In December 2000, we entered into an accounts receivable securitization facility (the "Securitization Facility"). On a revolving basis, we sell ~~our~~its interests in our accounts receivable to CRC, a wholly-owned, bankruptcy-remote, ~~special purpose subsidiary.~~special-purpose subsidiary incorporated in Nevada. CRC sells a percentage ownership in such receivables to an unrelated financial entity. We can receive up to $62.0 million of proceeds, subject to eligible receivables and pay a service fee recorded as interest expense, based on commercial paper interest rates plus an applicable margin of 0.44% per annum and a commitment fee of 0.10% per annum on the daily unused portion of the ~~facility.~~Facility. The net proceeds under the Securitization Facility are required to be shown as a current liability because the term, subject to annual renewals, is 364 days. As of December 31, ~~2004~~2005 and December 31, ~~2003,~~2004, we had ~~received~~$47.3 million and $44.1 million ~~and $48.4 million,~~outstanding, respectively, ~~in proceeds,~~ with a weighted average interest ~~rate~~rates of ~~2.4%~~4.4% and ~~1.0%~~2.4%, respectively. CRC does not meet the requirements for off-balance sheet accounting; therefore, it is reflected in our consolidated financial statements.

The Securitization Facility contains certain restrictions and covenants relating to, among other things, dividends, tangible net worth, ~~consolidated leverage ratio,~~cash flow coverage, acquisitions and dispositions, and total ~~indebtedness and is cross-defaulted.~~indebtedness. As of December 31, ~~2004,~~2005, we were in compliance with the Securitization Facility covenants.

Sale-Leaseback Transactions

In April 2006, we expect to complete a sale-leaseback transaction involving a major portion of our Chattanooga facility, including our corporate headquarters. In the transaction, we plan to sell the headquarters, maintenance facility, body shop, and approximately 46 acres of surrounding property for approximately $30.0 million. We expect to lease the facilities back under a 20-year lease with annual rental of approximately $2.5 million, subject to annual increases of 1.0%. We expect to have options to extend the lease for 5 years after the initial term and an option to purchase for fair market value.

In September 2005, we entered into an agreement with a finance company to lease approximately 1,800 model year 2006 and 2007 dry van trailers under seven year walk away leases. These trailers will replace approximately 1,200 model years 1998 and 1999 dry van trailers and approximately 600 model year 2000 dry van trailers. The 1,800 trailers will be replaced over the next year as new trailers are delivered. After the completion of this transaction, the oldest trailer we will be operating will be a 2001 model year trailer.

In April 2003, we engaged in a sale-leaseback transaction involving approximately 1,266 dry van trailers. We sold the trailers to a finance company for approximately $15.6 million in cash and leased the trailers back under three year walk away leases. The resulting gain was approximately $0.3 million and is being amortized over the life of the lease. The monthly cost of the lease payments will be higher than the cost of the depreciation and interest expense; however, there will be no residual risk of loss at disposition.

In April 2003, we also entered into an agreement with a finance company to sell approximately 2,585 dry van trailers and to lease an additional 3,600 model year 2004 dry van trailers. We sold the trailers, which consisted of model year 1991 to model year 1997 dry van trailers, to the finance company for approximately $20.5 million in cash and leased the 3,600 dry van trailers back under seven year walk away leases. The monthly cost of the lease payments will be higher than the cost of the depreciation and interest expense; however, there will be no residual risk of loss at disposition. The transaction was completed in the first quarter of 2004 and the leases begin to expire in June 2010.

Contractual Obligations and Commercial Commitments

The following table sets forth our contractual cash obligations and commitments as of December 31, ~~2004.~~2005.

Payments Due By Period
(in thousands)
Total 2005 2006 2007 2008 2009 There- after

Long-term debt, includingcurrent maturities
$ 8,022 $ 9 $ 9 $ 4
$
¾
$ 8,000
$
¾

Securitization facility (1)
44,148 44,148 ¾ ¾ ¾ ¾ ¾

Operating leases
141,788 43,924 36,735 23,657 15,416 10,737 11,319

Lease residual value guarantees
55,567 9,486 11,029 15,266 14,401 4,418 967

Purchase Obligations:

Diesel fuel (2)
53,331 40,799 12,532 ¾ ¾ ¾ ¾

Equipment (3)
117,891 117,891 ¾ ¾ ¾ ¾ ¾

Total Contractual Cash Obligations
$ 420,747 $ 256,257 $ 60,305 $ 38,927 $ 29,817 $ 23,155 $ 12,286

Payments due by period (in thousands)	Total		2006		2007		2008		2009		2010		There- after
Long-term debt, including current maturities (1)	$	40,237	$	1,862	$	1,790	$	1,795	$	34,790	$	-	$	-
Securitization facility, including interest (2)		47,833		47,833		-		-		-		-		-
Operating leases (3)		110,134		39,025		27,167		18,726		12,990		9,940		2,286
Lease residual value guarantees		47,369		9,124		10,553		14,401		4,418		8,873		-
Purchase obligations:
Diesel fuel (4)		110,421		110,421		-		-		-		-		-
Equipment (5)		217,600		217,600		-		-		-		-		-
Total contractual cash obligations	$	573,594	$	425,865	$	39,510	$	34,922	$	52,198	$	18,813	$	2,286

(1)	Represents principal and interest payments owed at December 31, 2005. The borrowings consist of draws under a revolving line of credit, with fluctuating borrowing amounts and variable interest rates. In determining future contractual interest and principal obligations, for variable interest rate debt, the interest rate and principal amount in place at December 31, 2005 was utilized. The table assumes long-term debt is held to maturity. Refer to Note 5, "Long-term Debt" and Note 6, "Accounts Receivable Securitization and Allowance for Doubtful Accounts."
(2)	In 2006, this amount represents proceeds drawn under our Securitization ~~Facility.~~Facility, and the interest rate in place at December 31, 2005 was utilized. The net proceeds under the Securitization Facility are required to be shown as a current liability because the term, subject to annual renewals, is 364 days. We expect the Securitization Facility to be renewed in December ~~2005.~~2006.
~~(2)~~(3)	Represents future monthly rental payment obligations under operating leases for over-the-road tractors, day-cabs, and trailers. Substantially all lease agreements for revenue equipment have fixed payment terms based on the passage of time. The tractor lease agreements generally stipulate maximum miles and provide for mileage penalties for excess miles. Lease terms for tractors and trailers range from 30 to 60 months and 60 to 84 months, respectively. Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Off Balance Sheet Arrangements and Note 7, "Leases," in the accompanying consolidated financial statements for further information.
(4)	This amount represents volume purchase commitments through our truck stop network. We estimate that these amounts represent approximately ~~11% and 35%~~65% of our fuel needs for ~~2006 and 2005, respectively.~~2006.
~~(3)~~(5)	Amount reflects the total purchase price or lease commitment of tractors and trailers scheduled for delivery throughout ~~2005.~~2006. Net of estimated trade-in values and other dispositions, the estimated amount due under these commitments is approximately ~~$78~~$127.0 million. These purchases are expected to be financed by debt, proceeds from sales of existing equipment, cash flows from operations, and operating leases. We have the option to cancel commitments relating to tractor equipment with 60 days notice.

2330

Off Balance Sheet Arrangements

At December 31, ~~2004,~~2005, we financed approximately ~~1,222~~1,140 tractors and ~~7,149~~7,545 trailers under operating leases. Vehicles held under operating leases are not carried on our balance sheet, and lease payments in respect of such vehicles are reflected in our income statements ~~in the line item "Revenue~~under revenue equipment rentals and purchased transportation." Our revenue equipment rental ~~expense was~~and other related amounts were $40.2 million in 2005, compared to $35.3 million in ~~2004, compared to $25.4 million in 2003.~~2004. The total amount of remaining payments under operating leases as of December 31, ~~2004,~~2005, was ~~$141.8~~$110.1 million. In connection with various operating leases, we issued residual value guarantees, which provide that if we do not purchase the leased equipment from the lessor at the end of the lease term, then we are liable to the lessor for an amount equal to the shortage (if any) between the proceeds from the sale of the equipment and an agreed value. As of December 31, ~~2004,~~2005, the maximum amount of the residual value guarantees was approximately ~~$55.6~~$47.4 million. To the extent the expected value at the lease termination date is lower than the residual value guarantee, we would accrue for the difference over the remaining lease term. We believe that the proceeds from the sale of equipment under operating leases would exceed the payment obligation on substantially all operating leases.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make decisions based upon estimates, assumptions, and factors we consider as relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in future economic conditions or other business circumstances may affect the outcomes of our estimates and assumptions. Accordingly, actual results could differ from those anticipated. A summary of the significant accounting policies followed in preparation of the financial statements is contained in Note 1 of the financial statements attached hereto. The following discussion addresses our most critical accounting policies, which are those that are both important to the portrayal of our financial condition and results of operations and that require significant judgment or use of complex estimates.

~~Property and~~Depreciation of Revenue Equipment

Depreciation is calculated using the straight-line method over the estimated useful lives of the assets and was approximately ~~$36.5~~$36.8 million on tractors and trailers in ~~2004. We depreciate~~2005. Depreciation of revenue equipment ~~excluding~~is our largest item of depreciation. We generally depreciate new tractors (excluding day ~~cabs~~cabs) over five ~~to ten~~ years ~~with~~to salvage values ~~ranging from 9%~~of 4% to ~~33%~~25% and new trailers over seven years to salvage values of 17% to 39%. ~~We evaluate the salvage value, useful life,~~Gains and ~~annual depreciation of tractors and trailers annually based~~losses on the ~~current market environment and our recent experience with disposition values. Any change could result in greater or lesser annual expense in the future. Gains or losses on~~ disposal of revenue equipment are included in depreciation expense in our statements of operations.

We ~~also evaluate~~annually review the ~~carrying value~~reasonableness of our estimates regarding useful lives and salvage values of our revenue equipment and other long-lived assets based upon, among other things, our experience with similar assets, conditions in the used revenue equipment market, and prevailing industry practice. Changes in our useful life or salvage value estimates, or fluctuations in market values that are not reflected in our estimates, could have a material effect on our results of operations.

Revenue equipment and other long-lived assets are tested for impairment ~~by analyzing the operating performance and~~whenever an event occurs that indicates an impairment may exist. Expected future cash flows ~~for those assets, whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. We evaluate the need~~are used to ~~adjust the carrying value of the underlying assets if~~analyze whether an impairment has occurred. If the sum of ~~the~~ expected undiscounted cash flows is less than the carrying ~~value. Impairment can be impacted by our projection~~value of the ~~actual level~~long-lived asset, then an impairment loss is recognized. We measure the impairment loss by comparing the fair value of ~~future~~the asset to its carrying value. Fair value is determined based on a discounted cash ~~flows,~~flow analysis or the ~~level~~appraised value of ~~actual cash flows and salvage values,~~ the ~~methods~~asset, as appropriate. We have not recognized any impairments of estimation used for determining fair values and the impact of guaranteed residuals. Any changes in management's judgments could result in greater or lesser annual depreciation expense or additional impairment charges in the future.long-lived assets to date.

Insurance and Other Claims

The primary claims arising against us consist of cargo liability, personal injury, property damage, workers’ compensation, and employee medical expenses. Our insurance program ~~for liability, property damage, and cargo loss and damage,~~ involves self-insurance with ~~high risk~~high-risk retention levels. Because of our significant self-insured retention amounts, we have significant exposure to fluctuations in the number and severity of claims and to variations between our estimates and actual ultimate payouts. We accrue the estimated cost of the uninsured portion of pending claims. ~~These accruals are based on our evaluation of~~Our estimates require judgments concerning the nature and severity of the claim, historical trends, advice from third-party administrators and insurers, the specific facts of individual cases, the jurisdictions involved, estimates of future claims development, ~~based on historical trends, as well as~~and the legal and other costs to settle or defend the claims. ~~Because of our significant self-insured retention amounts, we~~We have significant exposure to fluctuations in the number and severity of claims. If there is an increase in the frequency and severity of claims, or we are required to accrue or pay additional amounts if the claims prove to be more severe than originally assessed, or any of the claims would exceed the limits of our insurance coverage, our profitability would be adversely affected. ~~The rapid and substantial increase in~~

In addition to estimates within our self-insured retention ~~makes these~~layers, we also must make judgments concerning our aggregate coverage limits. If any claim occurrence were to exceed our aggregate coverage limits, we would have to accrue for the excess amount. Our critical estimates ~~an important accounting judgment.~~include evaluating whether a claim may exceed such limits and, if so, by how much. Currently, we are not aware of any such claims. If one or more claims were to exceed our then effective coverage limits, our financial condition and results of operations could be materially and adversely affected.

During 2004 we engaged an independent, third-party actuarial firm to assist us in evaluating our claims reserves estimates. As a result of the actuarial study and our own procedures we recorded a $19.6 million non-cash, pretax increase to claims reserves during the fourth quarter of 2004. We have incorporated several procedures suggested by the actuary into our claims estimation process for future periods.

In addition to estimates within our self-insured retention layers, we also must make judgments concerning our aggregate coverage limits. From 1999 to present, we carried excess coverage in amounts that have ranged from $15.0 million to $49.0 million in addition to our primary insurance coverage, although for the period from July through November 2002, our aggregate coverage limit was $2.0 million because of a fraudulently issued binder for our excess coverage. If any claim occurrence were to exceed our aggregate coverage limits, we would have to accrue for the excess amount, and our critical estimates include evaluating whether a claim may exceed such limits and, if so, by how much. Currently, we are not aware of any such claims. If one or more claims from this period were to exceed the then effective coverage limits, our financial condition and results of operations could be materially and adversely affected.

Lease Accounting and Off-Balance Sheet Transactions

Operating leases have been an important source of financing for our revenue equipment, computer equipment and company airplane. In connection with the leases of a majority of the value of the equipment we finance with operating leases, we ~~issued~~issue residual value guarantees, which provide that if we do not purchase the leased equipment from the lessor at the end of the lease term, then we are liable to the lessor for an amount equal to the shortage (if any) between the proceeds from the sale of the equipment and an agreed value. ~~As of December 31, 2004, the maximum amount of the residual value guarantees was approximately $55.6 million.~~ To the extent the expected value at the lease termination date is lower than the residual value guarantee, we would accrue for the difference over the remaining lease term. We ~~believe that proceeds from~~annually review the ~~sale~~estimated fair market value of the leased revenue equipment ~~under operating leases would exceed~~at the ~~payment obligation on all operating leases.~~end of the lease term against the residual values we guarantee. The estimated values at lease termination involve management judgments. As leases are entered into determination as to the classification as an operating or capital lease involves management judgments on residual values and useful lives.

Accounting for Income Taxes

In this area, we make important judgments concerning a variety of factors, including, the appropriateness of tax strategies, expected future tax consequences based on future company performance, and to the extent tax strategies are challenged by taxing authorities, our likelihood of success. We utilize certain income tax planning strategies to reduce our overall cost of income taxes. It is possible that certain strategies might be disallowed, resulting in an increased liability for income taxes. In connection with an audit of our 2001 and 2002 tax returns, the IRS proposed to disallow three of our tax strategies. We ~~have filed an appeal in~~met with Internal Revenue Service ("IRS") Appeals Division during the ~~matter~~fourth quarter of 2005 and have proposed a settlement agreement. At this time, we have not ~~yet been contacted by~~received the executed IRS ~~Appeals Division~~response to ~~schedule a hearing.~~the agreement. In April 2004, we submitted a $5.0 million cash bond to the ~~Internal Revenue Service~~IRS to prevent any future interest expense in the event of an unsuccessful defense of the strategies. In addition, we have accrued amounts that we believe are appropriate given our expectations concerning the ultimate resolution of the strategies. The IRS is currently auditing our 2003 and 2004 tax returns and has proposed two disallowances totaling approximately $350,000 for the 2003 and 2004 years related to the November 2003 stock offering. We have responded to the IRS with a settlement offer. At this time, the IRS has not responded to the offer. Significant management judgments are involved in assessing the likelihood of sustaining the strategies and in determining the likely range of defense and settlement costs, and an ultimate result worse than our expectations could adversely affect our results of operations.

Deferred income taxes represent a substantial liability on our consolidated balance sheet and are determined in accordance with SFAS No. 109,Accounting for Income Taxes. Deferred ~~taxassetsand~~tax assets and liabilities (tax benefits and liabilities expected to be realized in the future) are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry forwards.

The carrying value of our deferred tax assets assumes that we will be able to generate, based on certain estimates and assumptions, sufficient future taxable income in certain tax jurisdictions to utilize these deferred tax benefits. If these estimates and related assumptions change in the future, we may be required to establish a valuation allowance against the carrying value of the deferred tax assets, which would result in additional income tax expense. On a periodic basis we assess the need for adjustment of the valuation allowance. No valuation reserve has been established at December 31, ~~2004,~~2005, because, based on forecasted income, we believe that it is more likely than not that the future benefit of the deferred ~~taxassetswill~~tax assets will be realized. However, there can be no assurance that we will meet our forecasts of future income.

We believe that we have adequately provided for our future tax consequences based upon current facts and circumstances and current tax law. During ~~2004,~~2005, we made no material changes in our assumptions regarding the determination of income tax liabilities. However, should our tax positions be challenged, different outcomes could result and have a significant impact on the amounts reported through our consolidated statement of operations.

New Accounting Pronouncements

Effective December 31, 2005, we adopted FIN 47, Accounting for Conditional Asset Retirement Obligations, which clarifies that the term conditional asset retirement obligation as used in SFAS No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The adoption of FIN 47 impacted our accounting for the conditional obligation to remove company decals and other identifying markings from certain tractors and trailers under operating leases at the end of the lease terms. Upon adoption of this standard, we recorded an increase to other assets of $0.8 million and accrued expenses of $1.6 million, in addition to recognizing a non-cash, pre-tax cumulative effect charge of $0.8 million ($0.5 million on an after tax-basis, or $0.03 per diluted share).

Had the adoption of FIN 47 occurred at the beginning of the earliest period presented, our results of operations and earnings per share would have been affected as follows:

(in thousands except per share data)	2005			2004			2003
Income before cumulative effect of change in accounting principle, as reported:	$	5,671		$	3,376		$	12,156
Deduct: Accretion of conditional asset retirement liability and amortization of related asset, net of related tax effects		(251	)		(130	)		(81	)
Pro forma net income	$	5,420		$	3,246		$	12,075

Basic earnings per share:
As reported, before cumulative effect of change in accounting principle	$	0.40		$	0.23		$	0.84
Pro forma earnings per share:	$	0.38		$	0.22		$	0.83

Diluted earnings per share:
As reported, before cumulative effect of change in accounting principle	$	0.40		$	0.23		$	0.83
Pro forma diluted earnings per share:	$	0.38		$	0.22		$	0.82

The value of the conditional asset retirement obligation liability calculated on a pro forma basis as if the standard had been retrospectively applied to all periods presented are as follows:

December 31, 2005	December 31, 2004	December 31, 2003
$1.6 million	$1.3 million	$1.0 million

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payments, revising SFAS No. 123, Accounting for Stock Based Compensation; superseding Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees and its related implementation guidance; and amending SFAS No. 95, Statement of Cash Flows. SFAS 123R requires companies to recognize the grant date fair value of stock options and other equity-based compensation issued to employees in its income statement. SFAS 123R was to be effective for most public companies as of the first interim or annual period beginning after June 15, 2005. In April 2005, the SEC delayed the effective date, requiring companies to apply SFAS 123R in the first annual period beginning after June 15, 2005. We adopted SFAS 123R effective January 1, 2006. Our adoption of SFAS 123R will impact our results of operations by increasing salaries, wages, and related expenses for options granted in periods subsequent to the effective date of January 1, 2006. The financial impact for the unvested options outstanding as of December 31, 2005 will be de minimis.

In May 2005, the FASB issued SFAS Statement No. 154, Accounting Changes and Error Corrections. SFAS 154 replaces APB No. 20, Accounting Changes, and SFAS Statement No. 3, Reporting Changes in Interim Financial Statements. SFAS 154 changes the accounting for, and reporting of, a change in accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. SFAS 154 is effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005. Early application is permitted for accounting changes and corrections of errors during fiscal years beginning after June 1, 2005. We adopted this statement effective January 2006.

INFLATION AND FUEL COSTS

Most of our operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. During the past three years, the most significant effects of inflation have been on revenue equipment prices and the compensation paid to the drivers. New emissions control regulations and increases in commodity prices, wages of manufacturing workers, and other items have resulted in higher tractor prices, and there has been an industry-wide increase in wages paid to attract and retain qualified drivers. The cost of fuel also has risen substantially over the past three years. We believe this increase primarily reflects world events rather than underlying inflationary pressure. We attempt to limit the effects of inflation through increases in freight rates, certain cost control efforts and the effects of fuel prices through fuel surcharges.

SEASONALITY

In the trucking industry, revenue generally decreases as customers reduce shipments during the winter holiday season and as inclement weather impedes operations. At the same time, operating expenses generally increase, with fuel efficiency declining because of engine idling and weather creating more equipment repairs. For the reasons stated, first quarter net income historically has been lower than net income in each of the other three quarters of the year. Our equipment utilization typically improves substantially between May and October of each year because of the trucking industry's seasonal shortage of equipment on traffic originating in California and because of general increases in shipping demand during those months. The seasonal shortage typically occurs between May and August because California produce carriers' equipment is fully utilized for produce during those months and does not compete for shipments hauled by our dry van operation. During September and October, business increases as a result of increased retail merchandise shipped in anticipation of the holidays.

The table below sets forth quarterly information reflecting our equipment utilization (miles per tractor per period) during 2005, 2004 ~~2003~~ and ~~2002.~~2003. We believe that equipment utilization more accurately demonstrates the seasonality for our business than changes in revenue, which are affected by the timing of deliveries of new revenue equipment. Results of any one or more quarters are not necessarily indicative of annual results or continuing trends.

Equipment Utilization Table

(Miles Per Tractor Per Period)

First Quarter Second Quarter Third Quarter Fourth Quarter
2004 29,749 31,215 31,043 30,911
2003 30,308 32,612 33,568 33,214
2002 30,986 33,461 32,664 32,801

~~FACTORS THAT MAY AFFECT FUTURE RESULTS~~

~~The following issues and uncertainties, among others, should be considered in evaluating our business and growth outlook.~~

~~Our business is subject to general economic and business factors that are largely out of our control, any of which could have a materially adverse effect on our operating results.~~ Our business is dependent on a number of factors that may have a materially adverse effect on our results of operations, many of which are beyond our control. Some of the most significant of these factors include excess tractor and trailer capacity in the trucking industry, declines in the resale value of used equipment, strikes or other work stoppages, increases in interest rates, fuel taxes, tolls, and license and registration fees, rising costs of healthcare.

We also are affected by recessionary economic cycles, changes in customers' inventory levels, and downturns in customers' business cycles, particularly in market segments and industries, such as retail and manufacturing, where we have a significant concentration of customers, and regions of the country, such as California, Texas, and the Southeast, where we have a significant amount of business. Economic conditions may adversely affect our customers and their ability to pay for our services. Customers encountering adverse economic conditions represent a greater potential for loss and we may be required to increase our allowance for doubtful accounts.

In addition, it is not possible to predict the effects of actual or threatened terrorist attacks, efforts to combat terrorism, military action against any foreign state, heightened security requirements, or other related events. Such events, however, could negatively impact the economy and consumer confidence in the United States. Such events could also have a materially adverse effect on our future results of operations. Moreover, our results of operations may be affected by seasonal factors. Customers tend to reduce shipments after the winter holiday season and our operating expenses tend to be higher in the winter months primarily due to colder weather, which causes higher fuel consumption from increased idle time and higher repairs and maintenance costs.

~~We self-insure for a significant portion of our claims exposure, which could significantly increase the volatility of, and decrease the amount of, our earnings.~~ Our future insurance and claims expense could reduce our earnings and make our earnings more volatile. We currently self-insure for a portion of our claims exposure and accrue amounts for liabilities based on our assessment of claims that arise and our insurance coverage for the periods in which the claims arise. In general, for casualty claims after March 1, 2005, we are self-insured for the first $2.0 million of each personal injury and property damage claim and the first $1.0 million of each cargo claim. We are also responsible for a pro rata portion of legal expenses relating to such claims. We maintain a workers' compensation plan and group medical plan for our employees with a deductible amount of $1.0 million for each workers' compensation claim and a stop loss amount of $275,000 for each group medical claim. Because of our significant self-insured retention amounts, we have significant exposure to fluctuations in the number and severity of claims. If there is an increase in the frequency and severity of claims, or we are required to accrue or pay additional amounts if the claims prove to be more severe than originally assessed, our profitability would be adversely affected and could vary significantly from period to period. During the fourth quarter of 2004, we recorded a $19.6 million adjustment to our claims reserves, and we cannot assure you that future adjustments will not occur.

We maintain insurance above the amounts for which we self-insure with licensed insurance carriers. Our insurance and claims expense could increase when our current coverages expire or we could raise our self-insured retention. If these expenses increase, our earnings could be materially and adversely affected.

Our current aggregate primary and excess casualty insurance provides coverage up to a maximum per claim amount of $50.0 million. We do not maintain directors and officers insurance coverage, although we are obligated to indemnify them against certain liabilities they may incur while serving in such capacities. If any claim were to exceed our coverage, we would bear the excess, in addition to our other self-insured amounts. Any such claim could materially and adversely affect our financial condition and results of operations.

~~Ongoing insurance requirements could constrain our borrowing capacity.~~ The increase in our self-insured retention has caused our outstanding undrawn letters of credit in favor of insurance companies to increase. At December 31, 2004, our revolving line of credit had a maximum borrowing limit of $150.0 million, outstanding borrowings of $8.0 million, and outstanding letters of credit of $65.4 million. We expect outstanding letters of credit to increase in the future. Outstanding letters of credit reduce the available borrowings under our credit agreement, which could negatively affect our liquidity should we need to increase our borrowings in the future.

~~We operate in a highly competitive and fragmented industry, and numerous competitive factors could impair our ability to maintain or improve our current profitability.~~~~These factors include:~~

·	We compete with many other truckload carriers of varying sizes and, to a lesser extent, with less-than-truckload carriers, railroads, and other transportation companies, many of which have more equipment and greater capital resources than we do.
·	Many of our competitors periodically reduce their freight rates to gain business, especially during times of reduced growth rates in the economy, which may limit our ability to maintain or increase freight rates or maintain significant growth in our business.
·	~~Many of our customers are other transportation companies, and they may decide to transport their own freight.~~
·	~~Many customers reduce the number of carriers they use by selecting so-called "core carriers" as approved,service providers, and in some instances we may not be selected.~~
·	~~Many customers periodically accept bids from multiple carriers for their shipping needs, and this process may depress freight rates or result in the loss of some business to competitors.~~
·	~~The trend toward consolidation in the trucking industry may create other large carriers with greater financialresources and other competitive advantages relating to their size.~~
·	~~Advances in technology require increased investments to remain competitive, and our customers may notbe willing to accept higher freight rates to cover the cost of these investments.~~
·	~~Competition from non-asset-based logistics and freight brokerage companies may adversely affect our customer relationships and freight rates.~~
·	~~Economies of scale that may be passed on to smaller carriers by procurement aggregation providers may improve their ability to compete with us.~~

~~We derive a significant portion of our revenue from our major customers, the loss of one or more of which could have a materially adverse effect on our business.~~ A significant portion of our revenue is generated from our major customers. For 2004, our top 25 customers, based on revenue, accounted for approximately 49% of our revenue; and our top 10 customers, approximately 36% of our revenue. In the aggregate, subsidiaries of CNF, Inc. accounted for approximately 9% of our revenue in 2004. We do not expect these percentages to change materially for 2005. Generally, we do not have long term contractual relationships with our major customers, and we cannot assure you that our customers will continue to use our services or that they will continue at the same levels. For some of our customers, we have entered into multi-year contracts and we cannot assure you that the rates will remain advantageous. A reduction in or termination of our services by one or more of our major customers could have a materially adverse effect on our business and operating results.

~~Increases in compensation or difficulty in attracting drivers could affect our profitability and ability to grow.~~ The trucking industry experiences substantial difficulty in attracting and retaining qualified drivers, including independent contractors. Our ability to attract and retain drivers could be adversely affected by increased availability of alternative employment opportunities in an economic expansion and by the potential need for more drivers due to more restrictive driver hours-of-service requirements imposed by the U.S. Department of Transportation effective January 4, 2004. If we are unable to continue to attract drivers and contract with independent contractors, we could be required to adjust our driver compensation package, let trucks sit idle, or operate with fewer independent contractors and face difficulty meeting shipper demands, all of which could adversely affect our growth and profitability.

~~We may not be successful in improving our profitability.~~We have implemented certain initiatives designed to improve our profitability. In 2003 our net margin improved. In 2004 our net margins excluding the $12.2 million non-cash, after-tax increase to claims reserves, increased further. However, we face significant cost increases in 2005, and we cannot assure you that we will be successful in continuing to improve our profitability. If we fail to sustain or improve our profitability, our stock price could decline.

~~Our growth may not return to historical rates, which could adversely affect our stock price.~~ We experienced significant growth in revenue between our founding in 1986 and 1999. Since 2000, however, our revenue base has remained relatively constant. There can be no assurance that our revenue growth rate will return to historical levels or that we can effectively adapt our management, administrative, and operational systems to respond to any future growth. We can provide no assurance that our operating margins will not be adversely affected by future changes in and expansion of our business or by changes in economic conditions. Slower or less profitable growth could adversely affect our stock price.

~~We operate in a highly regulated industry and increased costs of compliance with, or liability for violation of, existing or future regulations could have a materially adverse effect on our business.~~Our operations are regulated and licensed by various U.S., Canadian, and Mexican agencies. Our company drivers and independent contractors also must comply with the safety and fitness regulations of the United States Department of Transportation, or DOT, including those relating to drug and alcohol testing and hours-of-service. Such matters as weight and equipment dimensions are also subject to U.S. and Canadian regulations. We also may become subject to new or more restrictive regulations relating to fuel emissions, drivers' hours-of-service, ergonomics, or other matters affecting safety or operating methods. Future laws and regulations may be more stringent and require changes in our operating practices, influence the demand for transportation services, or require us to incur significant additional costs. Higher costs incurred by us or by our suppliers who pass the costs onto us through higher prices would adversely affect our results of operations.

Beginning in 2004, motor carriers were required to comply with several changes to DOT hours-of-service requirements that may have a positive or negative effect on driver hours (and miles) and our operations. A citizens' advocacy group successfully petitioned the courts that the new rules were developed without driver health in mind. Pending further action by the courts or the effectiveness of new rules addressing these issues, Congress has enacted a law that extends the effectiveness of the new rules until September 30, 2005. We cannot predict whether there will be changes to the hours-of-service rules, the extent of any changes, or whether there will be further court challenges. Given this uncertainty, we are unable to determine the future effect of driver hour regulations on our operations. The DOT is also considering implementing higher safety requirements on trucks. These regulatory changes may have an adverse affect on our future profitability.

~~The IRS has audited our 2001 and 2002 tax returns and proposed the disallowance of deductions related to certain of our tax planning structures, which could affect our effective tax rate.~~ Federal, state, and local taxes comprise a significant part of our expenses. As such, we actively manage these expenses when executing our business strategy. Consequently, when we believe it is appropriate, we use a number of structures to permanently decrease our overall tax liability or to defer tax payments. During 2001, we implemented two structures of a type that have been subject to heightened IRS scrutiny. In the first of these structures, we formed a trust to fund the payment of certain contested third-party claims. We deducted the contributions to the trust in the form of our right to receive payment on certain notes issued by our subsidiaries. In the second of these structures, we changed our 401(k) plan year to end on December 29, and as a result deducted our 2002 plan year contribution in 2001. Both of these structures were designed to accelerate deductions to an earlier date than when they otherwise would have been available.

The IRS has proposed the disallowance of the deductions relating to the trust and 401(k) plan structures. The IRS also reviewed a captive insurance company that we established in 2002, and that also was disclosed, and proposed the disallowance of deductions for premium payments made by certain insured subsidiaries. We are prepared to vigorously defend these deductions, and accordingly have filed a formal protest with the IRS. This protest is subject to review by and a formal hearing with the IRS Appeals division. IRS Appeals has acknowledged the timely filing of our protest, but a hearing has not yet been scheduled.

In April 2004, we submitted a $5.0 million cash bond to the IRS, which stopped the running of interest expense in the event of a successful challenge by the IRS of all issues under protest. In addition, we have accrued amounts that we believe are appropriate given our expectations concerning the ultimate resolution of these matters. A successful challenge by the IRS of the trust and 401(k) plan deductions would affect only the timing, not the ultimate deductibility of, the related deductions, and there would consequently be no effect on income tax expense or the effective tax rate. If the IRS successfully challenges the captive insurance company deductions, we would incur additional income tax expense related to 2002, 2003 and 2004 of approximately $1.3 million, which would adversely impact our effective tax rate both in the year of payment and prospectively.

~~We have significant ongoing capital requirements that could affect our profitability if we are unable to generate sufficient cash from operations and obtain financing on favorable terms.~~The truckload industry is capital intensive, and our policy of operating newer equipment requires us to expend significant amounts annually. For the past few years, we have depended on cash from operations, our credit facilities, and operating leases to fund our revenue equipment. Our budget for capital expenditures, net of any offsets from sales or trades of equipment, is $65 to 70 million in 2005, exclusive of acquisitions. If we elect to expand our fleet in future periods, our capital needs would increase. We expect to pay for projected capital expenditures with cash flows from operations, borrowings under our line of credit, proceeds under the securitization facility and operating leases of revenue equipment. If we are unable to generate sufficient cash from operations and obtain financing on favorable terms in the future, we may have to limit our growth, enter into less favorable financing arrangements, or operate our revenue equipment for longer periods, any of which could have a materially adverse effect on our profitability.

We currently have trade-in or fixed residual agreements with certain equipment suppliers concerning the substantial majority of our tractor fleet. If the suppliers refuse or are unable to meet their financial obligations under these agreements, or if we decline to purchase the relevant number of replacement units from the suppliers, we may suffer a financial loss upon the disposition of our equipment.

Fluctuations in the price or availability of fuel, as well as hedging activities, surcharge collection, and the volume and terms of diesel fuel purchase commitments, may increase our cost of operation, which could materially and adversely affect our profitability.Fuel is one of our largest operating expenses. Diesel fuel prices fluctuate greatly due to economic, political, and other factors beyond our control. For example, our average price for diesel fuel was $1.72 per gallon in 2004, as compared to $1.43 per gallon in 2003. Fuel also is subject to regional pricing differences and often costs more on the West Coast, where we have significant operations. From time-to-time we have used fuel surcharges, hedging contracts, and volume purchase arrangements to attempt to limit the effect of price fluctuations. Although we impose fuel surcharges on substantially all accounts, these arrangements do not fully protect us from fuel price increases and also may result in us not receiving the full benefit of any fuel price decreases. We currently do not have any fuel hedging contracts in place. If we do hedge, we may be forced to make cash payments under the hedging arrangements. A small portion of our fuel requirements for 2005 are covered by volume purchase commitments. Based on current market conditions, we have decided to limit our hedging and purchase commitments, but we continue to evaluate such measures. The absence of meaningful fuel price protection through these measures, fluctuations in fuel prices, or a shortage of diesel fuel, could materially and adversely affect our results of operations.

~~We may not make acquisitions in the future, or if we do, we may not be successful in our acquisition strategy.~~ We made nine acquisitions between 1996 and 2000, including four between September 1999 and August 2000. Accordingly, acquisitions have provided a substantial portion of our growth. There is no assurance that we will be successful in identifying, negotiating, or consummating any future acquisitions. If we fail to make any future acquisitions, our growth rate could be materially and adversely affected. Any acquisitions we undertake could involve the dilutive issuance of equity securities and/or incurring indebtedness. In addition, acquisitions involve numerous risks, including difficulties in assimilating the acquired company's operations, the diversion of our management's attention from other business concerns, risks of entering into markets in which we have had no or only limited direct experience, and the potential loss of customers, key employees, and drivers of the acquired company, all of which could have a materially adverse effect on our business and operating results. If we make acquisitions in the future, we cannot assure you that we will be able to successfully integrate the acquired companies or assets into our business.

~~Our operations are subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties.~~ We are subject to various environmental laws and regulations dealing with the hauling and handling of hazardous materials, fuel storage tanks, air emissions from our vehicles and facilities, and discharge and retention of storm water. We operate in industrial areas, where truck terminals and other industrial activities are located, and where groundwater or other forms of environmental contamination have occurred. Our operations involve the risks of fuel spillage or seepage, environmental damage, and hazardous waste disposal, among others. We also maintain above-ground bulk fuel storage tanks and fueling islands at two of our facilities. A small percentage of our freight consists of low-grade hazardous substances, which subjects us to a wide array of regulations. If we are involved in a spill or other accident involving hazardous substances, if there are releases of hazardous substances we transport, or if we are found to be in violation of applicable laws or regulations, we could be subject to liabilities that could have a materially adverse effect on our business and operating results. If we should fail to comply with applicable environmental regulations, we could be subject to substantial fines or penalties and to civil and criminal liability.

~~Increased prices, reduced productivity, and restricted availability of new revenue equipment may adversely affect our earnings and cash flows.~~We have experienced higher prices for new tractors over the past three years, partially as a result of government regulations applicable to newly manufactured tractors and diesel engines. More restrictive Environmental Protection Agency, or EPA, emissions standards for 2007 will require vendors to introduce new engines, and some carriers may seek to purchase large numbers of tractors with pre-2007 engines, possibly leading to shortages. Our business could be harmed if we are unable to continue to obtain an adequate supply of new tractors and trailers for these or other reasons. As a result, we expect to continue to pay increased prices for equipment and incur additional expenses and related financing costs for the foreseeable future. Furthermore, the new engines are expected to reduce equipment productivity and lower fuel mileage and, therefore, increase our operating expenses.

We have agreements covering the terms of trade-in and/or repurchase commitments from our primary equipment vendors for disposal of a substantial portion of our revenue equipment. The prices we expect to receive under these arrangements may be higher than the prices we would receive in the open market. We may suffer a financial loss upon disposition of our equipment if these vendors refuse or are unable to meet their financial obligations under these agreements, if we fail to enter into definitive agreements that reflect the terms we expect, if we fail to enter into similar arrangements in the future, or if we do not purchase the required number of replacement units from the vendors.

~~New Accounting Pronouncements~~

~~In December 2003, the FASB issued FIN 46-R,~~~~Consolidation of Variable Interest Entities~~~~, ("FIN 46-R"). This Interpretation of Accounting Research Bulletin No. 51,~~~~Consolidated Financial Statements~~, addresses consolidation by business enterprises of variable interest entities. For enterprises that are not small business issuers, FIN 46-R is to be applied to all variable interest entities by the end of the first reporting period ending after March 15, 2004. Our adoption of FIN 46-R did not have an impact on our financial condition or results of operations.

~~In December 2004, the FASB issued SFAS No. 123-R,~~~~Share-Based Payments,~~ ~~an Amendment of FASB 123 and 95 on~~~~Accounting for Stock Based Compensation~~. SFAS 123-R requires companies to recognize in the income statement the grant date fair value of stock options and other equity-based compensation issued to employees. SFAS 123-R is effective for most public companies with interim or annual periods beginning after June 15, 2005. We will adopt this statement effective July 1, 2005. Our adoption of SFAS 123-R will impact our results of operations by increasing salaries, wages and related expenses. The amount of the expected impact is still being reviewed by the Company.

	First Quarter	Second Quarter	Third Quarter	Fourth Quarter
2005	27,245	28,589	29,592	30,376
2004	29,749	31,215	31,043	30,911
2003	30,308	32,612	33,568	33,214

ITEM ~~7A.~~7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We experience various market risks, including changes in interest rates and fuel prices. We do not enter into derivatives or other financial instruments for trading or speculative purposes, nor when there are no underlying related exposures.

COMMODITY PRICE RISK

From time-to-time we may enter into derivative financial instruments to reduce our exposure to fuel price fluctuations. In accordance with SFAS 133, we adjust any derivative instruments to fair value through earnings on a monthly basis. As of December 31, ~~2004,~~2005, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.

INTEREST RATE RISK

Our market risk is also affected by changes in interest rates. Historically, we have used a combination of fixed rate and variable rate obligations to manage our interest rate exposure. Fixed rate obligations expose us to the risk that interest rates might fall. Variable rate obligations expose us to the risk that interest rates might rise.

Our variable rate obligations consist of our Credit Agreement and our Securitization Facility. Borrowings under the Credit Agreement, provided there has been no default, are based on the banks' base rate, which floats daily, or LIBOR, which accrues interest based on one, two, three, or six month LIBOR rates plus an applicable margin that is adjusted quarterly between 0.75% and 1.25% based on a consolidated leverage ratio, which is generally defined as the ratio of borrowings, letters of credit, and the present value of operating lease obligations to our earnings before interest, income taxes, depreciation, amortization, and rental payments under operating leases. The applicable margin was 1.0% at December 31, ~~2004.~~2005. At December 31, ~~2004,~~2005, we had variable, ~~base rate~~LIBOR borrowings of ~~$8.0~~$33.0 million outstanding under the Credit Agreement.

During the first quarter of 2001, we entered into two $10 million notional amount interest rate swap agreements to manage the risk of variability in cash flows associated with floating-rate ~~debt.The~~debt. The swaps expire January 2006 and March 2006. Due to the counter-parties' embedded options to cancel, these derivatives are not designated as hedging instruments under SFAS No. 133 and consequently are marked to fair value through earnings, in other expense in the accompanying consolidated statement of operations. At December 31, ~~2004,~~2005, the fair value of these interest rate swap agreements was a liability of ~~$0.4 million.~~$13,000.

Our Securitization Facility carries a variable interest rate based on the commercial paper rate plus an applicable margin of 0.44% per annum. At December 31, ~~2004,~~2005, borrowings of ~~$44.1~~$47.3 million had been drawn on the Securitization Facility. Assuming variable rate borrowings under the Credit Agreement and Securitization Facility at December 31, ~~2004~~2005 levels, a one percentage point increase in interest rates could increase our annual interest expense by approximately ~~$321,000.~~$603,000.

ITEM 8.8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

~~Our audited~~The consolidated financial statements of Covenant Transport, Inc. and subsidiaries, as of December 31, 2005 and 2004, and the related consolidated balance sheets, statements of operations, ~~cash flows, stockholders'~~statements of stockholders’ equity and comprehensive ~~loss,~~income, and statements of cash flows for each of the years in the three-year period ended December 31, 2005, consolidated selected quarterly financial data (unaudited) for the years ended December 31, 2005 and 2004, together with the related notes, ~~related thereto,~~and the report of KPMG LLP, our independent registered public accounting firm for the years ended December 31, 2005 2004, and 2003 are ~~contained~~set forth at ~~Pages 40 to 54 of~~pages 46 through 62, elsewhere in this report.

ITEM 9.9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There has been no change in accountants during our three most recent fiscal years.

ITEM ~~9A.~~9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that material information relating to us and our consolidated subsidiaries is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors.

Based on their evaluation as of December 31, ~~2004,~~2005, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.

Management's Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the principal executive and principal financial officers and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

pertain to the maintenance of records, that in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

·	~~pertain to the maintenance of records, that in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;~~

· •	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

· •	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, ~~2004.~~2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) an Internal Control-Integrated Framework.

Based on its assessment, management believes that, as of December 31, ~~2004,~~2005, our internal control over financial reporting is effective based on those criteria.

Management's assessment of the effectiveness of internal control over financial reporting as of December 31, ~~2004,~~2005, has been audited by KPMG LLP, the independent registered public accounting firm who also audited our consolidated financial statements. KPMG LLP's attestation report on management's assessment of ~~the Company's~~our internal control over financial reporting appears on page 3945 herein.

Design and Changes in Internal Control over Financial Reporting

The design, monitoring, and revision of the system of internal accounting controls involves, among other things, management's judgments with respect to the relative cost and expected benefits of specific control measures.

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, ~~2004,~~2005, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM ~~9B.~~9B. OTHER INFORMATION

Not applicable.

3237

PART III

ITEM ~~10.~~10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

We incorporate by reference the information respecting executive officers and directors set forth under the captions "Election of Directors - Information Concerning Directors and Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in our Proxy Statement for the ~~2005~~2006 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission in accordance with Rule 14a-6 promulgated under the Securities Exchange Act of 1934, as amended (the "Proxy Statement"); provided, that the section entitled "Audit Committee Report for ~~2004"~~2005" and the Stock Performance Graph contained in the Proxy Statement are not incorporated by reference.

ITEM ~~11.~~11. EXECUTIVE COMPENSATION

We incorporate by reference the information set forth under the section entitled "Executive Compensation" in our Proxy Statement for the ~~2005~~2006 annual meeting of stockholders; provided, that the section entitled "Compensation Committee Report on Executive Compensation" contained in the Proxy Statement is not incorporated by reference.

ITEM ~~12.~~12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

We incorporate by reference the information set forth under the section entitled "Security Ownership of Certain Beneficial Owners and Management" in our Proxy Statement for the ~~2005~~2006 annual meeting of stockholders. The following table provides certain information as of December 31, ~~2004,~~2005, with respect to our compensation plans and other arrangements under which shares of our Class A common stock are authorized for issuance.

Equity Compensation Plan Information

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted- average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted- average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)	(c)	(a)	(b)	(c)
Equity compensation plans approvedby security holders (1)	1,205,592	$14.53	1,035,700
Equity compensation plans notapproved by security holders (2)	55,500	$12.01	0
Equity compensation plans approved by security holders (1)				1,328,513	$14.37	765,031
Equity compensation plans not approved by security holders (2)				125,000	$13.93	-
Total	1,261,092	$14.42	1,035,700	1,453,513	$14.33	765,031

(1)	Includes 1994 Incentive Stock Plan, Outside Director Stock Option Plan, and 2003 Incentive Stock Plan.
(2)	Includes 1998 Non-Officer Incentive Stock Plan, and shares reserved for issuance pursuant to grants outside any plan.

Summary Description of Equity Compensation Plans Not Approved by Security Holders

Summary of 1998 Non-Officer Incentive Stock Plan

In October 1998, our Board of Directors adopted the Non-Officer Plan to attract and retain executive personnel and other key employees and motivate them through incentives that were aligned with our goals of increased profitability and stockholder value. The Board of Directors authorized 200,000 shares of our Class A ~~Common Stock~~common stock for grants or awards pursuant to the Non-Officer Plan. Awards under the Plan could be in the form of incentive stock options, non-qualified stock options, restricted stock awards, or any other awards of stock consistent with the Non-Officer Plan's purpose. The Non-Officer Plan was to be administered by the Board of Directors or a committee that could be appointed by the Board of Directors. All non-officer employees were eligible for participation, and actual participants in the Non-Officer Plan were selected from time-to-time by the administrator. The administrator could

substitute new stock options for previously granted options. In conjunction with adopting the 2003 Plan, the Board of Directors voted to terminate the Non-Officer Plan effective as of May 31, 2003. Option grants previously issued continue in effect and may be exercised on the terms and conditions under which the grants were made.

Summary of Grants Outside the Plan

On August 31, 1998, our Board of Directors approved the grant of an option to purchase 5,000 shares of our Class A ~~Common Stock~~common stock to each of our four outside directors. The exercise price of the stock was equal to the mean between the lowest reported bid price and the highest reported asked price on the date of the grant. The options have a term of ten years from the date of grant, and the options ~~vest~~vested 20% on each of the first through fifth anniversaries of the grant.

On September 23, 1998, our Board of Directors approved the grant of an option to purchase 20,000 shares of our Class A ~~Common Stock~~common stock to Tony Smith upon closing of the acquisition of SRT and Tony Smith Trucking, Inc. The exercise price was the mean between the low bid price and the high asked price on the closing date. The options have a term of ten years from the date of grant, and the options ~~vest~~vested 20% on each of the first through fifth anniversaries of the grant.

On May 20, 1999, our Board of Directors approved the grant of an option to purchase 2,500 shares of our Class A ~~Common Stock~~common stock to each of our four outside directors. The exercise price of the stock was equal to the mean between the lowest reported bid price and the highest reported asked price on the date of the grant. The options have a term of ten years from the date of grant, and the options ~~vest~~vested 20% on each of the first through fifth anniversaries of the grant.

ITEM ~~13.~~13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

We incorporate by reference the information set forth under the sections entitled "Compensation Committee Interlocks and Insider Participation" and "Certain and Relationships and Related Transactions" in our Proxy Statement for the ~~2005~~2006 annual meeting of stockholders.

ITEM ~~14.~~14. PRINCIPAL ACCOUNTING FEES AND SERVICES

We incorporate by reference the information set forth under the section entitled "Principal Accounting Fees and Services" in our Proxy Statement for the ~~2005~~2006 annual meeting of stockholders.

3439

~~PART IV~~

ITEM ~~15.~~15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)	1.	Financial Statements.

		Our audited consolidated financial statements are set forth at the following pages of this report:
		Reports of Independent Registered Public Accounting Firm - KPMG LLP	3844
		Consolidated Balance Sheets	4046
		Consolidated Statements of Operations	4147
		Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)	4248
		Consolidated Statements of Cash Flows	4349
		Notes to Consolidated Financial Statements	4450

	2.	Financial Statement Schedules.

		Financial statement schedules are not required because all required information is included in the financial statements.

	3.	Exhibits.

		The exhibits required to be filed by Item 601 of Regulation S-K are listed under paragraph (b) below and on the Exhibit Index appearing at the end of this report. Management contracts and compensatory plans or arrangements are indicated by an asterisk.

(b)		Exhibits.

		The following exhibits are filed with this Form10-K or incorporated by reference to the document set forth next to the exhibit listed below.

Exhibit Number	Reference	Description
3.1	(1)	Restated Articles of Incorporation
3.2	(1)	Amended Bylaws dated September 27, 1994
4.1	(1)	Restated Articles of Incorporation
4.2	(1)	Amended Bylaws dated September 27, 1994
10.1	(1)	401(k) Plan filed as Exhibit 10.10*
10.2	(2)	Outside Director Stock Option Plan, filed as Appendix A*
10.3	(3)	Amendment No. 1 to the Outside Director Stock Option Plan, filed as Exhibit 10.11*
10.4	(4)	Loan Agreement dated December 12, 2000, among CVTI Receivables Corp., Covenant Transport, Inc., Three Pillars Funding Corporation, and SunTrust Equitable Securities Corporation, filed as Exhibit 10.10
10.5	(4)	Receivables Purchase Agreement dated as of December 12, 2000, among CVTI Receivables Corp., Covenant Transport, Inc., and Southern Refrigerated Transport, Inc., filed as Exhibit 10.11
10.6	(5)	Clarification of Intent and Amendment No. 1 to Loan Agreement dated March 7, 2001, among CVTI Receivables Corp., Covenant Transport, Inc., Three Pillars Funding Corporation, and SunTrust Equitable Securities Corporation, filed as Exhibit 10.12
10.7	(6)	Incentive Stock Plan, Amended and Restated as of May 17, 2001, filed as Appendix B*
10.8	(7)	Covenant Transport, Inc. 2003 Incentive Stock Plan, filed as Appendix B*
10.9	(8)	Consolidating Amendment No. 1 to Loan Agreement effective May 2, 2003, among CVTI Receivables Corp., Covenant Transport, Inc., Three Pillars Funding Corporation, and SunTrust Capital Markets, Inc. (formerly SunTrust Equitable Securities Corporation), filed as Exhibit 10.3
10.10	(9)	Master Lease Agreement dated April 15, 2003, between Transport International Pool, Inc. and Covenant Transport, Inc., filed as Exhibit 10.4

Exhibit
Number
Reference Description
3.1 (1) Restated Articles of Incorporation.
3.2 (1) Amended Bylaws dated September 27, 1994.
4.1 (1) Restated Articles of Incorporation.
4.2 (1) Amended Bylaws dated September 27, 1994.
10.1 (1) 401(k) Plan filed as Exhibit 10.10.*
10.2 (2) Outside Director Stock Option Plan, filed as Appendix A.
10.3 (3) Amendment No. 1 to the Outside Director Stock Option Plan, filed as Exhibit 10.11.
10.4 (4) Loan Agreement dated December 12, 2000, among CVTI Receivables Corp., Covenant Transport, Inc., Three Pillars Funding Corporation, and SunTrust Equitable Securities Corporation, filed as Exhibit 10.10.
10.5 (4) Receivables Purchase Agreement dated as of December 12, 2000, among CVTI Receivables Corp., Covenant Transport, Inc., and Southern Refrigerated Transport, Inc., filed as Exhibit 10.11.
10.6 (5) Clarification of Intent and Amendment No. 1 to Loan Agreement dated March 7, 2001, among CVTI Receivables Corp., Covenant Transport, Inc., Three Pillars Funding Corporation, and SunTrust Equitable Securities Corporation, filed as Exhibit 10.12.
10.7 (6) Incentive Stock Plan, Amended and Restated as of May 17, 2001, filed as Appendix B.*
10.8 (7) Covenant Transport, Inc. 2003 Incentive Stock Plan, filed as Appendix B.*
10.9 (8) Consolidating Amendment No. 1 to Loan Agreement effective May 2, 2003, among CVTI Receivables Corp., Covenant Transport, Inc., Three Pillars Funding Corporation, and SunTrust Capital Markets, Inc. (formerly SunTrust Equitable Securities Corporation), filed as Exhibit 10.3.
10.10 (9) Master Lease Agreement dated April 15, 2003, between Transport International Pool, Inc. and Covenant Transport, Inc., filed as Exhibit 10.4.

3540

10.11 (10) Amendment No. 5 to Loan Agreement dated December 9, 2003, among CVTI Receivables Corp., Covenant Transport, Inc., Three Pillars Funding LLC (successor to Three Pillars Funding Corporation), and SunTrust Capital Markets, Inc. (formerly SunTrust Equitable Securities Corporation) (Three other amendments were consolidated into Consolidating Amendment No. 1, filed with the Form 10-Q for the quarter ended June 30, 2003), filed as Exhibit 10.16.
10.12 (11) Amendment No. 6 to Loan Agreement dated July 8, 2004, among CVTI Receivables Corp., Covenant Transport, Inc., Three Pillars Funding LLC (f/k/a Three Pillars Funding Corporation), and SunTrust Capital Markets, Inc. (formerly SunTrust Equitable Securities Corporation) effective July 1, 2004, filed as Exhibit 10.1.
10.13 (11) Form of Indemnification Agreement between Covenant Transport, Inc. and each officer and director, effective May 1, 2004, filed as Exhibit 10.2.
10.14 # Amendment No. 7 to Loan Agreement dated November 17, 2004, among CVTI Receivables Corp., Covenant Transport, Inc., Three Pillars Funding LLC (f/k/a Three Pillars Funding Corporation), and SunTrust Capital Markets, Inc. (formerly SunTrust Equitable Securities Corporation).
10.15 # Amended and Restated Credit Agreement dated December 16, 2004, among Covenant Asset Management, Inc., Covenant Transport, Inc., Bank of America, N.A., and each other financial institution which is a party to the Credit Agreement.
21 # List of Subsidiaries.
23 # Consent of Independent Registered Public Accounting Firm - KPMG, LLP.
31.1 # Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by David R. Parker, the Company's Chief Executive Officer.
31.2 # Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Joey B. Hogan, the Company's Chief Financial Officer.
32.1 # Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by David R. Parker, the Company's Chief Executive Officer.
32.2 # Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Joey B. Hogan, the Company's Chief Financial Officer.

~~____________________________________________________________________________________________________________________~~

10.11	(10)	Amendment No. 5 to Loan Agreement dated December 9, 2003, among CVTI Receivables Corp., Covenant Transport, Inc., Three Pillars Funding LLC (successor to Three Pillars Funding Corporation), and SunTrust Capital Markets, Inc. (formerly SunTrust Equitable Securities Corporation), filed as Exhibit 10.16
10.12	(11)	Amendment No. 6 to Loan Agreement dated July 8, 2004, among CVTI Receivables Corp., Covenant Transport, Inc., Three Pillars Funding LLC (f/k/a Three Pillars Funding Corporation), and SunTrust Capital Markets, Inc. (formerly SunTrust Equitable Securities Corporation) effective July 1, 2004, filed as Exhibit 10.1
10.13	(11)	Form of Indemnification Agreement between Covenant Transport, Inc. and each officer and director, effective May 1, 2004, filed as Exhibit 10.2
10.14	(12)	Amendment No. 7 to Loan Agreement dated November 17, 2004, among CVTI Receivables Corp., Covenant Transport, Inc., Three Pillars Funding LLC (f/k/a Three Pillars Funding Corporation), and SunTrust Capital Markets, Inc. (formerly SunTrust Equitable Securities Corporation), filed as Exhibit 10.14
10.15	(12)	Amended and Restated Credit Agreement dated December 16, 2004, among Covenant Asset Management, Inc., Covenant Transport, Inc., Bank of America, N.A., and each other financial institution which is a party to the Credit Agreement, filed as Exhibit 10.15
10.16	(13)	Amendment No. 8 to Loan Agreement dated March 29, 2005, among Three Pillars Funding LLC (f/k/a Three Pillars Funding Corporation), SunTrust Capital Markets, Inc. (f/k/a SunTrust Equitable Securities Corporation), CVTI Receivables Corp., and Covenant Transport, Inc., filed as Exhibit 10.16
10.17	(14)	Amendment No. 1 to Amended and Restated Credit Agreement dated July 18, 2005, among Covenant Asset Management, Inc., Covenant Transport, Inc., a Nevada Corporation, Bank of America, N.A., as Agent, and the lenders party thereto from time-to-time, filed as Exhibit 10.1
21	#	List of Subsidiaries
23	#	Consent of Independent Registered Public Accounting Firm - KPMG LLP
31.1	#	Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by David R. Parker, the Company's Chief Executive Officer
31.2	#	Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Joey B. Hogan, the Company's Chief Financial Officer
32.1	#	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by David R. Parker, the Company's Chief Executive Officer
32.2	#	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Joey B. Hogan, the Company's Chief Financial Officer

References:

#	Filed herewith

All other footnotes indicate a document previously filed as an exhibit to and incorporated by reference from the following:

(1)	Form S-1, Registration No. 33-82978, effective October 28, ~~1994.~~1994
(2)	Schedule 14A, filed April 13, ~~2000.~~2000
(3)	Form 10-Q for the quarter ended September 30, 2000, filed November 13, ~~2000.~~2000
(4)	Form 10-K for the year ended December 31, 2000, filed March 29, ~~2001.~~2001
(5)	Form 10-Q for the quarter ended March 31, 2001, filed May 14, ~~2001.~~2001
(6)	Schedule 14A, filed April 5, ~~2001.~~2001
(7)	Schedule 14A, filed April 16, ~~2003.~~2003
(8)	Form 10-Q for the quarter ended June 30, 2003, filed August 11, ~~2003.~~2003
(9)	Form 10-Q/A for the quarter ended June 30, 2003, filed October 31, ~~2003.~~2003

(10)	Form 10-K, filed March 15, ~~2004.~~2004
(11)	Form 10-Q, filed August 5, ~~2004.~~2004
(12)	Form 10-K, filed March 16, 2005
(13)	Form 10-Q, filed May 9, 2005
(14)	Form 8-K, filed July 22, 2005

(c)		Financial Statement Schedules.

		Not applicable.

3642

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

	COVENANT TRANSPORT, INC.


Date: March ~~16, 2005~~31, 2006	By:	/s/ Joey B. Hogan
		Joey B. Hogan
		Executive Vice President and Chief
		Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature and Title		Date

/s/ David R. Parker		March ~~16, 2005~~31, 2006
David R. Parker
Chairman of the Board, President, and Chief Executive Officer (principal executive officer)

/s/ Joey B. Hogan		March ~~16, 2005~~31, 2006
Joey B. Hogan
Executive Vice President and Chief Financial Officer (principal financial and accounting officer)

/s/ Bradley A. Moline		March ~~9, 2005~~31, 2006
Bradley A. Moline
Director

/s/ William T. Alt		March ~~8, 2005~~31, 2006
William T. Alt
Director

/s/ Robert E. Bosworth		March ~~8, 2005~~31, 2006
Robert E. Bosworth
Director

/s/ Hugh O. Maclellan, Jr.		March ~~8, 2005~~31, 2006
Hugh O. Maclellan, Jr.
Director

/s/ Mark A. Scudder		March ~~15, 2005~~31, 2006
Mark A. Scudder
Director

/s/ Niel B. Nielson		March ~~8, 2005~~31, 2006
Niel B. Nielson
Director

3743

REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Covenant Transport, Inc.:

We have audited the accompanying Consolidated Balance Sheets of Covenant Transport, Inc. and subsidiaries as of December 31, ~~2004~~2005 and ~~2003,~~2004, and the related Consolidated Statements of Operations, Stockholders’ Equity and Comprehensive Income, ~~(Loss),~~ and Cash Flows for each of the ~~fiscal~~ years in the three-year period ended December 31, ~~2004.~~2005. These Consolidated Financial Statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these Consolidated Financial Statements based on our audits.

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

In our opinion, the Consolidated Financial Statements referred to above present fairly, in all material respects, the financial position of Covenant Transport, Inc. and subsidiaries as of December 31, ~~2004~~2005 and ~~2003,~~2004, and the results of their operations and their cash flows for each of the ~~fiscal~~ years in the three-year period ended December 31, ~~2004,~~2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Covenant Transport, Inc. and subsidiaries’ internal control over financial reporting as of December 31, ~~2004,~~2005, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March ~~16, 2005,~~31, 2006, expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for conditional asset retirement obligations in 2005.

KPMG LLP

~~/s/~~/s/ KPMG LLP

Atlanta, Georgia

March ~~16, 2005~~

31, 2006

3844

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Covenant Transport, Inc.:

We have audited management's assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting set forth in Item 9A of Covenant Transport, Inc.'s Annual Report on Form 10-K for the year ended December 31, ~~2004,~~2005, that Covenant Transport, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, ~~2004,~~2005, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that Covenant Transport, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, ~~2004,~~2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Covenant Transport, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2004,~~2005, based ~~oncriteria~~on criteria established inInternal Control—Integrated Frameworkissued by the ~~Committeeof~~Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of Covenant Transport, Inc. and subsidiaries as of December 31, ~~2004~~2005 and ~~2003,~~2004, and the related Consolidated Statements of Operations, Stockholders’ Equity and Comprehensive Income, ~~(Loss),~~ and Cash Flows for each of the ~~fiscal~~ years in the three-year period ended December 31 ~~2004,~~2005, and our report dated March ~~16, 2005,~~31, 2006, expressed an unqualified opinion on those consolidated financial statements.

KPMG LLP

~~/s/~~/s/ KPMG LLP

Atlanta, Georgia

March ~~16, 2005~~

31, 2006

3945

COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(In thousands, except share data)

2004 2003
ASSETS

Current assets:
Cash and cash equivalents $ 5,066 $ 3,306
Accounts receivable, net of allowance of $1,700 in 2004
   and $1,350 in 2003
74,127 62,998
Drivers advances and other receivables 7,400 9,622
Inventory and supplies 3,581 3,581
Prepaid expenses 11,643 16,185
Deferred income taxes 19,832 13,462
Income taxes receivable 5,689 278
Total current assets 127,338 109,432

Property and equipment, at cost 298,389 320,909
Less accumulated depreciation and amortization (88,967 ) (99,175 )
Net property and equipment 209,422 221,734

Other assets 23,266 23,115

Total assets $ 360,026 $ 354,281
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current maturities of long-term debt 9 1,300
Securitization facility 44,148 48,353
Accounts payable 6,574 8,822
Accrued expenses 15,253 14,420
Insurance and claims accrual 46,200 27,420
Total current liabilities 112,184 100,315

Long-term debt, less current maturities 8,013 12,000
Deferred income taxes 44,130 49,824
Total liabilities 164,327 162,139

Commitments and contingent liabilities

Stockholders' equity:
Class A common stock, $.01 par value; 20,000,000 shares authorized;
   13,421,527 and 13,295,026 shares issued; 12,323,927 and 12,323,526
   outstanding as of December 31, 2004 and 2003, respectively
134 133
Class B common stock, $.01 par value; 5,000,000 shares authorized;
   2,350,000 shares issued and outstanding as of December 31, 2004 and 2003
24 24
Additional paid-in-capital 91,058 88,888
Treasury stock at cost; 1,097,600 and 971,500 shares as of December 31,
   2004 and 2003, respectively
(9,925 ) (7,935 )
Retained earnings 114,408 111,032
Total stockholders' equity 195,699 192,142
Total liabilities and stockholders' equity $ 360,026 $ 354,281

COVENANT TRANSPORT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2005 AND 2004 (In thousands, except share data)
		2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	3,618		$	5,066
Accounts receivable, net of allowance of $2,200 in 2005 and $1,700 in 2004		77,969			74,127
Drivers advances and other receivables		3,932			7,400
Inventory and supplies		4,661			3,581
Prepaid expenses		16,199			11,643
Deferred income taxes		16,158			17,189
Income taxes receivable		7,559			5,689
Total current assets		130,096			124,695

Property and equipment, at cost		301,129			298,389
Less accumulated depreciation and amortization		(86,767	)		(88,967	)
Net property and equipment		214,362			209,422

Other assets, net		26,803			23,266

Total assets	$	371,261		$	357,383
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt		-			9
Securitization facility		47,281			44,148
Accounts payable		8,457			6,574
Accrued expenses		17,088			15,253
Insurance and claims accrual		41,801			46,200
Total current liabilities		114,627			112,184

Long-term debt, less current maturities		33,000			8,013
Deferred income taxes		33,910			41,487
Total liabilities		181,537			161,684

Commitments and contingent liabilities

Stockholders' equity:
Class A common stock, $.01 par value; 20,000,000 shares authorized; 13,447,608 and 13,421,527 shares issued; 11,629,208 and 12,323,927 outstanding as of December 31, 2005 and 2004, respectively		134			134
Class B common stock, $.01 par value; 5,000,000 shares authorized; 2,350,000 shares issued and outstanding as of December 31, 2005 and 2004		24			24
Additional paid-in-capital		91,553			91,058
Treasury stock at cost; 1,818,400 and 1,097,600 shares as of December 31, 2005 and 2004, respectively		(21,582	)		(9,925	)
Retained earnings		119,595			114,408
Total stockholders' equity		189,724			195,699
Total liabilities and stockholders' equity	$	371,261		$	357,383

See accompanying notes to consolidated financial statements.

4046

COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(In thousands, except per share data)

2004 2003 2002

Freight revenue $ 558,453 $ 555,678 $ 550,603
Fuel surcharges 45,169 26,779 13,815
Total revenue 603,622 582,457 564,418

Operating expenses:
Salaries, wages, and related expenses (1) 225,778 220,665 227,332
Fuel expense 127,723 109,231 96,332
Operations and maintenance 30,555 39,822 39,625
Revenue equipment rentals and purchased
transportation

69,928

69,997

59,265

Operating taxes and licenses 14,217 14,354 13,934
Insurance and claims (2) 54,847 35,454 31,761
Communications and utilities 6,517 7,177 7,021
General supplies and expenses 15,104 14,495 14,677
Depreciation and amortization, including impairment charge and
gains (losses) on disposition of equipment (3)

45,001

43,041

49,497

Total operating expenses 589,670 554,236 539,444
Operating income 13,952 28,221 24,974
Other (income) expenses:
Interest expense 3,098 2,332 3,542
Interest income (48 ) (114 ) (63 )
Other (926 ) (468 ) 916
Loss on early extinguishment of debt ¾ ¾ 1,434
Other expenses, net 2,124 1,750 5,829
Income before income taxes 11,828 26,471 19,145
Income tax expense 8,452 14,315 10,871
Net income $ 3,376 $ 12,156 $ 8,274

COVENANT TRANSPORT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003 (In thousands, except per share data)
	2005			2004			2003

Revenues
Freight revenue	$	555,428		$	558,453		$	555,678
Fuel surcharges		87,626			45,169			26,779
Total revenue		643,054			603,622			582,457

Operating expenses:
Salaries, wages, and related expenses		242,157			225,778			220,665
Fuel expense		170,582			127,723			109,231
Operations and maintenance		33,625			30,555			39,822
Revenue equipment rentals and purchased transportation		61,701			69,928			69,997
Operating taxes and licenses		13,431			14,217			14,354
Insurance and claims		41,034			54,847			35,454
Communications and utilities		6,579			6,517			7,177
General supplies and expenses		17,778			15,104			14,495
Depreciation and amortization, including gains (losses) on disposition of equipment		39,101			45,001			43,041
Total operating expenses		625,988			589,670			554,236
Operating income		17,066			13,952			28,221
Other (income) expenses:
Interest expense		4,203			3,098			2,332
Interest income		(273	)		(48	)		(114	)
Other		(538	)		(926	)		(468	)
Other expenses, net		3,392			2,124			1,750
Income before income taxes and cumulative effect of change in accounting principle		13,674			11,828			26,471
Income tax expense		8,003			8,452			14,315
Income before cumulative effect of change in accounting principle		5,671			3,376			12,156
Cumulative effect of change in accounting principle, net of tax (Note 1)		(485	)		-			-
Net income	$	5,186		$	3,376		$	12,156

Net income per share:
Basic earnings per share: $0.23 $0.84 $0.58
Diluted earnings per share: $0.23 $0.83 $0.57

Basic weighted average shares outstanding 14,641 14,467 14,223
Diluted weighted average shares outstanding 14,833 14,709 14,519

Net income per share:

Basic earnings per share before cumulative effect of change in accounting principle:	$	0.40		$	0.23	$	0.84

Cumulative effect of change in accounting principle		(0.03	)		-		-

Basic earnings per share:	$	0.37		$	0.23	$	0.84

Diluted earnings per share before cumulative effect of change in accounting principle:	$	0.40		$	0.23	$	0.83

Cumulative effect of change in accounting principle		(0.03	)		-		-

Diluted earnings per share:	$	0.37		$	0.23	$	0.83

Basic weighted average shares outstanding		14,175			14,641		14,467

Diluted weighted average shares outstanding		14,270			14,833		14,709

~~(1)~~	~~Includes a $1,500 pre-tax increase to workers' compensation claims reserve in 2004.~~
~~(2)~~	~~Includes an $18,000 pre-tax increase to casualty claims reserve in 2004.~~
~~(3)~~	~~Includes a $3,300 pre-tax impairment charge related to tractors in 2002.~~

See accompanying notes to consolidated financial statements.

4147

COVENANT TRANSPORT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

AND COMPREHENSIVE INCOME ~~(LOSS)~~

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, ~~2003~~ AND ~~2002~~2003

(In thousands)

			Additional		Accumulated		Total		Common Stock		Additional Paid-In Capital	Treasury Stock	Retained Earnings	Total Stockholders' Equity	Comprehensive Income
	Common Stock		Paid-In	Treasury	Other	Retained	Stockholders'	Comprehensive	Class A	Class B
			Capital	Stock	Comprehensive	Earnings	Equity	Income (Loss)
	Class A	Class B			Income (Loss)


Balances at December 31, 2001	$127	$24	$79,832	$(7,935)	$(748)	$90,602	$161,902
Balances at December 31, 2002									$130	$24	$84,493	$(7,935)	$98,876	$175,588

Exercise of employee stock options	3	¾	3,878	¾	¾	¾	3,881		3	-	3,615	-		3,618

Income tax benefit arising from the exercise of stock options	¾	¾	783	¾	¾	¾	783		-		780	-		780

Unrealized gain on cash flow hedging derivatives, net of taxes	¾	¾	¾	¾	748	¾	748
Net income									-				12,156		12,156

Comprehensive income for 2003															$12,156

Balances at December 31, 2003									$133	$24	$88,888	$(7,935)	$111,032	$192,142


Exercise of employee stock options									1	-	1,960	-		1,961

Income tax benefit arising from the exercise of stock options									-		210	-	-	210	��

Stock repurchase									-			(1,990)	-	(1,990)

Net income	¾	¾	¾	¾	¾	8,274	8,274	8,274	-				3,376		3,376

Comprehensive income for 2002								$9,022
Comprehensive income for 2004															$3,376

Balances at December 31, 2002	td30	td4	$84,493	$(7,935)	$¾	$98,876	td75,588
Balances at December 31, 2004									td34	td4	$91,058	$(9,925)	td14,408	td95,699

Exercise of employee stock options									-		445	-		445

Income tax benefit arising from the exercise of stock options									-		50	-	-	50

Stock repurchase									-			(11,657)	-	(11,657)

Net income									-				5,186		5,186

Comprehensive income for 2005															$5,186

Balances at December 31, 2005									$134	$24	$91,553	$(21,582)	$119,595	$189,724

Exercise of employee stock options 3 ¾ 3,615 ¾ ¾ ¾ 3,618

Income tax benefit arising from the
exercise of stock options

¾

¾

780

¾

¾

¾

780

Net income ¾ ¾ ¾ ¾ ¾ 12,156 12,156 12,156

Comprehensive income for 2003 $12,156

Balances at December 31, 2003 $133 $24 $88,888 $(7,935)
$¾
$111,032 $192,142

Exercise of employee stock options 1 ¾ 1,960 ¾ ¾ ¾ 1,961

Income tax benefit arising from the
exercise of stock options

¾

¾

210

¾

¾

210

Stock repurchase ¾ ¾ ¾ (1,990) ¾ ¾ (1,990)

Net income ¾ ¾ ¾ ¾ ¾ 3,376 3,376 3,376

Comprehensive income for 2004 ¾ ¾ ¾ ¾ ¾ ¾ ¾ $3,376

Balances at December 31, 2004 $134 $24 $91,058 $(9,925)
$¾
$114,408 $195,699

See accompanying notes to consolidated financial statements.

4248

COVENANT TRANSPORT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, ~~2003,~~ AND ~~2002~~2003

(In thousands)

2004 2003 2002
Cash flows from operating activities:
Net income $ 3,376 $ 12,156 $ 8,274
Adjustments to reconcile net income to net cash
provided by operating activities:

Net provision for losses on accounts receivable 547 94 852
Loss on early extinguishment of debt ¾ ¾ 1,434
Depreciation, amortization, and impairment of assets (1) 41,456 43,909 47,090
Provision for losses on guaranteed residuals ¾ ¾ 324
Income tax benefit from exercise of stock options 210 780 783
Deferred income taxes (benefit) (12,063 ) (9,605 ) (1,537 )
Loss (gain) on disposition of property and equipment 3,545 (867 ) 2,407
Changes in operating assets and liabilities:
Receivables and advances (9,454 ) (4,193 ) (1,317 )
Prepaid expenses and other assets 4,542 (1,735 ) (2,625 )
Inventory and supplies
¾
(356 ) 245
Insurance and claims accrual (2) 18,779 6,210 9,356
Accounts payable and accrued expenses (6,825 ) 1,343 1,881
Net cash flows provided by operating activities 44,113 47,716 67,167

Cash flows from investing activities:
Acquisition of property and equipment (81,615 ) (94,362 ) (70,720 )
Proceeds from disposition of property and equipment 49,179 68,487 14,369
Net cash used in investing activities (32,436 ) (25,875 ) (56,351 )

Cash flows from financing activities:
Exercise of stock options 1,961 3,615 3,881
Repurchase of company stock (1,990 ) ¾ ¾
Proceeds from issuance of debt 57,026 72,000 85,000
Repayments of long-term debt (66,510 ) (93,877 ) (100,038 )
Deferred costs (404 ) (315 ) ¾
Net cash used in financing activities (9,917 ) (18,577 ) (11,157 )

Net change in cash and cash equivalents 1,760 3,264 (341 )

Cash and cash equivalents at beginning of period 3,306 42 383
Cash and cash equivalents at end of period $ 5,066 $ 3,306 $ 42
Supplemental disclosure of cash flow information:

Cash paid during the year for:
Interest $ 3,031 $ 2,332 $ 4,016
Income taxes $ 20,867 $ 22,795 $ 12,389

~~(1)~~	~~Includes a $3,300 pre-tax impairment charge related to tractors in 2002.~~
~~(2)~~	~~Includes a $19,600 pre-tax adjustment to increase workers' compensation and casualty claims reserves in 2004~~

	2005			2004			2003
Cash flows from operating activities:
Net income	$	5,186		$	3,376		$	12,156
Adjustments to reconcile net income to net cash provided by operating activities:
Net provision for losses on accounts receivable		1,598			547			94
Depreciation and amortization		39,769			41,456			43,909
Income tax benefit from exercise of stock options		50			210			780
Deferred income taxes (benefit)		(6,249	)		(12,063	)		(9,605	)
Loss (gain) on disposition of property and equipment		(668	)		3,545			(867	)
Cumulative effect of change in accounting principle, net of tax		485			-			-
Changes in operating assets and liabilities:
Receivables and advances		(4,841	)		(9,454	)		(4,193	)
Prepaid expenses and other assets		(4,555	)		4,542			(1,735	)
Inventory and supplies		(1,081	)		-			(356	)
Insurance and claims accrual		(4,399	)		18,779			6,210
Accounts payable and accrued expenses		278			(6,825	)		1,343
Net cash flows provided by operating activities		25,573			44,113			47,716

Cash flows from investing activities:
Acquisition of property and equipment		(109,918	)		(81,615	)		(94,362	)
Proceeds from disposition of property and equipment		65,992			49,179			68,487
Net cash used in investing activities		(43,926	)		(32,436	)		(25,875	)

Cash flows from financing activities:
Exercise of stock options		445			1,961			3,615
Repurchase of company stock		(11,657	)		(1,990	)		-
Proceeds from Credit Facility		105,000			47,026			59,000
Proceeds from Securitization Facility		17,000			10,000			13,000
Repayment from Credit Facility		(80,022	)		(52,305	)		(90,000	)
Repayments of Securitization Facility		(13,867	)		(14,205	)		(3,877	)
Deferred costs		6			(404	)		(315	)
Net cash provided by (used in) financing activities		16,905			(9,917	)		(18,577	)

Net change in cash and cash equivalents		(1,448	)		1,760			3,264

Cash and cash equivalents at beginning of year		5,066			3,306			42
Cash and cash equivalents at end of year	$	3,618		$	5,066		$	3,306
Supplemental disclosure of cash flow information:

Cash paid during the year for:
Interest	$	4,255		$	3,031		$	2,332
Income taxes	$	16,261		$	20,867		$	22,795

See accompanying notes to consolidated financial statements.

4349

COVENANT TRANSPORT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004, ~~2003~~ AND ~~2002~~2003

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business - Covenant Transport, Inc. (the "Company") is a holding company for subsidiaries that offer transportation services to customers throughout the United States. The ~~Company~~Company's current operations comprise a single segment for financial reporting purposes.

Principles of Consolidation - The consolidated financial statements include the accounts of the Company, a holding company incorporated in the state of Nevada in 1994, and its wholly-owned subsidiaries, Covenant Transport, Inc., a Tennessee corporation; Harold Ives Trucking Co., an Arkansas corporation; ~~"Harold~~("Harold Ives"); Southern Refrigerated Transport, Inc., an Arkansas corporation; ~~"SRT"~~("SRT"); Covenant.com, Inc., a Nevada corporation; Covenant Asset Management, Inc., a Nevada corporation; CIP, Inc., a Nevada corporation; CVTI Receivables Corp., a Nevada ~~corporation,~~corporation; ("CRC"); and Volunteer Insurance Limited, a Cayman Islands company; ~~"Volunteer"~~("Volunteer"). Tony Smith Trucking, Inc. and Terminal Truck Broker, Inc., both Arkansas corporations, were dissolved in December 2004 and September 2003, respectively. All significant intercompany balances and transactions have been eliminated in consolidation.

Revenue Recognition - Revenue, drivers' wages and other direct operating expenses are recognized on the date shipments are delivered to the customer. The Company includes fuel surcharges in total revenue in its statements of operations. The Company also reports freight revenue, which is total revenue excluding fuel surcharge revenue because the Company believes that fuel surcharges tend to be a volatile source of revenue, and the exclusion of fuel surcharges affords a more consistent basis for comparing the results of operations from period to period.

Cash and Cash Equivalents - The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents.

Inventories and supplies - Inventories and supplies consist of parts, tires, fuel, and supplies. Tires on new revenue equipment are capitalized as a component of the related equipment cost when the ~~vehicle~~tractor or trailer is placed in service and recovered through depreciation over the life of the vehicle. Replacement tires and parts on hand at year end are recorded at the lower of cost or market with cost determined using the first-in, first-out (FIFO) method. Replacement tires are expensed when placed in service.

Property and Equipment - Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Revenue equipment is generally depreciated over five to ten years with salvage values ranging from 9%4% to ~~33%~~39%. The salvage value, useful life, and annual depreciation of tractors and trailers are evaluated annually based on the current market environment and on the Company's recent experience with disposition values. Any change could result in greater or lesser annual expense in the future. Gains or losses on disposal of revenue equipment are included in depreciation in the consolidated statements of operations.

Impairment of Long-Lived Assets - The Company evaluates the carrying value of long-lived assets by analyzing the operating performance and future cash flows for those assets when events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. Impairment can be impacted by the Company's projection of the actual level of future cash flows, the level of actual cash flows and salvage values, the methods of estimation used for determining fair values and the impact of guaranteed residuals. Any changes in management's judgments could result in greater or lesser annual depreciation expense or additional impairment charges in the future.

Intangible and Other Assets - The Company periodically evaluates the net realizability of the carrying amount of intangible assets. Non-compete agreements are amortized over the life of the agreement, and deferred loan costs are amortized over the life of the loan.

Goodwill - - The Company utilizes Statement of Financial Accounting Standards ~~(SFAS)~~("SFAS") No. 142,Goodwill and Other Intangible Assets, which requires the Company to evaluate goodwill and other intangible assets with indefinite useful lives for impairment on an annual basis, with any resulting impairment losses being recorded as a ~~cumulative effect~~component of ~~a change~~income from operations in ~~accounting principle.~~the consolidated statements of operations. Goodwill that was acquired in purchase business combinations completed before July 1, 2001, ~~is no longer being~~has not been amortized ~~after~~since January 1, 2002. During the second quarter of each year, the Company ~~completed~~completes its annual evaluation of its goodwill for impairment and determined that there was no impairment. At December 31, 2005 and 2004, the Company ~~has~~had approximately $11.5 million of goodwill.

Fair Value of Financial Instruments - The Company's financial instruments consist primarily of cash, accounts receivable, accounts payable, and long term debt. The carrying amount of cash, accounts receivable, and accounts payable approximates their fair value because of the short term maturity of these instruments. Interest rates that are currently available to the Company for issuance of long term debt with similar terms and remaining maturities are used to estimate the fair value of the Company's long term debt. The carrying amount of the Company's short and long term debt at December 31, ~~2004~~2005 and ~~2003~~2004 was approximately ~~$52.2~~$80.3 million and ~~$61.7~~$52.2 million, respectively, including the accounts receivable securitization borrowings and approximates the estimated fair value, due to the variable interest rates on these instruments.

Capital Structure - The shares of Class A and B ~~Common Stock~~common stock are substantially identical except that the Class B shares are entitled to two votes per share while beneficially owned by David Parker or certain members of his immediate family and Class A shares are entitled to one vote per share. The terms of any future issuances of preferred shares will be set by the Board of Directors.

Insurance and Claims - The Company's insurance program for liability, property damage, and cargo loss and damage, involves self-insurance with high retention levels. Under the casualty program, the Company is self-insured for personal injury and property damage claims for varying amounts depending on the date the claim was incurred. The insurance retention also provides for an additional self-insured aggregate amount, with a limit per occurrence until an aggregate threshold is reached. The deductible amount increased from $250,000 in 2001 to $2.0 million in ~~2004,~~2005, subject to aggregate thresholds. For the ~~year~~years ended December 31, 2005 and 2004, the Company was self-insured for personal injury and property damage claims for amounts up to $2.0 million per occurrence, subject to an additional $2.0 million self-insured aggregate amount, which results in the total self-insured retention of up to $4.0 million per occurrence until the $4.0 million aggregate threshold is reached. For cargo loss and damage claims, the Company is self-insured for amounts up to the first $1.0 million per occurrence. The Company maintains a workers' compensation plan and group medical plan for its employees with a deductible amount of $1.0 million for each workers' compensation claim and a ~~stop loss~~per claim limit amount of $275,000 for each group medical claim. The Company accrues the estimated cost of the retained portion of incurred claims. These accruals are based on an evaluation of the nature and severity of the claim and estimates of future claims development based on historical trends. Insurance and claims expense will vary based on the frequency and severity of claims, the premium expense, and self-insured retention levels.

Between 2001 and 2003, the Company increased its primary retention amounts from $5,000 per occurrence for workers' compensation and casualty claims to $1.0 million for workers' compensation and $2.0 million for casualty claims. Later during that period, the Company experienced substantial increases in the frequency of accidents and workers' compensation claims. Because of the significant increases in the Company's retention amounts and in the frequency of claims, the Company engaged an independent third-party actuary as part of its process of assessing its claims reserve estimates. Based on the actuarial report and the Company's evaluation, theThe Company recorded an aggregate $19.6 million pre-tax adjustment to its claims reserves during the fourth quarter of 2004. The adjustment included an $18.0 million increase to the Company's casualty reserve, which was reflected in insurance and claims on its consolidated statement of operations, and a $1.5 million increase to the Company's workers' compensation reserve, which was reflected in salaries, wages, and benefits on its consolidated statement of operations.

Concentrations of Credit Risk - The Company performs ongoing credit evaluations of its customers and does not require collateral for its accounts receivable. The Company maintains reserves which management believes are adequate to provide for potential credit losses. The Company's customer base spans the continental United ~~States. Three~~States with a diverse customer base that results in a lack of a concentration of credit risk for the year ended December 31, 2005. However, during 2004, three of the Company's customers, which ~~are~~were autonomously managed and operated, ~~are~~were wholly owned subsidiaries of a public entity, when added together amounted to approximately 9% of revenue in 2004 and approximately 11% of revenue in ~~2003 and 2002.~~2003.

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Income Taxes - Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Derivative Instruments and Hedging Activities - The Company engages in activities that expose it to market risks, including the effects of changes in interest rates and fuel prices. Financial exposures are evaluated as an integral part of the Company's risk management program, which seeks, from time to time, to reduce potentially adverse effects that the volatility of the interest rate and fuel markets may have on operating results. The Company does not regularly engage in speculative transactions, nor does it regularly hold or issue financial instruments for trading purposes.

All derivatives are recognized on the balance sheet at their fair values. On the date the derivative contract is entered into, the Company designates the derivative a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow hedge"). The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash-flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions.

The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a fair-value hedge, along with the loss or gain on the hedged asset or liability or unrecognized firm commitment of the hedged item that is attributable to the hedged risk, are recorded in earnings. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash-flow hedge are recorded in other comprehensive income, until earnings are affected by the variability in cash flows or unrecognized firm commitment of the designated hedged item.

The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged ~~item,~~item: the derivative expires or is sold, terminated, or ~~exercised,~~exercised; the derivative is undesignated as a hedging instrument, because it is unlikely that a forecasted transaction will ~~occur,~~occur; a hedged firm commitment no longer meets the definition of a firm ~~commitment,~~commitment; or management determines that designation of the derivative as a hedging instrument is no longer appropriate.

When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair-value hedge, the Company continues to carry the derivative on the balance sheet at its fair value, and no longer adjusts the hedged asset or liability for changes in fair value. The adjustment of the carrying amount of the hedged asset or liability is accounted for in the same manner as other components of the carrying amount of that asset or liability. When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the Company continues to carry the derivative on the balance sheet at its fair value, removes any asset or liability that was recorded pursuant to recognition of the firm commitment from the balance sheet, and recognizes any gain or loss in earnings. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the Company continues to carry the derivative on the balance sheet at its fair value, and gains and losses that were accumulated in other comprehensive income are recognized immediately in earnings. In all other situations in which hedge accounting is discontinued, the Company continues to carry the derivative at its fair value on the balance sheet and recognizes any changes in its fair value in earnings.

Effect of New Accounting Pronouncements - InEffective December ~~2003,~~31, 2005, the ~~FASB issued~~Company adopted FIN ~~46-R,~~47, ~~Consolidation of Variable Interest Entities~~Accounting for Conditional Asset Retirement Obligations, ~~("FIN 46-R"). This Interpretation of Accounting Research Bulletin~~which clarifies that the term conditional asset retirement obligation as used in SFAS No. ~~51,~~143, ~~Consolidated Financial Statements~~Accounting for Asset Retirement Obligations, ~~addresses consolidation by business enterprises~~refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of ~~variable interest entities. For enterprises~~settlement are conditional on a future event that ~~are~~may or may not ~~small business issuers,~~be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN ~~46-R is~~47 also clarifies when an entity would have sufficient information to ~~be applied~~

reasonably estimate the fair value of an asset retirement obligation. The adoption of FIN 47 impacted the Company's accounting for the conditional obligation to ~~all variable interest entities by~~remove company decals and other identifying markings from certain tractors and trailers under operating leases at the end of the ~~first reporting period ending~~lease terms. Upon adoption of this standard, the Company recorded an increase to other assets of $0.8 million and accrued expenses of $1.6 million, in addition to recognizing a non-cash pre-tax cumulative effect charge of $0.8 million ($0.5 million on an after ~~March 15, 2004. The Company's~~tax-basis, or $0.03 per diluted share).

Had the adoption of FIN ~~46-R did not have an impact on~~47 occurred at the beginning of the earliest period presented, the Company's ~~financial condition or~~ results of ~~operations.~~operations and earnings per share would have been affected as follows:

(in thousands except per share data)	2005			2004			2003
Income before cumulative effect of change in accounting principle, as reported:	$5,671			$3,376			$12,156
Deduct: Accretion of conditional asset retirement liability and amortization of related asset, net of related tax effects		(251	)		(130	)		(81	)
Pro forma net income	$	5,420		$	3,246		$	12,075

Basic earnings per share:
As reported, before cumulative effect of change in accounting principle	$	0.40		$	0.23		$	0.84
Pro forma earnings per share:	$	0.38		$	0.22		$	0.83

Diluted earnings per share:
As reported, before cumulative effect of change in accounting principle	$	0.40		$	0.23		$	0.83
Pro forma diluted earnings per share:	$	0.38		$	0.22		$	0.82

The value of the conditional asset retirement obligation liability calculated on a pro forma basis as if the standard had been retrospectively applied to all periods presented are as follows:

December 31, 2005	December 31, 2004	December 31, 2003
$1.6 million	$1.3 million	$1.0 million

In December 2004, the FASB issued SFAS No. ~~123-R,~~123R, Share-Based Payments ~~an Amendment of FASB~~, revising SFAS No. 123, ~~and 95 on~~Accounting for Stock Based Compensation; superseding Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees and its related implementation guidance; and amending SFAS No. 95, Statement of Cash Flows. SFAS ~~123-R~~123R requires companies to recognize ~~in the income statement~~ the grant date fair value of stock options and other equity-based compensation issued to ~~employees.~~employees in its income statement. SFAS ~~123-R is~~123R was to be effective for most public companies ~~with~~as of the first interim or annual ~~periods~~period beginning after June 15, 2005. In April 2005, the SEC delayed the effective date, requiring companies to apply SFAS 123R in the first annual period beginning after June 15, 2005. The Company ~~will adopt this statement~~adopted SFAS 123R effective ~~July~~January 1, ~~2005.~~2006. The Company's adoption of SFAS ~~123-R~~123R will impact its results of operations by increasing salaries, wages, and related ~~expenses.~~expenses for options granted in periods subsequent to the effective date of January 1, 2006. The ~~amount~~financial impact for the unvested options outstanding as of ~~the expected impact is still being reviewed by the Company.~~December 31, 2005 will be de minimis.

Earnings per Share ("EPS") - The Company applies the provisions of ~~FASB~~ SFAS No. 128, Earnings per Share, which requires companies to present basic EPS and diluted EPS. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.

4653

The following table sets forth for the periods indicated the weighed average shares outstanding used in the calculation of net income per share included in the Company's consolidated statements of operations:

(in thousands except per share data)	2004	2003	2002
(in thousands)				2005	2004	2003
Denominator for basic earnings per share - weighted-average shares	14,641	14,467	14,223	14,175	14,641	14,467

Effect of dilutive securities:

Dilutive options	192	242	296	95	192	242

Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions	14,833	14,709	14,519
Denominator for diluted earnings per share - adjusted weighted- average shares and assumed conversions				14,270	14,833	14,709

(in thousands)

2004

2003

Deferred tax assets:

Accounts receivable $ 249 $ 351
Insurance and claims 17,417 10,836
State net operating loss carryovers 1,805 1,815
Deferred gain 201 300
Investments 160 160
Total deferred tax assets 19,832 13,462

Deferred tax liabilities:

Property and equipment 43,099 48,001
Intangible assets 271 76
Accrued salaries and wages 609 605
Prepaid liabilities 151 1,142
Total deferred tax liabilities 44,130 49,824

Net deferred tax liability $ 24,298 $ 36,362

(in thousands)	2005			2004

Net current deferred tax assets:
Accounts receivable	$	475		$	249
Insurance and claims		15,493			16,652
State net operating loss carryovers		179			87
Deferred gain		11			201
Total net current deferred tax assets		16,158			17,189

Net non-current deferred tax liabilities:
Property and equipment		33,305			41,377
Intangible and other assets		766			271
Investments		(161	)		(161	)
Total net non-current deferred tax liabilities		33,910			41,487

Net deferred tax asset/ liability	$	17,752		$	24,298

Based upon the expected reversal of deferred tax liabilities and the level of historical and projected taxable income over periods in which the deferred tax assets are deductible, the Company's management believes it is more likely than not that the Company will realize the benefits of the deductible differences at December 31, ~~2004. Currently, the IRS is auditing the Company's~~2005.

In connection with an audit of our 2001 and 2002 ~~federal income~~ tax ~~returns. The Company has accrued~~returns, the IRS proposed to disallow three of our tax strategies. We met with Internal Revenue Service ("IRS") Appeals Division during the fourth quarter of 2005 and have proposed a settlement agreement. At this time, we have not received the executed IRS response to the agreement. In April 2004, we submitted a $5.0 million cash bond to the IRS to prevent any future interest expense in the event of ~~$408,000 as~~an unsuccessful defense of ~~December 31,~~the strategies. In addition, we have accrued amounts that we believe are appropriate given our expectations concerning the ultimate resolution of the strategies. The IRS is currently auditing our 2003 and 2004 tax returns and has proposed two disallowances totaling approximately $350,000 for the 2003 and 2004 years related to ~~issues raised by~~the November 2003 stock offering. We have responded to the IRS ~~affecting~~with a settlement offer. At this time, the ~~timing, but~~IRS has not responded to the ~~ultimate deductibility of, items related to a tax planning strategy implemented during 2001.~~offer. The amount ultimately paid upon resolution of the issue raised may differ from the amount accrued.

In the normal course of business, the Company is also subject to audits by the state and local tax authorities. The Company believes that its liability for state and local taxes is adequately accrued at December 31, ~~2004.~~2005. However, should the Company’s tax positions be challenged, different outcomes could result and have an impact on the amounts reported in the Company’s consolidated financial statements.

9. STOCK REPURCHASE PLAN

In May ~~2004,~~2005, the Board of Directors authorized a stock repurchase plan for up to ~~1.0~~1.3 million ~~company~~Company shares to be purchased in the open market or through negotiated transactions subject to criteria established by the ~~board.~~Board. During ~~2004,~~2005, the Company purchased a total of ~~126,100~~720,800 shares with an average price of ~~$15.78.~~$16.17. The stock repurchase plan expires ~~May 31, 2005.~~June 30, 2006 and replaced the stock repurchase program adopted in 2004.

10. DEFERRED PROFIT SHARING EMPLOYEE BENEFIT PLAN

The Company has a deferred profit sharing and savings plan that covers substantially all employees of the Company with at least six months of service. Employees may contribute a percentage of their annual compensation up to the maximum amount allowed by the Internal Revenue Code. The Company may make discretionary contributions as determined by a committee of the Board of Directors. The Company contributed approximately $1.1 million, $0.9 million, and $0.8 million in 2005, 2004, and ~~$1.0 million in 2004,~~ 2003, ~~and 2002,~~ respectively, to the profit sharing and savings plan.

11. STOCK OPTION PLANS

The Company has adopted stock plans for employees and directors. Awards may be stock options or other forms. The Company has reserved approximately 2,300,000 shares of Class A ~~Common Stock~~common stock for distribution at the discretion of the Board of Directors. The following table details the activity of the incentive stock option plan:

	Shares	Weighted Average Exercise Price	Options Exercisable at Year End	Shares	Weighted Average Exercise Price	Options Exercisable at Year End

Under option at December 31, 2001	1,582,445	$12.99	856,486

Options granted in 2002	186,250	$15.61
Options exercised in 2002	(318,832)	$12.22
Options canceled in 2002	(68,323)	$14.29
Under option at December 31, 2002	1,381,540	$13.48	855,685	1,381,540	$13.48	855,685

Options granted in 2003	196,664	$17.51		196,664	$17.51
Options exercised in 2003	(295,711)	$12.24		(295,711)	$12.24
Options canceled in 2003	(53,103)	$15.19		(53,103)	$15.19
Under option at December 31, 2003	1,229,390	$14.37	891,813	1,229,390	$14.37	891,813

Options granted in 2004	196,300	$15.81		196,300	$15.81
Options exercised in 2004	(126,501)	$15.50		(126,501)	$15.50
Options canceled in 2004	(38,097)	$16.45		(38,097)	$16.45
Under option at December 31, 2004	1,261,092	$14.42	926,713	1,261,092	$14.42	926,713

Options granted in 2005				237,085	$14.11
Options exercised in 2005				(28,081)	$15.86
Options canceled in 2005				(16,583)	$14.99
Under option at December 31, 2005				1,453,513	$14.33	1,443,513

	Options Outstanding			Options Exercisable		Options Outstanding			Options Exercisable
Range of Exercise Prices	Number Outstanding at 12/31/04	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price	Number Exercisable At 12/31/04	Weighted- Average Exercise Price	Number Outstanding at 12/31/05	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price	Number Exercisable at 12/31/05	Weighted- Average Exercise Price
$ 8.00 to $13.00	385,856	60	$10.04	385,856	$10.04	392,356	50	$10.08	382,356	$10.06
$13.01 to $16.50	490,204	70	$15.49	266,840	$15.35	681,387	74	$14.94	681,387	$14.94
$16.51 to $20.00	385,032	84	$17.44	274,017	$17.38
$16.51 to $21.50						379,770	75	$17.64	379,770	$17.64
	1,261,092			926,713		1,453,513			1,443,513

The Company accounts for its stock-based compensation plans under APB No. 25, under which no compensation expense has been recognized because all employee and outside director stock options have been granted with the exercise price equal to the fair value of the Company's Class A ~~Common Stock~~common stock on the date of grant. Under SFAS No. 123, fair value of options granted are estimated as of the date of grant using the Black-Scholes option pricing model and the following weighted average assumptions: risk-free interest rates ranging from ~~1.7%~~2.3% to ~~4.8%~~4.3%; expected life of 5 years; dividend rate of zero percent; and expected volatility of 42.2% for 2005, 50.7% for 2004, and 52.2% for ~~2003 and 53.3% for 2002.~~