J.B. HUNT TRANSPORT SERVICES, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.             Basis of Presentation

Our condensed consolidated financial statements included in this Form 10-Q have been prepared without audit (except that the balance sheet information as of December 31, 20022003 has been derived from consolidated financial statements which were audited) in accordance with the rules and regulations of the Securities and Exchange Commission.  Although certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United Sates of America have been condensed or omitted, we believe that the disclosures are adequate to make the information presented not misleading.  You should read the accompanying condensed consolidated financial statements in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2002.2003.

We believe that all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented have been made.  The results of operations for the interim periods presented in this report are not necessarily indicative of the results to be expected for the full calendar year ending December 31, 2003.2004.

2.             Stock-based Compensation

We have adopted the intrinsic value basedvalue-based method of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations in accounting for compensation costs for our stock option plans.  Accordingly, compensation expense is recognized on the date of grant only if the current market price of the underlying common stock at date of grant exceeds the exercise price.

Had we determined compensation cost based on the fair value at the grant date for our stock options under Statement of Financial Accounting Standard No. 123, Accounting for Stock-based Compensation (SFAS No. 123), our net earnings would have been reduced to the pro forma amounts indicated below.  All amounts in the chart, except per share amounts, are in thousands.

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Pro forma net earnings reflects only options granted since December 31, 1995.  Therefore, the full impact of calculating compensation costs for stock options under SFAS No. 123 is not reflected in the pro forma net earnings amounts presented above because compensation cost is reflected over the options’ vesting periods of 5 to 10 years and compensation cost for options granted prior to January 1, 1996 is not considered.

3.             Recently Issued Accounting Standards

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143).  SFAS No. 143 required us to record the fair value of an asset retirement obligation as a liability in the period in which we incur a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets.  We adopted SFAS No. 143 effective January 1, 2003.  The adoption of SFAS No. 143 did not have a material effect on our financial statements.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.  This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation.  The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003.  On October 9, 2003, the FASB staff issued FASB Staff Position (FSP) Financial Interpretation No. 46-6, which deferred the effective date for applying the provisions until March 31, 2004.  The adoption of Interpretation No. 46 is not expected to have a material effect on our financial statements.

4.Long-Term Debt

Long-term debt consists of (in thousands):

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5.4.             Capital Stock

We have a stock option plan (Management Incentive Plan) that provides for the awarding of our common stock and stock options to key employees.  A summary of the restricted and non-statutory options to purchase our common stock follows:

We announced on July 17, 2003April 22, 2004 that our Board of Directors had re-initiated a quarterly cash dividend. We had not paid a dividend since February 2000.  The re-initiation of a quarterly dividend was based on our lower debt levels and improved net earnings.  On October 21, 2004, our Board of Directors declared a two for one stock splitquarterly cash dividend of $.03 per common share, payable on our common stock, which was payable August 29, 2003,November 22, 2004 to stockholders of record on July 31, 2003.  All common stock related amounts in this Form 10-Q have been adjusted to reflect this stock split.as of November 5, 2004.

6.5.             Earnings Per Share

We compute basic earnings per share by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding for the reporting period.  Diluted earnings per share reflects the potential dilution that could occur if holders of options or other contracts to issue common stock options exercised or converted their holdings into common stock.  Outstanding stock options represent the only dilutive effects on weighted average shares.  The chart below presents a reconciliation between basic and diluted weighted average shares outstanding and the related earnings per share.  All amounts in the chart, except per share amounts, are expressed in thousands.

We had some options to purchase shares of common stock which were outstanding during the periods shown, but were excluded from the computation of diluted earnings per share because the option price was greater than the average market price of the common shares.  A summary of those options follows:

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7.6.             Comprehensive Income

Comprehensive income consists of net earnings and foreign currency translation adjustments.  During

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the three and nine months ended September 30, 20032004 and 2002,2003, comprehensive income was equal to:  (in thousands):to net earnings.

8.7.             Income Taxes

The effective income tax ratesrate for the three and nine monthsmonth periods ended September 30, 20032004, was 40.5%.  The effective income tax rate was 38.5% for the three and 2002, were 38.5% and 25.0%, respectively.nine month periods ending September 30, 2003.  The increase in the 20032004 effective income tax ratesrate was partly a result of the new accountable expense reimbursement plan (driver per diem plan).  This new plan,, which was implemented in February of 2003, benefits most of our eligible drivers and reduces2003.  The driver per diem plan, while reducing certain costs which are classified in the salary, wages and employee benefits, expense category.increases our non-deductible meal allowances, resulting in a higher effective tax rate.  The lower benefit costs ofincrease in the driver per diem plan are partly offset by higher2004 effective income tax rates.rate was also due to our increased level of earnings and the suspension, during the fourth quarter of 2003, of recording certain non-cash tax benefits associated with the sale and leaseback transactions as discussed below.

In 1999, we entered into a series of transactions effecting a sale and leaseback of a portion of our Intermodal container and chassis fleet for a selling price of approximately $175 million.  These transactions used a structure thatThis transaction was examined by the Internal Revenue Service (IRS) has indicated it intends to examine.IRS in an audit of our 1998 and 1999 income tax returns.  We have voluntarily disclosedreceived an IRS Notice of Proposed Assessment, which disallows the tax benefits associated with these transactions, toand as a result, we have filed an appeal in the matter.  We have been notified by the IRS Appeals Division that they intend to have the examining agent request more information from us and develop certain technical arguments we raised in Octoberdefending our position.  The examining agent has not yet contacted us and no specific timeframe has been given for the completion of 2002,this additional information request.  If a resolution of the matter cannot be reached in the appeals process, the IRS began their examinationwill forward a 90-day letter, also known as a Notice of Deficiency.  A resolution of the specific facts of these transactions.  As of September 30, 2003, no adverse findings have been asserted bydispute could occur at any point in the IRS.administrative process or could extend through a trial and court appeals.  If the IRS challenges our transactions, we intend to vigorously defend them.  As of September 30, 2003,are unsuccessful in defending this transaction, we had recognized approximately $31 million of income tax benefits from these transactions.  The annual tax benefits recognized from these transactions can be computed from the table contained in Footnote (4), Income Taxes, of our Form 10-K for the years 2002could owe additional taxes and 2001, and by summing the amounts labeled as “sale/leaseback benefit” for the years 1999 through 2002.  As of September 30, 2003, weinterest.  We estimate our maximum potentialearnings exposure to be approximately $36.5$34 million, includingwhich represents the tax benefits realized through December 31, 2002, plus estimated accrued interest in the eventthrough September 30, 2004.  This exposure would result if the IRS successfully challenges allsucceeded in disallowing 100% of the tax benefits realized to date.from this transaction.

9.8.             Business Segments

We operated three distinct business segments during the nine months ended September 30, 20032004 and 2002.2003.  These segments included:  Truck (JBT), Intermodal (JBI) and Dedicated Contract Services (DCS).  The operation of each of these businesses is described in footnote (10)(11) of our annual report (Form 10-K) for the year ended December 31, 2002.2003.  A summary of certain segment information is presented below (in millions):

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