**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, 2007





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 _X_ No____





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.


Large
      accelerated filer X Accelerated filer  Non-accelerated filer





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes
      ___No X




There
      were 15,065,006 shares
      of Common Stock, $1.00 par value per share, outstanding as of August 6,
      2007.





**PART
      I - FINANCIAL INFORMATION**





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




**LUFKIN
                  INDUSTRIES, INC.****CONDENSED
                  CONSOLIDATED BALANCE SHEETS (UNAUDITED)**(Thousands
                  of dollars, except share and per share data)June
                  30,
              
              December
                  31,Assets
              
              2007
              
              2006Current
                  Assets:Cash
                  and cash equivalents
              
              $
              76,469
              
              $
              57,797Receivables,
                  net
              
              
              84,099
              
              
              90,585Inventories
              
              
              100,741
              
              
              85,630Deferred
                  income tax assets
              
              
              9,244
              
              
              7,919Other
                  current assets
              
              
              4,483
              
              
              1,521Total
                  current assets
              
              
              275,036
              
              
              243,452Property,
                  plant and equipment, net
              
              
              118,392
              
              
              113,081Prepaid
                  pension costs
              
              
              56,557
              
              
              56,856Goodwill,
                  net
              
              
              11,798
              
              
              11,732Other
                  assets net
              
              
              4,209
              
              
              3,948Total
                  assets
              
              $
              465,992
              
              $
              429,069Liabilities
                  and Shareholders' EquityCurrent
                  liabilities:Accounts
                  payable
              
              $
              25,947
              
              $
              24,375Accrued
                  liabilities:Payroll
                  and benefits
              
              
              8,357
              
              
              9,810Warranty
                  expenses
              
              
              3,999
              
              
              3,668Taxes
                  payable
              
              
              3,163
              
              
              7,665Other
              
              
              17,468
              
              
              15,977Total
                  current liabilities
              
              
              58,934
              
              
              61,495Deferred
                  income tax liabilities
              
              
              27,616
              
              
              28,022Postretirement
                  benefits
              
              
              7,444
              
              
              8,475Other
                  liabilities
              
              
              5,770
              
              
              2,937Shareholders'
                  equity:Common
                  stock, $1.00 par value per share; 60,000,000 shares
                  authorized;15,492,784
                  and 15,322,903 shares issued and outstanding,
                  respectively
              
              
              15,493
              
              
              15,323Capital
                  in excess par
              
              
              45,962
              
              
              38,173Retained
                  earnings
              
              
              309,185
              
              
              280,198Treasury
                  stock, 395,278 and 395,278 shares, respectively, at cost
              
              
              (4,083
              )
              
              (4,083
              )Accumulated
                  other comprehensive loss
              
              
              (329
              )
              
              (1,471
              )Total
                  shareholders' equity
              
              
              366,228
              
              
              328,140Total
                  liabilities and shareholders' equity
              
              $
              465,992
              
              $
              429,069
  See
      notes
      to condensed consolidated financial statements.





**LUFKIN
                  INDUSTRIES, INC.****CONDENSED
                  CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)**(In
                  thousands of dollars, except per share and share data)Three
                  Months Ended
              
              Six
                  Months EndedJune
                  30,
              
              June
                  30,2007
              
              2006
              
              2007
              
              2006Sales
              
              $
              144,505
              
              $
              147,690
              
              $
              292,585
              
              $
              281,080Cost
                  of Sales
              
              
              104,181
              
              
              108,539
              
              
              212,210
              
              
              206,489Gross
                  Profit
              
              
              40,324
              
              
              39,151
              
              
              80,375
              
              
              74,591Selling,
                  general and administrative expenses
              
              
              14,699
              
              
              13,099
              
              
              29,243
              
              
              25,236Operating
                  income
              
              
              25,625
              
              
              26,052
              
              
              51,132
              
              
              49,355Interest
                  income
              
              
              966
              
              
              446
              
              
              1,831
              
              
              856Interest
                  expense
              
              
              (25
              )
              
              (29
              )
              
              (58
              )
              
              (63
              )Other
                  income (expense), net
              
              
              614
              
              
              21
              
              
              716
              
              
              39Earnings
                  before income tax provision
              
              
              27,180
              
              
              26,490
              
              
              53,621
              
              
              50,187Income
                  tax provision
              
              
              9,659
              
              
              9,035
              
              
              18,331
              
              
              17,565Net
                  earnings
              
              
              17,521
              
              
              17,455
              
              
              35,290
              
              
              32,622Net
                  earnings per shareBasic
              
              $
              1.17
              
              $
              1.18
              
              $
              2.35
              
              $
              2.21Diluted
              
              $
              1.15
              
              $
              1.16
              
              $
              2.32
              
              $
              2.16Dividends
                  per share
              
              $
              0.21
              
              $
              0.15
              
              $
              0.42
              
              $
              0.26Weighted
                  average number of shares outstanding:Basic
              
              
              15,026,974
              
              
              14,808,539
              
              
              14,991,428
              
              
              14,791,140Diluted
              
              
              15,229,990
              
              
              15,090,563
              
              
              15,209,214
              
              
              15,092,071




See
      notes
      to condensed consolidated financial statements.
















**LUFKIN
                  INDUSTRIES INC.****CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**(In
                  thousands of dollars)Six
                  Months EndedJune
                  30,2007
              
              2006Cash
                  flows from operating activities:Net
                  earnings
              
              $
              35,290
              
              $
              32,622Adjustments
                  to reconcile net earnings to cashprovided
                  by operating activities:Depreciation
                  and amortization
              
              
              6,832
              
              
              5,612Deferred
                  income tax provision
              
              
              (746
              )
              
              750Excess
                  tax benefit from share-based compensation
              
              
              (2,565
              )
              
              (2,685
              )Share-based
                  compensation expense
              
              
              2,270
              
              
              1,594Pension
                  income
              
              
              (1,629
              )
              
              (1,450
              )Postretirement
                  benefits
              
              
              (157
              )
              
              75Gain
                  on disposition of property, plant and equipment
              
              
              (87
              )
              
              (57
              )Changes
                  in:Receivables,
                  net
              
              
              7,104
              
              
              (620
              )Inventories
              
              
              (13,939
              )
              
              (12,226
              )Other
                  current assets
              
              
              (2,127
              )
              
              2,398Accounts
                  payable
              
              
              593
              
              
              5,232Accrued
                  liabilities
              
              
              (314
              )
              
              (13,286
              )Net
                  cash provided by operating activities
              
              
              30,525
              
              
              17,959Cash
                  flows from investing activites:Additions
                  to property, plant and equipment
              
              
              (10,988
              )
              
              (13,129
              )Proceeds
                  from disposition of property, plant and equipment
              
              
              371
              
              
              111Increase
                  in other assets
              
              
              (302
              )
              
              (208
              )Net
                  cash used in investing activities
              
              
              (10,919
              )
              
              (13,226
              )Cash
                  flows from financing activites:Payments
                  on short-term notes payable
              
              
              -
              
              
              (224
              )Dividends
                  paid
              
              
              (6,304
              )
              
              (3,855
              )Excess
                  tax benefit from share-based compensation
              
              
              2,565
              
              
              2,685Proceeds
                  from exercise of stock options
              
              
              2,682
              
              
              2,142Net
                  cash (used in) provided by financing activities
              
              
              (1,057
              )
              
              748Effect
                  of translation on cash and cash equivalents
              
              
              123
              
              
              87Net
                  increase in cash and cash equivalents
              
              
              18,672
              
              
              5,568Cash
                  and cash equivalents at beginning of period
              
              
              57,797
              
              
              25,822Cash
                  and cash equivalents at end of period
              
              $
              76,469
              
              $
              31,390
  See
      notes
      to condensed consolidated financial statements.








**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


(Unaudited)





**1.
      Basis of Presentation**


The
      accompanying unaudited condensed 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 condensed 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, 2006. The
      results of operations for the three and six months ended June 30, 2007, 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
                  31,2007
              
              2006Accounts
                  receivable
              
              $
              83,875
              
              $
              90,508Notes
                  receivable
              
              
              460
              
              
              472Other
                  receivables
              
              
              412
              
              
              292Gross
                  receivables
              
              
              84,747
              
              
              91,272Allowance
                  for doubtful accounts receivable
              
              
              (260
              )
              
              (215
              )Allowance
                  for doubtful notes receivable
              
              
              (388
              )
              
              (472
              )Net
                  receivables
              
              $
              84,099
              
              $
              90,585




Bad
      debt
      expense related to receivables was negligible in the three months ended
      June 30, 2007 and 2006, and in the six months ended June 30, 2007 and
      2006.




**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
                  31,2007
              
              2006Customer
                  prepayments
              
              $
              11,379
              
              $
              9,411Deferred
                  compensation plans
              
              
              4,469
              
              
              4,069Accrued
                  professional services
              
              
              778
              
              
              1,057Other
                  accrued liabilities
              
              
              842
              
              
              1,440Total
                  other current accrued liabilities
              
              $
              17,468
              
              $
              15,977





**4.
      Property, Plant & Equipment**


The
      following is a summary of the Company's property, plant and equipment balances
      (in thousands of dollars):


June
                  30,
              
              December
                  31,2007
              
              2006Land
              
              $
              3,494
              
              $
              3,482Land
                  improvements
              
              
              9,186
              
              
              8,543Buildings
              
              
              77,502
              
              
              75,082Machinery
                  and equipment
              
              
              227,913
              
              
              219,783Furniture
                  and fixtures
              
              
              5,257
              
              
              5,007Computer
                  equipment and software
              
              
              14,181
              
              
              14,027Total
                  property, plant and equipment
              
              
              337,533
              
              
              325,924Less
                  accumulated depreciation
              
              
              (219,141
              )
              
              (212,843
              )Total
                  property, plant and equipment, net
              
              $
              118,392
              
              $
              113,081





Depreciation
      expense related to property, plant and equipment was $3.6 million and $2.9
      million in the three months ended June 30, 2007 and 2006, respectively, and
      $6.8 million and $5.6 million in the six months ended June 30, 2007 and
      2006, respectively.





**5.
      Inventories**


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


June
                  30,
              
              December
                  31,2007
              
              2006Gross
                  inventories @ FIFO:Finished
                  goods
              
              $
              8,781
              
              $
              6,903Work
                  in progress
              
              
              23,895
              
              
              20,977Raw
                  materials & component parts
              
              
              98,929
              
              
              88,882Total
                  gross inventories @ FIFO
              
              
              131,605
              
              
              116,762Less
                  reserves:LIFO
              
              
              29,301
              
              
              28,888Valuation
              
              
              1,563
              
              
              2,244Total
                  inventories as reported
              
              $
              100,741
              
              $
              85,630


Gross
      inventories on a FIFO basis before adjustments for reserves shown above that
      were accounted for on a LIFO basis were $87.0 million and $82.7 million at
      June
      30, 2007, and December 31, 2006, respectively.








**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, 2007 and 2006, are
      illustrated below (in thousands of dollars, except share and per share data):


Three
                  Months Ended
              
              Six
                  Months EndedJune
                  30,
              
              June
                  30,2007
              
              2006
              
              2007
              
              2006Numerator:Numerator
                  for basic and diluted earnings pershare-net
                  earnings
              
              $
              17,521
              
              $
              17,455
              
              $
              35,290
              
              $
              32,622Denominator:Denominator
                  for basic net earnings per shareweighted-average
                  shares
              
              
              15,026,974
              
              
              14,808,539
              
              
              14,991,428
              
              
              14,791,140Effect
                  of dilutive securities: employee stockoptions
              
              
              203,016
              
              
              282,024
              
              
              217,786
              
              
              300,931Denominator
                  for diluted net earnings per shareadjusted
                  weighted-average sharesassumed
                  conversions
              
              
              15,229,990
              
              
              15,090,563
              
              
              15,209,214
              
              
              15,092,071Basic
                  net earnings per share
              
              $
              1.17
              
              $
              1.18
              
              $
              2.35
              
              $
              2.21Diluted
                  net earnings per share
              
              $
              1.15
              
              $
              1.16
              
              $
              2.32
              
              $
              2.16


Weighted
      options to purchase a total of 147,849 and 121,874 shares of the
      Company’s common stock for the three months ended June 30, 2007 and 2006,
      respectively, and 180,662 and 109,367 shares of the Company’s common stock
      for the six months ended June 30, 2007 and 2006, respectively, were
      excluded from the calculation of fully diluted earnings per share because their
      effect on fully diluted earnings per share for the period would have been
      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 April 3, 2007, the Company appeared before the appellate court in New Orleans
      for oral argument in this case. The three justices in this case will now prepare
      their decision and the Company anticipates that the decision will be issued
      in
      the fourth quarter of 2007. The
      Company believes that after a full and fair review of the evidence, the Court
      of
      Appeals will determine that the plaintiffs have not established their claims
      of
      discrimination by the Company against the plaintiffs and will enter a decision
      to that effect and will dismiss the case against the Company. At this time,
      the
      Company has concluded that an unfavorable ultimate outcome is not probable.
      If
      the District Court’s decision is reversed and remanded for a new trial, the
      Company will vigorously defend itself on retrial. While the ultimate
      outcome and impact of these claims against the Company cannot be predicted
      with
      certainty, the Company believes that the resolutions of these proceedings will
      not have a material adverse effect on its consolidated financial position.
      However, should the Company be unsuccessful in its appeal, the final
      determination could have a material impact on the Company’s reported earnings,
      results of operations and
      cash
      flows in a future reporting period.





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





**8.
      Comprehensive Income**


Comprehensive
      income includes net income and changes in the components of accumulated other
      comprehensive loss during the periods presented. The Company’s comprehensive
      income is as follows (in thousands of dollars):


Three
                  Months Ended
              
              Six
                  Months EndedJune
                  30,
              
              June
                  30,2007
              
              2006
              
              2007
              
              2006Net
                  earnings
              
              
              17,521
              
              
              17,455
              
              
              35,290
              
              
              32,622Other
                  comprehensive income, before tax:Change
                  in foreign currency translationForeign
                  currency translation adjustments
              
              
              1,819
              
              
              1,317
              
              
              2,188
              
              
              1,443Defined
                  benefit pension plans:Amortization
                  of prior service cost includedin
                  net periodic benefit cost
              
              
              142
              
              
              -
              
              
              283
              
              
              -Amortization
                  of unrecognized transitionasset
                  included in net periodic benefit cost
              
              
              (231
              )
              
              -
              
              
              (463
              )
              
              -Amortization
                  of unrecognized net lossincluded
                  in net periodic benefit cost
              
              
              39
              
              
              -
              
              
              51
              
              
              -Net
                  loss arising during period
              
              
              (2,354
              )
              
              -
              
              
              (2,354
              )
              
              -Total
                  defined benefit pension plans
              
              
              (2,404
              )
              
              -
              
              
              (2,483
              )
              
              -Defined
                  benefit postretirement plans:Amortization
                  of unrecognized net gainincluded
                  in net periodic benefit cost
              
              
              (68
              )
              
              -
              
              
              (113
              )
              
              -Net
                  gain arising during period
              
              
              987
              
              
              -
              
              
              987
              
              
              -Total
                  defined benefit postretirement plans
              
              
              919
              
              
              -
              
              
              874
              
              
              -Total
                  other comprehensive income, before tax
              
              
              334
              
              
              1,317
              
              
              579
              
              
              1,443Income
                  tax benefit related to items of othercomprehensive
                  income
              
              
              520
              
              
              -
              
              
              563
              
              
              -Total
                  other comprehensive income, net of tax
              
              
              854
              
              
              1,317
              
              
              1,142
              
              
              1,443Total
                  comprehensive income
              
              $
              18,375
              
              $
              18,772
              
              $
              36,432
              
              $
              34,065





In
      the
      second quarter of 2007, the pension and post-retirement plans were remeasured
      as
      of January 1, 2007, which resulted in plan gains and losses.





Accumulated
      other comprehensive loss in the consolidated balance sheet consists of the
      following (in thousands of dollars):


Defined
              
              Defined
              
              AccumulatedForeign
              
              Benefit
              
              Benefit
              
              OtherCurrency
              
              Pension
              
              Postretirement
              
              ComprehensiveTranslation
              
              Plans
              
              Plans
              
              LossBalance,
                  Dec. 31, 2006
              
              $
              2,958
              
              $
              (5,758
              )
              $
              1,329
              
              $
              (1,471
              )Current-period
                  change
              
              
              2,188
              
              
              (1,614
              )
              
              568
              
              
              1,142Balance,
                  June 30, 2007
              
              
              5,146
              
              
              (7,372
              )
              
              1,897
              
              
              (329
              )


**9.
      Stock Repurchase Plan**


On
      August
      2, 2007, the Company announced that the Board of Directors had authorized the
      use of up to an additional $30 million in cash for the repurchase of shares
      of
      the Company’s common stock. The purchases are to be made from time to time at
      prevailing market prices. Repurchased shares are added to treasury stock and
      are
      available for general corporate purposes including the funding of the Company’s
      stock option plans. As of June 30, 2007, authorizations of $2.1 million remained
      from prior authorizations.





**10.
      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
      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, 2006.
      The following is a summary of key segment information (in thousands of
      dollars):


Three
                  Months Ended June 30, 2007PowerOil
                  Field
              
              Transmission
              
              Trailer
              
              Corporate
              
              TotalGross
                  sales
              
              $
              94,006
              
              $
              41,330
              
              $
              10,931
              
              $
              -
              
              $
              146,267Inter-segment
                  sales
              
              
              (833
              )
              
              (928
              )
              
              (1
              )
              
              -
              
              
              (1,762
              )Net
                  sales
              
              $
              93,173
              
              $
              40,402
              
              $
              10,930
              
              $
              -
              
              $
              144,505Operating
                  income (loss)
              
              $
              18,935
              
              $
              7,382
              
              $
              (692
              )
              $
              -
              
              $
              25,625Other
                  income (expense), net
              
              
              571
              
              
              (29
              )
              
              1
              
              
              1,012
              
              
              1,555Earnings
                  (loss) beforeincome
                  tax provision
              
              $
              19,506
              
              $
              7,353
              
              $
              (691
              )
              $
              1,012
              
              $
              27,180
  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
  Six
                  Months Ended June 30, 2007PowerOil
                  Field
              
              Transmission
              
              Trailer
              
              Corporate
              
              TotalGross
                  sales
              
              $
              196,166
              
              $
              76,386
              
              $
              24,105
              
              $
              -
              
              $
              296,657Inter-segment
                  sales
              
              
              (1,707
              )
              
              (2,286
              )
              
              (79
              )
              
              -
              
              
              (4,072
              )Net
                  sales
              
              $
              194,459
              
              $
              74,100
              
              $
              24,026
              
              $
              -
              
              $
              292,585Operating
                  income (loss)
              
              $
              40,371
              
              $
              12,492
              
              $
              (1,731
              )
              $
              -
              
              $
              51,132Other
                  income (expense), net
              
              
              578
              
              
              64
              
              
              (3
              )
              
              1,850
              
              
              2,489Earnings
                  (loss) beforeincome
                  tax provision
              
              $
              40,949
              
              $
              12,556
              
              $
              (1,734
              )
              $
              1,850
              
              $
              53,621
  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


**11.
      Goodwill and Intangible Assets**





Goodwill




The
      changes in the carrying amount of goodwill for the six months ended
      June 30, 2007, are as follows (in thousands of dollars):


PowerOil
                  Field
              
              Transmission
              
              Trailer
              
              TotalBalance
                  as of 12/31/06
              
              $
              9,432
              
              $
              2,300
              
              $
              -
              
              $
              11,732Foreign
                  currency translation
              
              
              8
              
              
              58
              
              
              -
              
              
              66Balance
                  as of 6/30/07
              
              $
              9,440
              
              $
              2,358
              
              $
              -
              
              $
              11,798




Goodwill
      impairment tests were performed in the first quarter of 2007 and no impairment
      losses were recorded.







Intangible
      Assets




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


June
                  30,
              
              December
                  31,2007
              
              2006Intangible
                  assets subject to amortization:Non-compete
                  agreementsOriginal
                  balance
              
              $
              463
              
              $
              463Foreign
                  currency translation
              
              
              29
              
              
              20Accumulated
                  amortization
              
              
              (332
              )
              
              (285
              )Ending
                  balance
              
              $
              160
              
              $
              198





**12.
      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. Excess tax benefits, as defined in SFAS
      123R,
      will be recognized as additional paid-in-capital.





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





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




The
      following table is a summary of the stock-based compensation expense recognized
      under SFAS 123R for the three and six months ended June 30, 2007 and 2006 (in
      thousands of dollars):


Three
                  Months Ended
              
              Six
                  Months EndedJune
                  30,
              
              June
                  30,2007
              
              2006
              
              2007
              
              2006Stock-based
                  compensation expense
              
              $
              1,275
              
              $
              888
              
              $
              2,270
              
              $
              1,594Tax
                  benefit
              
              
              (472
              )
              
              (337
              )
              
              (840
              )
              
              (606
              )Stock-based
                  compensation expense, net of tax
              
              $
              803
              
              $
              551
              
              $
              1,430
              
              $
              988





The
      fair
      value of each option grant during the first six months of 2007 and
      2006 was estimated on the date of grant using the Black-Scholes option-pricing
      model with the following assumptions:


2007
                
                2006Expected
                    dividend yield
                
                
                1.30%
                    - 1.38
                %
                
                0.69%
                    - 0.91
                %Expected
                    stock price volatility
                
                
                42.00%
                    - 45.00
                %
                
                44.12%
                    - 45.35
                %Risk
                    free interest rate
                
                
                4.56%
                    - 4.85
                %
                
                4.52%
                    - 5.01
                %Expected
                    life options
                
                
                3
                    - 6 years
                
                
                6
                    - 8 yearsWeighted-average
                    fair value per share at grant date
                
                $
                23.28
                
                $
                28.16








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





A
      summary
      of stock option activity under the plans during the six months ended
      June 30, 2007, is presented below:


Weighted-Weighted-
              
              Average
              
              AggregateAverage
              
              Remaining
              
              IntrinsicExercise
              
              Contractual
              
              ValueOptions
              
              Shares
              
              Price
              
              Term
              
              ($000's)Outstanding
                  at January 1, 2007
              
              
              743,761
              
              $
              29.06Granted
              
              
              51,000
              
              
              62.05Exercised
              
              
              (169,881
              )
              
              15.79Forfeited
                  or expired
              
              
              (2,812
              )
              
              46.45Outstanding
                  at June 30, 2007
              
              
              622,068
              
              $
              35.31
              
              
              7.4
              
              $
              18,218Exercisable
                  at June 30, 2007
              
              
              301,914
              
              $
              30.73
              
              
              6.7
              
              $
              10,236




As
      of
      June 30, 2007, there was $2.9 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 intrinsic value of stock options
      exercised in the first six months of 2007 was $8.0 million.




**13.
      Recently Issued Accounting Pronouncements**


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





**14.
      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 pension 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 current accrued
      liabilities" and “Other liabilities” on the consolidated condensed 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 employees’
      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. 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.





The
      Company also has qualified defined contribution retirement plans covering
      substantially all of its U.S. and Canadian employees. For U.S. employees, the
      Company makes contributions of 75% of employee contributions up to a maximum
      employee contribution of 6% of employee earnings. Employees may contribute
      up to
      an additional 18% (in 1% increments), which is not subject to match by the
      Company. For Canadian employees, the Company makes contributions of 3%-8% of
      an
      employee’s salary with no individual employee match required. All obligations of
      the Company are funded through June 30 ,
      2007.
      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 $0.7 million in the three months ended June 30, 2007
      and 2006, respectively, and $1.6 million and $1.4 million in the six months
      ended June 30, 2007 and 2006, respectively. The liability for the non-qualified
      deferred defined contribution plan is included in "Other current accrued
      liabilities" on the consolidated condensed balance
      sheet.




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


Pension
                  Benefits
              
              Other
                  BenefitsThree
                  Months Ended June 30,
              
              2007
              
              2006
              
              2007
              
              2006Service
                  cost
              
              $
              1,356
              
              $
              1,225
              
              $
              42
              
              $
              16Interest
                  cost
              
              
              2,462
              
              
              2,099
              
              
              107
              
              
              75Expected
                  return on plan assets
              
              
              (4,435
              )
              
              (4,149
              )
              
              -
              
              
              -Amortization
                  of prior service cost
              
              
              142
              
              
              142
              
              
              -
              
              
              -Amortization
                  of unrecognized net (gain) loss
              
              
              39
              
              
              (115
              )
              
              (68
              )
              
              (91
              )Amortization
                  of unrecognized transition asset
              
              
              (231
              )
              
              (232
              )
              
              -
              
              
              -Net
                  periodic benefit cost (income)
              
              $
              (667
              )
              $
              (1,030
              )
              $
              81
              
              $
              -
  Pension
                  Benefits
              
              Other
                  BenefitsSix
                  Months Ended June 30,
              
              2007
              
              2006
              
              2007
              
              2006Service
                  cost
              
              $
              2,725
              
              $
              2,590
              
              $
              87
              
              $
              86Interest
                  cost
              
              
              4,862
              
              
              4,552
              
              
              229
              
              
              251Expected
                  return on plan assets
              
              
              (8,823
              )
              
              (8,230
              )
              
              -
              
              
              -Amortization
                  of prior service cost
              
              
              283
              
              
              283
              
              
              -
              
              
              -Amortization
                  of unrecognized net (gain) loss
              
              
              51
              
              
              31
              
              
              (113
              )
              
              (78
              )Amortization
                  of unrecognized transition asset
              
              
              (463
              )
              
              (464
              )
              
              -
              
              
              -Net
                  periodic benefit cost (income)
              
              $
              (1,365
              )
              $
              (1,238
              )
              $
              203
              
              $
              259





**Employer
      Contributions**





The
      Company previously disclosed in its financial statements for the year ended
      December 31, 2006, that it expected to make contributions of $160,000
      to its pension plans in 2007. The Company also disclosed that it expected
      contributions of $772,000 to be made to its postretirement plan in 2007. As
      of
      June 30, 2007, the Company has made contributions of $16,000 to its pension
      plans and has made contributions of $147,000 to its postretirement plan. The
      Company presently anticipates making additional contributions of $16,000 to
      its
      pension plans and $572,000 to its postretirement plan during the last six months
      of 2007.




**15.
      Adoption of FIN 48**





The
      Company adopted FASB **** Interpretation
      No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes- an
      interpretation of FASB Statement No. 109”, on January 1, 2007. As of January 1,
      2007, the Company had approximately $3,382,000 of total gross unrecognized
      tax
      benefits. Of this total, $2,898,000 (net of the federal benefit on state issues)
      represents the amount of unrecognized tax benefits that, if recognized, would
      favorably affect the net effective income tax rate in any future period. As
      of
      June 30, 2007, the Company had approximately $3,000,000 of total gross
      unrecognized tax benefits.





The
      Company has unrecognized tax positions for which it is reasonably possible
      that
      the total amounts of unrecognized tax benefits will significantly increase
      or
      decrease within the next twelve months. These unrecognized tax benefits relate
      to the capitalization of additional inventory costs and deductions for certain
      accrued liabilities. The Company has initiated the procedural steps to resolve
      these uncertain tax positions and estimates the range of possible change to
      be
      $500,000 to $600,000.





The
      Company conducts business globally and, as a result, Lufkin Industries, Inc.
      and
      its subsidiaries file income tax returns in the U.S. federal and state
      jurisdictions, and various foreign jurisdictions. For U.S. federal purposes,
      tax
      years prior to 2002 are closed to assessment and the 2002 tax year is open
      to
      examination only to the extent of certain refund claims filed. The 2003 through
      2005 tax years remain open to examination by U.S. federal and state authorities.
      The Company is currently under IRS examination for the 2002-2004 tax years
      for
      its amendments to those tax years and the originally filed and amended 2005
      tax
      return. This examination is in the preliminary stage and the Company has no
      reasonable basis to conclude that any unrecognized tax benefits associated
      with
      these years will significantly increase or decrease within the next twelve
      months. Statutes for years prior to 2003 remain subject to review in certain
      US
      state jurisdictions; however, the outcome of any future audit is not expected
      to
      have a material effect on the Company’s results of operations. The Company also
      remains subject to income tax examinations in the following material
      international jurisdictions: Canada (2002-2006), France (2004-2006) and
      Argentina (2001-2005).





Lufkin’s
      continuing practice is to recognize interest and penalties related to income
      tax
      matters in administrative costs. The Company had $146,000 accrued for interest
      and penalties at December 31, 2006. Interest of $43,000 and $87,000 was accrued
      during the three and six months ended June 30, 2007,
      respectively.





**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
      flatbed and dump trailers. While these markets are price-competitive,
      technological and quality differences can provide product differentiation.





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





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





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





**Trends/Outlook**





**Oilfield**


Demand
      for pumping unit equipment primarily depends on the level of onshore oil well
      new and workover 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 higher energy prices experienced since 2004
      have increased the demand for pumping units and related service and products
      from higher drilling activity, activation of idle wells and the upgrading of
      existing wells. During the first half of 2007, some reduced demand level for
      new
      pumping units in the North American market, especially in Canada, was
      experienced. Demand in North America. was impacted by the decline of coal-bed
      methane and other gas-related water lift projects tied to the lower price of
      gas, drilling delays from post-acquisition project reviews, the diversion of
      planned drilling activity to other international markets and the competitive
      pressure from lower-priced pumping units in areas traditionally served by the
      used unit market. Traditionally, as pumping unit demand increases and
      availability of used equipment diminishes, demand for new equipment increases,
      as was experienced in 2006. Increasingly in 2007, lower-priced imported pumping
      units have entered the North American market in place of used equipment and
      reduced the incremental demand for the Company’s new pumping units.
      Additionally, demand in Canada was impacted by weather conditions and the
      increased cost of drilling. The higher drilling costs have made certain projects
      economically unfeasible or have reduced the number of drilled wells. However,
      the demand for oilfield services and automation equipment continue to increase
      in the North American market. While a majority of the segment’s revenues are in
      North America, international opportunities continue to increase as new drilling
      increases and existing fields mature, requiring increased use of pumping units
      for artificial lift.





**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, marine and power generation
      in
      response to higher global energy prices. These market trends are expected to
      continue throughout 2007, assuming energy prices stay at recent
      levels.





**Trailer**


The
      Company primarily sells its trailer products in the United States to small
      and
      medium size fleet freight-hauling companies through a dealer network. Demand
      in
      this market is driven by the available cash flow or financing capabilities
      of
      the industry, age of the trailer fleets, changes in government regulations,
      availability of quality used trailers and the medium-term outlook for freight
      volumes. The profitability of the freight-hauling market is driven by freight
      volumes, fuel prices, wage levels and insurance costs. Recent demand for van
      trailers has not increased enough to meet trailer industry capacity, increasing
      price competition. Van demand has been impacted by freight haulers focusing
      purchases on new tractors before new diesel emission requirements are required
      on new tractors beginning in 2007. In light of these market conditions, the
      Company decided in the third quarter of 2006 not to participate in the van
      market until market conditions support better operating margins. This will
      give
      Trailer the capability to expand manufacturing capacity of flatbed and dump
      trailers quickly in response to market demand. Recent flatbed and dump trailer
      demand has decreased due to the decreased activity in the home and road
      construction markets.





**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, 2007, decreased to $144.5 million
      from
      $147.7 million for the three months ended June 30, 2006, or 2.2%. This decline
      was primarily driven by lower sales of van trailers related to the Company’s
      decision to suspend that
      product line and lower sales of new oil field equipment in the North American
      market. However, sales for the six months ended June 30, 2007, increased to
      $292.6 million from $281.1 million for the six months ended June 30, 2006,
      or
      4.1%. This growth was primarily from increased sales of pumping field services
      and automation equipment and Power Transmission high-speed gearboxes, partially
      offset by the impact of lower van trailer and new pumping units in North
      America.





Gross
      margin for the three months ended June 30, 2007, increased to 27.9% from 26.5%
      for the three months ended June 30, 2006, primarily due to the favorable mix
      effect of increased sales in Power Transmission and reduced Trailer van sales.
      Power Transmission products generally have higher average gross margins than
      Trailer products. Gross margin for the six months ended June 30, 2007, increased
      to 27.5% from 26.5% for the six months ended June 30, 2006, primarily due to
      the
      same favorable mix effect mentioned above. 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 increases in selling, general and administrative expenses had a negative
      impact on net earnings. S, G & A expenses as a percentage of revenue
      increased to 10.2% for the three months ended June 30, 2007, from 8.9% for
      the
      three months ended June 30, 2006, and increased to 10.0% for the six months
      ended June 30, 2007, from 9.0% for the six months ended June 30, 2006. These
      increases were related to increases in personnel-related expenses in response
      to
      prior and expected sales growth and higher stock option expense. The Company
      reported net earnings of $17.5 million or $1.15 per share (diluted) for the
      three months ended June 30, 2007, compared to net earnings of $17.5 million
      or
      $1.16 per share (diluted) for the three months ended June 30, 2006, and net
      earnings of $35.3 million or $2.32 per share (diluted) for the six months ended
      June 30, 2007, compared to net earnings of $32.6 million or $2.16 per share
      (diluted) for the six months ended June 30, 2006.





Debt/equity
      (long-term debt net of current portion as a percentage of total equity) levels
      were 0.0% as of June 30, 2007, and June 30, 2006. The Company had no short-term
      debt at June 30, 2007 and December 31, 2006. Cash balances at June 30, 2007,
      were $76.5 million, up from $57.8 million at December 31, 2006, due to higher
      net earnings offsetting capital expenditures and higher working capital and
      dividends.




Three
        Months Ended June 30, 2007, Compared to Three Months Ended June 30,
        2006
  The
        following table summarizes the Company’s sales and gross profit by operating
        segment (in thousands of dollars):


Three
                  Months EndedJune
                  30,
              
              Increase/
              
              %
                  Increase/2007
              
              2006
              
              (Decrease)
              
              (Decrease)SalesOil
                  Field
              
              $
              93,173
              
              $
              96,741
              
              $
              (3,568
              )
              
              (3.7
              )Power
                  Transmission
              
              
              40,402
              
              
              30,975
              
              
              9,427
              
              
              30.4Trailer
              
              
              10,930
              
              
              19,974
              
              
              (9,044
              )
              
              (45.3
              )Total
              
              $
              144,505
              
              $
              147,690
              
              $
              (3,185
              )
              
              (2.2
              )Gross
                  ProfitOil
                  Field
              
              $
              25,632
              
              $
              26,714
              
              $
              (1,082
              )
              
              (4.1
              )Power
                  Transmission
              
              
              13,589
              
              
              10,977
              
              
              2,612
              
              
              23.8Trailer
              
              
              1,103
              
              
              1,460
              
              
              (357
              )
              
              (24.5
              )Total
              
              $
              40,324
              
              $
              39,151
              
              $
              1,173
              
              
              3.0




**Oil
      Field**




Oil
      Field
      sales decreased to $93.2 million, or 3.7%, for the three months ended June
      30,
      2007, from $96.7 million for the three months ended June 30, 2006. Decreased
      sales of new pumping units in the North American market was partially offset
      by
      higher sales of oilfield services and automation equipment. Oil Field’s backlog
      decreased to $55.8 million as of June 30, 2007, from $91.0 million at June
      30,
      2006. This decrease is primarily related to the weaker demand for new pumping
      units in the North American market.




Gross
      margin (gross profit as a percentage of sales) for the Oil Field segment
      decreased slightly to 27.5% for three months ended June 30, 2007, compared
      to
      27.6% for the three months ended June 30, 2006, or 0.1 percentage points.
      This decline was primarily caused by lower plant efficiencies and fixed cost
      coverage in the US and Canada manufacturing facilities from lower production
      levels as North American demand for new pumping units has
      decreased.




Direct
      selling, general and administrative expenses for Oil Field increased to $4.4
      million, or 10.5%, for the three months ended June 30, 2007, from $4.0 million
      for the three months ended June 30, 2006. This increase is due to higher
      employee-related expenses in support of increased prior and expected sales
      volumes and third-party commissions in certain international
      markets. Direct selling, general and administrative expenses as a
      percentage of sales also increased to 4.7% for the three months ended June
      30,
      2007, from 4.1% for the three months ended June 30, 2006.





**Power
      Transmission**





Sales
      for
      the Company’s Power Transmission segment increased to $40.4 million, or 30.4%,
      for the three months ended June 30, 2007, compared to $31.0 million for the
      three months ended June 30, 2006. 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 drilling, production and refining from both the US and France
      manufacturing facilities. Power Transmission backlog at June 30, 2007, increased
      to $112.9 million from $77.8 million at June 30, 2006, primarily from sales
      of
      new units for the energy-related and marine markets.





Gross
      margin for the Power Transmission segment decreased to 33.6% for the
      three months ended June 30, 2007, compared to 35.4% for the three months ended
      June 30, 2006, from an
      unfavorable change in the product mix of low-speed units to more competitive
      markets and new
      equipment start-up costs in the France manufacturing facility.




Direct
      selling, general and administrative expenses for Power Transmission increased
      to
      $4.4 million, or 18.0%, for the three months ended June 30, 2007, from $3.7
      million for the three months ended June 30, 2006. This increase is due to higher
      employee-related expenses in support of increased sales volumes. Direct selling,
      general and administrative expenses as a percentage of sales, however, decreased
      to 10.9% for the three months ended June 30, 2007, from 12.1% for the three
      months ended June 30, 2006.




**Trailer**





Trailer
      sales for the three months ended June 30, 2007, decreased to $10.9 million,
      or 45.3%, from $20.0 million for the three months ended June 30, 2006. This
      decrease is primarily related to the decline in new van trailer sales,
      representing almost 90% of the sales decline. New van sales were impacted by
      the
      Company’s decision in 2006 not
      to
      take additional orders for van trailers due to poor market conditions. Sales
      for
      flatbed and dump trailers were also down due to weakness in the home
      construction market and low demand in the road construction market. Backlog
      for
      the Trailer segment decreased to $11.9 million at June 30, 2007, compared to
      $39.5 million at June 30, 2006. The backlog decrease was primarily from
      lower van trailer backlog related to the decision to not take additional van
      trailer orders as well as from lower flatbed and dump orders.




Trailer
      gross margin increased to 10.1% for the three months ended June 30, 2007,
      from 7.3% for the three months ended June 30, 2006, or 2.8 percentage
      points. This increase was
      primarily due to the favorable mix effect of lower van trailer sales, which
      traditionally had lower gross margins than flatbed or dump
      trailers.





Direct
      selling, general and administrative expenses for Trailer decreased to $0.4
      million, or 49.9%, for the three months ended June 30, 2007, from $0.7
      million for the three months ended June 30, 2006, from lower general
      liability legal and claims expenses and revised bad debt estimates of notes
      receivables. Direct selling, general and administrative expenses as a percentage
      of sales slightly decreased to 3.3% for the three months ended June 30,
      2007, from 3.6% for the three months ended June 30, 2006.




**Corporate/Other**





Corporate
      administrative expenses, which are allocated to the segments primarily based
      on
      historical third-party revenues, increased to $5.5 million, or 18.7%, for the
      three months ended June 30, 2007, from $4.6 million for the three months ended
      June 30, 2006, primarily from the higher employee-related and stock
      option expenses.




Interest
      income, interest expense and other income and expense for the three months
      ended
      June 30, 2007, totaled $1.6 million of income compared to income of $0.4 million
      for the three months ended June 30, 2006, primarily due to an increase in
      interest income from higher cash balances and the favorable impact of the
      stronger Canadian currency on U.S. dollar-denominated liabilities.





Pension
      income, which is reported as a reduction of cost of sales, decreased to $0.8
      million for the three months ended June 30, 2007, or 28%, compared to $1.1
      million for the three months ended June 30, 2006. Pension income in the second
      quarter of 2006 benefited from a remeasurement of the projected benefit
      obligation. The remeasurement in the second quarter of 2007 did not have a
      significant impact on pension income. Pension income in 2007 is expected to
      increase to approximately $3.2 million from $2.9 million in 2006.




The net
      tax rate for the three months ended June 30, 2007, was 35.5% compared to 34.1%
      in the three months ended June 30, 2006. The net tax rate for the
      three months ended
      June 30, 2007, was the
      result of the quarterly effective tax rate of 34.4% negatively impacted by
      adjustments to estimates of 2006 tax liabilities paid or to be paid in 2007.
      The
      2007 effective tax rate is expected to be approximately 35%.




**Six
      Months Ended June 30, 2007, Compared to Six Months Ended June 30,
      2006**





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


Six
                  Months EndedJune
                  30,
              
              Increase/
              
              %
                  Increase/2007
              
              2006
              
              (Decrease)
              
              (Decrease)SalesOil
                  Field
              
              $
              194,459
              
              $
              183,309
              
              $
              11,150
              
              
              6.1Power
                  Transmission
              
              
              74,100
              
              
              60,549
              
              
              13,551
              
              
              22.4Trailer
              
              
              24,026
              
              
              37,222
              
              
              (13,196
              )
              
              (35.5
              )Total
              
              $
              292,585
              
              $
              281,080
              
              $
              11,505
              
              
              4.1Gross
                  ProfitOil
                  Field
              
              $
              53,606
              
              $
              50,853
              
              $
              2,753
              
              
              5.4Power
                  Transmission
              
              
              24,826
              
              
              20,631
              
              
              4,195
              
              
              20.3Trailer
              
              
              1,943
              
              
              3,107
              
              
              (1,164
              )
              
              (37.5
              )Total
              
              $
              80,375
              
              $
              74,591
              
              $
              5,784
              
              
              7.8


**Oil
      Field**




Oil
      Field
      sales increased to $194.5 million, or 6.1%, for the six months ended June 30,
      2007, from $183.3 million for the six months ended June 30, 2006. Increased
      sales of oilfield services, automation equipment and new pumping units in the
      Middle East and Argentina markets was partially offset by lower new pumping
      units in the North American market. Oil Field’s backlog decreased to $55.8
      million as of June 30, 2007, from $67.1 million at December 31, 2006. This
      decrease is related to the weaker demand for new pumping units in the North
      American market.




Gross
      margin (gross profit as a percentage of sales) for the Oil Field segment
      decreased slightly to 27.6% for six months ended June 30, 2007, compared to
      27.7% for the six months ended June 30, 2006, or 0.1 percentage points.
      This decline was primarily caused by lower plant efficiencies and fixed cost
      coverage in the US and Canada manufacturing facilities from lower production
      levels as North American demand for new pumping units has
      decreased.




Direct
      selling, general and administrative expenses for Oil Field increased to $8.8
      million, or 16.7%, for the six months ended June 30, 2007, from $7.5 million
      for
      the six months ended June 30, 2006. This increase is due to higher
      employee-related expenses in support of increased prior and expected sales
      volumes and third-party commissions in certain international
      markets. Direct selling, general and administrative expenses as a
      percentage of sales also increased to 4.5% for the six months ended June 30,
      2007, from 4.1% for the six months ended June 30, 2006.





**Power
      Transmission**





Sales
      for
      the Company’s Power Transmission segment increased to $74.1 million, or 22.4%,
      for the six months ended June 30, 2007, compared to $60.5 million for the six
      months ended June 30, 2006. 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 drilling, production and refining from both the US and France
      manufacturing facilities. Power Transmission backlog at June 30, 2007, increased
      to $112.9 million from $95.6 million at December 31, 2006, primarily from sales
      of new units for the marine market.





Gross
      margin for the Power Transmission segment decreased to 33.5% for the
      six months ended June 30, 2007, compared to 34.1% for the six months ended
      June
      30, 2006, from increased sales of low-speed units, which traditionally carry
      lower margins than high-speed units.




Direct
      selling, general and administrative expenses for Power Transmission increased
      to
      $8.7 million, or 19.7%, for the six months ended June 30, 2007, from $7.2
      million for the six months ended June 30, 2006. This increase is due to higher
      employee-related expenses in support of increased sales volumes. Direct selling,
      general and administrative expenses as a percentage of sales, however, decreased
      slightly to 12.0% for the six months ended June 30, 2007, from 12.2% for the
      six
      months ended June 30, 2006.


**Trailer**





Trailer
      sales for the six months ended June 30, 2007, decreased to $24.0 million,
      or 35.5%, from $37.2 million for the six months ended June 30, 2006. This
      decrease is primarily related to the decline in new van trailer sales,
      representing over 80% of the sales decline. New van sales were impacted by
      the
      Company’s decision in 2006 not
      to
      take additional orders for van trailers due to poor market conditions. Sales
      for
      flatbed and dump trailers were also down due to weakness in the home
      construction market and low demand in the road construction market. Backlog
      for
      the Trailer segment decreased to $11.9 million at June 30, 2007, compared to
      $18.4 million at December 31, 2006. The backlog decrease was primarily from
      lower van trailer backlog related to the decision to not take additional van
      trailer orders as well as from lower flatbed and dump orders.




Trailer
      gross margin decreased slightly to 8.1% for the six months ended June 30,
      2007, from 8.3% for the six months ended June 30, 2006, or 0.2
      percentage points. This decrease was primarily due to the favorable mix effect
      of lower van trailer sales, which traditionally had lower gross margins than
      flatbed or dump trailers, being offset by plant reconfiguration costs in the
      first quarter of 2007 and lower plant utilization impacting fixed cost
      coverage.





Direct
      selling, general and administrative expenses for Trailer decreased to $0.8
      million, or 36.2%, for the six months ended June 30, 2007, from $1.3
      million for the six months ended June 30, 2006, from lower general
      liability legal and claims expenses and revised bad debt estimates of notes
      receivables. Direct selling, general and administrative expenses as a percentage
      of sales remained at 3.7% for the six months ended June 30, 2007, from
      the six months ended June 30, 2006.





**Corporate/Other**





Corporate
      administrative expenses, which are allocated to the segments primarily based
      on
      historical third-party revenues, increased to $10.7 million, or 20.1%, for
      the
      six months ended June 30, 2007, from $8.9 million for the six months ended
      June
      30, 2006, primarily from the higher employee-related and stock option
      expenses.




Interest
      income, interest expense and other income and expense for the six months ended
      June 30, 2007, totaled $2.5 million of income compared to income of $0.8 million
      for the six months ended June 30, 2006, primarily due to an increase in interest
      income from higher cash balances and the favorable impact of the stronger
      Canadian currency on U.S. dollar-denominated liabilities in
      Canada .





Pension
      income, which is reported as a reduction of cost of sales, increased to $1.6
      million for the six months ended June 30, 2007, or 12%, compared to $1.5 million
      for the six months ended June 30, 2006, primarily from expected asset returns
      exceeding expected expense increases. Pension income in 2007 is expected to
      increase to approximately $3.2 million from $2.9 million in 2006.




The net
      tax rate for the six months ended June 30, 2007, was 34.2% compared to 35.0%
      in
      the six months ended June 30, 2006. The net tax rate for the first six
      months of 2007 was the result of the quarterly effective tax rate of 34.7%
      positively impacted by a reduction in tax reserves on items falling out of
      statute, partially offset by adjustments to estimates of 2006 tax liabilities
      paid or to be paid in 2007. The 2007 effective tax rate is expected to be
      approximately 35%.


**Liquidity
      and Capital Resources**





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




The
      Company’s cash balance totaled $76.5
      million at June 30, 2007, compared to $57.8 million at December 31, 2006. For
      the six months ended June 30, 2007, net cash provided by operating
      activities was $30.5 million, net cash used in investing activities totaled
      $10.9 million, net cash used in financing activities amounted to $1.1
      million and the favorable effect of currency translation was $0.1 million.
      Significant components of cash provided by operating activities included net
      earnings, adjusted for non-cash expenses, of $39.2 million, offset by an
      increase in working capital of $8.7 million. This working capital increase
      was
      primarily due to increased inventory balances of $13.9 million from higher
      production activity in Power Transmission and Oil Field automation products.
      Reductions in van-related trailer inventory were offset by increased inventory
      related to new pumping units in the US and Canada plants. A reduction in
      receivables of $7.1 million from reduced sales volumes as compared to the fourth
      quarter of 2006 partially offset this increase. Net cash used in investing
      activities included net capital expenditures totaling $11.0 million, asset
      disposal proceeds of $0.4 million and an increase in other assets of $0.3
      million. Capital expenditures in the first six months of 2007 were
      primarily for the expansion of manufacturing capacity and efficiency
      improvements in the Oil Field and Power Transmission segments. Capital
      expenditures for 2007 are projected to be approximately $20.0 to $25.0 million,
      primarily for the expansion of manufacturing capacity and equipment replacement
      for efficiency improvements in the Oil Field and Power Transmission segments
      and
      will be funded by operating cash flows. Significant components of net
      cash used by financing activities included dividend
      payments of $6.3 million, or $0.42 per share, partially offset by the
      impact of stock option exercises, including the excess tax benefit from actual
      gains on stock option exercises of $5.2
      million.




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. Borrowings under the Bank Facility bear interest, at
      the Company’s option, at either the greater of (i) the prime rate, (ii) the base
      CD rate plus an applicable margin or (iii) the Federal Funds Effective Rate
      plus
      an applicable margin or the London Interbank Offered Rate plus an applicable
      margin, depending on certain ratios as defined in the Bank Facility. As of
      June
      30, 2007, 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 $6.9 million, $20.6 million of
      borrowing capacity was available at June 30, 2007.





As
      of
      June 30, 2007 ,
      the
      Company had a stock
      repurchase plan under which the Company was authorized to spend up to $19.1
      million for repurchases of its common stock. Pursuant to this plan, the Company
      has repurchased a total of 1,656,740 shares of its common stock at an aggregate
      purchase price of $17.0 million. Repurchased shares are added to treasury stock
      and are available for general corporate purposes including the funding of the
      Company’s stock option plans. No shares were repurchased in the first six
      months of 2007. As of June 30, 2007, the Company held 395,278 shares of treasury
      stock at an aggregate cost of approximately $4.1 million. Authorizations of
      approximately $2.1 million remained at June 30, 2007. On
      August
      2, 2007, the Company announced that the Board of Directors had authorized the
      use of up to an additional $30 million in cash for the repurchase of shares
      of
      the Company’s common stock. The purchases are to be made from time to time at
      prevailing market prices. The repurchases will be funded from existing cash
      balances and future operating cash flows.





**Recently
      Issued Accounting Pronouncements**





Management
      believes the impact of recently issued standards, which are not yet effective,
      will not have a material impact on the Company's condensed consolidated
      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 condensed consolidated financial statements, which have
      been prepared in accordance with accounting principles generally accepted in
      the
      United States of America. The preparation of these financial statements requires
      the Company to make estimates and judgments that affect the reported amounts
      of
      assets, liabilities, revenues and expenses and related disclosure of contingent
      assets and liabilities. The Company evaluates its estimates on an ongoing basis,
      based on historical experience and on various other assumptions that are
      believed to be reasonable under the circumstances. Actual results may differ
      from these estimates under different assumptions or conditions. The Company
      believes the following critical accounting policies affect its more significant
      judgments and estimates used in preparation of its consolidated
      statements.





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





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


l
                The
                    customer has accepted title and risk of loss;l
                The
                    customer has provided a written purchase order for the
                    product;l
                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;l
                The
                    customer must provide a storage period and future shipping
                    date;l
                The
                    Company must not have retained any future performance obligations
                    on the
                    product;l
                The
                    Company must segregate the stored product and not make it available
                    to use
                    on other orders; andl
                The
                    product must be completed and ready for
                    shipment.




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





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





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





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





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





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





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





**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,” “plan,” “schedule,”
“could,” “may,” “might,” “should,” “project” or similar expressions are intended
      to identify forward-looking statements. Similarly, statements that describe
      the
      Company’s future plans, objectives or goals are also forward-looking statements.
      Such statements reflect the Company’s current views with respect to certain
      events and are subject to certain assumptions, risks and uncertainties, many
      of
      which are outside the control of the Company. Undue reliance should not be
      place
      on forward-looking statements. These risks and uncertainties include, but are
      not limited to:





l
            oil
                price volatility;l
            declines
                in domestic and worldwide oil and gas drilling;l
            capital
                spending levels of oil producers;l
            the
                cyclicality of the trailer industry;l
            availability
                and prices for raw materials;l
            the
                inherent dangers and complexities of our operations;l
            uninsured
                judgments or a rise in insurance premiums;l
            the
                inability to effectively integrate acquisitions;l
            labor
                disruptions and increasing labor costs;l
            the
                availability of qualified and skilled labor;l
            disruption
                of our operating facilities or management information
                systems;l
            the
                impact on foreign operations of war, political disruption, civil
                disturbance, economic and legal sanctions and changes
                in global trade policies;l
            currency
                exchange rate fluctuations in the markets in which the Company
                operates;l
            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;l
            costs
                related to legal and administrative proceedings, including adverse
                judgments against the Company if the Company
                fails to prevail in reversing such judgments; andl
            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.




Additional
      information about risks and uncertainties that could cause actual results to
      differ materially from forward-looking statements is contained in Part I, Item
      1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2006. All forward-looking statements attributable to the
      Company or persons acting on the Company’s behalf are expressly qualified in
      their entirety by these factors. Should one or more of these risks or
      uncertainties materialize, or should underlying assumptions prove incorrect,
      actual results may vary materially from those anticipated, believed, estimated
      or expected. The forward-looking statements included in this report are only
      made as of the date of this report and, except as required by securities laws,
      the Company disclaims any obligation to publicly update forward-looking
      statements to reflect subsequent events or circumstances.





**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, 2007, this inter-company debt was comprised of 0.0 million euros
      and $8.9 million Canadian dollars. As of June 30, 2007, if the U.S. dollar
      strengthened by 10% over these currencies, the net income impact would be $0.5
      million of expense and if the U.S. dollar weakened by 10% over these currencies,
      the net income impact would be $0.5 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, 2007, if the U.S.
      dollar strengthened by 10% over these currencies, the net income impact would
      be negligible .





**Item
      4.**  **Controls
      and Procedures.**





Based
      on
      their evaluation of the Company’s disclosure controls and procedures as of June
      30, 2007, 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 that
      occurred during the quarter ended June 30, 2007, that have materially affected,
      or are reasonably likely to materially affect, the Company’s internal control
      over financial reporting.







**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 April 3, 2007, the Company appeared before the appellate court in New Orleans
      for oral argument in this case. The three justices in this case will now prepare
      their decision and the Company anticipates that the decision will be issued
      in
      the fourth quarter of 2007. The
      Company believes that after a full and fair review of the evidence, the Court
      of
      Appeals will determine that the plaintiffs have not established their claims
      of
      discrimination by the Company against the plaintiffs and will enter a decision
      to that effect and will dismiss the case against the Company. At this time,
      the
      Company has concluded that an unfavorable ultimate outcome is not probable.
      If
      the District Court’s decision is reversed and remanded for a new trial, the
      Company will vigorously defend itself on retrial. While the ultimate
      outcome and impact of these claims against the Company cannot be predicted
      with
      certainty, the Company believes that the resolutions of these proceedings will
      not have a material adverse effect on its consolidated financial position.
      However, should the Company be unsuccessful in its appeal, the final
      determination could have a material impact on the Company’s reported earnings,
      results of operations and
      cash
      flows in a future reporting period.





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




**Item
      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, 2006, which could materially affect
      the Company's business, financial condition and/or operating 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.








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





The
      Company held its Annual Meeting of Stockholders on May 2, 2007, in Lufkin,
      Texas
      to elect four directors and amend and restate and amend the Company’s Incentive
      Stock Compensation Plan 2000.





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 2010. 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
              
              
              
              Broker
                  Non-Favor
              
              Withheld
              
              Abstentions
              
              VotesJohn
                  H. Lollar
              
              
              12,532,244
              
              
              1,335,839
              
              
              -
              
              
              -Bob
                  H. O'Neal
              
              
              12,943,646
              
              
              924,437
              
              
              -
              
              
              -Thomas
                  E. Wiener
              
              
              13,132,480
              
              
              735,603
              
              
              -
              
              
              -Larry
                  M. Hoes
              
              
              12,994,077
              
              
              874,006
              
              
              -
              
              
              -





Directors
      with terms of office continuing after the Annual Meeting:





Directors
      with terms expiring in 2008:




H.
      J.
      Trout, Jr.


J.
      T.
      Jongebloed


Suzanne
      V. Baer





Directors
      with terms expiring in 2009:





Douglas
      V. Smith


Simon
      W.
      Henderson III


John
      F.
      Anderson




In
      addition, the shareholders of the Company voted on a proposal to amend and
      restate the Company’s Incentive Stock Compensation Plan 2000 (the “Plan”) to
      increase the number of shares of Common Stock of the Company as to which options
      may be granted under the Plan from 1,800,000 to 2,800,000 and extend the Plan
      to
      expire on May 31, 2017. The number of votes cast for or against, as well as
      the
      number of abstentions and broker non-votes, for the proposal are as
      follows:


Votes
                  in
              
              Votes
              
              
              
              Broker
                  Non-Favor
              
              Against
              
              Abstentions
              
              VotesAmend
                  Stock Comp. Plan
              
              
              6,730,673
              
              
              5,269,122
              
              
              31,097
              
              
              1,837,191





**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(a) 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











**SIGNATURES**











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
      9,
      2007





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)








**INDEX
      TO EXHIBITS**





Exhibit
                  Number
              
              Description*31.1
              
              Rule
                  13a-14(a)/15d-14(a) Certification of Chief Executive
                  Officer.*31.2
              
              Rule
                  13a-14(a)/15d-14(a) 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








****  ****