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                                  Nine Months Ended
                        March 27,                March 28,                 March 27,                 March 28,
                     2009          %          2008          %          2009           %          2008           %

Net sales          $ 69,292                 $ 85,838                 $ 223,562                 $ 241,345
Cost of goods
sold                 50,141                   59,211                   161,386                   165,522

Gross profit         19,151        27.6 %     26,627        31.0 %      62,176        27.8 %      75,823        31.4 %

Marketing,
engineering and
administrative
expenses             14,517        21.0       14,969        17.4        47,843        21.4        47,041        19.5

Earnings from
operations         $  4,634         6.7     $ 11,658        13.6     $  14,333         6.4     $  28,782        11.9

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

Net sales for the third quarter decreased 19.3%, or $16.5 million, to $69.3 million from $85.8 million in the same period a year ago. Compared to the third 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 $2.9 million versus the prior year, before eliminations. Adjusting for the impact of foreign currency translation on the third fiscal quarter, sales would have been down just under 16% versus the same period last fiscal year. The decline in sales for the fiscal 2009 third quarter was primarily due to lower sales of products to customers in the mega yacht, oil and gas, and industrial markets. This was partially offset by higher sales to customers in the commercial marine, land-based military and airport rescue fire fighting (ARFF) markets.

Sales at our manufacturing segment were down 16.2%, or $12.8 million, to $65.9 million from $78.7 million in the same period last year. Compared to the third quarter of fiscal 2008, the U.S. Dollar strengthened against the Euro and Asian currencies. The translation effect of this strengthening on foreign manufacturing operations was to decrease revenues by approximately $3.0 million versus the prior year, before eliminations. Sales at our U.S. domestic manufacturing locations were down just under 7%. Continued softening in transmission sales for the land-based oil and gas market, and lower propulsion system and industrial product shipments were only partially offset by improved shipments for the commercial marine product markets. Sales at our Belgian manufacturing location were down approximately 12% over the same period last year. Adjusting for the negative translation effect of a weakening Euro versus the U.S. Dollar, sales were down just over 2%. Our Italian manufacturing operations saw a nearly 46% decrease in sales compared to fiscal 2008's third quarter. The majority of this decrease is due to decreased sales of low horsepower marine transmissions and propulsion systems for the Italian and European pleasure craft and mega yacht markets. In addition, there was a softening in industrial product markets in the Italian and European market. Just under one-fifth of the decrease can be attributed to the translation effect of a

strengthening U.S. Dollar versus the third quarter of last fiscal year. The Company's Swiss manufacturing operation, which manufactures propellers for high-end pleasure craft and military patrol boat applications, experienced a 38% decrease in sales versus the prior year's third fiscal quarter. The Company continued to experience a decrease in order activity, cancellations and retiming of orders for pleasure craft marine transmission, boat management and propulsion systems for the global mega yacht market.

Our distribution segment experienced a decrease of 10.3% in sales, or $3.0 million, to $25.7 million from $28.7 million in the same period a year ago. Compared to the third 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 $1.5 million versus the prior year, before eliminations. The Company's distribution operations in Italy and Australia saw double digit 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.

The elimination for net inter/intra segment sales increased $0.8 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 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 27.6% of sales, compared to 31.0% of sales for the same period last year. This 340 basis point deterioration can be attributed to reduced sales of higher margin products, higher sales of lower margin products, increased warranty costs ($0.9 million), and an increase in domestic pension expense ($0.4 million). 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 $0.8 million in the third fiscal quarter versus the same period a year ago. Compared to the third 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 $0.9 million versus the prior year, before eliminations.

Marketing, engineering, and administrative (ME&A) expenses were 3.0% lower compared to last year's third fiscal quarter. However, due to lower sales volume, ME&A expenses as a percentage of sales were up 3.6 percentage points to 21.0% of sales versus 17.4% of sales in the third quarter of fiscal 2008. For the third quarter of fiscal 2009, stock based compensation expense totaled $0.4 million compared to income of $1.6 million for the third quarter of fiscal 2008, for a net year-over-year increase of $2.0 million. Fiscal 2008's third quarter included a $2.3 million reversal of stock based compensation expense, which reflected the decline of the Company's stock price during that quarter a year ago. In addition, expenses related to the Company's corporate and domestic incentive programs decreased $1.5 million versus the third quarter of fiscal 2008, due to the overall decline in financial performance year-over-year. This was partially offset by increased IT costs of $0.3 million, primarily 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 $0.8 million when compared to the same period of the prior fiscal year.

Interest expense of $0.5 million was down over 30% compared to fiscal 2008's third quarter. In the third quarter of fiscal 2009 and 2008, 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 third quarter of fiscal 2008, the interest rate on the Company's revolving credit facility was in the range of 4.36% to 5.85%, whereas for the third quarter of fiscal 2009 the range was 1.67% to 1.75%. At the same time, the average balance of the Company's revolving credit facility increased slightly versus the prior year. However, as a result of the lower interest rate, total interest on the revolver decreased just over $0.2 million.

Other expense of $1.0 million for the quarter was up approximately $0.9 million from the prior year primarily due to exchange losses caused by the strengthening of the U.S. Dollar versus the Japanese Yen.

The effective tax rate for 2009's third fiscal quarter of 11.8 percent improved over the prior year rate of 25.4 percent due primarily to a 5.9 percent reduction in the Italian corporate tax rate effective with the start of fiscal 2009, a shift in earnings to lower tax subsidiaries, the impact of foreign tax credits on the domestic tax rate and provision to return adjustments recorded in the third quarter based on changes in estimates. These favorable items were partially

offset by an additional reserve recorded due to a change in the estimate of realization of research and development tax credits during the fiscal 2009 third quarter.

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

Net sales for the first nine months of fiscal 2009 decreased 7.4%, or $17.8 million, to $223.6 million from $241.3 million in the same period a year ago. Compared to the first nine months of fiscal 2008, the Euro and Asian currencies weakened, on average, against the U.S. Dollar. The translation effect of this weakening on foreign operations was to decrease revenues by approximately $1.4 million versus the prior year. The Company's North American manufacturing operations saw a continued softening in demand for the Company's oil and gas transmission products and saw continued weakness in its marine propulsion system shipments for the mega yacht segment of the marine pleasure craft market. This was partially offset by year-over-year increases in the Company's industrial product and commercial marine transmission sales. In addition, vehicular transmission sales for the airport rescue and fire fighting (ARFF) and military markets remained steady. Overseas, the Company experienced particularly strong increases in sales at our distribution operations in Asia, which serve commercial marine markets. However, significant softening was experienced in the third fiscal quarter for propulsion and boat management systems for the global mega yacht segment of the pleasure craft market. As a result, through nine months these product markets are now experiencing a year-over-year decline.

Sales at our manufacturing segment were down 6.3%, or $13.6 million, to $201.3 million from $214.9 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 and lower sales of propulsion systems for the European mega yacht. This was partially offset by improved year-over-year sales of commercial marine transmissions. On a year-to-date basis, sales of industrial products as well as vehicular transmissions for the ARFF and military markets remained steady. Sales at the Company's Belgian manufacturing operation are up nearly 4% through the first nine months. The prior fiscal year's first nine months 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 significant decrease in sales in the third fiscal quarter compared to the prior fiscal year, as noted above. As a result, sales for the first nine months are down over 17% versus the first nine months of fiscal 2008. The decrease can be primarily attributed to decreased sales of low horsepower marine transmissions for the Italian and European pleasure craft as well as lower 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 9.0% increase in sales versus the prior year's first nine months. However, as noted above there was a significant fall off in third quarter shipments versus the prior fiscal year's third quarter. 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 global mega yacht market starting late in the second fiscal quarter of 2009, which accelerated in the third fiscal quarter of 2009.

Our distribution segment experienced a slight decrease of 0.7% in sales, or $0.6 million, to $83.7 million from $84.3 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 double digit decreases in pleasure craft marine transmission and boat management system product sales. Compared to the first nine months of fiscal 2008, the Euro and Asian currencies weakened, on average, against the U.S. Dollar. The translation effect of this weakening on foreign distribution operations was to decrease revenues by approximately $0.7 million versus the prior year, before eliminations.

The elimination for net inter/intra segment sales increased $3.6 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 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 27.8% of sales, compared to 31.4% of sales for the same period last year. This 360 basis point deterioration can be attributed to reduced sales of higher margin products, higher sales of lower margin products, increased warranty costs ($0.8 million), and an increase in domestic pension expense ($1.2 million) partially offset by higher pricing and expanded outsourcing. 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 $1.0 million in the first nine months of fiscal 2009 versus the same period a year ago. Compared to the first nine months 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 $1.8 million versus the prior year, before eliminations.

Marketing, engineering, and administrative (ME&A) expenses were 1.7% higher compared to last year's first nine months. ME&A expenses as a percentage of sales were up 1.9 percentage points to 21.4% of sales versus 19.5% of sales in the first nine months of fiscal 2008. On a year-to-date basis, expenses related to the Company's corporate and domestic incentive programs decreased $2.3 million versus the first nine months of fiscal 2008, due to the overall decline in financial performance year-over-year. This was offset by increased IT costs of $1.4 million, primarily depreciation expense, associated with the Company's new ERP system and higher domestic pension expenses of $0.5 million. In addition, there were severance costs of $1.3 million booked in the second fiscal quarter of 2009. For the first nine months of fiscal 2009, stock based compensation expense totaled $0.5 million compared to $0.2 million for the first nine months of fiscal 2008. As noted above, fiscal 2008's third quarter included a $2.3 million reversal of stock based compensation expense, which reflected the decline of the Company's stock price during that quarter a year ago. The net impact of foreign currency translation from overseas operations reduced ME&A expenses by approximately $0.8 million when compared to the same period of the prior fiscal year.

Interest expense of $1.8 million was down 21% compared to fiscal 2008's first nine months. In the first nine months of fiscal 2009 and 2008, the Company incurred interest of $1.1 million on the $25 million of Senior Notes that were entered into in April 2006. In addition, for the first nine months of fiscal 2008, the interest rate on the Company's revolving credit facility was in the range of 4.36% to 6.97%, whereas for the first nine months of fiscal 2009 the range was 1.67% to 4.00%. At the same time, the average balance of the Company's revolving credit facility increased slightly versus the prior year. However, as a result of the lower interest rate, total interest on the revolver decreased just over $0.5 million.

Year-to-date, the effective tax rate of 29.2 percent improved over the prior year rate of 33.3 percent due primarily to a 5.9 percent reduction in the Italian corporate tax rate effective with the start of fiscal 2009, a shift in earnings to lower tax subsidiaries and the impact of foreign tax credits on the domestic tax rate.

Financial Condition, Liquidity and Capital Resources

Comparison between March 27, 2009 and June 30, 2008

As of March 27, 2009, the Company had net working capital of $108.6 million, which represents an increase of $2.5 million, or 2%, from the net working capital of $106.1 million as of June 30, 2008.

Cash decreased 14.8% to $12.3 million as of March 27, 2009. The majority of the cash as of March 27, 2009 is at the Company's overseas operations in Europe and Asia-Pacific. Of the nearly $2.1 million decrease since the start of the fiscal year, roughly $1.7 million can be attributed to effect of exchange rate changes on cash.

Trade receivables of $55.1 million were down $12.5 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 $7.2 million versus the end of the prior fiscal year. The overall decrease in accounts receivable was consistent with the lower sales volume experienced in the last two fiscal quarters. Due to the global economic slowdown, the Company began to see an increase in requests for extended payment terms beyond its customary practice in the second fiscal quarter and into the third fiscal quarter. Management continues to actively monitor accounts receivables and work with customers on a global basis.

Net inventory increased by $0.2 million, or 0.2%, versus June 30, 2008 to $97.9 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 under $12 million versus the end of the prior fiscal year. The majority of the net increase in inventory, after the effect of foreign exchange, came at the Company's domestic manufacturing location and Asian distribution operation. The increase at the Company's domestic manufacturing operation is the result of customer reschedules and the impact of dual sourcing of component parts as we transition to low-cost suppliers. The increase at the Asian distribution operation can be attributed to the timing of shipments to customers. On a consolidated basis, as of March 27, 2009, the Company's backlog of orders to be shipped over the next six months approximates

$81.5 million, down 33% since the year began and 35% compared with the same period a year ago. Of the $39.2 million decrease experienced since the beginning of the fiscal year, approximately $4.7 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 $4.3 million versus June 30, 2008. This includes the addition of $6.6 million in capital expenditures, primarily at the Company's domestic and Belgian manufacturing operations, which was offset by depreciation of $6.5 million. The net remaining decrease of $4.4 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 March 27, 2009 of $31.8 million were down $6.1 million, or 16.1%, 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 $2.7 million versus the end of the prior fiscal year. The net remaining decrease after adjusting for the impact of foreign currency translation is primarily the result of the overall downturn in business, decrease in the order backlog and the focus on reducing inventory levels.

Total borrowings, notes payable and long-term debt, as of March 27, 2009 increased by $8.1 million, or 16%, to $58.0 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 March 27, 2009, the Company is in compliance with all covenants and other requirements set forth in its revolving loan and note agreements. The first installment of $3.6 million on the Company's unsecured $25 million 6.05% Senior Notes is due in April 2010.

Total shareholders' equity decreased by $12.7 million to a total of $117.0 million. Retained earnings increased by $6.4 million. The net increase in retained earnings included $8.7 million in net earnings reported year-to-date, offset by $2.3 million in dividend payments. Net unfavorable foreign currency translation of $19.6 million was reported as the U.S. Dollar strengthened against the Euro and Asian currencies during the first nine months of fiscal 2009. The remaining movement of $1.4 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 strong, there are no off-balance-sheet arrangements, and we continue to have sufficient liquidity for near-term needs. As of March 27, 2009, the Company had available borrowings under its $35 million revolving line of credit of nearly $7 million. Furthermore, the Company has over $12 million in cash at its subsidiaries around the world, approximately 45% 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 March 27, 2009, 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

Short-term borrowing     $1,652    $1,652

Revolver borrowing      $28,300           $28,300

Long-term debt          $28,056      $661  $4,421  $8,584 $14,390

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

Total obligations       $71,000    $5,563 $38,533 $12,221 $14,683

New Accounting Releases

In April 2009, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly." This FSP provides additional clarification on the determination of fair value, including illustrative examples. FSP FAS 157-4 is effective for interim and annual periods beginning after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, and is not expected to have a material impact on the Company's financial statements.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments." This FSP provides guidance on determining whether an impairment is other than temporary, provides examples to be considered and identifies reporting requirements related to such impairments. FSP FAS 115-2 and FAS 124-2 is effective for interim and annual periods beginning after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, and is not expected to have a material impact on the Company's financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments." This FSP requires disclosure about the fair value of financial instruments whenever summarized financial information for interim periods is issued, and requires disclosure of the fair value of all financial instruments (where practicable) in the body or . . .