UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

**FORM 10-Q**

      **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED October 1, 2004.**

      **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSISTION PERIOD from _______ to _________.**

Commission File Number 1-14182

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

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

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

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

Indicate by checkmark whether the    registrant (1) has filed all reports required to be filed by Section 13 or    15(d) of the Securities Exchange Act of 1934 during the preceding 12 months,    and (2) has been subject to such filing requirements for the past 90 days.Yes    No 

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

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

| Class                        |   |   | Outstanding at October 1, 2004 |   |
|------------------------------|--------|--------|--------------------------------|--------|
|                              |        |        |                                |        |
| Common Stock, $.01 par value |   |   | 5,166,678                      |   |

 

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**TB WOOD’S CORPORATION  FORM 10-Q – INDEXOctober 1, 2004**

| Part I. – Financial    Information   |   |   | Page No.                                                                                       |   |
|-------------------------------------------|--------|--------|------------------------------------------------------------------------------------------------|--------|
|                                           |        |   |                                                                                           |        |  |  |  |
|                                      |   |   |                                                                                           |   |   |   |   |
| Item 1.                                   |   |   | Financial Statements (unaudited):                                                              |   |   |   |   |
|                                      |   |   |                                                                                           |   |   |   |   |
|                                      |   |   | Condensed Consolidated    Statements of Operations – for the                              |        |  |   |   |
|                                      |   |   | three month and nine month periods ended October 1, 2004 and September 26, 2003                |        |  | 3 |   |
|                                      |   |   |                                                                                           |   |   |   |   |
|                                      |   |   | Condensed Consolidated    Balance Sheets –                                                |        |  |   |   |
|                                      |   |   | October 1, 2004 and January 2, 2004                                                            |        |  | 4 |   |
|                                      |   |   |                                                                                           |   |   |   |   |
|                                      |   |   | Condensed Consolidated    Statements of Cash Flows – for the                              |        |  |   |   |
|                                      |   |   | nine months ended October 1, 2004 and September 26, 2003                                       |        |  | 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                                     |        |  | 16 |   |
|                                      |   |   |                                                                                           |   |   |   |   |
| Item 4.                                   |        |        | Controls and Procedures                                                                        |        |  | 17 |   |
|                                      |   |   |                                                                                           |   |   |   |   |
| Part      II. – Other    Information |        |        | 17                                                                                             |   |
|                                      |   |   |                                                                                           |   |   |   |   |
| Item 1.                                   |        |        | Legal Proceedings                                                                              |   |   |   |   |
| Item 2.                                   |        |        | Unregistered Sales of Equity Securities and Use of Proceeds                                    |   |   |   |   |
| Item 3.                                   |        |        | Defaults on Senior Securities                                                                  |   |   |   |   |
| Item 4.                                   |        |        | Submission of Matters to a Vote of Security Holders                                            |   |   |   |   |
| Item 5.                                   |        |        | Other Information – Forward-Looking    Statements and Cautionary Factors                  |   |   |   |   |
| Item 6.                                   |        |        | Exhibits                                                                                       |   |   |   |   |
|                                      |   |   |                                                                                           |   |   |   |   |
| Signatures                           |        |        | 18                                                                                             |   |
|                                      |   |   |                                                                                           |   |   |   |   |
| Exhibit 31.1                              |   |   | Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002                        |   |   | 19 |   |
| Exhibit 31.2                              |   |   | Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002                        |   |   | 20 |   |
| Exhibit 32                                |   |   | Statement Pursuant to 18 U.S.C. Section 1350 as required by Section 906                        |   |   |   |   |
|                                      |   |   | of the Sarbanes Oxley Act of 2002                                                              |   |   | 21 |   |

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**Part I. – Financial Information**Item 1.  Financial Statements

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

|                                                    |       |       | **Three Months Ended** |       |       | **Nine Months Ended** |       |
|---------------------------------------------------------|------------|------------|------------------------|------------|------------|-----------------------|------------|
|                                                    |       |            |                        |            |            |                       |       |
| ** **                                              |       |       | **October 1,**         |       |       | **September 26,**     |       |   | **October 1,** |   |   | **September 26,** |   |
| **(in thousands of dollars, except per share amounts)** | ** ** | ** ** | **2004**               | ** ** | ** ** | **2003**              | ** ** | ** ** | **2004** | ** ** | ** ** | **2003** |   |
|                                                         |            |            |                        |            |            |                       |            |  |  |  |  |  |   |
|                                                    |       |       |                   |       |       |                  |       |   |   |   |   |   |   |
| Net Sales                                               |       | $          | 25,279                 |       | $          | 23,101                |       | $ | 76,819 |   | $ | 70,758 |   |
| Cost of Sales                                           |       |       | 19,050                 |       |       | 15,967                |       |   | 54,828 |   |   | 48,671 |   |
|                                                    |       |            |                        |            |            |                       |            |  |  |  |  |  |   |
|                                                    |       |       |                   |       |       |                  |       |   |   |   |   |   |   |
| Gross profit                                            |       |       | 6,229                  |       |       | 7,134                 |       |   | 21,991 |   |   | 22,087 |   |
|                                                    |       |       |                   |       |       |                  |       |   |   |   |   |   |   |
| Selling, general and administrative expense             |       |       | 7,392                  |       |       | 6,823                 |       |   | 21,782 |   |   | 20,326 |   |
|                                                    |       |            |                        |            |            |                       |            |  |  |  |  |  |   |
|                                                    |       |       |                   |       |       |                  |       |   |   |   |   |   |   |
| Operating (loss) income                                 |       |       | (1,163                 | )          |       | 311                   |       |   | 209 |   |   | 1,761 |   |
|                                                    |       |            |                        |            |            |                       |            |  |  |  |  |  |   |
|                                                    |       |       |                   |       |       |                  |       |   |   |   |   |   |   |
| Other (income) expense:                                 |       |       |                   |       |       |                  |       |   |   |   |   |   |   |
| Interest    expense and other finance charges           |       |       | 460                    |       |       | 232                   |       |   | 1,207 |   |   | 680 |   |
| Other    (income) expense                               |       |       | —                 |       |       | 1                     |       |   | — |   |   | (169 | ) |
|                                                    |       |            |                        |            |            |                       |            |  |  |  |  |  |   |
| Other    expense, net                                   |       |       | 460                    |       |       | 233                   |       |   | 1,207 |   |   | 511 |   |
|                                                    |       |            |                        |            |            |                       |            |  |  |  |  |  |   |
|                                                    |       |       |                   |       |       |                  |       |   |   |   |   |   |   |
| (Loss) income before provision for income taxes         |       |       | (1,623                 | )          |       | 78                    |       |   | (998 | ) |   | 1,250 |   |
|                                                    |       |       |                   |       |       |                  |       |   |   |   |   |   |   |
| (Benefit) provision for income taxes                    |       |       | (277                   | )          |       | 22                    |       |   | 119 |   |   | 631 |   |
|                                                    |       |            |                        |            |            |                       |            |  |  |  |  |  |   |
|                                                    |       |       |                   |       |       |                  |       |   |   |   |   |   |   |
| Net (loss) income                                       |       | $          | (1,346                 | )          | $          | 56                    |       | $ | (1,117 | ) | $ | 619 |   |
|                                                    |       |            |                        |            |            |                       |            |  |  |  |  |  |   |
|                                                    |       |       |                   |       |       |                  |       |   |   |   |   |   |   |
| **Per share amounts – Basic and Diluted:**         |       |       |                   |       |       |                  |       |   |   |   |   |   |   |
|                                                    |       |       |                   |       |       |                  |       |   |   |   |   |   |   |
| Basic    net (loss) income per common share             |       | $          | (0.26                  | )          | $          | 0.01                  |       | $ | (0.22 | ) | $ | 0.12 |   |
|                                                    |       |            |                        |            |            |                       |            |  |  |  |  |  |   |
|                                                    |       |       |                   |       |       |                  |       |   |   |   |   |   |   |
| Diluted    net (loss) income per common share           |       | $          | (0.26                  | )          | $          | 0.01                  |       | $ | (0.22 | ) | $ | 0.12 |   |
|                                                    |       |            |                        |            |            |                       |            |  |  |  |  |  |   |
|                                                    |       |       |                   |       |       |                  |       |   |   |   |   |   |   |
| Basic    weighted average shares of common              |       |       |                   |       |       |                  |       |   |   |   |   |   |   |
| stock    and equivalent outstanding                     |       |       | 5,166                  |       |       | 5,156                 |       |   | 5,166 |   |   | 5,156 |   |
|                                                    |       |            |                        |            |            |                       |            |  |  |  |  |  |   |
|                                                    |       |       |                   |       |       |                  |       |   |   |   |   |   |   |
| Diluted    weighted average shares of common            |       |       |                   |       |       |                  |       |   |   |   |   |   |   |
| stock    and equivalent outstanding                     |       |       | 5,166                  |       |       | 5,156                 |       |   | 5,166 |   |   | 5,156 |   |
|                                                    |       |            |                        |            |            |                       |            |  |  |  |  |  |   |

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

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

| ** **                                                                                |   |   | **October 1,** |   |   | **January 2,** |   |
|-------------------------------------------------------------------------------------------|--------|--------|----------------|--------|--------|----------------|--------|
| **(in thousands of dollars, except per share amounts)**                                   |   |   | **2004**       |   |   | **2004**       |   |
|                                                                                           |        |        |                |        |        |                |   |
| ASSETS                                                                                    |   |   |           |   |   |           |   |
| Current    Assets:                                                                        |   |   |           |   |   |           |   |
| Cash    and cash equivalents                                                              |   | $      | 761            |   | $      | 781            |   |
| Accounts    receivable less allowances of $928 at October 1, 2004                         |   |   |                |   |   |                |   |
| and    $1,124 at January 2, 2004                                                          |   |   | 15,381         |   |   | 14,067         |   |
| Inventories                                                                               |   |   | 22,381         |   |   | 21,634         |   |
| Other    current assets                                                                   |   |   | 3,895          |   |   | 3,590          |   |
|                                                                                      |   |        |                |        |        |                |   |
| Total    current assets                                                                   |   |   | 42,418         |   |   | 40,072         |   |
|                                                                                      |   |        |                |        |        |                |   |
|                                                                                      |   |   |           |   |   |           |   |
| Property, plant and equipment                                                             |   |   | 82,848         |   |   | 82,050         |   |
| Less    accumulated depreciation                                                          |   |   | 57,492         |   |   | 54,848         |   |
|                                                                                      |   |        |                |        |        |                |   |
| Net    property, plant and equipment                                                      |   |   | 25,356         |   |   | 27,202         |   |
|                                                                                      |   |        |                |        |        |                |   |
| Other Assets:                                                                             |   |   |           |   |   |           |   |
| Deferred    income taxes                                                                  |   |   | 2,604          |   |   | 2,364          |   |
| Goodwill                                                                                  |   |   | 5,729          |   |   | 5,654          |   |
| Other                                                                                     |   |   | 955            |   |   | 1,115          |   |
|                                                                                      |   |        |                |        |        |                |   |
| Total    other assets                                                                     |   |   | 9,288          |   |   | 9,133          |   |
|                                                                                      |   |        |                |        |        |                |   |
| TOTAL ASSETS                                                                              |   | $      | 77,062         |   | $      | 76,407         |   |
|                                                                                      |   |        |                |        |        |                |   |
|                                                                                      |   |   |           |   |   |           |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                |   |   |           |   |   |           |   |
| Current Liabilities:                                                                      |   |   |           |   |   |           |   |
| Current    maturities of long-term debt                                                   |   | $      | 21,652         |   | $      | 53             |   |
| Accounts    payable                                                                       |   |   | 8,093          |   |   | 7,169          |   |
| Accrued    expenses                                                                       |   |   | 6,851          |   |   | 6,519          |   |
| Deferred    income taxes                                                                  |   |   | 1,625          |   |   | 1,550          |   |
|                                                                                      |   |        |                |        |        |                |   |
| Total    current liabilities                                                              |   |   | 38,221         |   |   | 15,291         |   |
|                                                                                      |   |        |                |        |        |                |   |
|                                                                                      |   |   |           |   |   |           |   |
| Long-term debt, less current maturities                                                   |   |   | 5,932          |   |   | 25,371         |   |
|                                                                                      |   |        |                |        |        |                |   |
|                                                                                      |   |   |           |   |   |           |   |
| Postretirement benefit obligation, less current portion                                   |   |   | 9,622          |   |   | 10,327         |   |
|                                                                                      |   |        |                |        |        |                |   |
|                                                                                      |   |   |           |   |   |           |   |
| Shareholders’ Equity:                                                               |   |   |           |   |   |           |   |
| Preferred    stock, $.01 par value, 100 shares authorized at October 1, 2004 and          |   |   |           |   |   |           |   |
| January    2, 2004, and no shares issued or outstanding                                   |   |   | —         |   |   | —         |   |
| Common      stock, $.01 par value, 10,000,000 shares authorized; 5,639,798 issued;    and |   |   |           |   |   |           |   |
| 5,166,678    and 5,153,553 outstanding at October 1, 2004 and January 2, 2004,            |   |   |           |   |   |           |   |
| Respectively                                                                              |   |   | 57             |   |   | 57             |   |
| Additional    paid-in-capital                                                             |   |   | 27,046         |   |   | 26,910         |   |
| Retained    earnings                                                                      |   |   | 1,232          |   |   | 3,764          |   |
| Accumulated    other comprehensive loss                                                   |   |   | (472           | )      |   | (610           | )      |
| Treasury    stock at cost                                                                 |   |   | (4,576         | )      |   | (4,703         | )      |
|                                                                                      |   |        |                |        |        |                |   |
| Total    shareholders’ equity                                                       |   |   | 23,287         |   |   | 25,418         |   |
|                                                                                      |   |        |                |        |        |                |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                          |   | $      | 77,062         |   | $      | 76,407         |   |
|                                                                                      |   |        |                |        |        |                |   |

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

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

|                                                                                        |   |   | **Nine Months Ended** |   |
|---------------------------------------------------------------------------------------------|--------|--------|-----------------------|--------|
|                                                                                        |   |        |                       |   |
|                                                                                        |   |   | **October 1,**        |   |   | **September 26,** |   |
| **(in thousands of dollars)**                                                               |   |   | **2004**              |   |   | **2003** |   |
|                                                                                             |        |        |                       |        |  |  |   |
| **Cash flows from Operating Activities:**                                                   |   |   |                  |   |   |   |   |
| Net (loss) income                                                                           |   | $      | (1,117                | )      | $ | 619 |   |
|                                                                                        |   |        |                       |        |  |  |   |
|                                                                                        |   |   |                  |   |   |   |   |
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: |   |   |                  |   |   |   |   |
| Depreciation    and amortization                                                            |   |   | 4,007                 |   |   | 4,135 |   |
| Change    in deferred income taxes, net                                                     |   |   | (165                  | )      |   | 841 |   |
| Other                                                                                       |   |   | 228                   |   |   | 149 |   |
| Changes    in operating assets and liabilities:                                             |   |   |                  |   |   |   |   |
| Accounts    receivable                                                                      |   |   | (1,314                | )      |   | 65 |   |
| Inventories                                                                                 |   |   | (747                  | )      |   | (2,085 | ) |
| Other    current assets                                                                     |   |   | (305                  | )      |   | (264 | ) |
| Accounts    payable                                                                         |   |   | 924                   |   |   | 257 |   |
| Accrued    and other liabilities                                                            |   |   | (373                  | )      |   | (152 | ) |
|                                                                                        |   |        |                       |        |  |  |   |
| Total    adjustments                                                                        |   |   | 2,255                 |   |   | 2,946 |   |
|                                                                                        |   |        |                       |        |  |  |   |
| Net cash provided by operating activities                                                   |   |   | 1,138                 |   |   | 3,565 |   |
|                                                                                        |   |   |                  |   |   |   |   |
| **Cash Flows from Investing Activities:**                                                   |   |   |                  |   |   |   |   |
| Capital    expenditures                                                                     |   |   | (1,750                | )      |   | (1,655 | ) |
| Other                                                                                       |   |   | (354                  | )      |   | (439 | ) |
|                                                                                        |   |        |                       |        |  |  |   |
| Net cash used in investing activities                                                       |   |   | (2,104                | )      |   | (2,094 | ) |
|                                                                                        |   |   |                  |   |   |   |   |
| **Cash Flows from Financing Activities:**                                                   |   |   |                  |   |   |   |   |
| Proceeds    from revolving credit facilities                                                |   |   | 30,084                |   |   | 34,494 |   |
| Repayments    of revolving credit facilities                                                |   |   | (27,900               | )      |   | (34,700 | ) |
| Repayments    of other long-term debt, net                                                  |   |   | (24                   | )      |   | (65 | ) |
| Payments    of dividends                                                                    |   |   | (1,393                | )      |   | (1,407 | ) |
| Issuance    (purchase) of treasury stock, net                                               |   |   | 41                    |   |   | (619 | ) |
|                                                                                        |   |        |                       |        |  |  |   |
| Net cash provided by (used in) financing activities                                         |   |   | 808                   |   |   | (2,297 | ) |
|                                                                                        |   |   |                  |   |   |   |   |
| Effect of changes in foreign exchange rates                                                 |   |   | 138                   |   |   | 994 |   |
|                                                                                        |   |        |                       |        |  |  |   |
| Net (decrease) increase in cash and cash equivalents                                        |   |   | (20                   | )      |   | 168 |   |
| Cash and cash equivalents at beginning of period                                            |   |   | 781                   |   |   | 335 |   |
|                                                                                        |   |        |                       |        |  |  |   |
| Cash and cash equivalents at end of period                                                  |   | $      | 761                   |   | $ | 503 |   |
|                                                                                        |   |        |                       |        |  |  |   |
|                                                                                        |   |   |                  |   |   |   |   |
| Supplement Disclosure of Cash Flow Information:                                             |   |   |                  |   |   |   |   |
| Income taxes (refunded)                                                                     |   | $      | (175                  | )      | $ | (282 | ) |
|                                                                                        |   |        |                       |        |  |  |   |
|                                                                                        |   |   |                  |   |   |   |   |
| Interest paid                                                                               |   | $      | 1,190                 |   | $ | 710 |   |
|                                                                                        |   |        |                       |        |  |  |   |

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

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**TB Wood’s Corporation      and Subsidiaries  Notes to Condensed Consolidated Financial Statements(unaudited, in thousands of dollars, 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 condensed consolidated financial position of TB Wood’s Corporation and Subsidiaries (the “Company”) and the results of their operations and cash flows for the periods presented.  Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted.  Certain prior period amounts have been reclassified to conform to the current period presentation. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

|   | These financial statements should be read together with the audited financial statements and notes in the Company’s 2003 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 reports its financial results on a 52/53-week fiscal year, consisting of four quarters of 13 weeks each, ending on the Friday nearest December 31.  Fiscal 2004 is a 52-week year ending on December 31, 2004.  Fiscal 2003 was a 53-week year which ended on January 2, 2004. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                       |

| 2.     | Inventories |
|--------|-------------|
|   |        |

|   | The Company uses the last-in, first-out (“LIFO”) method of inventory valuation for approximately           73% percent of its inventories.  Remaining inventories are accounted for using the first-in, first-out (“FIFO”) method.  An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time.  Accordingly, interim LIFO calculations must necessarily be based on management’s estimates of the expected year-end inventory levels and costs.  Because these are subject to many forces beyond management’s control, interim results are subject to the final year-end LIFO inventory valuation.  The major classes of inventory consisted of thefollowing: |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

|   |                    |   |   | **October 1,** |   |   | **January 2,** |   |
|--------|-------------------------|--------|--------|----------------|--------|--------|----------------|--------|
|   |                    |   |   | **2004**       |   |   | **2004**       |   |
|   |                         |        |        |                |        |        |                |   |
|   | Finished goods          |   | $      | 15,263         |   | $      | 14,152         |   |
|   | Work in process         |   |   | 3,462          |   |   | 4,028          |   |
|   | Raw materials           |   |   | 8,817          |   |   | 8,787          |   |
|   | LIFO reserve            |   |   | (5,161         | )      |   | (5,333         | )      |
|   |                    |   |        |                |        |        |                |   |
|   | Inventory value at LIFO |   | $      | 22,381         |   | $      | 21,634         |   |
|   |                    |   |        |                |        |        |                |   |

| 3.     | Shareholders’ Equity |
|--------|----------------------------|
|   |                       |

|   | Treasury Stock: |
|--------|-----------------|
|   |            |

|   | During the nine months ended October 1, 2004 the Company did not purchase any shares for the treasury.  Year to date, the number of treasury shares sold to employees under the stock purchase plan was 5,920 shares and the number of shares issued to the Company’s 401(k) retirement plan was 7,205 shares. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                 |

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|   | Stock Options: |
|--------|----------------|
|   |           |

|   | On February 5, 2004, the Company granted options for the purchase of 103,800 shares of common stock to employees and directors at exercise prices equal to or in excess of market price on the date of grant.  On April 27, 2004 the Company granted options for the purchase of 84,000 shares of common stock to employees 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 and expire on February 5, 2014, and April 27, 2014 respectively. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

|   | The Company adopted Financial Accounting Standards Board (FASB) Statement of Accounting Financial Standard (SFAS) No. 123, as amended by SFAS No. 148, as of December 28, 2002 (beginning of Fiscal 2003) to account for stock based compensation cost using the fair value method.  The fair value after tax cost of stock based compensation cost was $31 and $27 for the third quarter of 2004 and 2003 respectively, and $84 and $81 for the 2004 and 2003 year to date periods, respectively. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

| 4.     | Other Comprehensive Income |
|--------|----------------------------|
|   |                       |

|   | Total comprehensive income (loss) for the year to date periods ended October 1, 2004 and September 26, 2003 was as follows: |
|--------|-----------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                        |

|   |                                                                                                                |   |   | **Nine Months Ended** |   |
|--------|---------------------------------------------------------------------------------------------------------------------|--------|--------|-----------------------|--------|
|   |                                                                                                                |   |        |                       |   |
|   |                                                                                                                |   |   | **October 1,**        |   |   | **September 26,** |   |
|   |                                                                                                                |   |   | **2004**              |   |   | **2003** |   |
|   |                                                                                                                     |        |        |                       |        |  |  |   |
|   | Net (loss) income                                                                                                   |   | $      | (1,117                | )      | $ | 619 |   |
|   | Other comprehensive income                                                                                          |   |   |                  |   |   |   |   |
|   | Foreign    currency translation adjustments                                                                         |   |   | 138                   |   |   | 994 |   |
|   |                                                                                                                |   |        |                       |        |  |  |   |
|   | Total comprehensive (loss) income                                                                                   |   | $      | (979                  | )      | $ | 1,613 |   |
|   |                                                                                                                |   |        |                       |        |  |  |   |
|   |                                                                                                                |   |   |                  |   |   |   |   |
|   | The components of accumulated other    comprehensive loss, net of income tax are as follows at the dates indicated: |   |
|        |                                                                                                                     |   |   | **October 1,**        |   |   | **September 26,** |   |
|   |                                                                                                                |   |   | **2004**              |   |   | **2003** |   |
|   |                                                                                                                |   |        |                       |        |  |  |   |
|   |                                                                                                                |   |   |                  |   |   |   |   |
|   | Aggregate currency translation adjustment                                                                           |   | $      | (472                  | )      | $ | (1,217 | ) |
|   |                                                                                                                |   |        |                       |        |  |  |   |

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|   | Earnings Per Share |
|--------|--------------------|
|   |               |

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

|   |                                                                |   |   | **Third Quarter Ended** |   |
|--------|---------------------------------------------------------------------|--------|--------|-------------------------|--------|
|   |                                                                |   |        |                         |   |
|   |                                                                |   |   | **October 1,**          |   |   | **September 26,** |   |
|   |                                                                |   |   | **2004**                |   |   | **2003** |   |
|   |                                                                     |        |        |                         |        |  |  |   |
|   | Basic weighted average number of common shares outstanding          |   |   | 5,166                   |   |   | 5,156 |   |
|   | Shares issueable upon assumed exercise of outstanding stock options |   |   | —                  |   |   | — |   |
|   |                                                                |   |        |                         |        |  |  |   |
|   | Diluted weighted average number of common and common equivalent     |   |   |                    |   |   |   |   |
|   | shares    outstanding                                               |   |   | 5,166                   |   |   | 5,156 |   |
|   |                                                                |   |        |                         |        |  |  |   |
|   |                                                                |   |   |                    |   |   |   |   |

|   | Outstanding options to purchase 771,001 and 707,660 shares of common stock as of October 1, 2004 and September 26, 2003, respectively, are not included in the above calculation as their effect would be anti-dilutive. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                     |

| 5.     | Postretirement Benefit |
|--------|------------------------|
|   |                   |

|   | The components of the net periodic post retirement benefit recognized are as follows: |
|--------|---------------------------------------------------------------------------------------|
|   |                                                                                  |

|   |                                                     |   |   | **Nine Months Ended** |   |
|--------|----------------------------------------------------------|--------|--------|-----------------------|--------|
|   |                                                     |   |        |                       |   |
|   |                                                     |   |   | **October 1,**        |   |   | **September 26,** |   |
|   |                                                     |   |   | **2004**              |   |   | **2003** |   |
|   |                                                          |        |        |                       |        |  |  |   |
|   | Service Cost                                             |   | $      | 6                     |   | $ | 4 |   |
|   | Interest Cost                                            |   |   | 27                    |   |   | 120 |   |
|   | Amortization of prior service benefit and actuarial gain |   |   | (622                  | )      |   | (488 | ) |
|   |                                                     |   |        |                       |        |  |  |   |
|   | Net periodic benefit                                     |   | $      | (589                  | )      | $ | (364 | ) |
|   |                                                     |   |        |                       |        |  |  |   |
|   |                                                     |   |   |                  |   |   |   |   |

|   | The Company expects to contribute $153 during fiscal 2004 to cover the cost of group insurance premiums applicable to its retirees participating in the postretirement benefit plan. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| 6.     | Business Segment Information |
|--------|------------------------------|
|   |                         |

|   | The Company’s reportable segments are business units that manufacture and market separate and distinct products and are managed separately because each business requires different processes, technologies and marketing strategies. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                        |

|   |                                |   |   | **Third Quarter Ended** |   |   | **Nine Months Ended** |   |
|--------|-------------------------------------|--------|--------|-------------------------|--------|--------|-----------------------|--------|
|   |                                |   |        |                         |        |        |                       |   |
|   |                                |   |   | **Oct 1,**              |   |   | **Sep 26,**           |   |   | **Oct 1,** |   |   | **Sep 26,** |   |
|   |                                |   |   | **2004**                |   |   | **2003**              |   |   | **2004** |   |   | **2003** |   |
|   |                                     |        |        |                         |        |        |                       |        |  |  |  |  |  |   |
|   | Sales:                              |   |   |                    |   |   |                  |   |   |   |   |   |   |   |
|   | Mechanical    Segment               |   | $      | 15,619                  |   | $      | 13,155                |   | $ | 48,144 |   | $ | 42,549 |   |
|   | Electronics    Segment              |   |   | 9,660                   |   |   | 9,946                 |   |   | 28,675 |   |   | 28,209 |   |
|   |                                |   |        |                         |        |        |                       |        |  |  |  |  |  |   |
|   |                                |   | $      | 25,279                  |   | $      | 23,101                |   | $ | 76,819 |   | $ | 70,758 |   |
|   |                                |   |        |                         |        |        |                       |        |  |  |  |  |  |   |
|   |                                |   |   |                    |   |   |                  |   |   |   |   |   |   |   |
|   | Operating (loss) income:            |   |   |                    |   |   |                  |   |   |   |   |   |   |   |
|   | Mechanical    Segment               |   | $      | (375                    | )      | $      | 419                   |   | $ | 1,663 |   | $ | 2,541 |   |
|   | Electronics    Segment              |   |   | (788                    | )      |   | (108                  | )      |   | (1,454 | ) |   | (780 | ) |
|   |                                |   |        |                         |        |        |                       |        |  |  |  |  |  |   |
|   |                                |   | $      | (1,163                  | )      | $      | 311                   |   | $ | 209 |   | $ | 1,761 |   |
|   |                                |   |        |                         |        |        |                       |        |  |  |  |  |  |   |
|   |                                |   |   |                    |   |   |                  |   |   |   |   |   |   |   |
|   | Depreciation and Amortization:      |   |   |                    |   |   |                  |   |   |   |   |   |   |   |
|   | Mechanical    Segment               |   | $      | 725                     |   | $      | 738                   |   | $ | 2,171 |   | $ | 2,216 |   |
|   | Electronics    Segment              |   |   | 329                     |   |   | 397                   |   |   | 1,033 |   |   | 1,270 |   |
|   | Corporate                           |   |   | 273                     |   |   | 227                   |   |   | 803 |   |   | 649 |   |
|   |                                |   |        |                         |        |        |                       |        |  |  |  |  |  |   |
|   |                                |   | $      | 1,327                   |   | $      | 1,362                 |   | $ | 4,007 |   | $ | 4,135 |   |
|   |                                |   |        |                         |        |        |                       |        |  |  |  |  |  |   |
|   |                                |   |   |                    |   |   |                  |   |   |   |   |   |   |   |
|   | Assets:                             |   |   |                    |   |   |                  |   |   |   |   |   |   |   |
|   | Mechanical    Segment               |   | $      | 46,492                  |   | $      | 43,823                |   | $ | 46,492 |   | $ | 43,823 |   |
|   | Electronics    Segment              |   |   | 24,287                  |   |   | 26,684                |   |   | 24,287 |   |   | 26,684 |   |
|   | Corporate                           |   |   | 6,283                   |   |   | 6,932                 |   |   | 6,283 |   |   | 6,932 |   |
|   |                                |   |        |                         |        |        |                       |        |  |  |  |  |  |   |
|   |                                |   | $      | 77,062                  |   | $      | 77,439                |   | $ | 77,062 |   | $ | 77,439 |   |
|   |                                |   |        |                         |        |        |                       |        |  |  |  |  |  |   |
|   |                                |   |   |                    |   |   |                  |   |   |   |   |   |   |   |
|   | Expenditures for long-lived assets: |   |   |                    |   |   |                  |   |   |   |   |   |   |   |
|   | Mechanical    Segment               |   | $      | 469                     |   | $      | 240                   |   | $ | 1,506 |   | $ | 819 |   |
|   | Electronics    Segment              |   |   | 55                      |   |   | 112                   |   |   | 173 |   |   | 224 |   |
|   | Corporate                           |   |   | 19                      |   |   | 137                   |   |   | 71 |   |   | 612 |   |
|   |                                |   |        |                         |        |        |                       |        |  |  |  |  |  |   |
|   |                                |   | $      | 543                     |   | $      | 489                   |   | $ | 1,750 |   | $ | 1,655 |   |
|   |                                |   |        |                         |        |        |                       |        |  |  |  |  |  |   |
|   |                                |   |   |                    |   |   |                  |   |   |   |   |   |   |   |

|   | The following table reconciles segment operating income to consolidated income before income taxes for the following periods: |
|--------|-------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                          |

|   |                                            |   |   | **Third Quarter Ended** |   |   | **Nine Months Ended** |   |
|--------|-------------------------------------------------|--------|--------|-------------------------|--------|--------|-----------------------|--------|
|   |                                            |   |        |                         |        |        |                       |   |
|   |                                            |   |   | **Oct 1,**              |   |   | **Sep 26,**           |   |   | **Oct 1,** |   |   | **Sep 26,** |   |
|   |                                            |   |   | **2004**                |   |   | **2003**              |   |   | **2004** |   |   | **2003** |   |
|   |                                                 |        |        |                         |        |        |                       |        |  |  |  |  |  |   |
|   | Segment operating (loss) income                 |   | $      | (1,163                  | )      | $      | 311                   |   | $ | 209 |   | $ | 1,761 |   |
|   | Interest expense                                |   |   | 460                     |   |   | 232                   |   |   | 1,207 |   |   | 680 |   |
|   | Other (income) expense, net                     |   |   | —                  |   |   | 1                     |   |   | — |   |   | (169 | ) |
|   |                                            |   |        |                         |        |        |                       |        |  |  |  |  |  |   |
|   | (Loss) income before provision for income taxes |   | $      | (1,623                  | )      | $      | 78                    |   | $ | (998 | ) | $ | 1,250 |   |
|   |                                            |   |        |                         |        |        |                       |        |  |  |  |  |  |   |

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

The following table, derived from the Company’s condensed consolidated financial statements, presents selected elements of the Company’s operating results, and the changes thereto, for the third quarter of the current and the immediately preceding year.  Amounts presented in Item 2 are in thousands of dollars, unless otherwise indicated. 

|                                                   |   |   | **Third Quarter Ended** |   |
|--------------------------------------------------------|--------|--------|-------------------------|--------|
|                                                   |   |        |                         |   |
|                                                   |   |   | **Oct 1, 2004**         |   |   | **Sep 26,2003** |   |   | **Dollar   Change** |   |   | **%   Change** |   |
|                                                        |        |        |                         |        |  |  |  |  |  |  |  |  |  |
| Sales                                                  |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Mechanical    Segment                                  |   | $      | 15,619                  |   | $ | 13,155 |   | $ | 2,464 |   |   | 18.7 | % |
| Electronics    Segment                                 |   |   | 9,660                   |   |   | 9,946 |   |   | (286 | ) |   | (2.9 | )% |
|                                                   |   |        |                         |        |  |  |  |  |  |  |  |  |   |
| Total    Sales                                         |   | $      | 25,279                  |   | $ | 23,101 |   | $ | 2,178 |   |   | 9.4 | % |
|                                                   |   |        |                         |        |  |  |  |  |  |  |  |  |   |
|                                                   |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Cost of Sales                                          |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Mechanical    Segment                                  |   | $      | 12,176                  |   | $ | 9,290 |   | $ | 2,886 |   |   | 31.1 | % |
| Electronics    Segment                                 |   |   | 6,874                   |   |   | 6,677 |   |   | 197 |   |   | 3.0 | % |
|                                                   |   |        |                         |        |  |  |  |  |  |  |  |  |   |
| Total    Cost of Sales                                 |   | $      | 19,050                  |   | $ | 15,967 |   | $ | 3,083 |   |   | 19.3 | % |
|                                                   |   |        |                         |        |  |  |  |  |  |  |  |  |   |
|                                                   |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Gross Profit                                           |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Mechanical    Segment                                  |   | $      | 3,443                   |   | $ | 3,865 |   | $ | (422 | ) |   | (10.9 | )% |
| Electronics    Segment                                 |   |   | 2,786                   |   |   | 3,269 |   |   | (483 | ) |   | (14.8 | )% |
|                                                   |   |        |                         |        |  |  |  |  |  |  |  |  |   |
| Total    Gross Profit                                  |   | $      | 6,229                   |   | $ | 7,134 |   | $ | (905 | ) |   | (12.7 | )% |
|                                                   |   |        |                         |        |  |  |  |  |  |  |  |  |   |
|                                                   |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Selling, General and Administrative (SG&A) Expense |   | $      | 7,392                   |   | $ | 6,823 |   | $ | 569 |   |   | 8.3 | % |
|                                                   |   |        |                         |        |  |  |  |  |  |  |  |  |   |
|                                                   |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Sales                                                  |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Mechanical    Segment                                  |   |   | 61.8                    | %      |   | 56.9 | % |   |   |   |   |   |   |
| Electronics    Segment                                 |   |   | 38.2                    | %      |   | 43.1 | % |   |   |   |   |   |   |
|                                                   |   |        |                         |        |  |  |   |   |   |   |   |   |   |
| Total    Sales                                         |   |   | 100.0                   | %      |   | 100.0 | % |   |   |   |   |   |   |
|                                                   |   |        |                         |        |  |  |   |   |   |   |   |   |   |
|                                                   |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Cost of Sales as a Percentage of Sales                 |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Mechanical    Segment                                  |   |   | 78.0                    | %      |   | 70.6 | % |   |   |   |   |   |   |
| Electronics    Segment                                 |   |   | 71.2                    | %      |   | 67.1 | % |   |   |   |   |   |   |
| Total    Cost of Sales                                 |   |   | 75.4                    | %      |   | 69.1 | % |   |   |   |   |   |   |
|                                                   |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Gross Profit as a Percentage of Sales                  |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Mechanical    Segment                                  |   |   | 22.0                    | %      |   | 29.4 | % |   |   |   |   |   |   |
| Electronics    Segment                                 |   |   | 28.8                    | %      |   | 32.9 | % |   |   |   |   |   |   |
| Total    Gross Profit                                  |   |   | 24.6                    | %      |   | 30.9 | % |   |   |   |   |   |   |
|                                                   |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| SG&A Expense as a Percentage of Sales              |   |   | 29.2                    | %      |   | 29.5 | % |   |   |   |   |   |   |

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The following table, derived from the Company’s condensed consolidated financial statements, presents selected elements of the Company’s operating results, and the changes thereto, for the first nine months of the current and the immediately preceding year.  

|                                                   |   |   | **Nine Months Ended** |   |
|--------------------------------------------------------|--------|--------|-----------------------|--------|
|                                                   |   |        |                       |   |
|                                                   |   |   | **Oct 1,2004**        |   |   | **Sep 26,2003** |   |   | **Dollar  Change** |   |   | **%  Change** |   |
|                                                        |        |        |                       |        |  |  |  |  |  |  |  |  |  |
| Sales                                                  |   |   |                  |   |   |   |   |   |   |   |   |   |   |
| Mechanical    Segment                                  |   | $      | 48,144                |   | $ | 42,549 |   | $ | 5,595 |   |   | 13.1 | % |
| Electronics    Segment                                 |   |   | 28,675                |   |   | 28,209 |   |   | 466 |   |   | 1.6 | % |
|                                                   |   |        |                       |        |  |  |  |  |  |   |   |   |   |
| Total    Sales                                         |   | $      | 76,819                |   | $ | 70,758 |   | $ | 6,061 |   |   | 8.6 | % |
|                                                   |   |        |                       |        |  |  |  |  |  |   |   |   |   |
|                                                   |   |   |                  |   |   |   |   |   |   |   |   |   |   |
| Cost of Sales                                          |   |   |                  |   |   |   |   |   |   |   |   |   |   |
| Mechanical    Segment                                  |   | $      | 35,298                |   | $ | 29,583 |   | $ | 5,715 |   |   | 19.3 | % |
| Electronics    Segment                                 |   |   | 19,530                |   |   | 19,088 |   |   | 442 |   |   | 2.3 | % |
|                                                   |   |        |                       |        |  |  |  |  |  |   |   |   |   |
| Total    Cost of Sales                                 |   | $      | 54,828                |   | $ | 48,671 |   | $ | 6,157 |   |   | 12.7 | % |
|                                                   |   |        |                       |        |  |  |  |  |  |   |   |   |   |
|                                                   |   |   |                  |   |   |   |   |   |   |   |   |   |   |
| Gross Profit                                           |   |   |                  |   |   |   |   |   |   |   |   |   |   |
| Mechanical    Segment                                  |   | $      | 12,846                |   | $ | 12,966 |   | $ | (120 | ) |   | (0.9 | )% |
| Electronics    Segment                                 |   |   | 9.145                 |   |   | 9,121 |   |   | 24 |   |   | 0.3 | % |
|                                                   |   |        |                       |        |  |  |  |  |  |   |   |   |   |
| Total    Gross Profit                                  |   | $      | 21,991                |   | $ | 22,087 |   | $ | (96 | ) |   | (0.4 | )% |
|                                                   |   |        |                       |        |  |  |  |  |  |   |   |   |   |
|                                                   |   |   |                  |   |   |   |   |   |   |   |   |   |   |
| Selling, General and Administrative (SG&A) Expense |   | $      | 21,782                |   | $ | 20,326 |   | $ | 1,456 |   |   | 7.2 | % |
|                                                   |   |        |                       |        |  |  |  |  |  |   |   |   |   |
|                                                   |   |   |                  |   |   |   |   |   |   |   |   |   |   |
| Sales                                                  |   |   |                  |   |   |   |   |   |   |   |   |   |   |
| Mechanical    Segment                                  |   |   | 62.7                  | %      |   | 60.1 | % |   |   |   |   |   |   |
| Electronics    Segment                                 |   |   | 37.3                  | %      |   | 39.9 | % |   |   |   |   |   |   |
|                                                   |   |        |                       |        |  |  |  |  |  |   |   |   |   |
| Total    Sales                                         |   |   | 100.0                 | %      |   | 100.0 | % |   |   |   |   |   |   |
|                                                   |   |        |                       |        |  |  |  |  |  |   |   |   |   |
|                                                   |   |   |                  |   |   |   |   |   |   |   |   |   |   |
| Cost of Sales as a Percentage of Sales                 |   |   |                  |   |   |   |   |   |   |   |   |   |   |
| Mechanical    Segment                                  |   |   | 73.3                  | %      |   | 69.5 | % |   |   |   |   |   |   |
| Electronics    Segment                                 |   |   | 68.1                  | %      |   | 67.7 | % |   |   |   |   |   |   |
| Total    Cost of Sales                                 |   |   | 71.4                  | %      |   | 68.8 | % |   |   |   |   |   |   |
|                                                   |   |   |                  |   |   |   |   |   |   |   |   |   |   |
| Gross Profit as a Percentage of Sales                  |   |   |                  |   |   |   |   |   |   |   |   |   |   |
| Mechanical    Segment                                  |   |   | 26.7                  | %      |   | 30.5 | % |   |   |   |   |   |   |
| Electronics    Segment                                 |   |   | 31.9                  | %      |   | 32.3 | % |   |   |   |   |   |   |
| Total    Gross Profit                                  |   |   | 28.6                  | %      |   | 31.2 | % |   |   |   |   |   |   |
|                                                   |   |   |                  |   |   |   |   |   |   |   |   |   |   |
| SG&A Expense as a Percentage of Sales              |   |   | 28.3                  | %      |   | 28.7 | % |   |   |   |   |   |   |

----

The principal reason for the sales increase has been the effect of the economic recovery that began in the second half of fiscal 2003 and has continued through the third quarter of 2004. In addition to the effect of general economic conditions on the Company’s revenues, the buying patterns and inventory management practices of one of the Company’s major customers have significantly influenced the timing of the Company’s revenues. Year to date 2003 revenues were adversely affected when significant 2002 year-end purchases by the Company’s largest customer were followed by reduced buying in the first nine months of 2003. While a similar buying pattern by this customer occurred at the end of fiscal 2003 and during the firstnine months of 2004, the general economic recovery, particularly its effect on demand for the Company’s mechanical products, has helped to avert a similar slowdown in shipments in the current quarter and nine months ended October 1, 2004.  

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Mechanical Business sales increased $2,464, or 18.7% over the prior year’s third quarter.  Increased volume accounted for approximately 14.0% of this increase, with the remainder of the increase attributable to higher pricing.  Electronics Business sales decreased $(286) or (2.9%), primarily from lower volumes (7.6%), offset by increased pricing of 1.8% and favorable currency translations of 2.9%.  Overall, consolidated revenue increased by 9.4% of which 4.6% was due to increased volumes, 3.3% was due to increased pricing, and 1.5% was due to favorable currency translation. The Company announced an average 3.0% price increase at the beginning of the year, and followed up with another increase in mid-second quarter to partially offsetescalating material costs, particularly for scrap metal and steel-related products.  

Year to date sales rose at the rate of 8.6% through the third quarter.  Of this increase 3.5% was due to increased volume, 3.1% to increased prices, and 2.0% to favorable currency translation.  

Total Company gross profit as a percent of net sales for the third quarter declined to 24.6% from 30.9% in the third quarter of 2003.  The major reasons for this decline were non-recurring costs associated with the Trenton, TN plant closure (3.0%); higher raw material costs (2.0%); the unfavorable impact of lower fixed cost absorption (3.0%); and a provision for obsolescence (1.0%) offset by the effect of price increases 3.0%.  The Company’s Mechanical Division reported gross profits of $3.4 million, or 55.3% of total gross profit, while the Electronics Division contributed $2.8 million of gross profit, or 44.7% of total gross profit.  The gross profit margin for the Mechanical Division declined due to the non-recurring costs associatedwith the Trenton, TN plant closure, higher raw material costs and lower absorption of fixed costs due to lower production levels.  The Electronic gross profit margin declined primarily due to lower fixed cost absorption and provision for obsolescence.         

Year to date gross profit margins declined from 31.2% a year ago to 28.6%.  Mechanical Products margins decreased from 30.5% to 26.7%, largely because of higher material costs and $1.4 million of expenses and productivity losses related to the closing of the Trenton, TN plant offset in part by margin gains associated with price increases. While moderating downward slightly in the second quarter, scrap metal prices and other steel-based material costs escalated to new highs in the third quarter of 2004.  In addition, 2003 results reflected savings associated with temporary work furloughs and benefit costs reductions, principally in the first quarter of 2003 when production was at a much lower rate than current operating levels. ElectronicsProducts margins declined slightly from 32.3% to 31.9% when compared to the first nine months of 2003 due primarily to a provision for obsolescence offset by improved product pricing and favorable currency translation.                                                    

Selling, general and administrative (SG&A) expenses declined to 29.2% of sales in the third quarter of 2004 as compared to 29.5% in the third quarter of 2003. In the first nine months of 2004, SG&A expenses declined to 28.3% of sales compared to 28.7% in 2003 principally due to the fixed nature of such costs relative to the increased revenue levels. Actual SG&A expenses increased by $569 in the third quarter of 2004, largely due to costs related to the restructuring of the marketing and sales organization principally serving the Electronics Division, and increased by $1,456 in the first nine months of 2004, as compared to the same period of 2003 primarily as a result of the aforementioned restructuring costs and increased costsrelated to higher volumes, notably freight costs. 2003 year to date SG&A benefited from $473 of non-recurring savings associated with the termination of a supplemental retirement plan for senior executives and $272 of savings related to reduced costs from employees foregoing salaries during March 2003.  SG&A expenses reflect a benefit of $194 and $589 for the quarter and nine months ended October 1, 2004 compared to $30 and $91 for the corresponding periods of the prior year in connection with the deferred recognition of gains associated with changes to post-employment healthcare obligations (see Note 5).  

Significant material cost increases and additional planned spending in 2004 related to the closure of the Trenton plant, along with other costs mentioned above, resulted in a loss as compared to income in the corresponding prior periods.  2004 results were affected by these items, and on a comparative basis, 2003 results reflect non-recurring savings attributable to benefit reductions and work furloughs. 

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Interest expense is the primary component of other expenses and was $460 in the third quarter of 2004 compared to $232 for the same period in 2003. This increase was caused by higher interest rates incurred by the Company as a result of amending its primary borrowing agreement, as well as higher borrowing levels in 2004 necessary to fund increased working capital needs associated with business growth.  Income taxes remain at rates higher than statutory rates primarily due to operating losses at the Company’s Mexican operations that do not currently yield any Mexican income tax benefits.  Higher interest expense contributed to the decline in net income in the third quarter of 2004 compared to the same quarter in the preceding year.  Net lossin the third quarter of 2004 was $(1,346), or $(0.26) per share, compared to net income of $56 or $0.01 per share in the third quarter of 2003.  Net loss for the nine months ended October 1, 2004 was $(1,117), or $(0.22) per share, compared to net income of $619, or $0.12 per share for the comparable period of 2003.

Liquidity and Capital Resources:

At October 1, 2004 the Company’s debt obligations totaled $27.6 million, compared to $25.4 million at January 2, 2004. Borrowings at October 1, 2004 include $21.4 million of revolving credit under the terms of a $36 million secured revolving credit facility (the “Facility”).    In addition, the Company owes $5.3 million of revenue bonds, and $0.9 million    for other borrowings. The revenue bonds are supported by letters of credit    issued under the terms of the Facility that expire in April 2005. At January    2, 2004 the Company had borrowed $19.4 million in revolving term debt under    the Facility, owed $5.3 million in tax-exempt revenue bonds, and had $0.7    million of other borrowings. After taking into consideration approximately    $1.7 million of additional letters of credit that serve as collateral for    long-term workers compensation risk exposures, the Company had approximately    $7.6 million of available borrowing capacity under the Facility at October1, 2004.

In February 2004, the Company amended the Facility to extend its maturity date to January 10, 2005 and provide the Company additional flexibility under certain of the financial covenants as the Company takes steps to negotiate a longer term financing agreement.  The amendment granted the lenders security over substantially all of the Company’s United States assets, reduced the maximum amount of the Facility from $46 million to $36 million, and increased stated borrowing rates approximately 0.5% (the Company’s effective borrowing rate under the Facility was approximately 4.77% on October 1, 2004).  

In addition, borrowings are subject to the satisfaction of certain financial covenants. As a result of the Company’s performance in the third quarter of 2004, the Company is in non-compliance with certain of the Facility’s financial covenants.  Given the fact that the Facility expires in January 2005 and the Company is continuing discussions with its current lenders and other sources of debt financing to secure long-term financing commitments beyond January 2005, the Company has not obtained a waiver of covenant non-compliance or an amendment of the Facility at this time.  Any modification to the Company’s principal borrowing arrangement is expected to lead to higher borrowing costs, a reduction in credit available under thefacility, and accelerated repayment terms for a portion of the Company’s indebtedness. 

The Company has generated positive cash flows from operations in each of the last five years ended January 2, 2004 as well as during the first nine months of fiscal 2004 during which the Company generated $1.1 million from its operating activities.  Cash from operations in 2004 is primarily attributable to non-cash charges for depreciation and amortization exceeding cash used by an operating loss, reduced by increases in working capital including $1.3 million of increased trade receivables and $0.7 million of increased inventory.  The increase in trade receivables arose in part from increased sales in the first nine months of 2004, as well as a lower than normal level of trade credit outstanding at the beginning of the period due to a $2.2million accelerated payment on trade receivables just prior to the beginning of the current fiscal year.  The investment in inventories has occurred to support expanded revenue levels and the transition of production from the Company’s Trenton, Tennessee facility to other operating locations.  The Company also used approximately $1.7 million for capital expenditures during the first nine months of 2004 and 2003, levels that management considers sufficient to maintain existing operations and support new product introductions, improve product quality, and reduce operating costs.  These uses of cash were funded primarily through increases in the revolving line of credit.

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The Company paid $1.4 million of dividends in each of the first nine months of 2004 and 2003. The Company did not declare a dividend for the third quarter of 2004.  The Company’s ongoing ability to declare and pay dividends is ultimately dependent upon its ability to operate at profitable levels, and demonstrate compliance with its revolving credit agreement.

The Company’s working capital    at October 1, 2004 as compared to January 2, 2004 was significantly lower    primarily due to the classification of $21.4 million of United States revolving    credit obligations at October 1, 2004 as a current liability. Because the    Facility has a stated maturity date within twelve months of the balance sheet    date, the direct borrowings have been classified as current obligations in    the October 1, 2004 balance sheet. By comparison at January 2, 2004, $19.4    million of the Facility and $5.3 million of industrial revenue bonds were    classified as long-term liabilities because of maturity dates extending one    year beyond the balance sheet date. The Company’s ability to make scheduled payments ofprincipal and interest on, or refinance, its indebtedness and fund planned capital expenditures will depend on its ability to generate cash in the future.  This is subject to general economic, competitive, legislative, regulatory and other factors that are beyond our control.  Based upon our current and anticipated levels of operating performance, the Company believes that the combination of cash generated by operations, available borrowing capacity and the Company’s ability to obtain additional long-term indebtedness in the current state of the secured lending markets, is adequate to finance the Company’s operations for the foreseeable future.

Accounting Policies:

Management’s discussion and analysis of the Company’s financial position and results of operations are based upon the Company’s Condensed Consolidated Financial Statements included as part of this document.  The preparation of these 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, post-retirement benefits, income taxes, and contingencies and litigation.  The Company bases these estimates on historical experiencesand 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 January 2, 2004 Consolidated Financial Statements included in the Company’s 2003 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 basedon our historical experience, terms of existing contracts, current economic trends in the industry, information provided by our customers, and information available from outside sources, as appropriate.  Our critical accounting policies include:

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

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

Impairment of Goodwill and Long Lived Assets: The Company periodically evaluates the realizable value of long-lived assets including property, plant and equipment, relying on a number of factors including operating results, budgets, economic projections, and anticipated future cash flows. The Company’s past business acquisitions resulted in the recognition of goodwill, which may result in future impairment expenses.  The Company’s other intangible assets which primarily consist of product application software, affects the amount of future period amortization expense.  The determination of the value of such intangible assets requires management to make estimates and assumptions that affect the Company’s consolidatedfinancial 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.  Shipping and handlingcosts incurred totaling $4,981 and $4,342 for the nine months ended October 1, 2004 and September 26, 2003, respectively, are included as a component of selling, general and administrative expenses.

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

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

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Recent Accounting Pronouncements

In January 2004, the Financial Accounting Standards Board (FASB) issued Staff Position (FSP) FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare and Prescription Drug, Improvement and Modernization Act of 2003” (the “Act”).  The Act expands Medicare primarily by adding a prescription drug benefit for Medicare-eligibles starting in 2006.  The Act provides employers currently sponsoring prescription drug programs for Medicare-eligibles with a range of options for coordinating with the new government-sponsored program to potentially reduce program costs.  In May 2004 the FASB issued FSP FAS 106-2 that defines how and when to recognize the effect of the Act upon the Company’s accumulatedpost-retirement benefit obligation and net periodic postretirement benefit cost during 2004.  The Company’s actuarial consultant has advised that the Medicare prescription benefit will have not have a material effect upon the Company’s accumulated post-retirement benefit obligation and net periodic postretirement benefit cost. 

In December 2003, the FASB issued Statement of Accounting Standards No. 132 (revised 2003) “Employers’ Disclosure about Pensions and Other Postretirement Benefits”, an amendment of FASB Statements No. 87, 88 and 106 effective for fiscal years ending after December 15, 2003.  The Company has adopted this statement and the additional disclosure required for its postretirement benefit plans are set forth in Footnote 6 Postretirement Benefits.

Safe Harbor Statement

Certain information included or incorporated by reference in this document may be deemed to be “forward looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act.  All statements other than statements of historical facts, that address activities, events or developments that the Company intends, expects, projects, believes or anticipates will or may occur in the future are forward looking statements.  Such statements are characterized by terminology such as “believe,” “anticipate,” “should,” “intend,” “plan,” “will,” “expects,” “estimates,” “projects,”“positioned,” “strategy,” and similar expressions.  These statements are based on assumptions and assessments made by the Company’s management in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate.  These forward looking statements are subject to a number of risks and uncertainties, including but not limited to continuation of the Company’s longstanding relationships with major customers, the Company’s ability to integrate acquired businesses into its operations and realize planned synergies, the extent to which acquired businesses are able to meet the Company’s expectations and operate profitably, the ability to obtain third partyfinancing, 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 manufacturingsector 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 whichare 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 2003 Annual Report to Shareholders, except for the significant volatility and the increase in the costs of scrap steel and certain other steel based raw materials used by the Company in its mechanical segment manufacturing operations during 2004.  Management has taken steps to offset the effect of these cost increases through announced price increases for its mechanical products in the marketplace, and is continuing to monitor the need for additional price increases or surcharges in the future.  However, there can be no assurance that the Company will be able to raise prices sufficiently to offset future cost increases due to competitive conditions in the marketplace for its mechanicalproducts.

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Item 4.  Controls and Procedures

(a)  Evaluation of disclosure controls and procedures:  As of October 1, 2004, 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 theSEC.  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.

| **Part II. – Other Information** |
|---------------------------------------|
|                                  |   |   |
| Item 1.                               | Legal Proceedings |
|                                  |   |   |
|                                  |  None |
|                                  |   |   |
| Item 2.                               |  Unregistered    Sales of Equity Securities and Use of Funds |
|                                  |   |   |
|                                  |  None |
|                                  |   |   |
| Item 3.                               |  Defaults    Upon Senior Securities |
|                                  |   |   |
|                                  |  None |
|                                  |   |   |
| Item 4.                               |  Submission    of Matters to a Vote of Security Holders |
|                                  |   |   |
|                                  |  None |
|                                  |   |   |
| Item 5.                               |  Other    Information |
|                                  |   |   |
|                                  |  None |
|                                  |   |   |
| Item 6.                               |  Exhibits |
|                                  |   |   |
|                                  | 31.1 | Certification of Principal Executive    Officer required by 13a-14(a) |
|                                  | 31.2 | Certification of Principal Financial    Officer required by 13a-14(a) |
|                                  | 32 | Section        1350 Certification of Principal Executive Officer and Principal Financial    Officer |

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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the Borough of Chambersburg and Commonwealth of Pennsylvania, on November 12, 2004

| Date November 15, 2004 | TB WOOD’S CORPORATION |
|------------------------|-----------------------------|
|                   |                        |   |
|                   | By:                         | /s/Joseph C. Horvath |
|                   |                        | JOSEPH C. HORVATH Chief Financial Officer(Principal Financial Officer andPrincipal Accounting Officer) |
|                   |                        |   |

 

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