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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



FORM 10-K



ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT
OF 1934



|                                            |  |                              
|------------------------------------------- |  | -----------------------------
|For the fiscal year ended December 31, 2003 |  | Commission file number 0-2612



LUFKIN INDUSTRIES,
INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Texas                                                          |  | 75-0404410                          
|(State or other jurisdiction of 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 1 936/634-2211



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



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes x No ̈



The aggregate market value of the Companys voting stock held by non-affiliates as of the last day of the second fiscal quarter,
June 30, 2003, was $159,852,557.



6,733,128 shares of the Companys
Common Stock were outstanding on March 8, 2004.



DOCUMENTS
INCORPORATED BY REFERENCE



The information called for by Items 10, 11, 12,
13 and 14 of Part III will be incorporated by reference from the registrants definitive proxy statement to be filed pursuant to Regulation 14A.



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1



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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 1,900 people at December 31, 2003, including approximately 1,300 that were paid on an hourly basis. 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:



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.



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 our customers as well as their long-term perceptions of the level and stability of the price of oil.
Also, the availability of used pumping unit equipment impacts the North American market.



Competition:



The primary
global competition for new pumping units and automation equipment is Weatherford. 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.



2



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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- Gearboxes where revolutions per minute (RPM) exceed 4,000 and range up to 60,000. 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 where RPM are below 4,000. 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:



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.



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.



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 Maag, Flender Graffenstaden, BHS, Renk, Allen Gear and Horsburgh & Scott. While price is an important factor, proven designs and workmanship 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. These are the highest production trailer in the segment.



Floats- 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.



Service- Through a network of company-owned branches, both trailers produced by the Company and by others are
repaired and serviced.



Raw Materials:



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. However, raw material shortages are infrequent.



3



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Trailer (Continued)



Markets:



The Company primarily sells its products in the United States to small and medium size fleet freight-hauling companies. 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.



In the last several years, the freight-hauling market has been severely depressed due to low freight volumes and higher operating costs. This has caused
many freight companies to go out of business, which has lead to the bankruptcy of some trailer manufacturers.



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, Fontaine and Hyundai. The Company does not have a significant market share in the trailer market.



For additional information about the Companys business segments and geographic areas, see Note 16 in Notes to Consolidated Financial Statements
included in this report.



We make available, free of charge,
through our website, www.lufkin.com, our 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 soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.



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 shop, structural shops, assembly shops and warehouses. Also, the Company has numerous service centers throughout the U.S. to support the oil field, power transmission and trailer markets. The majority of these locations are owned in fee,
with some leased. Internationally, the Company also has facilities in Canada, Egypt and Argentina for the production and servicing of pumping units and has a plant in France that manufactures, assembles and services industrial gears and power
transmission products throughout Europe.



Item 3. Legal Proceedings



A class action complaint was filed in the United States
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 of 1998 and in Lufkin,
Texas in August of 1998. The District Court in April of 1999 issued a decision that certified a class for this case, which includes all persons of a certain minority employed by the Company from March 6, 1994, to the present. The Company appealed
this class certification decision by the District Court to the 5th Circuit United States Court of Appeals in New Orleans, Louisiana. This appeal was denied on June 23, 1999. The Company is defending this action vigorously. Furthermore, the Company
believes that the facts and the law in this action support its position and is confident that it will prevail if this case is tried on its merits. Trial for this case began in December 2003 but was postponed by the Court and is in recess until
further notice.



In the case of Echometer and James N. McCoy
vs. Lufkin Industries, Inc., the plaintiff filed suit in U.S. District Court alleging infringement of a fluid-level device patent and received a jury verdict on September 26, 2003, in the amount of $150,000. The trial court judge is reviewing
post-trial motions before finalizing the judgment, which could materially impact the amount of the verdict. A final decision on the judgment is expected by the end of March 2004.



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



4



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PART II



Item 5. Market for the Registrants Common Equity and Related Stockholder Matters



Common Stock Information



|        |  |             |        |             |   |          |  |      |      |     |   |          |  |   |        |  |   |     
|------- |  | ----------- | ------ | ----------- | - | -------- |  | ---- | ---- | --- | - | -------- |  | - | ------ |  | - | ----
|        |  | 2003        |        | 2002       
|        |  | Stock Price |        | Stock Price
|Quarter |  | High        |        | Low         |   | Dividend |  | High |      | Low |   | Dividend
|First   |  | $           | 25.560 |             | $ | 18.500   |  | $    | 0.18 |     | $ | 27.000   |  | $ | 21.820 |  | $ | 0.18
|Second  |  |             | 27.000 |             |   | 18.810   |  |      | 0.18 |     |   | 29.730   |  |   | 23.460 |  |   | 0.18
|Third   |  |             | 27.000 |             |   | 22.580   |  |      | 0.18 |     |   | 28.700   |  |   | 23.910 |  |   | 0.18
|Fourth  |  |             | 29.460 |             |   | 22.690   |  |      | 0.18 |     |   | 28.180   |  |   | 22.300 |  |   | 0.18



The Companys
common stock is traded on the NASDAQ Stock Market (National Market) under the symbol LUFK and as of February 27, 2004, there were approximately 573 record holders of its common stock.



The Company has paid cash dividends for 64 consecutive years. Total dividend payments were $ 4,714,000, $4,670,000, and
$4,481,000 in 2003, 2002 and 2001, respectively.



Securities
authorized for issuance under equity compensation plans at December 31, 2003, are as follows:



|                                                           |  |                                                                                            |  |                                                                          |       |                                                                                                |        
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------ | ----- | ---------------------------------------------------------------------------------------------- | -------
|Plan Category                                              |  | Number of securities to be issued uponexercise of outstanding options, warrants and rights |  | Weighted-averageexercise price ofoutstanding options,warrants and rights |       | Number of securities remaining available for future issuanceunder
equitycompensation plans (a)
|Equity compensation plans approved by security holders     |  | 1,058,914                                                                                  |  | $                                                                        | 22.63 |                                                                                                | 436,771
|Equity compensation plans not approved by security holders |  |                                                                                           |  |                                                                          |      |                                                                                                |       
|                                                           |  |                                                                                            |  |                                                                          |       |                                                                                                |        
|Total                                                      |  | 1,058,914                                                                                  |  | $                                                                        | 22.63 |                                                                                                | 436,771
|                                                           |  |                                                                                            |  |                                                                          |       |                                                                                                |        



(a) Excludes
securities reflected in the first column, Number of securities to be issued upon exercise of outstanding options, warrants and rights.



Item 6. Selected Financial Data



Five Year Summary of Selected Consolidated Financial Data



|                                        |  |      |       |      |   |       |  |      |       |      |   |       |  |   |       |  
|--------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | - | ----- | -
|(In millions, except per share data)    |  | 2003 |       | 2002 |   | 2001  |  | 2000 |       | 1999 |  
|Sales                                   |  | $    | 262.3 |      | $ | 228.7 |  | $    | 278.9 |      | $ | 254.6 |  | $ | 246.0 |  
|Net earnings (loss)                     |  |      | 9.7   |      |   | 8.5   |  |      | 19.5  |      |   | 7.0   |  |   | (1.3  | )
|Net earnings (loss) per share           |  |      |       |      |   |       |  |      |       |      |   |       |  |   |       |  
|Basic                                   |  |      | 1.49  |      |   | 1.29  |  |      | 3.12  |      |   | 1.11  |  |   | (0.20 | )
|Diluted                                 |  |      | 1.46  |      |   | 1.26  |  |      | 3.03  |      |   | 1.11  |  |   | (0.20 | )
|Total assets                            |  |      | 263.7 |      |   | 248.4 |  |      | 246.1 |      |   | 233.6 |  |   | 221.4 |  
|Long-term notes payable, net of current |  |      | 0.0   |      |   | 0.2   |  |      | 0.3   |      |   | 7.0   |  |   | 9.1   |  
|Cash dividends per share                |  |      | 0.72  |      |   | 0.72  |  |      | 0.72  |      |   | 0.72  |  |   | 0.72  |  



5



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Item 6. Selected Financial Data (Continued)



Quarterly Financial Data (Unaudited)



|                                     |  |              |      |               |   |               |  |               |      |  |   |     
|------------------------------------ |  | ------------ | ---- | ------------- | - | ------------- |  | ------------- | ---- |  | - | ----
|(In millions, except per share data) |  | FirstQuarter |      | SecondQuarter |   | Third Quarter |  | FourthQuarter
|2003                                 |  |              |      |               |   |               |  |               |      |  |   |     
|Sales                                |  | $            | 55.1 |               | $ | 61.1          |  | $             | 71.5 |  | $ | 74.6
|Gross profit                         |  |              | 9.3  |               |   | 11.0          |  |               | 16.2 |  |   | 15.5
|Net earnings                         |  |              | 0.8  |               |   | 2.2           |  |               | 3.4  |  |   | 3.3 
|Basic earnings per share             |  |              | 0.12 |               |   | 0.34          |  |               | 0.52 |  |   | 0.51
|Diluted earnings per share           |  |              | 0.12 |               |   | 0.33          |  |               | 0.51 |  |   | 0.50
|                                     |  |              |      |              
|2002                                 |  |              |      |               |   |               |  |               |      |  |   |     
|Sales                                |  | $            | 51.0 |               | $ | 60.9          |  | $             | 60.8 |  | $ | 56.0
|Gross profit                         |  |              | 8.2  |               |   | 14.1          |  |               | 14.2 |  |   | 10.3
|Net earnings                         |  |              | 0.2  |               |   | 3.5           |  |               | 3.8  |  |   | 1.0 
|Basic earnings per share             |  |              | 0.03 |               |   | 0.53          |  |               | 0.57 |  |   | 0.17
|Diluted earnings per share           |  |              | 0.03 |               |   | 0.52          |  |               | 0.56 |  |   | 0.16



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



Overview



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 and
services 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-add 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, during the
third quarter of 2003, the Company completed two strategic acquisitions that will expand its Oil Field segment. The Company purchased the remaining shares of Lufkin Argentina S.A., its 1992 Argentina joint venture with Baker Hughes, Inc, effective
July 1, 2003. Lufkin Argentina manufactures and services oil field pumping units and automation equipment for use in Argentina and other South American countries. The Company also purchased the operating assets of Basin Technical Services in
Midland, Texas on July 30, 2003. This acquisition enhances Oil Fields product and service offerings in the oil field automation marketplace. Also, during the fourth quarter of 2003, the Company completed the acquisition on December 9, 2003, of
the operating assets and commercial operations of D&R Oilfield Services located in Drayton Valley, Alberta, Canada. This acquisition within the Oilfield segment strengthens the Companys presence in Canadas oil field service business.



In addition, the Company expanded its Power Transmission
capabilities through a new gear repair facility in Alabama that will service the Southeast U.S. and through new high-speed gearbox manufacturing capabilities in its French operation.



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, 2003, increased to $262.3 million from $228.7 million for the year ended December 31, 2002, or 14.7%. Sales
for 2001 were $278.9 million. This growth in 2003 was primarily driven by increased sales of new oil field equipment, new van trailers and acquisitions. The oil field market, though, has not returned to the activity levels seen in 2001. Additional
segment data on sales is provided later in this section.



6



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Gross margin for the year ended December 31, 2003, decreased to 19.8% from 20.5% for the year ended
December 31, 2002, and 24.4% for year ended December 31, 2001. This overall gross margin decline was due to increased price competition in all segments, the impact of reduced volumes on plant efficiency and utilization and reduced pension income.
Additional segment data on gross margin is provided later in this section.



The changes in sales and gross margin primarily drove the changes in net earnings. The Company reported net earnings of $9.7 million or $1.46 per share (diluted) for the year ended December 31, 2003, compared to net
earnings of $8.5 million or $1.26 per share (diluted) for the year ended December 31, 2002. Net income of $19.5 million or $3.03 per share (diluted) was reported for the year ended December 31, 2001.



Debt/equity (long-term debt net of current portion as a percentage of total
equity) levels decreased to 0.0% at December 31, 2003, from 0.1% at December 31, 2002. Short-term debt and the current portion of long-term debt was $0.7 million at December 31, 2003, up slightly from $0.3 million at December 31, 2002. Cash balances
at December 31, 2003, were $19.4 million, down from $27.6 million at December 31, 2002, due to higher capital expenditures, acquisitions and inventory levels in support of the Companys strategies as well as certain volume-related working
capital requirements.



Other Events



In October 2002, the Company experienced a two-week work stoppage by its
unionized workforce at its primary manufacturing facilities in Lufkin, Texas. This work stoppage was related to health-care and pension benefit differences during contract negotiations. While certain shipments were delayed during the fourth quarter
of 2002, this work stoppage did not have a significant impact on the overall results of the fourth quarter of 2002.



In the second quarter of 2003, the Company incurred a one-time severance expense of $354,000 for the lay-offs and early-retirements of certain employees.
These employee reductions were related to modifying the strategy of the Trailer branch facilities to focus primarily on parts from parts and service and other targeted cost reductions in areas not achieving profitability goals. The Oil Field segment
incurred $89,000, Power Transmission incurred $144,000, Trailer incurred $104,000 and Corporate incurred $17,000 of this severance expense.



Year Ended December 31, 2003 Compared to Year Ended December 31, 2002:



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



|                        |  |      |         |      |   |                    |  |   |                      |   |  |       |  
|----------------------- |  | ---- | ------- | ---- | - | ------------------ |  | - | -------------------- | - |  | ----- | -
|Year Ended December 31, |  | 2003 |         | 2002 |   | Increase(Decrease) |  |   | % Increase(Decrease) |  
|Sales                   |  |      |         |      |   |                    |  |   |                      |   |  |       |  
|Oil Field               |  | $    | 144,082 |      | $ | 118,700            |  | $ | 25,382               |   |  | 21.4  |  
|Power Transmission      |  |      | 74,625  |      |   | 70,455             |  |   | 4,170                |   |  | 5.9   |  
|Trailer                 |  |      | 43,548  |      |   | 39,569             |  |   | 3,979                |   |  | 10.1  |  
|                        |  |      |         |      |   |                    |  |   |                      |   |  |       |  
|Total                   |  | $    | 262,255 |      | $ | 228,724            |  | $ | 33,531               |   |  | 14.7  |  
|                        |  |      |         |      |   |                    |  |   |                      |   |  |       |  
|Gross Profit            |  |      |         |      |   |                    |  |   |                      |   |  |       |  
|Oil Field               |  | $    | 32,532  |      | $ | 24,953             |  | $ | 7,579                |   |  | 30.4  |  
|Power Transmission      |  |      | 19,428  |      |   | 19,566             |  |   | (138                 | ) |  | (0.1  | )
|Trailer                 |  |      | 57      |      |   | 2,319              |  |   | (2,262               | ) |  | (97.5 | )
|                        |  |      |         |      |   |                    |  |   |                      |   |  |       |  
|Total                   |  | $    | 52,017  |      | $ | 46,838             |  | $ | 5,179                |   |  | 11.1  |  
|                        |  |      |         |      |   |                    |  |   |                      |   |  |       |  



Oil Field sales
increased to $144.1 million, or 21.4%, for the year ended December 31, 2003, from $118.7 million for the year ended December 31, 2002. The added sales of the acquisitions and the benefit of the stronger Canadian dollar in 2003 contributed 10.4
percentage points of this increase. The balance of the increase, 11.0 percentage points, is accounted for by increased sales of new pumping units in the U.S. from higher drilling and production activity associated with higher energy prices and
increased sales of automation equipment from new product offerings. This increase was partially offset by a decline in sales of new pumping units into Canada from new drilling activity in Canada focusing on shallow wells, which use other forms of
artificial lift. Oil Fields backlog increased to $25.0 million as of December 31, 2003, from $12.6 million at December 31, 2002. This backlog increase was primarily from a $5.8 million benefit from the Argentina acquisition, increased bookings
of new pumping units in the U.S. small independent market, increasing deep-well drilling activity in Canada and Foundry machine tool orders from a general improvement in the U.S. industrial markets.



7



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Gross margin (gross profit as a percentage of revenue) for the Oil Field segment increased to 22.6% for
year ended December 31, 2003, compared to 21.1% for the year ended December 31, 2002, or 1.5 percentage points. This margin improvement was primarily the result of higher utilization of manufacturing facilities and continued cost containment
efforts. This was partially offset by the 1.4 percentage point impact of reduced pension income, which is discussed at the end of this section, and severance expenses.



Direct selling, general and administrative expenses for Oil Field increased to $8.4 million, or 10.7%, for year ended
December 31, 2003, 2003, from $7.6 million for the for year ended December 31, 2002. The additional expenses of Lufkin Argentina contributed 7.9% percentage points of this increase.



Sales for the Companys Power Transmission segment increased to $74.6 million, or 5.9%, for the year ended December 31,
2003, compared to $70.5 million for the year ended December 31, 2002. The benefit of the stronger euro on the sales of the French division contributed 3.8 percentage points of this increase. The additional 2.1 percentage points of growth was the
result of increased sales in the French operation, in euros, due to the addition of the high-speed product line and increased sales in the U.S. from new high-speed units to the oil and gas markets and the gear repair expansion in the Southeast U.S.
These gains were partially offset by a drop in sales in new low-speed units to the rubber market due to capital spending restraints from poor market conditions in the tire industry. The Companys Power Transmission backlog at December 31, 2003,
decreased to $24.8 million from $30.9 million at December 31, 2002. This backlog decline was from lower orders of new high-speed units in the oil and gas market due to short-term project delays and price competition and lower orders in the power
generation market from limited capital expansion activity.



Gross margin for the Power Transmission segment decreased to 26.0% for the year ended December 31, 2003, compared to 27.8% for the year ended December 31, 2002, or 1.8 percentage points. This decline was due to lower margins on new
high-speed units in the U.S. from several large project orders comprising multiple units, which are typically more competitive and price-sensitive and the 1.4 percentage point impact of reduced pension income and severance expenses.



Direct selling, general and administrative expenses for Power Transmission
increased to $11.9 million, or 17.0%, for the year ended December 31, 2003, from $10.2 million for the year ended December 31, 2002. Of this increase, the stronger euro contributed 7.2 percentage points. The balance of the increase was due to higher
third-party commissions in the U.S. associated with the above-mentioned large project orders, higher engineering expenses in France in support of the new high-speed product line and increased selling effort in the gear repair market.



Trailer sales for the year ended December 31, 2003, increased to $43.5
million, or 10.1%, from $39.6 million for the year ended December 31, 2002. This growth was negatively impacted by 5.8 percentage points from the change of strategy, implemented in the second quarter of 2003, of its branch locations to focus
primarily on parts sales instead of parts and service. The 15.9 percentage point increase in other trailer sales was primarily from increased sales of new vans as higher U.S. freight tonnage has led to more orders from freight-haulers and increased
sales of floats due to the introduction of a new model. These increases were partially offset by a decline in sales of dump trailers as orders from the construction market have been weak. Backlog for the Trailer segment totaled $11.1 million at
December 31, 2003, compared to $10.1 million at December 31, 2002. The backlog increase was primarily from floats due to the growth in demand for the new model.



Trailer gross margin declined to 0.1% for the year ended December 31, 2003, from 5.9% for the year ended December 31, 2002, or 5.8 percentage points
This margin decline was due to continued pricing pressure on all models of trailers in the depressed freight-hauling market and the 3.1 percentage point impact of reduced pension income and severance expenses.



Direct selling, general and administrative expenses for Trailer increased to
$2.1 million, or 36.1%, for the year ended December 31, 2003, from $1.5 million for the year ended December 31, 2002, due to an increase in general liability insurance claims. While insurance claim filings cannot be accurately forecasted, this
increase is not expected to recur on an ongoing and regular basis.



Corporate administrative expenses, which are allocated to the segments primarily based on sales, increased to $15.2 million, or 7.3%, for the year ended December 31, 2003, from $14.2 million for the year ended December 31, 2002, primarily
due to higher legal expenses associated with the Echometer trial in September of 2003 and the class action trial in December of 2003.



Investment income, interest expense and other income and expense for the year ended December 31, 2003, totaled $1.2 million of income compared to income
of $0.4 million for the year ended December 31, 2002. The increase was due primarily to the one-time gain of almost $1,000,000 on the sale of the Companys twenty-year old aircraft, partially offset by lower interest income from lower cash
balances.



8



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Pension income, which is reported as a reduction of cost of sales, declined to $1.8 million for the year
ended December 31, 2003, or 65.1%, compared to $5.3 million for the year ended December 31, 2002. This decline was primarily due to lower expected returns on plan assets due to the lower fair market value of the plan assets. Pension income in 2004
is expected to increase to approximately $3.0 million due to higher fair market value of the plan assets increasing the expected return. In deriving this forecast, the Company reviewed its assumptions for 2004 and lowered the discount rate to 6.25%
from 6.75%, the expected long-term return on assets to 8.50% from 8.75% and the compensation rate increase to 4.25% from 4.50%.



Year Ended December 31, 2002 Compared to Year Ended December 31, 2001:



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



|                        |  |      |         |      |   |                    |  |   |                      |   |  |       |  
|----------------------- |  | ---- | ------- | ---- | - | ------------------ |  | - | -------------------- | - |  | ----- | -
|Year Ended December 31, |  | 2002 |         | 2001 |   | Increase(Decrease) |  |   | % Increase(Decrease) |  
|Sales                   |  |      |         |      |   |                    |  |   |                      |   |  |       |  
|Oil Field               |  | $    | 118,700 |      | $ | 182,271            |  | $ | (63,571              | ) |  | (34.9 | )
|Power Transmission      |  |      | 70,455  |      |   | 62,498             |  |   | 7,957                |   |  | 12.7  |  
|Trailer                 |  |      | 39,569  |      |   | 34,138             |  |   | 5,431                |   |  | 15.9  |  
|                        |  |      |         |      |   |                    |  |   |                      |   |  |       |  
|Total                   |  | $    | 228,724 |      | $ | 278,907            |  | $ | (50,183              | ) |  | (18.0 | )
|                        |  |      |         |      |   |                    |  |   |                      |   |  |       |  
|Gross Profit            |  |      |         |      |   |                    |  |   |                      |   |  |       |  
|Oil Field               |  | $    | 24,953  |      | $ | 48,876             |  | $ | (23,923              | ) |  | (48.9 | )
|Power Transmission      |  |      | 19,566  |      |   | 18,946             |  |   | 620                  |   |  | 3.3   |  
|Trailer                 |  |      | 2,319   |      |   | 227                |  |   | 2,092                |   |  | 921.6 |  
|                        |  |      |         |      |   |                    |  |   |                      |   |  |       |  
|Total                   |  | $    | 46,838  |      | $ | 68,049             |  | $ | (21,211              | ) |  | (31.2 | )
|                        |  |      |         |      |   |                    |  |   |                      |   |  |       |  



Oil Field sales for
the year ended December 31, 2002, decreased 34.9% to $118.7 million from $182.3 million in the year ended December 31, 2001. Lower energy prices in the first half of 2002 caused declines in oil field drilling and production activity, directly
impacting the sale of new pumping units. The higher energy prices seen in the last half of 2002 have not translated into higher activity levels. Drilling activity has not increased with the higher energy prices due to uncertainty over both future
global demand levels and the stability of the price of oil. This was also reflected in the backlog of Oil Field, which declined to $12.6 million at December 31, 2002, from $19.4 million at December 31, 2001.



Gross profit for Oil Field decreased to $25.0 million, or 48.9%, for the year
ended December 31, 2002, compared to $48.9 million for the year ended December 31, 2001, due primarily to the decline in sales of oil field products but also due to a decline in the gross margin. Gross margin decreased to 21.1% in 2002 compared to
26.9% in 2001 due to the product mix shifting towards lower margin commercial castings and fixed production costs increasing as a percentage of revenue.



Direct selling, general and administrative expenses for Oil Field decreased to $7.6 million, or 20.0%, for the year ended December 31, 2002, from $9.5
million for the year ended December 31, 2001. This decrease was due to lower third-party sales commissions and lower legal expenses associated with ongoing and routine litigation. In 2002 certain types of legal expenses previously charged directly
to Oilfield were charged to Corporate.



Sales for the
Companys Power Transmission segment increased to $70.5 million, or 12.7%, for the year ended December 31, 2002, compared to $62.5 million for the year ended December 31, 2001. High-speed applications serving the oil and gas, refinery and
petrochemical markets increased in 2002 with some improvement seen in low-speed applications for the sugar and marine markets. However, demand in the power generation, steel and rubber markets continues to remain weak, contributing to the decline in
Power Transmission backlog to $30.9 million as of December 31, 2002, compared to $31.5 million as of December 31, 2001.



Power Transmission gross profit increased to $19.6 million, or 3.3%, for the year ended December 31, 2002, from $18.9 million for the year ended December
31, 2001. This improvement did not match the increase in sales, due to a gross margin decline to 27.8% for the year ended December 31, 2002, from 30.4% for the year ended December 31, 2001. Higher margins on sales of high-speed gearboxes and parts
were offset by a decline in inter-segment revenue to the Oil Field segment, reducing from $12.8 million in 2001 to a more normal level of $1.8 million in 2002. Due to the extraordinary demand for pumping units in Oil Field in 2001, Power
Transmission produced a large number of gearboxes for Oil Field. While these gearboxes were sold near cost to Oil Field, this incremental volume improved plant utilization and fixed cost absorption of Power Transmission, improving the overall gross
margin.



9



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Direct selling, general and administrative expenses for Power Transmission increased slightly to $10.2
million, or 1.0%, for the year ended December 31, 2002, from $10.1 million for the year ended December 31, 2001.



Trailer sales for the year ended December 31, 2002, increased 15.9% to $39.6 million from $34.1 million for the year ended December 31, 2001, due to some
improvement in the freight-hauling market. However, the market remained depressed due to a combination of lower shipping volumes, higher fuel costs, higher personnel costs and higher insurance rates. The continued depressed state of the market is
reflected in the decline in backlog from $13.5 million at December 31, 2001, to $10.1 million at December 31, 2002.



Trailer gross profit and margin improved to $2.3 million and 5.9%, respectively, for the year ended December 31, 2002, from $0.2 and 0.7%, respectively,
for the year ended December 31, 2001. This gross margin improvement was primarily due to two factors: cost containment efforts and reduced warranty charges. Labor and overhead costs only increased 12.0% in 2002 compared to 2001 versus the 15.9%
revenue increase. Warranty charges were lower due to improved quality efforts and a lower pool of trailers under warranty.



Direct selling, general and administrative expenses for Trailer decreased to $1.5 million, or 31.9%, for the year ended December 31, 2002, from $2.2
million for the year ended December 31, 2001. This decrease was primarily due to lower insurance claim expenses.



Corporate administrative expenses, which are allocated to the segments primarily based on sales, increased to $14.2 million, or 6.8%, for the year ended
December 31, 2002, from $13.3 million for the year ended December 31, 2001, due to costs associated with the settlement of the labor dispute in the fourth quarter of 2002 and higher legal expenses associated with ongoing and routine litigation.



Other income and expense for the year ended December 31, 2002,
totaled $0.4 million of income versus $0.7 million of expense for the year ended December 31, 2001. This improvement was due to higher interest income from invested cash, lower interest expense from reduced debt levels and the non-recurrence of
losses on asset disposals incurred in 2001.



Pension income,
which is reported as a reduction of cost of sales in each segment, decreased to $5.3 million, or 10.2%, for the year ended December 31, 2002, from $5.9 million for the year ended December 31, 2001. This decline was because liabilities of the plan
increased while the expected return on assets declined from a reduction in the fair market value. Pension income in 2003 is expected to decline to approximately $2.5 million due to further declines in the fair market value of the assets of the plan
lowering the expected return. In conjunction with these market declines, the Company reviewed its assumptions for 2003 and lowered the discount rate to 6.75% from 7.00%, the expected long-term return on assets to 8.75% from 9.00% and the
compensation rate increase to 4.50% from 5.00%.



Liquidity and
Capital Resources



The Company has historically relied on
cash flows from operations and third-party borrowings to finance its operations, including acquisitions, dividend payments and stock repurchases.



The Companys cash balance totaled $19.4 million at December 31, 2003, compared to $27.6 million at December 31, 2002. For the year ended December
31, 2003, net cash provided by operating activities was $13.5 million, cash used in investing activities totaled $18.5 million, cash used in financing activities amounted to $3.3 million and the favorable effect of foreign currency translation
amounted to $0.1 million. Significant components of cash provided by operating activities include net earnings adjusted for non-cash expenses of $20.4 million offset by a net increase in working capital of $6.9 million. This increase was primarily
due to higher inventory and accounts receivable, which consumed $5.2 million and $3.1 million, respectively. Oilfield inventory increased due to planned inventory build in anticipation of higher demand. Accounts receivable increased primarily in Oil
Field and Power Transmission due to higher revenue volumes and the granting of more extended credit terms to various international customers where longer credit terms are customary. Cash used in investing activities included net capital expenditures
totaling $11.8 million, an increase in other long-term assets of $0.9 million and acquisitions of other companies for $5.8 million. Capital expenditures in 2003 were primarily for additions and replacements of production equipment and operating
vehicles in the Oil Field segment, the expansion into the Southeast U.S. for repairing power transmission equipment and the replacement of the Companys twenty year-old aircraft, partially offset by the proceeds from the sale of the old plane.
Capital expenditures for 2004 are projected to be approximately $12.0 to $14.0 million. Significant components of cash used in financing activities included proceeds from short-term notes payable of $0.5 million, payments on long-term debt of $0.3
million, proceeds from the exercise of stock options of $1.2 million and dividend payments of $4.7 million or $0.72 per share.



Total debt balances at December 31, 2003, including current maturities of long-term debt, consisted of $0.5 million of short-term notes payable and $0.2
million of long-term notes payable, all current, to various banks. This debt is all associated with its French operations. As of December 31, 2003, the Company had no outstanding debt associated with the Bank Facility



10



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discussed below. Total debt increased by $0.3 million, consisting of short-term borrowings of $0.5 million and payments
on long-term notes payable of $0.2 million during 2003.



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 for up to $17.5 million of committed borrowings along with an additional
$10.0 million discretionary line of credit. This facility expires December 30, 2005. 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. As of December 31,
2003, 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.



In addition, the Company has short-term borrowing capabilities with a French bank for the working capital needs of its
French operation. The repayment terms are 60 days with interest calculated at the Euro Overnight Index Average plus an applicable margin, with specific accounts receivable provided as security. As of December 31, 2003, $0.5 million was outstanding
with this borrowing arrangement.



The Company currently has a
stock repurchase plan under which the Company is authorized to spend up to $19.1 million for repurchases of its common stock. In the second quarter of 2003, the Board of Directors authorized an additional $2.0 million of stock repurchases to the
plan. Pursuant to this plan, the Company has repurchased a total of 828,370 shares of its common stock at an aggregate purchase price of $17.0 million. A total of 1,500 shares were repurchased during the year ended December 31, 2003, at an average
price of $20.46 per share. Repurchased shares are added to treasury stock and are available for general corporate purposes including the funding of the Companys stock option plans. As of December 31, 2003, the Company held 302,239 shares of
treasury stock at an aggregate cost of approximately $6.2 million. Authorizations of approximately $2.1 million remained at December 31, 2003.



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



|                                                 |  |       |     |      |   |            |  |            |    |            |   |    |  |   |  
|------------------------------------------------ |  | ----- | --- | ---- | - | ---------- |  | ---------- | -- | ---------- | - | -- |  | - | -
|(Thousands of dollars)                           |  | Total |     | 2004 |   | 2005 &2006 |  | 2007 &2008 |    | Beyond2008
|Operating lease obligations                      |  | $     | 400 |      | $ | 309        |  | $          | 77 |            | $ | 14 |  | $ | 
|Contractual commitments for capital expenditures |  |       | 156 |      |   | 156        |  |            |   |            |   |   |  |   | 
|Long-term debt                                   |  |       | 196 |      |   | 196        |  |            |   |            |   |   |  |   | 
|                                                 |  |       |     |      |   |            |  |            |    |            |   |    |  |   |  
|Total                                            |  | $     | 752 |      | $ | 661        |  | $          | 77 |            | $ | 14 |  | $ | 
|                                                 |  |       |     |      |   |            |  |            |    |            |   |    |  |   |  



Since the Company has
no significant tax loss carryforwards, the Company expects to make quarterly estimated tax payments in 2004 based on taxable income levels. Also, The Company has various retirement plans for which the Company has committed a certain level of
benefit. The defined benefit plan is overfunded and no contributions are expected in the short-term. The Company expects to make contributions to its defined contribution and post-retirement health and life plans of approximately $3.0 million
annually, depending on participation levels in these plans.



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, 2004.



Recently Issued Accounting
Pronouncements



On April 30, 2003, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards No. 149 (SFAS 149), Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies accounting for
derivative instruments, including derivative instruments embedded in other contracts, and hedging activities under Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 improves the financial reporting
by requiring that contracts with comparable characteristics be accounted for similarly, clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows and amends certain other existing
pronouncements for more consistent reporting of contracts that derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. SFAS 149 is effective for contracts entered into or modified after June 15, 2003 and
for hedging relationships designated after June 30, 2003. The Company has adopted SFAS 149 and it did not have an impact on the Companys financial position or results of operations.



11



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On May 15, 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 150 (SFAS 150), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability because that financial instrument embodies an obligation of the issuer to transfer
assets or to issue equity shares. SFAS 150 is effective for instruments entered into or modified after May 31, 2003, and pre-existing instruments as of the beginning of the first interim period that commences after June 15, 2003. The Company has
adopted SFAS 150 and it did not have an impact on the Companys financial position or results of operations.



In January 2003, the Financial Accounting Standards Board issued Financial Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities- An Interpretation of Accounting Research Bulletin 51. FIN 46 addresses consolidation by business enterprises of variable interest entities (VIEs) and the primary objective is to provide guidance on the identification of, and
financial reporting for, entities over which control is achieved through means other than voting rights. FIN 46 requires an entity to consolidate a VIE if the entity has a variable interest (or combination of variable interests) that will absorb a
majority of the entitys expected losses if they occur, receive a majority of the entitys expected residual returns if they occur or both. This guidance applies immediately to VIEs created after January 1, 2003, and to VIEs in which an
enterprise obtains an interest after that date. However, On October 8, 2003, the FASB decided to grant a broader deferral of the implementation of FIN46. Pursuant to this deferral, public companies must complete their evaluations of VIEs that
existed prior to February 1, 2003, and the consolidation of those for which they are the primary beneficiary for financial statements issued for the first period ending after December 15, 2003. For calendar year companies, consolidation of
previously existing VIEs will be required in their December 31, 2003, financial statements. The Company has adopted FIN 46 and it did not have an impact on the Companys financial position or results of operations.



In December 2003, the Financial Accounting Standards Board issued a revision
to Statement of Financial Accounting Standards No. 132 (SFAS 132), Employers Disclosures about Pensions and Other Postretirement Benefits. This revision requires additional disclosures to those in the original Statement
about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined postretirement plans. Except for certain items, the provisions of the revised Statement were effective for fiscal years ending
after December 15, 2003, and the Company has adopted these disclosure requirements in this Annual Report on 10-K. As is permitted in the revised Statement, the Company has deferred disclosure of estimated future benefit payments, the disclosure of
which is effective for fiscal years ending after June 15, 2004.



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. The Company also recognizes Bill-and-Hold transactions when the product is completed and is ready to be shipped and the risk of loss on the product has been transferred to the customer.



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.



12



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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.



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 a defined benefit plan
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 impact on 2003 results:



|                                                                                                  |  |                               |      |   |                               |   |    
|------------------------------------------------------------------------------------------------- |  | ----------------------------- | ---- | - | ----------------------------- | - | ---
|(Thousands of dollars)                                                                            |  | .25 Percentage Point Increase |      |   | .25 Percentage Point Decrease
|Effect of change in discount rate on net periodic benefit cost (income)                           |  | $                             | (368 | ) |                               | $ | 385
|Effect of change in long-term rate of return on plan assets on net periodic benefit cost (income) |  | $                             | (409 | ) |                               | $ | 409



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 and similar expressions are intended to identify 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. These risks and uncertainties include, but are not limited to, (i) oil prices, (ii) capital
spending levels of oil producers, (iii) availability and prices for raw materials, (iv) currency exchange rate fluctuations in the markets in which the Company operates, (v) 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, (vi) costs related to legal and administrative
proceedings, including adverse judgments against the Company if the Company fails to prevail in reversing such judgments and (vii) 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. 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.



13



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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 believes the carrying values of its long-term debt obligations approximate fair values because the interest rates on these obligations are comparable to what the Company believes it could currently obtain for debt with similar terms and
maturities. 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 low level of current debt exposure, the Company does not have any significant exposure to interest rate fluctuations. However, if the Company drew on its line of credit with 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 debt denominated in U.S. dollars owed to the Companys U.S. entity by its French and Canadian entities. As of December 31, 2003, this inter-company debt was comprised of 0.8 million euros and 2.7 million Canadian
dollars. Also, certain assets and liabilities, primarily employee and tax related, denominated in the local currency of foreign operations whose functional currency is the U.S. dollar are exposed to fluctuations in currency rates.



Item 8. Financial Statements and Supplementary Data



Index to Financial Statements



Reports of Independent Auditors



Consolidated Balance Sheets



Consolidated Statements of Earnings



Consolidated Statements of Shareholders Equity



Consolidated Statements of Cash Flows



Notes to Consolidated Financial Statements



14



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INDEPENDENT AUDITORS REPORT



To the Board of Directors and Shareholders of Lufkin Industries, Inc:



We have audited the accompanying consolidated balance sheets of Lufkin
Industries, Inc. and subsidiaries (the Company) as of December 31, 2003 and 2002, and the related consolidated statements of earnings, shareholders equity and comprehensive income, and cash flows for the two years then ended. Our
audits also include the 2003 and 2002 financial statement schedules listed in the index at Item 15. These financial statements and financial statement schedules are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements and financial statement schedules based on our audits. The financial statements of Lufkin Industries, Inc. as of December 31, 2001, and for the year then ended, prior to the revisions discussed below,
were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated February 8, 2002.



We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.



In our opinion,
the 2003 and 2002 consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the 2003 and 2002 financial statement schedules, when considered in relation to 2003 and 2002 basic consolidated financial statements
taken as a whole, present fairly in all material respects the information set forth therein.



As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill and other intangible assets upon adoption of Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.



As discussed above, the consolidated financial statements of the Company as of December 31, 2001, and for the year then ended, were audited by other
auditors who have ceased operations. As described in Notes 1 and 8, these financial statements have been revised to include the transitional disclosures required by SFAS No. 142, which was adopted by the Company as of January 1, 2002, and have also
been adjusted to provide for a reclassification between current and non- current other assets. We audited the transitional disclosures and reclassification described above. Our procedures included (a) agreeing the previously reported net income to
the previously issued financial statements and the adjustments to reported net income representing amortization expense (including related tax effects) recognized in those periods related to goodwill to the Companys underlying records obtained
from management, (b) reviewing the underlying records obtained from management associated with the reclassification and (c) testing the mathematical accuracy of either the reclassification or the reconciliation of adjusted net income to reported net
income, and the related earnings-per-share amounts. In our opinion, the transitional disclosures and the noted reclassification for 2001 in Notes 1 and 8 are appropriate. However we were not engaged to audit, review, or apply any procedures to
the 2001 consolidated financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 consolidated financial statements taken as a whole.



/s/ Deloitte & Touche, LLP



Houston, Texas

March 4, 2004



15



---

Below is a copy of the report previously issued by Arthur Andersen LLP, the Companys former independent public
auditors, in connection with the Companys Annual Report for the year ended December 31, 2001. Arthur Andersen is unable to issue an updated report. Certain financial statements covered by this opinion have not been included in the accompanying
financial statements.



To the Shareholders of Lufkin Industries, Inc.:



We have audited the accompanying consolidated balance sheets
of Lufkin Industries, Inc. (a Texas corporation) and subsidiaries (collectively, the Company) as of December 31, 2001 and 2000, and the related consolidated statements of earnings, shareholders equity and cash flows for each of the three years
in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lufkin Industries, Inc., and subsidiaries as of December 31,
2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.



Arthur Andersen LLP



Houston, Texas

February 8, 2002





16



---

CONSOLIDATED BALANCE SHEETS



December 31, 2003 and 2002

(Thousands of
dollars, except share and per share data)



|                                                                                       |  |      |         |   |      |   |         |  
|-------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|Assets                                                                                 |  | 2003 |         |   | 2002 |  
|Current assets:                                                                        |  |      |         |   |      |   |         |  
|Cash and cash equivalents                                                              |  | $    | 19,408  |   |      | $ | 27,608  |  
|Receivables, net                                                                       |  |      | 42,908  |   |      |   | 33,872  |  
|Income taxes receivable                                                                |  |      |        |   |      |   | 713     |  
|Inventories                                                                            |  |      | 39,460  |   |      |   | 31,633  |  
|Deferred income tax assets                                                             |  |      | 1,472   |   |      |   | 948     |  
|Other current assets                                                                   |  |      | 1,051   |   |      |   | 462     |  
|                                                                                       |  |      |         |   |      |   |         |  
|Total current assets                                                                   |  |      | 104,299 |   |      |   | 95,236  |  
|                                                                                       |  |     
|Property, plant and equipment, net                                                     |  |      | 89,000  |   |      |   | 81,231  |  
|Prepaid pension costs                                                                  |  |      | 56,563  |   |      |   | 54,720  |  
|Goodwill, net                                                                          |  |      | 11,539  |   |      |   | 10,322  |  
|Other assets, net                                                                      |  |      | 2,255   |   |      |   | 6,846   |  
|                                                                                       |  |      |         |   |      |   |         |  
|Total assets                                                                           |  | $    | 263,656 |   |      | $ | 248,355 |  
|                                                                                       |  |      |         |   |      |   |         |  
|Liabilities and Shareholders Equity                                                   |  |      |         |   |      |  
|Current liabilities:                                                                   |  |      |         |   |      |   |         |  
|Short-term notes payable                                                               |  | $    | 493     |   |      | $ |        |  
|Current portion of long-term notes payable                                             |  |      | 196     |   |      |   | 259     |  
|Accounts payable                                                                       |  |      | 14,037  |   |      |   | 12,003  |  
|Accrued liabilities:                                                                   |  |      |         |   |      |   |         |  
|Payroll and benefits                                                                   |  |      | 5,965   |   |      |   | 5,833   |  
|Accrued warranty expenses                                                              |  |      | 1,698   |   |      |   | 1,858   |  
|Taxes payable                                                                          |  |      | 4,361   |   |      |   | 4,036   |  
|Other                                                                                  |  |      | 6,718   |   |      |   | 6,826   |  
|                                                                                       |  |      |         |   |      |   |         |  
|Total current liabilities                                                              |  |      | 33,468  |   |      |   | 30,815  |  
|                                                                                       |  |     
|Deferred income tax liabilities                                                        |  |      | 31,349  |   |      |   | 27,471  |  
|Postretirement benefits                                                                |  |      | 10,643  |   |      |   | 10,956  |  
|Long-term notes payable, net of current portion                                        |  |      |        |   |      |   | 164     |  
|                                                                                       |  |     
|Shareholders equity:                                                                  |  |      |         |   |      |   |         |  
|Preferred stock, no par value, 2,000,000 shares authorized, none issued or outstanding |  |      |        |   |      |   |        |  
|Common stock, par $1 per share; 60,000,000 shares authorized; 6,892,381 shares issued  |  |      | 6,892   |   |      |   | 6,892   |  
|Capital in excess of par                                                               |  |      | 18,480  |   |      |   | 18,477  |  
|Retained earnings                                                                      |  |      | 167,862 |   |      |   | 162,838 |  
|Treasury stock, 302,239 shares and 364,462 shares, respectively, at cost               |  |      | (6,244  | ) |      |   | (7,524  | )
|Accumulated other comprehensive income:                                                |  |      |         |   |      |   |         |  
|Cumulative translation adjustment                                                      |  |      | 1,206   |   |      |   | (1,734  | )
|                                                                                       |  |      |         |   |      |   |         |  
|Total shareholders equity                                                             |  |      | 188,196 |   |      |   | 178,949 |  
|                                                                                       |  |      |         |   |      |   |         |  
|Total liabilities and shareholders equity                                             |  | $    | 263,656 |   |      | $ | 248,355 |  
|                                                                                       |  |      |         |   |      |   |         |  



See notes to
consolidated financial statements.



17



---

CONSOLIDATED STATEMENTS OF EARNINGS



Years ended December 31, 2003, 2002 and 2001

(Thousands of dollars, except per share data)



|                                             |  |      |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                             |  | 2003 |         |   | 2002 |   |         | 2001 | 
|Sales                                        |  | $    | 262,255 |   |      | $ | 228,724 |      |  | $ | 278,907 |  
|                                             |  |      |        
|Cost of sales                                |  |      | 210,238 |   |      |   | 181,886 |      |  |   | 210,858 |  
|                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Gross profit                                 |  |      | 52,017  |   |      |   | 46,838  |      |  |   | 68,049  |  
|                                             |  |      |        
|Selling, general and administrative expenses |  |      | 37,544  |   |      |   | 33,428  |      |  |   | 35,045  |  
|                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Operating income                             |  |      | 14,473  |   |      |   | 13,410  |      |  |   | 33,004  |  
|Investment income                            |  |      | 187     |   |      |   | 607     |      |  |   | 437     |  
|Interest expense                             |  |      | (125    | ) |      |   | (285    | )    |  |   | (873    | )
|Other income (expense), net                  |  |      | 1,171   |   |      |   | 35      |      |  |   | (268    | )
|                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Earnings before income taxes                 |  |      | 15,706  |   |      |   | 13,767  |      |  |   | 32,300  |  
|                                             |  |      |        
|Income tax provision                         |  |      | 5,968   |   |      |   | 5,232   |      |  |   | 12,758  |  
|                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Net earnings                                 |  | $    | 9,738   |   |      | $ | 8,535   |      |  | $ | 19,542  |  
|                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Net earnings per share:                      |  |      |         |   |      |   |         |      |  |   |         |  
|Basic                                        |  | $    | 1.49    |   |      | $ | 1.29    |      |  | $ | 3.12    |  
|Diluted                                      |  | $    | 1.46    |   |      | $ | 1.26    |      |  | $ | 3.03    |  
|                                             |  |      |         |   |      |   |         |      |  |   |         |  



See notes to
consolidated financial statements.



18



---

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

& COMPREHENSIVE INCOME



Years ended December 31, 2003, 2002 and 2001

(Thousands of dollars, except
share and per share data)



|                                           |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   |        |   |  |   |        |  
|------------------------------------------ |  | ------------ |  | ---------------------- | ----- | ---------------- | - | ------ | -------------- | - | ------- | ------------------------------- |  | - | -------------------------- | - |  | - | ------ | - |  | - | ------ | -
|                                           |  | Common Stock |  | CapitalIn ExcessOf Par |       | RetainedEarnings |   |        | Treasury Stock |   |         | CumulativeTranslationAdjustment |  |   | Compre-hensiveIncome(Loss) |  
|                                           |  | Shares       |  | Amount                 |       |                  |   |        |               
|Balance, Dec. 31, 2000                     |  | 6,892,381    |  | $                      | 6,892 |                  | $ | 18,069 |                | $ | 143,912 |                                 |  | $ | (13,977                    | ) |  | $ | (2,245 | ) |  |   |        |  
|Comprehensive income:                      |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   |        |   |  |   |        |  
|Net earnings                               |  |              |  |                        |       |                  |   |        |                |   | 19,542  |                                 |  |   |                            |   |  |   |        |   |  | $ | 19,542 |  
|Other comprehensive income, net of tax     |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   |        |   |  |   |        |  
|Foreign currency translation adjustment    |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   | (471   | ) |  |   | (471   | )
|                                           |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   |        |   |  |   |        |  
|Comprehensive income                       |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   |        |   |  |   | 19,071 |  
|                                           |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   |        |   |  |   |        |  
|Cash dividends, $.72 per share             |  |              |  |                        |       |                  |   |        |                |   | (4,481  | )                               |  |   |                            |   |  |   |        |   |  |   |        |  
|Stock grant (1,089 shares)                 |  |              |  |                        |       |                  |   | 1      |                |   |         |                                 |  |   | 23                         |   |  |   |        |   |  |   |        |  
|Exercise of stock options (176,319 shares) |  |              |  |                        |       |                  |   | 130    |                |   |         |                                 |  |   | 3,604                      |   |  |   |        |   |  |   |        |  
|                                           |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   |        |   |  |   |        |  
|Balance, Dec. 31, 2001                     |  | 6,892,381    |  |                        | 6,892 |                  |   | 18,200 |                |   | 158,973 |                                 |  |   | (10,350                    | ) |  |   | (2,716 | ) |  |   |        |  
|Comprehensive income:                      |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   |        |   |  |   |        |  
|Net earnings                               |  |              |  |                        |       |                  |   |        |                |   | 8,535   |                                 |  |   |                            |   |  |   |        |   |  |   | 8,535  |  
|Other comprehensive income, net of tax     |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   |        |   |  |   |        |  
|Foreign currency translation adjustment    |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   | 982    |   |  |   | 982    |  
|                                           |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   |        |   |  |   |        |  
|Comprehensive income                       |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   |        |   |  |   | 9,517  |  
|                                           |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   |        |   |  |   |        |  
|Cash dividends, $.72 per share             |  |              |  |                        |       |                  |   |        |                |   | (4,670  | )                               |  |   |                            |   |  |   |        |   |  |   |        |  
|Exercise of stock options (137,886 shares) |  |              |  |                        |       |                  |   | 277    |                |   |         |                                 |  |   | 2,826                      |   |  |   |        |   |  |   |        |  
|                                           |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   |        |   |  |   |        |  
|Balance, Dec. 31, 2002                     |  | 6,892,381    |  |                        | 6,892 |                  |   | 18,477 |                |   | 162,838 |                                 |  |   | (7,524                     | ) |  |   | (1,734 | ) |  |   |        |  
|Comprehensive income:                      |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   |        |   |  |   |        |  
|Net earnings                               |  |              |  |                        |       |                  |   |        |                |   | 9,738   |                                 |  |   |                            |   |  |   |        |   |  |   | 9,738  |  
|Other comprehensive income, net of tax     |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   |        |   |  |   |        |  
|Foreign currency translation adjustment    |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   | 2,940  |   |  |   | 2,940  |  
|                                           |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   |        |   |  |   |        |  
|Comprehensive income                       |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   |        |   |  | $ | 12,678 |  
|                                           |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   |        |   |  |   |        |  
|Cash dividends, $.72 per share             |  |              |  |                        |       |                  |   |        |                |   | (4,714  | )                               |  |   |                            |   |  |   |        |   |  |   |        |  
|Treasury stock purchases (1,500 shares)    |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   | (31                        | ) |  |   |        |   |  |   |        |  
|Exercise of stock options (64,962 shares)  |  |              |  |                        |       |                  |   | 3      |                |   |         |                                 |  |   | 1,311                      |   |  |   |        |   |  |   |        |  
|                                           |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   |        |   |  |   |        |  
|Balance, Dec. 31, 2003                     |  | 6,892,381    |  | $                      | 6,892 |                  | $ | 18,480 |                | $ | 167,862 |                                 |  | $ | (6,244                     | ) |  | $ | 1,206  |   |  |   |        |  
|                                           |  |              |  |                        |       |                  |   |        |                |   |         |                                 |  |   |                            |   |  |   |        |   |  |   |        |  



See notes to
consolidated financial statements.



19



---

CONSOLIDATED STATEMENTS OF CASH FLOWS



Years ended December 31, 2003, 2002 and 2001

(Thousands of dollars)



|                                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                     |  | 2003 |         |   | 2002 |   |         | 2001 | 
|Cash flows from operating activities:                                                                |  |      |         |   |      |   |         |      |  |   |         |  
|Net earnings                                                                                         |  | $    | 9,738   |   |      | $ | 8,535   |      |  | $ | 19,542  |  
|Adjustments to reconcile net earnings to net cash                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Provided by operating activities:                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                                                        |  |      | 11,653  |   |      |   | 11,417  |      |  |   | 11,523  |  
|Deferred income tax provision                                                                        |  |      | 2,153   |   |      |   | 1,789   |      |  |   | 4,536   |  
|Pension income                                                                                       |  |      | (1,843  | ) |      |   | (5,283  | )    |  |   | (5,945  | )
|Postretirement benefits                                                                              |  |      | (313    | ) |      |   | (67     | )    |  |   | 51      |  
|(Gain) loss on disposition of property, plant and equipment                                          |  |      | (1,018  | ) |      |   | (22     | )    |  |   | 406     |  
|Increase (decrease) in cash flows from changes in working capital excluding effects of acquisitions: |  |      |         |   |      |   |         |      |  |   |         |  
|Receivables, net                                                                                     |  |      | (5,165  | ) |      |   | 2,674   |      |  |   | 4,538   |  
|Income taxes receivable                                                                              |  |      | 47      |   |      |   | (39     | )    |  |   | 565     |  
|Inventories                                                                                          |  |      | (3,102  | ) |      |   | 3,576   |      |  |   | 18      |  
|Other current assets                                                                                 |  |      | (354    | ) |      |   | 298     |      |  |   | (67     | )
|Accounts payable                                                                                     |  |      | 177     |   |      |   | 399     |      |  |   | (2,321  | )
|Accrued liabilities                                                                                  |  |      | 1,544   |   |      |   | (941    | )    |  |   | 1,852   |  
|                                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                                            |  |      | 13,517  |   |      |   | 22,336  |      |  |   | 34,698  |  
|                                                                                                     |  |      |        
|Cash flows from investing activities:                                                                |  |      |         |   |      |   |         |      |  |   |         |  
|Additions to property, plant and equipment                                                           |  |      | (13,006 | ) |      |   | (10,410 | )    |  |   | (7,909  | )
|Proceeds from disposition of property, plant and equipment                                           |  |      | 1,212   |   |      |   | 293     |      |  |   | 212     |  
|Acquisition of other companies                                                                       |  |      | (5,798  | ) |      |   |        |      |  |   |        |  
|Decrease in invested funds                                                                           |  |      |        |   |      |   | 5,863   |      |  |   | 2       |  
|Increase in other assets                                                                             |  |      | (859    | ) |      |   | (8      | )    |  |   | (6      | )
|                                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                                                |  |      | (18,451 | ) |      |   | (4,262  | )    |  |   | (7,701  | )
|                                                                                                     |  |      |        
|Cash flows from financing activities:                                                                |  |      |         |   |      |   |         |      |  |   |         |  
|Proceeds from (payments of) short-term debt, net                                                     |  |      | 493     |   |      |   |        |      |  |   | (7,790  | )
|Payments of long-term notes payable                                                                  |  |      | (260    | ) |      |   | (6,731  | )    |  |   | (1,721  | )
|Dividends paid                                                                                       |  |      | (4,714  | ) |      |   | (4,670  | )    |  |   | (4,481  | )
|Proceeds from exercise of stock options                                                              |  |      | 1,179   |   |      |   | 2,628   |      |  |   | 3,174   |  
|Purchases of treasury stock                                                                          |  |      | (31     | ) |      |   |        |      |  |   |        |  
|                                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash used in financing activities                                                                |  |      | (3,333  | ) |      |   | (8,773  | )    |  |   | (10,818 | )
|                                                                                                     |  |      |        
|Effect of translation on cash and cash equivalents                                                   |  |      | 67      |   |      |   | 220     |      |  |   | (95     | )
|                                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Net increase in cash and cash equivalents                                                            |  |      | (8,200  | ) |      |   | 9,521   |      |  |   | 16,084  |  
|Cash and cash equivalents at beginning of year                                                       |  |      | 27,608  |   |      |   | 18,087  |      |  |   | 2,003   |  
|                                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of year                                                             |  | $    | 19,408  |   |      | $ | 27,608  |      |  | $ | 18,087  |  
|                                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  



See notes to
consolidated financial statements.



20



---

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 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. Any gains or losses on transactions denominated in another foreign currency are included in income 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 also recognizes Bill-and-Hold transactions when the
product is completed and is ready to be shipped and the risk of loss on the product has been transferred to the customer.



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



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. In July, 1998, the Company began capitalizing certain maintenance and supplies inventories to better
match the estimated cost of such inventories with the related equipment produced. Such inventories were capitalized and were amortized over the three years of their estimated use and had the effect of increasing net earnings by $0.3 million ($0.05
per diluted share) in 2001.



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)
|Land                            |  |                      
|Land improvements               |  | 10.0  25.0           
|Buildings                       |  | 12.5  40.0           
|Machinery and equipment         |  | 3.0  15.0            
|Furniture and fixtures          |  | 5.0  12.5            
|Computer equipment and software |  | 3.0    7.0           



21



---

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



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 2003, 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 Footnote 6 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 believes the carrying value of its long-term debt, all current, approximates fair value because the interest rates of
this debt are comparable to what the Company believes it could currently obtain for debt with similar terms and maturities.



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, 2003, the
Company had no reportable derivatives.



Stock-based
compensation:The Company has 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. APB No. 25 requires no recognition of compensation expense for most stock-based compensation arrangements.



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:On April 30, 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 149 (SFAS 149), Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies accounting for derivative instruments, including derivative instruments embedded
in other contracts, and hedging activities under Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 improves the financial reporting by requiring that contracts with comparable characteristics be
accounted for similarly, clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows and amends certain other existing pronouncements for more consistent reporting of contracts that
derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. SFAS 149 is effective for contracts entered into or modified after June 15, 2003 and for hedging relationships designated after June 30, 2003. The
Company has adopted SFAS 149 and it did not have an impact on the Companys financial position or results of operations.



On May 15, 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150 (SFAS 150),
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability because that financial instrument embodies an obligation of the issuer to transfer assets or to issue equity shares. SFAS 150
is effective for instruments entered into or modified after May 31, 2003, and pre-existing instruments as of the beginning of the first interim period that commences after June 15, 2003. The Company has adopted SFAS 150 and it did not have an impact
on the Companys financial position or results of operations.



22



---

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



In January 2003, the Financial Accounting Standards Board issued Financial Interpretation
No. 46 (FIN 46), Consolidation of Variable Interest EntitiesAn Interpretation of Accounting Research Bulletin 51. FIN 46 addresses consolidation by business enterprises of variable interest entities (VIEs) and the primary
objective is to provide guidance on the identification of, and financial reporting for, entities over which control is achieved through means other than voting rights. FIN 46 requires an entity to consolidate a VIE if the entity has a variable
interest (or combination of variable interests) that will absorb a majority of the entitys expected losses if they occur, receive a majority of the entitys expected residual returns if they occur or both. This guidance applies
immediately to VIEs created after January 1, 2003, and to VIEs in which an enterprise obtains an interest after that date. However, On October 8, 2003, the FASB decided to grant a broader deferral of the implementation of FIN46. Pursuant to this
deferral, public companies must complete their evaluations of VIEs that existed prior to February 1, 2003, and the consolidation of those for which they are the primary beneficiary for financial statements issued for the first period ending after
December 15, 2003. For calendar year companies, consolidation of previously existing VIEs will be required in their December 31, 2003, financial statements. The Company has adopted FIN 46 and it did not have an impact on the Companys financial
position or results of operations.



In December 2003, the Financial Accounting
Standards Board issued a revision to Statement of Financial Accounting Standards No. 132 (SFAS 132), Employers Disclosures about Pensions and Other Postretirement Benefits. This revision requires additional disclosures
to those in the original Statement about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined postretirement plans. Except for certain items, the provisions of the revised Statement
were effective for fiscal years ending after December 15, 2003, and the Company has adopted these disclosure requirements in this Annual Report on 10-K. As is permitted in the revised Statement, the Company has deferred disclosure of estimated
future benefit payments, the disclosure of which is effective for fiscal years ending after June 15, 2004.



(2) Acquisitions



During the third quarter of 2003, the Company completed two strategic acquisitions that will expand its Oil Field segment. The Company purchased the remaining shares of Lufkin Argentina S.A., its 1992 Argentina joint venture with Baker
Hughes, Inc, effective July 1, 2003. Lufkin Argentina manufactures and services oil field pumping units and automation equipment for use in Argentina and other South American countries. The Company also purchased the operating assets of Basin
Technical Services in Midland, Texas on July 30, 2003. This acquisition enhances Oil Fields product and service offerings in the oil field automation marketplace. The aggregate purchase price for these acquisitions was $3.9 million in cash.



During the fourth quarter of 2003, the Company completed the
acquisition on December 9, 2003, of the operating assets and commercial operations of D&R Oilfield Services located in Drayton Valley, Alberta, Canada. This acquisition within the Oilfield segment strengthens the Companys presence in
Canadas oil field service business. The aggregate purchase price for this acquisition was $1.9 million in cash.



The Company has substantially completed the purchase allocation process for these three acquisitions, but additional adjustments may be made in 2004 as
final valuations and analysis of fair values are completed. As part of the purchase allocation process, certain goodwill and intangible balances were impacted in 2003, as seen in Footnote 8.



(3) Receivables



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



|                                |  |      |        |   |      |   |        |  
|------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|(Thousands of dollars)          |  | 2003 |        |   | 2002 |  
|Accounts receivable             |  | $    | 43,154 |   |      | $ | 33,777 |  
|Notes receivable                |  |      | 45     |   |      |   | 335    |  
|                                |  |      |        |   |      |   |        |  
|                                |  |      | 43,199 |   |      |   | 34,112 |  
|Allowance for doubtful accounts |  |      | (291   | ) |      |   | (240   | )
|Net receivables                 |  | $    | 42,908 |   |      | $ | 33,872 |  
|                                |  |      |        |   |      |   |        |  



Bad debt
expense/(recovery) related to receivables was $0.1 million, ($0.1) million and $0.5 million in 2003, 2002 and 2001, respectively.



23



---

(4) Property, Plant & Equipment



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



|                                         |  |      |          |   |      |   |          |  
|---------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|(Thousands of dollars)                   |  | 2003 |          |   | 2002 |  
|Land                                     |  | $    | 3,060    |   |      | $ | 2,693    |  
|Land improvements                        |  |      | 6,864    |   |      |   | 6,690    |  
|Buildings                                |  |      | 65,197   |   |      |   | 61,358   |  
|Machinery and equipment                  |  |      | 186,361  |   |      |   | 173,703  |  
|Furniture and fixtures                   |  |      | 3,978    |   |      |   | 3,898    |  
|Computer equipment and software          |  |      | 12,892   |   |      |   | 12,747   |  
|                                         |  |      |          |   |      |   |          |  
|Total property, plant and equipment      |  |      | 278,352  |   |      |   | 261,089  |  
|Less accumulated depreciation            |  |      | (189,352 | ) |      |   | (179,858 | )
|                                         |  |      |          |   |      |   |          |  
|Total property, plant and equipment, net |  | $    | 89,000   |   |      | $ | 81,231   |  
|                                         |  |      |          |   |      |   |          |  



Depreciation expense
related to property, plant and equipment was $11.6 million, $11.3 million and $11.0 million in 2003, 2002 and 2001, respectively.



(5) 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 2003, 2002 and 2001 is illustrated below:



|                                                                                                    |  |      |           |      |   |           |  |   |          
|--------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|(Thousands of dollars, except share and per share data)                                             |  | 2003 |           | 2002 |   | 2001     
|Numerator:                                                                                          |  |      |           |      |   |           |  |   |          
|Numerator for basic and diluted earnings per share-net earnings                                     |  | $    | 9,738     |      | $ | 8,535     |  | $ | 19,542   
|                                                                                                    |  |      |           |      |   |           |  |   |          
|Denominator:                                                                                        |  |      |           |      |   |           |  |   |          
|Denominator for basic earnings per share-weighted-average shares                                    |  |      | 6,542,436 |      |   | 6,610,312 |  |   | 6,270,505
|Effect of dilutive securities: employee stock options                                               |  |      | 105,380   |      |   | 150,328   |  |   | 148,436  
|                                                                                                    |  |      |           |      |   |           |  |   |          
|Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions |  |      | 6,647,816 |      |   | 6,760,640 |  |   | 6,418,941
|                                                                                                    |  |      |           |      |   |           |  |   |          
|Basic earnings per share                                                                            |  | $    | 1.49      |      | $ | 1.29      |  | $ | 3.12     
|                                                                                                    |  |      |           |      |   |           |  |   |          
|Diluted earnings per share                                                                          |  | $    | 1.46      |      | $ | 1.26      |  | $ | 3.03     
|                                                                                                    |  |      |           |      |   |           |  |   |          



Options to purchase a
total of 305,311, 312,896 and 120,986 shares of the Companys common stock were excluded from the calculation of fully diluted earnings per share for 2003, 2002 and 2001, respectively, because their effect on fully diluted earnings per share
for the period were antidilutive.



(6) Income Taxes



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



|                                                      |  |      |         |   |      |   |         |  
|----------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|(Thousands of dollars)                                |  | 2003 |         |   | 2002 |  
|Current deferred income tax assets                    |  |      |         |   |      |   |         |  
|Gross assets                                          |  | $    | 4,872   |   |      | $ | 3,469   |  
|Gross liabilities                                     |  |      | (3,400  | ) |      |   | (2,521  | )
|                                                      |  |      |         |   |      |   |         |  
|Total current deferred income tax assets, net         |  |      | 1,472   |   |      |   | 948     |  
|                                                      |  |      |         |   |      |   |         |  
|Noncurrent deferred income tax liabilities            |  |      |         |   |      |   |         |  
|Gross assets                                          |  |      | 12,021  |   |      |   | 10,498  |  
|Gross liabilities                                     |  |      | (43,370 | ) |      |   | (37,969 | )
|                                                      |  |      |         |   |      |   |         |  
|Total noncurrent deferred income tax liabilities, net |  |      | (31,349 | ) |      |   | (27,471 | )
|                                                      |  |      |         |   |      |   |         |  
|Net deferred income tax liabilities                   |  | $    | (29,877 | ) |      | $ | (26,523 | )
|                                                      |  |      |         |   |      |   |         |  



In 2003, noncurrent
deferred income tax liabilities were increased by $891,000 from the preliminary purchase accounting for the Argentina acquisition and did not impact the income tax provision.



24



---

(6) Income Taxes (Continued)



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



|                                    |  |      |         |   |      |   |         |  
|----------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|(Thousands of dollars)              |  | 2003 |         |   | 2002 |  
|Inventories                         |  | $    | (1,177  | ) |      | $ | (957    | )
|Prepaid pension costs               |  |      | (20,330 | ) |      |   | (19,621 | )
|Payroll and benefits                |  |      | 999     |   |      |   | 233     |  
|Accrued warranty expenses           |  |      | 520     |   |      |   | 610     |  
|Postretirement benefits             |  |      | 4,119   |   |      |   | 4,076   |  
|Depreciation                        |  |      | (13,877 | ) |      |   | (11,987 | )
|Other, net                          |  |      | (131    | ) |      |   | 1,123   |  
|                                    |  |      |         |   |      |   |         |  
|Net deferred income tax liabilities |  | $    | (29,877 | ) |      | $ | (26,523 | )
|                                    |  |      |         |   |      |   |         |  



The income tax
provision for 2003, 2002 and 2001 consisted of the following:



|                       |  |      |       |      |   |       |  |   |       
|---------------------- |  | ---- | ----- | ---- | - | ----- |  | - | ------
|(Thousands of dollars) |  | 2003 |       | 2002 |   | 2001 
|Current                |  | $    | 3,505 |      | $ | 3,187 |  | $ | 8,222 
|Deferred               |  |      | 2,463 |      |   | 2,044 |  |   | 4,536 
|                       |  |      |       |      |   |       |  |   |       
|Total                  |  | $    | 5,968 |      | $ | 5,231 |  | $ | 12,758
|                       |  |      |       |      |   |       |  |   |       



As noted above, in
2003, certain purchase entries of $891,000 related to the preliminary purchase accounting for the Argentina acquisition increased deferred tax liabilities and did not impact the income tax provision.



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)                     |  | 2003 |       |   | 2002 |   |       | 2001 | 
|Tax provision computed at statutory rate   |  | $    | 5,497 |   |      | $ | 4,818 |      |  | $ | 11,305 |  
|Tax effect of:                             |  |      |       |   |      |   |       |      |  |   |        |  
|Expenses for which no benefit was realized |  |      | 114   |   |      |   | 447   |      |  |   | 591    |  
|Change in effective state tax rate         |  |      | 411   |   |      |   |      |      |  |   |       |  
|State taxes net of federal benefit         |  |      | 225   |   |      |   | 236   |      |  |   | 777    |  
|Benefit of export incentives               |  |      | (347  | ) |      |   | (564  | )    |  |   | (33    | )
|Other, net                                 |  |      | 68    |   |      |   | 294   |      |  |   | 118    |  
|                                           |  |      |       |   |      |   |       |      |  |   |        |  
|Provision for income taxes                 |  | $    | 5,968 |   |      | $ | 5,231 |      |  | $ | 12,758 |  
|                                           |  |      |       |   |      |   |       |      |  |   |        |  



Cash payments for
income taxes totaled $2,278,000, $3,787,000 and $5,791,000 for 2003, 2002 and 2001, respectively.



25



---

(7) Inventories



Inventories used in determining cost of sales were as follows:



|                                |  |      |        |      |   |       
|------------------------------- |  | ---- | ------ | ---- | - | ------
|(Thousands of dollars)          |  | 2003 |        | 2002
|Gross inventories @ FIFO:       |  |      |        |      |   |       
|Finished goods                  |  | $    | 3,475  |      | $ | 4,656 
|Work in process                 |  |      | 7,411  |      |   | 6,210 
|Raw materials & component parts |  |      | 47,967 |      |   | 39,174
|                                |  |      |        |      |   |       
|Total gross inventories @ FIFO  |  |      | 58,853 |      |   | 50,040
|                                |  |      |        |      |   |       
|Less reserves:                  |  |      |        |      |   |       
|LIFO                            |  |      | 17,778 |      |   | 17,682
|Valuation                       |  |      | 1,615  |      |   | 725   
|                                |  |      |        |      |   |       
|Total inventories as reported   |  | $    | 39,460 |      | $ | 31,633
|                                |  |      |        |      |   |       



Gross inventories on a
FIFO basis shown above that were accounted for on a LIFO basis were $40,166,000 and $37,257,000 at December 31, 2003 and 2002, respectively.



During 2003 and 2002, LIFO inventories were reduced in certain LIFO pools and these reductions resulted in a liquidation of LIFO inventory quantities
carried at lower costs in prior years. The impact of the reductions increased net income in 2003 by approximately $2,000, net of taxes ($0.00 per diluted share) and reduced net income in 2002 by approximately $34,000, net of taxes ($0.00 per diluted
share).



(8) Goodwill & Acquired Intangible Assets



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



Acquired Intangible Assets



|                                |  |                      |     |                         |   |      |  
|------------------------------- |  | -------------------- | --- | ----------------------- | - | ---- | -
|(Thousands of dollars)          |  | Gross CarryingAmount |     | AccumulatedAmortization |  
|Amortized intangible assets:    |  |                      |     |                         |   |      |  
|Non-Compete Agreements          |  |                      |     |                         |   |      |  
|As of December 31, 2002         |  | $                    | 500 |                         | $ | (462 | )
|As of December 31, 2003         |  | $                    | 463 |                         | $ | (8   | )
|                                |  |                     
|Unamortized intangible assets:  |  |                      |     |                         |   |      |  
|None                            |  |                      |     |                         |   |      |  
|                                |  |                     
|Aggregate Amortization Expense: |  |                      |     |                         |   |      |  
|                                |  |                     
|For the year ended 12/31/01     |  | $                    | 76  |                         |   |      |  
|For the year ended 12/31/02     |  | $                    | 76  |                         |   |      |  
|For the year ended 12/31/03     |  | $                    | 46  |                         |   |      |  
|                                |  |                     
|Estimated Amortization Expense: |  |                      |     |                         |   |      |  
|                                |  |                     
|For the year ended 12/31/04     |  | $                    | 93  |                         |   |      |  
|For the year ended 12/31/05     |  | $                    | 93  |                         |   |      |  
|For the year ended 12/31/06     |  | $                    | 93  |                         |   |      |  
|For the year ended 12/31/07     |  | $                    | 93  |                         |   |      |  
|For the year ended 12/31/08     |  | $                    | 83  |                         |   |      |  



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. All prior-year agreements expired in 2003 and two additional agreements were signed in 2003.
Expenses related to the expired non-compete agreements were $50,000, $64,000 and $64,000 for the years 2003, 2002 and 2001, respectively and expenses on the new agreements were $31,000 in 2003. Estimated expenses for these two new agreements are
$75,000 for the years 2004 through 2006 and $44,000 in 2007.



26



---

(8) Goodwill & Acquired Intangible Assets (Continued)



Goodwill



Had the non-amortization provisions of SFAS No. 142 been in effect in years prior to the adoption year of 2002, the impact
on earnings at December 31, 2003, 2002 and 2001 would have been:



|                                                 |  |      |       |      |   |       |  |   |       
|------------------------------------------------ |  | ---- | ----- | ---- | - | ----- |  | - | ------
|(Thousands of dollars, except per share amounts) |  | 2003 |       | 2002 |   | 2001 
|Reported net earnings                            |  | $    | 9,738 |      | $ | 8,535 |  | $ | 19,542
|Add back: Goodwill Amortization                  |  |      |      |      |   |      |  |   | 229   
|                                                 |  |      |       |      |   |       |  |   |       
|Adjusted net earnings                            |  | $    | 9,738 |      | $ | 8,535 |  | $ | 19,771
|                                                 |  |      |       |      |   |       |  |   |       
|                                                 |  |      |      
|Basic earnings per share:                        |  |      |       |      |   |       |  |   |       
|Reported net earnings                            |  | $    | 1.49  |      | $ | 1.29  |  | $ | 3.12  
|Add back: Goodwill Amortization                  |  |      |      |      |   |      |  |   | 0.04  
|                                                 |  |      |       |      |   |       |  |   |       
|Adjusted net earnings                            |  | $    | 1.49  |      | $ | 1.29  |  | $ | 3.16  
|                                                 |  |      |       |      |   |       |  |   |       
|                                                 |  |      |      
|Diluted earnings per share:                      |  |      |       |      |   |       |  |   |       
|Reported net earnings                            |  | $    | 1.46  |      | $ | 1.26  |  | $ | 3.03  
|Add back: Goodwill Amortization                  |  |      |      |      |   |      |  |   | 0.04  
|                                                 |  |      |       |      |   |       |  |   |       
|Adjusted net earnings                            |  | $    | 1.46  |      | $ | 1.26  |  | $ | 3.07  
|                                                 |  |      |       |      |   |       |  |   |       



The changes in the
carrying amount of goodwill for the year ended December 31, 2003, are as follows:



|                                                      |  |          |       |                   |   |         |  |       |   |  |   |       
|----------------------------------------------------- |  | -------- | ----- | ----------------- | - | ------- |  | ----- | - |  | - | ------
|(Thousands of dollars)                                |  | OilField |       | PowerTransmission |   | Trailer |  | Total
|Balance as of 12/31/02                                |  | $        | 8,492 |                   | $ | 1,829   |  | $     |  |  | $ | 10,321
|Goodwill acquired during year                         |  |          | 856   |                   |   |        |  |       |  |  |   |      
|Impairment losses                                     |  |          |      |                   |   |        |  |       |  |  |   |      
|Goodwill written off related to sale of business unit |  |          |      |                   |   |        |  |       |  |  |   |      
|Foreign currency translation                          |  |          |      |                   |   | 362     |  |       |  |  |   | 362   
|                                                      |  |          |       |                   |   |         |  |       |   |  |   |       
|Balance as of 12/31/03                                |  | $        | 9,348 |                   | $ | 2,191   |  | $     |  |  | $ | 11,539
|                                                      |  |          |       |                   |   |         |  |       |   |  |   |       



Goodwill impairment tests were
performed in the first quarter of 2003 and no impairment losses were recorded.



(9) Debt Obligations



During the fourth
quarter of 2002, the Company completed and signed 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 for up to $17.5 million of committed
borrowings along with an additional $10.0 million discretionary line of credit. 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. As of December 31, 2003, 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.



In addition, the Company has short-term borrowing capabilities with a French bank for the working capital needs of its
French operation. The repayment terms are 60 days with interest calculated at the Euro Overnight Index Average plus an applicable margin, with specific accounts receivable provided as security. As of December 31, 2003, $0.5 million was outstanding
with this borrowing arrangement.



27



---

(9) Debt Obligations (Continued)



The Companys long-term notes payable at December 31, 2003 and 2002 consisted of the following:



|                                                                                                                                                                                                |  |      |     |      |   |      |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | ---- | - | ---- | -
|(Thousands of dollars, except payment amounts)                                                                                                                                                  |  | 2003 |     | 2002 |  
|Notes payable to banks denominated in euros, interest ranging from 3.7% to 4.9%, due in quarterly installments ranging from $10,000 to $52,000
secured by certain assets, maturing through 2004 |  |      | 196 |      |   | 423  |  
|Lesscurrent maturities of long-term notes payable                                                                                                                                              |  |      |    |      |   | (259 | )
|                                                                                                                                                                                                |  |      |     |      |   |      |  
|Total                                                                                                                                                                                           |  | $    | 196 |      | $ | 164  |  
|                                                                                                                                                                                                |  |      |     |      |   |      |  



Principal payments of
long-term notes payable as of December 31, 2003 are as follows:



|                         |  |   |    
|------------------------ |  | - | ---
|(Thousands of dollars)   |  |  
|Year ending December 31, |  |   |    
|2004                     |  | $ | 196
|2005                     |  |   |   
|2006                     |  |   |   
|2007                     |  |   |   
|2008                     |  |   |   
|                         |  |   |    
|Total                    |  | $ | 196
|                         |  |   |    



Cash payments for interest totaled
$13,000, $315,000 and $838,000 in 2003, 2002 and 2001, respectively.



(10) Stock Option Plans



The Company has two
stock option plans, the 2000 plan for employees and the 1996 plan for non-employee directors, that provide for the granting of options to outside directors and key employees to purchase an aggregate of not more than 1,050,000 shares of the
Companys common stock at fair market value on the date of grant. Options become exercisable from the initial grant date to four years after the grant date. The options expire ten years from the date of grant. Outstanding options may be
canceled and reissued under terms specified in the plans. The 1990 plan, which originally was authorized to grant 1,100,000 options, will remain in effect until all awards granted under this plan have been satisfied or expire. As of December 31,
2003, 486,210 options remained outstanding and exercisable from the 1990 plan.



The following table summarizes activity under the Companys stock option plans:



|                                       |  |           |   |  |          |   |  |          |  
|-------------------------------------- |  | --------- | - |  | -------- | - |  | -------- | -
|                                       |  | 2003      |   |  | 2002     |   |  | 2001     |  
|Options outstanding, beginning of year |  | 963,048   |   |  | 949,691  |   |  | 997,853  |  
|Granted (per share)                    |  |           |   |  |          |   |  |          |  
|2001 ($18.375 to $25.960)              |  |           |   |  |          |   |  | 145,457  |  
|2002 ($22.575 to $28.900)              |  |           |   |  | 154,404  |   |  |          |  
|2003 ($21.920 to $25.750)              |  | 179,203   |   |  |          |   |  |          |  
|Exercised (per share)                  |  |           |   |  |          |   |  |          |  
|2001 ($14.000 to $21.750)              |  |           |   |  |          |   |  | (176,319 | )
|2002 ($14.000 to $25.455)              |  |           |   |  | (137,886 | ) |  |          |  
|2003 ($14.000 to $22.750)              |  | (64,962   | ) |  |          |   |  |          |  
|Forfeited (per share)                  |  |           |   |  |          |   |  |          |  
|2001 ($14.000 to $38.000)              |  |           |   |  |          |   |  | (17,300  | )
|2002 ($17.500 to $39.375)              |  |           |   |  | (3,161   | ) |  |          |  
|2003 ($14.000 to $38.000)              |  | (18,375   | ) |  |          |   |  |          |  
|                                       |  |           |   |  |          |   |  |          |  
|Options outstanding, end of year       |  | 1,058,914 |   |  | 963,048  |   |  | 949,691  |  
|                                       |  |           |   |  |          |   |  |          |  



28



---

(10) Stock Option Plans (Continued)



The following table summarizes information about stock options outstanding at December 31, 2003:



|                         |  |                              |  |                                   |  |                       |       |                              |         |                                   |           |                       |   |      
|------------------------ |  | ---------------------------- |  | --------------------------------- |  | --------------------- | ----- | ---------------------------- | ------- | --------------------------------- | --------- | --------------------- | - | -----
|                         |  | Options Outstanding          |  | Options Exercisable              
|Range of Exercise Prices |  | NumberOutstandingat 12/31/03 |  | Wtd. Avg.ContractualRemainingLife |  | Wtd.Avg.ExercisePrice |       | NumberExercisableat 12/31/03 |         | Wtd. Avg.ContractualRemainingLife |           | Wtd.Avg.ExercisePrice
|$14.000-$18.375          |  | 348,482                      |  | 6.0 years                         |  | $                     | 16.17 |                              | 331,683 |                                   | 6.0 years |                       | $ | 16.06
|$20.000-$22.575          |  | 232,155                      |  | 4.8 years                         |  | $                     | 21.67 |                              | 232,341 |                                   | 4.9 years |                       | $ | 21.66
|$22.750-$33.375          |  | 401,479                      |  | 8.4 years                         |  | $                     | 25.90 |                              | 126,015 |                                   | 6.6 years |                       | $ | 27.35
|$35.250-$39.875          |  | 76,798                       |  | 3.9 years                         |  | $                     | 37.82 |                              | 76,798  |                                   | 3.9 years |                       | $ | 37.82
|                         |  |                              |  |                                   |  |                       |       |                              |         |                                   |           |                       |   |      
|$14.000-$39.875          |  | 1,058,914                    |  | 6.5 years                         |  | $                     | 22.63 |                              | 766,837 |                                   | 5.5 years |                       | $ | 21.79



The Company accounts
for its stock option plans under APB Opinion No. 25 under which no compensation cost has been 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, (in thousands except per share data):



|                                                                                                                                            |  |             |  |      |       |   |      |   |       |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                                                                                                                            |  |             |  | 2003 |       |   | 2002 |   |       | 2001 | 
|Net earnings, as reported                                                                                                                   |  |             |  | $    | 9,738 |   |      | $ | 8,535 |      |  | $ | 19,542 |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |             |  |      | (740  | ) |      |   | (750  | )    |  |   | (689   | )
|Pro forma net earnings                                                                                                                      |  |             |  | $    | 8,998 |   |      | $ | 7,785 |      |  | $ | 18,853 |  
|Earnings per share:                                                                                                                         |  |             |  |      |       |   |      |   |       |      |  |   |        |  
|Basic earnings per share                                                                                                                    |  | As reported |  | $    | 1.49  |   |      | $ | 1.29  |      |  | $ | 3.12   |  
|                                                                                                                                            |  | Pro forma   |  | $    | 1.38  |   |      | $ | 1.18  |      |  | $ | 3.01   |  
|Diluted earnings per share                                                                                                                  |  | As reported |  | $    | 1.46  |   |      | $ | 1.26  |      |  | $ | 3.03   |  
|                                                                                                                                            |  | Pro forma   |  | $    | 1.35  |   |      | $ | 1.15  |      |  | $ | 2.94   |  



The effects of
applying SFAS No. 123 to the pro forma disclosure amounts may not be indicative of future amounts. SFAS No. 123 does not apply to options awarded prior to 1995, and additional awards in future years are anticipated. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:



|                                |  |               |  |               |  |              
|------------------------------- |  | ------------- |  | ------------- |  | -------------
|                                |  | 2003 Grants   |  | 2002 Grants   |  | 2001 Grants  
|Expected dividend yield         |  | 2.96%-3.28%   |  | 2.49%-3.19%   |  | 2.80%-3.80%  
|Expected stock price volatility |  | 37.23%-38.68% |  | 38.31%-38.59% |  | 35.74%-37.91%
|Risk free interest rate         |  | 3.69%-4.46%   |  | 4.08%-5.06%   |  | 4.68%-5.43%  
|Expected life of options        |  | 10 years      |  | 10 years      |  | 8-10 years   



Options granted during
2003 had a weighted average fair value of $8.52 per option and a weighted average exercise price of $23.59 per option, options granted during 2002 had a weighted average fair value of $9.41 per option and a weighted average exercise price of $25.15
per option and options granted during 2001 had a weighted average fair value of $8.33 per option and a weighted average exercise price of $22.98 per option. At December 31, 2003, 436,771 options authorized remained available to be granted.



29



---

(11) Stock Repurchase Plan



The Company currently has a stock repurchase plan under which the Company is authorized to spend up to $19.1 million for
repurchases of its common stock. In the second quarter of 2003, the Board of Directors authorized an additional $2.0 million of stock repurchases to the plan. Pursuant to this plan, the Company has repurchased a total of 828,370 shares of its common
stock at an aggregate purchase price of $17.0 million. A total of 1,500 shares were repurchased during the year ended December 31, 2003, at an average price of $20.46 per share. Repurchased shares are added to treasury stock and are available for
general corporate purposes including the funding of the Companys stock option plans. As of December 31, 2003, the Company held 302,239 shares of treasury stock at an aggregate cost of approximately $6.2 million. Authorizations of approximately
$2.1 million remained December 31, 2003.



(12) Capital Stock



The Company has adopted a Shareholder Rights Plan (the
Plan) designed to protect against unsolicited attempts to acquire control of the Company that the Board believes are not in the best interest of the shareholders. The Plan provides for the possible issuance of a dividend of one common
stock purchase right for each outstanding share of common stock. Under certain conditions, each right may be exercised to purchase one share of common stock at an exercise price of $75, subject to adjustment. Under certain circumstances, the rights
entitle holders to purchase the common stock of the Company or an acquiring company having a value of twice the exercise price of the rights. The rights would become exercisable, or transferable apart from the common stock, ten days after a person
or group acquired 20% or more, or announced or made a tender offer for 30% or more, of the outstanding common stock. Under certain circumstances, all rights owned by an acquiring person would be null and void. The rights expire on May 31, 2006, and
may be redeemed by the Company at any time prior to the occurrence of certain events at $.05 per right.



The Company is also 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.



(13) Retirement Benefits



The Company has noncontributory pension plans covering
substantially all 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.



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 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 6% (in 1% increments)
which is not subject to match by the Company. All obligations of the Company are funded through December 31, 2003. The Companys expense for these plans totaled $1,949,000, $1,852,000 and $1,948,000 in 2003, 2002 and 2001, respectively.



On December 8, 2003, President Bush signed into law the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act expanded Medicare to include, for the first time, coverage for prescription drugs. Because of various uncertainties related to the Companys
response to this legislation and the appropriate accounting methodology for this event, the Company has elected to defer financial recognition of this legislation until the Financial Accounting Standards Board issues final accounting guidance. When
issued, that final guidance could require the Company to change previously reported information. This deferral is permitted under FSP FAS 106-1.



30



---

(13) Retirement Benefits (Continued)



Obligations and Funded Status



|                                               |  |                  |         |   |                |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------- |  | ---------------- | ------- | - | -------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|At December 31                                 |  | Pension Benefits |         |   | Other Benefits |  
|                                               |  | 2003             |         |   | 2002           |   |         | 2003 |  |   | 2002    |  
|Change in benefit obligation                   |  |                  |         |   |                |   |         |      |  |   |         |   |  |   |         |  
|Benefit obligation at beginning of year        |  | $                | 131,206 |   |                | $ | 128,346 |      |  | $ | 9,527   |   |  | $ | 9,601   |  
|Service cost                                   |  |                  | 3,870   |   |                |   | 3,607   |      |  |   | 201     |   |  |   | 170     |  
|Interest cost                                  |  |                  | 8,852   |   |                |   | 8,379   |      |  |   | 727     |   |  |   | 625     |  
|Plan participants contributions               |  |                  |        |   |                |   |        |      |  |   | 1,342   |   |  |   | 1,321   |  
|Amendments                                     |  |                  | 3,273   |   |                |   | 8       |      |  |   |        |   |  |   |        |  
|Actuarial loss (gain)                          |  |                  | 8,271   |   |                |   | (2,687  | )    |  |   | 2,567   |   |  |   | (77     | )
|Benefits paid                                  |  |                  | (6,996  | ) |                |   | (6,537  | )    |  |   | (2,583  | ) |  |   | (2,113  | )
|                                               |  |                  |         |   |                |   |         |      |  |   |         |   |  |   |         |  
|Benefit obligation at end of year              |  |                  | 148,476 |   |                |   | 131,206 |      |  |   | 11,781  |   |  |   | 9,527   |  
|                                               |  |                  |         |  
|Change in plan assets                          |  |                  |         |   |                |   |         |      |  |   |         |   |  |   |         |  
|Fair value of plan assets at beginning of year |  |                  | 167,325 |   |                |   | 186,037 |      |  |   |        |   |  |   |        |  
|Actual return on plan assets                   |  |                  | 29,041  |   |                |   | (12,175 | )    |  |   |        |   |  |   |        |  
|Employer contribution                          |  |                  |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|Plan participants contributions               |  |                  |        |   |                |   |        |      |  |   |        |   |  |   |        |  
|Benefits paid                                  |  |                  | (6,996  | ) |                |   | (6,537  | )    |  |   |        |   |  |   |        |  
|                                               |  |                  |         |   |                |   |         |      |  |   |         |   |  |   |         |  
|Fair value of plan assets at end of year       |  |                  | 189,370 |   |                |   | 167,325 |      |  |   |        |   |  |   |        |  
|                                               |  |                  |         |   |                |   |         |      |  |   |         |   |  |   |         |  
|                                               |  |                  |         |  
|Funded status                                  |  |                  | 40,894  |   |                |   | 36,119  |      |  |   | (11,781 | ) |  |   | (9,527  | )
|Unrecognized net actuarial loss (gain)         |  |                  | 15,141  |   |                |   | 21,961  |      |  |   | 1,138   |   |  |   | (1,429  | )
|Unrecognized prior service cost (benefit)      |  |                  | 4,872   |   |                |   | 1,910   |      |  |   |        |   |  |   |        |  
|Unrecognized net transition asset              |  |                  | (4,344  | ) |                |   | (5,270  | )    |  |   |        |   |  |   |        |  
|                                               |  |                  |         |   |                |   |         |      |  |   |         |   |  |   |         |  
|Net amount recognized                          |  | $                | 56,563  |   |                | $ | 54,720  |      |  | $ | (10,643 | ) |  | $ | (10,956 | )
|                                               |  |                  |         |   |                |   |         |      |  |   |         |   |  |   |         |  



Amounts recognized in the statement of
financial position consist of:



|                        |  |                  |        |                |   |        |  |   |         |   |  |   |         |  
|----------------------- |  | ---------------- | ------ | -------------- | - | ------ |  | - | ------- | - |  | - | ------- | -
|                        |  | Pension Benefits |        | Other Benefits |  
|                        |  | 2003             |        | 2002           |   | 2003   |  |   | 2002    |  
|Prepaid pension costs   |  | $                | 56,563 |                | $ | 54,720 |  | $ |        |   |  | $ |        |  
|Postretirement benefits |  |                  |       |                |   |       |  |   | (10,643 | ) |  |   | (10,956 | )
|                        |  |                  |        |                |   |        |  |   |         |   |  |   |         |  
|Net amount recognized   |  | $                | 56,563 |                | $ | 54,720 |  | $ | (10,643 | ) |  | $ | (10,956 | )
|                        |  |                  |        |                |   |        |  |   |         |   |  |   |         |  



The accumulated
benefit obligation for all defined benefit pension plans was $137,546 and $121,439 at December 31, 2003, and 2002, respectively.



Components of Net Periodic Benefit Cost



|                                              |  |                  |         |   |                |   |         |      |  |      |     |  |   |     |  
|--------------------------------------------- |  | ---------------- | ------- | - | -------------- | - | ------- | ---- |  | ---- | --- |  | - | --- | -
|                                              |  | Pension Benefits |         |   | Other Benefits |  
|                                              |  | 2003             |         |   | 2002           |   |         | 2003 |  | 2002 |    
|Service cost                                  |  | $                | 3,870   |   |                | $ | 3,607   |      |  | $    | 201 |  | $ | 170 |  
|Interest cost                                 |  |                  | 8,852   |   |                |   | 8,379   |      |  |      | 727 |  |   | 625 |  
|Expected return on plan assets                |  |                  | (14,320 | ) |                |   | (16,435 | )    |  |      |    |  |   |    |  
|Amortization of prior service cost            |  |                  | 311     |   |                |   | 93      |      |  |      |    |  |   |    |  
|Amortization of unrecognized net (gain) loss  |  |                  | 370     |   |                |   |        |      |  |      |    |  |   | (70 | )
|Amortization of unrecognized transition asset |  |                  | (926    | ) |                |   | (927    | )    |  |      |    |  |   |    |  
|                                              |  |                  |         |   |                |   |         |      |  |      |     |  |   |     |  
|Net periodic benefit cost (income)            |  | $                | (1,843  | ) |                | $ | (5,283  | )    |  | $    | 928 |  | $ | 725 |  
|                                              |  |                  |         |   |                |   |         |      |  |      |     |  |   |     |  



31



---

(13) Retirement Benefits (Continued)



Additional Information



|                                                                     |  |                 |   |                |   |      |  |      |   |  |   |  
|-------------------------------------------------------------------- |  | --------------- | - | -------------- | - | ---- |  | ---- | - |  | - | -
|                                                                     |  | PensionBenefits |   | Other Benefits
|                                                                     |  | 2003            |   | 2002           |   | 2003 |  | 2002
|Increase in minimum liability included in other comprehensive income |  | $               |  |                | $ |     |  | $    |  |  | $ | 



Assumptions



Weighted-average assumptions used to

determine benefit obligations at

December 31



|                                                                                                     |  |                 |   |  |                |   |  |      |   |  |      |  
|---------------------------------------------------------------------------------------------------- |  | --------------- | - |  | -------------- | - |  | ---- | - |  | ---- | -
|                                                                                                     |  | PensionBenefits |   |  | Other Benefits |  
|                                                                                                     |  | 2003            |   |  | 2002           |   |  | 2003 |   |  | 2002 |  
|Discount rate                                                                                        |  | 6.25            | % |  | 6.75           | % |  | 6.25 | % |  | 6.75 | %
|Rate of compensation increase                                                                        |  | 4.25            | % |  | 4.50           | % |  | N/A  |   |  | N/A  |  
|Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31 |  |                 |   |  |                |   |  |      |   |  |      |  
|                                                                                                     |  |                
|                                                                                                     |  | PensionBenefits |   |  | Other Benefits |  
|                                                                                                     |  | 2003            |   |  | 2002           |   |  | 2003 |   |  | 2002 |  
|Discount rate                                                                                        |  | 6.75            | % |  | 7.00           | % |  | 6.75 | % |  | 7.00 | %
|Expected long-term return on plan assets                                                             |  | 8.75            | % |  | 9.00           | % |  | N/A  |   |  | N/A  |  
|Rate of compensation increase                                                                        |  | 4.50            | % |  | 5.00           | % |  | N/A  |   |  | N/A  |  



For 2003, the Company
assumed a long-term asset rate of return of 8.75%. In developing the 8.75% 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 12-year compounded return (period ended December 31, 2002), which were in-line to higher than the Companys long-term rate of return
assumption.



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.



|                                                                                  |  |      |   |  |      |  
|--------------------------------------------------------------------------------- |  | ---- | - |  | ---- | -
|                                                                                  |  | 2003 |   |  | 2002 |  
|Health care cost trend rate assumed for next year                                 |  | 0.00 | % |  | 0.00 | %
|Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) |  | 0.00 | % |  | 0.00 | %
|Year that the rate reaches the ultimate trend rate                                |  | 0.00 | % |  | 0.00 | %



32



---

(13) Retirement Benefits (Continued)



Assumed health care cost trend rates can have a significant effect on the amounts reported for health care plans.
However, since the Companys costs for the retiree medical was fixed as of January 1, 1997, the 1% change in medical trend assumptions do not have any impact on the plans service cost, interest cost or benefit obligation.



|                                             |  |                              |   |                              |   |  
|-------------------------------------------- |  | ---------------------------- | - | ---------------------------- | - | -
|                                             |  | 1-Percentage Point Increase |   | 1-Percentage Point Decrease
|Effect on total of service and interest cost |  | $                            |  |                              | $ | 
|Effect on postretirement benefit obligation  |  | $                            |  |                              | $ | 



Plan Assets



The Companys pension plan weighted-average asset allocations at December 31, 2003, and
20021, by asset category are as follows:



|                    |  |                  |  |                          |   |  |      |  
|------------------- |  | ---------------- |  | ------------------------ | - |  | ---- | -
|                    |  | TargetAllocation |  | Plan AssetsAtDecember31, |  
|                    |  | 2004             |  | 2003                     |   |  | 2002 |  
|Equity securities   |  | 40%-70%          |  | 58                       | % |  | 46   | %
|Debt securities     |  | 30%-60%          |  | 37                       | % |  | 52   | %
|Real estate / Other |  | 0%-15%           |  | 5                        | % |  | 2    | %
|                    |  |                  |  |                          |   |  |      |  
|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, fixed income and real estate. During 2003,
the Company positioned the portfolio to take advantage of the improved equity markets. Concurrently, the Company diversified its fixed income allocation and expanded its real estate investments.



No equity or debt securities of the Company were held by the plan at December 31, 2003, or
2002.



The postretirement benefit plan of the Company is unfunded and thus had
no plan assets as of December 31, 2003, and 2002.



Cash Flows



Contributions



The Company does not expect to make any contributions to the pension plan in
2004 and expects to make contributions of $932,000 to its other postretirement plan in 2004.



(14) Commitments and Contingencies



Legal proceedings: A class action complaint was filed in the United States 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 of 1998 and in Lufkin, Texas in August of 1998. The District Court in April of 1999 issued a decision that certified a class for this case, which
includes all persons of a certain minority employed by the Company from March 6, 1994, to the present. The Company appealed this class certification decision by the District Court to the 5th Circuit United States Court of Appeals in New Orleans,
Louisiana. This appeal was denied on June 23, 1999. The Company is defending this action vigorously. Furthermore, the Company believes that the facts and the law in this action support its position and is confident that it will prevail if this case
is tried on its merits. Trial for this case began in December 2003 but was postponed by the Court and is in recess until further notice.



In the case of Echometer and James N. McCoy vs. Lufkin Industries, Inc., the plaintiff filed suit in U.S. District Court alleging infringement of a
fluid-level device patent and received a jury verdict on September 26, 2003, in the amount of $150,000. The trial court judge is reviewing post-trial motions before finalizing the judgment, which could materially impact the amount of the verdict. A
final decision on the judgment is expected by the end of March 2004.



33



---

(14) Commitments and Contingencies (Continued)



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, 2003, is as follows:



|                             |  |   |        |  
|---------------------------- |  | - | ------ | -
|($000s)                     |  |   |        |  
|Beginning balance            |  | $ | 1,994  |  
|Claims paid                  |  |   | (1,738 | )
|Additional warranties issued |  |   | 1,613  |  
|Revisions in estimates       |  |   | (208   | )
|Currency                     |  |   | 37     |  
|                             |  |   |        |  
|Ending Balance               |  | $ | 1,698  |  
|                             |  |   |        |  



(15) 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.



34



---

(16) 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. The following is a summary of key business segment and product group information:



|                                                        |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|(Thousands of dollars)                                  |  | 2003 |         |   | 2002 |   |         | 2001 | 
|Sales:                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Oil Field                                               |  | $    | 144,802 |   |      | $ | 118,700 |      |  | $ | 182,271 |  
|Power Transmission                                      |  |      | 74,625  |   |      |   | 70,455  |      |  |   | 62,498  |  
|Trailer                                                 |  |      | 43,548  |   |      |   | 39,569  |      |  |   | 34,138  |  
|                                                        |  |      |         |   |      |   |         |      |  |   |         |  
|Total sales                                             |  | $    | 262,255 |   |      | $ | 228,724 |      |  | $ | 278,907 |  
|                                                        |  |      |         |   |      |   |         |      |  |   |         |  
|Sales by geographic region:                             |  |      |         |   |      |   |         |      |  |   |         |  
|United States                                           |  | $    | 175,631 |   |      | $ | 167,719 |      |  | $ | 195,169 |  
|Europe                                                  |  |      | 23,506  |   |      |   | 12,704  |      |  |   | 14,752  |  
|Canada                                                  |  |      | 12,619  |   |      |   | 12,368  |      |  |   | 19,281  |  
|Latin America                                           |  |      | 33,052  |   |      |   | 23,941  |      |  |   | 26,009  |  
|Other                                                   |  |      | 17,447  |   |      |   | 11,992  |      |  |   | 23,696  |  
|                                                        |  |      |         |   |      |   |         |      |  |   |         |  
|Total sales                                             |  | $    | 262,255 |   |      | $ | 228,724 |      |  | $ | 278,907 |  
|                                                        |  |      |         |   |      |   |         |      |  |   |         |  
|Earnings (loss) before income taxes:                    |  |      |         |   |      |   |         |      |  |   |         |  
|Oil Field                                               |  | $    | 17,657  |   |      | $ | 11,131  |      |  | $ | 33,306  |  
|Power Transmission                                      |  |      | 2,748   |   |      |   | 5,001   |      |  |   | 4,348   |  
|Trailer                                                 |  |      | (5,879  | ) |      |   | (2,861  | )    |  |   | (5,545  | )
|Corporate                                               |  |      | 1,180   |   |      |   | 496     |      |  |   | 191     |  
|                                                        |  |      |         |   |      |   |         |      |  |   |         |  
|Total earnings (loss) before income taxes               |  | $    | 15,706  |   |      | $ | 13,767  |      |  | $ | 32,300  |  
|                                                        |  |      |         |   |      |   |         |      |  |   |         |  
|Assets:                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|Oil Field                                               |  | $    | 130,513 |   |      | $ | 111,915 |      |  | $ | 117,901 |  
|Power Transmission                                      |  |      | 70,230  |   |      |   | 69,210  |      |  |   | 66,331  |  
|Trailer                                                 |  |      | 28,831  |   |      |   | 30,288  |      |  |   | 25,823  |  
|Corporate                                               |  |      | 34,082  |   |      |   | 36,942  |      |  |   | 36,014  |  
|                                                        |  |      |         |   |      |   |         |      |  |   |         |  
|Total assets                                            |  | $    | 263,656 |   |      | $ | 248,355 |      |  | $ | 246,069 |  
|                                                        |  |      |         |   |      |   |         |      |  |   |         |  
|Property, plant & equipment, net, by geographic region: |  |      |         |   |      |   |         |      |  |   |         |  
|United States                                           |  | $    | 74,257  |   |      | $ | 72,559  |      |  | $ | 75,056  |  
|Europe                                                  |  |      | 8,755   |   |      |   | 7,751   |      |  |   | 5,297   |  
|Canada                                                  |  |      | 3,079   |   |      |   | 856     |      |  |   | 823     |  
|Latin America                                           |  |      | 2,790   |   |      |   |        |      |  |   |        |  
|Other                                                   |  |      | 119     |   |      |   | 65      |      |  |   | 120     |  
|                                                        |  |      |         |   |      |   |         |      |  |   |         |  
|Total P, P & E, net, by geographic region               |  | $    | 89,000  |   |      | $ | 81,231  |      |  | $ | 81,296  |  
|                                                        |  |      |         |   |      |   |         |      |  |   |         |  
|Capital expenditures:                                   |  |      |         |   |      |   |         |      |  |   |         |  
|Oil Field                                               |  | $    | 3,286   |   |      | $ | 6,799   |      |  | $ | 6,508   |  
|Power Transmission                                      |  |      | 2,438   |   |      |   | 3,265   |      |  |   | 1,051   |  
|Trailer                                                 |  |      | 170     |   |      |   | 212     |      |  |   | 147     |  
|Corporate                                               |  |      | 7,112   |   |      |   | 134     |      |  |   | 203     |  
|Total capital expenditures                              |  | $    | 13,006  |   |      | $ | 10,410  |      |  | $ | 7,909   |  
|                                                        |  |      |         |   |      |   |         |      |  |   |         |  
|Depreciation/Amortization:                              |  |      |         |   |      |   |         |      |  |   |         |  
|Oil Field                                               |  | $    | 5,146   |   |      | $ | 4,620   |      |  | $ | 4,510   |  
|Power Transmission                                      |  |      | 4,578   |   |      |   | 4,484   |      |  |   | 4,611   |  
|Trailer                                                 |  |      | 529     |   |      |   | 629     |      |  |   | 713     |  
|Corporate                                               |  |      | 1,400   |   |      |   | 1,684   |      |  |   | 1,689   |  
|Total depreciation/amortization                         |  | $    | 11,653  |   |      | $ | 11,417  |      |  | $ | 11,523  |  
|                                                        |  |      |         |   |      |   |         |      |  |   |         |  



35



---

(16) Business Segment Information (Continued)



Additional key segment information is presented below:



|                                     |  |           |         |   |                   |   |         |         |  |   |           |   |       |   |       |  |   |         |  
|------------------------------------ |  | --------- | ------- | - | ----------------- | - | ------- | ------- |  | - | --------- | - | ----- | - | ----- |  | - | ------- | -
|For the Year Ended December 31, 2003 | 
|                                     |  | Oil Field |         |   | PowerTransmission |   |         | Trailer |  |   | Corporate |   | Total |  
|Gross sales                          |  | $         | 145,522 |   |                   | $ | 76,282  |         |  | $ | 43,603    |   |       | $ |      |  | $ | 265,407 |  
|Inter-segment sales                  |  |           | (1,440  | ) |                   |   | (1,657  | )       |  |   | (55       | ) |       |   |      |  |   | (3,152  | )
|                                     |  |           |         |   |                   |   |         |         |  |   |           |   |       |   |       |  |   |         |  
|Net sales                            |  | $         | 144,082 |   |                   | $ | 74,625  |         |  | $ | 43,548    |   |       | $ |      |  | $ | 262,255 |  
|                                     |  |           |         |   |                   |   |         |         |  |   |           |   |       |   |       |  |   |         |  
|Operating income (loss)              |  | $         | 17,852  |   |                   | $ | 2,567   |         |  | $ | (5,946    | ) |       | $ |      |  | $ | 14,473  |  
|Other income (expense)               |  |           | (195    | ) |                   |   | 181     |         |  |   | 67        |   |       |   | 1,180 |  |   | 1,233   |  
|                                     |  |           |         |   |                   |   |         |         |  |   |           |   |       |   |       |  |   |         |  
|Earnings (loss) before tax provision |  | $         | 17,657  |   |                   | $ | 2,748   |         |  | $ | (5,879    | ) |       | $ | 1,180 |  | $ | 15,706  |  
|                                     |  |           |         |   |                   |   |         |         |  |   |           |   |       |   |       |  |   |         |  
|                                    
|For the Year Ended December 31, 2002 | 
|                                     |  | Oil Field |         |   | PowerTransmission |   |         | Trailer |  |   | Corporate |   | Total |  
|Gross sales                          |  | $         | 119,719 |   |                   | $ | 72,256  |         |  | $ | 39,617    |   |       | $ |      |  | $ | 231,592 |  
|Inter-segment sales                  |  |           | (1,019  | ) |                   |   | (1,801  | )       |  |   | (48       | ) |       |   |      |  |   | (2,868  | )
|                                     |  |           |         |   |                   |   |         |         |  |   |           |   |       |   |       |  |   |         |  
|Net sales                            |  | $         | 118,700 |   |                   | $ | 70,455  |         |  | $ | 39,569    |   |       | $ |      |  | $ | 228,724 |  
|                                     |  |           |         |   |                   |   |         |         |  |   |           |   |       |   |       |  |   |         |  
|Operating income (loss)              |  | $         | 11,510  |   |                   | $ | 4,770   |         |  | $ | (2,870    | ) |       | $ |      |  | $ | 13,410  |  
|Other income (expense)               |  |           | (379    | ) |                   |   | 231     |         |  |   | 9         |   |       |   | 496   |  |   | 357     |  
|                                     |  |           |         |   |                   |   |         |         |  |   |           |   |       |   |       |  |   |         |  
|Earnings (loss) before tax provision |  | $         | 11,131  |   |                   | $ | 5,001   |         |  | $ | (2,861    | ) |       | $ | 496   |  | $ | 13,767  |  
|                                     |  |           |         |   |                   |   |         |         |  |   |           |   |       |   |       |  |   |         |  
|                                    
|For the Year Ended December 31, 2001 | 
|                                     |  | Oil Field |         |   | PowerTransmission |   |         | Trailer |  |   | Corporate |   | Total |  
|Gross sales                          |  | $         | 187,112 |   |                   | $ | 75,315  |         |  | $ | 35,035    |   |       | $ |      |  | $ | 297,462 |  
|Inter-segment sales                  |  |           | (4,841  | ) |                   |   | (12,817 | )       |  |   | (897      | ) |       |   |      |  |   | (18,555 | )
|                                     |  |           |         |   |                   |   |         |         |  |   |           |   |       |   |       |  |   |         |  
|Net sales                            |  | $         | 182,271 |   |                   | $ | 62,498  |         |  | $ | 34,138    |   |       | $ |      |  | $ | 278,907 |  
|                                     |  |           |         |   |                   |   |         |         |  |   |           |   |       |   |       |  |   |         |  
|Operating income (loss)              |  | $         | 33,871  |   |                   | $ | 4,509   |         |  | $ | (5,376    | ) |       | $ |      |  | $ | 33,004  |  
|Other income (expense)               |  |           | (565    | ) |                   |   | (161    | )       |  |   | (169      | ) |       |   | 191   |  |   | (704    | )
|                                     |  |           |         |   |                   |   |         |         |  |   |           |   |       |   |       |  |   |         |  
|Earnings (loss) before tax provision |  | $         | 33,306  |   |                   | $ | 4,348   |         |  | $ | (5,545    | ) |       | $ | 191   |  | $ | 13,767  |  
|                                     |  |           |         |   |                   |   |         |         |  |   |           |   |       |   |       |  |   |         |  



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



None



Item 9A. Controls and
Procedures



Based on their evaluation of the
disclosure controls and procedures as of a date within 90 days of the filing of this report on Form 10-K, 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 disclosure controls and procedures (as defined in Rules 13a-14(c) promulgated under the Securities Exchange Act of 1934) are effective. There were no significant changes in the Companys internal controls or in other factors that could
significantly affect such controls subsequent to the date of their evaluation.



36



---

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 2004 Annual Meeting of Stockholders (the
Proxy Statement), which will be filed within 120 days after December 31, 2003. The information required by Item 10 regarding audit committee financial expert disclosure is incorporated by reference from the information under the caption
Report of the Audit Committee 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, the Code of Ethics for Senior Financial Officers of the Company. The Company requires all its senior financial officers 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 made available to stockholders the Code of Ethics for Senior Financial Officers of the Company
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 change to or waiver from the Code of Ethics for Senior Financial Officers of the Company will be
immediately disclosed on the Companys website at www.lufkin.com.



Item 11. Executive Compensation



The
information required by Item 11 is incorporated by reference from the information under the captions Compensation of Executive Officers, Stock Option Plans, Retirement Plan, Employment Contract and Change in
Control Agreement and Directors Meetings and Compensation in the Proxy Statement.



Item 12. Security Ownership of Certain Beneficial Owners and Management



The information required by Item 12 is incorporated by reference from the information under the caption Security Ownership of Certain Beneficial
Owners and Management in the Proxy Statement.



Item 13. Certain
Relationships and Related Transactions



During 2003
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.



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 in the Proxy Statement.



37



---

PART IV



Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K



(a) Documents filed as part of the report



1. Consolidated Financial Statements



Report of Independent Public Accountants

Consolidated Balance Sheets

Consolidated Statements of Earnings

Consolidated Statements of Shareholders Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements



2. Financial Statement Schedules



Schedule IIValuation and Qualifying Accounts



3. Exhibits



|       |   |  |                                                                                                                                                                                                                                
|------ | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  
|(3.1)  |   |  | Articles of Incorporation, as amended, included as Exhibit 3 to Form 10-K of the registrant for the year ended December 31, 1990, which exhibit is incorporated herein by
reference.                                           
|       |  
|(3.2)  |   |  | Articles of Amendment to Fourth Restated Articles of Incorporation, included as Exhibit 3.1 to Form 8-K of the registrant filed December 10, 1999, which exhibit is incorporated herein by
reference.                          
|       |  
|(3.3)  |   |  | Restated Bylaws, included as Exhibit 3.2 to Form 8-K of the registrant filed December 10, 1999, which exhibit is incorporated herein by reference.                                                                             
|       |  
|(10.1) |   |  | Shareholder Rights Agreement, dated as of May 4, 1987, was included as Exhibit 1 to Form 8-A of the registrant dated May 13, 1987, which agreement is incorporated herein by
reference.                                        
|       |  
|(10.2) | * |  | Companys 1990 Stock Option Plan was included as Exhibit 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.                    
|       |  
|(10.3) | * |  | Companys 1996 Nonemployee Director Stock Option Plan was 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.
|       |  
|(21)   |   |  | Schedule listing subsidiaries of the registrant Consent of Independent Public Accountants                                                                                                                                      
|       |  
|(31.a) |   |  | Chief Executive Officer certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002                                                                                                                             
|       |  
|(31.b) |   |  | Chief Financial Officer certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002                                                                                                                             
|       |  
|(32.a) |   |  | Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                 
|       |  
|(32.b) |   |  | Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                 



*Compensatory plan.



38



---

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (Continued)



(b) Reports on Form 8-K filed during the fourth quarter of 2003:



November 21, 2003, Form 8-K reporting under Item 5. Other
Events disclosing the asset purchase of D&R Oilfield Services.



SCHEDULE II



Lufkin Industries, Inc.

Valuation & Qualifying Accounts

(in
thousands of dollars)



|                                 |  |                            |        |                  |     |                         |     |            |       |                      |   |       
|-------------------------------- |  | -------------------------- | ------ | ---------------- | --- | ----------------------- | --- | ---------- | ----- | -------------------- | - | ------
|                                 |  |                            |        | Additions        |     |                         |     |           
|Description                      |  | Balance atBeginningof Year |        | ChargedToExpense |     | Chargedto OtherAccounts |     | Deductions |       | Balanceat End ofYear
|Allowance for Doubtful Accounts: |  |                            |        |                  |     |                         |     |            |       |                      |   |       
|Year Ended December 31, 2003     |  | $                          | 240    |                  | 156 |                         | 66  |            | 171   |                      | $ | 291   
|Year Ended December 31, 2002     |  |                            | 818    |                  |    |                         |    |            | 578   |                      |   | 240   
|Year Ended December 31, 2001     |  |                            | 605    |                  | 213 |                         |    |            |      |                      |   | 818   
|Inventory: Valuation Reserves:   |  |                            |        |                  |     |                         |     |            |       |                      |   |       
|Year Ended December 31, 2003     |  | $                          | 725    |                  | 268 |                         | 690 |            | 68    |                      | $ | 1,615 
|Year Ended December 31, 2002     |  |                            | 442    |                  | 422 |                         |    |            | 139   |                      |   | 725   
|Year Ended December 31, 2001     |  |                            | 1,219  |                  |    |                         | 82  |            | 859   |                      |   | 442   
|Inventory: LIFO Reserves:        |  |                            |        |                  |     |                         |     |            |       |                      |   |       
|Year Ended December 31, 2003     |  | $                          | 17,682 |                  | 96  |                         |    |            |      |                      | $ | 17,778
|Year Ended December 31, 2002     |  |                            | 17,565 |                  | 117 |                         |    |            |      |                      |   | 17,682
|Year Ended December 31, 2001     |  |                            | 19,449 |                  |    |                         |    |            | 1,884 |                      |   | 17,565



39



---

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Lufkin Industries, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on March 11, 2004.



|                        |  |                                                                                                          
|----------------------- |  | ---------------------------------------------------------------------------------------------------------
|LUFKIN INDUSTRIES, INC.
|                        | 
|By:                     |  | /s/ R. D. Leslie                                                                                         
|                        |  |                                                                                                          
|                        |  | R. D. Leslie, Vice President/Treasurer/Chief Financial Officer Principal Financial and Accounting Officer



Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed below on March 11, 2004, by the following persons on behalf of Lufkin Industries, Inc. and in the capacities indicated.



|   |  |                                                    |  | 
|-- |  | -------------------------------------------------- |  | 
|By |  | /s/ D. V. Smith                                    |  | 
|   |  |                                                    |  | 
|   |  | D. V. Smith, President and Chief Executive Officer |  | 
|   |  |                                                   
|By |  | /s/ J. F. Anderson                                 |  | 
|   |  |                                                    |  | 
|   |  | J.F. Anderson, Director                            |  | 
|   |  |                                                   
|By |  | /s/ S. W. Henderson, III                           |  | 
|   |  |                                                    |  | 
|   |  | S. W. Henderson, III, Director                     |  | 
|   |  |                                                   
|By |  | /s/ J. T. Jongebloed                               |  | 
|   |  |                                                    |  | 
|   |  | J. T. Jongebloed, Director                         |  | 
|   |  |                                                   
|By |  | /s/ J. H. Lollar                                   |  | 
|   |  |                                                    |  | 
|   |  | J. H. Lollar, Director                             |  | 
|   |  |                                                   
|By |  | /s/ B. H. ONeal                                   |  | 
|   |  |                                                    |  | 
|   |  | B. H. ONeal, Director                             |  | 
|   |  |                                                   
|By |  | /s/ H. J. Trout, Jr.                               |  | 
|   |  |                                                    |  | 
|   |  | H. J. Trout, Jr., Director                         |  | 
|   |  |                                                   
|By |  | /s/ T. E. Wiener                                   |  | 
|   |  |                                                    |  | 
|   |  | T. E. Wiener, Director                             |  | 



40



---

INDEX TO EXHIBITS



|              |  |                                                                                                                                                                                                                                
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                    
|              | 
|(3.1)         |  | Articles of Incorporation, as amended, included as Exhibit 3 to Form 10-K of the registrant for the year ended December 31, 1990, which exhibit is incorporated herein by
reference.                                           
|              | 
|(3.2)         |  | Articles of Amendment to Fourth Restated Articles of Incorporation, included as Exhibit 3.1 to Form 8-K of the registrant filed December 10, 1999, which exhibit is incorporated herein by
reference.                          
|              | 
|(3.3)         |  | Restated Bylaws, included as Exhibit 3.2 to Form 8-K of the registrant filed December 10, 1999, which exhibit is incorporated herein by reference.                                                                             
|              | 
|(10.1)        |  | Shareholder Rights Agreement, dated as of May 4, 1987, was included as Exhibit 1 to Form 8-A of the registrant dated May 13, 1987, which agreement is incorporated herein by
reference.                                        
|              | 
|(10.2)*       |  | Companys 1990 Stock Option Plan was included as Exhibit 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.                    
|              | 
|(10.3)*       |  | Companys 1996 Nonemployee Director Stock Option Plan was 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.
|              | 
|(21)          |  | Schedule listing subsidiaries of the registrant                                                                                                                                                                                
|              | 
|(23)          |  | Consent of Independent Public Accountants                                                                                                                                                                                      
|              | 
|(31.a)        |  | Chief Executive Officer certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002                                                                                                                             
|              | 
|(31.b)        |  | Chief Financial Officer certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002                                                                                                                             
|              | 
|(32.a)        |  | Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                 
|              | 
|(32.b)        |  | Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                 



*Compensatory plan.



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