**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**








**FORM
      10-Q**











(X)
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT
      OF 1934





For
      the
      quarterly period ended June 30, 2006





or





(  )
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT
      OF 1934





For
      the
      transition period from _______ to _______





Commission
      File Number: 0-02612





**LUFKIN
      INDUSTRIES, INC.**


(Exact
      name of registrant as specified in its charter)





**TEXAS**
            **75-0404410**(State
                or other jurisdiction of incorporation or organization)
            (I.R.S.
                Employer Identification No.)**601
                SOUTH RAGUET, LUFKIN, TEXAS**
            **75904**(Address
                of principal executive offices)
            (Zip
                Code)





**(936)
      634-2211**


(Registrant’s
      telephone number, including area code)





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  xNo o
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 Large
        accelerated filer  o                                 Accelerated
        filer x                               Non-accelerated
        filer
o
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).  Yes  o         
No  x
  There
        were 14,882,091 shares of Common Stock, $1.00 par value per share,
        outstanding as of August 3, 2006, not including 399,278 shares classified
        as
        Treasury Stock.
 Table
            of Contents


**Table
        of Contents**
 
 PART
        I - FINANCIAL INFORMATION
 
 Item
        1. Financial
        Statements
 
 Item
        2. Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations
 
 Item
        3. Quantitative
        and Qualitative Disclosures About Market Risk
 
 Item
        4. Controls and
        Procedures
 
 
 PART
        II - OTHER INFORMATION
 
 Item
        1. Legal
        Proceedings
 
 Item
        1a. Risk
        Factor
 
 Item
        4. Submission of
        Matters to a Vote of Security Holders
 
 Item
        6.
        Exhibits
 
 SIGNATURES
 
 INDEX
        TO EXHIBITS
 
 EX-31.1
 
 EX-31.2
 
 EX-32.1
  EX-32.2
  Table
            of Contents
 
 PART
      I
**- FINANCIAL INFORMATION**





**Item
      1.**  **Financial
      Statements.**





**LUFKIN
      INDUSTRIES, INC**


**CONSOLIDATED
      BALANCE SHEETS (UNAUDITED)**





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


June
                    30,
                
                December
                    31,Assets
                
                2006
                
                2005Current
                    Assets:Cash
                    and cash equivalents
                
                $
                31,390
                
                $
                25,822Receivables,
                    net
                
                
                81,864
                
                
                80,609Inventories
                
                
                87,602
                
                
                74,635Deferred
                    income tax assets
                
                
                4,712
                
                
                4,185Other
                    current assets
                
                
                5,219
                
                
                4,650Total
                    current assets
                
                
                210,787
                
                
                189,901Property,
                    plant and equipment, net
                
                
                101,369
                
                
                92,980Prepaid
                    pension costs
                
                
                63,516
                
                
                62,065Goodwill,
                    net
                
                
                11,664
                
                
                11,495Other
                    assets net
                
                
                3,528
                
                
                3,354Total
                    assets
                
                $
                390,864
                
                $
                359,795Liabilities
                    and Shareholders' EquityCurrent
                    liabilities:Short-term
                    notes payable
                
                $
                60
                
                $
                271Accounts
                    payable
                
                
                26,803
                
                
                20,794Accrued
                    liabilities:Payroll
                    and benefits
                
                
                7,370
                
                
                7,946Warranty
                    expenses
                
                
                3,757
                
                
                3,245Taxes
                    payable
                
                
                4,717
                
                
                14,391Other
                
                
                9,260
                
                
                9,626Total
                    current liabilities
                
                
                51,967
                
                
                56,273Deferred
                    income tax liabilities
                
                
                32,435
                
                
                31,049Postretirement
                    benefits
                
                
                11,469
                
                
                11,394Shareholders'
                    equity:Common
                    stock, $1.00 par value per share; 60,000,000 shares
                    authorized;15,281,369
                    and 15,124,644 shares issued and outstanding,
                    respectively
                
                
                15,281
                
                
                15,125Capital
                    in excess par
                
                
                35,255
                
                
                31,705Retained
                    earnings
                
                
                245,192
                
                
                216,427Treasury
                    stock, 399,278 and 399,278 shares, respectively, at cost
                
                
                (4,124
                )
                
                (4,124
                )Accumulated
                    other comprehensive income:Cumulative
                    translation adjustment
                
                
                3,389
                
                
                1,946Total
                    shareholders' equity
                
                
                294,993
                
                
                261,079Total
                    liabilities and shareholders' equity
                
                $
                390,864
                
                $
                359,795





See
      accompanying notes to consolidated financial statements.


1
 Table
          of Contents


**LUFKIN
      INDUSTRIES, INC.**


**CONSOLIDATED
      STATEMENTS OF EARNINGS**


**AND
      COMPREHENSIVE INCOME (UNAUDITED)**


(In
      thousands of dollars, except per share and share data)


Three
                                Months Ended
                            
                            Six
                                Months EndedJune
                                30,
                            
                            June
                                30,2006
                            
                            2005
                            
                            2006
                            
                            2005Sales
                            
                            $
                            147,690
                            
                            $
                            121,689
                            
                            $
                            281,080
                            
                            $
                            223,077Cost
                                of Sales
                            
                            
                            108,539
                            
                            
                            93,666
                            
                            
                            206,489
                            
                            
                            172,602Gross
                                Profit
                            
                            
                            39,151
                            
                            
                            28,023
                            
                            
                            74,591
                            
                            
                            50,475Selling,
                                general and administrative expenses
                            
                            
                            13,099
                            
                            
                            11,589
                            
                            
                            25,236
                            
                            
                            22,346Operating
                                income
                            
                            
                            26,052
                            
                            
                            16,434
                            
                            
                            49,355
                            
                            
                            28,129Interest
                                income
                            
                            
                            446
                            
                            
                            83
                            
                            
                            856
                            
                            
                            245Interest
                                expense
                            
                            
                            (29
                            )
                            
                            (37
                            )
                            
                            (63
                            )
                            
                            (80
                            )Other
                                income (expense), net
                            
                            
                            21
                            
                            
                            (189
                            )
                            
                            39
                            
                            
                            (378
                            )Earnings
                                before income tax provision
                            
                            
                            26,490
                            
                            
                            16,291
                            
                            
                            50,187
                            
                            
                            27,916Income
                                tax provision
                            
                            
                            9,035
                            
                            
                            5,865
                            
                            
                            17,565
                            
                            
                            10,050Net
                                earnings
                            
                            
                            17,455
                            
                            
                            10,426
                            
                            
                            32,622
                            
                            
                            17,866Change
                                in foreign currency translationadjustment
                            
                            
                            1,317
                            
                            
                            (726
                            )
                            
                            1,443
                            
                            
                            (1,226
                            )Total
                                comprehensive income
                            
                            $
                            18,772
                            
                            $
                            9,700
                            
                            $
                            34,065
                            
                            $
                            16,640Net
                                earnings per shareBasic
                            
                            $
                            1.18
                            
                            $
                            0.73
                            
                            $
                            2.21
                            
                            $
                            1.26Diluted
                            
                            $
                            1.16
                            
                            $
                            0.71
                            
                            $
                            2.16
                            
                            $
                            1.23Dividends
                                per share
                            
                            $
                            0.15
                            
                            $
                            0.09
                            
                            $
                            0.26
                            
                            $
                            0.18Weighted
                                average number of shares outstanding:Basic
                            
                            
                            14,808,539
                            
                            
                            14,234,337
                            
                            
                            14,791,140
                            
                            
                            14,132,675Diluted
                            
                            
                            15,090,563
                            
                            
                            14,656,909
                            
                            
                            15,092,071
                            
                            
                            14,526,304





See
      accompanying notes to consolidated financial statements.








2
 Table
          of Contents


**LUFKIN
      INDUSTRIES, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (UNAUDITED)**


(In
      thousands of dollars)





Six
                  Months EndedJune
                  30,2006
              
              2005Cash
                  flows form operating activities:Net
                  earnings
              
              $
              32,622
              
              $
              17,866Adjustments
                  to reconcile net earnings to cashprovided
                  by operating activities:Depreciation
                  and amortization
              
              
              5,612
              
              
              5,797Deferred
                  income tax provision
              
              
              750
              
              
              1,433Excess
                  tax benefit from share-based compensation
              
              
              (2,685
              )
              
              -Share-based
                  compensation expense
              
              
              1,594
              
              
              -Pension
                  income
              
              
              (1,450
              )
              
              (1,224
              )Postretirement
                  benefits
              
              
              75
              
              
              190(Gain)
                  loss on disposition of property, plant and equipment
              
              
              (57
              )
              
              49Changes
                  in:Receivables,
                  net
              
              
              (620
              )
              
              (7,961
              )Inventories
              
              
              (12,226
              )
              
              (24,823
              )Other
                  current assets
              
              
              2,398
              
              
              (911
              )Accounts
                  payable
              
              
              5,232
              
              
              5,182Accrued
                  liabilities
              
              
              (13,286
              )
              
              2,315Net
                  cash provided by (used in) operating activities
              
              
              17,959
              
              
              (2,087
              )Cash
                  flows from investing activities:Additions
                  to property, plant and equipment
              
              
              (13,129
              )
              
              (4,205
              )Proceeds
                  from disposition of property, plant and equipment
              
              
              111
              
              
              125Increase
                  in other assets
              
              
              (208
              )
              
              (185
              )Acquisition
                  of other companies
              
              
              -
              
              
              (3
              )Net
                  cash used in investing activities
              
              
              (13,226
              )
              
              (4,268
              )Cash
                  flows from financing activities:Proceeds
                  from (payments of) short-term notes payable
              
              
              (224
              )
              
              878Dividends
                  paid
              
              
              (3,855
              )
              
              (2,559
              )Excess
                  tax benefit from share-based compensation
              
              
              2,685
              
              
              -Proceeds
                  from exercise of stock options
              
              
              2,142
              
              
              4,426Net
                  cash provided by financing activities
              
              
              748
              
              
              2,745Effect
                  of translation on cash and cash equivalents
              
              
              87
              
              
              (70
              )Net
                  increase (decrease) in cash and cash equivalents
              
              
              5,568
              
              
              (3,680
              )Cash
                  and cash equivalents at beginning of period
              
              
              25,822
              
              
              17,097Cash
                  and cash equivalents at end of period
              
              $
              31,390
              
              $
              13,417









See
      accompanying notes to consolidated financial statements.








3
 Table
          of Contents


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Unaudited)





**1.
      Basis of Presentation**


The
        accompanying unaudited consolidated financial statements include the accounts
        of
        Lufkin Industries, Inc. and its consolidated subsidiaries (the “Company”) and
        have been prepared pursuant to the rules and regulations for interim financial
        statements of the Securities and Exchange Commission. Certain information
        in the
        notes to the consolidated financial statements normally included in financial
        statements prepared in accordance with accounting principles generally accepted
        in the United States of America has been condensed or omitted pursuant to
        these
        rules and regulations. In the opinion of management, all adjustments, consisting
        of normal recurring accruals unless specified, necessary for a fair presentation
        of the Company’s financial position, results of operations and cash flows for
        the interim periods included in this report have been included. For further
        information, including a summary of major accounting policies, refer to the
        consolidated financial statements and related footnotes included in the
        Company’s Annual Report on Form 10-K for the year ended December 31, 2005. The
        results of operations for the three and six months ended June 30, 2006, are
        not
        necessarily indicative of the results that may be expected for the full fiscal
        year.





**2.
      Receivables**


The
      following is a summary of the Company’s receivable balances (in thousands of
      dollars):




June
                  30,
              
              December
                  31,2006
              
              2005Accounts
                  receivable
              
              $
              81,975
              
              $
              80,602Notes
                  receivable
              
              
              484
              
              
              516Other
                  receivables
              
              
              292
              
              
              250Gross
                  receivables
              
              
              82,751
              
              
              81,368Allowance
                  for doubtful accounts receivable
              
              
              (403
              )
              
              (263
              )Allowance
                  for doubtful notes receivable
              
              
              (484
              )
              
              (496
              )Net
                  receivables
              
              $
              81,864
              
              $
              80,609





Bad
      debt
      expense related to receivables was $0.0 million and $0.5 million in the
      three months ended June 30, 2006 and 2005, respectively, and $0.0 million and
      $0.6 million in the six months ended June 30, 2006 and 2005,
      respectively.




**3.
      Other Current Accrued Liabilities**


The
      following is a summary of the Company's other current accrued liabilities
      balances (in thousands of dollars):




June
                  30,
              
              December
                  31,2006
              
              2005Customer
                  prepayments
              
              $
              2,124
              
              $
              3,245Deferred
                  compensation plans
              
              
              4,966
              
              
              4,811Other
                  accrued liabilities
              
              
              2,170
              
              
              1,570Total
                  other current accrued liabilities
              
              $
              9,260
              
              $
              9,626





4
 Table
          of Contents


**4.
      Property, Plant & Equipment (P. P. & E.)**


The
        following is a summary of the Company's P. P. & E. balances (in thousands of
        dollars):


June
                  30,
              
              December
                  31,2006
              
              2005Land
              
              $
              3,292
              
              $
              3,219Land
                  improvements
              
              
              7,901
              
              
              7,829Buildings
              
              
              74,309
              
              
              70,752Machinery
                  and equipment
              
              
              205,238
              
              
              195,730Furniture
                  and fixtures
              
              
              4,287
              
              
              4,076Computer
                  equipment and software
              
              
              13,797
              
              
              13,468Total
                  property, plant and equipment
              
              
              308,824
              
              
              295,074Less
                  accumulated depreciation
              
              
              (207,455
              )
              
              (202,094
              )Total
                  property, plant and equipment, net
              
              $
              101,369
              
              $
              92,980





Depreciation
      expense related to property, plant and equipment was $2.9 million and $2.8
      million in the three months ended June 30, 2006 and 2005, respectively, and
      $5.6 million and $5.7 million in the six months ended June 30, 2006 and
      2005, respectively.





**5.
      Inventories**


Inventories
      used in determining cost of sales were as follows (in thousands of
      dollars):




June
                  30,
              
              December
                  31,2006
              
              2005Gross
                  inventories @ FIFO:Finished
                  goods
              
              $
              7,380
              
              $
              5,647Work
                  in progress
              
              
              17,503
              
              
              17,664Raw
                  materials & component parts
              
              
              90,481
              
              
              77,039Total
                  gross inventories @ FIFO
              
              
              115,364
              
              
              100,350Less
                  reserves:LIFO
              
              
              26,282
              
              
              24,544Valuation
              
              
              1,480
              
              
              1,171Total
                  inventories as reported
              
              $
              87,602
              
              $
              74,635





Gross
      inventories on a FIFO basis before adjustments for reserves shown above that
      were accounted for on a LIFO basis were $82.4 million and $75.6 million at
      June
      30, 2006, and December 31, 2005, respectively.





5
 Table
          of Contents


**6.
      Net Earnings Per Share** Net
      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 net earnings
      per share for the three and six months ended June 30, 2006 and 2005, are
      illustrated below (in thousands of dollars, except share and per share
      data):


Three
                  Months Ended
              
              Six
                  Months EndedJune
                  30,
              
              June
                  30,2006
              
              2005
              
              2006
              
              2005Numerator:Numerator
                  for basic and diluted earnings per share-net earnings
              
              $
              17,455
              
              $
              10,426
              
              $
              32,622
              
              $
              17,866Denominator:Denominator
                  for basic net earnings per share weighted-average shares
              
              
              14,808,539
              
              
              14,234,337
              
              
              14,791,140
              
              
              14,132,675Effect
                  of dilutive securities: employee stock options
              
              
              282,024
              
              
              422,572
              
              
              300,931
              
              
              393,629Denominator
                  for diluted net earnings per share adjusted weighted-average
                  shares and assumed conversions
              
              
              15,090,563
              
              
              14,656,909
              
              
              15,092,071
              
              
              14,526,304Basic
                  net earnings per share
              
              $
              1.18
              
              $
              0.73
              
              $
              2.21
              
              $
              1.26Diluted
                  net earnings per share
              
              $
              1.16
              
              $
              0.71
              
              $
              2.16
              
              $
              1.23





Weighted
      options to purchase a total of 121,874 and 14,000 shares of the
      Company’s common stock for the three months ended June 30, 2006 and 2005,
      respectively, and 109,367 and 14,000 shares of the Company’s common
      stock for the six months ended June 30, 2006 and 2005,
      respectively, were excluded from the calculation of fully diluted earnings
      per
      share because their effect on fully diluted earnings per share for the period
      were antidilutive.




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


On
        January 13, 2005, the District Court entered its decision finding that the
        Company discriminated against African-American employees in initial assignments
        and promotions. The District Court also concluded that the discrimination
        resulted in a shortfall in income for those employees and ordered that the
        Company pay those employees back pay to remedy such shortfall, together with
        pre-judgment interest in the amount of 5%. On August 29, 2005, the District
        Court determined that the backpay award for the class of affected employees
        would be $3.4 million (including interest to January 1, 2005) and provided
        a
        formula for attorney fees that the Company estimates will result in a total
        not
        to exceed $2.5 million. In addition to back pay with interest, the District
        Court (i) enjoined and ordered the Company to cease and desist all racially
        biased assignment and promotion practices and (ii) ordered the Company to
        pay
        court costs and expenses.
 
 The
        Company has reviewed this decision with its outside counsel and on September
        19,
        2005, appealed the decision to the U.S. Court of Appeals for the Fifth Circuit.
        On January 26, 2006, the Court of Appeals notified the parties that the case
        had
        been docketed and a decision is expected before the end of 2006. The Company
        believes that after a full and fair review of the evidence, the Court of
        Appeals
        will determine that the plaintiffs have not established their claims of
        discrimination by the Company against the plaintiffs and will enter a decision
        to that effect and will dismiss the case against the Company. At this time,
        the
        Company has concluded that an unfavorable ultimate outcome is not probable.
        If
        the District Court’s decision is reversed and remanded for a new trial, the
        Company will vigorously defend itself on retrial. While the ultimate
        outcome and impact of these claims against the Company cannot be predicted
        with
        certainty, the Company believes that the resolutions of these proceedings
        will
        not have a material adverse effect on its consolidated financial position.
        However, should the Company be unsuccessful in its appeal, the final
        determination could have a material impact on the Company’s reported earnings
        and cash flows in a future reporting period.





6
 Table
          of Contents


**8.
      Segment Data**


The
        Company operates with three business segments - Oil Field, Power Transmission
        and Trailer. The three operating segments are supported by a common corporate
        group. Corporate expenses and certain assets are allocated to the operating
        segments based primarily upon third-party revenues. Inter-segment sales and
        transfers are accounted for as if the sales and transfers were to third parties,
        that is, at current market prices, as available. The accounting policies
        of the
        segments are the same as those described in the summary of significant
        accounting policies in the footnotes to the consolidated financial statements
        included in the Company’s Annual Report on Form 10-K for the year ended December
        31, 2005. The following is a summary of key segment information (in thousands
        of
        dollars):




Three
                  Months Ended June 30, 2006PowerOil
                  Field
              
              Transmission
              
              Trailer
              
              Corporate
              
              TotalGross
                  sales
              
              $
              97,682
              
              $
              33,314
              
              $
              19,975
              
              $
              -
              
              $
              150,971Inter-segment
                  sales
              
              
              (941
              )
              
              (2,339
              )
              
              (1
              )
              
              -
              
              
              (3,281
              )Net
                  sales
              
              $
              96,741
              
              $
              30,975
              
              $
              19,974
              
              $
              -
              
              $
              147,690Operating
                  income (loss)
              
              $
              20,799
              
              $
              5,726
              
              $
              (473
              )
              $
              -
              
              $
              26,052Other
                  income (expense), net
              
              
              (29
              )
              
              (20
              )
              
              1
              
              
              486
              
              
              438Earnings
                  (loss) beforeincome
                  tax provision
              
              $
              20,770
              
              $
              5,706
              
              $
              (472
              )
              $
              486
              
              $
              26,490
    Three
                  Months Ended June 30, 2005PowerOil
                  Field
              
              Transmission
              
              Trailer
              
              Corporate
              
              TotalGross
                  sales
              
              $
              78,539
              
              $
              27,643
              
              $
              20,691
              
              $
              -
              
              $
              126,873Inter-segment
                  sales
              
              
              (2,340
              )
              
              (2,843
              )
              
              (1
              )
              
              -
              
              
              (5,184
              )Net
                  sales
              
              $
              76,199
              
              $
              24,800
              
              $
              20,690
              
              $
              -
              
              $
              121,689Operating
                  income (loss)
              
              $
              14,218
              
              $
              3,070
              
              $
              (854
              )
              $
              -
              
              $
              16,434Other
                  income (expense), net
              
              
              (212
              )
              
              16
              
              
              1
              
              
              52
              
              
              (143
              )Earnings
                  (loss) beforeincome
                  tax provision
              
              $
              14,006
              
              $
              3,086
              
              $
              (853
              )
              $
              52
              
              $
              16,291
  7
 Table
            of Contents
 **8.
          Segment Data (Continued)**




Six
                Months Ended June 30, 2006PowerOil
                Field
            
            Transmission
            
            Trailer
            
            Corporate
            
            TotalGross
                sales
            
            $
            185,176
            
            $
            65,209
            
            $
            37,224
            
            $
            -
            
            $
            287,609Inter-segment
                sales
            
            
            (1,867
            )
            
            (4,660
            )
            
            (2
            )
            
            -
            
            
            (6,529
            )Net
                sales
            
            $
            183,309
            
            $
            60,549
            
            $
            37,222
            
            $
            -
            
            $
            281,080Operating
                income (loss)
            
            $
            39,623
            
            $
            10,339
            
            $
            (607
            )
            $
            -
            
            $
            49,355Other
                income (expense), net
            
            
            (30
            )
            
            (81
            )
            
            (1
            )
            
            944
            
            
            832Earnings
                (loss) beforeincome
                tax provision
            
            $
            39,593
            
            $
            10,258
            
            $
            (608
            )
            $
            944
            
            $
            50,187




Six
                  Months Ended June 30, 2005PowerOil
                  Field
              
              Transmission
              
              Trailer
              
              Corporate
              
              TotalGross
                  sales
              
              $
              143,244
              
              $
              50,371
              
              $
              37,122
              
              $
              -
              
              $
              230,737Inter-segment
                  sales
              
              
              (4,324
              )
              
              (3,335
              )
              
              (1
              )
              
              -
              
              
              (7,660
              )Net
                  sales
              
              $
              138,920
              
              $
              47,036
              
              $
              37,121
              
              $
              -
              
              $
              223,077Operating
                  income (loss)
              
              $
              24,114
              
              $
              5,629
              
              $
              (1,614
              )
              $
              -
              
              $
              28,129Other
                  income (expense), net
              
              
              (365
              )
              
              (24
              )
              
              1
              
              
              175
              
              
              (213
              )Earnings
                  (loss) beforeincome
                  tax provision
              
              $
              23,749
              
              $
              5,605
              
              $
              (1,613
              )
              $
              175
              
              $
              27,916







**9.
      Goodwill and Intangible Assets**





Goodwill




The
      changes in the carrying amount of goodwill for the six months ended
      June 30, 2006, are as follows (in thousands of dollars):


PowerOil
                  Field
              
              Transmission
              
              Trailer
              
              TotalBalance
                  as of 12/31/05
              
              $
              9,432
              
              $
              2,063
              
              $
              -
              
              $
              11,495Foreign
                  currency translation
              
              
              3
              
              
              166
              
              
              -
              
              
              169Balance
                  as of 6/30/06
              
              $
              9,435
              
              $
              2,229
              
              $
              -
              
              $
              11,664





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




8
 Table
          of Contents


**9.
      Goodwill and Intangible Assets (Continued)**




Intangible
      Assets




Balances
      and related accumulated amortization of intangible assets are as follows (in
      thousands of dollars):




June
                    30,
                
                December
                    31,2006
                
                2005Intangible
                    assets subject to amortization:Non-compete
                    agreementsOriginal
                    balance
                
                $
                463
                
                $
                463Foreign
                    currency translation
                
                
                36
                
                
                31Accumulated
                    amortization
                
                
                (239
                )
                
                (193
                )Ending
                    balance
                
                $
                260
                
                $
                301


**10.
      Stock Option Plans**


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





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





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




The
      following table is a summary of the stock-based compensation expense recognized
      under SFAS 123R for the three and six months ended June 30, 2006, and under
      APB
      Opinion No. 25 for the three and six months ended June 30, 2005 (in thousands
      of
      dollars):


Three
                  Months Ended
              
              Six
                  Months EndedJune
                  30,
              
              June
                  30,2006
              
              2005
              
              2006
              
              2005Stock-based
                  compensation expense
              
              $
              888
              
              $
              513
              
              $
              1,594
              
              $
              984Tax
                  benefit
              
              
              (337
              )
              
              185
              
              
              (606
              )
              
              354Stock-based
                  compensation expense, net of tax
              
              $
              551
              
              $
              328
              
              $
              988
              
              $
              630





9
 Table
          of Contents


**10.
      Stock Option Plans (Continued)**




The
      following table presents the pro forma effect on net earnings and earnings
      per
      share for the three and six months ended June 30, 2005, if the Company had
      applied the fair value recognition provisions of SFAS 123 to the Company’s stock
      options (in thousands of dollars except per share data):




Three
                  Months
              
              Six
                  MonthsEnded
              
              EndedJune
                  30, 2005
              
              June
                  30, 2005Net
                  earnings, as reported
              
              $
              10,426
              
              $
              17,866Add:
                  Total stock-based employee compensation expenseincluded
                  in reported net income, net of tax
              
              
              -
              
              
              -Deduct:
                  Total stock-based employee compensationexpense
                  determined under SFAS 123 for all awards,net
                  of tax
              
              
              (328
              )
              
              (630
              )Pro
                  forma net earnings
              
              $
              10,098
              
              $
              17,236Net
                  earnings per share:As
                  reported
              
              $
              0.73
              
              $
              1.26Pro
                  forma
              
              $
              0.71
              
              $
              1.22Diluted
                  net earnings per shareAs
                  reported
              
              $
              0.71
              
              $
              1.23Pro
                  forma
              
              $
              0.69
              
              $
              1.19





The
      fair
      value of each option grant during the first six months of 2006 and
      2005 was estimated on the date of grant using the Black-Scholes option-pricing
      model with the following assumptions:





2006
              
              2005Expected
                  dividend yield
              
              
              0.69%
                  - 0.91
              %
              
              1.17%
                  - 1.75
              %Expected
                  stock price volatility
              
              
              44.12%
                  - 45.35
              %
              
              38.62%
                  - 39.45
              %Risk
                  free interest rate
              
              
              4.52%
                  - 5.01
              %
              
              4.04%
                  - 4.19
              %Expected
                  life options
              
              
              6
                  -
                  8 years
              
              
              8
                  yearsWeighted-average
                  fair value per share at grant date
              
              
              $
                  28.16
              
              
              $ 
                  9.48


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




10
 Table
          of Contents


**10.
      Stock Option Plans (Continued)**




A
      summary
      of stock option activity under the plans during the six months ended
      June 30, 2006, is presented below:




Weighted-Weighted-
                
                Average
                
                AggregateAverage
                
                Remaining
                
                IntrinsicExercise
                
                Contractual
                
                ValueOptions
                
                Shares
                
                Price
                
                Term
                
                ($000's)Outstanding
                    at January 1, 2006
                
                
                797,720
                
                $
                18.35Granted
                
                
                51,000
                
                
                64.56Exercised
                
                
                (156,725
                )
                
                13.67Forfeited
                    or expired
                
                
                -
                
                
                -Outstanding
                    at June 30, 2006
                
                
                691,995
                
                $
                22.82
                
                
                7.6
                
                $
                25,596Exercisable
                    at June 30, 2006
                
                
                299,026
                
                $
                20.93
                
                
                6.8
                
                $
                11,671
  A
          summary
          of the status of the Company's nonvested shares as of June 30, 2006, and
          changes
          during the six months ended June 30, 2006, is presented below:
 Weighted-AverageGrant
                        DateNonvested
                        Shares
                    
                    Shares
                    
                    Fair
                        ValueNonvested
                        at January 1, 2006
                    
                    
                    413,743
                    
                    $
                    8.70Granted
                    
                    
                    51,000
                    
                    
                    28.16Vested
                    
                    
                    (71,774
                    )
                    
                    15.45Forfeited
                    
                    
                    -
                    
                    
                    -Nonvested
                        at June 30, 2006
                    
                    
                    392,969
                    
                    $
                    9.97


As
      of
      June 30, 2006, there was $3.0 million of total unrecognized compensation expense
      related to non-vested stock options. That cost is expected to be recognized
      over
      a weighted-average period of 1.1 years. The total fair value of shares vested
      during the six months ended June 30, 2006, was $1.1 million.




**11.
      Recently Issued Accounting Pronouncements**


In June
            2006, the Financial Accounting Standards Board issued Interpretation No.
            48 (“FIN 48”), “Accounting for Uncertainty in income Taxes- an
            interpretation of FASB Statement No. 109.” FIN 48 prescribes a
            recognition threshold and measurement attribute for the financial statement
            recognition and measurement of a tax position taken or expected to be
            taken in a
            tax return. FIN 48 also provides guidance on derecogntion,
            classification, interest and penalties, accounting in interim periods,
            disclosure and transition. In accordance with FIN 48, the evaluation
            of a tax
            position is a two-step process. The first step requires determining whether
            it is more likely than not that a tax position will be sustained upon
            examination or appeals based on the technical merits of the position.
            The second
            step requires that a tax position that meets the more-likely-than-not
            recognition threshold is measured to determine the amount of benefit
            to
            recognize in the financial statements. The tax position is measured at
            the
            largest benefit that is greater than 50 percent likely of being realized
            upon
            ultimate settlement. Differences between tax positions taken in a tax
            return and
            amounts recognized in the financial statements will generally result
            in an
            increase in a liability for income taxes payable and/or an increase in
            a
            deferred tax liability. Tax positions that previously failed to meet
            the
            more-likely-than-not recognition threshold should be recognized in the
            first subsequent financial reporting period in which the threshold is
            met and
            previously recognized tax positions that no longer meet the more-likely-than-not
            recognition threshold should be derecognized in the first subsequent
            financial
            reporting period in which the threshold is no longer met. FIN 48 is effective
            for fiscal years beginning after December 15, 2006, but earlier adoption is
            permitted. The Company is currently evaluating the impact, if any, the
            adoption
            of FIN 48 will have on its consolidated financial position or results
            of
            operations.
  Management
            believes the impact of other recently issued standards, which are not
            yet
            effective, will not have a material impact on the Company's consolidated
            condensed financial statements upon adoption.
 11
 Table
            of Contents


**12.
      Retirement Benefits**


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




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





The
      Company also has qualified defined contribution retirement plans covering
      substantially all of its U.S. employees. The Company makes contributions of
      75%
      of employee contributions up to a maximum employee contribution of 6% of
      employee earnings. Employees may contribute up to an additional 18% (in 1%
      increments), which is not subject to match by the Company. All obligations
      of
      the Company are funded through June 30, 2006. In addition, the Company provides
      an unfunded non-qualified deferred compensation defined contribution plan for
      certain U.S. employees. The Company's and
      individual's contributions are based on the same formula as the
      qualified contribution plan except that it does not limit the amount of a
      participant's compensation or maximum benefit. The contribution calculated
      under the non-qualified defined contribution plan is offset by
      the Company's and participant's contributions under the qualified plan. The
      Company’s expense for these plans totaled $0.7 million and $0.6 million in the
      three months ended June 30, 2006 and 2005, respectively, and $1.4 million and
      $1.0 million in the six months ended June 30, 2006 and 2005, respectively.
      The
      liability for the non-qualified deferred defined contribution plan is
      included in "Other accrued liabilities" on the Consolidated Balance
      Sheet.




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




12
 Table
          of Contents


**12.
        Retirement Benefits (Continued)**


**Components
      of Net Periodic Benefit Cost (in thousands of dollars)**


Pension
                  Benefits
              
              Other
                  BenefitsThree
                  Months Ended June 30,
              
              2006
              
              2005
              
              2006
              
              2005Service
                  cost
              
              $
              1,225
              
              $
              1,211
              
              $
              16
              
              $
              75Interest
                  cost
              
              
              2,099
              
              
              2,364
              
              
              75
              
              
              179Expected
                  return on plan assets
              
              
              (4,149
              )
              
              (3,927
              )
              
              -
              
              
              -Amortization
                  of prior service cost
              
              
              142
              
              
              78
              
              
              -
              
              
              -Amortization
                  of unrecognized net (gain) loss
              
              
              (115
              )
              
              1
              
              
              (91
              )
              
              17Amortization
                  of unrecognized transition asset
              
              
              (232
              )
              
              (216
              )
              
              -
              
              
              -Net
                  periodic benefit cost (income)
              
              $
              (1,030
              )
              $
              (489
              )
              $
              -
              
              $
              271







Pension
                Benefits
            
            Other
                BenefitsSix
                Months Ended June 30,
            
            2006
            
            2005
            
            2006
            
            2005Service
                cost
            
            $
            2,590
            
            $
            2,353
            
            $
            86
            
            $
            130Interest
                cost
            
            
            4,552
            
            
            4,754
            
            
            251
            
            
            348Expected
                return on plan assets
            
            
            (8,230
            )
            
            (7,862
            )
            
            -
            
            
            -Amortization
                of prior service cost
            
            
            283
            
            
            156
            
            
            -
            
            
            -Amortization
                of unrecognized net (gain) loss
            
            
            31
            
            
            2
            
            
            (78
            )
            
            17Amortization
                of unrecognized transition asset
            
            
            (464
            )
            
            (432
            )
            
            -
            
            
            -Net
                periodic benefit cost (income)
            
            $
            (1,238
            )
            $
            (1,029
            )
            $
            259
            
            $
            495


During
      the second quarter of 2006, certain assumptions such as turnover, mortality
      and
      renewal rates were updated to reflect recent trends. The projected benefit
      obligations of the pension plans reduced to $169.4 million from $182.4 and
      the
      accumulated postretirement benefit obligation reduced to $9.5 million from
      $13.1
      million. Increases in the turnover rate of employees and  lower retiree
      medical plan renewal rates drove the majority of these reductions. These
      projected obligation reductions resulted in a higher annual projection of
      net periodic benefit income from the pension plans by approximately $1.7
      million, or $0.07 per diluted share, and a reduced annual projected net periodic
      cost from the postretirement plans by approximately $0.5 million, or $0.02
      per diluted share.




**Employer
      Contributions**





The
      Company previously disclosed in its financial statements for the year ended
      December 31, 2005, that it did not expect to make any contributions to its
      pension plans in 2006. The Company also disclosed that it expected Company
      premium contributions of $325,000 to be made to its postretirement plan in
      2006.
      As of June 30, 2006, the Company has made contributions of $18,000 to its
      pension plans and has made Company premium contributions of $179,000 to its
      postretirement plan. The Company presently anticipates making contributions
      of
      $50,000 to its pension plans and an additional $186,000 to its postretirement
      plan during the last six months of 2006.







13
 Table
          of Contents


**Item
      2.** **Management’s Discussion and
      Analysis of Financial Condition and Results of Operations.**





**Overview**





**General**





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





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




In
      support of the above strategy, the Company has expanded its domestic and
      international Oil Field service operations through acquisitions and internal
      growth. The Company has also made capital investments to increase Oil Field
      manufacturing capacity in its three main manufacturing facilities to meet
      growing demand and reduce order lead-time.





In
      addition, the Company has expanded its Power Transmission capabilities through
      new gear repair facilities in the U.S. and Canada and through new high-speed
      gearbox manufacturing capabilities in its French operation. Capital investments
      targeting cost reductions and shorter manufacturing lead times are also being
      made in the Power Transmission segment.





**Trends/Outlook**





**Oil
      Field**


Demand
      for pumping unit equipment primarily depends on the level of onshore oil well
      drilling activity as well as the depth and fluid conditions of that drilling.
      Drilling activity is driven by the available cash flow of the Company’s
      customers as well as their long-term perceptions of the level and stability
      of
      the price of oil. The recent demand for pumping units has also been impacted
      by
      the use of artificial lift in natural gas and coal bed methane applications
      as
      higher energy prices have made certain extraction methods more economical.
      In
      addition, the availability of used pumping unit equipment impacts the demand
      for
      new pumping units, especially in the North American market. The higher energy
      prices experienced in 2004, 2005 and the first half of 2006 have increased
      the demand for new pumping units and related service and products from higher
      drilling activity, activation of idle wells and the upgrading of existing wells.
      While a majority of the segment’s revenues are in North America, international
      opportunities continue to increase as new drilling increases and existing fields
      mature, requiring increased use of pumping units for artificial lift. Demand
      levels experienced in 2005 and the second half of 2006 are expected to continue
      throughout the remainder of 2006 assuming energy prices stay at recent
      levels.





**Power
      Transmission**


Power
      Transmission services many diverse markets, with high-speed gearing for markets
      such as petrochemicals, refineries, offshore production and transmission of
      oil
      and slow-speed gearing for the gas, rubber, sugar, paper, steel, plastics,
      mining, cement and marine propulsion, each of which has its own unique set
      of
      drivers. Favorable conditions for one market may be unfavorable for another
      market. Generally, if general global industrial capacity utilizations are not
      high, then spending on new equipment lags. Also impacting demand are government
      regulations involving safety and environmental issues that can require capital
      spending. Recent market demand increases have come from energy-related markets
      such as refining, petrochemical, drilling, coal and power generation in response
      to higher global energy prices. These market trends should continue throughout
      the remainder of 2006 assuming energy prices stay at recent
      levels.


14
 Table
          of Contents


**Trailer**


The
      Company primarily sells its trailer products in the United States to small
      and
      medium size fleet freight-hauling companies through a dealer network. Demand
      in
      this market is driven by the available cash flow or financing capabilities
      of
      the industry, age of the trailer fleets, changes in government regulations,
      availability of quality used trailers and the medium-term outlook for freight
      volumes. The profitability of the freight-hauling market is driven by freight
      volumes, fuel prices, wage levels and insurance costs. In the last several
      years, the freight-hauling market has been severely depressed due to low freight
      volumes and higher operating costs. This led freight haulers to significantly
      lower orders for new trailers and extend the life of existing trailers. During
      2004 and 2005, the freight market improved as freight-hauling demand and freight
      pricing increased and aging trailers required replacement. However, the recent
      demand for van trailers has not increased enough to meet trailer industry
      capacity, increasing price competition. Van demand has been impacted by freight
      haulers focusing purchases on new tractors before new diesel emission
      requirements are required on new tractors beginning in 2007. Recent flatbed
      and
      dump trailer demand has increased significantly due to the increased activity
      in
      the home and road construction markets and the rebuilding effort resulting
      from
      the 2005 hurricanes.





**Summary
      of Results**





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





Overall,
      sales for the three months ended June 30, 2006, increased to $147.7 million
      from $121.7 million for the three months ended June 30, 2005, or 21.4%, and
      increased to $281.1 million for the six months ended June 30, 2006, from $223.1
      million for the six months ended June 30, 2005, or 26.0%. This growth was
      primarily driven by increased sales of new oil field equipment, but also by
      growth in Power Transmission sales. Additional segment data on sales is provided
      later in this section.





Gross
      margin for the three months ended June 30, 2006, increased to 26.5% from 23.0%
      for the three months ended June 30, 2005, and increased to 26.5% for the six
      months ended June 30, 2006, from 22.6% for the six months ended June 30, 2005.
      This overall gross margin improvement was primarily due to the full impact
      of
      price increases implemented in 2005 and 2006 to compensate for the
      increased raw material prices experienced by all segments in 2004. 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,
      but net earnings also benefited from leverage on selling, general and
      administrative expenses. The Company reported net earnings of $17.5 million,
      or
      $1.16 per share (diluted), for the three months ended June 30, 2006, compared
      to
      net earnings of $10.4 million, or $0.71 per share (diluted), for the three
      months ended June 30, 2005, and $32.6 million, or $2.16 per share (diluted),
      for
      the six months ended June 30, 2006 compared to net earnings of $17.9 million,
      or
      $1.23 per share (diluted).





Debt/equity
      (long-term debt net of current portion as a percentage of total equity) levels
      were 0.0% at June 30, 2006 and December 31, 2005. Short-term debt was $0.1
      million at June 30, 2006, down from $0.3 million at December 31, 2005. Cash
      balances at June 30, 2006, were $31.4 million, up from $25.8 million at December
      31, 2005, due to higher net earnings offsetting increased capital
      expenditures.




15
 Table
          of Contents


**Three
      Months Ended June 30, 2006, Compared to Three Months Ended June 30,
      2005**





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




Three
                  Months EndedJune
                  30,
              
              Increase/
              
              %
                  Increase/2006
              
              2005
              
              (Decrease)
              
              (Decrease)SalesOil
                  Field
              
              $
              96,741
              
              $
              76,199
              
              $
              20,542
              
              
              27.0Power
                  Transmission
              
              
              30,975
              
              
              24,800
              
              
              6,175
              
              
              24.9Trailer
              
              
              19,974
              
              
              20,690
              
              
              (716
              )
              
              (3.5
              )Total
              
              $
              147,690
              
              $
              121,689
              
              $
              26,001
              
              
              21.4Gross
                  ProfitOil
                  Field
              
              $
              26,714
              
              $
              18,874
              
              $
              7,840
              
              
              41.5Power
                  Transmission
              
              
              10,977
              
              
              7,772
              
              
              3,205
              
              
              41.2Trailer
              
              
              1,460
              
              
              1,377
              
              
              83
              
              
              6.0Total
              
              $
              39,151
              
              $
              28,023
              
              $
              11,128
              
              
              39.7





**Oil
      Field**




Oil
      Field
      sales increased to $96.7 million, or 27.0%, for the three months ended June
      30,
      2006, from $76.2 million for the three months ended June 30, 2005. The benefit
      of the stronger Canadian dollar in 2006 contributed 1.3 percentage points of
      this increase. Increased sales of new pumping units account for a majority
      of
      the balance of the increase of 25.7 percentage points. Sales of new pumping
      units in the U.S. and Canada, and related service, increased from higher
      drilling and production primarily in the North America and Middle East
      markets. Also, sales of automation equipment continued to increase due to market
      share growth from new product offerings. In addition, sales growth was impacted
      from price increases instituted throughout 2005 in response to dramatic raw
      material price increases experienced in 2004 in addition to price increases
      instituted in 2006. Oil Field’s backlog increased to $91.0 million as of June
      30, 2006, from $65.8 million at June 30, 2005. This backlog increase was
      primarily due to increased bookings of new pumping units in the North America
      and Middle East markets.




Gross
      margin (gross profit as a percentage of sales) for the Oil Field segment
      increased to 27.6% for three months ended June 30, 2006, compared to 24.8%
      for
      the three months ended June 30, 2005, or 2.8 percentage points. Throughout
      2005, sales prices were increased to recover higher material costs incurred
      in
      2004, but the benefit of these price increases were not fully realized in
      the first half of 2005. This margin improvement was partially offset by
      employee training costs associated with manufacturing facility expansions in
      the
      U.S., Canada and Argentina and higher inbound freight costs.




Direct
      selling, general and administrative expenses for Oil Field increased to $4.0
      million, or 40.5%, for the three months ended June 30, 2006, from $2.8 million
      for the three months ended June 30, 2005. This increase is due to higher
      employee-related expenses in support of increased current and expected sales
      volumes, insurance claims, third-party commissions and the impact of
      expensing stock options. Direct selling, general and administrative
      expenses as a percentage of sales also increased to 4.1% for the three months
      ended June 30, 2006, from 3.7% for the three months ended June 30,
      2005.





**Power
      Transmission**





Sales
      for
      the Company’s Power Transmission segment increased to $31.0 million, or 24.9%,
      for the three months ended June 30, 2006, compared to $24.8 million for the
      three months ended June 30, 2005. This growth was the result of increased sales
      of high-speed units to the energy-related markets, such as power generation
      and
      oil and gas production and refining, and from the new U.S. gear repair
      facilities. Power Transmission backlog at June 30, 2006, increased to $77.8
      million from $60.2 million at June 30, 2005, primarily from sales of new units
      for the energy-related markets.





Gross
      margin for the Power Transmission segment increased to 35.4% for the
      three months ended June 30, 2006, compared to 31.3% for the three months ended
      June 30, 2005, from the benefit of price increases and from increased sales
      of
      higher-margin high-speed units.




16
 Table
          of Contents


Direct
      selling, general and administrative expenses for Power Transmission increased
      to
      $3.7 million, or 14.1%, for the three months ended June 30, 2006, from $3.3
      million for the three months ended June 30, 2005. This increase is due to higher
      employee-related expenses in support of increased sales volumes and the impact
      of expensing stock options. However, direct selling, general and administrative
      expenses as a percentage of sales decreased to 12.1% for the three months ended
      June 30, 2006, from 13.2% for the three months ended June 30, 2005, from
      leverage on higher sales volumes.




**Trailer**





Trailer
      sales for the three months ended June 30, 2006, decreased to $20.0 million,
      or
      3.5%, from $20.7 million for the three months ended June 30, 2005. This decrease
      resulted from lower sales of new van trailers and used trailers, partially
      offset by higher sales of new flatbed and dump trailers. Sales growth in flatbed
      and dump trailers was strong due to the introduction of new models and demand
      from the home and road construction market. New van sales were impacted by
      the
      Company not booking lower margin orders as competitors lowered prices in
      response to industry overcapacity. Backlog for the Trailer segment increased
      to
      $39.5 million at June 30, 2006, compared to $31.6 million at June 30,
      2005. The backlog increase was primarily from orders for new flatbed trailers
      as
      described above.




Trailer
      gross margin increased to 7.3% for the three months ended June 30, 2006, from
      6.7% for the three months ended June 30, 2005, or 0.6 percentage points.
      This margin improvement was due to higher selling prices for and the
      favorable mix impact of higher-margin flatbed and dump trailers, partially
      offset by increases in aluminum costs for van trailers.





Direct
      selling, general and administrative expenses for Trailer decreased to $0.7
      million, or 33.5%, for the three months ended June 30, 2006, from $1.1 million
      for the three months ended June 30, 2005. In the second quarter of 2005, bad
      debt expense was increased due to a disputed receivable. This
      also caused direct selling, general and administrative expenses as a percentage
      of sales to decrease to 3.6% for the three months ended June 30, 2006, from
      5.3%
      for the three months ended June 30, 2005.




**Corporate/Other**





Corporate
      administrative expenses, which are allocated to the segments primarily based
      on
      historical third-party revenues, increased to $4.6 million, or 6.0%, for the
      three months ended June 30, 2006, from $4.4 million for the three months ended
      June 30, 2005, primarily from the impact of expensing stock
      options.




Investment
      income, interest expense and other income and expense for the three months
      ended
      June 30, 2006, totaled $0.4 million of income compared to an expense of $0.1
      million for the three months ended June 30, 2005, primarily due to an increase
      in investment income from higher cash balances.





Pension
      income, which is reported as a reduction of cost of sales, increased to $1.1
      million for the three months ended June 30, 2006, or 86%, compared to $0.6
      million for the three months ended June 30, 2005. This increase is due to the
      remeasurement of the projected benefit obligation, which lowered by
      approximately 7% from December 31, 2005. Certain assumptions, like turnover,
      mortality and retirement age, were updated to reflect more recent trends.
      Pension income in 2006 is expected to increase to approximately $2.9 million
      from $2.1 million in 2005 for the reasons mentioned above.




The net
      tax rate for the three months ended June 30, 2006, was 34.1% compared to 36.0%
      in the three months ended June 30, 2005. This net tax rate was the
      result of the effective tax rate of 36.0% benefitting from a one-time reduction
      of certain deferred tax balances of $0.4 million to reflect the
      impact of the new Texas margin tax, enacted in the second quarter of 2006,
      which
      will replace the existing Texas franchise tax.




17
 Table
          of Contents


**Six Months
        Ended June 30, 2006, Compared to Six Months Ended June 30,
        2005**
 
 The
        following table summarizes the Company’s sales and gross profit by operating
        segment (in thousands of dollars):
  Six
                      Months EndedJune
                      30,
                  
                  Increase/
                  
                  %
                      Increase/2006
                  
                  2005
                  
                  (Decrease)
                  
                  (Decrease)SalesOil
                      Field
                  
                  $
                  183,309
                  
                  $
                  138,920
                  
                  $
                  44,389
                  
                  
                  32.0Power
                      Transmission
                  
                  
                  60,549
                  
                  
                  47,036
                  
                  
                  13,513
                  
                  
                  28.7Trailer
                  
                  
                  37,222
                  
                  
                  37,121
                  
                  
                  101
                  
                  
                  0.3Total
                  
                  $
                  281,080
                  
                  $
                  223,077
                  
                  $
                  58,003
                  
                  
                  26.0Gross
                      ProfitOil
                      Field
                  
                  $
                  50,853
                  
                  $
                  33,200
                  
                  $
                  17,653
                  
                  
                  53.2Power
                      Transmission
                  
                  
                  20,631
                  
                  
                  15,015
                  
                  
                  5,616
                  
                  
                  37.4Trailer
                  
                  
                  3,107
                  
                  
                  2,260
                  
                  
                  847
                  
                  
                  37.5Total
                  
                  $
                  74,591
                  
                  $
                  50,475
                  
                  $
                  24,116
                  
                  
                  47.8
 
 **Oil
        Field**
  Oil
        Field
        sales increased to $183.3 million, or 32.0%, for the six months ended June
        30, 2006, from $138.9 million for the six months ended June 30, 2005. The
        benefit of the stronger Canadian dollar in 2006 contributed 1.2 percentage
        points of this increase. Increased sales of new pumping units account for
        a
        majority of the balance of the increase of 30.8 percentage points. Sales of
        new pumping units in the U.S. and Canada, and related service, increased
        from higher drilling and production primarily in the North America and
        Middle East markets. Also, sales of automation equipment continued to increase
        due to market share growth from new product offerings. In addition, sales
        growth
        was impacted from price increases instituted throughout 2005 in response
        to
        dramatic raw material price increases experienced in 2004 in addition to
        price
        increases instituted in 2006. Oil Field’s backlog increased to $91.0 million as
        of June 30, 2006, from $67.5 million at December 31, 2005. This backlog increase
        was primarily due to increased bookings of new pumping units in the North
        America and Middle East markets.
  Gross
        margin (gross profit as a percentage of sales) for the Oil Field segment
        increased to 27.7% for six months ended June 30, 2006, compared to 23.9%
        for the six months ended June 30, 2005, or 3.8 percentage points.
        Throughout 2005, sales prices were increased to recover higher material costs
        incurred in 2004, but the benefit of these price increases were not fully
        realized in the first half of 2005. This margin improvement was partially
        offset by employee training costs associated with manufacturing facility
        expansions in the U.S., Canada and Argentina and higher inbound freight
        costs.
  Direct
        selling, general and administrative expenses for Oil Field increased to $7.5
        million, or 35.5%, for the six months ended June 30, 2006, from $5.6
        million for the six months ended June 30, 2005. This increase is due to
        higher employee-related expenses in support of increased current and expected
        sales volumes, insurance claims, third-party commissions and the impact of
        expensing stock options. Direct selling, general and administrative
        expenses as a percentage of sales also increased to 4.1% for the six months
        ended June 30, 2006, from 4.0% for the six months ended June 30,
        2005.
 
 **Power
        Transmission**
 
 Sales
        for
        the Company’s Power Transmission segment increased to $60.5 million, or 28.7%,
        for the six months ended June 30, 2006, compared to $47.0 million for
        the six months ended June 30, 2005. The effect of the weaker euro in 2006
        negatively impacted sales growth by 1.6 percentage points. The net growth
        of
        30.3% was the result of increased sales of high-speed units to the
        energy-related markets, such as power generation and oil and gas production
        and
        refining, and from the new gear repair facilities. Power Transmission backlog
        at
        June 30, 2006, increased to $77.8 million from $60.2 million at June 30,
        2005,
        primarily from sales of new units for the energy-related markets.
 
 18
 Table
            of Contents
 Gross
        margin for the Power Transmission segment increased to 34.1% for
        the six months ended June 30, 2006, compared to 31.9% for the six
        months ended June 30, 2005, from the benefit of price increases and from
        increased sales of higher-margin high-speed units.
 
 Direct
        selling, general and administrative expenses for Power Transmission increased
        to
        $7.4 million, or 11.6%, for the six months ended June 30, 2006, from
        $6.6 million for the six months ended June 30, 2005. This increase is due
        to higher employee-related expenses in support of increased sales volumes
        and
        the impact of expensing stock options. However, direct selling, general and
        administrative expenses as a percentage of sales decreased to 12.2% for
        the six months ended June 30, 2006, from 14.1% for the six months
        ended June 30, 2005, from leverage on higher sales volumes.
  **Trailer**
 
 Trailer
        sales for the six months ended June 30, 2006, increased slightly to $37.2
        million, or 0.3%, from $37.1 million for the six months ended June 30,
        2005. Higher sales of new flatbed and dump trailers was offset by lower
        sales of new van trailers and used trailers. Sales growth in flatbed and
        dump
        trailers was strong due to the introduction of new models and demand from
        the
        home and road construction market. New van sales were impacted by the Company
        not booking lower margin orders as competitors lowered prices in response
        to
        industry overcapacity. Backlog for the Trailer segment increased to $39.5
        million at June 30, 2006, compared to $25.5 million at December 31, 2005.
        The backlog increase was primarily from orders for new flatbed trailers,
        as
        described above, and new van trailers. The backlog for new van trailers at
        December 31, 2005, were lower than average due to the timing of booking certain
        orders.
  Trailer
        gross margin increased to 8.3% for the six months ended June 30, 2006, from
        6.1% for the six months ended June 30, 2005, or 2.2 percentage points.
        This margin improvement was due to higher selling prices for, and the
        favorable mix impact of, higher-margin flatbed and dump trailers, partially
        offset by increases in aluminum costs for van trailers and plant inefficiencies
        from flatbed and dump trailer production ramp-up.
 
 Direct
        selling, general and administrative expenses for Trailer decreased to $1.4
        million, or 16.3%, for the six months ended June 30, 2006, from $1.7
        million for the six months ended June 30, 2005. In the first half of 2005,
        bad debt expense was increased due to a disputed receivable. This
        also caused direct selling, general and administrative expenses as a percentage
        of sales to decrease to 3.7% for the six months ended June 30, 2006, from
        4.5% for the six months ended June 30, 2005.
  **Corporate/Other**
 
 Corporate
        administrative expenses, which are allocated to the segments primarily based
        on
        historical third-party revenues, increased to $8.9 million, or 5.0%, for
        the six months ended June 30, 2006, from $8.5 million for the six
        months ended June 30, 2005, primarily from the impact of expensing
        stock options.
  Investment
        income, interest expense and other income and expense for the six months
        ended June 30, 2006, totaled $0.8 million of income compared to an expense
        of
        $0.2 million for the six months ended June 30, 2005, primarily due to an
        increase in investment income from higher cash balances.
 
 Pension
        income, which is reported as a reduction of cost of sales, increased to $1.5
        million for the six months ended June 30, 2006, or 16%, compared to $1.2
        million for the six months ended June 30, 2005. This increase is due to the
        remeasurement of the projected benefit obligation, which lowered by
        approximately 7% from December 31, 2005. Certain assumptions, like turnover,
        mortality and retirement age, were updated to reflect more recent trends.
        Pension income in 2006 is expected to increase to approximately $2.9 million
        from $2.1 million in 2005 for the reasons mentioned above.
  The net
        tax rate for the six months ended June 30, 2006, was 35.0% compared to
        36.0% in the six months ended June 30, 2005. This net tax rate
        was the result of the effective tax rate of 36.0% benefitting from a one-time
        reduction of certain deferred tax balances of $0.4 million to
        reflect the impact of the new Texas margin tax, enacted in the second quarter
        of
        2006, which will replace the existing Texas franchise tax.





19
 Table
          of Contents


**Liquidity
      and Capital Resources**





The
      Company has historically relied on cash flows from operations and third-party
      borrowing to finance its operations, including acquisitions, dividend payments
      and stock repurchases. The Company believes that its cash flows from operations
      and its available borrowing capacity under its credit agreements will be
      sufficient to fund its operations, including planned capital expenditures,
      dividend payments and stock repurchases, through December 31, 2006.




The
      Company’s cash balance totaled $31.4 million at June 30, 2006, compared to $25.8
      million at December 31, 2005. For the six months ended June 30, 2006, net
      cash provided by operating activities was $17.9 million, net cash used in
      investing activities totaled $13.2 million and net cash provided by
      financing activities amounted to $0.7 million. Significant components of cash
      provided by operating activities include net earnings, adjusted for non-cash
      expenses, of $36.4 million and an increase in working capital of $18.5 million.
      This increase was primarily due to higher Oil Field inventory
      balances, which used $12.2 million, from higher sales volume compared
      to the prior quarter and from tax payments, which used $12.7 million. These
      increases were partially offset by increased accounts payable balances, which
      provided $5.2 million, from higher production activity. Net cash used in
      investing activities included net capital expenditures totaling $13.0 million
      and an increase in other assets of $0.2 million. Capital expenditures in the
      first six months of 2006 were primarily for the expansion of manufacturing
      capacity and efficiency improvements in the Oil Field and Power Transmission
      segments. Capital expenditures for 2006 are projected to be in the range of
      $30.0 million to $35.0 million, primarily for the expansion of manufacturing
      capacity and efficiency improvements in the Oil Field and Power Transmission
      segments. Significant components of net cash provided by financing
      activities included the impact of stock option exercises of $4.8 million,
      partially offset by the repayment of short-term notes payable of $0.2 million
      and dividend payments of $3.9 million, or $0.26 per share.





Total
      debt balances at June 30, 2006, consisted of $60,000 of short-term notes
      payable. As of June 30, 2006, the Company had no outstanding debt associated
      with the Bank Facility discussed below and $60,000 of short-term bank debt
      associated with a French bank for the working capital needs of its French
      operation. Total debt decreased by $0.2 million from short-term note repayments
      during the six months ended June 30, 2006.




The
      Company has a three-year $27.5 million credit facility with a domestic bank
      (the
“Bank Facility”) consisting of an unsecured revolving line of credit that
      provides up to $17.5 million of committed borrowing along with an additional
      $10.0 million discretionary line of credit. This Bank Facility expires
      on December 31, 2008. Borrowing under the Bank Facility bear interest, at
      the Company’s option, at either the greater of (i) the prime rate, (ii) the base
      CD rate plus an applicable margin or (iii) the Federal Funds Effective Rate
      plus
      an applicable margin or the London Interbank Offered Rate plus an applicable
      margin, depending on certain ratios as defined in the Bank Facility. As of
      June
      30, 2006, no debt was outstanding under the Bank Facility and the Company was
      in
      compliance with all financial covenants under the terms of the Bank Facility.
      Deducting outstanding letters of credit of $5.0 million, $22.5 million of
      borrowing capacity was available at June 30, 2006.





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.
      Pursuant to this plan, the Company has repurchased a total of 1,656,740 shares
      of its common stock at an aggregate purchase price of $17.0 million. Repurchased
      shares are added to treasury stock and are available for general corporate
      purposes including the funding of the Company’s stock option plans. No shares
      were repurchased in the first half of 2006. As of June 30, 2006, the
      Company held 399,278 shares of treasury stock at an aggregate cost of
      approximately $4.1 million. Authorizations of approximately $2.1 million
      remained at June 30, 2006.




20
 The
        following table summarizes the Company’s expected cash outflow from financial
        contracts and commitments as of June 30, 2006. Information on recurring
        purchases of materials for use in manufacturing and service operations has
        not
        been included. These amounts are not long-term in nature (less than three
        months) and are generally consistent from year to year.




(In
                  thousands of dollars)
                
                
                
                Payments
                    due by periodLess
                    than
                
                1
                    -
                    3
                
                3
                    -
                    5
                
                More
                    thanContractual
                    obligations
                
                Total
                
                1
                    year
                
                years
                
                years
                
                5
                    yearsOperating
                    lease obligations
                
                $
                2,243
                
                $
                276
                
                $
                1,088
                
                $
                825
                
                $
                54Contractual
                    commitmentsfor
                    capital expenditures
                
                
                11,018
                
                
                11,018
                
                
                -
                
                
                -
                
                
                -Total
                
                $
                13,261
                
                $
                11,294
                
                $
                1,088
                
                $
                825
                
                $
                54





Since
      the
      Company has no significant tax loss carryforwards, the Company expects to make
      quarterly estimated tax payments in 2006 based on taxable income levels. Also,
      the Company has various retirement plans for which the Company has committed
      a
      certain level of benefit. The Company expects to make contributions to its
      pension, defined contribution and post-retirement health and life plans of
      approximately $3.2 million in 2006, depending on participation levels in these
      plans.




**Recently
      Issued Accounting Pronouncements**





In June
          2006, the Financial Accounting Standards Board issued Interpretation No.
          48 (“FIN 48”), “Accounting for Uncertainty in income Taxes- an
          interpretation of FASB Statement No. 109.” FIN 48 prescribes a
          recognition threshold and measurement attribute for the financial statement
          recognition and measurement of a tax position taken or expected to be taken
          in a
          tax return. FIN 48 also provides guidance on derecogntion,
          classification, interest and penalties, accounting in interim periods,
          disclosure and transition. In accordance with FIN 48, the evaluation of
          a tax
          position is a two-step process. The first step requires determining whether
          it is more likely than not that a tax position will be sustained upon
          examination or appeals based on the technical merits of the position. The
          second
          step requires that a tax position that meets the more-likely-than-not
          recognition threshold is measured to determine the amount of benefit to
          recognize in the financial statements. The tax position is measured at
          the
          largest benefit that is greater than 50 percent likely of being realized
          upon
          ultimate settlement. Differences between tax positions taken in a tax return
          and
          amounts recognized in the financial statements will generally result in
          an
          increase in a liability for income taxes payable and/or an increase in
          a
          deferred tax liability. Tax positions that previously failed to meet the
          more-likely-than-not recognition threshold should be recognized in the
          first subsequent financial reporting period in which the threshold is met
          and
          previously recognized tax positions that no longer meet the more-likely-than-not
          recognition threshold should be derecognized in the first subsequent financial
          reporting period in which the threshold is no longer met. FIN 48 is effective
          for fiscal years beginning after December 15, 2006, but earlier adoption is
          permitted. The Company is currently evaluating the impact, if any, the
          adoption
          of FIN 48 will have on its consolidated financial position or results of
          operations.
 Management
            believes the impact of other recently issued standards, which are not
            yet
            effective, will not have a material impact on the Company's consolidated
            condensed financial statements upon adoption
  **Critical
              Accounting Policies and Estimates**
 
 The
              discussion and analysis of financial condition and results of operations
              are
              based upon the Company’s consolidated financial statements, which have been
              prepared in accordance with accounting principles generally accepted
              in the
              United States of America. The preparation of these financial statements
              requires
              the Company to make estimates and judgments that affect the reported
              amounts of
              assets, liabilities, revenues and expenses and related disclosure of
              contingent
              assets and liabilities. The Company evaluates its estimates on an ongoing
              basis,
              based on historical experience and on various other assumptions that
              are
              believed to be reasonable under the circumstances. Actual results may
              differ
              from these estimates under different assumptions or conditions. The
              Company
              believes the following critical accounting policies affect its more
              significant
              judgments and estimates used in preparation of its consolidated
              statements.
  The
                Company extends credit to customers in the normal course of business.
                Management
                performs ongoing credit evaluations of our customers and adjusts
                credit limits
                based upon payment history and the customer’s current credit worthiness. An
                allowance for doubtful accounts has been established to provide for
                estimated
                losses on receivable collections. The balance of this allowance is
                determined by
                regular reviews of outstanding receivables and historical experience.
                As the
                financial condition of customers change, circumstances develop or
                additional
                information becomes available, adjustments to the allowance for doubtful
                accounts may be required.
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Revenue
        is not recognized until it is realized or realizable and earned. The criteria
        to
        meet this guideline are: persuasive evidence of an arrangement exists, delivery
        has occurred or services have been rendered, the price to the buyer is fixed
        or
        determinable and collectibility is reasonably assured. In some cases, a customer
        is not able to take delivery of a completed product and requests that the
        Company store the product for defined period of time. The Company will process
        a
        Bill-and-Hold invoice and recognize revenue at the time of the storage request
        if all of the following:




·
            The
                customer has accepted title and risk of
                loss;


·
            The
                  customer has provided a written purchase order for the
                  product;


·
            The
                customer, not the Company, requested the product to be stored and
                to be
                invoiced under a Bill-and-Hold arrangement. The customer must also
                provide
                the business purpose for the storage
                request;


·
            The
                customer must provide a storage period and future shipping
                date;


·
            The
                Company must not have retained any future performance obligations
                on the
                product;


·
            The
                Company must segregate the stored product and not make it available
                to use
                on other orders; and


·
            The
                product must be complete and ready for
                shipment.


The
      Company has made significant investments in inventory to service its customers.
      On a routine basis, the Company uses estimates in determining the level of
      reserves required to state inventory at the lower of cost or market.
      Management’s estimates are primarily influenced by market activity levels,
      production requirements, the physical condition of products and technological
      innovation. Changes in any of these factors may result in adjustments to the
      carrying value of inventory. Also, the Company accounts for a significant
      portion of its inventory under the LIFO method. The LIFO reserve can be impacted
      by changes in the LIFO layers and by inflation index adjustments. Generally,
      annual increases in the inflation rate or the FIFO value of inventory cause
      the
      value of the LIFO reserve to increase. Long-lived
          assets held and used by the Company are reviewed for impairment whenever
          events
          or changes in circumstances indicate that the carrying amount of an asset
          may
          not be recoverable. The Company assesses the recoverability of long-lived
          assets
          by determining whether the carrying value can be recovered through projected
          undiscounted cash flows, based on expected future operating results. Future
          adverse market conditions or poor operating results could result in the
          inability to recover the current carrying value and thereby possibly requiring
          an impairment charge in the future.
  Goodwill
        acquired in connection with business combinations represent the excess of
        consideration over the fair value of net assets acquired. The Company performs
        impairment tests on the carrying value of goodwill at least annually or whenever
        events or changes in circumstances indicate the carrying value of goodwill
        may
        be greater than fair value, such as significant underperformance relative
        to
        historical or projected operating results and significant negative industry
        or
        economic trends. The Company’s fair value is primarily determined using
        discounted cash flows, which requires management to make judgments about
        future
        operating results, working capital requirements and capital spending levels.
        Changes in cash flow assumptions or other factors which negatively impact
        the
        fair value of the operations would influence the evaluation and may result
        in a
        determination that goodwill is impaired and a corresponding impairment
        charge.
  Deferred
          tax assets and liabilities are recognized for the differences between the
          book
          basis and tax basis of the net assets of the Company. In providing for
          deferred
          taxes, management considers current tax regulations, estimates of future
          taxable
          income and available tax planning strategies. Changes in state, federal
          and
          foreign tax laws as well as changes in the financial position of the Company
          could also affect the carrying value of deferred tax assets and liabilities.
          If
          management estimates that some or all of any deferred tax assets will expire
          before realization or that the future deductibility is not probable, a
          valuation
          allowance would be recorded.
 
 The
          Company is subject to claims and legal actions in the ordinary course of
          business. The Company maintains insurance coverage for various aspects
          of its
          businesses and operations. The Company retains a portion of the insured
          losses
          that occur through the use of deductibles. Management regularly reviews
          estimates of reported and unreported insured and non-insured claims and
          legal
          actions and provides for losses through reserves. As circumstances develop
          and
          additional information becomes available, adjustments to loss reserves
          may be
          required.


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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. The impact of
      changes in these estimates does not differ significantly from those disclosed
      in
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2005




**Forward-Looking
      Statements and Assumptions** 
 This
        quarterly report on Form 10-Q 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. Undue reliance should not be place on forward-looking
        statements. These risks and uncertainties include, but are not limited
        to:
  ·
              oil
                  prices;
 ·
              capital
                  spending levels of oil producers;
 ·
              the
                  cyclicality of the trailer
                  industry;
 ·
              availability
                  and prices for raw materials;
 ·
              the
                  inherent dangers and complexities of our
                  operations;
 ·
              uninsured
                  judgments or a rise in insurance premiums;
 ·
              the
                  inability to effectively integrate
                  acquisitions;
 ·
              labor
                  disruptions and increasing labor
                  costs;
 ·
              the
                  availability of qualified and skilled
                  labor;
 ·
              disruption
                  of our operating facilities or management information
                  systems;
 ·
              the
                  impact on foreign operations of war, political disruption, civil
                  disturbance, economic and legal sanctions and changes in global
                  trade
                  policies;
 ·
              currency
                  exchange rate fluctuations in the markets in which the Company
                  operates;
 ·
              changes
                  in the laws, regulations, policies or other activities of governments,
                  agencies and similar organizations where such actions may affect
                  the
                  production, licensing, distribution or sale of the Company’s products, the
                  cost thereof or applicable tax
                  rates;
 ·
              costs
                  related to legal and administrative proceedings, including adverse
                  judgments against the Company if the Company fails to prevail in
                  reversing
                  such judgments; and
 ·
              general
                  industry, political and economic conditions in the markets where
                  the
                  Company 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.


23
 Table
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**Item
      3.** **Quantitative and Qualitative
      Disclosures About Market Risk.** 
 The
        Company’s financial instruments include cash, accounts receivable, accounts
        payable, invested funds and debt obligations. The book value of accounts
        receivable, short-term debt and accounts payable are considered to be
        representative of their fair market value because of the short maturity of
        these
        instruments. The Company’s accounts receivable are not concentrated in one
        customer or industry and are not viewed as an unusual credit risk.
  The
        Company does not utilize financial or derivative instruments for trading
        purposes or to hedge exposures to interest rates, foreign currency rates
        or
        commodity prices. Due to the 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 under its Bank Facility, the Company
        would have exposure since the interest rate is variable. In addition, the
        Company primarily invoices and purchases in the same currency as the functional
        currency of its operations, which minimizes exposure to currency rate
        fluctuations.
 
 The
        Company is exposed to currency fluctuations with debt denominated in U.S.
        dollars owed to the Company’s U.S. entity by its French and Canadian entities.
        As of June 30, 2006, this inter-company debt was comprised of 0.1 million
        euros
        and $9.7 million Canadian dollars. As of June 30, 2006, if the U.S. dollar
        strengthened by 10% over these currencies, the net income impact would be
        $0.6
        million of expense and if the U.S. dollar weakened by 10% over these currencies,
        the net income impact would be $0.6 million of income. 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. As of June 30, 2006, if the U.S.
        dollar strengthened by 10% over these currencies, the net income impact would
        be
        $0.0 million of expense and if the U.S. dollar weakened by 10% over these
        currencies, the net income impact would be $0.0 million of income.
 
 **Item
        4.**  **Controls and
        Procedures.**
 
 Based
        on
        their evaluation of the Company’s disclosure controls and procedures as of June
        30, 2006, the Chief Executive Officer of the Company, Douglas V. Smith, and
        the
        Chief Financial Officer of the Company, R. D. Leslie, have concluded that
        the
        Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and
        Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934) are
        effective.
 
 There
        were no changes in the Company’s internal control over financial reporting
        during the quarter ended June 30, 2006, that have materially affected, or
        are
        reasonably likely to materially affect, the Company’s internal control over
        financial reporting.




24
 Table
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**PART
        II****- OTHER INFORMATION**
 **Item
        1.**  **Legal
        Proceedings**.
 
 A
        class
        action complaint was filed in the U.S. District Court for the Eastern District
        of Texas on March 7, 1997, by an employee and a former employee which alleged
        race discrimination in employment. Certification hearings were conducted
        in
        Beaumont, Texas in February 1998 and in Lufkin, Texas in August 1998. In
        April
        1999, the District Court issued a decision that certified a class for this
        case,
        which included all black employees employed by the Company from March 6,
        1994,
        to the present. The case was closed from 2001 to 2003 while the parties
        unsuccessfully attempted mediation. Trial for this case began in December
        2003,
        but was postponed by the District Court and was completed in October 2004.
        The
        only claims made at trial were those of discrimination in initial assignments
        and promotions.
  On
        January 13, 2005, the District Court entered its decision finding that the
        Company discriminated against African-American employees in initial assignments
        and promotions. The District Court also concluded that the discrimination
        resulted in a shortfall in income for those employees and ordered that the
        Company pay those employees back pay to remedy such shortfall, together with
        pre-judgment interest in the amount of 5%. On August 29, 2005, the District
        Court determined that the backpay award for the class of affected employees
        would be $3.4 million (including interest to January 1, 2005) and provided
        a
        formula for attorney fees that the Company estimates will result in a total
        not
        to exceed $2.5 million. In addition to back pay with interest, the District
        Court (i) enjoined and ordered the Company to cease and desist all racially
        biased assignment and promotion practices and (ii) ordered the Company to
        pay
        court costs and expenses.
 
 The
        Company has reviewed this decision with its outside counsel and on September
        19,
        2005, appealed the decision to the U.S. Court of Appeals for the Fifth Circuit.
        On January 26, 2006, the Court of Appeals notified the parties that the case
        had
        been docketed and a decision is expected before the end of 2006. The Company
        believes that after a full and fair review of the evidence, the Court of
        Appeals
        will determine that the plaintiffs have not established their claims of
        discrimination by the Company against the plaintiffs and will enter a decision
        to that effect and will dismiss the case against the Company. At this time,
        the
        Company has concluded that an unfavorable ultimate outcome is not probable.
        If
        the District Court’s decision is reversed and remanded for a new trial, the
        Company will vigorously defend itself on retrial. While the ultimate
        outcome and impact of these claims against the Company cannot be predicted
        with
        certainty, the Company believes that the resolutions of these proceedings
        will
        not have a material adverse effect on its consolidated financial position.
        However, should the Company be unsuccessful in its appeal, the final
        determination could have a material impact on the Company’s reported earnings
        and cash flows in a future reporting period.
 
 There
        are
        various other claims and legal proceedings arising in the ordinary course
        of
        business pending against or involving the Company wherein monetary damages
        are
        sought. It is management’s opinion that the Company’s liability, if any, under
        such claims or proceedings would not materially affect its consolidated
        financial position, results of operations or cash flow.
  **Item
        1A.**  **Risks**
        Factors.
  In
        addition to other information set forth in this quarterly report, the factors
        discussed in Part I, "Item 1A. Risk Factors" in the Company's Annual Report
        on
        Form 10-K for the year ended December 31, 2005, which could materially affect
        the Company's business, financial condition or future results, should be
        carefully considered. The risks described in the Company's Annual Report
        on Form
        10-K are not the only risks facing the Company. Additional risks and
        uncertainties not currently known to the Company or that it currently deems
        to
        be immaterial also may materially adversely affect the Company's business,
        financial condition and/or operating results.  25
 Table
              of
              Contents


**Item
          4.** **Submission of Matters to a Vote
          of Security Holders.**
 
 (a)
              The
                  Company held its Annual Meeting of Stockholders on May 3, 2006,
                  in Lufkin,
                  Texas to elect four directors. 
 (b)
              Directors
                  elected at the Annual Meeting:  Douglas
          V. Smith
 Simon
          W. Henderson
 John
          F. Anderson
 Susan
          V. Baer
  Directors
          with terms of office continuing after the Annual Meeting:
 
 Directors
          with
          terms expiring in 2007:
  John
          H.
          Lollar
 Bob
          H.
          O’Neal
 Thomas
          E.
          Wiener
  Directors
          with
          terms expiring in 2008:
  H.
          J. Trout,
          Jr.
 J.
          T.
          Jongebloed
 
 (c)
              The
                  Annual Meeting was held to elect to elect four directors. All of
                  the
                  nominated directors were elected and will serve a three-year term
                  expiring
                  in 2009. The number of votes cast for, against or withheld, as
                  well as the
                  number of abstentions and broker non-votes, for each nominated
                  director
                  are as follows:
 Votes
                        in
                    
                    Votes
                    
                    Votes
                    
                    
                    
                    Broker
                        Non-Favor
                    
                    Against
                    
                    Withheld
                    
                    Abstentions
                    
                    VotesDouglas
                        V. Smith
                    
                    
                    12,645,063
                    
                    
                    -
                    
                    
                    200,702
                    
                    
                    -
                    
                    
                    -Simon
                        H. Henderson
                    
                    
                    12,654,536
                    
                    
                    -
                    
                    
                    191,229
                    
                    
                    -
                    
                    
                    -John
                        F. Anderson
                    
                    
                    12,784,445
                    
                    
                    -
                    
                    
                    61,320
                    
                    
                    -
                    
                    
                    -Suzanne
                        V. Baer
                    
                    
                    12,577,561
                    
                    
                    -
                    
                    
                    268,204
                    
                    
                    -
                    
                    
                    -
 26
 Table
                  of Contents
  **Item
              6****.** **Exhibits.**  *31.1
                            Rule
                                13a-14(a)/15d-14(a) Certification of Chief Executive
                                Officer.*31.2
                            Rule
                                13a-14(a)/15d-14(e) Certification of Chief Financial
                                Officer.*32.1
                            Section
                                1350 Certification of Chief Executive Officer.*32.2
                            Section
                                      1350 Certification of Chief Financial
                                Officer.
 *
                    Filed
                    herewith
 27
 Table
                        of Contents
  **SIGNATURE**S
  Pursuant
                        to the requirements of the Securities Exchange Act of 1934,
                        the registrant has
                        duly caused this report to be signed on its behalf by the
                        undersigned thereunto
                        duly authorized.
  Date:
                        August 7, 2006
  LUFKIN
                        INDUSTRIES, INC.
  By: 
                        /s/ R. D. Leslie
  R.
                        D.
                        Leslie
 Signing
                        on
                        behalf of the registrant and as
 Vice
                        President/Treasurer/Chief Financial Officer
 (Principal
                        Financial and Accounting Officer)
 Table
                            of Contents
  **INDEX
                            OF EXHIBITS**
   Exhibit
                                        Number
                                    
                                    Exhibit*31.1
                                    
                                    Rule
                                        13a-14(a)/15d-14(a) Certification of Chief
                                        Executive
                                        Officer.*31.2
                                    
                                    Rule
                                        13a-14(a)/15d-14(e) Certification of Chief
                                        Financial
                                        Officer.*32.1
                                    
                                    Section
                                        1350 Certification of Chief Executive Officer.*32.2
                                    
                                    Section
                                        1350 Certification of Chief Financial
                                        Officer.
  * Filed
                              herewith