

 <PAGE> 16
                                       EXHIBIT 13
 <TABLE> 
 FINANCIAL HIGHLIGHTS
 <CAPTION>

                                                1997       1996       1995
 <S>                                          <C>        <C>        <C> 
 Net Sales                                    $189,942   $176,657   $164,232
 Net Earnings                                    7,729      6,559      5,672
 Net Earnings Per Share                           2.78       2.36       2.03
 Dividends Per Share                               .70        .70        .70
 Average Shares Outstanding For The Year     2,781,174  2,776,805  2,790,111
 </TABLE>
 <TABLE>
 Sales and Earnings by Quarter
 <CAPTION>
 1997                    1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr.    Year
 <S>                     <C>        <C>        <C>        <C>       <C>
 Net Sales               $40,941    $45,496    $49,204    $54,301   $189,942
 Gross Profit              8,687     10,980     11,724     12,428     43,819
 Net Earnings              1,132      1,742      1,916      2,939      7,729
 Net Earnings Per Share      .41        .63        .69       1.05       2.78
 Dividends Per Share        .175       .175       .175       .175        .70
 Stock Price Range:
   High                   23 5/8     23 5/8     25 1/8     28 3/4     28 3/4 
   Low                    21 3/4     21 3/8     21 3/8     23 3/8     21 3/8
 </TABLE>
 <TABLE>
 Sales and Earnings by Quarter
 <CAPTION>
 1996                    1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr.    Year
 <S>                     <C>        <C>        <C>        <C>         <C> 
 Net Sales               $36,775    $41,763    $47,209    $50,910   $176,657
 Gross Profit              7,093      9,295     11,340     13,149     40,877
 Net Earnings                221      1,263      1,808      3,267      6,559
 Net Earnings Per Share      .08        .45        .65       1.18       2.36
 Dividends Per Share        .175       .175       .175       .175        .70
 Stock Price Range:
   High                   25 1/4     23 3/4     23 1/4     25 1/2     25 1/2 
   Low                    22 1/2     22         21 3/8     22 1/4     21 3/8
 </TABLE>
 
 Based on average shares outstanding for the period.
 
 In thousands of dollars except per share and stock price range statistics.
                                       (1)
 <PAGE> 17

 Management's Discussion and Analysis of 
 Financial Condition and Results of Operations
 
 RESULTS OF OPERATIONS 
 NET SALES, NEW ORDERS AND BACKLOG
 
 Sales for 1997 were up over the previous year continuing a five year trend of
 revenue growth.  Shipments into our traditional markets generally remained
 stable during the year with new business providing for the second consecutive
 year of 8percent sales growth.  Although order rates fluctuated during the
 year, there was a positive trend which provided a $10 million increase in
 backlog by year-end.
 
 Net sales for 1997 were $190 million, an increase of 8 percent over the $177
 million reported in 1996, and 16 percent above the $164 million in 1995.  All
 of our operations around the world contributed to the 8 percent sales increase
 in 1996, but the strongest showing came from our manufacturing operations and
 the domestic marketing subsidiaries.  Demand from the marine and construction
 equipment markets continued, and there was new interest in modulating clutches
 for marine and environmental applications.  There was an 8 percent sales
 increase again in 1997 with almost all of the improvement provided by
 shipments of power shift transmissions for a major vehicle contract.  Though
 some softness occurred in demand for the lower horsepower marine transmissions
 at mid-year, shipments for the twelve months to our principal markets again
 provided a solid base of sales comparable to the previous year.
 
 Shipments from our overseas marketing subsidiaries showed continued
 improvement throughout the period rising by about 10 percent in each of the
 past two fiscal years.  Sales improvements in both years were largely related
 to boat building activity in the Pacific Rim with additional incremental
 business obtained in 1997 for Arneson surface drives in Europe.  
 
 During the period, foreign currency exchange rates had little impact on
 reported sales.  The dollar, which had weakened against European currencies in
 1995, stabilized in 1996 and became stronger in 1997 but did not significantly
 impact reported sales in either year.  Price increases, which were implemented
 selectively in each year, had the overall effect of increasing revenues by
 less than the rate of inflation.
 
 The backlog of orders scheduled for shipment during the next six months
 increased in the third quarter of fiscal 1996 on the strength of a large order
 for power shift transmissions.  However, by June of that year backlog was down
 by 9 percent from a year earlier primarily due to strong year-end shipments
 and a reduction in past due orders.  Order rates improved early in 1997 and,
 although there was some modest softening in selected markets by mid-year,
 year-end backlog was up 16 percent over the prior year.
 
 MARGINS, COSTS AND EXPENSES
 
 Since the late 1980's we have been rearranging and restructuring our
 manufacturing operations.  In this continuous improvement effort, portions of
 both domestic and overseas manufacturing facilities have been changed several
 times.  The most recent changes have been in our domestic plants. The clutch,
 PTO, and drive line business unit completed its rearrangement in late 1995 and
 the marine and custom transmission business units cellularization program was 
                                      (19)
 
 completed in 1996.  The benefits of those changes have been improved
 productivity and product delivery.  Our Belgian plant, which has a more
 homogeneous production volume than in the U.S., has been realizing benefits of
 its cellularization program for the past several years.
 
 The consolidated gross margin increased by 1 percentage point in 1996,
 primarily as a result of improved productivity in Europe and a favorable
 product mix at our Belgian operation.  Domestic margins increased in the last
 quarter of that fiscal year as we began to realize the benefits of the

 <PAGE> 18 

 manufacturing improvements. However, domestic margins were down slightly for
 the year due to a first quarter voluntary separation program charge and
 inefficiencies at mid-year related to a change in computer hardware and
 business systems.
 
 In 1997, the gross margin continued to improve during the first two quarters
 but declined during the second half of the year and by year-end the
 consolidated margin was even with a year ago.  Domestic margins showed
 year-to-year improvement throughout the year, but margins in Belgium declined
 in the second half.  That decline was caused by a temporary drop in orders and
 resultant short work-weeks with reduced productivity.
 
 Marketing, engineering, and administrative (MEA)expenses increased by 8
 percent in 1996, about the same percent as the sales growth.  Increases were
 due primarily to the addition of marketing and engineering personnel, higher
 computer related expense, and additional product promotion and other marketing
 expense. 
 
 In 1997, MEA expenses rose by almost 9 percent and increased slightly as a
 percent of sales.  The increase occurred at our domestic location with expense
 of the full year of salaries for prior year marketing and engineering
 personnel additions, a one-time expense of an accelerated product development
 program, and a salaried employee bonus payment not made in the previous year. 
 A propulsion products marketing group also was established in 1997 to focus on
 development of markets for our full line of marine propulsion products -
 transmissions, Arneson drives, and water  jets.
 
 INTEREST, TAXES AND NET EARNINGS
 
 The increase in interest income of $1.2 million in 1997 over 1996 is
 attributed to interest received on an income tax refund.
 
 The substantial increase in interest expense in 1996 was generated about
 equally by higher domestic debt and payment of interest related to the audit
 of prior years' tax returns.  As discussed in more detail below, additional
 debt was required to finance the working capital increase.  Virtually all of
 the short-term debt was repaid by the end of fiscal year 1997 and interest
 expense declined by about 8 percent in that year.
 
 The effective income tax rate in 1995 was slightly lower than the composite of
 our various statutory tax rates as we were able to utilize the remaining small
 amount of foreign tax credit carryforwards.  The tax rate rose in 1996 and
 1997 due primarily to the proportionately greater foreign earnings on which a
 higher tax rate is applied.
 
 As a result of the sales growth and other improvements discussed above, net
 earnings for 1997 were $7.7 million, an increase of 18 percent over the $6.6
 million in 1996, and 36 percent over the $5.7 million in 1995.
 
 LIQUIDITY AND CAPITAL RESOURCES
 
 The net cash from operating activities in 1996 was a deficit of $4.1 million,
 down sharply from the positive cash flows of a year earlier.  Despite the
 improved profitability in 1996, working capital increases more than offset the 
 
                                      (20)
 
 positive cash flows from earnings and depreciation.  Inventory increased in
 line with the higher sales; but, as a percent of net sales, receivables  rose
 by two percentage points during the year.  Also, current liabilities were down
 from the prior year.  In 1997, the positive cash flows from higher earnings
 and depreciation were supplemented by reductions in accounts receivable and
 inventory, and the net cash flow from operating activities was a record $20.5
 million.  Receivable days outstanding and inventory turnover ended the year at
 their best rates since 1990.  After fixing the interest rate on most of our
 debt with a private placement in 1996, we focused on improving cash flow and
 reducing  short-term debt.  Borrowings, primarily domestic, declined by $7

 <PAGE> 19
 
 million in 1997.
 
 Fixed asset purchases in recent years have been less than depreciation as we
 generally have rearranged existing machinery into cells.  With that program
 completed, we are in a better position to identify critical equipment needs;
 and we expect future spending will exceed depreciation somewhat as individual
 cell structures are refined.
 
 Working capital and the current ratio have risen in each of the past two
 years.  The working capital increase of $9 million in 1996 primarily provided
 the funds required to support the higher sales volume.  A further increase of
 $5.7 million this past year reflected an increase in cash and short-term
 investments and a reduction in short-term borrowings.  The current ratio at
 June 30, 1997 rose to 3.3, up from 2.8 at the previous year-end.
 
 The Company is involved in various stages of investigation relative to
 hazardous waste sites on the United States EPA National Priorities List.  It
 is not possible at this time to determine the ultimate outcome of those
 matters; but, as discussed further in Footnote N to the consolidated financial
 statements, they are not expected to materially affect the Company's
 operations, financial position or cash flows.  The Company believes the
 capital resources available in the form of existing cash, lines of credit and
 funds provided by operations will be adequate to meet anticipated requirements 
 for capital expenditures and other foreseeable business requirements in the
 future.
 
 RECENT FINANCIAL REPORTING PROUNCEMENTS 
 
 The Financial Accounting Standards Board issued Statements of Accounting
 Standards No. 128, "Earnings Per Share", and No. 131, "Disclosure about
 Segments of an Enterprise and Related Information", which are addressed in
 Footnotes H and I, respectively, to the consolidated financial statements.
 
                                      (21)
 <PAGE> 20
 <TABLE> 
 TWIN DISC, INCORPORATED AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
 JUNE 30, 1997 and 1996 
 <CAPTION>
 
         (Dollars in thousands)                     1997          1996    
                                                    ----          ----
 <S>                                                <C>           <C>
 ASSETS
 
 Current assets:
   Cash and cash equivalents                     $  8,983      $  2,043       
   Trade accounts receivable, net                  32,428        34,917       
   Inventories                                     47,844        51,083       
   Deferred income taxes                            3,491         2,710   
   Other                                            5,216         5,887
                                                  -------       -------     
         Total current assets                      97,962        96,640
 
 Property, plant and equipment, net                34,249        35,715
 Investments in affiliates                         10,880        12,079
 Deferred income taxes                              4,559         3,758
 Intangible pension asset                           4,779         8,079
 Other assets                                       6,326         6,428 
                                                  -------       -------    
                                                 $158,755      $162,699
                                                  -------       -------
                                                  -------       -------
  
 LIABILITIES and SHAREHOLDERS' EQUITY
 
 
 Current liabilities:                              
   Notes payable                                 $    169      $  7,360
   Accounts payable                                12,834         8,806
   Accrued liabilities                             16,618        17,836
                                                  -------       -------
        Total current liabilities                  29,621        34,002
 
 Long-term debt                                    19,944        19,938
 Accrued retirement benefits                       35,393        33,578
                                                  -------       -------
                                                   84,958        87,518
 Shareholders' equity:
   Common shares authorized: 15,000,000;
     issued: 3,643,630; no par value               11,653        11,653
   Retained earnings                               77,424        71,658
   Foreign currency translation adjustment          6,060        10,326
   Minumum pension liability adjustment            (3,708)         (620)
                                                  -------       -------
                                                   91,429        93,017
   Less treasury stock, at cost                    17,632        17,836
                                                  -------       -------
              Total shareholders' equity           73,797        75,181
                                                  -------       -------
                                                 $158,755      $162,699
                                                  -------       -------
                                                  -------       -------
 </TABLE>
 
             The notes to consolidated financial statements 
                are an integral part of these statements.
 
                                     (22)
 <PAGE> 21

 <TABLE>
 TWIN DISC, INCORPORATED and SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS
 for the years ended June 30, 1997, 1996 and 1995
 <CAPTION>
    (In thousands, except per share data)
                                        1997            1996           1995  
                                        ----            ----           ----
 <S>                                  <C>             <C>            <C>
 Net sales                            $189,942        $176,657       $164,232  
 Cost of goods sold                    146,123         135,780        127,886
                                       -------         -------        -------
            Gross profit                43,819          40,877         36,346
 Marketing, engineering and                      
   administrative expenses              31,219          28,706         26,461
                                       -------         -------        -------
            Earnings from operations    12,600          12,171          9,885
 Other income (expense):
   Interest income                       1,335             121            186
   Interest expense                     (1,781)         (1,942)        (1,281)
   Equity in earnings of affiliates        307              45            186
   Other, net                              219             512           (392) 
                                       -------         -------        -------
                                            80          (1,264)        (1,301)  
   
                                       -------         -------        -------
            Earnings before income
              taxes                     12,680          10,907          8,584
 
 Income taxes                            4,951           4,348          2,912
                                       -------         -------        -------
 
            Net earnings              $  7,729        $  6,559       $  5,672
                                       -------         -------        -------
                                       -------         -------        -------
 Earnings per common share, based
   on weighted average shares
   outstanding                        $   2.78        $   2.36       $   2.03
                                       -------         -------        -------
                                       -------         -------        -------
 Weighted average shares
   outstanding                           2,781           2,777          2,790
                                       -------         -------        -------
                                       -------         -------        -------
 </TABLE>
                    The notes to consolidated financial statements
                       are an integral part of these statements.
 
                                      (23)
 <PAGE> 22

 <TABLE>
 TWIN DISC, INCORPORATED and SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 for the years ended June 30, 1997, 1996 and 1995
 <CAPTION>                                                             
                (In thousands)               1997          1996          1995
                                             ----          ----          ----
 <S>                                         <C>           <C>           <C>
 Cash flows from operating
     activities:
   Net earnings                           $  7,729      $  6,559      $  5,672
   Adjustments to reconcile 
       to net cash provided (used)
       by operating activities:
     Depreciation and amortization           5,489         5,233         4,847
     (Gain)loss on sale of fixed assets       (127)          (26)           65
     Equity in earnings of affiliates         (307)          (45)         (186)
     Provision for deferred income taxes     1,481         1,646         1,038
     Dividends received from affiliate         300           548           371
     Changes in operating assets and
       liabilities:
       Trade accounts receivable, net        1,267        (6,055)       (2,266)
       Inventories                           2,882        (3,926)       (3,259)
       Other assets                           (954)         (987)       (3,608)
       Accounts payable                      3,463        (3,513)        3,765
       Accrued liabilities                    (391)       (3,982)        2,823
       Deferred retirement plan               (345)          415        (1,316)
                                            -------       -------       -------
 Net cash provided (used) by
   operating activities                     20,487        (4,133)        7,946
                                            -------       -------       -------
 Cash flows from investing activities:
   Proceeds from sale of plant assets          501            18            39
   Acquisitions of plant assets             (4,734)       (4,140)       (4,290)
   Investment in affiliate                      -             -         (3,000)
   Payment for license agreement                -         (2,402)           -  
   Other                                        -             -           (172)
                                           -------       -------       -------
 Net cash used by investing activities      (4,233)       (6,524)       (7,423)
                                           -------       -------       -------
 Cash flows from financing activities:
   Increases (decreases) in notes
     payable, net                           (7,182)        5,076        (1,113)
   Proceeds from long-term debt                  4        19,914         2,500
   Principal payments on long-term debt         -        (14,000)           -
   Acquisition of treasury stock                -             -           (586)
   Proceeds from exercise of stock options     188            35            71
   Dividends paid                           (1,947)       (1,943)       (1,951)
                                           -------       -------       -------
 Net cash provided (used) by
   financing activities                     (8,937)        9,082        (1,079)
                                           -------       -------       -------
       
 Effect of exchange rate changes on cash      (377)         (123)          131
                                           -------       -------       -------
 
 Net change in cash and cash equivalents     6,940        (1,698)         (425)
           
 Cash and cash equivalents:
   Beginning of year                         2,043         3,741         4,166
                                           -------       -------       -------
   End of year                            $  8,983      $  2,043      $  3,741
                                           -------       -------       -------
                                           -------       -------       -------
 Supplemental cash flow information:
   Cash paid during the year for:
 
      Interest                            $  1,822      $  1,802      $  1,288
 
      Income taxes                           3,318         4,946         2,698
 
 </TABLE>
               The notes to consolidated financial statements
                are an integral part of these statements.
                                   (24)
 <PAGE> 23

 <TABLE>
 TWIN DISC, INCORPORATED and SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
 for the years ended June 30, 1997, 1996 and 1995
 <CAPTION>
                (In thousands)                    1997      1996      1995
                                                  ----      ----      ----
 <S>                                           <C>       <C>       <C>
 Common stock
   Balance, June 30                            $ 11,653  $ 11,653  $ 11,653 
                                                -------   -------   -------
 Retained earnings
   Balance, July 1                               71,658    67,054    63,353
   Net earnings                                   7,729     6,559     5,672
   Cash dividends                                (1,947)   (1,943)   (1,951)
   Stock options exercised                          (16)      (12)      (20)
                                                -------   -------   -------
   Balance, June 30                              77,424    71,658    67,054
                                                -------   -------   -------
 Foreign currency translation adjustment
   Balance, July 1                               10,326    14,081     8,729
   Current adjustment                            (4,266)   (3,755)    5,352
                                                -------   -------   -------
   Balance, June 30                               6,060    10,326    14,081
                                                -------   -------   -------
 Minimum pension liability adjustment, net
   Balance, July 1                                 (620)     (284)     (951)
   Current adjustment, net of related income
     taxes ($1,975 in 1997, $215 in 1996
     and $(426) in 1995)                         (3,088)     (336)      667 
                                                -------   -------   -------
   Balance, June 30                              (3,708)     (620)     (284)
                                                -------   -------   -------
 Treasury stock, at cost
   Balance, July 1                              (17,836)  (17,882)  (17,387)
   Shares acquired                                   -         -       (586) 
   Stock options exercised                          204        46        91
                                                -------   -------   -------
   Balance, June 30                             (17,632)  (17,836)  (17,882)
                                                -------   -------   -------
 Shareholders' equity balance, June 30         $ 73,797  $ 75,181  $ 74,622
                                                -------   -------   -------
                                                -------   -------   -------     
 </TABLE> 
             The notes to consolidated financial statements
                are an integral part of these statements.
                                  (25)
 <PAGE> 24
                       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 subsidiaries, all of which are
 wholly owned.  Certain foreign subsidiaries are included based on fiscal years
 ending May 31, to facilitate prompt reporting of consolidated accounts. All
 significant intercompany transactions have been eliminated.
 
 Translation of Foreign Currencies--Substantially all foreign currency balance
 sheet accounts are translated into United States dollars at the rates of
 exchange prevailing at year-end.  Revenues and expenses are translated at
 average rates of exchange in effect during the year.  Foreign currency
 translation adjustments are recorded as a component of shareholders' equity. 
 Gains and losses from foreign currency transactions are included in earnings.
 
 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 $538,000 and $372,000 at June 30, 1997 and 1996,
 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 short-term debt approximates fair value
 because of the immediate short-term maturity of these financial instruments. 
 The carrying amount reported for long-term debt approximates fair value
 because the underlying instrument bears interest at a current market rate. 
 
 Derivative Financial Instruments--Derivative financial instruments (primarily
 forward foreign exchange contracts) may be utilized by the Company to hedge
 foreign exchange rate risk.  The Company has established policies and
 procedures for risk assessment and the approval, reporting and monitoring of
 derivative financial instrument activities.  The Company does not enter into
 financial instruments for trading or speculative purposes.  For financial
 reporting purposes, forward foreign exchange contracts used to hedge the
 currency fluctuations on transactions denominated in foreign currencies are
 marked-to-market and the resulting gains and losses, together with the
 offsetting losses and gains on hedged transactions, are recorded in the "Other
 income (expense)" caption in the statement of operations.
 
 Inventories--Inventories are valued at the lower of cost or market.  Cost has
 been determined by the last-in, first-out (LIFO) method for parent company
 inventories, and by the first-in, first-out (FIFO) method for 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 amortized by depreciation charges.  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 physical disposition.
 
 Investments in Affiliates--The Company's 25% investments in affiliates are
 stated at cost, adjusted for equity in undistributed earnings since
 acquisition.  
 
 Revenue Recognition--Revenues are recognized when products are shipped.
 
 Income 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.  
                                      (26)
  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.
 
 Management Estimates--The preparation of financial statements in conformity
 
 <PAGE> 25

 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.
 
 Reclassification--Certain amounts in the consolidated financial statements for
 prior years have been reclassified to conform to the 1997 presentation.
 
 
 B.  INVENTORIES
 
 The major classes of inventories at June 30 were as follows:
 <TABLE>   
 <CAPTION>  
                       (In thousands)          1997            1996
                                               ----            ----
 <S>                                         <C>             <C>
 Finished parts                              $38,713         $41,535
 Work-in-process                               5,997           5,429
 Raw materials                                 3,134           4,119
                                             -------         -------
                                             $47,844         $51,083
                                             -------         -------
                                             -------         -------
 </TABLE>
 Inventories stated on a LIFO basis represent approximately 42% and 36% of
 total inventories at June 30, 1997 and 1996, respectively.  The approximate
 current cost of the LIFO inventories exceeded the LIFO cost by $17,526,000 and
 $17,171,000 at June 30, 1997 and 1996, respectively. 
 
 
 C.  PROPERTY, PLANT AND EQUIPMENT
 
 Property, plant and equipment at June 30 were as follows:
 <TABLE>
 <CAPTION>
                       (In thousands)          1997            1996 
                                               ----            ----
 <S>                                         <C>             <C>
 Land                                        $ 1,335         $ 1,399
 Buildings                                    18,708          19,082
 Machinery and equipment                      87,832          88,182
                                             -------         -------
                                             107,875         108,663
 Less accumulated depreciation                73,626          72,948
                                             -------         -------            
   
                                             $34,249         $35,715
                                             -------         -------
                                             -------         -------
 </TABLE>

 D.  INVESTMENTS IN AFFILIATES
 
 The Company's investments in affiliates consists of 25% interests in Niigata
 Converter Company, Ltd., Japan and Palmer Johnson Distributors, LLC, a
 domestic distributor of Twin Disc products.  The Company acquired the interest
 in Palmer Johnson Distributors, LLC, in July 1994.
                                      (27)
 Undistributed earnings of the affiliates included in consolidated retained
 earnings approximated $3,127,000 and $3,120,000 at June 30, 1997 and 1996,
 respectively.
 
 Combined condensed financial data of the above-listed affiliates are
 summarized in U.S. dollars as follows:
 <TABLE>
 <CAPTION>
                           (In thousands)                                     
                                                  1997        1996 
                                                  ----        ----
 <S>                                           <C>         <C>
 Current assets                                $ 87,375    $104,949    
 Other assets                                    43,582      51,263
                                                -------     -------    
                                               $130,957    $156,212
                                                -------     -------
                                                -------     -------
 
 Current liabilities                           $ 85,479    $100,153    
 Other liabilities                                8,479      14,622       
 Shareholders' equity                            36,999      41,437  
                                                -------     -------
                                               $130,957    $156,212    
                                                -------     -------
                                                -------     -------
                                      
 
                                               1997      1996      1995 
                                              -----      ----      ----
 
 Net sales                                  $166,171  $183,487  $169,256
 Gross profit                                 19,911    23,436    26,173
 Net earnings                                  1,228       181       742

 <PAGE> 26
 
 E.  ACCRUED LIABILITIES
 
 Accrued liabilities at June 30 were as follows:
 
                               (In thousands)      1997      1996
                                                   ----      ----
 Salaries and wages                            $  5,983  $  5,756
 Retirement plans                                 2,150     4,122
 Other                                            8,485     7,958
                                                -------   -------
                                               $ 16,618  $ 17,836
                                                -------   -------
                                                -------   -------  
 </TABLE>
 F.  DEBT
 
 Short-term notes payable consists of amounts borrowed under unsecured line of
 credit agreements. Unused lines of credit total $18,700,000 at June 30, 1997. 
 These lines of credit are available predominately at the LIBOR interest rate
 and may be withdrawn at the option of the banks.  The weighted average
 interest rate of short-term lines outstanding at June 30, 1997 and 1996 was
 7.3% and 8.4%, respectively.

 Included in long term debt is $20 million of 7.37% ten-year unsecured notes,
 net of $77,000 unamortized debt issuance costs at June 30, 1997.  These notes
 contain certain covenants, including the maintenance of a current ratio of not
 less than 1.5.  Principal payments of $2,857,000 are due in the years 2000
 through 2005, with the remaining balance due on June 1, 2006.  Also included
 in long-term debt is $21,000 of debt related to a foreign subsidiary.
                                      (28)
 
 G.  LEASE COMMITMENTS
 
 Approximate future minimum rental commitments under noncancellable operating
 leases are as follows (in thousands):
 
           Fiscal Year
           -----------
              1998              $ 2,062
              1999                1,543
              2000                  884
              2001                  479
              2002                  345
           Thereafter               187
                                  -----
                                $ 5,500
                                  -----
                                  -----
 
 Total rent expense for operating leases approximated $2,254,000, $2,109,000
 and  $1,939,000 in 1997, 1996 and 1995, respectively.
 
 
 H.  SHAREHOLDERS' EQUITY
  
 At June 30, 1997 and 1996, treasury stock consisted of 856,456 and 866,356
 shares of common stock, respectively.  The Company issued 9,900 shares of
 treasury stock in 1996 to fulfill its obligations under the stock option
 plans.  The difference between the cost of treasury shares issued and the
 option price is charged to retained earnings.
 
 Cash dividends per share were $.70 in 1997, 1996 and 1995.   
 
 In 1988, 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 $80, 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 20%, (or at
 least 30% in the case of existing holders who currently own 20% or more of the
 common stock), or commenced a tender offer for at least 30%, 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, 1998 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.
 
 The Financial Accounting Standards Board has issued Statement of Financial
 Accounting Standards (FAS) 128 "Earnings Per Share", which becomes effective
 for the Company's 1998 fiscal year and establishes new standards for reporting
 earnings per share.  FAS 128 is not expected to have a significant effect on
 the Company's earnings per share computations.
                                      (29)
 <PAGE> 27

 I.  BUSINESS SEGMENTS AND FOREIGN OPERATIONS
 
 The Company and its subsidiaries are engaged in one line of business, the
 manufacture and sale of power transmission equipment.  Transfers among
 geographic areas are made at established intercompany selling prices.  
 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, marine, energy and natural resources and
 agricultural.

 <PAGE> 28

 One customer accounted for approximately 11%, 10% and 12% of consolidated net
 sales in 1997, 1996 and 1995, respectively.  
 
 Information about the Company's operations in different geographic areas is
 summarized as follows:
 <TABLE>
 <CAPTION> 
                         (In thousands)         1997       1996      1995
                                                ----       ----      ----   
 <S>                                         <C>        <C>       <C>
 Sales to unaffiliated customers:
  United States                              $131,844   $120,137  $108,607
  Foreign:
     Europe                                    34,332     34,206    35,572
     Other                                     23,766     22,314    20,053
                                              -------    -------   ------- 
       Total                                 $189,942   $176,657  $164,232
                                              -------    -------   -------
                                              -------    -------   ------- 
 Transfers between geographic areas:
  United States                              $ 28,716   $ 30,230  $ 26,167
  Foreign:
     Europe                                    16,398     23,130    15,024
     Other                                        415        322       361
                                              -------    -------   ------- 
       Total                                 $ 45,529   $ 53,682  $ 41,552
                                              -------    -------   -------
                                              -------    -------   -------
 Net sales:
  United States                              $160,560   $150,367  $134,774
  Foreign:
     Europe                                    50,730     57,336    50,596
     Other                                     24,181     22,636    20,414
  Eliminations                                (45,529)   (53,682)  (41,552)
                                              -------    -------   ------- 
       Total                                 $189,942   $176,657  $164,232
                                              -------    -------   -------
                                              -------    -------   -------
 Earnings before income taxes:
  United States                             $  6,009    $  2,821  $  4,332
  Foreign:
     Europe                                    4,378       6,126     2,635
     Other                                     2,293       1,960     1,617
                                             -------     -------   -------
       Total                                $ 12,680    $ 10,907  $  8,584
                                             -------     -------   -------
                                             -------     -------   -------
 Identifiable assets at June 30:
  United States                             $115,973    $117,552  $106,971
  Foreign:
     Europe                                   33,329      36,356    39,537
     Other                                    12,947      12,794    10,269
  Eliminations                                (3,494)     (4,003)    1,524
                                             -------     -------   ------- 
       Total                                $158,755    $162,699  $158,301
                                             -------     -------   -------
                                             -------     -------   -------
 </TABLE>
                                      (30)
 
 Net earnings of the foreign subsidiaries were $3,840,000,$4,758,000 and
 $2,480,000 in 1997, 1996 and 1995, respectively.  The net assets of the
 foreign subsidiaries were $26,341,000 and $32,085,000 at June 30, 1997 and
 1996, respectively.  Undistributed earnings of foreign subsidiaries, on which
 no provisions for United States income taxes have been made, aggregated
 approximately $20,500,000 (including $2,022,000 translation component) at June
 30, 1997.  Included in earnings are foreign currency transaction gains
 (losses) of $334,000, $409,000 and $(248,000) in 1997, 1996 and 1995,
 respectively. 
 
 The Financial Accounting Standards Board has issued Statement of Financial
 Accounting Standards (FAS) 131 "Disclosure about Segments of an Enterprise and
 Related Information", which becomes effective for the Company's 1999 fiscal
 year.  FAS 131 establishes new standards for reporting information about
 operating segments in financial statements.  The Company is evaluating the
 extent to which its segment reporting may be affected by FAS 131.
 
 <PAGE> 28

 J.   STOCK OPTION PLANS
 
 The Company has a non-qualified stock option plan for officers, key employees
 and directors to purchase up to 125,000 shares of common stock, and an
 incentive stock option plan for officers and key employees to purchase up to
 225,000 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 and based on
 such directors' seniority.  Except as described in the following sentence, all
 options allow for exercise prices not less than the grant date fair market
 value, immediate vesting and expire ten years after the date of grant.  For
 options under the incentive stock option 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.
 
 Shares available for future options as of June 30 were as follows:
      
                                            1997             1996
                                            ----             ---- 
         Non-qualified stock          
          option plan                      23,950           28,650
         Incentive stock option plan       53,400           67,500
  
 Stock option transactions under the plans during 1997 and 1996 were
 as follows:
 <TABLE>
 <CAPTION>
                                        Weighted           Weighted
                                         Average            Average
                                 1997     Price     1996     Price
                                 ----   ---------   ----    -------
 <S>                            <C>     <C>       <C>       <C>   
 Non-qualified stock    
  option plan:                                  
   Options outstanding              
     at beginning of year       95,350   $21.69    81,450    $21.21
   Granted                      15,100    21.88    13,900     24.50
   Cancelled                   (10,400)   23.32        -    
   Exercised ($17.88-$19.50
     per share)                 (5,900)   19.03        -
                                -------            -------
   Options outstanding         
     at June 30                 94,150   $21.71    95,350    $21.69
                               -------             -------
                               -------             -------
                                      (31)
 
   Options price range
    ($14.00 - $20.00)      
 
     Number of shares                     42,500
 
     Weighted average price              $18.82
 
     Weighted average remaining life       6.74 years
 
   Options price range
    ($20.01 - $29.63)      
 
     Number of shares                     51,650
 
     Weighted average price              $24.09
 
     Weighted average remaining life       6.09 years

                                        Weighted           Weighted
                                         Average            Average
                                 1997     Price     1996     Price
                                 ----   ---------   ----    -------
 Incentive stock option plan:
   Options outstanding           
     at beginning of year      151,450   $21.52   132,050    $20.78
   Granted                      24,250    22.05    25,050     24.89
   Cancelled                   (10,150)   22.57    (3,400)    23.60
   Exercised ($14.00-$19.50
     per share)                 (4,000)   18.81    (2,250)    15.29
                               -------             -------
   Options outstanding         
     at June 30                161,550   $21.60   151,450    $21.52
                               -------            -------
                               -------            -------
 
   Options price range
    ($14.00 - $20.00)      
 
     Number of shares                     71,100
 
     Weighted average price              $18.44

 <PAGE> 29

     Weighted average remaining life       6.32 years
 
   Options price range
    ($20.01 - $29.63)      
 
     Number of shares                     90,450
 
     Weighted average price              $24.08
 
     Weighted average remaining life       6.23 years
 </TABLE>
 
 The Company has elected to continue to account for its stock option plans
 under the guidelines of Accounting Principles Board Opinion No. 25. 
 Accordingly, no compensation cost has been recognized in the statement of
 operations.  Had the Company recognized compensation expense based on the fair
 value at the grant date for awards under the plans, consistent with the method
 prescribed by FASB Statement 123, the net earnings and earnings per share
 would have been as follows (in thousands, except per share amounts):
 
                                            1997             1996
          Net earnings
                 As reported               $7,729           $6,559
                 Pro forma                  7,554            6,365
 
          Earnings per share
                 As reported               $ 2.78            $2.36
                 Pro forma                   2.72             2.29
 
 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: 20% volatility, 3% annual dividend yield, interest
 rates based on expected terms and grant dates, 3 year term for the
 Non-Qualified Plan and 5 year term for the Incentive Plan and exercise price
 equal to the fair market value on grant date for the Non-Qualified Plan and
 110% of the fair market value on grant date for the Incentive Plan.
 
                                      (32)
 
 K.  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 totalled $3,517,000, $2,564,000 and
 $2,718,000 in 1997, 1996 and 1995, respectively.  Total engineering and
 development costs were $8,288,000, $6,998,000 and $7,411,000 in 1997, 1996 and
 1995, respectively.
 
 L.  RETIREMENT PLANS
 
 The Company has noncontributory, qualified defined benefit pension plans
 covering substantially all domestic employees and contributory plans covering
 certain foreign employees.  Domestic plan benefits are based on years of
 service, and for salaried employees on final average compensation.  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 contributed for federal income tax purposes. 
 Domestic plan assets consist principally of listed equity and fixed income
 securities. 
 
 In addition, the Company has unfunded, non-qualified retirement plans for
 certain management employees and directors.  Benefits are based on final 
 average compensation and do not vest until such management employee reaches
 normal retirement with the Company.
 
 Net pension expense for the Company's domestic defined benefit plans
 consists of the following components:
 <TABLE>
 <CAPTION> 
                   (In thousands)                 1997      1996     1995 
                                                  ----      ----     ----
 <S>                                            <C>       <C>      <C>
 Service cost-benefits earned during the year   $ 1,636   $ 1,529  $ 1,585 
 Interest cost on projected benefit obligation    7,056     6,823    6,643  
 Actual return on plan assets                    (5,198)   (9,956)  (3,835) 
 Net amortization and deferral                     (188)    5,304     (588)
                                                 ------    ------   ------
 Net pension cost                               $ 3,306   $ 3,700  $ 3,805    
                                                 ------    ------   ------
                                                 ------    ------   ------
 </TABLE>
                                      (33)
 
 The following table sets forth the Company's domestic defined
 benefit plans' funded status and the amounts recognized in the Company's
 balance sheets as of June 30:

 <PAGE> 30 

 <TABLE>
 <CAPTION>                                      
         (In thousands)                      1997          1996
                                             ----          ----     
 <S>                                     <C>            <C>
 Actuarial present value of 
   benefit obligations: 
   
    Vested benefit obligation             $ 76,030      $ 70,042 
    Non-vested benefit obligation           12,451        15,683 
                                           -------       -------
    Accumulated benefit           
     obligation                             88,481        85,725 
    Effect of projected future
     compensation levels                       552         4,622 
                                           -------       -------
    Projected benefit obligation            89,033        90,347 
             
 Plan assets at fair value                 (76,097)      (73,422)      
                                            ------        ------
 Deficiency of plan assets
   compared to projected 
   benefit obligation                       12,936        16,925         
 
 Unrecognized net loss                      (7,012)       (4,042)        
 
 Unrecognized prior service
   cost                                     (3,427)       (8,656)       
           
 Unrecognized transitional net 
   liability                                  (535)         (667)        
  
 Adjustment required to
   recognize additional 
   minimum liability                        10,858         9,095        
                                           -------       -------
 Accrued retirement cost    
   at June 30                             $ 12,820     $  12,655
                                           -------       -------
                                           -------       -------


 Assumptions used in accounting for the retirement plans 
 are as follows:
 
</TABLE>
<TABLE> 
 <CAPTION>
                                             1997         1996
                                             ----         ----
 <S>                                        <C>           <C>
 Discount rate                               8.0%         7.8%
 Rate of increase in compensation 
   levels                                    4.5%         4.5%
 Expected long-term rate of return on
   plan assets                               9.0%         9.0%
 
 Total accrued retirement costs at June 30 are summarized as follows:
 
    (In thousands)                           1997         1996
                                             ----         ----
 Current:
   Domestic defined benefit plans          $  (493)     $ 1,156
   Foreign contributory benefit plans          446          673
                                            ------       ------
                                               (47)       1,829
 Long-term:
   Domestic defined benefit plans           13,313       11,499
                                            ------       ------
       
                                           $13,266      $13,328
                                            ------       ------
                                            ------       ------
 </TABLE>

 Effective as of January 1, 1997, the Twin Disc, Incorporated Retirement Plan
 for Salaried Employees was amended to freeze the benefit formula in effect
 prior to January 1, 1997 and to change the formula for benefit accruals to a
 cash balance pension plan.  The effect of this change was to decrease the
 unrecognized prior service cost by $4.2 million.
 
 Retirement plan expense for the Company's foreign plans was $325,000, $597,000
 and $307,000 in 1997, 1996 and 1995, respectively.
 
                                      (34)
 
 The Company sponsors defined contribution plans covering substantially all
 domestic employees.  These plans provide for employer contributions based
 primarily on employee participation.  The total expense under the plans was
 $1,281,000, $1,056,000 and $906,000 in 1997, 1996 and 1995, respectively.
 
 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. 
 
 The Company recognized $2,293,000, $2,680,000 and $2,841,000 in non-pension
 postretirement benefit expense in 1997, 1996 and 1995, respectively, which
 <PAGE> 31

 consists primarily of interest cost. 
 
 The following table sets forth the status of the postretirement benefit
 programs (other than pensions) and amounts recognized in the Company's
 consolidated balance sheet at June 30:
 <TABLE>
 <CAPTION>       
           (In thousands)                           1997          1996
                                                    ----          ----
 <S>                                              <C>           <C>
 Accumulated postretirement benefit obligation:
 
  Retirees                                         $25,998       $28,077
  Fully eligible active plan participants              440           433
  Other active participants                            504           471
                                                    ------        ------
                                                    26,942        28,981
  Unamortized net amount resulting
    from changes in plan experience and
    actuarial assumptions                           (2,665)       (4,279)
                                                    ------        ------
 Accrued postretirement benefit obligation         $24,277       $24,702
                                                    ------        ------
                                                    ------        ------
 </TABLE>
 The current portion of the accumulated postretirement benefit obligation of
 $2,197,000 and $2,293,000 is included in accrued liabilities at June 30, 1997
 and 1996, respectively.

 The assumed weighted average discount rate used in determining the actuarial
 present value of the accumulated postretirement benefit obligation was 8.00%
 and 7.75% at June 30, 1997 and 1996, respectively.  The assumed weighted
 average health care cost trend rate was 9% in fiscal year 1997, decreasing by
 1% each year thereafter until it reaches 7% in fiscal year 1999, and remains
 constant thereafter.  A 1% increase in the assumed health care trend would
 increase the accumulated postretirement benefit obligation by approximately
 $1.8 million and the interest cost by approximately $142,000.
 
 M.  INCOME TAXES
 
 United States and foreign earnings before income taxes were as follows:
 <TABLE>
 <CAPTION> 

                     (In thousands)      1997      1996      1995
                                         ----      ----      ----
 <S>                                   <C>       <C>       <C>
      United States                    $ 6,009   $ 2,821   $ 4,332
      Foreign                            6,671     8,086     4,252
                                        ------    ------    ------
                                       $12,680   $10,907   $ 8,584
                                        ------    ------    ------
                                        ------    ------    ------
 
                                      (35)
 
</TABLE>
<TABLE>
 The provision (credit) for income taxes is comprised of the following:
 <CAPTION>
                     (In thousands)      1997      1996      1995
                                         ----      ----      ----
     <S>                               <C>       <C>       <C>
     Currently payable:
        Federal                        $   913   $   829   $   782
        State                              100        78        12
        Foreign                          2,457     1,925     1,007
                                        ------    ------    ------
                                         3,470     2,832     1,801
                                        ------    ------    ------
      Deferred:
        Federal                          1,559       388       452
        State                              (51)      (54)       12
        Foreign                            (27)    1,182       647
                                        ------    ------    ------
                                         1,481     1,516     1,111
                                        ------    ------    ------
                                       $ 4,951   $ 4,348   $ 2,912
                                        ------    ------    ------
                                        ------    ------    ------
 </TABLE>
 The components of the net deferred tax asset as of June 30, were as
 follows:
 <TABLE>
 <CAPTION>    
                      (In thousands)             1997             1996
                                                 ----             ----
 <S>                                           <C>              <C> 
 Deferred tax assets:
   Retirement plans and employee benefits      $11,605          $ 9,971
   Research and development expenses               553              926
   Other                                         2,525            1,550
   Alternative minimum tax credit
       carryforwards                             1,143            1,223
   Foreign net operating loss tax and
      credit carryforwards                          -               672
   R&E tax credit carryforwards                     -               335

 <PAGE> 32
                                                ------           ------
                                                15,826           14,677
                                                ------           ------
 Deferred tax liabilities:
   Fixed assets                                  5,634            6,368
   Other                                         2,142            1,841
                                                ------           ------
                                                 7,776            8,209
                                                ------           ------
 Total net deferred tax assets                 $ 8,050          $ 6,468
                                                ------           ------
                                                ------           ------
 </TABLE>
                                      (36)
 <TABLE>
 Following is a reconciliation of the applicable U.S. federal income tax rate
 to the effective tax rates reflected in the statements of operations:
 <CAPTION>
                                                  1997      1996     1995 
                                                  ----      ----     ----
    <S>                                           <C>       <C>      <C>
    U.S. federal income tax rate                  34.0%     34.0%    34.0%
    Increases (reductions)
        in tax rate resulting from:
      Utilization of net operating
        loss carryforwards                          -         -      (1.6)
      Foreign tax items                             .2       4.2     (1.8)
      Employee benefits - foreign                   -         -       1.8
      Accrual for prior years                      3.7        -        -
      Other, net                                   1.1       1.7      1.5
                                                  ----      ----     ----
                                                  39.0%     39.9%    33.9%
                                                  ----      ----     ----
                                                  ----      ----     ----
 </TABLE>
  
 N.  CONTINGENCIES
 
 The Company is involved in various stages of investigation relative to
 hazardous waste sites, two of which are on the United States EPA National
 Priorities List (Superfund sites).  The Company's assigned responsibility at
 each of the Superfund sites is less than 2%.  The Company has also been
 requested to provide administrative information related to two other potential
 Superfund sites but has not yet been identified as a potentially responsible
 party.  Additionally, the Company is subject to certain product liability
 matters.
 
 At June 30, 1997 the Company has accrued approximately $1,320,000, which
 represents management's best estimate available for possible losses related to
 these 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.
                                       (37)
 <PAGE> 33 
                         REPORT OF INDEPENDENT ACCOUNTANTS
 
 
 To the Shareholders
 Twin Disc, Incorporated
 Racine, Wisconsin
 
 We have audited the accompanying consolidated balance sheets of Twin Disc,
 Incorporated and Subsidiaries as of June 30, 1997 and 1996, and the related
 consolidated statements of operations, changes in shareholders' equity, and
 cash flows for each of the three years in the period ended June 30, 1997. 
 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 in accordance with generally accepted auditing
 standards.  Those standards 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.  An audit
 also includes assessing the accounting principles used and significant
 estimates made by management, as well as evaluating the overall financial
 statement presentation.  We believe that our audits provide a reasonable basis
 for our opinion.
 
 In our opinion, the financial statements referred to above present fairly, in
 all material respects, the consolidated financial position of Twin Disc,
 Incorporated and Subsidiaries as of June 30, 1997 and 1996, and the
 consolidated results of their operations and their cash flows for each of the
 three years in the period ended June 30, 1997 in conformity with generally
 accepted accounting principles.
 
 
 
                                COOPERS & LYBRAND L.L.P.
 
 Milwaukee, Wisconsin
 July 18, 1997
                                      (39)
 
 <PAGE> 34

 <TABLE>
 FINANCIAL SUMMARY
 <CAPTION>
                          1997      1996       1995     1994      1993
 (In thousands of dollars, except where noted)                    
 
 Statement of Operations                    
 <S>                    <C>       <C>       <C>       <C>       <C>
 Net sales              $189,942  $176,657  $164,232  $141,193  $139,403
 Costs and expenses,
  including marketing,
  engineering and
  administrative         177,342   164,486   154,347   136,244   135,284
 Earnings
  from operations         12,600    12,171     9,885     4,949     4,119
 Other income
  (expense)                   80    (1,264)   (1,301)       18       (95)
 Earnings
  before income taxes     12,680    10,907     8,584     4,967     4,024
 Income taxes              4,951     4,348     2,912       578     1,362
 Net earnings              7,729     6,559     5,672     4,389     2,662
                     
 Overseas operations                    
   Sales                  58,098    55,520    55,625    45,862    44,766 
   Earnings (loss)         3,840     4,758     2,480     2,365     1,673
 
 Balance Sheet                    
                     
 Assets                    
 Cash and equivalents      8,983     2,043     3,741     4,166     2,903 
 Receivables, net         32,428    34,917    29,247    25,682    25,106 
 Inventories              47,844    51,083    47,157    41,569    42,562 
 Other current assets      8,707     8,597    10,345     8,993     6,961 
 Total current assets     97,962    96,640    90,490    80,410    77,532 
 Investments and
  other assets            26,544    30,344    30,463    26,830    21,813 
 Fixed assets less
  accumulated
  depreciation            34,249    35,715    37,348    36,676    37,560 
 Total assets            158,755   162,699   158,301   143,916   136,905 
                     
 Net assets overseas      26,341    32,085    32,368    29,580    28,059 
                     
 Liabilities and Shareholders' Equity                    
 Current liabilities      29,621    34,002    36,852    32,710    31,252 
 Long-term debt           19,944    19,938    14,000    11,500    13,000
 Deferred liabilities     35,393    33,578    32,827    34,309    31,244
 Shareholders' equity     73,797    75,181    74,622    65,397    61,409
 Total liabilities and
  shareholders' equity   158,755   162,699   158,301   143,916   136,905
 </TABLE>                                  
 1993 Net Earnings data and Return percentages reflect operating earnings
 before the effect of adopting Financial Accounting Standards 106 and 109.  The
 cumulative effect of their adoption was a net loss of $14.44 million or $5.16
 per share.
                                    (40-41)
 <PAGE> 35

 <TABLE>
 FINANCIAL SUMMARY (CONTINUED)
 <CAPTION>
                          1997      1996       1995     1994      1993
 
 (In thousands of dollars, except where noted)                    
 <S>                      <C>       <C>        <C>      <C>       <C>
 Comparative Financial Information                    
 Per share statistics                    
 Net earnings               2.78      2.36      2.03      1.57       .95
 Dividends                   .70       .70       .70       .70       .70
 Shareholders' equity      26.48     27.07     26.75     23.36     21.93
                     
 Return on equity          10.5%      8.7%      7.6%      6.7%      4.3%
 Return on assets           4.9%      4.0%      3.6%      3.0%      1.9%
 Return on sales            4.1%      3.7%      3.5%      3.1%      1.9%
                     
 Average shares
  outstanding          2,781,174 2,776,805 2,790,111 2,799,390 2,799,603
 Number of shareholder
  accounts                   845       913       996     1,058     1,139
 Number of employees       1,081     1,080     1,097     1,099     1,114
                   
 Additions to plant
  and equipment            4,734     4,140     4,290     4,216     4,684
 Depreciation              5,141     5,071     4,792     4,670     4,958
 Net working capital      68,341    62,638    53,638    47,700    46,280
 </TABLE>
 1993 Net Earnings data and Return percentages reflect operating earnings
 before the effect of adopting Financial Accounting Standards 106 and 109.  The
 cumulative effect of their adoption was a net loss of $14.44 million or $5.16
 per share.
                                    (40-41)
 <PAGE> 36

 DIRECTORS
 
 MICHAEL E. BATTEN
   Chaiman, Chief Executive Officer
 JEROME K. GREEN
   Former Group Vice President, The Marmon Group, (A Diversified Manufacturer),
   Chicago, Illinois
 MICHAEL H. JOYCE
   President, Chief Operating Officer
 JAMES O. PARRISH
   Vice President-Finance & Treasurer
 PAUL J. POWERS
   Chairman, President-Chief Executive Officer, Commercial Intertech Corp.,
   (Manufacturer of Hydraulic Components, Fluid Purification Products, Pre-
   Engineered Buildings and Stamped Metal Products), Youngstown, Ohio
 RICHARD T. SAVAGE
   President-Chief Executive Officer, Modine Manufacturing Company, 
   (Manufacturer of Heat Exchange Equipment), Racine, Wisconsin
 DAVID L. SWIFT
   Retired Chairman, President-Chief Executive Officer, Acme-Cleveland
   Corporation, (Manufacturer of Diversified Industrial Products), Pepper Pike, 
   Ohio
 STUART W. TISDALE
   Retired Chairman-Chief Executive Officer, WICOR, Inc. (Parent Company of
   Wisconsin Gas Company, Sta-Rite Industries, Incorporated and WEXCO of 
   Delaware, Incorproated), Milwaukee, Wisconsin
 GEORGE E. WARDEBERG
   President, Chief Executive Officer, WICOR, Inc.  (Parent Company of 
   Wisconsin Gas Company, Sta-Rite Industries, Incorporated and WEXCO of 
   Delaware, Incorproated), Milwaukee, Wisconsin
 DAVID R. ZIMMER
   Executive Vice President-Operations, United Dominion Industries, 
   (Manufacturer of Diversified Engineered Products), Charlotte, North Carolina
                                      (42)
 <PAGE> 37

 OFFICERS
 
 MICHAEL E. BATTEN
   Chairman, Chief Executive Officer
 MICHAEL H. JOYCE
   President, Chief Operating Officer
 JAMES O. PARRISH
   Vice President-Finance & Treasurer
 PHILIPPE PECRIAUX
   Vice President-Europe
 JAMES MCINDOE
   Vice President-International Marketing
 LANCE J. MELIK
   Vice President-Corporate Development
 FRED H. TIMM
   Corporate Controller & Secretary
 PAUL A. PELLIGRINO
   Vice President-Engineering
 JOHN W. SPANO
   Vice President-Sales and Marketing
                                      (43)
 <PAGE> 38

 CORPORATE DATA
 
 ANNUAL MEETING
   Corporate Offices, 2:00 PM, October 17, 1997
 SHARES TRADED
   New York Stock Exchange: Symbol TDI
 ANNUAL REPORT ON SECURITIES AND EXCHANGE COMMISSION FORM 10-K
   SINGLE COPIES OF THE COMPANY'S 1997 ANNUAL REPORT ON SECURITIES AND
EXCHANGE
 COMMISSION FORM 10-K WILL BE PROVIDED WITHOUT CHARGE TO
SHAREHOLDERS AFTER
 SEPTEMBER 30, 1997, UPON WRITTEN REQUEST DIRECTED TO THE SECRETARY,
TWIN DISC,
 INCORPORATED, 1328 RACINE STREET, RACINE, WISCONSIN 53403.
 TRANSFER AGENT & REGISTRAR
   Firstar Trust Company, Milwaukee, Wisconsin
 INDEPENDENT ACCOUNTANTS
   Coopers & Lybrand L.L.P., Milwaukee, Wisconsin
 GENERAL COUNSEL
   von Briesen, Purtell, & Roper,s.c., Milwaukee, Wisconsin
 CORPORATE OFFICES
   Twin Disc, Incorporated, Racine, Wisconsin 53403, Telephone: (414) 638-4100
 WHOLLY OWNED SUBSIDIARIES
   Twin Disc International S.A., Nivelles, Belgium
   Twin Disc Spain, S.A., Madrid, Spain
   Twin Disc Italia S.R.L., Viareggio, Italy
   Twin Disc (Pacific) Pty. ltd., Brisbane, Queensland, Australia
   Twin Disc (Far East) Ltd., Singapore
   Twin Disc (South Africa) Pty. Ltd., Johannesburg, South Africa
   Mill-Log Equipment Co., Inc., Coburg, Oregon
   Southern Diesel Systems Inc., Miami, Florida
   TD Electronics, Inc., Loves Park, Illinois
 PARTIALLY OWNED AFFILIATES
   Niigata Converter Company, Ltd., Kamo, Omiya and Tokyo, Japan
   Palmer Johnson Distributors, LLC, Sturgeon Bay, Wisconsin
 MANUFACTURING FACILITIES
   Racine, Wisconsin; Nivelles, Belgium; Kamo and Omiya Japan
 SALES OFFICES
 DOMESTIC
   Racine, Wisconsin; Coburg, Oregon; Seattle, Washington; Miami, Florida;
   Jacksonville, Florida
 OVERSEAS
   Nivelles, Belgium; Brisbane and Perth Australia; Singapore; Johannesburg, 
   South Africa; Madrid, Spain; Viareggio, Italy
 AFFILIATES
   Tokyo, Japan; Sturgeon Bay, Wisconsin
 MANUFACTURING LICENSES
   Niigata Converter Company, Ltd., Tokyo, Japan; Transfluid S.R.L., Milan, 
   Italy; Nakamura Jico Co. Ltd., Tokyo, Japan; Hindustan Motors, Ltd., Madras, 
   India
                                      (44)
 
