Lufkin Industries 10Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2008

( ) 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, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer X Accelerated filer ______

Non-accelerated filer ______ Smaller reporting company ______

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 14,883,672 shares of Common Stock, $1.00 par value per share, outstanding as of August 7, 2008.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

LUFKIN INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Thousands of dollars, except share and per share data)
	June 30,			December 31,
Assets	2008			2007
Current Assets:
Cash and cash equivalents	$	103,816		$	95,748
Receivables, net		101,275			90,696
Income tax receivable		4,064			4,637
Inventories		115,375			92,914
Deferred income tax assets		1,564			888
Other current assets		5,066			1,260
Current assets from discontinued operations		2,387			6,724
Total current assets		333,547			292,867

Property, plant and equipment, net		122,375			117,190
Prepaid pension costs		54,320			71,571
Goodwill, net		12,187			11,990
Other assets, net		3,230			3,394
Long-term assets from discontinued operations		1,366			3,644
Total assets	$	527,025		$	500,656

Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable	$	34,408		$	23,083
Accrued liabilities:
Payroll and benefits		10,510			11,085
Warranty expenses		3,188			2,925
Taxes payable		3,730			4,391
Other		20,307			21,739
Current liabilities from discontinued operations		2,457			4,911
Total current liabilities		74,600			68,134

Deferred income tax liabilities		27,472			34,600
Postretirement benefits		7,017			7,303
Other liabilities		5,644			5,966
Commitments and contingencies		-			-

Shareholders' equity:

Common stock, $1.00 par value per share; 60,000,000 shares authorized;
15,723,451 and 15,534,184 shares issued and outstanding, respectively		15,723			15,534
Capital in excess par		57,735			48,315
Retained earnings		370,811			341,315
Treasury stock, 898,278 and 895,278 shares, respectively, at cost		(32,090	)		(31,580	)
Accumulated other comprehensive income		113			11,069
Total shareholders' equity		412,292			384,653
Total liabilities and shareholders' equity	$	527,025		$	500,656

See notes to condensed consolidated financial statements.

LUFKIN INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(In thousands of dollars, except per share and share data)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007

Sales	$	174,488		$	133,575		$	315,558		$	268,559

Cost of Sales		126,693			94,173			227,243			189,788

Gross Profit		47,795			39,402			88,315			78,771

Selling, general and administrative expenses		16,976			14,372			33,741			28,451

Operating income		30,819			25,030			54,574			50,320

Interest income		440			966			1,119			1,831
Interest expense		(56	)		(25	)		(137	)		(58	)
Other income (expense), net		331			614			(49	)		719

Earnings from continuing operations before
income tax provision and discontinued
operations		31,534			26,585			55,507			52,812

Income tax provision		10,356			9,505			18,744			18,062

Earnings from continuing operations before
discontinued operations		21,178			17,080			36,763			34,750

Earnings from discontinued operations, net of tax		55			441			99			540

Net earnings	$	21,233		$	17,521		$	36,862		$	35,290

Basic earnings per share:

Earnings from continuing operations	$	1.44		$	1.14		$	2.50		$	2.32
Earnings from discontinued operations		-			0.03			0.01			0.03

Net earnings	$	1.44		$	1.17		$	2.51		$	2.35

Diluted earnings per share:

Earnings from continuing operations	$	1.42		$	1.12		$	2.47		$	2.29
Earnings from discontinued operations		-			0.03			0.01			0.03

Net earnings	$	1.42		$	1.15		$	2.48		$	2.32


Dividends per share	$	0.25		$	0.21		$	0.50		$	0.42

Weighted average number of shares outstanding:
Basic		14,772,015			15,026,974			14,707,037			14,991,428
Diluted		14,922,885			15,229,990			14,864,895			15,209,214

See notes to condensed consolidated financial statements.

LUFKIN INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands of dollars)

	Six Months Ended
	June 30,
	2008			2007
Cash flows from operating activities:
Net earnings	$	36,862		$	35,290
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation and amortization		7,557			6,563
Deferred income tax benefit		(236	)		(746	)
Excess tax benefit from share-based compensation		(4,215	)		(2,565	)
Share-based compensation expense		1,843			2,270
Pension income		(1,058	)		(1,629	)
Postretirement benefits		(10	)		(157	)
Gain on disposition of property, plant and equipment		(26	)		(85	)
Income from discontinued operations		(99	)		(540	)
Changes in:
Receivables, net		(7,460	)		6,946
Inventories		(21,601	)		(16,394	)
Other current assets		(1,716	)		(2,032	)
Accounts payable		12,818			2,189
Accrued liabilities		(4,821	)		1,171
Net cash used in continuing operations		17,838			30,281
Net cash provided by (used in) discontinued operations		(884	)		244

Net cash provided by operating activities		16,954			30,525

Cash flows from investing activites:
Additions to property, plant and equipment		(10,181	)		(10,670	)
Proceeds from disposition of property, plant and equipment		148			361
Increase in other assets		(257	)		(367	)
Net cash used in continuing operations		(10,290	)		(10,676	)
Net cash provided by (used in) discontinued operations		884			(243	)

Net cash used in investing activities		(9,406	)		(10,919	)

Cash flows from financing activites:
Dividends paid		(7,366	)		(6,304	)
Excess tax benefit from share-based compensation		4,215			2,565
Proceeds from exercise of stock options		4,222			2,682
Purchases of treasury stock		(1,117	)		-
Net cash used in financing activities		(46	)		(1,057	)

Effect of translation on cash and cash equivalents		566			123

Net increase in cash and cash equivalents		8,068			18,672

Cash and cash equivalents at beginning of period		95,748			57,797

Cash and cash equivalents at end of period	$	103,816		$	76,469

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, 2007. The results of operations for the three and six months ended June 30, 2008, are not necessarily indicative of the results that may be expected for the full fiscal year.

2. Recently Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157 “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. Prior to SFAS 157, there were different definitions of fair value and limited and dispersed guidance for applying those definitions. SFAS 157 retains the exchange price notion of fair value and clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement and establishes a fair value hierarchy that distinguishes between market participant assumptions developed based on market data obtained from independent sources and the reporting entity’s own assumptions. SFAS 157 also clarifies that market participant assumptions should include assumptions about risk and the effect of a restriction on the sale or use of an asset. SFAS 157 expands disclosures about the use of fair value to measure assets and liabilities in interim and annual periods and the inputs used to measure fair value. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The provisions of SFAS 157 should be applied prospectively as of the beginning of the fiscal year in which it is initially applied except for certain types of financial instruments. In February 2008, the Financial Accounting Standards Board issued FASB Staff Position (“FSP”) No. FAS 157-1 and No. FAS 157-2, which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years, and removes certain leasing transactions from the scope of SFAS 157. On January 1, 2008, the Company adopted the initial requirements of SFAS 157 and it had no significant impact on its consolidated financial position or results of operations. The Company doe not expect the adoption of the remaining requirements of SFAS 157 to have a significant impact on its consolidated financial position or results of operations.

In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 (revised 2007) “Business Combinations” (“SFAS 141R”), replacing Statement of Financial Accounting Standards No. 141 “Business Combinations” (“SFAS 141”). SFAS 141R broadens the scope of SFAS 141 by applying the acquisition method of accounting to all transactions and other events in which one entity obtains control over one or more businesses and not just business combinations in which control was obtained by transferring consideration. SFAS 141R also modifies the application of the acquisition method. SFAS 141R requires acquired assets and liabilities to be measured at fair value at the acquisition date versus the cost-allocation process used under SFAS 141. This change will require acquisition-related costs and restructuring costs that are expected but not legally obligated to be recognized separately from the acquisition. SFAS 141R also provides revised guidance on accounting for step acquisitions, assets and liabilities arising from contingencies, measuring goodwill and gains from bargain purchases and contingent consideration at the acquisition date. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

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.

3. Discontinued Operations

Operating results of discontinued operations were as follows (in thousands of dollars):

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2008		2007			2008		2007

Sales	$	561	$	10,930		$	6,502	$	24,026

Earnings before income tax provision		16		595			88		809

Income tax (provision) benefit		39		(154	)		11		(269	)

Earnings from discontinued operations, net of tax	$	55	$	441		$	99	$	540

	June 30,		December 31,
	2008		2007

Receivables, net	$	1,255	$	2,938
Inventories		317		2,907
Deferred income tax assets		727		728
Other current assets		88		151

Current assets from discontinued operations		2,387		6,724

Property, plant and equipment, net		-		2,939
Deferred income tax assets		678		238
Other assets, net		688		467

Long-term assets from discontinued operations		1,366		3,644

Total assets from discontinued operations	$	3,753	$	10,368


Accounts payable	$	251	$	894
Accrued liabilities:
Payroll and benefits		164		359
Warranty expenses		575		717
Taxes payable		657		2,739
Other		810		202

Current liabilities from discontinued operations		2,457		4,911

Total liabilities from discontinued operations	$	2,457	$	4,911

4. Receivables

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

	June 30,			December 31,
	2008			2007

Accounts receivable	$	100,785		$	90,383
Other receivables		591			402
Gross receivables		101,376			90,785

Allowance for doubtful accounts receivable		(101	)		(89	)
Net receivables	$	101,275		$	90,696

Bad debt expense related to receivables was negligible for the three and six months ended June 30, 2008 and 2007.

5. Inventories

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

	June 30,		December 31,
	2008		2007
Gross inventories @ FIFO:
Finished goods	$	4,382	$	3,717
Work in progress		27,956		21,150
Raw materials & component parts		103,423		83,452
Maintenance, tooling & supplies		11,494		11,357
Total gross inventories @ FIFO		147,255		119,676
Less reserves:
LIFO		30,123		25,183
Valuation		1,757		1,579
Total inventories as reported	$	115,375	$	92,914

Gross inventories on a FIFO basis before adjustments for reserves shown above that were accounted for on a LIFO basis were $98.3 million and $77.0 million at June 30, 2008, and December 31, 2007, respectively.

6. Property, Plant & Equipment

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

	June 30,			December 31,
	2008			2007

Land	$	5,319		$	3,386
Land improvements		9,492			8,389
Buildings		76,317			70,281
Machinery and equipment		234,788			227,304
Furniture and fixtures		5,417			5,076
Computer equipment and software		14,348			14,246
Total property, plant and equipment		345,681			328,682
Less accumulated depreciation		(223,306	)		(211,492	)
Total property, plant and equipment, net	$	122,375		$	117,190

Depreciation expense related to property, plant and equipment was $3.8 million and $3.4 million for the three months ended June 30, 2008 and 2007, respectively, and $7.5 million and $6.4 million for the six months ended June 30, 2008 and 2007, respectively.

7. Goodwill and Intangible Assets

Goodwill

The changes in the carrying amount of goodwill for the six months ended June 30, 2008, are as follows (in thousands of dollars):

				Power
	Oil Field			Transmission		Total
Balance as of 12/31/07	$	9,447		$	2,543	$	11,990

Foreign currency translation		(3	)		200		197
Balance as of 6/30/08	$	9,444		$	2,743	$	12,187

Goodwill impairment tests were performed in the first quarter of 2008 and no impairment losses were recorded.

Intangible Assets

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

	June 30,			December 31,
	2008			2007
Intangible assets subject to amortization:
Non-compete agreements
Original balance	$	463		$	463
Foreign currency translation		10			26
Accumulated amortization		(424	)		(378	)

Ending balance	$	49		$	111

8. Other Current Accrued Liabilities

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

	June 30,		December 31,
	2008		2007
Customer prepayments	$	14,008	$	15,328
Deferred compensation plans		4,483		4,506
Accrued professional services		745		802
Other accrued liabilities		1,071		1,103
Total other current accrued liabilities	$	20,307	$	21,739

9. Retirement Benefits

The Company has a qualified noncontributory pension plan covering substantially all U.S. employees. The benefits provided by these plans are measured by length of service, compensation and other factors, and are currently funded by trusts established under the plans. Funding of retirement costs for these plans complies with the minimum funding requirements specified by the Employee Retirement Income Security Act, as amended. In addition, the Company has two unfunded non-qualified deferred compensation pension plans for certain U.S. employees. The Pension Restoration Plan provides supplemental retirement benefits. The benefit is based on the same benefit formula as the qualified pension plan except that it does not limit the amount of a participant's compensation or maximum benefit. The Company also provides a Supplemental Executive Retirement Plan that credits an individual with 0.5 years of service for each year of service credited under the qualified plan. The benefits calculated under the non-qualified pension plans are offset by the participant's benefit payable under the qualified plan. The liabilities for the non-qualified deferred compensation pensions plans are included in "Other current accrued liabilities" and “Other liabilities” in 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 June 30, 2008. 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 $0.8 million and $0.7 million in the three months ended June 30, 2008 and 2007, respectively, and $1.8 million and $1.6 million in the six months ended June 30, 2008 and 2007, respectively. The liability for the non-qualified deferred defined contribution plan is included in "Other current accrued liabilities" in 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 Benefits
Three Months Ended June 30,	2008			2007			2008			2007

Service cost	$	1,324		$	1,356		$	30		$	42
Interest cost		2,601			2,462			118			107
Expected return on plan assets		(4,309	)		(4,435	)		-			-
Amortization of prior service cost		141			142			-			-
Amortization of unrecognized net (gain) loss		69			39			(63	)		(68	)
Amortization of unrecognized transition asset		(159	)		(231	)		-			-
Net periodic benefit cost (income)	$	(333	)	$	(667	)	$	85		$	81

	Pension Benefits						Other Benefits
Six Months Ended June 30,	2008			2007			2008			2007

Service cost	$	2,561		$	2,725		$	76		$	87
Interest cost		5,251			4,862			227			229
Expected return on plan assets		(8,567	)		(8,823	)		-			-
Amortization of prior service cost		283			283			-			-
Amortization of unrecognized net (gain) loss		90			51			(109	)		(113	)
Amortization of unrecognized transition asset		(319	)		(463	)		-			-
Net periodic benefit cost (income)	$	(701	)	$	(1,365	)	$	194		$	203

Employer Contributions

The Company previously disclosed in its financial statements for the year ended December 31, 2007, that it expected to make contributions of $250,000 to its pension plans in 2008. The Company also disclosed that it expected contributions of $642,000 to be made to its postretirement plan in 2008. As of June 30, 2008, the Company has made contributions of $79,000 to its pension plans and has made contributions of $503,000 to its postretirement plan. The Company presently anticipates making additional contributions of $186,000 to its pension plans and $195,000 to its postretirement plan during the remainder of 2008.

10. Legal Proceedings

On March 7, 1997, a class action complaint was filed against Lufkin Industries, Inc. (the “Company”) in the U.S. District Court for the Eastern District of Texas by an employee and a former employee of the Company who 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 was $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 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 appellate court subsequently issued a decision on Friday, February 29, 2008 that reversed and vacated the plaintiff’s claim regarding the initial assignment of black employees into the Foundry Division. The court also denied plaintiff’s appeal for class certification in order to claim disparate treatment. Plaintiff’s claim on the issue of the Company’s promotional practices was affirmed but the backpay award was vacated and remanded for recomputation in accordance with the opinion. The District Court’s injunction was vacated and remanded with instructions to enter appropriate injunctive relief. Finally, the issue of plaintiff’s attorney’s fees was remanded to the district court for further consideration in accordance with prevailing authority. Plaintiffs and the Company subsequently filed requests for rehearing with the court on March 20, 2008 in order to address significant issues. On April 10, 2008 the Company was informed that the Fifth U.S. Circuit Court of Appeals had denied both requests for a rehearing. The Company, with the assistance of outside counsel, is reviewing its appellate options at this time as well as its position in future proceedings in the District Court. At present, however, the district court will conduct further proceedings on the injunctive relief to be entered, back pay and plaintiffs’ request for attorneys’ fees. The Fifth Circuit’s opinion to reverse and affirm portions of the District Court’s decision, together with the assignment of a different judge for this case in the District Court (the trial judge who wrote the trial court decision is deceased) prevents the Company from estimating the back pay or attorneys’ fees award at this time. The District Court will interpret the Fifth Circuit’s instructions and take additional evidence to determine these issues. On July 2, 2008, the Company filed a Petition for Writ of Certiorari in the Supreme Court of the United States requesting that the court review the decision of the United States Court of Appeals for the Fifth Circuit. This review will address the remaining issue in this case. The Company believes that its position is supported by legal authority that would reverse the decisions of the lower courts if its appeal to the Supreme Court of the United States is accepted for review.

The Company believes that resolution of these proceedings will not have a material adverse effect on its consolidated financial position. However, if further appellate review is unsuccessful, the proceedings in the District Court for a final determination of back pay and attorney’s fees could have a material impact on the Company’s reported earnings and results of operations 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.

11. Comprehensive Income

Comprehensive income includes net income and changes in the components of accumulated other comprehensive income during the periods presented. In the second quarter of 2008, a net loss was recognized in the defined benefit pension plans from adjusting expected asset returns to actual returns realized as of June 30, 2008. The Company’s comprehensive income is as follows (in thousands of dollars):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007

Net earnings	$	21,233		$	17,521		$	36,862		$	35,290

Other comprehensive income, before tax:

Foreign currency translation adjustments		105			1,819			997			2,188

Defined benefit pension plans:

Amortization of prior service cost included
in net periodic benefit cost		141			142			283			283
Amortization of unrecognized transition
asset included in net periodic benefit cost		(159	)		(231	)		(319	)		(463	)
Amortization of unrecognized net loss
included in net periodic benefit cost		69			39			90			51
Net loss arising during period		(19,406	)		(2,354	)		(19,406	)		(2,354	)

Total defined benefit pension plans		(19,355	)		(2,404	)		(19,352	)		(2,483	)

Defined benefit postretirement plans:

Amortization of unrecognized net gain
included in net periodic benefit cost		(63	)		(68	)		(109	)		(113	)
Net gain arising during period		303			987			303			987

Total defined benefit postretirement plans		240			919			194			874

Total other comprehensive income, before tax		(19,010	)		334			(18,161	)		579

Income tax benefit related to items of other
comprehensive income		7,189			520			7,205			563

Total other comprehensive income, net of tax		(11,821	)		854			(10,956	)		1,142

Total comprehensive income	$	9,412		$	18,375		$	25,906		$	36,432

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

			Defined			Defined		Accumulated
	Foreign		Benefit			Benefit		Other
	Currency		Pension			Postretirement		Comprehensive
	Translation		Plans			Plans		Loss

Balance, Dec. 31, 2007	$	8,015	$	1,221		$	1,833	$	11,069

Current-period change		997		(12,044	)		91		(10,956	)

Balance, June 30, 2008		9,012		(10,823	)		1,924		113

12. Net Earnings Per Share

A reconciliation of the number of weighted shares used to compute basic and diluted net earnings per share for the three and six months ended June 30, 2008 and 2007, are illustrated below:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2008		2007		2008		2007
Weighted average common shares outstanding
for basic EPS		14,772,015		15,026,974		14,707,037		14,991,428
Effect of dilutive securities: employee stock
options		150,870		203,016		157,858		217,786
Adjusted weighted average common shares
outstanding for diluted EPS		14,922,885		15,229,990		14,864,895		15,209,214

Weighted options to purchase a total of 44,563 and 147,849 shares of the Company’s common stock for the three months ended June 30, 2008 and 2007, respectively, and 180,720 and 180,662 shares of the Company’s common stock for the six months ended June 30, 2008 and 2007, 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.

13. Stock Option Plans

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

The following table is a summary of the stock-based compensation expense recognized under SFAS 123R for the three and six months ended June 30, 2008 and 2007 (in thousands of dollars):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007

Stock-based compensation expense	$	879		$	1,275		$	1,843		$	2,270
Tax benefit		(325	)		(472	)		(682	)		(840	)
Stock-based compensation expense, net of tax	$	554		$	803		$	1,161		$	1,430

The fair value of each option grant during the first six months of 2008 and 2007 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	2008			2007

Expected dividend yield		1.33% - 1.70	%		1.30% - 1.38	%
Expected stock price volatility		41.00% - 46.00	%		42.00% - 45.00	%
Risk free interest rate		1.90% - 3.27	%		4.56% - 4.85	%
Expected life options	2 - 6 years			3 - 6 years
Weighted-average fair value per share at grant date	$	19.82		$	23.28

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

A summary of stock option activity under the plans during the six months ended June 30, 2008, is presented below:

						Weighted-
				Weighted-		Average		Aggregate
				Average		Remaining		Intrinsic
				Exercise		Contractual		Value
Options	Shares			Price		Term		($000's)

Outstanding at January 1, 2008		659,143		$	39.28
Granted		106,000			58.41
Exercised		(206,266	)		20.47
Forfeited or expired		(17,725	)		46.06
Outstanding at June 30, 2008		541,152		$	49.98		8.0	$	18,022
Exercisable at June 30, 2008		282,174		$	48.09		7.4	$	9,929

As of June 30, 2008, there was $3.2 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 2.3 years. The intrinsic value of stock options exercised in the first six months of 2008 was $11.0 million.

14. Stock Repurchase Plans

During the first six months of 2008, the Company repurchased shares pursuant to a plan approved by the Board of Directors in the third quarter of 2007, under which the Company was authorized to spend up to an aggregate of $30.0 million. Repurchased shares are added to treasury stock and are available for general corporate purposes including the funding of the Company’s stock option plan. As of December 31, 2007, 462,131 shares had been repurchased at an aggregate price of $25.4 million, or $54.91 per share under this plan. No shares were repurchased during the second quarter of 2008. During the first quarter of 2008, 20,000 shares were repurchased at an aggregate price of $1.1 million, or $55.85 per share under the 2007 plan. As of June 30, 2008, the Company held 898,278 shares of treasury stock at an aggregate cost of approximately $32.1 million. At June 30, 2008, approximately $3.5 million of repurchase authorizations remained under the 2007 plan. While this repurchase authorization has no expiration date, the Company expects to spend this remaining authorization during 2008.

15. Material Events Related to FIN 48

As of January 1, 2008, the Company had approximately $2,742,000 of total gross unrecognized tax benefits. Of this total, $2,543,000 (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the net effective income tax rate in any future period. As of June 30, 2008, the Company had approximately $1,142,000 of total gross unrecognized tax benefits. Of this total, $943,000 (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. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

(Thousands of dollars)	2008

Balance at December 31, 2007	$	2,742

Gross increases- current year tax positions		-
Gross increases- tax positions from prior periods		-
Gross decreases- tax positions from prior periods		(712	)
Settlements		(888	)

Balance at June 30, 2008	$	1,142

The Company’s continuing practice is to recognize interest and penalties related to income tax matters in administrative costs. The Company had $301,000 accrued for interest and penalties at December 31, 2007. Interest and penalties of $266,000 and $223,000 was recognized as income during the three and six months ended June 30, 2008, respectively, mostly due to settlements with taxing authorities.

16. Segment Data

The Company operates with two business segments - Oil Field and Power Transmission. The two 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, 2007. The following is a summary of key segment information (in thousands of dollars):

Three Months Ended June 30, 2008

				Power
	Oil Field			Transmission			Corporate		Adjustment*		Total

Gross sales	$	127,219		$	48,342		$	-	$	-	$	175,561
Inter-segment sales		(712	)		(361	)		-		-		(1,073	)
Net sales	$	126,507		$	47,981		$	-	$	-	$	174,488

Operating income	$	24,471		$	6,348		$	-	$	-	$	30,819
Other income, net		52			64			599		-		715
Earnings from continuing operations
before income tax provision	$	24,523		$	6,412		$	599	$	-	$	31,534

Three Months Ended June 30, 2007

				Power
	Oil Field			Transmission			Corporate		Adjustment*			Total

Gross sales	$	94,006		$	41,330		$	-	$	-		$	135,336
Inter-segment sales		(833	)		(928	)		-		-			(1,761	)
Net sales	$	93,173		$	40,402		$	-	$	-		$	133,575

Operating income (loss)	$	18,935		$	7,382		$	-	$	(1,287	)	$	25,030
Other income (expense), net		572			(29	)		1,012		-			1,555
Earnings (loss) from continuing operations
before income tax provision	$	19,507		$	7,353		$	1,012	$	(1,287	)	$	26,585

Six Months Ended June 30, 2008

				Power
	Oil Field			Transmission			Corporate		Adjustment*			Total

Gross sales	$	228,718		$	88,937		$	-	$	-		$	317,655
Inter-segment sales		(1,302	)		(795	)		-		-			(2,097	)
Net sales	$	227,416		$	88,142		$	-	$	-		$	315,558

Operating income (loss)	$	45,002		$	11,143		$	-	$	(1,571	)	$	54,574
Other income (expense), net		(216	)		3			1,146		-			933
Earnings (loss) from continuing operations
before income tax provision	$	44,786		$	11,146		$	1,146	$	(1,571	)	$	55,507

Six Months Ended June 30, 2007

				Power
	Oil Field			Transmission			Corporate		Adjustment*			Total

Gross sales	$	196,166		$	76,386		$	-	$	-		$	272,552
Inter-segment sales		(1,707	)		(2,286	)		-		-			(3,993	)
Net sales	$	194,459		$	74,100		$	-	$	-		$	268,559

Operating income (loss)	$	40,371		$	12,492		$	-	$	(2,543	)	$	50,320
Other income, net		578			64			1,850		-			2,492
Earnings (loss) from continuing operations
before income tax provision	$	40,949		$	12,556		$	1,850	$	(2,543	)	$	52,812

* Due to the discontinuation of the Trailer segment, certain items previously allocated to that segment have been reclassified to continuing operations. One adjustment is related to pension and postretirement charges associated with Trailer personnel that will continue to be a liability in future years. The other adjustment is for corporate allocations previously charged to Trailer as these expenses will continue in the future.

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 and power transmission 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 increasing and reducing gearboxes for industrial applications. 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. In Power Transmission, the Company continues to expand its gear repair network by opening and expanding facilities in various locations in the U.S. and Canada. The Company is making targeted capital investments in the U.S. and France 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 new onshore oil well and workover drilling activity as well as the depth and fluid conditions of that drilling. Drilling activity is driven by the available cash flow of the Company’s customers as well as their long-term perceptions of the level and stability of the price of oil. The higher energy prices experienced since 2004 have increased the demand for pumping units and related service and products from higher drilling activity, activation of idle wells and the upgrading of existing wells. During 2007, demand in the North American market was negatively affected by the impact of lower natural gas prices on coal-bed methane and other unconventional gas production that use rod pumps to de-water wells, drilling program delays from M&A activity, cost control efforts deferring or reducing capital spending programs and the competitive pressure from lower-priced pumping units in areas traditionally served by the used unit market. Traditionally, as pumping unit demand increases and availability of used equipment diminishes, demand for new equipment increases. In 2007, lower-priced imported pumping units entered the North American market in place of used equipment and reduced the incremental demand for the Company’s new pumping units. During the first half of 2008, demand levels in North America increased over the levels experienced in the latter half of 2007 as higher energy prices drove increased drilling and workover activity. Additionally, the demand for pumping units, oilfield services and automation equipment continues to increase in international markets. 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, especially in the South American, Russian and Middle Eastern markets.

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, spending on new equipment lags. Also impacting demand are government regulations involving safety and environmental issues that can require capital spending. Recent market demand increases have come from energy-related markets such as refining, petrochemical, drilling, coal, marine and power generation in response to higher global energy prices. These market trends are expected to continue throughout 2008, assuming energy prices stay at recent levels.

Other

The main U.S. manufacturing facilities for Oil Field and Power Transmission are unionized and the current labor contract expires in October 2008. While the Company is confident it can successfully negotiate a new contract, any labor disruption could have a significant impact on Oil Field and Power Transmission’s ability to maintain production levels.

Discontinued Operations

During the second quarter of 2008, the Trailer segment was classified as a discontinued operation. In January 2008, the Company announced the decision to suspend its participation in the commercial trailer markets and to develop a plan to run-out existing inventories, fulfill contractual obligations and close all trailer facilities in 2008. During the second quarter of 2008, this plan was completed, with the majority of the remaining inventory and manufacturing equipment sold and all facilities closed. Trailer generated income of $0.1 million and $0.4 million, net of tax, during the second quarter of 2008 and 2007, respectively, and generated income of $0.1 million and $0.5 million, net of tax, during the first half of 2008 and 2007, respectively.

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. Prior period amounts have been reclassed to reflect the impact of discontinued operations.

Overall, sales for the three months ended June 30, 2008, increased to $174.5 million from $133.6 million for the three months ended June 30, 2007, or 30.6%. Also, sales for the six months ended June 30, 2008, increased to $315.6 million from $268.6 million for the six months ended June 30, 2007, or 17.5%. This increase was primarily driven by increased sales of new pumping units in the U.S. market, but also from continued growth in Power Transmission sales.

Gross margin for the three months ended June 30, 2008, decreased to 28.0% from 29.3% for the three months ended June 30, 2007, and decreased to 27.4% for the six months ended June 30, 2008, from 29.5% for the six months ended June 30, 2007. This gross margin decrease was related to non-cash additions to LIFO inventory reserves related to the inflationary impact of higher raw material prices for steel and castings. Additional segment data on gross margin is provided later in this section.

Higher selling, general and administrative expenses also negatively impacted net earnings, with these expenses increasing to $17.0 million during the second quarter of 2008 from $14.4 million during the second quarter of 2007, and increasing to $33.8 million during the first half of 2008 from $28.5 million during the first half of 2007 These increases were primarily related to higher divisional spending to support higher sales volume. However, as a percentage of sales, selling, general and administrative expenses decreased to 9.7% during the second quarter of 2008 compared to 10.8% during the second quarter of 2007 and increased to 10.7% during the first half of 2008 compared to 10.6% during the first half of 2007.

The net tax rate in the second quarter of 2008 was 32.7%, compared to 35.5% in the second quarter of 2007, due to the favorable resolution of previously reserved items related to an IRS audit of the 2002-2005 tax years.

The Company reported net earnings from continuing operations of $21.2 million or $1.42 per share (diluted) for the three months ended June 30, 2008, compared to net earnings from continuing operations of $17.1 million or $1.12 per share (diluted) for the three months ended June 30, 2007, and reported net earnings from continuing operations of $36.8 million or $2.47 per share (diluted) for the six months ended June 30, 2008, compared to net earnings from continuing operations of $34.8 million or $2.29 per share (diluted) for the six months ended June 30, 2007

Debt/equity (long-term debt net of current portion as a percentage of total equity) levels were 0.0% as of June 30, 2008, and December 31, 2007. Cash balances at June 30, 2008, were $103.9 million, up from $95.7 million at December 31, 2007.

Three Months Ended June 30, 2008, Compared to Three Months Ended June 30, 2007

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

	Three Months Ended
	June 30,				Increase/			% Increase/
	2008		2007		(Decrease)			(Decrease)
Sales
Oil Field	$	126,507	$	93,173	$	33,334			35.8
Power Transmission		47,981		40,402		7,579			18.8
Total	$	174,488	$	133,575	$	40,913			30.6

Gross Profit
Oil Field	$	33,026	$	25,632	$	7,394			28.8
Power Transmission		14,756		13,589		1,167			8.6
Adjustment*		13		181		(168	)		(92.8	)
Total	$	47,795	$	39,402	$	8,393			21.3

* Due to the discontinuation of the Trailer segment, certain items previously allocated to that segment in cost of sales have been reclassified to continuing operations. The adjustment is related to pension and postretirement charges associated with Trailer personnel that will continue to be a liability in future years.

Oil Field

Oil Field sales increased to $126.5 million, or 35.8%, for the three months ended June 30, 2008, from $93.2 million for the three months ended June 30, 2007. New unit sales of $79.2 million during the second quarter of 2008 were up $26.3 million, or 49.7%, compared to $52.9 million during the second quarter 2007, primarily from higher U.S. demand. Service sales of $24.0 million during the second quarter of 2008 were up $4.8 million, or 24.8%, compared to $19.2 million during the second quarter 2007, from growth in the U.S. market. Automation sales of $17.8 million during the second quarter of 2008 were up $4.2 million, or 29.8%, compared to $13.6 million during the second quarter 2007, from growth in international sales. Commercial casting sales of $5.7 million during the second quarter of 2008 were down $1.8 million, or 23.4%, compared to $7.5 million during the second quarter 2007, from lower sales to the machine tool market. Oil Field’s backlog also increased to $170.9 million as of June 30, 2008, from $55.8 million at June 30, 2007, and $76.9 million at December 31, 2007. This increase was driven by increased bookings for new units for the U.S. market as higher energy prices drove increased drilling and workover activity. Also, certain U.S. customers placed orders for new units to be shipped throughout the remainder of 2008 versus their normal buying practice of ordering units as needed.

Gross margin (gross profit as a percentage of sales) for the Oil Field segment decreased to 26.1% for three months ended June 30, 2008, compared to 27.5% for the three months ended June 30, 2007, or 1.4 percentage points. This gross margin decrease was related to increased non-cash additions to LIFO inventory reserves of $2.6 million, or 2.0 percentage points of gross margin, related to the inflationary impact of higher raw material prices for steel and castings.

Direct selling, general and administrative expenses for Oil Field increased to $5.3 million, or 23.1%, for the three months ended June 30, 2008, from $4.3 million for the three months ended June 30, 2007. This increase was due to higher employee-related expenses in support of increased sales volumes. However, direct selling, general and administrative expenses as a percentage of sales decreased to 4.2% for the three months ended June 30, 2008, from 4.6% for the three months ended June 30, 2007.

Power Transmission

Sales for the Company’s Power Transmission segment increased to $48.0 million, or 18.8%, for the three months ended June 30, 2008, compared to $40.4 million for the three months ended June 30, 2007. New unit sales of $37.1 million during the second quarter of 2008 were up $6.8 million, or 22.4%, compared to $30.3 million during the second quarter 2007 from increased sales of high-speed units for the oil and gas markets and increased sales of marine units for the coastal, river and inland-waterway transportation markets. Repair and service sales of $10.8 million during the second quarter of 2008 were up $0.8 million, or 7.8%, compared to $10.0 million during the second quarter 2007. Power Transmission backlog at June 30, 2008, increased to $138.8 million from $112.9 million at June 30, 2007, and $122.2 million at December 31, 2007, primarily from increased bookings of new units for the energy-related and marine markets.

Gross margin for the Power Transmission segment decreased to 30.8% for the three months ended June 30, 2008, compared to 33.6% for the three months ended June 30, 2007, or 2.8 percentage points. This gross margin decrease was from increased non-cash additions to LIFO inventory reserves of $1.2 million, or 2.5 percentage points of gross margin, related to the inflationary impact of higher raw material prices for steel and castings.

Direct selling, general and administrative expenses for Power Transmission increased to $5.9 million, or 35.8%, for the three months ended June 30, 2008, from $4.4 million for the three months ended June 30, 2007. This increase was 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 increased to 12.3% for the three months ended June 30, 2008, from 10.8% for the three months ended June 30, 2007.

Corporate/Other

Corporate administrative expenses, which are allocated to the segments primarily based on historical third-party revenues, were $5.7 million for the three months ended June 30, 2008, an increase of $0.0 million or 0.7%, from $5.7 million for the three months ended June 30, 2007.

Interest income, interest expense and other income and expense for the three months ended June 30, 2008, decreased to $0.7 million of income compared to income of $1.6 million for the three months ended June 30, 2007, primarily due to lower interest rates on invested cash balances and the unfavorable currency impact of the weakening Canadian dollar during the second quarter of 2008 compared to the same period in 2007.

Pension income, which is reported as a reduction of cost of sales, decreased to $0.6 million for the three months ended June 30, 2008, or 33%, compared to $0.8 million for the three months ended June 30, 2007. This decrease was primarily due to lower expected returns on asset balances.

The net tax rate for the three months ended June 30, 2008, was 32.8% compared to 35.8% in the three months ended June 30, 2007. The net tax rate for the second quarter of 2008 decreased due to the favorable resolution of previously reserved items related to an IRS audit of the 2002-2005 tax years.

Due to the discontinuation of the Trailer segment, certain items previously allocated to that segment have been reclassified to continuing operations. One adjustment is related to pension and postretirement charges associated with Trailer personnel that will continue to be a liability in future years. The other adjustment is for corporate allocations previously charged to Trailer as these expenses will continue in the future.

Six Months Ended June 30, 2008, Compared to Six Months Ended June 30, 2007

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

	Six Months Ended
	June 30,				Increase/			% Increase/
	2008		2007		(Decrease)			(Decrease)
Sales
Oil Field	$	227,416	$	194,459	$	32,957			16.9
Power Transmission		88,142		74,100		14,042			19.0
Total	$	315,558	$	268,559	$	46,999			17.5

Gross Profit
Oil Field	$	61,257	$	53,606	$	7,651			14.3
Power Transmission		26,943		24,826		2,117			8.5
Adjustment*		115		339		(224	)		(66.1	)
Total	$	88,315	$	78,771	$	9,544			12.1

* Due to the discontinuation of the Trailer segment, certain items previously allocated to that segment in cost of sales have been reclassed to continuing operations. The adjustment is related to pension and postretirement charges associated with Trailer personnel that will continue to be a liability in future years.

Oil Field

Oil Field sales increased to $227.4 million, or 16.9%, for the six months ended June 30, 2008, from $194.5 million for the six months ended June 30, 2007. New unit sales of $134.9 million during the first six months of 2008 were up $23.3 million, or 20.9%, compared to $111.6 million during the first six months of 2007, primarily from higher U.S. and Middle East/North Africa demand. Service sales of $45.0 million during the first six months of 2008 were up $5.9 million, or 15.1%, compared to $39.1 million during the first six months of 2007, from growth in the U.S. market. Automation sales of $36.0 million during the first six months of 2008 were up $8.2 million, or 29.4%, compared to $27.8 million during the first six months of 2007, from growth in international sales. Commercial casting sales of $11.6 million during the first six months of 2008 were down $4.4 million, or 27.6%, compared to $16.0 million during the first six months of 2007, from lower sales to the machine tool market. Oil Field’s backlog also increased to $170.9 million as of June 30, 2008, from $76.9 million at December 31, 2007. This increase was driven by increased bookings for new units for the U.S. market as higher energy prices drove increased drilling and workover activity. Also, certain U.S. customers placed orders for new units to be shipped throughout the remainder of 2008 versus their normal buying practice of ordering units as needed.

Gross margin (gross profit as a percentage of sales) for the Oil Field segment decreased to 26.9% for six months ended June 30, 2008, compared to 27.6% for the six months ended June 30, 2007, or 0.7 percentage points. This gross margin decrease was related to increased non-cash additions to LIFO inventory reserves of $3.1 million, or 1.4 percentage points of gross margin, related to the inflationary impact of higher raw material prices for steel and castings.

Direct selling, general and administrative expenses for Oil Field increased to $10.3 million, or 19.9%, for the six months ended June 30, 2008, from $8.6 million for the six months ended June 30, 2007. This increase is due to higher employee-related expenses in support of increased sales volumes and third-party commissions. Direct selling, general and administrative expenses as a percentage of sales also increased to 4.5% for the six months ended June 30, 2008, from 4.4% for the six months ended June 30, 2007.

Power Transmission

Sales for the Company’s Power Transmission segment increased to $88.1 million, or 19.0%, for the six months ended June 30, 2008, compared to $74.1 million for the six months ended June 30, 2007. New unit sales of $68.7 million during the first six months of 2008 were up $12.7 million, or 22.6%, compared to $56.0 million during the first six months of 2007, from increased sales of high-speed units for the oil and gas markets and increased sales of marine units for the coastal, river and inland-waterway transportation markets. Repair and service sales of $19.5 million during the first six months of 2008 were up $1.4 million, or 7.7%, compared to $18.1 million during the first six months of 2007. Power Transmission backlog at June 30, 2008, increased to $138.8 million from $122.2 million at December 31, 2007, primarily from increased bookings of new units for the energy-related and marine markets.

Gross margin for the Power Transmission segment decreased to 30.6% for the six months ended June 30, 2008, compared to 33.5% for the six months ended June 30, 2007, or 2.9 percentage points. This gross margin decrease was from increased non-cash additions to LIFO inventory reserves of $1.5 million, or 1.7 percentage points of gross margin, related to the inflationary impact of higher raw material prices for steel and castings and from the unfavorable mix effect of increased marine unit sales.

Direct selling, general and administrative expenses for Power Transmission increased to $11.2 million, or 28.7%, for the six months ended June 30, 2008, from $8.7 million for the six months ended June 30, 2007. This increase was 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 increased to 12.7% for the six months ended June 30, 2008, from 11.8% for the six months ended June 30, 2007.

Corporate/Other

Corporate administrative expenses, which are allocated to the segments primarily based on historical third-party revenues, were $12.3 million for the six months ended June 30, 2008, an increase of $1.1 million or 9.7%, from $11.2 million for the six months ended June 30, 2007, primarily from higher personnel-related expenses in support of sales volume growth.

Interest income, interest expense and other income and expense for the six months ended June 30, 2008, decreased to $0.9 million of income compared to income of $2.5 million for the six months ended June 30, 2007, primarily due to lower interest rates on invested cash balances and the unfavorable currency impact of the weakening Canadian dollar during the first half of 2008 compared to the same period in 2007.

Pension income, which is reported as a reduction of cost of sales, decreased to $1.1 million for the six months ended June 30, 2008, or 35%, compared to $1.6 million for the six months ended June 30, 2007. This decrease was primarily due to lower expected returns on asset balances.

The net tax rate for the six months ended June 30, 2008, was 33.7% compared to 34.2% in the six months ended June 30, 2007. The net tax rate for the first six months of 2008 deceased due to the favorable resolution of previously reserved items related to an IRS audit of the 2002-2005 tax years.

Due to the discontinuation of the Trailer segment, certain items previously allocated to that segment have been reclassed to continuing operations. One adjustment is related to pension and postretirement charges associated with Trailer personnel that will continue to be a liability in future years. The other adjustment is for corporate allocations previously charged to Trailer as these expenses will continue in the future.

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, 2008, and the foreseeable future.

The Company’s cash balance totaled $103.8 million at June 30, 2008, compared to $95.7 million at December 31, 2007. For the six months ended June 30, 2008, net cash provided by operating activities was $17.0 million, net cash used in investing activities totaled $9.4 million and net cash used in financing activities amounted to $0.0 million. Significant components of cash provided by operating activities included net earnings from continuing operations, adjusted for non-cash expenses, of $40.6 million, an increase in working capital of $22.8 million and $0.8 million of cash used by discontinued operations. This working capital increase was primarily due to increased inventory balances from higher production activity in Oilfield and Power Transmission and strategic steel purchases. Net cash used in investing activities included net capital expenditures totaling $10.0 million, an increase in other assets of $0.3 million and $0.8 million of net proceeds from asset sales of discontinued operations. Capital expenditures in the first six months of 2008 were primarily for the expansion of manufacturing and service capacity and efficiency improvements in the Oil Field and Power Transmission segments. Capital expenditures for 2008 are projected to be approximately $30.0 million, primarily for the expansion of manufacturing and service 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 $7.4 million, or $0.50 per share and treasury stock purchases of $1.1 million, offset by the impact of stock option exercises, including the excess tax benefit from actual gains on stock option exercises, of $8.4 million.

The Company has a six-year credit facility with a domestic bank (the “Bank Facility”) consisting of an unsecured revolving line of credit that provides up to $40.0 million of aggregate borrowing. This Bank Facility expires on December 31, 2010. Borrowings under the Bank Facility bear interest, at the Company’s option, at either the greater of (i) the prime rate, (ii) the base CD rate plus an applicable margin or (iii) the Federal Funds Effective Rate plus an applicable margin or the London Interbank Offered Rate plus an applicable margin, depending on certain ratios as defined in the Bank Facility. As of June 30, 2008, 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 $8.1 million, $31.9 million of borrowing capacity was available at June 30, 2008.

During the second quarter of 2008, no shares were repurchased pursuant to a plan approved by the Board of Directors in the third quarter of 2007, under which the Company was authorized to spend up to an aggregate of $30.0 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. As of December 31, 2007, 462,131 shares had been repurchased at an aggregate price of $25.4 million, or $54.91 per share under this plan. During the first quarter of 2008, 20,000 shares were repurchased at an aggregate price of $1.1 million, or $55.85 per share under the 2007 plan. As of June 30, 2008, the Company held 898,278 shares of treasury stock at an aggregate cost of approximately $32.1 million. At June 30, 2008, approximately $3.5 million of repurchase authorizations remained under the 2007 plan. While this repurchase authorization has no expiration date, the Company expects to spend this remaining authorization during 2008.

Recently Issued Accounting Pronouncements

Critical Accounting Policies and Estimates

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

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

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

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

The Company adopted FIN 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, Accounting for Income Taxes, by prescribing 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. The application of income tax law is inherently complex. The Company is required to determine if an income tax position meets the criteria of more-likely-than-not to be realized based on the merits of the position under tax laws, in order to recognize an income tax benefit. This requires the Company to make many assumptions and judgments regarding merits of income tax positions and the application of income tax law. Additionally, if a tax position meets the recognition criteria of more-likely-than-not the Company is required to make judgments and assumptions to measure the amount of the tax benefits to recognize based on the probability of the amount of tax benefits that would be realized if the tax position was challenged by the taxing authorities. Interpretations and guidance surrounding income tax laws and regulations change over time. As a consequence, changes in assumptions and judgments can materially affect amounts recognized in the consolidated financial statements.

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 it is more likely than not 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, 2007.

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:

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

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, 2007. All forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by these factors. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated or expected. The forward-looking statements included in this report are only made as of the date of this report and, except as required by securities laws, the Company disclaims any obligation to publicly update forward-looking statements to reflect subsequent events or circumstances.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

The Company is exposed to currency fluctuations with debt denominated in U.S. dollars owed to the Company’s U.S. entity by its French and Canadian entities. As of June 30, 2008 this inter-company debt was comprised of 0.0 million euros and $6.3 million Canadian dollars. As of June 30, 2008, if the U.S. dollar strengthened by 10% over these currencies, the net income impact would be $0.4 million of expense and if the U.S. dollar weakened by 10% over these currencies, the net income impact would be $0.4 million of income. Also, certain assets and liabilities, primarily employee and tax related, denominated in the local currency of foreign operations whose functional currency is the U.S. dollar are exposed to fluctuations in currency rates. As of June 30, 2008, if the U.S. dollar strengthened by 10% over these currencies, the net income impact would be $0.0 million of expense and if the U.S. dollar weakened by 10% over these currencies, the net income impact would be $0.0 million of income.

Item 4. Controls and Procedures.

Based on their evaluation of the Company’s disclosure controls and procedures as of June 30, 2008, the Chief Executive Officer of the Company, John F. Glick, and the Chief Financial Officer of the Company, Christopher L. Boone, 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 to ensure that information required to be disclosed in reports that the Company files or submits under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and effective to ensure that information required to be disclosed in such reports is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, to allow timely decisions regarding disclosure.

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2008, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II- OTHER INFORMATION

Item 1. Legal Proceedings.

Item 1A. Risks Factors.

In addition to other information set forth in this quarterly report, the factors discussed in Part I, Item 1A. “Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect the Company's business, financial condition and/or operating results, should be carefully considered. The risks described in the Company's Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect the Company's business, financial condition and/or operating results.

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

The Company held its Annual Meeting of Stockholders on May 7, 2008, in Lufkin, Texas to elect three directors.

The Annual Meeting was held to elect to elect three directors. All of the nominated directors were elected and will serve a three-year term expiring in 2011. The number of votes cast for or withheld, as well as the number of abstentions and broker non-votes, for each nominated director are as follows:

	Votes in	Votes		Broker Non-
	Favor	Withheld	Abstentions	Votes

H. J. Trout	12,947,245	459,791	-	-
J. T. Jongebloed	12,559,852	847,184	-	-
S. V. Baer	12,982,855	424,181	-	-

Directors with terms of office continuing after the Annual Meeting:

Directors with terms expiring in 2009:

D. V. Smith

S. W. Henderson III

J. F. Anderson

Directors with terms expiring in 2010:

J. H. Lollar

B. H. O’Neal

T. E. Wiener

J. F. Glick

Item 6. Exhibits.

**10.1		Severance Agreement, dated as of January 21, 2008, between Lufkin Industries, Inc. and Mark E. Crews, included as Exhibit 10.1 to Form 8-K filed May 13, 2008 (File No. 0-02612), which exhibit is incorporated herein by reference.

**10.2		Severance Agreement, dated as of February 12, 2008, between Lufkin Industries, Inc. and Terry L. Orr, included as Exhibit 10.2 to Form 8-K filed May 13, 2008 (File No. 0-02612), which exhibit is incorporated herein by reference.

**10.3		Severance Agreement, dated as of March 1, 2008, between Lufkin Industries, Inc. and John F. Glick, included as Exhibit 10.3 to Form 8-K filed May 13, 2008 (File No. 0-02612), which exhibit is incorporated herein by reference.

**10.4		Severance Agreement, dated as of May 7, 2008, between Lufkin Industries, Inc. and Christopher L. Boone, included as Exhibit 10.4 to Form 8-K filed May 13, 2008 (File No. 0-02612), which exhibit is incorporated herein by reference.

**10.5		Form of Employee Stock Option Agreement for the Company's 2000 Incentive Stock Compensation Plan, included as Exhibit 10.5 to Form 8-K filed May 13, 2008 (File No. 0-02612), which exhibit is incorporated herein by reference.

**10.6		Form of Director Stock Option Agreement for the Company's 2000 Incentive Stock Compensation Plan, included as Exhibit 10.5 to Form 8-K filed May 13, 2008 (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

** Incorporated by reference

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 8, 2008

LUFKIN INDUSTRIES, INC.

By: /s/ Christopher L. Boone

Christopher L. Boone

Signing on behalf of the registrant and as

Vice President/Treasurer/Chief Financial Officer

(Principal Financial and Accounting Officer)

INDEX TO EXHIBITS

Exhibit Number		Description

**10.1		Severance Agreement, dated as of January 21, 2008, between Lufkin Industries, Inc. and Mark E. Crews, included as Exhibit 10.1 to Form 8-K filed May 13, 2008 (File No. 0-02612), which exhibit is incorporated herein by reference.

**10.2		Severance Agreement, dated as of February 12, 2008, between Lufkin Industries, Inc. and Terry L. Orr, included as Exhibit 10.2 to Form 8-K filed May 13, 2008 (File No. 0-02612), which exhibit is incorporated herein by reference.

**10.3		Severance Agreement, dated as of March 1, 2008, between Lufkin Industries, Inc. and John F. Glick, included as Exhibit 10.3 to Form 8-K filed May 13, 2008 (File No. 0-02612), which exhibit is incorporated herein by reference.

**10.4		Severance Agreement, dated as of May 7, 2008, between Lufkin Industries, Inc. and Christopher L. Boone, included as Exhibit 10.4 to Form 8-K filed May 13, 2008 (File No. 0-02612), which exhibit is incorporated herein by reference.

**10.5		Form of Employee Stock Option Agreement for the Company's 2000 Incentive Stock Compensation Plan, included as Exhibit 10.5 to Form 8-K filed May 13, 2008 (File No. 0-02612), which exhibit is incorporated herein by reference.

**10.6		Form of Director Stock Option Agreement for the Company's 2000 Incentive Stock Compensation Plan, included as Exhibit 10.5 to Form 8-K filed May 13, 2008 (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

** Incorporated by reference

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Lufkin Industries (LUFK) Inactive 10-Q2009 Q2 Quarterly report

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