<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 JUNE 30, 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 WOODS'S CORPORATION
             (Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

                          Common Stock, $.01 par value

     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]

<PAGE>

     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                      July 24, 2006
--------------------------------------   ----------------
Common Stock, $.01 par value per share   3,735,932 shares


                                        2

<PAGE>

                              TB WOOD'S CORPORATION
                                FORM 10-Q - INDEX
                                  JUNE 30, 2006

<TABLE>
<CAPTION>
                                                                                       Page No.
                                                                                       --------
<S>                                                                                       <C>
Part 1. - Financial Information

Item 1. Financial Statements (unaudited):

        Condensed Consolidated Statements of Operations - for the Second Quarter
           and Six Months ended June 30, 2006 and July 1, 2005                             4

        Condensed Consolidated Balance Sheets - June 30, 2006 and December 31, 2005        5

        Condensed Consolidated Statements of Cash Flows - for the Second Quarter
           and Six Months ended June 30, 2006 and July 1, 2005                             6

        Notes to Condensed Consolidated Financial Statements                               7

Item 2. Management's Discussion and Analysis of Financial Condition and Results
           of Operations                                                                  11

Item 3. Quantitative and Qualitative Disclosures about Market Risk                        18

Item 4. Controls and Procedures                                                           18

Part II - Other Information                                                               19

Item 4  Submission of Matters to a Vote of Security Holders

Item 6  Exhibits

Signatures                                                                                20

Exhibit 31.1 Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002      21
Exhibit 31.2 Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002      22
Exhibit 32   Statement Pursuant to 18 U.S.C. Section 1350 as required by Section 906
                of the Sarbanes Oxley Act of 2002                                         23
</TABLE>


                                        3

<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
                                                  --------------------   ------------------
                                                   June 30,    July 1,   June 30,   July 1,
(in thousands, except per share amounts)             2006       2005       2006       2005
-----------------------------------------------    --------   --------   --------   -------
<S>                                                 <C>        <C>        <C>       <C>
Net sales                                           $29,750    $27,844    $59,169   $55,555
Cost of goods sold                                   20,255     19,568     40,570    39,126
                                                    -------    -------    -------   -------
Gross profit                                          9,495      8,276     18,599    16,429
Selling, general and administrative expense           7,139      6,874     14,440    13,734
                                                    -------    -------    -------   -------
Operating income                                      2,356      1,402      4,159     2,695
Interest expense and other finance charges              943        524      1,788     1,140
                                                    -------    -------    -------   -------
Income before provision for income taxes              1,413        878      2,371     1,555
Provision for income taxes                              466        381        782       686
                                                    -------    -------    -------   -------
Net income                                          $   947    $   497    $ 1,589   $   869
                                                    =======    =======    =======   =======
PER SHARE AMOUNTS - BASIC AND DILUTED:
   Basic net income per common share                  $0.25      $0.10      $0.43     $0.17
                                                    =======    =======    =======   =======
   Diluted net income per common share                $0.24      $0.10      $0.41     $0.17
                                                    =======    =======    =======   =======
   Basic weighted average shares of common
      stock and equivalents outstanding               3,721      5,183      3,722     5,181
                                                    =======    =======    =======   =======
   Diluted weighted average shares of common
      stock and equivalents outstanding               3,936      5,183      3,906     5,181
                                                    =======    =======    =======   =======
</TABLE>

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


                                       4

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                    June 30,   December 31,
(in thousands, except per share amounts)                                              2006         2005
---------------------------------------------------------------------------------   --------   ------------
<S>                                                                                  <C>          <C>
ASSETS
Current Assets:
   Cash and cash equivalents                                                        $    983      $ 3,419
   Accounts receivable less allowances of  $455 at June 30, 2006
      and $495 at December 31, 2005                                                   18,929       14,827
   Inventories--Note 2                                                                18,497       15,579
   Other current assets                                                                2,927        3,061
                                                                                    --------      -------
      Total current assets                                                            41,336       36,886

Property, plant and equipment                                                         83,610       80,416
   Less accumulated depreciation                                                      59,071       57,361
                                                                                    --------      -------
      Net property, plant and equipment                                               24,539       23,055
Other Assets:
   Goodwill                                                                            5,791        5,676
   Loan issue costs, net of amortization                                               1,443        1,564
   Deferred income taxes                                                                 117            -
   Other                                                                                 205          572
                                                                                    --------      -------
      Total other assets                                                               7,556        7,812
                                                                                    --------      -------
TOTAL ASSETS                                                                         $73,431      $67,753
                                                                                    ========      =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
    Current maturities of long-term debt                                            $  6,264      $ 4,138
    Accounts payable                                                                   9,866        8,465
    Accrued expenses                                                                   7,928        6,996
    Deferred income taxes                                                                720          716
                                                                                    --------      -------
      Total current liabilities                                                       24,778       20,315
Long-term debt, less current maturities                                               25,108       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;
      3,732,740 and 3,703,386 outstanding at June 30, 2006 and December 31, 2005          57           57
   Additional paid-in-capital                                                         28,362       28,153
   Retained earnings                                                                  10,703        9,216
   Accumulated other comprehensive loss                                                  (58)        (151)
   Treasury stock at cost                                                            (15,519)     (15,757)
                                                                                    --------      -------
      Total shareholders' equity                                                      23,545       21,518
                                                                                    --------      -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                          $ 73,431      $67,753
                                                                                    ========      =======
</TABLE>

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


                                       5

<PAGE>

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

<TABLE>
<CAPTION>
                                                               Second quarter ended     Six months ended
                                                               --------------------   -------------------
                                                               June 30,    July 1,    June 30,    July 1,
(in thousands)                                                   2006       2005        2006       2005
-----------------------------------------------------------    --------   --------    --------   --------
<S>                                                            <C>        <C>         <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income                                                     $    947   $    497    $  1,589   $    869
Adjustments to reconcile net income to net cash provided by
operating activities:
   Depreciation and amortization                                  1,097      1,212       2,192      2,471
   Change in deferred income taxes, net                             (84)        63         (60)      (102)
   Stock options and employee stock benefit expense                 149         87         302        171
   Other                                                            (14)      (121)         (3)      (121)
   Changes in operating assets and liabilities:
      Accounts receivable                                        (1,748)       778      (4,102)    (1,689)
      Inventories                                                (2,044)     1,622      (2,918)     2,708
      Other current assets                                          338        158         134        627
      Accounts payable                                            2,446     (1,419)      1,401       (698)
      Accrued and other liabilities                               1,514       (435)        918       (374)
                                                               --------   --------    --------   --------
   Total adjustments                                              1,654      1,945      (2,136)     2,993
                                                               --------   --------    --------   --------
Net cash provided by (used in) operating activities               2,601      2,442        (547)     3,862
CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures                                          (2,796)      (898)     (3,449)    (1,349)
   Other                                                            146        444         160         67
                                                               --------   --------    --------   --------
Net cash used in investing activities                            (2,650)      (454)     (3,289)    (1,282)
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from revolving credit facilities                     28,375     27,554      55,779     57,547
   Repayments of revolving credit facilities                    (28,201)   (27,632)    (53,653)   (69,666)
   Proceeds from long-term debt                                      --         --          15     13,000
   Repayments of long-term debt                                    (487)    (1,053)       (802)    (1,698)
   Issuance (purchase) of treasury stock                             (7)        16          57         29
                                                               --------   --------    --------   --------
Net cash provided by (used in) financing activities                (320)    (1,115)      1,396       (788)
Effect of changes in foreign exchange rates                         (84)      (211)          4       (340)
                                                               --------   --------    --------   --------
Net increase (decrease) in cash and cash equivalents               (453)       662      (2,436)     1,452
Cash and cash equivalents at beginning of period                  1,436      1,346       3,419        556
                                                               --------   --------    --------   --------
Cash and cash equivalents at end of period                     $    983   $  2,008    $    983   $  2,008
                                                               ========   ========    ========   ========
Income taxes paid                                              $    797   $    125    $  1,108   $    235
                                                               ========   ========    ========   ========
Interest paid                                                  $    941   $    693    $  1,731   $  1,247
                                                               ========   ========    ========   ========
</TABLE>

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


                                       6

<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 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. 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 inventories at June 30, 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.


                                       7

<PAGE>

     The major classes of inventories are comprised as follows:

                                                           June 30   December 31
                                                             2006       2005
                                                           -------   -----------
     Finished goods                                        $12,855     $11,159
     Work in process                                         3,547       3,452
     Raw materials                                           8,492       7,009
                                                           -------     -------
                                                            24,894      21,620
        Less LIFO Reserve                                   (6,397)     (6,041)
                                                           -------     -------
     Inventory value at LIFO                               $18,497     $15,579
                                                           =======     =======

     During the second quarter of 2006, the LIFO reserve was increased by $210,
     while in the second quarter of 2005 the LIFO reserve was increased by $223.
     For the first six months of 2006, the LIFO reserve was increased by $356,
     while during the similar period 2005 it was increased by $53. 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 consolidated statements of operation. The Company incurred
     $1,684 and $1,593 of shipping and handling costs in the second quarters
     ended June 30, 2006 and July 1, 2005, respectively. The corresponding year
     to date amounts were $3,404 and $3,230, respectively.

3.   Shareholders' Equity

     During the first six months of 2006 the Company issued 12,751 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 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 January 13,
     2016. On February 10, 2006 and April 27, 2006, the Company granted options
     for the purchase of 6,000 shares of the common stock to each of its newly
     appointed directors at exercise prices equal to or in excess of market
     price on the dates of grant. These options expire after ten years and vest
     over three years following the grant dates. The Company adopted Financial
     Accounting Standards Board (FASB) Statement of Accounting Financial
     Standard (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 and using the fair value
     method, was $67 and $35 for the second quarter of 2006 and 2005
     respectively, and $139 and $69 for the first six months of 2006 and 2005
     respectively.


                                       8

<PAGE>

4.   Other Comprehensive Income

     Total comprehensive income (loss) was as follows:

<TABLE>
<CAPTION>
                                                   Second quarter ended    Six months ended
                                                   --------------------   ------------------
                                                    June 30,   July 1,    June 30,   July 1,
                                                      2006       2005       2006       2005
                                                    --------   -------    --------   -------
<S>                                                   <C>       <C>        <C>        <C>
     Net income                                       $947      $ 497      $1,589     $ 869
     Other comprehensive (loss):
        Foreign currency translation adjustments       (23)      (211)         93      (340)
                                                      ----      -----      ------     -----
     Total comprehensive income                       $924      $ 286      $1,682     $ 529
                                                      ====      =====      ======     =====
</TABLE>

     Accumulated other comprehensive (loss), net of income tax, is comprised of
     aggregate currency translation adjustments of $(58) and $(151) as of June
     30, 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>
                                                        Second quarter ended    Six months ended
                                                        --------------------   ------------------
                                                         June 30,   July 1,    June 30,   July 1,
                                                           2006       2005       2006      2005
                                                         --------   -------    --------   -------
<S>                                                        <C>       <C>         <C>       <C>
     Basic  weighted  average number of common shares
        outstanding                                        3,721     5,183       3,722     5,181
     Shares   issuable   upon  assumed   exercise  of
        outstanding stock options                            215        --         184       --
                                                           -----     -----       -----     -----
     Diluted   weighted   average  number  of  common
        shares outstanding                                 3,936     5,183       3,906     5,181
                                                           =====     =====       =====     =====
</TABLE>

     Total outstanding options to purchase 135,750 and 629,451 shares of common
     stock as of June 30, 2006 and July 1, 2005, respectively, are not included
     in the above calculation as their effect would be anti-dilutive.


                                       9

<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>
                                                Second quarter ended    Six months ended
                                                --------------------   ------------------
                                                 June 30,   July 1,    June 30,   July 1,
                                                   2006       2005       2006       2005
                                                 --------   -------    --------   -------
<S>                                               <C>       <C>        <C>        <C>
     Sales:
        Mechanical Segment                        $20,142   $18,283    $40,257    $36,436
        Electronics Segment                         9,608     9,561     18,912     19,119
                                                  -------   -------    -------    -------
                                                  $29,750   $27,844    $59,169    $55,555
                                                  -------   -------    -------    -------
     Operating income (loss):
        Mechanical Segment                        $ 2,285   $ 1,287    $ 4,160    $ 2,248
        Electronics Segment                            71       115         (1)       447
                                                  -------   -------    -------    -------
                                                  $ 2,356   $ 1,402    $ 4,159    $ 2,695
                                                  -------   -------    -------    -------
     Depreciation and amortization:
        Mechanical Segment                        $   562   $   660    $ 1,122    $ 1,337
        Electronics Segment                           270       286        539        592
        Corporate                                     265       266        531        542
                                                  -------   -------    -------    -------
                                                  $ 1,097   $ 1,212    $ 2,192    $ 2,471
                                                  -------   -------    -------    -------
     Expenditures for long-lived assets:
        Mechanical Segment                        $ 2,164   $   173    $ 2,615       $341
        Electronics Segment                           371       499        529        720
        Corporate                                     261       226        305        288
                                                  -------   -------    -------    -------
                                                  $ 2,796   $   898    $ 3,449    $ 1,349
                                                  -------   -------    -------    -------
</TABLE>

     Assets:                                    June 30,   December 31,
                                                  2006         2005
                                                --------   ------------
        Mechanical Segment                       $46,735      $42,097
        Electronics Segment                       21,882       20,760
        Corporate                                  4,813        4,896
                                                 -------      -------
                                                 $73,431      $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 Events

     On July 19, 2006, the Company's Board of Directors declared a quarterly
     dividend of 9 cents per share. This dividend will be payable August 11,
     2006 to shareholders of record on August 4, 2006.


                                       10

<PAGE>

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
                                              ------------------------------------
                                              June 30,   July 1,   Dollar      %
                                                2006       2005    Change   Change
                                              --------   -------   ------   ------
<S>                                            <C>       <C>       <C>       <C>
Sales
   Mechanical Segment                          $20,142   $18,283   $1,859    10.2%
   Electronics Segment                           9,608     9,561       47     0.5%
                                               -------   -------   ------
       Total Sales                             $29,750   $27,844   $1,906     6.8%
                                               -------   -------   ------
Cost of Sales
   Mechanical Segment                          $13,953   $13,218   $  735     5.6%
   Electronics Segment                           6,302     6,350      (48)   (0.8%)
                                               -------   -------   ------
       Total Cost of Sales                     $20,255   $19,568   $  687     3.5%
                                               -------   -------   ------
Gross Profit
   Mechanical Segment                          $ 6,189   $ 5,065   $1,124    22.2%
   Electronics Segment                           3,306     3,211       95     3.0%
                                               -------   -------   ------
      Total Gross Profit                       $ 9,495   $ 8,276   $1,219    14.7%
                                               -------   -------   ------
Selling, General and Administrative Expense    $ 7,139   $ 6,874   $  265     3.9%
                                               -------   -------   ------
Sales
   Mechanical Segment                             67.7%     65.7%
   Electronics Segment                            32.3%     34.3%
                                               -------   -------
      Total Sales                                100.0%    100.0%
                                               -------   -------
Cost of Sales as a Percentage of Sales
   Mechanical Segment                             69.3%     72.3%
   Electronics Segment                            65.6%     66.4%
      Total Cost of Sales                         68.1%     70.3%

Gross Profit as a Percentage of Sales
   Mechanical Segment                             30.7%     27.7%
   Electronics Segment                            34.4%     33.6%
      Total Gross Profit                          31.9%     29.7%
SG&A Expenses as a Percentage of Sales            24.0%     24.7%
</TABLE>


                                       11

<PAGE>

<TABLE>
<CAPTION>
                                                         Six months ended
                                              ------------------------------------
                                              June 30,   July 1,   Dollar      %
                                                2006       2005    Change   Change
                                              --------   -------   ------   ------
<S>                                            <C>       <C>       <C>       <C>
Sales
   Mechanical Segment                          $40,257   $36,436   $3,821    10.5%
   Electronics Segment                          18,912    19,119     (207)   (1.1%)
                                               -------   -------   ------
      Total Sales                              $59,169   $55,555   $3,614     6.5%
                                               -------   -------   ------
Cost of Sales
   Mechanical Segment                          $28,188   $26,591   $1,597     6.0%
   Electronics Segment                          12,382    12,535     (153)   (1.2%)
                                               -------   -------   ------
      Total Cost of Sales                      $40,570   $39,126   $1,444     3.7%
                                               -------   -------   ------
Gross Profit
   Mechanical Segment                          $12,069    $9,845   $2,224    22.6%
   Electronics Segment                           6,530     6,584      (54)   (0.8%)
                                               -------   -------   ------
       Total Gross Profit                      $18,599   $16,429   $2,170    13.2%
                                               -------   -------   ------
Selling, General and Administrative Expense
                                               $14,440   $13,734   $  706     5.1%
                                               -------   -------   ------
Sales
   Mechanical Segment                             68.0%     65.6%
   Electronics Segment                            32.0%     34.4%
                                               -------   -------
      Total Sales                                100.0%    100.0%
                                               -------   -------
Cost of Sales as a Percentage of Sales
   Mechanical Segment                             70.0%     73.0%
   Electronics Segment                            65.5%     65.6%
      Total Cost of Sales                         68.6%     70.4%
Gross Profit as a Percentage of Sales
   Mechanical Segment                             30.0%     27.0%
   Electronics Segment                            34.5%     34.4%
      Total Gross Profit                          31.4%     29.6%
SG&A Expenses as a Percentage of Sales            24.4%     24.7%
</TABLE>

Second quarter 2006 continued to gain from a favorable economy, with revenues
growing $1.9 million, or 6.8% over similar quarter in 2005. Volume increases
contributed 5.3% points of the Company's sales gain, with 0.7% points
attributable to favorable pricing, net of higher volume rebates, and the balance
of the gain coming from a favorable currency effect. Approximately one-half of
our revenue increase related to sales growth with the Company's largest
distributor, where second quarter sales increased $1.0 million or 21.3% over
same period in 2005. Almost all of the sales gain came from Mechanical business,
where sales increased $1.9 million, or 10.2% over the same quarter of 2005.
Higher volume accounted for $1.4 million of the increase; higher prices, net of
rebates, provided $0.3 million; and we realized a $0.2 million favorable
currency effect. Electronic Business sales were essentially flat with $0.1
million of higher


                                       12

<PAGE>

volume being negated by a similar price reduction. Our newest electronics
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 $3.6 million or 6.5%, with the Company's
largest distributor buying $1.9 million, or 19.6%, in the comparable period of
prior year. Higher sales volume provided $3.0 million of the increase, pricing
and product mix net of volume rebates accounted for $0.5 million, and currency
gain contributed $0.1 million. As in the second quarter, this gain was largely
from Mechanical Business whose sales increased 10.5% or $3.8 million. Increased
volume contributed $2.8 million of this gain; price increases net of volume
rebates added $0.6 million; and $0.4 million of the increase was caused by the
favorable effects of a weaker US dollar against the Canadian currency.
Electronic Business revenue fell $0.2 million, largely due to a weaker Euro.

Second quarter 2006 total Company gross profit rose by $1.2 million to $9.5
million. Stated as a percent of net sales, the gross profit margin rose from
29.7% to 31.9% as the gross profit rose 14.7% versus a 6.8 % rise in sales.
Mechanical Business was the main contributor to this favorable situation, as its
gross profit was $6.2 million or 65.3% of the total margin for the Company.
Compared to second quarter 2005, this segment's gross profit rose $1.1 million.
Higher volume contributed $0.7 million of the increase, higher prices $0.3
million and favorable currency $0.1 million. As the Company reduced excessive
inventory in 2005 second quarter, 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 $0.5 million.
However, this favorable outcome was largely offset by the absence of
non-recurring favorable effects relating to the sale of the idled Trenton,
Tennessee manufacturing facility and termination of our post-retirement life
insurance benefit plan in the second quarter of 2005. Electronics Business gross
profit increased marginally by $0.1 million, principally due to the effect of
changing inventory levels. The Company is focused on investing in machinery and
research and development that reduce unit production cost of the "X4" and
related platform drives, which we believe will lead to higher margins with
rising sales in the future.

On a year-to-date basis, the Company's gross profit increased by $2.2 million to
$18.6 million. Since gross profit increased at a higher rate than sales, gross
margin expressed as a percent of net sales rose from 29.6% to 31.4%. Our
Mechanical Business was responsible for this $2.2 million increase, with $1.3
million coming from higher volume, $0.6 million coming from previously announced
price increases, and $0.1 million coming from a favorable Canadian currency
effects. As in the second quarter, a $0.8 million favorable inventory effect was
balanced by absence of non-recurring gains recognized in 2005 and an increase in
LIFO reserves in 2006. Electronic Business gross margin was largely flat due to
marginal gains from different sources listed above being negated by $0.1 million
adverse currency effect due to a weaker Euro.

For the second quarter 2006, selling, general and administrative expenses
increased by $0.3 million, but due to a higher proportionate increase in sales,
have decreased as a percent of sales to 24.0% from 24.7% in 2005 second quarter.
Higher employee bonus accruals contributing to this increase approximated $0.2
million. Year-to-date selling, general and administrative costs rose $0.7
million compared to the first-half of 2005, but as in the second quarter,
declined as a percent of net sales from 24.7% to 24.4%. Higher employee bonus
accruals that approximated $0.4 million and the absence of a $0.3 million
non-recurring gain in 2005 related to former CEO's post-retirement payment were
primarily responsible for this increase.


                                       13

<PAGE>

Interest expense and other finance charges increased $0.4 million in second
quarter to $0.9 million compared to the prior year. This increase was caused by
higher 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. Income taxes
approximate statutory rates. For the year to date, interest expense and other
finance charges were $0.6 million higher at $1.8 million, and provision for
incomes taxes was $0.1 million higher at $0.8 million.

As a result of the above, net income in the second quarter of 2006 compared to
the same quarter in the preceding year increased to $0.9 million from $0.5
million. Diluted net income per share in the second quarter of 2006 was $0.24
per share, compared to a diluted net income per share of $0.10 in 2005. Year to
date 2006 net income was $1.6 million, or $0.41 per diluted share compared to
net income of $0.9 million, or $0.17 per diluted share for the corresponding
period in 2005. 2006 Diluted net income per share rose 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 June 30, 2006 current and long-term debt totaled $31.4 million, compared to
$30.0 million at December 31, 2005, and was comprised of $3.1 million and $8.1
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. The Company's effective borrowing rates at June 30, 2006
and December 31, 2005 for its long-term obligations were approximately 9.83% and
9.49% respectively.

On January 7, 2005, the Company entered into a new senior secured loan and
security agreement (the "Loan Agreement") that provided for up to an $18.3
million revolving line of credit and two term loans totaling $13.0 million (Term
Loan A--$10.0 million and Term Loan B--$3.0 million). The proceeds were used to
retire amounts outstanding under the Company's outstanding revolving line of
credit. 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 65% of the outstanding stock of the Company's
Canadian, German and Mexican subsidiaries. The Loan Agreement was amended on
July 29, 2005 to extend the term for an additional two years through April 2009
and permit the Company to borrow up to $15.0 million to fund the purchase of up
to 1.5 million shares of outstanding common stock and repay Term Loan B, the
outstanding balance of which was approximately $2.0 million.

All borrowings under the Loan Agreement bear variable interest of a margin plus
LIBOR, and the remaining Term Loan A is repayable in monthly principal
installments totaling $0.13 million. The average borrowing rates for the
Company's short-term borrowings under the Loan Agreement at June 30, 2006 and
December 31, 2005 were 7.82% and 7.97% respectively. At June 30, 2006 the
Company had remaining borrowing capacity of $8.0 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


                                       14

<PAGE>

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% based upon the
Company's carrying value of such notes), 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 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.

The Company used $0.5 million of its cash balance in the 2006 second quarter
compared to generating $0.7 million in 2005 second quarter. For the year to date
2006 the Company used $2.4 million of its cash balance as compared to generating
$1.5 million during the same period last year. Operating activities in the
second quarter generated $2.6 million of cash versus $2.4 million in the same
quarter of the previous year. Year to date 2006 operating activities used $0.5
million cash as our accounts receivable increased $4.1 million and inventory
increased $2.9 million to meet higher sales, which exceeded our operating
profits, depreciation and amortization, and other working capital adjustments.
Conversely, in the first half of 2005 operating activities yielded $3.9 million
of cash benefiting in part from a $2.7 million reduction of inventory.

During the second quarter of 2006 the Company funded $2.8 million of capital
expenditures compared to $0.9 million in the comparable period of 2005. In 2006,
year to date capital expenditures were $3.4 million compared to $1.3 million in
2005. This planned increase is primarily to support upgrading the Company's
mechanical products manufacturing capabilities and fund certain facility
improvements. The Company has a capital budget of $5.0 in 2006 million compared
to $3.1 million of capital expenditures in 2005.

The Company repaid $0.5 million of contractually due long-term loan installments
in the second quarter of 2006 compared to $1.1 million in the second quarter of
2005. For the first half of 2006, the Company repaid $0.8 million of contractual
obligations compared to $1.7 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
obtaining $15.0 senior unsecured term financing as part of its financing
activities in the fourth quarter of 2005.

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.

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


                                       15

<PAGE>

these estimates, including those related to bad debts, inventories, intangible
assets, income taxes, litigation and 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. 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 defect in design, materials, and workmanship over various time
periods. Warranty reserve and allowance for product returns is established based
upon management's best estimates of amounts necessary to settle future and
existing claims on products sold as of the balance sheet date. The warranty
reserve and allowance for product returns is not significant to the financial
position of the Company for all periods presented.

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

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


                                       16

<PAGE>

affects the amount of future period amortization expense. The determination of
the value of such intangible assets requires management to make estimates and
assumptions that affect the Company's Consolidated Financial Statements.

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

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 December 2004, the FASB issued Statement of Accounting Standards No. 123
(revised 2004) "Share-Based Payment", a revision of FASB Statement No. 123
"Accounting for Stock Based Compensation" which the Company adopted in the third
quarter of 2005. As the Company had already adopted FASB Statement No. 123 in
2003 the only effects of the revised Statement No. 123 upon the Company are
expanded disclosure related to its stock based compensation plan.

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

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,"


                                       17

<PAGE>

"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 2005 Annual Report
to Shareholders.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures: As of June 30, 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.

(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.


                                       18

<PAGE>

PART II - OTHER INFORMATION

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

        a)   The Company held its Annual Meeting of Shareholders on April 27,
             2006.

        b)   The following individuals were nominated and elected to serve as
             directors of TB Wood's Corporation: Rick Lazio and Michael R.
             Zimmerman.

        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
             --------------------   ---------   --------------
             Rick Lazio             2,882,524       15,630
             Michael R. Zimmerman   2,894,131        4,023

        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 2,895,523 votes for, 50 votes against, and 2,581 votes
             abstaining.

        3.   To approve the TB Wood's Corporation 2006 Stock-Based Incentive
             Compensation Plan, approved by a count of 2,098,150 votes for,
             199,625 votes against, and 2,113 votes abstaining.

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


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<PAGE>

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Borough of
Chambersburg and Commonwealth of Pennsylvania.

Date August 8, 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)


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