Low               Declared      Paid in Cash
                                             ----              ---               --------      ------------
                 <S>                        <C>                <C>               <C>           <C>    
                 Fiscal Year 1997
                 ----------------
                 1st quarter                $14.13           $10.75                     -              $.08
                 2nd quarter                 16.50            12.75                   .08               .08
                 3rd quarter                 19.50            14.00                   .08               .08
                 4th quarter                 22.25            18.06                   .08               .08

                 Fiscal Year 1998
                 ----------------
                 1st quarter                $23.12           $20.50                  $.08              $.08
                 2nd quarter                 24.50             20.81                  .09               .09
                 3rd quarter                 21.06             14.56                  .09               .09
                 4th quarter                 14.81             11.75                  .09               .09
</TABLE>

         On February 26, 1999 there were 165 registered shareholders of the
Company's Common Stock, and the high and low sales prices for the Common Stock
were both $12.00. During fiscal year 1998, the Company declared and paid total
dividends of $.35 on the shares of its Common Stock. The Company declared a $.09
dividend on January 5, 1999, and paid it on January 29, 1999. The declaration of
any dividend, including the amount thereof, will be 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 and capital requirements, and such
other factors as the Board of Directors deems relevant.


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
1998 and have been derived from the Company's financial statements which have
been audited by the Company's independent public accountants. 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."

         Effective fiscal year 1995, the Company changed its year-end to the
Friday closest to the last day of December. Fiscal year-ends are as follows:

                           1998             January 1, 1999
                           1997             January 2, 1998
                           1996             January 3, 1997
                           1995             December 29, 1995
                      1994  & prior         December 31 of calendar year.

                                       9


<PAGE>

<TABLE>
<CAPTION>
                                                              Selected Financial Data

(in thousands, except per share data)                                                Fiscal Year
                                                            1998           1997         1996         1995       1994
<S>                                                      <C>            <C>           <C>          <C>         <C>    
Revenue and Income
Net sales                                               $133,949       $124,027     $102,505     $102,307    $95,315
Gross profit                                              47,589         45,012       37,747       36,111     32,886
Operating income                                          15,566         16,951       12,573       12,593      9,795
Net income, before one-time charges*                       7,890          8,689        6,294        4,599      3,077
                                                   -----------------------------------------------------------------
Cash Flow
Cash provided by operations                               $6,362        $16,829       $9,090       $9,214     $5,379
Capital expenditures                                       7,481          5,824        3,762        4,531      2,722
                                                   -----------------------------------------------------------------
Assets and Liabilities
Working capital**                                        $34,644        $27,862      $26,962      $26,160    $24,931
Total assets                                              96,025         89,617       73,395       66,631     61,075
Total debt                                                32,469         26,539       22,227       41,463     42,661
Shareholders' equity (deficit)                            28,515         23,606       16,875      (7,488)   (12,866)
                                                   -----------------------------------------------------------------
Per Share Data
Net income, before one-time charges*                       $1.33          $1.47        $1.12        $1.21       $.82
Cash dividends declared                                      .35            .24          .32            -          -
Book value                                                  4.81           3.99         3.01       (1.97)     (3.43)
                                                   -----------------------------------------------------------------

Weighted average shares outstanding                        5,932          5,921        5,600        3,810      3,750
</TABLE>

*  Before $1,654 of one-time charges in 1996 related to the write-off of a
   non-compete agreement and the early retirement of debt related to the IPO and
   $839 of one-time income in 1994 related to the sale of a product line 
** Working capital is defined as the sum of accounts receivable, inventory, and 
   other current assets, less accounts payable and accrued expenses.


Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operation

Year Ended January 1, 1999 Compared to Year Ended January 2, 1998

         Net sales for fiscal 1998 increased to $133.9 million from $124.0
million in 1997, an increase of $9.9 million, or 8.0%. The increase in sales was
primarily due to increased electronics business sales resulting from the
acquisition of Berges electronic GmbH on December 1, 1997. The year 1998 started
off with record sales in the first quarter, but beginning in the second quarter,
a softening in our North American market resulted in lower sales levels for the
remainder of the year.

         Gross profit for 1998 increased to $47.6 million from $45.0 million in
1997, an increase of $2.6 million, or 5.7%. Gross profit as a percent of net
sales decreased to 35.5% from 36.3%, due primarily to lower margins in the
mechanical business resulting from expenditures for tooling and start-up costs
related to new business, training of new employees, and consolidation of the
gear coupling product line in our San Marcos facility.

         Selling, general, and administrative ("SG&A") expense for fiscal 1998
increased to $32.0 million from $28.1 million in 1997, an increase of $3.9
million or 14.1%. SG&A expense as a percent of net sales increased to 23.9% from
22.6%, primarily as a result of higher SG&A expense as a percent of sales at
Berges electronic GmbH which was not included in 1997 operating results.

         Other expense for fiscal 1998 decreased to $2.4 million from $2.5
million in 1997, a decrease of $0.1 million or 1.9%. Interest expense, a
component of total other expense, increased to $2.0 million in 1998 from $1.7

                                       10

<PAGE>

million in 1997. This increase was due primarily to higher debt levels in 1998,
offset by lower interest rates. The effective tax rate for 1998 was 40.0%.
Details of the provision for income taxes are discussed in Note 5 to the
financial statements.

         Net income for fiscal 1998 decreased to $7.9 million from $8.7 million
in 1997, a decrease of $.8 million, or 9.2%.

Year Ended January 2, 1998 Compared to Year Ended January 3, 1997

         Net sales for fiscal 1997 increased to $124.0 million from $102.5
million in 1996, an increase of $21.5 million or 21.0%. The improvement was
broad-based with sales from existing businesses increasing $15.8 million or
15.4% and sales from businesses acquired in late 1996 and 1997 contributing an
additional $5.7 million.

         Gross profit increased to $45.0 million from $37.7 million in 1996, an
increase of $7.3 million or 19.2%. Gross profit as a percent of net sales
decreased to 36.3% from 36.8%, due primarily to shifts in product mix and higher
costs of sales in the mechanical business resulting from the integration of the
gear coupling acquisition.

         SG&A expense for fiscal 1997 increased to $28.1 million from $25.2
million in 1996, an increase of $2.9 million or 11.5%. SG&A expense as a percent
of net sales decreased to 22.6% from 24.6%, primarily as a result of the
significantly higher sales volume and implementation of cost reduction
initiatives.

         Other expense, excluding extraordinary items, for fiscal 1997 decreased
to $2.5 million from $2.6 million in 1996, a decrease of $0.1 million or 4.2%.
Interest expense, a component of total other expense, decreased to $1.7 million
in 1997 from $2.0 million in 1996. This decrease was due primarily to lower
borrowings in the first part of 1997. The effective tax rate for 1997 was 40.0%.
Details of the provision for income taxes are discussed in Note 5 to the
financial statements. In 1996, an extraordinary item of $1.3 million, net of
tax, was related to early repayment of debt with the proceeds from the Initial
Public Offering ("IPO").

         Net income for fiscal 1997 increased to $8.7 million from $6.3 million 
in 1996, before one-time charges, an increase of $2.4 million, or 38.1%.

Liquidity and Capital Resources

         The Company's principal sources of funds are cash flow from operations
and borrowings under the Company's revolving credit agreement. Cash provided
from operations in 1998 was $6.4 million, a decrease of $10.5 million from the
prior year. Net cash used for investing activities during fiscal years 1998,
1997, and 1996 was $7.9 million, $16.7 million, and $9.2 million, respectively.
The Company's investing activities in 1998 were primarily capital expenditures.
In 1997, the Company acquired Graseby Controls, Inc., through a purchase of
stock, and acquired the assets of Berges electronic GmbH for a total of $9.9
million, net of acquired cash. In 1996, the Company acquired the assets of Deck
Manufacturing Corp. and Ambi-Tech, Inc., and purchased the stock of Grupo Blaju
S.A. de C.V. for a total of $3.7 million in cash and notes. Also in 1996, the
Company purchased 21% of T. B. Wood's Canada Ltd. for $1.6 million to make the
Company's Canadian operations a wholly owned subsidiary.

         Capital expenditures for fiscal years 1998, 1997, and 1996 were $7.5
million, $5.8 million, and $3.8 million, respectively. During the last three
fiscal years, the Company has made significant capital investments in computer
controlled surface ("CNC") mount production lines for populating semi-conductors
onto circuit boards, test and production equipment at the Company's foundry in
Chambersburg, and other equipment to improve and modernize production
facilities. In 1998, the Company initiated two major facility projects: 1) an
engineering center in Chambersburg scheduled for completion in late 1999 and 2)
a new plant in San Marcos, Texas to manufacture flexible couplings, which will
be operational in the first quarter of 1999. In 1997, the Company purchased a
$2.1 million facility for its electronics systems business in Chattanooga,
Tennessee. These capital expenditures are 

                                       11

<PAGE>

intended to reduce costs, improve product quality, and provide additional 
capacity for meeting the Company's growth objectives.

         In April 1997, the Company borrowed $2.6 million by issuing Variable
Rate Demand Revenue Bonds, under the authority of The Industrial Revenue Board
of the City of Chattanooga, Tennessee, to finance a new facility for the
electronics systems business.

         On February 8, 1996, the Company completed an Initial Public Offering
of its Common Stock that raised approximately $22.5 million in aggregate gross
proceeds for the Company. The proceeds, net of issuance costs, of $19.8 million
were used to repay debt. The Company paid $2.1 million in dividends during 1998.
The Company paid a $.08 per share dividend in the first quarter and a $.09 per
share dividend in the second, third, and fourth quarters of 1998, and declared a
$.09 dividend on January 5, 1999, paid on January 29, 1999, to shareholders of
record on January 15, 1999.

         The Company believes that it will have sufficient cash flow from
operations and available borrowings to meet its future short-term and long-term
cash needs for interest, operating expenses, and capital expenditures.

Derivative Financial Instruments

         Market risk is the potential change in an instrument's value caused by,
for example, fluctuations in interest and currency exchange rates. The Company's
primary market risk exposures are interest rate and unfavorable movements in
exchange rates between the U.S. dollar and each of the Mexican peso, Canadian
dollar, German deutsche mark, Indian rupee, and Italian lira. 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 affects 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.
<TABLE>
<CAPTION>
         Interest Rate Derivatives at                  1999              2000             2001
         -------------------------------------------------------------------------------------
         <S>                                         <C>                 <C>              <C>   
         Interest Rate Swap:
            Variable to Fixed
            Fixed Rate U.S. $.......................  10,000            10,000         10,000
            Average Pay Rate........................    5.75%             5.75%          5.75%
</TABLE>

         The Securities and Exchange Commission has qualified Mexico as a highly
inflationary economy under the provisions of SFAS No. 52, effective 1997. The
re-measurement of the Company's operation is recorded in the accompanying
Statement of Operations.

Year 2000

         The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 compliance issue. As the
Year 2000 approaches and thereafter, such systems may be unable to accurately
process certain date-based information. This could result in system failures or
miscalculations causing disruptions of operations including, among other things,
a temporary inability to process transactions or engage in a variety of business
activities. The Company has implemented a five step process to evaluate the
impact of the Year 2000 compliance issue. These steps involve an inventory of
Company systems, an evaluation and analysis of systems regarding the Year 2000
compliance impact, implementation of modifications to specified systems, unit
testing, and finally systems or integration testing to validate compliance. The
Company relies upon third party vendors which supply goods and services to the
Company and, although the Company has consulted with various vendors in order to
minimize the risk of the Year 2000 compliance issue, such third parties may be
affected by the Year 2000 compliance issue. While the Company believes its
actions shall have the effect of ameliorating year 2000 risk, there can be no
assurance that

                                       12

<PAGE>

the Company's internal systems or equipment or those of third parties on which
the Company relies will be Year 2000 compliant in a timely manner or that the
Company's or third parties' contingency plans will mitigate the effects of
noncompliance. The failure of the systems or equipment of the Company or third
parties could result in the reduction or suspension of the Company's operations
and could have a material adverse affect on the Company. Subject to the final
results of the evaluation and analysis of the Year 2000 compliance issue, the
Company believes that its Year 2000 compliance costs will not be material to its
operations, liquidity or capital resources. There is still uncertainty regarding
the scope of the Year 2000 compliance issue and, at this time, the Company is
unable to quantify the impact of potential Year 2000 compliance failures. The
Company's Year 2000 compliance program and possible contingency plans are still
being developed and assessed in order to attempt to minimize the effect of
failures within the Company's reasonable control.

Recent Accounting Pronouncements

         In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative's fair
value be recognized in earnings in the current period unless specific hedge
accounting criteria are met. The Company plans to adopt SFAS No. 133 in the
first quarter of fiscal 2000. Management is still assessing the impact of the
adoption of this statement on the financial statements. Currently, management
does not believe the adoption of this statement will have a material impact on
the Company's financial statements.

Safe Harbor Statement

         Under the Private Securities Litigation Reform Act of 1995, except for
the historical information contained herein, this annual report contains
forward-looking statements about matters which involve risks and uncertainties,
including but not limited to economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and prices, and other factors discussed in the Company's filings with
the Securities and Exchange Commission.

                                       13

<PAGE>


Item 8.  Financial Statements and Supplementary Data.
<TABLE>
<CAPTION>
                                                                                                              Page
                                                                                                              ----
<S>                                                                                                           <C>   
Report of Independent Public Accountants.....................................................................   15

Consolidated Balance Sheets as of January 1, 1999, January 2, 1998 and January 3, 1997.......................   16

Consolidated Statements of Operations for the Years Ended January 1, 1999, January 2, 1998,
         and January 3, 1997 ................................................................................   17

Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the Years Ended
         January 1, 1999, January 2, 1998, and January 3, 1997 ..............................................   18

Consolidated Statements of Cash Flows for the Years Ended January 1, 1999, January 2, 1998,
         and January 3, 1997 ................................................................................   19

Notes to Consolidated Financial Statements...................................................................   20
</TABLE>
                                       14


<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
TB Wood's Corporation:

         We have audited the accompanying consolidated balance sheets of TB
Wood's Corporation (a Delaware corporation) and Subsidiaries as of January 1,
1999 and January 2, 1998 and the related consolidated statements of operations,
comprehensive income, changes in shareholders' equity (deficit), and cash flows
for each of the three years in the period ended January 1, 1999. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of TB Wood's
Corporation and subsidiaries as of January 1, 1999 and January 2, 1998 and the
results of their operations and their cash flows for each of the three years in
the period ended January 1, 1999 in conformity with generally accepted
accounting principles.

         Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.




ARTHUR ANDERSEN LLP



Atlanta, Georgia
February 12, 1999




                                       15

<PAGE>



                     TB Wood's Corporation And Subsidiaries
                           Consolidated Balance Sheets
<TABLE>
<CAPTION>
(in thousands, except per share and share amounts)                                1998           1997       1996
----------------------------------------------------------------------- ---------------- --------------- ----------
<S>                                                                                <C>            <C>       <C>
ASSETS
Current Assets:
Cash and cash equivalents                                                        $2,521          $2,552       $306
Accounts receivable, less allowances for doubtful accounts, discounts,
     and claims of $414, $476 and $437 in 1998, 1997 and 1996,                   17,428          20,174     15,518
respectively
Inventories:
     Finished goods                                                              21,433           15417     16,293
     Work in process                                                              8,370           8,467      7,994
     Raw materials                                                                5,982           6,073      3,755
     LIFO reserve                                                                (5,930)         (3,819)    (4,057)
                                                                        ---------------- --------------- ----------
                                                                                 29,855          26,138     23,985
Other current assets                                                              2,705             967      1,053
                                                                        ---------------- --------------- ----------
     Total current assets                                                        52,509          49,831     40,862
                                                                        ---------------- --------------- ----------
Property, Plant, and Equipment:
Machinery and equipment                                                          43,131          36,782     33,075
Land, buildings, and improvements                                                12,118          11,100      8,577
                                                                        ---------------- --------------- ----------
                                                                                 55,249          47,882     41,652
Less accumulated depreciation                                                    27,553          23,794     21,154
                                                                        ---------------- --------------- ----------
                                                                                 27,696          24,088     20,498
                                                                        ---------------- --------------- ----------
Other Assets:
Deferred income taxes (Note 5)                                                    3,570           4,602      5,249
Goodwill, net of accumulated amortization of
     $1,418, $1,123 and $958 in 1998, 1997 and 1996, respectively                10,059           9,122      4,603

Other                                                                             2,191           1,974      2,183
                                                                        ---------------- --------------- ----------
     Total other assets                                                          15,820          15,698     12,035
                                                                        ---------------- --------------- ----------
                                                                                $96,025         $89,617    $73,395
                                                                        ================ =============== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities:
Current maturities of long-term debt (Note 4)                                      $378            $611       $520
Accounts payable                                                                  6,332           8,610      5,210
Checks outstanding                                                                1,705           1,615      1,532
Accrued expenses (Note 3)                                                         9,012          10,987      8,384
Deferred income taxes (Note 5)                                                    1,589             729        539
                                                                        ---------------- --------------- ----------
     Total current liabilities                                                   19,016          22,552     16,185
                                                                        ---------------- --------------- ----------
Long-term debt, less current maturities (Note 4)                                 32,091          25,928     21,707
Postretirement benefit obligation, less current portion                          16,403          17,531     18,628
                                                                                                 
Commitments and Contingencies (Note 7):
Shareholders' Equity :
Preferred stock, $.01 par value; 5,000,000 shares
authorized, no shares issued or outstanding                                           0               0          0
Common stock, $.01 par value; 40,000,000 shares authorized, 5,909,286
issued and 5,899,168 outstanding in 1998, 5,859,286 issued and
5,849,772 outstanding in 1997 and 3,375,0000 shares issued and                       
outstanding in 1996                                                                  59              58         58      
Common stock in treasury at cost; 10,118 in 1998, 9,514 in  1997 and                             
0 in 1996                                                                          (158)           (181)         0  
Additional paid-in capital                                                       28,821          28,340     28,158
Retained Earnings / Accumulated deficit                                           1,136          (4,408)   (11,306)
Accumulated other comprehensive income                                           (1,343)           (203)       (35)
                                                                        ---------------- --------------- ----------
     Total shareholders' equity                                                  28,515          23,606     16,875
                                                                        ---------------- --------------- ----------
                                                                                $96,025         $89,617    $73,395
                                                                        ================ =============== ==========
</TABLE>
                                                                               

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


                                       16

<PAGE>



                     TB Wood's Corporation And Subsidiaries
                      Consolidated Statements of Operations
<TABLE>
<CAPTION>
 (in thousands, except per share amounts)                                          1998            1997            1996
-----------------------------------------                                          ----            ----            ----
<S>                                                                                <C>              <C>             <C>
Net sales                                                                      $133,949        $124,027        $102,505
Cost of sales                                                                    86,360          79,015          64,758
                                                                      -----------------  --------------- ---------------
     Gross profit                                                                47,589          45,012          37,747
Selling, general, and administrative expenses                                    32,023          28,061          25,174
                                                                       ----------------- --------------- ---------------
     Operating income                                                            15,566          16,951          12,573
                                                                       ----------------- --------------- ---------------
Other (expense) income:
     Interest expense and other finance charges                                 (2,040)         (1,695)         (1,982)
     Other, net                                                                   (380)           (773)           (593)
                                                                       ----------------- --------------- ---------------
          Other expense, net                                                    (2,420)         (2,468)         (2,575)
                                                                       ----------------- --------------- ---------------
Income before provision for income taxes and extraordinary item                  13,146          14,483           9,998
Provision for income taxes (Note 5)                                               5,256           5,794           4,053
                                                                       ----------------- --------------- ---------------
                                                                      
Income before extraordinary item                                                  7,890           8,689           5,945
Extraordinary item, early extinguishment of debt
     (less related income tax benefit of $870)                                        0               0         (1,305)
                                                                       ----------------- --------------- ---------------
Net income                                                                       $7,890          $8,689          $4,640
                                                                       ================= =============== ===============
Per share of common stock:
Basic:
   Income before extraordinary item                                              $ 1.34           $1.49           $1.08
   Extraordinary item                                                               .00             .00           (.24)
                                                                       ----------------- --------------- ---------------
Net income per common share                                                       $1.34           $1.49           $ .84
                                                                       ================= =============== ===============
Weighted average shares of common stock and
   equivalents outstanding                                                        5,874           5,833           5,520
                                                                       ----------------- --------------- ---------------
Per diluted share of common stock:
     Income before extraordinary item                                             $1.33           $1.47           $1.06
     Extraordinary item                                                             .00             .00           (.23)
                                                                       ----------------- --------------- ---------------
                                                                       
Net income per common share                                                       $1.33           $1.47            $.83
                                                                       ================= =============== ===============
Weighted average shares of common stock
     and equivalents outstanding                                                  5,932           5,921           5,600
                                                                       ================= =============== ===============
</TABLE>

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

                                       17

<PAGE>



                     TB Wood's Corporation And Subsidiaries
      Consolidated Statements of Changes in Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
                                                                                                                
                                                                                                                    Foreign
                                                                                        Additional                  Currency
                                                  Common                     Treasury    Paid-In   Accumulated     Translation
(in thousands)                                    Stock        Warrants       Stock      Capital     Deficit        Adjustment
--------------                                    -----        --------       -----      -------     -------       ----------
<S>                                                <C>           <C>           <C>         <C>         <C>             <C>
Balance, December 29, 1995                          33           500            0         6,104      (14,094)         (31)
Net income                                           0             0            0             0        4,640            0
Issuance of stock in connection with the
     Initial Public Offering                        20             0            0        19,803            0            0
Investment in Wood's-Canada                          0             0            0        (1,600)           0            0
Exercise of warrants                                 4          (500)           0           500            0            0
Gain on repayment of subordinated note               0             0            0         2,992            0            0
Dividends declared                                   0             0            0             0       (1,852)           0
Stock option compensation and proceeds
  from options exercised                             1             0            0           359             0           0
Foreign currency translation adjustment              0             0            0             0             0          (4)
----------------------------------------- ------------- ------------- ------------ ------------- ------------- ------------

Balance, January 3, 1997                            58             0            0        28,158      (11,306)         (35)
Net income                                           0             0            0             0         8,689            0
Stock issuance for 401(k) plan                       0             0            0           100             0            0
Dividends declared                                   0             0            0             0        (1,400)           0
Stock option compensation and proceeds
  from options exercised                             0             0           95            82             0            0
Treasury stock, net                                  0             0         (276)            0          (391)           0
Foreign currency translation adjustment              0             0            0             0             0         (168)
----------------------------------------- ------------- ------------- ------------ ------------- ------------- ------------

 Balance, January 2, 1998                           58             0         (181)       28,340        (4,408)        (203)
Net income                                           0             0            0             0         7,890            0
Stock issuance for 401(k) plan                       0             0            0             0             0            0
Dividends declared                                   0             0            0             0       (2,056)            0
Stock option compensation and proceeds
  from options exercised                             1             0          467           481         (257)            0
Treasury stock, net                                  0             0         (444)            0          (33)            0
Foreign currency translation adjustment              0             0            0             0            0        (1,140)
----------------------------------------- ------------- ------------- ------------ ------------- ------------- ------------

Balance, January 1, 1999                           $59            $0        $(158)      $28,821       $1,136       $(1,343)
                                          ============= ============= ============ ============= ============= ============
</TABLE>

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

                                       18

<PAGE>



                     TB Wood's Corporation And Subsidiaries
                      Consolidated Statements Of Cash Flows
<TABLE>
<CAPTION>
(in thousands)                                                                        1998            1997            1996
-------------------------------------------------------------------------- ---------------- --------------- ---------------
<S>                                                                                   <C>             <C>             <C>
Cash Flows from Operating Activities:
Net income                                                                          $7,890          $8,689          $4,640
                                                                           ---------------- --------------- ---------------
Adjustments to reconcile net income to net cash provided by operating
activity:
     Depreciation and amortization                                                   4,374           4,097           3,427
     Deferral of interest and management fees payable to affiliates                      0               0             288
     Change in deferred income taxes, net                                            1,892             837         (1,095)
     Stock option compensation expense                                               1,222             101             140
     Net loss (gain) on sale of assets                                                   5              10            (44)
     Write off of non-compete agreement                                                  0               0             563
     Extraordinary loss on early extinguishment of debt, net                             0               0           1,305
     Other                                                                             (28)              0               0
     Changes in working capital, net of effects of acquisitions:
          Accounts receivable                                                        2,746            (173)           (854)
          Inventories                                                               (4,157)          1,876          (1,615)
          Prepaid expenses and other current assets                                 (1,955)           (227)           (751)
          Accounts payable                                                          (2,278)          1,531             631
          Accrued and other liabilities                                             (3,349)             88           2,455
                                                                           ---------------- --------------- ---------------
               Total adjustments                                                    (1,528)          8,140           4,450
                                                                           ---------------- --------------- ---------------
               Net cash provided by operating activities                             6,362          16,829           9,090
                                                                           ---------------- --------------- ---------------
Cash Flows from Investing Activities:
Acquisitions, net of cash acquired                                                       0          (9,914)         (2,920)
Capital expenditures                                                                (7,481)         (5,824)         (3,762)
Purchase of minority interest in subsidiary                                              0               0          (1,600)
Proceeds from sales of fixed assets                                                    414              65             128
Other, net                                                                            (792)         (1,003)         (1,004)
                                                                           ---------------- --------------- ---------------
     Net cash used in investing activities                                          (7,859)        (16,676)         (9,158)
                                                                           ---------------- --------------- ---------------
Cash Flows from Financing Activities:
Change in checks outstanding                                                            90              83           (516)
Repayments of subordinated note and associated taxes                                     0               0        (13,094)
Repayments of proceeds from long-term debt, net                                      (357)           2,003        (14,564)
Repayments of original revolving credit facility, net                                    0               0        (10,721)
Proceeds from the PNC revolving credit facility, net (Note 4)                        6,287           2,300          20,200
Proceeds from public sale of common stock                                                0               0          19,823
Payment of dividends                                                                (2,056)         (1,866)         (1,386)
Proceeds from issuance of stock upon option exercise                                    70              17             219
Treasury Stock                                                                      (1,428)           (276)              0
                                                                           ---------------- --------------- ---------------
     Net cash provided by (used in) financing activities                             2,606           2,261            (39)
                                                                           ---------------- --------------- ---------------
Effect of changes in foreign exchange rates                                        (1,140)           (168)             (4)
                                                                           ---------------- --------------- ---------------
                                                                                            
(Decrease) increase in cash and cash equivalents                                      (31)           2,246           (111)
Cash and cash equivalents at beginning of year                                      2,552              306            417
                                                                           ---------------- --------------- ---------------
Cash and cash equivalents at end of year                                           $2,521           $2,552           $306
                                                                           ================ =============== ===============
Income taxes paid during the year                                                  $3,819           $6,307         $5,409
                                                                           ================ =============== ===============
Interest paid during the year                                                      $2,040           $1,573         $2,040
                                                                           ================ =============== ===============
</TABLE>

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



                                       19





<PAGE>


                     TB Wood's Corporation And Subsidiaries
                   Notes To Consolidated Financial Statements
               (in thousands, except per share and share amounts)

1.        NATURE OF BUSINESS AND PRINCIPLES OF CONSOLIDATION

         TB Wood's Corporation and subsidiaries (collectively, "Wood's" or the
"Company") is an established designer, manufacturer, and marketer of electronic
and mechanical industrial power transmission products which are sold to
distributors, domestic and international manufacturers and 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 throughout the United States, Canada,
Mexico, Germany, Italy and India. The accompanying consolidated financial
statements include the accounts of TB Wood's Corporation and its wholly owned
subsidiaries. All intercompany accounts have been eliminated in consolidation.

         Year-End
         Fiscal year-ends are as follows:

         1998........................................January 1, 1999
         1997........................................January 2, 1998
         1996........................................January 3, 1997

         The accompanying consolidated financial statements include the accounts
of TB Wood's Corporation and its wholly owned subsidiaries. All significant
inter-company balances and transactions have been eliminated.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Restricted Cash

         At January 1, 1999, $410 of cash is restricted under the Variable Rate
Demand Revenue Bonds (Note 4). This cash may be used for building renovations,
improvements or other capital expenditures related to a new production facility
for the electronics systems business. The funds will be used to repay the bonds
if not spent prior to April 2000.

Cash Equivalents

         The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

Property, Plant, and Equipment

         The Company depreciates its property, plant, and equipment principally
using the straight-line method over the estimated useful lives of the assets.
Equipment under capital leases is depreciated over the asset's estimated useful
life and is included in machinery and equipment. Maintenance and repair costs
are charged to expense as incurred, while major renewals and improvements are
capitalized. When property and equipment are retired or otherwise disposed of,
the related carrying value and accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in income. The depreciable
lives of the major classes of property, plant and equipment are summarized as
follows:

        Asset Type                                          Lives
        ---------------------------------------------------------------
        Machinery and equipment                           3 - 15 years
        Buildings and improvements                       10 - 40 years

                                       20
<PAGE>
Inventories

         Inventories are stated at the lower of cost or market primarily using
the last-in, first-out ("LIFO") method. Market is defined as net realizable
value. Cost includes raw materials, direct labor, and manufacturing overhead.
Approximately 77% and 78% of total inventories in years ending January 1, 1999
and January 2, 1998 were valued using the LIFO method. Wood's-Canada and
Wood's-Mexico inventories are stated at the lower of cost or market using the
first-in, first-out ("FIFO") method.


Self-Insurance

         The Company maintains workers' compensation insurance policies which
have the potential for retrospective premium adjustments and a partially
self-insured group health insurance policy which is subject to specific
retention levels. Insurance administrators assist the Company in estimating the
fully developed workers' compensation liability and group health insurance
reserves which are accrued by the Company. In the opinion of management,
adequate provision has been made for all incurred claims. At January 1, 1999 the
Company has issued letters of credit totaling $1,050 to cover incurred claims
and other costs related to the workers' compensation.

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."
Translation adjustments, which result from the process of translating financial
statements into U.S. dollars, are accumulated as a separate component of
shareholders' equity (deficit). Exchange gains and losses resulting from foreign
currency transactions, primarily inter-company sales of products are included in
other income (expense) in the accompanying statements of operations and are not
material. The Securities and Exchange Commission has qualified Mexico as a
highly inflationary economy under the provisions of SFAS No. 52, effective 1997.
The re-measurement of the Company's Mexico operation is recorded in the
accompanying statement of operations.

Goodwill

         The excess of cost over the net assets acquired ("Goodwill") is being
amortized on a straight-line basis over a period of 40 years. Goodwill relates
to the acquisition of TB Wood's Incorporated ("Wood's-US") in 1986 and the
acquisition of certain other businesses and product lines (Note 8).

Long Lived Assets and Intangible Assets

         The Company reviews the carrying values assigned to long-lived assets
and certain identifiable intangible assets based on expectations of undiscounted
future cash flows and operating income generated by the long-lived assets or the
tangible assets underlying certain identifiable intangible assets in determining
whether the carrying amount of such assets is recoverable.

Shareholders' Equity

         In 1996, the board of directors authorized, subject to certain business
and market conditions, the purchase of up to 200,000 of the Company's common
shares. At January 1, 1999 the number of treasury shares purchased under this
authorization was 90,225 and the number of treasury shares issued to employees
under option and purchase plans was 8,775 and under the 401(k) profit-sharing
plan was 4,436.

                                       21
<PAGE>



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 short-term and long-term debt and deferred
compensation amounts approximate carrying value and are based on their effective
interest rates compared to current market rates.

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.

Cyclical Industry

         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 the relevant fiscal
periods.

Major Customers

         The Company's five largest customers accounted for approximately 25%,
30%, and 29% of net sales for fiscal years 1998, 1997, and 1996, respectively.
Of these customers, one accounted for close to 18% of net sales for the year
ended January 1, 1999. The loss of one or more of these customers would have an
adverse effect on the Company's performance and operations. Foreign and export
sales accounted for 24.9%, 17.0%, and 17.7% of total sales in fiscal years 1998,
1997, and 1996, respectively. Inter-company transactions are consummated on
terms equivalent to those that prevail in arms-length transactions.

Supply of Electronic Raw Materials and Purchased Components

         Historically, the electronics component industry, which supplies
components for the Company's electronic products, has from time to time
experienced heavy demand for certain components during periods of growth in the
consumer electronic industry. The rapid growth of the AC electronic drive market
has also created heavy demand for power control electronics. While certain of
the Company's components are obtained from a single or limited number of
sources, the Company has potential alternate suppliers for most of the specialty
components used in its manufacturing operations. There can be no assurance,
however, that the Company will not experience shortages of raw materials or
components essential to the production of its products or be forced to seek
alternative sources of supply, which may increase costs or adversely affect the
Company's ability to obtain and fulfill orders for its products.

Net Income Per Share

         In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards ("SFAS") No. 128, "Earnings Per Share", which
the Company adopted for the year ended January 2, 1998. Basic earnings per share
("EPS") is computed by dividing reported earnings available to common
shareholders by weighted average shares outstanding. No dilution for any
potentially dilutive securities is included in basic EPS. Diluted EPS is
computed by dividing reported earnings available to common shareholders by
weighted average shares and common equivalent shares outstanding. All prior year
EPS amounts have been restated to conform to the provisions of SFAS No. 128. The
difference between primary and fully diluted net income per share is not
material for any of the periods presented and has therefore been excluded.

                                       22
<PAGE>

Year End

         Effective fiscal year 1995, the Company changed its year-end to the
Friday closest to the last day of December. Fiscal year-ends are as follows:

                 1998                      January 1, 1999
                 1997                      January 2, 1998
                 1996                      January 3, 1997
                 1995                    December 29, 1995
         1994 & prior         December 31 of calendar year

Recent Accounting Pronouncements

         Effective fiscal 1997, the Company adopted SFAS No. 129, "Disclosure of
Information and Capital Structure." SFAS No. 129 requires disclosure of the
pertinent rights and privileges of all securities other than ordinary common
stock. The Company has disclosed such information in its annual reports filed in
form 10-K.

         In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" effective for fiscal years beginning after December 15, 1997. The
statement addresses the reporting and display of changes in equity that result
from transactions and other economic events, excluding transactions with owners.
The Company adopted SFAS No. 130 in 1998.

         Effective fiscal 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The Company has
disclosed such information in Note 9 to the consolidated Financial statements.

         Effective January 3, 1998, the Company adopted SFAS No. 132,
"Employers' Disclosure about Pension and Other Postretirement Benefits." (See
Note 6).

         In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for all fiscal quarters beginning
after June 15, 1999. SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value and that changes in the
derivative's fair value be recognized in earnings in the current period unless
specific hedge accounting criteria are met. The Company plans to adopt SFAS No.
133 in the first quarter of fiscal 2000. Management is still assessing the
impact of the adoption of this statement on the financial statements. Currently,
management does not believe the adoption of this statement will have a material
impact on the Company's financial statements.

Reclassifications

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


                                       23
<PAGE>


3.       ACCRUED EXPENSES

         Components of accrued expenses were as follows:
<TABLE>
<CAPTION>
                                                                    1998              1997            1996
----------------------------------------------------------------------------------------------------------
<S>                                                                  <C>              <C>             <C>   
Accrued payroll and other compensation                            $1,987            $3,428          $2,619
Other accrued liabilities                                          6,091             6,352           4,525
Accrued workers' compensation                                        934             1,207           1,240    
                                                                  ----------------------------------------
Total                                                             $9,012           $10,987          $8,384  
                                                                  ========================================
</TABLE>



4.       LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

         Long-term debt and capital lease obligations as at the end of each
fiscal period consist of the following:
<TABLE>
<CAPTION>

                                                                    1998              1997            1996
----------------------------------------------------------------------------------------------------------
<S>                                                                 <C>               <C>            <C>
Unsecured Revolving Line of Credit                               $28,954           $22,500         $20,200
Note payable to a former shareholder of Wood's                         0                 0             321
Capital lease obligations                                            965             1,489           1.706
Industrial revenue bond                                            2,550             2,550               0
                                                          ------------------------------------------------
                                                                  32,469            26,539          22,227
Less current maturities                                            (378)             (611)           (520)
                                                          ------------------------------------------------
                                                                 $32,091           $25,928         $21,707   
                                                          ================================================
</TABLE>

Aggregate future maturities of long-term debt and capital lease obligations as
of January 1, 1999 are as follows:

1999                                                         $378
2000                                                          279
2001                                                          225
2002                                                           83
2003                                                       28,954
Thereafter                                                  2,550
                                                        ---------
                                                          $32,469

         In connection with the proceeds received from the offering of the
Company's common stock on February 8, 1996 (Note 8), the Company repaid a term
loan with Fleet Capital, a debt agreement with US Leasing, and a portion of a
revolver loan with Fleet. An extraordinary loss of approximately $1,305, net of
taxes, was incurred in the first quarter of 1996 as a result of the repayment of
certain indebtedness.

         The Company has a $47,500 unsecured revolving credit facility arranged
by PNC Bank, N.A ("PNC") bearing variable interest of LIBOR plus 112.5 basis
points, maturing January 2003. The credit facility contains numerous restrictive
financial covenants which require the Company to comply with certain financial
tests, including, among other things, maintaining minimum tangible net worth, as
defined, and maintaining certain specified ratios. The credit facility also
contains other restrictive covenants that include, among other things,
restrictions on outside investments and restrictions on capital expenditures.

         In April 1997, the Company borrowed approximately $2.6 million by
issuing Variable Rate Demand Revenue Bonds under the authority of the Industrial
Revenue Board of the City of Chattanooga, bearing variable interest of 4.05% at
January 1, 1999 maturing April 2022. The bonds were issued to finance the new
production facility for the electronics systems business.

                                       24
<PAGE>
         In August 1998, the company entered into an interest rate swap
agreement that effectively converted underlying variable rate debt in the
unsecured revolving credit facility to fixed rate debt. The notional principal
amount of the swap agreement is $10,000 with an effective fixed rate of 5.75%.
The swap agreement is settled each month and will expire in July 2001.

         The gross proceeds from (repayments of) the revolving credit facilities
are as follows:
<TABLE>
<CAPTION>

                                                               1998            1997            1996
---------------------------------------------------------------------------------------------------
<S>                                                             <C>            <C>           <C>
Proceeds from the original
     Revolving credit facility                                   $0              $0         $88,507
Repayments of original
     Revolving credit facility                                    0               0        (99,228)
Proceeds from new
     Revolving credit facility                               40,300          46,400          32,900
Repayments of new
     Revolving credit facility                              (34,013)        (44,100)        (12,700)
                                                           ----------------------------------------
</TABLE>


5.       INCOME TAXES

         The components of the provision (benefit) for income taxes are shown
below:
<TABLE>
<CAPTION>
                                                               1998            1997            1996
---------------------------------------------------------------------------------------------------
<S>                                                              <C>          <C>             <C>
Current:
     Federal and state                                       $2,300          $4,365          $4,407
     Foreign                                                  1,064             592             442
                                                             --------------------------------------
                                                              3,364           4,957           4,849
                                                             --------------------------------------
Deferred:
     Federal and state                                        1.892             837           (796)
     Foreign                                                      0               0               0
                                                             --------------------------------------
                                                              1,892             837           (796)
                                                             --------------------------------------
Provision for income taxes                                   $5,256          $5,794          $4,053
                                                             ======================================
</TABLE>

         Under SFAS No. 109, deferred tax assets or liabilities at the end of
each period are determined by applying the current tax rate to the difference
between the financial reporting and income tax bases of assets and liabilities.
The deferred tax benefit is determined based on changes in deferred tax items
exclusive of deferred tax implications of the early extinguishment of debt and
reclassifications between deferred and current taxes.

                                       25


<PAGE>


The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>

                                                               1998            1997            1996
---------------------------------------------------------------------------------------------------
<S>                                                           <C>             <C>             <C>
Deferred income tax liabilities:
Book basis in property over tax basis                       $(2,337)        $(2,163)        $(1,536)
LIFO inventory basis differences                             (3,042)         (3,046)         (3,127)
Long-term debt basis differences                                  0               0               0
Other                                                        (1,337)         (1,085)           (964)
                                                           ----------------------------------------
Total deferred income tax liabilities                        (6,716)         (6,294)         (5,627)
                                                           ----------------------------------------
Deferred income tax assets:
Postretirement benefits not
     currently deductible                                     6,772           7,212           7,652
Accrued liabilities not currently deductible                  1,050           1,498           1,394
Allowance for doubtful accounts and
     inventory reserves                                         742             825             662
Other                                                           133             632             629
                                                           ----------------------------------------
Total deferred income tax assets                              8,697          10,167          10,337
                                                           ----------------------------------------
Net deferred income tax asset                                $1,981          $3,873          $4,710
                                                           ========================================
</TABLE>

         A reconciliation of the provision for income taxes at the statutory
federal income tax rate to the Company's tax provision as reported in the
accompanying statements of operations is shown below:
<TABLE>
<CAPTION>

                                                               1998            1997            1996
---------------------------------------------------------------------------------------------------
<S>                                                               <C>          <C>              <C>
Federal statutory income tax                                 $4,470          $4,924          $3,399
State income taxes, net of
     Federal income tax benefit                                 592             651             456
Foreign taxes and other, net                                    194             219             198
                                                             --------------------------------------
                                                             $5,256          $5,794          $4,053
                                                             ======================================
</TABLE>

         In 1998, 1997, and 1996 earnings before income taxes included $2,320,
$1,259, and $884, respectively, of earnings generated by the Company's foreign
operations. No federal or state income taxes have been provided on such
earnings, since undistributed earnings have been reinvested and are not expected
to be remitted to the parent company.

         In September 1997, the Internal Revenue Service completed its review of
the Company's 1995, 1994, and 1993 federal income tax returns. The review did
not have a material effect on the Company's operations. The Internal Revenue
Service is currently in review of the Company's 1996 federal income tax return.


6.       BENEFIT PLANS

Compensation Plans

         Wood's maintains a discretionary compensation plan for its salaried and
hourly employees which provides for incentive awards based on certain levels of
earnings, as defined. Amounts awarded under the plan and charged to expense in
the accompanying statements of operations were $1,238, $2,002, and $1,664, for
fiscal years 1998, 1997, and 1996, respectively.

                                       26

<PAGE>


Profit-Sharing Plans

         Since January 1, 1988, the Company has maintained a separate defined
contribution 401(k) profit-sharing plan covering all salaried and non-production
unit-domestic hourly employees. Under this plan, the Company matches a specified
percentage of each eligible employee's contribution and purchases Company common
shares on the open market. The Company contributed 35,990 shares of common stock
held in treasury in 1998, and 5,797 in 1997. Amounts contributed by the Company
under this profit-sharing plan were approximately $580, $530, and $500, for
fiscal years 1998, 1997, and 1996, respectively. In addition, the Company has a
noncontributory profit-sharing plan covering its Canadian employees for which
$17, $37, and $40 were charged to expense for the fiscal years 1998, 1997, and
1996, 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 lessor of 90% of the fair value of the
shares on the first day or the last day of the quarterly period. Employee
contributions to the ESPP were $152 and $63 for 1998 and 1997 respectively.
Pursuant to the ESPP, 8,775 shares were issued to employees during 1998 and
4,436 shares during 1997. At the annual meeting on April 11, 1997, the Company's
shareholders approved the reservation of 500,000 shares to be issued under the
ESPP. As of January 1, 1999, 486,789 shares are available for future issuance.

Stock Options

         In March 1991, the Company granted nonqualified stock options to the
president of the Company to purchase 157,893 shares of the Company's common
stock at an option price of $6.33 per share. The options vested 30% in January
1993, 15% in each of January 1994, 1995, 1996, and 1997, and 10% in January
1998. On March 30, 1992, the option agreement was amended to set the option
price at $1.58 per share plus an amount equal to the average yield on the
30-year U.S. Treasury bond maturing on the day closest to the fifteenth
anniversary of the option measurement date as defined in the agreement. The
options are exercisable on or after the seventh anniversary of the measurement
date and expire one year thereafter. During 1992, the controlling shareholder
granted an additional 47,367 options on the controlling shareholder's shares to
a director, with terms similar to the 1991 options, as amended. Also in 1992,
the Company granted an additional 30,000 options to an employee with terms
similar to the 1991 options, as amended, with vesting beginning in 1994. The
options are exercisable beginning on the seventh anniversary of the measurement
date, as defined, and expire on the eighth anniversary of the measurement date.
The option agreements contain various fair value puts and calls, with fair value
to be determined by the board of directors or an independent appraiser.

         As a result of the above amendment, beginning in March 1992, the
Company began accounting for the options under variable plan accounting, whereby
increases in the value of the Company's common stock above the option price
resulted in the recording of compensation expense by the Company. Through
December 31, 1994, the Company recorded no compensation expense related to the
options as, in the opinion of management, the fair value of the Company's common
stock was equal to or below the option price, as adjusted. Due to increases in
the estimated fair value of the Company's common stock, as determined by an
independent appraiser, the Company recorded stock option compensation expense of
$675 for the year ended December 29, 1995. Additional stock option compensation
expense of approximately $230 will be recorded in future periods based on the
vesting schedule of options. In July 1995, the option agreements were amended to
remove features of the options that resulted in variable plan accounting.
Accordingly, subsequent to July 1, 1995, the options are being accounted for as
fixed options whereby future increases in the value of the Company's common
stock will not result in additional stock option compensation expense.

         In February 1994, the Company granted an additional 105,000 options
with terms similar to those discussed above, except that the February 1994
options do not have a put feature and have an option price which escalates

                                       27
<PAGE>
during the vesting period at a fixed rate of 6% per year. The February 1994
options are exercisable at a fixed exercise price for a one-year period
following the vesting period. The Company accounts for the February 1994 options
as fixed options whereby future increases in the value of the Company's common
stock do not result in the recording of compensation expense by the Company. The
option agreements contain various fair value puts and calls, with fair value to
be determined by the board of directors or an independent appraiser.

         In December 1994, the controlling shareholder of the Company granted
89,004 options on the controlling shareholder's shares to certain members of
management which contain terms similar to the February 1994 options, except that
the option price escalates during the vesting period at a fixed rate of 7.86%
per year.

         The Company adopted a 1996 stock-based incentive compensation plan (the
"1996 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 1996 Plan is administered by a committee designated by the board of
directors (the "Committee"). The aggregate maximum number of shares of common
stock available for awards under the 1996 Plan is 500,000, subject to adjustment
to reflect changes in the Company's capitalization. Awards under the 1996 Plan
may be made to all officers and key employees of the Company. No awards can be
made under the 1996 Plan after January 31, 2006.

         The Committee may grant shares of common stock in the form of either
deferred stock or restricted stock, as defined in the 1996 Plan. Options granted
under the 1996 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 grant as an ISO, options
under the 1996 Plan will be nonqualified. The exercise price of the options will
be determined by the Committee. The maximum term of an option or Stock
Appreciation Right (or "SAR") granted under the 1996 Plan shall not exceed ten
years from the date of grant or 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 or SAR may be exercisable sooner than six months from the
date the option or SAR is granted.

         Effective fiscal year 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 requires companies to
estimate the value of all stock-based compensation using a recognized pricing
model. However, it also allows an entity to continue to measure compensation
cost for those plans using the method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities electing to remain with the method of accounting in APB No.
25 must make pro forma disclosures of net income and, if presented, earnings per
share, as if the fair value-based method of accounting defined in the statement
had been applied.

         In June 1997, the Company granted options to purchase 46,250 shares of
common stock at an option price of $14 per share and 92,500 at an option price
of $23. The options vest evenly over a three-year period from the grant date.
The options may be exercised as they vest. The $14 options expire ten years from
the grant date, and the $23 options expire five years from the grant date.

         In February and August 1998, the company granted options to purchase
50,550 and 25,000 shares of common stock at an option price of $21 per share,
respectively and 101,100 and 50,000 options at $28 per share, respectively. The
options vest evenly over a three-year period from the grant date. The options
may be exercised as they vest. The $21 options expire ten years from the grant
date and the $28 options expire five years from the grant date. No compensation
expense was incurred in 1998 because the strike price was higher than the market
price.

                                       28
<PAGE>
         The Company has elected to account for its stock-based compensations
plan under APB No. 25. Using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1998, 1997 and 1996:
<TABLE>
<CAPTION>

                                               1998                    1997                 1996
                                               ----                    ----                 ----
<S>                                              <C>                    <C>                 <C>
Risk free interest rate                        5.5%                    5.5%                 5.7%
Expected lives                         5 & 10 years                10 years              3 years
Expected volatility                           25.7%                   31.3%                33.0%
Dividend yield                                 2.4%                    2.3%                   0%
</TABLE>


         If the Company had accounted for these plans in accordance with SFAS
No. 123, the Company's reported pro forma net income and pro forma net income
per share for the fiscal years from 1995 to 1998 would have been as follows:
<TABLE>
<CAPTION>
                                               1998                     1997                 1996
                                               ----                     ----                 ----
<S>                                             <C>                      <C>                  <C>    
Net income as reported                       $7,890                   $8,689               $4,640

Pro forma                                     7,715                    8,646                4,629

Primary EPS as reported                        1.33                     1.47                  .83
Pro forma                                      1.30                     1.46                  .83
</TABLE>


Post-retirement Benefits

         The Company sponsors a defined benefit post-retirement medical plan
that provides coverage for retirees and their dependents. A portion of the plan
is paid for by retiree cost sharing. The accounting for the plan anticipates
future cost sharing increases to keep pace with health care inflation. The plan
is unfunded. The Company adopted the provisions of SFAS No. 132, "Employers
Disclosure About Pensions and Other Postretirement Benefits" effective January
3, 1998.


                                       29

<PAGE>


         The following table summarizes the Company's post-retirement benefit
obligations and the assumptions used in determining post-retirement benefit
cost.
<TABLE>
<CAPTION>
                                                                1998                     1997                 1996
------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                      <C>                  <C>
Benefit obligation at beginning of year                      $18,031                  $19,128              $18,928
Service Cost                                                     205                      185                  140
Interest Cost                                                    503                      483                  762
Amortization                                                  (1,501)                  (1,521)                (475)
Retiree benefits                                                (246)                    (244)                (227)
                                                             -----------------------------------------------------
Benefit obligation at end of year                            $16,992                  $18,031              $19,128
                                                             =====================================================
Discount Rate                                                   7.75%                    7.75%                7.75%
                                                             -----------------------------------------------------
Initial health care cost trend                                  8.00%                    8.00%                8.00%
                                                             -----------------------------------------------------
Ultimate health care cost trend rate                            5.00%                    5.00%                5.00%
                                                             -----------------------------------------------------
Year ultimate health care cost
     trend rate reached                                         2004                     2004                 2004
                                                             -----------------------------------------------------
</TABLE>

         Net periodic post-retirement benefit costs include the following
components:
<TABLE>
<CAPTION>
                                           1998               1997               1996
                                         --------------------------------------------
<S>                                        <C>                 <C>               <C>
Service cost                               $205               $185               $140
Interest cost                               503                483                762
Amortization                             (1,501)            (1,521)              (475)
                                         --------------------------------------------
Net benefit cost                          $(793)             $(853)              $427
                                          ===========================================
</TABLE>

7.       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.

                                       30

<PAGE>


Operating Lease Commitments

         The Company leases office space, office equipment, and other items
under non-cancelable operating leases. The expense for non-cancelable operating
leases was approximately $385, $600, and $582, for fiscal years 1998, 1997, and
1996, respectively. At January 1, 1999, future minimum lease payments under
non-cancelable operating leases are as follows:

         1999                                               $439
         2000                                                361
         2001                                                210
         2002                                                166
         2003 and thereafter                                 443
                                                          ------
                                                          $1,619
                                                          ======

8.       ACQUISITIONS, MERGERS AND PUBLIC OFFERING

Acquisitions

         In February 1996, the Company exercised an option to purchase the
outstanding shares of Grupo Blaju, S.A., de C.V. (subsequently renamed TB Wood's
Mexico, S.A., de C.V.) and its subsidiaries for approximately $458, including
legal and professional fees. There was no goodwill associated with the purchase.

         In October 1996, the Company purchased the assets of Ambi-Tech
Industries, Inc., a leading manufacturer of electronic brakes for electric
motors, for approximately $991 cash, including legal and professional fees, and
an $800 note payable at 7% interest. Principal is due in five annual installment
of $160 beginning September, 1997. Goodwill associated with the purchase is
being amortized over 40 years using the straight-line method (Note 2).

         In November 1996, the Company acquired certain assets of Deck
Manufacturing Corp. ("Deck"), an established designer and manufacturer of
industrial disc and gear couplings, for approximately $1,471 of cash, including
legal and professional fees. Goodwill associated with the purchase is being
amortized over 40 years using the straight-line method (Note 2). The Company
also loaned Deck $400 which is secured by the excess accounts receivable and the
inventory not acquired. The note receivable is included in other assets.

         In May 1997, the Company purchased the stock of Wood's-NC, formerly
Graseby Controls Inc., a subsidiary of Graseby plc, for cash of approximately
$5,000. Wood's-NC manufactures and sells industrial AC drives, including the
Volkmann(TM) brand of high-frequency AC drives, electronic brakes, and Soft
Starts. Goodwill associated with the purchase is being amortized over 40 years
using the straight-line method (Note 2).

         In November 1997, the Company purchased the stock of Berges electronic
GmbH ("Berges") for cash of approximately $1,480 and assumed liabilities of
$4,,765. Berges designs, manufactures, and markets its own line of AC inverters
for the European market and sells TB Wood's inverters on a private label basis.
Goodwill associated with the purchase is being amortized over 40 years using the
straight-line method (Note 2).

         In December 1997, the Company purchased a 65% ownership in a joint
venture with TB Wood's Enertec ("Enertec") for $91. Enertec distributes
domestically manufactured electrical components and performs system integration
design in the India market. Enertec was not included in the 1997 financial
statements as its impact was immaterial.


                                       31

<PAGE>


Merger

         In January 1996, the Company completed a merger (the "Merger") in
contemplation of an initial public offering of the Company's common stock.
Pursuant to the Merger, a subsidiary of a newly formed holding company merged
with Wood's-U.S., with Wood's-U.S. as the surviving corporation. In the Merger,
the shareholders of Wood's-U.S. received three shares of the holding company's
stock in exchange for each share of Wood's-U.S. stock. The financial statements
of the Company, prior to January 1996, have been restated to include the effects
of the Merger.

Initial Public Offering

         Effective February 8, 1996, the Company completed an Offering of its
common stock that raised approximately $22,478 in aggregate gross proceeds for
the Company. The net proceeds (after deducting issuance costs) of approximately
$19,823 from the Offering were used to repay $4,767 of the Fleet Term Loan,
$5,203 of the Senior Fleet Revolver Loan, and $10,000 of the USL Fixed and
Floating Rate Notes. In addition, the Company paid approximately $616 to USL. In
conjunction with the Offering, USL redeemed warrants to purchase 375,000 shares
of the Company's stock which were included in the shares of common stock issued.
The Company also purchased the remaining 21% interest of Wood's-Canada held by
the shareholders of Wood's-U.S. for approximately $1,600.

         The effects of interest and other charges in fiscal 1996, prior to the
Offering, are not material to the consolidated financial statements.


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 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 and couplings. The
electronics business segment includes electronic drives and electric drive
systems. Products of these segments are sold to distributors, original equipment
manufacturers 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.
Intersegment 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.


                                       32

<PAGE>


         The following table summarizes revenues, operating income, total assets
and expenditures for long-lived assets by business segment for fiscal years
1998, 1997 and 1996:
<TABLE>
<CAPTION>
                                                      Mechanical         Electronics
                                                        Business            Business               Total
--------------------------------------------------------------------------------------------------------
<S>                                                         <C>                 <C>                 <C>   
1998:
Revenues from external customers                         $76,909             $57,040            $133,949
Operating profit                                           9,485               6,081              15,566
Depreciation                                               2,605               1,474               4,079
Segment Assets                                            35,483              44,452              79,935
Expenditures for long-lived assets                         5,359               2,122               7,481
1997:
Revenues from external customers                         $79,988             $44,039            $124,027
Operating profit                                          11,925               5,026              16,951
Depreciation                                               2,860               1,021               3,881
Segment Assets                                            44,108              32,040              76,148
Expenditures for long-lived assets                         3,206               3,024               6,230
1996:
Revenues from external customers                         $69,571             $32,934            $102,505
Operating profit                                           9,993               2,580              12,573
Depreciation                                               2,505                 706               3,211
Expenditures for long-lived assets                         2,734               1,028               3,762
</TABLE>


         The following table reconciles segment profit to consolidated income
before income taxes and extraordinary items for fiscal years 1998, 1997 and
1996:
<TABLE>
<CAPTION>

                                                                  1998             1997               1996
----------------------------------------------------------------------------------------------------------
<S>                                                              <C>              <C>               <C>    
Total operating profit for reportable segments                 $15,566          $16,951            $12,573
Interest, net                                                   (2,040)          (1,695)            (1,982)
Other unallocated amounts                                         (380)            (773)              (593)
                                                               -------------------------------------------
Income before income taxes and
    Extraordinary items                                        $13,146          $14,483             $9,998
                                                               ===========================================
</TABLE>

         The following table reconciles segment assets to consolidated total
assets as of January 1, 1999 and January 2, 1998:
<TABLE>
<CAPTION>

                                                                                   1998              1997
---------------------------------------------------------------------------------------------------------
<S>                                                                                <C>              <C>
Total assets for reportable segments                                            $79,935           $76,148
Cash                                                                              2,521             2,552
Corporate fixed assets                                                            5,611             3,389
Goodwill                                                                          3,323             2,623
Deferred tax                                                                      3,570             4,602
Other unallocated assets                                                          1,065               303
                                                                                -------------------------
Consolidated total                                                              $96,025           $89,617
                                                                                =========================
</TABLE>

                                       33

<PAGE>


Information regarding the Company's domestic and foreign operations is as
follows:
<TABLE>
<CAPTION>
                                                              Net                   Long-Lived
                                                            Sales                       Assets
----------------------------------------------------------------------------------------------
<S>                                                         <C>                           <C>    
1998: 
United States                                            $100,658                      $33,206
Canada                                                     11,987                          869
Germany                                                     7,708                        2,105
Italy                                                       9,979                          525
Mexico                                                      3,482                          966
India                                                         135                           84
                                                         -------------------------------------
Consolidated                                             $133,949                      $37,755

1997:
United States                                            $107,186                      $29,689
Canada                                                     14,135                        1,062
Germany                                                         0                        1,248
Italy                                                           0                          462
Mexico                                                      2,706                          749
                                                         -------------------------------------
Consolidated                                             $124,027                      $33,210

1996
United States                                             $87,717                      $23,329
Canada                                                     12,931                        1,148
Mexico                                                      1,857                          624
                                                         -------------------------------------
Consolidated                                             $102,505                      $25,101
</TABLE>

10.      QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
                                                    Fiscal Quarters
1998                                            First            Second              Third              Fourth
--------------------------------------------------------------------------------------------------------------
<S>                                             <C>               <C>                <C>                 <C>    
Sales                                         $36,051           $34,161            $34,150             $29,587
Gross profit                                   13,376            12,252             11,838              10,123
Gross profit %                                  37.1%             35.9%              34.7%               34.2%
Net income(loss) before
     Extraordinary item                         2,383             2,259              1,759               1,489
Per diluted share of common stock:
Net income (loss) before
     Extraordinary item                           .40               .38                .30                 .25
Net income                                        .40               .38                .30                 .25
Dividends declared                                .09               .09                .09                 .09
                                               ===============================================================
</TABLE>

<TABLE>
<CAPTION>
                                                     Fiscal Quarters
1997                                              First            Second             Third           Fourth
------------------------------------------------------------------------------------------------------------
<S>                                              <C>               <C>               <C>              <C>    
Sales                                           $30,489           $31,739           $31,257          $30,542
Gross profit                                     10,951            11,507            11,487           11,067
Gross profit %                                    35.9%             36.3%             36.8%            36.2%
Net income                                        2,137             2,145             2,199            2,208
Net income per
     Common share                                  0.36              0.36              0.37             0.37
                                                ============================================================
</TABLE>

                                       34
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure.

         None


                                       35
<PAGE>


                                    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 definitive Proxy Statement for
the 1999 Annual Meeting in the Sections entitled "Election of Director,"
"Management" and "Section 16(a) Beneficial Ownership Reporting Compliance" and
is incorporated herein by reference.

Item 11.  Executive Compensation.

         The information called for by this Item is set forth in the Company's
definitive Proxy Statement for the 1999 Annual Meeting in the Section entitled
"Executive Compensation" and is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management.

         The information called for by this Item is set forth in the Company's
definitive Proxy Statement for the 1999 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.

         None.

                                       36
<PAGE>



                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(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 15 through 35 hereof and the report thereon of
         Arthur Andersen LLP appearing on page 15 hereof.

         (2)      Financial Statement Schedule

         Schedule II for the fiscal year ended January 1, 1999 and the report of
Arthur Andersen thereon.

         (3)      Exhibits

Number                              Description
------                              -----------
3.1      Amended Certificate of Incorporation of the Company (incorporated by
         reference to TB Wood's Corporation Registration Statement filed on Form
         S-1, as amended, File No. 33-96498 ("Form S-1") Exhibit 3.1).

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

4.1      Shareholders' Agreements by and among T. B. Wood's Sons Company, Thomas
         C. Foley and Gifford P. Foley, Barton J. Winokur, Kurt A. Herwald,
         Michael L. Hurt, Michael H. Iversen, David H. Halleen, Stanley L. Mann,
         Lee J. McCullough, Carl R. Christenson, Harold L. Coder, III, James E.
         Williams, Joseph S. Augustine, Bernard M. Goldsmith, Harvey R. Heller,
         Robert Patterson Saltsman, F. Philip Handy, F. Philip Handy, as
         Guardian of the Property of Kate Elizabeth Handy, F. Philip Handy, as
         Guardian of the Property of Philip Breckenridge Handy and F. Philip
         Handy, as Guardian of the Property of Abigail Slocum Handy
         (incorporated by reference to Form S-1 Exhibit 4.1).

4.2      Amendments to Shareholders' Agreements by and among TB Wood's
         Incorporated (formerly known as "T. B. Wood's Sons Company"), Thomas C.
         Foley and Gifford P. Foley, Barton J. Winokur, Kurt A. Herwald, Michael
         L. Hurt, Michael H. Iversen, David H. Halleen, Stanley L. Mann, Lee J.
         McCullough, Carl R. Chistenson, Harold L. Coder, III, James E.
         Williams, Joseph S. Augustine (incorporated by reference to Form S-1
         Exhibit 4.2).

9.1      Voting Trust Agreement dated March 31, 1989, among T. B. Wood's Son's
         Company and Bernard M. Goldsmith, Harvey R. Heller, Robert Patterson
         Saltsman, F. Philip Handy, F. Philip Handy, as Guardian of the Property
         of Abigail Slocum Handy, Kate Elizabeth Handy, Philip Breckenridge
         Handy and F. Philip Handy, as Trustee (incorporated by reference to
         Form S-1 Exhibit 9.1).

10.1     Stock Purchase Agreement dated January 7, 1994 by and among T. B.
         Wood's Sons Company, Plant Engineering Consultants, Inc. and John
         Morris, Jesse Batten, Ralph Pedigo, Ronald Bingham, Walter Taeubel and
         Cook Family Trust (incorporated by reference to Form S-1 Exhibit 10.1).

10.2     Asset Purchase Agreement dated May 12, 1994 by and between T. B. Wood's
         Sons Company and Magnetic Power Systems, Inc. (incorporated by
         reference to Form S-1 Exhibit 10.2).

10.3     Non-Qualified Stock Option Agreements between 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
         10.36).

                                       37
<PAGE>
10.4     Non-Qualified Stock Option Agreement dated as of March 15, 1991 between
         T. B. Wood's Sons Company and Michael L. Hurt, together with Addendum
         dated as of March 30, 1992 (incorporated by reference to Form S-1
         Exhibit 10.37).

10.5     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).

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

10.7     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).

10.8     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).

10.9     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).

10.10    Revolving Credit Agreement by and among TB Wood's Incorporated, Plant
         Engineering Consultants, Inc., Grupo Blaju, S.A., de C.V., TB Wood's
         Canada, Ltd. and the Banks Party thereto and PNC Bank, National
         Association, as Agent, dated October 10, 1996 (incorporated by
         reference to Form 10-K, for fiscal year 1996, Exhibit 10.44).

10.11    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).

10.12    Stock Purchase Agreement by and between TB Wood's Incorporated and
         Graseby Electro-Optics Inc. dated May 8, 1997 (incorporated by
         reference to Form 10-K, for fiscal year 1997, Exhibit 10.46).

10.13    Translated Stock Purchase Agreement by and among TB Wood's Incorporated
         and Berges Antriebstechnic GmbH and Karen Sarstedt, dated October 23,
         1997 (incorporated by reference to Form 10-K, for fiscal year 1997,
         Exhibit 10.47).

10.14    Form of the Non-Qualified Stock Option Agreements 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 issued under the 1996 Plan (incorporated by
         reference to Form 10-K, for fiscal year 1997, Exhibit 10.48).

                                       38
<PAGE>



10.15    Form of the Non-Qualified Stock Option Agreements 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 issued under the 1996 Plan (incorporated by
         reference to Form 10-K, for fiscal year 1997, Exhibit 10.49).

10.16    Employment Agreement between TB Wood's Incorporated and Michael L. Hurt
         dated April 14, 1998.

10.17    Supplemental Executive Retirement Plan between TB Wood's Corporation
         and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson, Michael H.
         Iversen and other key employees dated May 7, 1998.

10.18    Form of the Non-Qualified Stock Option Agreements 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 issued under the 1996 Plan.

10.19    Form of the Non-Qualified Stock Option Agreements 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 issued under the 1996 Plan.

11.1     Statement regarding Computation of Per Share Earnings.

21.1     Subsidiaries of Registrant.

23.1     Consent of Independent Public Accountants.

(b)      Reports on Form 8-K.

         There were no reports on Form 8-K by the Registrant during the fourth
quarter of fiscal year 1998.

                                       39
<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 25, 1999.


                              TB WOOD'S CORPORATION




                              By:  /s/ MICHAEL L. HURT
                                 -------------------------
                                       Michael L. Hurt
                                       President

         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 of the Board                       April 1, 1999
-------------------                 (Principal Executive Officer)
    Thomas C. Foley                     



/s/ MICHAEL L. HURT                 President and Director                      April 1, 1999
-------------------                 (Principal Executive Officer)
    Michael L. Hurt                     



/s/ JEAN-PIERRE L. CONTE            Director                                    April 1, 1999
------------------------
    Jean-Pierre L. Conte



/s/ ROBERT DOLE                     Director                                    April 1, 1999
-------------------
Senator Robert Dole



/s/ CRAIG R. STAPLETON              Director                                    April 1, 1999
----------------------
    Craig R. Stapleton



/s/ DAVID H. HALLEEN                Vice President of Finance,                  April 1, 1999
--------------------                (Principal Financial Officer and
    David H. Halleen                Principal Accounting Officer)     
                                    

                                       40
</TABLE>

<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
                                                              ---------
                                                                                               Deductions (write-offs
                                                                                                   of bad debts,       
                                          Balance at                                            discounts and claims      Balance at
                                         beginning of    Charged to costs     Charged to           in excess of             end of  
           Description                      period         and expenses     other accounts         provision)(1)            period  
------------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>               <C>         <C>                     <C>       <C>
Year ended January 3, 1997:
  Allowance for doubtful accounts            $364                65                                      (63)                $366
  Allowance for discounts and claims          146                                                        (75)                  71
                                         -------------------------------------------------------------------------------------------
                                              510                65                0                    (138)                 437
                                         ===========================================================================================

Year ended January 2, 1998:
  Allowance for doubtful accounts            $366                26                                      (58)                $334
  Allowance for discounts and claims           71                71                                                           142
                                         -------------------------------------------------------------------------------------------
                                              437                97                0                     (58)                 476
                                         ===========================================================================================

Year ended January 1, 1999:
  Allowance for doubtful accounts             334                 2                                      (74)                $262
  Allowance for discounts and claims          142                10                                                           152
                                         -------------------------------------------------------------------------------------------
                                              476                12                0                     (74)                 414
                                         ===========================================================================================
</TABLE>


--------------
Note:
(1) Represents write-off accounts to be uncollectible, less recoveries
    of amounts previously written off.

                                       41