In the financial review that follows, we discuss our results of operations, financial condition and certain other information. The figures discussed in this review reflect the revision described in Note A. This discussion should be read in conjunction with our consolidated fiscal 2012 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, 2012 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 28,  December 30,   December 28,   December 30,
                            2012     %    2011     %     2012     %     2011     %

Net sales                  $72,325       $82,941       $141,118       $164,271
Cost of goods sold          50,014        53,379         99,391        103,941

Gross profit                22,311 30.8%  29,562 35.6%   41,727 29.6%   60,330 36.7%

Marketing, engineering and
administrative expenses     16,770  23.2  20,097  24.2   33,390  23.7   36,006  21.9

Earnings from operations    $5,541   7.7  $9,465  11.4   $8,337   5.9  $24,324  14.8

Comparison of the Second Quarter of FY 2013 with the Second Quarter of FY 2012

Net sales for the second quarter decreased 12.8%, or $10.6 million, to $72.3 million from the record $82.9 million in the same period a year ago. Compared to the second quarter of fiscal 2012, on average, the euro and Asian currencies weakened against the U.S. dollar. The net translation effect of this on foreign operations was to decrease revenues by approximately $0.7 million versus the prior year, before eliminations. The decrease in sales was primarily the result of lower demand from customers in the pressure pumping sector of the North American oil and gas market. Offsetting weakness in this market was higher demand from customers in the North American and Asian commercial marine markets. Sales to customers serving the global mega yacht market remained at historical lows in the quarter, while demand remained steady for equipment used in the airport rescue and fire fighting (ARFF), and military markets.

Sales at our manufacturing segment were down 14.3% versus the same period last year. Compared to the second quarter of fiscal 2012, on average, the euro weakened against the U.S. dollar. The net translation effect of this on foreign manufacturing operations was to decrease revenues for the manufacturing segment by approximately $0.7 million versus the prior year, before eliminations. In the current fiscal year's second quarter, our domestic manufacturing operation saw a decrease in sales of 14.5% versus the second fiscal quarter of 2012. The primary driver for this decrease was the decrease in shipments of transmissions and related products for the North American oil and gas markets. This was only partially offset by an increase in commercial marine transmission shipments. The Company's Italian manufacturing operations, which have been adversely impacted by the softness in the European mega yacht and industrial markets, experienced a 16.7% decrease in sales compared to the prior fiscal year's second quarter. Nearly a third of this decrease relates to foreign currency translation. The Company's Belgian manufacturing operation, which also continues to be adversely impacted by the softness in the global mega yacht market, saw a 14.4% decrease in sales versus the prior fiscal year's second quarter. A little more than half of the decrease was driven by foreign exchange translation, as the Euro weakened against the U.S. Dollar compared to the second quarter of fiscal 2012. The Company's Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, experienced flat sales.

Our distribution segment experienced an increase of 16.0% in sales compared to the second quarter of fiscal 2012. Compared to the second quarter of fiscal 2012, on average, the Asian currencies strengthened against the U.S. dollar. The net translation effect of this on foreign distribution operations was to increase revenues for the distribution segment by approximately $0.8 million versus the prior year, before eliminations. The Company's distribution operation in Singapore continues to experience record demand for marine transmission products for use in various commercial applications. This operation saw a nearly 50% increase in shipments versus the prior fiscal year's record second quarter. The Company's distribution operation in the Northwest of the United States and Southwest of Canada experienced a decrease in sales of just over 40% versus the prior fiscal year's record second quarter. This operation continued to be impacted by the softness in the Canadian oil and gas market. The Company's distribution operation in Italy, which provides boat accessories and propulsion systems for the pleasure craft market, saw a 5% decrease in sales due to continued weakness in the global mega yacht market as well as customer requests to delay shipments. The Company's distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw an increase in sales of 7%.

The elimination for net inter/intra segment sales increased $4.1 million, including an unfavorable exchange movement of $0.8 million, accounting for the remainder of the net change in sales versus the same period last year.

Gross profit as a percentage of sales decreased 480 basis points to 30.8% of sales, compared to 35.6% of sales for the same period last year. Gross profit for fiscal 2013's second quarter was significantly impacted by lower sales volumes, primarily due to lower shipments to the Company's North American pressure pumping transmission customers (approximately $5.4 million), a less profitable mix related to the Company's oil and gas transmission business (approximately $1.2 million), and unfavorable manufacturing efficiency and absorption due to lower volumes.

For the fiscal 2013 second quarter, marketing, engineering and administrative (ME&A) expenses, as a percentage of sales, were 23.2 %, compared to 24.2 % for the fiscal 2012 second quarter. ME&A expenses decreased $3.3 million versus the same period last fiscal year. Stock-based compensation expense decreased $2.4 million versus the prior year's second fiscal quarter. In addition, the annual bonus expense decreased approximately $1 million versus the prior year's second fiscal quarter.

Interest expense of $0.3 million for the quarter was down 13.6% versus last year's second fiscal quarter. Total interest on the Company's $40 million revolving credit facility ("revolver") increased 9% to $0.1 million in fiscal 2013's second quarter. This increase can be attributed to an overall increase in the average borrowings year-over-year, partially offset by a lower interest rate on the revolver. The average borrowing on the revolver, computed monthly, increased to $22.5 million in fiscal 2013's second quarter, compared to $22.0 million in the same period a year ago. The interest rate on the revolver decreased from a range of 1.74% to 2.12% in the prior fiscal year's second quarter to a range of 1.71% to 1.73% in the current year. The interest expense on the Company's $25 million Senior Note decreased 20%, at a fixed rate of 6.05%, to $0.2 million, due to a lower remaining principal balance.

Other income of $0.0 million for the quarter ended December 28, 2012 decreased from other income of $0.2 million for the comparable period a year ago. The prior year's improvement was due primarily to favorable foreign currency movements of the Euro, Canadian Dollar and Swiss Franc.

The effective tax rate for the first half of fiscal 2013 is 38.3 percent, which is slightly higher than the prior year rate of 35.5 percent. The current year rate is somewhat inflated due to the non-deductibility of the losses in certain foreign jurisdictions during the first half, due to an ongoing valuation allowance determination, on an overall reduced earnings base. The favorable impact of the recently extended research and development tax credit will be recorded in the third fiscal quarter, as it was signed January 2, 2013. The Company estimates the favorable impact of this item to be approximately $0.5 million.

Comparison of the First Six Months of FY 2013 with the First Six Months of FY 2012

Net sales for the first six months of fiscal 2013 decreased 14.1%, or $23.2 million, to $141.1 million from a record $164.3 million in the same period a year ago. Compared to the first six months of fiscal 2012, on average, the euro and Swiss franc weakened against the U.S. dollar. The net translation effect of this on foreign operations was to decrease revenues by approximately $2.8 million versus the prior year, before eliminations. The decrease in sales continued to primarily be driven by lower demand from customers in the pressure pumping sector of the North American oil and gas market. Offsetting weakness in this market was higher demand from customers in the North American and Asian commercial marine markets. Sales to customers serving the global mega yacht market remained at historical lows in the first half, while demand remained steady for equipment used in the airport rescue and fire fighting (ARFF), and military markets.

Sales at our manufacturing segment were down 16.0% versus the same period last year. Compared to the first six months of fiscal 2012, on average, the euro and Swiss franc weakened against the U.S. dollar. The net translation effect of this on foreign manufacturing operations was to decrease revenues for the manufacturing segment by approximately $2.7 million versus the prior year, before eliminations. In the current fiscal year's first six months, our domestic manufacturing operation saw a decrease of nearly 19% in sales versus the first six months of fiscal 2012. The primary driver for this decrease was the decrease in shipments of transmissions and related products for the North American oil and gas markets. This was only partially offset by an increase in commercial marine transmission shipments. The Company's Italian manufacturing operations, which have been adversely impacted by the softness in the European mega yacht and industrial markets, experienced a 24.1% decrease compared to the prior fiscal year's first six months. Approximately one-third of this decrease can be attributed to unfavorable foreign currency translation, with the majority of the remaining decrease due to continued softness and timing of shipments to the Italian mega yacht market. The Company's Belgian manufacturing operation, which also continued to be adversely impacted by the softness in the global mega yacht market, saw a nearly 2% increase in sales versus the prior fiscal year's first six months. Adjusted for unfavorable foreign currency translation, the increase would have been closer to 6.5%. The Company's Swiss manufacturing operation, which supplies customized propellers for the global mega yacht and patrol boat markets, experienced a 13.5% decrease in sales.

Our distribution segment experienced a slight increase of 2.5% in sales compared to the first six months of fiscal 2012. Compared to the first six months of fiscal 2012, on average, the Asian currencies strengthened again the U.S. dollar. The net translation effect of this on foreign distribution operations was to increase revenues for the distribution segment by approximately $0.5 million versus the prior year, before eliminations. The Company's distribution operations in Singapore continued to experience record shipments for marine transmission products for use in various commercial applications. This operation saw a 62.3% increase in sales versus the prior fiscal year's record first six months. The Company's distribution operation in the Northwest of the United States and Southwest of Canada experienced a nearly 56% decrease in sales due to continued softness in the Canadian oil and gas market. The Company's distribution operation in Italy, which provides boat accessories and propulsion systems for the pleasure craft market, saw a decrease in sales of 6.7% due to continued weakness in the global pleasure craft and mega yacht markets. The Company's distribution operation in Australia, which provides boat accessories, propulsion and marine transmission systems for the pleasure craft market, saw a decrease in sales of nearly 12%.

The elimination for net inter/intra segment sales increased $0.1 million, including an unfavorable exchange movement of $0.6 million, accounting for the remainder of the net change in sales versus the same period last year.

Gross profit as a percentage of sales decreased 710 basis points to 29.6% of sales, compared to 36.7% of sales for the same period last year. Gross profit for fiscal 2013's first six months was significantly impacted by lower sales volumes, primarily due to lower shipments to the Company's North American pressure pumping transmission customers (approximately $11.7 million), a less profitable mix related to the Company's oil and gas transmission business (approximately $2.9 million), and unfavorable manufacturing efficiency and absorption due to lower volumes.

Year-to-date, ME&A expenses, as a percentage of sales, were 23.7 %, compared to 21.9 % for the fiscal 2012 first six months. For the fiscal 2013 first half, ME&A expenses decreased $2.6 million versus the same period last fiscal year. Stock based compensation expense in the fiscal 2013 first half of $0.9 million decreased $1.5 million versus the same period a year ago. In addition, the annual bonus expense decreased approximately $1.9 million versus the prior year's first six months. Year-to-date, movements in foreign exchange rates decreased ME&A expenses by $0.8 million versus the comparable period a year ago. The net remaining increase primarily relates to increased research and development activities, age inflation and additional headcount, partially offset by lower pension expense.

Interest expense of $0.6 million for the first six months was down 14.1% versus last fiscal year's first six months. Total interest on the Company's $40 million revolving credit facility ("revolver") increased 4% to $0.2 million in fiscal 2013's first six months versus the same period a year ago. This increase can be attributed to an overall increase in the average borrowing year-over-year, partially offset by a decrease in the interest rate on the revolver. The average borrowing on the revolver, computed monthly, increased to $19.7 million in fiscal 2013's first six months, compared to $17.9 million in the same period a year ago. The interest rate on the revolver decreased from a range of 1.74% to 2.12% in the prior fiscal year's first half to a range of 1.71% to 1.75% in the current year. The interest expense on the Company's $25 million Senior Note decreased 20%, at a fixed rate of 6.05%, to $0.4 million, due to a lower remaining principal balance.

The effective tax rate for the first half of fiscal 2013 is 38.3 percent, which is slightly higher than the prior year rate of 35.5 percent. The current year rate is somewhat inflated due to the non-deductibility of the losses in certain foreign jurisdictions during the first half, due to an ongoing valuation allowance determination, on an overall reduced earnings base. The favorable impact of the recently extended research and development tax credit will be recorded in the third fiscal quarter, as it was signed January 2, 2013. The Company estimates the favorable impact of this item to be approximately $0.5 million.

Financial Condition, Liquidity and Capital Resources

Comparison between December 28, 2012 and June 30, 2012

As of December 28, 2012, the Company had net working capital of $132.3 million, which represents an increase of $1.7 million, or just over 1%, from the net working capital of $130.5 million as of June 30, 2012.

Cash increased $4.9 million to $20.6 million as of December 28, 2012, versus $15.7 million as of June 30, 2012. The majority of the cash as of December 28, 2012 is at our overseas operations in Europe and Asia-Pacific.

Trade receivables of $38.5 million were down $25.0 million, or nearly 40%, when compared to last fiscal year-end. The impact of foreign currency translation was to increase accounts receivable by $0.8 million versus June 30, 2012. The net remaining decrease is consistent with the sales volume decrease versus the fourth quarter of fiscal 2012. Historically, the fourth fiscal quarter generally is the strongest sales quarter of the fiscal year.

Net inventory increased by $15.1 million versus June 30, 2012 to $118.3 million. The impact of foreign currency translation was to increase net inventory by $2.1 million versus June 30, 2012. After adjusting for the impact of foreign currency translation, the net increase of $13.0 million primarily came at the Company's domestic manufacturing and Asian distribution locations. The increase was driven primarily by an elevated level of oil and gas transmissions inventory that has yet to work its way through sales as well as increased inventory to meet increased demand from North American and Asian commercial marine markets. On a consolidated basis, as of December 28, 2012, the Company's backlog of orders to be shipped over the next six months approximates $68.2 million, compared to $98.7 million at June 30, 2012 and $148.5 million at December 30, 2011. The majority of the decrease is being experienced at the Company's domestic manufacturing location due to continued softness in the North American pressure pumping transmission market. As a percentage of six month backlog, inventory has increased from 104% at June 30, 2012 to 173% at December 28, 2012.

Net property, plant and equipment (PP&E) decreased $0.6 million versus June 30, 2012. This includes the addition of $3.5 million in capital expenditures, primarily at the Company's Racine-based manufacturing operation, which was partially offset by depreciation of $5.0 million. The net remaining decrease is due to foreign currency translation effects. In total, the Company expects to invest approximately $10 million in capital assets in fiscal 2013. The Company continues to review its capital plans based on overall market conditions and availability of capital, and may make changes to its capital plans accordingly. In addition, the quoted lead times on certain manufacturing equipment purchases may push some of the capital expenditures into the next fiscal year. In fiscal 2012, the Company spent $13.7 million for capital expenditures, up from $12.0 million and $4.5 million in fiscal years 2011 and 2010, respectively. The Company's capital program is focused on modernizing key core manufacturing, assembly and testing processes and expanding capacity at its facilities around the world.

Accounts payable as of December 28, 2012 of $24.4 million were up $0.8 million, or 3.5%, from June 30, 2012. The impact of foreign currency translation was to increase accounts payable by $0.7 million versus June 30, 2012.

Total borrowings and long-term debt as of December 28, 2012 increased by $1.8 million, or roughly 6%, to $34.0 million versus June 30, 2012. This increase was driven by the overall increase in working capital levels, primarily driven by an increase in inventory and a net decrease in accrued liabilities, and the repurchase of $3.1 million (185,000 shares) of the Company's stock. These were substantially offset by a nearly $25 million reduction in accounts receivable. In addition, the Company made payments for its annual incentive program in the first fiscal quarter of 2012 based on the achievement of fiscal 2012 targets.

Total equity increased $4.6 million, or 3%, to $141.1 million as of December 28, 2012. Retained earnings increased by $2.5 million. The net increase in retained earnings included $4.6 million in net earnings attributable to Twin Disc for the first six months offset by $2.1 million in dividend payments. Net favorable foreign currency translation of $3.4 million was reported. In addition, the adjustment for the amortization of net actuarial loss and prior service cost on the Company's defined benefit pension plans was $1.3 million. The net remaining movement of $2.6 million primarily relates to changes in Treasury Stock, including the repurchase of 185,000 shares of the Company's stock for $3.1 million in the second fiscal quarter.

In December 2002, the Company entered into a $20,000,000 revolving loan agreement with M&I Marshall & Ilsley Bank ("M&I"), which had an original expiration date of October 31, 2005. Through a series of amendments, the last of which was agreed to during the fourth quarter of fiscal 2011, the total commitment was increased to $40,000,000 and the term was extended to May 31, 2015. This agreement contains certain covenants, including restrictions on investments, acquisitions and indebtedness. Financial covenants include a minimum consolidated net worth, minimum EBITDA for the most recent four fiscal quarters of $11,000,000 at December 28, 2012, and a maximum total funded debt to EBITDA ratio of 3.0 at December 28, 2012. As of December 28, 2012, the Company was in compliance with these covenants with a four quarter EBITDA total of $40,156,000 and a funded debt to EBITDA ratio of 0.85. The minimum net worth covenant fluctuates based upon actual earnings and is subject to adjustment for certain pension accounting adjustments to equity. As of December 28, 2012 the minimum equity requirement was $119,373,000 compared to an actual result of $174,177,000 after all required adjustments. The outstanding balance of $19,500,000 and $17,550,000 at December 28, 2012 and June 30, 2012, respectively, is classified as long-term debt. In accordance with the loan agreement as amended, the Company can borrow at LIBOR plus an additional "Add-On," between 1.5% and 2.5%, depending on the Company's Total Funded Debt to EBITDA ratio. The rate was 1.71% and 1.74% at December 28, 2012 and June 30, 2012, respectively.

On April 10, 2006, the Company entered into a Note Agreement (the "Note Agreement") with The Prudential Insurance Company of America and certain other entities (collectively, "Purchasers"). Pursuant to the Note Agreement, Purchasers acquired, in the aggregate, $25,000,000 in 6.05% Senior Notes due April 10, 2016 (the "Notes"). The Notes mature and become due and payable in full on April 10, 2016 (the "Payment Date"). Prior to the Payment Date, the Company is obligated to make quarterly payments of interest during the term of the Notes, plus prepayments of principal of $3,571,429 on April 10 of each year from 2010 to 2015, inclusive. The outstanding balance was $14,285,714 at December 28, 2012 and June 30, 2012, respectively. Of the outstanding balance, $3,571,429 was classified as a current maturity of long-term debt at December 28, 2012 and June 30, 2012, respectively. The remaining $10,714,286 is classified as long-term debt. The Company also has the option of making additional prepayments subject to certain limitations, including the payment of a Yield-Maintenance Amount as defined in the Note Agreement. In addition, the Company will be required to make an offer to purchase the Notes upon a Change of Control, and any such offer must include the payment of a Yield-Maintenance Amount. The Note Agreement includes certain financial covenants which are identical to those associated with the revolving loan agreement discussed above. The Note Agreement also includes certain restrictive covenants that limit, among other things, the incurrence of additional indebtedness and the disposition of assets outside the ordinary course of business. The Note Agreement provides that it shall automatically include any covenants or events of default not previously included in the Note Agreement to the extent such covenants or events of default are granted to any other lender of an amount in excess of $1,000,000. Following an Event of Default, each Purchaser may accelerate all amounts outstanding under the Notes held by such party.

On November 19, 2012, the Company and its wholly-owned subsidiary Twin Disc International, S.A. entered into a multi-currency revolving Credit Agreement with Wells Fargo Bank, National Association. Pursuant to the Credit Agreement, the Company may, from time to time, enter into revolving credit loans in amounts not to exceed, in the aggregate, Wells Fargo's revolving credit commitment of $15,000,000. In general, outstanding revolving credit loans (other than foreign currency loans) will bear interest at one of the following rates, as selected by the Company: (1) a "Base Rate," which is equal to the highest of (i) the prime rate; (ii) the federal funds rate plus 0.50%; or (iii) LIBOR plus 1.00%; or (2) a "LIBOR Rate" (which is equal to LIBOR divided by the difference between 1.00 and the Eurodollar Reserve Percentage (as defined in the Credit Agreement)) plus 1.50%. Outstanding revolving credit loans that are foreign currency loans will bear interest at the LIBOR Rate plus 1.50%, plus an additional "Mandatory Cost," which is designed to compensate Wells Fargo for the cost of compliance with the requirements of the Bank of England and/or the Financial Services Authority, or the requirements of the European Central Bank. In addition to principal and interest payments, the Borrowers will be responsible for paying monthly commitment fees equal to .25% of the unused revolving credit commitment. The Company has the option of making additional prepayments subject to certain limitations. The Credit Agreement includes financial covenants regarding minimum net worth, minimum EBITDA for the most recent four fiscal quarters of $11,000,000, and a maximum total funded debt to EBITDA ratio of 3.0:1. The Credit Agreement also includes certain restrictive covenants that limit, among other things, certain investments, acquisitions and indebtedness. The Credit Agreement provides that it shall automatically include any covenants or events of default not previously included in the Credit Agreement to the extent such covenants or events of default are granted to any other lender of an amount in excess of $1,000,000. The Credit Agreement also includes customary events of default, including events of default under the M&I agreement or the Prudential Note Agreement. Following an event of default, Wells Fargo may accelerate all amounts outstanding under any revolving credit notes or the Credit Agreement. The Credit Agreement is scheduled to expire on May 31, 2015. As of December 28, 2012, there were no borrowings under the Credit Agreement.

Four quarter EBITDA and total funded debt are non-GAAP measures, and are included herein for the purpose of disclosing the status of the Company's compliance with the four quarter EBITDA covenant and the total funded debt to four quarter EBITDA ratio covenant described above. In accordance with the Company's revolving loan agreement with M&I and the Note Agreement:

· "Four quarter EBITDA" is defined as "the sum of (i) Net Income plus, to the extent deducted in the calculation of Net Income, (ii) interest expense, (iii) depreciation and amortization expense, and (iv) income tax expense;" and

· "Total funded debt" is defined as "(i) all Indebtedness for borrowed money (including without limitation, Indebtedness evidenced by promissory notes, bonds, debentures and similar interest-bearing instruments), plus (ii) all purchase money Indebtedness, plus (iii) the principal portion of capital lease obligations, plus (iv) the maximum amount which is available to be drawn under letters of credit then outstanding, all as determined for the Company and its consolidated Subsidiaries as of the date of determination, without . . .