<PAGE>
 
                      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


                           December 31,
For the fiscal year ended    1998                 Commission file number  0-2612
 
                            LUFKIN INDUSTRIES, INC.
            ------------------------------------------------------
            (Exact name of registrant as specified in its charter)
 
                  Texas                                    75-0404410
      -------------------------------                  -------------------
      (State or other jurisdiction of                  (I.R.S. Employer
      incorporation or organization)                   Identification No.)
 
     601 South Raguet, Lufkin, Texas                          75904
 ----------------------------------------                  ----------
 (Address of principal executive offices)                  (Zip Code)
 
Registrant's telephone number, including area code   409/634-2211

Securities registered pursuant to Section 12(b) of the Act:  None
Securities registered pursuant to Section 12(g) of the Act:


                     Common Stock, Par Value $1 Per Share
                     ------------------------------------
                               (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 "X" 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. [_]

The aggregate market value of the Company's voting stock held by non-affiliates
as of January 31, 1999 was $104,753,000.

6,577,051 shares of the Company's Common Stock were outstanding on December 31,
1998.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the sections entitled "Financial Review", "Letter to the
Shareholders", "Management's Discussion and Analysis", "Product Line
Information"  and the consolidated financial statements of the Company's Annual
Report to Shareholders for the year ended December 31, 1998, are incorporated by
reference in Parts I, II and IV, hereof and are included as Exhibit 13.

The sections entitled "Voting Securities", "Directors and Nominees for Director"
and "Executive Compensation" of the Company's definitive Proxy Statement for its
annual meeting of shareholders on May 5, 1999, are incorporated by reference in
Part III hereof.
<PAGE>
 
                                    Part I

Item 1.   Business

     The Company was incorporated under the laws of Texas on March 4, 1902 and
since that date, has maintained its principal office and manufacturing
facilities in Lufkin, Texas.  The Company designs, manufactures, sells, and
services various types of oil field pumping units, power transmission products,
foundry castings and highway trailers. Lufkin manufactures four basic types of
pumping units:  an air-balanced unit; a beam-balanced unit; a crank-balanced
unit; and a Mark II Unitorque unit.  The basic differences between the four
types relate to the counterbalancing system.  The depth of a well and the
desired fluid production determine the type of counterbalancing configuration
that is required.  There are numerous sizes and combinations of Lufkin oil field
pumping units within the four basic types.  The Company's power transmission
products (speed increasers and reducers) are designed, manufactured and sold
primarily for use in industrial applications such as petrochemical, refining,
rubber, plastics and steel and for use in marine propulsion applications.  The
Company produces numerous sizes and combinations of gears.  The Company's
foundry castings are primarily customer designed components manufactured by
Lufkin for use in customer products.  Lufkin also produces various sizes and
styles of trailers, including vans, platforms, and dumps.

     The Company manufactures most of the component parts used in its Oil Field,
Foundry Castings and Power Transmission products and purchases the raw materials
and outside manufactured parts from a variety of suppliers on an order basis.
The Trailer Division generally assembles various component parts manufactured by
others.  The inventory consists primarily of raw materials and component parts
which are generally assembled into finished products to fill specific customer
orders.  These finished products are sold primarily by the Company's own
employees.

     Oil field pumping units are the Company's primary products sold for export.
These sales, other than to Canada, are made principally through foreign sales
representatives, licensees and distributors.  During 1998, foreign sales
accounted for approximately 14 percent of the Company's total sales.

     The Company's domestic and international markets are highly competitive
with price, quality and speed of delivery being important factors.  While the
Company believes that it is one of the larger manufacturers of sucker rod
pumping units in the United States, manufacturers of other types of units
(submersibles and hydraulics)  have a significant share of the total pumping
unit market.  The Company does not believe it has a large market share in the
power transmission, foundry castings or trailer markets.

     The Company employed approximately 2,300 people at December 31, 1998,
including approximately 1,700 that were paid on an hourly basis.  The Company
has an open shop contract, which runs to October 3, 1999, with three AFL-CIO
labor unions.  The Company considers its employee relations to be satisfactory.

     Additional information required by Item 1 is included in the sections
entitled "Management's Discussion and Analysis", "Letter to the Shareholders",
and "Product Line Information" of the Annual Report, portions of which sections
are incorporated herein by reference and included as part of Exhibit 13.

Item 2.   Properties

     The Company's major manufacturing facilities are located in and near
Lufkin, are owned in fee and include approximately 150 acres, a foundry, machine
shop, structural shops, assembly shops and warehouses.  The Company also has a
plant in Nisku, Canada which produces structural parts for pumping units.  These
parts are then assembled with parts shipped from Lufkin and are delivered to the
Company's Canadian customers.

Item 3.   Legal Proceedings

     None

Item 4.   Submission of Matters to a Vote of Shareholders

     None
<PAGE>
 
Item 4A.  Executive Officers of the Registrant

     The following information is submitted with respect to the executive
officers of the Company as of March 1, 1999:
                                                            Officer
   Name                 Position with Company        Age     Since
   ----                 ---------------------        ---    -------
D. V. Smith             Chairman, President &
                          Chief Executive Officer     56      1993
J. F. Glick             Vice President                46      1994
M. A. Penn              Vice President                58      1983
E. G. Pittman           Vice President                65      1976
S. H. Semlinger         Vice President                45      1992
C. J. Haley, Jr.        Secretary-Treasurer           56      1973
L. M. Hoes              Vice President                52      1996
P. G. Perez             Vice President                53      1996

     There is no significant family relationship either by blood or by marriage
among the officers of the Company.

     All of the executive officers of the Company, with the exception of Mr.
Glick, Mr. Hoes and Mr. Perez have been employed by the Company for more than
five years in the same or similar positions.  Mr. Glick was first employed by
the Company in September 1994 to serve as Vice President and General Manager of
the Power Transmission Division.  Prior to joining the Company, Mr. Glick served
as Director of Manufacturing, U.K. and Ireland, with Cooper Oil Tools and as
Plant Manager of Cooper Oil Tools in Leeds, England.  Mr. Hoes was first
employed by the Company in May, 1996 to serve as Vice President and General
Manager of the Oil Field Products Division.  Prior to joining the Company, Mr.
Hoes was employed as Vice President of Manufacturing for Cooper Cameron Inc. in
Houston, Texas, as Vice President of Manufacturing for Cooper Oil Tool Division
and as Vice President of Engineering for Cooper Oil Tool Division based in
Houston, Texas.  Mr. Perez was first employed by the Company in July, 1993 to
serve as Director of Human Resources.  Mr. Perez was previously employed by
Cooper Industries as Manager of Employee Relations for Cooper Oil Tool Division
in Houston, Texas and by Cameron Iron Works as Manager of Labor Relations in
Houston, Texas.  The executive officers of the Company serve at the pleasure of
the Board of Directors of the Company.  The term of office for all officers
expires at the next annual meeting of the Board of Directors of the Company.

                                    Part II

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

     The information required by Item 5 is included in the section entitled
"Financial Review" of the Annual Report to Shareholders, which section is
incorporated herein by reference and included as part of Exhibit 13.

Item 6.   Selected Financial Data
<TABLE>
<CAPTION>
 
                                 FIVE YEAR SUMMARY OF SELECTED
                                  CONSOLIDATED FINANCIAL DATA
<S>                                       <C>      <C>      <C>      <C>      <C>
(In millions, except per share data)        1998     1997     1996     1995     1994
------------------------------------------------------------------------------------
Sales                                     $283.7   $287.6   $226.0   $248.9   $217.3
Earnings (loss) from operations             13.6     14.8     10.5      8.9     (1.2)*
Earnings (loss) per share
 Basic                                      2.11     2.26     1.57     1.31     (.18)
 Diluted                                    2.08     2.22     1.56     1.31     (.18)
Total assets                               242.8    209.8    185.9    186.3    176.8
Long term notes payable                     11.5      6.7        -        -        -
Cash dividends per share                     .72      .68      .60      .60      .60
</TABLE>
*Includes pretax charges of $11.2 million for special inventory writedowns.
<PAGE>
 
Item 7.  Management's Discussion and Analysis
           of Financial Condition and Results of Operations

     The information required by Item 7 is included in the section entitled
"Management's Discussion and Analysis" of the Company's Annual Report to
Shareholders, portions of which section are incorporated herein by reference and
included as part of Exhibit 13.


Item 7a.  Quantitative and Qualitative Disclosures about Market Risk

     The information required by Item 7a is included in the section entitled
"Management's Discussion and Analysis" of the Company's Annual Report to
Shareholders, portions of which section are incorporated herein by reference and
included as part of Exhibit 13.

Item 8.   Financial Statements and Supplementary Data

     The information required by Item 8 is included in the consolidated
financial statements and related notes and the "Report of Independent Public
Accountants" of the Company's Annual Report to Shareholders, which consolidated
financial statements and related notes and report of independent public
accountants are incorporated herein by reference and included as part of Exhibit
13.

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

     None

                                   Part III


Item 10.  Directors and Executive Officers of the Registrant

      The information required by Item 10 relating to the directors of the
Company is included in the section entitled "Directors and Nominees for
Director" on pages 2  through 4 of the definitive Proxy Statement for the annual
meeting of Company shareholders on May 5, 1999 ("Proxy Statement"), which
section is incorporated herein by reference.  The information relating to the
executive officers of the Company is provided in Item 4A of Part I of this
Annual Report.

Item 11.  Executive Compensation 

     The information required by Item 11 is included in the section entitled
"Executive Compensation" on pages 6 through 11 of the Proxy Statement, which
section is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

     The information required by Item 12 is included in the sections entitled
"Voting Securities" and "Election of Directors" on pages 1 through 4 of the
Company's Proxy Statement, which sections are incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

     None
<PAGE>
 
                                    Part IV


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

     (a)  Documents filed as part of the report

          1. Consolidated Financial Statements (incorporated by
             reference to the Annual Report to Shareholders)

             Report of Independent Public Accountants
             Consolidated Balance Sheet
             Consolidated Statement of Earnings
             Consolidated Statement of Shareholders' Equity
             Consolidated Statement of Cash Flows
             Notes to Consolidated Financial Statements

          2. Financial statement schedules

             Schedules Omitted--All schedules for which
             provision is made in the applicable regulations of
             the Securities and Exchange Commission have been
             omitted because they are not applicable or not re-
             quired or the required information is included in
             the consolidated financial statements or notes thereto.

          3. Exhibits

               (3)    Articles of Incorporation, as amended, and
                      Bylaws, as amended, were included as exhibit 3
                      to Form 10-K of the registrant for the year
                      ended December 31, 1990, which exhibits are
                      incorporated herein by reference.

              (10.1)  Shareholder Rights Agreement, dated as of
                      May 4, 1987, was included as exhibit (1)
                      to Form 8-A of the registrant dated May 13,
                      1987, which agreement is incorporated herein
                      by reference.

              (10.2)* Company's 1990 Stock Option Plan was included
                      as Exhibit 99.1 to the Company's registration
                      statement on Form S-8 dated September 24, 1990
                      (File No. 33-36976), which plan is incorporated
                      herein by reference.

              (13)    Portions of the Annual Report
                      to Shareholders for the year ended
                      December 31, 1998 are included as an
                      exhibit to this report for the informa-
                      tion of the Securities and Exchange Com-
                      mission.

              (21)    Schedule listing subsidiaries of the
                      registrant

              (23)    Consent of Independent Public Accountants

              (27)    Financial Data Schedule


          *Compensatory plan.

     (b)  Reports on Form 8-K filed during the fourth quarter of 1998

          None
<PAGE>
 
                                  SIGNATURES


     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Lufkin Industries, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on February
17, 1999.

LUFKIN INDUSTRIES, INC.

BY /s/ C. James Haley, Jr.
   ------------------------------------------
   C. James Haley, Jr., Secretary-Treasurer
   Principal Financial and Accounting Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on February 17, 1999, below by the following persons on
behalf of Lufkin Industries, Inc. and in the capacities indicated.


By /s/ D. V. Smith
   ------------------------------------------
   D. V. Smith, President and Chief Executive
   Officer


By /s/ S. W. Henderson, III
   ------------------------------------------
   S. W. Henderson, III, Director


By /s/ L. R. Jalenak, Jr.
   ------------------------------------------
   L. R. Jalenak, Jr., Director


By /s/ H. H. King
   ------------------------------------------
   H. H. King, Director


By /s/ M. E. Kurth, Jr.
   ------------------------------------------
   M. E. Kurth, Jr., Director


By /s/ W. T. Little
   ------------------------------------------
   W. T. Little, Director


By /s/ J. H. Lollar
   ------------------------------------------
   J. H. Lollar, Director


By /s/ B. H. O'Neal
   ------------------------------------------
   B. H. O'Neal, Director


By /s/ H. J. Trout, Jr.
   ------------------------------------------
   H. J. Trout, Jr., Director


By /s/ W. W. Trout, Jr.
   ------------------------------------------
   W. W. Trout, Jr., Director


By /s/ T. E. Wiener
   ------------------------------------------
   T. E. Wiener, Director