UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549


Form
10-Q





QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934





For the
quarter ended December 26, 2008





Commission
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





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√                                           Non-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√


At
January 30, 2009, the registrant had 11,029,344 shares of its common stock
outstanding.


-1-


Part
I.                                FINANCIAL
INFORMATION





Item
1.                     Financial
Statements





TWIN
DISC, INCORPORATED


CONDENSED
CONSOLIDATED BALANCE SHEETS


(In
Thousands, Unaudited)





December
      26,
            
            
            June
      30,2008
            
            
            2008AssetsCurrent
      assets:Cash
            
            $
            11,151
            
            
            $
            14,447Trade
      accounts receivable, net
            
            
            58,117
            
            
            
            67,611Inventories,
      net
            
            
            98,017
            
            
            
            97,691Deferred
      income taxes
            
            
            6,450
            
            
            
            6,297Other
            
            
            9,581
            
            
            
            9,649Total
      current assets
            
            
            183,316
            
            
            
            195,695Property,
      plant and equipment, net
            
            
            64,217
            
            
            
            67,855Goodwill,
      net
            
            
            16,622
            
            
            
            18,479Deferred
      income taxes
            
            
            4,875
            
            
            
            5,733Intangible
      assets, net
            
            
            7,597
            
            
            
            9,589Other
      assets
            
            
            6,013
            
            
            
            7,277$
            282,640
            
            
            $
            304,628Liabilities
      and Shareholders' EquityCurrent
      liabilities:Short-term
      borrowings and current maturities of long-term debt
            
            $
            672
            
            
            $
            1,730Accounts
      payable
            
            
            35,902
            
            
            
            37,919Accrued
      liabilities
            
            
            44,781
            
            
            
            49,939Total
      current liabilities
            
            
            81,355
            
            
            
            89,588Long-term
      debt
            
            
            51,252
            
            
            
            48,227Accrued
      retirement benefits
            
            
            33,194
            
            
            
            34,325Other
      long-term
            
            
            973
            
            
            
            2,163166,774
            
            
            
            174,303Minority
      interest
            
            
            715
            
            
            
            679Shareholders'
      equity:Common
      shares authorized: 30,000,000;issued:
      13,099,468; no par value
            
            
            13,862
            
            
            
            14,693Retained
      earnings
            
            
            146,681
            
            
            
            142,361Accumulated
      other comprehensive (loss) income
            
            
            (15,136
            )
            
            
            2,446145,407
            
            
            
            159,500Less
      treasury stock, at cost(2,070,124
      and 1,929,354 shares, respectively)
            
            
            30,256
            
            
            
            29,854Total
      shareholders' equity
            
            
            115,151
            
            
            
            129,646$
            282,640
            
            
            $
            304,628





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


-2-


TWIN
DISC, INCORPORATED


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(In
Thousands Except Per Share Data, Unaudited)





Three
      Months Ended
            
            
            Six
      Months EndedDec.
      26,
            
            
            Dec.
      28,
            
            
            Dec.
      26,
            
            
            Dec.
      28,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      sales
            
            $
            81,598
            
            
            $
            81,894
            
            
            $
            154,270
            
            
            $
            155,507Cost
      of goods sold
            
            
            58,645
            
            
            
            56,548
            
            
            
            111,245
            
            
            
            106,311Gross
      profit
            
            
            22,953
            
            
            
            25,346
            
            
            
            43,025
            
            
            
            49,196Marketing,
      engineering and administrative expenses
            
            
            17,008
            
            
            
            17,378
            
            
            
            33,326
            
            
            
            32,072Earnings
      from operations
            
            
            5,945
            
            
            
            7,968
            
            
            
            9,699
            
            
            
            17,124Interest
      expense
            
            
            714
            
            
            
            825
            
            
            
            1,311
            
            
            
            1,568Other
      (income) expense, net
            
            
            (192
            )
            
            
            179
            
            
            
            (1,012
            )
            
            
            174522
            
            
            
            1,004
            
            
            
            299
            
            
            
            1,742Earnings
      before income taxes and minority interest
            
            
            5,423
            
            
            
            6,964
            
            
            
            9,400
            
            
            
            15,382Income
      taxes
            
            
            1,924
            
            
            
            2,729
            
            
            
            3,277
            
            
            
            5,967Earnings
      before minority interest
            
            
            3,499
            
            
            
            4,235
            
            
            
            6,123
            
            
            
            9,415Minority
      interest
            
            
            (66
            )
            
            
            (26
            )
            
            
            (225
            )
            
            
            (101
            )Net
      earnings
            
            $
            3,433
            
            
            $
            4,209
            
            
            $
            5,898
            
            
            $
            9,314Dividends
      per share
            
            $
            0.0700
            
            
            $
            0.0700
            
            
            $
            0.1400
            
            
            $
            0.1250Earnings
      per share data:Basic
      earnings per share
            
            $
            0.31
            
            
            $
            0.37
            
            
            $
            0.53
            
            
            $
            0.82Diluted
      earnings per share
            
            $
            0.31
            
            
            $
            0.37
            
            
            $
            0.52
            
            
            $
            0.81Weighted
      average shares outstanding data:Basic
      shares outstanding
            
            
            11,126
            
            
            
            11,261
            
            
            
            11,188
            
            
            
            11,378Dilutive
      stock awards
            
            
            47
            
            
            
            138
            
            
            
            87
            
            
            
            137Diluted
      shares outstanding
            
            
            11,173
            
            
            
            11,399
            
            
            
            11,275
            
            
            
            11,515Comprehensive
      (loss) income:Net
      earnings
            
            $
            3,433
            
            
            $
            4,209
            
            
            $
            5,898
            
            
            $
            9,314Adjustment
      for amortization of net actuarial lossand
      prior service cost
            
            
            472
            
            
            
            463
            
            
            
            942
            
            
            
            463Foreign
      currency translation adjustment
            
            
            (11,076
            )
            
            
            4,377
            
            
            
            (18,524
            )
            
            
            7,085Comprehensive
      (loss) income
            
            $
            (7,171
            )
            
            $
            9,049
            
            
            $
            (11,684
            )
            
            $
            16,862





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


-3-


TWIN
DISC, INCORPORATED


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(In
Thousands, Unaudited)





Six
      Months EndedDecember
      26,
            
            
            December
      28,2008
            
            
            2007Cash
      flows from operating activities:Net
      earnings
            
            $
            5,898
            
            
            $
            9,314Adjustments
      to reconcile net earnings tonet
      cash provided by operating activities:Depreciation
      and amortization
            
            
            4,754
            
            
            
            3,560Other
      non-cash changes, net
            
            
            520
            
            
            
            1,982Net
      change in working capital, excluding cash
            
            
            (8,441
            )
            
            
            (3,507
            )Net
      cash provided by operating activities
            
            
            2,731
            
            
            
            11,349Cash
      flows from investing activities:Acquisitions
      of fixed assets
            
            
            (4,651
            )
            
            
            (6,820
            )Proceeds
      from sale of fixed assets
            
            
            15
            
            
            
            200Other,
      net
            
            
            1,111
            
            
            
            (337
            )Net
      cash used by investing activities
            
            
            (3,525
            )
            
            
            (6,957
            )Cash
      flows from financing activities:(Decrease)
      increase in notes payable, net
            
            
            (951
            )
            
            
            29Proceeds
      from long-term debt
            
            
            3,584
            
            
            
            11,393Proceeds
      from exercise of stock options
            
            
            110
            
            
            
            100Purchase
      of treasury stock
            
            
            (1,813
            )
            
            
            (13,367
            )Dividends
      paid
            
            
            (1,578
            )
            
            
            (1,437
            )Other
            
            
            -
            
            
            
            19Net
      cash used by financing activities
            
            
            (648
            )
            
            
            (3,263
            )Effect
      of exchange rate changes on cash
            
            
            (1,854
            )
            
            
            1,480Net
      change in cash
            
            
            (3,296
            )
            
            
            2,609Cash
      balance:Beginning
      of period
            
            
            14,447
            
            
            
            19,508End
      of period
            
            $
            11,151
            
            
            $
            22,117





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


-4-


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





A.     Basis
of Presentation





The
unaudited condensed consolidated 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 presentation 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 the consolidated 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 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
impacted the Company’s Condensed Consolidated Statements of Cash Flow, resulting
in a transfer of $337,000 from operating activities to investing
activities.





New Accounting
Releases





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


a)
            How
      investment allocation decisions are
made;


b)
            The
      major categories of plan assets;


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


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


e)
            Significant
      concentrations of risk within plan
assets.





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





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





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – An Amendment of FASB Statement No.
133.”  This statement enhances the disclosures regarding derivatives
and hedging activities by requiring:


·
            Disclosure
      of the objectives for using derivative instruments in terms of underlying
      risk and accounting designation;


·
            Disclosure
      of the fair values of derivative instruments and their gains and losses in
      a tabular format;


·
            Disclosure
      of information about credit-risk-related contingent features;
      and


·
            Cross-reference
      from the derivative footnote to other footnotes in which
      derivative-related information is
disclosed.


SFAS No.
161 is effective for fiscal years and interim periods beginning after November
15, 2008.  Adoption of SFAS No. 161 is not expected to have a material
impact on the Company’s financial statements.


-5-


In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations.”  This statement will significantly change the
accounting for business combinations, requiring the acquiring entity to
recognize the acquired assets and liabilities at the acquisition date fair value
with limited exceptions.  The statement also includes a substantial
number of new disclosure requirements.  SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual report period beginning on or after
December 15, 2008.  Earlier adoption is
prohibited.  Accordingly, the Company will be subject to SFAS No.
141(R) beginning on July 1, 2009.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No. 51.”  SFAS
No. 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary, and includes expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interest.  SFAS No. 160
is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Earlier adoption is
prohibited.  Adoption of SFAS No. 160 is not expected to have a
material impact on the financial statements of the Company.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an Amendment of FASB
Statement No. 115.”  This standard permits an entity to choose to
measure many financial instruments and certain other items at fair
value.  This statement is effective as of the beginning of an entity’s
first fiscal year that begins after November 15, 2007.  The Company
adopted SFAS No. 159 in the first quarter of fiscal 2009 with no material impact
to the financial statements.  The Company has currently chosen not to
elect the fair value option for any items that are not already required to be
measured at fair value in accordance with accounting principles generally
accepted in the United States.





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.  On February
12, 2008, the FASB issued FSP 157-2 which delays the effective date of SFAS No.
157 for one year, for all nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually).  SFAS No. 157 and FSP
157-2 are effective for financial statements issued for fiscal years beginning
after November 15, 2007.  The Company adopted SFAS No. 157 in the
first quarter of fiscal 2009 for those assets and liabilities not subject to the
one year deferral granted in FSP 157-2, with no material impact to the financial
statements.  The Company is currently evaluating the impact of
adopting SFAS No. 157 for the assets and liabilities subject to the one year
deferral granted under FSP 157-2, for which SFAS No. 157 will become effective
for fiscal years beginning after November 15, 2008.





In
September 2006 and March 2007, respectively, the FASB ratified Emerging Issues
Task Force (“EITF”) Issue No. 06-4, “Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements” and Issue No. 06-10, “Accounting for Collateral Assignment
Split-Dollar Life Insurance Arrangements.”  These EITF’s address the
possible recognition of a liability and related compensation costs for
split-dollar life insurance policies that provide a benefit to an employee that
extends to postretirement periods.  EITF 06-4 and 06-10 are effective
for fiscal years beginning after December 15, 2007, including interim periods
within those years.  The Company adopted these EITF’s in the first
quarter of fiscal 2009 with no material impact to the financial
statements.





During
June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No.
109.”  FIN 48 addresses the determination of whether tax benefits
claimed or expected to be claimed on a tax return should be recorded in the
financial statements by standardizing the level of confidence needed to
recognize uncertain tax benefits and the process for measuring the amount of
benefit to recognize.  FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition.  The Company adopted the provisions of FIN
48 as of July 1, 2007, with no material impact to the Company’s financial
statements.


-6-





B.     Inventory





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





December
      26,
            
            
            June
      30,2008
            
            
            2008Inventories:Finished
      parts
            
            $
            56,047
            
            
            $
            53,697Work
      in process
            
            
            16,781
            
            
            
            20,725Raw
      materials
            
            
            25,189
            
            
            
            23,269$
            98,017
            
            
            $
            97,691





The year
end fiscal 2008 figures were revised to reflect subcomponents in raw materials
rather than finished parts.  Finished parts now more properly reflects
goods in a saleable state.





C.     Warranty





The
Company 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 26,
2008 and December 28, 2007 (in thousands).





Three
      Months Ended
            
            
            Six
      Months EndedDec.
      26,
            
            
            Dec.
      28,
            
            
            Dec.
      26,
            
            
            Dec.
      28,2008
            
            
            2007
            
            
            2008
            
            
            2007Reserve
      balance, beginning of period
            
            $
            7,838
            
            
            $
            7,527
            
            
            $
            8,125
            
            
            $
            7,266Current
      period expense
            
            
            1,314
            
            
            
            1,248
            
            
            
            2,107
            
            
            
            2,142Payments
      or credits to customers
            
            
            (764
            )
            
            
            (1,108
            )
            
            
            (1,556
            )
            
            
            (1,938
            )Translation
            
            
            (157
            )
            
            
            135
            
            
            
            (445
            )
            
            
            332Reserve
      balance, end of period
            
            $
            8,231
            
            
            $
            7,802
            
            
            $
            8,231
            
            
            $
            7,802





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):





Three
      Months Ended
            
            
            Six
      Months EndedDec.
      26,
            
            
            Dec.
      28,
            
            
            Dec.
      26,
            
            
            Dec.
      28,2008
            
            
            2007
            
            
            2008
            
            
            2007Manufacturing
      segment sales
            
            $
            74,946
            
            
            $
            71,645
            
            
            $
            135,377
            
            
            $
            136,192Distribution
      segment sales
            
            
            27,151
            
            
            
            29,862
            
            
            
            57,970
            
            
            
            55,626Inter/Intra
      segment elimination
            
            
            (20,499
            )
            
            
            (19,613
            )
            
            
            (39,077
            )
            
            
            (36,311
            )Net
      sales
            
            $
            81,598
            
            
            $
            81,894
            
            
            $
            154,270
            
            
            $
            155,507Manufacturing
      segment earnings
            
            $
            5,323
            
            
            $
            8,026
            
            
            $
            8,443
            
            
            $
            16,816Distribution
      segment earnings
            
            
            2,315
            
            
            
            2,723
            
            
            
            5,495
            
            
            
            5,240Inter/Intra
      segment elimination
            
            
            (2,215
            )
            
            
            (3,785
            )
            
            
            (4,538
            )
            
            
            (6,674
            )Earnings
      before income taxesand
      minority interest
            
            $
            5,423
            
            
            $
            6,964
            
            
            $
            9,400
            
            
            $
            15,382Dec.
      26,
            
            
            June
      30,Assets
            
            2008
            
            
            2008Manufacturing
      segment assets
            
            $
            353,100
            
            
            $
            369,842Distribution
      segment assets
            
            
            62,192
            
            
            
            67,223Corporate
      assets and eliminationof
      inter-company assets
            
            
            (132,652
            )
            
            
            (132,437
            )$
            282,640
            
            
            $
            304,628





F.      Stock-Based
Compensation





In fiscal
2009 and 2008, the Company granted a target number of 88,500 and 52,758
performance stock unit awards, respectively, to various employees of the
Company, including executive officers. The performance stock unit awards granted
in fiscal 2009 will vest if the Company achieves a specified target objective
relating to consolidated economic profit (as defined in the Performance Stock
Unit Award Grant Agreement) in the cumulative three fiscal year period ending
June 30, 2011.  The performance stock unit awards granted in fiscal
2009 are subject to adjustment if the Company’s economic profit 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 106,200.  Based upon actual results to date, the Company is
accruing the performance stock unit awards granted in fiscal 2009 at the
targeted payout level.  The performance stock unit awards granted in
fiscal 2008 will vest if the Company achieves a specified target objective
relating to consolidated economic profit (as defined in the Performance Stock
Unit Award Grant Agreement) in the cumulative three fiscal year period ending
June 30, 2010.  The performance stock unit awards granted in fiscal
2008 are subject to adjustment if the Company’s economic profit 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 63,310.  Based upon actual results to date, the Company is accruing
the performance stock unit awards granted in fiscal 2008 at the targeted payout
level.  There were 214,300 and 202,178 unvested stock unit awards
outstanding at December 26, 2008 and December 28, 2007,
respectively.  The performance stock unit awards are remeasured at
fair-value (based upon the Company’s stock price) 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 income for the three and six months ended December 26, 2008,
related to the performance stock unit awards, approximated $(521,000) and
$(671,000), respectively.  The compensation expense for the three and
six months ended December 28, 2007, related to the performance stock unit
awards, approximated $1,262,000 and $1,250,000, respectively.





In fiscal
2009 and 2008, the Company granted a target number of 66,500 and 37,310
performance stock awards, respectively, to various employees of the Company,
including executive officers.  The performance stock awards granted in
fiscal 2009 will vest if the Company achieves a specified target objective
relating to consolidated economic profit (as defined in the Performance Stock
Award Grant Agreement) in the cumulative three fiscal year period ending June
30, 2011. The performance stock awards granted in fiscal 2009 are subject to
adjustment if the Company’s economic profit 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 79,800. Based
upon actual results to date, the Company is accruing the performance stock
awards granted in 2009 at the targeted payout level.  The performance
stock awards granted in fiscal 2008 will vest if the Company achieves a
specified target objective relating to consolidated economic profit (as defined
in the Performance Stock Award Grant Agreement) in the cumulative three fiscal
year period ending June 30, 2010. The performance stock awards granted in fiscal
2008 are subject to adjustment if the Company’s economic profit 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
44,772. Based upon actual results to date, the Company is accruing the
performance stock awards granted in fiscal 2008 at the targeted payout
level.  There were 176,868 and 218,558 unvested stock awards
outstanding at December 26, 2008 and December 28, 2007,
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 26, 2008, related to performance stock awards,
approximated $320,000 and $600,000, respectively.  The compensation
expense for the three and six months ended December 28, 2007, related to
performance stock awards, approximated $240,000 and $445,000,
respectively.


-7-





In
addition to the performance shares mentioned above, the Company has unvested
restricted stock outstanding that will vest if certain service conditions are
fulfilled.  The fair value of the restricted stock grants is recorded
as compensation over the vesting period, which is generally 1 to 4
years.  During fiscal 2009 and 2008, the Company granted 17,700 and
7,200 service based restricted shares, respectively, to employees and
non-employee directors in each year. There were 23,700 and 20,000 unvested
shares outstanding at December 26, 2008 and December 28, 2007,
respectively.  The compensation expense for the three and six months
ended December 26, 2008, related to performance stock awards, approximated
$66,000 and $121,000, respectively.  The compensation expense for the
three and six months ended December 28, 2007, related to performance stock
awards, approximated $33,000 and $68,000, respectively.





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 EndedDec.
      26,
            
            
            Dec.
      28,
            
            
            Dec.
      26,
            
            
            Dec.
      28,2008
            
            
            2007
            
            
            2008
            
            
            2007Pension
      Benefits:Service
      cost
            
            $
            298
            
            
            $
            303
            
            
            $
            587
            
            
            $
            591Interest
      cost
            
            
            1,771
            
            
            
            1,736
            
            
            
            3,527
            
            
            
            3,452Expected
      return on plan assets
            
            
            (2,238
            )
            
            
            (2,407
            )
            
            
            (4,461
            )
            
            
            (4,795
            )Amortization
      of prior service cost
            
            
            (179
            )
            
            
            (179
            )
            
            
            (359
            )
            
            
            (359
            )Amortization
      of transition obligation
            
            
            18
            
            
            
            19
            
            
            
            31
            
            
            
            31Amortization
      of net loss
            
            
            800
            
            
            
            427
            
            
            
            1,601
            
            
            
            854Net
      periodic benefit cost (income)
            
            $
            470
            
            
            $
            (101
            )
            
            $
            926
            
            
            $
            (226
            )Postretirement
      Benefits:Service
      cost
            
            $
            9
            
            
            $
            10
            
            
            $
            19
            
            
            $
            19Interest
      cost
            
            
            324
            
            
            
            342
            
            
            
            648
            
            
            
            684Amortization
      of net loss
            
            
            138
            
            
            
            133
            
            
            
            275
            
            
            
            266Net
      periodic benefit cost
            
            $
            471
            
            
            $
            485
            
            
            $
            942
            
            
            $
            969





The
Company previously disclosed in its financial statements for the year ended June
30, 2008, that it expected to contribute $302,000 to its pension plan in fiscal
2009.  As of December 26, 2008, no contributions have been
made.





H.     Income
Taxes




The
Company has approximately $625,000 of unrecognized tax benefits as of
December 26, 2008, which, if recognized, would favorably impact the
effective tax rate. We do not anticipate any decline in the net amount of
unrecognized tax benefits during the next twelve months.




During
the three months ended December 26, 2008, the unrecognized tax benefit decreased
approximately $68,000 due mainly to the settlement of a Michigan nexus review,
plus the settlement of other miscellaneous items.




Annually,
we file income tax returns in various taxing jurisdictions inside and outside
the United States.  In general, the tax years that remain subject to
examination are 2003 through 2007 for our major operations in the U.S., Italy,
Belgium, and Japan.  The U.S. Internal Revenue Service is currently
auditing our consolidated income tax return for fiscal 2006.  Other
audits currently underway include those in Singapore and Italy.  It is
reasonably possible that at least one of these audit cycles will be completed
during fiscal 2009.




We
recognize accrued interest and penalties related to unrecognized tax benefits in
income tax expense. As of December 26, 2008, total accrued interest and
penalties with respect to income taxes was approximately $80,000 that would
favorably affect the effective tax rate if recognized.





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 26, 2008 were as follows (in
thousands):


-8-





Balance
      at June 30, 2008
            
            $
            18,479Translation
      adjustment
            
            
            (1,857
            )Balance
      at December 26, 2008
            
            $
            16,622





The gross
carrying amount and accumulated amortization of the Company’s intangible assets
that have defined useful lives and are subject to amortization as of December
26, 2008 and June 30, 2008 are as follows (in thousands):





December
      26,
            
            
            June
      30,2008
            
            
            2008Intangible
      assets with finite lives:Licensing
      agreements
            
            $
            3,015
            
            
            $
            3,015Non-compete
      agreements
            
            
            2,050
            
            
            
            2,050Other
            
            
            5,991
            
            
            
            5,99111,056
            
            
            
            11,056Accumulated
      amortization
            
            
            (5,692
            )
            
            
            (5,176
            )Translation
      adjustment
            
            
            196
            
            
            
            1,235Total
            
            $
            5,560
            
            
            $
            7,115





The
weighted average remaining useful life of the intangible assets included in the
table above is approximately 9 years.





Intangible
amortization expense was $243,000 and $516,000 for the three and six months
ended December 26, 2008, respectively, and $237,000 and $470,000 for the three
and six months ended December 28, 2007, respectively.  Estimated
intangible amortization expense for the remainder of fiscal 2009 and each of the
next five fiscal years is as follows (in thousands):





Fiscal
      Year2009
            
            $
            4652010
            
            
            7242011
            
            
            7242012
            
            
            7242013
            
            
            6822014
            
            
            682





The gross
carrying amount of the Company’s intangible assets that have indefinite lives
and are not subject to amortization as of December 26, 2008 and June 30, 2008
are $2,037,000 and $2,474,000, respectively.  These assets are
comprised of acquired tradenames.





J.      Long-term
Debt


Notes
payable and long-term debt at December 26, 2008 and June 30, 2008 consisted of
the following (in thousands):





December
      26,
            
            
            June
      30,2008
            
            
            2008Revolving
      loan
            
            $
            23,900
            
            
            $
            19,70010-year
      unsecured senior notes
            
            
            25,000
            
            
            
            25,000Notes
      payable
            
            
            -
            
            
            
            1,010Other
            
            
            3,024
            
            
            
            4,247Subtotal
            
            
            51,924
            
            
            
            49,957Less:
      current maturities and notes payable
            
            
            (672
            )
            
            
            (1,730
            )Total
      long-term debt
            
            $
            51,252
            
            
            $
            48,227


-9-


K.     Shareholders'
Equity







In
October 2007, the Board of Directors approved a two-for-one stock split of the
Company’s outstanding common stock.  The split was issued on December
31, 2007 to shareholders of record at the close of business on December 10,
2007.  The split increased the number of shares outstanding to
approximately 11.4 million from approximately 5.7 million.  The
Condensed Consolidated Financial Statements and Notes thereto, including all
share and per share data, have been restated as if the stock split had occurred
as of the earliest period presented.





On July
27, 2007, the Board of Directors authorized the purchase of up to 200,000 shares
of Common Stock at market values.  This resolution superseded the
resolution previously adopted by the Board in January 2002.  On August
14, 2007, the Board of Directors authorized the purchase of an additional
200,000 shares of Common Stock at market values.  On February 1, 2008,
the Board of Directors authorized the purchase of an additional 500,000 shares
of Common Stock at market values. The Company purchased 250,000 shares of its
outstanding Common Stock in the second quarter of fiscal 2009 at an average
price of $7.25 per share at a total cost of $1,813,000.  In fiscal
2008, the Company repurchased 660,000 shares of its outstanding Common Stock at
an average price of $23.70 per share at a total cost of
$15,643,000.





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 fiscal 2008 financial statements and
related notes.





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





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





Results of
Operations





(In
      thousands)Three
      Months Ended
            
            
            Six
      Months EndedDecember
      26,
            
            
            December
      28,
            
            
            December
      26,
            
            
            December
      28,2008
            
            
            %
            
            
            2007
            
            
            %
            
            
            2008
            
            
            %
            
            
            2007
            
            
            %Net
      sales
            
            $
            81,598
            
            
            
            
            
            $
            81,894
            
            
            
            
            
            $
            154,270
            
            
            
            
            
            $
            155,507Cost
      of goods sold
            
            
            58,645
            
            
            
            
            
            
            56,548
            
            
            
            
            
            
            111,245
            
            
            
            
            
            
            106,311Gross
      profit
            
            
            22,953
            
            
            
            28.1
            %
            
            
            25,346
            
            
            
            30.9
            %
            
            
            43,025
            
            
            
            27.9
            %
            
            
            49,196
            
            
            
            31.6
            %Marketing,
      engineering andadministrative
      expenses
            
            
            17,008
            
            
            
            20.8
            
            
            
            17,378
            
            
            
            21.2
            
            
            
            33,326
            
            
            
            21.6
            
            
            
            32,072
            
            
            
            20.6Earnings
      from operations
            
            $
            5,945
            
            
            
            7.3
            
            
            $
            7,968
            
            
            
            9.7
            
            
            $
            9,699
            
            
            
            6.3
            
            
            $
            17,124
            
            
            
            11.0





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





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


-10-


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





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





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





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





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





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


-11-





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





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





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





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





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





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





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





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





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





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





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





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





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





Financial Condition,
Liquidity and Capital Resources





Comparison between December
26, 2008 and June 30, 2008





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





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





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


-12-


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





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





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





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





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





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





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





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


-13-





Contractual
      Obligations
            Total
            Less
      than
              1
      year
            1-3
              Years
            3-5
              Years
            After
      5
              YearsRevolver
      borrowing
            $23,900
            
            $23,900Long-term
      debt
            $28,024
            $672
            $4,452
            $8,507
            $14,393Operating
      leases
            $12,992
            $3,250
            $5,812
            $3,637
            $293Total
      obligations
            $64,916
            $3,922
            $34,164
            $12,144
            $14,686





New Accounting
Releases





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


a)
            How
      investment allocation decisions are
made;


b)
            The
      major categories of plan assets;


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


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


e)
            Significant
      concentrations of risk within plan
assets.





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





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





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – An Amendment of FASB Statement No.
133.”  This statement enhances the disclosures regarding derivatives
and hedging activities by requiring:


·
            Disclosure
      of the objectives for using derivative instruments in terms of underlying
      risk and accounting designation;


·
            Disclosure
      of the fair values of derivative instruments and their gains and losses in
      a tabular format;


·
            Disclosure
      of information about credit-risk-related contingent features;
      and


·
            Cross-reference
      from the derivative footnote to other footnotes in which
      derivative-related information is
disclosed.


SFAS No.
161 is effective for fiscal years and interim periods beginning after November
15, 2008.  Adoption of SFAS No. 161 is not expected to have a material
impact on the Company’s financial statements.





In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations.”  This statement will significantly change the
accounting for business combinations, requiring the acquiring entity to
recognize the acquired assets and liabilities at the acquisition date fair value
with limited exceptions.  The statement also includes a substantial
number of new disclosure requirements.  SFAS No. 141(R) applies
prospectively to business combinations for which the


-14-


acquisition
date is on or after the beginning of the first annual report period beginning on
or after December 15, 2008.  Earlier adoption is
prohibited.  Accordingly, the Company will be subject to SFAS No.
141(R) beginning on July 1, 2009.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No. 51.”  SFAS
No. 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary, and includes expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interest.  SFAS No. 160
is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Earlier adoption is
prohibited.  Adoption of SFAS No. 160 is not expected to have a
material impact on the financial statements of the Company.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an Amendment of FASB
Statement No. 115.”  This standard permits an entity to choose to
measure many financial instruments and certain other items at fair
value.  This statement is effective as of the beginning of an entity’s
first fiscal year that begins after November 15, 2007.  The Company
adopted SFAS No. 159 in the first quarter of fiscal 2009 with no material impact
to the financial statements.  The Company has currently chosen not to
elect the fair value option for any items that are not already required to be
measured at fair value in accordance with accounting principles generally
accepted in the United States.





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.  On February
12, 2008, the FASB issued FSP 157-2 which delays the effective date of SFAS No.
157 for one year, for all nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually).  SFAS No. 157 and FSP
157-2 are effective for financial statements issued for fiscal years beginning
after November 15, 2007.  The Company adopted SFAS No. 157 in the
first quarter of fiscal 2009 for those assets and liabilities not subject to the
one year deferral granted in FSP 157-2, with no material impact to the financial
statements.  The Company is currently evaluating the impact of
adopting SFAS No. 157 for the assets and liabilities subject to the one year
deferral granted under FSP 157-2, for which SFAS No. 157 will become effective
for fiscal years beginning after November 15, 2008.





In
September 2006 and March 2007, respectively, the FASB ratified Emerging Issues
Task Force (“EITF”) Issue No. 06-4, “Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements” and Issue No. 06-10, “Accounting for Collateral Assignment
Split-Dollar Life Insurance Arrangements.”  These EITF’s address the
possible recognition of a liability and related compensation costs for
split-dollar life insurance policies that provide a benefit to an employee that
extends to postretirement periods.  EITF 06-4 and 06-10 are effective
for fiscal years beginning after December 15, 2007, including interim periods
within those years.  The Company adopted these EITF’s in the first
quarter of fiscal 2009 with no material impact to the financial
statements.





During
June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No.
109.”  FIN 48 addresses the determination of whether tax benefits
claimed or expected to be claimed on a tax return should be recorded in the
financial statements by standardizing the level of confidence needed to
recognize uncertain tax benefits and the process for measuring the amount of
benefit to recognize.  FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition.  The Company adopted the provisions of FIN
48 as of July 1, 2007, with no material impact to the Company’s financial
statements.





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.





The
Company’s significant accounting policies are described in Note A of the
Company’s Annual Report filed on Form 10-K for June 30, 2008.  Not all
of these significant accounting policies require management to make difficult,
subjective, or complex judgments or estimates.  However, the policies
management considers most critical to understanding and evaluating our reported
financial results are the following:


-15-







Revenue
Recognition







Twin Disc
recognizes revenue from product sales at the time of shipment and passage of
title.  While we respect the customer’s right to return products that
were shipped in error, historical experience shows those types of adjustments
have been immaterial and thus no provision is made.  With respect to
other revenue recognition issues, management has concluded that its policies are
appropriate and in accordance with the guidance provided by the Securities and
Exchange Commissions’ Staff Accounting Bulletin (SAB) No. 104, “Revenue
Recognition.”




Accounts
Receivable







Twin Disc
performs ongoing credit evaluations of our customers and adjusts credit limits
based on payment history and the customer’s credit-worthiness as determined by
review of current credit information.  We continuously monitor
collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer-collection issues.  In addition, senior management reviews
the accounts receivable aging on a monthly basis to determine if any receivable
balances may be uncollectible.  Although our accounts receivable are
dispersed among a large customer base, a significant change in the liquidity or
financial position of any one of our largest customers could have a material
adverse impact on the collectibility of our accounts receivable and future
operating results.




Inventory







Inventories
are valued at the lower of cost or market.  Cost has been determined
by the last-in, first-out (LIFO) method for the majority of the inventories
located in the United States, and by the first-in, first-out (FIFO) method for
all other inventories.  Management specifically identifies obsolete
products and analyzes historical usage, forecasted production based on future
orders, demand forecasts, and economic trends when evaluating the adequacy of
the reserve for excess and obsolete inventory.  The adjustments to the
reserve are estimates that could vary significantly, either favorably or
unfavorably, from the actual requirements if future economic conditions,
customer demand or competitive conditions differ from expectations.





Goodwill





In
conformity with U.S. GAAP, goodwill is tested for impairment annually or more
frequently if events or changes in circumstances indicate that an impairment
might exist.  The Company performs impairment reviews for its
reporting units using a fair-value method based on management’s judgments and
assumptions or third party valuations.  The Company is subject to
financial statement risk to the extent the carrying amount of a reporting unit
exceeds its fair value.  The impairment testing performed by the
Company at June 30, 2008 indicated that the estimated fair value of each
reporting unit exceeded its corresponding carrying value, including goodwill and
as such, no impairment existed at that time.  While the Company
believes its judgments and assumptions were reasonable, different assumptions,
economic factors and/or market indicators could change the estimated fair values
of the Company’s reporting units and, therefore, impairment charges could be
required in the future.




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.





Pension and Other Postretirement
Benefit Plans





The
Company provides a wide range of benefits to employees and retired employees,
including pensions and postretirement health care coverage.  Plan
assets and obligations are recorded annually based on the
Company’s


-16-


measurement
date utilizing various actuarial assumptions such as discount rates, expected
return on plan assets, compensation increases, retirement and mortality tables,
and health care cost trend rates as of that date.  The approach used
to determine the annual assumptions are as follows:





·
            Discount rate – based
      on Moody’s AA Corporate Bond rate, with appropriate consideration of
      pension plans’ participants’ demographics and benefit payment
      terms.


·
            Expected Return on Plan
      Assets – based on the expected long-term average rate of return on
      assets in the pension funds, which is reflective of the current and
      projected asset mix of the funds and considers historical returns earned
      on the funds.


·
            Compensation Increase –
      reflect the long-term actual experience, the near-term outlook and assumed
      inflation.


·
            Retirement and Mortality
      Rates – based upon the Generational Mortality Table for fiscal 2008
      and the UP 1994 Mortality Table for all prior years
    presented.


·
            Health Care Cost Trend
      Rates – developed based upon historical cost data, near-term
      outlook and an assessment of likely long-term
  trends.





Measurements
of net periodic benefit cost are based on the assumptions used for the previous
year-end measurements of assets and obligations.  The Company reviews
its actuarial assumptions on an annual basis and makes modifications to the
assumptions when appropriate.  As required by U.S. GAAP, the effects
of the modifications are recorded currently or amortized over future
periods.  Based on information provided by its independent actuaries
and other relevant sources, the Company believes that the assumptions used are
reasonable; however, changes in these assumptions could impact the Company’s
financial position, results of operations or cash flows.




Income
Taxes







The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes.”  Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards.  Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled.  The Company’s policy is to remit earnings from foreign
subsidiaries only to the extent any resultant foreign taxes are creditable in
the United States.  Accordingly, the Company does not currently
provide for additional United States and foreign income taxes which would become
payable upon repatriation of undistributed earnings of foreign
subsidiaries.





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, 2010, 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 26, 2008 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 $76,000.





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.





Stock
market risk – The Company’s earnings are exposed to stock market risk relative
to the Performance Stock Unit Awards.  These are cash based awards
which are revalued at the end of each reporting period based upon the Company’s
closing stock price as of the end of the period.  A one dollar
increase or decrease in the Company’s


stock
price would result in a decrease or increase, respectively, in earnings from
operations of approximately $99,000.  These awards were valued at the
Company’s December 26, 2008 closing stock price of $7.00.


-17-





Currency
risk - The Company has exposure to foreign currency exchange
fluctuations.  Approximately 35% of the Company’s revenues in the six
months ended December 26, 2008 were denominated in currencies other than the
U.S. Dollar.  Of that total, approximately 86% was denominated in Euro
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 non-functional 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 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 2009 and 2008 was the Euro.  At December 26, 2008, the Company
had net outstanding forward exchange contracts to purchase Euros in the value of
$547,000 with a weighted average maturity of 176 days.  The fair value
of the Company’s contracts was a gain of approximately $60,000 at December 26,
2008.  At June 30, 2008, the Company had net outstanding forward
exchange contracts to purchase Euros in the value of $752,000 with a weighted
average maturity of 34 days.  The fair value of the Company’s
contracts was a minimal gain at June 30, 2008.





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 first quarter of fiscal 2009, the Company
implemented a new enterprise resource planning (ERP) system at its North
American manufacturing operation.  As a result of the implementation,
the Company initiated a process to review and redesign, as necessary, the
controls impacted by the new ERP system, which was substantially completed by
the end of the second fiscal quarter.  Further testing and validation
of the revised controls will continue through the third
quarter.  Despite the process to review, redesign and test controls,
as necessary, management believes adequate disclosure controls and procedures
remained in place during the quarter covered by this report.





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.


-18-





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 2008 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 six months
ended December 26, 2008, 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 - 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.





Issuer
Purchases of Equity Securities





Period
            (a)
      Total Number of Shares Purchased
            (b)
      Average Price Paid per Share
            (c)
      Total Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
            (d)
      Maximum Number of Shares that May Yet Be Purchased Under the Plans or
      ProgramsSeptember
      27, 2008 – October 31, 2008
            0
            NA
            0
            500,000November
      1 - 28, 2008
            250,000
            7.25
            250,000
            250,000November
      29, 2008 - December 26, 2008
            0
            NA
            0
            250,000Total
            0
            
            0





On
February 1, 2008, the Board of Directors authorized the purchase of up to
500,000 shares of Common Stock at market values.





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 17, 2008, 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 2011:





Michael
      E. Batten
            For:
            7,596,431
            Authority
      withheld:
            2,494,983David
      R. Zimmer
            For:
            7,553,780
            Authority
      withheld:
            2,537,634Michael
      Doar
            For:
            9,409,477
            Authority
      withheld:
            681,937





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Proposal No. 2 –
Ratification of Independent Registered Public Accounting Firm:





The
shareholders ratified the appointment of PricewaterhouseCoopers LLP as the
Company’s independent registered public accounting firm for the fiscal year
ending June 30, 2009 with 9,740,088 votes for ratification, 320,033 votes
against and 31,293 votes abstaining.





Item
5.                      Other
Information





None.





Item
6.                      Exhibits





31a
            Certification
      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.


-20-


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
      4, 2009
            /s/ JEFFREY S.
      KNUTSONJeffrey
      S. KnutsonCorporate
      ControllerChief
      Accounting Officer


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