In the financial review that follows, we discuss our results of operations, financial condition and certain other information. This discussion should be read in conjunction with our consolidated fiscal 2008 financial statements and related notes.

Some of the statements in this Quarterly Report on Form 10-Q are "forward looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include the Company's description of plans and objectives for future operations and assumptions behind those plans. The words "anticipates," "believes," "intends," "estimates," and "expects," or similar anticipatory expressions, usually identify forward-looking statements. In addition, goals established by Twin Disc, Incorporated should not be viewed as guarantees or promises of future performance. There can be no assurance the Company will be successful in achieving its goals.

In addition to the assumptions and information referred to specifically in the forward-looking statements, other factors, including but not limited to those factors discussed under Item 1A, Risk Factors, of the Company's Annual Report filed on Form 10-K for June 30, 2008 could cause actual results to be materially different from what is presented here.

Results of Operations

(In thousands)
                                Three Months Ended                                  Six Months Ended
                       December 26,             December 28,             December 26,              December 28,
                     2008          %          2007          %          2008           %          2007           %

Net sales          $ 81,598                 $ 81,894                 $ 154,270                 $ 155,507
Cost of goods
sold                 58,645                   56,548                   111,245                   106,311

Gross profit         22,953        28.1 %     25,346        30.9 %      43,025        27.9 %      49,196        31.6 %

Marketing,
engineering and
administrative
expenses             17,008        20.8       17,378        21.2        33,326        21.6        32,072        20.6

Earnings from
operations         $  5,945         7.3     $  7,968         9.7     $   9,699         6.3     $  17,124        11.0

Comparison of the Second Quarter of FY 2009 with the Second Quarter of FY 2008

Net sales for the second quarter decreased 0.4%, or $0.3 million, to $81.6 million from $81.9 million in the same period a year ago. Compared to the second quarter of fiscal 2008, the U.S. Dollar strengthened against the Euro and Asian currencies. The translation effect of this strengthening on foreign operations was to decrease revenues by approximately $2.4 million versus the prior year, before eliminations. Adjusting for the impact of foreign currency translation on the second fiscal quarter, sales would have been up just under 3% versus the same period last fiscal

year. The second quarter of fiscal 2009 also benefited from delayed shipments in the first fiscal quarter related to the Company's implementation of a new ERP system at its domestic manufacturing operation. In addition to the softness that continued to be experienced in the oil and gas markets, the Company began to see softening in the mega yacht segment of the pleasure craft market. However, commercial marine and industrial product markets continued to be above year ago levels.

Sales at our manufacturing segment were up 4.6%, or $3.3 million, to $74.9 million from $71.6 million in the same period last year. Sales at our U.S. domestic manufacturing locations were up just over 7% and benefited from the delayed shipments in the first quarter related to the ERP implementation issues noted above. Continued softening in transmission sales for the land-based oil and gas market and lower propulsion system shipments were more than offset by improved shipments for the industrial and commercial marine product markets. Sales at our Belgian manufacturing location were up over 12% over the same period last year. Adjusting for the negative translation effect of a weakening Euro versus the U.S. Dollar, sales were up over 22%. The prior fiscal year's second quarter was unfavorably affected by material shortages and equipment downtime, as progress continued on the plant re-layout associated with the June 2007 restructuring program. Our Italian manufacturing operations saw a nearly 14% decrease in sales compared to fiscal 2008's second quarter. Approximately one-half of this decrease can be attributed to the translation effect of a strengthening U.S. Dollar versus the second quarter of last fiscal year. The net remaining decrease is due to decreased sales of low horsepower marine transmissions for the Italian and European pleasure craft market. The Company's Swiss manufacturing operation, which manufactures propellers for high end pleasure craft and military patrol boat applications, experienced a 19% increase in sales versus the prior year's second fiscal quarter. However, the Company did experience a decrease in order activity, cancellations and retiming of orders for pleasure craft marine transmission, boat management and propulsion systems for the mega yacht market.

Our distribution segment experienced a decrease of 9.1% in sales, or $2.7 million, to $27.2 million from $29.9 million in the same period a year ago. The Company's distribution operations in Italy and Australia saw significant decreases in pleasure craft marine transmission and boat management system product sales. This was partially offset by continued strength in commercial marine transmission sales at the Company's distribution operations in Asia. Compared to the second quarter of fiscal 2008, the U.S. Dollar strengthened against the Euro and Asian currencies. The translation effect of this strengthening on foreign distribution operations was to decrease revenues by approximately $1.2 million versus the prior year, before eliminations.

The elimination for net inter/intra segment sales increased $0.9 million, accounting for the remainder of the net change in sales versus the same period last year. This change is primarily due to an increase in shipments from our Japanese joint venture to our distributor in Singapore, due to very strong demand in the Asia Pacific region for the high horsepower marine transmissions produced in Japan.

Gross profit as a percentage of sales decreased to 28.1% of sales, compared to 30.9% of sales for the same period last year. This 280 basis point deterioration can be attributed to reduced sales of higher margin products, higher sales of lower margin products, increased material costs, and an increase in domestic pension expense partially offset by higher pricing and expanded outsourcing. In the current fiscal quarter, domestic pension expense increased approximately $0.4 million versus the same period last year. In addition, the Company's Belgian operation's gross profit was favorably affected by the continued relative strength of the U.S. Dollar versus the Euro, when compared to the average rate in fiscal 2008. This operation manufactures with Euro-based costs and sells more than a third of its production into the U.S. market at U.S. Dollar prices. It is estimated that the year-over-year effect of the stronger U.S. Dollar was to improve margins at our Belgian subsidiary by over $0.3 million in the second fiscal quarter versus the same period a year ago. Compared to the second quarter of fiscal 2008, the U.S. Dollar strengthened against the Euro and Asian currencies. The translation effect of this strengthening on foreign operations was to decrease gross margin by approximately $1.1 million versus the prior year, before eliminations.

Marketing, engineering, and administrative (ME&A) expenses were 2.1% lower compared to last year's second fiscal quarter. As a percentage of sales, ME&A expenses were down 0.4 percentage points to 20.8% of sales versus 21.2% of sales in the second quarter of fiscal 2008. For the fiscal 2009 second quarter, ME&A expenses benefited from a decrease in the Company's stock based compensation expense due to a decline in the Company's stock price versus the same period last year. Compared to fiscal 2008's second quarter, stock based compensation expense decreased $1.7 million in the quarter. In addition, expenses related to the Company's corporate and domestic incentive programs decreased $0.8 million versus the second quarter of fiscal 2008. These benefits were partially offset by severance costs of $1.3 million, increased IT costs of $0.5 million, including depreciation expense, associated with the Company's new ERP system and higher domestic pension expenses of $0.2 million. The net impact of foreign currency translation from overseas operations reduced ME&A expenses by approximately $0.6 million when compared to the same period last fiscal year.

Interest expense of $0.7 million was down over 13% compared to fiscal 2008's second quarter. In the quarter, the Company incurred interest of $0.4 million on the $25 million of Senior Notes that were entered into in April 2006. In addition, for the second quarter of fiscal 2008, the interest rate on the Company's revolving credit facility was in the range of 5.69% to 6.97%, whereas for the second quarter of fiscal 2009 the range was 3.16% to 4.00%. At the same time, the average balance of the Company's revolving credit facility decreased slightly versus the prior year. As a result of the lower interest rate and average balances, total interest on the revolver decreased just over $0.1 million.

Other income of $0.2 million for the quarter was up approximately $0.4 million from the prior year due to exchange gains caused by the strengthening of the U.S. Dollar.

The Company's consolidated income tax rate for the fiscal 2009 second quarter was 35.5 percent, compared to 39.2 percent for fiscal 2008's second quarter. Favorably impacting the Company's tax rate was a 5.9 percent reduction in the Italian corporate tax rate for fiscal 2009 and a shift in earnings to subsidiaries in countries with a lower effective tax rate.

Comparison of the First Six Months of FY 2009 with the First Six Months of FY 2008

Net sales for the first six months of fiscal 2009 decreased 0.8%, or $1.2 million, to $154.3 million from $155.5 million in the same period a year ago. Compared to the first six months of fiscal 2008, the Euro and Asian currencies strengthened, on average, against the U.S. dollar. The translation effect of this strengthening on foreign operations was to increase revenues by approximately $1.5 million versus the prior year, before eliminations. Adjusting for the impact of foreign currency translation, the net decrease of $2.7 million came in a number of the Company's product markets. The Company's North American manufacturing operations saw a continued softening in demand for the Company's oil and gas transmission products. This was partially offset by year-over-year increases in the Company's industrial product and commercial marine transmission sales. Overseas, the Company experienced particularly strong increases in sales at our distribution operations in Asia, which serve commercial marine markets. In addition, although experiencing some softening in the second fiscal quarter, year-to-date sales of propulsion and boat management systems for the mega yacht segment of the pleasure craft market showed improvement through six months. Although order activity remained relatively steady, land based transmission sales into the airport rescue and fire fighting and military markets were down somewhat versus the first six months of fiscal 2008.

Sales at our manufacturing segment were down 0.6%, or $0.8 million, to $135.4 million from $136.2 million in the same period last year. Year-to-date, sales at our U.S. domestic manufacturing locations were down almost 8%. This was primarily due to the continued slow down in sales of land based transmissions for the oil and gas markets, lower sales of propulsion systems for the European mega yacht market as well as lower sales of land based transmissions for the airport rescue and fire fighting and military markets. This was partially offset by improved year-over-year sales of commercial marine transmissions and industrial products. The prior fiscal year's first half was unfavorably affected by material shortages and equipment downtime, as progress continued on the plant re-layout associated with the June 2007 restructuring program. Our Italian manufacturing operations saw a slight decrease in sales compared to fiscal 2008's first six months, which was primarily due to decreased sales of low horsepower marine transmissions for the Italian and European pleasure craft market partially offset by higher sales of boat management systems for the Italian mega yacht market. The Company's Swiss manufacturing operation, which manufactures propellers for high end pleasure craft and military patrol boat applications, experienced a 32.3% increase in sales versus the prior year's first six months. About a third of this increase was due to the translation effect of a strengthening Swiss Franc versus the U.S. Dollar versus the same period a year ago. As noted above, the Company did experience a decrease in order activity, cancellations and retiming of orders for pleasure craft marine transmission, boat management and propulsion systems for the mega yacht market starting late in the second fiscal quarter of 2009.

Our distribution segment experienced an increase of 4.2% in sales, or $2.4 million, to $58.0 million from $55.6 million in the same period a year ago. The Company's Asian distribution operations in Singapore and joint venture in Japan saw significant growth in the commercial marine transmission markets. Partially offsetting these increases, the Company's distribution operations in Italy and Australia saw significant decreases in pleasure craft marine transmission and boat management system product sales. Compared to the first six months of fiscal 2008, the Euro and Asian currencies strengthened, on average, against the U.S. dollar. The translation effect of this strengthening on foreign distribution operations was to increase revenues by approximately $0.7 million versus the prior year, before eliminations.

The elimination for net inter/intra segment sales increased $2.8 million, accounting for the remainder of the net change in sales versus the same period last year. This change is primarily due to an increase in shipments from our Japanese joint venture to our distributor in Singapore, due to very strong demand in the Asia Pacific region for the high horsepower marine transmissions produced in Japan.

Gross profit as a percentage of sales decreased to 27.9% of sales, compared to 31.6% of sales for the same period last year. This 370 basis point deterioration can be attributed to reduced sales of higher margin products, higher sales of lower margin products, increased material costs, and an increase in domestic pension expense partially offset by higher pricing and expanded outsourcing. In the current fiscal year's first six months, domestic pension expense increased approximately $0.8 million versus the same period last year. In addition, the Company's Belgian operation's gross profit was favorably affected by the continued strength, on average, of the U.S. Dollar versus the Euro, when compared to the average rate in fiscal 2008. This operation manufactures with Euro-based costs and sells more than a third of its production into the U.S. market at U.S. Dollar prices. It is estimated that the year-over-year effect of the stronger U.S. Dollar was to improve margins at our Belgian subsidiary by over $0.2 million in the first half of fiscal 2009 versus the same period a year ago.

Marketing, engineering, and administrative (ME&A) expenses were 3.9% higher compared to last year's first six months. As a percentage of sales, ME&A expenses were up 1.0 percentage points to 21.6% of sales versus 20.6% of sales in the first half of fiscal 2008. For fiscal 2009's first six months, ME&A expenses benefited from a decrease in the Company's stock based compensation expense due to a decline in the Company's stock price versus the same period last year. Compared to fiscal 2008's first six months, stock based compensation expense decreased $1.7 million. In addition, expenses related to the Company's corporate and domestic incentive programs decreased $0.9 million versus the first six months of fiscal 2008. These benefits were offset by severance costs of $1.3 million, increased IT costs of $1.1 million, including depreciation expense, associated with the Company's new ERP system and higher domestic pension expenses of $0.3 million. The net impact of foreign currency translation from overseas operations on ME&A expenses was negligible versus the first six months of fiscal 2008. The net year-to-date increase in ME&A expenses was primarily due to inflationary increases in salaries, wages and benefits as well as an increase in product development activities.

Interest expense of $1.3 million was down over 16% compared to fiscal 2008's first six months. In the first half of fiscal 2009, the Company incurred interest of $0.8 million on the $25 million of Senior Notes that were entered into in April 2006. In addition, for the first half of fiscal 2008, the interest rate on the Company's revolving credit facility was in the range of 5.69% to 6.97%, whereas for the first half of fiscal 2009 the range was 3.16% to 4.00%. The average balance of the Company's revolving credit facility increased slightly versus the prior year. As a result of the lower interest rate, only partially offset by a higher average balance, total interest on the revolver decreased just under $0.3 million.

Other income of $1.0 million for the quarter was up significantly from the prior year result due to exchange gains caused by the strengthening of the U.S. Dollar primarily in the first quarter of fiscal 2009.

The Company's consolidated income tax rate for the fiscal 2009 first six months was 34.9 percent, compared to 38.8 percent for fiscal 2008's first six months. Favorably impacting the Company's tax rate was a 5.9 percent reduction in the Italian corporate tax rate for fiscal 2009 and a shift in earnings to subsidiaries in countries with a lower effective tax rate.

Financial Condition, Liquidity and Capital Resources

Comparison between December 26, 2008 and June 30, 2008

As of December 26, 2008, the Company had net working capital of $102.0 million, which represents a decrease of $4.1 million, or 4%, from the net working capital of $106.1 million as of June 30, 2008.

Cash decreased 22.8% to $11.2 million as of December 26, 2008. The majority of the cash as of December 26, 2008 is at the Company's overseas operations in Europe and Asia-Pacific. Of the nearly $3.3 million decrease since the start of the fiscal year, roughly $1.9 million can be attributed to effect of exchange rate changes on cash.

Trade receivables of $58.1 million were down $9.5 million from last fiscal year-end. The effect of foreign currency translation due to the strengthening U.S. Dollar versus the Euro and Asian currencies was to decrease trade accounts receivables by just under $7 million versus the end of the prior fiscal year. Sales for the second half of fiscal 2008 totaled $176.2 million versus $154.3 million for the first six months of fiscal 2008. For the fourth fiscal quarter of

fiscal 2008, sales totaled $90.4 million versus $81.6 million for the second quarter of fiscal 2009. The overall decrease in accounts receivable was consistent with the lower sales volume experienced. In the second fiscal quarter, the Company began to see an increase in requests for extended payment terms beyond its customary practice. Management continues to actively monitor accounts receivables and work with customers on a global basis.

Net inventory increased by $0.3 million, or 0.3%, versus June 30, 2008 to $98.0 million. The effect of foreign currency translation due to the strengthening U.S. Dollar versus the Euro and Asian currencies was to decrease net inventories by just over $10 million versus the end of the prior fiscal year. The majority of the net increase, after the effect of foreign exchange, in inventory came at the Company's domestic manufacturing location and Asian distribution operation. The latter can be attributed to the timing of shipments to customers. On a consolidated basis, as of December 26, 2008, the Company's backlog of orders to be shipped over the next six months approximates $106.3 million, down 12% since the year began and compared with the same period a year ago. Of the $14.4 million decrease experienced since the beginning of the fiscal year, approximately $5.4 million can be attributed to the effect of foreign currency translation. The reduction of inventory levels at both the Company's manufacturing and distribution operations around the world continues to be a priority for the balance of fiscal 2009 and beyond.

Net property, plant and equipment (PP&E) decreased $3.6 million versus June 30, 2008. This includes the addition of $4.7 million in capital expenditures, primarily at the Company's domestic and Belgian manufacturing operations, which was offset by depreciation of $4.2 million. The net remaining decrease of $4.1 million is due to the effects of foreign currency translation. As a result of current external business factors, the Company has revised its capital expenditure projection for the year and now expects to invest between $10 and $12 million in capital assets in fiscal 2009, compared to its prior estimate of between $15 and $17 million. The quoted lead times on certain manufacturing equipment purchases may push some of the capital expenditures into the next fiscal year. This compares to $15.0 million in capital expenditures in fiscal 2008, $15.7 million in fiscal 2007 and $8.4 million in fiscal 2006. The Company's capital program is focusing on modernizing key core manufacturing, assembly and testing processes at its facilities around the world as well as the implementation of the global ERP system.

Accounts payable as of December 26, 2008 of $35.9 million were down $2.0 million, or 5.3%, from June 30, 2008. The effect of foreign currency translation due to the strengthening U.S. Dollar versus the Euro and Asian currencies was to decrease accounts payable by just under $3.7 million versus the end of the prior fiscal year. The net increase after adjusting for the impact of foreign currency translation is primarily the result of the overall increase in inventory and the timing of payments at calendar year end due to a holiday shutdown.

Total borrowings, notes payable and long-term debt, as of December 26, 2008 increased by $2.0 million, or nearly 4%, to $51.9 million versus June 30, 2008. This increase was driven by the increase in working capital, primarily inventory, the payment of annual incentive and bonus awards for fiscal 2008 performance in the first fiscal quarter of 2009 and a $1.8 million stock repurchase in the fiscal second quarter, partially offset by net cash provided by operating activities. In the second fiscal quarter, the Company repurchased 250,000 shares of its outstanding common stock at an average price of $7.25 per share. For the balance of fiscal 2009, the Company is not required to make any additional contributions to its domestic defined benefit plans. However, based on overall financial performance and cash flows, the Company may elect to make further contributions beyond those required. At December 26, 2008, the Company is in compliance with all covenants and other requirements set forth in its revolving loan and note agreements.

Total shareholders' equity decreased by $14.5 million to a total of $115.2 million. Retained earnings increased by $4.3 million. The net increase in retained earnings included $5.9 million in net earnings reported year-to-date, offset by $1.6 million in dividend payments. Net unfavorable foreign currency translation of $18.5 million was reported as the U.S. Dollar strengthened against the Euro and Asian currencies during the first six months of fiscal 2009. The remaining movement of $0.9 million represents an adjustment for the amortization of net actuarial loss and prior service cost on the Company's pension plans.

The Company's balance sheet remains very strong, there are no off-balance-sheet arrangements, and we continue to have sufficient liquidity for near-term needs. As of December 26, 2008, the Company had available borrowings under its $35 million revolving line of credit of $11.1 million. Furthermore, the Company has over $11 million in cash at its subsidiaries around the world, approximately 51% of which is considered permanently reinvested. Management believes that available cash, our revolver facility, cash generated from operations, existing lines of credit and access to debt markets will be adequate to fund our capital requirements for the foreseeable future.

As of December 26, 2008, the Company has obligations under non-cancelable operating lease contracts and a senior note agreement for certain future payments. A summary of those commitments follows (in thousands):

                                Less than   1-3     3-5   After 5
Contractual Obligations  Total   1 year    Years   Years   Years

Revolver borrowing      $23,900           $23,900

Long-term debt          $28,024      $672  $4,452  $8,507 $14,393

Operating leases        $12,992    $3,250  $5,812  $3,637    $293

Total obligations       $64,916    $3,922 $34,164 $12,144 $14,686

New Accounting Releases

In December 2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") 132(R)-1, "Employers' Disclosure about Postretirement Benefit Plan Assets." This FSP provides guidance on an employer's disclosures regarding plan assets of a defined benefit pension or other postretirement plan. The objectives of the disclosures required under this FSP are to provide users of financial statements with an understanding of:
a) How investment allocation decisions are made;

b) The major categories of plan assets;

c) The inputs and valuation techniques used to measure the fair value of plan assets;

d) The effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period; and

e) Significant concentrations of risk within plan assets.

The disclosures about plan assets required by this FSP are required for fiscal years ending after December 15, 2009, and earlier application is permitted. This FSP is not expected to have a material impact on the Company's financial statements.

In April 2008, the FASB issued FSP 142-3, "Determination of the Useful Life of Intangible Assets." This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets." The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), "Business Combinations," and other U.S. generally accepted accounting principles. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. This FSP is not expected to have a material impact on the Company's financial statements.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - An Amendment of FASB Statement No. 133." This statement enhances the disclosures regarding derivatives and hedging activities by requiring:
· Disclosure of the objectives for using derivative instruments in terms of . . .