<PAGE>




                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                                    FORM 10-Q


[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 1, 2005.

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSISTION PERIOD FROM _______ TO _________.


                         Commission File Number 1-14182


                              TB WOOD'S CORPORATION
             -----------------------------------------------------
             (Exact Name of Registrant as Specified in its charter)



       Delaware                                        25-1771145
(State of incorporation)                         (IRS Employer I.D. No)


                             440 North Fifth Avenue
                             Chambersburg, PA 17201
               (Address of principal executive offices, Zip Code)

                                  717-264-7161
              (Registrant's Telephone Number, Including Area Code)


Indicate by checkmark 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, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes [ ] No [X]

Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Securities Exchange Act of 1934. Yes [ ] No [X]

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

          Class                                   Outstanding at August 8, 2005
----------------------------                      ----------------------------
Common Stock, $.01 par value                             5,192,448



<PAGE>




                              TB WOOD'S CORPORATION

                           FORM 10-Q QUARTERLY REPORT

                                  JULY 1, 2005

                                EXPLANATORY NOTE



As previously announced in a Current Report on Form 8-K filed with the SEC on
August 19, 2005, the Audit Committee and management of TB Wood's Corporation
("TB Wood's" or the "Company") concluded that we would need to amend and restate
our previously issued financial statements and other financial information for
the fiscal year and quarter to date periods in each of the three years in the
period ended December 31, 2004, as presented in the Company's annual report on
Form 10K for the year ended December 31, 2004, and in the quarter ended March
31, 2005, as presented in the company's quarterly report on Form 10-Q for that
period, with respect to our accounting for post-employment healthcare benefit
obligations.

The financial statements reported in this Form 10-Q reflect the adjustments
necessary to restate the Company's condensed consolidated results of operation
for the quarter and six months ended July 1, 2004 and the condensed consolidated
financial position at December 31, 2004, and are more fully described in Note 1
to these condensed consolidated financial statements. Such restatement did not
materially affect periods subsequent to December 31, 2004.

As a result of the restatement, the Company has determined that the previously
issued 2002, 2003 and 2004 financial statements, and the previously issued 2005
quarterly statement, should no longer be relied upon until amendments thereof
are filed with the Securities and Exchange Commission.

Background

The Company sponsors an unfunded group medical insurance plan for its active
employees and for retirees and their dependents that retired before January 1,
2002. Prior to that date, active employees were eligible for post-employment
healthcare benefits; however, the Company curtailed those benefits in their
entirety for all active employees effective December 31, 2001. In December 2004,
the Company announced to those retirees still participating in the plan that the
Company would only provide coverage through age 65, and that the retiree share
of the cost would effectively be 100% of the Company's cost, together with an
administrative fee.

Previously, the Company only recognized the curtailment aspects of its 2001
actions, and did not account for the settlement, at no cost to the Company, of
the prior service costs and other unamortized gains and losses attributable to
the active employees when the amortization of such deferred credits would no
longer be matched with any future service period for those employees following
the plan change. In addition, under the Company's historic accounting treatment
prior to the restatement, following the withdrawal of approximately 90% of the
retiree participants in December 2004, also at no cost to the Company,
management concluded that the plan was effectively terminated, and applied
settlement accounting that resulted in recognition of an aggregate pre-tax gain
of approximately $9.3 million, equivalent to (i) the reduction in the
accumulated plan benefit obligation to the extent that retirees irrevocably
withdrew from the plan; (ii) the reduction of all unamortized prior service cost
credit relating to the action of curtailing benefits for active employees in
2001, and iii) all unamortized gains and losses remaining under the plan since
its inception.

                                       2
<PAGE>

As previously disclosed, the Company received a comment letter from the Staff of
the SEC during the second quarter of 2005 with respect to its 2004 Form 10-K
regarding its accounting treatment of its post-employment healthcare benefit
obligations. As part of its ongoing discussions with the Staff of the SEC and
upon further review of these events, the Company determined to restate its
treatment of these healthcare benefit obligations in accordance with Statement
of Financial Accounting Standards No. 106 relative to the 2001 curtailment of
post employment healthcare benefits for active employees, and resulting partial
plan settlement, as well as the partial plan settlement in 2004 associated with
the withdrawal from the plan by, and effective settlement with, a substantial
portion of retiree plan participants. As a result of the restatement, a
significant portion of the pre-tax $9.3 million non-cash gain recognized in the
fourth quarter of 2004 will, instead, be recognized in 2001. In addition,
amortization of previously deferred credits relating to other actuarial gains
and losses, including approximately $0.14 million of reductions in non-cash
expenses in each of the first two quarters of fiscal 2004 have been eliminated,
and the appropriate deferred tax consequences of the aforementioned adjustments
have been recorded. Certain disclosures in the notes to these condensed
consolidated financial statements have also been restated to reflect the above
restatement adjustments.

We are still in discussions with the SEC regarding the appropriate accounting
treatment of the Company's post-employment healthcare benefit obligations and we
intend to file an amendment to our annual report on Form 10-K for the fiscal
year ended December 31, 2004 as soon as our discussions are finalized. We
believe we have utilized the appropriate accounting treatment to arrive at the
restated 2004 condensed financial statements and information included herein,
but are still in discussions with the SEC, and therefore there is potential for
a change at some future date.




                                       3

<PAGE>


                              TB WOOD'S CORPORATION
                                FORM 10-Q - INDEX
                                  JULY 1, 2005
<TABLE>
<CAPTION>
Part 1. - Financial  Information                                                                                           Page No.
--------------------------------                                                                                           --------
<S>           <C>                                                                                                             <C>
Item 1.    Financial Statements (unaudited):

                 Condensed Consolidated Statements of Operations - for the Second Quarter
                   and Six Months ended July 1, 2005 and July 2,                                                                5

                 Condensed Consolidated Balance Sheets -
                    July 1, 2005 and December 31, 2004                                                                          6

                 Condensed Consolidated Statements of Cash Flows - for the Second Quarter
                   and Six Months ended July 1, 2005 and July 2, 2004                                                           7

                 Notes to Condensed Consolidated Financial Statements                                                           8

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations                                15

Item 3.   Quantitative and Qualitative Disclosures about Market Risk                                                           21

Item 4.   Controls and Procedures                                                                                              21

Part II - Other Information                                                                                                    22

Item 1    Legal Proceedings
Item 2    Changes in Securities and Use of Proceeds
Item 3    Defaults on Senior Securities
Item 4    Submission of Matters to a Vote of Security Holders
Item 5    Other Information
Item 6    Exhibits

Signatures                                                                                                                     23

</TABLE>

                                       4
<PAGE>


PART 1. - FINANCIAL INFORMATION
Item 1 Financial Statements


                     TB Wood's Corporation and Subsidiaries
                 Condensed Consolidated Statements of Operations
                                   (Unaudited)


<TABLE>
<CAPTION>

                                                                  Second quarter ended                 Six months ended
                                                           ---------------------------------------------------------------------
                                                               July 1,           July 2,           July 1,           July 2,
(in thousands, except per share amounts)                         2005              2004              2005             2004
---------------------------------------------------------- ----------------- ----------------- ----------------- ----------------
                                                                                 (Restated)                         (Restated)
<S>                                                                <C>               <C>               <C>             <C>


Net sales                                                        $27,844           $25,459           $55,555           $51,540
Cost of goods sold                                                19,568            17,211            39,126            35,778
                                                           ----------------- ----------------- ----------------- ----------------

Gross profit                                                       8,276             8,248            16,429            15,762

Selling, general and administrative expense                        7,133             7,737            13,982            14,664
Gain on termination of post employment life insurance
     benefit                                                         270                                 270
                                                           ----------------- ----------------- ----------------- ----------------

Operating income                                                   1,413               511             2,717             1,098

Interest expense and other finance charges                           524               378             1,140               747
                                                           ----------------- ----------------- ----------------- ----------------

Income before provision for income taxes                             889               133             1,577               351

Provision for income taxes                                           385               122               695               289
                                                           ----------------- ----------------- ----------------- ----------------

Net income                                                      $    504          $     11          $    882            $   62
                                                           ================= ================= ================= ================

PER SHARE AMOUNTS - BASIC AND DILUTED:

   Basic net income per common share                                $0.10            $0.00              $0.17            $0.01
                                                           ================= ================= ================= ================

   Diluted net income per common share                              $0.10            $0.00              $0.17            $0.01
                                                           ================= ================= ================= ================

   Basic weighted average shares of common stock and
     equivalents outstanding                                       5,183             5,161             5,181             5,161
                                                           ================= ================= ================= ================

   Diluted weighted average shares of common stock and
     equivalents outstanding                                       5,183             5,165             5,181             5,165
                                                           ================= ================= ================= ================

</TABLE>


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

                                       5


<PAGE>



                     TB Wood's Corporation and Subsidiaries
                      Condensed Consolidated Balance Sheets
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                   July 1,         December 31,
(in thousands, except per share amounts)                                                             2005              2004
---------------------------------------------------------------------------------------------- ----------------- --------------
                                                                                                                   (Restated)
<S>                                                                                                    <C>               <C>
ASSETS
Current Assets:
   Cash and cash equivalents                                                                          $ 2,008          $    556
   Accounts receivable less allowances of $938 at July 1, 2005
            and $880 at December 31, 2004                                                              15,042            13,353
   Inventories--Note 2                                                                                 17,710            20,418
   Other current assets                                                                                 3,115             3,742
                                                                                               ----------------- -----------------
      Total current assets                                                                             37,875            38,069

Property, plant and equipment                                                                          80,223            82,125
   Less accumulated depreciation                                                                       56,815            57,666
                                                                                               ----------------- -----------------
       Net property, plant and equipment                                                               23,408            24,459
Other Assets:
   Goodwill                                                                                             5,649             5,902
   Other                                                                                                1,177               940
                                                                                               ----------------- -----------------
      Total other assets                                                                                6,826             6,842
                                                                                               ----------------- -----------------

TOTAL ASSETS                                                                                          $68,109           $69,370
                                                                                               ================= =================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
    Current maturities of long-term debt                                                              $ 9,012           $ 7,605
    Accounts payable                                                                                    7,105             7,803
    Accrued expenses                                                                                    6,103             6,343
    Deferred income taxes                                                                                 278               134
                                                                                               ----------------- -----------------
        Total current liabilities                                                                      22,498            21,885

Long-term debt, less current maturities                                                                14,484            16,708
Postretirement benefit obligation, less current portion                                                   385               542
Deferred income taxes                                                                                     449               687

Shareholders' Equity:
    Preferred stock, $.01 par value, 100 shares authorized at July 1, 2005 and
      December 31, 2004, and no shares issued or outstanding                                                --                --
    Common stock, $.01 par value, 10,000,000 shares authorized; 5,639,798 issued; 5,187,498
     and 5,172,690 outstanding at July 1, 2005 and December 31, 2004                                       57                57
    Additional paid-in-capital                                                                         27,206            27,095
    Retained earnings                                                                                   7,587             6,756
    Accumulated other comprehensive income (loss)                                                        (182)              158
    Treasury stock at cost                                                                             (4,375)           (4,518)
                                                                                               ----------------- -----------------
          Total shareholders' equity                                                                   30,293            29,548
                                                                                               ----------------- -----------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                            $68,109           $69,370
                                                                                               ================= =================
</TABLE>

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

                                       6
<PAGE>


                     TB Wood's Corporation and Subsidiaries
                 Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                         Second quarter ended              Six months ended
                                                                    ------------------------------- ------------------------------
                                                                       July 1,         July 2,         July 1,         July 2,
(in thousands)                                                           2005            2004            2005            2004
------------------------------------------------------------------- --------------- --------------- --------------- ---------------
                                                                                        (Restated)                    (Restated)
<S>                                                                         <C>            <C>            <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income                                                              $   504        $     11         $   882        $     62
Adjustments to reconcile net income to net cash provided by
operating activities:
     Depreciation and amortization                                        1,212           1,329           2,471           2,680
     Change in deferred income taxes, net                                    67            (108)            (94)           (217)
     Gain of termination of benefit plan                                   (270)                           (270)
     Other                                                                  (34)             70              50             136
     Changes in operating assets and liabilities:
         Accounts receivable                                                778             185          (1,689)         (2,358)
         Inventories                                                      1,622          (1,098)          2,708          (1,378)
         Other current assets                                               158             121             627             (87)
         Accounts payable                                                (1,419)           (230)           (698)            597
         Accrued and other liabilities                                     (176)           (147)           (125)            (48)
                                                                    --------------- --------------- --------------- ---------------
     Total adjustments                                                    1,938             122           2,980            (675)
                                                                    --------------- --------------- --------------- ---------------
Net cash provided by (used in) operating activities                       2,442             133           3,862            (613)

CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures                                                   (898)           (834)         (1,349)         (1,207)
    Other                                                                   444             191              67              15
                                                                    --------------- --------------- --------------- ---------------
Net cash used in investing activities                                      (454)           (643)         (1,282)         (1,192)

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from long-term debt                                             --              18          13,000              18
    Repayments of long-term debt                                         (1,053)            (22)         (1,698)            (42)
    Proceeds from revolving credit facilities                            27,554           9,380          57,547          20,444
    Repayments of revolving credit facilities                           (27,632)         (8,801)        (69,666)        (17,671)
    Payments of dividends                                                    --            (465)             --            (929)
    Issuance of treasury stock                                               16              14              29              27
                                                                    --------------- --------------- --------------- ---------------
Net cash provided by financing activities                                (1,115)            124            (788)          1,847

Effect of changes in foreign exchange rates                                (211)             50            (340)            (42)
                                                                    --------------- --------------- --------------- ---------------
Net increase in cash and cash equivalents                                   662            (336)          1,452             ---
Cash and cash equivalents at beginning of period                          1,346           1,117             556             781
                                                                    --------------- --------------- --------------- ---------------
Cash and cash equivalents at end of period                              $ 2,008        $    781         $ 2,008        $    781
                                                                    =============== =============== =============== ===============

Income taxes paid (refunded)                                            $   125       $      29         $   235        $   (310)
                                                                    =============== =============== =============== ===============

Interest paid                                                          $    693        $    394      $    1,247        $    774
                                                                    =============== =============== =============== ===============
</TABLE>

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


                                       7


<PAGE>


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

1.       Basis of Presentation

         In the opinion of management, the accompanying unaudited condensed
         consolidated financial statements contain all adjustments consisting of
         normal recurring adjustments necessary to present fairly the
         consolidated financial position of TB Wood's Corporation and
         Subsidiaries (the "Company") and the results of their operations and
         cash flows for the periods presented. Certain information and footnote
         disclosures normally included in the financial statements prepared in
         accordance with accounting principles generally accepted in the United
         States have been condensed or omitted. Certain prior period amounts
         have been reclassified to conform to the current period presentation.

         These financial statements should be read together with the audited
         financial statements and notes in the Company's 2004 Annual Report on
         Form 10-K filed with the Securities and Exchange Commission. Operating
         results for the interim periods presented are not necessarily
         indicative of the results that may be expected for the full fiscal
         year. Management concluded that it had incorrectly applied the
         provisions of Statement of Financial Accounting Standards No. 106
         relative to the 2001 curtailment of post employment healthcare benefits
         for active employees, and resulting partial plan settlement, as well as
         the partial plan settlement in 2004 associated with the change in
         benefit cost sharing arrangements for retiree plan participants. The
         matter consists of errors related to accounting for certain amendments
         to the Company post-employment medical plan, primarily related to
         transactions recorded in 2004 and 2001.

         We expect this will result in the restatement of amounts previously
         reported in the Company's financial statements for the years 2004, 2003
         and 2002, including the 2004 quarterly financial statements. The
         restatements reported have no effect on the Company's past, current or
         future revenues or cash flows. The determination to restate the
         consolidated financial statements was approved by the audit committee
         of the Company's board of directors upon the recommendation of TB
         Wood's senior management. The 2004 quarterly financial statements
         included herein have been adjusted to reflect the effects of the
         anticipated restatement. In addition, certain disclosures in other
         notes to these condensed consolidated financial statements have been
         revised to reflect the restatement adjustments. The effect of the
         restatement on the Company's results of operations and financial
         position for the quarter ended April 1, 2005, as previously reported,
         was not material. The table below shows the impact of the restatement
         on the quarter and six months ended July 2, 2004 included in the
         previously filed condensed consolidated financial statements:
<TABLE>
<CAPTION>
                                                                IMPACT OF THE   AS PREVIOUSLY
                                                    AS ADJUSTED  RESTATEMENT       FILED
                                                    -----------------------------------------
<S>                                                     <C>         <C>             <C>
Quarter ended July 2, 2004
Selling, general, and administrative expenses        $ 7,737      $ 137           $7,600
Operating income                                         511       (137)             648
Income (loss) before income taxes                        133       (137)             270
Provision for income taxes                               122        (53)             175
                                                    -----------------------------------------
Net income (loss)                                       $ 11      $ (84)            $ 95
                                                    =========================================
</TABLE>

                                       8

<PAGE>

<TABLE>
<CAPTION>

                                                                                          IMPACT OF THE AS PREVIOUSLY
                                                                           AS ADJUSTED     RESTATEMENT      FILED
                                                                         --------------- -------------- -------------
                         <S>                                                 <C>              <C>            <C>
                 Six months ended July 2, 2004
                 -----------------------------
                 Selling, general, and administrative expenses            $14,664            $ 274          $14,390
                 Operating income                                           1,098             (274)           1,372
                 Income (loss) before income taxes                            351             (274)             625
                 Provision for income taxes                                   289             (107)             396
                                                                         --------------- -------------- -------------
                 Net income (loss)                                        $    62            $(167)         $   229
                                                                         =============== ============== =============
</TABLE>

<TABLE>
<CAPTION>
               December 31, 2004                                                                    AS PREVIOUSLY
               -----------------                                                   AS ADJUSTED          FILED
                                                                               ------------------- -----------------
                   <S>                                                                   <C>                <C>
               Liabilities:
                   Postretirement benefit obligation, less current portion
                                                                                     $     542           $     235
                   Deferred income taxes, non-current                                      687                 807

               Shareholders' equity
                  Retained earnings                                                      6,756               6,943
                    Total shareholders' equity                                          29,548              29,735
                     Total Liabilities and Stockholders' Equity                        $69,370             $69,370
</TABLE>

         Effective January 1, 2005 the Company adopted a calendar year as the
         annual period for reporting its financial results. Interim periods
         consist of four quarters of 13 weeks each, except for the fourth
         quarter that ends on December 31. Previously, the Company reported on a
         52/53 week fiscal year ending on the Friday nearest December 31. Fiscal
         2004 was a 52-week year that ended on December 31, 2004, and this
         change is not expected to have any material impact on comparability
         between fiscal reporting periods.

2.       Inventories and Cost of Goods Sold

         The Company uses the last-in, first-out ("LIFO") method for a majority
         of inventories located in the United States, which represents
         approximately 72% and 74% of inventories at July 1, 2005 and December
         31, 2004 respectively. Inventories for foreign operations are stated at
         the lower of cost or market using the first-in, first-out ("FIFO")
         method. An actual valuation of inventory under the LIFO method can only
         be made at the end of each year based upon the inventory levels and
         costs at that time. Accordingly, interim LIFO inventory determinations
         must necessarily be based on management's estimates of expected
         year-end inventory levels and costs. Because these are subject to many
         forces beyond management's control, interim results are subject to
         final year-end LIFO inventory valuation adjustments. The major classes
         of inventories are valued principally using the "last in first out"
         (LIFO) method, and consisted of the following:
<TABLE>
<CAPTION>
                                                                                                   July 1          December 31
                                                                                                    2005               2004
                                                                                              ----------------- -------------------
               <S>                                                                                    <C>               <C>
          Finished goods                                                                            $11,771           $14,296
          Work in process                                                                             4,047             3,714
          Raw materials                                                                               8,027             8,490
          LIFO reserve                                                                               (6,135)           (6,082)
                                                                                              ----------------- -------------------
          Inventory value at LIFO                                                                   $17,710           $20,418
                                                                                              ================= ===================
</TABLE>

                                       9
<PAGE>

          During the second quarter of 2005, the LIFO reserve was increased by
          $223, while in the second quarter of 2004 the LIFO reserve remained
          unchanged. For the first six months of 2005, the LIFO reserve was
          increased by $53, while during the similar period 2004 it was
          increased by $37. Had the Company utilized the FIFO method of
          accounting for all of its inventories, costs of goods sold would have
          been lower in 2005 and 2004 by the respective amounts of the
          aforementioned changes in LIFO reserve.
          Shipping and handling costs incurred by the Company to deliver
          manufactured goods to its customers are not included in costs of goods
          sold but are presented as an element of selling, general and
          administrative expense. The Company incurred $1,593 and $1,669 of
          shipping and handling costs in the second quarters ended July 1, 2005
          and July 2, 2004, respectively. The corresponding year to date amounts
          were $3,230 and $3,295, respectively.

3.       Shareholders' Equity

         During the first six months of 2005 the Company issued 14,808 treasury
         shares to participants in Company sponsored employee stock purchase and
         401(k) retirement plans.

         On February 11, 2005, the Company granted options for the purchase of
         146,500 shares of the common stock to employees and directors at
         exercise prices equal to or in excess of market price on the date of
         grant. These options vest over three years following the grant date and
         expire on February 11, 2015. The Company follows Financial Accounting
         Standards Board (FASB) Statement of Financial Accounting Standards
         (SFAS) No. 123, as amended by SFAS No. 148, to account for stock based
         compensation cost using the fair value method. Stock based compensation
         cost, recorded as an after tax cost, was $35 and $29 for the second
         quarter of 2005 and 2004 respectively, and $69 and $53 for the first
         six months of 2005 and 2004, respectively.

4.       Earnings Per Share

         Basic earnings per share is computed by dividing net income (loss) by
         the weighted average shares outstanding. Diluted earnings per share is
         computed by dividing net income (loss) by the weighted average shares
         outstanding and common equivalent shares if dilutive. The computation
         of weighted average shares outstanding is as follows:
<TABLE>
<CAPTION>
                                                                        Second quarter ended             Six months ended
                                                                      July 1,         July 2,         July 1,        July 2,
                                                                        2005            2004            2005           2004
                                                                    -------------- --------------- --------------- -------------
                  <S>                                                     <C>             <C>             <C>            <C>
          Basic   weighted   average   number  of  common  shares
              outstanding                                                5,183           5,161           5,181           5,161
          Shares  issuable upon assumed  exercise of  outstanding
              stock options                                                 --               4              --               4
                                                                    -------------- --------------- --------------- -------------
          Diluted   weighted  average  number  of  common  shares
              outstanding                                                5,183           5,165           5,181           5,165
                                                                    ============== =============== =============== =============
</TABLE>

         Total outstanding options to purchase 679,451 and 712,567 shares of
         common stock as of July 1, 2005 and July 2, 2004, respectively, are not
         included in the above calculation as their effect would be
         anti-dilutive.

                                       10
<PAGE>




5.       Other Comprehensive Income

         Total comprehensive income (loss) was as follows:
<TABLE>
<CAPTION>
                                                                       Second quarter ended                 Six months ended
                                                                    July 1,           July 2,            July 1,         July 2,
                                                                     2005               2004              2005            2004
                                                                ----------------- ------------------ ----------------- -------------
                                                                                       (Restated)                         (Restated)
              <S>                                                      <C>               <C>                <C>                <C>
          Net income                                                   $404              $ 11               $882               $62
          Other comprehensive (loss):
            Foreign currency translation adjustments                   (211)               50               (340)              (42)
                                                                ----------------- ------------------ ----------------- -------------
          Total comprehensive income                                  $ 293              $ 61              $ 542              $ 20
                                                                ================= ================== ================= =============
</TABLE>

         Accumulated other comprehensive income (loss), net of income tax, is
         comprised of aggregate currency translation adjustments of $(182) and
         $158 as of July 1, 2005 and December 31, 2004, respectively.

6.       Postretirement Benefit

         In the second quarter of 2005, the Company announced to employees that
         it was discontinuing its sponsorship of an unfunded defined benefit
         post employment group term life insurance plan that provided life
         insurance coverage for active employees and retirees. As a result the
         Company recognized a non-recurring gain of $270 from the termination of
         this benefit program.

         The Company sponsors an unfunded group medical insurance plan that
         provides health insurance coverage for a limited number of retirees
         and/or their dependents that retired before January 1, 2002. Prior to
         that date, active employees were eligible for post-employment
         healthcare benefits; however, the Company curtailed those benefits in
         their entirety for all active employees effective December 31, 2001. In
         December 2004, the Company announced to those retirees still
         participating in the plan that the Company would only provide coverage
         through age 65, and that the retiree share of the cost would
         effectively be 100% of the Company's cost, together with an
         administrative fee.

         As described in Note 1, the Company expects to restate its previously
         issued financial statements for 2004 as a result of discussions with
         the SEC in connection with a comment letter the Company received during
         the second quarter of 2005 with respect to its Annual Report on Form
         10-K for the year ended December 31, 2004 regarding its accounting
         treatment in the fourth quarter of 2004 of its post-employment
         healthcare benefits plan. Prior to the restatement described in this
         Form 10-Q, the Company only recognized the curtailment aspects of its
         2001 actions, and did not account for the settlement, at no cost to the
         Company, of the prior service costs and other unamortized gains and
         losses attributable to the active employees when the amortization of
         such deferred credits would no longer be matched with any future
         service period for those employees following the plan change. In
         addition, under the accounting treatment in effect prior to the
         restatement, following the withdrawal of approximately 90% of the
         retiree participants in December 2004, also at no cost to the Company,
         management concluded that the plan was effectively terminated, and
         applied settlement accounting that resulted in recognition of an
         aggregate pre-tax gain of approximately $9.3 million, equivalent to i)
         the reduction in the accumulated plan benefit obligation to the extent
         that retirees irrevocably withdrew from the plan; ii) the reduction of
         all unamortized prior service cost credit relating to the action of
         curtailing benefits for active employees in 2001, and iii) all
         unamortized gains and losses remaining under the plan since its
         inception.

                                       11
<PAGE>

         Following discussions with the Staff of the Securities and Exchange
         Commission ("SEC") and upon further review of these events, the Company
         determined to restate its treatment of these healthcare benefit
         obligations in accordance with Statement of Financial Accounting
         Standards No. 106 relative to the 2001 curtailment of post employment
         healthcare benefits for active employees, and resulting partial plan
         settlement, as well as the partial plan settlement in 2004 associated
         with the withdrawal from the plan by, and effective settlement with, a
         substantial portion retiree plan participants. The effect of applying
         settlement accounting to these events requires the immediate
         recognition of all prior service costs and the pro rata portion of
         unamortized other actuarial gains and losses attributable to active
         employees at the time the Company's obligation to such employees was
         eliminated. While discussions with the Staff of the SEC are continuing
         with respect to this matter, a determination to restate the
         consolidated financial statements was approved by the audit committee
         of the Company's board of directors upon the recommendation of TB
         Wood's senior management.

         The effects of the anticipated restatement described above have been
         reflected to the extent they pertain to the periods included in the
         Form 10-Q. As a result of the restatement, the amount of the
         amortization previously recognized in 2004 relative to then recorded
         deferred credits relating to unamortized actuarial gains and losses has
         been reduced. At December 31, 2004, such deferred credits approximated
         $0.2 million, and will be amortized over the remaining estimated four
         year term of participation by the existing plan participants. In 2005
         and 2004, as restated, the Company recognized net periodic benefits of
         $11 and $57 in the second quarter, and $22 and $114 for the first six
         months, respectively. All gains are presented as a reduction of
         selling, general and administrative expense. Future contributions to
         post-retirement benefit programs are not expected to be material.

                                       12
<PAGE>



7.       Business Segment Information

         The Company's reportable segments are business units that manufacture
         and market separate and distinct products and are, in part, managed
         separately because each business requires different processes,
         technologies and marketing strategies.
<TABLE>
<CAPTION>
                                                                      Second quarter ended              Six months ended
                                                                --------------------------------------------------------------------
                                                                    July 1,         July 2,         July 1,         July 2,
                                                                      2005            2004            2005            2004
                                                                --------------------------------------------------------------------
                                                                                (Restated)                      (Restated)
<S>                                                                       <C>           <C>             <C>             <C>
          Sales:
             Mechanical Segment                                       $18,283         $16,263         $36,436         $32,525
             Electronics Segment                                        9,561           9,196          19,119          19,015
                                                                --------------- --------------- --------------- ---------------
                                                                      $27,844         $25,459         $55,555         $51,540
                                                                --------------- --------------- --------------- ---------------

          Operating income (loss):
             Mechanical Segment                                        $1,117          $1,153          $2,078          $1,854
             Electronics Segment                                           26            (642)            358            (756)
                                                                --------------- --------------- --------------- ---------------
                                                                       $1,143            $511          $2,436          $1,098
                                                                --------------- --------------- --------------- ---------------

          Depreciation and amortization:
             Mechanical Segment                                        $  660          $  722        $  1,337        $  1,446
             Electronics Segment                                          286             344             592             704
             Corporate                                                    266             263             542             530
                                                                --------------- --------------- --------------- ---------------
                                                                       $1,212          $1,329          $2,471          $2,680
                                                                --------------- --------------- --------------- ---------------

          Expenditures for long-lived assets:
             Mechanical Segment                                          $173            $716            $341          $1,037
             Electronics Segment                                          499              90             720             118
             Corporate                                                    226              28             288              52
                                                                --------------- --------------- --------------- ---------------
                                                                         $898            $834          $1,349          $1,207
                                                                --------------- --------------- --------------- ---------------

          Assets:                                                   July 1,     December 31,
                                                                      2005            2004
                                                                --------------- ---------------
             Mechanical Segment                                       $42,869         $43,541
             Electronics Segment                                       21,034          22,136
             Corporate                                                  4,206           3,693
                                                                      $68,109         $69,370

</TABLE>

         The Company measures its business segments at the operating income
         level, excluding gains from the termination and settlement of benefit
         programs, and does not allocate interest and other finance costs to
         determine pre-tax income on an operating segment basis.

                                       13

<PAGE>




8.       Subsequent Events

          On August 9, 2005, the Company offered to purchase up to 750,000
          shares of its common stock at a price not greater than $7.50 nor less
          than $5.00 per share through a modified "Dutch Auction" procedure
          ("Offer"). Under the terms of the offer, the Company will select the
          lowest purchase price that will allow it to buy 750,000 shares of
          common stock or, if a lesser number of shares of common stock are
          properly tendered and subject to satisfaction of the Minimum Share
          Condition described below, all shares of common stock that are
          properly tendered and not withdrawn. All shares of common stock
          acquired in the Offer will be acquired at the same purchase price
          regardless of whether the shareholder tendered at a lower price. The
          Offer is currently scheduled to expire on September 6, 2005.

          The offer is subject to a number of conditions, including (i)
          shareholders tendering and not withdrawing before the expiration time
          in the aggregate a minimum of 500,000 shares (the "minimum share
          condition") and (ii) the receipt by the Company of subordinated debt
          financing on terms and conditions satisfactory to it, in its
          reasonable judgment, in an amount expected to be $10 million, to fund
          these share purchases and other transactions described below. The
          Company expects borrowings under the subordinated debt facility to
          have a stated interest rate of 12% per annum and to have a maturity
          date seven years following initial borrowings. In addition, the
          Company expects that the creditor will be granted a warrant to
          purchase shares of its common stock equal to up to 2.67% of its shares
          (on a fully diluted basis) at a price based upon the average trading
          price for the twenty trading days prior to this Offer.

          Assuming that 750,000 shares of common stock are tendered in the Offer
          at a price between $5.00 and $7.50 per share, the aggregate purchase
          price will be between approximately $3.8 million and $5.6 million. In
          preparation for making the Offer, the Company amended its senior bank
          loan agreement, extending the term thereof from January 2007 to April
          2009. The amendment requires that a portion of the senior debt
          outstanding at the time the tender offer is completed ($2.25 million
          at July 1, 2005) be repaid with the proceeds from unsecured
          subordinated financing. The Company also plans to repay additional
          senior bank debt to the extent there are unused subordinated debt
          proceeds for additional working capital. The fees and expenses owed to
          the senior bank in connection with the aforementioned amendment,
          together with the fees and expenses of this Offer and borrowing under
          its proposed new subordinated debt facility, will be approximately
          $0.8 million.







                                       14



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

The Company is a worldwide manufacturer of mechanical and electronic products
used in the process of power transmission for industrial and other commercial
applications. The following tables, derived from the Company's condensed
consolidated financial statements, presents selected elements of the Company's
operating results, and the changes thereto, for the second quarter and six
months year to date of the current and the immediately preceding year. Amounts
presented in Item 2 are in thousands of dollars, unless otherwise indicated.
<TABLE>
<CAPTION>

                                                                                        Second quarter ended
                                                                        July 1,         July 2,        Dollar Change  % Change
                                                                          2005            2004
                                                                                     (Restated)
<S>                                                                          <C>             <C>              <C>         <C>
          Sales
             Mechanical Segment                                            $18,283         $16,263          $2,020       12.4%
             Electronics Segment                                             9,561           9,196             365        4.0%
                                                                     --------------- --------------- ---------------
                                                                     --------------- --------------- ---------------
                 Total Sales                                               $27,844         $25,459          $2,385        9.4%

          Cost of Sales
             Mechanical Segment                                            $13,218         $11,139          $2,079       18.7%
             Electronics Segment                                             6,350           6,372             (22)      (0.3%)
                                                                     --------------- --------------- ---------------
                                                                     --------------- --------------- ---------------
                 Total Cost of Sales                                       $19,568         $17,511          $2,057       11.7%

          Gross Profit
             Mechanical Segment                                             $5,065          $5,124           $ (59)      (1.2%)
             Electronics Segment                                             3,211           2,824             387       13.7%
                                                                     --------------- --------------- ---------------
                                                                     --------------- --------------- ---------------
                 Total Gross Profit                                         $8,276          $7,948            $328        4.1%

          Selling, General and Administrative Expense                       $7,133          $7,437           $(304)      (4.1%)

          Sales
             Mechanical Segment                                            65.7%           63.9%
             Electronics Segment                                           34.3%           36.1%
                                                                     --------------- ---------------
                                                                     --------------- ---------------
                 Total Sales                                              100.0%          100.0%

          Cost of Sales as a Percentage of Sales
             Mechanical Segment                                            72.3%           68.5%
             Electronics Segment                                           66.4%           69.3%
                 Total Cost of Sales                                       70.3%           68.8%

          Gross Profit as a Percentage of Sales
             Mechanical Segment                                            27.7%           31.5%
             Electronics Segment                                           33.6%           30.7%
                 Total Gross Profit                                        29.7%           31.2%

          SG&A Expenses as a Percentage of Sales                           25.7%           29.2%

</TABLE>

                                       15
<PAGE>


<TABLE>
<CAPTION>

                                                                                          Six months ended
                                                                        July 1,         July 2,        Dollar Change  % Change
                                                                          2005            2004
                                                                                     (Restated)
<S>                                                                        <C>               <C>               <C>       <C>
          Sales
             Mechanical Segment                                            $36,436         $32,525          $3,911       12.0%
             Electronics Segment                                            19,119          19,015             104        0.5%
                                                                     --------------- --------------- ---------------
                                                                     --------------- --------------- ---------------
                 Total Sales                                               $55,555         $51,540          $4,015        7.8%

          Cost of Sales
             Mechanical Segment                                            $26,591         $23,122          $3,469       15.0%
             Electronics Segment                                            12,535          12,956            (121)      (3.2%)
                                                                     --------------- --------------- ---------------
                                                                     --------------- --------------- ---------------
                 Total Cost of Sales                                       $39,126         $36,078          $3,348        9.4%

          Gross Profit
             Mechanical Segment                                             $9,845          $9,403           $ 442        4.7%
             Electronics Segment                                             6,584           6,059             525        8.7%
                                                                     --------------- --------------- ---------------
                                                                     --------------- --------------- ---------------
                 Total Gross Profit                                        $16,429         $15,462            $967        6.3%

          Selling, General and Administrative Expense                      $14,892         $14,364           $(382)      (2.7%)

          Sales
             Mechanical Segment                                            65.6%           63.1%
             Electronics Segment                                           34.4%           36.9%
                                                                     --------------- ---------------
                                                                     --------------- ---------------
                 Total Sales                                              100.0%          100.0%

          Cost of Sales as a Percentage of Sales
             Mechanical Segment                                            73.0%           71.1%
             Electronics Segment                                           65.6%           68.1%
                 Total Cost of Sales                                       70.4%           70.0%

          Gross Profit as a Percentage of Sales
             Mechanical Segment                                            27.0%           28.9%
             Electronics Segment                                           34.4%           31.9%
                 Total Gross Profit                                        29.6%           30.0%

          SG&A Expenses as a Percentage of Sales                           25.2%           27.9%
</TABLE>


Second quarter 2005 revenues grew $2.4 million, or 9.4% over similar quarter in
2004. Major contribution to this gain came from the Company's largest
distributor, where second quarter sales increased $1.0 million or 24.7% over
same period in 2004. The Company believes that inventory levels at this customer
have been reduced to near targeted levels, and that this improvement should
continue through the remainder of the year if the overall economy sustains its
current pace. 5% points of the Company's sales gain was driven by volume
increase, 2.7% points by favorable pricing with the rest of the gain being a
favorable currency effect. Mechanical business sales increased $2.0 million,
with approximately half of this gain attributable to volume increase, $0.7
million due to price increment, and the remainder resulting from a weaker
dollar. Electronic Business sales grew $0.4 million, with half the gain coming
from higher volume and the other half from favorable currency effect.

                                       16
<PAGE>

Year to date revenues increased $4.0 million or 7.8%. Sales volume increased by
$1.7 million, pricing and product mix accounted for $1.5 million, and currency
gain contributed $0.8 million. As in the second quarter, this gain was largely
due to Mechanical Business whose sales increased 12.0% or $3.9 million. $2.0
million of this gain was attributable to volume and $1.7 million to pricing.
Electronic Business revenue was largely flat, with a 1.4% drop in volume being
compensated by favorable currency effect.

Second quarter 2005 total Company gross profit increased $0.3 million from the
prior year to $8.3 million. Stated as a percent of net sales, the gross profit
margin fell from 31.2% to 29.7% as the sales increased 9.4%. Mechanical Business
gross profit was $5.1 million or 61.2% of the total margin for the Company, and
compared to second quarter 2004, this segment's gross profit was flat. Increased
margins due to higher volume, prices and weaker dollar were offset by higher
production costs and lower absorption of fixed manufacturing costs. Metal cost
escalation on a year-over-year basis was the main driver of higher production
costs, however metal cost prices have continued to trend downward in the quarter
from high levels at December 2004. As the sales revenue was higher in the
quarter compared to 2004, gross profit margin as a percent of net sales fell
from 31.5% to 27.7%. Electronics Business reported $0.4 million increase in
gross profit, principally due to lower production costs and currency changes.

On a year-to-date basis, the Company's gross profit increased by $1.0 million to
$16.4 million. Since sales increased at a slightly higher rate, gross margin
expressed as a percent of net sales declined slightly from 30.0% to 29.6%.
Mechanical Business contributed $0.4 million or 45.7% of this gross profit
increase, largely as a result of passing on higher metal costs to customers, and
to a lesser extent via higher volume sales and favorable currency effect. In
addition, higher production levels in 2004 associated with plans to close the
Company's Trenton, Tennessee facility resulted in a higher level of fixed costs
absorption in the prior year, adversely affecting margin improvement. Electronic
Business contributed $0.5 million increase due to second half 2004 workforce
reductions taking effect in the first half of 2004. Favorable currency effect
and production efficiencies countered flat pricing and a slightly lower volume.





For the second quarter 2005, selling, general and administrative expenses
declined by $0.3 million. This, combined with the rise in sales, resulted in the
fall of their percent to net sales from 30.4% to 25.7%. Electronic Business
selling, general and administrative costs were reduced by $0.5 million,
principally in the US due to a reorganization that took place in the third
quarter of 2004.

Year-to-date selling, general and administrative costs declined $0.4 million,
with a reduction as a percent of net sales from 27.9% to 25.2%. Mechanical
Business costs increased $0.2 million largely due to higher employee bonus
accruals and lower gains associated with post-employment healthcare plans.
However, this was offset by $0.6 million of costs reductions in the Electronics
Business principally due to second half 2004 restructuring efforts lowering
costs in the first half of 2005 for this business unit.

Interest expense and other finance charges increased $0.1 million in second
quarter to $0.5 million compared to the prior year. This increase was caused by
higher interest rates incurred by the Company under the terms of its new senior
secured borrowing facility, including amortization of the related costs,
together with increasing interest rates experienced in capital markets. Income
taxes remain at rates higher than statutory rates primarily due to operating
losses at the Company's Mexico operations that have not yet yielded any tax
benefits. For the year to date, interest expense and other finance charges were
$0.4 million higher at $1.1 million, and provision for incomes taxes was $0.4
million higher at $0.7 million.

As a result of the above, net income in the second quarter of 2005 was $0.5
million, compared to breakeven operating results in the same quarter in the
preceding year. Net income per share in the second quarter of 2005 was $0.10 per
share, compared to a net income per share of nil in 2004. Year to date 2005 net
income was $0.9 million, or $0.17 per share compared to net income of $0.1
million, or $0.01 per share for the corresponding period in 2004.

                                       17
<PAGE>


Liquidity and Capital Resources:

On January 7, 2005, the Company entered into a Loan and Security Agreement (the
"Agreement") that provides for up to an $18.3 million revolving line of credit
and two term loans (Term Loan A and Term Loan B) totaling $13.0 million. At July
1, 2005 current and long-term debt of the Company totaled $23.5 million,
compared to $24.6 million at April 1, 2005, and $24.3 million at December 31,
2004. Borrowings at July 1, 2005 include $6.0 million of revolving credit and
$11.4 million of term debt under the terms of the Agreement. In addition, the
Company owes $5.3 million of revenue bonds and approximately $0.8 million of
other revolving and term borrowings. In July, 2005 the Company and its senior
lender agreed to extend this agreement from January 2007 to April 2009.

The proceeds from the Agreement were used to retire amounts outstanding under
the Company's previous credit agreement, as well as fund existing letters of
credit that support $5.3 million of industrial revenue bonds and certain
obligations under various self-insured workers compensation insurance policies.
The term of the Agreement is two years and the loans are secured by
substantially all of the Company's domestic assets and pledges of 65% of the
outstanding stock of the Company's Canadian, German and Mexican subsidiaries.
The revolving credit portion of the Agreement is governed by a borrowing base
formula, and the Term Loans are repayable in monthly principal installments
totaling $0.2 million. All borrowings under the Agreement bear variable interest
of a margin plus LIBOR or US Prime Rate.

The amounts owed under the revenue bonds, together with $1.6 million of
obligations for workers compensation coverage, are secured by letters of credit
backed by the Agreement. The Company's unused borrowing capacity under the terms
of the Facility was $4.2 million and $5.3 million as at July 1, 2005, and April
1, 2005, respectively. Had the Agreement been in place at December 31, 2004, the
remaining borrowing capacity available to the Company would have been
approximately $2.4 million, after taking into consideration the costs of the
transaction.

The Agreement contains restrictive financial covenants that require the Company
to comply with certain financial tests including, among other things,
maintaining minimum tangible net worth, having a minimum earnings before
interest, taxes and depreciation and amortization ("EBITDA"), and meeting
certain specified leverage and operating ratios, all as defined in the
Agreement. The Agreement also contains other restrictive covenants that restrict
outside investments, capital expenditures, and dividends.

The Company generated net cash flow of $0.7 million in 2005 second quarter
versus a net cash depletion of $0.3 million in the same quarter last year.
Operating activities generated $2.4 million cash compared to $0.1 million for
the same period in 2004. This change largely resulted from $0.5 million
increased net income, and $2.1 million reduced investment in receivables and
inventories, net of trade credit. Capital expenditures of $0.9 million were
partially funded by $0.4 million sale proceeds from Trenton, Tennessee plant
idled in the third quarter of 2004. Cash from operating activities was more than
sufficient to fund the remaining capital expenditures, pay down $1.1 million of
long-term debt, and increase cash balances by $0.7 million.

Year to date, the Company generated $1.5 million cash versus zero cash
generation in the same period of 2004. Operating activities provided $3.9
million versus a $0.6 million use of cash for the corresponding period of 2004.
Net income of $0.9 million and inventory reduction of $2.7 million were the
principal drivers for the 2005 year to date increase. During the first half of
2004, the Company invested in inventory to create safety stock as it transferred
production from the idled Trenton facility to other production facilities. Since
that time, considerable reductions in inventory quantities have occurred through
the implementation of lean manufacturing processes. Capital expenditures of $1.3
million in the first six months of 2005 were comparable to prior year levels.
Financing activities used $0.8 million of the Company's positive cash flow,
largely to fund $0.2 million monthly principal repayments associated with the
new Term Loans.

                                       18
<PAGE>

The Company did not pay any dividends either in the second quarter 2005 or in
the first half of 2005 compared to payments of $0.5 million and $0.9 million
during the corresponding periods of 2004 respectively. The Company's ongoing
ability to declare and pay dividends is dependent upon its ability to continue
to operate at profitable levels and demonstrate compliance with the terms of its
senior secured credit facility.

Based upon our current level of operations, the Company believes that the
combination of cash generated by operations, available borrowing capacity and
the Company's ability to obtain additional long-term indebtedness in the current
state of the secured lending markets, is adequate to finance the Company's
operations for the foreseeable future.

Accounting Policies:

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

The Company believes the following critical accounting policies affect
management's more significant judgments and estimates used in the preparation of
its Consolidated Financial Statements. For a detailed discussion on the
application of these and other accounting policies see Note 2 in the December
31, 2004 Consolidated Financial Statements included in the Company's 2004 annual
report on Form 10-K. Certain of our accounting policies require the application
of significant judgment by management in selecting the appropriate assumptions
for calculating financial estimates. By their nature, these judgments are
subject to an inherent degree of uncertainty and actual results could differ
from these estimates. These judgments are based on our historical experience,
terms of existing contracts, current economic trends in the industry,
information provided by our customers, and information available from outside
sources, as appropriate. Our critical accounting policies include:

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

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

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

                                       19
<PAGE>

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

Postretirement Benefit Obligation: The Company, in consultation with an
actuarial firm specializing in the valuation of postretirement benefit
obligations, selects certain actuarial assumptions to base the actuarial
valuation of such obligations on, such as the discount rate (interest rate used
to determine present value of obligations payable in the future), initial health
care cost trend rate, the ultimate cost care trend rate, and mortality tables to
determine the expected future mortality of plan participants. To the extent that
the actual rates and mortality vary from the assumptions used to determine the
present actuarial valuation of these postretirement benefits, additional
provision for expense may be necessary.

Income Taxes: Under the requirements of SFAS No. 109, "Accounting for Income
Taxes," we record deferred tax assets and liabilities for the future tax
consequences attributable to differences between financial statements carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The Company has not
recognized any income tax benefit related to the income tax losses incurred by
its Mexican subsidiary currently because there is uncertainty as to whether that
subsidiary will realize those benefits in the future. As the Mexican subsidiary
realizes these income tax benefits in the future, a reduction of income taxes
will be recognized. Management judgment is required in determining the Company's
provision for income taxes, including recognition of amounts related to changes
in deferred tax assets and liabilities, which, if actual experience varies,
could result in material adjustments to deferred tax assets and liabilities.

Recent Accounting Pronouncements

In December 2004, the FASB issued Statement of Accounting Standards No. 123R
(revised 2004) "Share-Based Payment" a revision of FASB Statement No. 123
"Accounting for Stock Based Compensation." The effective date of this revised
accounting standard is for the first annual reporting period that begins after
June 15, 2005. In fiscal 2003 the Company adopted FASB Statement No. 123 to
account for stock-based compensation cost using the fair value method and
therefore believes the only effects of the revised Statement No. 123 upon the
Company will be expanded disclosure related to its stock based compensation
plan. The Company intends to adopt the revised Statement No. 123 effective for
its 2006 financial statements.

In November 2004, the FASB issued Statement of Accounting Standards No. 151
"Inventory Costs, an amendment of Accounting Research Bulletin No. 43, Chapter
4" to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). This Statement is
effective for inventory cost incurred during fiscal years beginning after June
15, 2005 with earlier application permitted for costs incurred during fiscal
years beginning after the date of the issuance of this Statement. The Statement
introduces the concept of "normal capacity" and requires the allocation of fixed
production overheads to inventory based upon the normal capacity of the
production facilities. Unallocated overheads must be recognized as an expense in
the period in which they are incurred. The Company is not yet able to determine
the effect of this Statement upon its consolidated financial statements because
the impact is dependent upon production levels attained during a given financial
reporting period compared to the normal production levels that could have been
attained if there was sufficient customer demand. The Company intends to adopt
this statement in fiscal 2006.


                                       20
<PAGE>

Safe Harbor Statement

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

Item 3  Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risks since the 2004 Annual Report
to Shareholders.

Item 4.  Controls and Procedures

(a) Evaluation of disclosure controls and procedures: As of July 1, 2005, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's Principal Executive Officer and Principal
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. "Disclosure controls and
procedures" are defined in Exchange Act Rule 13a-15. Based upon this evaluation,
our Principal Executive Officer and Principal Financial Officer concluded that
the Company's disclosure controls and procedures are effective in timely
alerting them to material information required to be disclosed in the Company's
periodic reports filed with the SEC. It should be noted that the design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in the achieving the stated goals under all potential future conditions,
regardless of how remote.

                                       21
<PAGE>

Restatement. On August 19, 2005, in response to a comment raised by the Staff of
the Securities and Exchange Commission concerning the Company's accounting for
post-retirement healthcare benefit obligations, the Audit Committee of the Board
of Directors and management of the Company concluded that the Company's
financial statements for each of the years in the three year period ended
December 31, 2004, that were previously reported in the Company's 2004 Annual
Report on Form 10-K should be restated and such financial statements should no
longer be relied upon. The restatement revised the accounting for the
post-employment healthcare benefit obligations included in the aforementioned
financial statements. The restatement, associated with infrequent events related
to significant benefit plan settlements, occurred as a result of a different
interpretation of the provisions of Statement of Financial Accounting Standards
Board Statement No. 106 than previously agreed to by the Company's senior
management and its independent accountants. This restatement has no effect on
the past, current or future revenues or cash flows of the Company. As set forth
in the table in Note 1, the impact of the restatement on the December 31, 2004
balance sheet was to increase the accrued benefit obligation relating to the
postretirement benefit plan by $307,000, with the offset, net of deferred income
taxes, charged to retained earnings. The unamortized actuarial gains comprising
a portion of this obligation is $227, which the Company currently expects will
be amortized over five years.


(b) Changes in internal controls: There were no significant changes in the
Company's internal control over financial reporting that occurred during the
period covered by this report that have materially affected or are reasonably
likely to materially affect, the Company's internal control over financial
reporting subsequent to the date of their last evaluation.


PART II - OTHER INFORMATION

Item 1.     Legal Proceedings

                None

Item 2.    Changes in Securities

               None

Item 3.   Defaults Upon Senior Securities

              None

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

              a) The Company held its Annual Meeting of Shareholders on April
28, 2005.

           b)      The following individuals were nominated and elected to serve
                   as directors of TB Wood's Corporation: Thomas C. Foley and
                   Frank D. Osborn.

              c) The Shareholders voted as follows on the following matters:

              1. Election of Directors. The voting result for each nominee is as
follows:

Name                    Votes for     Votes Withheld
Thomas C. Foley          4,321,274       220,148
Frank D. Osborn          4,533,714         7,178

                                       22
<PAGE>


         2.       To ratify the Audit Committee's selection of Grant Thornton
                  LLP as the Company's independent public accountants was
                  approved by a count of 4,536,105 votes for, 2,050 votes
                  against, 3,266 votes abstaining and zero broker non-vote.


Item 5.   Other Information

              None

Item 6.  Exhibits

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

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

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


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 Borough of
Chambersburg and Commonwealth of Pennsylvania, on August 22, 2005

Date  August 22, 2005           TB WOOD'S CORPORATION

                                By:  /s/Joseph C. Horvath
                                     JOSEPH C. HORVATH
                                     Vice-President and Chief Financial Officer
                                    (Principal Financial Officer and
                                     Principal Accounting Officer)