<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 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 SEPTEMBER 29, 2006

                                       OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

           For the transition period from ____________ to ____________

                         Commission file number: 1-14182

                              TB WOOD'S CORPORATION
             (Exact name of registrant as specified in its charter)

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

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

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

                                     [NONE]
   (Former name, former address and former fiscal year, if changed since last
                                     report)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X]   No [_]

      Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.

Large accelerated filer [_]   Accelerated filer [_]   Non-accelerated filer [X]

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

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

                 Class                   October 25, 2006
--------------------------------------   ----------------
Common Stock, $.01 par value per share   3,740,415 shares


                                        1
<PAGE>

                              TB WOOD'S CORPORATION
                                FORM 10-Q - INDEX
                               SEPTEMBER 29, 2006

<TABLE>
<CAPTION>
Part 1. - Financial Information                                                        Page No.
-------------------------------                                                        --------
<S>                                                                                       <C>
Item 1.   Financial Statements (unaudited):

             Condensed Consolidated Statements of Operations - for the Third Quarter
                and Nine Months ended September 29, 2006 and September 30, 2005            3

             Condensed Consolidated Balance Sheets - September 29, 2006 and December
                31, 2005                                                                   4

             Condensed Consolidated Statements of Cash Flows - for the Third Quarter
                and Nine Months ended September 29, 2006 and September 30, 2005            5

             Notes to Condensed Consolidated Financial Statements                          6

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of
             Operations                                                                   10

Item 3.   Quantitative and Qualitative Disclosures about Market Risk                      17

Item 4.   Controls and Procedures                                                         17

Part II - Other Information                                                               18

Item 6    Exhibits                                                                        18

Signatures                                                                                19

Exhibit 31.1 Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002      20
Exhibit 31.2 Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002      21
Exhibit 32   Statement Pursuant to 18 U.S.C. Section 1350 as required by Section 906
                of the Sarbanes Oxley Act of 2002                                         22
</TABLE>


                                        2
<PAGE>

PART 1. - FINANCIAL INFORMATION

Item 1 Financial Statements

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

<TABLE>
<CAPTION>
                                                                         Third quarter ended             Nine months ended
                                                                   -----------------------------   -----------------------------
                                                                   September 29,   September 30,   September 29,   September 30,
(in thousands, except per share amounts)                                2006            2005            2006            2005
----------------------------------------------------------------   -------------   -------------   -------------   -------------
<S>                                                                   <C>             <C>             <C>             <C>
Net sales                                                             $29,894         $27,673         $89,063         $83,228
Cost of goods sold                                                     20,226          19,419          60,796          58,545
                                                                      -------         -------         -------         -------
Gross profit                                                            9,668           8,254          28,267          24,683
Selling, general and administrative expense                             6,960           6,899          21,400          20,633
                                                                      -------         -------         -------         -------
Operating income                                                        2,708           1,355           6,867           4,050
Interest expense and other finance charges                                961             489           2,749           1,629
                                                                      -------         -------         -------         -------
Income before provision for income taxes                                1,747             866           4,118           2,421
Provision for income taxes                                                453             301           1,235             987
                                                                      -------         -------         -------         -------
Net income                                                            $ 1,294         $   565         $ 2,883         $ 1,434
                                                                      =======         =======         =======         =======
PER SHARE AMOUNTS - BASIC AND DILUTED:
   Basic net income per common share                                  $  0.35         $  0.11         $  0.77         $  0.28
                                                                      =======         =======         =======         =======
   Diluted net income per common share                                $  0.33         $  0.11         $  0.74         $  0.28
                                                                      =======         =======         =======         =======
   Basic weighted average shares of common stock and equivalents
      outstanding                                                       3,724           5,189           3,727           5,185
                                                                      =======         =======         =======         =======
   Diluted weighted average shares of common stock and
      equivalents outstanding                                           3,910           5,189           3,913           5,185
                                                                      =======         =======         =======         =======
</TABLE>

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


                                        3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                        September 29,   December 31,
(in thousands, except per share amounts)                                                     2006            2005
-------------------------------------------------------------------------------------   -------------   ------------
<S>                                                                                        <C>            <C>
ASSETS
Current Assets:
   Cash and cash equivalents                                                               $  1,395       $  3,419
   Accounts receivable less allowances of $445 at September 29, 2006
      and $495 at December 31, 2005                                                          18,351         14,827
   Inventories--Note 2                                                                       19,014         15,579
   Other current assets                                                                       2,907          3,061
                                                                                           --------       --------
      Total current assets                                                                   41,667         36,886
Property, plant and equipment                                                                84,716         80,416
   Less accumulated depreciation                                                             59,937         57,361
                                                                                           --------       --------
      Net property, plant and equipment                                                      24,779         23,055
Other Assets:
   Goodwill                                                                                   5,818          5,676
   Loan issue costs, net of amortization                                                      1,353          1,564
   Deferred income taxes                                                                        129            144
   Other                                                                                        133            428
                                                                                           --------       --------
      Total other assets                                                                      7,433          7,812
                                                                                           --------       --------
TOTAL ASSETS                                                                               $ 73,879       $ 67,753
                                                                                           ========       ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
   Current maturities of long-term debt                                                    $  6,210       $  4,138
   Accounts payable                                                                           8,454          8,465
   Accrued expenses                                                                           8,906          6,996
   Deferred income taxes                                                                        724            716
                                                                                           --------       --------
      Total current liabilities                                                              24,294         20,315
Long-term debt, less current maturities                                                      24,498         25,829
Deferred income taxes                                                                            --             91
Shareholders' Equity:
   Preferred stock, $.01 par value, 100 shares authorized; no shares issued                      --             --
   Common stock, $.01 par value, 10,000,000 shares authorized;  5,639,798 issued;
      3,737,780 and 3,703,386 outstanding at September 29, 2006 and December 31, 2005            57             57
   Additional paid-in-capital                                                                28,491         28,153
   Retained earnings                                                                         11,659          9,216
   Accumulated other comprehensive income (loss)                                                358           (151)
   Treasury stock at cost                                                                   (15,478)       (15,757)
                                                                                           --------       --------
      Total shareholders' equity                                                             25,087         21,518
                                                                                           --------       --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                 $ 73,879       $ 67,753
                                                                                           ========       ========
</TABLE>

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


                                        4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                   Third quarter ended               Nine months ended
                                                              -----------------------------   -----------------------------
                                                              September 29,   September 30,   September 29,   September 30,
(in thousands)                                                     2006            2005            2006            2005
-----------------------------------------------------------   -------------   -------------   -------------   -------------
<S>                                                              <C>             <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income                                                       $  1,294        $    565        $  2,883        $  1,434
Adjustments to reconcile net income to net cash provided by
operating activities:
   Depreciation and amortization                                    1,105           1,153           3,297           3,624
   Change in deferred income taxes, net                                (8)             63             (68)            (39)
   Stock options and employee stock benefit expense                   198              88             500             259
   Other                                                               (2)             53              (5)            (68)
   Changes in operating assets and liabilities:
      Accounts receivable                                             578             121          (3,524)         (1,568)
      Inventories                                                    (517)          2,096          (3,435)          4,804
      Other current assets                                             20            (208)            154             419
      Accounts payable                                             (1,412)            286             (11)           (412)
      Accrued and other liabilities                                 1,027             575           1,945             201
                                                                 --------        --------        --------        --------
   Total adjustments                                                  989           4,227          (1,147)          7,220
                                                                 --------        --------        --------        --------
Net cash provided by operating activities                           2,283           4,792           1,736           8,654
CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures                                            (1,040)         (1,104)         (4,489)         (2,453)
   Other, net                                                        (114)           (414)             46            (347)
                                                                 --------        --------        --------        --------
Net cash (used in) investing activities                            (1,154)         (1,518)         (4,443)         (2,800)
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from revolving credit facilities                       29,663          24,172          85,442          81,719
   Repayments of revolving credit facilities                      (30,035)        (27,625)        (83,688)        (97,291)
   Proceeds from long-term debt                                        73              40              88          13,040
   Repayments of long-term debt                                      (390)           (420)         (1,192)         (2,118)
   Payments of dividends                                             (337)             --            (337)             --
   Issuance (purchase) of treasury stock                              (43)             15              14              44
   Other                                                              (43)             --             (43)             --
                                                                 --------        --------        --------        --------
Net cash provided by (used in) financing activities                (1,112)         (3,818)            284          (4,606)
Effect of changes in foreign exchange rates                           395             187             399            (153)
                                                                 --------        --------        --------        --------
Net increase (decrease) in cash and cash equivalents                  412            (357)         (2,024)          1,095
Cash and cash equivalents at beginning of period                      983           2,008           3,419             556
                                                                 --------        --------        --------        --------
Cash and cash equivalents at end of period                       $  1,395        $  1,651        $  1,395        $  1,651
                                                                 ========        ========        ========        ========
Income taxes paid (refunded)                                     $    150        $    (38)       $  1,258        $    197
                                                                 ========        ========        ========        ========
Interest paid                                                    $    918        $    443        $  2,649        $  1,690
                                                                 ========        ========        ========        ========
</TABLE>

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


                                        5
<PAGE>

                     TB Wood's Corporation and Subsidiaries
        Notes to Condensed Consolidated Financial Statements (unaudited)
            (in thousands, except share number and 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 of America have been
     condensed or omitted. Certain prior period amounts have been reclassified
     to conform to the current period presentation. In the opinion of
     management, the accompanying unaudited consolidated financial statements
     contain all adjustments, consisting only of normal recurring accruals,
     considered necessary for a fair presentation of the Company's financial
     position, results of operations, and cash flows as of and for the periods
     presented.

     These financial statements should be read together with the audited
     financial statements and notes in the Company's 2005 Annual Report on Form
     10-K filed with the Securities and Exchange Commission on March 24,2006.
     Operating results for the interim periods presented are not necessarily
     indicative of the results that may be expected for the full fiscal year.

     The Company utilizes a calendar year as the annual period for reporting its
     financial results. However, interim periods consist of four quarters of 13
     weeks each, except for the fourth quarter that ends on December 31.

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
     69% and 71% of consolidated inventories at September 29, 2006 and December
     31, 2005, 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 are based on
     management's estimates of expected year-end inventory levels and costs.
     Because these are subject to many factors beyond management's control,
     interim results are subject to final year-end LIFO inventory valuation
     adjustments.


                                       6
<PAGE>

     The major classes of inventories are comprised as follows:

                          September 29,   December 31,
                              2006            2005
                          -------------   ------------
Finished goods               $13,046         $11,159
Work in process                3,724           3,452
Raw materials                  8,866           7,009
                             -------         -------
                              25,635          21,620
   Less LIFO reserve          (6,622)         (6,041)
                             -------         -------
Inventory value at LIFO      $19,014         $15,579
                             =======         =======

     During the third quarter of 2006, the LIFO reserve was increased by $225,
     while in the third quarter of 2005 the LIFO reserve was increased by $54.
     For the first nine months of 2006, the LIFO reserve was increased by $581,
     while during the similar period 2005 it was increased by $107. Had the
     Company utilized the FIFO method of accounting for all of its inventories,
     costs of goods sold would have been lower in 2006 and 2005 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
     within the condensed consolidated statements of operation. The Company
     incurred $1,767 and $1,526 of shipping and handling costs in the third
     quarters ended September 29, 2006 and September 30, 2005, respectively. The
     corresponding year to date amounts were $5,171 and $4,756, respectively.

3.   Shareholders' Equity

     During the first nine months of 2006 the Company issued 17,791 treasury
     shares to participants in Company sponsored employee stock purchase and
     401(k) retirement plans, and 16,603 treasury shares were issued on exercise
     of vested stock options.

     On January 13, 2006, the Company granted options for the purchase of 87,000
     shares of 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 January 13, 2016.
     On February 10, 2006 and April 27, 2006, the Company granted options for
     the purchase of 6,000 shares of common stock to each of its newly appointed
     directors at exercise prices equal to or in excess of market prices on the
     dates of grant. These options expire after ten years and vest over three
     years following the grant dates. Stock based compensation cost, recorded as
     an after tax cost and using the fair value method, was $71 and $34 for the
     third quarter of 2006 and 2005, respectively, and $210 and $103 for the
     first nine months of 2006 and 2005, respectively.


                                        7
<PAGE>

4.   Other Comprehensive Income

     Total comprehensive income (loss) was as follows:

<TABLE>
<CAPTION>
                                         Third quarter ended      Nine months ended
                                        ---------------------   ---------------------
                                        September   September   September   September
                                         29, 2006    30, 2005    29, 2006    30, 2005
                                        ---------   ---------   ---------   ---------
<S>                                       <C>          <C>        <C>        <C>
   Net income                             $1,294       $565       $2,883     $1,434
   Other comprehensive income (loss):
      Foreign currency translation
         adjustments                         416        187          509       (153)
                                          ------       ----       ------     ------
   Total comprehensive income             $1,710       $752       $3,392     $1,281
                                          ======       ====       ======     ======
</TABLE>

Accumulated other comprehensive income (loss), net of income tax, is comprised
of aggregate currency translation adjustments of $358 and ($151) as of September
29, 2006 and December 31, 2005, respectively.

5.   Earnings Per Share

     Basic earnings per share is computed by dividing net income by the weighted
     average shares outstanding. Diluted earnings per share is computed by
     dividing net income by the weighted average shares outstanding and common
     equivalent shares if dilutive. The computation of weighted average shares
     outstanding is as follows:

<TABLE>
<CAPTION>
                                    Third quarter ended      Nine months ended
                                   ---------------------   ---------------------
                                   September   September   September   September
                                    29, 2006    30, 2005    29, 2006    30, 2005
                                   ---------   ---------   ---------   ---------
<S>                                  <C>         <C>         <C>         <C>
Basic weighted average number
   of common shares outstanding      3,724       5,189       3,727       5,185
Shares issuable upon assumed
   exercise of outstanding stock
      options                          186          --         186          --
                                     -----       -----       -----       -----
Diluted weighted average number
   of common shares outstanding      3,910       5,189       3,913       5,185
                                     =====       =====       =====       =====
</TABLE>

     Total outstanding options to purchase 173,766 and 665,451 shares of common
     stock as of September 29, 2006 and September 30, 2005, respectively, are
     not included in the above calculations as their effect would be
     anti-dilutive.


                                        8
<PAGE>

6.   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>
                                       Third quarter ended      Nine months ended
                                      ---------------------   ---------------------
                                      September   September   September   September
                                       29, 2006    30, 2005    29, 2006    30, 2005
                                      ---------   ---------   ---------   ---------
<S>                                    <C>         <C>         <C>         <C>
Sales:
   Mechanical Segment                  $20,269     $18,224     $60,526     $54,660
   Electronics Segment                   9,625       9,449      28,537      28,568
                                       -------     -------     -------     -------
                                       $29,894     $27,673     $89,063     $83,228
                                       -------     -------     -------     -------
Operating income:
   Mechanical Segment                  $ 1,927     $   907     $ 6,088     $ 3,155
   Electronics Segment                     781         448         779         895
                                       -------     -------     -------     -------
                                       $ 2,708     $ 1,355     $ 6,867     $ 4,050
                                       -------     -------     -------     -------
Depreciation and amortization:
   Mechanical Segment                  $   569     $   636     $ 1,691     $ 1,973
   Electronics Segment                     274         280         813         872
   Corporate                               262         237         793         779
                                       -------     -------     -------     -------
                                       $ 1,105     $ 1,153     $ 3,297     $ 3,624
                                       -------     -------     -------     -------
Expenditures for long-lived assets:
   Mechanical Segment                  $   864     $   299     $ 3,479     $   640
   Electronics Segment                     115         481         644       1,201
   Corporate                                61         324         366         612
                                       -------     -------     -------     -------
                                       $ 1,040     $ 1,104     $ 4,489     $ 2,453
                                       -------     -------     -------     -------
</TABLE>

Assets:                               September    December
                                       29, 2006    31, 2005
                                      ---------   ---------
   Mechanical Segment                  $46,243     $42,097
   Electronics Segment                  22,770      20,760
   Corporate                             4,866       4,896
                                       -------     -------
                                       $73,879     $67,753
                                       -------     -------

     The Company measures its business segments at the operating income level,
     and therefore does not allocate interest and other finance costs to
     determine pre-tax income on an operating segment basis.

7.   Subsequent Event

     On October 26, 2006, the Company's Board of Directors declared a quarterly
     dividend of 9 cents per share. This dividend will be payable November 17,
     2006 to shareholders of record as of the close of business on November 10,
     2006.


                                        9
<PAGE>

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

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

<TABLE>
<CAPTION>
                                                         Third quarter ended
                                               ---------------------------------------
                                               September   September   Dollar      %
                                                29, 2006    30, 2005   Change   Change
                                               ---------   ---------   ------   ------
<S>                                             <C>         <C>        <C>       <C>
Sales
   Mechanical Segment                           $20,269     $18,224    $2,045    11.2%
   Electronics Segment                            9,625       9,449       176     1.9%
                                                -------     -------    ------     ---
      Total Sales                               $29,894     $27,673    $2,221     8.0%
                                                -------     -------    ------     ---
Cost of Sales
   Mechanical Segment                           $14,007     $13,510      $497     3.7%
   Electronics Segment                            6,219       5,909       310     5.2%
                                                -------     -------    ------     ---
      Total Cost of Sales                       $20,226     $19,419      $807     4.2%
                                                -------     -------    ------     ---
Gross Profit
   Mechanical Segment                           $ 6,262     $ 4,714    $1,548    32.8%
   Electronics Segment                            3,406       3,540      (134)   (3.8%)
                                                -------     -------    ------     ---
      Total Gross Profit                        $ 9,668     $ 8,254    $1,414    17.1%
                                                -------     -------    ------     ---
Selling, General and Administrative Expense     $ 6,960     $ 6,899    $   61     0.9%
                                                -------     -------    ------     ---
Sales
   Mechanical Segment                              67.8%       65.9%
   Electronics Segment                             32.2%       34.1%
                                                  -----       -----
      Total Sales                                 100.0%      100.0%
                                                  -----       -----
Cost of Sales as a Percentage of Sales
   Mechanical Segment                              69.1%       74.1%
   Electronics Segment                             64.6%       62.5%
      Total Cost of Sales                          67.7%       70.2%
Gross Profit as a Percentage of Sales
   Mechanical Segment                              30.9%       25.9%
   Electronics Segment                             35.4%       37.5%
      Total Gross Profit                           32.3%       29.8%
Selling, General and Administrative Expenses
   as a Percentage of Sales                        23.3%       24.9%
</TABLE>


                                       10
<PAGE>

<TABLE>
<CAPTION>
                                                                                         Nine months ended
                                                                       -----------------------------------------------------
                                                                       September 29,  September 30,
                                                                            2006          2005       Dollar Change  % Change
                                                                       -------------  -------------  -------------  --------
<S>                                                                       <C>            <C>             <C>         <C>
Sales
   Mechanical Segment                                                     $60,526        $54,660         $5,866      10.7%
   Electronics Segment                                                     28,537         28,568            (31)     (0.1%)
                                                                          -------        -------         ------
      Total Sales                                                         $89,063        $83,228         $5,835       7.0%
                                                                          -------        -------         ------
Cost of Sales
   Mechanical Segment                                                     $42,195        $40,101         $2,094       5.2%
   Electronics Segment                                                     18,601         18,444            157       0.9%
                                                                          -------        -------         ------
      Total Cost of Sales                                                 $60,796        $58,545         $2,251       3.8%
                                                                          -------        -------         ------
Gross Profit
   Mechanical Segment                                                     $18,331        $14,559         $3,772      25.9%
   Electronics Segment                                                      9,936         10,124           (188)     (1.9%)
                                                                          -------        -------         ------
      Total Gross Profit                                                  $28,267        $24,683         $3,584      14.5%
                                                                          -------        -------         ------
Selling, General and Administrative Expense                               $21,400        $20,633         $  767       3.7%
                                                                          -------        -------         ------
Sales
   Mechanical Segment                                                        68.0%          65.7%
   Electronics Segment                                                       32.0%          34.3%
                                                                          -------        -------
      Total Sales                                                           100.0%         100.0%
                                                                          -------        -------
Cost of Sales as a Percentage of Sales
   Mechanical Segment                                                        69.7%          73.4%
   Electronics Segment                                                       65.2%          64.6%
      Total Cost of Sales                                                    68.3%          70.3%
Gross Profit as a Percentage of Sales
   Mechanical Segment                                                        30.3%          26.6%
   Electronics Segment                                                       34.8%          35.4%
      Total Gross Profit                                                     31.7%          29.7%
Selling, General and Administrative Expenses as a Percentage of Sales        24.0%          24.8%
</TABLE>

Third quarter 2006 continued to gain from a favorable economy, with revenues
growing $2.2 million, or 8.0% over the third quarter in 2005. Volume increases
contributed 4.4% points of the Company's sales gain, with 2.6% points
attributable to favorable pricing, net of higher volume rebates, and the balance
of the gain coming from a favorable currency effect. Most of the quarterly sales
gain came from the Mechanical business, where sales increased $2.0 million, or
11.2% over the same quarter of 2005. Higher volume accounted for $1.2 million of
the increase; higher prices, net of rebates, provided $0.7 million; and the
Company realized a $0.1 million favorable currency effect. Higher prices have
largely resulted from our US price increases effective September 2005, April and
September 2006. Electronic Business sales were flat in real terms, with a $0.2
million gain resulting from a favorable currency effect. Our newest electronics


                                       11
<PAGE>

product, the "X4" drive, is priced lower than the legacy products it replaces
and unit volumes have not yet risen to the level to compensate for the lower
unit pricing.

Year to date 2006 revenues increased $5.8 million or 7.0%, with the Company's
largest distributor buying $2.2 million, or 15.0% more, than the comparable
period of prior year. Higher sales volume provided $4.2 million of the increase;
product mix and pricing net of volume rebates accounted for $1.2 million; and
currency gain contributed $0.4 million. As in the second quarter, this gain was
largely from Mechanical Business whose sales increased 10.7% or $5.9 million
over the first nine months of 2005. Higher volume contributed $4.0 million of
this gain; price increases net of volume rebates added $1.4 million; and $0.5
million of the increase was caused by the favorable effects of a weaker US
dollar against the Canadian currency. Electronic Business revenue was flat with
a $0.1 million increase in volume being negated by an adverse currency effect,
largely due to a weaker Euro.

Third quarter 2006 total Company gross profit rose by $1.4 million to $9.7
million. Stated as a percent of net sales, the gross profit margin rose from
29.8% to 32.3% as the gross profit rose 17.1% versus a 8.0 % rise in sales.
Mechanical Business was the principal contributor to this favorable situation,
as its gross profit was $6.3 million or 64.8% of the total margin for the
Company. Compared to third quarter 2005, this segment's gross profit rose $1.5
million. Higher volume contributed $0.6 million of the increase, higher prices
$0.7 million and inventory adjustments $0.2 million. Electronics Business gross
profit decreased by $0.1 million, principally due to product mix issues where
lower priced "X4" platform drives have not reached sufficient volume levels to
compensate for the higher priced legacy drives they have been designed to
replace.

On a year-to-date basis, the Company's gross profit increased by $3.6 million to
$28.3 million. Since gross profit increased at a higher rate than sales, gross
margin expressed as a percent of net sales rose from 29.7% to 31.7%. Our
Mechanical Business was the main contributor to the gross profit rise with a
$3.8 million increase. Higher volume contributed $1.9 million, $1.4 million came
from previously announced price increases, and $0.1 million came from a
favorable Canadian currency effects. As the Company reduced excessive inventory
in 2005, it had to absorb labor and overhead embedded in these inventories at
that time. In 2006, the overall inventory level has been increased to meet
rising demand, and the absence of the aforementioned embedded charges helped
increase Mechanical Division gross profit by $0.8 million. This favorable
outcome was partly offset by a $0.4 million increase in energy and other costs
of operations. Electronic Business gross margin decreased by $0.2 million,
largely due to product mix and higher costs of certain components, partly offset
by favorable cost absorption associated with increased X4 drives inventory
manufactured to support future demand.

For the third quarter 2006, selling, general and administrative expenses
marginally increased by $0.1 million, but due to a higher proportionate increase
in sales, decreased as a percent of sales to 23.3% from 24.9% in 2005 third
quarter. Year-to-date selling, general and administrative costs increased $0.8
million compared to the first nine months of 2005 but declined from 24.8% to
24.0% measured as a percentage of net sales. Higher management incentive
accruals of $0.5 million contributed to this increase.

Interest expense and other finance charges increased $0.5 million in the third
quarter to $1.0 million compared to the prior year. This increase was caused by
higher debt levels and interest rates incurred under the terms of the Company's
new senior secured and senior subordinated debt arrangements finalized in
January and October of 2005, respectively, including amortization of the related
costs. Interest expense was also higher due to increasing interest rates
experienced in the capital markets through 2005, which continued in 2006. For
the year to date, interest expense and other finance charges were $1.1 million
higher at $2.7 million.


                                       12
<PAGE>

The Company's income tax rates are lower than statutory rates primarily due to
certain income tax credits and reductions of previously estimated income tax
liabilities. The income tax provisions for the third quarter and nine months
year to date were $0.2 million higher than amounts provided in the corresponding
periods in the prior year due to increased pre-tax profits.

As a result of the above, net income in the third quarter of 2006 compared to
the same quarter in the preceding year increased to $1.3 million from $0.6
million. Diluted net income per share in the third quarter of 2006 was $0.33 per
share, compared to a diluted net income per share of $0.11 in the third quarter
of 2005. Year to date 2006 net income was $2.9 million, or $0.74 per diluted
share compared to net income of $1.4 million, or $0.28 per diluted share for the
corresponding period in 2005. Diluted net income per share in 2006 increased due
to higher income, as well as a lower number of outstanding shares resulting from
the Company's buy-back of 1.5 million shares in October 2005.

Liquidity and Capital Resources:

At September 29, 2006 current and long-term debt totaled $30.7 million, compared
to $30.0 million at December 31, 2005, and was comprised of $2.8 million and
$7.7 million in revolving and term debt, respectively, under the senior secured
credit facility; $5.3 million in tax-exempt revenue bonds; $0.6 million of
principally foreign revolving and term debt, and $14.3 million of unsecured
subordinated term debt. As of September 29, 2006 the Company had remaining
borrowing capacity of $8.3 million.

On January 7, 2005, the Company entered into a new senior secured loan and
security agreement (the "Loan Agreement") that provided for up to an $18.3
million revolving line of credit and two term loans totaling $13.0 million (Term
Loan A--$10.0 million and Term Loan B--$3.0 million). The proceeds were used to
retire amounts outstanding under the Company's outstanding revolving line of
credit. In addition, the Loan Agreement secures existing letters of credit that
support $5.3 million of industrial revenue bonds and certain obligations under
various self-insured workers compensation insurance policies. The borrowings
under the Loan Agreement are secured by substantially all of the Company's
domestic assets and pledges of 66% of the outstanding stock of the Company's
Canadian and Mexican subsidiaries, and 65% of the outstanding stock of the
Company's German subsidiary. The Loan Agreement was amended on July 29, 2005 to
extend the term for an additional two years through April 2009 and to permit the
Company to borrow up to $15.0 million to fund the purchase of up to 1.5 million
shares of outstanding common stock and repay Term Loan B, the outstanding
balance of which was approximately $2.0 million. The remaining Term Loan A is
repayable in monthly principal installments totaling $0.13 million.

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

On October 20, 2005 the Company entered into a Securities Purchase Agreement in
exchange for the issuance of $15.0 million of senior subordinated notes
(initially valued at $14.24 million on the Company's balance sheet) and
detachable warrants (valued at $0.76 million on the Company's balance sheet) to
purchase 174,000 shares of the company's common stock. The senior subordinated
notes have a stated rate of 12% (effective rate of 12.97%), are due on October
12, 2012, and contain customary financial covenants similar to, but less
restrictive than, the covenants in the Loan Agreement. The proceeds from the
sale of the notes and detachable warrants were used to acquire 1.5 million
shares of the Company's common stock at a


                                       13
<PAGE>

purchase price of $11.25 million, repay approximately $2.0 million of term debt
under the Loan Agreement, pay $1.0 million of transaction costs related to the
stock purchase and related financing transaction, with the balance providing
additional working capital.

All borrowings under the Loan Agreement bear variable interest of a margin plus
LIBOR. The average borrowing rates for the Company's short-term borrowings at
September 29, 2006 and December 31, 2005 were 8.08% and 7.97% respectively. The
Company's effective borrowing rates at September 29, 2006 and December 31, 2005
for its long-term obligations were approximately 9.88% and 9.49% respectively.

The Company generated $0.4 million of its cash balance in the 2006 third quarter
compared to using a similar amount in 2005 third quarter. For the year to date
2006 the Company used $2.0 million of its cash balance as compared to generating
$1.1 million during the same period last year. Operating activities in the third
quarter generated $2.3 million of cash versus $4.8 million in the same quarter
of the previous year. Year to date 2006 operating activities generated $1.7
million cash as $2.9 million of net income, $3.3 million of depreciation and
amortization, and other working capital adjustments exceeded accounts receivable
and inventory increases totaling $7.0 million. Operating activities in the first
nine months of 2005 yielded $8.7 million of cash, benefiting in part from a $4.8
million reduction of inventory.

During the third quarter of 2006 the Company funded $1.0 million of capital
expenditures compared to $1.1 million in the comparable period of 2005. In 2006,
year to date capital expenditures were $4.5 million compared to $2.5 million in
2005. The Company's expects to increase capital spending in 2006 to $5.75
million compared to $3.1 million of capital expenditures in 2005. This planned
increase is primarily to support upgrading the Company's mechanical products
manufacturing capabilities and fund certain facility improvements.

The Company repaid $0.4 million of contractually due long-term loan installments
in the third quarter of 2006, similar to the amount repaid in the third quarter
of 2005. For the first nine months of 2006, the Company repaid $1.2 million of
contractual obligations compared to $2.1 million in 2005. These long-term
obligations principally relate to secured term financing obtained in the first
quarter of 2005. The reduction in these payment obligations is due to the
Company's prepaying $2.0 million of secured term debt with a portion of $15.0
senior unsecured term financing as part of its financing activities in the
fourth quarter of 2005.

In July 2006, based on operating results for the second quarter of 2006, the
Company board of directors declared a dividend of $0.09 per common share, which
totaled $0.3 million. On October 26, 2006, the Company's board of directors
declared a dividend in the same amount for the 2006 third quarter.

Based upon our current level of operations, the Company believes that the
combination of cash generated by operations and available borrowing capacity
under its credit agreements is adequate to finance the Company's operations for
the foreseeable future.

Critical Accounting Policies:

Management's discussion and analysis of the Company's financial statements and
results of operations are based upon the Company's Condensed Consolidated
Financial Statements included as part of this document. The preparation of these
Condensed Consolidated Financial Statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosures of contingent assets and
liabilities. On an ongoing basis, the Company evaluates these estimates,
including those related to bad debts, inventories, intangible assets, income
taxes, litigation and


                                       14
<PAGE>

other contingencies. 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, 2005 Consolidated Financial Statements included in the Company's 2005 Annual
Report on Form 10-K filed with the Securities and Exchange Commission on March
24,2006 (the "Annual Report"). 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:

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

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

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

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


                                       15
<PAGE>

requires management to make estimates and assumptions that affect the Company's
Consolidated Financial Statements.

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

Income Taxes: Under the requirements of SFAS No. 109, "Accounting for Income
Taxes," we record deferred tax assets and liabilities for the future tax
consequences attributable to differences between financial statements carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Management judgment is
required in determining the Company's provision for income taxes, deferred tax
assets and liabilities, which, if actual experience varies, could result in
material adjustments to deferred tax assets and liabilities.

Recent Accounting Pronouncements

In June 2006, the FASB issued FIN No. 48, "Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109", which clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with FASB Statement No. 109, "Accounting for
Income Taxes". The interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN No. 48
requires recognition of tax benefits that satisfy a greater than 50% probability
threshold. FIN No. 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN No. 48 is effective for us beginning July 1, 2007. We are
currently assessing the potential impact that the adoption of FIN No. 48 will
have on our financial statements.

In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Current Year Misstatements". SAB No. 108 requires
analysis of misstatements using both an income statement (rollover) approach and
a balance sheet (iron curtain) approach in assessing materiality and provides
for a one-time cumulative effect transition adjustment. SAB No. 108 is effective
for our fiscal year 2007 annual financial statements. We are currently assessing
the potential impact that the adoption of SAB No.108 will have on our financial
statements, but the impact is not expected to be material.

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 of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. 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,"


                                       16
<PAGE>

"foresees," "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. For
additional factors that could impact future results, please see our Annual
Report.

Item 3 Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risks since the 2005 Annual Report
to Shareholders.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures: As of September 29, 2006,
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.


                                       17
<PAGE>

PART II - OTHER INFORMATION

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


                                       18
<PAGE>

Signatures

Pursuant to the requirements 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.

Date November 13, 2006                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)


                                       19