SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

                    ANNUAL REPORT PURSUANT TO SECTION 13 OR
                  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                    For the fiscal year ended January 2, 1998

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:

Title of each class                               Name of each exchange on
                                                      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 March 16, 1998,  was  $65,530,916.  On
March 16, 1998,  there were 5,859,286  shares of the  registrant's  common stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1997 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.
                              TB WOOD'S CORPORATION
                          1997 FORM 10-K ANNUAL REPORT


                                       1
<PAGE>



                                TABLE OF CONTENTS


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 ............................................10
  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 ................................34

PART III .....................................................................34

  Item 10. Directors and Executive Officers of the Registrant ................34
  Item 11. Executive Compensation ............................................34
  Item 12. Security Ownership of Certain Beneficial Owners
           and Management ....................................................34
  Item 13. Certain Relationships and Related Transactions ....................34

PART IV ......................................................................34

  Item 14. Exhibits, Financial Statement Schedules, and
           Reports on Form 8-K ...............................................34

SIGNATURES ...................................................................37



                                       2
<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 was incorporated in 1995. In January
1996, a subsidiary of the Company merged with TB Wood's Incorporated  ("TBW"), a
Pennsylvania  Corporation  that was  formed in 1857,  with TBW as the  surviving
corporation in the merger. The Company's products are sold to North American and
international manufacturers and users of industrial equipment.  Headquartered in
Chambersburg,  Pennsylvania,  the Company operates eleven production  facilities
with over 1,100 employees in the United States,  Canada,  Mexico,  Germany,  and
Italy.

Industry Overview

     The power transmission industry provides electronic and mechanical products
and systems used in automated  manufacturing and material processing  activities
that transfer 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   components   product
categories.

Products

     The Company  designs,  manufactures  and markets  electronic and mechanical
power transmission  products and systems.  During 1997, 1996 and 1995, net sales
for these product offerings were as follows:

<TABLE>
<CAPTION>

                                                   1997                    1996                    1995
                                                   ----                    ----                    ----
                                        Net Sales          %    Net Sales          %    Net Sales          %
                                        ---------          -    ---------          -    ---------          -
Electronic power transmission
<S>                                         <C>        <C>          <C>        <C>          <C>        <C>
products and systems                        $44.0      35.5%        $32.9      32.1%        $34.2      33.4%
Mechanical power transmission
products and systems                         80.0      64.5%         69.6      67.9%         68.1      66.6%
                                      ------------ ---------- ------------ ---------- ------------ ----------
                                           $124.0     100.0%       $102.5     100.0%       $102.3     100.0%
                                      ------------ ---------- ------------ ---------- ------------ ----------
</TABLE>

Electronic Product Offering

     The Company designs and manufactures  Alternating Current ("AC") and Direct
Current  ("DC")  electronic  drives,  AC motor soft  starters  and  brakes,  and
integrated  electronic drive systems which are marketed throughout North America
and  internationally.  These  products are used to start,  stop, and control the
speed of electric motors.  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 general requirements 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.


                                       3
<PAGE>


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,  a  broad  line  of  flexible  couplings,  as  well  as
hydrostatic drives, mechanical 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.

New Products

     Since  1993,  the  Company  has  introduced  a  significant  number  of new
products. In 1993, the Company introduced the XFC E-trAC (registered  trademark)
micro-electronic  drive  product line to complement  the WFC E-trAC  (registered
trademark), NEMA 4, AC Electronic drive product line. The Company introduced six
new electronic products during the past five years, including the new WFCHT line
of full-featured electronic drives that improve motor performance at low speeds,
thereby expanding the applications for these products. The Company also extended
its very  successful  line of XFC  micro-inverters  to 20 horsepower and the WFC
inverters to 75 horsepower.  The Company  introduced a line of electronic drives
for specific Original  Equipment  Manufacturer  (OEM) applications that are more
cost-effective  than using a general purpose  electronic  drive, a series of 575
volt   electronic   drives  for  the  Canadian   market,   a  new  DVC  line  of
high-performance  electronic drives for motor sizes up to 700 horsepower,  and a
new  step-precision  winding technology for electronic drive systems used in the
synthethic fibers industry.

     During  the  last  five  years,   several  new  mechanical   products  (two
synchronous  drives,  one  hydrostatic  drive,  and four  couplings)  have  been
introduced.  The  new  mechanical  products  include  the  Dura-Flex  (registerd
trademark)  coupling that expands the flexible coupling product line into higher
performance applications. During 1997, the Company expanded its coupling product
line by introducing axially-split and composite couplings.

Marketing and Distribution

     The Company markets its products in North America and  internationally.  In
North   America,   the  Company  sells  to  selected,   authorized,   industrial
distributors  which resell the Company's  products to  industrial  consumers and
Original Equipment  Manufacturers  ("OEMs").  The Company also sells directly to
OEMs. The Company's products are sold principally  throughout North America and,
to a lesser extent,  internationally.  The Company's marketing alliances include
licensing   agreements  and  distribution   agreements  with   distributors  and
manufacturers  which, in some cases, market the Company's products under private
label  agreements.  The Company has a technical sales force of  approximately 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.

     Most  of  the  Company's   products  are  manufactured  to  maintain  stock
inventories,  and on-time  delivery is important,  therefore  order backlogs are
generally less than one month's shipments.

Acquisitions

     TB Wood's seeks acquisitions that enhance product offerings, leverage fixed
costs,  and extend global reach.  In April 1993,  the Company  acquired  several
lines of business  including a flexible  coupling and mechanical  variable speed
drive product line as well as two manufacturing facilities. In January 1994, the
Company acquired Plant  Engineering  Consultants,  Inc.  ("PEC"),  an integrated
electronic drive systems manufacturer and marketer.


                                       4
<PAGE>

     In early 1996, the Company  acquired Grupo Blaju S.A. de C.V.,  providing a
leading market share position in belted drive  components in Mexico and a strong
and cost-effective Mexican manufacturing operation. In October 1996, the Company
acquired the assets of Ambi-Tech  Industries,  Inc., a leading  manufacturer  of
electronic brakes. Ambi-Tech provides an important electronic product extension,
as well as new technical  capability to support the Company's  aggressive growth
plans in the  electronics  business.  In November  1996,  the  Company  acquired
certain  assets  of Deck  Manufacturing,  a  producer  of gear  couplings.  Deck
provides a valuable  addition to the Company's  line of  couplings,  the fastest
growing  area of the  Company's  mechanical  business.  In May 1997 the  Company
acquired Graseby Controls Inc.  located in Greensboro,  North Carolina.  Graseby
Controls has a leading  position in the machine  tool spindle  drive market with
its  well-established  Volkmann  (TM) brand of high  frequency,  AC  drives.  In
December,  1997 the Company acquired Berges  electronics  GmbH  headquartered in
Marienheide,  Germany  with  operations  in Germany and Italy.  Berges  designs,
manufactures and markets AC drives for the European markets.

     The Company  uses  strategic  alliances  to gain access to  technology  and
products  that can not be as easily or  effectively  obtained  through  internal
development or acquisition and to expand international market penetration. Since
1993 the Company has entered into six strategic alliances, the most recent being
TB Wood's Enertec Ltd. an electronic joint venture in India.

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  which  are  among  the  largest  distributors  in  the
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  30% of the Company's net sales in 1997.
Motion  Industries  accounted for  approximately  20% of the Company's total net
sales in 1997 and has been a  significant  customer of the Company for more than
15 years.

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 for
greater  speed  and  process  control  from  end  users.  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 competitors in
electronic products and systems include Control Techniques Drives,  Inc./Emerson
Electric  Co. Inc.,  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 there are no significant  foreign  competitors in the North
American  mechanical  product  category market because of a fragmented  customer
base,  prohibitive  freight  costs as  compared to selling  price and  difficult
access to existing distribution channels.


                                       5
<PAGE>


Research and Development

     The Company's  research and development  efforts include the development of
new  products,  the testing of products  and the  enhancement  of  manufacturing
techniques and processes.  The Company's  annual  expenditures  for research and
development  (including royalties and payments to third parties) during the last
three fiscal years have  averaged  3.0% of net sales,  with a higher  percentage
being spent on electronic products.

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   transformers,   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,  forgings and powdered  metal
components.  The Company also designs,  tools and outsources  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  grants to others  licenses under
certain of its  patents  and obtains  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)
and Fiberlink(TM).

Employees

     As of January 2, 1998,  the Company  employed  approximately  1,144 people.
Approximately  30 of the Company's  hourly  employees  located at its Stratford,
Ontario  facility are represented by the United  Steelworkers of Canada pursuant
to a  collective  bargaining  agreement  dated  January 20, 1995 that expired on
January  19,  1998.  A new  agreement  is in effect as of January  20,  1998 and
expires  on January  19,  2001.  Approximately  100 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 expired on January 31, 1998. A new agreement is in effect as of January 31,
1998 and expires on January 31, 1999.

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


                                       6
<PAGE>


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 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.  Dana Corporation has submitted a Remediation Plan to the
Michigan  Department  of  Environmental  Quality  ("MDEQ")  with  respect to the
continued  monitoring of the  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 waste water,  hazardous  waste and employee and
community  right-to-know  should  not  have a  material  adverse  effect  on the
Company's financial condition.


                                       7
<PAGE>


<TABLE>
<CAPTION>

Item 2.  Properties

The Company owns and operates the following facilities:
          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.                 40,400
Trenton, Tennessee            Manufacturing of mechanical products.                                 60,000
Stratford, Ontario            Manufacturing of mechanical products.  Central distribution           46,000
                              and 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        56,000
                              drive systems. Headquarters of PEC.
Greensboro, North Carolina    Manufacturing and engineering of electronic products and              20,000
                              administrative offices for TB Wood's North Carolina.
Elk Grove, Illinois           Distribution center.                                                  21,700
</TABLE>

*Includes certain leased space

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

Item 3.  Legal Proceedings

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

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

         None.


                                       8
<PAGE>


                                     PART II

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

     The Company  consummated the Initial Public Offering 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  February 8, 1996 though  January 2, 1998 were as
follows:

                             Sales Price            Dividends
                             -----------            ---------
      Fiscal Year 1997       High         Low       Paid in Cash
      ----------------       ----         ---       ------------
      1st quarter              $14.13     $10.75            $.08
      2nd quarter               16.50      12.75             .08
      3rd quarter               19.50      14.00             .08
      4th quarter               22.25      18.06             .08

      Fiscal Year 1996
      ----------------
      1st quarter             $12.125    $10.875            $.00
      2nd quarter              11.750      8.875             .08
      3rd quarter               9.875      8.250             .08
      4th quarter              11.750      7.625             .08

     On March 16, 1998, there were 161 registered  shareholders of the Company's
Common Stock, and the high and low sales prices for the Common Stock were $22.00
and  $22.00,  respectively.  During  fiscal year 1997,  the  Company  paid total
dividends  of $.32 and  declared  total  dividends  of $.24 on the shares of its
Common Stock.  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 1997 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:

                       1997               January 2, 1998
                       1996               January 3, 1997
                       1995             December 29, 1995

                                       9
<PAGE>

<TABLE>
<CAPTION>

                             Selected Financial Data

(in thousands, except per share data)                                  Fiscal Year
-------------------------------------                                  -----------
                                                1997        1996         1995       1994        1993
                                                ----        ----         ----       ----        ----
Revenue and Income:
<S>                                         <C>         <C>          <C>         <C>         <C>
Net sales                                   $124,027    $102,505     $102,307    $95,315     $72,375

Gross profit                                  45,012      37,747       36,111     32,886      24,922
Operating income                              16,951      12,573       12,593      9,795       6,329
Net income, before one-time charges*           8,689       6,294        4,599      3,077       1,779
                                            --------    --------     --------    -------     -------
Cash Flow:
Cash provided by operations                  $16,829      $9,090       $9,214     $5,379      $5,647
Capital expenditures                           5,824       3,762        4,531      2,722       2,202
                                            --------    --------     --------    -------     -------
Assets and Liabilities:
Working capital**                            $27,682     $26,962      $26,160    $24,931     $19,815
Total assets                                  89,617      73,395       66,631     61,075      57,237
Total debt                                    26,539      22,227       41,463     42,661      42,900
Shareholders' equity (deficit)                23,606      16,875      (7,488)   (12,866)    (16,537)
                                            --------    --------     --------    -------     -------
Diluted Per Share Data:
Net income, before one-time charges*           $1.47       $1.12        $1.21       $.82        $.50
Cash dividends declared                          .24         .32            -          -           -
Cash dividends paid                              .32         .24            -          -           -
Book value                                      3.99        3.01       (1.97)     (3.43)      (4.64)
                                            --------    --------     --------    -------     -------

Weighted average shares outstanding            5,921       5,600        3,810      3,750       3,563
</TABLE>

* Before  $1,654 of  one-time  charges  in 1996  related to the  write-off  of a
noncompete  agreement  and the early  retirement  of debt related to the Initial
Public  Offering,  $839 of  one-time  income  in 1994  related  to the sale of a
product  line,   and  $9,477  of  net  one-time   charges  in  1993  related  to
extraordinary  income from the early repayment of debt and the cumulative effect
of changes in the accounting for postretirement  benefits.
** 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 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 resulting from the integration of the recently  acquired coupling
business.



                                       10
<PAGE>



     Selling,  general,  and  administrative  ("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 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%.

Year Ended January 3, 1997, Compared to Year Ended December 29, 1995

     Net sales for fiscal 1996  increased to $102.5  million from $102.3 million
in 1995, an increase of $0.2 million or 0.2%. The Company's  overall 1996 sales,
excluding sales from the three businesses  acquired during the year, declined by
approximately  $2.3 million  compared to 1995. This decline  resulted  primarily
from reduced  sales of electronic  drive  products to  distributors  who delayed
purchases in anticipation of the Company's  introduction of a higher performance
series of electronic drives during the second half of 1996.

     Gross profit  increased to $37.7  million  from $36.1  million in 1995,  an
increase  of $1.6  million  or 4.5%.  Gross  profit  as a  percent  of net sales
increased to 36.8% from 35.3%,  due primarily to productivity  improvements  and
cost  reductions  resulting  from the Company's  capital  expenditure  and Total
Quality Management programs.

     SG&A expense for fiscal 1996  increased to $25.2 million from $23.5 million
in 1995,  an increase of $1.7 million or 7.0%.  SG&A expense as a percent of net
sales  increased  to 24.6% from 23.0%.  The  increase in SG&A  expense  resulted
primarily  from  increases in research and  development  and marketing  expenses
related to new product  introductions in the Company's  electronics business, as
well as additional SG&A expenses from acquired operations.

     Other  expense for fiscal 1996  decreased to $2.6 million from $4.9 million
in 1995, a decrease of $2.4 million or 47.7%. This decrease was due primarily to
lower interest costs as a result of debt repayment from the proceeds of the IPO,
prepayment of a subordinated  note at a discount,  and reduced interest rates on
the Company's  revolving line of credit.  Other expense  included a $0.6 million
write-off of a noncompete agreement.  The effective tax rate for 1996 was 40.5%.
Details  of the  provision  for  income  taxes  are  discussed  in Note 5 to the
financial  statements.  An extraordinary  item of $1.3 million,  net of tax, was
related to early repayment of debt with the proceeds from the IPO.

     Net income for fiscal 1996 was $4.6 million,  unchanged  from 1995. In 1996
net income before  one-time  charges,  net of tax,  increased by $1.7 million or
36.9% over 1995.

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 1997 was $16.8  million,  an increase of $7.7  million  over $9.1
million in 1996.



                                       11
<PAGE>



     Net cash used for investing  activities during fiscal years 1997, 1996, and
1995 was $16.4  million,  $9.2  million,  and $6.4  million,  respectively.  The
Company's   investing   activities  were  primarily   acquisitions  and  capital
expenditures. In 1997, the Company acquired the assets of Graseby Controls, Inc.
and 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 TB Wood's
Canada Ltd. for $1.6 million to make the Company's Canadian  operations a wholly
owned subsidiary.

     Capital  expenditures  for  fiscal  years  1997,  1996,  and 1995 were $5.8
million,  $3.8 million,  and $4.5 million,  respectively.  During the last three
fiscal years, the Company has made significant  capital  investments in computer
controlled surface mounts, production lines for populating  semi-conductors onto
circuit boards,  computer numerically controlled ("CNC") machine tools, test and
production equipment at the Company's foundry in Chambersburg,  and equipment to
improve and modernize plants acquired through recent purchases of businesses. In
1997, the Company purchased a $2.1 million facility for it's electronics systems
business in Chattanooga,  Tennessee.  These capital  expenditures  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,  to finance a new production  facility for the electronics
systems  business.  In 1997,  the net  proceeds  from the new  revolving  credit
facility were $2.3 million which included  borrowings of approximately  $5.0 and
$5.7  million to finance  the  purchase  of Graseby  Controls,  Inc.  and Berges
electronic  GmbH,  respectively.  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 $1.9
million in dividends  during 1997.  The Company paid an $.08 per share  dividend
following the first,  second,  and third  quarters of 1997, and declared an $.08
dividend on January 8, 1998, paid on January 30, 1998, to shareholders of record
on January 16, 1998.

     The Company believes that it will have sufficient cash flow from operations
and available  borrowings to meet its future 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 risk and the risk of unfavorable
movements  in exchange  rates  between  the U.S.  dollar and each of the Mexican
peso,  Canadian dollar,  German mark, 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
effects on both total  return and reported  earnings.  The  Company's  financial
advisors,  both internal and external,  provide ongoing advice  regarding trends
that affect management's assessment.

     The  Securities and Exchange  Commission  has qualified  Mexico as a highly
inflationary economy under the provisions of SFAS No. 52. As of January 2, 1998,
the  remeasurement of the Mexico operation did not have a material effect on the
Company's statement of operations.

                                       12
<PAGE>

Year 2000

     Based on a review  of the  implications  of the Year  2000 on the  Company,
although final cost estimates  have yet to be  determined,  management  does not
currently  believe that the costs related to the Company's  compliance with the
Year 2000 issue will have material  adverse  effect on the  Company's  financial
position,  results of operations or cash flows.  However,  in the event that the
Company or any of the Company's  significant  suppliers or customers  experience
disruptions  due to the Year  2000  issue,  the  Company's  operations  could be
adversely affected.

Recent Accounting Pronouncements

     In March 1997, the Financial  Accounting  Standards  Board issued SFAS 128,
"Earnings  Per  Share,"  ("EPS")  which the  Company  adopted for the year ended
January  2,  1998.  Basic net 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 128.

     For the year ended  January 2,  1998,  the  Company  adopted  Statement  of
Financial  Accounting  Standards No. 129 ("SFAS 129") "Disclosure of Information
and Capital Structure". SFAS 129 requires disclosure of the pertinent rights and
privileges of all securities  other than ordinary common stock.  The Company has
disclosed such information in previous years' annual reports filed in Form 10-K.

     In July 1997, the Financial  Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS 130"),  "Reporting  Comprehensive Income".
The  statement  addresses  the  reporting  and display of changes in equity that
result from transactions and other economic events,  excluding transactions with
owners.  Management  has not  evaluated  the  impact  of this  statement  on the
financial statements.

     During 1998, the Company plans to adopt  Statement of Financial  Accounting
Standard No. 131 ("SFAS 131"),  "Disclosures about Segments of an Enterprise and
Related Information".  The statement addresses reporting of segment information.
Management  has not  evaluated  the impact of this  statement  on the  financial
statements.

Safe Harbor Statement

     Under the Private Securities  Litigation Reform Act of 1995, except for the
historical  information  contained herein,  the matters discussed in this annual
report are  forward-looking  statements  which involve risks and  uncertainties,
including   but  not  limited  to   economic,   competitve,   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
                                                                            Page

Report of Independent Public Accountants .....................................15

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

Consolidated Statements of Operations for the Years
  Ended January 2, 1998, January 3, 1997, and December 29, 1995 ..............17

Consolidated Statements of Changes in Shareholders'
  Equity (Deficit) for the Years Ended January 2, 1998,
  January 3, 1997, and December 29, 1995 .....................................18

Consolidated Statements of Cash Flows for the Years Ended
  January 2, 1998, January 3, 1997, and December 29, 1995 ....................19

Notes to Consolidated Financial Statements ...................................20




                                       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 2, 1998, and
January 3, 1997, and the related consolidated statements of operations,  changes
in shareholders' equity (deficit), and cash flows for each of the three years in
the period ended January 2, 1998.  These  financial  statements and the schedule
referred  to below  are the  responsibility  of the  Company's  management.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule 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 2, 1998 and January 3, 1997 and the results of their
operations  and their cash flows for each of the three years in the period ended
January 2, 1998 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 under Item 14(a)(2)
of this Form 10-K 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
audits 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
January 30, 1998




                                       15
<PAGE>


<TABLE>
<CAPTION>


                     TB Wood's Corporation And Subsidiaries
                           Consolidated Balance Sheets


(in thousands, except per share and share amounts)                                       1997          1996
--------------------------------------------------                                       ----          ----
ASSETS
Current Assets:
<S>                                                                                    <C>             <C>
Cash and cash equivalents                                                              $2,552          $306
Accounts receivable, less allowances for doubtful accounts, discounts,
     and claims of $476 and $437 in 1997 and 1996, respectively                        20,174        15,518
Inventories:
     Finished goods                                                                    15,417        16,293
     Work in process                                                                    8,467         7,994
     Raw materials                                                                      6,073         3,755
     LIFO reserve                                                                      (3,819)       (4,057)
                                                                                     ---------     ---------
                                                                                       26,138        23,985
Other current assets                                                                      967         1,053
                                                                                     ---------     ---------
     Total current assets                                                              49,831        40,862
                                                                                     ---------     ---------
Property, Plant, and Equipment:
Machinery and equipment                                                                36,782        33,075
Land, buildings, and improvements                                                      11,100         8,577

                                                                                       47,882        41,652
Less accumulated depreciation                                                         (23,794)      (21,154)
                                                                                     ---------     ---------

                                                                                       24,088        20,498
Other Assets:
Deferred income taxes (Note 5)                                                          4,602         5,249
Goodwill, net of accumulated amortization of
     $1,123 and $958 in 1997 and 1996, respectively                                     9,122         4,603
Other                                                                                   1,974         2,183
                                                                                     ---------     ---------
     Total other assets                                                                15,698        12,035
                                                                                     ---------     ---------
                                                                                      $89,617       $73,395
                                                                                     =========     =========


Liabilities and Shareholders' Equity (Deficit)
Current Liabilities:
Current maturities of long-term debt (Note 4)                                            $611          $520
Accounts payable                                                                        8,610         5,210
Checks outstanding                                                                      1,615         1,532
Accrued expenses (Note 3)                                                              10,987         8,384
Deferred income taxes (Note 5)                                                            729           539
                                                                                     ---------     ---------
     Total current liabilities                                                         22,552        16,185
Long-term debt, less current maturities (Note 4)                                       25,928        21,707
Postretirement benefit obligation, less current portion                                17,531        18,628
Commitments and Contingencies (Note 8)
Shareholders' Equity (Deficit):
Preferred stock, $.01 par value; 5,000,000 shares authorized,
     no shares issued or outstanding                                                        0             0
Common stock, $.01 par value; 40,000,000 shares authorized, 5,859,286 issued
and
     5,849,772  outstanding in 1997, and 5,827,397 shares issued and                       58            58
outstanding in 1996
Common stock held in treasury at cost; 9,514 in 1997 and 0 in 1996                       (181)            0
Additional paid-in capital                                                             28,340        28,158
Accumulated deficit                                                                    (4,408)      (11,306)
Foreign currency translation adjustment                                                  (203)          (35)
                                                                                     ---------     ---------
     Total shareholders' equity                                                        23,606        16,875
                                                                                     ---------     ---------
                                                                                      $89,617       $73,395
                                                                                     =========     =========
</TABLE>

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



                                       16
<PAGE>

<TABLE>
<CAPTION>



                     TB Wood's Corporation And Subsidiaries
                      Consolidated Statements of Operations

 (in thousands, except per share amounts)                                    1997         1996         1995
 ----------------------------------------                                    ----         ----         ----
<S>                                                                      <C>          <C>          <C>
Net sales                                                                $124,027     $102,505     $102,307
Cost of sales                                                              79,015       64,758       66,196
                                                                        ----------   ----------   ----------
     Gross profit                                                          45,012       37,747       36,111
Selling, general, and administrative expenses                              28,061       25,174       23,518
                                                                        ----------   ----------   ----------
     Operating income                                                      16,951       12,573       12,593
                                                                        ----------   ----------   ----------
Other expense:
     Interest expense and other finance charges                            (1,695)      (1,982)      (4,461)
     Other, net                                                              (773)        (593)        (467)
                                                                        ----------   ----------   ----------
          Other expense, net                                               (2,468)      (2,575)      (4,928)
                                                                        ----------   ----------   ----------
Income before provision for income taxes and extraordinary item            14,483        9,998        7,665
Provision for income taxes (Note 5)                                         5,794        4,053        3,066
                                                                        ----------   ----------   ----------
Income before extraordinary item                                            8,689        5,945        4,599
Extraordinary item, early extinguishment of debt
     (less related income tax benefit of $870)                                  0       (1,305)           0
                                                                        ----------   ----------   ----------
Net income                                                                 $8,689       $4,640       $4,599
                                                                        ==========   ==========   ==========

Per share of common stock:
 Basic:
     Income before extraordinary item                                       $1.49        $1.08        $1.36
     Extraordinary item                                                       .00         (.24)         .00
                                                                        ----------   ----------   ----------
Net income per common share                                                 $1.49         $.84        $1.36
                                                                        ----------   ----------   ----------
Weighted average shares of common stock                                     5,833        5,520        3,375
                                                                        ==========   ==========   ==========

Diluted:
     Income before extraordinary item                                       $1.47        $1.06        $1.21
     Extraordinary item                                                       .00         (.23)         .00
                                                                        ----------   ----------   ----------
Net income per common share                                                 $1.47         $.83        $1.21
                                                                        ==========   ==========   ==========
Weighted average shares of common stock
     and equivalents outstanding                                            5,921        5,600        3,810
                                                                        ==========   ==========   ==========
</TABLE>

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




                                       17
<PAGE>


<TABLE>
<CAPTION>

                                    TB Wood's Corporation And Subsidiaries
                       Consolidated Statements of Changes in Shareholders' Equity (Deficit)


                                                                                                                      Foreign
                                                                                    Additional                       Currency
                                               Common                   Treasury       Paid-In       Accumulated  Translation
(in thousands)                                  Stock     Warrants         Stock       Capital   Equity(Deficit)   Adjustment
--------------                                  -----     --------         -----       -------   ---------------   ----------

<S>                                               <C>         <C>             <C>       <C>            <C>             <C>
Balance, December 31, 1994                        $33         $500            $0        $5,429          $(18,693)       $(135)
Net income                                          0            0             0             0             4,599            0
Stock option compensation                           0            0             0           675                 0            0
Foreign currency translation adjustment             0            0             0             0                 0          104
                                                ------       ------        ------      --------        ----------      -------

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 401k 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)
                                                ======       ======       =======      ========          ========        =====


</TABLE>

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


                                       18
<PAGE>

<TABLE>
<CAPTION>

                                       TB Wood's Corporation And Subsidiaries
                                        Consolidated Statements of Cash Flows

(in thousands)                                                               1997           1996           1995
--------------                                                               ----           ----           ----

Cash Flows from Operating Activities:
<S>                                                                        <C>            <C>            <C>
Net income                                                                 $8,689         $4,640         $4,599
                                                                          --------       --------       --------
Adjustments  to  reconcile   net  income  to  net  cash  provided  by  operating
     activities:
     Depreciation and amortization                                          4,097          3,427          3,618
     Deferral of interest and management fees payable to                        0            288          1,152
affiliates
     Change in deferred income taxes, net                                     837         (1,095)           205
     Stock option compensation expense                                        101            140            675
     Net loss (gain) on sale of assets                                         10            (44)             0
     Write-off of noncompete agreement                                          0            563              0
     Extraordinary loss on early extinguishment of debt, net                    0          1,305              0
     Changes in working capital, net of effects of acquisitions:
          Accounts receivable                                                (173)          (854)          (115)
          Inventories                                                       1,876         (1,615)        (1,612)
          Prepaid expenses and other current assets                          (227)          (751)           (34)
          Accounts payable                                                  1,531            631           (467)
          Accrued and other liabilities                                        88          2,455          1,193
                                                                          --------       --------       --------
               Total adjustments                                            8,140          4,450          4,615
                                                                          --------       --------       --------
               Net cash provided by operating activities                   16,829          9,090          9,214
                                                                          --------       --------       --------
Cash Flows from Investing Activities:
Acquisitions, net of cash acquired                                         (9,914)        (2,920)             0
Capital expenditures                                                       (5,824)        (3,762)        (4,531)
Purchase of minority interest in subsidiary                                     0         (1,600)             0
Proceeds from sales of fixed assets                                            65            128             44
Other, net                                                                 (1,003)        (1,004)        (1,915)
                                                                          --------       --------       --------
     Net cash used in investing activities                                (16,676)        (9,158)        (6,402)
                                                                          --------       --------       --------
Cash Flows from Financing Activities:
Change in checks outstanding                                                   83           (516)          (383)
Repayments of subordinated note and associated taxes                            0        (13,094)             0
Proceeds from (repayments of ) long-term debt, net                          2,003        (14,564)        (2,131)
Repayments of original revolving credit facility, net                           0        (10,721)          (313)
Proceeds from new revolving credit facility, net (Note 4)                   2,300         20,200              0
Proceeds from public sale of common stock                                       0         19,823              0
Payment of dividends                                                       (1,866)        (1,386)             0
Proceeds from issuance of stock upon option exercise                           17            219              0
Treasury Stock                                                               (276)             0              0
                                                                          --------       --------       --------
     Net cash provided by (used in) financing activities                    2,261            (39)        (2,827)
                                                                          --------       --------       --------
Effect of changes in foreign exchange rates                                  (168)            (4)           103
                                                                          --------       --------       --------
Net increase(decrease) in cash and cash equivalents                         2,246           (111)            88
Cash and cash equivalents at beginning of year                                306            417            329
                                                                          ========       ========       ========
Cash and cash equivalents at end of year                                   $2,552           $306           $417
                                                                          ========       ========       ========

Income taxes paid during the year                                          $6,307         $5,409         $2,140
                                                                          ========       ========       ========
Interest paid during the year                                              $1,573         $2,040         $2,868
                                                                          ========       ========       ========

</TABLE>

The accompanying notes are an integral part of these consolidated 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 domestic
and  international  manufacturers and users of industrial  equipment.  Principal
products of TB Wood's Incorporated ("Wood's-U.S."), a wholly owned subsidiary of
TB Wood's Corporation,  include electronic drives,  integrated  electronic drive
systems,  mechanical belted drives,  and flexible  couplings.  Plant Engineering
Consultants,   Inc.   ("PEC"),   a  wholly  owned   subsidiary  of  Wood's-U.S.,
manufactures  integrated  electronic  drive  systems.  TB  Wood's  Canada,  Ltd.
("Wood's-Canada" {Note 9}) and TB Wood's Mexico, S.A., de C.V.  ("Wood's-Mexico"
{Note 9}),  wholly owned  subsidiaries  of  Wood's-U.S.,  manufacture and market
mechanical  industrial power  transmission  products and act as distributors for
electronic and mechanical  products  manufactured by the domestic  operations of
Wood's-U.S.  TB Wood's  North  Carolina  ("Wood's-NC"  {Note 9}), a wholly owned
subsidiary  of  Wood's-U.S.,  manufactures  and markets  Volkmann  (TM) brand of
high-frequency AC drives, other AC drives,  Ambi-Tech brand and other electronic
brakes and Soft Starts.  Berges  electronic  GmbH ("Berges"  {Note 9}), a wholly
owned subsidiary of Wood's-U.S.,  designs, manufactures and markets its own line
of AC drives for the European  market and acts as the European  distributor  for
electronic products  manufactured by the domestic  operations of Wood's-U.S.  To
allow for more timely  consolidation and reporting,  Berges'  operations will be
reported beginning in fiscal 1998 using a fiscal year starting December 1997 and
ending December 1998. Wood's-U.S.  was organized in 1857 and was incorporated in
Pennsylvania in 1906.

     The accompanying  consolidated financial statements include the accounts of
TB Wood's Corporation and its wholly owned  subsidiaries.  The minority interest
in Wood's-Canada, purchased by Wood's-U.S. in connection with the Initial Public
Offering   ("Offering"   {Note  9}),  was  not  separately   classified  in  the
accompanying  financial statements for 1995 because the minority owners were the
same  individuals  who owned the common  stock of  Wood's-U.S.  All  significant
intercompany balances and transactions have been eliminated.

Year-End

           Fiscal year-ends are as follows:
                    1997                     January 2, 1998
                    1996                     January 3, 1997
                    1995                   December 29, 1995

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Restricted Cash

     At January 2, 1998,  $420 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 the  new  production
facility for the electronics  systems business.  The funds will be used to repay
the bonds if not spent prior to April 1999.

Cash Equivalents

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



                                       20
<PAGE>



Property, Plant, and Equipment

     The  Company   depreciates  its  property,   plant,   and  equipment  using
principally  the  straight-line  method over the  estimated  useful lives of the
assets.  Equipment under capital leases is depreciated over the assets estimated
useful life and is included in machinery and equipment.  Maintenance  and repair
costs are charged to expense as incurred, and major renewals and betterments 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.

Inventories

     Wood's-U.S., PEC, and Wood's-NC inventories are stated at the lower of cost
or  market  using  the  last-in,   first-out  ("LIFO")  method.   Wood's-Canada,
Wood's-Mexico,  and Berges inventories are stated at the lower of cost or market
using the first-in, first-out method. Market is defined as net realizable value.
Cost  includes  raw  materials,   direct  labor,  and  manufacturing   overhead.
Approximately 78% and 90% of total inventories were valued using the LIFO method
at January 2, 1998 and January 3, 1997, respectively.

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. The Company has issued
letters of credit totaling $950 to cover incurred claims and other costs related
to the workers' compensation policy.

Foreign Currency Translation

     The financial  statements of  Wood's-Canada,  Wood's-Mexico and the balance
sheet of Berges  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  intercompany sales of
products between Wood's-U.S.,  Wood's-Canada and Wood's-Mexico,  are included in
other 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. As of January 2, 1998,
the  remeasurement of the Mexico operation did not have a material effect on the
Company's 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 the  Company  in 1986  and the  acquisition  of  certain
businesses and product lines (Note 9).

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.



                                       21
<PAGE>



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  2,  1998  the  number  of  treasury  shares  purchased  under  this
authorization  was 20,100 and the number of treasury  shares issued to employees
under option and purchase  plans was 4,436 and under the 401(k)  profit  sharing
plan was 6,150.

     The Company's  Employee Stock Purchase Plan ("ESPP")  enables  employees of
the Company to subscribe for shares of common stock on quarterly  offering dates
at a purchase  price which is the lesser of 90% of the fair market  value of the
shares  on the  first  day or the last  day of the  quarterly  period.  Employee
contributions to the ESPP were $63 for 1997.  Pursuant to the ESPP, 4,436 shares
were issued to employees  during 1997. At the annual  meeting on March 10, 1997,
the Company's  shareholders  approved the  reservation  of 500,000  shares to be
issued under the ESPP. As of January 2, 1998,  495,564  shares are available for
future issuances.

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  amounts of assets and liabilities and 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.



                                       22
<PAGE>



Sales

     The Company's five largest customers accounted for approximately 30%,
29%, and 28% of net sales for fiscal years 1997,  1996, and 1995,  respectively.
Of these  customers,  one accounted for  approximately  20% of net sales for the
year ended  January 2, 1998.  The loss of one or more of these  customers  could
have an adverse effect on the Company's performance and operations. Export sales
accounted for 17.0%, 17.7%, and 14.7% of total sales in fiscal years 1997, 1996,
and 1995,  respectively.  Intercompany  transactions  are  consummated  on terms
equivalent  to those  that  prevail  in  arms-length  transactions.  Information
regarding the Company's domestic and foreign operations is as follows:
<TABLE>
<CAPTION>

                          United       Wood's-                      Foreign
                          States        Canada        Berges         Other       Eliminations     Consolidated
                          ------        ------        ------         -----       ------------     ------------

Year ended
January 2, 1998
<S>                        <C>            <C>                <C>        <C>           <C>               <C>
Net Sales                  $122,613       $14,134            $0         $2,747        $(15,467)         $124,027
Operating Profit             16,068           740             0            143               0            16,951
Identifiable Assets          95,101         5,221        10,636          2,220         (23,561)           89,617
</TABLE>

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 issued SFAS 128,
"Earnings  Per  Share,"  ("EPS")  which the  Company  adopted for the year ended
January  2,  1998.  Basic net 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 128.



                                       23
<PAGE>

<TABLE>
<CAPTION>


         The computation of weighted average shares outstanding and net income per share are as follows:

(in thousands, except per share data)                                       1997          1996         1995
-------------------------------------                                       ----          ----         ----
Weighted average shares outstanding
<S>                                                                        <C>           <C>           <C>
Common shares outstanding for basic EPS                                    5,833         5,520         3,375
Shares issued upon assumed exercise of outstanding warrants                    0             0           375
Shares issued upon assumed exercise of outstanding stock options              88            80            60
                                                                         --------      --------      --------
Weighted average number of common and common equivalent shares
outstanding                                                                5,921         5,600         3,810
                                                                         --------      --------      --------

Income before extraordinary item                                          $8,689        $5,945        $4,599
Extraordinary item                                                             0        (1,305)            0
                                                                         --------      --------      --------
Net  income                                                               $8,689        $4,640        $4,599
                                                                         ========      ========      ========


Basic net income per common share:
Before extraordinary item                                                  $1.49         $1.08         $1.36
Extraordinary item                                                          0.00         (0.24)         0.00
                                                                         --------      --------      --------
Net Income                                                                 $1.49          $.84         $1.36
                                                                         ========      ========      ========

Diluted net income per common share:
Before extraordinary item                                                  $1.47         $1.06         $1.21
Extraordinary item                                                          0.00         (0.23)         0.00
                                                                         --------      --------      --------
Net Income                                                                 $1.47          $.83         $1.21
                                                                         ========      ========      ========
</TABLE>

     Effective in 1997, the Company  adopted  Statement of Financial  Accounting
Standards  No.  129  ("SFAS  129")   "Disclosure  of  Information   and  Capital
Structure".  SFAS 129 requires disclosure of the pertinent rights and privileges
of all securities  other than ordinary  common stock.  The Company has disclosed
such information in previous years' annual reports filed in Form 10-K.

     In July 1997, the Financial  Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income".
The  statement  addresses  the  reporting  and display of changes in equity that
result from transactions and other economic events,  excluding transactions with
owners.  Management  has not  evaluated  the  impact  of this  statement  on the
financial statements.

     In 1998,  the Company  plans to adopt  Statement  of  Financial  Accounting
Standard No. 131 ("SFAS 131"),  "Disclosures about Segments of an Enterprise and
Related Information".  The statement addresses reporting of segment information.
Management  has not  evaluated  the impact of this  statement  on the  financial
statements.

Reclassifications

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



                                       24
<PAGE>



3.     ACCRUED EXPENSES

Components of accrued expenses were as follows:

                                                     1997               1996
                                                     ----               ----

Accrued payroll and other compensation             $3,428             $2,619
Other accrued liabilities                           6,352              4,525
Accrued workers' compensation                       1,207              1,240
                                                 ---------           --------
Total                                             $10,987             $8,384
                                                 =========           ========



4.     LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Long-term debt and capital lease obligations consist of the following:
                                                     1997               1996
                                                    ----               ----

Unsecured revolving line of credit                $22,500            $20,200
Capital lease obligations                              35                307
Industrial revenue bond                             2,550                  0
Other                                               1,454              1,720
                                                 ---------           --------
                                                   26,539             22,227
Less current maturities                              (611)              (520)
                                                 =========           ========
                                                  $25,928            $21,707
                                                 =========           ========


Aggregate future maturities of long-term debt and capital lease obligations
as of January 2, 1998 are as follows:

     1998                                            $611
     1999                                             306
     2000                                             279
     2001                                             225
     2002                                          22,568
     Thereafter                                     2,550
                                                 ---------
                                                  $26,539
                                                 =========

     On July 18, 1996, the Company repaid principal of approximately  $16,674 on
a junior  subordinated  note  payable  to a company  formerly  related by common
ownership for approximately  $10,677.  The gain on extinguishment of $2,992, net
of tax, is reflected as a component of shareholders' equity.

     In connection with the proceeds received from the Offering of the Company's
common  stock  (Note 9),  the  Company  repaid a term loan  with  Fleet,  a debt
agreement  with  USL,  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 1996 as a result of the repayment of certain indebtedness.

     On October 10, 1996, the Company entered into a $40,000 unsecured revolving
credit facility  arranged by PNC Bank, N.A. The Company used the proceeds of the
credit facility to repay the balance of a revolver loan with Fleet.  The Company
realized an initial rate reduction of  approximately 50 basis points with future
rates based on the ratio of total  indebtedness to EBITDA, as defined.  The loan
agreement 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 loan agreement also contains other restrictive  covenants
which  include,  among other things,  restrictions  on outside  investments  and
restrictions on capital expenditures.



                                       25
<PAGE>



     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,  to finance the new production facility for the electronics
systems business.

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

                                           1997          1996           1995
                                           ----          ----           ----

Proceeds from the Fleet
     revolving credit facility               $0       $88,507       $100,977
Repayments of Fleet
     revolving credit facility                0       (99,228)      (101,290)
Proceeds from the PNC
     revolving credit facility           46,400        32,900              0
Repayments of the PNC
     revolving credit facility          (44,100)      (12,700)             0


5.     INCOME TAXES

         The  components of the  provision  (benefit) for income taxes are shown
below:
                                           1997          1996          1995
                                           ----          ----          ----

Current:

     Federal and state                   $4,365        $4,407        $2,837
     Foreign                                592           442            24
                                        --------      --------      --------
                                          4,957         4,849         2,861
                                        --------      --------      --------
Deferred:
     Federal and state                      837          (796)          203
     Foreign                                  0             0             2
                                        --------      --------      --------
                                            837          (796)          205
                                        --------      --------      --------
Provision for income taxes               $5,794        $4,053        $3,066
                                        ========      ========      ========


     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 provision  (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.



                                       26
<PAGE>


The components of deferred income taxes are as follows:

                                                        1997            1996
                                                        ----            ----

Deferred income tax liabilities:

Book basis in property over tax basis                 $(2,163)       $(1,536)
LIFO inventory basis differences                       (3,046)        (3,127)
Other                                                  (1,085)          (964)
                                                     ---------      ---------
Total deferred income tax liabilities                  (6,294)        (5,627)
                                                     ---------      ---------
Deferred income tax assets:
Postretirement benefits not
     currently deductible                               7,212          7,652
Accrued liabilities not currently deductible            1,498          1,394
Allowance for doubtful accounts and
     inventory reserves                                   825            662
Stock option compensation not
     currently deductible                                 106            326
Other                                                     526            303
                                                     ---------      ---------
Total deferred income tax assets                       10,167         10,337
                                                     ---------      ---------
Net deferred income tax asset                          $3,873         $4,710
                                                     =========      =========


     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:

                                              1997        1996        1995
                                              ----        ----        ----

Federal statutory income tax                $4,924      $3,399      $2,606
State income taxes, net of
     federal income tax benefit                651         456         460
Changes in the valuation
     allowance                                   0           0        (112)
Other, net                                     219         198         112
                                           --------    --------    --------
                                            $5,794       $4,05      $3,066
                                           ========     =======    ========



     In 1997,  1996, and 1995,  earnings  before income taxes  included  $1,259,
$884, and $283,  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  1993,  1994, and 1995 federal income tax returns.  The review did not
have a material effect on operations.

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 $2,002,  $1,664,  and $1,443 for
fiscal years 1997, 1996, and 1995, respectively.



                                       27
<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 nonproduction
unit domestic hourly employees. Under this plan, the Company matches a specified
percentage of each eligible employee's contribution.  Amounts contributed by the
Company under this  profit-sharing plan were approximately $530, $500, and $500,
for fiscal years 1997, 1996, and 1995,  respectively.  In addition,  the Company
has other noncontributory  profit-sharing plans covering its eligible production
employees  and Canadian  employees  for which $37, $40, and $41, were charged to
expense for the fiscal years 1997, 1996, and 1995, respectively.

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  vest 30% in January
1993,  15% in 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.  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.

     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  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.



                                       28
<PAGE>



     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 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  Rights  ("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.

     In June 1997,  the Company  granted  46,250  options at an option  price of
$14.00  per share and  92,500 at an option  price of $23.00.  The  options  vest
evenly  over a  three-year  period  from the  grant  date.  The  options  may be
exercised as they vest. The $14.00 options expire ten years from the grant date,
and the $23.00 options expire five years from the grant date.

     As of January 2, 1998, 143,063 options have been exercised and 135,189
are exercisable under the above plans at prices ranging from $2.52 to $7.74.

     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  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.

     The Company has elected to account for its stock-based  compensation  plans
under APB No. 25;  however,  the Company has computed  for pro forma  disclosure
purposes the value of all options  amended  during 1995 and granted  during 1997
using the Black Scholes option pricing model as prescribed by SFAS No. 123 using
the following assumptions:

                                                    1997        1995
                                                    ----        ----

Risk free interest rate                             5.5%        5.7%
Expected lives                                  10 years     4 years
Expected volatility                                31.3%       33.0%
Dividend yield                                      2.3%          0%


                                       29
<PAGE>


     The total  value of the  options  granted in 1997 was $265,  which would be
amortized over the vesting period. The total value of the options amended during
the year ended  December 29, 1995 was $975,  which would be  amortized  over the
vesting  period of the options.  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 1997,  1996,  and 1995 would
have been as follows:

                                            1997        1996        1995
                                            ----        ----        ----
Net income as reported                    $8,689      $4,640      $4,599

Pro forma                                  8,646       4,629       4,575

EPS as reported
     Basic                                  1.49         .84        1.36
     Diluted                                1.47         .83        1.21
Pro forma
     Basic                                  1.48         .84        1.36
     Diluted                                1.46         .83        1.20


Postretirement Benefits

     The Company  sponsors a defined benefit  postretirement  medical plan which
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  following  table  summarizes  the  Company's   postretirement  benefit
obligations and the assumptions used in determining postretirement benefit cost.

                                                         1997        1996
                                                         ----        ----

Accumulated postretirement benefit obligation:
Retirees                                               $4,326      $4,061
Fully eligible active plan participants                   999         938
Other active participants                               1,572       1,474
                                                     ---------   ---------
Total obligation                                        6,897       6,473
Unrecognized prior service gain
     and actuarial gains                               11,134      12,655
                                                    ----------   ---------
Postretirement benefit obligation                     $18,031     $19,128
                                                     =========   =========

Discount rate                                           7.75%       7.75%
                                                    ----------   ---------
Initial health care cost trend                          8.00%       8.00%
                                                    ----------   ---------
Ultimate health care cost trend rate                    5.00%       5.00%
                                                    ----------   ---------
Year ultimate health care cost
     trend rate reached                                  2004          2004
                                                    ----------    ----------

     The health care cost trend rate has an effect on the amounts  reported.  To
illustrate,  increasing the assumed health care cost trend rate by 1.0% for each
year would increase the APBO as of January 2, 1998 by approximately $950 and the
aggregate   of  service  and   interest   costs   components   of  net  periodic
postretirement benefit cost for fiscal year 1997 by approximately $135.



                                       30
<PAGE>



Net periodic postretirement benefit costs include the following components:

                                                            1997        1996
                                                            ----        ----

Service cost                                                $185        $140
Interest cost                                                483         762
Amortization                                              (1,521)       (475)
                                                          -------     -------
Net benefit (income) cost                                  $(853)       $427
                                                          =======     =======

     In 1997,  the Company  changed the  remaining  amortization  period for the
unrecognized prior service cost from 14.4 years to 5.4 years.

7.     TRANSACTIONS WITH AFFILIATE

     Prior to the  Offering  (Note 9), the  Company  had a  management  services
agreement and aircraft use  agreement.  The Company paid The NTC Group,  Inc. an
aggregate of $36 and $400 in fiscal years 1996 and 1995, respectively.

8.     COMMITMENTS AND CONTINGENCIES

Legal Proceedings

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

Environmental Risks

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

Operating Lease Commitments

     The Company leases office space,  office  equipment,  and other items under
noncancelable  operating leases. The expense for noncancelable  operating leases
was  approximately  $642, $600, and $582, for fiscal years 1997, 1996, and 1995,
respectively.   At  January  2,  1998,   future  minimum  lease  payments  under
noncancelable operating leases are as follows:

     1998                                            $418
     1999                                             260
     2000                                              63
     2001                                              20
     2002 and thereafter                               12
                                                    ------
                                                     $773
                                                    ======


                                       31
<PAGE>



9.     ACQUISITIONS, MERGER 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  installments  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.,  an established  designer and  manufacturer  of industrial  disc and gear
couplings, for approximately $1,471 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  electronics
GmbH, 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).

     The   acquisitions  of  Wood's-NC  and  Berges  are  not  material  to  the
consolidated financial statements.  Accordingly, pro forma results of operations
for the year ended January 2, 1998 have not been presented.

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.



                                       32
<PAGE>



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 ("USL"). 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 by selling  shareholders.  The Company also purchased the remaining 21.0%
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.
Accordingly,  pro forma results of operations for the year ended January 3, 1997
have not been presented.

10.      QUARTERLY FINANCIAL DATA (UNAUDITED)
<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
Basic net income per share                      0.37          0.37         0.38          0.38
Diluted net income per share                    0.36          0.36         0.37          0.37

Dividends declared                               .00           .08          .08           .08
Dividends paid                                   .08           .08          .08           .08

</TABLE>
<TABLE>
<CAPTION>

1996                                           First        Second        Third        Fourth
----                                           -----        ------        -----        ------

<S>                                          <C>           <C>          <C>           <C>
Sales                                        $23,813       $25,107      $25,849       $27,736
Gross profit                                   8,892         9,190        9,324        10,341
Gross profit %                                  37.3%         36.6%        36.1%         37.3%
Income before
     extraordinary item                          933 (1)     1,515        1,684         1,813
Basic net income per share
     before extraordinary item                   .20 (1)       .26          .29           .31
Basic net income (loss) per share               (.08)          .26          .29           .31

Diluted net income per share
     before extraordinary item                   .19 (1)       .26          .29           .31
Diluted net income (loss) per share             (.08)(2)       .26          .29           .31
Dividends declared                                 -           .08          .08           .16
Dividends paid                                     -           .08          .08           .08
</TABLE>

--------------------------------------------
(1)  Includes  a  nonrecurring  charge of $349  ($.07 per  share)  net of taxes,
related to the  write-off  of a  noncompete  agreement  in  February  1996.
(2) Includes extraordinary charges of $1,305 ($.27 per share), net of taxes, for
the early repayment of debt related to the Offering of stock in February 1996.



                                       33
<PAGE>



Item  9.  Changes  in and  Disagreements  With  Accountants  on  Accounting  and
          Financial Disclosure.

     None.

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

     The information  called for by this item regarding  directors and executive
officers is set forth in the Company's  definitive  Proxy Statement for the 1998
Annual Meeting in the sections  entitled  "Election of Directors",  "Management"
and  "Compliance  with Section  16(a) of the Exchange  Act" 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 1998 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 1998 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.

                                     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 14 through  34 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 2, 1998 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 Bylaws of the Company  (incorporated by reference
          to Form S-1 Exhibit 3.2).



                                       34
<PAGE>



4.1       Shareholders'  Agreements by and among TB 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.  Christenson,  Harold L. Coder, III,
          James E. Williams,  Joseph S. Augustine  (incorporated by reference to
          Form S-1 Exhibit 4.2).

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).

10.31     Junior  Subordinated  Promissory  Note dated  March 31, 1993 issued by
          T.B. Wood's Sons Company in favor of The Bibb Company (incorporated by
          reference to Form S-1 Exhibit 10.31).

10.32     Warrant to  Purchase  Common  Stock  dated  April 1993  issued by T.B.
          Wood's Sons Company to The Bibb Company  (incorporated by reference to
          Form S-1 Exhibit 10.32).

10.33     Subordinated Promissory Note dated April 2, 1993 issued by T.B. Wood's
          Sons  Company  in favor of  Charles  O.  Wood,  III,  together  with a
          Subordination  Agreement  dated  April  2,  1993 by T.B.  Wood's  Sons
          Company,  TB  Wood's  Canada,  Ltd.,  Mr.  Wood  and the  subordinated
          creditors  listed on the  signature  pages  thereto  (incorporated  by
          reference to Form S-1 Exhibit 10.33).

10.36     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).

10.37     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).

10.38     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).

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

10.40     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).



                                       35
<PAGE>



10.41     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).

10.43     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 10K, for fiscal year 1995, Exhibit 10.43).

10.44     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 10K, for fiscal year 1996, Exhibit 10.44).

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

10.46     Stock  Purchase  Agreement by and between TB Wood's  Incorporated  and
          Graseby Electro-Optics Inc., dated May 8, 1997

10.47     Translated   Stock   Purchase   Agreement   by  and  among  TB  Wood's
          Incorporated and Berges Antriebstechnik GmbH and Karen Sarstedt, dated
          October 23, 1997.

10.48     Form of the Non-Qualified  Stock Option  Agreements  between TB Wood's
          Corporation and Thomas C. Foley,  Michael L. Hurt,  Carl  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.

10.49     Form of the Non-Qualified  Stock Option  Agreements  between TB Wood's
          Corporation and Thomas C. Foley,  Michael L. Hurt,  Carl  Christenson,
          Michael  H.  Iversen,  Willard  C.  Macfarland,  Jr.,  and  other  key
          employees dated January 29, 1998 issued under the 1996 Plan.

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 1997.



                                       36
<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 31, 1998.

                              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.



/s/ THOMAS C. FOLEY          Chairman of the Board and Director   March 31, 1998
-------------------
Thomas C. Foley             (Principal Executive Officer)


/s/ MICHAEL L. HURT          President and Director               March 31, 1998
-------------------
Michael L. Hurt             (Principal Executive Officer)


/s/ JEAN-PIERRE L. CONTE     Director                             March 31, 1998
------------------------
Jean-Pierre L. Conte


/s/ CRAIG R. STAPLETON       Director                             March 31, 1998
----------------------
Craig R. Stapleton


/s/ ROBERT J. DOLE           Director                             March 31, 1998
------------------
Robert J. Dole


/s/ PHILIP A. GARTON         Vice President of Finance,           March 31, 1998
--------------------
Philip A. Garton             Corporate Controller
                            (Principal Financial Officer and
                             Principal Accounting Officer)




                                       37
<PAGE>

<TABLE>
<CAPTION>


                                             TB Wood's Corporation And Subsidiaries
                                                          Schedule II
                                                Valuation and Qualifying Accounts



           Column A               Column B                  Column C                        Column D            Column E
                                                            Additions
                                 Balance at                                          Deductions (write-offs
                                beginning of   Charged to costs   Charged to other   of bad debts, discounts   Balance at
         Description               period        and expenses         accounts       and claims in excess of  end of period
                                                                                          provision)(1)
----------------------------------------------------------------------------------------------------------------------------

Year ended December 29, 1995:
<S>                                      <C>                  <C>                                        <C>           <C>
  Allowance for doubtful                 $172                 273                                        (81)          $364

accounts
  Allowance for discounts and             207                  62                                       (123)           146
claims                                   -----               -----                                      -----          -----
                                          379                 335                 0                     (204)           510
                                         =====               =====              =====                   =====          =====



Year ended January 3, 1997:
  Allowance for doubtful                 $364                  65                                        (63)          $366
accounts
  Allowance for discounts and             146                                                            (75)            71
claims                                   -----               -----                                      -----          -----
                                          510                  65                 0                     (138)           437
                                         =====               =====              =====                   =====          =====


Year ended January 2, 1998:
  Allowance for doubtful                 $366                   0                                        (32)          $334
accounts
  Allowance for discounts and              71                  71                                           0           142
claims                                   -----               -----                                      -----          -----
                                          437                  71                 0                      (32)           476
                                         =====               =====              =====                   =====          =====
</TABLE>

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



                                       38
<PAGE>