UNITED
        STATES
 SECURITIES
        AND EXCHANGE COMMISSION
 
 Washington,
        D. C. 20549
 
 FORM
        10-K
 
 [X]
        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF
        1934
 
 For
        the
        fiscal year ended December
        31, 2006
 
 
 (  )
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT
        OF 1934
 
 For
        the
        transition period from _______ to _______
 
 Commission
        File Number: 0-02612
 
 
 LUFKIN
        INDUSTRIES, INC.
 (Exact
        name of registrant as specified in its charter)
 
 TEXAS
              75-0404410(State
                  or other jurisdiction of incorporation or organization)
              (I.R.S.
                  Employer Identification No.)601
                  SOUTH RAGUET, LUFKIN, TEXAS
              75904(Address
                  of principal executive offices)
              (Zip
                  Code)
 
 (Registrant’s
        telephone number, including area code) (936)
        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 if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act. Yes X No
 
 Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 15(d) of the Act. Yes  No X
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days. Yes X No___
 
 Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K is not contained herein, and will not be contained, to the
        best
        of 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. [ ]
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
 Large
        accelerated filer X Accelerated Filer ______ Non-accelerated
        filer ______
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Act). Yes  No X
 
 The
        aggregate market value of the Company's voting stock held by non-affiliates
        as
        of the last business day of the Company’s most recently completed second fiscal
        quarter, June 30, 2006, was $884,442,668.
 
 There
          were 14, 942,313
          shares of Common Stock, $1.00 par value per share, outstanding as of February
          26, 2007, not including 395,278 shares classified as Treasury
          Stock.
 
 DOCUMENTS
        INCORPORATED BY REFERENCE
 
 The
        information called for by Items 10, 11, 12 and 14 of Part III of this annual
        report on Form 10-K are incorporated by reference from the registrant’s
        definitive proxy statement to be filed pursuant to Regulation
        14A.
  **Table
            of Contents**
  
 **TABLE
        OF CONTENTS**
 
 **PART
                  I**Item
                  1.
              BusinessItem
                  1A.
              Risk
                  FactorsItem
                  1B.
              Unresolved
                  Staff CommentsItem
                  2.
              PropertiesItem
                  3.
              Legal
                  ProceedingsItem
                  4.
              Submission
                  of Matters to a Vote of Security Holders**PART
                  II**Item
                  5.
              Market
                  for Registrant’s Comment Equity, Related Stockholder Matters and issuer
                  Purchases of Equity SecuritiesItem
                  6.
              Selected
                  Financial DataItem
                  7.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  OperationsItem
                  7A.
              Quantitative
                  and Qualitative Disclosures About Market RiskItem
                  8.
              Financial
                  Statements and Supplementary DataItem
                  9.
              Changes
                  in and Disagreements With Accountants on Accounting and Financial
                  DisclosureItem
                  9A.
              Controls
                  and ProcedureItem
                  9B.
              Other
                  Information**PART
                  III**Item
                  10.
              Directors
                  and Executive Officers of the RegistrantItem
                  11.
              Executive
                  CompensationItem
                  12.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder MattItem
                  13.
              Certain
                  Relationships and Related TransactionsItem
                  14.
              Principal
                  Accountant Fees and Services**PART
                  IV**Item
                  15.
              Exhibits
                  and Financial Statement SchedulesSIGNATURESINDEX
                  TO EXHIBITSEX-10.13
              Thrift
                  Plan Restoration Plan for Salaried Employees of Lufkin Industries,
                  Inc. as
                  amended.EX-10.14
              Retirement
                  Plan Restoration Plan for Salaried Employees of Lufkin Industries,
                  Inc. as
                  amended.EX-10.15
              Lufkin
                  Industries, Inc. Supplemental Retirement Plan as
                  amended.EX-10.22
              Amended
                  and Restated Employment Agreement, dated January 1, 1999, between
                  Lufkin
                  Industries, Inc. and Douglas V. Smith.EX-21
              Subsidiaries
                  of the registrant.EX-23
              Consent
                  of Independent Registered Public Accounting FirmEX-31.1
              Rule
                  13a-14(a)/15d-14(a) Certification of the Chief Executive
                  OfficerEX-31.2
              Rule
                  13a-14(a)/15d-14(a) Certification of the Chief Financial
                  OfficerEX-32.1
              Section
                  1350 Certification of the Chief Executive OfficerEX-32.2
              Section
                  1350 Certification of the Chief Financial
                  Officer






**Table
            of Contents**








**PART
      I**





**Item
      1.Business**




Lufkin
      Industries, Inc. (the “Company”) was incorporated under the laws of the State of
      Texas on March 4, 1902, and since that date has maintained its principal office
      and manufacturing facilities in Lufkin, Texas. The Company employed
      approximately 3,000 people at December 31, 2006, including approximately 2,200
      that were paid on an hourly basis. Certain of our operations are subject to
      a
      union contract that expires in October 2008. The Company is divided into three
      operating segments: Oil Field, Power Transmission and Trailer.





**Oil
      Field**





Products:




The
      Oil
      Field segment manufactures and services artificial reciprocating rod lift
      equipment, commonly referred to as pumping units, and related
      products.





Pumping
                Units- Four basic types of pumping units are manufactured: 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.Service-
                Through a network of service centers, the Company transports and
                repairs
                pumping units. The service centers also refurbish used pumping
                units.Automation-
                The Company designs, manufactures, installs and services computer
                control
                equipment and analytical services for pumping units that lower production
                costs and optimize well efficiency.Foundry
                Castings- As part of the Company’s vertical integration strategy, the Oil
                Field segment operates an iron foundry to produce castings for new
                pumping
                units. In order to maximize utilization of this facility, castings
                for
                third parties are also produced.





Raw
      Materials & Labor:




Oil
      Field
      purchases a variety of raw materials in manufacturing its products. The
      principal raw materials are structural and plate steel, round alloy steel and
      iron castings from both its own foundry and third-party foundries. Casting
      costs
      are subject to change from raw material prices on scrap iron and pig iron in
      addition to natural gas and electricity prices. Due to the many configurations
      of its products and thus sizes of raw material used, Oil Field does not enter
      into long-term contracts for raw materials but generally does not experience
      shortages of raw materials. However, during 2004, Oil Field experienced rapid
      raw material price increases due to increased global demand for metal
      commodities but did not experience any material shortages. Raw material prices
      stabilized in 2005, but are not expected to decline in the short-term nor are
      shortages expected. Certain materials like steel round and bearings have
      continued to experience price increases and longer lead times. Raw material
      prices may continue to increase and availability may decrease with little
      notice.




The
      nature of the products manufactured and serviced generally requires skilled
      labor. Oil Field’s ability to increase capacity could be limited by its ability
      to hire and train qualified personnel. Also, the main U.S. manufacturing
      facilities are unionized, so any labor disruption could have a significant
      impact on Oil Field’s ability to maintain production levels. The current labor
      contract expires in October 2008.





Markets:




Demand
      for pumping unit equipment primarily depends on the level of onshore oil well
      drilling activity as well as the depth and fluid conditions of that drilling.
      Drilling activity is driven by the available cash flow of the Company’s
      customers as well as their long-term perceptions of the level and stability
      of
      the price of oil. The recent demand for pumping units has also been impacted
      by
      the use of artificial lift in natural gas and coal bed methane applications
      as
      higher energy prices have made certain extraction methods more economical.
      In
      addition, the availability of used pumping unit equipment impacts the demand
      for
      new pumping units, especially in the North American market. The higher energy
      prices experienced since 2004 have increased the demand for new pumping units
      and related service and products from higher drilling activity, activation
      of
      idle wells and the upgrading of existing wells. While a majority of the
      segment’s revenues are in North America, international opportunities continue to
      increase as new drilling increases and existing fields mature, requiring
      increased use of pumping units for artificial lift. In 2006, an Oil Field
      customer and its related subsidiaries represented 11.6% of consolidated company
      sales and the loss of this customer would have a material adverse effect on
      this
      segment.





Competition:




The
      primary global competitor for new pumping units and automation equipment is
      Weatherford, but Chinese manufacturers of pumping units are increasingly present
      in the market. Used pumping units are also an important factor in the North
      American market, as customers will generally attempt to satisfy requirements
      through used equipment before purchasing new equipment. While the Company
      believes that it is one of the larger manufacturers of sucker rod pumping units
      in the world, manufacturers of other types of units (submersibles and
      hydraulics) have a significant share of the total artificial lift market. While
      Weatherford is the Company’s single largest competitor in the service market,
      small independent operators provide significant competitive
      pressures.




Because
      of the competitive nature of the business and the relative age of many of the
      product designs, price, delivery time, product quality and customer service
      are
      important factors in winning orders. To this end, the Company maintains
      strategic levels of inventories in order to ensure delivery times and invests
      in
      new capital equipment to maintain quality and price levels.





**Power
      Transmission**





Products:




The
      Power
      Transmission segment designs, manufactures and services speed increasing and
      reducing gearboxes for industrial applications. Speed increasers convert lower
      speed and higher torque input to higher speed and lower torque output while
      speed reducers convert higher speed and lower torque input to lower speed and
      higher torque output. The Company produces numerous sizes and designs of
      gearboxes depending on the end use. While there are standard designs, the
      majority of gearboxes are customized for each application.





High-Speed
                Gearboxes- Single stage gearboxes with pitch line velocities equal
                to or
                greater than 35 meters per second or rotational speeds greater than
                4500
                rpm or multi-stage gearboxes with at least one stage having a pitch
                line
                velocity equal to or greater than 35 meters per second and other
                stages
                having pitch line velocities equal to or greater than 8 meters per
                second.
                These gearboxes require extremely high precision manufacturing and
                testing
                due to the stresses on the gearing. The ratio of increasers to reducers
                is
                fairly even. These gearboxes more typically service the energy related
                markets of petrochemicals, refineries, offshore production and
                transmission of oil and gas.Low-Speed
                Gearboxes- Gearboxes which do not meet the pitch line or rotational
                speed
                criteria of high-speed gearboxes are classified as low-speed gearboxes.
                The majority of low-speed gearboxes are reducers. While still requiring
                close tolerances, these gearboxes do not require the same precision
                of
                manufacturing and testing. These gearboxes more typically service
                commodity-related industries like rubber, sugar, paper, steel, plastics,
                mining and cement as well as marine propulsion.Parts-
                The Company manufactures capital spares for customers in conjunction
                with
                the production of new gearboxes as well as producing parts for
                after-market service.Repair
                & Service- The Company provides on and off-site repair and service
                for
                not only its own products but also those manufactured by other companies.
                Repair work is performed in dedicated facilities due to the high
                turn-around times required.





Raw
      Materials & Labor:




Power
      Transmission purchases a variety of raw materials in manufacturing its products.
      The principal raw materials are steel plate, round alloy steel, iron castings
      and steel forgings. Due to the customized nature of its products, Power
      Transmission generally does not enter into long-term contracts for raw
      materials. Though raw material shortages are infrequent, lead times can be
      long
      due to the custom nature of many of its orders. However, during 2004, Power
      Transmission experienced rapid raw material price increases due to increased
      global demand for metal commodities but did not experience any material
      shortages. Raw material prices stabilized in 2005 but are not expected to
      decline in the short-term and may continue to increase with little notice.
      Certain materials like steel round and bearings have continued to experience
      price increases and longer lead times. Raw material and component part shortages
      are not expected in the short-term, but certain supplier lead-times have grown,
      especially bearing suppliers.




The
      nature of the products manufactured and serviced generally requires skilled
      labor. Power Transmission’s ability to increase capacity could be limited by its
      ability to hire and train qualified personnel. Also, the main U.S. manufacturing
      facilities are unionized, so any labor disruption could have a significant
      impact on Power Transmission’s ability to maintain production levels. The
      current labor contract expires in October 2008.





Markets:




As
      noted
      above, Power Transmission services many diverse markets, each of which has
      its
      own unique set of drivers. Favorable conditions for one market may be
      unfavorable for another market. Generally, if general global industrial capacity
      utilizations are not high, then spending on new equipment lags. Also impacting
      demand are government regulations involving safety and environmental issues
      that
      can require capital spending. Power Transmission products are sold both to
      end
      customers and to intermediate project contractors both within the United States
      and globally. Recent market demand increases have come from energy-related
      markets such as oil and gas production, pipeline transmission, refining,
      petrochemical, drilling, coal and power generation in response to higher global
      energy prices.





Competition:




Despite
      the highly technical nature of this product, there are many competitors. While
      several North American competitors have de-emphasized the market, many European
      companies remain in the market. Competitors include Flender Graffenstaden,
      BHS,
      Renk, Kreiter GearTech, Rientjes, Falk, and Horsburgh & Scott. While price
      is an important factor, proven designs, workmanship and engineering support
      are
      critical factors. Due to this, the Company outsources very little of the design
      and manufacturing processes.





**Trailer**





Products:




The
      Trailer segment manufactures and services various highway trailers for the
      freight-hauling market.





Vans-
                General-purpose dry-freight vans. Historically these have been the
                highest
                production trailer in the segment. However, due to van trailer
                manufacturing over-capacity and the entry of additional competitors,
                van
                trailer pricing reached a level that did not yield acceptable returns
                on
                the capital employed. In the third quarter of 2006, the Company announced
                its decision not to accept additional orders for new van trailers.
                After
                the existing backlog of van trailers was manufactured by the end
                of 2006,
                the van trailer manufacturing capacity was redeployed for additional
                flatbed and dump production capacity as well providing additional
                manufacturing capacity for Oil Field products.Flatbeds-
                Flat-bed style trailers used in hauling heavier loads that do not
                require
                protection from outdoor elements.Dumps-
                Trailers designed to haul bulk materials like gravel or
                sand.Parts-
                Through a network of company-owned branches, both trailers produced
                by the
                Company and by others are supported by replacement
                parts.








Raw
      Materials & Labor:




Trailer
      purchases a variety of raw materials in manufacturing its products. The
      principal raw materials are aluminum, structural and plate steel, axles,
      suspensions, tires, plywood and hardwood flooring. Trailer has annual contracts
      for aluminum in order to mitigate price fluctuations, but due to the
      configurable nature of its products, Trailer does not have long-term purchase
      contracts on its other raw material purchases. Raw material shortages have
      been
      infrequent. However, during 2004, Trailer experienced rapid raw material price
      increases due to increased global demand for metal commodities and experienced
      periodic material shortages. Raw material prices stabilized in 2005, but are
      not
      expected to decline in the short-term nor are shortages expected. Certain
      materials like aluminum have continued to experience price
      volatility.





The
      nature of the products manufactured generally requires skilled labor. Trailer’s
      ability to increase capacity could be limited by its ability to hire and train
      qualified personnel. Also, the main U.S. manufacturing facilities are unionized,
      so any labor disruption could have a significant impact on Trailer’s ability to
      maintain production levels. The current labor contract expires in October
      2008.





Markets:




The
      Company primarily sells its products in the United States to small and medium
      size fleet freight-hauling companies through a dealer network. Demand in this
      market is driven by the available cash flow or financing capabilities of the
      industry, age of the trailer fleets, changes in government regulations,
      availability of quality used trailers and the medium-term outlook for freight
      volumes. The profitability of the freight-hauling market is driven by freight
      volumes, fuel prices, wage levels and insurance costs.




Since
      2004, the freight market has improved as freight-hauling demand and freight
      pricing increased and aging trailers required replacement. However, the demand
      for van trailers has not increased enough to meet industry capacity, increasing
      price competition. Van demand has been impacted by freight haulers focusing
      purchases of new tractors before new diesel emission requirements are required
      on new tractors beginning in 2007. Flatbed and dump trailer demand has increased
      significantly from the home and road construction markets and the rebuilding
      effort from the 2005 hurricanes.





Competition:




The
      trailer market is highly competitive with relatively low barriers to entry.
      The
      majority of the cost of a new trailer comes from purchased materials of
      aluminum, steel, tires, axles and wood flooring. Since there is minimal product
      differentiation in this market, price is the key driver. The companies with
      the
      highest market share are Great Dane and Wabash, along with several other large
      manufacturers like Utility, Stoughton, Fontaine, Vanguard and Hyundai. The
      Company does not have a significant market share in the trailer market.




See
      Note
      18 in Notes to Consolidated Financial Statements included in this report for
      financial information about the Company’s business segments and geographic
      areas.





Federal
      Regulation and Environmental Matters




The
      Company’s operations are subject to various federal, state and local laws and
      regulations, including those related to air emissions, wastewater discharges,
      the handling of solid and hazardous wastes and occupational safety and health.
      Environmental laws have, in recent years, become more stringent and have
      generally sought to impose greater liability on a larger number of potentially
      responsible parties. While the Company is not currently aware of any situation
      involving an environmental claim that would likely have a material adverse
      effect on its business, it is always possible that an environmental claim with
      respect to one or more of the Company’s current businesses or a business or
      property that one of our predecessors owned or used could arise that could
      have
      a material adverse effect. The Company’s operations have incurred, and will
      continue to incur, capital and operating expenditures and other costs in
      complying with these laws and regulations in both the United States and abroad.
      However, the Company does not anticipate the future costs of environmental
      compliance will have a material adverse effect on its business, financial
      results or results of operations.





Available
      Information


The
      Company makes available, free of charge, through our website, www.lufkin.com,
      its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
      on Form 8-K and amendments to those reports filed or furnished pursuant to
      Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended,
      as
      soon as reasonably practicable after it electronically files such material
      with,
      or furnishes such material to, the Securities and Exchange
      Commission.





**Item
      1A. Risk Factors.**





*The
      risks described below are those which the Company believes are the material
      risks that it faces. Any of the risk factors described below could significantly
      and adversely affect its business, prospects, financial condition and results
      of
      operations.*





*A
      decline in domestic and worldwide oil and gas drilling activity would adversely
      affect the Company’s results of operations.*




The
      Oil
      Field segment is materially dependent on the level of oil and gas drilling
      activity in North America and worldwide, which in turn depends on the level
      of
      capital spending by major, independent and state-owned exploration and
      production companies. This capital spending is driven by current prices for
      oil
      and gas and the perceived stability and sustainability of those prices. Oil
      and
      gas prices have been subject to significant fluctuation in recent years in
      response to changes in the supply and demand for oil and gas, market
      uncertainty, world events, governmental actions, and a variety of additional
      factors that are beyond the Company’s control, including:





●
            the
                level of North American and worldwide oil and gas exploration and
                production activity;●
            worldwide
                economic conditions, particularly economic conditions in North
                America;●
            oil
                and gas production costs;●
            weather
                conditions;●
            the
                expected costs of developing new reserves;●
            national
                government political requirements and the policies of
                OPEC;●
            the
                price and availability of alternative fuels;●
            the
                effect of worldwide energy conservation measures;●
            environmental
                regulation; and●
            tax
                policies.








*The
      business of the Trailer segment is highly cyclical, which could adversely affect
      its business and results of operations.*




The
      truck
      trailer manufacturing industry historically has been and is expected to continue
      to be cyclical, as well as affected by overall economic conditions. New trailer
      production for the trailer industry reached its most recent peak of
      approximately 306,000 units in 1999, falling to approximately 140,000 by 2001
      and rebounding to approximately 280,000 units in 2006. Customers historically
      have replaced trailers in cycles that run from five to 12 years, depending
      on
      service and trailer type. Poor economic conditions can adversely affect demand
      for new trailers and in the past have led to an overall aging of trailer fleets
      beyond this typical replacement cycle. Customers’ buying patterns can also
      reflect regulatory changes, such as the new federal hours-of-service rules
      and
      anticipated 2007 federal emissions standards. Trailer’s business is likely to
      continue to be highly cyclical based on current and expected economic conditions
      and regulatory factors.





*Increases
      in the prices of our raw materials could adversely affect our margins and
      results of operations.*




The
      Company uses large amounts of steel, iron and electricity in the manufacture
      of
      its products. The price of these raw materials has a significant impact on
      the
      cost of producing products. Steel and electricity prices have increased
      significantly since the end of 2003, caused primarily by higher energy prices
      and increased global demand. Since most of the Company’s suppliers are not
      currently parties to long-term contracts with us, the Company is vulnerable
      to
      fluctuations in prices of such raw materials. Factors such as supply and demand,
      freight costs and transportation availability, inventory levels of brokers
      and
      dealers, the level of imports and general economic conditions may affect the
      price of cast iron and steel. During 2004, the Company encountered rapid raw
      material price increases. While raw material prices stabilized in 2005, the
      prices may increase significantly in the future. Certain items such as steel
      round, bearings and aluminum have continued to experience price increases,
      price
      volatility and longer lead times. If the Company is unable to pass future raw
      material price increases on to its customers, margins, results of operations,
      cash flow and financial condition could be adversely affected.





*Interruption
      in our supply of raw materials could adversely affect our results of
      operations.*




The
      Company relies on various suppliers to supply the components utilized to
      manufacture our products. The availability of the raw materials is not only
      a
      function of the availability of steel and iron, but also the alloy materials
      that are utilized by our suppliers. To date, these shortages have not caused
      a
      material disruption in availability or our manufacturing operations. However,
      there can be no assurance that material disruptions could not occur in the
      future. Raw material shortages and allocations may result in inefficient
      operations and a build-up of inventory, which can negatively affect the
      Company’s working capital position. The loss of any of the Company’s suppliers
      or their inability to meet its price, quality, quantity and delivery
      requirements could have an adverse effect on the Company’s business and results
      of operations.





*The
      inherent dangers and complexity of the Company’s operations could subject it to
      substantial liability claims that could adversely affect our results of
      operations.*




The
      products that the Company manufactures and the services that it provides are
      complex, and the failure of this equipment to operate properly or to meet
      specifications may greatly increase our customers’ costs. In addition, many of
      these products are used in inherently hazardous industries, such as the oil
      and
      gas drilling and production industry where an accident or product failure can
      cause personal injury or loss of life, damage to property, equipment, or the
      environment, regulatory investigations and penalties and the suspension of
      the
      end-user’s operations. If the Company’s products or services fail to meet
      specifications or are involved in accidents or failures, we could face warranty,
      contract, or other litigation claims for which it may be held responsible and
      its reputation for providing quality products may suffer.


The
      Company’s insurance may not be adequate in risk coverage or policy limits to
      cover all losses or liabilities that we may incur or be responsible. Moreover,
      in the future we may not be able to maintain insurance at levels of risk
      coverage or policy limits that we deem adequate or at premiums that are
      reasonable for us, particularly in the recent environment of significant
      insurance premium increases. Further, any claims made under the Company’s
      policies will likely cause its premiums to increase.




Any
      future damages deemed to be caused by the Company’s products or services that
      are assessed against it and that are not covered by insurance, or that are
      in
      excess of policy limits or subject to substantial deductibles, could have a
      material adverse effect on our results of operations and financial condition.
      Litigation and claims for which we are not insured can occur, including employee
      claims, intellectual property claims, breach of contract claims, and warranty
      claims.





*We
      may not be able to successfully integrate future acquisitions, which will cause
      to fail to realize expected returns.*




The
      Company continually explores opportunities to acquire related businesses, some
      of which could be material to the Company. The ability to continue to grow,
      however, may depend upon identifying and successfully acquiring attractive
      companies, effectively integrating these companies, achieving cost efficiencies
      and managing these businesses as part of the Company. The Company may not be
      able to effectively integrate the acquired companies and successfully implement
      appropriate operational, financial and management systems and controls to
      achieve the benefits expected to result from these acquisitions. The Company’s
      efforts to integrate these businesses could be affected by a number of factors
      beyond its control, such as regulatory developments, general economic conditions
      and increased competition. In addition, the process of integrating these
      businesses could cause the interruption of, or loss of momentum in, the
      activities of our existing business. The diversion of management’s attention and
      any delays or difficulties encountered in connection with the integration of
      these businesses could negatively impact the Company’s business and results of
      operations. Further, the benefits that the Company anticipates from these
      acquisitions may not develop.





*Labor
      disputes and increasing labor costs could have a material adverse effect on
      our
      business.*




The
      Company’s main U.S. manufacturing facilities are unionized and the current labor
      contract with respect to those facilities expires in October 2008. The Company
      cannot assure that any disputes, work stoppages or strikes will not arise in
      the
      future. In 2002, a strike involving union employees, which continued for
      approximately 14 consecutive days, resulted in operating losses for us. In
      addition, when our existing collective bargaining agreement expires, the Company
      cannot assure that it will be able to reach a new agreement with its employees
      or that any new agreement will be on substantially similar terms as the existing
      agreement. Labor costs may increase significantly as a result of the
      negotiations for any new labor agreement. Future disputes with and labor
      concessions to the Company’s employees could have a material adverse effect upon
      its results of operations and financial position.





*The
      inability to hire and retain qualified employees may hinder our
      growth.*




The
      ability to provide high-quality products and services depends in part on the
      Company’s ability to hire and retain skilled personnel in the areas of
      management, product engineering, servicing and sales. Competition for such
      personnel is intense and competitors can be expected to attempt to hire the
      Company’s skilled employees from time to time. In particular, the Company’s
      business and results of operations could be materially adversely affected if
      it
      is unable to retain the customer relationships and technical expertise provided
      by the Company’s management team and professional personnel.





*Significant
      competition in the industries in which the Company operates may result in its
      competitors offering new or better products and services or lower prices, which
      could result in a loss of customers and a decrease in
      revenues.*




The
      industries in which the Company operates are highly competitive. The Company
      competes with other manufacturers and service providers of varying sizes, some
      of which may have greater financial and technological resources than it does.
      As
      an example, barriers to entry in the standard truck trailer manufacturing
      industry are low. As a result, it is possible that additional competitors could
      enter the trailer market at any time. In the recent past, the manufacturing
      over-capacity and high leverage of some of our competitors in the trailer
      industry, along with the bankruptcies and financial stresses that affected
      the
      industry, contributed to significant pricing pressures. This pricing pressure
      led to the Company’s decision in 2006 not to accept additional orders for van
      trailers.




If
      the
      Company is unable to compete successfully with other manufacturers and service
      providers, it could lose customers and its revenues may decline. In addition,
      competitive pressures in the industry may affect the market prices of the
      Company’s new and used equipment, which, in turn, may adversely affect its sales
      margins, results of operations, cash flow and financial condition.





*Disruption
      of our manufacturing operations or management information systems would have
      an
      adverse effect or our financial condition and results of
      operations.*




While
      the
      Company owns numerous facilities domestically and internationally, its primary
      manufacturing facilities in and around Lufkin, Texas accounts for a significant
      percentage of its manufacturing output. An unexpected disruption in the
      Company’s production at these facilities or in its management information
      systems for any length of time would have an adverse effect on our business,
      financial condition and results of operations.





*The
      Company has foreign operations that would be adversely impacted in the event
      of
      war, political disruption, civil disturbance, economic and legal sanctions
      and
      changes in global trade policies.*




The
      Company has operations in certain international areas, including parts of the
      Middle East and South America, that are subject to risks of war, political
      disruption, civil disturbance, economic and legal sanctions (such as
      restrictions against countries that the U.S. government may deem to sponsor
      terrorism) and changes in global trade policies. The Company’s operations may be
      restricted or prohibited in any country in which these risks occur. In
      particular, the occurrence of any of these risks could result in the following
      events, which in turn, could materially and adversely impact the Company’s
      results of operations:





●
            disruption
                of oil and natural gas exploration and production
                activities;●
            restriction
                of the movement and exchange of funds;●
            inhibition
                of our ability to collect receivables;●
            enactment
                of additional or stricter U.S. government or international sanctions;
                and●
            limitation
                of our access to markets for periods of
                time.





*Results
      of operations could be adversely affected by actions under U.S. trade
      laws.*




Although
      the Company is a U.S.-based manufacturing and services company, it does own
      and
      operate international manufacturing operations that support its U.S.-based
      business. If actions under U.S. trade laws were instituted that limited the
      Company’s access to these products, the ability to meet its customer
      specifications and delivery requirements would be reduced. Any adverse effects
      on the Company’s ability to import products from its foreign subsidiaries could
      have a material adverse effect on our results of operations.





*The
      Company is subject to currency exchange rate risk, which could adversely affect
      its results of operations.*




The
      Company is subject to currency exchange rate risk with debt denominated in
      U.S.
      dollars owed to its U.S. entity by its Canadian subsidiary. The Company cannot
      assure that future currency exchange rate fluctuations will not have an adverse
      affect on its results of operations.





*The
      Company’s common stock has experienced, and may continue to experience, price
      volatility.*




The
      trading price of the Company’s common stock has been and may continue to be
      subject to large fluctuations. The Company’s common stock price may increase or
      decrease in response to a number of events and factors, including:





●
            trends
                in the Company’s industries and the markets in which it
                operates;●
            changes
                in the market price of the products the Company sells;●
            the
                introduction of new technologies or products by the Company or its
                competitors;●
            changes
                in expectations as to the Company’s future financial performance,
                including financial estimates by securities analysts●
            operating
                results that vary from the expectations of securities analysts and
                investors;●
            announcements
                by the Company or its competitors of significant contracts, acquisitions,
                strategic partnerships, joint ventures, financings or capital
                commitments;●
            changes
                in laws and regulations; and●
            general
                economic and competitive
                conditions.





**Item 1B.
      Unresolved Staff
      Comments.**




None





**Item 2.  Properties**




The
      Company's major manufacturing facilities are located in and near Lufkin, Texas
      are owned in fee and include approximately 150 acres, a foundry, machine shops,
      structural shops, assembly shops and warehouses. The facilities by segment
      are:





Oil
                FieldPumping
                Unit Manufacturing
            240,000
                sq. ft.Foundry
                Operations
            687,000
                sq. ft.Power
                TransmissionNew
                Unit Manufacturing
            458,000
                sq. ft.Repair
                Operations
            84,000
                sq. ft.Trailer
                Manufacturing
            388,000
                sq. ft.Corporate
                Facilities
            33,000
                sq. ft.




Also,
      the
      Company has numerous service centers throughout the U.S. to support the Oil
      Field, Power Transmission and Trailer segments. The majority of these locations
      are owned in fee, with some leased. None of these leases qualify as capital
      leases.




Internationally,
      the Company also has facilities for the production and servicing of pumping
      units and power transmission products. The facilities by segment
      are:





Oilfield
                (Pumping unit manufacturing and repair):Nisku,
                Alberta, Canada
            66,000
                sq. ft .Comodoro
                Rivadia, Argentina
            125,000
                sq. ft.Power
                Transmission (New unit manufacturing and repair):Fougerolles,
                France
            377,000
                sq. ft.




Also,
      the
      Company has several international service centers to support the Oil Field
      segment. The majority of these locations are owned in fee, with some leased.
      None of these leases qualify as capital leases.





**Item 3. Legal Proceedings**




A
      class
      action complaint was filed in the U.S. District Court for the Eastern District
      of Texas on March 7, 1997, by an employee and a former employee which alleged
      race discrimination in employment. Certification hearings were conducted in
      Beaumont, Texas in February 1998 and in Lufkin, Texas in August 1998. In April
      1999, the District Court issued a decision that certified a class for this
      case,
      which included all black employees employed by the Company from March 6, 1994,
      to the present. The case was closed from 2001 to 2003 while the parties
      unsuccessfully attempted mediation. Trial for this case began in December 2003,
      but was postponed by the District Court and was completed in October 2004.
      The
      only claims made at trial were those of discrimination in initial assignments
      and promotions.




On
      January 13, 2005, the District Court entered its decision finding that the
      Company discriminated against African-American employees in initial assignments
      and promotions. The District Court also concluded that the discrimination
      resulted in a shortfall in income for those employees and ordered that the
      Company pay those employees back pay to remedy such shortfall, together with
      pre-judgment interest in the amount of 5%. On August 29, 2005, the District
      Court determined that the backpay award for the class of affected employees
      would be $3.4 million (including interest to January 1, 2005) and provided
      a
      formula for attorney fees that the Company estimates will result in a total
      not
      to exceed $2.5 million. In addition to back pay with interest, the District
      Court (i) enjoined and ordered the Company to cease and desist all racially
      biased assignment and promotion practices and (ii) ordered the Company to pay
      court costs and expenses.




The
      Company has reviewed this decision with its outside counsel and on September
      19,
      2005, appealed the decision to the U.S. Court of Appeals for the Fifth Circuit.
      On January 26, 2006, the Court of Appeals notified the parties that the case
      had
      been docketed. The
      Company has submitted its briefs and now anticipates a decision in this case
      in
      the second quarter of 2007. The Company believes that after a full and fair
      review of the evidence, the Court of Appeals will determine that the plaintiffs
      have not established their claims of discrimination by the Company against
      the
      plaintiffs and will enter a decision to that effect and will dismiss the case
      against the Company. At this time, the Company has concluded that an unfavorable
      ultimate outcome is not probable. If the District Court’s decision is reversed
      and remanded for a new trial, the Company will vigorously defend itself on
      retrial. While the ultimate outcome and impact of these claims against the
      Company cannot be predicted with certainty, the Company believes that the
      resolutions of these proceedings will not have a material adverse effect on
      its
      consolidated financial position. However, should the Company be unsuccessful
      in
      its appeal, the final determination could have a material impact on the
      Company’s reported earnings, results of operations and
      cash
      flows in a future reporting period.




There
      are
      various other claims and legal proceedings arising in the ordinary course of
      business pending against or involving the Company wherein monetary damages
      are
      sought. It is management’s opinion that the Company’s liability, if any, under
      such claims or proceedings would not materially affect its consolidated
      financial position, results of operations or cash flow.





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




None








**Table
            of Contents**





**PART
      II**





**Item
      5. Market for Registrant's Common
      Equity, Related Stockholder Matters and Issuer Purchases of
      Equity Securities**





**Common
      Stock Information**




The
      Company's common stock is traded on the NASDAQ Stock Market (National Market)
      under the symbol “LUFK.” As of January 31, 2007, there were approximately 447
      record holders of its common stock. This number does not include any beneficial
      owners for whom shares of common stock may be held in “nominee” or “street”
name. The following table sets forth, for each quarterly period during fiscal
      2006 and 2005, the high and low sales price per share of the Company’s common
      stock and the dividends paid per share on the Company’s common
      stock.





2006
                
                2005Stock
                    Price
                
                Stock
                    PriceQuarter
                
                High
                
                Low
                
                Dividend
                
                High
                
                Low
                
                DividendFirst
                
                $
                68.670
                
                $
                45.560
                
                $
                0.11
                
                $
                24.145
                
                $
                17.500
                
                $
                0.09Second
                
                
                71.470
                
                
                50.210
                
                
                0.15
                
                
                36.230
                
                
                24.045
                
                
                0.09Third
                
                
                65.210
                
                
                49.050
                
                
                0.18
                
                
                51.900
                
                
                35.050
                
                
                0.09Fourth
                
                
                61.460
                
                
                50.660
                
                
                0.18
                
                
                56.570
                
                
                33.960
                
                
                0.11


The
      Company has paid cash dividends for 67 consecutive years. Total dividend
      payments were $9.2 million, $5.5 million and $4.9 million in 2006, 2005 and
      2004, respectively.





**Equity
      Compensation Plan Information**





The
      following table sets forth securities of the Company authorized for issuance
      under equity compensation plans at December 31, 2006.





Plan
                  Category
              
              Number
                  of securities to be issued upon exercise of outstanding options,
                  warrants
                  and rights (a)
              
              Weighted-average
                  exercise price of outstanding options, warrants and rights
                  (b)
              
              Number
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in column
                  (a))Equity
                  compensation plans approved by security holders
              
              
              
              
              
              743,761
              
              
              
              
              $
              29.06
              
              
              
              
              
              285,531Equity
                  compensation plans not approved by security holders
              
              
              
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              -Total
              
              
              
              
              
              743,761
              
              
              
              
              $
              29.06
              
              
              
              
              
              285,531


2,200,000
      shares were authorized for issuance pursuant to the 1990 Stock Option Plan,
      300,000 shares were authorized for issuance pursuant to the 1996 Nonemployee
      Director Stock Option Plan and 1,800,000 shares were authorized for issuance
      pursuant to the Incentive Stock Compensation Plan 2000. Awards may be granted
      pursuant to the Incentive Stock Compensation Plan 2000 include options,
      restricted stock, performance awards, phantom shares, bonus shares and other
      stock-based awards.





**Table
            of Contents**











**Item 6.  Selected Financial Data**





**Five
      Year Summary of Selected Consolidated Financial Data**




The
      following table sets forth certain selected historical consolidated financial
      data and should be read in conjunction with “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations” and the Consolidated
      Financial Statements and Notes thereto included elsewhere in this annual report
      on Form 10-K. The following information may not be indicative of our future
      operating results.





(In
                    millions, except per share data)
                
                2006
                
                2005
                
                2004
                
                2003
                
                2002Sales
                
                $
                605.5
                
                $
                492.2
                
                $
                356.3
                
                $
                262.3
                
                $
                228.7Net
                    earnings
                
                
                73.0
                
                
                44.5
                
                
                14.4
                
                
                9.7
                
                
                8.5Net
                    earnings per share:Basic
                
                
                4.92
                
                
                3.10
                
                
                1.06
                
                
                0.74
                
                
                0.65Diluted
                
                
                4.83
                
                
                3.03
                
                
                1.04
                
                
                0.73
                
                
                0.63Total
                    assets
                
                
                429.1
                
                
                359.8
                
                
                300.3
                
                
                263.7
                
                
                248.4Long-term
                    notes payable, net of current
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                0.2Cash
                    dividends per share
                
                
                0.62
                
                
                0.38
                
                
                0.36
                
                
                0.36
                
                
                0.36





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





**Overview**




**General**




Lufkin
      Industries is a global supplier of oil field, power transmission and trailer
      products. Through its Oil Field segment, the Company manufactures and services
      artificial reciprocating rod lift equipment and related products, which are
      used
      to extract crude oil and other fluids from wells. Through its Power Transmission
      segment, the Company manufactures and services high-speed and low-speed speed
      increasing and reducing gearboxes for industrial applications. Through its
      Trailer segment, the Company manufactures various highway trailers, including
      van, float and dump trailers. While these markets are price-competitive,
      technological and quality differences can provide product differentiation.


The
      Company’s strategy is to differentiate its products through additional
      value-added capabilities. Examples of these capabilities are high-quality
      engineering, customized designs, rapid manufacturing response to demand through
      plant capacity, inventory and vertical integration, superior quality and
      customer service, and an international network of service locations. In
      addition, the Company’s strategy is to maintain a low debt-to-equity ratio in
      order to quickly take advantage of growth opportunities and pay dividends even
      during unfavorable business cycles.




In
      support of the above strategy, the Company has been making capital investments
      in Oil Field to increase manufacturing capacity and capabilities in its three
      main manufacturing facilities in Lufkin, Texas, Canada and Argentina. These
      investments should reduce production lead times and improve quality. Investments
      also continue to be made to expand the Company’s presence in automation products
      and international service, as with the recently opened service facility in
      Oman.




In
      Power
      Transmission, the Company continues to expand its gear repair network by opening
      and expanding facilities in various locations in the US and Canada. The Company
      is making targeted capital investments to expand capacity and reduce
      manufacturing lead times as well as certain capital investments targeting cost
      reductions.




**Trends/Outlook**





**Oilfield**




Demand
      for pumping unit equipment primarily depends on the level of onshore oil well
      drilling activity as well as the depth and fluid conditions of that drilling.
      Drilling activity is driven by the available cash flow of the Company’s
      customers as well as their long-term perceptions of the level and stability
      of
      the price of oil. The recent demand for pumping units has also been impacted
      by
      the use of artificial lift in natural gas and coal bed methane applications
      as
      higher energy prices have made certain extraction methods more economical.
      In
      addition, the availability of used pumping unit equipment impacts the demand
      for
      new pumping units, especially in the North American market. The higher energy
      prices experienced since 2004 have increased the demand for new pumping units
      and related service and products from higher drilling activity, activation
      of
      idle wells and the upgrading of existing wells. Lower average energy prices
      in
      the latter half of 2006 caused some reduced activity levels in the North
      American market. While a majority of the segment’s revenues are in North
      America, international opportunities continue to increase as new drilling
      increases and existing fields mature, requiring increased use of pumping units
      for artificial lift. Despite recent lower energy prices, general demand levels
      experienced in 2006 are expected to continue throughout 2007, assuming energy
      prices stay at recent levels.





**Power
      Transmission**




Power
      Transmission services many diverse markets, with high-speed gearing for markets
      such as petrochemicals, refineries, offshore production and transmission of
      oil
      and slow-speed gearing for the gas, rubber, sugar, paper, steel, plastics,
      mining, cement and marine propulsion, each of which has its own unique set
      of
      drivers. Favorable conditions for one market may be unfavorable for another
      market. Generally, if general global industrial capacity utilizations are not
      high, then spending on new equipment lags. Also impacting demand are government
      regulations involving safety and environmental issues that can require capital
      spending. Recent market demand increases have come from energy-related markets
      such as refining, petrochemical, drilling, coal and power generation in response
      to higher global energy prices. Despite recent lower energy prices, these market
      trends are expected to continue throughout 2007, assuming energy prices stay
      at
      recent levels.





**Trailer**




The
      Company primarily sells its trailer products in the United States to small
      and
      medium size fleet freight-hauling companies through a dealer network. Demand
      in
      this market is driven by the available cash flow or financing capabilities
      of
      the industry, age of the trailer fleets, changes in government regulations,
      availability of quality used trailers and the medium-term outlook for freight
      volumes. The profitability of the freight-hauling market is driven by freight
      volumes, fuel prices, wage levels and insurance costs. During 2004 and 2005,
      the
      freight market improved after several years of low volumes and higher operating
      cost. Freight-hauling demand and freight pricing increased and aging trailers
      required replacement. However, the recent demand for van trailers has not
      increased enough to meet trailer industry capacity, increasing price
      competition. Van demand has been impacted by freight haulers focusing purchases
      on new tractors before new diesel emission requirements are required on new
      tractors beginning in 2007. In light of these market conditions, the Company
      decided in the third quarter of 2006 not to participate in the van market until
      market conditions support better operating margins. The Company plans to
      redeploy certain personnel and equipment to increase the manufacturing capacity
      of flatbed and dump trailers. Recent flatbed and dump trailer demand has
      increased significantly due to the increased activity in the home and road
      construction markets and the rebuilding effort resulting from the 2005
      hurricanes.




**Summary
      of Results**




The
      Company generally monitors its performance through analysis of sales, gross
      margin (gross profit as a percentage of sales) and net earnings, as well as
      debt/equity levels, short-term debt levels, and cash balances.




Overall,
      sales for the year ended December 31, 2006, increased to $605.5 million from
      $492.2 million for the year ended December 31, 2005, or 23.0%. Sales for 2004
      were $356.3 million. This growth in 2006 was primarily driven by increased
      sales
      of new oil field equipment, but also by growth in Power Transmission sales.
      Additional segment data on sales is provided later in this section.




Gross
      margin for the year ended December 31, 2006, increased to 25.8% from 23.0%
      for
      the year ended December 31, 2005, and 17.4% for year ended December 31, 2004.
      This overall gross margin improvement from 2004 was primarily due to price
      increases in late 2004 and 2005 to compensate for the increased raw material
      prices experienced by all segments in 2004 and the benefit of higher production
      volumes on fixed cost coverage. The gross margin improvement in 2006 over 2005
      was primarily related to certain cost reductions related to capital expenditures
      and improved margins in Power Transmission due to increased sales of
      higher-margin energy-related high-speed units. Additional segment data on gross
      margin is provided later in this section.








**Table
            of Contents**




The
      changes in sales and gross margin primarily drove the changes in net earnings,
      but 2006 net earnings also benefited from leverage on selling, general and
      administrative expenses and a lower total tax rate. The net tax rate in 2006
      was
      lowered to 30.3% due to the benefits of R&E tax credits, current and
      deferred state tax rate adjustments and other estimate revisions. The Company
      reported net earnings of $73.0 million or $4.83 per share (diluted) for the
      year
      ended December 31, 2005, compared to net earnings of $44.5 million or $3.03
      per
      share (diluted) for the year ended December 31, 2005. Net income of $14.4
      million or $1.04 per share (diluted) was reported for the year ended December
      31, 2004.




Debt/equity
      (long-term debt net of current portion as a percentage of total equity) levels
      were 0.0% as of December 31, 2006, December 31, 2005 and December 31, 2004.
      Short-term debt was $0.0 million at December 31, 2006, down from $0.3 million
      at
      December 31, 2005. Cash balances at December 31, 2006, were $57.8 million,
      up
      from $25.8 million at December 31, 2005, due to higher net earnings offsetting
      increased capital expenditures, working capital growth and higher
      dividends.





**Other
      Events**




In
      the
      fourth quarter of 2006, the Company recorded certain expenses related to the
      previously announced decision not to participate in the trailer van market
      due
      to current market conditions. These expenses of approximately $1.0 million
      pre-tax relate to equipment idled but not disposed and the estimated loss on
      disposal of van-related inventory.








**Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005:**





The
      following table summarizes the Company’s sales and gross profit by operating
      segment (in thousands of dollars):





Increase/
                
                %
                    Increase/Year
                    Ended December 31
                
                2006
                
                2005
                
                (Decrease)
                
                (Decrease)SalesOil
                    Field
                
                $
                401,200
                
                $
                307,075
                
                $
                94,125
                
                
                30.7Power
                    Transmission
                
                
                124,922
                
                
                106,616
                
                
                18,306
                
                
                17.2Trailer
                
                
                79,370
                
                
                78,476
                
                
                894
                
                
                1.1Total
                
                $
                605,492
                
                $
                492,167
                
                $
                113,325
                
                
                23.0Gross
                    ProfitOil
                    Field
                
                $
                109,414
                
                $
                76,578
                
                $
                32,836
                
                
                42.9Power
                    Transmission
                
                
                41,024
                
                
                32,300
                
                
                8,724
                
                
                27.0Trailer
                
                
                5,811
                
                
                4,463
                
                
                1,348
                
                
                30.2Total
                
                $
                156,249
                
                $
                113,341
                
                $
                42,908
                
                
                37.9


**Oil
      Field**




Oil
      Field
      sales increased to $401.2 million, or 30.7%, for the year ended December
      31, 2006, from $307.1 million for the year ended December 31, 2005. The
      benefit of the stronger Canadian dollar in 2006 and new service centers
      contributed 1.3 percentage points of this increase. Increased sales of new
      pumping units accounted for a majority of the balance of the increase
      of 29.3 percentage points. Sales of new pumping units and related service,
      increased from higher drilling and production primarily in the North
      America and Middle East markets. Also, sales of automation equipment continued
      to increase due to market share growth from new product offerings. Sales growth
      also was impacted from price increases instituted throughout 2005 in response
      to
      dramatic raw material price increases experienced in 2004 in addition to price
      increases instituted in 2006. Oil Field’s backlog remained at $67.1 million as
      of December 31, 2006, from $67.5 million at December 31, 2005. Despite higher
      sales volumes, backlog levels have not increased due to a targeted effort to
      reduce lead times through higher manufacturing capacity.




Gross
      margin (gross profit as a percentage of sales) for the Oil Field segment
      increased to 27.3% for year ended December 31, 2006, compared to 24.9% for
      the year ended December 31, 2005, or 2.4 percentage points. Gross
      margins benefited from certain cost reduction related to capital expenditures
      and the full-year impact of price increases instituted in 2005. This margin
      improvement was partially offset by employee training and other
      expansion-related costs associated with manufacturing facility expansions in
      the
      U.S., Canada and Argentina and higher inbound freight costs.




Direct
      selling, general and administrative expenses for Oil Field increased to $16.0
      million, or 30.5%, for the year ended December 31, 2006, from $12.0 million
      for the year ended December 31, 2005. This increase is due to higher
      employee-related expenses in support of increased current and expected sales
      volumes, third-party commissions and the impact of expensing stock
      options. Direct selling, general and administrative expenses as a
      percentage of sales remained at 3.9% for the year ended December 31, 2006,
      compared to 3.9% for the year ended December 31, 2005.





**Power
      Transmission**




Sales
      for
      the Company’s Power Transmission segment increased to $124.9 million, or 17.2%,
      for the year ended December 31, 2006, compared to $106.6 million for
      the year ended December 31, 2005. This growth was the result of increased
      sales of high-speed units to the energy-related markets, such as power
      generation and oil and gas production and refining, and from the new gear repair
      facilities. Power Transmission backlog at December 31, 2006, increased to $95.6
      million from $53.4 million at December 31, 2005, primarily from sales of new
      units for the energy-related markets.




Gross
      margin for the Power Transmission segment increased to 31.9% for
      the year ended December 31, 2006, compared to 31.5% for the year ended
      December 31, 2005, from the benefit of price increases and from increased sales
      of higher-margin high-speed units, partially offset by higher manufacturing
      overhead costs.




Direct
      selling, general and administrative expenses for Power Transmission increased
      to
      $15.6 million, or 15.5%, for the year ended December 31, 2006, from
      $13.5 million for the year ended December 31, 2005. This increase is due to
      higher employee-related expenses in support of increased sales volumes and
      the
      impact of expensing stock options. However, direct selling, general and
      administrative expenses as a percentage of sales decreased to 12.5% for
      the year ended December 31, 2006, from 12.7% for the year
      ended December 31, 2005, from leverage on higher sales
      volumes.





**Trailer**




Trailer
      sales for the year ended December 31, 2006, increased to $79.4 million, or
      1.1%, from $78.5 million for the year ended December 31, 2005. Higher sales
      of new flatbed and dump trailers was offset by lower sales of new van
      trailers and used trailers. Sales growth in flatbed and dump trailers was strong
      due to the introduction of new models and demand from the home and road
      construction market. New van sales were impacted by the Company not booking
      lower margin orders as competitors have lowered prices in response to industry
      manufacturing overcapacity and
      trucking industry issues such as soft freight demand and driver shortages.
      In
      light of current conditions in the trailer van market, the Company has declined
      to take additional orders for van trailers in order to expand manufacturing
      capacity for the production of flatbed and dump trailers and will be converting
      part of the Trailer factory to the production of oil field equipment. Backlog
      for the Trailer segment decreased to $18.4 million at December 31, 2006,
      compared to $25.5 million at December 31, 2005. The backlog decrease was
      primarily from lower van trailer backlog related to the decision to not take
      additional van trailer orders, partially offset by increased orders for new
      flatbed trailers, as described above.




Trailer
      gross margin increased to 7.3% for the year ended December 31, 2006, from
      5.7% for the year ended December 31, 2005, or 1.6 percentage points.
      Excluding the impact of the van-related equipment and inventory expenses
      described above, margins would have improved approximately an additional 1.2
      percentage pints. This increase was due to higher selling prices for,
      and the favorable mix impact of, higher-margin flatbed and dump trailers,
      partially offset by increases in aluminum costs for van trailers and plant
      inefficiencies from flatbed and dump trailer production ramp-up.




Direct
      selling, general and administrative expenses for Trailer decreased to $2.4
      million, or 12.3%, for the year ended December 31, 2006, from $2.8 million
      for the year ended December 31, 2005. In 2005, bad debt expense
      was increased due to a disputed receivable. This also caused
      direct selling, general and administrative expenses as a percentage of sales
      to
      decrease to 3.1% for the year ended December 31, 2006, from 3.6% for
      the year ended December 31, 2005.





**Corporate/Other**




Corporate
      administrative expenses, which are allocated to the segments primarily based
      on
      historical third-party revenues, increased to $19.3 million, or 21.9%, for
      the year ended December 31, 2006, from $15.9 million for the year
      ended December 31, 2005, primarily from the impact of expensing stock
      options and higher employee-related expenses.




Interest
      income, interest expense and other income and expense for the year ended
      December 31, 2006, totaled $1.5 million of income compared to income of $0.1
      million for the year ended December 31, 2005, primarily due to an increase
      in interest income from higher cash balances.




Pension
      income, which is reported as a reduction of cost of sales, increased to $2.9
      million for the year ended December 31, 2006, or 37%, compared to $2.1
      million for the year ended December 31, 2005. This increase is primarily
      due to higher expected returns from increased asset balances. Pension income
      in
      2007 is expected to increase slightly to $3.2 million.




The net
      tax rate for the year ended December 31, 2006, was 30.3% compared to 35.7%
      in the year ended December 31, 2005. This lower net tax rate was
      the result of several items. A tax initiative to claim research and
      experimentation tax credits for the 2002 through 2005 tax years and the recent
      legislation passed to allow a research and experimentation tax credit for the
      2006 tax year produced a significant benefit to the tax rate. A lower effective
      state tax rate, and the related benefit to deferred tax balances, combined
      with
      the favorable impact on state deferred tax balances due to the new Texas margin
      tax also produced a benefit to the net tax rate. Other items such as the lower
      international tax rates and revisions to prior period estimates produced
      additional benefits to the net tax rate. The effective tax rate in 2007 is
      expected to return to an approximate 35% level .
      See
      Footnote 7 to the Consolidated Financial Statements for additional
      detail.








**Year
      Ended December 31, 2005 Compared to Year Ended December 31,
      2004:**





The
      following table summarizes the Company’s sales and gross profit by operating
      segment (in thousands of dollars):





Increase/
                
                %
                    Increase/Year
                    Ended December 31
                
                2005
                
                2004
                
                (Decrease)
                
                (Decrease)SalesOil
                    Field
                
                $
                307,075
                
                $
                216,025
                
                $
                91,050
                
                
                42.1Power
                    Transmission
                
                
                106,616
                
                
                79,498
                
                
                27,118
                
                
                34.1Trailer
                
                
                78,476
                
                
                60,758
                
                
                17,718
                
                
                29.2Total
                
                $
                492,167
                
                $
                356,281
                
                $
                135,886
                
                
                38.1Gross
                    ProfitOil
                    Field
                
                $
                76,578
                
                $
                41,780
                
                $
                34,798
                
                
                83.3Power
                    Transmission
                
                
                32,300
                
                
                19,234
                
                
                13,066
                
                
                67.9Trailer
                
                
                4,463
                
                
                1,070
                
                
                3,393
                
                
                317.1Total
                
                $
                113,341
                
                $
                62,084
                
                $
                51,257
                
                
                82.6




**Oil
      Field**




Oil
      Field
      sales increased to $307.1 million, or 42.1%, for the year ended December 31,
      2005, from $216.0 million for the year ended December 31, 2004. The added sales
      from 2004 acquisitions and the benefit of the stronger Canadian dollar in 2005
      contributed 1.8 percentage points of this increase. Increased sales of new
      pumping units account for a majority of the balance of the increase of 40.3
      percentage points. Sales of new pumping units in the U.S., Canada and Argentina,
      and related service, increased from higher drilling and production. Also, sales
      of automation equipment continued to increase due to market share growth from
      new product offerings. In addition, sales growth was impacted from price
      increases instituted throughout 2004 and 2005 in response to dramatic raw
      material price increases experienced in 2004. Oil Field’s backlog increased to
      $67.5 million as of December 31, 2005, from $61.6 million at December 31, 2004.
      This backlog increase was from increased bookings of new pumping units in the
      U.S., Canada and Argentina markets.




Gross
      margin (gross profit as a percentage of revenue) for the Oil Field segment
      increased to 24.9% for year ended December 31, 2005, compared to 19.3% for
      the
      year ended December 31, 2004, or 5.6 percentage points. During 2004, higher
      raw
      material prices, especially steel, and higher fuel prices in the service
      operations impacted margins. Throughout 2004 and 2005, sales prices were
      increased to recover these higher material costs, contributing to the improved
      gross margin in 2005.




Direct
      selling, general and administrative expenses for Oil Field increased to $12.0
      million, or 13.8%, for the year ended December 31, 2005, from $10.5 million
      for
      the year ended December 31, 2004, due to higher employee-related expenses in
      support of increased sales volumes. However, direct selling, general and
      administrative expenses as a percentage of sales decreased to 3.9% for the
      year
      ended December 31, 2005, from 4.9% for the year ended December 31, 2004, from
      leverage on higher sales volumes.





**Power
      Transmission**




Sales
      for
      the Company’s Power Transmission segment increased to $106.6 million, or 34.1%,
      for the year ended December 31, 2005, compared to $79.5 million for the year
      ended December 31, 2004. This growth was the result of increased sales of
      high-speed units to the energy-related markets, such as power generation and
      refining, and low-speed unit sales to the steel and sugar markets. The growth
      from the new gear repair facilities also contributed to the sales increase.
      The
      Company’s Power Transmission backlog at December 31, 2005, increased to $53.3
      million from $40.1 million at December 31, 2004, primarily from new high-speed
      units and gear repair for the reasons noted above.




Gross
      margin for the Power Transmission segment increased to 30.3% for the year ended
      December 31, 2005, compared to 24.2% for the year ended December 31, 2004,
      or
      6.1 percentage points. This increase resulted from the favorable impact of
      higher volumes on plant efficiencies and fixed cost coverage as well as from
      the
      benefit of increased selling prices. Also, increased inter-segment production
      in
      support of the Oil Field segment provided additional manufacturing volume that
      contributed to improved gross margins.




Direct
      selling, general and administrative expenses for Power Transmission increased
      $1.0 million to $13.5 million, or 8.1%, for the year ended December 31, 2005,
      from $12.5 million for the year ended December 31, 2004, due to higher
      employee-related expenses in support of increased sales volumes. However, direct
      selling, general and administrative expenses as a percentage of sales decreased
      to 12.7% for the year ended December 31, 2005, from 15.7% for the year ended
      December 31, 2004, from leverage on higher sales volumes.





**Trailer**




Trailer
      sales for the year ended December 31, 2005, increased to $78.5 million, or
      29.2%, from $60.8 million for the year ended December 31, 2004. This increase
      resulted from higher sales of all models of new trailers. Freight industry
      demand has continued to improve due to replacement trailer demand and from
      increases in freight volume levels. Sales growth in flatbeds was particularly
      strong due to the introduction of new models and demand from the construction
      market. Backlog for the Trailer segment increased to $25.5 million at December
      31, 2005, compared to $11.5 million at December 31, 2004. The backlog increase
      was primarily from orders for new van and flatbed trailers for the reasons
      mentioned above.




Trailer
      gross margin increased to 5.7% for the year ended December 31, 2005, from 1.8%
      for the year ended December 31, 2004, or 3.9 percentage points. This margin
      improvement was due to higher selling prices on new trailers and the favorable
      mix impact of higher-margin flatbed and dump trailers, partially offset by
      plant
      inefficiencies from flatbed and dump trailer production ramp-up and late
      supplier deliveries.




Direct
      selling, general and administrative expenses for Trailer increased to $2.8
      million for the year ended December 31, 2005, from $2.6 million for the year
      ended December 31, 2004, from higher bad debt expense associated with an account
      receivable that had been in dispute. In the fourth quarter of 2005, the dispute
      was settled and the receivable was converted to a note. However, the note has
      been fully reserved until the note holder establishes an acceptable credit
      status. Despite these higher expenses, direct selling, general and
      administrative expenses as a percentage of sales decreased to 3.6% for the
      year
      ended December 31, 2005, from 4.2% for the year ended December 31, 2004, from
      leverage on higher sales volumes.





**Corporate/Other**




Corporate
      administrative expenses, which are allocated to the segments primarily based
      on
      historical third-party revenues, increased to $15.9 million, or 15.0%, for
      the
      year ended December 31, 2005, from $13.8 million for the year ended December
      31,
      2004, primarily from higher employee-related and audit expenses.




Investment
      income, interest expense and other income and expense for the year ended
      December 31, 2005, totaled $0.1 million of income compared to expense of $0.0
      million for the year ended December 31, 2004, due to an increase in investment
      income.




Pension
      income, which is reported as a reduction of cost of sales, decreased to $2.1
      million for the year ended December 31, 2005, or 38%, compared to $3.4 million
      for the year ended December 31, 2004. This decrease is due to lower expected
      returns on plan assets from lowering the expected return rate from 8.5% to
      8.0%,
      from lowering the discount rate from 6.25% to 6.0% for the first nine months
      of
      2005 and to 5.5% for the last three months of 2005 and from higher benefits
      granted to bargaining employees in the new three-year collective bargaining
      agreement signed October 2, 2005. Pension income in 2006 is expected to decrease
      to approximately $1.2 million primarily due to the full-year impact of lowering
      the discount rate to 5.5% and the higher benefits granted. The expected
      long-term rate of return on plan assets and the expected rate of compensation
      rate are not projected to change from 8.0% and 4.25%, respectively.







The
      effective tax rate for the year ending December 31, 2005, was 35.7% compared
      to
      36.5% for the year ended December 31, 2004, due primarily to the lower
      percentage impact of permanent differences due to higher pre-tax
      income.





**Liquidity
      and Capital Resources**




The
      Company has historically relied on cash flows from operations and third-party
      borrowing to finance its operations, including acquisitions, dividend payments
      and stock repurchases. The Company believes that its cash flows from operations
      and its available borrowing capacity under its credit agreements will be
      sufficient to fund its operations, including planned capital expenditures,
      dividend payments and stock repurchases, through December 31, 2007.




The
      Company’s cash balance totaled $57.8
      million at December 31, 2006, compared to $25.8 million at December 31, 2005.
      For the year ended December 31, 2006, net cash provided by operating
      activities was $67.4 million, net cash used in investing activities totaled
      $31.7 million and net cash used in financing activities amounted to $3.8
      million. Significant components of cash provided by operating activities
      included net earnings, adjusted for non-cash expenses, of $76.7 million and
      an
      increase in working capital of $9.3 million. This working capital increase
      was
      primarily due to higher inventory balances, which used $10.5 million,
      primarily from increased Oil Field inventory related to higher sales
      volumes compared to the prior year and from higher receivable balances, which
      used $9.4 million, due to higher sales volumes in all segments in the last
      quarter of 2006 compared to the last quarter of 2005. These increases were
      partially offset by increased other accrued liabilities balances, which provided
      $7.5 million, primarily from higher customer installment payments. Net cash
      used
      in investing activities included net capital expenditures totaling $31.0 million
      and an increase in other assets of $0.7 million. Capital expenditures in 2006
      were primarily for the expansion of manufacturing capacity and efficiency
      improvements in the Oil Field and Power Transmission segments. Capital
      expenditures for 2007 are projected to be approximately $40.0 to $42.0 million,
      primarily for the expansion of manufacturing capacity and efficiency
      improvements in the Oil Field and Power Transmission segments and will be funded
      by operating cash flows. Significant components of net cash used by
      financing activities included the repayment
      of short-term notes payable of $0.3 million and dividend payments of $9.2
      million, or $0.62 per share, partially offset by the impact
      of stock option exercises, including the excess tax benefit from actual gains
      on
      stock option exercises, of $5.7
      million.




As
      of
      December 31, 2006, the Company had no outstanding debt associated with the
      Bank
      Facility discussed below. Total debt decreased by $0.3 million from short-term
      note repayments during the year ended December 31, 2006.




The
      Company has a three-year $27.5 million credit facility with a domestic bank
      (the
“Bank Facility”) consisting of an unsecured revolving line of credit that
      provides up to $17.5 million of committed borrowing along with an additional
      $10.0 million discretionary line of credit. This Bank Facility expires
      on December 31, 2008. Borrowing under the Bank Facility bear interest, at
      the Company’s option, at either the greater of (i) the prime rate, (ii) the base
      CD rate plus an applicable margin or (iii) the Federal Funds Effective Rate
      plus
      an applicable margin or the London Interbank Offered Rate plus an applicable
      margin, depending on certain ratios as defined in the Bank Facility. As of
      December 31, 2006, no debt was outstanding under the Bank Facility and the
      Company was in compliance with all financial covenants under the terms of the
      Bank Facility. Deducting outstanding letters of credit of $5.1 million, $22.4
      million of borrowing capacity was available at December 31, 2006.




The
      Company currently has a stock repurchase plan under which the Company was authorized to spend up to $19.1 million for repurchases of its common stock.
      Pursuant to this plan, the Company has repurchased a total of 1,656,740 shares
      of its common stock at an aggregate purchase price of $17.0 million. Repurchased
      shares are added to treasury stock and are available for general corporate
      purposes including the funding of the Company’s stock option plans. No shares
      were repurchased in 2006. As of December 31, 2006, the Company held 395,278
      shares of treasury stock at an aggregate cost of approximately $4.1 million.
      Authorizations of approximately $2.1 million remained at December 31,
      2006.




The
      following table summarizes the Company’s expected cash outflows from financial
      contracts and commitments as of December 31, 2006. Information on recurring
      purchases of materials for use in manufacturing and service operations has
      not
      been included. These amounts are not long-term in nature (less than three
      months) and are generally consistent from year to year.





(In
                  thousands of dollars)
              
              
              
              Payments
                  due by periodLess
                  than
              
              1
                  -
                  3
              
              3
                  -
                  5
              
              More
                  thanContractual
                  obligations
              
              Total
              
              1
                  year
              
              years
              
              years
              
              5
                  yearsOperating
                  lease obligations
              
              $
              2,110
              
              $
              673
              
              $
              1,032
              
              $
              405
              
              $
              -Contractual
                  commitmentsfor
                  capital expenditures
              
              
              4,053
              
              
              4,053
              
              
              -
              
              
              -
              
              
              -Total
              
              $
              6,163
              
              $
              4,726
              
              $
              1,032
              
              $
              405
              
              $
              -
  Since
        the
        Company has no significant tax loss carryforwards, the Company expects to
        make
        quarterly estimated tax payments in 2007 based on taxable income levels.
        Also,
        the Company has various qualified retirement plans for which the Company
        has
        committed a certain level of benefit. The Company expects to make
        contributions to its pension plans of approximately $0.2 million and to
        its post-retirement health and life plans of approximately $0.7 million in
        2007, depending on participation levels in these plans.





**Recently
      Issued Accounting Pronouncements**




In June
      2006, the Financial Accounting Standards Board issued Interpretation No.
      48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes- an
      interpretation of FASB Statement No. 109.” FIN 48 prescribes a
      recognition threshold and measurement attribute for the financial statement
      recognition and measurement of a tax position taken or expected to be taken
      in a
      tax return. FIN 48 also provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. In accordance with FIN 48, the evaluation of a tax
      position is a two-step process. The first step requires determining whether
      it is more likely than not that a tax position will be sustained upon
      examination or appeals based on the technical merits of the position. The second
      step requires that a tax position that meets the more-likely-than-not
      recognition threshold is measured to determine the amount of benefit to
      recognize in the financial statements. The tax position is measured at the
      largest benefit that is greater than 50 percent likely of being realized upon
      ultimate settlement. Differences between tax positions taken in a tax return
      and
      amounts recognized in the financial statements will generally result in an
      increase in a liability for income taxes payable and/or an increase in a
      deferred tax liability. Tax positions that previously failed to meet the
      more-likely-than-not recognition threshold should be recognized in the
      first subsequent financial reporting period in which the threshold is met and
      previously recognized tax positions that no longer meet the more-likely-than-not
      recognition threshold should be derecognized in the first subsequent financial
      reporting period in which the threshold is no longer met. FIN 48 is effective
      for fiscal years beginning after December 15, 2006, but earlier adoption is
      permitted. The
      Company is currently evaluating the impact, if any, the adoption of FIN 48
      will
      have on its consolidated financial position or results of
      operations.




In
      September 2006, the Financial Accounting Standards Board issued Statement
      of Financial Accounting Standards No. 158 (“SFAS 158”), “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans- an
      amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS 158 requires
      employers to recognize the overfunded or underfunded status of a defined benefit
      postretirement plan (other than a multiemployer plan) as an asset or liability
      in its statement of financial position and to recognize changes in that funded
      status in the year in which the changes occur through comprehensive income.
      SFAS
      158 also requires an employer to measure the funded status of a plan as of
      the
      date of its year-end statement of financial position, with limited exceptions.
      SFAS 158 defines the funded status of a benefit plan as the difference between
      the fair value of the plan assets and the projected benefit obligation for
      pension plans or the accumulated postretirement benefit obligation for other
      postretirement plans. Previously unrecognized items such as gains or losses,
      prior service credits and transition assets or liabilities will be recognized
      in
      other comprehensive income and will be subsequently recognized through net
      periodic benefit cost pursuant to the provisions of Statements 87 and 106.
      Employers with issued equity securities must recognize the funded status of
      postretirement plans as of the end of the fiscal year ending after December
      15,
      2006. The requirement to measure plan assets and benefit obligations as of
      the
      date of the employer’s fiscal year-end statement is effective for fiscal years
      ending after December 15, 2008. On December 31, 2006, the Company adopted SFAS
      158. The incremental effect of applying SFAS 158 on individual line items of
      the
      balance sheet is disclosed in Footnote 12.




Management
      believes the impact of other recently issued standards, which are not yet
      effective, will not have a material impact on the Company's consolidated
      condensed financial statements upon adoption.




**Critical
      Accounting Policies and Estimates**




The
      discussion and analysis of financial condition and results of operations are
      based upon the Company’s consolidated financial statements, which have been
      prepared in accordance with accounting principles generally accepted in the
      United States of America. The preparation of these financial statements requires
      the Company to make estimates and judgments that affect the reported amounts
      of
      assets, liabilities, revenues and expenses and related disclosure of contingent
      assets and liabilities. The Company evaluates its estimates on an ongoing basis,
      based on historical experience and on various other assumptions that are
      believed to be reasonable under the circumstances. Actual results may differ
      from these estimates under different assumptions or conditions. The Company
      believes the following critical accounting policies affect its more significant
      judgments and estimates used in preparation of its consolidated
      statements.




The
      Company extends credit to customers in the normal course of business. Management
      performs ongoing credit evaluations of our customers and adjusts credit limits
      based upon payment history and the customer’s current credit worthiness. An
      allowance for doubtful accounts has been established to provide for estimated
      losses on receivable collections. The balance of this allowance is determined
      by
      regular reviews of outstanding receivables and historical experience. As the
      financial condition of customers change, circumstances develop or additional
      information becomes available, adjustments to the allowance for doubtful
      accounts may be required.




Revenue
      is not recognized until it is realized or realizable and earned. The criteria
      to
      meet this guideline are: persuasive evidence of an arrangement exists, delivery
      has occurred or services have been rendered, the price to the buyer is fixed
      or
      determinable and collectibility is reasonably assured. In some cases, a customer
      is not able to take delivery of a completed product and requests that the
      Company store the product for defined period of time. The Company will process
      a
      Bill-and-Hold invoice and recognize revenue at the time of the storage request
      if all of the following criteria are met:





●
            The
                customer has accepted title and risk of loss;●
            The
                customer has provided a written purchase order for the
                product;●
            The
                customer, not the Company, requested the product to be stored and
                to be
                invoiced under a Bill-and-Hold arrangement. The customer must also
                provide
                the business purposes for the storage request;●
            The
                customer must provide a storage period and future shipping
                date;●
            The
                Company must not have retained any future performance obligations
                on the
                product;●
            The
                Company must segregate the stored product and not make it available
                to use
                on other orders; and●
            The
                product must be completed and ready for
                shipment.






The
      Company has made significant investments in inventory to service its customers.
      On a routine basis, the Company uses estimates in determining the level of
      reserves required to state inventory at the lower of cost or market.
      Management’s estimates are primarily influenced by market activity levels,
      production requirements, the physical condition of products and technological
      innovation. Changes in any of these factors may result in adjustments to the
      carrying value of inventory. Also, the Company accounts for a significant
      portion of its inventory under the LIFO method. The LIFO reserve can be impacted
      by changes in the LIFO layers and by inflation index adjustments. Generally,
      annual increases in the inflation rate or the FIFO value of inventory cause
      the
      value of the LIFO reserve to increase.




Long-lived
      assets held and used by the Company are reviewed for impairment whenever events
      or changes in circumstances indicate that the carrying amount of an asset may
      not be recoverable. The Company assesses the recoverability of long-lived assets
      by determining whether the carrying value can be recovered through projected
      undiscounted cash flows, based on expected future operating results. Future
      adverse market conditions or poor operating results could result in the
      inability to recover the current carrying value and thereby possibly requiring
      an impairment charge in the future.




Goodwill
      acquired in connection with business combinations represent the excess of
      consideration over the fair value of net assets acquired. The Company performs
      impairment tests on the carrying value of goodwill at least annually or whenever
      events or changes in circumstances indicate the carrying value of goodwill
      may
      be greater than fair value, such as significant underperformance relative to
      historical or projected operating results and significant negative industry
      or
      economic trends. The Company’s fair value is primarily determined using
      discounted cash flows, which requires management to make judgments about future
      operating results, working capital requirements and capital spending levels.
      Changes in cash flow assumptions or other factors which negatively impact the
      fair value of the operations would influence the evaluation and may result
      in a
      determination that goodwill is impaired and a corresponding impairment
      charge.




Deferred
      tax assets and liabilities are recognized for the differences between the book
      basis and tax basis of the net assets of the Company. In providing for deferred
      taxes, management considers current tax regulations, estimates of future taxable
      income and available tax planning strategies. Changes in state, federal and
      foreign tax laws as well as changes in the financial position of the Company
      could also affect the carrying value of deferred tax assets and liabilities.
      If
      management estimates that some or all of any deferred tax assets will expire
      before realization or that the future deductibility is not probable, a valuation
      allowance would be recorded.




The
      Company is subject to claims and legal actions in the ordinary course of
      business. The Company maintains insurance coverage for various aspects of its
      businesses and operations. The Company retains a portion of the insured losses
      that occur through the use of deductibles. Management regularly reviews
      estimates of reported and unreported insured and non-insured claims and legal
      actions and provides for losses through reserves. As circumstances develop
      and
      additional information becomes available, adjustments to loss reserves may
      be
      required.




The
      Company sells certain of its products to customers with a product warranty
      that
      provides repairs at no cost to the customer or the issuance of credit to the
      customer. The length of the warranty term depends on the product being sold,
      but
      ranges from one year to five years. The Company accrues its estimated exposure
      to warranty claims based upon historical warranty claim costs as a percentage
      of
      sales multiplied by prior sales still under warranty at the end of any period.
      Management reviews these estimates on a regular basis and adjusts the warranty
      provisions as actual experience differs from historical estimates or other
      information becomes available.




The
      Company offers defined benefit plans and other benefits upon the retirement
      of
      its employees. Assets and liabilities associated with these benefits are
      calculated by third-party actuaries under the rules provided by various
      accounting standards, with certain estimates provided by management. These
      estimates include the discount rate, expected rate of return of assets and
      the
      rate of increase of compensation and health claims. On a regular basis,
      management reviews these estimates by comparing them to actual experience and
      those used by other companies. If a change in an estimate is made, the carrying
      value of these assets and liabilities may have to be adjusted. Differences
      in
      the discount rate and expected long-term rate of return on plan assets within
      reasonably likely ranges would have had the following estimated impact on 2006
      results:





Pension
              
              Other(Thousands
                  of dollars)
              
              Benefits
              
              Benefits**Discount
                  rate****Effect
                  of change on net periodic benefit cost (income)**.25
                  percentage point increase
              
              $
              (106
              )
              $
              (14
              ).25
                  percentage point decrease
              
              
              110
              
              
              13**Effect
                  of change on PBO/APBO**.25
                  percentage point increase
              
              $
              5,278
              
              $
              202.25
                  percentage point decrease
              
              
              (5,025
              )
              
              (194
              )**Long-term
                  rate of return on plan assets****Effect
                  of change on net periodic benefit cost (income)**.25
                  percentage point increase
              
              $
              514
              
              $
              -.25
                  percentage point decrease
              
              
              (514
              )
              
              -


**Forward-Looking
      Statements and Assumptions**




This
      annual report on Form 10-K contains forward-looking statements and information,
      within the meaning of the Private Securities Litigation Reform Act of 1995,
      that
      are based on management’s beliefs as well as assumptions made by and information
      currently available to management. When used in this report, the words
“anticipate,” “believe,” “estimate,” “expect,” “plan,” “schedule,” “could,”
“may,” “might,” “should,” “project” or similar expressions are intended to
      identify forward-looking statements. Similarly, statements that describe the
      Company’s future plans, objectives or goals are also forward-looking statements.
      Such statements reflect the Company’s current views with respect to certain
      events and are subject to certain assumptions, risks and uncertainties, many
      of
      which are outside the control of the Company. Undue reliance should not be
      place
      on forward-looking statements. These risks and uncertainties include, but are
      not limited to:





●
            oil
                prices;●
            declines
                in domestic and worldwide oil and gas drilling;●
            capital
                spending levels of oil producers;●
            the
                cyclicality of the trailer industry;●
            availability
                and prices for raw materials;●
            the
                inherent dangers and complexities of our operations;●
            uninsured
                judgments or a rise in insurance premiums;●
            the
                inability to effectively integrate acquisitions;●
            labor
                disruptions and increasing labor costs;●
            the
                availability of qualified and skilled labor;●
            disruption
                of our operating facilities or management information
                systems;●
            the
                impact on foreign operations of war, political disruption, civil
                disturbance, economic and legal sanctions and changes in global trade
                policies;●
            currency
                exchange rate fluctuations in the markets in which the Company
                operates;●
            changes
                in the laws, regulations, policies or other activities of governments,
                agencies and similar organizations where such actions may affect
                the
                production, licensing, distribution or sale of the Company’s products, the
                cost thereof or applicable tax rates;●
            costs
                related to legal and administrative proceedings, including adverse
                judgments against the Company if the Company fails to prevail in
                reversing
                such judgments; and●
            general
                industry, political and economic conditions in the markets where
                the
                Company’s procures material, components and supplies for the production of
                the Company’s principal products or where the Company’s products are
                produced, distributed or sold.






These
      and
      other risks are described in greater detail in “Risk Factors” included elsewhere
      in this annual report on Form 10-K. All forward-looking statements attributable
      to the Company or persons acting on its behalf are expressly qualified in their
      entirety by these factors. Should one or more of these risks or uncertainties
      materialize, or should underlying assumptions prove incorrect, actual results
      may vary materially from those anticipated, believed, estimated or expected.
      The
      Company undertakes no obligations to update or revise its forward-looking
      statements, whether as a result of new information, future events or
      otherwise.





**Item 7A.  Quantitative
      and Qualitative
      Disclosures About Market Risk**




The
      Company’s financial instruments include cash, accounts receivable, accounts
      payable, invested funds and debt obligations. The book value of accounts
      receivable, short-term debt and accounts payable are considered to be
      representative of their fair market value because of the short maturity of
      these
      instruments. The Company’s accounts receivable are not concentrated in one
      customer or industry and are not viewed as an unusual credit risk.




The
      Company does not utilize financial or derivative instruments for trading
      purposes or to hedge exposures to interest rates, foreign currency rates or
      commodity prices. Due to the lack of current debt, the Company does not have
      any
      significant exposure to interest rate fluctuations. However, if the Company
      drew
      on its line of credit under its Bank Facility, the Company would have exposure
      since the interest rate is variable. In addition, the Company primarily invoices
      and purchases in the same currency as the functional currency of its operations,
      which minimizes exposure to currency rate fluctuations.




The
      Company is exposed to currency fluctuations with intercompany debt denominated
      in U.S. dollars owed to the Company’s U.S. entity by its Canadian subsidiary. As
      of December 31, 2006, this inter-company debt was comprised of 9.5 million
      Canadian dollars. As of December 31, 2006, if the U.S. dollar strengthened
      by
      10% over the Canadian dollar, the net income impact would be $0.5 million of
      expense and if the U.S. dollar weakened by 10% over the Canadian dollar, the
      net
      income impact would be $0.5 million of income. Also, certain assets and
      liabilities, primarily employee and tax related in Argentina, denominated in
      the
      local currency of foreign operations whose functional currency is the U.S.
      dollar are exposed to fluctuations in currency rates. As of December 31, 2006,
      if the U.S. dollar strengthened by 10% over these currencies, the net income
      impact would be $0.0 million of expense and if the U.S. dollar weakened by
      10%
      over these currencies, the net income impact would be $0.0 million of
      income.





**Item 8.Financial Statements and Supplementary Data**





**Management’s
      Report on Internal Control over Financial Reporting**




The
      management of Lufkin Industries, Inc. (the “Company”), is responsible for
      establishing and maintaining adequate internal control over financial reporting
      (as defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the
      Securities Exchange Act of 1934, as amended). The Company’s management assessed
      the effectiveness of the Company’s internal control over financial reporting as
      of December 31, 2006. In making this assessment, the Company’s management used
      the criteria set forth by the Committee of Sponsoring Organizations of the
      Treadway Commission (“COSO”) in “Internal Control- Integrated Framework.”




Based
      on
      this assessment, management believes that, as of December 31, 2006, the
      Company’s internal control over financial reporting is effective based on those
      criteria.




The
      Company’s independent registered public accounting firm, Deloitte & Touche
      LLP, who has audited and reported on the consolidated financial statements of
      the Company included in this report, has issued an attestation report on
      management’s assessment of the Company’s internal control over financial
      reporting, which report is included in this section.








**Table
            of Contents**




**REPORT** **OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors and Stockholders of Lufkin Industries, Inc.




We
      have
      audited the accompanying consolidated balance sheets of Lufkin Industries,
      Inc.
      and subsidiaries (the "Company") as of December 31, 2006 and 2005, and the
      related consolidated statements of earnings, shareholders' equity and
      comprehensive income, and cash flows for each of the three years in the period
      ended December 31, 2006. Our audits also included the financial statement
      schedule listed in the Index at Item 15. We also have audited management's
      assessment, included in the accompanying Management’s Report on Internal Control
      over Financial Reporting, that the Company maintained effective internal control
      over financial reporting as of December 31, 2006, based on criteria established
      in *Internal
      Control—Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission. The
      Company's management is responsible for these financial statements and financial
      statement schedule, for maintaining effective internal control over financial
      reporting, and for its assessment of the effectiveness of internal control
      over
      financial reporting. Our responsibility is to express an opinion on these
      financial statements and the financial statement schedule, an opinion on
      management's assessment, and an opinion on the effectiveness of the Company's
      internal control over financial reporting based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement and whether effective internal
      control over financial reporting was maintained in all material respects. Our
      audit of financial statements included examining, on a test basis, evidence
      supporting the amounts and disclosures in the financial statements, assessing
      the accounting principles used and significant estimates made by management,
      and
      evaluating the overall financial statement presentation. Our audit of internal
      control over financial reporting included obtaining an understanding of internal
      control over financial reporting, evaluating management's assessment, testing
      and evaluating the design and operating effectiveness of internal control,
      and
      performing such other procedures as we considered necessary in the
      circumstances. We believe that our audits provide a reasonable basis for our
      opinions.




A
      company's internal control over financial reporting is a process designed by,
      or
      under the supervision of, the company's principal executive and principal
      financial officers, or persons performing similar functions, and effected by
      the
      company's board of directors, management, and other personnel to provide
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of financial statements for external purposes in accordance with
      generally accepted accounting principles. A company's internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the company's
      assets that could have a material effect on the financial
      statements.




Because
      of the inherent limitations of internal control over financial reporting,
      including the possibility of collusion or improper management override of
      controls, material misstatements due to error or fraud may not be prevented
      or
      detected on a timely basis. Also, projections of any evaluation of the
      effectiveness of the internal control over financial reporting to future periods
      are subject to the risk that the controls may become inadequate because of
      changes in conditions, or that the degree of compliance with the policies or
      procedures may deteriorate.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of the Company and subsidiaries
      as of December 31, 2006 and 2005, and the results of their operations and their
      cash flows for each of the three years in the period ended December 31, 2006,
      in
      conformity with accounting principles generally accepted in the United States
      of
      America. Also, in our opinion, such financial statement schedule, when
      considered in relation to the basic consolidated financial statements taken
      as a
      whole, present fairly, in all material respects, the information set forth
      therein. Also, in our opinion, management's assessment that the Company
      maintained effective internal control over financial reporting as of December
      31, 2006, is fairly stated, in all material respects, based on the criteria
      established in *Internal
      Control—Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission.
      Furthermore, in our opinion, the Company maintained, in all material respects,
      effective internal control over financial reporting as of December 31, 2006,
      based on the criteria established in *Internal
      Control—Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway
      Commission.




As
      discussed in Note 1 to the consolidated financial statements, the Company
      adopted SFAS 123(R), *Share-Based
      Payment* ,
      on
      January 1, 2006, and SFAS 158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement
      Plans* on
      December 31, 2006.











DELOITTE
      & TOUCHE LLP








Houston,Texas





March
      1,2007





**Table
            of Contents**





LUFKIN
      INDUSTRIES ,
      INC.


CONSOLIDATED
      BALANCE SHEETS


December
        31, 2006 and 2005
 (Thousands
        of dollars, except share and per share data)


2006
            
            2005AssetsCurrent
                Assets:Cash
                and cash equivalents
            
            $
            57,797
            
            $
            25,822Receivables,
                net
            
            
            90,585
            
            
            80,609Inventories
            
            
            85,630
            
            
            74,635Deferred
                income tax assets
            
            
            7,919
            
            
            4,185Other
                current assets
            
            
            1,521
            
            
            4,650Total
                current assets
            
            
            243,452
            
            
            189,901Property,
                plant and equipment, net
            
            
            113,081
            
            
            92,980Prepaid
                pension costs
            
            
            56,856
            
            
            62,065Goodwill,
                net
            
            
            11,732
            
            
            11,495Other
                assets, net
            
            
            3,948
            
            
            3,354Total
                assets
            
            $
            429,069
            
            $
            359,795Liabilities
                and Shareholders' EquityCurrent
                liabilities:Short-term
                notes payable
            
            $
            -
            
            $
            271Accounts
                payable
            
            
            24,375
            
            
            20,794Accrued
                liabilities:Payroll
                and benefits
            
            
            9,810
            
            
            7,946Warranty
                expenses
            
            
            3,668
            
            
            3,245Taxes
                payable
            
            
            7,665
            
            
            14,391Other
            
            
            15,977
            
            
            9,626Total
                current liabilities
            
            
            61,495
            
            
            56,273Deferred
                income tax liabilities
            
            
            28,022
            
            
            31,049Postretirement
                benefits
            
            
            8,475
            
            
            11,394Other
                liabilities
            
            
            2,937
            
            
            -Shareholders'
                equity:Common
                stock, $1.00 par value per share; 60,000,000 shares
                authorized;15,322,903
                and 15,124,644 shares issued and outstanding,
                respectively
            
            
            15,323
            
            
            15,125Capital
                in excess par
            
            
            38,173
            
            
            31,705Retained
                earnings
            
            
            280,198
            
            
            216,427Treasury
                stock, 395,278 and 399,278 shares, respectively, at cost
            
            
            (4,083
            )
            
            (4,124
            )Accumulated
                other comprehensive income
            
            
            (1,471
            )
            
            1,946Total
                shareholders' equity
            
            
            328,140
            
            
            261,079Total
                liabilities and shareholders' equity
            
            $
            429,069
            
            $
            359,795





See
      notes
      to consolidated financial statements.








**Table
            of Contents**








LUFKIN
      INDUSTRIES,
      INC.


CONSOLIDATED
      STATEMENTS OF EARNINGS




Years
      ended December 31, 2006, 2005 and 2004


(Thousands
      of dollars, except per share data)




2006
            
            2005
            
            2004Sales
            
            $
            605,492
            
            $
            492,167
            
            $
            356,281Cost
                of Sales
            
            
            449,243
            
            
            378,826
            
            
            294,197Gross
                Profit
            
            
            156,249
            
            
            113,341
            
            
            62,084Selling,
                general and administrative expenses
            
            
            52,994
            
            
            44,135
            
            
            39,371Operating
                income
            
            
            103,255
            
            
            69,206
            
            
            22,713Interest
                income
            
            
            1,893
            
            
            563
            
            
            147Interest
                expense
            
            
            (160
            )
            
            (159
            )
            
            (139
            )Other
                income (expense), net
            
            
            (259
            )
            
            (335
            )
            
            (17
            )Earnings
                before income tax provision
            
            
            104,729
            
            
            69,275
            
            
            22,704Income
                tax provision
            
            
            31,735
            
            
            24,731
            
            
            8,287Net
                earnings
            
            
            72,994
            
            
            44,544
            
            
            14,417Net
                earnings per shareBasic
            
            $
            4.92
            
            $
            3.10
            
            $
            1.06Diluted
            
            $
            4.83
            
            $
            3.03
            
            $
            1.04





See
      notes
      to consolidated financial statements.








**Table
            of Contents**





LUFKIN
      INDUSTRIES, INC.


CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY & COMPREHENSIVE INCOME





AccumulatedYears
                      Ended December 31, 2006, 2005 and 2004
                  
                  
                  
                  Common
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  OtherStock
                  
                  
                  
                  Capital
                  
                  
                  
                  
                  
                  Compre-
                  
                  Compre-(Thousands
                      of dollars, except share data)
                  
                  
                  
                  Shares,
                      net
                  
                  Common
                  
                  In
                      Excess
                  
                  Retained
                  
                  Treasury
                  
                  hensive
                  
                  hensiveof
                      Treasury
                  
                  Stock
                  
                  of
                      Par
                  
                  Earnings
                  
                  Stock
                  
                  Income
                  
                  Income
                  
                  Total**Balance,
                      Dec. 31, 2003**
                  
                  
                  
                  
                  
                  13,180,284
                  
                  $
                  13,785
                  
                  $
                  11,588
                  
                  $
                  167,862
                  
                  $
                  (6,244
                  )
                  
                  
                  
                  $
                  1,206
                  
                  $
                  188,197Comprehensive
                      income:Net
                      earnings
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  14,417
                  
                  
                  
                  
                  $
                  14,417
                  
                  
                  
                  
                  
                  14,417Other
                      comprehensive income, net of tax:Foreign
                      currency translationadjustments
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,467
                  
                  
                  
                  
                  
                  1,467Other
                      comprehensive income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,467
                  
                  
                  1,467Comprehensive
                      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  15,884Cash
                      dividends
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (4,905
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (4,905
                  )Exercise
                      of stock options
                  
                  
                  
                  
                  
                  800,396
                  
                  
                  687
                  
                  
                  7,900
                  
                  
                  
                  
                  
                  1,169
                  
                  
                  
                  
                  
                  
                  
                  
                  9,756**Balance,
                      Dec. 31, 2004**
                  
                  
                  
                  
                  
                  13,980,680
                  
                  
                  14,472
                  
                  
                  19,488
                  
                  
                  177,374
                  
                  
                  (5,075
                  )
                  
                  
                  
                  
                  2,673
                  
                  
                  208,932Comprehensive
                      income:Net
                      earnings
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  44,544
                  
                  
                  
                  
                  
                  44,544
                  
                  
                  
                  
                  
                  44,544Other
                      comprehensive income, net of tax:Foreign
                      currency translationadjustments
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (727
                  )
                  
                  
                  
                  
                  (727
                  )Other
                      comprehensive income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (727
                  )
                  
                  (727
                  )Comprehensive
                      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  43,817Cash
                      dividends
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (5,491
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (5,491
                  )Exercise
                      of stock options
                  
                  
                  
                  
                  
                  744,686
                  
                  
                  653
                  
                  
                  12,217
                  
                  
                  
                  
                  
                  951
                  
                  
                  
                  
                  
                  
                  
                  
                  13,821**Balance,
                      Dec. 31, 2005**
                  
                  
                  
                  
                  
                  14,725,366
                  
                  
                  15,125
                  
                  
                  31,705
                  
                  
                  216,427
                  
                  
                  (4,124
                  )
                  
                  
                  
                  
                  1,946
                  
                  
                  261,079Comprehensive
                      income:Net
                      earnings
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  72,994
                  
                  
                  
                  
                  
                  72,994
                  
                  
                  
                  
                  
                  72,994Other
                      comprehensive income, net of tax:Foreign
                      currency translationadjustments
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,012
                  
                  
                  1,012
                  
                  
                  1,012Total
                      comprehensive income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  74,006Initial
                      application of FAS 158:Defined
                      benefit pension plans
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (5,758
                  )Defined
                      benefit postretirement plans
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,329Total
                      initial application of FAS 158:
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (4,429
                  )
                  
                  (4,429
                  )Cash
                      dividends
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (9,223
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (9,223
                  )Stock-based
                      compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,908
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,908Exercise
                      of stock options
                  
                  
                  
                  
                  
                  202,259
                  
                  
                  198
                  
                  
                  3,560
                  
                  
                  
                  
                  
                  41
                  
                  
                  
                  
                  
                  
                  
                  
                  3,799**Balance,
                      Dec. 31, 2006**
                  
                  
                  
                  
                  
                  14,927,625
                  
                  $
                  15,323
                  
                  $
                  38,173
                  
                  $
                  280,198
                  
                  $
                  (4,083
                  )
                  
                  
                  
                  $
                  (1,471
                  )
                  $
                  328,140





See
      notes
      to consolidated financial statements.








**Table
            of Contents**





LUFKIN
      INDUSTRIES, INC.


CONSOLIDATED
      STATEMENTS OF CASH FLOWS




Years
      ended December 31, 2006, 2005 and 2004


(Thousands
      of dollars)


2006
              
              2005
              
              2004Cash
                  flows form operating activities:Net
                  earnings
              
              $
              72,994
              
              $
              44,544
              
              $
              14,417Adjustments
                  to reconcile net earnings to cashprovided
                  by operating activities:Depreciation
                  and amortization
              
              
              11,950
              
              
              11,376
              
              
              11,823Deferred
                  income tax provision
              
              
              (4,520
              )
              
              (2,041
              )
              
              3,146Excess
                  tax benefit from share-based compensation
              
              
              (3,525
              )
              
              -
              
              
              -Share-based
                  compensation expense
              
              
              2,908
              
              
              -
              
              
              -Pension
                  income
              
              
              (2,901
              )
              
              (2,115
              )
              
              (3,387
              )Postretirement
                  benefits
              
              
              (123
              )
              
              747
              
              
              4(Gain)
                  loss on disposition of property, plant andequipment
              
              
              (123
              )
              
              92
              
              
              (59
              )Changes
                  in:Receivables,
                  net
              
              
              (9,440
              )
              
              (19,905
              )
              
              (17,396
              )Inventories
              
              
              (10,490
              )
              
              (20,360
              )
              
              (14,308
              )Other
                  current assets
              
              
              3,553
              
              
              (3,533
              )
              
              (20
              )Accounts
                  payable
              
              
              3,039
              
              
              (2,367
              )
              
              9,158Accrued
                  liabilities
              
              
              4,044
              
              
              17,242
              
              
              2,967Net
                  cash provided by operating activities
              
              
              67,366
              
              
              23,680
              
              
              6,345Cash
                  flows from investing activites:Additions
                  to property, plant and equipment
              
              
              (31,241
              )
              
              (15,803
              )
              
              (11,723
              )Proceeds
                  from disposition of property, plant and equipment
              
              
              236
              
              
              187
              
              
              229Increase
                  in other assets
              
              
              (680
              )
              
              (833
              )
              
              (380
              )Acquisition
                  of other companies
              
              
              -
              
              
              (3
              )
              
              (313
              )Net
                  cash used in investing activities
              
              
              (31,685
              )
              
              (16,452
              )
              
              (12,187
              )Cash
                  flows from financing activites:Proceeds
                  from (payments of) short-term notes payable
              
              
              (288
              )
              
              (1,530
              )
              
              1,474Payment
                  of long-term notes payable
              
              
              -
              
              
              -
              
              
              (193
              )Dividends
                  paid
              
              
              (9,223
              )
              
              (5,491
              )
              
              (4,905
              )Excess
                  tax benefit from share-based compensation
              
              
              3,525
              
              
              -
              
              
              -Proceeds
                  from exercise of stock options
              
              
              2,192
              
              
              8,564
              
              
              7,543Net
                  cash provided by (used in) financing activities
              
              
              (3,794
              )
              
              1,543
              
              
              3,919Effect
                  of translation on cash and cash equivalents
              
              
              88
              
              
              (46
              )
              
              (388
              )Net
                  increase in cash and cash equivalents
              
              
              31,975
              
              
              8,725
              
              
              (2,311
              )Cash
                  and cash equivalents at beginning of period
              
              
              25,822
              
              
              17,097
              
              
              19,408Cash
                  and cash equivalents at end of period
              
              $
              57,797
              
              $
              25,822
              
              $
              17,097





See
      notes
      to consolidated financial statements.








**Table
            of Contents**





**LUFKIN
      INDUSTRIES, INC****.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**(1)
      Corporate Organization and Summary of Significant Accounting
      Policies**




Lufkin
      Industries, Inc. and its consolidated subsidiaries (collectively, the “Company”)
      manufacture and sell oil field pumping units, power transmission products and
      highway trailers throughout the world.




**Principles
      of consolidation** :
      The
      consolidated financial statements include the accounts of Lufkin Industries,
      Inc. and its consolidated subsidiaries after elimination of all significant
      inter-company accounts and transactions.




**Use
      of estimates:** The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities as of the date
      of the financial statements and the reported amounts of revenues and expenses
      during the reporting periods. Actual results could differ from those
      estimates.




**Foreign
      currencies:** Assets
      and liabilities of foreign operations where the applicable foreign currency
      is
      the functional  currency
      are translated into U.S. dollars at the exchange rate in effect at the end
      of
      each accounting period, with any resulting gain or loss shown in accumulated
      other comprehensive income in the shareholders’ equity section of the balance
      sheet. Income statement accounts are translated at the average exchange rates
      prevailing during the period. Gains and losses resulting from balance sheet
      translation of foreign operations where the U.S. dollar is the functional
      currency are included in the consolidated statement of earnings as incurred.




Any
      gains
      or losses on transactions denominated in another foreign currency are included
      in the consolidated statement of earnings as incurred




**Cash
      equivalents:** The
      Company considers all highly liquid investments with maturities of three months
      or less when purchased to be cash equivalents.




**Revenue
      recognition** :
      Revenue
      is not recognized until it is realized or realizable and earned. The criteria
      to
      meet this guideline are: persuasive evidence of an arrangement exists, delivery
      has occurred or services have been rendered, the price to the buyer is fixed
      or
      determinable and collectibility is reasonably assured. The Company will process
      a Bill-and-Hold invoice and recognize revenue at the time of the storage request
      if all of the following criteria are met:





●
            The
                customer has accepted title and risk of loss;●
            The
                customer has provided a written purchase order for the
                product;●
            The
                customer, not the Company, requested the product to be stored and
                to be
                invoiced under a Bill-and-Hold arrangement. The customer must also
                provide
                the business purposes for the storage request;●
            The
                customer must provide a storage period and future shipping
                date;●
            The
                Company must not have retained any future performance obligations
                on the
                product;●
            The
                Company must segregate the stored product and not make it available
                to use
                on other orders; and●
            The
                product must be completed and ready for
                shipment.






Amounts
      billed for shipping are classified as sales and costs incurred for shipping
      are
      classified as cost of sales in the consolidated income statement.




**Accounts
      & Notes Receivable and Allowance for Doubtful Accounts** :
      Accounts and notes receivable are stated at the historical carrying amount
      net
      of write-offs and allowance for doubtful accounts. The Company establishes
      an
      allowance for doubtful accounts based on historical experience and any specific
      customer issues that the Company has identified. Uncollected receivables are
      generally reserved before being past due over one year or when the Company
      has
      determined that the balance will not be collected.




**Inventories:** The
      Company reports its inventories by using the last-in, first-out (LIFO) and
      the
      first-in, first-out (FIFO) methods less reserves necessary to report inventories
      at the lower of cost or estimated market. Inventory costs include material,
      labor and factory overhead. On a routine basis, the Company uses estimates
      in
      determining the level of reserves required to state inventory at the lower
      of
      cost or market. Management’s estimates are primarily influenced by market
      activity levels, production requirements, the physical condition of products
      and
      technological innovation. Changes in any of these factors may result in
      adjustments to the carrying value of inventory.




**Property,
      plant and equipment (P. P. & E.):** The
      Company records investments in these assets at cost. Improvements are
      capitalized, while repair and maintenance costs are charged to operations as
      incurred. Gains or losses realized on the sale or retirement of these assets
      are
      reflected in income. The Company periodically reviews its P. P. & E. for
      possible impairment whenever events or changes in circumstance might indicate
      that the carrying amount of an asset may not be recoverable. An impairment
      loss
      is recognized if the carrying amount of a long-lived asset is not recoverable
      and exceeds its fair value. The carrying amount of a long-lived asset is not
      recoverable if it exceeds the sum of the undiscounted cash flows expected to
      result from the use and eventual disposition of the asset.  Depreciation
      for financial reporting purposes is provided on a straight-line method based
      upon the estimated useful lives of the assets. Accelerated depreciation methods
      are used for tax purposes. The following is a summary of the Company’s P. P.
& E. useful lives:





Useful
                    Life(in
                    years)LandLand
                    improvements
                10.0
                -
                25.0Buildings
                12.5
                -
                40.0Machinery
                    and equipment
                3.0
                -
                15.0Furniture
                    and fixtures
                5.0
                -
                12.5Computer
                    equipment and software
                3.0
                -
                7.0
  **Goodwill
        and other intangible assets:** In June
        2001, the Financial Accounting Standards Board issued Statement of Financial
        Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.”
SFAS No. 142 eliminated the amortization of goodwill and intangible asserts
        with
        indefinite lives and requires that such assets be tested for impairment at
        least
        annually. During the first quarter of 2006, the Company completed its annual
        impairment evaluation by comparing the fair value of each reporting unit
        to its
        carrying amount. Since the fair value of each reporting unit exceeded the
        carrying value, no impairment was recorded.




The
      Company amortizes intangible assets with finite lives over the years expected
      to
      be benefited.




**Income
      taxes** :
      Deferred income tax assets or liabilities are recorded based on the difference
      between the financial statement and income tax bases of assets and liabilities
      using enacted tax rates. See Note 7 for more detail.




**Financial
      instruments:** The
      Company’s financial instruments include cash, accounts receivable, accounts
      payable and debt obligations. The book value of accounts receivable, short-term
      debt and accounts payable are considered to be representative of their fair
      value because of the short maturity of these instruments.




The
      Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” and SFAS No.
      138, “Accounting for Certain Derivative Instruments and Certain Hedging
      Activities,” an amendment of SFAS No. 133, as of the quarter ended March 31,
      2001. These statements establish accounting and reporting standards that require
      every derivative instrument, including certain derivative instruments embedded
      in other contracts, to be recorded on the balance sheet as either an asset
      or a
      liability measured at its fair value. As of December 31, 2006, the Company
      had
      no reportable derivatives.




**Stock-based
      compensation:** Beginning January 1, 2006, employee services received in exchange for stock
      are expensed in accordance with SFAS 123(R), *Share-Based
      Payment* .
      The
      fair value of the employee services received in exchange for stock is measured
      based on the grant-date fair value. The fair value is determined using the
      Black-Scholes option-pricing model for the stock option. Awards granted are
      expensed pro-ratably over the vesting period of the award. As stock based
      compensation expense is recognized based on awards ultimately expected to vest,
      compensation expense is reduced for estimated forfeitures based on historical
      forfeiture rates. SFAS 123(R) requires forfeitures to be estimated at the time
      of grant and revised, if necessary, in subsequent periods to reflect actual
      forfeitures.




Prior
      to
      January 1, 2006, the Company had elected to follow the accounting provisions
      of
      APB No. 25, “Accounting for Stock Issued to Employees,” for stock-based
      compensation and to furnish the pro-forma disclosures required under SFAS No.
      148, “Accounting for Stock-Based Compensation- Transition and Disclosures.” The
      Company accounted for its stock option plans under APB Opinion No. 25 under
      which no compensation cost was recognized. Had compensation cost for these
      plans
      been accounted for consistent with SFAS No. 123, “Accounting for Stock-Based
      Compensation,” the Company’s net earnings and earnings per share would have been
      reduced to the following pro forma amounts:





(Thousands
                  of dollars, except per share data)
              
              2005
              
              2004Net
                  earnings, as reported
              
              $
              44,544
              
              $
              14,417Deduct:
                  Total stock-based employee compensationexpense
                  determined under SFAS 123 for all awards,net
                  of tax
              
              
              (1,213
              )
              
              (838
              )Pro
                  forma net earnings
              
              $
              43,331
              
              $
              13,579Net
                  earnings per share:As
                  reported
              
              $
              3.10
              
              $
              1.06Pro
                  forma
              
              $
              3.02
              
              $
              1.00Diluted
                  net earnings per shareAs
                  reported
              
              $
              3.03
              
              $
              2.04Pro
                  forma
              
              $
              2.95
              
              $
              0.98




The
      fair
      value of each option grant was estimated on the date of grant using the
      Black-Scholes option-pricing model with the following assumptions:





2005
              
              2004Expected
                  dividend yield
              
              
              0.75%
                  - 1.75
              %
              
              1.95%
                  - 2.35
              %Expected
                  stock price volatility
              
              
              38.62%
                  - 44.14
              %
              
              38.78%
                  - 38.82
              %Risk
                  free interest rate
              
              
              4.04%
                  - 4.47
              %
              
              4.10%
                  - 4.57
              %Expected
                  life options
              
              
              5
                  - 8 years
              
              
              10
                  years
  **Product
        warranties** :
        The
        Company sells certain of its products to customers with a product warranty
        that
        provides repairs at no cost to the customer or the issuance of credit to
        the
        customer. The length of the warranty term depends on the product being sold,
        but
        ranges from one year to five years. The Company accrues its estimated exposure
        to warranty claims based upon historical warranty claim costs as a percentage
        of
        sales multiplied by prior sales still under warranty at the end of any period.
        Management reviews these estimates on a regular basis and adjusts the warranty
        provisions as actual experience differs from historical estimates or other
        information becomes available.
  Recently
        issued accounting pronouncements: In June
        2006, the Financial Accounting Standards Board issued Interpretation No.
        48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes- an
        interpretation of FASB Statement No. 109.” FIN 48 prescribes a
        recognition threshold and measurement attribute for the financial statement
        recognition and measurement of a tax position taken or expected to be taken
        in a
        tax return. FIN 48 also provides guidance on derecognition,
        classification, interest and penalties, accounting in interim periods,
        disclosure and transition. In accordance with FIN 48, the evaluation of a
        tax
        position is a two-step process. The first step requires determining whether
        it is more likely than not that a tax position will be sustained upon
        examination or appeals based on the technical merits of the position. The
        second
        step requires that a tax position that meets the more-likely-than-not
        recognition threshold is measured to determine the amount of benefit to
        recognize in the financial statements. The tax position is measured at the
        largest benefit that is greater than 50 percent likely of being realized
        upon
        ultimate settlement. Differences between tax positions taken in a tax return
        and
        amounts recognized in the financial statements will generally result in an
        increase in a liability for income taxes payable and/or an increase in a
        deferred tax liability. Tax positions that previously failed to meet the
        more-likely-than-not recognition threshold should be recognized in the
        first subsequent financial reporting period in which the threshold is met
        and
        previously recognized tax positions that no longer meet the more-likely-than-not
        recognition threshold should be derecognized in the first subsequent financial
        reporting period in which the threshold is no longer met. FIN 48 is effective
        for fiscal years beginning after December 15, 2006, but earlier adoption is
        permitted. The
        Company is currently evaluating the impact, if any, the adoption of FIN 48
        will
        have on its consolidated financial position or results of
        operations.
  In
        September 2006, the Financial Accounting Standards Board issued Statement
        of Financial Accounting Standards No. 158 (“SFAS 158”), “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans- an
        amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS 158 requires
        employers to recognize the overfunded or underfunded status of a defined
        benefit
        postretirement plan (other than a multiemployer plan) as an asset or liability
        in its statement of financial position and to recognize changes in that funded
        status in the year in which the changes occur through comprehensive income.
        SFAS
        158 also requires an employer to measure the funded status of a plan as of
        the
        date of its year-end statement of financial position, with limited exceptions.
        SFAS 158 defines the funded status of a benefit plan as the difference between
        the fair value of the plan assets and the projected benefit obligation for
        pension plans or the accumulated postretirement benefit obligation for other
        postretirement plans. Previously unrecognized items such as gains or losses,
        prior service credits and transition assets or liabilities will be recognized
        in
        other comprehensive income and will be subsequently recognized through net
        periodic benefit cost pursuant to the provisions of Statements 87 and 106.
        Employers with issued equity securities must recognize the funded status
        of
        postretirement plans as of the end of the fiscal year ending after December
        15,
        2006. The requirement to measure plan assets and benefit obligations as of
        the
        date of the employer’s fiscal year-end statement is effective for fiscal years
        ending after December 15, 2008. On December 31, 2006, the Company adopted
        SFAS
        158. The incremental effect of applying SFAS 158 on individual line items
        of the
        balance sheet is disclosed in Footnote 12.
  Management
        believes the impact of other recently issued standards, which are not yet
        effective, will not have a material impact on the Company's consolidated
        condensed financial statements upon adoption.





**(2)
      Acquisitions**




During
      the fourth quarter of 2004, the Company completed the acquisition on November
      1,
      2004, of the operating assets and commercial operations of Black Widow Oilfield
      Services located in Medicine Hat, Alberta, Canada to further expand its service
      presence in Canada. The aggregate purchase price for this acquisition was $0.3
      million in cash.








**(3)
      Receivables**




The
      following is a summary of the Company's receivable balances:





(Thousands
                  of dollars)
              
              2006
              
              2005Accounts
                  receivable
              
              $
              90,508
              
              $
              80,602Notes
                  receivable
              
              
              472
              
              
              516Other
                  receivables
              
              
              292
              
              
              250Gross
                  receivables
              
              
              91,272
              
              
              81,368Allowance
                  for doubtful accounts receivable
              
              
              (215
              )
              
              (263
              )Allowance
                  for doubtful notes receivable
              
              
              (472
              )
              
              (496
              )Net
                  receivables
              
              $
              90,585
              
              $
              80,609
  Bad
        debt
        expense  related
        to receivables was ($0.2) million, $0.5 million and $0.3 million in 2006,
        2005
        and 2004, respectively.





**(4)
      Other Current Accrued Liabilities**




The
      following is a summary of the Company's other current accrued liabilities
      balances:




(Thousands
                  of dollars)
              
              2006
              
              2005Customer
                  prepayments
              
              $
              9,411
              
              $
              3,245Deferred
                  compensation plans
              
              
              4,069
              
              
              4,811Accrued
                  professional services
              
              
              1,057
              
              
              788Other
                  accrued liabilities
              
              
              1,440
              
              
              782Total
                  other current accrued liabilities
              
              $
              15,977
              
              $
              9,626





**(5)
      Property, Plant & Equipment**




The
      following is a summary of the Company’s P. P. & E. balances:




(Thousands
                  of dollars)
              
              2006
              
              2005Land
              
              $
              3,482
              
              $
              3,219Land
                  improvements
              
              
              8,543
              
              
              7,829Buildings
              
              
              75,082
              
              
              70,752Machinery
                  and equipment
              
              
              219,783
              
              
              195,730Furniture
                  and fixtures
              
              
              5,007
              
              
              4,076Computer
                  equipment and software
              
              
              14,027
              
              
              13,468Total
                  property, plant and equipment
              
              
              325,924
              
              
              295,074Less
                  accumulated depreciation
              
              
              (212,843
              )
              
              (202,094
              )Total
                  property, plant and equipment, net
              
              $
              113,081
              
              $
              92,980
  Depreciation
        expense related to property, plant and equipment was $11.8 million, $11.3
        million and $11.7 million in 2006, 2005 and 2004,
        respectively.





**(6)
      Earnings per Share**




Earnings
      per share amounts are based on the weighted average number of shares of common
      stock and common stock equivalents outstanding during the period. The weighted
      average number of shares used to compute basic and diluted earnings per share
      for 2006, 2005 and 2004 is illustrated below:





(Thousands
                  of dollars, except share and per share data)
              
              2006
              
              2005
              
              2004Numerator:Numerator
                  for basic and diluted earnings pershare-net
                  earnings
              
              $
              72,994
              
              $
              44,544
              
              $
              14,417Denominator:Denominator
                  for basic net earnings per shareweighted-average
                  shares
              
              
              14,844,514
              
              
              14,369,934
              
              
              13,570,340Effect
                  of dilutive securities: employee stockoptions
              
              
              278,155
              
              
              315,922
              
              
              349,770Denominator
                  for diluted net earnings per shareadjusted
                  weighted-average sharesassumed
                  conversions
              
              
              15,122,669
              
              
              14,685,856
              
              
              13,920,110Basic
                  net earnings per share
              
              $
              4.92
              
              $
              3.10
              
              $
              1.06Diluted
                  net earnings per share
              
              $
              4.83
              
              $
              3.03
              
              $
              1.04




Options
      to purchase a total of 134,949, 86,500 and 182,796 shares of the Company’s
      common stock were excluded from the calculation of fully diluted earnings per
      share for 2006, 2005 and 2004, respectively, because their effect on fully
      diluted earnings per share for the period were antidilutive.





**(7)
      Income Taxes**




Earnings
      before income taxes for 2006, 2005 and 2004 consisted of the
      following:




(Thousands
                  of dollars)
              
              2006
              
              2005
              
              2004Domestic
              
              $
              86,536
              
              $
              60,103
              
              $
              19,818Foreign
              
              
              18,193
              
              
              9,172
              
              
              2,886Total
                  earnings before income taxes
              
              $
              104,729
              
              $
              69,275
              
              $
              22,704




The
      income tax provision for 2006, 2005 and 2004 consisted of the
      following:





(Thousands
                  of dollars)
              
              2006
              
              2005
              
              2004Current:U.S.
                  federal and state income taxes
              
              $
              32,465
              
              $
              23,972
              
              $
              6,811Foreign
              
              
              3,919
              
              
              2,777
              
              
              1,599Total
                  current
              
              
              36,384
              
              
              26,749
              
              
              8,410Deferred:U.S.
                  federal and state income taxes
              
              
              (4,387
              )
              
              (1,647
              )
              
              8Foreign
              
              
              (262
              )
              
              (371
              )
              
              (131
              )Total
                  deffered
              
              
              (4,649
              )
              
              (2,018
              )
              
              (123
              )Total
              
              $
              31,735
              
              $
              24,731
              
              $
              8,287


A
      reconciliation of the income tax provision as computed at the statutory U.S.
      income tax rate and the income tax provision presented in the consolidated
      financial statements is as follows:





(Thousands
                    of dollars)
                
                2006
                
                2005
                
                2004Tax
                    provision computed at statutory rate
                
                $
                36,655
                
                $
                24,246
                
                $
                7,947Tax
                    effect of:Expenses
                    for which no benefit was realized
                
                
                84
                
                
                237
                
                
                160Change
                    in effective state tax rate
                
                
                (742
                )
                
                -
                
                
                -Tax
                    credit
                
                
                (1,949
                )
                
                -
                
                
                -State
                    taxes net of federal benefit
                
                
                1,591
                
                
                1,663
                
                
                472Benefit
                    of export incentives
                
                
                (846
                )
                
                (677
                )
                
                (504
                )Benefit
                    of manufacturing deduction
                
                
                (629
                )
                
                (439
                )
                
                -Other,
                    net
                
                
                (2,429
                )
                
                (299
                )
                
                212Total
                    provision for taxes
                
                $
                31,735
                
                $
                24,731
                
                $
                8,287





Cash
      payments for income taxes totaled $40.5 million, $12.4 million and $6.5 million
      for 2006, 2005 and 2004, respectively.




Net
      deferred income tax assets and liabilities are comprised of the following:





(Thousands
                  of dollars)
              
              2006
              
              2005Current
                  deffered income tax assets:Gross
                  assets
              
              $
              11,036
              
              $
              4,634Gross
                  liabilities
              
              
              (3,117
              )
              
              (449
              )Total
                  current deferred income tax assets, net
              
              
              7,919
              
              
              4,185Noncurrent
                  deffered income tax liabilities:Gross
                  assets
              
              
              4,949
              
              
              4,311Gross
                  liabilities
              
              
              (32,971
              )
              
              (35,360
              )Total
                  noncurrent deffered income tax liabilities, net
              
              
              (28,022
              )
              
              (31,049
              )Net
                  deferred income tax liabilities
              
              $
              (20,103
              )
              $
              (26,864
              )




The
      tax
      effects of significant temporary differences representing deferred income tax
      assets and liabilities are as follows:





(Thousands
                  of dollars)
              
              2006
              
              2005Inventories
              
              $
              5,148
              
              $
              1,623Prepaid
                  pension costs
              
              
              (18,801
              )
              
              (21,975
              )Payroll
                  and benefits
              
              
              825
              
              
              1,051Accrued
                  warranty expenses
              
              
              1,195
              
              
              906Postretirement
                  benefits
              
              
              4,368
              
              
              4,284Prepaid
                  expenses
              
              
              (232
              )
              
              (403
              )Depreciation
              
              
              (12,701
              )
              
              (11,099
              )Accrued
                  liabilities
              
              
              728
              
              
              729Other,
                  net
              
              
              (633
              )
              
              (1,980
              )Net
                  deferred income tax liabilities
              
              $
              (20,103
              )
              $
              (26,864
              )








**(8)
      Inventories**




Inventories
      used in determining cost of sales were as follows:




(Thousands
                  of dollars)
              
              2006
              
              2005Gross
                  inventories @ FIFO:Finished
                  goods
              
              $
              6,903
              
              $
              5,647Work
                  in progress
              
              
              20,977
              
              
              17,664Raw
                  materials & component parts
              
              
              88,882
              
              
              77,039Total
                  gross inventories @ FIFO
              
              
              116,762
              
              
              100,350Less
                  reserves:LIFO
              
              
              28,888
              
              
              24,544Valuation
              
              
              2,244
              
              
              1,171Total
                  inventories as reported
              
              $
              85,630
              
              $
              74,635
  Gross
        inventories on a FIFO basis shown above that were accounted for on a LIFO
        basis
        were $82.7 million and $75.6 million at December 31, 2006 and 2005,
        respectively.





**(9)
      Goodwill & Acquired Intangible Assets**




Balances
      and related amortization expense for goodwill and acquired intangible assets
      are
      as follows:


Gross
                  Carrying
              
              Accumulated(Thousands
                  of dollars)
              
              
              
              Amount
              
              AmortizationAmortized
                  intangible assetsNon-compete
                    agreeements:As
                  of December 31, 2005
              
              
              
              
              $
              516
              
              $
              (215
              )As
                  of December 31, 2006
              
              
              
              
              
              515
              
              
              (317
              )Aggregate
                  amortization expense:For
                  the year ended 12/31/04
              
              
              
              
              $
              93For
                  the year ended 12/31/05
              
              
              
              
              
              99For
                  the year ended 12/31/06
              
              
              
              
              
              106Estimated
                  amortization expense:For
                  the year ended 12/31/07
              
              
              
              
              $
              103For
                  the year ended 12/31/08
              
              
              
              
              
              95For
                  the year ended 12/31/09
              
              
              
              
              
              -For
                  the year ended 12/31/10
              
              
              
              
              
              -For
                  the year ended 12/31/11
              
              
              
              
              
              -








**Acquired
      Intangible Assets**




The
      Company also has multi-year non-compete agreements with certain individuals
      that
      are paid and expensed on an annual basis and thus are not recorded as pre-paid
      assets. Expenses related to these non-compete agreements were $75,000, $75,000
      and $79,000 for the years 2006, 2005 and 2004, respectively. Estimated expenses
      for these agreements are $44,000 in 2007.





**Goodwill**




The
      changes in the carrying amount of goodwill for the year ended December 31,
      2006,
      are as follows:


Power(Thousands
                  of dollars)
              
              Oil
                  Field
              
              Transmission
              
              Trailer
              
              TotalBalance
                  as of 12/31/05
              
              $
              9,432
              
              $
              2,063
              
              $
              -
              
              $
              11,495Foreign
                  currency translation
              
              
              -
              
              
              237
              
              
              -
              
              
              237Balance
                  as of 12/31/06
              
              $
              9,432
              
              $
              2,300
              
              $
              -
              
              $
              11,732




Goodwill
      impairment tests were performed in the first quarter of 2006 and no impairment
      losses were recorded.





**(10)
      Debt Obligations**




In
      2005,
      the Company renewed its $27.5 million credit facility with a domestic bank
      (the
“Bank Facility”) consisting of an unsecured revolving line of credit that
      provides for up to $17.5 million of committed borrowings along with an
      additional $10.0 million discretionary line of credit for an additional three
      years. The Bank Facility expires on December 31, 2008. Borrowings under the
      Bank
      Facility bear interest, at the Company’s option, at either the greater of (i)
      the prime rate, (ii) the base CD rate plus an applicable margin or (iii) the
      Federal Funds Effective Rate plus an applicable margin or the London Interbank
      Offered Rate (“LIBOR”) plus an applicable margin, depending on certain ratios as
      defined in the agreement. The Bank Facility includes customary affirmative
      and
      negative covenants, including a minimum tangible net worth, a maximum leverage
      ratio and a minimum current ratio. As of December 31, 2006, no amounts were
      outstanding of the $27.5 million of the revolving line of credit and all
      financial covenants were in compliance under the terms of the Bank Facility.
      Deducting outstanding letters of credit of $5.1 million, $22.4 million of
      borrowing capacity was available at December 31, 2006.




The
      Company’s had no long-term notes payable at December 31, 2006 and
      2005.




Cash
      payments for interest totaled $3,000, $37,000 and $17,000 in 2006, 2005 and
      2004, respectively.





**(11)
      Stock Option Plans**




On
      January 1, 2006, the Company adopted SFAS 123-Revised 2004 (“SFAS 123R”),
“Share-Based Payment,” using the modified prospective method. SFAS 123R is a
      revision of SFAS No. 123 “Accounting for Stock-Based Compensation,” and
      supersedes APB No. 25, “Accounting for Stock Issued to Employees.” This
      Statement requires that the cost of employee services received in exchange
      for
      stock based on the grant-date fair value be measured and that the cost be
      recognized over the period during which the employee is required to provide
      service in exchange for the award. The fair value will be estimated using an
      option-pricing model. Excess tax benefits, as defined in SFAS 123R, will be
      recognized as additional paid-in-capital.




Under
      the
      modified prospective method, the Company began recognizing expense on January
      1,
      2006, on any unvested awards granted prior to the adoption date of January
      1,
      2006, expected to vest over the remaining vesting period of the awards. New
      awards granted after the adoption date will be expensed pro-ratably over the
      vesting period of the award.




The
      Company currently has three stock compensation plans that are affected by SFAS
      123R. The 1990 Stock Option Plan, the 1996 Nonemployee Director Stock Option
      Plan and the 2000 Incentive Stock Compensation Plan provide for the granting
      of
      stock options to officers, employees and non-employee directors at an exercise
      price equal to the fair market value of the stock at the date of grant. The
      2000
      Incentive Stock Compensation Plan also provides for other forms of
      stock-based compensation such as restricted stock but none have been granted
      to
      date. Options granted to employees vest over two to four years and are
      exercisable up to ten years from the grant date. Upon retirement, any unvested
      options become exercisable immediately. Options granted to directors vest at
      the
      grant date and are exercisable up to ten years from the grant date.




The
      following table is a summary of the stock-based compensation expense recognized
      under SFAS 123R for the year ended December 31, 2006, and
      pro-forma compensation expense had expense been recognized under SFAS
      123 for the
      years ended December 31, 2005 and 2004:





(Thousands
                of dollars)
            
            2006
            
            2005
            
            2004Stock-based
                compensation expense
            
            $
            2,908
            
            $
            1,886
            
            $
            1,321Tax
                benefit
            
            
            (1,105
            )
            
            (673
            )
            
            (483
            )Stock-based
                compensation expense, net of tax
            
            $
            1,803
            
            $
            1,213
            
            $
            838




The
      fair
      value of each option grant during the years ended December 31, 2006, 2005 and
      2004 was estimated on the date of grant using the Black-Scholes option-pricing
      model with the following assumptions:


2006
                
                2005
                
                2004Expected
                    dividend yield
                
                
                0.69%
                    - 1.30
                %
                
                0.75%
                    - 1.75
                %
                
                1.95%
                    - 2.35
                %Expected
                    stock price volatility
                
                
                44.12%
                    - 48.00
                %
                
                38.62%
                    - 44.14
                %
                
                38.78%
                    - 38.82
                %Risk
                    free interest rate
                
                
                4.52%
                    - 5.03
                %
                
                4.04%
                    - 4.47
                %
                
                4.10%
                    - 4.57
                %Expected
                    life options
                
                
                1
                    - 6 years
                
                
                5
                    - 8 years
                
                
                10
                    yearsWeighted-average
                    fair value per share at grant date
                
                $
                22.82
                
                $
                15.16
                
                $
                7.29





The
      expected life of options was determined based on the exercise history of
      employees and directors since the inception of the plans. The expected
      volatility is based upon the historical weekly and daily stock price for the
      prior number of years equivalent to the expected life of the stock option.
      The
      expected dividend yield was based on the dividend yield of the Company’s common
      stock at the date of the grant. The risk free interest rate was based upon
      the
      yield of U.S. Treasuries which terms were equivalent to the expected life of
      the
      stock option.




A
      summary
      of stock option activity under the plans during year ended December 31,
      2006, is presented below:


Weighted-Weighted-
              
              Average
              
              AggregateAverage
              
              Remaining
              
              IntrinsicExercise
              
              Contractual
              
              ValueOptions
              
              Shares
              
              Price
              
              Term
              
              ($000's)Outstanding
                  at January 1, 2006
              
              
              797,720
              
              $
              18.35Granted
              
              
              164,091
              
              
              61.35Exercised
              
              
              (218,050
              )
              
              14.19Forfeited
                  or expired
              
              
              -
              
              
              -Outstanding
                  at December 31, 2006
              
              
              743,761
              
              $
              29.06
              
              
              7.4
              
              $
              22,137Exercisable
                  at December 31, 2006
              
              
              414,275
              
              $
              21.97
              
              
              6.5
              
              $
              15,159Wtd
                  Avg Rem Recog Period
              
              
              1.37




As
      of
      December 31, 2006, there was $4.0 million of total unrecognized compensation
      expense related to non-vested stock options. That cost is expected to be
      recognized over a weighted-average period of 1.4 years. The intrinsic value
      of
      stock options exercised in 2006 was $10.5 million.





**(12)
      Incremental Effect of Applying FASB Statement No. 158**




The
      following table illustrates the incremental effect on individual lines of the
      Consolidated Balance Sheets of applying FASB Statement No. 158, Employers’
      Accounting for Defined Benefit Pension and Other Postretirement Plans- an
      amendment of FASB Statements No. 87, 88, 106 and 132(R)” on December 31, 2006.
      See Footnote 1 for additional information on this statement.


Before
              
              
              
              AfterApplication
                  of
              
              
              
              Application
                  of(Thousands
                  of dollars)
              
              Statement
                  158
              
              Adjustments
              
              Statement
                  158Prepaid
                  pension costs
              
              
              64,966
              
              
              (8,110
              )
              
              56,856Total
                  assets
              
              
              437,179
              
              
              (8,110
              )
              
              429,069Other
                  accrued liabilities
              
              
              17,414
              
              
              (1,437
              )
              
              15,977Total
                  current liabilities
              
              
              62,932
              
              
              (1,437
              )
              
              61,495Deferred
                  income tax liabilities
              
              
              30,407
              
              
              (2,385
              )
              
              28,022Postretirement
                  benefits
              
              
              11,271
              
              
              (2,796
              )
              
              8,475Other
                  liabilities
              
              
              -
              
              
              2,937
              
              
              2,937Accumulated
                  other comprehensive income
              
              
              2,958
              
              
              (4,429
              )
              
              (1,471
              )Total
                  shareholders' equity
              
              
              332,569
              
              
              (4,429
              )
              
              328,140


**(13)
      Other Comprehensive Income**




The
      following table illustrates the related tax effect allocated to each component
      of other comprehensive income:


Pre-Tax
              
              Tax
                  (Expense)/
              
              Net(Thousands
                  of dollars)
              
              Amount
              
              Benefit
              
              Amount**Year
                  ended December 31, 2004**Foreign
                  currency translation adjustments
              
              $
              1,467
              
              $
              -
              
              $
              1,467Other
                  comprehensive income
              
              $
              1,467
              
              $
              -
              
              $
              1,467**Year
                  ended December 31, 2005**Foreign
                  currency translation adjustments
              
              $
              (727
              )
              $
              -
              
              $
              (727
              )Other
                  comprehensive income
              
              $
              (727
              )
              $
              -
              
              $
              (727
              )**Year
                  ended December 31, 2006**Foreign
                  currency translation adjustments
              
              $
              1,012
              
              $
              -
              
              $
              1,012Initial
                  application of FAS 158:Defined
                  benefit pension plans:Net
                  prior service cost
              
              
              (7,294
              )
              
              2,553
              
              
              (4,741
              )Net
                  loss
              
              
              (3,129
              )
              
              1,095
              
              
              (2,034
              )Net
                  transition asset
              
              
              1,565
              
              
              (548
              )
              
              1,017Total
                  defined benefit pension plans
              
              
              (8,858
              )
              
              3,100
              
              
              (5,758
              )Defined
                  benefit postretirement plans:Net
                  gain
              
              
              2,046
              
              
              (717
              )
              
              1,329Total
                  defined benefit postretirement plans
              
              
              2,046
              
              
              (717
              )
              
              1,329Other
                  comprehensive income
              
              $
              (5,800
              )
              $
              2,383
              
              $
              (3,417
              )





The
      following table illustrates the balances of accumulated other comprehensive
      income:





Defined
              
              Defined
              
              AccumulatedForeign
              
              Benefit
              
              Benefit
              
              OtherCurrency
              
              Pension
              
              Postretirement
              
              Comprehensive(Thousands
                  of dollars)
              
              Translation
              
              Plans
              
              Plans
              
              Income**Balance,
                  Dec. 31, 2004**
              
              $
              2,673
              
              $
              -
              
              $
              -
              
              $
              2,673Current-period
                  change
              
              
              (727
              )
              
              -
              
              
              -
              
              
              (727
              )**Balance,
                  Dec. 31, 2005**
              
              
              1,946
              
              
              -
              
              
              -
              
              
              1,946Current-period
                  change
              
              
              1,012
              
              
              -
              
              
              -
              
              
              1,012Initial
                  application of FAS 158
              
              
              -
              
              
              (5,758
              )
              
              1,329
              
              
              (4,429
              )**Balance,
                  Dec. 31, 2006**
              
              $
              2,958
              
              $
              (5,758
              )
              $
              1,329
              
              $
              (1,471
              )





**(14)
      Stock Repurchase Plan**




The
      Company currently has a stock repurchase plan under which the
      Company  was
      authorized to spend up to $19.1 million for repurchases of its common stock.
      In
      the second quarter of 2003, the Board of Directors of the Company authorized
      an
      additional $2.0 million of stock repurchases to the plan. Pursuant to this
      plan,
      the Company has repurchased a total of 1,656,740 shares of its common stock
      at
      an aggregate purchase price of $17.0 million. Repurchased shares are added
      to
      treasury stock and are available for general corporate purposes including the
      funding of the Company’s stock option plans. No shares were repurchased in 2005
      or 2006. As of December 31, 2006, the Company held 395,278 shares of treasury
      stock at an aggregate cost of approximately $4.1 million. Authorizations of
      approximately $2.1 million remained at December 31, 2006.





**(15)
      Capital Stock**




The
      Company is authorized to issue 2,000,000 shares of preferred stock, the terms
      and conditions to be determined by the Board of Directors in creating any
      particular series. As of December 31, 2006, no shares of preferred stock had
      been issued.





**(16)
      Retirement Benefits**




The
      Company has a qualified noncontributory pension plan covering substantially
      all
      U.S. employees. The benefits provided by these plans are measured by length
      of
      service, compensation and other factors, and are currently funded by trusts
      established under the plans. Funding of retirement costs for these plans
      complies with the minimum funding requirements specified by the Employee
      Retirement Income Security Act, as amended. In addition, the Company has two
      unfunded non-qualified deferred compensation pensions plans for certain U.S.
      employees. The Pension Restoration Plan provides supplemental retirement
      benefits. The benefit is based on the same benefit formula as the qualified
      pension plan except that it does not limit the amount of a participant's
      compensation or maximum benefit. The Company also provides a Supplemental
      Executive Retirement Plan that credits an individual with 0.5 years of service
      for each year of service credited under the qualified plan. The benefits
      calculated under the non-qualified pension plans are offset by the participant's
      benefit payable under the qualified plan. The liabilities for the non-qualified
      deferred compensation pensions plans are included in "Other accrued liabilities"
      on the Consolidated Balance Sheet.




The
      Company sponsors two defined benefit postretirement plans that cover both
      salaried and hourly employees. One plan provides medical benefits, and the
      other
      plan provides life insurance benefits. Both plans are contributory, with retiree
      contributions adjusted periodically. The Company accrues the estimated costs
      of
      the plans over the employee’s service periods. The Company's postretirement
      health care plan is unfunded. For measurement purposes, the submitted claims
      medical trend was assumed to be 9.25% in 1997. Thereafter, the Company’s
      obligation is fixed at the amount of the Company’s contribution for
      1997.




The
      Company also has qualified defined contribution retirement plans covering
      substantially all of its U.S. and Canadian employees. For U.S. employees, the
      Company makes contributions of 75% of employee contributions up to a maximum
      employee contribution of 6% of employee earnings. Employees may contribute
      up to
      an additional 18% (in 1% increments), which is not subject to match by the
      Company. For Canadian employees, the Company makes contributions of 3%-8% of
      an
      employee’s salary with no individual employee match required. All obligations of
      the Company are funded through December 31, 2006. In addition, the Company
      provides an unfunded non-qualified deferred compensation defined contribution
      plan for certain U.S. employees. The Company's and
      individual's contributions are based on the same formula as the
      qualified contribution plan except that it does not limit the amount of a
      participant's compensation or maximum benefit. The contribution calculated
      under the non-qualified defined contribution plan is offset by
      the Company's and participant's contributions under the qualified plan. The
      Company’s expense for these plans totaled $3.3 million, $2.5 million and $2.5
      million in the years ended December 31, 2006, 2005 and 2004, respectively.
      The
      liability for the non-qualified deferred defined contribution plan is
      included in "Other accrued liabilities" on the Consolidated Balance
      Sheet.




On
      December 8, 2003, the “Medicare Prescription Drug, Improvement and Modernization
      Act of 2003” (the “Act”) was signed into law. The Act introduces a prescription
      drug benefit under Medicare as well as a federal subsidy to sponsors of retiree
      health care benefit plans that provide a benefit that is at least actuarially
      equivalent to Medicare Part D. Measures of the accumulated postretirement
      benefit obligation and net periodic postretirement benefit cost do not reflect
      any amount associated with the subsidy because the Company’s plan is not
      actuarially equivalent to Medicare Part D and is not expected to receive any
      subsidy.





**Obligations
      and Funded Status at December 31**




Pension
                  Benefits
              
              Other
                  Benefits(Thousands
                  of dollars)
              
              2006
              
              2005
              
              2006
              
              2005**Changes
                  in benefit obligation**Benefit
                  obligation at beginning of year
              
              $
              182,375
              
              $
              157,353
              
              $
              13,087
              
              $
              11,865Service
                  cost
              
              
              5,178
              
              
              4,769
              
              
              172
              
              
              280Interest
                  cost
              
              
              9,104
              
              
              9,421
              
              
              502
              
              
              704Plan
                  participants' contributions
              
              
              -
              
              
              -
              
              
              1,045
              
              
              1,213Plan
                  change
              
              
              -
              
              
              3,653
              
              
              -
              
              
              -Actuarial
                  loss (gain)
              
              
              (18,262
              )
              
              11,562
              
              
              (3,895
              )
              
              527Benefits
                  paid
              
              
              (7,534
              )
              
              (7,247
              )
              
              (1,686
              )
              
              (1,502
              )Benefit
                  obligation at end of year
              
              
              170,861
              
              
              179,511
              
              
              9,225
              
              
              13,087**Change
                  in plan assets**Fair
                  value of plan assets at beginning of year
              
              
              209,560
              
              
              200,373
              
              
              -
              
              
              -Actual
                  return on plan assets
              
              
              22,567
              
              
              16,434
              
              
              -
              
              
              -Employer
                  contributions
              
              
              33
              
              
              -
              
              
              641
              
              
              289Plan
                  participants' contributions
              
              
              -
              
              
              -
              
              
              1,045
              
              
              1,213Benefits
                  paid
              
              
              (7,534
              )
              
              (7,247
              )
              
              (1,686
              )
              
              (1,502
              )Fair
                  value of plan assets at end of year
              
              
              224,626
              
              
              209,560
              
              
              -
              
              
              -Funded
                  (unfunded) status at end of year
              
              $
              53,765
              
              
              30,049
              
              $
              (9,225
              )
              
              (13,087
              )Unrecognized
                  net actuarial loss (gain)
              
              
              
              
              
              26,667
              
              
              
              
              
              1,693Unrecognized
                  prior service cost (benefit)
              
              
              
              
              
              7,840
              
              
              
              
              
              -Unrecognized
                  net transition asset
              
              
              
              
              
              (2,491
              )
              
              
              
              
              -Net
                  amount recognized
              
              
              
              
              
              62,065
              
              
              
              
              
              (11,394
              )  **Amounts
        recognized in the balance sheet consist of:**


Pension
                  Benefits
              
              Other
                  Benefits(Thousands
                  of dollars)
              
              2006
              
              2005
              
              2006
              
              2005Prepaid
                  pension costs
              
              $
              56,856
              
              $
              62,065
              
              $
              -
              
              $
              -Other
                  current accrued liabilities
              
              
              (154
              )
              
              -
              
              
              (750
              )
              
              -Postretirement
                  benefits
              
              
              -
              
              
              -
              
              
              (8,475
              )
              
              (11,394
              )Other
                  non-current liabilities
              
              
              (2,937
              )
              
              -
              
              
              -
              
              
              -$
              53,765
              
              $
              62,065
              
              $
              (9,225
              )
              $
              (11,394
              )







**Amounts
      recognized in accumulated other comprehensive income consist
      of:**




Pension
                  Benefits
              
              Other
                  Benefits(Thousands
                  of dollars)
              
              2006
              
              2005
              
              2006
              
              2005Prior
                  service cost
              
              $
              4,741
              
              $
              -
              
              $
              -
              
              $
              -Net
                  loss (gain)
              
              
              2,034
              
              
              -
              
              
              (1,329
              )
              
              -Transition
                  asset
              
              
              (1,017
              )
              
              -
              
              
              -
              
              
              -$
              5,758
              
              $
              -
              
              $
              (1,329
              )
              $
              -




The
        accumulated benefit obligation for all defined benefit pension plans was
        $158.4
        million and $164.9 million at December 31, 2006, and 2005,
        respectively







**Components
      of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive
      Income**


Pension
                  Benefits
              
              Other
                  Benefits(Thousands
                  of dollars)
              
              2006
              
              2005
              
              2006
              
              2005**Net
                  Periodic Benefit Cost**Service
                  cost
              
              $
              5,178
              
              $
              4,769
              
              $
              172
              
              $
              280Interest
                  cost
              
              
              9,104
              
              
              9,421
              
              
              502
              
              
              704Expected
                  return on plan assets
              
              
              (16,458
              )
              
              (15,887
              )
              
              -
              
              
              -Amortization
                  of prior service cost
              
              
              566
              
              
              374
              
              
              -
              
              
              -Amortization
                  of net (gain) loss
              
              
              61
              
              
              134
              
              
              (156
              )
              
              52Amortization
                  of transition asset
              
              
              (926
              )
              
              (926
              )
              
              -
              
              
              -Net
                  periodic benefit cost (income)
              
              
              (2,475
              )
              
              (2,115
              )
              
              518
              
              
              1,036




**Other
      Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive
      Income**




None





The
      estimated net loss, prior service cost and transition asset for the defined
      benefit pension plans that will be amortized from accumulated other
      comprehensive income into net periodic benefit cost over the next fiscal year
      are $49,000, $596,000 and ($926,000), respectively. The estimated net gain
      for
      the defined benefit postretirement plans that will be amortized from accumulated
      other comprehensive income into net periodic benefit cost over the next fiscal
      year is ($180,000).








**Additional
      Information**





**Assumptions**





**Weighted-average
      assumptions used to determine benefit obligations at December
      31**


Pension
                  Benefits
              
              Other
                  Benefits2006
              
              2005
              
              2006
              
              2005Discount
                  rate
              
              
              5.75
              %
              
              5.50
              %
              
              5.75
              %
              
              5.50
              %Rate
                  of compensation increase
              
              
              4.50
              %
              
              4.25
              %
              
              N/A
              
              
              N/A  **Weighted-average
        assumptions used to determine net periodic benefit cost for years ended December
        31**


Pension
                  Benefits
              
              Other
                  Benefits2006
              
              2005
              
              2006
              
              2005Discount
                  rate
              
              
              5.50
              %
              
              6.00
              %
              
              5.50
              %
              
              5.75
              %Expected
                  long-term return on plan assets
              
              
              8.00
              %
              
              8.00
              %
              
              N/A
              
              
              N/ARate
                  of compensation increase
              
              
              4.50
              %
              
              4.25
              %
              
              N/A
              
              
              N/A




For
      2006,
      the Company assumed a long-term asset rate of return of 8.00%. In developing
      the
      8.00% expected long-term rate of return assumption, the Company evaluated input
      from its third-party pension plan asset manager, including their review of
      asset
      class return expectations and long-term inflation assumptions. The Company
      also
      considered its historical 10-year and 15-year compounded return (period ended
      December 31, 2005), which were in-line to higher than the Company’s long-term
      rate of return assumption, and analyzed expected long-term rate of return
      projections by asset class.





**Assumed
      health care cost trend rates at**





**December
      31**




Since
      the
      Company’s costs for the retiree medical was fixed as of January 1, 1997, no
      health care cost inflation has been assumed and any change in health care trend
      rates would not have any impact on the plan’s service cost, interest cost or
      benefit obligation.





**Plan
      Assets**




The
      Company’s qualified pension plan weighted-average asset allocations at December
      31, 2006, and 2005, by asset category are as follows:


Target
              
              Plan
                  AssetsAllocation
              
              At
                  December 31,2007
              
              2006
              
              2005Equity
                  securities
              
              
              40%
                  - 70
              %
              
              65
              %
              
              60
              %Debt
                  securities
              
              
              30%
                  - 60
              %
              
              26
              %
              
              28
              %Real
                  estate
              
              
              0%
                  - 15
              %
              
              9
              %
              
              12
              %Total
              
              
              
              
              
              100
              %
              
              100
              %




The
      Company invests in a diversified portfolio consisting of an array of assets
      classes that attempts to maximize returns while minimizing volatility. These
      asset classes include U.S. domestic equities, developed market equities,
      international equities, fixed income and real estate.




No
      equity
      or debt securities of the Company were held by the plan at December 31, 2006,
      or
      2005.




The
      unqualified pension plans and the postretirement benefit plan of the Company
      are
      unfunded and thus had no plan assets as of December 31, 2006, and
      2005.





**Cash
      Flows**





**Contributions**




The
      Company expects to make contributions of $160,000 to the pension plans and
      expects to make contributions of $772,000 to the postretirement plan in
      2007.





**Estimated
      Future Benefit Payments**




The
      following benefit payments, which reflect expected future service, as
      appropriate, are expected to be paid during the fiscal years
      ending:


Pension
              
              Other(Thousands
                  of dollars)
              
              Benefits
              
              Benefits2007
              
              $
              8,331
              
              $
              7722008
              
              
              8,900
              
              
              7792009
              
              
              9,436
              
              
              7812010
              
              
              9,974
              
              
              7862011
              
              
              10,578
              
              
              7932012
                  - 2016
              
              
              61,877
              
              
              3,963











**(17)
      Commitments and Contingencies**




**Legal
      proceedings** : A
      class
      action complaint was filed in the U.S. District Court for the Eastern District
      of Texas on March 7, 1997, by an employee and a former employee which alleged
      race discrimination in employment. Certification hearings were conducted in
      Beaumont, Texas in February 1998 and in Lufkin, Texas in August 1998. In April
      1999, the District Court issued a decision that certified a class for this
      case,
      which included all black employees employed by the Company from March 6, 1994,
      to the present. The case was closed from 2001 to 2003 while the parties
      unsuccessfully attempted mediation. Trial for this case began in December 2003,
      but was postponed by the District Court and was completed in October 2004.
      The
      only claims made at trial were those of discrimination in initial assignments
      and promotions.




On
      January 13, 2005, the District Court entered its decision finding that the
      Company discriminated against African-American employees in initial assignments
      and promotions. The District Court also concluded that the discrimination
      resulted in a shortfall in income for those employees and ordered that the
      Company pay those employees back pay to remedy such shortfall, together with
      pre-judgment interest in the amount of 5%. On August 29, 2005, the District
      Court determined that the backpay award for the class of affected employees
      would be $3.4 million (including interest to January 1, 2005) and provided
      a
      formula for attorney fees that the Company estimates will result in a total
      not
      to exceed $2.5 million. In addition to back pay with interest, the District
      Court (i) enjoined and ordered the Company to cease and desist all racially
      biased assignment and promotion practices and (ii) ordered the Company to pay
      court costs and expenses.




The
      Company has reviewed this decision with its outside counsel and on September
      19,
      2005, appealed the decision to the U.S. Court of Appeals for the Fifth Circuit.
      On January 26, 2006, the Court of Appeals notified the parties that the case
      had
      been docketed. The
      Company has submitted its briefs and now anticipates a decision in this case
      in
      the second quarter of 2007. The Company believes that after a full and fair
      review of the evidence, the Court of Appeals will determine that the plaintiffs
      have not established their claims of discrimination by the Company against
      the
      plaintiffs and will enter a decision to that effect and will dismiss the case
      against the Company. At this time, the Company has concluded that an unfavorable
      ultimate outcome is not probable. If the District Court’s decision is reversed
      and remanded for a new trial, the Company will vigorously defend itself on
      retrial. While the ultimate outcome and impact of these claims against the
      Company cannot be predicted with certainty, the Company believes that the
      resolutions of these proceedings will not have a material adverse effect on
      its
      consolidated financial position. However, should the Company be unsuccessful
      in
      its appeal, the final determination could have a material impact on the
      Company’s reported earnings, results of operations and
      cash
      flows in a future reporting period.




There
      are
      various other claims and legal proceedings arising in the ordinary course of
      business pending against or involving the Company wherein monetary damages
      are
      sought. It is management’s opinion that the Company’s liability, if any, under
      such claims or proceedings would not materially affect its consolidated
      financial position, results of operations or cash flow.




**Product
      warranties** :
      The
      change in the aggregate product warranty liability for the year ended December
      31, 2006, is as follows:


(Thousands
                  of dollars)Beginning
                  balance
              
              $
              3,245Claims
                  paid
              
              
              (2,550
              )Additional
                  warranties issued
              
              
              3,192Revisions
                  in estimates
              
              
              (251
              )Currency
              
              
              32Ending
                  balance
              
              $
              3,668




**Operating
      leases** :
      Future
      minimum rental payments for operating leases having initial or remaining
      noncancelable lease terms in excess of one year are:


(Thousands
                  of dollars)2007
              
              $
              6732008
              
              
              5682009
              
              
              4642010
              
              
              3522011
              
              
              53All
                  years
              
              $
              2,110





Expenditures
      for rentals and leases, including short-term rental contracts, were $2.9
      million, $2.3 million and $1.9 million for the years ended December 31, 2006,
      2005 and 2004, respectively.




**Capital
      expenditures** :
      As of
      December 31, 2006, the Company had contractual commitments for capital
      expenditures of $4.1 million that are expected to be paid in 2007.





**(18)
      Business Segment Information**




The
      Company operates with three business segments--Oil Field, Power Transmission
      and
      Trailer. The three operating segments are supported by a common corporate group.
      The accounting policies of the segments are the same as those described in
      the
      summary of major accounting policies. Corporate expenses and certain assets
      are
      allocated to the operating segments primarily based upon third party revenues.
      Sales by geographic region are determined by the shipping destination of a
      product or the site of service work. Inter-segment sales and transfers are
      accounted for as if the sales and transfers were to third parties, that is,
      at
      current market prices, as available. The following is a summary of key business
      segment and product group information:


(Thousands
                  of dollars)
              
              2006
              
              2005
              
              2004Sales
                  by segment:Oil
                  Field
              
              $
              401,200
              
              $
              307,075
              
              $
              216,025Power
                  Transmission
              
              
              124,922
              
              
              106,616
              
              
              79,498Trailer
              
              
              79,370
              
              
              78,476
              
              
              60,758Total
                  sales
              
              $
              605,492
              
              $
              492,167
              
              $
              356,281Sales
                  by geographic region:United
                  States
              
              $
              428,211
              
              $
              355,631
              
              $
              262,606Europe
              
              
              32,789
              
              
              28,552
              
              
              15,278Canada
              
              
              40,143
              
              
              34,140
              
              
              19,544Latin
                  America
              
              
              60,049
              
              
              51,346
              
              
              43,349Other
              
              
              44,300
              
              
              22,498
              
              
              15,504Total
                  sales
              
              $
              605,492
              
              $
              492,167
              
              $
              356,281Earnings
                  (loss) before income taxes:Oil
                  Field
              
              $
              85,325
              
              $
              57,659
              
              $
              25,089Power
                  Transmission
              
              
              19,022
              
              
              13,492
              
              
              2,332Trailer
              
              
              (1,661
              )
              
              (2,454
              )
              
              (5,079
              )Corporate
              
              
              2,043
              
              
              578
              
              
              362Total
                  earnings (loss) before income taxes
              
              $
              104,729
              
              $
              69,275
              
              $
              22,704Assets
                  by segment:Oil
                  Field
              
              $
              213,854
              
              $
              184,330
              
              $
              154,315Power
                  Transmission
              
              
              105,013
              
              
              87,485
              
              
              75,562Trailer
              
              
              27,582
              
              
              39,433
              
              
              38,346Corporate
              
              
              82,620
              
              
              48,547
              
              
              32,046Total
                  assets
              
              $
              429,069
              
              $
              359,795
              
              $
              300,269Property,
                  plant & equipmet, net, by geographic regionUnited
                  States
              
              $
              81,385
              
              $
              70,017
              
              $
              70,290Europe
              
              
              10,740
              
              
              6,948
              
              
              8,483Canada
              
              
              11,612
              
              
              7,309
              
              
              5,746Latin
                  America
              
              
              8,985
              
              
              8,582
              
              
              4,867Other
              
              
              359
              
              
              124
              
              
              169Total
                  P, P & E, net
              
              $
              113,081
              
              $
              92,980
              
              $
              89,555Capital
                  expenditures by segmentOil
                  Field
              
              $
              19,554
              
              $
              11,815
              
              $
              9,274Power
                  Transmission
              
              
              10,486
              
              
              2,668
              
              
              2,095Trailer
              
              
              358
              
              
              523
              
              
              158Corporate
              
              
              843
              
              
              797
              
              
              196Total
                  capital expenditures
              
              $
              31,241
              
              $
              15,803
              
              $
              11,723Depreciation/amortization
                  by segment:Oil
                  Field
              
              $
              7,166
              
              $
              6,257
              
              $
              5,627Power
                  Transmission
              
              
              3,595
              
              
              3,662
              
              
              4,353Trailer
              
              
              636
              
              
              490
              
              
              481Corporate
              
              
              553
              
              
              968
              
              
              1,363Total
                  depreciation/amortization
              
              $
              11,950
              
              $
              11,377
              
              $
              11,824


Additional
      key segment information is presented below:


**Year
        Ended December 31, 2006**
 Power(Thousands
                    of dollars)
                
                Oil
                    Field
                
                Transmission
                
                Trailer
                
                Corporate
                
                TotalGross
                    sales
                
                $
                404,432
                
                $
                133,674
                
                $
                79,413
                
                $
                -
                
                $
                617,519Inter-segment
                    sales
                
                
                (3,232
                )
                
                (8,752
                )
                
                (43
                )
                
                -
                
                
                (12,027
                )Net
                    sales
                
                $
                401,200
                
                $
                124,922
                
                $
                79,370
                
                $
                -
                
                $
                605,492Operating
                    income (loss)
                
                $
                85,790
                
                $
                19,126
                
                $
                (1,661
                )
                $
                -
                
                $
                103,255Other
                    income (expense), net
                
                
                (465
                )
                
                (104
                )
                
                -
                
                
                2,043
                
                
                1,474Earnings
                    (loss) beforeincome
                    tax provision
                
                $
                85,325
                
                $
                19,022
                
                $
                (1,661
                )
                $
                2,043
                
                $
                104,729
 **Year
        Ended December 31, 2005**
 Power(Thousands
                    of dollars)
                
                Oil
                    Field
                
                Transmission
                
                Trailer
                
                Corporate
                
                TotalGross
                    sales
                
                $
                312,803
                
                $
                112,527
                
                $
                78,480
                
                $
                -
                
                $
                503,810Inter-segment
                    sales
                
                
                (5,728
                )
                
                (5,911
                )
                
                (4
                )
                
                -
                
                
                (11,643
                )Net
                    sales
                
                $
                307,075
                
                $
                106,616
                
                $
                78,476
                
                $
                -
                
                $
                492,167Operating
                    income (loss)
                
                $
                58,037
                
                $
                13,621
                
                $
                (2,452
                )
                $
                -
                
                $
                69,206Other
                    income (expense), net
                
                
                (378
                )
                
                (129
                )
                
                (2
                )
                
                578
                
                
                69Earnings
                    (loss) beforeincome
                    tax provision
                
                $
                57,659
                
                $
                13,492
                
                $
                (2,454
                )
                $
                578
                
                $
                69,275
 **Year
        Ended December 31, 2004**
  Power(Thousands
                  of dollars)
              
              Oil
                  Field
              
              Transmission
              
              Trailer
              
              Corporate
              
              TotalGross
                  sales
              
              $
              218,056
              
              $
              81,622
              
              $
              60,790
              
              $
              -
              
              $
              360,468Inter-segment
                  sales
              
              
              (2,031
              )
              
              (2,124
              )
              
              (32
              )
              
              -
              
              
              (4,187
              )Net
                  sales
              
              $
              216,025
              
              $
              79,498
              
              $
              60,758
              
              $
              -
              
              $
              356,281Operating
                  income (loss)
              
              $
              25,545
              
              $
              2,243
              
              $
              (5,075
              )
              $
              -
              
              $
              22,713Other
                  income (expense), net
              
              
              (456
              )
              
              89
              
              
              (4
              )
              
              362
              
              
              (9
              )Earnings
                  (loss) beforeincome
                  tax provision
              
              $
              25,089
              
              $
              2,332
              
              $
              (5,079
              )
              $
              362
              
              $
              22,704





**(19)
      Concentrations of Credit Risk**







The
      Company’s concentration with respect to trade accounts receivable is limited.
      The large number of customers and diversified customer base across the three
      segments significantly reduces the Company’s credit risk. The Company also has
      strict policies regarding the granting of credit to customers and does not
      offer
      credit terms to those customers that do not meet certain financial criteria
      and
      other guidelines.











**(20)
      Quarterly Financial Data**





The
      following table sets forth unaudited quarterly financial data for 2006 and
      2005:


First
              
              Second
              
              Third
              
              Fourth(Millions
                  of dollars, except per share data)
              
              Quarter
              
              Quarter
              
              Quarter
              
              Quarter**2006**Sales
              
              $
              133.4
              
              $
              147.7
              
              $
              158.8
              
              $
              165.6Gross
                  profit
              
              
              35.4
              
              
              39.1
              
              
              38.7
              
              
              43.0Net
                  earnings
              
              
              15.2
              
              
              17.4
              
              
              17.4
              
              
              23.0Basic
                  earnings per share
              
              
              1.03
              
              
              1.18
              
              
              1.17
              
              
              1.54Diluted
                  earnings per share
              
              
              1.01
              
              
              1.16
              
              
              1.15
              
              
              1.52**2005**Sales
              
              $
              101.4
              
              $
              121.7
              
              $
              123.7
              
              $
              145.4Gross
                  profit
              
              
              22.4
              
              
              28.0
              
              
              28.4
              
              
              34.5Net
                  earnings
              
              
              7.4
              
              
              10.4
              
              
              11.3
              
              
              15.4Basic
                  earnings per share
              
              
              0.53
              
              
              0.73
              
              
              0.78
              
              
              1.05Diluted
                  earnings per share
              
              
              0.52
              
              
              0.71
              
              
              0.76
              
              
              1.03





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




None





**Item 9A. Controls
      and
      Procedures**





**Disclosure
      Controls and Procedures**




Based
      on
      their evaluation of the Company’s disclosure controls and procedures as of
      December 31, 2006, the Chief Executive Officer of the Company, Douglas V. Smith,
      and the Chief Financial Officer of the Company, R. D. Leslie, have concluded
      that the Company’s disclosure controls and procedures (as defined in Rules
      13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act
      of
      1934) are effective.




There
      were no changes in the Company’s internal control over financial reporting
      during the quarter ended December 31, 2006, that have materially affected,
      or
      are reasonably likely to materially affect the Company’s internal control over
      financial reporting.




Management’s
      Report on Internal Control over Financial Reporting and the Report of the
      Independent Registered Public Accounting Firm thereon are set forth in Part
      II,
      Item 8 of this report and are incorporated herein by reference.





**Item 9B.Other
      Information**





None





**Table
            of Contents**








**PART
      III**








**Item
      10.Directors and Executive Officers of
      the Registrant**




The
      information required by Item 10 regarding directors is incorporated by reference
      from the information under the caption “Nominees for Director” and under the
      caption “Information About Current and Continuing Directors” in the section
“Company Information” in the Company’s definitive Proxy Statement for the 2007
      Annual Meeting of Stockholders (the “Proxy Statement”), which will be filed
      within 120 days after December 31, 2006. The information required by Item 10
      regarding audit committee financial expert disclosure and the identification
      of
      the Company’s audit committee is incorporated by reference from the information
      under the caption “Board Committees” in the section “Company Information” in the
      Proxy Statement. The information required by Item 10 regarding the disclosure
      of
      delinquent filers pursuant to Item 405 of Regulation S-K is incorporated by
      reference from the information under the caption “Section 16(a) Beneficial
      Ownership Reporting Compliance” in the Proxy Statement. The information required
      by Item 10 regarding executive officers is incorporated by reference from the
      information under the caption “Information About Current Executive Officers” in
      the Proxy Statement.




The
      Company has adopted a written code of ethics, entitled the “Code of Ethics for
      Senior Financial Officers of the Company.” The Company requires all its senior
      financial officers, including the Company’s principal executive officer,
      principal financial officer and principal accounting officer, to adhere to
      the
      Code of Ethics for Senior Financial Officers of the Company in addressing the
      legal and ethical issues encountered in conducting their work. The Company
      has
      also adopted a written Corporate Code of Conduct applicable to all salaried
      employees of the Company, including the senior financial officers. The Company
      has made available to stockholders the Code of Ethics for Senior Financial
      Officers of the Company and the Corporate Code of Conduct on its website
      at www.lufkin.com or
      a copy
      can be obtained by writing to the Company Secretary, P.O. Box 849, Lufkin,
      Texas
      75902. Any amendment to, or waiver from, the Code of Ethics for Senior Financial
      Officers of the Company and the Corporate Code of Conduct will be disclosed
      in a
      current report on Form 8-K within four business days of such amendment or waiver
      as required by the Marketplace Rules of the Nasdaq Stock Market,
      Inc.





**Item 11.  Executive Compensation**




The
      information required by Item 11 is incorporated by reference from the
      information under the captions “Compensation of Executive Officers”,
“Compensation Committee Report”, “Stock Option Plans”, “Compensation Committee
      Interlocks and Insider Participation”, “Board Committees” and “Director
      Compensation” in the Proxy Statement.





**Item
      12. Security Ownership of Certain Beneficial
      Owners and Management and Related Stockholder
      Matters**




The
      information required by Item 12 related to security ownership of certain
      beneficial owners and management and related stockholder matters is incorporated
      by reference from the information under the caption “Security Ownership of
      Certain Beneficial Owners and Management” in the Proxy Statement. Information
      concerning securities authorized for issuance under the Company’s equity
      compensation plans is set forth in Item 5 of this report and is incorporated
      in
      Item 12 of this report by reference.





**Item 13.Certain Relationships and Related Transactions**




During
      2006, there were no transactions with management and others, no business
      relationships regarding directors or nominees for directors and no indebtedness
      of management required to be disclosed pursuant to this Item 13. The information
      required by Item 13 related to director independence is incorporated by
      reference from the information under the caption “Information About Current and
      Continuing Directors” in the Proxy Statement.





**Item 14. Principal
      Accountant Fees and
      Services**




The
      information required by Item 14 is incorporated by reference from the
      information under the caption “Report of the Audit Committee” and “Independent
      Public Accountants” in the Proxy Statement.





**Table
            of Contents**





**PART
      IV**








**Item
      15.Exhibits and Financial Statement
      Schedules**








(a)
            Documents
                filed as part of the report.1.
            Consolidated
                Financial StatementsReport
                of Independent Registered Public Accounting FirmConsolidated
                Balance SheetsConsolidated
                Statements of EarningsConsolidated
                Statements of Shareholders' Equity & Comprehensive
                IncomeConsolidated
                Statements of Cash FlowsNotes
                to Consolidated Financial Statements2.
            Financial
                Statement SchedulesSchedule
                II- Valuation and Qualifying AccountsAll
                other financial statement schedules are omitted because of the absence
                of
                conditions under which they are required or because all material
                information required to be reported is included in the consolidated
                financial statements and notes thereto.3.
            Exhibits(3.1)
            Fourth
                Restated Articles of Incorporation, as amended, included as Exhibit
                4.1 to
                Lufkin Industries, Inc.’s (the “Company”) registration statement on Form
                S-8 filed February 17, 2004 (File No. 333-112890), which exhibit
                is
                incorporated herein by reference.(3.2)
            Articles
                of Amendment to Fourth Restated Articles of Incorporation, included
                as
                Exhibit 3.1 to the Company’s current report on Form 8-K of the registrant
                filed December 10, 1999, which exhibit is incorporated herein by
                reference.(3.3)
            Restated
                Bylaws, included as Exhibit 3.1 to the Company’s current report on Form
                8-K of the registrant filed February 21, 2006 (File No. 0-02612),
                which
                exhibit is incorporated herein by reference.(4.1)
            Form
                of Common Stock Certificate, included as Exhibit 4.1 to the Company’s
                quarterly report on Form 10-Q of the registrant filed May 9, 2005
                (File
                No. 0-02612), which exhibit is incorporated herein by
                reference.*
            (10.1)
            1990
                Stock Option Plan, included as Exhibit 4.3 to the Company's registration
                statement on Form S-8 dated August 23, 1995 (File No. 33-62021),
                which
                plan is incorporated herein by reference.*
            (10.2)
            1996
                Nonemployee Director Stock Option Plan, included as Exhibit 4.3 to
                the
                Company's registration statement on Form S-8 dated June 28, 1996
                (File No.
                333-07129), which plan is incorporated herein by
                reference.*
            (10.3)
            Incentive
                Stock Compensation Plan 2000, included as Exhibit 4.4 to the Company's
                registration statement on Form S-8 filed February 17, 2004 (File
                No.
                333-112890), which exhibit is incorporated herein by
                reference.(10.4)
            Credit
                Agreement, dated December 30, 2002, between Lufkin Industries, Inc.,
                JPMorgan Chase Bank and the lenders party thereto, included as Exhibit
                10.1 to the Company’s quarterly report on Form 10-Q of the registrant
                filed May 9, 2005 (File No. 0-02612), which exhibit is incorporated
                herein
                by reference.(10.5)
            Agreement
                and First Amendment to Credit Agreement, dated June 30, 2004, between
                Lufkin Industries, Inc. and JPMorgan Chase Bank, included as Exhibit
                10.2
                to the Company’s quarterly report on Form 10-Q of the registrant filed May
                9, 2005 (File No. 0-02612), which exhibit is incorporated herein
                by
                reference.(10.6)
            Agreement
                and Second Amendment to Credit Agreement, dated February 1, 2005,
                between
                Lufkin Industries, Inc. and JPMorgan Chase Bank, included as Exhibit
                to
                the Company’s quarterly report on 10.3 Form 10-Q of the registrant filed
                May 9, 2005 (File No. 0-02612), which exhibit is incorporated herein
                by
                reference.(10.7)
            Agreement
                and Third Amendment to Credit Agreement between Lufkin Industries,
                Inc.
                and JPMorgan Chase Bank, National Association, included as Exhibit
                10.3 to
                the Company’s current report on Form 8-K of the registrant filed February
                21, 2006 (File No. 0-02612), which exhibit is incorporated herein
                by
                reference.*
            (10.8)
            Form
                of General Stock Option Agreement for the Company’s 1990 Stock Option
                Plan, included as Exhibit 10.4 to the Company’s quarterly report on Form
                10-Q of the registrant filed May 9, 2005 (File No. 0-02612), which
                exhibit
                is incorporated herein by reference.*
            (10.9)
            Form
                of Stock Option Agreement with Chief Executive Officer for the Company’s
                1990 Stock Option Plan, included as Exhibit 10.5 to the Company’s
                quarterly report on Form 10-Q of the registrant filed May 9, 2005
                (File
                No. 0-02612), which exhibit is incorporated herein by
                reference.*
            (10.10)
            Form
                of Stock Option Agreement for the Company’s 1996 Nonemployee Director
                Stock Option Plan, included as Exhibit 10.6 to the Company’s quarterly
                report on Form 10-Q of the registrant filed May 9, 2005 (File No.
                0-02612), which exhibit is incorporated herein by
                reference.*
            (10.11)
            Form
                of General Stock Option Agreement for the Company’s 2000 Incentive Stock
                Compensation Plan, included as Exhibit 10.7 to the Company’s quarterly
                report on Form 10-Q of the registrant filed May 9, 2005 (File No.
                0-02612), which exhibit is incorporated herein by
                reference.*
            (10.12)
            Form
                of Stock Option Agreement with Chief Executive Officer for the 2000
                Incentive Stock Compensation Plan, included as Exhibit 10.8 to the
                Company’s quarterly report on Form 10-Q of the registrant filed May 9,
                2005 (File No. 0-02612), which exhibit is incorporated herein by
                reference.*
            (10.13)
            Thrift
                Plan Restoration Plan for Salaried Employees of Lufkin Industries,
                Inc.,
                as amended.*
            (10.14)
            Retirement
                Plan Restoration Plan for Salaried Employees of Lufkin Industries,
                Inc,
                as amended.*
            (10.15)
            Lufkin
                Industries, Inc. Supplemental Retirement Plan, as
                amended.*
            (10.16)
            Lufkin
                Industries, Inc. 2007 Variable Compensation Plan, included as Exhibit
                10.1
                to Form 8-K filed February 20, 2007 (File
                No. 0-02612), which exhibit is incorporated herein by
                reference.*
            (10.17)
            Severance
                Agreement, dated November 11, 1999, between Lufkin Industries, Inc.
                and
                Larry M. Hoes,
                included as Exhibit 10.13to
                the Company’s quarterly report onForm 10-Qof
                the registrantfiled May 9, 2005 (File No. 0-02612), which exhibit is incorporated
                herein
                by reference.*
            (10.18)
            Severance
                Agreement, dated November 11, 1999, between Lufkin Industries, Inc.
                and
                John F. Glick,
                included as Exhibit 10.14to
                the Company’s quarterly report onForm 10-Qof
                the registrantfiled May 9, 2005 (File No. 0-02612), which exhibit is incorporated
                herein
                by reference.*
            (10.19)
            Severance
                Agreement, dated November 11, 1999, between Lufkin Industries, Inc.
                and
                Scott H. Semlinger,
                included as Exhibit 10.15to
                the Company’s quarterly report onForm 10-Qof
                the registrantfiled May 9, 2005 (File No. 0-02612), which exhibit is incorporated
                herein
                by reference.*
            (10.20)
            Severance
                Agreement, dated May 3, 2000, between Lufkin Industries, Inc. and
                Robert
                D. Leslie,
                included as Exhibit 10.16to
                the Company’s quarterly report onForm 10-Qof
                the registrantfiled May 9, 2005 (File No. 0-02612), which exhibit is incorporated
                herein
                by reference.*
            (10.21)
            Severance
                Agreement, dated November 11, 1999, between Lufkin Industries, Inc.
                and
                Paul G. Perez,
                included as Exhibit 10.17to
                the Company’s quarterly report onForm 10-Qof
                the registrantfiled May 9, 2005 (File No. 0-02612), which exhibit is incorporated
                herein
                by reference.*
            (10.22)
            Amended
                and Restated Employment Agreement, dated January 1, 1999, between
                Lufkin
                Industries, Inc. and Douglas V. Smith.*
            (10.23)
            Severance
                Agreement, dated January 16, 1993, between Lufkin Industries, Inc.
                and
                Douglas V. Smith, included as Exhibit 10.23 to the Company's annual
                report
                on Form 10-K of the registrant filed Match 16, 2006 (File No. 0-02612),
                which exhibit is incorporated herein by reference.*
            (10.24)
            Employment
                Agreement, dated as of August 18, 2006, by and between Lufkin Industries,
                Inc. and Larry M. Hoes (incorporated by reference to Exhibit 10.1
                to
                Lufkin Industries, Inc.’s Form 8-K (File No. 0-02612) filed on August 24,
                2006).*
            (10.25)
            Employment
                Agreement, dated as of August 18, 2006, by and between Lufkin Industries,
                Inc. and John F. Glick (incorporated by reference to Exhibit 10.1
                to
                Lufkin Industries, Inc.’s Form 8-K (File No. 0-02612) filed on August 24,
                2006).*
            (10.26)
            Employment
                Agreement, dated as of August 18, 2006, by and between Lufkin Industries,
                Inc. and Scott H. Semlinger (incorporated by reference to Exhibit
                10.1 to
                Lufkin Industries, Inc.’s Form 8-K (File No. 0-02612) filed on August 24,
                2006).*
            (10.27)
            Employment
                Agreement, dated as of August 18, 2006, by and between Lufkin Industries,
                Inc. and Paul G. Perez (incorporated by reference to Exhibit 10.1
                to
                Lufkin Industries, Inc.’s Form 8-K (File No. 0-02612) filed on August 24,
                2006).*
            (10.28)
            Employment
                Agreement, dated as of August 18, 2006, by and between Lufkin Industries,
                Inc. and Robert D. Leslie (incorporated by reference to Exhibit 10.1
                to
                Lufkin Industries, Inc.’s Form 8-K (File No. 0-02612) filed on August 24,
                2006).(21)
            Subsidiaries
                of the registrant(23)
            Consent
                of Independent Registered Public Accounting Firm(31.1)
            Rule
                13a-14(a)/15d-14(a) Certification of the Chief Executive Officer(31.2)
            Rule
                13a-14(a)/15d-14(a) Certification of the Chief Financial Officer(32.1)
            Section
                1350 Certification of the Chief Executive Officer(32.2)
            Section
                1350 Certification of the Chief Financial
                Officer








*
      Management contract or compensatory plan or arrangement.





**Table
            of Contents**











**SCHEDULE
      II**





Lufkin
      Industries, Inc.


Valuation
      & Qualifying Accounts


(in
      thousands of dollars)


AdditionsBalance
                  at
              
              
              
              Charged
                  to
              
              
              
              Balance
                  atBeginning
              
              Charged
              
              Other
              
              
              
              End
                  ofDescription
              
              of
                  Year
              
              to
                  Expense
              
              Accounts
              
              Deductions
              
              YearAllowance
                  for Doubtful Receivables:Year
                  Ended December 31, 2006
              
              $
              759
              
              
              (206
              )
              
              -
              
              
              (134
              )
              $
              687Year
                  Ended December 31, 2005
              
              
              176
              
              
              510
              
              
              -
              
              
              (73
              )
              
              759Year
                  Ended December 31, 2004
              
              $
              291
              
              
              272
              
              
              -
              
              
              387
              
              $
              176Inventory:
                  Valuation Reserves:Year
                  Ended December 31, 2006
              
              $
              1,171
              
              
              1,466
              
              
              -
              
              
              393
              
              $
              2,244Year
                  Ended December 31, 2005
              
              
              1,151
              
              
              207
              
              
              -
              
              
              187
              
              
              1,171Year
                  Ended December 31, 2004
              
              $
              1,615
              
              
              (195
              )
              
              -
              
              
              269
              
              $
              1,151Inventory:
                  LIFO Reserves:Year
                  Ended December 31, 2006
              
              $
              24,544
              
              
              4,344
              
              
              -
              
              
              -
              
              $
              28,888Year
                  Ended December 31, 2005
              
              
              20,985
              
              
              3,559
              
              
              -
              
              
              -
              
              
              24,544Year
                  Ended December 31, 2004
              
              $
              17,778
              
              
              3,207
              
              
              -
              
              
              -
              
              $
              20,985














**Table
            of Contents**











**SIGNATURES**




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








LUFKIN
                INDUSTRIES, INC.BY
            /s/
                R. D. LeslieR.D.
                LeslieSigning
                on behalf of the registrant and asVice
                President/Treasurer/Chief Financial Officer(Principal
                Financial and Accounting Officer)








LUFKIN
      INDUSTRIES, INC.





Date:
      March 1, 2007




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








Name
            Title
            DateBy
            /s/
                D. V. Smith
            President
                and Chief Executive Officer
            March
                1, 2007D.
                V. Smith
            (Principal
                Executive Officer)By
            /s/
                R. D. Leslie
            Vice
                President/Treasurer/Chief Financial Officer
            March
                1, 2007R.
                D. Leslie
            (Principal
                Financial and Accounting Officer)By
            /s/
                L. M. Hoes
            Director
            March
                1, 2007L.
                M. HoesBy
            /s/
                J. F. Anderson
            Director
            March
                1, 2007J.F.
                AndersonBy
            /s/
                S. V. Baer
            Director
            March
                1, 2007S.
                V. BaerBy
            /s/
                S. W. Henderson, III
            Director
            March
                1, 2007S.
                W. Henderson, IIIBy
            /s/
                J. T. Jongebloed
            Director
            March
                1, 2007J.
                T. JongebloedBy
            /s/
                J. H. Lollar
            Director
            March
                1, 2007J.
                H. LollarBy
            /s/
                B. H. O’Neal
            Director
            March
                1, 2007B.
                H. O'NealBy
            /s/
                H. J. Trout, Jr
            Director
            March
                1, 2007H.
                J. Trout, Jr.By
            /s/
                T. E. Wiener
            Director
            March
                1, 2007T.
                E. Wiener











**Table
            of Contents**





**INDEX
      TO EXHIBITS**





Exhibit
              Number
            Description(3.1)
            Fourth
                Restated Articles of Incorporation, as amended, included as Exhibit
                4.1 to
                Lufkin Industries, Inc.’s (the “Company”) registration statement on Form
                S-8 filed February 17, 2004 (File No. 333-112890), which exhibit
                is
                incorporated herein by reference.(3.2)
            Articles
                of Amendment to Fourth Restated Articles of Incorporation, included
                as
                Exhibit 3.1 to the Company’s current report on Form 8-K of the registrant
                filed December 10, 1999, which exhibit is incorporated herein by
                reference.(3.3)
            Restated
                Bylaws, included as Exhibit 3.1 to the Company’s current report on Form
                8-K of the registrant filed February 21, 2006 (File No. 0-02612),
                which
                exhibit is incorporated herein by reference.(4.1)
            Form
                of Common Stock Certificate, included as Exhibit 4.1 to the Company’s
                quarterly report on Form 10-Q of the registrant filed May 9, 2005
                (File
                No. 0-02612), which exhibit is incorporated herein by
                reference.*
            (10.1)
            1990
                Stock Option Plan, included as Exhibit 4.3 to the Company's registration
                statement on Form S-8 dated August 23, 1995 (File No. 33-62021),
                which
                plan is incorporated herein by reference.*
            (10.2)
            1996
                Nonemployee Director Stock Option Plan, included as Exhibit 4.3 to
                the
                Company's registration statement on Form S-8 dated June 28, 1996
                (File No.
                333-07129), which plan is incorporated herein by
                reference.*
            (10.3)
            Incentive
                Stock Compensation Plan 2000, included as Exhibit 4.4 to the Company's
                registration statement on Form S-8 filed February 17, 2004 (File
                No.
                333-112890), which exhibit is incorporated herein by
                reference.(10.4)
            Credit
                Agreement, dated December 30, 2002, between Lufkin Industries, Inc.,
                JPMorgan Chase Bank and the lenders party thereto, included as Exhibit
                10.1 to the Company’s quarterly report on Form 10-Q of the registrant
                filed May 9, 2005 (File No. 0-02612), which exhibit is incorporated
                herein
                by reference.(10.5)
            Agreement
                and First Amendment to Credit Agreement, dated June 30, 2004, between
                Lufkin Industries, Inc. and JPMorgan Chase Bank, included as Exhibit
                10.2
                to the Company’s quarterly report on Form 10-Q of the registrant filed May
                9, 2005 (File No. 0-02612), which exhibit is incorporated herein
                by
                reference.(10.6)
            Agreement
                and Second Amendment to Credit Agreement, dated February 1, 2005,
                between
                Lufkin Industries, Inc. and JPMorgan Chase Bank, included as Exhibit
                to
                the Company’s quarterly report on 10.3 Form 10-Q of the registrant filed
                May 9, 2005 (File No. 0-02612), which exhibit is incorporated herein
                by
                reference.(10.7)
            Agreement
                and Third Amendment to Credit Agreement between Lufkin Industries,
                Inc.
                and JPMorgan Chase Bank, National Association, included as Exhibit
                10.3 to
                the Company’s current report on Form 8-K of the registrant filed February
                21, 2006 (File No. 0-02612), which exhibit is incorporated herein
                by
                reference.*
            (10.8)
            Form
                of General Stock Option Agreement for the Company’s 1990 Stock Option
                Plan, included as Exhibit 10.4 to the Company’s quarterly report on Form
                10-Q of the registrant filed May 9, 2005 (File No. 0-02612), which
                exhibit
                is incorporated herein by reference.*
            (10.9)
            Form
                of Stock Option Agreement with Chief Executive Officer for the Company’s
                1990 Stock Option Plan, included as Exhibit 10.5 to the Company’s
                quarterly report on Form 10-Q of the registrant filed May 9, 2005
                (File
                No. 0-02612), which exhibit is incorporated herein by
                reference.*
            (10.10)
            Form
                of Stock Option Agreement for the Company’s 1996 Nonemployee Director
                Stock Option Plan, included as Exhibit 10.6 to the Company’s quarterly
                report on Form 10-Q of the registrant filed May 9, 2005 (File No.
                0-02612), which exhibit is incorporated herein by
                reference.*
            (10.11)
            Form
                of General Stock Option Agreement for the Company’s 2000 Incentive Stock
                Compensation Plan, included as Exhibit 10.7 to the Company’s quarterly
                report on Form 10-Q of the registrant filed May 9, 2005 (File No.
                0-02612), which exhibit is incorporated herein by
                reference.*
            (10.12)
            Form
                of Stock Option Agreement with Chief Executive Officer for the 2000
                Incentive Stock Compensation Plan, included as Exhibit 10.8 to the
                Company’s quarterly report on Form 10-Q of the registrant filed May 9,
                2005 (File No. 0-02612), which exhibit is incorporated herein by
                reference.*
            (10.13)
            Thrift
                Plan Restoration Plan for Salaried Employees of Lufkin Industries,
                Inc.,
                as amended.*
            (10.14)
            Retirement
                Plan Restoration Plan for Salaried Employees of Lufkin Industries,
                Inc,
                as amended.*
            (10.15)
            Lufkin
                Industries, Inc. Supplemental Retirement Plan, as
                amended.*
            (10.16)
            Lufkin
                Industries, Inc. 2007 Variable Compensation Plan, included as Exhibit
                10.1
                to Form 8-K filed February 20, 2007 (File
                No. 0-02612), which exhibit is incorporated herein by
                reference.*
            (10.17)
            Severance
                Agreement, dated November 11, 1999, between Lufkin Industries, Inc.
                and
                Larry M. Hoes,
                included as Exhibit 10.13to
                the Company’s quarterly report onForm 10-Qof
                the registrantfiled May 9, 2005 (File No. 0-02612), which exhibit is incorporated
                herein
                by reference.*
            (10.18)
            Severance
                Agreement, dated November 11, 1999, between Lufkin Industries, Inc.
                and
                John F. Glick,
                included as Exhibit 10.14to
                the Company’s quarterly report onForm 10-Qof
                the registrantfiled May 9, 2005 (File No. 0-02612), which exhibit is incorporated
                herein
                by reference.*
            (10.19)
            Severance
                Agreement, dated November 11, 1999, between Lufkin Industries, Inc.
                and
                Scott H. Semlinger,
                included as Exhibit 10.15to
                the Company’s quarterly report onForm 10-Qof
                the registrantfiled May 9, 2005 (File No. 0-02612), which exhibit is incorporated
                herein
                by reference.*
            (10.20)
            Severance
                Agreement, dated May 3, 2000, between Lufkin Industries, Inc. and
                Robert
                D. Leslie,
                included as Exhibit 10.16to
                the Company’s quarterly report onForm 10-Qof
                the registrantfiled May 9, 2005 (File No. 0-02612), which exhibit is incorporated
                herein
                by reference.*
            (10.21)
            Severance
                Agreement, dated November 11, 1999, between Lufkin Industries, Inc.
                and
                Paul G. Perez,
                included as Exhibit 10.17to
                the Company’s quarterly report onForm 10-Qof
                the registrantfiled May 9, 2005 (File No. 0-02612), which exhibit is incorporated
                herein
                by reference.*
            (10.22)
            Amended
                and Restated Employment Agreement, dated January 1, 1999, between
                Lufkin
                Industries, Inc. and Douglas V. Smith.*
            (10.23)
            Severance
                Agreement, dated January 16, 1993, between Lufkin Industries, Inc.
                and
                Douglas V. Smith, included as Exhibit 10.23 to the Company's annual
                report
                on Form 10-K of the registrant filed Match 16, 2006 (File No. 0-02612),
                which exhibit is incorporated herein by reference.*
            (10.24)
            Employment
                Agreement, dated as of August 18, 2006, by and between Lufkin Industries,
                Inc. and Larry M. Hoes (incorporated by reference to Exhibit 10.1
                to
                Lufkin Industries, Inc.’s Form 8-K (File No. 0-02612) filed on August 24,
                2006).*
            (10.25)
            Employment
                Agreement, dated as of August 18, 2006, by and between Lufkin Industries,
                Inc. and John F. Glick (incorporated by reference to Exhibit 10.1
                to
                Lufkin Industries, Inc.’s Form 8-K (File No. 0-02612) filed on August 24,
                2006).*
            (10.26)
            Employment
                Agreement, dated as of August 18, 2006, by and between Lufkin Industries,
                Inc. and Scott H. Semlinger (incorporated by reference to Exhibit
                10.1 to
                Lufkin Industries, Inc.’s Form 8-K (File No. 0-02612) filed on August 24,
                2006).*
            (10.27)
            Employment
                Agreement, dated as of August 18, 2006, by and between Lufkin Industries,
                Inc. and Paul G. Perez (incorporated by reference to Exhibit 10.1
                to
                Lufkin Industries, Inc.’s Form 8-K (File No. 0-02612) filed on August 24,
                2006).*
            (10.28)
            Employment
                Agreement, dated as of August 18, 2006, by and between Lufkin Industries,
                Inc. and Robert D. Leslie (incorporated by reference to Exhibit 10.1
                to
                Lufkin Industries, Inc.’s Form 8-K (File No. 0-02612) filed on August 24,
                2006).(21)
            Subsidiaries
                of the registrant(23)
            Consent
                of Independent Registered Public Accounting Firm(31.1)
            Rule
                13a-14(a)/15d-14(a) Certification of the Chief Executive Officer(31.2)
            Rule
                13a-14(a)/15d-14(a) Certification of the Chief Financial Officer(32.1)
            Section
                1350 Certification of the Chief Executive Officer(32.2)
            Section
                1350 Certification of the Chief Financial
                Officer








*
      Management contract or compensatory plan or
      arrangement.