K. STOCK-BASED COMPENSATION

During fiscal 2011, the Company adopted the Twin Disc, Incorporated 2010 Stock Incentive Plan for Non-Employee Directors (the "Directors' Plan"), a plan to grant non-employee directors equity based awards up to 250,000 shares of common stock, and the Twin Disc, Incorporated 2010 Long-Term Incentive Compensation Plan (the "Incentive Plan"), a plan under which officers and key employees may be granted equity based awards up to 650,000 shares of common stock. The Directors' Plan may grant options to purchase shares of common stock, at the discretion of the board, to non-employee directors who are elected or reelected to the board, or who continue to serve on the board. Such options carry an exercise price equal to the fair market value of the Company's common stock as of the date of grant, vest immediately, and expire ten years after the date of grant. Options granted under the Incentive Plan are determined to be non-qualified or incentive stock options as of the date of grant, and may carry a vesting schedule. For options under the Incentive Plan that are intended to qualify as incentive stock options, if the optionee owns more than 10% of the total combined voting power of the Company's stock, the price will not be less than 110% of the grant date fair market value and the options expire five years after the date of grant. There were no incentive options granted to a greater than 10% shareholder during the years presented. There were no options outstanding under the Directors' Plan and the Incentive Plan as of June 30, 2012 and 2011.

The Company has 21,600 non-qualified stock options outstanding as of June 30, 2012 under the Twin Disc, Incorporated Plan for Non-Employee Directors and Twin Disc, Incorporated 2004 Stock Incentive Plan. The 2004 plans were terminated during 2010, except options then outstanding will remain so until exercised or until they expire.

The Company has 44,000 non-qualified stock options outstanding at June 30, 2012 under the Twin Disc, Incorporated 1998 Incentive Compensation plan and the 1998 Stock Option Plan for Non-employee Directors. The 1998 plans were terminated during 2004, except that options then outstanding will remain so until exercised or until they expire.

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

	2012		2011
2010 Long-Term Incentive Compensation Plan		600,831		650,000
2010 Stock Incentive Plan for Non-employee Directors		223,726		233,512

Stock option transactions under the plans during 2012 were as follows:

				Weighted		Weighted Average		Aggregate
				Average		Remaining Contractual		Intrinsic
	2012			Price		Life (years)		Value

Non-qualified stock options:
Options outstanding at beginning of year		95,400		$	6.76
Granted		-			-
Canceled/expired		-			-
Exercised		(29,800	)		5.58

Options outstanding at June 30		65,600		$	7.30		2.63	$	784,062

Options exercisable at June 30		65,600		$	7.30		2.63	$	784,062

Options price range ($3.25 - $4.98)

Number of shares		44,000

Weighted average price	$	3.58

Weighted average remaining life	1.00 years

Options price range ($5.73 - $7.19)

Number of shares		2,400

Weighted average price	$	6.23

Weighted average remaining life	3.00 years

Options price range ($10.01 - $27.55)

Number of shares		19,200

Weighted average price	$	15.96

Weighted average remaining life	6.31 years

				Weighted		Weighted Average		Aggregate
				Average		Remaining Contractual		Intrinsic
	2012			Price		Life (years)		Value

Incentive stock options:
Options outstanding at beginning of year		8,200		$	3.76
Granted		-			-
Canceled/expired		(7,400	)		3.76
Exercised		(800	)		3.76

Options outstanding at June 30		-		$	-		0.00	$	0

Options exercisable at June 30		-		$	-		0.00	$	0

Options price range ($3.76 - $4.98)

Number of shares		-

Weighted average price	$	-

Weighted average remaining life	0 years

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

During fiscal 2012, 2011 and 2010, 0, 0 and 7,200 non-qualified stock options were granted, respectively. As a result, compensation cost of $0, $0 and $44,000 has been recognized in the Consolidated Statements of Operations and Comprehensive (Loss) Income for fiscal 2012, 2011 and 2010, respectively.

The total intrinsic value of options exercised during the years ended June 30, 2012, 2011 and 2010 was approximately $1,002,000, $630,000 and $89,000, respectively.

In fiscal 2012, 2011 and 2010, the Company granted a target number of 15,449, 98,358 and 91,807 performance stock unit awards, respectively, to various employees of the Company, including executive officers. The performance stock unit awards granted in fiscal 2012 will vest if the Company achieves a specified target objective relating to consolidated economic profit (as defined in the Performance Stock Unit Award Grant Agreement) in the cumulative three fiscal year period ending June 30, 2014. The performance stock unit awards granted in fiscal 2012 are subject to adjustment if the Company's economic profit for the period falls below or exceeds the specified target objective, and the maximum number of performance stock units that can be awarded if the target objective is exceeded is 18,539. Based upon actual results to date and the probability of achieving the targeted performance levels, the Company is accruing the performance stock unit awards granted in fiscal 2012 at the target level. The performance stock unit awards granted in fiscal 2011 will vest if the Company achieves a specified target objective relating to consolidated economic profit (as defined in the Performance Stock Unit Award Grant Agreement) in the cumulative three fiscal year period ending June 30, 2013. The performance stock unit awards granted in fiscal 2011 are subject to adjustment if the Company's economic profit for the period falls below or exceeds the specified target objective, and the maximum number of performance stock units that can be awarded if the target objective is exceeded is 118,030. Based upon actual results to date and the probability of achieving the maximum performance levels, the Company is accruing the performance stock unit awards granted in fiscal 2011 at the maximum level. The performance stock unit awards granted in fiscal 2010 will vest if the Company achieves a specified target objective relating to consolidated economic profit (as defined in the Performance Stock Unit Award Grant Agreement) in the cumulative three fiscal year period ending June 30, 2012. The performance stock unit awards granted in fiscal 2010 are subject to adjustment if the Company's economic profit for the period falls below or exceeds the specified target objective, and the maximum number of performance stock units that can be awarded if the target objective is exceeded is 110,168. Based upon actual results to date, the Company is accruing the performance stock unit awards granted in fiscal 2010 at the maximum level. There were 133,479, 316,698 and 233,065 unvested performance stock unit awards outstanding at June 30, 2012, 2011 and 2010, respectively. The weighted average grant date fair value of the unvested awards at June 30, 2012 was $15.79. The performance stock unit awards are remeasured at fair-value based upon the Company's stock price at the end of each reporting period. The fair-value of the stock unit awards are expensed over the performance period for the shares that are expected to ultimately vest. The compensation (income) expense for the year ended June 30, 2012, 2011 and 2010 related to the performance stock unit award grants, approximated $(631,000), $4,246,000 and $0, respectively. At June 30, 2012, the Company had $958,000 of unrecognized compensation expense related to the unvested shares that are ultimately expected to vest based upon the probability of achieving threshold performance levels. The total fair value of performance stock unit awards vested in fiscal 2012, 2011 and 2010 was $2,068,000, $0 and $0, respectively. The performance stock unit awards are cash based, and are thus recorded as a liability on the Company's Consolidated Balance Sheets. As of June 30, 2012, these awards are included in "Accrued liabilities" ($2,068,000) and "Other long-term liabilities" ($1,547,000) due to a portion of the awards having performance periods ending in less than one year, with the others all exceeding one year. As of June 30, 2011, these awards were included in "Other long-term liabilities" ($4,246,000) due to the performance periods all exceeding one year.

In fiscal 2012, 2011 and 2010, the Company granted a target number of 15,335, 72,546 and 74,173 performance stock awards, respectively, to various employees of the Company, including executive officers. The performance stock awards granted in fiscal 2012 will vest if the Company achieves a specified target objective relating to consolidated economic profit (as defined in the Performance Stock Award Grant Agreement) in the cumulative three fiscal year period ending June 30, 2014. The performance stock awards granted in fiscal 2012 are subject to adjustment if the Company's economic profit for the period falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 18,402. Based upon actual results to date and the probability of achieving the targeted performance levels, the Company is accruing the performance stock awards granted in fiscal 2012 at the target level. The performance stock awards granted in fiscal 2011 will vest if the Company achieves a specified target objective relating to consolidated economic profit (as defined in the Performance Stock Award Grant Agreement) in the cumulative three fiscal year period ending June 30, 2013. The performance stock awards granted in fiscal 2011 are subject to adjustment if the Company's economic profit for the period falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 87,055. Based upon actual results to date and the probability of achieving the maximum performance levels, the Company is accruing the performance stock awards granted in fiscal 2011 at the maximum level. The performance stock awards granted in fiscal 2010 will vest if the Company achieves a specified target objective relating to consolidated economic profit (as defined in the Performance Stock Award Grant Agreement) in the cumulative three fiscal year period ending June 30, 2012. The performance stock awards granted in fiscal 2010 are subject to adjustment if the Company's economic profit for the period falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 89,008. Based upon actual results to date, the Company is accruing the performance stock awards granted in fiscal 2010 at the maximum level. There were 102,391, 242,563 and 177,983 unvested performance stock awards outstanding at June 30, 2012, 2011 and 2010, respectively. The fair value of the stock awards (on the date of grant) is expensed over the performance period for the shares that are expected to ultimately vest. The compensation expense for the year ended June 30, 2012, 2011 and 2010, related to performance stock awards, approximated $838,000, $876,000 and $0, respectively. The weighted average grant date fair value of the unvested awards at June 30, 2012 was $16.60. At June 30, 2012, the Company had $778,000 of unrecognized compensation expense related to the unvested shares that are ultimately expected to vest based upon the probability of achieving threshold performance levels. The total fair value of performance stock awards vested in fiscal 2012, 2011 and 2010 was $1,671,000, $0 and $0, respectively.

In addition to the performance shares mentioned above, the Company has unvested restricted stock outstanding that will vest if certain service conditions are fulfilled. The fair value of the restricted stock grants is recorded as compensation over the vesting period, which is generally 1 to 4 years. During fiscal 2012, 2011 and 2010, the Company granted 43,620 119,268 and 109,123 service based restricted shares, respectively, to employees and non-employee directors in each year. There were 250,323, 237,691 and 126,423 unvested shares outstanding at June 30, 2012, 2011 and 2010, respectively. Compensation expense of $1,435,000, $1,026,000 and $463,000 was recognized during the year ended June 30, 2012, 2011 and 2010, respectively, related to these service-based awards. The total fair value of restricted stock grants vested in fiscal 2012, 2011 and 2010 was $977,000, $133,000 and $138,000, respectively. As of June 30, 2012, the Company had $1,451,000 of unrecognized compensation expense related to restricted stock which will be recognized over the next three years.