J.B. HUNT TRANSPORT SERVICES, INC.

Form 10-K

For The Calendar Year Ended December 31, 20022004

Table of Contents

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Additional general information about us is available from our Internet website at www.jbhunt.com. We make a number of reports and other information available free of charge on our website including our annual report on Form 10-K, our quarterly reports on Form 10-Q, as well as earnings releases.  Our website also contains corporate governance guidelines, codes of conduct, our whistleblower policy, committee charters for our board of directors and officer certifications of our filings with the SEC.

Business Strategy

We seek to add value to each of our customer’s supply chain by providing superior service at competitive rates while controlling or minimizing our customers’ costs through network density, transportation mode conversion and dedicated fleets.  We believe that our operating strategy can add value to customers and increase our profits and returns to stockholders.

Recent Focus

During the past four years, we have taken significant steps to re-establish a primary focus on the profitability of our three business segments.  In each segment we have implemented capacity management decision-making processes that result in the deployment of our assets where we believe they will generate more profit.  We continually seek to replace less-profitable freight with higher-margin freight and lanes.  Selective pricing actions and ensuring that we properly charge for all services provided have also been areas of major focus.  We have also worked to ingrain safety into our corporate culture, which has reduced our accident and injury costs during 2003 and 2004.

JBT SEGMENTSegment

PrimaryOur primary transportation service offerings classified in this segment include full truck-load, dry-van freight which is predominantly transported utilizing company-owned revenue equipment.  Freight is pickedcompany-controlled tractors.  We pick up our freight at the dock or specified location of the shipper and transportedtransport the load directly to the location of the consignee.  The load may beMost of our loads are transported entirely by our power equipmentcompany-owned tractors and employee drivers, or a portion of the movement mayby independent contractors (ICs) who agree to transport freight in our trailers.  We also assign freight to be handled by a third-party motor carrier.carriers other than ICs.  Typically, in these cases, the charges for the entire movement are billed to the customer by us, and we, in turn, pay the third-partythird party for their portion of the transportation services provided.  JBT operates

We operate utilizing certain Canadian authorities, which were initially granted in 1988 and mayallowing us to transport freight to and from all points in the continental United States to Quebec, British Columbia and Ontario.  We have authorization to operate directly in all the Canadian provinces, but to date we have served limited points in Canada, primarily through interchange operations with Canadian motor carriers.  We operated our JBT and JBI segments in combined fashion in periods prior to January 1, 2000.  This combined operation was reported as Van/Intermodal (“Van”) in prior periods.  In late 2000, we began utilizing independent contractors on a limited basisICs in the JBT segment.  These independent contractors (I/C’s) provide their own tractorssegment and agree to transport freight in JBHT owned or controlled trailing equipment.  Atat December 31, 2002, approximately 680 I/C’s were2004, we had 1,113 ICs operating in the JBT segment.  JBT gross revenue for calendar year 20022004 was $827$928 million, compared with $829$841 million in 2001.2003.  At December 31, 2002,2004, the JBT segment operated 4,924 company owned4,280 company-controlled tractors and employed 7,5735,846 people, 5,5414,866 of whom were drivers.

JBI SEGMENTSegment

TransportationThe transportation service offerings of our JBI segment utilize agreements with various railroadsmost major North American rail carriers to provide proven intermodal freight solutions tofor our customers in all major lanes of commerce inthroughout the continental United States, Canada and Mexico.  We differentiate ourselves from others through our premium service network, as well as, coordinated door to door service on company-owned and controlled assets.  We established our first intermodal agreementOur JBI segment began operations in 1989 with a unique partnership with the former Santa Fe Railway (now the Burlington Northern Santa Fe), a watershed event in 1989.  Through growth of this transportation segmentthe industry and additions, deletions,the first agreement that linked major rail and mergerstruck-load carriers in a joint marketing environment.  Essentially, JBI draws on the intermodal (also known as “container on flatcar”) services of rail carriers we now have agreements with seven North American rail carriers including:  BNSF, Norfolk Southern, CSX, Kansas City Southern, Union Pacific, Canadian National,for the underlying linehaul movement of its equipment and Florida East Coast railroads.  Typically, freight is picked upperforms the pickups and deliveries (“drayage”) for customers at the dock or specified location of the shipper and transported to the rail carrier for loading on rail cars.  Upon completion of the rail routing, the freight is picked up at the rail carrier’s ramp and transported to the consignee.  These originatingorigin and destination draysrail terminal locations. We may be transported entirely bydirectly provide the drayage service at either the origin or destination rail ramp utilizing our power equipmentcompany-controlled tractors, or may be handled by a third-party motor carrier.  It is our customary business practice that all charges for the entire movement are billed to the customer by us and we in turn, pay the rail carrier and third-party motor carrier for their portion of the transportationpurchase these services provided.  In 1993, rail operations were expanded to utilize high-cube containers which can be separated from the chassis and double-stacked on rail cars to provide improved productivity.  This concept is known as container-on-flatcar.  Most of our agreements with rail carriers allow for the majority ofthird parties.  JBI business carried under these rail agreements to receive priority space on trains and preferential loading and unloading at rail facilities.  JBI gross revenue for calendar year 2002 was $809 million, compared with $740 million inprovides

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ASSOCIATED COMPANY - MEXICOOperations in Mexico

We have provided transportation services to and from Mexico since 1989.  These services frequently involve equipment interchange operations with various Mexican motor carriers.  In addition, a joint venture agreement with Transportacion Maritima Mexicana (TMM), one of the largest transportation companies in Mexico, was signed in 1992.  The joint venture, Comercializadora Internacional de Carga S.A. de C.V. and its subsidiaries, originated and completed northbound and southbound international truck movements between the U.S.United States and Mexico.  The joint venture also provided Mexican domestic irregular route truck service, refrigerated freight services, Mexican dedicated contract business and short-haul drayage to and from the Mexican maritime ports and rail heads.  For the calendar year ended December 31, 2001 and for prior years, our share of the Mexican joint venture operating results was included on a one-line, non-operating item on the Consolidated Statements of Earnings entitled “Equity in earnings (loss) of associated companies.  During the first quarter of 2002,

As previously reported, we sold our joint venture interest in Mexico to TMM.TMM during the first quarter of 2002 in exchange for $22.5 million, including a $18.1 million note receivable.  We have received approximately $18.0 million of principal and interest related to this note.  At December 31, 2004, we have a $1.7 million account receivable from TMM and expect to receive these remaining funds during the first quarter of 2005.  These transactions have had no net impact on our earnings.  We still provide transportation services to and from Mexico primarily by utilizing the services of a variety of Mexican carriers.

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MARKETING AND OPERATIONSMarketing and Operations

We transport, or arrange for the transportation of, a wide range of freight, including forest and paper products, including automotive parts, department storebuilding materials, general merchandise, paper and wood products, food and beverages, plastics, chemicals and manufacturing materialsautomotive parts.  Our customer base is extremely diverse and supplies.includes a growing list of Fortune 500 companies.  Our primary customers include manyability to offer multiple services, utilizing our three business segments and a full complement of the “Fortune 500” companies.logistics services through third parties, represents a competitive advantage.  We have been reasonably successful providing a broad range of transportation services to larger shippers that seek to use a limited number of “core” carriers.  Our largest customer in 20022004 was Wal-Mart Stores, Inc., which accounted for approximately 18%15% of our total revenue.  A broad geographic dispersion and a good balance in the type of freight transported allows us some protection from major seasonal fluctuations.  However, consistent with the truckload industry in general, freight is typically stronger during the second half of the year, with peak volume occurring in August through mid November.  Revenue and earnings are also affected by bad weather, holidays, fuel prices, driver cost and availability, and railroad service levels.

We generally market all of our service offerings through a nationwide sales and marketing network.  All transportation services offered are typically billed directly to the customer by usWe do have some sales and all inquiries, claims and other customer contacts are handled by us.  Certain marketing sales, engineering and design functions are assigned to each operating segment.  However, marketing and pricing strategy, and national account service coordination is managed at the corporate level.business unit level, particularly for our DCS segment.  In accordance with our typical arrangements, we bill the customer for all services and we, in turn, pay all third parties for their portion of transportation services provided.  In recent years, we have re-established a primary focus on improving the profitability of each of our business segments and charging a fair price for all services provided.

PERSONNELPeople

AtWe believe that one of the factors differentiating us from our competitors is our service-oriented people.  As of December 31, 2002,2004, we had approximately 15,850 employees, including 11,483 company drivers.  We also had arrangements with 1,301 ICs to transport freight in our trailing equipment.  In addition, we employed 16,265 people, including 12,029 drivers.  Historically1,072 mechanics and 3,295 office personnel at the truckload transportation industry and JBHT have experienced shortagesend of qualified drivers.  In addition, driver turnover rates for truckload motor carriers frequently exceed 100%.  During the past few years a number of changes have occurred within the industry relative to drivers.  In 1996, we announced and implemented an approximate 33% increase in wages for our over-the-road drivers.  As anticipated, this increase in driver compensation was partially offset by lower driver recruiting and training expense, reduced accident and safety costs and better equipment utilization.  We also experienced a decline in driver turnover rates between 1997 and 1999.  During late 2000 and 2001, supply and demand conditions for drivers changed and a number of truck load carriers, including JBHT, implemented lower mileage pay rates for newly hired drivers.  Partly as a result of this reduced compensation level for drivers, our driver turnover rate increased during 2000 and has remained at historically high levels in 2001 and 2002.  During calendar year 2002, we have once again experienced some difficulty attracting and retaining a desired level of drivers.  To date, we continue to hire only experienced drivers and, although recruiting costs have increased significantly, operations have not been disrupted by a shortage of qualified drivers.  At December 31, 2002, we also employed approximately 3,100 office employees and 1,137 mechanics.2004.  None of our employees are represented by unions or covered by collective bargaining agreements.

Our industry has periodically had a difficult time attracting and retaining enough qualified truck drivers.  It is also common for the driver turnover rate of individual carriers to exceed 100%.  It has been our practice during the past few years to compensate our drivers at an above-average level in order to attract a high caliber of experience and minimize turnover.  During 2004, we increased company driver and IC compensation in order to attract and retain an adequate supply of qualified drivers.  While we have, to date, not experienced significant operational disruptions due to driver shortages, we expect costs to recruit, train and retain company drivers and ICs will continue to rise in the foreseeable future.

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REVENUE EQUIPMENTRevenue Equipment

As of December 31, 2004, we operated 10,151 company-controlled tractors.  In addition, our 1,301 contracted ICs operate their own tractors, but transport freight in our trailing equipment.  We operate with standardized tractors in as many fleets as possible, particularly in our JBT and JBI fleets.  Based on customer preference and the actual business application, our DCS fleet is more diversified.  We believe operating with relatively newer revenue equipment provides better customer service, attracts quality drivers and lowers maintenance expense.  At December 31, 2002, we owned or leased 10,653 company operated tractors, 26,0872004, the average age of our combined tractor fleet was 2.0 years, our trailers were 4.1 years old and 19,672 containers.our containers were 6.4 years old.  We believe that modern, late-model, cleanperform routine servicing and preventative maintenance of our equipment differentiates quality customer service, increases equipment utilization and reduces maintenance costs and downtime.  at most of our regional terminal facilities.

We generallytypically operate with newer revenue equipment in theour JBT segment withto minimize downtime and maximize utilization.  However, during 2003, the age of tractors and trailers approximating 2.1 years and 2.2 years, respectively, at December 31, 2002.  Somewhat older equipment and tractors designed for local and regional operations are typically utilized in theour JBT tractor fleet increased, primarily due to our decision to delay trades.  Our JBI and DCS segments.  Specially designedsegment utilizes high-cube containers, which can be separated from the chassis and double-stacked on rail carscars.  We are also operated by JBI.  The average agecurrently in the process of JBI tractorsexpanding our container fleet and containers at December 31, 2002 was approximately 4.6 years and 5.2 years, respectively.  The JBI segment commenced receiving brand new containers and reconditionedreconditioning our chassis in late 2001.  Approximately 6,300 new containers and 6,300 new and reconditioned chassis were placed in service during 2002.fleet.  The composition of the dedicated contractour DCS trailing fleet varies with specific customer service requirements.  At December 31,requirements and may include dry-vans, flatbeds, temperature-controlled, curtain-side vans, or even straight trucks.

Effective October 1, 2002, the average age of DCS segment tractors was 2.8 years.Environmental Protection Agency (EPA) required that most newly manufactured heavy-duty tractor engines comply with certain new emission standards.  In November of 2002, we committed to purchaseordered approximately 2,100 new tractors, the majority of which will be traded one-for-oneprimarily for units in theour JBI and DCS fleets.fleets, which were equipped with Mercedes engines.  These tradesengines were exempt from the EPA’s October 1, 2002, rules.  Except for these new tractors, which were utilized primarily for local and regional operations, we limited our new tractor purchases while we tested a limited number of the new engines.  In late 2003, we commenced receiving new tractors with the 2002 EPA-compliant engines.  At December 31, 2004, approximately 4,870 of our company-controlled fleet consisted of tractors with these compliant engines.  In addition to higher initial purchase prices, these tractors also experience an approximate 3% to 5% reduction in fuel efficiency.  We are uncertain if future maintenance costs will significantly reducebe higher, on the average, age offor these tractors as they age.  We do anticipate continued increases in tractor fleets.  Allownership costs and fuel costs as regular replacements and additions increase the percentage of our fleet with these newer engines.  In addition higher worldwide steel prices have resulted in increased acquisition costs for new revenue equipmentequipment.  A new set of proposed fuel-emission standards mandated by the EPA is maintainedexpected to become effective in accordance with a specific maintenance program primarily based2007.  We are unable to predict the impact these proposed standards will have on age and/or miles traveled.our future operations and financial results.

COMPETITIONCompetition

We are oneAccording to the American Trucking Associations (ATA), all modes of the largest publicly held truckloaddomestic freight carriers in the United States. WeStates generated approximately $610 billion of revenue in 2003.  Of this total, truck transportation represented about 87%, or $531 billion.  ATA also estimated that approximately 54% of the nation’s 2003 truck revenue related to for-hire carriers, while 46% related to private carriers.  As of July 2004, there were more than 573,000 private, for-hire, U.S. Mail and other U.S. interstate motor carriers on file with the Federal Motor Carrier Safety Administration (FMCSA).  The top ten for-hire truck-load carriers only generate about 3% of the total revenue in this segment, and we represent approximately 1% of this segment’s revenue.  The market in which we compete primarilyis frequently referred to as highly fragmented and includes thousands of carriers, many of which are very small.  While we compete with other irregular route, truckload common carriers. Less-than-truckload common carriers and private carriers generally provide limited competition for truckload carriers.  JBHT and our associated companies are one of a few carriers offering nationwide logistics management and dedicated revenue equipment services. Although a number of smaller carriers may provide competition on a regional basis, only a limited number of companies represent competition in all markets. The extensive rail network developed in conjunction withmarkets across the various railroads also allows us the opportunity to differentiate our services in the marketplace.country.

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REGULATIONRegulation

Our operations as a for-hire motor carrier are subject to regulation by the U.S. Department of Transportation’s Federal Motor Carrier Safety Administration (FMCSA)Transportation (DOT), and certain business is also subject to state rules and regulations.  The DOT periodically conducts reviews and audits to ensure our compliance with all federal safety requirements, and we report certain accident and other information to the DOT.  Our operations into and out of Canada and Mexico are also subject to regulation by various Canadian provinces.  Entry control barriers were substantially removed asthose countries.

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We consider our critical accounting policies and estimates to be those that require us to make more significant judgments and estimates when we prepare our financial statements and related disclosures, we must use estimates in determininginclude the economic useful lives of assets, provisions for uncollectible accounts receivable, exposures under self-insurance plans and various other recorded or disclosed amounts.  However, we believe that certain accounting policies are of more significance in the financial statement preparation process than others and are discussed below.  To the extent that actual outcomes differ from estimates, or additional facts and circumstances cause us to revise estimates, earnings will be affected.following:

Workers’ Compensation and Accident Costs

We purchase insurance coverage for a portion of our expenses related to employee injuries (workers’ compensation), vehicular collisions and accidents and cargo claims.  Most insurance arrangements include a level of self insuranceself-insurance (deductible) coverage applicable to each claim, but provide an umbrella policy to limit our exposure to catastrophic claim costs that are completely insured.  The amounts of self insuranceself-insurance change from time to time based on certain measurement dates and policy expiration dates.  Our current insurance coverage specifies that the self insured limit on the majorityDuring 2004, we were self-insured for a portion of our claims exposure resulting from cargo loss, personal injury, property damage, workers’ compensation and health claims for amounts up to the first $2 million for auto accidents and $1 million for workers’ compensation claims.  These same levels of self-insurance are in effect for 2005.

Our claims accrual policy for all self-insured claims is $1.5 million, which is prefunded withto recognize a liability at the time of the incident based on our insurance carrier.  We are substantially self-insured for lossanalysis of the nature and damage to our ownedseverity of the claims, analyses provided by third-party claims administrators, as well as legal, economic and leased revenue equipment.regulatory factors.  Our safety and claims personnel work directly with representatives from ourthe insurance companies to continually update the estimated ultimate cost of each claim.  The ultimate cost of a claim develops over time as additional information regarding the nature, timing and extent of damages claimed becomes available.  Accordingly, we use an actuarial method to develop current claim information to derive an estimate of our ultimate claim liability.  This process involves the use of loss- development factors based on our historical claims experience.  In doing so, the recorded ultimate liability considers future claims growth and provides an allowance for incurred-but-not-reported claims.  We do not discount our estimated losses.  At December 31, 2002,2004, we

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had approximately $15$19 million of estimated net claims payable.  In addition, we are required to pay certain advanced deposits and monthly premiums.  At December 31, 2002,2004, we had a prepaid insurance asset of approximately $45 million.$58 million, which represented pre-funded claims and premiums.  We are also substantially self-insured for loss of and damage to our owned and leased revenue equipment.

Revenue Equipment

We operate a significant number of tractors, trailers and containers in connection with our business.  This equipment may be purchased or acquired under capital or operating leases.lease agreements.  In addition, we may rent revenue equipment from third parties and various railroads under short-term rental arrangements.  Revenue equipment which is purchased is depreciated on the straight-line method over the estimated useful life down to an estimated salvage or trade-in value.  Equipment acquired under capital leases is initially recorded at the net present value of the minimum lease payments and amortized on the straight-line method over the lease term or the estimated useful life, whichever is shorter.  We had no revenue equipment under capital lease arrangements at December 31, 2004.

We have an agreement with our primary tractor supplier for guaranteed residual or trade-in values for certain new equipment acquired since 1999.  During the fourth quarter of 2003, we reviewed the useful lives and salvage values of our tractor fleet.  We have utilized thesethe guaranteed trade-in values as well as other operational information, such as anticipated annual miles, in accounting for purchased and leased tractors.  If theour tractor supplier was unable to perform under the terms of such agreements,our agreement for guaranteed trade-in values, it could have a materialmaterially negative impact on our financial results.  We periodically review the useful lives and salvage values of our revenue equipment and evaluate our long-lived assets for impairment.  We have not identified any impairments to our existing assets.

Revenue Recognition

We recognize revenue based on the relative transit time of the freight transported.  Accordingly, a portion of the total revenue which will be billed to the customer once a load is delivered is recognized in each reporting

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12Operating Data By Segment

* Reflects average use of corporate-wide trailing equipment

RESULTS OF OPERATIONS

20022004 Compared With 20012003

Operating Segments

For Years Ended December 31

(in millions of dollars)

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related footnotes appearing in this annual report.

Overview of 20022004

Our consolidated net earnings for calendar year 2002 were $51.82004 totaled a record $146 million. This compares with our previous record net earnings of $95 million or dilutedin 2003.  Diluted earnings per share of $1.33,were $1.75 in 2004, also a record number, compared with 2001 full-year earnings of $32.9 million, or 91 cents per diluted share.  We generated $101 million of operating income$1.17 in 2002, a nearly 40% increase over the $72.2 million of operating income in 2001.  Our operating ratio was 95.5% in 2002 and 96.6% in 2001.  Our increase in 2002 net earnings was in spite of an effective income tax rate which rose to 30.8% from 23.5% in 2001 and the2003.  The average number of diluted shares outstanding increasing by nearly 8%.  Thein 2004 was approximately 2% higher than the comparable number in 2003.  Consolidated operating revenues were $2.79 billion in 2004, an increase of 14% over the $2.43 billion in shares outstanding reflects a secondary public offering, which closed in June of 2002.   2003.

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Each of our threebusiness segments contributed to our improved financial results in 2004.  While the overall economy and level of freight activity were not particularly strong during 2004, a number of factors contributed to our improved earningslevel of earnings.  We have continued our focus on capacity management, as well as individual load and lane profitability.  A number of new proprietary technology tools and increased management focus have allowed us to reduce the amount of unprofitable lanes and freight, and to properly charge for equipment and services provided to customers.  In addition, the levels of available capacity in 2002.the industry have been reduced by significant increases in insurance, fuel, equipment and driver compensation costs.  The availability of qualified drivers has also limited carriers’ ability to expand the size of their fleets.

JBT Segment

JBT segment gross revenue was essentially flat, totaling $827.3$928 million in 2002 and $828.62004, up 10% over the $841 million in 2001.  However, 2002 revenues were generated with approximately 3% fewer tractors.  In addition, 20022003.  Higher fuel surcharge revenues were $14.2 million lower than(FSC) revenue in 2004 impacted this comparison.  If the comparable amount of FSC revenue was excluded from both years, 2004 JBT segment revenue rose 7.9% over 2003.  The average tractor count in 2001, which negatively impacted the revenue comparison by approximately 2%.  Truck segment operating income rose to $26.6 million in 2002,2004 declined 3.1% from $8.7 million in 2001.  The improvement in 2002 operating income reflected higher2003.  However, revenue per loaded mile, reduced empty milesexcluding FSC, was 8.7% above 2003, offsetting the decrease in the tractor fleet and enhancing operating income.  Current year revenue growth was also up approximately 2% from outsourced freight activity.

Operating income of the JBT segment rose to $103 million in 2004, from $49 million in 2003.  The significant increase in revenue per loaded mile, excluding FSC, accounted for the majority of this operating income improvement.  In addition, lower driver pay rates.JBT accident and workers’ compensation costs positively impacted current year operating income.

JBI Segment

JBI segment gross revenue grew by 19%, to $1,115 million in 2004, from $936 million in 2003.  Higher FSC revenue in 2004 impacted this comparison.  If FSC revenue was excluded from both years, 2004 JBI segment revenue increased 15.8% over 2003.  A significant portion of this revenue growth was driven by a 10.3% increase in loads.  Revenue per loaded mile, excluding FSC, was 3.4% above 2003 levels.  The remaining portion of revenue growth was primarily a result of freight mix changes.

Operating income in the JBI segment increased to $131 million in 2004 from $91 million in 2003.  The increase in current year JBI operating income levels was partly a result of the higher revenue per loaded mile, excluding FSC, increased load volume and reduced empty miles was a result of our continued focus on yield managementlower revenue equipment ownership costs, partly offset by higher rail and improved revenue quality.  The reduction in driver pay per mile was a result of changes in pay scales for newly-hired drivers.dray purchased transportation expenses.

JBI segment gross revenue grew 9%, to $809.1 million in 2002, from $740.5 million in 2001.  Revenue growth was due, in part, to continued demand for our intermodal service offering and conversion of our container fleet to 100% 53-foot units.  Operating income in the JBI segment rose to $54.6 million in 2002 from $42.1 million in 2001.  Our JBI operating ratio was 93.3% in 2002 and 94.3% in 2001.  Financial results in this segment were enhanced by improved container utilization, improved driver productivity and a focus on revenue quality.DCS Segment

DCS segment revenue grew nearly 15%,over 13% to $628.3$760 million in 2002,2004 from $548.7 million$671 in 2001.  Revenue2003.  The higher level of FSC revenue in 2004 impacted this comparison.  If FSC revenue was excluded from both years, 2004 DCS segment revenue rose 10% over 2003.  The average number of trucks in the dedicated fleet increased nearly 5% in 2004.  The additional revenue growth in the current year was primarily a result of a 9%6% increase in the size of the DCS tractor fleet and our focus on improving the quality of individual fleets.  While operatingnet revenue per tractor.

Operating income roseincreased 65% to $19.7$75 million in 2002 from $17.42004 versus $45 million in 2001, the segment’s2003.  During 2004, we have conducted reviews of our underperforming dedicated accounts and identified opportunities to either improve margins or redeploy assets.  We have also implemented cost controls and raised rates as appropriate.  These efforts have improved our DCS segment operating ratio was 96.9%to 90.2% in 2002 and 96.8%2004 from 93.3% in 2001.  We reduced some costs in the DCS segment such as driver pay and overhead, however, higher accident and claims expenses, as well as new project start up costs, more than offset the improvements.2003.

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The following table sets forth items in our Consolidated Statements of Earnings as a percentage of operating revenues and the percentage increase or decrease of those items as compared with the prior year.

Consolidated Operating Expenses

Total operating expenses increased 10.2% in 2002 increased 5.9%2004 over 2001,2003, while operating revenues rose 7.0%increased 14.5%.  OurThe combination of the change in these two categories resulted in our operating ratio improvedimproving by 350 basis points to 95.5%88.9% in 2002, compared2004, from 92.4% in 2003.  As previously mentioned, increases in revenue per loaded mile, excluding fuel surcharges, and lower casualty and workers’ compensation claims costs were two of the more significant factors driving these changes.  We also increased the number of ICs in our JBT and DCS fleets to 1,301 at December 31, 2004, from 994 at the end of 2003.  When we replace company-operated tractors and driver employees with 96.6% in 2001.  Salaries,ICs, certain costs such as salaries, wages, employee benefits and fuel are reduced and other costs such as purchased transportation increase.

The expense category of salaries, wages and employee benefits expense increased 3.6% in 2002, and declined to 36.4%29.8% of revenue in 20022004 from 37.6%32.5% in 2001.  As previously mentioned, a lower mileage pay rate in our JBT segment for newly-hired drivers2003 and the usetotal expense dollars only increased 4.8% from 2003, compared with the 14.5% increase in revenue.  While we did increase compensation levels for many of additional independent contractorsour drivers in 2004, these increases were primary contributorspartly offset by lower workers’ compensation costs.  The number of company drivers at December 31, 2004 was approximately equal to the relationshipnumber at the end of this cost category to operating revenues.  Partly offsetting a decline2003.  The 16.6% increase in drivers’ wages relative to revenue were increases in maintenance wages, workers’ compensation, health insurance and office employee incentive expenses.  We opened some new company managed maintenance facilities and increased our mechanic labor force by about 14% in order to reduce the amount of maintenance that we outsource.  We also experienced higher costs in workers’ compensation and other fringe benefit programs and paid additional incentive payments to our office and administrative personnel that resulted from improved 2002 net earnings.

Rentsrents and purchased transportation expense increased 15.5%,was primarily due to the growth of our JBI business segment and the related paymentsadditional funds paid to railroads and drayage carrierscompanies, related to JBI business growth, and to the usecontinued expansion of more independent contractors.  The 6.8% declineour IC fleets.

Fuel cost per gallon was approximately 21% higher in 2004 over 2003.  This increase in fuel costs and slightly lower fuel tax expense was primarily a resultefficiency accounted for the 24.2% increase in fuel costs.  We have fuel surcharge programs in place with the majority of our customers that allow us to adjust charges relatively quickly when fuel costs per gallon averaging about 5% less vs. 2001.  Operating supplies and expenseschange.  If fuel costs change rapidly, we may experience some financial impact from timing differences between financial reporting periods.  We were down 10.3%able to recover substantially all of our increased fuel costs experienced in 2002 reflecting the reduced amount of outsourced tractor and trailer maintenance work and our focus on reducing travel expenses. 

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