TWIN DISC, INCORPORATED Annual REPORT 2010

TWIN DISC, INCORPORATED Annual Report 2010 Stock Price Range StockPrice Dividends PerShare Dividends Stock Price Range StockPrice Diluted Earnings PerShare Earnings Diluted Dividends PerShare Dividends Basic Earnings PerShare Earnings Basic Diluted Earnings PerShare Earnings Diluted Basic Earnings PerShare Earnings Basic Earnings Net(Loss) NetEarnings GrossProfit GrossProfit

Insharethousandsdollarsofper except andstockrange price statistics. NetSales 2009 NetSales 2010 sales INCORPORATEDDISC, TWIN Cover: Cover: on a single job. single a on transmissions Series Twinof8500 dollars of Disc ormore pumping units, which translate tomillions havemultipleseight operationofcould fracturing typical operations.A fracturing cementing and well in transmissionused Series Twin8500 the for Disc NorthAmerica hasled torecord order backlogs

Twin Disc Annual Report 2010 Theresurgence ofoil and gasdrilling in qu y b earnings and (High – Low) – (High (High – Low) – (High

22.94 – 12.92 – 22.94 15.23 – 6.21 – 15.23

$72,671

$47,057 20,072 (2,404 qtr 1st 2,465 9,747 (0.22 (0.22 0.07 0.22 0.22 0.07 arter

) ) ) 15.38 – 4.02 – 15.38 14.77 – 9.12 – 14.77 $81,598 $55,186 22,953 14,786 qtr 2nd 3,433 0.31 (0.04 (0.04 0.07 (490 0.31 0.07 ) ) )

13.17 – 8.77 – 13.17 8.12 – 4.54 – 8.12 $69,292 $60,977 0.26 19,151 16,505 qtr 3rd 2,850 1,451 0.07 0.26 0.07 0.13 0.13 roll”capability. transmissionfeaturingsystems“pump and automaticTwinthroughTD61-1180 Disc DetroitDiesel 665hp (496 kW)engines driving FireFighting (ARFF) trucks equipped with Rosenbauer rescue-readywith three quick response Top: Akron-CantonAirport inOhio stands 14.92 – 11.35 – 14.92 9.72 – 6.06 – 9.72 Airport Rescue and Rescue Panther Airport 6x6 $72,057 $64,314 19,267 19,427 2,754 h qtr 4th 2,040 0.07 0.07 0.25 0.25 0.18 0.18 off-highway powertransmissionequipment. manufacturer anddistributorofheavy-duty Twin Disc,Incorporatedisaninternational 22.94 – 4.02 – 22.94 15.23 – 6.21 – 15.23 $295,618 $227,534 81,443 60,465 11,502 1.03 1.04 0.05 0.05 0.28 0.28 Year 597

Above: islands around the port. the around islands and areashistoricto Rochelle La of French port ancient the from sightseers controls,transport to transmissions controlledthree-stationEC300 by TwinQuickShift® andMGX-5145A engines Disc equippedwith twin Volvo 700-hp (522-kW) CroisiéresoperatesInterIles Melusine , fin ancial highlights 2010 2009 2008 Net Sales $227,534 $295,618 $331,694 Net Earnings 597 11,502 24,252 Basic Earnings Per Share 0.05 1.04 2.15 Diluted Earnings Per Share 0.05 1.03 2.13 Dividends Per Share 0.280 0.280 0.265 Average Shares Outstanding For The Year 11,063,417 11,096,750 11,278,885 Diluted Shares Outstanding For The Year 11,159,282 11,194,170 11,411,927

In thousands of dollars except per share and shares outstanding statistics.

Company engineers work hand- and boat management systems. markets. The Corporation, in-hand with customers and Its off-highway transmission which is a multinational engine manufacturers to design products are used in agricultural, organization headquartered in products with characteristics all-terrain specialty vehicle and Racine, Wisconsin, currently unique to their specific military applications. Twin Disc has a diverse shareholder base applications. Twin Disc supplies also sells industrial products such with approximately one-third the commercial, pleasure craft and as power take-offs, mechanical, of the outstanding shares held military segments of the marine hydraulic and modulating by management, active and market with transmissions, clutches and control systems to retired employees and other surface and waterjet drives, the agricultural, environmental long-term investors. electronic controls, propellers and energy and natural resources

Above: Trican Well Service Ltd, headquartered in Calgary, Alberta, Canada, is currently the largest pressure pumping service provider in Canada and the largest fracturing company in Russia, with growing operations in the United States, Kazakhstan and Algeria. The company uses Twin Disc 8500 transmission systems on many of its high-horsepower, high-pressure pumping applications around the world. programs thataresoimportanttoourfuture. maintain our schedules on key product development objectives for the year, but also we have been able to Not only have we been able to meet our financial Shareholders Our TO Twin Disc Annual Report 2010 for fiscal 2011. for fiscal yearthe and an improving outlook was ableDisc to report aprofit for latterthe 2010,Twin of half fiscal products and geographic areas in the increasing demand in certain to prepare for the downturn and action taken in late 2009 fiscal year. toDue quick and decisive improvement achieved during the progressivelies inthe quarterly 2010 for realthe story fiscal recession, significantthe global 95 percent respectively, reflecting year were down 23 percent and compared to the previous fiscal While and sales earnings L (DP) capabilities.(DP) positioning dynamic overall its enhances that isanessential partof the vessel’s propulsion MCD The azimuthingZ-drives. twin power to 3000-0-LD model (MCD) ControlMarineDrive (1920andkW)driving throughTwin a Disc hpproducing 2575 each displacement engines ShipbuildingGroup,high- Caterpillar two has vessel and asset management.asset and expense both tighteninginbelt of period understandingthis during andcooperation their for worldaroundassociates the ourof all outtogo thanks Our eft: eft: The260',DPII classed, platform supply JeanLabbuiltPierre, byEastern

Swiss watch.Swiss a Grisons/Graubündenlike running region the excursionsthrough renownedrail its keep 8-FLW-1754with equipped torqueconverters, TD44-2611Disc power-shift transmissions 434-hp(324-kW) engines driving through Twin RhaetianRailway (RhB),powered byCummins T to our future.our to important programsso are that productdevelopmentkey on schedulesmaintain ourto able year,thehave been we butalso forobjectives financial our meet toable Not been haveonlywe op: The 25 shunting the locomotives25 of The

Financial Results 2010 and began to strengthen previous year. However, the quarterly Net sales for fiscal 2010 were during the balance of the fiscal track improved significantly to a $228 million compared to year. The six-month backlog fourth-quarter margin of 30.2 percent $296 million in fiscal 2009. Net stood at $60.6 million as we as contrasted to 26.7 percent for the income for the current fiscal year entered fiscal 2010 and grew to same period the previous year. was $0.5 million, or $0.05 per $84.4 million by year-end. During diluted share, compared to $11.5 the course of the year quarterly million, or $1.03 per diluted revenues grew sequentially with share, for fiscal 2009. corresponding improvement in bottom-line results. The softening corporate order and revenue trend that began during Gross profit, as a percentage of fiscal 2009 reached the bottom fiscal 2010 sales, was 26.6 percent, during the first quarter of fiscal compared to 27.6 percent the

Top: A Chipeador chipper, powered by a Above: Baia Yacht’s 54' Aqua cruises at Caterpillar 765-hp (570-kW) engine and 44 knots off of Naples, Italy, with its twin actuated by a remote-controlled Twin Disc Caterpillar 1014-hp (756-kW) engines HP600 power take-off disposes of brush driving Arneson ASD12 Surface Drives waste near Ranquil, Chile. equipped with Rolla propellers. Twin Disc Annual Report 2010 covenantcompliance. coverdebttosufficient more than wereand 2009, fiscal formillion comparedmillion,$30.0 $13.6to totaled 2010 (EBITDA) forfiscal depreciationamortizationand beforeinterest,Earnings taxes, benefits. certain changesto bonusandeliminationplansof compensation,executive salaries, initiativesincludingandwages across-the-boardreductioncost resultingfrom reducedexpenses compensationstock-based and andpension in expenses increased nettingofyear. a reflects This year-over-million $3.6 down were expenses ME&Aoverall 2009, percentforfiscal 20.5 to percent,compared25.0 were 2010, forfiscal percentage sales ofa as administrative expenses, (ME&A) marketing,andWhileengineering stood at 26.0 percent.26.0 at stood capitalizationto debt total 2010 fiscal of Atend 2009.Junethe 30, at million year-endat$50.8 from million $31.1 to reduced was debt corporateand year; the during weregeneratedmillion $35.1 of flows recession.cashOperating condition global despitethe strong financial maintaina CompanyThe continued to Airports in Ireland.in Airports vehiclesbound for Dublin, Shannon and Cork tothewheels and thepumps, isone often such automaticputtingtransmissionsystempower Twin TD61-1180 a through Disc driving engine equippedwith Caterpillara 705-hp (526-kW) vehicle, 6x6 (ARFF) FightingFire and Rescue Top: and construction applications.constructionand irrigation,fromrecyclingdown slowedproductsother and offs take- orderspowerformarketsas industrialour in experienced industry.Weak also was demand inventories risingthe plagued lowerdemandandas 2010 fiscal in megayachts,soft werevery market,includingmarine craft pleasureShipments the to year. the during recessionTwinon global Disc the ofimpact moderatingthe in diversityimportantplayedanrole Productmarketgeographicand Opera This Sides VMA 130 Rescue 7 Airport Airport 7 Rescue 130 VMA Sides This tions Review worldwidetendersforpatrol boats. propulsiongrowthin systemsfor steady,solid experienced we while markets,excludingEurope, held workboat global the from transmissionsformarineDemand spitetrends.recessionaryofin growth even andshowedresilience productmarketareas several declines, these offsetting Partially a sister ship of the same configuration.same the ofship sister a YorkPoliceCityHarbor Unit deployed has Newconditions.weatheradverseThe and states sea high maneuverabilitycomfortin and transmissions,hasdemonstrated speed, waterjetsthrough Twin DiscMG-5114SC DetroitDiesel 825-hp (615-kW) engines driving IndustriesofSeattle, Washington, with twin KvichakMedium,bybuilt Boat Marine Response Above: USCG all-aluminum This

NET EARNINGS diluted (per share) NET SALES ($ millions) DIVIDENDS 0 50 100 150 200 250 300 350 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 2010 2010 2009 2009 2008 2008 2007 2007

CAPITAL EXPENDITURES ($ thousands) NET CASH PROVIDED by operating activities ($ thousands) 0 3,000 6,000 9,000 12,000 15,000 18,000 0 10,000 20,000 30,000 40,000 2010 2010 2009 2009 2008 2008 2007 2007

In addition, we continued to backlog. Order rates from the reductions, restructuring, and is now in field test and due to increase market share in the Pacific Basin and Asia were strong. voluntary retirement packages and enter production mid-fiscal 2011. airport rescue and fire fighting Over 60 percent of our sales are the suspension of the corporate The EJS is completing final (ARFF) markets during the now generated outside of the incentive program. In addition, software development and will year. Finally, we benefited from United States. we continued to implement key also be in production by mid- the resurgence in demand for programs in lean manufacturing, fiscal 2011. We continue to Announced at the end of fiscal fracturing/pressure pumping our global sourcing efforts and be active in other organic and 2009 but implemented during transmissions in the oil and selected capital expenditures. external corporate development fiscal 2010, a $25 million cost gas industry. projects. As with our past reduction and avoidance program Despite all of the belt tightening, innovations, we seek to provide While demand from Europe was was a key driver in delivering the we were able to continue our key the market and our customers weak, the mixture of demand improving financial results during product development programs with technologically differentiated in North America could be the year. Included in the package on schedule, particularly the 7500 products that provide the users characterized as generally soft were a pension freeze, salary and pressure pumping transmission with meaningful features. until the second half of the wage reductions, temporary layoffs and the Express Joystick System® year when oil and gas orders in the U.S., government-sponsored (EJS™). The 7500 transmission has contributed to the increase in layoffs in Europe, ME&A cost completed lab tests successfully

Right: Operated by Compagnie Oceane and equipped with twin Cummins 1400-hp (1044-kW) engines and Twin Disc MGX-6620SC QuickShift® transmissions with three-station EC300 controls, passenger/freight ferry Kerdonis operates from the mainland French port city of Quiberon, Brittany, to Belle Ile and Hovat. port of its namesake.itsof port the watersofout coastal of sector patrolsits transmission,Twinmarine MG-6619 a Disc through driving engine (1342-kW) 1800-hp vessel Bottom left: world.around the manufacturers airports and performanceprerequisite with ARFF vehicle unique“pump and roll” feature, hasmade ita automaticits with alongtransmissionsystem, Disc’sAirport Rescue and Fire Fighting (ARFF) Top:

Theacceleration and reliability ofTwin Twin Disc Annual Report 2010 Valparaiso The 108' (33-meter) Chilean Navy Chilean (33-meter) 108' The , equipped with a MTU a with equipped ,

our Board. our internationalandon experience Mike’sgrowth,technology global with person havea to pleased are improvedbusinessefficiency. We for assets deployment critical of identify,manage the and track tosolutions technology used providerleadinginnovative ofa TechnologiesZebra Corporation, of Officer Financial Chief as serves Directors.ofMr. (50) Smiley Board the to elected was Smiley MichaelC. April2010, On 16, Directors Rexroth pumps to power various equipment.variouspower pumps Rexrothto 174-hp(130-kW) diesel engine and driving machine’s the tocoupled pumpdrive Iveco 230 TwinAM a ofhelp Disc the with smoothly Italian railwaysrunning keeps machine Middle: positive attitude.positive insight,counselandhis miss management the andwill team fellowdirectorsHis period. that duringsuccessgrowthandour contributedhas togreatlyand twelveyearsfordirector a as Company the served Johnhas Directors.of Board the from MellowesretireJohnA. will 2010, 15, October on held be Meetingto AnnualAt the This Bonciani railwaymaintenanceBonciani This

transmissions with EC300 controls.EC300 transmissionswith TwinQuickShift® throughMGX-5065A Disc driving engines Iveco (294-kW) 394-hp twin Germany,provides fast response with its Frankfurt, in base a Mainfrom River the BereitschaftspolizeiWasserschutzpolizei on byAbove:operated Police Boat, 6 Hessen

Outlook Our six-month backlog at While we have more modest has grown significantly in the June 30, 2010, was $84.4 million, expectations regarding growth in past several months and now compared to $60.6 million a year our other markets, the positive includes the initial orders for the ago. The growing trend over the trending reflects primarily 7500 transmission as well as the past year, as well as current order improving conditions in the oil 8500 transmission system. These intake, are encouraging signs for and gas markets. The demand for bookings point to an improving the coming year. pressure pumping transmissions year for the Company.

John H. Batten Michael E. Batten President, Chief Operating Officer Chairman, Chief Executive Officer TRANSMISSIONS INDUSTRIAL Twin Disc Annual Report 2010 fiscal 2007 and fiscal 2008. 2007and fiscal fiscal returned levels from to peak our 8500transmission system shale more affordable. Orders for made natural from gas extraction recovered and technology new transmissions as price the of oil horsepower, pressure pumping Demand returned for our high- our oil and gas products. intensifyingin the activity over-year improvement was largest factor year- inthis throughoutyear. the The products increased nicely for Sales our transmission

Left: Left: situations.fighting threateningandfire challenging most the to protectionpersonnel and agility speed, brings pumpdrive, 450 Twin AM a byactuated Disc pressure technology extinguishingvortex high- its vehicle,with Defend) – Extinguish – Top: productivity and reliabilitycustomers.productivityanditsfor inits fracturing rigsto obtain maximum TwinDisc8500 transmission systems exploration productioncompanies,anduses andhydraulic fracturing tooil and natural gas serviceprovider ofspecialized oil field services to 2250-horsepower segment. required for transportation) 1500- “road-able”the permits (no special that 7500is the well positioned in housings reduce further weight so technology. The aluminum cast replaced with new, patented clutch 7500transmissionthe has been mind. The torque converter on and pumping requirements in with engine the ratingsspecifically Reduction ratios were calculated high-range pumping applications. for popular, the mobile, mid-to strong, as it is expressly designed Demand for remains model this first unit for testing field. inthe transmissionfield and shipped the lab testing for our 7500oil new 2010,we completed infiscal Also Twin Disc continues to work with commercial O benefiting fromapplicationsofourtransmissiontechnology. military agencies and prime contractors on new vehicles The armor-plated Airmatic RED (Rescue armor-plated(Rescue The RED Airmatic CalfracWell ServicesLtd., leadinga

TwinDisc’s “pumpunique roll” andmode. into shift scene on when and seconds 35 within km/h) mph(80 50 to 0 from go can Airport, vehicle,located at Indianapolis International system,this Oshkosh Striker™ 4500 8x8ARFF DiscTD61-2619 automatic transmission Caterpillarengine working through Twina Above:Equipped with 950-hpa (708-kW) E Ms, Fiscal 2010 was a stable year Shipments of our XT1410 legacy applications of our transmission for our Airport Rescue and military transmission increased technology. We are optimistic Fire Fighting (ARFF) vehicle year-over-year as production about continued growth for our transmission system. Net of the BAE M88 Hercules Tank industrial transmission products shipments were down slightly Retriever continued at high levels. in fiscal 2011. year-over-year but remain at high Also, high usage of the vehicles levels. Airport improvements in in-theatre lead to an increased developing areas such as China, demand for rebuilt units. India and South America continue Twin Disc continues to work to drive the demand for these with commercial OEMs, military specialized vehicles. We are agencies and prime contractors on continuing to add and develop new vehicles benefiting from service dealers in these key areas.

106

Top: Howard’s Transport utilizes a giant Western Star semi-tractor rig equipped with a Twin Disc TD61-1179 transmission and 8-FLW-1754 torque converter to move large and heavy oil and gas field equipment over treacherous “roads” from one well site to another throughout western Canada. Above: Rosenbauer Panther 6x6 ARRF vehicles, powered by Detroit Diesel 600-hp (447-kW) engines driving through TD61-1180 transmission systems featuring 8-MLW-1751 torque converters, stand ready to sprint into service at the Concepción Airport in Chile. PRODUCTS INDUSTRIAL Twin Disc Annual Report 2010 875-hp (652-kW) engine driving an 83" an driving engine (652-kW) 875-hp Caterpillar a with Chiparvestor CL 23 Model MorbarkWernerofa uses Inc., Mill, Saw reduce timbering scrap in southern Indiana.southern in scrap timbering reduce Twinclutchwettoa through chipper Disc Left: of 2010. were delayed until the summer as many of the construction projects significant effect newon unit orders, spending in North America had no and biomass recyclers. Stimulus larger rock crushers, chippers wood our larger PTOs in typically used year, as didunit and orders parts for picked up in the second half of the Air clutch demand from the oil field orders increased throughout year. the In North America, unit and parts demand. falling the American counterparts to reactto OEMs were slower than North their of finishedequipment inventory, as hampered by significant amounts inEuropeSales were particularly 2009. fiscal and markets second of inthe half slowing geographic inall regions products, which ahad dramatic seen improvements for our industrial 2010 showedFiscal quarterly WernerCompany,Chip division a

25 Twin25 shuntingDisc-equippedlocomotives. Grisons/Graubündenregion with thehelp of mountainsthe of the through journeys train maintainstheschedules ofits wonderful Switzerland,privatelyrailwayin owned Top: expansion ofthepumpdrivelinebuiltinItaly. of theproductlineandcontinueddevelopment PTO line(RCTOs),upgradingofthecontrolfeatures expansion of our remote-controlled hydraulic dry clutch Industrial product development is centered on the The Rhaetian Railway (RhB), the largest the (RhB), Railway Rhaetian The

We were able to acquire new business Industrial product development Overall, we expect some in the Middle Eastern irrigation is centered on the expansion of improvement in demand for market through market share gains in our remote-controlled hydraulic our industrial products in fiscal our smaller mechanical PTO range. dry clutch PTO line (RC PTOs), 2011 as the global economy upgrading of the control features of continues to recover. We continued throughout the year the product line and the continued with our global outsourcing efforts development and expansion of the to control the costs of our industrial pump drive line built in Italy. line in order to remain competitive in the global marketplace.

126

Top: Jones Manufacturing Mighty Giant Tub and Hay Grinders use Twin Disc 8-FLW-1854-1 torque converters rated to 765 hp (570 kW) to transmit smooth, cushioned power from big block Caterpillar engines to the heavy driveline loads of high-capacity grinding. Above: Twin Disc’s new line of remote- controlled hydraulic power take-offs (RC PTOs) offers operators of tub grinders, wood chippers, rock crushers and biomass recyclers increased safety and convenience by removing them from close proximity to the machines. offshore rigs. oil station-keeping ability alongside demonstratewhich our improved dynamic positioning applications, and EC300control systems into our QuickShift®transmissions we continued to of expand sales and North American markets and push boats. In Asian the both boats and inland waterway tug demand for crew boats, supply previous year, but had good still markets were softerthan the vessels. The AmericanNorth transportation and offshore supply levels activitywith in good mining, markets continued strong at very during 2010. The fiscal Asian workwith global the boat market Geography to do had everything WORK BOATWORK MARKET Twin Disc Annual Report 2010 of Le Havre, France.Le of Port the containerpushesin barges transmissionsand EC300 controls, QuickShift® Twin MGX-5321DC Disc (757-kW)engines working through Wartsila twin refurbishedwith 1015-hp Above: spending for equipment. new direct result of reduced capital throughoutsoft 2010 asa fiscal way transportation, remained very onprimarily inland based water- The European workboat markets, continuedBasin, to develop. of iswhich part larger the Santos shore market as Tupi the oil field, into burgeoning the Brazilian off- 2010, but we made some inroads South declinedinfiscal America work the Overall, boat markets in Vintagetug river 1931 Meteor,

between Salvador and ItaparicaandSalvador Island. between crossingtime the half controls,in EC300 cuts transmissionswith QuickShift® MGX-5135SC and engines (447-kW) 600-hpCaterpillar ferry fast Top: PATROL CRAFT installation reviewsandseatrials. reviews, propeller designs, product designs, continents working to complete application On any given project, we had offices on four these new projects. new these steep pleasure craft declinewith were able tosome offset the of are on used patrol also boats, we inpleasureused craft applications and boat management systems) propellers, Arneson Surface Drives (marine transmissions, controls, of marine the product models As trials. most andreviews sea product designs, installation propellerreviews, designs, working to complete application we had offices on four continents market. On any given project, into patrol global the boat managed to increase our sales half of fiscal 2009, our marine team momentum from the second Continuing on the building In Brazil, the 72-car, the Brazil, In600-person IvetefourSangalowith equipped ,

transmission with EC300 controls.EC300 transmissionwith Twinand MGX-5095A engine Disc (265-kW) Brittany,powered by Scaniaa 355-hp Lorient, of French port the of harbor the works Lorient, Societe’de byoperatedLamanage Bottom: south. the in ArenasPunta to north the in Arica watersalong thewest coast ofthe country from the as such ships, 17 of fleet itstransmissions in marine Middle:

The Chilean Navy uses TwinNavy uses Disc Chilean The Small harbor work boatwork harbor Small Talcahuano, to patrol South Pacific patrolSouth to AvelVor ,

In total, our marine products saw a with the number of vessels used year-over-year decline from fiscal in the cleanup effort. The demand 2009. We are confident that we for oil and the need for offshore are well positioned with new drilling continue to increase, technology to gain market share but the demand for Twin Disc- as the global marine markets equipped crew boats and supply improve. We actively continue to boats in the Gulf may shift to monitor the situation in the U.S. other regions of the world until Gulf Coast with respect to future the cleanup and drilling safety drilling activity. Demand for spare protocols have been resolved. parts and service has increased

Above: Twin Disc QuickShift® transmissions and EC300 controls provide smooth, secure, precise handling for catamaran excursion vessels Impacto, Nueva Leon and Patagonia Infinity to navigate the windy waters of majestic Parque Nacional Los Glaciares in El Calafate, Argentina. RE CRAFT MARKET CRAFT PLEASURE Twin Disc Annual Report 2010 in slow-speed maneuvering. unparalleled precision and ease The EJS affordsboat operators one joystick control system. propeller –plus thrusters into nents –engine, transmission, driveline propulsion compo - unites control of conventional all transmissions and EC300controls, on our QuickShift® marine This remarkable system,based Express Joystick System® (EJS™). craft shows developed our newly demonstrated at major pleasure year fiscal the During we management systems. Surface Drives and boat controls, propellers, Arneson products –transmissions, affectedall marine Disc Twin existing inventory. This and continued dealers to sell craft markets, as most builders ment pleasure global inthe 2010saw noFiscal real improve - markets remain weak. gain market share while the overall which help will those early adopters and differentiating technology, to offer builders extremely useful Wehad no sales. feel well positioned builders with whom we previously we have taken orders from boat overwhelmingly positive, and The response the EJSwas to builders with whom we previously had no sales. positive, and we have taken orders from boat The response to the E J S

was overwhelmingly

through its 44-knot paces in the AdriaticSea. the in paces 44-knot its through ASD16s,MTUsArneson (1491-kW) driving Pershingits PershingDrives, YachtsSurface Arneson puts Top: Longtime customer of Twincustomerof Longtime Disc , equipped with twin 2000-hp twin with equipped 90,

During the fiscal year our responsiveness, power, quiet and engineers in Italy developed a fuel savings of electric drive hybrid drive system for our propulsion. At cruise the propul- QuickShift® transmissions. During sion system switches to diesel docking, idle and slow speed power for efficient endurance maneuvering and acceleration to running. The transmission cruise, Twin Disc QuickShift® captures flywheel rotational energy Hybrid Transmissions provide the to recharge electric drive batteries.

Above and left: The Twin Disc Express Joystick Right: Built by Power Boat Shipyard, this System (EJS), evolved from the QuickShift® 52' Superboat in Sao Vicente, Brazil, achieves transmission and EC300 controls, revolutionizes a top speed of 70 knots via three 440-hp docking and slow-speed maneuvering for diesel- (328-kW) Yanmar engines driving Arneson powered, conventional driveline boats. It gives ASD8 Surface Drives through Twin Disc instant access to full or incremental power in MG-5061A transmissions. any direction, immediate yet shockless shifting from forward to reverse, and propeller control down to 50 rpm. The EJS simultaneously actuates and controls engines, transmissions and thrusters. With intuitive, easy fingertip movements the boat operator can instantaneously control all aspects of vessel direction and speed. 17 Twin Disc Annual Report 2010 months (orforsuchshorterperiodthattheregistrantwasrequiredtosubmitandpostfiles). Data required File submitted to be and pursuant posted to Rule 405of Regulation S-T(§232.405of chapter) this during preceding the 12 Indicate by check mark registrant the whether has submitted electronically and on posted its corporate Web site, ifany, Interactive every and subject to (2)has such been filing requirements forpastthe 90days. Exchange Act of 1 Indicate by check mark registrant the whether (1 Yes Indicate by check mark registrant ifthe is not required to file reports 15(d) pursuantthe of Section 13 or Section Act. to Yes Indicate by check mark registrant ifthe is awell-known issuer, seasoned as in defined Securities 405 Rule the Act. of Large Accelerated Filer reporting company (as in defined 1 Rule Indicate by check mark registrant the whether is alarge accelerated filer, an acceleratedfiler, a non-accelerated filer, smaller ora Formthis 1 contained, toof best the registrant’s the knowledge, indefinitive proxy or information statements incorporated by reference in III Part of Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405of Regulation S‑Kis not contained herein, andnot will be UNITED STATES SECURITIES AND EXCHANGECOMMISSION

Regulation not 14A later days than 120 afterthe end year the of fiscal covered this by report, are incorporated by reference into III. Part Portions of Proxy the Statement for Annual the Meeting of Shareholders filed pursuant be will 15,2010,which held to October be to INCORPORATEDDOCUMENTS BYREFERENCE: At August registrant 18,2010,the had 11,313,006shares of its common stock outstanding. responding to requirement this and registrant is not bound by determination this for any other purpose. by non-affiliates the of registrant Determination was $83,250,798. of stockownership byaffiliates was made solely of purpose the for At last 25,2009,the business December day of registrant’s the secondquarter, fiscal the aggregate market value the commonof stock held Indicate by check mark registrant the whether is ashell company (as in defined 1 Rule [ ] [ ] No No 0‑K or any amendment to Form this 1 [√] [√] 934 during preceding the 1 (Address of Principal Executive Office) [ ]Accelerated Filer Incorporation or Organization) (State or Jurisdiction Other of 1328 RacineStreet, Racine, Wisconsin Preferred stockpurchaserights ANNUAL REPORT PURSUANT TO SECTION13OR15(d)OF THE SECURITIESEXCHANGE ACT OF1934 Title of eachclass Common stock, nopar Wisconsin 2b- of Exchange the Act). Securities registeredSecurities pursuant 1 to Section Securities registeredSecurities pursuant 1 to Section (Exact Name(Exact of Registrant inits asCharter) Specified Registrant’s Telephone Number, including area code 2 months (or for such that shorter registrant the period was required to file such reports), [√] Non-accelerated Filer ) has filed all all reports ) hasSection 1 required filed filedbe by to 0‑K. [√] TWIN DISC, INCORPORATED For theFiscal Year EndedJune30, Commission File Number1 (Title of Class) FORM 1 ( 262) 638- None 4000 0-K Name of eachexchange on registered: which Smaller Reporting Company Reporting [ ]Smaller Yes - 7635 2010 [√] 2(b) of Act: the 2(g) of Act: the The NASDAQ StockMarket, LLC The NASDAQ StockMarket, LLC Identification Number) 2b- of Act). the (I.R.S. Employer(I.R.S. (Zip Code) (Zip No 39- 53403 0667110 [ ]

3 or 1 Yes Yes [ ] (d) of the Securities 5(d) of Securities the [ ] [ ] Washington, D. C. 20549

No No

[ ] [√]

PART I

Item 1. Business Twin Disc was incorporated under the laws of the state of Wisconsin in 1918. Twin Disc designs, manufactures and sells marine and heavy duty off-highway power transmission equipment. Products offered include: marine transmissions, surface drives, propellers and boat management systems as well as power-shift transmissions, hydraulic torque converters, power take-offs, industrial clutches and controls systems. The Company sells its products to customers primarily in the pleasure craft, commercial and military marine markets as well as in the energy and natural resources, government and industrial markets. The Company’s worldwide sales to both domestic and foreign customers are transacted through a direct sales force and a distributor network. The products described above have accounted for more than 90% of revenues in each of the last three fiscal years.

Most of the Company’s products are machined from cast iron, forgings, cast aluminum and bar steel which generally are available from multiple sources and which are believed to be in adequate supply.

The Company has pursued a policy of applying for patents in both the United States and certain foreign countries on inventions made in the course of its development work for which commercial applications are considered probable. The Company regards its patents collectively as important but does not consider its business dependent upon any one of such patents.

The business is not considered to be seasonal except to the extent that employee vacations are taken mainly in the months of July and August, curtailing production during that period.

The Company’s products receive direct widespread competition, including from divisions of other larger independent manufacturers. The Company also competes for business with parts manufacturing divisions of some of its major customers. Primary competitive factors for the Company’s products are performance, price, service and availability. The Company’s top ten customers accounted for approximately 31% of the Company’s consolidated net sales during the year ended June 30, 2010. There were no customers that accounted for 10% or more of consolidated net sales in fiscal 2010.

Unfilled open orders for the next six months of $84,419,000 at June 30, 2010, compares to $60,583,000 at June 30, 2009. The Company saw an increase in orders by oil and gas customers for the 8500 transmission system as stable oil and gas prices have driven demand for new high- horsepower rigs. Since orders are subject to cancellation and rescheduling by the customer, the six-month order backlog is considered more representative of operating conditions than total backlog. However, as procurement and manufacturing “lead times” change, the backlog will increase or decrease; and thus it does not necessarily provide a valid indicator of the shipping rate. Cancellations are generally the result of rescheduling activity and do not represent a material change in backlog.

Management recognizes that there are attendant risks that foreign governments may place restrictions on dividend payments and other movements of money, but these risks are considered minimal due to the political relations the United States maintains with the countries in which the Company operates or the relatively low investment within individual countries. No material portion of the Company’s business is subject to renegotiation of profits or termination of contracts at the election of the Government.

Engineering and development costs include research and development expenses for new product development and major improvements to existing products, and other costs for ongoing efforts to refine existing products. Research and development costs charged to operations totaled $2,347,000, $2,636,000 and $2,788,000 in fiscal 2010, 2009 and 2008, respectively. Total engineering and development costs were $7,885,000, $9,142,000 and $9,025,000 in fiscal 2010, 2009 and 2008, respectively.

The Company’s development of its 7500 transmission has entered its field test phase, and the Company expects to start production in the second half of fiscal 2011. The 7500 transmission is specifically designed for oil and gas high-pressure pumping applications, and is expected to offer significant advantages in those applications over the Company’s current product mix. For example, the 7500 transmission will be considerably lighter than the Company’s 8500 transmission system, and will be able to fit within the frame rails of on-road fracturing rigs that don’t need special permits to move from one field to another. It is also designed to work in a range of 1,500 to 2,500 horsepower, which is a larger market than the 2,500 to 3,000 horsepower application market for the Company’s 8500 transmission system.

Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, is not anticipated to have a material effect on capital expenditures, earnings or the competitive position of the Company.

The number of persons employed by the Company at June 30, 2010 was 913.

A summary of financial data by segment and geographic area for the years ended June 30, 2010, 2009 and 2008 appears in Note J to the consolidated financial statements.

The Company’s internet website address is www.twindisc.com. The Company makes available free of charge (other than an investor’s own internet access charges) through its website the Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after it electronically files such material with, or furnishes such material to, the United States Securities and Exchange Commission. In addition, the Company makes available, through its website, important corporate governance materials. This information is also available from the Company upon request. The Company is not including the information contained on or available through its website as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K.

18 19 Twin Disc Annual Report 2010 a customer relation, or other actionthat could adversely affect warranty and qualityfuture costs, sales and profitability. supplier quality issue, couldto lead warranty actions, scrapping of raw materials, finished or goods returned products,the deterioration in performance of its products and suppliers, asignificant quality or product issue,whether performance, due to design, manufacturing or products is one of its competitive advantages. While Company the prides itself on putting inplace procedures to ensure quality the and affect profitability. As amanufacturer of engineered highly products, performance, the reliability and productivity of Company’s the A significant design, manufacturing or supplier qualityissue could result in recalls or other by actions theCompany that could adversely torespect afew significant products, could have an adverse effect Company’sthe on profitability and financial condition. Company’s ability to its meet obligations to its customers may affected. be Such adisruptionwith to respect numerous products, withor relationship with Company, the supplying cease or otherwise raw materials, component consistent or parts, services with past practice, the suppliedand by services outside If third parties. asupplier of significant raw materials, component were to parts services terminate or its and have an adverse on effect its ability to manufacture and deliver Companyproducts. The relies on raw materials, component parts, The termination of relationshipswith theCompany’s suppliers, or the inability of such supplierscould disrupt to perform, its business recoupedbe through product pricing, it could potentially have an adverse effect on futureour profitability. costs through cost reduction programs and pricing actions. However, ifmaterial prices were to continue to increase at arate that could not have anfuture adverse on effect profitability. To date, Company the with successful offsetting hasthe been effects of increased commodity TheCompany continues to face the prospect of increasing commodity costs, including steel, other raw materials that andenergy could of Company’s the significantcustomers wouldcause sales andits profitability be adversely to affected. customers that accounted for 10% or more of consolidated net sales in fiscal 2010, deterioration of a business relationship with one or more If the Company were to business lose with any customers, key the Company’s business would beadversely affected. Although there were no would adversely affect sales, our profitability and relationships withcustomers. our Companythe would unable be to its meet production schedules for some of its key products and would miss product dates delivery which components from any of its suppliers, are who those particularly sources, sole and could not procure components the from other sources, delays supply intheir of raw materials to Company. the If Company the were asignificant to experience or prolonged shortage of critical significant increase indemand,capacity constraints or Company’s other issuesthe experienced by suppliers notwill result in shortages or on anumber able of be criteria, to andthat support will we they expect our growing However, needs. there no can assurance be that a and China India, demandparticular global the for steel significantly has risen in recent years. CompanyThe selects its suppliers based castings and in forgings the used manufacturing of its products. With continued the development of third certain world economies, in In the event of an increase in the global demand for steel, the Company could beadversely affected if shortagesexperiences it of raw other conditions may cause Company’s the customers to forego postpone purchases or otherwise infavor of repairing existing equipment. and appropriations, including and defense security outlays, prices, fuel interest rates, as well as many other factors. Adverse economic and and industrial markets. The demand forthe products maybe impacted the by strength economy,the of generally, governmental spending ers primarily pleasure inthe craft, commercial marine markets,and military as theand well energy as in natural resources, government variations caused by changes ingeneral economic conditions and other factors. In particular, Company the its sells products to custom- financial Historically, performance. of sales many of products the that Company the manufactures and have sells subject to cyclical been weakness in overall economic or activity fluctuations in those other factors can have a material effectadverse on the Company’s overall Many of the Company’s product markets are cyclical in nature sensitive or are to volatile otherwise or variable factors. Adownturn or produ actors The Company faces risks associated with its international sales and operations that could adversely affect its business, results of operations or financial condition. Sales to customers outside the United States approximated 65% of our consolidated net sales for fiscal 2010. We have international manufacturing operations in Belgium, Italy and Switzerland. In addition, we have international distribution operations in Singapore, China, Australia, Japan, Italy and Canada. Our international sales and operations are subject to a number of risks, including: – currency exchange rate fluctuations – export and import duties, changes to import and export regulations, and restrictions on the transfer of funds – problems with the transportation or delivery of our products – issues arising from cultural or language differences and labor unrest – longer payment cycles and greater difficulty in collecting accounts receivables – compliance with trade and other laws in a variety of jurisdictions These factors could adversely affect our business, results of operations or financial condition.

A material disruption at the Company’s manufacturing facilities in Racine, Wisconsin, could adversely affect its ability to generate sales and meet customer demand. The majority of the Company’s manufacturing, based on fiscal 2010’s sales, came from its two facilities in Racine, Wisconsin. If operations at these facilities were to be disrupted as a result of significant equipment failures, natural disasters, power outages, fires, explosions, adverse weather conditions or other reasons, the Company’s business and results of operations could be adversely affected. Interruptions in production would increase costs and reduce sales. Any interruption in production capability could require the Company to make substantial capital expenditures to remedy the situation, which could negatively affect its profitability and financial condition. The Company maintains property damage insurance which it believes to be adequate to provide for reconstruction of its facilities and equipment, as well as business interruption insurance to mitigate losses resulting from any production interruption or shutdown caused by an insured loss. However, any recovery under this insurance policy may not offset the lost sales or increased costs that may be experienced during the disruption of operations. Lost sales may not be recoverable under the policy and long-term business disruptions could result in a loss of customers. If this were to occur, future sales levels and costs of doing business, and therefore profitability, could be adversely affected.

Any failure to meet our debt obligations and satisfy financial covenants could adversely affect our business and financial condition. Beginning in 2008 and continuing into 2010, general worldwide economic conditions have experienced a downturn due to the combined effects of the subprime lending crisis, general credit market crisis, collateral effects on the finance and banking industries, slower economic activity, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns. These conditions make it difficult for customers, vendors and the Company to accurately forecast and plan future business activities, and cause U.S. and foreign businesses to slow spending on products, which delay and lengthen sales cycles. These conditions led to declining revenues in several of the Company’s divisions in fiscal 2009 and 2010. The Company’s amended revolving credit facility and senior notes agreements require it to maintain specified quarterly financial covenants such as a minimum consolidated net worth amount, a minimum EBITDA as defined, for the most recent four fiscal quarters of $11,000,000 and a funded debt to EBITDA ratio of 3.0 or less. At June 30, 2010, the Company was in compliance with these financial covenants. Based on its annual financial plan, which reflects these actions and the softening forecast, the Company believes that it will generate sufficient EBITDA levels throughout fiscal 2011 in order to maintain compliance with its financial covenants. However, as with all forward-looking information, there can be no assurance that the Company will achieve the planned results in future periods especially due to the significant uncertainties flowing from the current economic environment. If the Company is not able to achieve these objectives and to meet the required covenants under the agreements, the Company may require forbearance from its existing lenders in the form of waivers and/or amendments of its credit facilities or be required to arrange alternative financing. Failure to obtain relief from covenant violations or to obtain alternative financing, if necessary, would have a material adverse impact on the Company.

The Company may experience negative or unforeseen tax consequences. The Company reviews the probability of the realization of our net deferred tax assets each period based on forecasts of taxable income in both the U.S. and foreign jurisdictions. This review uses historical results, projected future operating results based upon approved business plans, eligible carryforward periods, tax-planning opportunities and other relevant considerations. Adverse changes in the profitability and financial outlook in the U.S. or foreign jurisdictions may require the creation of a valuation allowance to reduce our net deferred tax assets. Such changes could result in material non-cash expenses in the period in which the changes are made and could have a material adverse impact on the Company’s results of operations and financial condition.

Item 1B. Unresolved staff comments None.

Item 2. Properties Manufacturing Segment The Company owns two manufacturing, assembly and office facilities in Racine, Wisconsin, U.S.A., one in Nivelles, Belgium, two in Decima, Italy, and one in Novazzano, Switzerland. The aggregate floor space of these six plants approximates 724,000 square feet. One of the Racine facilities includes office space, which includes the Company’s corporate headquarters. The Company leases additional manufacturing, assembly and office facilities in Italy (Limite sull’Arno) and India (outsourcing office in Chennai).

20 21 Twin Disc Annual Report 2010 Michael E.Batten Name inlieuofReport included being Proxy inthe Statement for Annual the Meeting of Shareholders held to on be 15,2010. October Pursuant Instruction to General G(3)of Form following 10-K,the list is included as an unnumbered Item inPart Iof this of the RegistrantExecutive Officers 4.Item RESER Company’s results of operations,position financial or statement cashof flows. is not presently determinable. Management that believes disposition final the of such litigation notwill have a material impact the on Twin is adefendant Disc product inseveral liability or related claims of ultimate the which outcome and liability to Company, the ifany, 3.Proceedings Item Legal CompanyThe believes its properties are well maintained and adequate for its present and anticipated needs. Kent, Washington, U.S.A. Coburg, Oregon, U.S.A. Medley, Florida, U.S.A. Jacksonville, Florida, U.S.A. The productfollowing service. properties are leased: CompanyThe hasalso operationsthe in following locations, all which of are for used sales offices, warehousinglight and assembly or Distribution Segment John H.Batten Christopher J. Eperjesy James E.Feiertag Henri-Claude Fabry Dean J.Bratel Denise L.Wilcox Jeffrey S.Knutson Thomas E. Valentyn Prior tojoiningTwinDisc,Ms.Wilcox heldpositionswithJohnsonInternationalandRunzheimerInternational. 1998, Ms.Wilcoxwaspromotedto DirectorCorporateHumanResourcesinMarch2002andtohercurrent roleinNovember2004. Denise L.Wilcox,VicePresident– HumanResources.AfterjoiningtheCompanyasManagerCompensation &BenefitsinSeptember Mr. BrateljoinedTwinDiscin1987. Corporate Engineering(sinceJanuary2003),ChiefEngineerOctober 2001)andEngineeringManager(sinceDecember1999). Dean J.Bratel,VicePresident–Engineering.Mr.Bratelwaspromoted tohiscurrentroleinNovember2004afterservingasDirectorof Twin Discin1997asDirector,MarketingandSalesoftheBelgiansubsidiary. appointed tohiscurrentpositioninJanuary2009,afterservingasVice President–GlobalDistributionsince2001.Mr.Fabryjoined Henri ClaudeFabry,VicePresident–InternationalDistributionand ManagingDirector,TwinDiscInternationalS.A.Mr.Fabrywas the VicePresidentofManufacturingforDrivesandSystemsGroup ofRockwellAutomationsince1999. he servedasVicePresident–ManufacturingsincejoiningtheCompany inNovember2000.PriortojoiningTwinDisc,Mr.Feiertagwas James E.Feiertag,ExecutiveVicePresident.Mr.Feiertagwasappointed tohispresentpositioninOctober2001.Priorbeingpromoted, for KmartCorporationsince2001,andSeniorManager–Corporate FinancewithDaimlerChryslerAGsince1999. current roleinNovember2002.PriortojoiningTwinDisc,Mr.Eperjesy wasDivisionalVicePresident–FinancialPlanning&Analysis Christopher J.Eperjesy,VicePresident–Finance,ChiefFinancialOfficerandTreasurer.Mr.EperjesyjoinedtheCompanyinhis joined TwinDiscin1996asanApplicationEngineer.Mr.BattenisthesonofMichaelBatten. Manager –MarineandPropulsionsinceOctober2001Commercial1998.Mr.Batten Officer. Priortothispromotion,Mr.BattenservedasExecutiveVicePresidentsinceNovember2004,andGeneral John H.Batten,PresidentandChiefOperatingOfficer.EffectiveJuly1,2008,Mr.Battenwasnamed Chairman andChiefExecutiveOfficerin1991. Michael E.Batten,ChairmanandChiefExecutiveOfficer.Mr.BattenhasbeenemployedwiththeCompanysince1970,wasnamed Shareholders. Eachofficerholdsofficeuntilasuccessorisdulyelected,orhe/sheresignsremovedfromoffice. Officers areelectedannuallybytheBoardofDirectorsatmeetingheldinconjunctionwitheachAnnualMeeting VED Position Chairman ander Executive Chief Offic President andChiefOperatingOfficer Vice President –Finance, Financial Chief Officer and Treasurer Executive Vice President Vice President -International Distribution and Managing Director, Vice President–Engineering Twin International Disc S.A. Vice President–HumanResources Corporate Controller CounselandGeneral Secretary Perth, Western Australia, Australia Brisbane, Queensland, Australia Burnaby, British Columbia, Canada Edmonton, Canada Alberta, Guangzhou, China Shanghai, China Singapore Limite sull’Arno, Italy Age 70 45 42 53 64 46 53 45 51

Jeffrey S. Knutson, Corporate Controller. Mr. Knutson was appointed to his current role in October 2005 after joining the Company in February 2005 as Controller of North American Operations. Prior to joining Twin Disc, Mr. Knutson held Operational Controller positions with Tower Automotive (since August 2002) and Rexnord Corporation (since November 1998).

Thomas E. Valentyn, General Counsel and Secretary. Mr. Valentyn joined the Company in his current role in September 2007. Prior to joining Twin Disc, Mr. Valentyn served as Vice President and General Counsel at Norlight Telecommunications, Inc. since July 2000.

PART II

Item 5. Market for the Registrant’s Common Stock and Related Stockholder Matters The Company’s common stock is traded on the NASDAQ Global Select Market under the symbol TWIN. The price information below represents the high and low sales prices from July 1, 2008 through June 30, 2010: Fiscal Year Ended June 30, 2010 Fiscal Year Ended June 30, 2009 High Low Dividend High Low Dividend First Quarter $15.23 $6.21 $0.0700 First Quarter $22.94 $12.92 $0.0700 Second Quarter 14.77 9.12 0.0700 Second Quarter 15.38 4.02 0.0700 Third Quarter 13.17 8.77 0.0700 Third Quarter 8.12 4.54 0.0700 Fourth Quarter 14.92 11.35 0.0700 Fourth Quarter 9.72 6.06 0.0700

For information regarding the Company’s equity-based compensation plans, see the discussion under Item 12 of this report. As of August 18, 2010, shareholders of record numbered 736. The closing price of Twin Disc common stock as of August 18, 2010, was $12.47.

Issuer Purchases of Equity Securities (c) Total number of (d) Maximum number shares purchased as part of shares that may yet (a) Total number of (b) Average price of publicly announced be purchased under Period shares purchased paid per share plans or programs the plans or programs ______March 27, 2010–April 30, 2010 0 N/A 0 250,000 May 1, 2010–May 28, 2010 0 N/A 0 250,000 May 29, 2010–June 30, 2010 ______0 N/A 0 250,000 Total 0 ______

On February 1, 2008, the Board of Directors authorized the purchase of up to 500,000 shares of Common Stock at market values, of which 250,000 shares have already been purchased during the second quarter of fiscal 2009.

Performance Graph The following table compares total shareholder return over the last 5 fiscal years to the Standard & Poor’s 500 Machinery (Industrial) Index and the Russell 2000 Index. The S&P 500 Machinery (Industrial) Index consists of a broad range of manufacturers. The Russell 2000 Index consists of a broad range of 2,000 companies. The Company believes, because of the similarity of its business with those companies contained in the S&P 500 Machinery (Industrial) Index, that comparison of shareholder return with this index is appropriate. Total return values for the Corporation’s common stock, the S&P 500 Machinery (Industrial) Index and the Russell 2000 Index were calculated based upon an assumption of a $100 investment on June 30, 2005 and based upon cumulative total return values assuming reinvestment of dividends on a quarterly basis.

400 COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN 375 TWIN DISC, INCORPORATED; S&P MACHINERY; AND RUSSELL 2000

350

325 339.03 300 Twin Disc

275 S&P Machinery

250 Russell 2000

225 199.65 200

175 142.92 152.53 130.99 145.34 127.58 150 115.60 145.00 125 100.00 100.00 121.51 91.31 100 114.58 110.93 100.00 75 88.99

50 67.62 JUNE 30, 2005 JUNE 30, 2006 JUNE 30, 2007 JUNE 30, 2008 JUNE 30, 2009 JUNE 30, 2010 22 23 Twin Disc Annual Report 2010 Dividends share per . Twin common Disc shareholders Diluted share earnings per attributable to Twin common Disc shareholders share earnings per Basic attributable to Net earnings attributable to Twin Disc . Asian market, saw a3.9%year-over-year off insales, 2009’s decrease of fiscal record level. This slight decrease was primarily driven by exchange rates had a net favorable impact on sales of $4.9 million. TheCompany’s distribution operation in Singapore,which serves the Net for sales distribution operations were down amore modest$11.0million, 2010. or 9.8%,infiscal Year-over-year changes in foreign industrial markets. and was primarily due to impact the of continued the megayacht,global the softening in experienced European commercial marine and drivessurface for patrol global the boat market. The net remainingcame decrease Company’sthe at European manufacturing operations marine transmissions, industrial products and aftermarket sales partially offset parts, of by higher oil land-based transmissionsand gas and of atsales $1.0million. Sales Company’s the domestic manufacturing location were down $37.1million, primarily driven by lower of sales by $82.5 million, or 31.0%, than in the prior fiscal year. Year-over-year changes in foreign exchange rates had a net favorable impact on sales Infor 2010, fiscal our worldwide manufacturing operations,before eliminating intra-segment and inter-segment sales, were lower favorable translation 2010, effect sales on of $3.3millioncompared in fiscal 2009. fiscal to Net $68.1million, 2010. orTheyear-over-year decreased 23.0%,infiscal sales movement in foreign exchange rates resulted ina net Net Sales 2010ComparedFiscal to 2009 Fiscal included consolidated inthe results for years the June ended 30,2007,2008,2009and 2010. operations for these four acquired entities are included in the consolidated results for the year ended June 30, 2006. A full year’s results are limited liability company. four All entities have year ending afiscal May 31. theSince acquisition effectivealso was May 31, no resultsof S.r.l., an Italian limited liability company; Equipment Boat Limited, aMaltese limited liability company; and Vetus Italia S.r.l., an Italian Effective MayCompanythe 31,2006, acquired four related foreign entities: B.C.S. S.r.l., an limitedItalian liability company; Service B.C.S. ofRestructuring operations Marketing, engineering and administrative expenses of sold Cost goods Net sales . . Results of Operations in any forward looking statements. limited factorsunder toItem those discussed 1A,Risk Factors, could cause results actual materially to be differentfrom what is presented In addition to assumptions the and information referredthe in forward-looking to specifically statements, factors,other including, but not performance. Therecanbe no assurance Companythe inachievingbe successful its will goals. forward-looking statements. In addition, goals established by Company the should as not guarantees viewed be or promises of future plans.those The words “anticipates,”“believes,” “intends,” “estimates,” and “expects,” or similar anticipatory expressions, identify usually Forward-looking statements include Company’s the description of plans and objectives for future operations and assumptions behind risks and uncertainties that could cause results actual to differ materiallyfrom what appears here. are not historical are facts forward-looking statements, are which on management’s based current expectations. These statements involve Statements report inthis (including but not limited statements to certain inItems 1,3and 7)and inother Company communications that Note on Forward-Looking Statements Item 7 Total long-term debt Total assets . period): of end (at Data Sheet Balance Net sales Data: Operations of Statement (in thousands, except share per amounts) Financial Highlights Item 6 . Management’s Discussion . SelectedFinancialD Earnings fromEarnings operations Gross profit (In thousands) . . .

ata . and Analysis ofFinancialCondition . . .

______$ $227,534 167,069 56,886 60,465 3,085 and Results ofOperations 2010 494

______$227,534 $259,056 ______27,211 25.0% 6 26.6% 1.4% 0.2% 0.05 0.05 0.28 2010 597 %

______$290,008 $295,618 $ 214,175 $ 295,618 46,348 11,502 19,785 81,443 0,470 1,188 1.03 1.04 0.28 2009 2009 For the years ended June ended yearsthe For ______$304,628 $331,694 48,227 ______24,252 20.5% 27.6% 0.265 6.7% 0.4% 2.13 2.15 2008 %

______$267,184 $317,200 $ 104,868 226,826 331,694 42,152 30, 21,852 38,892 66,349 0.205 (373 1.84 1.88 2007 2008 % ) ______$243,287 $236,172 38,369 ______0.1825 14.453 11.7% 20.0% 31.6% (0.1% 1.22 1.26 2006

)

decreased shipments in the fourth fiscal quarter of commercial marine transmissions for Asian markets. The Company’s distribution operations in Europe, Australia and the Southeastern United States experienced sharper declines versus the prior fiscal year due to the continued softening of the global megayacht and industrial markets. The Company provides marine transmissions, and propulsion and boat management systems to serve the global megayacht market.

Net sales for the Company’s largest product market, marine transmission and propulsion systems, were down 22.7% compared to the prior fiscal year. Increased sales of propulsion and transmission systems for the military patrol boat market were up significantly, but were more than offset by continued weakness in the European megayacht market as well as some softening off of record levels in the commercial marine market. Sales of the Company’s boat management systems manufactured at our Italian operation and servicing the global megayacht market, were off approximately 40% versus the prior fiscal year. This was primarily driven by continued weakening in sales to builders of megayachts. In the off-highway transmission market, the year-over-year decrease of just over 10% can be attributed primarily to decreased sales of the Company’s vehicular transmissions for the airport, rescue and fire fighting (ARFF) and agricultural tractor markets, only partially offset by increased transmission sales in land-based oil field markets. Sales of transmission systems for the military market were relatively flat year-over-year. The decrease experienced in the Company’s industrial products of roughly 29% was due to decreased sales in the agriculture, mining and general industrial markets, primarily in the North American and Italian markets, partially offset by increased activity related to oil field markets.

The elimination for net intra-segment and inter-segment sales decreased $25.4 million, or 30.7%, from $82.6 million in fiscal 2009 to $57.2 million in fiscal 2010. Year-over-year changes in foreign exchange rates had a net unfavorable impact of $2.6 million on net intra-segment and inter- segment sales.

Gross Profit In fiscal 2010, gross profit decreased $21.0 million, or 25.8%, to $60.5 million. Gross profit as a percentage of sales decreased 100 basis points in fiscal 2010 to 26.6%, compared to 27.6% in fiscal 2009. The table below summarizes the gross profit trend by quarter for fiscal years 2010 and 2009:

Gross Profit ($ millions) ______1st Quarter ______2nd Quarter ______3rd Quarter ______4th Quarter ______Year 2010 ...... $ 9.7 $14.8 $16.5 $19.5 $60.5 2009 ...... $20.1 $22.9 $19.2 $19.2 $81.4 Percentage of Sales ...... 2010 ...... 20.7% 26.8% 27.1% 30.2% 26.6% 2009 ...... 27.6% 28.1% 27.6% 26.7% 27.6%

There were a number of factors that impacted the Company’s overall gross margin rate in fiscal 2010. Gross margin for the year was unfavorably impacted by lower volumes, extended shutdowns in the first half of the fiscal year at the Company’s domestic and European manufacturing operations, and an increase in expenses related to the Company’s defined benefit plans. The Company estimates the net unfavorable impact of lower volumes on gross margin in fiscal 2010 was approximately $27 million. On June 3, 2009, the Company announced it would freeze future accruals under the domestic defined benefit pension plans effective August 1, 2009. This resulted in a curtailment gain of $1.7 million recorded in the fourth quarter of fiscal 2009. Of this amount, $1.2 million was recorded as income in cost of goods sold, with the remainder recorded in ME&A expenses. As a result, there was a net increase in the defined benefit pension expense recorded in cost of goods sold of $2.8 million, from a net benefit of $(0.5) million in fiscal 2009 to a net expense of $2.3 million in fiscal 2010 (see Note M of the Notes to the Consolidated Financial Statements). The net impact of this change was to decrease gross profit as a percentage of sales by nearly 120 basis points. The above were partially offset by a favorable shift in product mix, primarily related to oil field product in the second half of the fiscal year (estimated impact was $0.7 million), selective pricing actions, and lower warranty expenses. Total warranty expense decreased over $2.7 million in the current fiscal year, from $6.4 million in fiscal 2009 to $3.7 million in fiscal 2010 (see Note F of the Notes to the Consolidated Financial Statements). The decrease in warranty expense can be attributed to a decrease in volume and an overall reduction in specific warranty campaigns that were experienced in fiscal 2009. The net impact of this change was to increase gross profit as a percentage of sales by nearly 50 basis points. In addition, the year-over- year movement in foreign exchange rates, primarily driven by movements in the euro and Asian currencies, resulted in a net favorable translation effect on gross profit of $1.2 million in fiscal 2010, compared to fiscal 2009.

Marketing, Engineering and Administrative (ME&A) Expenses Marketing, engineering, and administrative (ME&A) expenses decreased $3.6 million, or 5.9%, in fiscal 2010 versus fiscal 2009. As a percentage of sales, ME&A expenses increased by 450 basis points to 25.0% in fiscal 2010, compared to 20.5% in fiscal 2009. The table below summarizes significant changes in certain ME&A expenses for the fiscal year: Fiscal Year Ended June 30, 2010 June 30, 2009 Increase/(Decrease) $ thousands – (Income)/Expense ______Pension ...... $2,044 $ 413 $1,631 Stock Based Compensation ...... 505 (581 ) 1,086 Severance ...... — 1,308 (1,308 ) Domestic/Corporate IT Expenses ...... 4,847 5,740 ______(893 ) ______516 Foreign Currency Translation . . . . . ______924 ______1,440 All Other, Net ...... ______(5,024 ) $(3,584 ) ______24 25 Twin Disc Annual Report 2010 of oil land-based and gas transmissions, and drives surface for megayacht global the market. The net remainingcame decrease the at of atsales $5.9million. Sales Company’s the domestic manufacturing location were down $19.8million, primarily driven by lower sales million, or 11.1%,lower than prior inthe year. fiscal Year-over-year changes in foreign exchange rates had a net unfavorable impact on sales Infor 2009, fiscal our worldwide manufacturing operations,before eliminating intra-segment and inter-segment sales, were $33.1 unfavorable translation 2009, effect sales on of $4.8millioncompared in fiscal 2008. fiscal to Net $36.1million, 2009. orTheyear-over-year decreased 10.9%, infiscal sales movement in foreign exchange rates resulted ina net Net Sales 2009ComparedFiscal to 2008 Fiscal second2011. ofthe half fiscal continue.will In addition, Company the continues to work on development the of its 7500transmission to production start and expects in demand for high-horsepowernew With rigs. oil and gas prices remainingCompanythe firm, is optimistic demand fortransmissions these is aresult of increased orders by oil and gas customers for Company’s the 8500transmission system as stable oil and gas prices have driven $84.4 million, or approximately than 40%higher six-month the of backlog $60.6million as of June 30,2009.The improvement backlog in As of June Company’s 30,2010,the of backlog orders for scheduled shipment during next the sixmonths (six-month was backlog) Order Rates foreign credits, tax resulted which relatively inthe low rate for 2009. fiscal lowthe of base earnings. In addition, prior the year included fiscal percentage a3.0 point benefit (ratereduction) related to an increase in to impact the of permanent items, remained which relatively constant with prior the year, but had agreater impact on rate tax the due to For effectivetax rate 2010,the percent, was 57.6 comparedpercent to 34.7 year.last fiscal The increased rate for2010 was primarily due Income Taxes Company’s foreign subsidiaries. interest rate of 6.05%,remained flat at $1.5million. The net remaining interestmillion expense of$0.2 was from various borrowings the at 2009the rateto 4.00%, fiscal floor, 2010.all fiscal for of Interestexpense the for Company’s Seniormillion $25 afixed which carry Notes, 2009. Partially offsettingthe averageborrowing, decreased the interest rate the on revolverfrom increased a range of 1.69% to 4.00%in The averageborrowing the on revolver, computed monthly, 2010, to $14.4millioncompared decreased in fiscal millionfiscal to $24.0 in overall average inthe decrease borrowings year-over-year offset partially by an increasethe interest in rate the on revolver year-over-year. (“revolver”) be decrease $0.2million 2010. fromThis 2009 can decreased to $0.6million in $0.8millionfiscal infiscal attributed to an Interest by decreased $0.2million, expense 2010. or 8.2%,infiscal Total interestCompany’s the on $35million revolving credit facility Interest Expense by $122,000.Accruedaccrual restructuring costs were $945,000and $1,121,000at June 30,2010and 2009,respectively. and Company 2009,the made cash payments of $192,000and $200,000,respectively. The exchange 2010 was impact to in fiscal reduce the related legislation to aBelgian change surrounding prepension the costs and required legally inflationary adjustments. 2010 During fiscal employees.4 salaried An adjustment was made fourth inthe quarter 2010, of fiscal resulting ina pre-tax expense of $138,000 primarily operation to improve future profitability. The charge consists of prepension costs for 37 employees: 33 manufacturing employees and CompanyThe recorded a restructuring charge the of $2,076,000in fourth Companyquarter 2005 the as of fiscal Belgian restructured its reduce by $292,000.Accrued accrual the restructuring costs were $2,315,000and $2,417,000at June 30,2010and 2009,respectively. Company 2010 theand fiscal 2009, cashpaymentsmade of $152,000 and $120,000, respectively. The exchange 2010 was fiscal to in impact primarily related legislation to aBelgian change surrounding prepension the costs and required legally inflationary adjustments.During adjustments to benefits. An additional adjustment wasthe made in fourth quarter 2010, of resultingfiscal ina expense of$342,000 pre-tax adjustment was made fourth inthe quarter 2009, of fiscal resulting ina pre-tax expense of $240,000 related to legally required inflationary turing processes. The charge consists of prepension costs for 32employees: 29 manufacturing employees employees. salaried and 3 An reduction at operation its Belgian to improve profitabilitythrough targeted outsourcingsavings and additional on corefocus manufac- Company fourth the quarterDuring the 2007, of fiscal

Company’s European manufacturing operations and was primarily due to the impact of the softening experienced in the second half of the fiscal year in the megayacht market. Softening demand as a result of the global economic slowdown unfavorably impacted shipments and order rates in the third and fourth fiscal quarters.

Net sales for distribution operations were down $3.3 million, or 2.9%, in fiscal 2009. Year-over-year changes in foreign exchange rates had a net unfavorable impact on sales of $2.2 million. The Company’s distribution operation in Singapore, which serves the Asian market, saw a 35% year- over-year increase in sales. This increase was primarily driven by increased shipments of commercial marine transmissions for Asian markets. Offsetting the increase experienced in Asia, the Company’s distribution operations in Europe, Australia and the Southeastern United States experienced declines versus the prior fiscal year due to the continued softening of the global megayacht market. The Company provides marine transmissions, and propulsion and boat management systems to serve this market.

Net sales for the Company’s largest product market, marine transmission and propulsion systems, were roughly flat compared to the prior fiscal year. Sales of the Company’s boat management systems manufactured at our Italian operation and servicing the global megayacht market, were off approximately 30% versus the prior fiscal year. This was primarily driven by second half fall-off in sales to builders of megayachts. In the off- highway transmission market, the year-over-year decrease of nearly 19% can be attributed primarily to decreased transmission sales in land-based oil field markets, only partially offset by increased sales of the Company’s transmissions for the agricultural tractor market. Sales of the Company’s vehicular transmissions for the airport rescue and fire fighting and military markets remained at or slightly above year ago levels. The decrease experienced in the Company’s industrial products of roughly 10% was also due in part to the decreased activity related to oil field markets as well as decreased sales into the agriculture, mining and general industrial markets, primarily in the North American and Italian markets.

The elimination for net intra-segment and inter-segment sales decreased $0.4 million, or 0.4%, from $82.9 million in fiscal 2008 to $82.5 million in fiscal 2009. Year-over-year changes in foreign exchange rates had a net favorable impact of $3.2 million on net intra-segment and inter-segment sales.

Gross Profit In fiscal 2009, gross profit decreased $23.4 million, or 22.3%, to $81.4 million. Gross profit as a percentage of sales decreased 400 basis points in fiscal 2009 to 27.6%, compared to 31.6% in fiscal 2008. There were a number of factors that impacted the Company’s overall gross margin rate in fiscal 2009. Gross margin for the year was unfavorably impacted by lower volumes (estimated impact of $15 million), an unfavorable shift in product mix, and an increase in warranty expenses ($1.7 million). In addition, the year-over-year movement in foreign exchange rates, primarily driven by movements in the euro, resulted in a net unfavorable translation effect on gross profit of $3.3 million in fiscal 2009, compared to fiscal 2008. These adverse effects were partially offset by selective pricing actions, improvements achieved through the Company’s outsourcing and cost-reduction programs and lower domestic bonus expense. On June 3, 2009, the Company announced it would freeze future accruals under the domestic defined benefit pension plans effective August 1, 2009. This resulted in a curtailment gain of $1.7 million recorded in the fourth quarter of fiscal 2009. Of this amount, $1.2 million was recorded as income in cost of goods sold, with the remainder recorded in ME&A expenses. In addition, the Company’s Belgian operation’s gross margin was favorably affected by the continued relative strength of the euro versus the U.S. dollar, 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. The average to U.S. dollar exchange rate, computed monthly, in fiscal 2009 was $1.37, which was 7.3% lower than in fiscal 2008. It is estimated that the year-over-year effect of a weaker euro, on average, was to improve margins at our Belgian subsidiary by nearly $1.4 million.

Marketing, Engineering and Administrative (ME&A) Expenses Marketing, engineering, and administrative (ME&A) expenses decreased $5.9 million, or 8.9%, in fiscal 2009 versus fiscal 2008. As a percentage of sales, ME&A expenses increased by 50 basis points to 20.5% in fiscal 2009, compared to 20.0% in fiscal 2008. The table below summarizes significant changes in certain ME&A expenses for the fiscal year: Fiscal Year Ended June 30, 2009 June 30, 2008 Increase/(Decrease) $ thousands – (Income)/Expense ______Domestic Bonus ...... $ — $3,100 $(3,100 ) Stock Based Compensation ...... (581 ) 1,879 (2,460 ) Pension ...... (88 ) 261 (349 ) Severance ...... 1,308 — 1,308 Domestic/Corporate IT Expenses ...... 5,740 4,419 ______1,321 ______(3,280 ) Foreign Currency Translation . . . . . ______(1,544 ) ______(4,824 ) All Other, Net ...... ______(1,055 ) $(5,879 ) ______

The decrease in domestic bonus compensation is due to the fact that the annual incentive targets for fiscal year 2009 were not achieved and as a result no bonuses were accrued. The decrease in stock-based compensation expense for executive officers is primarily driven by the reversal of accruals for long-term incentive compensation awards for fiscal years 2010 and 2011, due to the low probability of achieving the threshold performance levels (see Note K of the Notes to the Consolidated Financial Statements). The severance charge related to actions announced in the second quarter of fiscal 2009 at the Company’s Belgian operation. The increase in domestic and corporate IT expenses primarily represents increased depreciation expense related to the implementation of the Company’s new global ERP system. The net remaining decrease in ME&A expenses primarily relates to global cost reduction initiatives implemented by the Company in the second half of fiscal 2009. 26 27 Twin Disc Annual Report 2010 manufacturing operations and distribution operations Pacific inthe Basin. primarily inventories, retirement and inaccrued adecrease benefits. The increase in inventory cameprimarily Company’sthe at European The net increase was driven primarily by a net increaseearnings in partially offsetof $2.3million by increases in working capital, The cashnet provided by million, 2008operating $19.9 an in activities fiscal increasetotaled million, of$2.2 or13%, versus 2007. fiscal throughoutwhen compared 2009 fiscal 2008. in fiscal same theperiod to net increase ininventory came primarily at Company’s the distribution operation inSingapore, saw which double-digit growth sales liabilities primarily relates to reduction the inbonus and compensation stock-based versus accruals end the of prior the year. fiscal The decline fourthquarter inthe fiscal as well as reduced inventories Company’sthe at manufacturing locations. decrease inaccrued The primarily accounts payable liabilities. and accrued The inaccounts decrease payable can be primarily attributed the to general volume The was net decrease driven primarily earningsby a in net decrease net partially offsetof $12.6million,decreases in by working capital, The cashnet provided by million,decrease 2009operating $11.6 a million, of$8.3 in activities fiscal totaled or42%, versus 2008. fiscal outstanding receivables balancesglobally. a result of lower second2010compared of inthe half sales fiscal 2009 as inasa well fiscal samecontinued theperiod to effort tocollect Company’s European manufacturing locations and its distribution operation inSingapore.trade accounts The in decrease receivable was receivable offset balances,partially earningsby a in net decrease net of $11.1 million. decreaseThe in net inventory cameprimarily the at 2009. The net increase was driven by a in net decrease workingcapital, primarily due in to decreases net inventories trade accountsand The cashnet provided by million, 2010operating $35.1 an in activities fiscal increasetotaled million, of$23.5 or203%, versus fiscal Fiscal Years 2010,2009and2008 Liquidity and Capital Resources net decreaseintheirsix-monthbacklogs,primarilyforproductsservingtheItalianandglobalmegayachtmarkets. systems, duetocontinuedsofteningintheendmarketsfortheseproducts.TheCompany’sEuropeanmanufacturingoperationssawa more thanoffsetbydecreasesinthesix-monthbacklogsformarineandoilgastransmissions,industrialproductspropulsion manufacturing operationsawanincreaseinbacklogforairportrescueandfirefightingmilitaryvehiculartransmissions.Thiswas $60.6 million,orapproximately50%lowerthanthesix-monthbacklogof$120.8millionasJune30,2008.TheCompany’sdomestic As ofJune30,2009,theCompany’sbacklogordersscheduledforshipmentduringnextsixmonths(six-monthbacklog)was Order Rates Note(see Nof Notes the to Consolidated the Financial Statements). is one-time the benefit recorded 2008 in fiscal related to adjusting thebalanceItalian deferred tax newthefor reduced tax Italian rate Company’sIn 2009 theand fiscal 2008, effective tax rate approximated 34.7% and 30.9%, respectively. The primary cause the for increase Income Taxes borrowings at Company’s the foreign subsidiaries. afixed interestcarry rate of 6.05%, remainedflat million. at$1.5 The net remaining interestexpensemillion of$0.2 was fromvarious 2008 to arange6.97% infiscal 2009.of 1.69% to 4.00%in fiscal Interest expense Company’sthe for Seniormillion $25 whichNotes, 2008. in fiscal Morethan offsetting the average increased borrowing, the interest rate the on revolver decreased from a range of3.71% to over-year. The averageborrowing the on revolver, computed monthly, 2009, increased to $24.0millioncompared in fiscal million to$22.8 interest inthe decrease rate on revolver the year-over-year more which than offset an increasetheoverall in averageborrowings year- (“revolver”) be decrease $0.6million 2009. fromThis 2008 can decreased to $0.7million in $1.3millionfiscal infiscal attributed toa Interest by decreased $0.6million, expense 2009. or 18.1%,infiscal Total interestCompany’s the on $35million revolving credit facility Interest Expense and 2008,respectively. 2009was impactto infiscal reducetheby $137,000. accrual costsrestructuring Accrued were $1,121,000 and $1,465,000 at June 30,2009 employees.salaried Company 2009 theand fiscal 2008, During cashpaymentsmade of $200,000 and $262,000, respectively. The exchange operation to improve future profitability. The charge consists of prepension costs for 37 employees: 33 manufacturing employees and 4 CompanyThe recorded a restructuring charge the of $2,076,000in fourth Companyquarter 2005 the as of fiscal Belgian restructured its costs were $2,417,000and $2,603,000at June 30,2009and 2008,respectively. of $120,000 The net cash used for investing activities in fiscal 2010 of $4.6 million consisted primarily of capital expenditures for machinery and equipment at our domestic and Belgian manufacturing operations, and the continuation of the global implementation of a new ERP system started in fiscal 2007. In fiscal 2010, the Company spent $4.5 million for capital expenditures, down from $8.9 million and $15.0 million in fiscal years 2009 and 2008, respectively. The software costs associated with the new ERP have been substantially paid for and were capitalized as appropriate in fiscal years 2007 and 2008.

The net cash used for investing activities in fiscal 2009 of $7.8 million consisted primarily of capital expenditures for machinery and equipment at our domestic and Belgian manufacturing operations, and the continuation of the global implementation of a new ERP system started in fiscal 2007. In fiscal 2010, the Company expects to complete the majority of the remaining ERP implementation work for its foreign manufacturing and distribution operations. The software costs associated with the new ERP have been substantially paid for and capitalized as appropriate in fiscal years 2007 and 2008.

The net cash used for investing activities in fiscal 2008 of $14.7 million consisted primarily of capital expenditures for machinery and equipment at our domestic and Belgian manufacturing operations, and the continuation of the implementation of a new ERP system started in fiscal 2007 at our domestic manufacturing location in Racine. The software costs associated with the new ERP have been substantially paid for and capitalized as appropriate in fiscal years 2007 and 2008.

In fiscal 2010, the net cash used by financing activities of $23.2 million consisted primarily of payments on long-term debt and dividends paid to shareholders of the Company.

In fiscal 2009, the net cash used by financing activities of $4.2 million consisted primarily of dividends paid to shareholders of the Company and the purchase of shares of the Company’s outstanding common stock under a Board-authorized stock repurchase program, offset by net borrowings on the Company’s revolving credit facility. In the second fiscal quarter of 2009, the Company repurchased a total of 250,000 shares of its outstanding common stock at an average price of $7.25 per share, for a total of $1.8 million. In addition, the Company paid $3.1 million in dividends to its shareholders, a 3.5% increase over fiscal 2008. These were offset by over $2.8 million in additional borrowings under the Company’s revolving credit facility.

In fiscal 2008, the net cash used by financing activities of $12.6 million consisted primarily of the purchase of shares of the Company’s outstanding common stock under a Board-authorized stock repurchase program. In the first and third fiscal quarters of 2008, the Company repurchased a total of 660,000 shares of its outstanding common stock at an average price of $23.70 per share, for a total of $15.6 million. In addition, the Company paid $3.0 million in dividends to its shareholders, a 25% increase over fiscal 2007. These were offset by over $5 million in additional borrowings under the Company’s revolving credit facility.

Future Liquidity and Capital Resources In December 2002, the Company entered into a $20,000,000 revolving loan agreement with M&I Marshall & Ilsley Bank (“M&I”), which had an original expiration date of October 31, 2005. In September 2004, the revolving loan agreement was amended to increase the commitment to $35,000,000 and the termination date of the agreement was extended to October 31, 2007. During the first quarter of fiscal 2007, the term was extended by an additional two years to October 31, 2009. An additional amendment was agreed to in the first quarter of fiscal 2008 to extend the term by an additional year to October 31, 2010, and eliminate the covenants limiting capital expenditures and restricted payments (dividend payments and stock repurchases). During the fourth quarter of fiscal 2009, the term was further extended to May 31, 2012 and the funded debt to four quarter EBITDA maximum was increased from 2.5 to 3.0. This agreement contains certain covenants, including restrictions on investments, acquisitions and indebtedness. Financial covenants include a minimum consolidated net worth amount, a minimum EBITDA for the most recent four fiscal quarters of $11,000,000 at June 30, 2010, and a maximum total funded debt to EBITDA ratio of 3.0 at June 30, 2010. As of June 30, 2010, the Company was in compliance with these covenants with a four quarter EBITDA total of $13,688,000 and a funded debt to EBITDA ratio of 2.27. The minimum net worth covenant fluctuates based upon actual earnings and is subject to adjustment for certain pension accounting adjustments to equity. As of June 30, 2010, the minimum equity requirement was $101,836,000 compared to an actual result of $122,460,000 after all required adjustments. The outstanding balance under the revolving loan agreement of $9,000,000 and $22,450,000 at June 30, 2010 and June 30, 2009, respectively, is classified as long-term debt. In accordance with the loan agreement as amended, the Company has the option of borrowing at the prime interest rate or LIBOR plus an additional “Add-On,” between 2% and 3.5%, depending on the Company’s Total Funded Debt to EBITDA ratio, subject to a minimum interest rate of 4%. The rate was 4.0% at June 30, 2010 and 2009, respectively.

On April 10, 2006, the Company entered into a Note Agreement (the “Note Agreement”) with The Prudential Insurance Company of America and certain other entities (collectively, “Purchasers”). Pursuant to the Note Agreement, Purchasers acquired, in the aggregate, $25,000,000 in 6.05% Senior Notes due April 10, 2016 (the “Notes”). The Notes mature and become due and payable in full on April 10, 2016 (the “Payment Date”). Prior to the Payment Date, the Company is obligated to make quarterly payments of interest during the term of the Notes, plus prepayments of principal of $3,571,429 on April 10 of each year from 2010 to 2015, inclusive. The outstanding balance was $21,428,571 and $25,000,000 at June 30, 2010 and 2009, respectively. Of the outstanding balance, $3,571,429 was classified as a current maturity of long-term debt at June 30, 2010 and 2009, respectively. The remaining $21,428,571 and $17,857,142 is classified as long-term debt as of June 30, 2010 and 2009, respectively. The Company also has the option of making additional prepayments subject to certain limitations, including the payment of a Yield-Maintenance Amount as defined in the Note Agreement. In addition, the Company will be required to make an offer to purchase the Notes upon a Change of Control, and any such offer must include the payment of a Yield-Maintenance Amount. The Note Agreement includes certain financial covenants which are identical to those associated with the revolving loan agreement discussed above. The Note Agreement also includes certain restrictive covenants that limit, among other things, the incurrence of additional indebtedness and the disposition of assets outside the ordinary course of business. The Note Agreement provides that it shall automatically include any covenants or events of default not previously included in the Note Agreement to the extent such covenants or events of default are granted to any other lender of an amount in excess of $1,000,000. Following an Event of Default, each Purchaser may accelerate all amounts outstanding under the Notes held by such party.

28 29 Twin Disc Annual Report 2010 Total Funded Debt to Four Quarter EBITDATotalQuarter Four to Debt Funded Reconciliation EBITDA Quarter Four Company’s reported Net to Earnings calculation the of four quarter EBITDA for four the quarters June ended 30,2010: 2009, Consolidated Sheet, Balance and therefore no reconciliation is included herein. The followingtable thesets forth reconciliation the of Company’sThe debt funded total as of June 30,2010 andequal 2009,wasthe to total debt Company’s reported the on June 30,2010 and • • • above.described In accordance with Company’s the revolving loan agreement with M&Iand Note the Agreement: of Company’s the compliance with four the quarter EBITDA covenant and debt total the funded to four quarter EBITDA ratio covenant Four quarter EBITDA and debt total funded are non-GAAP measures, and are included herein for of disclosing purpose the status the access to debt markets adequate be will to Twin fund Disc’s capital requirements for foreseeable the future. Management that believes available cash, credit the facility, cash generated from future operations, existing lines of credit and potential Company’s plans to continue investing equipment inmodern and facilities, its sourcing global program and products. new Twin capital expects Disc expenditures $10and 2011. These between to $15million infiscal be anticipated expenditures the reflect from 2.5at June 30,2009.The in decrease net workingcapital was primarily driven inaccountsby adecrease receivable and inventories. Net working capital approximately decreased $19.5 million, or 2010, current the18.8%, andin fiscal ratio to decreased 2.3 at June 30, 2010, intends using to doso cash from operations and, ifnecessary, from available borrowings under existing credit facilities. benefit plans,the minimum contributions required. However,Companythe if to makeelects voluntary contributions 2011, it in fiscal at its European operations to pay down some of debt.Company itsthe In local 2011, fiscal to contribute expects $2,206,000 to its defined available for repatriation by Company. the necessary as deemed In third the quarter, fiscal Companythe used roughly $2million cashof June Company 30,2010,the had cash of also $19.0million, primarily at its overseas operations.funds,with These limited restrictions, are and investing For needs. year the June ended Company 30,2010,the generated net cash from operating of activities $35.1million. As of $35 million revolving loan agreement as of June 30, 2010,and continues to generate enough cash from operations to our meet operating below, and we continue to have sufficient liquidity near-termfor needs. The Companymillion had$26.0 of availableborrowings on our Company’sThe balance sheet remainsstrong, therevery are no off-balance-sheetarrangements other than theoperating listedleases Item 1A,Risk Factors, of Form this 10-Kfor discussion of topic. further this are to improve expected first inthe beginning quarter 2011 of and fiscal continuing thereafter.factors the see under discussed Please with above the covenants, inparticular, minimum EBITDA for most the recent four quarters fiscal and debt funded total to EBITDA, Company to notviolate does expect any of its financial covenantscurrent 2011. The in fiscal surroundingmargin ongoing compliance business trends insome of Company’s the key product oil land-based &gas transmission markets, global the inparticular market, the thanhigher six-month the of backlog $60.6million as of June 30,2009.In light of increasing the order and backlog overall improving ofbacklog orders for scheduled shipment during next the sixmonths (six-month was $84.4million, or backlog) approximately 40% As of June Company 30,2010,the was incompliance of with all covenants the above. described As of June Company’s 30,2010,the “ “ “ interest (iii)depreciation expense, and amortization and expense, (iv) income and expense;” tax Four quarter EBITDA” is defined as “the sum of (i) Net Income plus, the extentto thecalculation deducted in of Net Income, (ii) with above the definitions. Total debt funded to four quarter EBITDA”the is defined ratioas debtof funded total to four quarter EBITDAcalculated inaccordance and inaccordance with generally accepted accounting principles applied on aconsistent basis.” outstanding, as for determined all Company the and its consolidated Subsidiaries as of date the of determination, without duplication, principal portionof capital obligations, lease plus (iv) maximum the amount is which available drawn to be under letters of credit then promissory notes, bonds, debentures and similar interest-bearing instruments), plus purchase (ii)all money Indebtedness, plus (iii)the Total debt” funded isall defined as “(i) Indebtedness forborrowed money (includingwithout limitation, Indebtedness evidenced by Four by: Divided EBITDA Quarter . Total Debt . Income Taxes Interest Expense . Depreciation &Amortization Net Earnings . Total . Funded Debt to Four EBITDA Quarter . Four EBITDA Quarter . . .

______$ 597,000 $31,131,000 $13,688,000 13,688,000 2,282,000 9,817,000 992,000 2.27

Off Balance Sheet Arrangements and Contractual Obligations The Company had no off-balance sheet arrangements, other than operating leases, as of June 30, 2010 and 2009.

The Company has obligations under non-cancelable operating lease contracts and loan and senior note agreements for certain future payments. A summary of those commitments follows (in thousands): Less than 1–3 3–5 After Contractual Obligations Total 1 Year Years Years 5 Years Revolving loan borrowing $ 9,000 — $9,000 — — Long-term debt $ 22,131 $3,920 $7,470 $7,142 $3,599 Operating leases $ 5,573 $2,694 $2,549 $ 154 $ 176

The table above does not include tax liabilities for unrecognized tax benefits totaling $808,000, excluding related interest and penalties, as the timing of their resolution cannot be estimated. See Note N of the Consolidated Financial Statements for disclosures surrounding uncertain income tax positions.

The Company maintains defined benefit pension plans for some of its operations in the United States and Europe. The Company has established the Pension Committee to manage the operations and administration of the defined benefit plans. The Company estimates that fiscal 2011 contributions to all defined benefit plans will total $2,206,000.

Other Matters Critical Accounting Policies The preparation of this Annual 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 to the consolidated financial statements. 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:

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, 2010, 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.

30 31 Twin Disc Annual Report 2010 on ourposition, financial results or liquidity. interim and ending annualCodification afterSeptember periods 15,2009. The is not intended to change GAAP anddid not have aneffect authoritative U.S. generally accepted accounting principles by recognized FASB, the and isapplied to be for financial statements issued for In June FASB 2009,the issued FASB the Accounting Standards (“Codification”). Codification Codificationis The thesingle source of Company’s first quarter 2010), of and didfiscal not have a material Company’sthe impact on financial statements. or more of techniques the provided for update. inthis This clarification was the in effective period followingfirst reporting issuance (the quoted price inan active market for identical the liability is not available, areporting entity is required to measure fair value using one In August FASB 2009,the issued aclarification on fair value measurements. Thisclarification provides that in circumstances which a in incorporatedhas been report. inthis subsequent events have evaluated issued been inboth and financial revised statements. Thisupdate was effective upon issuance, and In FASB February 2010,the issued astandards update removing requirement the for an SECdate a filer to disclose through which to haveexpected amaterial impact on Company’s the financial statements. and years, within interim those on beginning or periods after Junewithearly 15,2010, adoptionpermitted. Thisstandards update is not milestone is judged criteriaconsidered to to certain meet be substantive. This update is effective milestonesfor fiscal years, in achieved on achievement of amilestone inits entirety may as recognized revenue milestone the inwhich be is achieved only period inthe ifthe and determining it when may appropriate be to apply milestone the of method revenue recognition. Consideration that is contingent In April Financial 2010,the Accounting Standards (“FASB”) Board issued astandards update providing guidance on defining amilestone Recently IssuedAccountingStandards and strategies tax periods, back and that carry-forward could potentially of enhance likelihood realization the of adeferred asset. tax valuation allowance is required, Company the into takes account such factors as prior earnings history, future expected earnings, carry- allowances it when is more likely than not that or all aportionof not realized. adeferred In assetwill be tax determining a whether would become payable upon repatriation of undistributed earnings of foreign certain Company subsidiaries. The maintains valuation Unitedin the States. Accordingly, Company the not does currently provide for additional United States and foreign income taxes which Company’sor The settled. is policy to remitearningsfrom foreign subsidiaries only the extentto any resultant foreigntaxes are creditable using rates to tax enacted apply expected to taxable income years inthe temporary differences those inwhich be to arerecovered expected liabilities and and respective bases their operating tax loss and credit assetsand Deferred tax tax liabilities carryforwards. are measured forrecognized future the consequences tax attributable to differencesbetween financialstatement amounts carrying of existing assets and CompanyThe accounts for incometaxes inaccordancewith ASC Topic 740, “Income Taxes.”Deferredtax assets and liabilities are Income Taxes reasonable; however, changes assumptions inthese could impact Company’s the position, financial results of operations cashor flows. on information provided by its independent actuaries and other relevant sources, Company the that believes assumptions the are used appropriate. As required by U.S. GAAP, effects the the of modifications arerecorded currently or amortized over Based future periods. obligations.Company The assumptionsits actuarial reviews on an annualbasis and makes modifications the to assumptions when Measurements benefit cost of netare periodic thebased on assumptions for used the previous year-end measurements of assets and care cost trend rates as of that date. The approach theto determine used annual assumptions are as follows: assumptions such as discount rates, return on expected plan assets,compensation increases, retirement and mortality tables, and health care coverage. Plan assetsand obligations are recorded annually on Company’s the based measurement date utilizing various actuarial CompanyThe provideswide range a benefitsof to employees and retired employees, including pensions postretirement and health Pension and Other Postretirement Benefit Plans appropriate, such amounts estimated due to be and payable future inthe could differ materiallyfrom what transpires. actually andtype volume of products new and economic trends long-term trends. Health Care Trend Cost upon Rates –developed based historical cost data, near-term outlook and an assessment of likely Retirement and Mortality upon Rates Generational –based the Mortality Table for 2008,2009 and fiscal 2010. Compensation Increasethe long-term –reflect the near-term experience, actual outlook and assumed inflation. iswhich reflective currentthe of and projected mix asset fundsthe of and considers historical returnsearned funds.the on Return on long-term Plan on AssetsExpected expected average the –based rate of return on pension assetsinthe funds, pensionthe plans.is made Corporateup curve ThisyieldBonds of rated AA better.or Discount rate on Hewitt the –based Top Yield Quartile at Curve June 30,2010,as applied payouts to expected from In June 2009, the FASB issued an amendment changing how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. New disclosures will be required regarding involvement with variable interest entities and any significant changes in risk exposure due to that involvement. This change will be effective for the start of the first fiscal year beginning after November 15, 2009, (July 1, 2010, for the Company) and is not expected to have a material impact on the Company’s financial statements.

In June 2009, the FASB issued a revision which will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” and changes the requirements for derecognizing financial assets, and requires additional disclosures. This change will be effective for the start of the first fiscal year beginning after November 15, 2009, (July 1, 2010, for the Company) and is not expected to have a material impact on the Company’s financial statements.

In April 2009, the FASB issued an update that requires disclosure about the fair value of financial instruments whenever summarized financial information for interim periods is issued, and requires disclosure of the fair value of all financial instruments (where practicable) in the body or accompanying notes of interim and annual financial statements. This update was effective for the Company’s first quarter of fiscal 2010, and appropriate disclosures have been included herein.

In March 2009, the FASB concluded that vested share-based payment awards that entitle holders to receive nonforfeitable dividends declared on common stock are participating securities. Accordingly, those awards should be considered in the calculation of earnings per share using the two class method. This guidance is effective for fiscal years beginning after December 15, 2008. The Company implemented this provision in the first fiscal quarter of 2010, with no material impact to the financial statements.

In December 2008, the FASB issued additional 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 guidance 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.

These disclosures about plan assets are required for fiscal years ending after December 15, 2009. The Company has adopted these new disclosure requirements with this report (See Note M – Pension and Other Postretirement Benefit Plans).

In April 2008, the FASB issued an update that amends the factors to be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of this update is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset. This change was effective for the Company’s first quarter of fiscal 2010, and had no material impact on the Company’s financial statements.

In December 2007, the FASB established 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. This new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company implemented this new standard in the first fiscal quarter of 2010, with minimal impact to the presentation of the financial statements.

In September 2006, the FASB issued guidance on fair value measurements. This guidance defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The final phase of this guidance was adopted by the Company in fiscal 2010, with no material impact to the financial statements.

Item 7(a). Quantitative and qualitative Disclosure About Market Risk The Company is exposed to market risks from changes in interest rates, commodities and foreign currency exchange rates. To reduce such risks, the Company selectively uses financial instruments and other proactive 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. Discussion of the Company’s accounting policies and further disclosure relating to financial instruments is included in Note A to the consolidated financial statements.

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. The Company currently has a $35 million revolving loan agreement, which is due to expire on May 31, 2012. In accordance with the loan agreement as amended, the Company has the option of borrowing at the prime interest rate or LIBOR plus an additional “Add-On,” between 2% and 3.5%, depending on the Company’s Total Funded Debt to EBITDA ratio, subject to a minimum interest rate of 4%. Due to the relative stability of interest rates, the Company did not utilize any financial instruments at June 30, 2010, 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 $36,000.

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. Direct material cost as a percent of total cost of goods sold was 56.2% for fiscal 2010. 32 33 Twin Disc Annual Report 2010 principal executive and principal financial officers, as appropriate, allow to timely decisions regardingdisclosure. reportsin the it files or submitsExchangethe under is accumulatedAct and communicatedCompany’s the to management, including its Exchange Commission and forms, rules and to provide reasonable assurance that information required by disclosed Company to the be under Exchange the Act is recorded, andSecurities the processed, in summarized specified and reported withinperiods time the effective to provide reasonable assurancethat information Company requiredthebe disclosed by to the in reports filesit or submits evaluation, Executive Chief the Officer ChiefFinancial and Officer have concluded that such disclosurecontrols and procedures are Companythe has evaluated effectiveness the the design of and operation of its disclosure controls and procedures. Based on such andunder supervision the with participation the of management, including Executive Chief the Officer Chief Financial the and Officer, As required by Rules Exchange 13a-15 and 15d-15of Securities the Act of 1934,as ofcovered end the of period the by report this and Conclusion Regarding Disclosure Controls and Procedures Item None. Item Twin common Disc shareholders share earnings per Basic attributable to Net earnings attributable to Twin. Disc . Gross profit Net. sales . 2009 Twin common Disc shareholders (loss) share earningsBasic per attributable to Net (loss) earnings attributable to Twin. Disc . Gross profit Net. sales . 2010 andSales by Earnings –Unaudited Quarter (inthousands, except share per amounts) ConsolidatedSee Financial Statements and Financial Statement Schedule. Item 8. FinancialStatements The fair valueCompany’s the of contracts was again of $3,000 at June 30,2009. net outstanding forward exchange contracts to purchase U.S. dollars value inthe of $156,000with aweighted average maturity of 74days. 2009 was euro. the At June Company 30,2010,the had no outstanding forward exchange contracts. At June Company 30,2009,the had gains andCompany on losses whichthe hedgedcurrency the itemsto 2010 The inand samefiscal inthe primary period. was exposed Operations and Comprehensive Income (Loss) as changes the fair inthe value of contracts the are and recognized generallythe offset transactions. Gains and on contracts losses these are recorded Income inOther net Consolidated inthe (Expense), Statement of liabilities hedged. being The maturities the of forward exchange contracts generally coincidesettlementwiththe dates the of related exchange rates. Gains and resulting losses from contracts these the offset foreign exchange gains or losses the underlyingon assets and denominated receivables and payables. contracts These are effective highly hedging inthe cash flowsattributable to changescurrency in CompanyThe primarily enters into forward exchange contracts to earningsreducethe andcash flow impact of currency non-functional changes inforeign exchange rates. ofuse financial instruments foris trading prohibited. purposes CompanyThe uses financial instruments to manage the market risk from direction of Company the corporate department and treasury restrictderivative transactions intended to those for The hedging purposes. Derivative Financial InstrumentsCompany –The haswritten policies and proceduresthat financialall place instruments the under fluctuations on significant transactions denominated in foreign currencies. tion adjustments are recorded as acomponent of shareholders’ equity. Forward foreign exchange contracts are to hedge used currency the CompanyThe not does translationthehedge exposure represented the by net assets of its foreign subsidiaries. Foreigntransla currency - two percent was denominated ineuros with balancecomprised the of Japanese yen, Swiss franc and Australian the and Singapore dollars. revenues year inthe June ended 30,2010,were denominated incurrencies other than U.S. the dollar. Ofthat total, approximately eighty CurrencyCompany risk –The has exposure to foreign exchangecurrency fluctuations. Approximately percent thirty Company’sthe of Twin common Disc shareholders Diluted share earnings per attributable to Twin common Disc shareholders Diluted (loss) share earnings per attributable to Dividends share per Dividends share per 9.Change 9(a).Controls . . in Disagreements and and . . procedures and Supplementary D with A . . . . ccountants ata on A ccounting

(

______Disclosure Financial and $72,671 $47,057 (2,404 20,072 2,465 9,747 1 1 (0.22 st Qtr.st Qtr.st 0.22 0.22 0.22 0.07 0.07

) ) )

______$81,598 $55,186 22,953 14,786 0.31 2 2 3,433 (0.04 (0.04 .31 0.31 nd Qtr.nd Qtr.nd 0.07 (490 0.07

) ) ) ______$69,292 $60,977 1,451 19,151 16,505 0.26 3 3 2,850 0.13 0.26 0.07 0.07 rd Qtr.rd Qtr.rd 0.13

______$72,057 $64,314 19,427 2,040 19,267 0.25 0.18 4 4 2,754 0.18 0.25 0.07 0.07 th Qtr.th Qtr.th

______$295,618 $227,534 60,465 81,443 11,502 597 0.05 1.04 1.03 0.05 0.28 0.28 Year Year

Management’s Report on Internal Control Over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures included in such controls may deteriorate.

The Company conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon such evaluation, our management concluded that our internal control over financial reporting was effective as of June 30, 2010.

PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the Company’s consolidated financial statements and the effectiveness of internal control over financial reporting as of June 30, 2010, as stated in their report which is included herein.

Changes in Internal Controls Over Financial Reporting During the fourth quarter of fiscal 2010, there have not been any changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9(b). Other Information Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant For information with respect to the executive officers of the Registrant, see “Executive Officers of the Registrant” at the end of Part I of this report.

For information with respect to the Directors of the Registrant, see “Election of Directors” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 15, 2010, which is incorporated into this report by reference.

For information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934, see “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 15, 2010, which is incorporated into this report by reference.

For information with respect to the Company’s Code of Ethics, see “Guidelines for Business Conduct and Ethics” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 15, 2010, which is incorporated into this report by reference. The Company’s Code of Ethics, entitled, “Guidelines for Business Conduct and Ethics,” is included on the Company’s website, www.twindisc.com.

For information with respect to procedures by which shareholders may recommend nominees to the Company’s Board of Directors, see “Selection of Nominees for the Board” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 15, 2010, which is incorporated into this report by reference. There were no changes to these procedures since the Company’s last disclosure relating to these procedures.

For information with respect to the Audit Committee Financial Expert, see “Director Committee Functions: Audit Committee” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 15, 2010, which is incorporated into this report by reference.

For information with respect to the Audit Committee Disclosure, see “Director Committee Functions: Audit Committee” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 15, 2010, which is incorporated into this report by reference.

For information with respect to the Audit Committee Membership, see “Director Committee Functions: Committee Membership” in the Proxy Statement for the Annual Meeting of Shareholders to be held October 15, 2010, which is incorporated into this report by reference.

Item 11. Executive Compensation The information set forth under the captions “Executive Compensation,” “Director Compensation,” “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report,” in the Proxy Statement for the Annual Meeting of Shareholders to be held on October 15, 2010, is incorporated into this report by reference. Discussion in the Proxy Statement under the captions “Compensation Committee Report” is incorporated by reference but shall not be deemed “soliciting material” or to be “filed” as part of this report.

34 35 Twin Disc Annual Report 2010 (a)(3) Exhibits. Exhibit See Index included as last the page of form, this is which incorporated by reference. ofall are which incorporated by reference. “IndexSee to Consolidated Financial Statements and Financial Statement Schedule,” and Consolidated the Financial Statement Schedule, (a)(2) Consolidated Financial Statement Schedule Registered Public Accounting and Firm Consolidated the Financial Statements, of all are which incorporated by reference. “IndexSee to Consolidated Financial Statements and Financial Statement Schedule,” of Report the Independent (a)(1) Consolidated Financial Statements Item PARTIV 15,2010,under heading held the to “Fees October be to Independent Registered Public Accounting Firm.” CompanyThe incorporates by referencethe information containedthe in Proxy Statement forthe Annual Meeting of Shareholders Item Annual Meeting of Shareholders is 15,2010,which incorporated held to October be into report this by reference. For information with respect to director independence, see “Corporate Governance – Board Independence” in the Proxy Statement for the Meeting of Shareholders is 15,2010,which incorporated held to October be into report this by reference. see “Corporate Governance – Review, Approval or Ratification of Transactions with Related Persons” inthe Proxy Statement forthe Annual For information withto respect transactions with related persons and for policies review, the approval or ratification of suchtransactions, Item of Registrant. the There are no arrangementsknown theRegistrant, to the operation which of may at a subsequentdate result ina change incontrol into this report by reference. Plan Information” Proxy inthe Statement for Annual the Meeting of Shareholders held to onis be 15,2010,which incorporated October For information regarding authorized securities for issuance under equity compensation plans of Company, the “Equity see Compensation incorporated into report this by reference. Shareholders held to on be 15,2010under captions the October “Principal Shareholders” and “Directors and Executive Officers” and ownershipSecurity of beneficial owners certain and managementtheset in is forth Proxy Statement forthe Annual Meeting of Item 15.Exhibits,tatementS F inancial Schedules 14.Principal 13.Certain R elationships 12.O Security accounting wnership Certainof O Beneficial fees Relatedand ransactionsT ,Independence Director and ser vices wners Management and INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page

Report of Independent Registered Public Accounting Firm ...... 37

Consolidated Balance Sheets as of June 30, 2010 and 2009 ...... 38

Consolidated Statements of Operations and Comprehensive (Loss) Income for the years ended June 30, 2010, 2009 and 2008 ...... 39

Consolidated Statements of Cash Flows for the years ended June 30, 2010, 2009 and 2008 ...... 40

Consolidated Statements of Changes in Equity for the years ended June 30, 2010, 2009 and 2008 ...... 41

Notes to Consolidated Financial Statements ...... 42–60

INDEX TO FINANCIAL STATEMENT SCHEDULE

Schedule II – Valuation and Qualifying Accounts ...... 61

Schedules, other than those listed, are omitted for the reason that they are inapplicable, are not required, or the information required is shown in the financial statements or the related notes.

36 37 Twin Disc Annual Report 2010 September 13,2010 Milwaukee, Wisconsin PricewaterhouseCoopers LLP conditions, or that degree the of compliance or with policies the procedures may deteriorate. of any evaluation of effectiveness to future are periods subject to risk that the controls may become inadequate of because changes in of itsBecause inherent limitations, internal control over reporting financial may not prevent or misstatements. detect Also, projections statements.financial or timely detection of unauthorized acquisition, use, or disposition of company’s the assetsthat could have amaterial on the effect accordance with authorizations of management and directors of company; the and (iii)provide reasonable assurance regarding prevention accordance with generally accepted accounting principles, and that receipts and expenditures of company the are made being only in company; (ii)provide reasonable assurance that transactions are recorded to preparation permit as necessary of statements financial in maintenancethe of records that, inreasonable detail, accurately and fairly transactions the and reflect dispositions of assetsof the the accounting principles. Acompany’s internal control over reporting financial includes and policies those procedures thatto (i)pertain of reporting financial and preparation the of statements financial for inaccordance purposes external with generally accepted A company’s internal control over reporting financial is aprocess to designed provide reasonable assurance regarding reliability the We that believe our audits provide areasonable basis for our opinions. audits on risk. Our assessed the based included also performing such other procedures as we considered circumstances. inthe necessary assessing risk that the amaterial weakness exists, and testing and evaluating and design the operating effectiveness of internal control auditOur of internal control over reporting financial included obtaining an understanding of internal control over reporting, financial accounting principles and used significant estimates made by management, and evaluating overall the statement financial presentation. statements included examining, on atest supporting basis, evidence amounts the and disclosures statements, financial inthe assessing the and internal effective whether control over reporting financial was maintained material audits inall Our respects. of financial the we plan and audits performthe to obtain reasonable assurance about statements financial the whether are of free material misstatement audits inaccordance with standards the of Public the Company Accounting Oversight (United Board States). standards Those require that statement schedule, and on Company’s the internal control over on reporting financial our based integrated audits. We conducted our Financial appearing Reporting under item responsibility 9(a).Our is to express opinions onstatements, financial these on financial the assessment of effectiveness the of internal control over reporting, financial included inManagement’s on Report Internal Control Over statements financial these and statement financial schedule, for maintaining internal effective control over reporting financial and for its by Committee the of Sponsoring Organizations of Treadway the Commission The Company’s (COSO). management is responsible for control over reporting financial as of June on criteria 30,2010,based established inInternal Control –Integrated Framework issued relatedthe consolidated statements. financial inour Also opinion, Company the maintained, material internal inall effective respects, appearing under Item 15(a)(2)presents fairly, material information inall the respects, forth therein set read when inconjunction with generally accepted United inthe Sates of In America. addition, inour opinion, statement financial the schedule listed index inthe operations and cash their flowsfor eachof June ended three the years period inthe 30,2010inconformity with accounting principles position financial the respects, of Twin Incorporated Disc, and its subsidiaries at June 30,2010and June 30,2009,and results the of their In our opinion, consolidated the statements financial listed index inthe appearing under Item 15(a)(1)present fairly, material inall To of Board the Directors and Shareholders of Twin Incorporated: Disc, PUBLIC FIRM REGISTERED ACCOUNTING REPORTINDEPENDENT OF TWIN DISC, INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

June 30, 2010 and 2009 2010 2009 (In thousands, except share amounts) ______ASSETS Current assets: Cash ...... $ 19,022 $ 13,266 Trade accounts receivable, net ...... 43,014 53,367 Inventories, net ...... 72,799 92,331 Deferred income taxes ...... 5,224 6,280 Other ...... ______7,391 ______8,677 Total current assets ...... 147,450 173,921

Property, plant and equipment, net ...... 58,243 65,799 Goodwill, net ...... 16,440 17,509 Deferred income taxes ...... 24,029 18,829 Intangible assets, net ...... 6,268 7,855 Other assets ...... ______6,626 ______6,095 $259,056 $290,008 ______

LIABILITIES and EQUITY Current liabilities: Short-term borrowings and current maturities of long-term debt ...... $ 3,920 $ 4,421 Accounts payable ...... 23,842 24,864 Accrued liabilities ...... ______35,545 ______40,967 Total current liabilities ...... 63,307 70,252

Long-term debt ...... 27,211 46,348 Accrued retirement benefits ...... 72,833 60,241 Deferred income taxes ...... 3,914 4,443 Other long-term liabilities ...... ______2,472 ______899 169,737 182,183 Twin Disc shareholders’ equity: Preferred shares authorized: 200,000; issued: none; no par value ...... — — Common shares authorized: 30,000,000; issued: 13,099,468; no par value ...... 10,667 13,205 Retained earnings ...... 147,438 149,974 Accumulated other comprehensive loss ...... ______(42,048 ) ______(25,935 ) 116,057 137,244 Less treasury stock, at cost ...... ______27,597 ______30,256 (1,901,242 and 2,070,124 shares, respectively) Total Twin Disc shareholders’ equity ...... 88,460 106,988 Noncontrolling interest ...... ______859 ______837 Total Equity ...... ______89,319 ______107,825 $259,056 $290,008 ______

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

38 39 Twin Disc Annual Report 2010 for years the June ended 30,2012009and 2008 CONSOLIDATEDSTATEMENTS OPERATIONSOF INCOME (LOSS) COMPREHENSIVE AND DISC,TWIN INCORPORATED SUBSIDIARIES and Net sales . Cost of sold Cost goods

Marketing, engineering and administrative expenses . Restructuring ofRestructuring operations

incomeOther (expense):

Income taxes .

Net earnings Less: NetLess: earnings attributable to noncontrolling interest, net of tax .

Diluted share earnings per attributable to Twin common Disc shareholders share earnings per Basic attributable to Twin common Disc shareholders share per Earnings data:

Weighted average shares outstanding data:

Comprehensive (loss) income:

The notes to consolidated financialstatements are an statements. integral partthese of Interest income . Interest expense Other, net Basic sharesBasic outstanding . Dilutive stock awards . Net earnings Foreign translation currency adjustment . Benefit plan adjustments,Benefit net . Comprehensive (loss) income Comprehensive earnings attributable to noncontrolling interest . (In thousands, except share per data) Earnings beforeEarnings income taxes and noncontrolling interest . Net earnings attributable to Twin Disc . Diluted shares outstanding Comprehensive (loss) income attributable to Twin Disc Gross profit Earnings fromEarnings operations ......

______$227,534 $ 730 $(15,467 167,069 (15,334 $ 597 60,465 11,063 11,159 $ 0.05 (2,282 (1,363 (6,414 56,886 (9,650 1,722 3,085 (133 0.05 (133 2010 494 835 992 730 96 84 ) ) ) ) ) ) ) )

______$(16,864 (10,458 (17,908 (16,578 $295,618 $ 11,788 $ 11,502 $ 1.04 (1,740 214,175 81,443 60,470 19,785 18,045 11,788 11,097 11,194 (2,487 (286 1,188 6,257 (286 1.03 2009 207 540 97 ) ) ) ) ) ) ) )

______$331,694 $ 2.15 226,826 $ 24,252 (3,644 104,868 $24,344 $31,297 (3,038 11,412 31,389 (7,461 66,349 38,892 35,248 10,904 24,344 11,279 14,506 (1,107 (373 133 2.13 2008 501 (92 (92 ) ) ) ) ) ) ) TWIN DISC, INCORPORATED and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended June 30, 2010, 2009 and 2008 (in thousands) 2010 2009 2008 ______Cash flows from operating activities: Net earnings ...... $730 $11,788 $24,344 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization...... 9,817 9,774 7,881 Loss on sale of plant assets...... 261 17 468 Restructuring of operations...... 494 1,188 (373 ) Stock compensation expense (benefit)...... 507 (2,481 ) 1,301 (Benefit) provision for deferred income taxes...... (1,474 ) 730 2,243 Changes in operating assets and liabilities: Trade accounts receivable, net...... 8,181 9,568 1,795 Inventories, net...... 16,338 (1,282 ) (12,949 ) Other assets...... 1,177 1,200 (1,127 ) Accounts payable...... (191 ) (10,890 ) 5,491 Accrued liabilities...... (3,779 ) (6,314 ) (4,870 ) Accrued/prepaid retirement benefits...... ______3,055 ______(1,692 ) ______(4,332 ) Net cash provided by operating activities...... ______35,116 ______11,606 ______19,872 Cash flows from investing activities: Proceeds from sale of plant assets...... 148 20 256 Acquisitions of plant assets...... (4,456 ) (8,895 ) (14,999 ) Other, net ...... ______(293 ) ______1,111 ______— Net cash used by investing activities...... ______(4,601 ) ______(7,764 ) ______(14,743 ) Cash flows from financing activities: Proceeds from notes payable...... 86 — 950 Payments of notes payable...... (690 ) (1,653 ) (724 ) (Payment of) proceeds from long-term debt...... (18,950 ) 2,787 5,055 Proceeds from exercise of stock options...... 108 110 246 Acquisition of treasury stock...... — (1,813 ) (15,644 ) Dividends paid to shareholders...... (3,133 ) (3,105 ) (3,000 ) Dividends paid to noncontrolling interest...... (160 ) (143 ) (164 ) Other...... ______(449 ) ______(428 ) ______691 Net cash used by financing activities...... ______(23,188 ) ______(4,245 ) ______(12,590 ) Effect of exchange rate changes on cash...... ______(1,571 ) ______(778 ) ______2,400 Net change in cash...... 5,756 (1,181 ) (5,061 ) Cash: Beginning of year...... ______13,266 ______14,447 ______19,508 End of year...... $19,022 $13,266 $14,447 ______Supplemental cash flow information: Cash paid during the year for: Interest ...... $ 2,092 $ 2,699 $ 3,626 Income taxes...... 2,832 7,009 7,875

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

40 41 Twin Disc Annual Report 2010

Balance atJune30, 2010 Balance atJune30, 2009 Balance atJune30, 2008 Balance atJune30, 2007 for years the June ended 30,2012009and 2008(inthousands) CONSOLIDATEDSTATEMENTS EQUITY IN CHANGES OF DISC,TWIN INCORPORATED SUBSIDIARIES and The notes to consolidated statements financial are an integral of statements. part these Shares (acquired) issued, net Compensation and expense dividendsCash Benefit plan adjustments, net tax of . Translation adjustments Net earnings Adjustment for the change in Benefit plan adjustments, net tax of . Translation adjustments Net earnings Compensation and expense dividendsCash Benefit plan adjustments, net tax of . Translation adjustments Net earnings Shares (acquired) issued, net

Shares (acquired) issued, net Compensation and expense dividendsCash

windfall tax benefits tax windfall measurement date due to the benefits tax windfall adoption of SFAS No. 158 windfall tax benefits tax windfall ......

. . .

—

______$10,667 14,693 13,304 13,205 Common (2,867 (1,737 (2,328 3,126 Stock 329 840 — — — — — — — — — — — —

) ) )

$147,438 ______149,974 142,361 121,109 11,502 24,252 Retained Earnings (3,133 (3,000 (3,105 (784 597 — — — — — — — — — — — — ) ) ) ) ______Accumulated Other Comprehensive (Loss) Income $(42,048 ) (10,473 (25,935 ) (17,908 14,400 (9,699 (6,414 (7,461 (4,493 2,446 — — — — — — — — — — — — — ) ) ) ) ) )

______$(27,597 (30,256 (29,854 (14,483 (15,371 Treasury 2,659 (402 Stock — — — — — — — — — — — — — — — — ) ) ) ) ) )

—

______controlling Interest (160 $859 $645 (164 (143 Non- 133 837 286 106 679 49 92 15 — — — — — — — — —

) ) )

______$89,319 107,825 130,325 116,082 (10,458 (17,908 (17,108 24,344 14,506 (3,293 (6,414 (3,164 11,788 (9,650 (7,461 (3,248 (2,730 3,126 Equity (208 (784 ) 730 329 840 Total

) ) ) ) ) ) ) ) ) ) ) TWIN DISC, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of the significant accounting policies followed in the preparation of these financial statements:

Consolidation Principles – The consolidated financial statements include the accounts of Twin Disc, Incorporated and its wholly and partially owned domestic and foreign subsidiaries. Certain foreign subsidiaries are included based on fiscal years ending March 31 or May 31, to facilitate prompt reporting of consolidated accounts. All significant intercompany transactions have been eliminated.

Translation of Foreign Currencies – The financial statements of the Company’s non-U.S. subsidiaries are translated using the current exchange rate for assets and liabilities and the weighted average exchange rate for the year for revenues and expenses. The resulting translation adjustments are recorded as a component of accumulated other comprehensive (loss) income, which is included in equity. Gains and losses from foreign currency transactions are included in earnings. Included in other income (expense) are foreign currency transaction (gains) losses of ($571,000), ($328,000) and $1,208,000 in fiscal 2010, 2009 and 2008, respectively.

Receivables – Trade accounts receivable are stated net of an allowance for doubtful accounts of $1,792,000 and $1,623,000 at June 30, 2010 and 2009, respectively. The Company records an allowance for doubtful accounts provision for certain customers where a risk of default has been specifically identified as well as provisions determined on a general basis when it is believed that some default is probable and estimable but not yet clearly associated with a specific customer. The assessment of likelihood of customer default is based on a variety of factors, including the length of time the receivables are past due, the historical collection experience and existing economic conditions. The current conditions in the global credit markets may reduce a customer’s ability to access sufficient liquidity and capital to fund their operations and render the Company’s estimation of customer defaults inherently uncertain. While the Company believes current allowances for doubtful accounts are adequate, it is possible that the adverse impact of the global credit crisis may cause higher levels of customer defaults and bad debt expense in future periods.

Fair Value of Financial Instruments – The carrying amount reported in the consolidated balance sheets for cash, trade accounts receivable, accounts payable and notes payable approximate fair value because of the immediate short-term maturity of these financial instruments. The fair value of the Company’s 6.05% Senior Notes due April 10, 2016, was approximately $22,977,000 and $23,250,000 at June 30, 2010 and 2009, respectively. The fair value of long-term debt is estimated by discounting the future cash flows at rates offered to the Company for similar debt instruments of comparable maturities. This rate was represented by the U.S. Treasury Three-Year Yield Curve Rate (1.00% and 1.64% for fiscal 2010 and 2009, respectively), plus the current add-on related to the Company’s revolving loan agreement (3.00% and 2.50% for fiscal 2010 and 2009, respectively) resulting in a total rate of 4.00% and 4.14% for fiscal 2010 and 2009, respectively. See Note G, “Debt” for the related book value of this debt instrument. The Company’s revolving loan agreement approximates fair value at June 30, 2010.

Derivative Financial Instruments – The Company has written policies and procedures that place all financial instruments under the direction of the Company’s corporate treasury and restricts all 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 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 2010 and 2009 was the euro. At June 30, 2010, the Company had no outstanding forward exchange contracts. At June 30, 2009, the Company had net outstanding forward exchange contracts to purchase U.S. dollars in the value of $156,000 with a weighted average maturity of 74 days. The fair value of the Company’s contracts was a gain of $3,000 at June 30, 2009.

Inventories – 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 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.

Property, Plant and Equipment and Depreciation – Assets are stated at cost. Expenditures for maintenance, repairs and minor renewals are charged against earnings as incurred. Expenditures for major renewals and betterments are capitalized and depreciated. Depreciation is provided on the straightline method over the estimated useful lives of the assets for financial reporting and on accelerated methods for income tax purposes. The lives assigned to buildings and related improvements range from 10 to 40 years, and the lives assigned to machinery and equipment range from 5 to 15 years. Upon disposal of property, plant and equipment, the cost of the asset and the related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in earnings. Fully depreciated assets are not removed from the accounts until physically disposed.

Impairment of Long-lived Assets – The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. For property, plant and equipment and other long-lived assets, excluding indefinite lived intangible assets, the Company performs undiscounted operating cash flow analyses to determine if an impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on fair value.

42 43 Twin Disc Annual Report 2010 deferred assetswhere tax it is considered more likely than not that Company the not will realizebenefit the of such assets. rates tax enacted the in ineffect yearswhich in temporary differences to reverse. are expected Valuation allowances are provided for on temporary the based differencesthe financialbetween statement amounts carrying bases tax of the and assets liabilitiesand using that have Company’s inthe recognized been financial statements. thisUnder deferred method, tax liabilities and assets are determined Deferred TaxesCompany –The deferredtax liabilitiesrecognizes futureand assets forthe expected incometax consequences eventsof from what transpires. actually Note See Ffor warranty activity inthe for 2010 reserve and fiscal 2009. adequate and that judgment the applied is appropriate, such amounts estimated due to be and payable future inthe could differ materially of repair, knowledge and of type volume the of products new and economic trends. While Company the warranty the believes is reserve forof reserve the warranty costs, management into takes consideration termof the warranty the coverage, historical claim rates and costs amountsthe to future settle necessary and existing claims on products as sold of balancesheet the date. When evaluating adequacy the involvedexpense insatisfactorily addressing situation. the The warranty is establishedCompany’s the based on reserve best estimate of its suppliers. However, its warranty obligation is affected by product failure rates,the extent the of market affected the by failure the and CompanyThe engages inextensive product quality programs and processes, including actively monitoring evaluatingand the quality of from 12months to 24months. warranty and assumes no liability) against defective materials or workmanship. Such warranty generally extends ranging from periods are issued by respective the manufacturers thereof and are to customer, original furnished the as to Company the which makes no Warranty perform interim impairment as necessary. reviews an impairment charge future. inthe Company The continuewill to monitor significantall estimates and impairment indicators, will and management’s judgments, assumptions and estimates made inassessing fair the value and of other goodwill intangibles, could result in Changes incircumstances, existing at measurement the date or at other future, inthe times or numerous inthe estimates associated with were no impairments. discount rate.Company The completedthe impairment testing of indefinite-lived intangibles as of June 30,2010, and concluded there assumptions related to projected revenues; assumed royalty rates that payable could be Company ifthe didnot own asset;and the a annually for possible impairment. The fair value assets is estimatedthese of usingthe relief-from-royaltywhich method, requires Company’sThe intangibleother with assets indefinite lives, including trademarks tradenames, and are not amortized, but arereviewed fairvaluethe and value ineachreporting of therefore unit carrying the goodwill exceeded was not goodwill impaired. economic and market conditions over and projected the aweighted-average period cost of capital thatcurrent reflects market conditions, impairment upon goodwill the Based completed review atwhich end the incorporates 2010, of fiscal management’sbest estimates of of goodwill. the implied fair value ofan impairment goodwill, the loss is inan recognized amount to equal that excess, amount not to carrying the exceed fair value of other tangible all and identifiable intangible assets the of unit. reporting amount thecarrying If the exceeds the of goodwill impairment loss, ifany. In second the step implied the value is estimated of goodwill the as fair the value of reporting the unit less the amountcarrying fair exceeds the value, second the step impairment of goodwill the test is to performed measure amount the of the necessary.when For of June the purposes 30,2010,impairment analysis Company the has discounted utilized cash flow analyses. the If flow analyses; however, may other methods to be substantiateused the discounted cash flow includinganalyses, valuations third party compared value of reporting the to carrying the unit, including The fair goodwill. value is primarily determined using discountedcash Impairment is measured of goodwill according to atwo-step approach. In first the step,the fair value of a unit,reporting as defined, is impact on recoverability the of assetsand these could have amaterial impact on Company’s the consolidated financial statements. ity of a significant assetgroup within a reporting unit; and slowergrowth rates. Any adverse change inthese factors could have a signif – The Company –The warrants assembledall products (exceptparts and component products parts whichor written on warranties Stock-Based Compensation – At June 30, 2010, the Company has two stock-based compensation plans, which are described more fully in Note K, “Stock-Based Compensation.” The Company accounts for these plans under the recognition and measurement provisions of ASC Topic 718-10, “Compensation-Stock Compensation.”

Management Estimates – The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual amounts could differ from those estimates.

Shipping and Handling Fees and Costs – The Company records revenue from shipping and handling costs in net sales. The cost associated with shipping and handling of products is reflected in cost of goods sold.

Reclassification – Certain amounts in the fiscal 2009 consolidated balance sheet have been reclassified to conform to the presentation in the fiscal 2010 financial statements.

Recently Issued Accounting Standards In April 2010, the Financial Accounting Standards Board (“FASB”) issued a standards update providing guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition. Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive. This update is effective for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010, with early adoption permitted. This standards update is not expected to have a material impact on the Company’s financial statements.

In February 2010, the FASB issued a standards update removing the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. This update was effective upon issuance, and has been incorporated in this report.

In August 2009, the FASB issued a clarification on fair value measurements. This clarification provides that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the techniques provided for in this update. This clarification was effective in the first reporting period following issuance (the Company’s first quarter of fiscal 2010), and did not have a material impact on the Company’s financial statements.

In June 2009, the FASB issued the FASB Accounting Standards Codification (“Codification”). The Codification is the single source of authoritative U.S. generally accepted accounting principles recognized by the FASB, and is to be applied for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification is not intended to change GAAP and did not have an effect on our financial position, results or liquidity.

In June 2009, the FASB issued an amendment changing how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. New disclosures will be required regarding involvement with variable interest entities and any significant changes in risk exposure due to that involvement. This change will be effective for the start of the first fiscal year beginning after November 15, 2009, (July 1, 2010, for the Company) and is not expected to have a material impact on the Company’s financial statements.

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. 44 45 Twin Disc Annual Report 2010 Balance atBalance June 30,2008 Juneended 30,2010and 2009,were as follows (inthousands): The changes amountthecarrying in substantiallyof goodwill, all whichallocated of theis to manufacturingsegment, forthe years D.GOODWILLINTANGIBLES OTHER AND Land Property, plant and equipment at June 30were as follows (inthousands): C.PROPERTY, EQUIPMENT PLANT AND Finished parts The major classes of inventories at June 30were as follows (inthousands): B.INVENTORIES of guidance this was adopted by Company the with 2010, no material infiscal impact the financialto statements. measuring fair value ingenerally accepted accounting principles, and expands disclosures about fair value measurements. The final phase In September FASB 2006,the issued guidance on fair value measurements. This guidance defines value,fair establishes framework a for presentation of financial the statements. December 15, 2008. TheCompany implementedthis new standard inthe firstfiscal quarter of 2010,with minimal impact to the controlling interest. guidance This new is effective fiscal years, beginningforfiscal years, those andwithin periods on orafter interim deconsolidationthe of asubsidiary, and includes expanded disclosure requirements regarding interests the of parent the and its non- In FASB 2007,the December established accounting new and reporting standards for noncontrolling the interest and for inasubsidiary Company’sthe first quarter 2010, of and fiscal had no material Company’sthe impact on financial statements. intangiblea recognized cash flows of to expected measure assetandused the period fair the value the Thisof asset. change was effectivefor life ofdetermine useful the intangible arecognized asset.The intent this of update is to improve lifethe consistency the between useful of In April FASB 2008,the issued an update that amends factors the considered to be indeveloping renewal or extension assumptions to used disclosure requirements Note withreport this (See M–Pension and Postretirement Other Benefit Plans). disclosuresThese about plan assets are required foryears fiscal ending December 15,2009. Theafter Company has new these adopted Translation adjustment Buildings Raw materials Work-in-process. . Machinery andMachinery equipment Balance atBalance June 30,2009 2009, respectively. The approximatecurrent cost the LIFOinventoriesof the LIFOcost exceeded by $24,617,000 and $23,164,000 at June 30,2010 and Inventories stated on aLIFObasis represent approximately 22%and 19%of total inventories at June 30,2010and 2009,respectively. Translation adjustment Less: accumulatedLess: depreciation Balance atBalance June 30,2010

Depreciation for expense years the June ended 30,2010,2009and 2008was $9,021,000,$8,766,000and $6,921,000,respectively.

. .

......

______$ 58,243 $ 3,557 $47,051 $72,799 $ 123,629 165,698 107,455 38,512 16,750 8,998 2010 2010

______$ 65,799 $ 3,665 $62,498 130,938 173,893 108,094 $16,440 39,290 18,479 21,107 92,331 17,509 (1,069 8,726

(970 2009 2009

) )

At June 30, the following acquired intangible assets have defined useful lives and are subject to amortization (in thousands): 2010 2009 ______Licensing agreements...... $3,015 $ 3,015 Non-compete agreements...... 2,050 2,050 Other ...... ______5,991 ______5,991 11,056 11,056 Accumulated amortization...... (6,980 ) (6,184 ) Translation adjustment...... ______211 ______711 Total...... $4,287 $5,583 ______

The weighted average remaining useful life of the intangible assets included in the table above is approximately 7 years.

Intangible amortization expense for the years ended June 30, 2010, 2009 and 2008 was $796,000, $1,008,000 and $960,000, respectively. Estimated intangible amortization expense for each of the next five fiscal years is as follows (in thousands): Fiscal Year 2011...... $ 712 2012...... 712 2013...... 669 2014...... 669 2015...... 400 Thereafter ...... ______1,125 $4,287 ______

The gross carrying amount of the Company’s intangible assets that have indefinite lives and are not subject to amortization as of June 30, 2010 and 2009, are $1,981,000 and $2,272,000, respectively. These assets are comprised of acquired tradenames.

E. ACCRUED LIABILITIES Accrued liabilities at June 30 were as follows (in thousands): 2010 2009 ______Salaries and wages ...... $ 6,067 $ 7,086 Retirement benefits...... 6,090 6,633 Warranty...... 4,829 8,028 Customer advances/deferred revenue...... 8,240 5,551 Accrued income tax...... 1,691 443 Other ...... ______8,628 ______13,226 $35,545 $40,967 ______F. WARRANTY The following is a listing of the activity in the warranty reserve during the years ended June 30 (in thousands): 2010 2009 ______Reserve balance, July 1...... $8,028 $8,125 Current period expense...... 3,703 6,420 Payments or credits to customers...... (5,266 ) (6,089 ) Translation ...... ______(404 ) ______(428 ) Reserve balance, June 30 $6,061 $8,028 ______

46 47 Twin Disc Annual Report 2010 1 Revolving loanagreement. . Available creditlines option of The banks. the following is aggregateborrowing information at thousands):June 30(in Notes payable consists of amounts borrowed underline unsecured of credit agreements. lines These of credit maywithdrawnbe the at Notes Payable G. DEBT Capital leaseobligations Secured long-termdebt. . Unused creditlines Other long-termdebt Outstanding creditlines Subtotal Notes payable–other May an interest 2013,carrying rate of 4.00%.This 2010. mortgage in fiscal loanpaid wasfull in longsecured The debtterm of $1,348,000 at June 30,2009, primarily represented a mortgage loan held at a foreign maturing subsidiary in M&I consented to Company the entering into Note the Agreement. As acondition to issuance the of Notes, the Company the entered into an amendment to its revolving loan agreement with M&Iin which such party. As of June Company 30,2010,the was incompliance covenants. with these in excess of $1,000,000.Following an Event of Default, eachPurchaser may accelerate amounts all outstanding under Notes the held by previously included Note inthe Agreement to extent the such covenants or events of default are granted to any other lender of an amount ordinary course of business. The Note Agreement providesthat it shall automatically include any covenants eventsor of default not restrictive covenants that limit, among other things,incurrence the of additional indebtedness and disposition the of assetsoutside the arewhich identical associated to with revolving those the loan agreement above. discussed The Note Agreement includesalso certain and any such offer must includepaymentthe of a Yield-Maintenance Amount. The NoteAgreement includes financial certain covenants Notein the Agreement. In addition, Company the required be will to make an offer to purchasethe Notes Changeupon a Control, of option of making additional prepayments subject limitations, to certain including payment the of aYield-Maintenance Amount as defined of Notes, the plus prepayments of principal of $3,571,429 on April 10 of eachyear from 2010to 2015,inclusive.Company The thehas also “Payment2016 (the Date”). Prior to Payment the Date, Company the is obligated to make quarterly payments of interest during term the Notes$25,000,000 in6.05%Senior due April “Notes”). 10,2016(the The Notes mature becomeand due payableand full on in April 10, andAmerica other certain entities (collectively, “Purchasers”). Pursuant to Note the Agreement, Purchasers acquired, aggregate, inthe On April Company 10,2006,the entered into aNote Agreement “Note (the Agreement”) with The Prudential InsuranceCompany of Company achieve planned the will results infuture due to uncertainties the of periods incertain its markets. maintain compliance with above the covenants. However, forward-looking as with all information, there no can assurance be that the annual financialCompany plan,the believes it positionedis well to generate sufficient EBITDA levels throughout 2011 fiscal in order to maximum debt total funded to EBITDA ratio. As of June Company 30,2010,the was incompliance covenants. with these on its Based include aminimum consolidated net worth amount, as defined, aminimum EBITDA forthe most recent fourquarters, fiscal and a This agreement contains covenants, certain including restrictions on investments, acquisitions and indebtedness. Financial covenants rate was 4.0%and 4.0%at June 30,2010and 2009,respectively. 2%andbetween 3.5%,depending on Company’s the debt total funded to EBITDA ratio, subject to aminimum interest rate of 4%.The agreement as amended, Company the has option the of borrowing at prime the interest rate or plus LIBOR an additional “Add-On,” balance of $9,000,000 and $22,450,000 at June 30,2010and 2009,respectively, is classified as long-term debt. In accordancewiththe loan quarterthe 2009, oftotal commitment fiscal was increased to $35,000,000 theand was extendedterm to May 31,2012. The outstanding had an expiration original date of 31,2005.Through series October of a amendments,thelast which wasof agreed to theduring fourth In Company 2002,the December entered into a$20,000,000 revolving loan agreement with M&IMarshall (“M&I”), Bank &Ilsley which Total long-termdebt Less: currentmaturities. . Long-term debtconsistedofthefollowingatJune30(inthousands): Long-Term Debt Weighted-average interestratesoncreditlines . Total notespayable 0-year unsecuredseniornotes ......

______$27,211 $ 9,000 21,429 $7,716 31,131 (3,920 ) $ 0 7,716 4.5% 2010 2010 23 61 18 — —

______$ 22,450 $46,348 25,000 $7,473 50,769 $ 0 ( 1,348 1,809 7,473 4,421 ) 4.3% 162 2009 2009 — — The aggregate scheduled maturities of outstanding long-term debt obligations in subsequent years are as follows (in thousands): Fiscal Year 2011 ...... $ 3,920 2012 ...... 12,814 2013 ...... 3,656 2014 ...... 3,571 2015 ...... 3,571 Thereafter ...... ______3,599 $31,131 ______H. LEASE COMMITMENTS Approximate future minimum rental commitments under noncancellable operating leases are as follows (in thousands): Fiscal Year 2011 ...... $2,694 2012 ...... 1,704 2013 ...... 845 2014 ...... 124 2015 ...... 30 Thereafter ...... ______176 $5,573 ______

Total rent expense for operating leases approximated $3,989,000, $4,136,000 and $4,259,000 in fiscal 2010, 2009 and 2008, respectively.

I. SHAREHOLDERS’ EQUITY At June 30, 2010 and 2009, treasury stock consisted of 1,901,242 and 2,070,124 shares of common stock, respectively. The Company issued 168,882 shares of treasury stock in fiscal 2010, to fulfill its obligations under the stock option plans and restricted stock grants. The difference between the cost of treasury shares and the option price is recorded in common shares.

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 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. In fiscal 2009, the Company purchased 250,000 shares of its outstanding common stock at an average price of $7.25 per share for a total cost of $1,812,500. In fiscal 2008, the Company purchased 660,000 shares of its outstanding common stock at an average price of $23.70 per share for a total cost of $15,644,000.

Cash dividends per share were $0.28, $0.28 and $0.265 in fiscal 2010, 2009 and 2008, respectively (on a post-split basis).

In 1998, the Company’s Board of Directors established a Shareholder Rights Plan (“Rights Agreement”) and distributed to shareholders one preferred stock purchase right for each outstanding share of common stock. Under certain circumstances, a right could be exercised to purchase one one-hundredth of a share of Series A Junior Preferred Stock at an exercise price of $160, subject to certain anti-dilution adjustments. The rights would become exercisable ten (10) days after a public announcement that a party or group has either acquired at least 15% (or at least 25% in the case of existing holders who currently own 15% or more of the common stock), or commenced a tender offer for at least 25% of the Company’s common stock. Generally, after the rights would become exercisable, if the Company were a party to certain merger or business combination transactions, or were to transfer 50% or more of its assets or earnings power, or certain other events were to occur, each right would entitle its holders, other than the acquiring person, to buy a number of shares of common stock of the Company, or of the other party to the transaction, having a value of twice the exercise price of the right. The rights expired June 30, 2008.

Effective June 30, 2008, the Company’s Board of Directors established a new Shareholder Rights Plan and distributed to shareholders one preferred stock purchase right (a “Right’) for each outstanding share of common stock. Under certain circumstances, a Right can be exercised to purchase one four-hundredth of a share of Series A Junior Preferred Stock at an exercise price of $125, subject to certain anti-dilution adjustments. The Rights will become exercisable on the earlier of: (i) ten business days following a public announcement that a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired, or obtained the right to acquire from shareholders, beneficial ownership of 15% or more of the outstanding Company’s common stock (or 30% or more in the case of any person or group which currently owns 15% or more of the shares or who shall become the beneficial owner of 15% or more of the shares as a result of any transfer by reason of the death of or by gift from any other person who is an affiliate or an associate of such existing holder or by succeeding such a person as trustee of a trust existing on the Record Date (“Existing Holder”)) or (ii) ten business days following the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 15% or more of such outstanding Common Stock (or 30% or more for an Existing Holder), as such periods may be extended pursuant to the Rights Agreement. In the event that any person or group becomes an Acquiring Person, each holder of a Right 48 49 Twin Disc Annual Report 2010 selling prices.selling Management evaluates performance the of its on segments net based earnings. of summary significant inthe accountingsame described as those policies. Transfers amongsegments are at established inter-company provides different and requiresservices differenttechnology and marketingstrategies. Theaccountingsegments the practicesof the are CompanyThe hastwo segments:reportable manufacturing and distribution. segments These are managed separatelybecause each and energy naturalin the resources, government and industrial markets. domestic and foreign customers inavarietyof market areas, principally pleasure craft, commercial marine markets,and military as well as transmissions,shift hydraulic torque converters,power take-offs, industrial clutches and controls systems. The Companysells both to equipment. Principal products include marine transmissions, drives, surface propellers and boat management systems, as well as power- CompanyThe and its subsidiaries are engagedthe in manufacture sale and of marine and heavy duty off-highway power transmission OPERATIONSJ.FOREIGN SEGMENTS AND BUSINESS Translation adjustments (in thousands): The components of accumulated comprehensiveother loss included in shareholder’sequity as of June 30,2010 and 2009, are as follows 150,000 shares of preferred the stock for of Shareholder the purpose the Rights Plan. CompanyThe is authorized to issue 200,000 shares of preferred stock, none which of have issued. been CompanyThe has designated to receive be Rights will $.01redemption the price. actionofthe of Board the Directors ordering redemption of Rights, terminate the Rights the will and only the right of holders the of appropriately adjusted to reflect any stock split, stock dividend transactionafter occurring or similarthe date hereof. Immediatelyupon a person becomes an Acquiring Person, Company the may redeem Rights the inwhole, but not at inpart, aprice of Right, $.01per expireTheRights will the at close of business on earlierJune 30,2018,unless redeemed or exchangedCompany. the by At anybeforetime Person become null and will void. Person Rights that all are, or circumstances (undertheRights certain in specified Agreement) were,beneficially owned by an Acquiring are no longer redeemable by Company the forth asbelow. set Notwithstanding any of foregoing, the ifany person becomes an Acquiring two exercise the times price of Right. the However, Rights are not exercisable paragraph inthis as described until such as time Rights the thereaftershall haverightthe to receive, upon exercise, inlieu of Preferred Stock, common Companystock the of having avalueequal to Accumulated other comprehensive loss Benefit plan adjustments, net of incometaxes of $28,672 and $25,213, respectively. . correction was not material to current the or any previously issued financial statements. date from March 31to Junewith 2009, an 30infiscal offsetting correction madeEarnings. Retained to The Company believes this that benefitThe plan adjustment figure 2009 fiscal a reflectsfrom correction of$283,000 to therelated impact ofchanging the measurement . .

______$ 8,938 $(42,048 (50,986 2010 ) ) ______$(25,935 $ 18,637 $ (44,572 2009 ) ) Information about the Company’s segments is summarized as follows (in thousands): 2010 ______Manufacturing ______Distribution ______Total Net sales ...... $183,369 $101,337 $284,706 Intra-segment sales ...... 10,752 12,990 23,742 Inter-segment sales ...... 29,715 3,715 33,430 Interest income ...... 979 21 1,000 Interest expense ...... 4,795 75 4,870 Income taxes ...... 1,475 2,412 3,887 Depreciation and amortization ...... 7,537 873 8,410 Net earnings ...... 400 5,079 5,479 Assets...... 217,656 53,514 271,170 Expenditures for segment assets ...... 3,714 234 3,948 2009 Net sales ...... $265,852 $112,323 $378,175 Intra-segment sales ...... 27,001 15,906 42,907 Inter-segment sales ...... 34,003 5,647 39,650 Interest income ...... 1,113 94 1,207 Interest expense ...... 5,669 90 5,759 Income taxes ...... 5,920 3,595 9,515 Depreciation and amortization ...... 7,531 899 8,430 Net earnings ...... 16,602 6,438 23,040 Assets...... 236,923 61,052 297,975 Expenditures for segment assets ...... 8,267 606 8,873 2008 Net sales ...... $298,978 $115,645 $414,623 Intra-segment sales ...... 29,701 9,651 39,352 Inter-segment sales ...... 35,521 8,056 43,577 Interest income ...... 1,547 235 1,782 Interest expense ...... 6,807 90 6,897 Income taxes ...... 13,293 3,318 16,611 Depreciation and amortization ...... 7,431 444 7,875 Net earnings ...... 39,591 6,435 46,026 Assets...... 240,685 60,832 301,517 Expenditures for segment assets ...... 13,878 1,121 14,999

The following is a reconciliation of reportable segment net sales, earnings and assets to the Company’s consolidated totals (in thousands): ______2010 ______2009 ______2008 Net sales Total net sales from reportable segments...... $284,706 $378,175 $414,623 Elimination of inter-company sales...... ______(57,172 ) ______(82,557 ) ______(82,929 ) Total consolidated net sales...... $227,534 $295,618 $331,694 ______Net earnings attributable to Twin Disc Total earnings from reportable segments...... $ 5,479 $ 23,040 $ 46,026 Other corporate expenses...... ______(4,882 ) ______(11,538 ) ______(21,774 ) Total consolidated net earnings attributable to Twin Disc ...... $ 597 $ 11,502 $ 24,252 ______Assets Total assets for reportable segments...... $271,170 $297,975 Corporate assets...... ______(12,114 ) ______(7,967 ) Total consolidated assets...... $259,056 $290,008 ______

50 51 Twin Disc Annual Report 2010 2010 outstanding under Stock the Incentive Plan as of June 30, 2010. terminated during 2004,except that options outstanding then remain will until so exercised or expire. until they There were no options IncorporatedDisc, 1998Incentive Compensation plan and 1998Stock the Option Plan for Non-employee Directors. The 1998 plans were CompanyThe has 15,800incentive stock options and 100,200 non-qualified stock options outstanding at June 30,2010, theunder Twin CompanyThe has 40,800 non-qualified stock options outstanding as of June 30,2010, the Directors’under Plan. years afterthedate grant.of There were no incentive options granted toa greater than 10% shareholder during theyears presented. voting power of Company’s the not stock, less price the than will be 110%of grant the date fair market value and options the expire five Stock Incentive Plan that are intended as incentive to qualify stock options, optionee ifthe owns more than 10%of total the combined non-qualified todetermined be or incentive stock options as thedate of grant,of a and vestingschedule.may carry For optionsthe under as of the date of grant, vest immediately, and expire ten years afterthe date ofgrant. Options granted underthe Stock Incentive Plan are each annual meeting of shareholders. Such options an exercise price to carry equal fair the market value of Company’s the common stock arewho or elected reelected to board, the or continue who on board, the to options serve to purchase 1,200shares of common stock as of to purchase up to 656,000shares of common stock as well as other awards. equity-based The Directors’ Plangrants non-employee directors Incorporated 2004Stock Incentive Plan “Stock (the Incentive Plan”), aplan under officers which andkey employees granted be may options “Directors’ Plan”), aplan to grant non-employee directors options to purchase up to 144,000shares of common stock, and Twin the Disc, Companythe 2005, fiscal During adoptedthe Disc, Twin Incorporated 2004 Stock Incentive Plan for Non-Employee Directors (the K.COMPENSATIONSTOCK-BASED Interest income . . Interest income . . items:significant Other

Interest income . . United States. . . Net sales Interest expense Interest expense United States. . . Long-lived assets(inthousands) Interest expense Italy Income taxes. . Income taxes. . . Belgium . Income taxes. . Depreciation and amortization Other countries Other Depreciation and amortization Switzerland Depreciation and amortization Expenditures for segment assets Expenditures for segment assets Italy Expenditures for segment assets Total thousands): (in follows as summarized is Company the about information Geographic All adjustmentsrepresentintercompanyeliminationsandcorporateamounts. Other countries Other

Total Net salesbygeographicregionarebasedonproductshipmentdestination.

Supply, Inc. (adistributor of Twin accounted Disc), for approximately 10%of consolidated 2009. infiscal net sales There werecustomers no that accounted for 10% or more of consolidated 2008. 2010 One customer,fiscal or in fiscal sales net Sewart 2008 2009 ......

......

______$42,810 $227,534 $ 79,301 117,989 $64,869 30,244 14,999 $1,782 $1,207 $1,000 16,611 Segment 5,759 4,870 7,785 7,875 8,430 7,449 8,410 8,873 6,257 3,948 6,897 9,515 3,887 Totals 2010 2010 568

______Adjustments $114,540 $295,618 $(1,281 $(1,000 $45,804 133,402 $71,894 1,344 1,407 $(916 47,676 (3,859 (3,272 (2,588 (5,707 (3,258 (2,895 9,466 8,388 7,661 2009 2009 508 575 6 22 —

) ) ) ) ) ) ) ) ) ______Consolidated $131,650 $331,694 128,065 10,904 14,999 $501 71,979 3,038 2,487 $ 207 2,282 6,257 7,881 9,774 9,817 $ 84 8,895 4,456 992 Totals 2008

Shares available for future options as of June 30 were as follows: ______2010 ______2009 2004 Stock Incentive Plan...... 242,232 395,853 2004 Stock Incentive Plan for Non-employee Directors...... 57,600 72,000

Stock option transactions under the plans during 2009 were as follows: Weighted Weighted Average Aggregate Average Remaining Contractual Intrinsic ______2010 ______Price ______Life (Years) ______value Non-qualified stock options: Options outstanding at beginning of year. . . . . 156,200 $ 6.32 Granted...... 7,200 14.61 Canceled/Expired...... — — Exercised...... ______(22,400 ) ______4.81 ______Options outstanding at June 30 141,000 $ 6.99 3.95 $825,012 ______Options exercisable at June 30 141,000 $ 6.99 3.95 $825,012 ______Options price range ($3.25 – $4.98) Number of shares...... 97,800 Weighted average price...... $ 3.75 Weighted average remaining life...... 2.39 years

Options price range ($5.73 – $7.19) Number of shares...... 8,400 Weighted average price...... $ 6.23 Weighted average remaining life...... 5.00 years

Options price range ($10.01 – $27.55) Number of shares...... 34,800 Weighted average price...... $ 16.26 Weighted average remaining life...... 8.07 years

Weighted Weighted Average Aggregate Average Remaining Contractual Intrinsic ______2010 ______Price ______Life (Years) ______value Incentive stock options: Options outstanding at beginning of year . . . 19,400 $ 4.23 Granted ...... — — Canceled/Expired ...... (3,600 ) 4.98 Exercised ...... ______— ______— ______Options outstanding at June 30 ...... 15,800 $ 4.06 1.57 $118,030 ______Options exercisable at June 30 ...... 15,800 $ 4.06 1.57 $118,030 ______Options price range ($3.76 – $4.98) Number of shares ...... 15,800 Weighted average price ...... $ 4.06 Weighted average remaining life ...... 1.57 years

The Company accounts for stock-based compensation in accordance with ASC Topic 718-10, “Compensation – Stock Compensation.” In addition, the Company computes its windfall tax pool using the shortcut method. ASC Topic 718-10 requires the Company to expense the cost of employee services received in exchange for an award of equity instruments using the fair-value-based method. All options were 100% vested at the adoption of this statement.

During fiscal 2010, 2009 and 2008, 7,200, 7,200 and 7,200 non-qualified stock options were granted, respectively. As a result, compensation cost of $44,000, $31,000 and $74,000 has been recognized in the Consolidated Statements of Operations and Comprehensive (Loss) Income for fiscal 2010, 2009 and 2008, respectively.

The total intrinsic value of options exercised during the years ended June 30, 2010, 2009 and 2008, was approximately $89,000, $155,000 and $811,000, respectively.

52 53 Twin Disc Annual Report 2010 unrecognized compensation expense related to restricted stock which will be recognized over the next three years. three next overthe recognized be will which stock restricted relatedcompensationto unrecognized expense Companyof $778,000 the respectively.had $1,560,000, 2010, and $138,000 30, of $138,000, June As was 2008 and 2009 2010, fiscal in grants vested stock restricted of value fair awards. total The respectively,2008, service-based and 2009 these related2010, to June 30, ended year the during recognized was $154,000 andrespectively. $208,000 2008, and$463,000, of2009 Compensation 2010, expense June at30, respectively, unvested shares 20,000 employeesoutstanding year.non-employeeand toand 23,700 each 126,423, directors in There were shares, restricted service-based 7,200 and Company 17,700 grantedthe 109,123, 2008, and 2009 2010, fiscal During years. 4 to 1 generally is which period, vesting compensation recorded as the grants is over stock restricted the value of fair The conditionsfulfilled. are service Inaddition performancetheto shares mentioned above, Companythe hasunvested restricted stockoutstanding thatvestcertain willif respectively.$2,540,000, and $496,000 $0, was 2008 and 2009 2010, fiscal in performance awardsstock vested of value fair total The levels.performance thresholdprobability achieving of the upon based vest to unvested ultimatelyaresharesthatcompensation the expected related to unrecognized cost no was there 2010, $21.28. 30, At was unvestedrespectively.June the 2010 $1,005,000, awards and 30, of value at weighted grantJune date fair average The awards,stockapproximatedperformance related to 2008, and $31,000 2009 $0, 2010, June30, ended year the forcompensation expense ultimately The tovest. expected aresharesthat the for period performance overthe expensed grant)is ofdate awards the stock(on the respectively. 2008, of and value fair awards2009 unvestedstockThe outstandingperformance 2010, 110,368 June atand 30, 103,810 177,983, were There 2008. fiscal awardsunitgrantedin stockperformance the accrue notCompany date,did the resultsto actual upon Based 44,772. is exceeded is objectivetarget the awardedif be canshares thatperformanceofnumbermaximum the andobjective,target specified Company’s the the exceeds adjustment below or to if falls subject are 2008 period economic fiscal awardsprofit the grantedin for performance stock The 2010. ending 30, June Performanceperiod the AwardStockyear fiscal cumulativethree Grant the Agreement) in in economicconsolidated defined relating to target objective profit (as Companyspecified a the achieves if vest will 2008 fiscal grantedin performance awards stock The 2009. fiscal awardsunitgrantedin stockperformance the accruing Companynot is the levels, performance threshold the probabilitylowachieving of the anddate resultsto actual upon Based 79,800. is exceeded is objectivetarget the awardedif profitbelow falls period forthe exceedsor the specified target objective, the maximumand number performance of shares that be can Company’s the adjustment to if subject are 2009 economic fiscal performance grantedawardsstock in The 2011. Juneending30, period the Performance year in consolidatedStockrelatingfiscal economicprofit cumulativeto defined three (as Awardthe GrantAgreement) in granted performance2010.fiscal inThe stock awards grantedif will fiscal the 2009 vest in Company achieves specifieda target objective awardsstockperformance the accruing Companynot is the levels, performance threshold the probabilitylowachieving of the anddate resultsto actual upon Based 89,008. is exceeded is objectivetarget the awardedif be canshares thatperformanceofnumbermaximum the and target objective, specified the Company’s exceeds adjustment the below or to if subjectare falls period economicprofitthe for 2010 fiscal performance granted awards in stock The 2012. ending 30, June period year fiscal cumulativethree Grant the Agreement) in thein Performance Stock consolidated economic targetrelating defined objective to profit (as Award specified Companya achieves the if vest will Company, 2010 employeesvarious the ofto fiscal in performance stock granted awards including The officers. executive performance awards,stock respectively, 37,310 and 66,500 74,173, Company target of number grantedthe a 2008, and 2009 2010, fiscal In respectively. $1,868,000, and $496,000 $0, was 2008 and 2009 2010, fiscal unit in awards performance vested stock of value fair total L. ENGINEERING AND DEVELOPMENT COSTS Engineering and development costs include research and development expenses for new products, development and major improvements to existing products, and other costs for ongoing efforts to refine existing products. Research and development costs charged to operations totaled $2,347,000, $2,636,000 and $2,788,000 in fiscal 2010, 2009 and 2008, respectively. Total engineering and development costs were $7,885,000, $9,142,000 and $9,025,000 in fiscal 2010, 2009 and 2008, respectively.

M. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS The Company has non-contributory, qualified defined benefit pension plans covering substantially all domestic employees hired prior to October 1, 2003, and certain foreign employees. Domestic plan benefits are based on years of service, and, for salaried employees, on average compensation for benefits earned prior to January 1, 1997, and on a cash balance plan for benefits earned after January 1, 1997. The Company’s funding policy for the plans covering domestic employees is to contribute an actuarially determined amount which falls between the minimum and maximum amount that can be deducted for federal income tax purposes.

On June 3, 2009, the Company announced it would freeze future accruals under the domestic defined benefit pension plans effective August 1, 2009. This resulted in a curtailment gain of $1,700,000 recorded in the fourth quarter of fiscal 2009.

In addition, the Company has unfunded, non-qualified retirement plans for certain management employees and Directors. In the case of management employees, benefits are based either on final average compensation or on an annual credit to a bookkeeping account, intended to restore the benefits that would have been earned under the qualified plans, but for the earnings limitations under the Internal Revenue Code. In the case of Directors, benefits are based on years of service on the Board. All benefits vest upon retirement from the Company.

In addition to providing pension benefits, the Company provides health care and life insurance benefits for certain domestic retirees. All employees retiring after December 31, 1992, and electing to continue health care coverage through the Company’s group plan, are required to pay 100% of the premium cost.

The measurement date for the Company’s pension and postretirement benefit plans in fiscal 2010 and 2009 was June 30. The Company was required to adopt the year end measurement date for its pension and postretirement benefit plans in fiscal 2009 using the prospective method. Prior to fiscal 2009, the measurement date was March 31. The adoption of the change in measurement date requirement in fiscal 2009 resulted in a $784,000 charge to retained earnings, net of tax.

Obligations and Funded Status The following table sets forth the Company’s defined benefit pension plans’ and other postretirement benefit plans’ funded status and the amounts recognized in the Company’s balance sheets and statement of operations as of June 30 (in thousands): Other Pension Benefits Postretirement Benefits ______2010 ______2009 ______2010 ______2009 Change in benefit obligation: Benefit obligation, beginning of year...... $115,572 $122,534 $21,985 $23,239 Service cost...... 292 1,266 28 38 Interest cost...... 7,282 7,082 1,347 1,297 Adjustment for change in measurement date ...... — (179 ) — 333 Actuarial loss (gain) ...... 11,740 (6,219 ) 1,937 (312 ) Benefits paid...... ______(9,029 ) ______(8,912 ) ______(2,463 ) ______(2,610 ) Benefit obligation, end of year...... $125,857 $115,572 $22,834 $21,985 ______

Change in plan assets: Fair value of assets, beginning of year...... $ 77,517 $111,891 $ — $ — Actual return on plan assets...... 7,075 (24,202 ) — — Employer contribution...... 828 801 2,463 2,610 Adjustment for change in measurement date ...... — (2,061 ) — — Benefits paid...... ______(9,029 ) ______(8,912 ) ______(2,463 ) ______(2,610 ) Fair value of assets, end of year...... $ 76,391 $ 77,517 $ — $ — ______

Funded status ...... $(49,466 ) $(38,055 ) $(22,834 ) $(21,985 ) ______

54 55 Twin Disc Annual Report 2010

Information forpensionplanswithanaccumulatedbenefitobligationinexcessofplanassets(inthousands): 2009, respectively. The accumulatedbenefit obligation benefit all defined pensionfor plans was$125,857,000 and$115,572,000 at June30,2010 and Net amount recognized to be

Service cost Service cost Service Projected and accumulated benefit obligation. . Amounts balancesheet inthe consist recognized of:

Interest cost. . Interest cost. . . Fair value of plan assets. .

Amortization cost of prior service Expected return onExpected plan assets. . (inthousands) Components of Net Periodic BenefitCost

Amortization of net loss actuarial Curtailment benefit

Settlement loss Net amount. recognized . Net periodic benefit costNet benefit . periodic . Amortization cost. of prior service .

Amortization of transition obligation. .

Amortization of net loss actuarial comprehensive loss consist of (net of tax): Amounts inaccumulated recognized other

Net periodic benefit costNet benefit . periodic .

Net amount. recognized . years.Company The thatbelieves the error was not material to any previously issued financialstatements. pension$626,000 of benefit income net periodic the in fourth thisquarter 2009.Of amount,of fiscal $345,000 related to fiscal previous plan overstated had been inprior years and during first the three quarters 2009. of fiscal To correct error, this for Companythe recorded InCompany fourth the quarterthe 2009, of fiscal discoveredpensionthat benefit periodic the cost net related to its pensionforeign

during year next the fiscal forthe benefitdomesticqualified defined plans are as follows (in thousands): The amounts inaccumulated comprehensiveother that loss be as components to arerecognized expected benefit cost periodic of net Prepaid cost benefit . . Pension obligation. . Postretirement and health other obligations . . cost. Prior service Actuarial net loss. . Net transition obligation. . cost. Prior service Actuarial net loss

......

______$ 319 $(49,466 $ — $45,250 (49,785 45,250 ______2010 — — ______

)

) PensionBenefits PensionBenefits ______$3,134 $3,134

______June 30,2010 ______$123,072 $ 110 $(38,055 ) $ 46 $39,959 — (38,165 $ 292 $ 28 73,287 $1,556 $4,318 39,913 (6,052 2,637 1,347 7,282 (678 2010 2010 2009 859 99 60 — — — — ) ) )