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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------------------------------------------
For the Fiscal Year Ended June 30, 2003
Commission File Number 1-7635


TWIN DISC, INCORPORATED
- --------------------------------------------------------------------------------

(Exact Name of Registrant as Specified in its Charter)

Wisconsin 39-0667110
- ------------------------------------ ---------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)

1328 Racine Street, Racine, Wisconsin 53403
- ------------------------------------- ---------------------------------
(Address of Principal Executive Office) (Zip Code)

Registrant's Telephone Number, including area code: (262) 638-4000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered:
Common stock, no par value New York Stock Exchange
- -------------------------- ------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:

Common stock, no par value
- --------------------------------------------------------------------------------
(Title of Class)


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

At August 29, 2003, the aggregate market value of the common stock held by
non-affiliates of the registrant was $46,453,235. Determination of stock
ownership by affiliates was made solely for the purpose of responding to this
requirement and registrant is not bound by this determination for any other
purpose.

At August 29, 2003, the registrant had 2,806,842 shares of its common stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

The incorporated portions of such documents being specifically identified in
the applicable Items of this Report.

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held October 17, 2003 are incorporated by reference into Part III.

2
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 heavy duty off-highway power
transmission equipment. Products offered include: marine transmissions and
surface drives; power-shift transmissions; power take-offs and reduction gears;
industrial clutches; and control systems. The Company sells its products to
customers primarily in the marine, industrial equipment, government, energy
and natural resources and agricultural markets. The Company's worldwide sales
to both domestic and foreign customers are transacted through a direct sales
force and a distributor network. There have been no significant changes in
products or markets since the beginning of the fiscal year. 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. Ten customers accounted for approximately 44% of the
Company's consolidated net sales during the year ended June 30, 2003. Sewart
Supply, Inc., an independent distributor of Twin Disc products, accounted for
approximately 11% of consolidated net sales in 2003.

Unfilled open orders for the next six months of $30,593,000 at June 30, 2003
compares to $31,484,000 at June 30, 2002. 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. The Company's business
is not 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 charges for ongoing efforts to refine existing products. Research and
development costs charged to operations totaled $2,220,000, $1,887,000 and
$1,929,000 in 2003, 2002 and 2001, respectively. Total engineering and
development costs were $7,190,000, $6,718,000 and $5,791,000 in 2003, 2002
and 2001, respectively.

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, 2003 was 832.

A summary of financial data by segment and geographic area for the years ended
June 30, 2003, 2002 and 2001 appears in Note L to the consolidated financial
statements on pages 25 through 27 of this form.

On April 2, 2001, the Company entered into a Joint Venture Agreement with
Niigata Engineering Co. LTD., Japan to form NICO Transmissions Co., Inc. (NTC).
NTC is an engineering and marketing company supporting the Company's expanding
global marine product line as well as a distribution company for Niigata's
family of transmission products. Pursuant to the terms of the Joint Venture
Agreement, the Company contributed $0.7 million in exchange for a controlling
66% ownership interest in NTC and Niigata contributed $0.3 million for a 34%
ownership interest. Effective April 1, 2003, Niigata Engineering Co. LTD's
ownership interest was transferred to Hitachi Nico Transmission Co. LTD. and
NTC was renamed Twin Disc Nico Co. LTD (TDN). TDN contributed $13.7 million
and $12.2 million in net sales and $0.0 million and $0.3 million in net earnings
to the Company in 2003 and 2002, respectively. See Item 8 and Note F to the
consolidated financial statements.

3
Item 2. Properties

The Company owns manufacturing, assembly and office facilities in Racine,
Wisconsin, U.S.A. and one in Nivelles, Belgium. The aggregate floor space
of these three plants approximates 677,000 square feet. One of the Racine
facilities includes office space which is the location of the Company's
corporate headquarters. The Company leases additional manufacturing,
assembly and office facilities in Decima, Italy.

The Company also has operations in the following locations, all of which
are used for sales offices, warehousing and light assembly or product service.
The following properties are leased:

Jacksonville, Florida, U.S.A. Chambery, France

Miami, Florida, U.S.A. Brisbane, Queensland, Australia

Coburg, Oregon, U.S.A. Perth, Western Australia, Australia

Kent, Washington, U.S.A. Singapore

Edmonton, Alberta, Canada Shanghai, China

Vancouver, British Columbia, Canada Capezzano Planore, Italy

The properties are generally suitable for operations and are utilized in the
manner for which they were designed. Manufacturing facilities are currently
operating at less than 65% capacity and are adequate to meet foreseeable
needs of the Company.

Item 3. Legal Proceedings

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

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

No matters were submitted to a vote of security holders during the fourth
quarter of the year ended June 30, 2003.

Executive Officers of the Registrant

Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an unnumbered Item in Part I of this Report in lieu of being
included in the Proxy Statement for the Annual Meeting of Shareholders to
be held on October 17, 2003.


Name Principal Occupation Last Five Years Age
- ------------------ ---------------------------------------- ------

Michael E. Batten Chairman, Chief Executive Officer since 1983 63

Michael H. Joyce President - Chief Operating Officer since 1995 62

James E. Feiertag Executive Vice President since October 2001: 46
formerly Vice President - Manufacturing since
November 2000; formerly Vice President of
Manufacturing for the Drives and Systems Group,
Rockwell Automation Group since 1999; formerly
Director of Manufacturing for the Drives Group,
Rockwell Automation Group

Christopher J. Eperjesy Vice President - Finance and Treasurer 35
since November 2002: formerly Divisional Vice
President - Financial Planning & Analysis,
Kmart Corporation since 2001; formerly Senior
Manager - Corporate Finance, Daimler Chrysler
AG since 1999, formerly Senior Financial
Analyst - Corporate Finance Group, Daimler
Chrysler AG since 1997
Lance J. Melik Vice President and General Manager - 60
Transmission And Industrial Products
since October 2001; formerly Vice President -
Transmission and Industrial Products since
1999 and Vice President - Corporate Development
since September 1995

Henri Claude Fabry Vice President - Global Distribution since 57
October 2001; formerly Vice President Marine
and Distribution since 1999; formerly Director
of Marketing and Sales, Twin Disc International
S.A. since February 1997
Fred H. Timm Vice President - Administration and Secretary 57
since October 2001, formerly Corporate Controller
And Secretary since 1995

4
John H. Batten Vice President and General Manager - Marine 38
and Propulsion since October 2001; formerly
Commercial Manager - Marine and Propulsion
since 1998, formerly Application Engineer
since 1997


Officers are elected annually by the Board of Directors at the Board meeting
held preceding each Annual Meeting of the Shareholders. Each officer holds
office until his successor is duly elected, or until he resigns or is removed
from office. John H. Batten is the son of Michael E. Batten.

PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters


The Company's common stock is traded on the New York Stock Exchange under the
symbol TDI. The price information below represents the high and low sales
prices for each period:

Fiscal Year Ended June 30, 2003 Fiscal Year Ended June 30, 2002
High Low High Low

First Quarter 15.14 12.90 First Quarter 16.20 14.16
Second Quarter 13.25 11.90 Second Quarter 14.55 12.25
Third Quarter 13.35 9.90 Third Quarter 16.75 14.00
Fourth Quarter 14.35 10.70 Fourth Quarter 16.95 14.00


Quarterly dividends of $0.175 per share were declared and paid for each of the
quarters above. As of June 30, 2003 there were 955 shareholder accounts. The
sales price of Twin Disc common stock as of August 29, 2003 was 16.55.

Pursuant to a shareholder rights plan (the "Rights Plan"), on April 17, 1998,
the Board of Directors declared a dividend distribution, payable to
shareholders of record at the close of business on June 30, 1998, of one
Preferred Stock Purchase Right ("Rights") for each outstanding share of Common
Stock. The Rights will expire 10 years after issuance, and will be exercisable
only if a person or group becomes the beneficial owner of 15% or more of the
Common Stock (or 25% 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) (an "Acquiring Person"), or 10 business days following the
commencement of a tender or exchange offer that would result in the offeror
beneficially owning 25% or more of the Common Stock. A person who is not an
Acquiring Person will not be deemed to have become an Acquiring Person solely
as a result of a reduction in the number of shares of Common Stock outstanding
due to a repurchase of Common Stock by the Company until such person becomes
beneficial owner of any additional shares of Common Stock. Each Right will
entitle shareholders who received the Rights to buy one newly issued unit of
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 Company will
generally be entitled to redeem the Rights at $.05 per Right at any time prior
to 10 business days after a public announcement of the existence of an
Acquiring Person. In addition, if (i) a person or group accumulates more than
25% of the Common Stock (except pursuant to an offer for all outstanding shares
of Common Stock which the independent directors of the Company determine to be
fair to and otherwise in the best interests of the Company and its shareholders
and except solely due to a reduction in the number of shares of Common Stock
outstanding due to the repurchase of Common Stock by the Company), (ii) a
merger takes place with an Acquiring Person where the Company is the surviving
corporation and its Common Stock is not changed or exchanged, (iii) an
Acquiring Person engages in certain self-dealing transactions, or (iv) during
such time as there is an Acquiring Person, an event occurs which results in
such Acquiring Person's ownership interest being increased by more than 1%
(e.g., a reverse stock split), each Right (other than Rights held by the
Acquiring Person and certain related parties which become void) will represent
the right to purchase, at the exercise price, Common Stock (or in certain
circumstances, a combination of securities and/or assets) having a value of
twice the exercise price. In addition, if following the public announcement
of the existence of an Acquiring Person the Company is acquired in a merger
or other business combination transaction, except a merger or other business
combination transaction that takes place after the consummation of an offer
for all outstanding shares of Common Stock that the independent directors
of the Company have determined to be fair, or a sale or transfer of 50% or
more of the Company's assets or earning power is made, each Right (unless
previously voided) will represent the right to purchase, at the exercise
price, common stock of the acquiring entity having a value of twice the
exercise price at the time.

The Rights may have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the
Company without conditioning the offer on a substantial number of Rights
being acquired. However, the Rights are not intended to prevent a take-over,
but rather are designed to enhance the ability of the Board of Directors to
negotiate with an acquirer on behalf of all of the shareholders. In addition,
the Rights should not interfere with a proxy contest.

The Rights should not interfere with any merger or other business combination
approved by the Board of Directors since the Rights may be redeemed by the
Company at $.05 per Right prior to 10 business days after the public
announcement of the existence of an Acquiring Person.

5
The news release announcing the declaration of the Rights dividend, dated
April 17, 1998, filed as Item 14(a)(3), Exhibit 4(b) of Part IV of the
Annual Report on Form 10-K for the year ended June 30, 1998 is hereby
incorporated by reference.

Recent Sales of Unregistered Securities

During the period covered by this report, the Company offered participants
in the Twin Disc, Incorporated B The Accelerator 401(k) Savings Plan (the
"Plan") the option to invest their Plan accounts in a fund comprised of
Company stock. Participation interests of Plan participants in the Plan,
which may be considered securities, were not registered with the SEC.
During the fiscal year ended June 30, 2002, 68 Plan participants allocated
an aggregate of $81,000 toward this investment option. Participant accounts
in the Plan consist of a combination of employee deferrals, Company matching
contributions, and, in some cases, additional Company profit-sharing
contributions. No underwriters were involved in these transactions.
On September 6, 2002, the Company filed a Form S-8 to register 100,000
shares of Company common stock offered through the Plan, as well as an
indeterminate amount of Plan participation interests.

Item 6. Selected Financial Data

Financial Highlights
(dollars in thousands, except per share amounts and shares outstanding)

For the years ended June 30,
Statement of Operations Data: 2003 2002 2001 2000 1999

Net sales $179,591 $179,385 $180,786 $177,987 $168,142
Net earnings (loss) (2,368) 2,058 6,169 3,773 (1,018)
Basic earnings (loss) per share (.84) .732 .201 .34 (.36)
Diluted earnings (loss) per share (.84) .732 .201 .34 (.36)
Dividends per share .70 .70 .70 .70 .805

Balance Sheet Data (at end of period):
Total assets $170,358 $157,280 $156,734 $174,190 $176,900
Total long-term debt 16,584 18,583 23,404 31,524 17,112

During the third quarter of 2001, the Company sold its investment in Niigata
Converter Company, Ltd., resulting in a net gain of $2,288,000 or $.81 per
share. See Note D to the consolidated financial statements.



On April 2, 2001, the Company entered into a Joint Venture Agreement with
Niigata Engineering Co. LTD., Japan to form NICO Transmissions Co., Inc.
which subsequently changed to Twin Disc Nico Co. LTD. (TDN). TDN's balance
sheet and statement of operations as of and for the years ended March 31, 2003
and 2002 are consolidated with the Company's balance sheet and statement of
operations as of and for the years ended June 30, 2003 and 2002. TDN
contributed the following for the years ended June 30 (dollars in thousands,
except per share amounts):
2003 2002
------------ ------------

Net sales $13,708 $12,217
Net earnings 23 263
Basic and diluted earnings per share .01 .09
Total assets 6,076 6,169
Total long-term obligations 0 0


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Note on Forward-Looking Statements

Statements in this report (including but not limited to certain statements in
Items 1, 3 and 7) and in other Company communications that are not historical
facts are forward-looking statements, which are based on management's current
expectations. These statements involve risks and uncertainties that could
cause actual results to differ materially from what appears here.

Forward-looking statements include the Company's description of plans and
objectives for future operations and assumptions behind those plans. The
words "anticipates," "believes," "intends," "estimates," and "expects," or
similar anticipatory expressions, usually identify forward-looking statements.
In addition, goals established by Twin Disc, Incorporated should not be viewed
as guarantees or promises of future performance. There can be no assurance
the Company will be successful in achieving its goals.

In addition to the assumptions and information referred to specifically in
the forward-looking statements, other factors could cause actual results to
be materially different from what is presented here.

6


Results of Operations

(In thousands, except per share data) 2003 % 2002 % 2001 %

Net sales $179,591 $179,385 $180,786
Cost of goods sold 144,575 139,146 137,091
------- ------- -------
Gross profit 35,016 19.5% 40,239 22.4% 43,695 24.2%
Marketing, engineering
and administrative expenses 34,790 19.4% 34,638 19.3% 31,716 17.5%
Restructuring of operations 2,042 1.1% - 0.0% 1,453 0.8%
(Loss) earnings from operations (1,816)(1.0)% 5,601 3.1% 10,526 5.8%


Net Sales, New Orders and Backlog

Net sales for the last three fiscal years have been relatively flat, increasing
by less than one percent in 2003 and declining by less than one percent between
2001 and 2002. However, as a result of the strong Euro and Asian currencies
versus the dollar, foreign currency exchange had a net favorable impact on
sales of over $11 million in fiscal 2003, compared to fiscal 2002.

Our domestic operations experienced a decline in sales in all market segments
except for Propulsion, which had a very strong year, in fiscal 2003. After
adjusting for the impact of foreign exchange rate changes, sales for overseas
operations were slightly higher in fiscal 2003. Overall, the Company's three
major markets, marine, transmission and industrial products, all continued to
be impacted by global economic conditions. However, the second half of the
current fiscal year saw significant contributions from new-product
introductions, such as our high-performance QuickShift(tm) marine
transmissions and the 8500 series transmissions for oilfield applications,
which supplemented improving core business strength. Our continuing
ability to compete successfully for defense applications was underscored
by the $14.8 million contract for transmission systems announced in June,
augmenting recently awarded U.S. defense contracts for other land-based
transmissions. Sales from this contract will first be realized in fiscal
year 2004.

For fiscal 2003, the Company's wholly owned distribution companies posted a
9% improvement in sales, of which 6% can be attributed to the favorable
impact of exchange rate fluctuations versus fiscal 2002. In particular,
we saw strong sales for Arneson Surface Drives and the Italian Luxury Yacht
industry weathered the pleasure craft downturn better than any other segment.
Our distribution offices in Italy and the Pacific Rim continued to show
strength in spite of weak global market conditions.

We had mixed results in our manufacturing operations in fiscal 2003. Our
Italian operations posted another strong sales year with an increase of 18.4%
versus fiscal 2002. However, the majority of this increase was caused by the
strengthening Euro. Although our Belgian operations got off to a slow start
in fiscal 2003, the second half of the year saw some recovery as we began to
produce and see the effects of our new QuickShift(tm) marine transmissions.
After adjusting for the impact of a strengthening Euro in fiscal 2003, our
Belgian operations posted a slight increase in sales, primarily driven by a
very strong fourth quarter. In the U.S., our domestic operations were faced
with a number of challenges early in fiscal 2003. In the first quarter,
quality problems necessitated downtime in order to segregate non-conforming
parts received from two of the Company's vendors. By the end of the second
quarter, the disruption of production flow as a result of these vendor-supplied
off-spec parts was normalized. In the second quarter, the Company announced
restructuring actions that impacted both our U.S. and Belgian manufacturing
operations (see Footnote R to the consolidated financial statements). These
actions were taken in an effort to streamline the Company's cost structure
and align its corporate workforce with market conditions. In addition to
these challenges, the Company continued to be confronted with softness in many
of its key markets. However, propulsion products continued to be a strong
area for the Company in fiscal 2003, increasing over 30% versus the prior year
(almost half of this increase is attributable to exchange rate changes versus
fiscal 2002).

Order rates for most of our products were down throughout much of the past
three fiscal years, contributing along with improved deliveries, to a steady
decline in backlog. The backlog of orders scheduled for shipment during the
next six months (six-month backlog) remained relatively flat at $31 million
at the end of fiscal 2003. However, the year-over-year change in foreign
exchange rates resulted in an approximately $2.1 million increase in the
backlog at June 30, 2003 versus June 30, 2002. From June 2001 to June 2002,
the six-month backlog declined 26 percent from $39 million to $31 million.
The year-over-year change in foreign exchange rates resulted in an
approximately $1.0 million increase in the backlog at June 30, 2002 versus
June 30, 2001. With the addition of the new $14.8 million transmission
contract discussed above, we expect the six-month backlog to grow in fiscal
2004.

Net sales of $181 million in fiscal 2001 were two percent ahead of the
previous fiscal year and then declined by a lesser amount to $179 million
in fiscal 2002. Demand continued at a steady pace for the first part of
fiscal 2001, but eased somewhat by mid-year. Shipments in fiscal 2001
followed the same pattern with favorable year-to-year comparisons during
the first half in all forward-market product lines as well as aftermarket
service parts. As fiscal 2001 progressed, we experienced softening demand
for power-shift transmissions and torque converters and for power take-offs
used in irrigation and waste recycling applications. These declines were
partially offset by the increased volume of shipments for military
applications, surface drive marine propulsion units, and the continuing
steady demand for marine transmissions produced overseas. Indicative of a
modest recovery in certain of the Company's markets, fourth quarter shipments
of power take-offs in fiscal 2001 were approximately equal to year ago levels.

7

Shipments from our wholly owned distribution companies, primarily those
offshore, continued to register sales gains in fiscal 2001 as recovering
economies, particularly in the Pacific Rim, were a positive influence. In
fiscal 2002, shipments declined as a result of weak market conditions and
stronger foreign competition caused by the continuing strength of the U.S.
dollar.

At the end of fiscal 2001, the six-month backlog was $39 million, a substantial
reduction from the prior year-end. The decline was due primarily to reduced
orders for marine and industrial products. As fiscal 2002 opened, order rates
generally remained weak but longer-term military orders rolling into the
six-month window and irregular order peaks helped to stabilize the six-month
backlog through most of the year. During the fourth quarter, those contracts
were completed and weaker seasonal order patterns were seen. In addition,
customers continued to adjust to the shorter lead times achieved over the past
two years. As a result, the six-month backlog at the end of fiscal 2002 had
declined to $31 million, 20 percent below the prior year-end.

The U.S. dollar weakened against most currencies in fiscal year 2003. On the
other hand, the U.S. dollar strengthened against most currencies in fiscal year
2001 and maintained that edge until the final months of fiscal 2002. As a
result, through most of these two fiscal years there had been increased pricing
pressure from non-dollar based competition, and sales from our offshore
subsidiaries had been reported at lower levels when translated into U.S.
dollars. As a result of the significantly weaker dollar in 2003, particularly
against the Euro, the opposite was true in fiscal 2003. However, pricing
pressure from non-dollar based competition does continue. Until the fiscal
2002 drop in shipments from our Belgian subsidiary, there was an offsetting
favorable impact caused by higher margins realized on dollar-denominated sales.
Price increases, implemented selectively in each year, generated revenues about
equal to the rate of inflation.

Margins, Costs and Expenses

Gross profit as a percentage of sales declined in fiscal 2003 to 19.5%,
compared to 22.4% and 24.2% in fiscal 2002 and 2001, respectively. Almost
half of the current year deterioration can be attributed to increased pension
and medical costs of nearly $1.6 million, and a $0.8 million impairment charge
taken in the second quarter (see Footnote E to the consolidated financial
statements). The remaining deterioration is due to unfavorable volume and
mix in the current fiscal year as well as supplier quality issues the Company
experienced in the first and second quarters of fiscal 2003. The latter was
somewhat offset by ongoing productivity and cost improvement initiatives in
our manufacturing operations. Despite early setbacks caused by the supplier
quality issues and restructuring actions taken in the first half of the fiscal
year, the second half of the year was much stronger. For example, fourth
quarter gross profit as a percentage of sales of 22.7% compared favorably
with fiscal 2002 at 22.9% and 2001 at 22.5%.

On July 15, 2003, the Company announced a number of actions to address rising
pension and retiree healthcare costs, meant to ensure both the future strength
of our pension fund and the Company's ability to remain globally competitive.
In addition to changes to both the pension and post-retirement healthcare plans
(see Footnote O to the consolidated financial statements), the Company
announced across-the-board wage reductions for corporate officers, and most
domestic salaried and hourly employees. Domestic employee groups, including
officers, also will forego performance bonuses in both fiscal 2003 and 2004.
The 401(k) company match also has been reduced from 75 percent to 50 percent
on the first six percent of employees' contributions. The combined effect
of these actions will approximately offset projected increases for both
pension and post-retirement healthcare costs in fiscal 2004.

Despite declining production volume in fiscal 2002, domestic manufacturing
margins improved due to a more favorable product mix and the increased
efficiencies mentioned below. However, we were unable to overcome the volume
induced margin declines at our principal plant in Europe and the lower
margins on NTC sales into its home market. As a result, the consolidated
gross margin declined by almost two percentage points in fiscal 2002.

In fiscal 2001, incremental improvements in all aspects of our manufacturing
operations from on-time delivery to inventory reduction and cellular layout
led the way to higher gross margins than in fiscal 2000. During the fourth
quarter of fiscal 2001, we provided for approximately $1 million of inventory
obsolescence and $500,000 for a marine transmission warranty program.
Although the fourth-quarter margin was down somewhat from the comparable
period a year earlier, it was consistent with previous fiscal 2001 quarters.

Marketing, engineering, and administrative (ME&A) expense remained flat in
fiscal 2003 versus the prior year, in spite of an almost $1.4 million increase
attributable to the unfavorable exchange rate impact of the weakening dollar
on our overseas operations. This was achievable primarily as a result of
ongoing cost reduction initiatives, including the restructuring actions
announced in the 2nd quarter. For the year, total engineering related expenses
were approximately $1 million higher than the prior year as the Company
continued to invest in engineering projects related to the development of
new marine, industrial, surface drive and electronic control products.
This increase was more than offset by reductions in marketing and administrative
expenses, even with the negative foreign exchange impact. For fiscal 2002,
ME&A increased $2.9 million, with approximately one-half of the $2.9 million
increase in fiscal 2002 spending was due to the first-year expenses of NTC,
and the balance consisted of added marketing and engineering expenses related
to a new product introduction. In fiscal 2001, ME&A was virtually unchanged
from the previous year.

During the second quarter of 2003, the Company recorded a pre-tax restructuring
charge of $2.0 million in connection with the reduction of its workforce.
These actions were taken in an effort to streamline the Company's cost
structure and align its corporate workforce with market conditions.
The charge consists of employee termination and severance benefits for a total
of 58 employees; 48 production employees and 10 salaried employees. During
2003 the Company made cash payments of $0.6 million. As of June 30, 2003, a
remaining balance in accrued liabilities of $1.3 million remains.

8

During the fourth quarter of 2001, the Company recorded a pre-tax restructuring
charge of $1.5 million in connection with the reduction of its workforce and
consolidation of facilities. These actions were taken in an effort to
streamline the Company's cost structure and utilization of available capacity
at other locations. The charge included $1.0 million in employee termination
and severance benefits, $0.3 million for remaining costs related to pre-existing
leases, $0.1 million for the estimated loss on fixed assets, which were held for
disposal, and $0.1 million in miscellaneous costs. Approximately $0.7 million of
the charge for employee termination and severance benefits was classified to
cost of goods sold with the remaining $0.3 million charged to marketing,
engineering and administrative expenses. A total of 46 employees were
terminated; 22 production employees and 24 salaried employees. In 2001, the
Company made cash payments of $0.1 million and also charged the $0.1 million
loss on fixed assets against the reserve. As of June 30, 2001, the reserve had
a balance of $1.3 million. In 2002, cash payments of $1.1 million were charged
against the reserve and $0.1 million was reversed against cost of goods sold.
In 2003, the remaining reserve of $0.1 million was reversed against
administrative expenses.

The Company adopted the Statement of Financial Accounting Standards Board No.
142, "Goodwill and Other Intangible Assets," at the beginning of fiscal 2002.
On review, it was determined that there was no impairment in these assets.
The favorable after-tax impact on earnings due to discontinuing the
amortization of goodwill and other intangible assets was $171,000, or
$.06 per share for the 2003 fiscal year.

Interest, Taxes and Net Earnings

Interest expense declined for the fourth straight year in fiscal 2003 as debt
was further reduced by $2 million-excluding the impact of foreign exchange-and
the company continued to pay down its senior notes, which carry a significantly
higher interest rate than its revolver facility. In fiscal 2002, debt was
reduced by nearly $8 million, resulting in a nearly $0.5 million decline in
interest expense versus the prior year.

The low effective tax rate in fiscal 2003 results from the benefit of domestic
losses partially offset by taxes incurred on foreign earnings, the inability
to utilize foreign tax credits and a reduction in statutory rates at some
foreign locations. In fiscal years 2002 and 2001, limitations on foreign tax
credit utilization, the relatively high proportion of foreign earnings and
settlement of some state tax issues resulted in an unusually high tax rate.
The effective rate in fiscal 2002 was increased further by two third-quarter
adjustments totaling about $300,000. In fiscal 2002, a tax incentive provided
by the Belgian government several years ago was disallowed by the European
Commission and was refunded to the government, and the United States tax
provision was adjusted upward for the taxes due on an asset sale gain
recorded in the prior year's third quarter. Statutory rate changes at
European operations reduced taxes in 2003 by approximately $100,000.

Management believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize
deferred tax assets except for certain foreign tax credit carryforwards
for which a valuation allowance has been recorded.

Liquidity and Capital Resources

The net cash provided by operating activities in fiscal 2003 totaled $6.7
million versus $13.2 million in the prior year. This decline was primarily
driven by the net loss experienced in the current year. In addition, the net
change in operating assets and liabilities contributed $2.8 million to
operating cash flow in fiscal 2003, compared to nearly $5 million in the
prior year. While the continued reduction of inventories contributed $3.7
million to operating cash flow in both 2003 and 2002, accounts receivable
t June 30, 2003 were approximately $3 million higher, adjusted for the impact
of exchange rate changes, than at June 30, 2002. While fourth quarter sales
were flat year-over-year, there was a significant shift from domestic to
overseas sales in the current quarter. In general, customer credit terms in
both our European and Asian markets are longer, partially explaining this
increase. Additionally, our domestic operations had a past due balance of $0.6
million from one overseas customer, of which $0.5 million has been collected
subsequent to year-end.

The net change in accounts payable at June 30, 2003 compared to June 30, 2002
was primarily due to the timing of payments at our domestic operations at the
end of fiscal 2002. From a balance sheet perspective, the net increase in
accounts payable from June 30, 2002 to June 30, 2003 of just over $3 million
includes an approximately $1.5 million impact of changes in foreign exchange
rates year-over-year.

The almost $8 million increase in deferred income taxes as of June 30, 2003
versus the prior year was primarily caused by a year-end adjustment to the
minimum pension liability adjustment of $15.9 million (or 9.7 million net of
related income taxes).

In fiscal 2002, operating cash flows increased to $13 million from $7.4
million in fiscal 2001 with the favorable impact of inventory reductions
and reduced pension contributions. In fiscal 2001, positive cash flows from
earnings, depreciation, and working capital reductions were partially offset
by taxes and by increased contributions to the Company pension fund.

Expenditures for capital equipment for the prior two fiscal years had been
held to a level of about one-half depreciation. While the desire to
conserve cash had been one consideration, we also had been more selective
in adding major machine tools and had focused on our core competency
manufacturing cells. In fiscal 2003, we increased capital spending by
$2.3 million compared to fiscal 2002 as the Company further developed its
key manufacturing cells in both our domestic and European operations. We
expect this trend to continue in fiscal 2004.

9

The overall liquidity of the Company remains strong. We continue to reduce
total borrowings, have over $9 million of available borrowings on our $20
million revolving loan agreement, and continue to generate enough cash from
operations to meet our operating and investing needs. Working capital
increased slightly to about $51 million, and the current ratio has been
unchanged at between 2.1 and 2.2 for the past four fiscal years. The
Company's balance sheet is strong, there are no off-balance sheet
arrangements, and we continue to have sufficient liquidity for near-term
needs.

The Company's existing $20 million unsecured revolving loan agreement expires
in October 2005. It is the Company's intention to have a new loan agreement
negotiated prior to that date.

Off-balance Sheet Arrangements

The Company had no off-balance arrangements, guarantees or obligations except
for normal open purchase orders and operating leases as of June 30, 2003 and
2002. Obligations for operating leases are listed in the table below.

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 4-5 After
Contractual Obligations Total 1 Year Years Years 5 Years

Short-term debt $ 2,429 $ 2,429 - - -
Revolving loan borrowing $10,865 - $10,865 - -
Long-term debt $ 8,576 $ 2,857 $ 5,719 - -
Operating leases $11,061 $ 2,868 $ 3,762 $2,213 $2,218


The Company believes the capital resources available in the form of existing
cash, lines of credit (see Footnote I to the consolidated financial
statements), and funds provided by operations will be adequate to meet
anticipated capital expenditures and other foreseeable future business
requirements.

Other Matters

Environmental Matters

The Company has been involved in various stages of investigation relative
to hazardous waste sites, two of which were on the United States EPA National
Priorities List (Superfund sites). The Company's involvement in one of the
Superfund sites was settled in 2003 for approximately $191,000. The Company
has made a $117,000 payment in trust in settlement of its exposure related
to the second Superfund site and anticipates that no further payments will
be required. The excess reserve for these sites of $300,000 was reversed
against cost of sales in 2003.

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.

Twin Disc's significant accounting policies are described in Note A to the
consolidated financial statements on pages 19 through 21 of this form. 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:

Revenue Recognition

Twin Disc recognizes revenue from product sales at the time of shipment and
passage of title. While we respect the customer's right to return products
that were shipped in error or do not function properly, historical experience
shows those types of adjustments have been immaterial and thus no provision is
made. With respect to other revenue recognition issues, management has
concluded that its policies are appropriate and in accordance with the guidance
provided by Securities and Exchange Commissions' Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition".

Accounts Receivable

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

10

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.

Warranty

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

Income Taxes

As part of the process of preparing our consolidated financial statements,
income taxes in each of the jurisdictions in which we operate must be
estimated. This process involves estimating the actual current tax exposure
and assessing the realizability of temporary differences. If it is deemed
more likely than not that a temporary difference will be realized, a valuation
allowance is recorded.

Recently Issued Accounting Standards

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies the
requirements of FAS 5, "Accounting for Contingencies," relating to guarantor's
accounting for, and disclosure of, the issuance of certain types of guarantees.
The Interpretation's provisions for initial recognition and measurement should
be applied on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements of annual periods that end after December 15, 2002. The adoption
of the accounting and disclosure provisions of this Interpretation did not
have a significant impact on the Company's financial statements for the year
ending June 30, 2003.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that
is within its scope as a liability (or an asset in some circumstances).
Many of those instruments were previously classified as equity. This Statement
is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The Company does not expect
the adoption of the provisions of this Statement to have a significant
impact on its 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 exchange. To reduce such risks, the Company selectively
uses financial instruments and other pro-active management techniques. All
hedging transactions are authorized and executed pursuant to clearly defined
policies and procedures, which prohibit the use of financial instruments for
trading or speculative purposes. Discussions of the Company's accounting
policies and further disclosure relating to financial instruments is included
in Note A to the consolidated financial statements on pages 19 through 21 of
this form.

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.
During 2003, the Company entered into a $20,000,000 revolving loan agreement,
which expires on October 31, 2005. In accordance with the loan agreement, the
Company has the option of borrowing at the prime interest rate or LIBOR plus
an additional "Add-On", between 1% and 2.75%, depending on the Company's Total
Funded Debt to EBITDA ratio. Due to the relative stability of interest rates,
the Company did not utilize any financial instruments at June 30, 2003 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 $45,000.

11

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

Currency risk - The Company has exposure to foreign currency exchange
fluctuations. Approximately one-third of the Company's revenues in the
years ended June 30, 2003 and 2002 were denominated in currencies other
than the U.S. dollar. Of that total, approximately two-thirds was denominated
in euros with the balance composed of Japanese yen and the Australian and
Singapore dollars. The Company does not hedge the translation exposure
represented by the net assets of its foreign subsidiaries. Foreign currency
translation adjustments are recorded as a component of shareholders' equity.
Forward foreign exchange contracts are used to hedge the currency fluctuations
on significant transactions denominated in foreign currencies.

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

The Company primarily enters into forward exchange contracts to reduce the
earnings and cash flow impact of non-functional currency denominated
receivables and payables. These contracts are highly effective in hedging
the cash flows attributable to changes in currency exchange rates. Gains
and losses resulting from these contracts offset the foreign exchange gains
or losses on the underlying assets and liabilities being hedged. The
maturities of the forward exchange contracts generally coincide with the
settlement dates of the related transactions. Gains and losses on these
contracts are recorded in Other Income (Expense), net in the Consolidated
Statement of Operations as the changes in the fair value of the contracts
are recognized and generally offset the gains and losses on the hedged
items in the same period. The primary currency to which the Company was
exposed in 2003 and 2002 was the Euro. At June 30, 2003, the Company had
net outstanding forward exchange contracts to purchase Euros in the value
of $2,701,000 with a weighted average maturity of 50 days. The fair value
of the Company's contracts was approximately zero at June 30, 2003. At
June 30, 2002, the Company had net outstanding forward exchange contracts
to purchase Euros in the value of $2,053,000 with a weighted average
maturity of 40 days. The fair value of the Company's contracts was
approximately $0.2 million at June 30, 2002.

Item 8. Financial Statements and Supplementary Data

See consolidated financial statements and Financial Statement Schedule on Pages
13 through 33 of this form.

Sales and Earnings by Quarter (dollars in thousands, except per share amounts)

2003 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year

Net sales $36,521 $42,794 $47,177 $53,099 $179,591
Gross profit 5,930 6,680 10,425 11,981 35,016
Net earnings (loss) (1,731) (3,087) 509 1,941 (2,368)
Basic earnings per share (.62) (1.10) .18 .70 (.84)
Diluted earnings per share (.62) (1.10) .18 .70 (.84)
Dividends per share .175 .175 .175 .175 .70

2002 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year

Net sales $40,631 $43,986 $41,928 $52,840 $179,385
Gross profit 8,546 9,962 9,614 12,117 40,239
Net earnings 272 423 (37) 1,400 2,058
Basic earnings per share .10 .15 (.01) .49 .73
Diluted earnings per share .10 .15 (.01) .49 .73
Dividends per share .175 .175 .175 .175 .70


Item 9. Change in and Disagreements with Accountants on Accounting and Financial
Disclosure

None.

12

Item 9(a). Disclosure Controls and Procedures.

As required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934,
as of the end of the period covered by this report and under the supervision
and with the participation of management, including the Chief Executive Officer
and the Chief Financial Officer, the Company has evaluated the effectiveness of
he design and operation of its disclosure controls and procedures. Based on
such evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that such disclosure controls and procedures are effective in ensuring
that material information relating to the Company, including its consolidated
subsidiaries, is made known to the certifying officers by others within the
Company and its consolidated subsidiaries during the period covered by this
report.

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 17, 2003, 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 17, 2003, which is incorporated into this report by reference.

Item 11. Executive Compensation

The information set forth under the captions "Compensation of Executive
Officers", "Stock Options", "Retirement Income Plan", "Supplemental Retirement
Benefit Plan", "Compensation of Directors" and "Employment Contracts" in the
Proxy Statement for the Annual Meeting of Shareholders to be held on
October 17, 2003 is incorporated into this report by reference. Discussion
in the Proxy Statement under the captions "Board Executive Selection and Salary
Committee Report on Executive Compensation" and "Corporate Performance Graph"
is not incorporated by reference and shall not be deemed "filed" as part of
this report.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Security ownership of certain beneficial owners and management is set forth in
the Proxy Statement for the Annual Meeting of Shareholders to be held on
October 17, 2003 under the caption "Principal Shareholders, Directors and
Executive Officers" and incorporated into this report by reference.

There are no arrangements known to the Registrant, the operation of which may
at a subsequent date result in a change in control of the Registrant.

The following table summarizes certain information regarding the Company's
equity-based compensation plans:


# of securities Weighted average # of securities remaining
to be issued upon price of outstanding available for future
exercise of options, options, warrants issuance under equity
Plan Category warrants and rights and rights compensation plans
-------------------- -------------------- -------------------- -------------------------

Equity Compensation Plans
Approved by Shareholders 236,350 $19.70 $53,650

Equity Compensation Plans
Not Approved By Shareholders 0 N/A 0
------- ------ -------
Total 236,350 $19.70 $53,650



13

Item 13. Certain Relationships and Related Transactions

None.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)(1) Consolidated Financial Statements
See "Index to Consolidated Financial Statements and Financial Statement
Schedule" below, the Report of Independent Auditors on page 14 and the
Consolidated Financial Statements on pages 15 to 32, all of which are
incorporated by reference.

Individual financial statements of the 50% or less owned entities accounted for
by the equity method are not required because the 50% or less owned entities do
not constitute significant subsidiaries.

(a)(2) Consolidated Financial Statement Schedules

See "Index to Consolidated Financial Statements and Financial Statement
Schedule" below, the Report of Independent Auditors on Financial Statement
Schedule on page 33 and the Consolidated Financial Statement Schedule on
page 33, all of which are incorporated by reference.

(a)(3) Exhibits. See Exhibit Index included as the last page of this form,
which is incorporated by reference.

Copies of exhibits filed as a part of this Annual Report on Form 10-K may be
obtained by shareholders of record upon written request directed to the
Secretary, Twin Disc, Incorporated, 1328 Racine Street, Racine, Wisconsin 53403.

(b) A Form 8-K was filed on April 21, 2003 announcing the financial results for
the third fiscal quarter of 2003.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . 14

Consolidated Balance Sheets as of June 30, 2003 and 2002. . . . . . . . 15

Consolidated Statements of Operations for the years
ended June 30, 2003, 2002 and 2001 . . . . . . . . . . . . . . . . . . 16

Consolidated Statements of Cash Flows for the years
ended June 30, 2003, 2002 and 2001 . . . . . . . . . . . . . . . . . . 17

Consolidated Statements of Changes in Shareholders' Equity and

Comprehensive Income for the years ended June 30, 2003, 2002 and 2001 . 18

Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . 19-32

INDEX TO FINANCIAL STATEMENT SCHEDULE

Report of Independent Auditors on Financial Statement Schedule. . . . . 33

Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . . 33

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.

14

REPORT OF INDEPENDENT AUDITORS

To the Shareholders
Twin Disc, Incorporated
Racine, Wisconsin

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in shareholders' equity and
comprehensive income and cash flows present fairly, in all material respects,
the financial position of Twin Disc, Incorporated and Subsidiaries at
June 30, 2003 and 2002, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 2003, in
conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements
in accordance with auditing standards generally accepted in the United States
of America which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.



PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
July 25, 2003

15
TWIN DISC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 and 2002

(Dollars in thousands) 2003 2002
---- ----

Assets
Current assets:
Cash and cash equivalents $ 5,908 $ 7,400
Trade accounts receivable, net 35,367 29,255
Inventories, net 47,247 44,504
Deferred income taxes 4,469 4,505
Other 4,104 4,126
------- -------
Total current assets 97,095 89,790

Property, plant and equipment, net 30,210 29,549
Investment in affiliate 2,550 2,439
Goodwill, net 12,876 12,311
Deferred income taxes 20,164 12,246
Intangible pension asset 24 1,383
Other assets 7,439 9,562
------ ------
$170,358 $157,280
======= =======

Liabilities And Shareholders' Equity

Current liabilities:
Notes payable $ 2,429 $ 1,708
Current maturities on long-term debt 2,857 2,857
Accounts payable 16,115 13,042
Accrued liabilities 24,885 22,312
------ ------
Total current liabilities 46,286 39,919

Long-term debt 16,584 18,583
Accrued retirement benefits 56,732 39,797
------ ------
119,602 98,299

Minority interest 485 472

Shareholders' equity:
Preferred shares authorized: 200,000;
issued: none; no par value - -
Common shares authorized: 15,000,000;
issued: 3,643,630; no par value 11,653 11,653
Retained earnings 83,191 87,524
Accumulated other comprehensive loss (26,978) (23,187)
------ ------
67,866 75,990
Less treasury stock, at cost 17,595 17,481
------ ------
Total shareholders' equity 50,271 58,509
------ ------
$170,358 $157,280
======= =======


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

16



TWIN DISC, INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended June 30, 2003, 2002 and 2001

(In thousands, except per share data)
2003 2002 2001
---- ---- ----

Net sales $179,591 $179,385 $180,786
Cost of goods sold 144,575 139,146 137,091
------- ------- -------
Gross profit 35,016 40,239 43,695
Marketing, engineering and
administrative expenses 34,790 34,638 31,716
Restructuring of operations 2,042 - 1,453
------- ------- -------
(Loss) earnings from operations (1,816) 5,601 10,526

Other income (expense):
Interest income 167 294 262
Interest expense (1,323) (1,700) (2,194)
Equity in net earnings
of affiliates 402 481 820
Gain on sale of affiliate - - 3,935
Other, net (69) 467 (258)
------- ------- -------
(823) (458) 2,565
------- ------- -------
(Loss) earnings before income taxes
and minority interest (2,639) 5,143 13,091

Income taxes (283) 2,950 6,922
------- ------- -------
(Loss) earnings before minority interest(2,356) 2,193 6,169
Minority interest (12) (135) -
------- ------- -------
Net (loss) earnings $ (2,368) $ 2,058 $ 6,169
======= ======= =======
(Loss) earnings per share data:
Basic earnings (loss) per share $ (0.84) $ 0.73 $ 2.20
Diluted earnings (loss) per share (0.84) 0.73 2.20

Weighted average shares outstanding data:
Basic shares outstanding 2,805 2,808 2,808
Dilutive stock options - - -
------- ------- -------
Diluted shares outstanding 2,805 2,808 2,808
======= ======= =======

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

17

TWIN DISC, INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 2003, 2002 and 2001

(In thousands) 2003 2002 2001
---- ---- ----

Cash flows from operating activities:
Net (loss) earnings $ (2,368) $ 2,058 $ 6,169
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 5,673 5,709 6,392
Write-off of impaired asset 773 - -
Loss on sale of plant assets 105 90 10
Gain on sale of affiliate - - (3,935)
Minority interest 12 135 -
(Gain) loss on restructuring
of operations 1,278 (53) 1,262
Equity in net earnings of affiliate (402) (481) (820)
Provision for deferred income taxes 1,424) 378 (4,680)
Dividends received from affiliate 303 400 632
Changes in operating assets and liabilities:
Trade accounts receivable, net (2,977) (995) 672
Inventories, net 3,725 3,724 1,483
Other assets (1,205) 67 3,535
Accounts payable 1,489 2,456 (1,677)
Accrued liabilities 577 (3,702) 1,210
Accrued/prepaid retirement benefits 1,151 3,375 (2,869)
------- ------- -------
Net cash provided by
operating activities 6,710 13,161 7,384
------- ------- -------
Cash flows from investing activities:
Proceeds from sale of plant assets 20 25 52
Proceeds from sale of affiliate - - 7,173
Acquisitions of plant assets (4,410) (2,063) (3,492)
Investment in joint venture - - (654)
------- ------- -------
Net cash (used) provided by
investing activities (4,390) (2,038) 3,079
------- ------- -------

Cash flows from financing activities:
Decreases in notes payable, net (23) (3,082) -
Payments of long-term debt (1,992) (4,857) (7,857)
Acquisition of treasury stock (114) - (34)
Dividends paid (1,965) (1,965) (1,966)
------- ------- -------
Net cash used by financing activities (4,094) (9,904) (9,857)
------- ------- -------
Effect of exchange rate changes on cash 282 220 (296)
------- ------- -------
Net change in cash and cash equivalents (1,492) 1,439 310
Cash and cash equivalents:
Beginning of year 7,400 5,961 5,651
------- ------- -------
End of year $ 5,908 $ 7,400 $ 5,961
======= ======= =======
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 1,870 $ 1,882 $ 2,078
Income taxes 1,675 1,908 5,155


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

18

TWIN DISC, INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
for the years ended June 30, 2003, 2002 and 2001

(In thousands) 2003 2002 2001
---- ---- ----

Common stock
Balance, June 30 $ 11,653 $ 11,653 $ 11,653
------- ------- -------
Retained earnings
Balance, July 187,524 87,431 83,228
Net (loss) earnings (2,368) 2,058 6,169
Cash dividends (1,965) (1,965) (1,966)
------- ------- -------
Balance, June 30 83,191 87,524 87,431
------- ------- -------
Accumulated other comprehensive (loss) income
Balance, July 1 (23,187) (23,181) 799
------- ------- -------
Foreign currency translation adjustment
Balance, July 1 (1,520) (5,420) 799
Current adjustment 5,929 3,900 (6,219)
------- ------- -------
Balance, June 30 4,409 (1,520) (5,420)
------- ------- -------
Minimum pension liability adjustment, net
Balance, July 1 (21,667) (17,761) -
Current adjustment, net of related income
Taxes ($6,215 in 2003, $2,497 in 2002,
and $11,356 in 2001) (9,720) (3,906) (17,761)
------- ------- -------
Balance, June 30 (31,387) (21,667) (17,761)
------- ------- -------
Accumulated other comprehensive (loss) income
Balance, June 30 (26,978) (23,187) (23,181)
------- ------- -------

Treasury stock, at cost
Balance, July 1 (17,481) (17,481) (17,447)
Shares acquired (114) - (34)
------- ------- -------
Balance, June 30 (17,595) (17,481) (17,481)
------- ------- -------
Shareholders' equity balance, June 30 $ 50,271 $ 58,509 $ 58,422
======= ======= =======
Comprehensive income (loss)
Net (loss) earnings $ (2,368) $ 2,058 $ 6,169
Other comprehensive income (loss)
Foreign currency translation adjustment 5,929 3,900 (6,219)
Minimum pension liability adjustment, net (9,720) (3,906) (17,761)
------- ------- -------
Other comprehensive (loss) income (3,791) (6) (23,980)
------- ------- -------
Comprehensive (loss) income $ (6,159) $ 2,052 $(17,811)
======= ======= =======


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

19
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. Foreign currency translation adjustments are recorded as a
component of shareholders' equity. Gains and losses from foreign currency
transactions are included in earnings. Included in other income (expense) are
foreign currency transaction losses (gains) of $123,000, $(170,000), and
$145,000 in 2003, 2002 and 2001, respectively.

Cash Equivalents-The Company considers all highly liquid marketable securities
purchased with a maturity date of three months or less to be cash equivalents.

Receivables-Trade accounts receivable are stated net of an allowance for
doubtful accounts of $502,000 and $756,000 at June 30, 2003 and 2002,
respectively.


Fair Value of Financial Instruments-The carrying amount reported in the
consolidated balance sheets for cash and cash equivalents, 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 long-term debt exceeds its carrying amount by $438 and $328 at June 30, 2003
and 2002, respectively, based on the current rates that would be offered to the
Company for debt with the same remaining maturity.

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 restrict 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 2003 and 2002
was the Euro. At June 30, 2003, the Company had net outstanding forward
exchange contracts to purchase Euros in the value of $2,701,000 with a weighted
average maturity of 50 days. The fair value of the Company's contracts was
approximately zero at June 30, 2003. At June 30, 2002, the Company had net
outstanding forward exchange contracts to purchase Euros in the value of
$2,053,000 with a weighted average maturity of 40 days. The fair value of the
Company's contracts was approximately $0.2 million at June 30, 2002.

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.

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 straight-line
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-On July 1, 2002, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment of Long-lived Assets," which supercedes SFAS No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
of," and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30 related to the disposal of a segment of a business. The adoption
of SFAS No. 144 did not have a significant impact in the Company's financial
position or results of operations.

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.

20
Investments in Affiliates-The Company's investments in 20% to 50%-owned
affiliates in which it has significant influence are accounted for using the
equity method. Investments in affiliates where significant control does not
exist are accounted for using the cost method.

Revenue Recognition--Revenue is recognized by the Company when all of the
following criteria are met: persuasive evidence of an arrangement exists;
delivery has occurred and ownership has transferred to the customer; the
price to the customer is fixed or determinable; and collectability is
reasonably assured.

Goodwill and Other Intangibles-In June 2001, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets," to establish accounting and
reporting standards for goodwill and intangible assets. According to SFAS
No. 142, goodwill and intangible assets deemed to have indefinite lives will
no longer be amortized. Other intangible assets will continue to be amortized
over their useful lives. The Company adopted the new rules for accounting for
goodwill and other intangible assets on July 1, 2001. Upon adoption of SFAS No.
142, it was determined that there was no impairment of the Company's existing
goodwill and indefinite lived intangible assets.

Under SFAS No. 142, goodwill will be tested for impairment at least annually
and more frequently if an event occurs which indicates the goodwill may be
impaired. Impairment of goodwill is measured according to a two step approach.
In the first step, the fair value of a reporting unit, as defined by the
statement, is compared to the carrying value of the reporting unit, including
goodwill. If the carrying amount exceeds the fair value, the second step of
the goodwill impairment test is performed to measure the amount of the
impairment loss, if any. In the second step the implied value of the goodwill
is estimated as the fair value of the reporting unit less the fair value of
all other tangible and identifiable intangible assets of the reporting unit.
If the carrying amount of the goodwill exceeds the implied fair value of the
goodwill, an impairment loss is recognized in an amount equal to that excess,
not to exceed the carrying amount of the goodwill.

Deferred Taxes-The Company recognizes deferred tax liabilities and assets for
the expected future income tax consequences of events that have been recognized
in the Company's financial statements. Under this method, deferred tax
liabilities and assets are determined based on the temporary differences between
the financial statement carrying amounts and the tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
temporary differences are expected to reverse.

The Company does not provide for taxes which would be payable if undistributed
earnings of its foreign subsidiaries or its foreign affiliate were remitted
because the Company either considers these earnings to be invested for an
indefinite period or anticipates that if such earnings were distributed,
the U.S. income taxes payable would be substantially offset by foreign tax
credits.

Stock-Based Compensation-At June 30, 2003, the Company has two stock-based
compensation plans, which are described more fully in Note M, "Stock Option
Plans." The Company accounts for these plans under the recognition and
measurement provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
No stock-based employee compensation cost related to stock options is
reflected in earnings, as all option grants under those plans had an
exercise price equal to or greater than the market value of the underlying
common stock on the date of grant. The effect on net earnings and earnings
per share if the Company had applied the fair value recognition provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation is disclosed in Note M.

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 sales.

Reclassification-Certain amounts in the 2002 financial statements have been
reclassified to conform to the presentation in the 2003 financial statements.

Recently Issued Accounting Standards- In November 2002, the FASB issued FASB
Interpretation No. 45 ("FIN 45"). Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 clarifies the requirements of FAS 5, "Accounting for
Contingencies," relating to guarantor's accounting for, and disclosure of,
the issuance of certain types of guarantees. The Interpretation's provisions
for initial recognition and measurement should be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of annual periods that end
after December 15, 2002. The adoption of the accounting and disclosure
provisions of this Interpretation did not have a significant impact on the
Company's financial statements for the year ending June 30, 2003.

In May 2003, the FASB issued SFAS No. 150. "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not expect the adoption of
the provisions of this Statement to have a significant impact on its financial
statements.

21

B. Inventories

The major classes of inventories at June 30 were as follows (in thousands):
2003 2002
---- ----

Finished parts $ 36,175 $ 35,485
Work-in-process 7,003 5,668
Raw materials 4,069 3,351
------- -------
$ 47,247 $ 44,504
======= =======

Inventories stated on a LIFO basis represent approximately 43% and 47% of total
inventories at June 30, 2003 and 2002, respectively. The approximate current
cost of the LIFO inventories exceeded the LIFO cost by $20,542,000 and
$20,776,000 at June 30, 2003 and 2002, respectively. Inventory quantities
were reduced in 2003 resulting in a liquidation of LIFO inventory quantities
carried at costs prevailing in prior years which were lower than current costs.
The effect was to decrease the 2003 net loss by $70,000.



C. Property, Plant And Equipment

Property, plant and equipment at June 30 were as follows (in thousands):

2003 2002
---- ----

Land $ 1,412 $ 1,407
Buildings 24,948 23,428
Machinery and equipment 92,371 89,086
------- -------
118,731 113,921
Less accumulated depreciation 88,521 84,372
------- -------
$ 30,210 $ 29,549
======= =======


D. Investment In Affiliates

In January of 2001, the Company sold its remaining 19.5% investment in Niigata
Converter Company, LTD., Japan (Niigata). The total proceeds from the
transaction were $7.2 million, including the elimination of a $1.7 million
note receivable, resulting in a pre-tax gain of $3.9 million recognized in 2001.

The Company's investment in affiliate consists of a 25% interest in a domestic
distributor of Twin Disc products. Combined condensed financial data for the
investment in affiliate accounted for under the equity method of accounting
are summarized below (in thousands). The statement of operations information
includes the results of operations of the domestic distributor from June 1
through May 31.


2003 2002
---- ----

Current assets $ 12,792 $ 11,070
Other assets 2,125 5,457
------- -------
$ 14,917 $ 16,527
======= =======
Current liabilities $ 2,662 $ 6,673
Other liabilities 2,164 97
Shareholders' equity 10,091 9,757
------- -------
$ 14,917 $ 16,527
======= =======

2003 2002 2001
---- ---- ----

Net sales $ 27,008 $ 23,774 $ 27,516
Gross profit 8,831 8,300 9,832
Net earnings 1,607 1,925 3,281


At June 30, 2003 and 2002, trade receivables from the 25% owned distributor were
$1,719,000 and $1,147,000, respectively.

22

Sales to the Company's 25% owned domestic distributor are the same terms and
conditions as sales to independent distributors. Sales to this distributor
were $10,886,000, $9,250,000 and $11,259,000 in fiscal 2003, 2002 and 2001,
respectively.

E. Goodwill And Other Intangibles

The Company performed impairment tests of its goodwill at June 30, 2003 and
2002 and at July 1, 2001 and determined that no impairment of goodwill existed.
Goodwill at June 30, 2003 and 2002 of $12,876,000 and $12,311,000, respectively,
is net of accumulated amortization of $997,000. There were no other indefinite
lived intangible assets identified by the Company at June 30, 2003 or 2002.

In the second quarter of 2003, review of long-lived assets revealed a permanent
impairment in the value of a license agreement to manufacture and distribute
certain products. It was determined that this asset should be subjected to
SFAS 144 impairment tests due to current period operating and cash flow losses
generated on products sold under the agreement in conjunction with recent
projections that these losses will continue. The fair value of the asset being
held for use was determined based on discounted cash flows generated from the
use of the asset using a discount rate reflecting the Company's average cost
of funds, plus salvage value. It was determined that the carrying value of
the license exceeded the fair value and a charge of $773,000 was recorded
during the quarter ended December 31, 2002 to write-down this asset to its
fair value. This charge was classified as a component of cost of sales
pertaining to the Company's Manufacturing segment.

Included in Other assets on the Company's Consolidated Balance Sheet as of the
end of June 30, 2003 and 2002, respectively, are the following acquired
intangible assets (in thousands):


2003 2002
---- ----

Intangible assets with finite lives:
Licensing agreements $ 5,490 $ 5,490
Other 1,259 1,259
------- -------
$ 6,749 $ 6,749

Accumulated amortization $ 4,211 $ 3,611
Write off or impaired asset 773 -
------- -------
Total $ 1,765 $ 3,138
======= =======

The weighted average remaining useful life of the intangible assets included in
the table above is approximately 16 years.


Intangible amortization expense for the year ended June 30, 2003 and
2002 was $601,000 and $726,000, respectively. Estimated intangible amortization
expense for each of the subsequent five fiscal years is as follows
(in thousands):
Fiscal Year

2004 $ 416
2005 231
2006 68
2007 60
2008 60
Thereafter 930
-------
$ 1,765
=======


The following proforma information reconciles the net income and earnings per
share reported for the fiscal year ended June 30, 2001 to adjusted net income
and earnings per share to reflect the adoption of SFAS No. 142 (in thousands
except earnings per share data):
2001
----

Net income, as reported $ 6,169
Goodwill amortization (net of tax) 171
-------
Net income, as adjusted $ 6,340
=======

Basic earnings per share, as reported $ 2.20
Goodwill amortization (net of tax) .06
-------
Basic earnings per share, as adjusted $ 2.26
========

Diluted earnings per share, as reported $ 2.20
Goodwill amortization (net of tax) .06
-------
Diluted earnings per share, as adjusted $ 2.26
=======


23
F. Joint Venture

On April 2, 2001, the Company entered into a Joint Venture Agreement with
Niigata Engineering Co. LTD., Japan to form NICO Transmissions Co., Inc. (NTC).
NTC is an engineering and marketing company supporting the Company's expanding
global marine product line as well as a distribution company for Niigata's
family of transmission products.

Pursuant to the terms of the Joint Venture Agreement, the Company contributed
0.7 million in exchange for a controlling 66% ownership interest in NTC and
Niigata contributed $0.3 million for a 34% ownership interest. NTC's balance
sheet and statement of operations as of and for the years ended March 31, 2003
and 2002 are consolidated with the Company's balance sheet and statement of
operations as of and for the years ended June 30, 2003 and 2002, respectively.

In 2002, Niigata filed for creditor protection in Japan under the local
bankruptcy code. Niigata was acquired out of bankruptcy in 2003 and the
acquiring company is participating in the joint venture under the original
terms of the joint agreement. Subsequent to the acquisition of Niigata, the
name of the Joint Venture was changed to Twin Disc Nico Co. LTD.. During 2002
the Company fully reserved for its receivable from Niigata in the amount of
$237,000 as a result of this filing and wrote off this amount in 2003.

G. Accrued Liabilities


Accrued liabilities at June 30 were as follows (in thousands):
2003 2002
---- ----

Salaries and wages $ 4,756 $ 4,875
Retirement benefits 6,309 4,666
Warranty 6,070 5,294
Other 7,750 7,477
------- -------
$ 24,885 $ 22,312
======= =======


H. Warranty

The Company warrants all assembled products and parts (except component products
or parts on which written warranties are issued by the respective manufacturers
thereof and are furnished to the original customer, as to which the Company
makes no warranty and assumes no liability) against defective materials or
workmanship. Such warranty generally extends from periods ranging from 12 months
to 24 months.

The Company engages in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of its suppliers.
However, its warranty obligation is affected by product failure rates, the
extent of the market affected by the failure and the expense involved in
satisfactorily addressing the situation. The warranty reserve is established
based on the Company's best estimate of the amounts necessary to settle future
and existing claims on products sold as of the balance sheet date. When
evaluating the adequacy of the reserve for warranty costs, management takes into
consideration the term of the warranty coverage, historical claim rates and
costs of repair, knowledge of the type and volume of new products and economic
trends. While the Company believes the warranty reserve is adequate and that
the judgment applied is appropriate, such amounts estimated to be due and
payable in the future could differ materially from what actually transpires.


The following is a listing of the activity in the warranty reserve during the
year ended June 30, 2003 (in thousands):

Year Ended
June 30, 2003
-------------

Reserve balance, July 1, 2003 $ 5,294
Current period expense 4,417
Payments or credits to customers (3,766)
Adjustment to preexisting warranties 125
-------
Reserve balance, June 30, 2003 $ 6,070
=======


I. Debt

Notes payable consists of amounts borrowed under unsecured line of credit
agreements. Unused lines of credit total $8,577,378 at June 30, 2003.
These lines of credit may be withdrawn at the option of the banks.
The weighted average interest rate of the lines outstanding at June 30, 2003
and 2002 was 3.4% and 4.6%, respectively.

24

Included in long-term debt is $8,571,000 and $11,429,000 of 7.37% ten-year
unsecured notes at June 30, 2003 and 2002, respectively. These notes contain
certain covenants, including the maintenance of a current ratio of not less
than 1.5 and the maintenance of an EBITDA to interest charges ratio greater
than 2.3. Consolidated net worth must be at least equal to the sum of
$60,310,000 plus 35% of consolidated net earnings for each quarter from
July 1, 1996, however the Company may exclude up to $34,000,000 of net
worth adjustments that result from changes to the assumptions used by the
Company in determining its pension liability or changes in the market value
of plan assets. As of June 30, 2003, the Company was in compliance with all
debt covenants.

During 2003, the Company entered into a $20,000,000 revolving loan agreement
which expires on October 31, 2005. This agreement contains certain covenants,
including restrictions on investments, acquisitions and indebtedness. Financial
covenants include a minimum consolidated net worth calculated consistently with
the net worth covenant discussed in the above paragraph, minimum EBITDA of
6,000,000 at June 30, 2003 and a maximum total funded debt to EBITDA ratio of
3.75 at June 30, 2003. As of June 30, 2003, the Company was in compliance with
all debt covenants. The outstanding balance of $10,865,000 and $10,000,000 at
June 30, 2003 and 2002, respectively, is classified as long-term debt. Notes
under this agreement bear interest on a schedule determined by the Company's
leverage ratio and the LIBOR interest rate (LIBOR plus 2.75% and 1.00% at June
30, 2003 and 2002, respectively). The rate was 4.07% and 3.9% at June 30, 2003
and 2002, respectively.



The aggregate scheduled maturities of outstanding long term debt obligations
in subsequent years are as follows (in thousands):

Fiscal Year

2004 $ 2,857
2005 13,727
2006 2,857
-------
$ 19,441
=======


J. Lease Commitments

Approximate future minimum rental commitments under noncancellable operating
leases are as follows (in thousands):

Fiscal Year

2004 $ 2,868
2005 2,117
2006 1,645
2007 1,184
2008 1,029
Thereafter 2,218
-------
$ 11,061
=======

Total rent expense for operating leases approximated $3,320,000, $3,135,000
and $3,444,000 in 2003, 2002 and 2001 respectively

K. Shareholders' Equity

At June 30, 2003 and 2002, treasury stock consisted of 845,788 and 835,788
shares of common stock, respectively. The Company acquired 10,000 shares
of treasury stock in 2003 for $114,000.

Cash dividends per share were $.70 in 2003, 2002 and 2001.

In 1998, the Company's Board of Directors established a Shareholder Rights Plan
and distributed to shareholders one preferred stock purchase right for each
outstanding share of common stock. Under certain circumstances, a right may
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 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 become exercisable, if the Company
is a party to certain merger or business combination transactions, or transfers
50% or more of its assets or earnings power, or certain other events occur, each
right will 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 expire June 30, 2008, and may be redeemed by the Company for $.05 per
right at any time until ten (10) days following the stock acquisition date.
The Company is authorized to issue 200,000 shares of preferred stock, none of
which have been issued. The Company has designated 50,000 shares of the
preferred stock for the purpose of the Shareholder Rights Plan.

25
L. Business Segments And Foreign Operations

The Company and its subsidiaries are engaged in the manufacture and sale of
power transmission equipment. Principal products include industrial clutches,
hydraulic torque converters, fluid couplings, power-shift transmissions,
marine transmissions, universal joints, power take-offs and reduction gears.
The Company sells to both domestic and foreign customers in a variety of market
areas, principally construction, industrial, energy and natural resources and
marine and agricultural.

The Company has two reportable segments: manufacturing and distribution. These
segments are managed separately because each provides different services and
requires different technology and marketing strategies. The accounting practices
of the segments are the same as those described in the summary of significant
accounting policies. Transfers among segments are at established inter-company
selling prices.


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

Manufacturing Distribution Total
------------- ------------ -----
2003

Net sales $153,713 $63,413 $217,126
Intra-segment sales 6,587 2,890 9,477
Inter-segment sales 25,848 2,210 28,058
Interest income 470 254 95
Interest expense 1,480 137 1,617
Income taxes (1,054) 1,073 19
Depreciation and amortization 5,2912 92 5,583
Segment (loss) earnings (1,866) 1,943 77
Segment assets 152,093 32,7611 84,854
Expenditures for segment assets 3,882 528 4,410

2002
Net sales $155,730 $ 61,848 $217,578
Intra-segment sales 6,696 1,870 8,566
Inter-segment sales 22,784 6,843 29,627
Interest income 468 43 511
Interest expense 1,783 131 1,914
Income taxes 1,940 1,362 3,302
Depreciation and amortization 5,409 210 5,619
Segment earnings 2,247 2,366 4,613
Segment assets 139,810 30,275 170,085
Expenditures for segment assets 1,851 212 2,063


2001
Net sales $171,439 $ 45,337 $216,776
Intra-segment sales 7,953 304 8,257
Inter-segment sales 27,009 724 27,733
Interest income 393 76 469
Interest expense 2,796 107 2,903
Income taxes 4,072 851 4,923
Depreciation and amortization 5,997 269 6,266
Segment earnings 5,562 1,365 6,927
Segment assets 141,737 24,822 166,559
Expenditures for segment assets 3,245 247 3,492

26


The following is a reconciliation of reportable segment net sales,
earnings (loss) and assets, to the Company's consolidated totals (in thousands):

2003 2002 2001
---- ---- ----

Net sales
Total net sales from reportable segments $217,126 $217,578 $216,776
Elimination of inter-company sales (37,535) (38,193) (35,990)
------- ------- -------
Total consolidated net sales $179,591 $179,385 $180,786
======= ======= =======
(Loss) earnings:
Total earnings from reportable segments $ 77 $ 4,613 $ 6,927
Other corporate expenses (2,445) (2,555) (758)
------- ------- -------
Total consolidated net (loss) earnings $( 2,368) $ 2,058 $ 6,169
======= ======= =======
Assets
Total assets for reportable segments $184,854 $170,085
Elimination of inter-company assets (19,402) (18,831)
Corporate assets 4,906 6,026
------- -------
Total consolidated assets $170,358 $157,280
======= =======


Other significant items:

Segment Consolidated
Totals Adjustments Totals
2003 ------- ----------- ------------

Interest income $ 495 $ (328) $ 167
Interest expense 1,617 (294) 1,323
Income taxes 19 (302) (283)
Depreciation and amortization 5,583 90 5,673
Expenditures for segment assets 4,410 - 4,410


2002

Interest income $ 511 $ (217) $ 294
Interest expense 1,914 (214) 1,700
Income taxes 3,302 (352) 2,950
Depreciation and amortization 5,619 90 5,709
Expenditures for segment assets 2,063 - 2,063


2001

Interest income $ 469 $ (207) $ 262
Interest expense 2,903 (709) 2,194
Income taxes 4,923 1,999 6,922
Depreciation and amortization 6,266 126 6,392
Expenditures for segment assets 3,492 - 3,492

All adjustments represent inter-company eliminations and corporate amounts.

27

Geographic information about the Company is summarized as follows
(in thousands):
2003 2002 2001
---- ---- ----

Net sales
United States $ 95,813 $108,288 $120,522
Other countries 83,778 71,097 60,264
------- ------- -------
Total $179,591 $179,385 $180,786
======= ======= =======

Long-lived assets United States $ 63,865 $ 59,530
Belgium 11,228 10,596
Other countries 6,646 4,842
Elimination of inter-company assets (8,476) (7,478)
------- -------
Total $ 73,263 $ 67,490
======= =======

One customer accounted for approximately 10%, 11% and 11% of consolidated net
sales in 2003, 2002 and 2001, respectively.

M. Stock Option Plans

During fiscal 1999, the Company adopted the Twin Disc, Incorporated 1998 Stock
Option Plan for Non-Employee Directors, a non-qualified plan for non-employee
directors to purchase up to 35,000 shares of common stock, and the Twin Disc,
Incorporated 1998 Incentive Compensation Plan, a plan where options are
determined to be non-qualified or incentive at the date of grant, for officers
and key employees to purchase up to 165,000 shares of common stock. The plans
are administered by the Executive Selection and Compensation Committee of the
Board of Directors which has the authority to determine which officers and key
employees will be granted options. The grant of options to non-employee
directors is fixed at options to purchase 1,000 shares of common stock per
year or 600 at time of appointment. Except as described in the following
sentence, all options allow for exercise prices not less than the grant date
fair market value, vest immediately and expire ten years after the date of
grant. For options under the Incentive Compensation Plan, if the optionee
owns more than 10% of the total combined voting power of all classes of the
Company's stock, the price will be not less than 110% of the grant date fair
market value and the options expire five years after the grant date. In
addition, the Company has 44,450 incentive stock option plan options and
46,050 non-qualified stock option plan options outstanding at June 30, 2003
under the Twin Disc, Incorporated 1988 Incentive Stock Option plan and the
Twin Disc, Incorporated 1988 Non-Qualified Stock Option Plan for Officers,
Key Employees and Directors, respectively. The plans terminated during 1999.


Shares available for future options as of June 30 were as follows:

2003 2002
---- ----

1998 Stock Option Plan for Non-Employee Directors 6,400 14,650
1998 Incentive Compensation Plan 47,250 62,300

Stock option transactions under the plans during 2003, 2003 and 2001 were as
follows:


Weighted Weighted Weighted
Average Average Average
2003 Price 2002 Price 2001 Price
---- -------- ---- -------- ---- --------

Non-qualified stock options:
Options outstanding
at beginning of year 102,350 $20.46 88,350 $21.31 83,600 $22.06
Granted 40,800 14.39 14,500 15.05 15,750 17.47
Canceled (18,000) 18.14 (500) 14.00 (11,000) 21.47
------- ----- ------ ----- ------ -----
Options outstanding
at June 30 125,150 $18.82 102,350 $20.46 88,350 $21.31
======= ===== ======= ===== ====== =====

Options price range
($12.70 - $20.00)
Number of shares 92,450
Weighted average price $ 16.30
Weighted average
remaining life 7.36 years

Options price range
($21.875 - $28.75)
Number of shares 32,700
Weighted average price $ 24.96
Weighted average
remaining life 4.85 years

28


Weighted Weighted Weighted
Average Average Average
2003 Price 2002 Price 2001 Price
---- -------- ---- -------- ---- --------

Incentive stock options:
Options outstanding
at beginning of year 146,000 $20.75 125,650 $22.29 119,400 $23.24
Granted - - 30,200 15.25 26,800 17.81
Canceled (39,300) 21.32 (9,850) 23.47 (20,550) 21.95
------- ----- ------- ----- ------- -----
Options outstanding
at June 30 106,700 $20.55 146,000 $20.75 125,650 $22.29
======= ===== ======= ===== ======= =====
Options price range
($15.05 - $20.00)
Number of shares 68,400
Weighted average price $ 17.66
Weighted average
remaining life 7.16 years

Options price range
($21.875 - $28.75)
Number of shares 38,300
Weighted average price $ 25.70
Weighted average
remaining life 5.13 years

The Company accounts for its stock option plans under the guidelines of
Accounting Principles Board Opinion No. 25. Had the Company recognized
compensation expense determined based on the fair value at the grant date for
awards under the plans, the net earnings and earnings per share would have been
as follows (in thousands,
except per share amounts)

2003 2002 2001
---- ---- ----

Net (loss) earnings
As reported $ (2,368) $ 2,058 $ 6,169
Pro forma (2,442) 1,954 6,028
Basic and diluted (loss) earnings per share
As reported $ (0.84) $ 0.73 $ 2.20
Pro forma (0.87) 0.70 2.15


The above pro forma net earnings and earnings per share were computed using the
fair value of options at the date of grant (for options granted after June 1995)
as calculated by the Black-Scholes option-pricing method and the following
assumptions: 22% volatility, 4.8% annual dividend yield, risk free interest
rates of 3.58% and 2.71% in 2003, 23% volatility, 4.5% annual dividend yield,
risk free interest rate of 4.53% in 2002, 22% volatility, 4.2% annual dividend
yield, risk free interest rate of 6.05% in 2001, a 5 year term and an exercise
price equal to the fair market value on the date of grant except for incentive
options granted to greater than 10% shareholders which are calculated using a
3 year term and an exercise price equal to 110% of the fair market value on the
date of grant. For those options granted during 2003, 2002 and 2001 with
exercise prices equal to the grant date fair market value, the exercise prices
and weighted average fair values of the options were $14.34 and $1.83 in 2003,
$15.05 and $2.37 in 2002 and $17.54 and $3.38 in 2001, respectively. For those
options granted with exercise prices greater than the grant date fair market
value, the exercise prices and weighted average fair values of the options were
none in 2003, $16.56 and $1.83 in 2002 and $19.59 and $2.50 in 2001,
respectively.

29
N. 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
charges for ongoing efforts to refine existing products. Research and
development costs charged to operations totaled $2,220,000, $1,887,000 and
$1,929,000 in 2003, 2002 and 2001 respectively. Total engineering and
development costs were $7,190,000, $6,718,000 and $5,791,000 in 2003, 2002
and 2001 respectively.

O. Retirement 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. Domestic plan assets consist principally of listed
equity and fixed income securities.

On June 20, 2003 the Board of Directors amended the defined benefit pension
plans covering domestic salaried and hourly employees to exclude all employees
hired after October 1, 2003 from the plans. In addition, a portion of the
medical supplement for post-1992 retirees that is payable prior to Medicare
eligibility has been removed from the plan. The $19.24 per month benefit
times years of service has been reduced to $4.42 per month times years of
service. This is effective October 1, 2003 for all participants. The $14.82
benefit removed is now provided through the retiree health plan discussed below.
The remaining medical supplement will be calculated using service frozen as of
October 1, 2003.

In addition, the Company has unfunded, non-qualified retirement plans for
certain management employees and directors. Benefits are based on final
average compensation and 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 coverage through the Company's
group plan, are required to pay 100% of the premium cost. On June 20, 2003 the
Board of Directors amended the coverage under the plans as follows:

--Pre-1993 retirees are required to pay any cost increases after 2003 for
retiree medical coverage.
--Dental and vision coverage for Pre-1993 retirees was eliminated.
--Life insurance coverage for individuals who retire on or after October 1,
2003 was eliminated.
--Access to retiree medical coverage after age 65 for individuals who retire
on or after October 1, 2003 and their spouses was eliminated.
--Retiree medical coverage was eliminated for all employees hired on or after
October 1, 2003.
--A Healthcare Reimbursement Account ("HRA") program will be established for
individuals who retire after January 1, 1993 but before age 65.

30

The following table sets forth the Company's defined benefit pension
plans' and other post-retirement benefit plan's funded status and the amounts
recognized in the Company's balance sheets and income statements as of June 30
(dollars in thousands):

Other Post
Pension retirement
Benefits Benefits
-------------------- -----------------
2003 2002 2003 2002
---- ---- ---- ----

Change in benefit obligation:
Benefit obligation, beginning of year $115,147 $114,025 $ 32,999 $ 31,967
Service cost 1,344 1,361 17 17
Interest cost 8,277 8,203 2,362 2,281
Amendments (6,376) - (6,106) -
Actuarial loss 7,034 908 6,678 2,277
Benefits paid (9,466) (9,350) (3,581) (3,543)
-------- ------- ------- -------
Benefit obligation, end of year $115,960 $115,147 $ 32,369 $ 32,999
======= ======= ======= =======
Change in plan assets:
Fair value of assets, beginning of year $ 92,405 $ 98,352 $ - $ -
Actual return on plan assets (9,403) 1,209 - -
Employer contribution 1,742 2,194 3,581 3,543
Benefits paid (9,466) (9,350) (3,581) (3,543)
------- ------- ------- -------
Fair value of assets, end of year $ 75,278 $ 92,405 $ - $ -
======= ======= ======= =======
Funded status $(40,682)$(22,742)$(32,369) $(32,999)
Unrecognized net transition obligation 391 388 - -
Unrecognized actuarial loss 58,128 36,339 17,159 11,279
Unrecognized prior service cost (5,842) 1,178 (6,106) -
------- ------- ------- -------
Net amount recognized $ 11,995 $ 15,163 $(21,316) $(21,720)
======= ======= ======= =======
Amounts recognized in the balance sheet
consist of:
Accrued benefit liability (39,483) (21,739) (21,316) (21,720)
Intangible asset 24 1,383 - -
Deferred tax asset 20,067 13,852 - -
Minimum pension liability adjustment 31,387 21,667 - -
------ ------ ------ ------
Net amount recognized $ 11,995 $ 15,163 $(21,316) $(21,720)
======= ======= ======= =======

Weighted average assumptions as of
March 31 measurement date:
Discount rate 6.75% 7.50% 6.75% 7.50%
Expected return on plan assets 9.00% 9.00%
Rate of compensation increase 5.00% 5.00%


Pension Benefits
-----------------------------------
2003 2002 2001
---- ---- ----

Service cost $ 1,344 $ 1,361 $ 1,284
Interest cost 8,277 8,203 8,333
Expected return on plan assets (7,883) (8,476) (9,837)
Amortization of prior service cost 624 625 607
Amortization of transition obligation 56 49 181
Unrecognized net loss 2,492 1,802 -
------- ------- -------
Net periodic benefit cost $ 4,910 $ 3,564 $ 568
======= ======= =======

Postretirement Benefits
------------------------------------
2003 2002 2001
---- ---- ----

Service cost $ 17 $ 17 $ 16
Interest cost 2,362 2,281 2,298
Recognized net actuarial loss 798 580 345
------- ------- -------
Net periodic benefit cost $ 3,177 $ 2,878 $ 2,659
======= ======= =======


31
The pension plans held 62,402 shares of Company stock with a fair market value
of $882,988 and $873,000 at June 30, 2003 and 2002, respectively.

The assumed weighted average health care cost trend rate was 9% in 2003 until
October 1, 2003, the date from which Pre-1993 retirees are required to pay all
costs increases. A 1% increase in the assumed health care cost trend would
increase the accumulated postretirement benefit obligation by approximately
$460,000 and the service and interest cost by approximately $31,000. A 1%
decrease in the assumed health care cost trend would decrease the accumulated
postretirement benefit obligation by approximately $459,000 and the service
and interest cost by approximately $31,000.

The Company sponsors defined contribution plans covering substantially all
domestic employees and certain foreign employees. These plans provide for
employer contributions based primarily on employee participation. The total
expense under the plans was $1,568,000, $1,780,000 and $1,591,000 in 2003,
2002, and 2001 respectively..

P. Income Taxes


United States and foreign (loss) earnings before income taxes were as follows
(in thousands):
2003 2002 2001
---- ---- ----

United States $ (6,820) $ 568 $ 3,457
Foreign 4,169 4,440 9,634
------- ------ -------
$ (2,651) $ 5,008 $ 13,091
======= ====== =======


The provision (credit) for income taxes is comprised of the following
(in thousands):
2003 2002 2001
---- ---- ----

Currently payable:
Federal $ (176) $ 168 $ 2,552
State 48 70 101
Foreign 1,269 2,334 4,455
------- ----- ------
1,141 2,572 7,108
------- ------ ------
Deferred:
Federal (1,281) 441 (564)
State (587) (83) 494
Foreign 444 20 (116)
------- ------ ------
(1,424) 378 (186)
------- ------ ------
$ (283) $2,950 $ 6,922
====== ===== =======

The components of the net deferred tax asset as of June 30, were as follows
(in thousands):
2003 2002
---- ----

Deferred tax assets:
Retirement plans and employee benefits $ 23,571 $ 16,371
Alternative minimum tax credit
Carryforwards 509 690
Foreign tax credit carryforwards 641 920
State net operating loss and other
state credit carryforwards 553 519
Federal net operating loss carryforward 1,206 -
Other 3,610 4,386
------- -------
30,090 22,886

Deferred tax liabilities:
Property, plant and equipment 4,222 4,620
Intangibles 594 595
------- -------
4,816 5,215
------- -------
Valuation allowance (641) (920)
------- -------
Total net deferred tax assets $ 24,633 $ 16,751
======= =======

32
Management believes that it is more likely than not that the results
of future operations will generate sufficient taxable income to realize deferred
tax assets except for certain foreign tax credit carryforwards. Of the $641,000
in foreign tax credit carryforwards at June 30, 2003, $257,000 will expire in
2005, $223,000 will expire in 2006 and $161,000 will expire in 2007. The
alternative minimum tax credit carryforwards will be carried forward
indefinitely. Of the $507,000 of state net operating loss carryforwards at
June 30, 2002, $444,000 will expire in 2014, $23,000 will expire in 2015 and
$40,000 will expire in 2017. Of the $46,000 net of federal tax of state credit
carryforwards, $12,000 will expire in 2014, $11,000 will expire in 2015,
$11,000 will expire in 2016 and $12,000 will expire in 2017. The federal
net operating loss carryforward of $1,206,000 will expire in 2023.

Following is a reconciliation of the applicable U.S. federal income taxes to the
actual income taxes reflected in the statements of operations (in thousands):

2003 2002 2001
---- ---- ----

U.S. federal income tax at 34% $ (901) $ 1,749 $ 4,451
Increases (reductions)
in tax resulting from:
Foreign tax items 291 144 234
State taxes (366) (298) 351
Valuation allowance - 920 1,500
Disposition of investment in subsidiary - 522 286
Statutory rate change 97 - -
Other, net 596 (87) 100
------ ------ ------
$ (283) $ 2,950 $ 6,922
====== ====== ======

The Company has not recorded deferred income taxes applicable to undistributed
earnings of foreign subsidiaries that are indefinitely reinvested in foreign
operations. The undistributed earnings amount to approximately $20.8 million
at June 30, 2003. If these earnings were remitted to the U.S., they would be
subject to U.S. income tax. However this tax would be substantially less than
the U.S. statutory income tax because of available foreign tax credits.

Q. Contingencies

The Company has been involved in various stages of investigation relative to
hazardous waste sites, two of which were on the United States EPA National
Priorities List (Superfund sites). The Company's involvement in one of the
Superfund sites was settled in 2003 for approximately $191,000. The Company
has made a $117,000 payment in trust in settlement of its exposure related
to the second Superfund site and anticipates that no further payments will
be required. The excess reserve for these sites of $300,000 was reversed
against cost of sales in 2003. Additionally, the Company is subject to certain
product liability matters in the normal course of business.

At June 30, 2003 and 2002, the Company has accrued approximately $100,000
and $632,000, respectively which represents management's best estimate
available for possible losses related to environmental and product liability
contingencies. This amount has been provided over the past several years.
Based on the information available, the Company does not expect that any
unrecorded liability related to these matters would materially affect the
consolidated financial position, results of operations or cash flows.

R. Restructuring Of Operations

During the second quarter of 2003, the Company recorded a pre-tax restructuring
charge of $2.0 million in connection with the reduction of its workforce.
These actions were taken in an effort to streamline the Company's cost structure
and align its corporate workforce with market conditions. The charge consists
of employee termination and severance benefits for a total of 58 employees;
48 production employees and 10 salaried employees. During 2003 the Company
made cash payments of $0.6 million. As of June 30, 2003, a remaining balance
in accrued liabilities of $1.3 million remains.

During the fourth quarter of 2001, the Company recorded a pre-tax restructuring
charge of $1.5 million in connection with the reduction of its workforce and
consolidation of facilities. These actions were taken in an effort to
streamline the Company's cost structure and utilization of available capacity at
other locations. The charge included $1.0 million in employee termination and
severance benefits, $0.3 million for remaining costs related to pre-existing
leases, $0.1 million for the estimated loss on fixed assets which were held for
disposal, and $0.1 million in miscellaneous costs. Approximately $0.7 million of
the charge for employee termination and severance benefits was classified to
cost of goods sold with the remaining $0.3 million charged to marketing,
engineering and administrative expenses. A total of 46 employees were
terminated; 22 production employees and 24 salaried employees. In 2001, the
Company made cash payments of $0.1 million and also charged the $0.1 million
loss on fixed assets against the reserve. As of June 30, 2001, the reserve had
a balance of $1.3 million. In 2002, cash payments of $1.1 million were charged
against the reserve and $0.1 million was reversed against cost of goods sold.
In 2003, the remaining reserve of $0.1 million was reversed against
administrative expenses.

33

REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors
Twin Disc, Incorporated
Racine, Wisconsin

Our audits of the consolidated financial statements referred to in our report
dated July 25, 2003 appearing on page 14 of this form 10-K also included an
audit of the information set forth in the Financial Statement Schedule listed
in Item 14(a)(2) of this Form 10-K. In our opinion, this Financial Statement
Schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.

/s/ PricewaterhouseCooopers LLP
- -------------------------------
PricewaterhouseCoopers LLP


Milwaukee, Wisconsin
July 25, 2003



TWIN DISC, INCORPORATED AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the years ended June 30, 2003, 2002 and 2001
(In thousands)


Additions
Balance at Charged to Balance at
Beginning costs and end of
Description of Period Expenses Deductions of Period
- ------------------------- --------- ---------- -------------- ---------
2003:

Allowance for losses on
accounts receivable $ 756 $ 135 $ 389 $ 502
Reserve for inventory
Obsolescence $4,593 $1,822 $1,002 $5,413


2002:

Allowance for losses on
accounts receivable $ 699 $ 336 $ 279 $ 756
Reserve for inventory
Obsolescence $3,346 $2,178 $ 931 $4,593


2001:

Allowance for losses on
accounts receivable $ 704 $ 157 $ 162 $ 699
Reserve for inventory
Obsolescence $1,371 $2,470 $ 495 $3,346


Accounts receivable written-off and inventory disposed of during the year
and other adjustments (primarily foreign currency translation adjustments).



34

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.

TWIN DISC, INCORPORATED


By /s/ FRED H. TIMM
Fred H. Timm, Vice President -
Administration and Secretary
(Chief Accounting Officer)

September 17, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.



By /s/ MICHAEL E. BATTEN
Michael E. Batten, Chairman,
Chief Executive Officer and Director


September 17, 2003 By /s/ MICHAEL H. JOYCE
Michael H. Joyce, President,
Chief Operating Officer and Director


By /s/ CHRISTOPHER J. EPERJESY
Christopher J. Eperjesy, Vice President-
Finance, Treasurer and
Chief Financial Officer

Paul J. Powers, Director
September 17, 2003 David L. Swift, Director
John A. Mellowes, Director
George E. Wardeberg, Director
David R. Zimmer, Director
David B. Rayburn, Director
John H. Batten, Director


By /s/ CHRISTOPHER J. EPERJESY
Christopher J. Eperjesy,
Attorney in Fact


35
EXHIBIT INDEX
TWIN DISC, INCORPORATED
10-K for Year Ended June 30, 2003

Exhibit Description Filed Herewith

3a) Articles of Incorporation, as restated October 21, 1988
(Incorporated by reference to Exhibit 3(a) of the
Company's Form 10K for the year ended June 30, 1989).
b) Corporate Bylaws, as amended through June 22, 1998
(Incorporated by reference to Exhibit 3(b) of the
Company's Form 10K for the year ended June 30, 1998).

4a) Form of Rights Agreement dated as of April 17, 1998 by
and between the Company and the Firstar Trust Company,
as Rights Agent, with Form of Rights Certificate
(Incorporated by reference to Exhibits 1 and 2 of the
Company's Form 8-A dated May 4, 1998).

b) Announcement of Shareholder Rights Plan per news release
dated April 17, 1998 (Incorporated by reference to Exhibit
6(a), of the Company's Form 10Q dated May 4, 1998).

Material Contracts
10a) The 1988 Incentive Stock Option Plan (Incorporated by
reference to Exhibit B of the Proxy Statement for the
Annual Meeting of Shareholders held on October 21, 1988).

b) The 1988 NonQualified Stock Option Plan for Officers,
Key Employees and Directors (Incorporated by reference
to Exhibit C of the Proxy Statement for the Annual Meeting
of Shareholders held on October 21, 1988).

c) Amendment to 1988 Incentive Stock Option Plan of Twin Disc,
Incorporated (Incorporated by reference to Exhibit A of the
Proxy Statement for the Annual Meeting of Shareholders held
on October 15, 1993).

d) Amendment to 1988 Non-Qualified Incentive Stock Option Plan
for Officers, Key Employees and Directors of Twin Disc,
Incorporated (Incorporated by reference to Exhibit B of the
Proxy Statement for the Annual Meeting of Shareholders
held on October 15, 1993).

e) Form of Severance Agreement for Senior Officers and form of
Severance Agreement for Other Officers (Incorporated by
reference to Exhibit 10(c) and (d), respectively, of the
Company's Form 10K for the year ended June 30, 1989).

f) Supplemental Retirement Plan (Incorporated by reference to
Exhibit 10(f) of the Company's Form 10K for the year ended
June 30, 1998).

g) Director Tenure and Retirement Policy (Incorporated by
reference to Exhibit 10(f) of the Company's Form 10K for
the year ended June 30, 1993).

10h) Form of Twin Disc, Incorporated Corporate Short Term
Incentive Plan (Incorporated by reference to Exhibit
10(g) of the Company's Form 10K for the year ended
June 30, 1993).

i) The 1998 Incentive Compensation Plan (Incorporated by
reference to Exhibit A of the Proxy Statement for the
Annual Meeting of Shareholders held on October 16, 1998).
j) The 1998 Stock Option Plan for Non-Employee Directors
(Incorporated by reference to Exhibit B of the Proxy
Statement for the Annual Meeting of Shareholders held
on October 16, 1998).

k) Retention and Non-Compete Agreement dated November 7, 2002.

21 Subsidiaries of the Registrant X

23 Consent of Independent Auditors X

24 Power of Attorney X

31a Certification X

31b Certification X

32a Certification pursuant to 18 U.S.C. Section 1350 X

32b Certification pursuant to 18 U.S.C. Section 1350 X