**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 March 31, 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 15,045,655 shares of Common Stock, $1.00 par value per share,
      outstanding as of May 7, 2007 .








**Table
      of Contents**





PART
      I - FINANCIAL
      INFORMATION





Item
      1. Financial Statements





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





Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk





Item
      4. Controls and Procedures








PART
      II - OTHER INFORMATION





Item
      1. Legal Proceedings





Item
      1a. Risk Factor





Item
      6. Exhibits





SIGNATURES





INDEX
      TO EXHIBITS





EX-31.1





EX-31.2





EX-32.1




EX-32.2













PART





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




**LUFKIN
                  INDUSTRIES, INC.****CONDENSED
                  CONSOLIDATED BALANCE SHEETS (UNAUDITED)**(Thousands
                  of dollars, except share and per share data)March
                  31,
              
              December
                  31,Assets
              
              2007
              
              2006Current
                  Assets:Cash
                  and cash equivalents
              
              $
              84,326
              
              $
              57,797Receivables,
                  net
              
              
              77,812
              
              
              90,585Inventories
              
              
              94,587
              
              
              85,630Deferred
                  income tax assets
              
              
              8,773
              
              
              7,919Other
                  current assets
              
              
              3,066
              
              
              1,521Total
                  current assets
              
              
              268,564
              
              
              243,452Property,
                  plant and equipment, net
              
              
              114,212
              
              
              113,081Prepaid
                  pension costs
              
              
              57,574
              
              
              56,856Goodwill,
                  net
              
              
              11,760
              
              
              11,732Other
                  assets net
              
              
              4,042
              
              
              3,948Total
                  assets
              
              $
              456,152
              
              $
              429,069Liabilities
                  and Shareholders' EquityCurrent
                  liabilities:Accounts
                  payable
              
              $
              27,972
              
              $
              24,375Accrued
                  liabilities:Payroll
                  and benefits
              
              
              8,532
              
              
              9,810Warranty
                  expenses
              
              
              3,717
              
              
              3,668Taxes
                  payable
              
              
              10,776
              
              
              7,665Other
              
              
              19,000
              
              
              15,977Total
                  current liabilities
              
              
              69,997
              
              
              61,495Deferred
                  income tax liabilities
              
              
              27,998
              
              
              28,022Postretirement
                  benefits
              
              
              8,523
              
              
              8,475Other
                  liabilities
              
              
              5,049
              
              
              2,937Shareholders'
                  equity:Common
                  stock, $1.00 par value per share; 60,000,000 shares
                  authorized;15,339,591
                  and 15,322,903 shares issued and outstanding,
                  respectively
              
              
              15,340
              
              
              15,323Capital
                  in excess par
              
              
              39,681
              
              
              38,173Retained
                  earnings
              
              
              294,830
              
              
              280,198Treasury
                  stock, 395,278 and 395,278 shares, respectively, at cost
              
              
              (4,083
              )
              
              (4,083
              )Accumulated
                  other comprehensive loss
              
              
              (1,183
              )
              
              (1,471
              )Total
                  shareholders' equity
              
              
              344,585
              
              
              328,140Total
                  liabilities and shareholders' equity
              
              $
              456,152
              
              $
              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 EndedMarch
                  31,2007
              
              2006Sales
              
              $
              148,081
              
              $
              133,389Cost
                  of Sales
              
              
              108,030
              
              
              97,949Gross
                  Profit
              
              
              40,051
              
              
              35,440Selling,
                  general and administrative expenses
              
              
              14,544
              
              
              12,137Operating
                  income
              
              
              25,507
              
              
              23,303Interest
                  income
              
              
              865
              
              
              410Interest
                  expense
              
              
              (34
              )
              
              (34
              )Other
                  income (expense), net
              
              
              103
              
              
              19Earnings
                  before income tax provision
              
              
              26,441
              
              
              23,698Income
                  tax provision
              
              
              8,672
              
              
              8,531Net
                  earnings
              
              
              17,769
              
              
              15,167Net
                  earnings per shareBasic
              
              $
              1.19
              
              $
              1.03Diluted
              
              $
              1.17
              
              $
              1.01Dividends
                  per share
              
              $
              0.21
              
              $
              0.11Weighted
                  average number of shares outstanding:Basic
              
              
              14,938,614
              
              
              14,742,279Diluted
              
              
              15,171,170
              
              
              15,069,752




See
      notes
      to condensed consolidated financial statements.





**LUFKIN
                  INDUSTRIES INC.****CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**(In
                  thousands of dollars)Three
                  Months EndedMarch
                  31,2007
              
              2006Cash
                  flows from operating activities:Net
                  earnings
              
              $
              17,769
              
              $
              15,167Adjustments
                  to reconcile net earnings to cashprovided
                  by operating activities:Depreciation
                  and amortization
              
              
              3,215
              
              
              2,754Deferred
                  income tax provision
              
              
              (370
              )
              
              584Excess
                  tax benefit from share-based compensation
              
              
              (247
              )
              
              (439
              )Share-based
                  compensation expense
              
              
              995
              
              
              707Pension
                  income
              
              
              (808
              )
              
              (307
              )Postretirement
                  benefits
              
              
              4
              
              
              187(Gain)
                  loss on disposition of property, plant and equipment
              
              
              (93
              )
              
              1Changes
                  in:Receivables,
                  net
              
              
              12,936
              
              
              9,851Inventories
              
              
              (8,737
              )
              
              (10,306
              )Other
                  current assets
              
              
              (1,537
              )
              
              2,345Accounts
                  payable
              
              
              3,013
              
              
              4,712Accrued
                  liabilities
              
              
              7,105
              
              
              (3,783
              )Net
                  cash provided by operating activities
              
              
              33,245
              
              
              21,473Cash
                  flows from investing activites:Additions
                  to property, plant and equipment
              
              
              (4,350
              )
              
              (5,796
              )Proceeds
                  from disposition of property, plant and equipment
              
              
              366
              
              
              10Increase
                  in other assets
              
              
              (90
              )
              
              (285
              )Net
                  cash used in investing activities
              
              
              (4,074
              )
              
              (6,071
              )Cash
                  flows from financing activites:Payments
                  on short-term notes payable
              
              
              -
              
              
              (231
              )Dividends
                  paid
              
              
              (3,138
              )
              
              (1,623
              )Excess
                  tax benefit from share-based compensation
              
              
              247
              
              
              439Proceeds
                  from exercise of stock options
              
              
              242
              
              
              370Net
                  cash used in financing activities
              
              
              (2,649
              )
              
              (1,045
              )Effect
                  of translation on cash and cash equivalents
              
              
              7
              
              
              (29
              )Net
                  increase in cash and cash equivalents
              
              
              26,529
              
              
              14,328Cash
                  and cash equivalents at beginning of period
              
              
              57,797
              
              
              25,822Cash
                  and cash equivalents at end of period
              
              $
              84,326
              
              $
              40,150




See
      notes
      to condensed consolidated financial statements.








**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


(Unaudited)





**1.
      Basis of Presentation**


The
      accompanying unaudited consolidated financial statements include the accounts
      of
      Lufkin Industries, Inc. and its consolidated subsidiaries (the “Company”) and
      have been prepared pursuant to the rules and regulations for interim financial
      statements of the Securities and Exchange Commission. Certain information in
      the
      notes to the consolidated financial statements normally included in financial
      statements prepared in accordance with accounting principles generally accepted
      in the United States of America has been condensed or omitted pursuant to these
      rules and regulations. In the opinion of management, all adjustments, consisting
      of normal recurring accruals unless specified, necessary for a fair presentation
      of the Company’s financial position, results of operations and cash flows for
      the interim periods included in this report have been included. For further
      information, including a summary of major accounting policies, refer to the
      consolidated financial statements and related footnotes included in the
      Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The
      results of operations for the three months ended March 31, 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):


March
                  31,
              
              December
                  31,2007
              
              2006Accounts
                  receivable
              
              $
              77,882
              
              $
              90,508Notes
                  receivable
              
              
              466
              
              
              472Other
                  receivables
              
              
              183
              
              
              292Gross
                  receivables
              
              
              78,531
              
              
              91,272Allowance
                  for doubtful accounts receivable
              
              
              (253
              )
              
              (215
              )Allowance
                  for doubtful notes receivable
              
              
              (466
              )
              
              (472
              )Net
                  receivables
              
              $
              77,812
              
              $
              90,585


Bad
      debt
      expense related to receivables was $0.0 million and $0.0 million in the
      three months ended March 31, 2007 and 2006, respectively.




**3.
      Other Current Accrued Liabilities**


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





March
                  31,
              
              December
                  31,2007
              
              2006Customer
                  prepayments
              
              $
              13,215
              
              $
              9,411Deferred
                  compensation plans
              
              
              4,248
              
              
              4,069Accrued
                  professional services
              
              
              925
              
              
              1,057Other
                  accrued liabilities
              
              
              612
              
              
              1,440Total
                  other current accrued liabilities
              
              $
              19,000
              
              $
              15,977













**4.
      Property, Plant & Equipment**


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


March
                  31,
              
              December
                  31,2007
              
              2006Land
              
              $
              3,489
              
              $
              3,482Land
                  improvements
              
              
              8,843
              
              
              8,543Buildings
              
              
              75,608
              
              
              75,082Machinery
                  and equipment
              
              
              222,431
              
              
              219,783Furniture
                  and fixtures
              
              
              5,090
              
              
              5,007Computer
                  equipment and software
              
              
              14,116
              
              
              14,027Total
                  property, plant and equipment
              
              
              329,577
              
              
              325,924Less
                  accumulated depreciation
              
              
              (215,365
              )
              
              (212,843
              )Total
                  property, plant and equipment, net
              
              $
              114,212
              
              $
              113,081





Depreciation
      expense related to property, plant and equipment was $3.2 million and $2.7
      million in the three months ended March 31, 2007 and 2006,
      respectively.





**5.
      Inventories**


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


March
                  31,
              
              December
                  31,2007
              
              2006Gross
                  inventories @ FIFO:Finished
                  goods
              
              $
              8,103
              
              $
              6,903Work
                  in progress
              
              
              25,172
              
              
              20,977Raw
                  materials & component parts
              
              
              92,089
              
              
              88,882Total
                  gross inventories @ FIFO
              
              
              125,364
              
              
              116,762Less
                  reserves:LIFO
              
              
              28,926
              
              
              28,888Valuation
              
              
              1,851
              
              
              2,244Total
                  inventories as reported
              
              $
              94,587
              
              $
              85,630


Gross
      inventories on a FIFO basis before adjustments for reserves shown above that
      were accounted for on a LIFO basis were $86.8 million and $82.7 million at
      March
      31, 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 months ended March 31, 2007 and 2006, are illustrated
      below (in thousands of dollars, except share and per share data):




Three
                    Months EndedMarch
                    31,2007
                
                2006Numerator:Numerator
                    for basic and diluted earnings pershare-net
                    earnings
                
                $
                17,769
                
                $
                15,167Denominator:Denominator
                    for basic net earnings per shareweighted-average
                    shares
                
                
                14,938,614
                
                
                14,742,279Effect
                    of dilutive securities: employee stockoptions
                
                
                232,556
                
                
                327,473Denominator
                    for diluted net earnings per shareadjusted
                    weighted-average sharesassumed
                    conversions
                
                
                15,171,170
                
                
                15,069,752Basic
                    net earnings per share
                
                $
                1.19
                
                $
                1.03Diluted
                    net earnings per share
                
                $
                1.17
                
                $
                1.01
  Weighted
      options to purchase a total of 183,736 and 111,500 shares of the
      Company’s common stock for the three months ended March 31, 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
      were antidilutive.





**7.
      Legal Proceedings**


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





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





The
      Company has reviewed this decision with its outside counsel and on September
      19,
      2005, appealed the decision to the U.S. Court of Appeals for the Fifth Circuit.
      On 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 income during the periods presented. The Company’s comprehensive
      income is as follows (in thousands of dollars):




Three
                  Months EndedMarch
                  31,2007
              
              2006Net
                  earnings
              
              
              17,769
              
              
              15,167Other
                  comprehensive income, before tax:Change
                  in foreign currency translationForeign
                  currency translation adjustments
              
              
              368
              
              
              126Defined
                  benefit pension plans:Amortization
                  of prior service cost included in net periodic benefit
                  cost
              
              
              142
              
              
              -Amortization
                  of unrecognized transition asset included in net
                  periodicbenefit
                  cost
              
              
              (232
              )
              
              -Amortization
                  of unrecognized net loss included in net periodic benefit
                  cost
              
              
              12
              
              
              -Total
                  defined benefit pension plans
              
              
              (78
              )
              
              -Defined
                  benefit postretirement plans:Amortization
                  of unrecognized net gain included in net periodic benefit
                  cost
              
              
              (45
              )
              
              -Total
                  defined benefit postretirement plans
              
              
              (45
              )
              
              -Total
                  other comprehensive income, before tax
              
              
              245
              
              
              126Income
                  tax benefit related to items of other comprehensive income
              
              
              43
              
              
              -Total
                  other comprehensive income, net of tax
              
              
              288
              
              
              126Total
                  comprehensive income
              
              $
              18,057
              
              $
              15,293


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
              
              Loss**Balance,
                  Dec. 31, 2006**
              
              $
              2,958
              
              $
              (5,758
              )
              $
              1,329
              
              $
              (1,471
              )Current-period
                  change
              
              
              368
              
              
              (51
              )
              
              (29
              )
              
              288**Balance,
                  Mar. 31, 2007**
              
              
              3,326
              
              
              (5,809
              )
              
              1,300
              
              
              (1,183
              )
  **9.
      Segment Data**


The
      Company operates with three business segments - Oil Field, Power Transmission
      and Trailer. The three operating segments are supported by a common corporate
      group. Corporate expenses and certain assets are allocated to the operating
      segments based primarily upon third-party revenues. Inter-segment sales and
      transfers are accounted for as if the sales and transfers were to third parties,
      that is, at current market prices, as available. The accounting policies of
      the
      segments are the same as those described in the summary of significant
      accounting policies in the footnotes to the consolidated financial statements
      included in the Company’s Annual Report on Form 10-K for the year ended December
      31, 2006. The following is a summary of key segment information (in thousands
      of
      dollars):




Three
                    Months Ended March 31, 2007PowerOil
                    Field
                
                Transmission
                
                Trailer
                
                Corporate
                
                TotalGross
                    sales
                
                $
                102,160
                
                $
                35,067
                
                $
                13,176
                
                $
                -
                
                $
                150,403Inter-segment
                    sales
                
                
                (874
                )
                
                (1,369
                )
                
                (79
                )
                
                -
                
                
                (2,322
                )Net
                    sales
                
                $
                101,286
                
                $
                33,698
                
                $
                13,097
                
                $
                -
                
                $
                148,081Operating
                    income (loss)
                
                $
                21,436
                
                $
                5,110
                
                $
                (1,039
                )
                $
                -
                
                $
                25,507Other
                    income (expense), net
                
                
                6
                
                
                93
                
                
                (3
                )
                
                838
                
                
                934Earnings
                    (loss) beforeincome
                    tax provision
                
                $
                21,442
                
                $
                5,203
                
                $
                (1,042
                )
                $
                838
                
                $
                26,441
  Three
                      Months Ended March 31, 2006PowerOil
                      Field
                  
                  Transmission
                  
                  Trailer
                  
                  Corporate
                  
                  TotalGross
                      sales
                  
                  $
                  87,494
                  
                  $
                  31,894
                  
                  $
                  17,249
                  
                  $
                  -
                  
                  $
                  136,637Inter-segment
                      sales
                  
                  
                  (926
                  )
                  
                  (2,321
                  )
                  
                  (1
                  )
                  
                  -
                  
                  
                  (3,248
                  )Net
                      sales
                  
                  $
                  86,568
                  
                  $
                  29,573
                  
                  $
                  17,248
                  
                  $
                  -
                  
                  $
                  133,389Operating
                      income (loss)
                  
                  $
                  18,824
                  
                  $
                  4,613
                  
                  $
                  (134
                  )
                  $
                  -
                  
                  $
                  23,303Other
                      income (expense), net
                  
                  
                  -
                  
                  
                  (61
                  )
                  
                  (2
                  )
                  
                  458
                  
                  
                  395Earnings
                      (loss) beforeincome
                      tax provision
                  
                  $
                  18,824
                  
                  $
                  4,552
                  
                  $
                  (136
                  )
                  $
                  458
                  
                  $
                  23,698
  **10.
      Goodwill and Intangible Assets**





Goodwill




The
      changes in the carrying amount of goodwill for the three months ended
      March 31, 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
              
              
              1
              
              
              27
              
              
              -
              
              
              28Balance
                  as of 3/31/07
              
              $
              9,433
              
              $
              2,327
              
              $
              -
              
              $
              11,760
  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):


March
                    31,
                
                December
                    31,2007
                
                2006Intangible
                    assets subject to amortization:Non-compete
                    agreementsOriginal
                    balance
                
                $
                463
                
                $
                463Foreign
                    currency translation
                
                
                19
                
                
                20Accumulated
                    amortization
                
                
                (309
                )
                
                (285
                )Ending
                    balance
                
                $
                173
                
                $
                198





**11.
      Stock Option Plans**


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





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





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




The
      following table is a summary of the stock-based compensation expense recognized
      under SFAS 123R for the three months ended March 31, 2007 and 2006 (in thousands
      of dollars):




Three
                  Months EndedMarch
                  31,2007
              
              2006Stock-based
                  compensation expense
              
              $
              995
              
              $
              707Tax
                  benefit
              
              
              (368
              )
              
              (254
              )Stock-based
                  compensation expense, net of tax
              
              $
              627
              
              $
              453




The
      fair
      value of each option grant during the first three 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
              
              
              1.38
              %
              
              0.69
              %Expected
                  stock price volatility
              
              
              42.00%
                  - 45.00
              %
              
              44.12
              %Risk
                  free interest rate
              
              
              4.81%
                  - 4.85
              %
              
              4.52
              %Expected
                  life options
              
              
              3
                  - 5 years
              
              
              5
                  yearsWeighted-average
                  fair value per share at grant date
              
              $
              21.88
              
              $
              26.97
  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 three months ended
      March 31, 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
              
              
              35,000
              
              
              60.97Exercised
              
              
              (16,688
              )
              
              14.55Forfeited
                  or expired
              
              
              (2,812
              )
              
              -Outstanding
                  at March 31, 2007
              
              
              759,261
              
              $
              30.78
              
              
              7.4
              
              $
              20,293Exercisable
                  at March 31, 2007
              
              
              439,107
              
              $
              24.34
              
              
              6.6
              
              $
              14,392
  As
      of
      March 31, 2007, there was $3.7 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 1.2 years. The intrinsic value
      of
      stock options exercised in the first three months of 2007 was $0.7
      million.





**12.
      Recently Issued Accounting Pronouncements**


In June
      2006, the Financial Accounting Standards Board issued Interpretation No.
      48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes- an
      interpretation of FASB Statement No. 109.” FIN 48 prescribes a
      recognition threshold and measurement attribute for the financial statement
      recognition and measurement of a tax position taken or expected to be taken
      in a
      tax return. FIN 48 also provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. In accordance with FIN 48, the evaluation of a tax
      position is a two-step process. The first step requires determining whether
      it is more-likely-than-not that a tax position will be sustained upon
      examination or appeals based on the technical merits of the position. The second
      step requires that a tax position that meets the more-likely-than-not
      recognition threshold is measured to determine the amount of benefit to
      recognize in the financial statements. The tax position is measured at the
      largest benefit that is greater than 50 percent likely of being realized upon
      ultimate settlement. Differences between tax positions taken in a tax return
      and
      amounts recognized in the financial statements will generally result in an
      increase in a liability for income taxes payable and/or an increase in a
      deferred tax liability. Tax positions that previously failed to meet the
      more-likely-than-not recognition threshold should be recognized in the
      first subsequent financial reporting period in which the threshold is met and
      previously recognized tax positions that no longer meet the more-likely-than-not
      recognition threshold should be derecognized in the first subsequent financial
      reporting period in which the threshold is no longer met. FIN 48 is effective
      for fiscal years beginning after December 15, 2006, but earlier adoption is
      permitted. The
      Company adopted FIN 48 as of January 1, 2007, and it did not have an impact
      on
      the Company's consolidated condensed financial statements. See Footnote 14
      for
      additional information on the adoption of FIN 48.





Management
      believes the impact of other 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.





**13.
      Retirement Benefits**


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




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





The
      Company also has qualified defined contribution retirement plans covering
      substantially all of its U.S. and Canadian employees. For U.S. employees, the
      Company makes contributions of 75% of employee contributions up to a maximum
      employee contribution of 6% of employee earnings. Employees may contribute
      up to
      an additional 18% (in 1% increments), which is not subject to match by the
      Company. For Canadian employees, the Company makes contributions of 3%-8% of
      an
      employee’s salary with no individual employee match required. All obligations of
      the Company are funded through March 31, 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 $0.9 million and $0.7 million in the
      three months ended March 31, 2007 and 2006, respectively. The liability for
      the
      non-qualified deferred defined contribution plan is included in "Other
      current accrued liabilities" on the Consolidated Balance Sheet.




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


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




Pension
                  Benefits
              
              Other
                  BenefitsThree
                  Months Ended March 31,
              
              2007
              
              2006
              
              2007
              
              2006Service
                  cost
              
              $
              1,369
              
              $
              1,324
              
              $
              45
              
              $
              70Interest
                  cost
              
              
              2,400
              
              
              2,412
              
              
              122
              
              
              176Expected
                  return on plan assets
              
              
              (4,388
              )
              
              (4,081
              )
              
              -
              
              
              -Amortization
                  of prior service cost
              
              
              141
              
              
              141
              
              
              -
              
              
              -Amortization
                  of unrecognized net (gain) loss
              
              
              12
              
              
              130
              
              
              (45
              )
              
              13Amortization
                  of unrecognized transition asset
              
              
              (232
              )
              
              (233
              )
              
              -
              
              
              -Net
                  periodic benefit cost (income)
              
              $
              (698
              )
              $
              (307
              )
              $
              122
              
              $
              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
      March 31, 2007, the Company has made contributions of $8,000 to its pension
      plans and has made contributions of $75,000 to its postretirement plan. The
      Company presently anticipates making additional contributions of $25,000 to
      its
      pension plans and $398,000 to its postretirement plan during the last nine
      months of 2007.




**14.
      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.




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.
      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 (2002-2005), 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. There were no significant changes to the
      accrued interest and penalties for the three-month period ending March 31,
      2007.








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





**Trailer**


The
      Company primarily sells its trailer products in the United States to small
      and
      medium size fleet freight-hauling companies through a dealer network. Demand
      in
      this market is driven by the available cash flow or financing capabilities
      of
      the industry, age of the trailer fleets, changes in government regulations,
      availability of quality used trailers and the medium-term outlook for freight
      volumes. The profitability of the freight-hauling market is driven by freight
      volumes, fuel prices, wage levels and insurance costs. During 2004 and 2005,
      the
      freight market improved after several years of low volumes and higher operating
      cost. Freight-hauling demand and freight pricing increased and aging trailers
      required replacement. However, the recent demand for van trailers has not
      increased enough to meet trailer industry capacity, increasing price
      competition. Van demand has been impacted by freight haulers focusing purchases
      on new tractors before new diesel emission requirements are required on new
      tractors beginning in 2007. In light of these market conditions, the Company
      decided in the third quarter of 2006 not to participate in the van market until
      market conditions support better operating margins. 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 March 31, 2007, increased to $148.1 million
      from $133.4 million for the three months ended March 31, 2006, or 11.0%. This
      growth was primarily driven by increased sales of new oil field equipment,
      but
      also by growth in Power Transmission sales. This growth was partially offset
      by
      the impact of lower trailer sales from the Company’s previously announced
      decision not to participate in the trailer van market due to current market
      conditions.





Gross
      margin for the three months ended March 31, 2007, increased to 27.0% from 26.6%
      for the three months ended March 31, 2006. This gross margin increase was
      primarily due to the favorable mix effect of increased sales in Oilfield and
      Power Transmission and reduced Trailer sales. Oilfield and Power Transmission
      products generally have higher average gross margins than Trailer products.
      Also, Power Transmission gross margins improved in the first three months of
      2007 compared to the first three months of 2006. Additional segment data on
      gross margin is provided later in this section.





The
      changes in sales and gross margin primarily drove the changes in net earnings,
      but net earnings for the first three months of 2007 also benefited from a lower
      total tax rate. The net tax rate in the three months ended March 31, 2007,
      was
      32.8%, down from 36% in the three months ended March 31, 2006, primarily due
      to
      a reduction in tax reserves on items falling out of statute. The Company
      reported net earnings of $17.8 million or $1.17 per share (diluted) for the
      three months ended March 31, 2007, compared to net earnings of $15.2 million
      or
      $1.01 per share (diluted) for the three months ended March 31, 2006.





Debt/equity
      (long-term debt net of current portion as a percentage of total equity) levels
      were 0.0% as of March 31, 2007, and March 31, 2006. The Company had no
      short-term debt at March 31, 2007 and December 31, 2006. Cash balances at March
      31, 2007, were $84.3 million, up from $57.8 million at December 31, 2006, due
      to
      higher net earnings and reduced working capital offsetting capital expenditures
      and higher dividends.




**Three
      Months Ended March 31, 2007, Compared to Three Months Ended March 31,
      2006**





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




Three
                    Months EndedMarch
                    31,
                
                Increase/
                
                %
                    Increase/2007
                
                2006
                
                (Decrease)
                
                (Decrease)SalesOil
                    Field
                
                $
                101,286
                
                $
                86,568
                
                $
                14,718
                
                
                17.0Power
                    Transmission
                
                
                33,698
                
                
                29,573
                
                
                4,125
                
                
                13.9Trailer
                
                
                13,097
                
                
                17,248
                
                
                (4,151
                )
                
                (24.1
                )Total
                
                $
                148,081
                
                $
                133,389
                
                $
                14,692
                
                
                11.0Gross
                    ProfitOil
                    Field
                
                $
                27,974
                
                $
                24,138
                
                $
                3,836
                
                
                15.9Power
                    Transmission
                
                
                11,236
                
                
                9,655
                
                
                1,581
                
                
                16.4Trailer
                
                
                841
                
                
                1,647
                
                
                (806
                )
                
                (48.9
                )Total
                
                $
                40,051
                
                $
                35,440
                
                $
                4,611
                
                
                13.0


**Oil
      Field**




Oil
      Field
      sales increased to $101.3 million, or 17.0%, for the three months ended March
      31, 2007, from $86.6 million for the three months ended March 31, 2006.
      Increased sales of new pumping units and service in international markets and
      increased sales of automation products accounted for a majority of the increase.
      These increased sales of new pumping units, and related service, were primarily
      in the Argentina and Middle East/North Africa markets. S ales
      of
      automation equipment continued to increase due to market share growth from
      new
      product offerings and a large international order. Oil Field’s backlog decreased
      to $58.1 million as of March 31, 2007, from $88.6 million at March 31, 2006,
      and
      $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 to 27.6% for three months ended March 31, 2007, compared to 27.9%
      for
      the three months ended March 31, 2006, or 0.3 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 23.8%, for the three months ended March 31, 2007, from $3.5 million
      for the three months ended March 31, 2006. This increase is due to higher
      employee-related expenses in support of increased sales volumes and third-party
      commissions in certain international markets. Direct selling, general and
      administrative expenses as a percentage of sales also increased to 4.3% for
      the
      three months ended March 31, 2007, from 4.1% for the three months ended March
      31, 2006.





**Power
      Transmission**





Sales
      for
      the Company’s Power Transmission segment increased to $33.7 million, or 13.9%,
      for the three months ended March 31, 2007, compared to $29.6 million for the
      three months ended March 31, 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 production and refining from both the US and France manufacturing
      facilities. Power Transmission backlog at March 31, 2007, increased to $103.5
      million from $67.4 million at March 31, 2006, and $95.6 million at December
      31,
      2006, primarily from sales of new units for the energy-related
      markets.





Gross
      margin for the Power Transmission segment increased to 33.3% for the
      three months ended March 31, 2007, compared to 32.6% for the three months ended
      March 31, 2006, from increased sales of higher-margin high-speed units and
      improved margins from gear repair.




Direct
      selling, general and administrative expenses for Power Transmission increased
      to
      $4.4 million, or 21.5%, for the three months ended March 31, 2007, from
      $3.6 million for the three months ended March 31, 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 increased
      to 13.2% for the three months ended March 31, 2007, from 12.3% for the three
      months ended March 31, 2006.




**Trailer**





Trailer
      sales for the three months ended March 31, 2007, decreased to $13.1
      million, or 24.1%, from $17.3 million for the three months ended March 31,
      2006. This decrease is primarily related to the decline in new van trailer
      sales. 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 seasonal demand in the road construction market.
      Backlog for the Trailer segment decreased to $15.9 million at March 31, 2007,
      compared to $33.6 million at March 31, 2006, and $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.




Trailer
      gross margin decreased to 6.4% for the three months ended March 31, 2007,
      from 9.5% for the three months ended March 31, 2006, or 3.1 percentage
      points. This decrease was primarily due to plant reconfiguration costs
      associated with ending van trailer production.





Direct
      selling, general and administrative expenses for Trailer decreased to $0.5
      million, or 21.3%, for the three months ended March 31, 2007, from $0.7
      million for the three months ended March 31, 2006, from lower general
      liability legal and claims expenses. Direct selling, general and administrative
      expenses as a percentage of sales slightly increased to 4.0% for the three
      months ended March 31, 2007, from 3.9% for the three months ended March 31,
      2006.




**Corporate/Other**





Corporate
      administrative expenses, which are allocated to the segments primarily based
      on
      historical third-party revenues, increased to $5.2 million, or 21.5%, for the
      three months ended March 31, 2007, from $4.3 million for the three months ended
      March 31, 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
      March 31, 2007, totaled $0.9 million of income compared to income of $0.4
      million for the three months ended March 31, 2006, primarily due to an increase
      in interest income from higher cash balances.





Pension
      income, which is reported as a reduction of cost of sales, increased to $0.8
      million for the three months ended March 31, 2007, or 163%, compared to $0.3
      million for the three months ended March 31, 2006. This increase is primarily
      due to lower interest and service costs from the lower projected benefit
      obligation from March 31, 2006, and higher expected returns due to increases
      in
      asset balances. The projected benefit obligation was remeasured lower in the
      second quarter of 2006. Pension income in 2007 is expected only to increase
      to
      approximately $3.2 million from $2.9 million in 2006.




The net
      tax rate for the three months ended March 31, 2007, was 32.8% compared to 36.0%
      in the three months ended March 31, 2006. The net tax rate for the
      first three months of 2007 was the result of the effective tax rate of 35.0%
      benefiting from a
      reduction in tax reserves on items falling out of statute .




**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 $84.3
      million at March 31, 2007, compared to $57.8 million at December 31, 2006.
      For
      the three months ended March 31, 2007, net cash provided by operating
      activities was $33.2 million, net cash used in investing activities totaled
      $4.1
      million and net cash used in financing activities amounted to $2.6 million.
      Significant components of cash provided by operating activities included net
      earnings, adjusted for non-cash expenses, of $20.4 million and a decrease in
      working capital of $12.8 million. This working capital decrease was primarily
      due to lower receivables from reduced sales levels during the fourth quarter
      of
      2006 and reduced days sales outstanding, as well as the benefit of making no
      US
      federal tax payments in the first quarter of 2007. These decreases were
      partially offset by increased inventory balances from higher production activity
      in Power Transmission and Oil Field automation products. Net cash used in
      investing activities included net capital expenditures totaling $4.0 million
      and
      an increase in other assets of $0.1 million. Capital expenditures in the
      first three 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 $30.0 to $35.0 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 $3.1 million, or $0.21 per share, partially offset by the
      impact of stock option exercises, including the excess tax benefit from actual
      gains on stock option exercises of $0.5
      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
      March
      31, 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 $6.0 million, $21.5 million of
      borrowing capacity was available at March 31, 2007.





The
      Company currently has a stock repurchase plan under which the Company was
      authorized to spend up to $19.1 million for repurchases of its common stock.
      Pursuant to this plan, the Company has repurchased a total of 1,656,740 shares
      of its common stock at an aggregate purchase price of $17.0 million. Repurchased
      shares are added to treasury stock and are available for general corporate
      purposes including the funding of the Company’s stock option plans. No shares
      were repurchased in the first three months of 2007. As of March 31, 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 March 31, 2007.




**Recently
      Issued Accounting Pronouncements**





In June
      2006, the Financial Accounting Standards Board issued Interpretation No.
      48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes- an
      interpretation of FASB Statement No. 109.” FIN 48 prescribes a
      recognition threshold and measurement attribute for the financial statement
      recognition and measurement of a tax position taken or expected to be taken
      in a
      tax return. FIN 48 also provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. In accordance with FIN 48, the evaluation of a tax
      position is a two-step process. The first step requires determining whether
      it is more-likely-than-not that a tax position will be sustained upon
      examination or appeals based on the technical merits of the position. The second
      step requires that a tax position that meets the more-likely-than-not
      recognition threshold is measured to determine the amount of benefit to
      recognize in the financial statements. The tax position is measured at the
      largest benefit that is greater than 50 percent likely of being realized upon
      ultimate settlement. Differences between tax positions taken in a tax return
      and
      amounts recognized in the financial statements will generally result in an
      increase in a liability for income taxes payable and/or an increase in a
      deferred tax liability. Tax positions that previously failed to meet the
      more-likely-than-not recognition threshold should be recognized in the
      first subsequent financial reporting period in which the threshold is met and
      previously recognized tax positions that no longer meet the more-likely-than-not
      recognition threshold should be derecognized in the first subsequent financial
      reporting period in which the threshold is
      no
      longer met. FIN 48 is effective for fiscal years beginning after December 15,
      2006, but earlier adoption is permitted. The Company adopted FIN 48 as of
      January 1, 2007, and it did not have an impact on the Company's consolidated
      condensed financial statements. As of March 31, 2007, the Company had
      approximately $2,700,000 of total gross unrecognized tax benefits.




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





**Critical
      Accounting Policies and Estimates**





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





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





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


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 purposes 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 probable, a valuation
      allowance would be recorded.





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





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





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


**Item3.**  **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 March 31, 2007, this inter-company debt was comprised of (0.3) million
      euros and $10.6 million Canadian dollars. As of March 31, 2007, if the U.S.
      dollar strengthened by 10% over these currencies, the net income impact would
      be
      $0.6 million of expense and if the U.S. dollar weakened by 10% over these
      currencies, the net income impact would be $0.6 million of income. Also, certain
      assets and liabilities, primarily employee and tax related, denominated in
      the
      local currency of foreign operations whose functional currency is the U.S.
      dollar are exposed to fluctuations in currency rates. As of March 31, 2007,
      if
      the U.S. dollar strengthened by 10% over these currencies, the net income impact
      would be $0.0 million of expense and if the U.S. dollar weakened by 10% over
      these currencies, the net income impact would be $0.0 million of
      income.





**Item4.**  **Controls
      and Procedures.**





Based
      on
      their evaluation of the Company’s disclosure controls and procedures as of March
      31, 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 March 31, 2007, that have materially affected,
      or are reasonably likely to materially affect, the Company’s internal control
      over financial reporting.







PARTII - OTHER
      INFORMATION





**Item1.**  **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.




**Item1A.   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.








**Item6.
      Exhibits.**





10.1
              
              Lufkin
                  Industries, Inc. 2007 Variable Compensation Plan, included as Exhibit
                  10.1
                  to Form 8-K filed February 20, 2007 (File
                  No. 0-02612), which exhibit is incorporated herein by
                  reference.*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:  May
      10,
      2007





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














**INDEX
      TO EXHIBITS**








Exhibit
                Number
              
              Description10.1
              
              Lufkin
                  Industries, Inc. 2007 Variable Compensation Plan, included as Exhibit
                  10.1
                  to Form 8-K filed February 20, 2007 (File
                  No. 0-02612), which exhibit is incorporated herein by
                  reference.*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