UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 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 December
31, 2006Commission File Number
1-7635

TWIN DISC,
INCORPORATED

(Exact name of registrant as specified
in its charter)

Wisconsin
    
    39-0667110(State or other
      jurisdiction of
    
    (I.R.S.
    EmployerIncorporation or
      organization)
    
    Identification
    No.)1328 Racine
      Street, Racine, Wisconsin 53403(Address of principal executive
      offices)(262)
      638-4000(Registrant's telephone number,
      including area code)


Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15
(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90
days.

Yes No x .

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer
__
Accelerated Filer xNon-accelerated filer .

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No x .

At January 31, 2007, the registrant had
5,839,688 shares of its common stock outstanding.

1

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|PART 1  FINANCIAL
      INFORMATION                                                                         |             
|------------------------------------------------------------------------------------------------------------ | ------------
|                                                                                                            
|Item 1. Financial Statements                                                                                 |             
|TWIN DISC,
      INCORPORATED                                                                               
|CONDENSED CONSOLIDATED BALANCE
      SHEETS                                                                  |             
|(In Thousands, Unaudited)                                                                                   
|                                                                                                            
|                                                                                                             | December 31,
|                                                                                                             | 2006        
|Assets                                                                                                       |             
|Current
    assets:                                                                                          |             
|Cash and cash
      equivalents                                                                              | $14,741     
|Trade accounts
      receivable, net                                                                         | 52,018      
|Inventories,
      net                                                                                       | 82,731      
|Deferred
      income taxes                                                                                  | 6,221       
|Other                                                                                                        | 6,325       
|                                                                                                             |             
|                                                                                                            
|Total current assets                                                                                         | 162,036     
|                                                                                                            
|Property, plant and
      equipment, net                                                                     | 52,315      
|Goodwill                                                                                                     | 15,960      
|Deferred income
      taxes                                                                                  | 4,041       
|Intangible assets,
      net                                                                                 | 11,905      
|Other
    assets                                                                                             | 6,617       
|                                                                                                            
|                                                                                                             | $252,874    
|Liabilities
      and Shareholders' Equity                                                                   |             
|Current
      liabilities:                                                                                   |             
|Bank
      overdraft                                                                                         | $ -         
|Notes
      payable                                                                                          | -           
|Current
      maturities of long-term debt                                                                   | 232         
|Accounts
      payable                                                                                       | 29,712      
|Accrued
      liabilities                                                                                    | 45,236      
|                                                                                                             |             
|                                                                                                            
|Total current liabilities                                                                                    | 75,180      
|                                                                                                            
|Long-term
    debt                                                                                           | 54,653      
|Accrued retirement
      benefits                                                                            | 20,866      
|Other long-term
      liablilities                                                                           | 846         
|                                                                                                             |             
|                                                                                                            
|                                                                                                             | 151,545     
|                                                                                                            
|Minority
    interest                                                                                        | 569         
|                                                                                                            
|Shareholders'
      equity:                                                                                  |             
|Common shares
      authorized: 15,000,000;                                                                  |             
|issued: 6,550,224; no par value                                                                              | 12,382      
|Retained
      earnings                                                                                      | 109,885     
|Accumulated
      other comprehensive loss                                                                   | (6,638)     
|                                                                                                            
|                                                                                                             | 115,629     
|Less treasury
      stock, at cost                                                                           |             
|(708,636 and 718,236 shares, respectively)                                                                   | 14,869      
|                                                                                                             |             
|                                                                                                            
|Total shareholders' equity                                                                                   | 100,760     
|                                                                                                             |             
|                                                                                                            
|                                                                                                             | $252,874    
|                                                                                                            
|                                                                                                            
|The notes to condensed consolidated
      financial statements are an integral part of these
    statements. |             

2

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|TWIN DISC,
      INCORPORATED                           
|--------------------------------------------------------
|CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS   
|(In Thousands Except Per Share Data,
      Unaudited)   
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|Net sales                                               
|Cost of goods
    sold                                  
|                                                        
|                                                        
|                                                        
|Marketing, engineering and
      administrative expenses
|Interest
    expense                                    
|Other income,
    net                                   
|                                                        
|                                                        
|                                                        
|Earnings before income
      taxes and minority interest
|Income
    taxes                                        
|                                                        
|                                                        
|Earnings before minority
      interest                 
|Minority
    interest                                   
|                                                        
|                                                        
|Net
      earnings                                      
|                                                        
|                                                        
|Dividends per
    share                                 
|                                                        
|Earnings per share
      data:                          
|Basic earnings per share                                
|Diluted earnings per share                              
|                                                        
|Shares outstanding
      data:                          
|Average shares outstanding                              
|Dilutive stock options                                  
|                                                        
|                                                        
|Diluted shares outstanding                              
|                                                        
|Comprehensive
      income:                             
|Net earnings                                            
|Foreign currency translation adjustment                 
|                                                        
|                                                        
|Comprehensive income                                    

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

3

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TWIN DISC,
INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS

(In Thousands, Unaudited)

|                                              | Six Months Ended
|--------------------------------------------- | ----------------
|                                              | December 31,    
|                                              | 2006            
|                                             
|Cash flows from operating
      activities:   |                 
|Net
    earnings                              | $ 9,342         
|Adjustments to reconcile net earnings to      |                 
|net cash used in operating
      activities:  |                 
|Depreciation and
    amortization             | 3,368           
|Other non-cash changes 
    net              | 869             
|Net change in working
    capital,            |                 
|excluding cash                                | (19,987)        
|                                             
|                                              | (6,408)         
|Cash flows from investing
      activities:   |                 
|Acquisitions
      of fixed assets            | (8,011)         
|Proceeds from
      sale of fixed assets      | 101             
|                                             
|                                              | (7,910)         
|Cash flows from financing
      activities:   |                 
|Bank overdraft                                | (3,194)         
|Decrease in notes payable, net                | (396)           
|Proceeds from long-term debt                  | 16,255          
|Proceeds from exercise of stock options       | 56              
|Purchase of treasury stock                    | (51)            
|Dividends paid                                | (1,109)         
|Other                                         | (47)            
|                                             
|                                              | 11,514          
|                                              |                 
|                                             
|Effect of exchange rate
      changes on cash | 1,118           
|                                              |                 
|                                             
|Net change in cash and
      cash equivalents | (1,686)         
|                                             
|Cash and cash
      equivalents:              |                 
|Beginning of period                           | 16,427          
|                                              |                 
|                                             
|End of period                                 | $14,741         

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

4

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NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31,
2006 (UNAUDITED)

A. Basis of
Presentation

The unaudited condensed financial
statements have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) and, in the opinion
of the Company, include all adjustments, consisting only of normal recurring
items, necessary for a fair statement of results for each period. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations. The Company
believes that the disclosures made are adequate to make the information
presented not misleading. It is suggested that these financial statements be
read in conjunction with financial statements and the notes thereto included in
the Company's latest Annual Report. The year-end condensed balance sheet data
was derived from audited financial statements, but does not include all
disclosures required by accounting principles generally accepted in the the
United States of America.

Certain balances in prior fiscal years
have been reclassified to conform to the presentation adopted in the current
year. This reclassification had no impact on the Companys Condensed
Consolidated Statement of Operations.

New Accounting
Releases

In June 2006, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation (FIN) No. 48 Accounting
for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109.
This interpretation clarifies the accounting for uncertainty in income taxes
recognized in an entitys financial statements in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
It prescribes a recognition threshold and measurement attribute for financial
statement disclosure of tax positions taken or expected to be taken on a tax
return. FIN No. 48 is effective for fiscal years beginning after December 15,
2006. The Company is currently evaluating the impact of adoption of FIN No. 48
on its financial statements.

In September 2006, the FASB issued SFAS
No. 157 Fair Value Measurements. This statement defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
The provisions of this statement are effective for financial statements issued
for fiscal years beginning after November 15, 2007 and are not expected to have
a material impact on the financial statements of the Company.

During September 2006, the FASB issued
SFAS No. 158 Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R). This statement requires an employer that sponsors one or more
single-employer defined benefit plans to:

|1. | Recognize the funded status of a
      benefit plan  measured as the difference between plan assets at fair
      value and the benefit obligation  in its statement of financial
      position.                                                                                                                                                                                                               
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | Recognize as a component of other
      comprehensive income, net of tax, the gains or losses and prior service
      costs or credits that arise during the period but are not recognized as
      components of net periodic benefit cost pursuant to FASB Statement No. 87
      , Employers Accounting for Pensions, or No. 106, Employers Accounting
      for Postretirement Benefits Other Than Pensions.
|3. | Measure defined benefit plan
      assets and obligations as of the date of the employers fiscal year-end
      statement of financial position.                                                                                                                                                                                                                                                                 
|4. | Disclose in the notes to the
      financial statements additional information about certain effects on net
      periodic benefit cost for the next fiscal year that arise from delayed
      recognition of the gains or losses, prior service costs or credits, and
      transition asset or obligation.                                                                                                      

5

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This statement is effective for fiscal
years ending after December 15, 2006. Based upon amounts disclosed in the
Companys 2006 Annual Report on Form 10-K, the impact of adopting this statement
would result in the recognition of an additional liability of $6,544,000
(primarily related to postretirement healthcare), a deferred tax impact of
$2,552,000 and an offsetting charge to other comprehensive income of $3,992,000.
The impact of this statement could differ from these amounts, depending
primarily upon current fiscal year asset performance.

B. Inventory

The major classes of inventories were as
follows (in thousands):

|                    | December 31, | June 30,
|------------------- | ------------ | --------
|                    | 2006         | 2006    
|Inventories:        |              |         
|Finished
    parts  | $56,483      | $39,656 
|Work in
    process | 12,660       | 11,176  
|Raw
    materials   | 13,588       | 14,249  
|                   
|                    | $82,731      | $65,081 

C. Warranty

Twin Disc engages in extensive product
quality programs and processes, including actively monitoring and evaluating the
quality of its suppliers. However, its warranty obligation is affected by
product failure rates, the extent of the market affected by the failure and the
expense involved in satisfactorily addressing the situation. The warranty
reserve is established based on our best estimate of the amounts necessary to
settle future and existing claims on products sold as of the balance sheet date.
When evaluating the adequacy of the reserve for warranty costs, management takes
into consideration the term of the warranty coverage, historical claim rates and
costs of repair, knowledge of the type and volume of new products and economic
trends. While we believe the warranty reserve is adequate and that the judgment
applied is appropriate, such amounts estimated to be due and payable in the
future could differ materially from what actually transpires. The following is a
listing of the activity in the warranty reserve during the three and six month
periods ended December 31, 2006 and 2005 (in thousands).

|                                           | Three
      Months Ended | Six Months
    Ended
|------------------------------------------ | ------------------------ | --------------------
|                                           | December 31,             | December
    31,    
|                                           | 2006                     | 2005                
|                                          
|Reserve balance, beginning
      of period | $7,129                   | $6,437              
|Current period
      expense               | 1,475                    | 939                 
|Payments or credits to
      customers     | (1,314)                  | (862)               
|Acquisition
      accounting               | -                        | -                   
|Translation                                | 161                      | (57)                
|                                           |                          |                     
|                                          
|Reserve balance, end of
      period       | $7,451                   | $6,457              
|                                          
|                                          
|D.
      Contingencies                     |                          |                     

The Company is involved in litigation of
which the ultimate outcome and liability to the Company, if any, is not
presently determinable. Management believes that final disposition of such
litigation will not have a material impact on the Companys results of
operations, financial position or cash flows.

E. Business Segments

Information about the Companys segments
is summarized as follows (in thousands):

6

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|                                       | Three
      Months Ended | Six
      Months Ended
|-------------------------------------- | ------------------------ | ----------------------
|                                       | December 31,             | December 31,          
|                                       | 2006                     | 2005                  
|                                      
|Manufacturing segment
      sales      | $71,131                  | $54,106               
|Distribution segment
      sales       | 20,433                   | 19,460                
|Inter/Intra segment
      elimination  | (17,325)                 | (16,515)              
|                                      
|Net sales                              | $74,239                  | $57,051               
|                                      
|Manufacturing segment
      earnings   | $ 11,253                 | $ 4,601               
|Distribution segment
      earnings    | 1,254                    | 1,595                 
|Inter/Intra segment
      elimination  | (3,222)                  | (2,014)               
|                                      
|Earnings before income
      taxes     |                          |                       
|and minority interest                  | $
      9,285            | $ 4,182               
|                                      
|                                       | December 31,             | June 30,              
|Assets                                 | 2006                     | 2006                  
|                                      
|Manufacturing segment
      assets     | $255,846                 | $239,138              
|Distribution segment
      assets      | 55,692                   | 53,896                
|Corporate assets and
      elimination |                          |                       
|of inter-company assets                | (58,664)                 | (56,862)              
|                                      
|                                       | $252,874                 | $236,172              

F.
Stock Based Compensation

In July 2005, the Company adopted SFAS No.
123R Share Based Payment (FAS 123R). This statement requires the Company to
expense the cost of employee services received in exchange for an award of
equity instruments using the fair-value-based method. All options outstanding
were 100% vested at the adoption of this statement.

During the second quarter of 2007 and
2006, 3,600 and 3,600 stock options were granted, respectively. As a result,
compensation cost of $40,000 and $19,000 has been recognized in the Condensed
Consolidated Statements of Operations for fiscal 2007 and 2006. No options were
granted in the first quarter of 2007 and 2006.

In fiscal 2007 and 2006, the Company
granted 30,434 and 47,510 performance stock unit award grants, respectively, to
various employees of the Company, including executive officers. The performance
stock unit awards granted in fiscal 2007 will vest if the Company achieves a
specified target objective relating to consolidated net operating profit after
tax (NOPAT) in the cumulative three fiscal year period ending June 30, 2009.
The performance stock unit awards granted in fiscal 2007 are subject to
adjustment if the Companys NOPAT for the period falls below or exceeds the
specified target objective, and the maximum number of performance stock units
that can be awarded if the target objective is exceeded is 36,521. The stock
unit awards granted in fiscal 2006 will vest if the Company achieves specified
consolidated gross revenue objectives in the fiscal year ending June 30, 2008.
If such objectives are met, the employees will receive a cash payment equal to
the number of units multiplied by the fair-value of the Companys common stock
as of June 30, 2008 and 2009. There were 74,569 and 0 unvested stock unit awards
outstanding at December 31, 2006 and 2005, respectively. The performance stock
unit awards are remeasured at fair-value at the end of each reporting period.
The fair-value of the stock unit awards are expensed over the performance period
for the shares that are expected to ultimately vest. The compensation expense
for the three and six months ended December 31, 2006, related to the performance
stock unit award grants, approximated $292,000 and $534,000, respectively. There
was no compensation expense recorded for the three and six months ended December
31, 2005.

In fiscal 2007 and 2006, the Company
granted 30,441 and 66,700 performance stock awards, respectively, to various
employees of the Company, including executive officers. The performance stock
awards granted in fiscal 2007 will vest if the Company achieves a specified
target objective relating to consolidated NOPAT in the cumulative three fiscal
year period ending June 30, 2009. The performance stock awards granted in fiscal
2007 are subject to adjustment if the Companys NOPAT for the period falls below
or exceeds the specified target objective, and the maximum number of performance
shares that can be awarded if the target objective is exceeded is 36,532. The

7

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2006 stock awards will vest if the Company
achieves specified consolidated gross revenue objectives in the fiscal years
ending June 30, 2008. There were 148,891 and 127,650 unvested stock awards
outstanding at December 31, 2006 and 2005, respectively. The fair value of the
stock awards (on the date of grant) is expensed over the performance period for
the shares that are expected to ultimately vest. The compensation expense for
the three and six months ended December 31, 2006, related to performance stock
awards, approximated $223,000 and $445,000, respectively. The compensation
expense for the three and six months ended December 31, 2005 related to
performance stock awards, approximated $163,000 and $336,000,
respectively.

In addition to the performance shares
mentioned above, the Company has unvested restricted stock outstanding that will
vest if certain service conditions are fulfilled. During fiscal 2007 and 2006,
the Company granted 3,600 service based restricted shares to non-employee
directors in each year. There were 31,600 and 34,000 unvested shares outstanding
at December 31, 2006 and 2005, respectively. Compensation expense of $45,000 and
$78,000 was recognized during the three and six months ended December 31, 2006,
respectively, related to these service-based awards. Compensation expense of
$23,000 and $68,000 was recognized during the three and six months ended
December 31 2005, respectively, related to these service-based
awards.

G. Pension and Other Postretirement
Benefit Plans

The Company has non-contributory,
qualified defined benefit plans covering substantially all domestic employees
hired prior to October 1, 2003 and certain foreign employees. Additionally, the
Company provides health care and life insurance benefits for certain domestic
retirees. Components of net periodic benefit cost for the defined benefit
pension plans and other postretirement benefit plan are as follows (in
thousands):

|                                            | Three
      Months Ended | Six Months Ended
|------------------------------------------- | ------------------------ | ----------------
|                                            | December 31,             | December
  31   
|                                            | 2006                     | 2005            
|                                           
|Pension Benefits:                           |                          |                 
|Service
      cost                          | $ 307                    | $ 292           
|Interest
      cost                         | 1,760                    | 1,744           
|Expected
      return on plan assets        | (2,226)                  | (1,955)         
|Amortization
      of prior service cost    | (179)                    | (156)           
|Amortization
      of transition obligation | 18                       | 16              
|Amortization
      of net loss              | 674                      | 964             
|Net periodic benefit
      cost             | $ 354                    | $ 905           
|                                           
|                                           
|Postretirement
      Benefits:              |                          |                 
|Service
      cost                          | $ 19                     | $ 18            
|Interest
      cost                         | 334                      | 352             
|Amortization
      of net actuarial loss    | 52                       | 86              
|                                            |                          |                 
|Net periodic benefit
      cost             | $ 405                    | $
      456     

The Company previously disclosed in its
financial statements for the year ended June 30, 2006, that it expected to
contribute $5,077,000 to its pension plan in fiscal 2007 and indicated that a
review of the Pension Protection Act of 2006 may result in the Company electing
to make additional contributions. In the first fiscal quarter, the Company
elected to make $7.7 million of contributions to its domestic defined benefit
plans. This amount included contributions of $5.5 million in excess of the
minimum required. This allowed the plans to be at the Full Funding Limit for the
2005 plan year, and as a result, the plans will be exempt from paying PBGC
variable rate premiums for the 2006 plan year. For the balance of fiscal 2007,
the Company is not required to make any additional contributions to its domestic
defined benefit plans. However, based on overall financial performance, cash
flows and in light of

8

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the recently enacted Pension Protection
Act of 2006, the Company may elect to make further contributions beyond those
required.

H. Acquisitions

Effective May 31, 2006, the Company
acquired 100% of the outstanding stock of four related foreign entities: B.C.S.
S.r.l., an Italian limited liability company; B.C.S. Service S.r.l., an Italian
limited liability company; Boat Equipment Limited, a Maltese limited liability
company; and Vetus Italia S.r.l., an Italian limited liability company
(collectively the BCS Group). This acquisition was accounted for using the
purchase method of accounting. See the Notes to the Annual Financial Statements
for the year ended June 30, 2006 for a complete description of the BCS
acquisition. The purchase price, including acquisition costs, net of cash
acquired was $20,330,000. A preliminary allocation of the purchase price was
completed at June 30, 2006. Additional adjustments to the BCS preliminary
purchase price allocation remain a possibility as further review and analysis is
completed in relation to this acquisition.

Pro forma disclosures have not been
included due to the lack of available quarterly information in prior
periods.

I. Goodwill and Other
Intangibles

The changes in the carrying amount of
goodwill, substantially all of which is allocated to the manufacturing segment,
for the six months ended December 31, 2006 were as follows (in
thousands):

|Balance at June 30,
      2006     |  | $15,304
|---------------------------------- |  | -------
|Translation
      adjustment       |  | 208    
|Acquisition
      accounting       |  | 448    
|                                  
|Balance at December 31,
      2006 |  | $15,960

The gross carrying amount and accumulated
amortization of the Companys intangible assets that have finite useful lives
and are subject to amortization as of December 31, 2006 and June 30, 2006 are as
follows (in thousands):

|                                           | December
    31, | June
    30, 
|------------------------------------------ | ---------------- | -------------
|                                           | 2006             | 2006         
|Intangible
      assets with finite lives: |                  |              
|Licensing
      agreements                 | $ 3,015          | $ 3,015      
|Non-compete
      agreements               | 4,732            | 4,732        
|Other                                      | 4,993            | 4,971        
|                                          
|                                           | 12,740           | 12,718       
|Accumulated
      amortization             | (3,945)          | (3,382)      
|Translation
      adjustment               | 273              | 116          
|                                          
|Total                                      | $
      9,068    | $
      9,452

Intangible amortization expense was
$283,000 and $563,000 for the three and six months ended December 31, 2006,
respectively, and $85,000 and $169,000 for the three and six months ended
December 31, 2005, respectively. Estimated intangible amortization expense for
each of the next five fiscal years is as follows (in thousands):

9

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|Fiscal
      Year |  |        
|----------------- |  | -------
|2007              |  | $ 1,126
|2008              |  | 1,155  
|2009              |  | 1,154  
|2010              |  | 954    
|2011              |  | 954    
|2012              |  | 954    

The gross carrying amount of the Companys
intangible assets that have indefinite lives and are not subject to amortization
as of December 31, 2006 and June 30, 2006 are $2,837,000 and $2,759,000,
respectively. These assets are comprised of acquired tradenames.

J. Long-term Debt

Long-term debt at December 31, 2006 and
June 30, 2006 consisted of the following (in thousands):

|                                     | December
    31, | June
    30,
|------------------------------------ | ---------------- | ------------
|                                     | 2006             | 2006        
|                                    
|Revolving
    loan                   | $25,250          | $ 9,000     
|10-year unsecured senior
      notes | 25,000           | 25,000      
|Other                                | 4,635            | 5,002       
|                                     |                  |             
|Subtotal                             | 54,885           | 39,002      
|Less: current
      maturities       | (232)            | (633)       
|                                     |                  |             
|Total long-term
      debt           | $54,653          | $38,369     

The increase in long-term debt of
$16,284,000 was driven by (1) increased working capital requirements due to
increased demand for the Companys products, (2) payments on capital
expenditures, (3) increased contributions to the Companys domestic defined
benefit pension plans, and (4) the payment of annual incentive and bonus awards
for fiscal 2006 performance in the first half of fiscal 2007.

Item 2. Management Discussion and
Analysis

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
2006 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,
2006 could cause actual results to be materially different from what is
presented here.

10

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|Results of Operations          |  |                    |  |       |  |                  |  |       |  |                 |  |       |  |               |  |      
|------------------------------ |  | ------------------ |  | ----- |  | ---------------- |  | ----- |  | --------------- |  | ----- |  | ------------- |  | -----
|                              
|                              
|(In thousands)                 |  |                    |  |       |  |                  |  |       |  |                 |  |       |  |               |  |      
|                               |  | Three Months Ended |  |       |  | Six Months Ended |  |      
|                               |  | December 31,       |  |       |  | December 31,     |  |      
|                               |  | 2006               |  | %     |  | 2005             |  | %     |  | 2006            |  | %     |  | 2005          |  | %    
|                              
|Net sales                      |  | $ 74,239           |  |       |  | $ 57,051         |  |       |  | $140,013        |  |       |  | $106,628      |  |      
|Cost of goods sold             |  | 49,850             |  |       |  | 41,028           |  |       |  | 95,311          |  |       |  | 76,201        |  |      
|                              
|Gross
      profit             |  | 24,389             |  | 32.9% |  | 16,023           |  | 28.1% |  | 44,702          |  | 31.9% |  | 30,427        |  | 28.5%
|                              
|Marketing, engineering and     |  |                    |  |       |  |                  |  |       |  |                 |  |       |  |               |  |      
|administrative expenses        |  | 14,528             |  | 19.6  |  | 11,489           |  | 20.1  |  | 28,180
    20.1 |  |       |  | 21,637        |  | 20.3 
|                               |  |                    |  |       |  |                  |  |       |  |                 |  |       |  |              
|                              
|Earnings from
      operations |  | $
      9,861      |  | 13.3  |  | $
      4,534    |  | 7.9   |  | $
      16,522  |  | 11.8  |  | $
      8,790 |  | 8.2  

Comparison of the Second Quarter of FY
2007 with the Second Quarter of FY 2006

Net sales for the second quarter improved
30.1%, or $17.2 million, to $74.2 million from $57.1 million in the same period
a year ago. The recent BCS Group acquisition contributed $8.1 million to net
sales in the fiscal 2007 second quarter. Sales from our existing operations,
after backing out the recent acquisition, increased 15.9% . The
quarter-over-quarter improvement came in a number of the Companys product
markets. The Companys North American manufacturing operations saw increased
demand for transmission and industrial products for oil-servicing and commercial
applications. In addition, sales of the Companys military transmissions were
up. Sales of marine transmissions for commercial applications also saw
quarter-over-quarter improvement in sales and order activities. Compared to the
second quarter of fiscal 2006, the Euro and Asian currencies strengthened
against the US dollar. The translation effect of this strengthening on foreign
operations was to increase revenues by approximately $2.2 million versus the
prior year, before eliminations.

Sales at our manufacturing segment were up
31.5% versus the same period last year. Adjusting for the impact of the BCS
group acquisition, sales of existing manufacturing operations were up 20.5%
versus the second quarter of fiscal 2006. Sales at our US domestic manufacturing
locations were up over 17.0% . As noted above, the sales growth in our domestic
operations was primarily driven by increased sales of commercial marine
transmissions, military and oilfield series transmissions, and industrial
products. Sales at our Belgian manufacturing location were up 29.2% over the
same period last year. About a quarter of this increase can be attributed to the
translation effect of a strengthening Euro versus the second quarter of last
fiscal year. The prior years second fiscal quarter was unfavorably effected by
material shortages and equipment downtime at our Belgian operation. The
quarter-over-quarter improvement can be attributed to the absence of these
factors in fiscal 2007s second quarter as well as an improvement in overall
order activity. Our Italian manufacturing operations, excluding the BCS Group,
saw a 17.2% increase in sales compared to fiscal 2006s second quarter.
Approximately half of this increase can be attributed to the translation effect
of a strengthening Euro versus the second quarter of last fiscal
year.

Our distribution segment experienced an
increase of 5.0% in sales compared to the second quarter of fiscal 2006.
Adjusting for the impact of the BCS group acquisition, sales of existing
distribution operations were down 7.4% versus the second quarter of fiscal 2006.
Our distribution operations saw decreases versus relatively strong second
quarter performance in the prior fiscal year. In addition, our domestic
distribution operation was adversely effected by customer requested delays on
delivery of oil field related transmissions.

The elimination for net inter/intra
segment sales increased $0.8 million, accounting for the remainder of the
net

11

---

change in sales versus the same period
last year. Nearly two-thirds of the net change in sales, excluding the impact of
the BCS Group, came at our domestic manufacturing location. These increased
sales were primarily to third party entities. After considering this, the net
increase in inter/intra segment sales was consistent with the overall increase
in sales and order levels experienced by the Company in the second
quarter.

Gross margin as a percentage of sales
increased to 32.9% of sales, compared to 28.1% of sales for the same period last
year. This 480 basis point improvement can be attributed to improved product
mix, selective price increases, improved productivity and absorption, and the
impact of cost reduction programs. These favorable margin items were partially
offset by higher prices for steel, shipping and energy versus the same period of
the prior fiscal year. Higher volume, level fixed costs, increased manufacturing
productivity and absorption at our domestic manufacturing operations, and lower
pension expense helped to partially offset higher raw material and other costs.

Marketing, engineering, and administrative
(ME&A) expenses were 26.5% higher compared to last years second fiscal
quarter. Excluding the ME&A expenses of the acquired BCS group companies,
the quarter-over-quarter increase was 13.6% . As a percentage of sales, ME&A
expenses were down slightly to 19.6% of sales versus 20.1% of sales in the
second quarter of fiscal 2006. The overall increase can be attributed to the
quarter-over-quarter increase in salary and wage costs and general spending as
well as the costs associated with the selection and implementation of a new
global enterprise resource planning (ERP) system.

Interest expense of $0.8 million for the
quarter was up 106.5% versus last years second fiscal 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 2006, the interest rate on the Companys revolving credit facility was in
the range of 5.0% to just under 5.6%, whereas for the second quarter of fiscal
2007 the range was 6.3% to 6.6% . However, the average balance of the Companys
revolving credit facility decreased versus the prior year. As a result, total
interest on the revolver was flat at $0.2 million.

The consolidated income tax rate was
slightly lower than a year ago primarily due to changes in the mix of foreign
versus domestic earnings.

Comparison of the First Six Months of
FY 2007 with the First Six Months of FY 2006

Net sales for the first six months of 2007
improved 31.3%, or $33.4 million, to $140.0 million from $106.6 million in the
same period a year ago. The recent BCS Group acquisition contributed $14.7
million to net sales in the first six months of fiscal 2007. Sales from our
existing operations, after backing out the recent acquisition, increased 17.5% .
Consistent with the second quarter results discussed above, the year-over-year
improvement came in a number of the Companys product markets. The Companys
North American manufacturing operations saw increased demand for transmission
and industrial products for oil-servicing and commercial applications. In
addition, sales of the Companys military transmissions were up. Sales of marine
transmissions for commercial applications also saw year-over-year improvement in
sales and order activities. Compared to the first six months of fiscal 2006, the
Euro and Asian currencies strengthened against the US dollar. The translation
effect of this strengthening on foreign operations was to increase revenues by
approximately $3.1 million versus the prior year, before
eliminations.

Sales at our manufacturing segment were up
nearly 31% versus the same period last year. Adjusting for the impact of the BCS
group acquisition, sales of existing manufacturing operations were up 20.4%
versus the first half of fiscal 2006. Sales at our US domestic manufacturing
location were up 20.0% . As noted above, the sales growth in our domestic
operations was primarily driven by increased sales of commercial marine
transmissions, military and oilfield series transmissions, and industrial
products. Sales at our Belgian manufacturing location were up 25.1% over the
same period last year. Approximately one quarter of this increase can be
attributed to the translation effect of a strengthening Euro versus the first
six months of last fiscal year. The prior years first and second fiscal
quarters were unfavorably effected by material shortages and equipment downtime
at our Belgian operation. The year-over-year improvement can be attributed to
the absence of these factors in fiscal 2007s first six months as well as an
improvement in overall order activity. Our Italian manufacturing operations,
excluding the BCS Group, saw a

12

---

16.0% increase in sales compared to fiscal 2006s first six months. Just under half of this increase can be attributed to the translation effect of a strengthening Euro versus the first six months of last fiscal
year.

Our distribution segment experienced an increase of 11.0% in sales compared to the first six months of fiscal 2006. Adjusting for the impact of the BCS group acquisition, sales of existing distribution operations were down
slightly versus the first six months of fiscal 2006. Our distribution operations saw decreases versus relatively strong first half sales performance in the prior fiscal year. In addition, our domestic distribution operation was adversely effected by
customer requested delays on delivery of oil field related transmissions.

The elimination for net inter/intra segment sales increased $1.2 million, accounting for the remainder of the net change in sales versus the same period last year. Over two-thirds of the net change in sales, excluding
the impact of the BCS Group, came at our domestic manufacturing location. These increased sales were primarily to third party entities. After considering this, the net increase in inter/intra segment sales was consistent with the overall increase in
sales and order levels experienced by the Company in the first six months.

Gross margin as a percentage of sales increased to 31.9% of sales, compared to 28.5% of sales for the same period last year. This 340 basis point improvement can be attributed to improved product mix, selective price
increases, improved productivity and absorption, and the impact of cost reduction programs. These favorable margin items were partially offset by higher prices for steel, shipping and energy versus the same period of the prior fiscal year. Higher
volume, level fixed costs, increased manufacturing productivity and absorption at our domestic manufacturing operations, and lower pension expense helped to partially offset higher raw material and other costs.

Marketing, engineering, and administrative (ME&A) expenses were 30.2% higher compared to last fiscal years first six months. Excluding the ME&A expenses of the acquired BCS group companies, the year-over-year
increase was 17.5% . As a percentage of sales, ME&A expenses were down slightly to 20.1% of sales versus 20.3% of sales in the fiscal 2006s first six months. The overall increase can be attributed to the year-over-year increase in salary
and wage costs and general spending as well as the costs associated with the selection and implementation of a new global enterprise resource planning (ERP) system.

Interest expense of $1.5 million for the first six months of fiscal 2007 was up 105.2% versus last fiscal years first six months. In the first six months, 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 six months of fiscal 2006, the interest rate on the Companys revolving credit facility was in the range of 4.4% to just under 5.6%, whereas for
the first six months of fiscal 2007 the range was 6.1% to 6.6% . However, the average balance of the Companys revolving credit facility decreased versus the prior year. As a result, total interest on the revolver was down by $0.1 million
to $0.5 million.

The consolidated income tax rate remained relatively flat to the prior fiscal year at 38.7% .

Financial Condition, Liquidity and Capital Resources

Comparison between December 31, 2006 and June 30, 2006

As of December 31, 2006, the Company had net working capital of $86.9 million, which represents an increase of $15.3 million from the net working capital of $71.5 million as of June 30, 2006.

Cash and cash equivalents decreased 10.3% to $14.7 million as of December 31, 2006. The majority of the cash and cash equivalents as of December 31, 2006 are at our overseas operations in Europe and
Asia-Pacific.

Trade receivables of $52.0 million were down $3.9 million to last fiscal year-end. The net decrease is consistent with the seasonal sales volume decline experienced in the final month of the quarter compared to the
final month of the prior fiscal year.

Net inventory increased by $17.7 million, or 27.1%, versus June 30, 2006 to $82.7 million. More than half of the

13

---

increase came at the Companys domestic
manufacturing location, where a significant increase in the order rate continues
to be experienced. On a consolidated basis, as of December 31, 2006, the
Companys backlog of orders to be shipped over the next six months, including
the recently acquired BCS group companies, approximates $112.4 million, up 22.7%
since the year began and up 34.1% compared with the same period a year
ago.

Net property, plant and equipment
(PP&E) increased $5.4 million versus June 30, 2006. This includes the
addition of $8.0 million in capital expenditures, primarily at the Companys
Racine-based manufacturing operation, which was offset by depreciation of $2.8
million. In total, the Company expects to invest approximately $15 million in
capital assets in fiscal 2007. The quoted lead times on certain manufacturing
equipment purchases may push some of the capital expenditures into the next
fiscal year. This compares to $8.4 million in capital expenditures in fiscal
2006 and $12.0 million in fiscal 2005. 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 selection and implementation of a
global ERP system.

Accounts payable as of December 31, 2006
of $29.7 million were up $1.8 million, or 6.6%, from June 30, 2006. The increase
is primarily the result of the overall increase in volume and continued strength
in order activity in the second quarter. The balance as of June 30, 2006
included a high level of capital related items in the year-end balance being
paid out in the first fiscal quarter of 2007.

Total borrowings, notes payable and
long-term debt, as of December 31, 2006 increased by $12.7 million, or nearly
30%, to $54.9 million versus June 30, 2006. This increase was driven by (1)
increased working capital requirements due to increased demand for the Companys
products, (2) payments on capital expenditures, (3) increased contributions to
the Companys domestic defined benefit pension plans, and (4) the payment of
annual incentive and bonus awards for fiscal 2006 performance in the first half
of fiscal 2007. In the first half of fiscal 2007, the Company elected to make
$7.7 million of contributions to its domestic defined benefit plans. This amount
included contributions of $5.5 million in excess of the minimum required. This
allowed the plans to be at the Full Funding Limit for the 2005 plan year, and as
a result, the plans will be exempt from paying PBGC variable rate premiums for
the 2006 plan year. For the balance of fiscal 2007, the Company is not required
to make any additional contributions to its domestic defined benefit plans.
However, based on overall financial performance, cash flows and in light of the
recently enacted Pension Protection Act of 2006, the Company may elect to make
further contributions beyond those required.

Total shareholders equity increased by
$11.5 million to a total of $100.8 million. Retained earnings increased by $8.2
million. The net increase in retained earnings included $9.3 million in net
earnings reported year-to-date, offset by $1.1 million in dividend payments. Net
favorable foreign currency translation of $2.5 million was reported as the U.S.
Dollar weakened against the Euro and Asian currencies during the first six
months of fiscal 2007.

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 31, 2006, the Company
had outstanding available borrowings under its $35 million revolving line of
credit of nearly $10.0 million. Furthermore, the Company has nearly $15 million
in cash and cash equivalents at its subsidiaries around the world. 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 31, 2006, 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):

14

---

|                        |         | Less
      than | 1-3     | 3-5     | After 5
|----------------------- | ------- | --------------- | ------- | ------- | -------
|Contractual Obligations | Total   | 1
      year    | Years   | Years   | Years  
|                        |         |                 |         |         |        
|Revolving
      loan    | $25,250 |                 | $25,250 |         |        
|                        |         |                 |         |         |        
|Long-term
      debt    | $29,635 | $ 232           | $ 2,635 | $ 8,483 | $18,285
|                        |         |                 |         |         |        
|Operating
      leases  | $ 9,558 | $ 2,734         | $ 3,883 | $ 2,187 | $ 754  
|                        |         |                 |         |         |        
|Total
      obligations | $64,443 | $ 2,966         | $31,768 | $10,670 | $19,039

In October 2006, the revolving loan
agreement scheduled to expire in October 2007 was amended to extend the term to
October 31, 2009. All other terms and covenants remain the same.

New Accounting
Releases

In June 2006, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation (FIN) No. 48 Accounting
for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109.
This interpretation clarifies the accounting for uncertainty in income taxes
recognized in an entitys financial statements in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
It prescribes a recognition threshold and measurement attribute for financial
statement disclosure of tax positions taken or expected to be taken on a tax
return. FIN No. 48 is effective for fiscal years beginning after December 15,
2006. The Company is currently evaluating the impact of adoption of FIN No. 48
on its financial statements.

In September 2006, the FASB issued SFAS
No. 157 Fair Value Measurements. This statement defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
The provisions of this statement are effective for financial statements issued
for fiscal years beginning after November 15, 2007 and are not expected to have
a material impact on the financial statements of the Company.

During September 2006, the FASB issued
SFAS No. 158 Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R). This statement requires an employer that sponsors one or more
single-employer defined benefit plans to:

|1. | Recognize the funded status of a
      benefit plan  measured as the difference between plan assets at fair
      value and the benefit obligation  in its statement of financial
      position.                                                                                                                                                                                                               
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | Recognize as a component of other
      comprehensive income, net of tax, the gains or losses and prior service
      costs or credits that arise during the period but are not recognized as
      components of net periodic benefit cost pursuant to FASB Statement No. 87
      , Employers Accounting for Pensions, or No. 106, Employers Accounting
      for Postretirement Benefits Other Than Pensions.
|3. | Measure defined benefit plan
      assets and obligations as of the date of the employers fiscal year-end
      statement of financial position.                                                                                                                                                                                                                                                                 
|4. | Disclose in the notes to the
      financial statements additional information about certain effects on net
      periodic benefit cost for the next fiscal year that arise from delayed
      recognition of the gains or losses, prior service costs or credits, and
      transition asset or obligation.                                                                                                      

This statement is effective for fiscal
years ending after December 15, 2006. Based upon amounts disclosed in the
Companys 2006 Annual Report on Form 10-K, the impact of adopting this statement
would result in the recognition of an additional liability of $6,544,000
(primarily related to postretirement healthcare), a deferred tax

15

---

impact of $2,552,000 and an offsetting charge to other comprehensive income of $3,992,000. The impact of this statement could differ from these amounts, depending primarily upon current fiscal year asset
performance.

Critical Accounting Policies

The preparation of this Quarterly Report requires managements judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at
the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

Twin Discs critical accounting policies are described in Item 7 of the Companys Annual Report filed on Form 10-K for June 30, 2006. There have been no significant changes to those accounting policies subsequent
to June 30, 2006.

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

The Company is exposed to market risks from changes in interest rates, commodities and foreign exchange. To reduce such risks, the Company selectively uses financial instruments and other pro-active management techniques.
All hedging transactions are authorized and executed pursuant to clearly defined policies and procedures, which prohibit the use of financial instruments for trading or speculative purposes.

Interest rate risk - The Companys earnings exposure related to adverse movements of interest rates is primarily derived from outstanding floating rate debt instruments that are indexed to the prime and LIBOR interest
rates. In accordance with the $35,000,000 revolving loan agreement expiring October 31, 2009, the Company has the option of borrowing at the prime interest rate or LIBOR plus an additional Add-On, between 1% and 2.75%, depending on
the Companys Total Funded Debt to EBITDA ratio. Due to the relative stability of interest rates, the Company did not utilize any financial instruments at December 31, 2006 to manage interest rate risk exposure. A 10 percent increase or
decrease in the applicable interest rate would result in a change in pretax interest expense of approximately $167,000.

Commodity price risk - The Company is exposed to fluctuation in market prices for such commodities as steel and aluminum. The Company does not utilize commodity price hedges to manage commodity price risk
exposure.

Currency risk - The Company has exposure to foreign currency exchange fluctuations. Approximately 47% and 40% of the Companys revenues in the six months ended December 31, 2006 and the year ended June 30, 2006,
respectively, were denominated in currencies other than the U.S. dollar. Of those non-U.S. dollar denominated amounts, approximately 70% were denominated in euros with the balance composed of Japanese yen, the Swiss Franc and the Australian and
Singapore dollars. The Company does not hedge the translation exposure represented by the net assets of its foreign subsidiaries. Foreign currency translation adjustments are recorded as a component of shareholders equity. Forward foreign
exchange contracts are used to hedge the currency fluctuations on significant transactions denominated in foreign currencies.

Derivative Financial Instruments - The Company has written policies and procedures that place all financial instruments under the direction of the company corporate treasury and restrict derivative transactions to those
intended for hedging purposes. The use of financial instruments for trading purposes is prohibited. The Company uses financial instruments to manage the market risk from changes in foreign exchange rates.

The Company primarily enters into forward exchange contracts to reduce the earnings and cash flow impact of nonfunctional currency denominated receivables and payables. These contracts are highly effective in hedging the
cash flows attributable to changes in currency exchange rates. Gains and losses resulting from these contracts offset the foreign exchange gains or losses on the underlying assets and liabilities being hedged. The maturities of the forward exchange
contracts generally coincide with the settlement dates of the related transactions. Gains and losses on these contracts are recorded in Other income (expense), net in the Condensed Consolidated Statement of Operations as the changes in the fair
value of the contracts are recognized and generally offset the gains and losses on the hedged items in the same period. The primary currency to which the Company was exposed in fiscal 2007 and 2006 was the Euro. At December 31, 2006, the Company had
net outstanding forward exchange contracts to purchase Euros in the value of $800,000 with a weighted average maturity of 19 days. The fair value of the Companys contracts was a gain of approximately $43,000 at December 31, 2006. At
June 30, 2006, the Company had net

16

---

outstanding forward exchange contracts to purchase Euros in the value of $2,250,000 with a weighted average maturity of 47 days. The fair value of the Companys contracts was a gain of approximately $31,000 at
June 30, 2006.

Item 4. Controls and Procedures.

(a)Evaluation of Disclosure Controls and Procedures.

The Companys management, with the participation of the Companys Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Companys disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, the Companys Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Companys disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information
required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, and that such information is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely discussions regarding required disclosure.

(b)Changes in Internal Control Over Financial Reporting.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). During the period covered by this report,
no changes were made which have materially affected, or which are reasonably likely to materially affect, our internal control over financial reporting.  On May 31, 2006, the Company acquired the BCS Group for approximately $20.3 million,
including acquisitions costs, net of cash acquired. As part of its ongoing integration activities, the Company is continuing to incorporate its controls and procedures into this recently acquired business.

|Part II. |  | OTHER INFORMATION 
|-------- |  | ------------------
|Item 1.  |  | Legal Proceedings.

Twin Disc is a defendant in several product liability or related claims considered either adequately covered by appropriate liability insurance or involving amounts not deemed material to the business or financial condition
of the Company.

Item 1A. Risk Factors.

There have been no material changes to the risk factors previously disclosed in response to Item 1A to Part I of our 2006 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

There were no securities of the Company sold by the Company during the three months ended December 31, 2006, which were not registered under the Securities Act of 1933, in reliance upon an exemption from registration
provided by Section 4 (2) of the Act.

During the period covered by this report, the Company offered participants in the Twin Disc, Incorporated B The Accelerator 401(k) Savings Plan (the Plan) the option to invest their Plan accounts in a fund
comprised of Company stock. Participation interests of Plan participants in the Plan, which may be considered securities, were not registered with the SEC. Participant accounts in the Plan consist of a combination of employee deferrals, Company
matching contributions, and, in some cases, additional Company profit-sharing contributions. No underwriters were involved in these transactions. On September 6, 2002, the Company filed a Form S-8 to register 200,000 shares of Company common stock
offered through the Plan, as well as an indeterminate amount of Plan participation interests.

17

---



Issuer Purchases of
Equity Securities

|                      |           |                      |                             | (d) Maximum        
|--------------------- | --------- | -------------------- | --------------------------- | -------------------
|Period                | (a) Total |                      | (c) Total Number
      of   | Number of Shares   
|                      | Number of | (b) Average          | Shares Purchased as Part    | that May Yet Be    
|                      | Shares    | Price Paid
      per | of Publicly
      Announced | Purchased Under the
|                      | Purchased | Share                | Plans or Programs           | Plans or Programs  
|                      |           |                      |                             |                    
|October 1 - 31, 2006  | 0         | NA                   | 0                           | 195,392            
|                      |           |                      |                             |                    
|November 1 - 30, 2006 | 0         | NA                   | 0                           | 195,392            
|                      |           |                      |                             |                    
|December 1 - 31, 2006 | 0         | NA                   | 0                           | 195,392            
|                      |           |                      |                             |                    
|Total                 | 0         |                      | 0                           |                    
|                      |           |                      |                             |                    

In April 1995, the Company authorized
200,000 shares to be purchased in a Stock Repurchase Program. In January 2002,
the program was extended to authorize an additional 200,000 shares (split
adjusted) to be purchased. There is no expiration date for this
program.

Item 3. Defaults Upon Senior
Securities.

None.

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

At the Annual Meeting of Shareholders held
October 20, 2006, the number of votes cast for, against, abstentions or broker
non-votes with respect to each matter were as follows:

Proposal No. 1 Election of Directors to serve until the Annual Meeting in
2009:

|David D.
      Rayburn |  | For: |  | 5,066,949 |  | Authority
      withheld: |  | 233,377
|---------------------- |  | ---- |  | --------- |  | ------------------------- |  | -------
|Malcolm F.
      Moore |  | For: |  | 5,072,499 |  | Authority
      withheld: |  | 227,827

Proposal No. 2 Approval of amended Twin Disc, Inc. 2004 Stock Incentive
Plan:

For:
3,322,428                   
Against:
267,590                   
Abstain:
21,926                   
Broker Non-votes:
2,168,382

Item
5.      
Other
Information.

None.

|Item
      6. |  | Exhibits.                                                                                                        |  |  |  |  |  |  |  | 
|------------- |  | ---------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|31a           |  | Certfication of Chief
      Executive Officer pursuant to Section  302 of the Sarbanes-Oxley Act of
      2002. 
|31b           |  | Certification of Chief
      Financial Officer pursuant to Section  302 of the Sarbanes-Oxley Act of
      2002.
|32a           |  | Certification of Chief Executive Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.       
|32b           |  | Certification of Chief
      Financial Officer pursuant to Section  906 of the Sarbanes-Oxley Act of
      2002.

18

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SIGNATURE

Pursuant to the requirements 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.

TWIN DISC,
      INCORPORATED(Registrant)Date: February 9,
      2007
    
    /S/JEFFREY S.
      KNUTSONJeffrey S.
      KnutsonCorporate
      ControllerChief Accounting
      Officer


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