SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K


For the fiscal year ended December 31, 1996:         Commission File No. 0-21922

                            ARROW TRANSPORTATION CO.
             ------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

          Oregon                                            93-1103182
----------------------------                       ----------------------------
(State or other jurisdiction                           (.R.S. Employer 
of incorporation)                                           Identification No.)


10145 N. Portland Road, Portland, Oregon                      97203  
----------------------------------------           ----------------------------
(Address of principal executive offices)                    (Zip Code)



                                 (503) 286-3661
               --------------------------------------------------
               Registrant's telephone number, including area code

           Securities registered pursuant to Section 12(b) of The Act:
                                      None

           Securities registered pursuant to Section 12(g) of the Act:
                           Common Stock, no par value

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                 YES (X) NO ( )

As of December 31, 1996 4,191,366 shares of Common Stock were  outstanding,  and
the aggregate market value of the Common stock of Arrow  Transportation Co. held
by nonaffiliates  (2,998,702  shares) was approximately  $1,686,770 based on the
market price at that date.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      NONE

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                            ARROW TRANSPORTATION CO.
                          1996 FORM 10-K ANNUAL REPORT
                                     PART I

ITEM 1.  BUSINESS

General

Arrow  Transportation  Co. is  headquartered  in Portland,  Oregon and through a
wholly-owned  subsidiary,  Arrow  Transportation  Co. of  Delaware,  is  engaged
primarily in the  transportation  of bulk liquid chemical products in intrastate
and interstate commerce. Such companies are hereinafter collectively referred to
as  "Arrow" or the  "Company."  The  Company  commenced  operations  in 1931 and
currently  serves a wide variety of  manufacturing  and industrial  users in the
United States and Western Canada.  The Company's  operations are concentrated in
Oregon,  Washington,  California  and Texas in the United States and Alberta and
British Columbia in Canada.  Interstate  operations  between these locations and
points throughout the United States are served.

The Company  transports a wide  variety of chemical  products,  including  water
treatment  chemicals,   paints  and  coatings,   adhesives,   acids,   alcohols,
chlorinated solvents, liquid plastics, corrosives, caustic materials and refined
chemicals.  The Company does not transport food  products.  Each of the products
transported requires specialized trailers and experienced personnel with special
skills necessary for safe and efficient handling of these various chemicals. The
Company has received  several  national  awards for safety and has  consistently
maintained  a  satisfactory   rating  from  the  United  States   Department  of
Transportation  ("DOT").  The Company's  strategy is to offer a complete line of
chemical  transportation  services  and to provide  dependable,  safe and timely
service designed to meet the specialized needs of its customers.

Arrow also offers  rail/truck  bulk transfer  services which enable  shippers to
take  advantage  of  rail  linehaul   economics.   The  Company's  domestic  and
international bulk intermodal container service and rail transloading operations
allow Arrow to provide a portfolio of services to its customers.

At December 31, 1996,  Arrow was  approximately  the 40th largest bulk commodity
motor carrier in the United States and the leading bulk chemical commodity motor
carrier in the Pacific  Northwest.  At December 31, 1996, Arrow operated a fleet
of 162 tractors and 235 trailers.  The Company's equipment is based at terminals
in  Portland,  Oregon,  Longview  and Tacoma,  Washington,  Richmond and Downey,
California,  and Houston,  Texas.  The Company has a limited  service  satellite
terminal in Eugene,  Oregon. Arrow's terminal facilities cover the major Western
and  Southwestern  traffic  lanes,  providing  the  Company  with the ability to
efficiently meet the needs of shippers in the United States and Western Canada.

Arrow  Transportation  Co. was  organized  in February  1992 under Oregon law to
become the "parent" company of its wholly-owned subsidiary, Arrow Transportation
Co. of Delaware, a corporation organized under the laws of the State of Delaware
in 1931.  The Company's  executive  offices are located at 10145 North  Portland
Road, Portland, Oregon 97203 and its telephone number is (503) 286-3661.

Historical Background

Arrow  was  established  in  1931 as a  transporter  of  bulk  liquid  petroleum
products.  The Company  principally served the Pacific  Northwest,  transporting
products such as gasoline,  diesel fuel,  lubrication  oils,  aviation fuels and
fuel oils. During the mid 1980's, recognizing a need to diversify and expand its
transportation  service  capabilities,   Arrow  acquired  Inland  Transportation
Company of Seattle in 1985 and Widing  Transportation of Portland in 1986. These
acquisitions  expanded  Arrow's  primary  service  area and  range  of  products
transported to include chemicals, compressed gasses and fertilizers.


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In the summer of 1993, in order to take advantage of market opportunities, Arrow
completed a public stock offering, raising approximately $4.3 million to provide
the equity  required to purchase  modern  revenue  producing  equipment,  expand
terminal facilities, and pay off debt.

After the public offering,  the Company purchased 95 tractors, 87 trailers,  and
expanded its terminal  network into the Texas and the southern  U.S. The Company
experienced  rapid growth until the fall of 1994 when it experienced a strike by
its  mechanics  and drivers in Oregon.  The Company lost business as a result of
service  disruptions  caused  by the  labor  problems  in 1994 and then  several
factors developed which negatively impacted its profitability. Slowing growth in
the durable goods producing  segments of the economy  translated to soft freight
demand during 1995. Additionally,  intrastate deregulation in Oregon, Washington
and Texas impacted rates and volume negatively as increased  competition entered
those markets.

Both  revenue and  earnings  declined  in 1995 as a result of overly  aggressive
geographic  and fleet  expansion in 1994 and 1995.  The  terminals  and carrying
capacity  added in late in 1994 and early 1995 added to  operating  and overhead
expense and were not  effectively  utilized  because of lower  business  levels.
Business  volume  declined in 1995 as a result of business lost from service and
pricing  issues,   sluggish  freight  demand,  the  impact  of  deregulation  of
intrastate  transportation and business lost as a result of service  disruptions
caused by 1994's labor problems. This low level of capacity utilization and lack
of balance in its newer  longhaul  traffic lanes were the primary  factors which
contributed to the losses experienced in 1995.

Recognizing a need to improve  Arrow's  performance,  the Company  implemented a
business  plan  in  1996  designed  to  restructure   the  Company  and  restore
profitability.  During the first three quarters of 1996, the Company implemented
phase I of its business  plan.  This plan was designed to enhance the  Company's
overall  competitiveness,  productivity  and  efficiency  through a reduction in
operating  and  overhead  costs.   The  plan  downsized  and   restructured  the
organization  to better serve its  customers.  Terminals  were closed and excess
linehaul  carrying  capacity was  eliminated  as Arrow sold 43 power  units.  An
integral  part of the  business  plan was the  installation  of a  formal  Total
Quality Management ("TQM") program throughout the organization.  Installation of
the  Company's  TQM program  included the training of all corporate and terminal
staff and resulted in the empowerment of its front line managers and associates,
streamlined terminal operations and it strengthened customer service.

The Company has made  significant  changes and  continues to make changes to its
operations  in order to achieve  reductions  in its  operating  cost  structure.
During the fourth quarter of 1996, the Company began  implementation of phase II
of its profit improvement plan. The phase II plan included additional reductions
in corporate  and support  staff,  selected  fleet  downsizing,  operating  cost
reductions,  redeployment  of equipment and the  restructuring  of the Company's
term debt and lease arrangements. The changes the Company is making are meant to
focus the Company on its core competencies,  to reduce waste and redundancies in
its processes,  and improve cash flow. Although the changes the Company has made
and continues to make have reduced its operating cost structure and are expected
to produce improved results,  given the Company's  leverage  position,  business
volume  must  improve for the full  benefit of the many  actions the Company has
taken to be realized.

Business Strategy

Arrow's  business  strategy is to offer high  quality,  environmentally  secure,
specialized  chemical  transportation  services  in the tank  truckload  carrier
market.   Arrow   concentrates  its  resources  and  efforts  primarily  on  the
transportation of bulk chemicals. Management believes that there are significant
opportunities to improve Arrow's profitability,  operating efficiency and expand
its customer base. Key aspects of the Company's  business and growth  strategies
are as follows:

FOCUSED  MARKETING  EFFORT.  The Company  plans to increase  business  volume by
focusing Arrow's business  development  efforts on the Western United States and
Canada. Arrow will focus on those markets where it believes it has a competitive
advantage,  the Pacific  Northwest and  California.  As an integral part of this
strategy,  the  Company  will focus its Texas long haul  business  only on those
traffic lanes from Texas where the Company can obtain  balanced  freight  demand
with minimal empty miles.

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<PAGE>
IMPROVE  UTILIZATION  OF  CARRYING  CAPACITY.  The  Company  plans  to  increase
utilization of Arrow's carrying  capacity and achieve balance between  equipment
levels  and  anticipated  demand  for  Arrow's  services.  Arrow  sold 43 excess
tractors  during 1996 and plans to sell certain  equipment in 1997 to achieve an
improvement in the balance of demand and equipment levels.

REDUCE ARROW'S OPERATING COST STRUCTURE.  The Company has taken action to reduce
staff,  downsize and close certain  terminals and to instituted  strict spending
controls to reduce costs.  It has also  undertaken a formal program to lower its
operating costs and improve its operating  efficiency and effectiveness  through
the  implementation of an integrated total quality management program throughout
the entire Company.

SEEK  REPLACEMENT  OF PRIVATE TANK TRUCK FLEETS.  The Company  continues to seek
growth  by  replacing   aging,   less  efficient   private  fleets  operated  by
manufacturers,  distributors  and users of chemicals.  The advantages of private
fleet  operations  have  been  reduced  since  federal   deregulation  in  1980.
Intrastate  deregulation  which became effective  January 1, 1995 should further
reduce  the  advantages  of private  fleet  operation.  Analysts  who follow the
truckload  industry expect private fleet  conversions to be an increasing source
of growth.

INCREASE MARKET SHARE DURING INDUSTRY CONSOLIDATION.  The highly fragmented tank
truck industry is undergoing a consolidation as shippers are concentrating their
business with fewer carriers.  The safety and liability  issues  associated with
transporting chemicals has lead the Chemical  Manufacturers  Association ("CMA")
to develop the Responsible Care Program,  which  established  rigid standards to
ensure the proper handling and transportation of chemical  products.  Generally,
only carriers  that have modern  equipment,  insurance and safety  programs that
comply with the CMA's  Responsible  Care Program  standards  are  becoming  core
carriers.

PROVIDE  VALUE  ADDED  SERVICES.  In  addition  to the  Company's  high  quality
transportation  services, the Company provides other value-added services to its
customers such as logistical coordination,  rail tank car storage,  transloading
and   private   fleet  and  third   party   maintenance   services.   Intermodal
transportation of International  Standards  Organization  ("ISO") containers and
cleaning  services  are  additional  sources of  revenue.  These  services  have
enhanced the west coast distribution  capabilities of chemical shippers and have
established the Company as an integral part of its customers  manufacturing  and
distribution networks.

Operations

The Company focuses its  operational  strategy on providing bulk chemical liquid
transportation  services to clients located across the U.S. and Canada.  Arrow's
primary source of revenue is received from linehaul services. Additional sources
of revenue  include  rail/truck  transloading  services,  rail car storage,  ISO
container  intermodal  services,  maintenance  services and third party tankwash
services at Company operated tankwash facilities.

Arrow believes that its structure, based on interlinked operating terminals that
provide the Company  with a strong  regional  presence,  customer  contacts  and
operating controls of a regional carrier and centralized  controls and operating
guidelines that provide the Company with the  coordination and efficiencies of a
national  carrier,  allows the Company to maximize  operating  efficiency at all
levels.

Terminal  operations  are regulated by specific  safety,  maintenance,  customer
service and other operating  procedures  established by the Company,  which each
terminal  manager  is  responsible  for   implementing   and  maintaining.   The
implementation of Company policies is reviewed during field trips both by safety
personnel  and other  Arrow  executives  while  visiting  the  terminals.  These
regulations  provide the basis for the uniform  efficiency and safety of Arrow's
operations  and allow  terminal  managers to focus on managing the employees and
equipment   resources  at  their  terminal  rather  than  on  setting  operating
procedures.

All terminals work together in an integrated and coordinated  fashion.  Constant
monitoring of each terminal's operations and financial  performance,  as well as
overall  safety,  training and customer  service is  undertaken  at the Portland
headquarters. Arrow's online communication system is also designed to facilitate
this  coordination  by enabling the  interaction of the various  terminals among
themselves as well as providing

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<PAGE>
terminal managers with updates of operating data.

Transload Operations

The Company conducts a rail  transloading  operation which enables product to be
transloaded  directly from rail car to tank trailer.  This allows  shippers from
outside  the  user's  area  to  combine  the   economics   of  long-  haul  rail
transportation  with the service  requirements  of local truck  delivery.  Large
volume  shipments  through  a  transload  facility   significantly  improve  the
utilization of dedicated  trailers over normal truck  operations.  The Company's
first  transload  facility  was  established  in  1991 at the  Portland,  Oregon
terminal.  The Company continues to explore  opportunities to develop additional
rail transloading capabilities.

Intermodal Operations

Arrow offers a wide range of intermodal  services by transporting ISO containers
on  specialized  chassis to and from a primary  mode of  transportation  such as
rail, barge or vessel.  Arrow's intermodal  operations provide both domestic and
international  service.  The  Company's  strategically  located  facilities  are
staffed with highly trained operating  personnel.  The intermodal work force has
been trained in  operations,  safety and quality  assurance  for a wide range of
liquid chemical products. Arrow is focusing on the liquid chemical ISO container
as the centerpiece of this service.

Tank Wash Operations

The Company operates three EPA and state licensed tank washing  facilities,  one
in California,  one in Oregon and one in Washington.  These  facilities are used
for both Company  equipment and as a means to generate  additional  tank washing
revenue  from  shippers  and  other  motor  carriers.  Management  believes  the
availability  of these  facilities  enables the Company to provide an integrated
service package to its customers.

Equipment Rental Operations

In addition to its transport business, the Company also leases tractors and tank
trailers to shippers.  Trailers rented by shippers are used for standing storage
or are transported by the Company on behalf of the shippers. Tractors are rented
by customers in connection with their private fleet  operations.  The rental fee
for these tractors and trailers is typically paid monthly.

Maintenance

All  Arrow  terminals,  except  Eugene,  Oregon  have full  service  maintenance
facilities.  The Portland,  Oregon  terminal has tractor and trailer  rebuilding
capabilities.  All terminals are provided with computer  generated reports which
indicate when inspection  and/or  servicing of units is required.  Arrow exceeds
all requirements set forth by the DOT by performing periodic  inspections on its
tractors  every  6,000  miles,  and  trailers  every  60  days  as  part  of its
service/inspection program. All Arrow maintenance facilities are registered with
the DOT and are  qualified  to perform all tank tests and  inspections  required
under HM 183 for the Company's fleet and third parties.

Arrow fleet  maintenance  has been certified by the National Board of Boiler and
Pressure  Vessel  Inspectors  as being  ASME  qualified  to  perform  cargo tank
repairs,modifications  and  alterations.  In 1995,  the Comapny  aquired the "R"
stamp  and  certification.  Since  that  time,  maintenance  services  have been
expanded to provide cargo tank and ISO container  testing and repair services to
private fleets and other tank truck operatiors.

Marketing and Customers

The Company has a sales,  customer  service and marketing staff  supplemented by
active client development work by senior management.  Arrow's  salespeople focus
on covering accounts located in the Pacific  Northwest,  California and Texas as
well as nationally at the corporate headquarters of its customers.


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Major  customers  are added only after  credit  review and  analysis  by Arrow's
credit manager.  Arrow's salespeople are also aided by terminal managers and the
dispatchers,   who  act  as  regional  customer  service   representatives   and
continually  coordinate the transportation  needs of specific customers in their
geographical area.

The Company operates under 49 State General Commodity  Contract Authority and 49
State Interstate  General Commodity Common Authority and intrastate  authorities
granted by various  state  public  service  commissions.  Approximately,  75% of
Arrow's  revenues are generated  pursuant to contractual  agreements and each of
the Company's 50 largest customers is under contract.

During the year ended  December 31, 1996,  the Company  booked revenue from over
1,000  customers.  Its largest  customer  represented  approximately 4% of total
revenues while the top twenty-five customers combined represented  approximately
53% of total revenues.  The Company's one hundred largest  accounts  represented
approximately 85% of total revenues and approximately 75% of these accounts have
been served by the Company for over 10 years.

Fleet

Tractor Operations
As of December  31,  1996,  the Company  operated 162 tractors (32 owned and 130
leased under lease agreements).  The Company's tractor fleet is comprised of the
following:

Model Year             Owned      Leased     Total as of 12/31/96
----------             -----      ------     --------------------
1995                      -         35                 35
1994                     25         70                 95
1993                      -         25                 25
1986                      2          -                  2
1984                      1          -                  1
1980-1983(1)              4          -                  4
                       -----      -----              -----
Total                    32        130                162

(1) All  1980-1986  model  tractors were removed from active  service  effective
January 1, 1997 and are scheduled for sale in 1997.

The  Company  has  purchased  or leased  primarily  new  Freightliner  tractors.
Standardization  of purchases  enabled the Company to simplify its own training,
control  the  cost of  spare  parts  inventories  and  optimize  its  preventive
maintenance  programs.  In accordance with the Company's  restructuring plan, 43
tractors were sold during 1996.

Trailer Operations
As of December 31,  1996,  the Company  operated 235 trailers  (201 owned and 34
leased under lease agreements). The Company's tank trailer fleet is comprised of
the following:

Model Year         Owned         Leased       Total as of 12/31/96
----------         -----         ------       --------------------
1995                 18              -                18
1994                 37             23                60
1993                 48              -                48
1992                  1              -                 1
1990                  1             10                11
1989                 20              1                21
1988                 14              -                14
1986                  3              -                 3
1984                  1              -                 1
1980-1983(1)          6              -                 6
1970-1979            40              -                40
1960-1969            10              -                10
1958-1959             2              -                 2
                   -----         ------           -------
Total               201             34               235

(1)  Forty-Eight of the pre- 1984 trailers have been reconditioned.

A typical  stainless  steel  trailer  operated  by the Company is 42.5 feet long
(tandem axle), 8 feet wide, and 10.5 feet high.

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The  interior  volume of these  trailers  typically  ranges  from 5,000 to 7,200
gallons, and their weight capacity ranges up to 65,000 pounds.

Employees

As of December  31,  1996,  the Company  employed  283 people,  of whom 184 were
drivers, 24 were mechanics,  12 were tank washers, 15 were rail yard and service
personnel,   and  48  were   support   personnel,   including   management   and
administration.  Most  terminals  are  headed  by a  terminal  manager  who  has
responsibility  for hiring  drivers  and  administrative  personnel  and,  where
applicable, mechanics, customer service and tank wash personnel.

The  Company's  drivers,  tank  cleaners,  and shop and  service  personnel  are
represented by the Teamsters. Its mechanics are represented by the International
Association of Machinist and Aerospace  Workers.  In 1994, during the process of
contract  negotiations,  the Company experienced a four week strike by mechanics
and drivers at its Portland, Oregon terminal. The strike ended upon ratification
of five-year labor agreements.  The new labor agreements,  which cover all union
employees, expire June 30, 1999.

Drivers

As of December  31,  1996,  the  Company  utilized  the  services of 184 Company
drivers  who work  exclusively  for  Arrow.  Company  drivers  are  selected  in
accordance  with specific  guidelines  which focus  primarily on safety records,
driving experience and personal evaluations.  The Company only employs qualified
tank  truck  drivers  with a  minimum  of two  years of  over-the  road  driving
experience  in trucks  with a gross  weight in  excess of 26,000  pounds.  These
drivers are then  enrolled in a training  program which is  administered  by the
Company's full time driver trainer.

Due to demographic and macroeconomic  trends,  the ability to attract and retain
qualified drivers has become an increasingly  difficult problem for the trucking
industry.  Management  believes that Arrow's policy of utilizing Company drivers
and its labor agreement provide the Company a competitive advantage with respect
to driver retention and recruitment.  Arrow's  collective  bargaining  agreement
with the International  Brotherhood of Teamsters,  Chauffeurs,  Warehousemen and
Helpers of America ("Teamsters") provides working conditions and a comprehensive
benefit package which encourages longevity.

Driving  hours are  regulated  by the DOT.  Drivers can only drive for up to ten
continuous hours. They must then rest for at least eight hours and cannot in any
case drive more than 70 hours per eight day period.

Competition

The tank truck services  business is extremely  competitive and fragmented.  The
Company  competes  primarily with other tank truck carriers and private carriers
in various states. With respect to certain aspects of its business,  the Company
also   competes  with   intermodal   transportation,   railroads,   flatbed  and
less-than-truckload  carriers. Intermodal transportation has increased in recent
years  as  reductions  in  train  crew  size  and the  development  of new  rail
technology have reduced costs of intermodal shipping.


Competition  for freight  transported by the Company is based primarily on rates
and service. Management believes that Arrow's overall size and availability of a
wide  range of  equipment,  together  with its  geographically  dispersed  local
marketing/sales  network and west coast terminals facilities present the Company
with competitive  advantages over many other truckload carriers in its core west
coast market.

The Company's  largest  competitors are Matlack Systems,  Inc.,  Chemical Leaman
Tank Lines,  Inc.,  Trimac  Transportation  Services,  Ltd., and Montgomery Tank
Lines and its affiliated companies as well as a number of privately held western
regional  carriers.  There are approximately 200 recognized tank truck carriers,
most of whom are primarily regional operators.


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Insurance

The primary risks  associated  with the Comany's  business are bodily injury and
property damage, workers' compensation claims and cargo loss damage. The Company
purchases  insurance  coverage  against  these risks.  The Company has liability
insurance coverage which meets or exceeds regulatory  requirements.  Coverage is
provided for bodily injury and/or property damage  liability  resulting from the
sudden  and  accidental  "discharge,   dispersal,   release  or  escape  of  the
pollutants" caused directly by the loading, unloading, upset, overturn or damage
of a  company  vehicle  as a result of its  maintenance  or use.  The  pollution
coverage is more favorable  than that  purchased by certain other  transporters,
who may have  only the  federally  mandated  endorsement  on their  policy.  The
Company's  policy  does not allow the  insurance  carrier to charge  back to the
Company  the  amount  paid  for  certain  pollution  losses  arising  out of the
operation of the Company's vehicle.  The Company's  automobile  liability policy
provides  comprehensive  coverage  with  $10  million  limit  of  liability  per
occurrence  with no deductible.  The insurance  carrier is responsible for third
party automobile liability claims on a first dollar basis. Each insurance policy
is reviewed  annually  with  outside  insurance  consultants  to  determine  its
adequacy in meeting losses and anticipating industry trends.

Safety

Management regularly  communicates to employees concerning the interrelationship
of Arrow's  safety and  insurance  programs  through  the  employee  orientation
process, newsletter, and regularly scheduled meetings at all locations. A safety
award  program  affiliated  with  the  National  Safety  Council  is in place to
recognize employees for their performance.

During 1996 the Company  had 0.56  reportable  accidents  per million  miles.  A
reportable  accident,  as defined by the DOT, is one involving  death,  personal
injury with treatment  sought  immediately  away from the accident or a disabled
vehicle requiring towing.  DOT has awarded the Company its highest safety rating
for more than 15  consecutive  years.  Additionally,  the Company  has  received
national  safety awards from the National Tank Truck  Carriers  Association.  In
addition  to  following  DOT  regulations  requiring  random drug test and post-
accident drug testing,  the Company  rigorously  enforces its accident reporting
and follow-up standards.

A full time  Environmental  Manager,  Safety  Director  and Driver  Trainer  are
employed  to  supervise  the  implementation  of  Arrow's  hiring  and  training
function. Routine inspections are carried out by regulatory agencies in addition
to those carried out by Arrow's consultants and insurance providers.

Regulation

As a motor  carrier,  the  Company is  regulated  by the DOT and  various  state
agencies.  There are additional  regulations  specifically  relating to the tank
truck industry  including  testing and  specifications  of equipment and product
handling  requirements.  The Company may transport  most types of freight to and
from any point in the United States over any route selected by the Company.  The
trucking  industry is subject to possible  regulatory  and  legislative  changes
(such as increasingly stringent  environmental  regulations or limits on vehicle
weight and size) that may affect the  economics  of the  industry  by  requiring
changes in operating  practices or by changing the demand for common or contract
carrier services or the cost of providing truckload services.  In addition,  the
Company's tank wash facilities are subject to stringent local, state and federal
environmental regulations.

The Federal Motor Carrier Act of 1980 (the "Act") served to increase competition
among  motor  carriers  and  limit  the  level  of  regulation  in the  industry
(sometimes  referred to as  "deregulation").  The Act also enabled applicants to
obtain ICC  operating  authority  more  readily  and  allowed  interstate  motor
carriers such as the Company to change their rates by a certain  percentage each
year  without  ICC  approval.  The law also  removed  many  route and  commodity
restrictions on the  transportation  of freight.  In 1994,  Congress adopted the
Negotiated  Rates Act which  requires,  among other  things,  written  contracts
between shippers and carriers.

Interstate  motor  carrier   operations  are  subject  to  safety   requirements
prescribed  by the DOT.  Such matters as weight and  dimension of equipment  are
also subject to federal and state regulations. Since 1989, DOT

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<PAGE>
regulations have imposed  mandatory drug testing of drivers.  To date, the DOT's
national  commercial  driver's  license and drug  testing  requirement  have not
adversely  affected the  availability to the Company of qualified  drivers.  New
alcohol  testing  rules  adopted by the DOT became  effective  in January  1995,
require certain tests for alcohol levels in drivers and other safety  personnel.
The  Company  does  not  believe  the  new  rules  will  adversely   affect  the
availability of qualified drivers.

The "Airport  Improvement Act" (the "Act"), which became effective on January 1,
1995, essentially deregulated intra-state transportation of motor carriers. This
Act  prohibits  individual  states  from  regulating  entry,  pricing or service
levels.   However,  the  states  retained  the  right  to  continue  to  require
certification of carriers, but this certification is based only upon two primary
fitness  criteria:  that of safety and insurance.  Prior to January 1, 1995, the
Company held  intra-state  authority  in several  states.  Since that date,  the
Company  has  either  been  "grandfathered  in" or has  obtained  the  necessary
certification to continue to operate in those states. In states that the Company
was not  previously  authorized  to operate,  it has obtained  certificates  (or
permits)  allowing  it to  operate  or is  in  the  process  of  obtaining  said
certificates in order of importance to the Company.

From time to time,  various  legislative  proposals  are  introduced to increase
federal,  state,  or local  taxes on motor  fuels.  The Company  cannot  predict
whether,  or in what form, any increase in such taxes  applicable to the Company
will be enacted.

Fuel

Any increase in fuel taxes or in fuel prices  could have a direct  impact on the
Company's  operating  results to the  extent  that such  increases  could not be
passed along to its customers. During 1996, fuel prices increased significantly.
Market  conditions  did not allow the Company to fully  recapture this increased
cost.

























                                        9

<PAGE>
ITEM 2.  PROPERTY

The  principal  properties of the Company  consist of six full service  terminal
locations,  and one satellite terminal location. The Company's executive offices
occupy a portion of the Portland terminal. Also at the Portland facility, a rail
spur allows for rail/truck  transloading  services.  The tank wash facilities at
the  full  service  terminals,   which  are  regulated  by  the  EPA  and  state
authorities,  and are used for both Company equipment and as a means to generate
additional tank washing revenue from shippers and other motor carriers.

Management  believes the availability of these facilities enables the Company to
provide an integrated service package to its customers.

The following table is a summary of Arrow's facilities:
<TABLE>
<CAPTION>
                                  Owned or      
   Location                        Leased             Function
   --------                      ---------            --------
<S>                              <C>                  <C>

   Portland, Oregon                 Leased            Executive Offices, Dispatch, Intermodal,
                                                      Maintenance, Transloading, and Tank
                                                      Cleaning Facilities

   Eugene, Oregon                   Leased            Satellite

   Tacoma, Washington               Leased            Dispatch, Intermodal, Maintenance, and
                                                      Tank Cleaning Facilities

   Longview, Washington             Leased            Dispatch, Maintenance and Intermodal
                                                      Facilities

   Richmond, California             Leased            Dispatch, Intermodal, Maintenance, and
                                                      Tank Cleaning Facilities

   Downey, California               Leased            Dispatch, Intermodal, and Maintenance

   Houston, Texas                   Leased            Dispatch, Intermodal,and Maintenance,
</TABLE>




ITEM 3.  LEGAL PROCEEDINGS

See Managements' Discussion and Analysis, "Contingencies"


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of fiscal year 1996.






                                       10

<PAGE>
                                     PART II


ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS

The  Company's  common  stock  traded on the Nasdaq Small Cap Market tier of the
Nasdaq Stock Market under the symbol "ARRW",  until March 11, 1997. On March 11,
1997 the  Company's  common  stock was  delisted  by Nasdaq as it no longer  met
Nasdaq's minimum listing  requirements.  Effective March 12, 1997, the Company's
common stock began trading on the OTC  Electronic  Bulletin  Board  System.  The
following  table sets forth the high and low  closing  prices as reported by the
Nasdaq Stock Market.

                                                Prices
         Quarter Ended                  Low              High
         -------------                  ---              ----
         March 31, 1995                 3                5
         June 30, 1995                  2 3/4            3 3/8
         September 30, 1995             1 3/4            3
         December 31, 1995              1 1/4            2 1/2

         March 31, 1996                 11/16            1 1/2
         June 30, 1996                  11/16            1 1/8
         September 30, 1996             13/16            1
         December 31, 1996              11/32            15/16

The Company has not paid any cash  dividends on the common stock in the past and
anticipates  that,  for the  foreseeable  future,  it will  retain any  earnings
available for dividends for use in its business.  Further,  the Company's credit
arrangement  with its  lender  does not  allow the  Company  to  declare  or pay
dividend on its common stock.  There were  approximately  1,500  shareholders of
common stock as of March 31, 1997.


ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The  selected  consolidated  financial  data  presented  below should be read in
conjunction with  "Management's  Discussion and Analysis of Financial  Condition
and  Results  of  Operations"  and with the  Consolidated  Financial  statements
(including the Notes thereto)  presented  elsewhere.  The selected  consolidated
financial data have been derived from the Consolidated Financial Statements.
<TABLE>
<CAPTION>
Five Year Selected Financial Data
(Dollars in thousands, except per share amounts)


   Year Ended December 31,             1996        1995        1994        1993        1992
                                    ---------   ---------   ---------   ---------   ---------   
<S>                                 <C>         <C>         <C>         <C>         <C>     
   Operating revenues               $ 27,579    $ 31,416    $ 34,110    $ 24,824    $ 24,990
   Income (loss)                    $ (1,787)   $ (1,820)   $     18    $    753    $    857
   Net income (loss) per common
       and equivalent share         $   (.43)   $   (.43)   $   0.00    $    .21    $    .28

   At December 31,
   Total assets                     $ 16,639    $ 20,847    $ 24,184    $ 21,060    $ 12,222
   Long-term indebtedness           $  7,814    $ 11,264    $ 10,548    $ 10,124    $  5,333
   Shareholders' equity (deficit)   $  1,063    $  2,259    $  4,282    $  4,189    $   (751)
</TABLE>




                                       11

<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND


RESULTS OF OPERATION

The  following  discussion  should  be read in  conjunction  with the  Financial
Statements of the Company and notes thereto appearing elsewhere herein.


Results of Operations

The  following  table sets  forth  certain  financial  data as a  percentage  of
operating revenues:

                                                           Years Ended
                                                           December 31,
                                                    1996       1995       1994
                                                  -------    -------    -------
Operating revenues                                100.00%    100.00%    100.00%
Operating expenses
   Compensation                                    57.18      55.16      53.25
   Supplies and maintenance                        11.97      12.74      11.16
   Fuel and fuel taxes                              9.05       8.14       8.14
   Depreciation and amortization                    8.80       8.88       7.83
   Taxes and licenses                               3.92       4.36       4.26
   Insurance and claims                             3.07       2.82       3.22
   Selling and administration                       4.58       4.70       4.45
   Rent and purchased transportation                4.15       4.47       2.76
   Communications and utilities                     1.89       1.94       1.61
   Restructuring expense                            -          1.70       -
   Gain on disposition of revenue equipment       (0.12)      (0.10)     (0.58)
                                                  -------    -------    -------

           Total operating expenses               104.49     104.81      96.10
                                                  -------    -------    -------

   Operating income (loss)                         (4.49)     (4.81)      3.90
   Interest expense                                (3.55)     (3.91)     (3.78)
   Non-operating income (expense), net              0.17      (0.47)      0.07
                                                  -------    -------    -------
   Income (loss) before income taxes
        and extraordinary item                     (7.87)     (9.19)      0.05
   Income tax (benefit) expense                    (1.93)     (3.40)      0.00
                                                  -------    -------    -------
   Net income (loss) before extraordinary item     (5.94)     (5.79)      0.05
   Extraordinary item, net                         (0.54)      -          -
                                                  -------    -------    -------
   Net income (loss)                               (6.48%)    (5.79%)     0.05%
                                                  =======    =======    =======

This  report  contains  forward  looking  statements  which  involve  risks  and
uncertainties.  The Company's actual results may differ  significantly  from the
results  discussed in the forward looking  statements.  Factors that might cause
such differences include but are not limited to those discussed below.

The Company made  significant  changes in 1996 and  continues to make changes to
its operations in order to achieve  reductions to its operating cost  structure.
The Company recently began  implementation of phase II of its profit improvement
plan.  The phase II plan includes  reductions  in corporate  and support  staff,
selected fleet downsizing, operating cost reductions,  redeployment of equipment
and the restructuring of certain term debt and lease  arrangements.  The changes
the Company is making are meant to focus the  Company on its core  competencies,
to reduce waste and redundancies in its processes, and improve cash flow.


                                       12

<PAGE>
Although the changes the Company has made and continues to make have reduced its
operating cost structure and are expected to produce improved results,  the full
benefit of the many actions the Company has taken have yet to be realized.

The Company's  leverage  position  requires  business  volume to improve  before
profitability  will return. The Company did not achieve adequate business volume
in its target  markets in 1996 to  effectively  utilize  its fleet.  During 1996
business   volume  was   impacted  by  intense   competition   due  to  industry
over-capacity,  sluggish  freight  demand,  terminal  closures and severe winter
weather  conditions.  Operating costs were adversely  impacted by sharply higher
fuel  prices,  especially  on the west coast,  and higher union wage and benefit
rates.  These factors  contributed  significantly to the loss experienced during
1996.  Competition  in the tank truck  industry  remains  intense with  business
increasingly becoming price sensitive.  Arrow's focus will continue to be on its
core western market where the Company believes it has a competitive edge.


Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

Results of Operations

Operating Revenues

Revenue for the twelve months ended December 31, 1996 decreased  $3,800,000,  or
12.2% to $27,579,000  from $31,416,000 for the year ended December 31, 1995. The
Company's  revenue declined in 1996 because of terminal closures and the reasons
noted above.  During 1996, as part of its restructuring plan, the Company closed
terminals in Baton Rouge, LA, Chattanooga, TN, Port Neches, TX and Tulsa, OK. It
also downsized and refocused its Houston,  TX terminal on those lanes of traffic
upon which it could achieve balanced freight demand.

Total  shipments  decreased 8.0% from 33,265 in 1995 to 30,602 in 1996.  Average
miles  per  shipment  decreased  to 405 from 431 in 1995,  average  revenue  per
shipment  decreased  to $901 from $944 in 1995,  and revenue per mile  increased
from $2.16 to $2.18 for 1996.  These  changes  reflect the  elimination  of some
non-contributory  long-haul business  associated with the company's terminals in
Texas and the Southern U.S. The effect of industry over-capacity on pricing also
effected revenue per shipment.

Operating Expenses

Excluding the effect of the 1995 restructuring  charge,  operating expenses as a
percentage  of revenue  ("operating  ratio")  increased  from  103.1% in 1995 to
104.5% in 1996.  Contractual increases in union wages and benefits combined with
intense  pricing  pressure,  the  Company's  inability to recover  significantly
increased  fuel costs and the  Company's low levels of capacity  utilization  in
certain markets offset  reductions in expenses that were achieved as part of the
TQM program.

Compensation  expense  increased as a percentage of revenue to 57.18% from 55.2%
in 1995. The increase was primarily a result of  contractually  increased  union
wages and benefits.

Supplies and maintenance  expenses decreased as a percentage of revenue to 12.0%
from 12.7% in 1995.  The decrease  was  primarily a result of a reduction in the
use of  non-Company  tank  cleaning  and  repair  services  with the  closure of
terminals in the Southeast.

Fuel and fuel taxes  increased  to 9.1% of revenue from 8.1% of revenue in 1995.
The increase reflects a significant  increase in fuel prices,  which the Company
was not able to fully recapture due to market conditions.

Depreciation  expense decreased $363,000 to 8.8% of revenue from 8.9% of revenue
in 1995. The decrease  primarily  reflects the sale of 43 power units in 1996 as
part of the Company's fleet downsizing

                                       13

<PAGE>
Taxes and  licenses  decreased  to 3.9% of revenue from 4.4% of revenue due to a
reduction  in  licensing   expenses  due  to  the  fleet   downsizing  and  some
non-recurring 1995 expenses.

Insurance and claims expense  increased to 3.1% of revenue from 2.8% in 1995 due
to the  decreased  sales volumes as the Company's  fleet  insurance  expense was
consistent from 1995 to 1996.

Selling and  administration  expenses decreased $211,000 to 4.6% of revenue from
4.7% in 1995. The decrease in selling and administration  expenses was primarily
a result of non-recurring 1995 expenses for costs associated with the opening of
new terminals  and lower levels of  professional  service fees,  offset by costs
incurred in 1996 to implement the TQM program.

Rent and purchased transportation decreased $260,000 to 4.2% of revenue compared
to 4.5% in 1995.  The  decrease is  primarily  attributable  to  moratoriums  on
payments granted by creditors.

Interest and Other

Interest expense decreased $249,000 from 1995 to 1996 primarily due to the fleet
downsizing and  restructuring of the Company's  long-term debt and capital lease
obligations.

The  Company  reported  $48,000  of  non-operating  income in 1996  compared  to
$148,000  of  non-operating  expense  in  1995.  The  1995  expense  included  a
non-recurring  $152,000  charge  to  write  down  specific  receivables  to  net
realizable value.

Income Taxes

The effective  rate of income tax benefit  decreased  from 37% in 1995 to 25% in
1996 as the Company  recorded a valuation  allowance  against its  deferred  tax
asset in 1996.

Extraordinary Item, Net

The Company recorded a $150,000 charge for the net effect of  restructuring  its
long-term  debt  obligations  and the  disposal of capital  lease assets and the
related  obligations with the Company's  creditors.  The  restructuring  reduced
payments due in 1997 by approximately $1 million.

Net Income (Loss)

The Company incurred a net loss of $1,787,000 or $.43 per share in 1996 compared
to a net loss of $1,820,000 or $.43 per share in 1995. Decreased business volume
caused by industry over-capacity, sluggish freight demand, terminal closures and
severe  winter  weather  conditions  impacted  revenues.  Operating  costs  were
adversely impacted by sharply higher fuel prices,  especially on the west coast,
and  higher  union  wage  and  benefit  rates.  These  factors  along  with  the
extraordinary  charge  to  restructure  the  Company's  obigations   contributed
significantly to the loss experienced during 1996.


Year Ended December 31, 1995 Compared to Year Ended December 31, 1994.

Both  revenue and  earnings  declined  in 1995 as a result of overly  aggressive
geographic  and fleet  expansion in 1994 and 1995.  The  terminals  and carrying
capacity added in late 1994 and early 1995 added operating and overhead  expense
and were not  effectively  utilized  because  of lower  business  levels.  Arrow
utilized  less  than 60% of its  carrying  capacity  in 1995.  This low level of
capacity  utilization and lack of balance in its new longhaul traffic lanes were
the primary factors which contributed to the losses experienced in 1995.



                                       14

<PAGE>
Results of Operations

Operating Revenues

Revenue for the twelve months ended December 31, 1995 decreased  $2,694,000,  or
7.9% to $31,416,000  from  $34,110,000 for the year ended December 31, 1994. The
Company's revenue declined in 1995 as a result of business lost from service and
pricing  issues,  sluggish  freight demand from slow growth in the durable goods
producing  sectors of the  economy,  the impact of  deregulation  of  intrastate
transportation  and business lost as a result of service  disruptions  caused by
1994's labor problems.

Total  shipments  in 1995 were  33,265  compared to 40,515 in 1994 a decrease of
17.9% from the prior year.  Average miles per shipment increased to 431 from 380
in 1994.  Average revenue per shipment  increased to $944 from $822 in 1994. The
increases in miles and revenue per shipment reflect the higher mileage shipments
associated with business  generated at the company's  terminals in Texas and the
Southern U.S.  Revenue per mile decreased  slightly to $2.15 from $2.16.  Excess
empty miles  associated  with the higher  mileage  shipments  from Texas and the
Southern U.S. were primarily responsible for this decline.

Operating Expenses

Operating expenses as a percentage of revenue ("operating ratio"),  increased to
104.8% in 1995 from 96.1% in 1994. The terminals and carrying  capacity added in
1994 and in the first  half of 1995 were not  effectively  utilized  because  of
lower business levels. The Company's expansion and fleet modernization  programs
added to the Company's  operating costs and carrying  capacity.  During 1995 the
Company  experienced higher operating  expenses  associated with increased union
wages and benefits, the purchase/lease of new revenue equipment as well as costs
associated  with the  Company's  expansion  into new  markets.  These  increases
combined  with lower  revenue  levels and a  restructuring  charge of  $535,000,
recorded  in the  fourth  quarter  of 1995,  were the  primary  reasons  for the
increase in the Company's operating ratio.

Compensation expense increased as a percentage of revenue to 55.2% from 53.3% in
1994. The increase was primarily a result of increased  union wages and benefits
and  compensation  costs  associated with personnel added to staff the Company's
new terminals.

Supplies and maintenance  expenses increased as a percentage of revenue to 12.8%
from  11.2% in 1994.  The  increase  was  primarily  a result of a higher use of
outside tank cleaning,  equipment  additions and increased  parts,  supplies and
repair costs associated with the Company's new terminals.

Depreciation  expense  increased  $120,000 to 8.9% of revenue from 7.8% in 1994.
The increase  was the result of equipment  additions in late 1994 and in 1995 as
part of the Company's fleet modernization program.

Insurance and claims  expense  decreased in 1995 to 2.8% of revenue from 3.2% in
1994. The decline was  attributable to lower insurance costs which resulted from
the company's favorable claims experience.

Selling and  administration  expenses  increased to 4.7% of revenue from 4.5% in
1994. The increase in selling and administration expenses was primarily a result
of certain costs  associated with the opening of new terminals and higher levels
of professional service fees.

Rent and purchased  transportation increased to 4.5% of revenue compared to 2.8%
in 1994. The increase was  principally  attributable  to the addition of revenue
equipment financed through operating leases.

Communications  and utilities  expense increased to 1.9% of revenue from 1.6% in
1994. The increase was

                                       15

<PAGE>
a result of increased  data line and cellular  communications  costs  associated
with the Company's terminal and fleet expansion.

During the fourth quarter of 1995, the Company's  board of directors  approved a
profit  improvement  plan for 1996 to refocus the Company's  operations on those
markets  where  management  and the board  believe the Company has a competitive
edge.  The  implementation  of the  plan  will  result  in a  downsizing  of the
company's fleet, a reduction in its corporate staff and the closure of terminals
in Baton  Rouge,  LA,  Chattanooga,  TN and Tulsa,  OK. The  Company  recorded a
restructuring  charge of $535,000  in the fourth  quarter of 1995 to reflect the
costs associated with implementing the profit improvement plan.

Interest and Other

Interest  expense  declined  slightly in 1995 from 1994.  Lower debt levels were
primarily  responsible for the decrease.  The Company recorded net other expense
of  $148,000  in 1995  compared  to $22,000 in 1994.  The  increase in net other
expense was primarily related to an increase in reserves related to other assets
the Company has determined may not be fully realizable.

Income Taxes

The estimated  effective rate of income tax (benefit) for 1995 was 37%. In 1994,
due to low earnings, there was no tax expense recognized.

Net Income(Loss)

The Company recorded a net loss of $1,820,000 or $.43 per share in 1995 compared
to net income of  $18,000  or $.00 per share in 1994.  The net loss for 1995 was
primarily  caused by  overexpansion  of the Company's fleet and terminal network
and a lack of balance in its new higher mileage  traffic lanes from the Southern
US. Lower revenue  levels in 1995 combined with an increase in costs  associated
with the Company's  increased  carrying  capacity and expanded  terminal network
resulted  in a low  level of  capacity  utilization  in 1995.  The low  level of
capacity  utilization  combined  with  higher  operating  costs  related  to the
Company's   expansion,   labor  agreement,   fleet  modernization   program  and
restructuring charges were the principal reasons for the loss in 1995.


Liquidity and Capital Resources
-------------------------------

Net cash provided by operating activities was approximately  $1,263,000 for 1996
and $2,019,000 for 1995. Capital expenditures were $102,000 for 1996 compared to
$1,671,000 for 1995. In 1995, the Company leased 35 new tractors and acquired 13
new stainless steel tank trailers due to purchase commitments.

In order to finance its  operations and fund capital  expenditures,  the Company
obtained loans from its principal lender and loans, capital and operating leases
from  equipment  manufacturers  and other  asset based  lenders/lessors  for its
revenue  equipment.  The equipment  loans/leases,  which are of shorter duration
(four to five years for  tractors,  five to seven years for  trailers)  than the
economic useful lives of the equipment,  result in maturities that contribute to
working capital deficits. At December 31, 1996 the Company had a working capital
deficiency of approximately  $3,367,000  compared to a deficiency of $489,000 at
December 31, 1995. The equipment  modernization program and associated financing
combined  with recent  losses by the Company  have  created the working  capital
deficit.  The increase in the Company's working capital  deficiency from 1995 to
1996 also reflects a change in  classification  of the Company's  line of credit
borrowings  to a current  liability  in 1996 due to its November  1997  maturity
date.

The Company's  combined credit  arrangement  provides for a line of credit at an
interest  rate of 1.5% over the lender's  reference  rate (8.25% at December 31,
1996). Maximum borrowing under the line is limited to the

                                       16

<PAGE>
lesser  of  $4,000,000  or  85%  of  eligible  accounts  receivable  which  were
$2,321,000  at December 31, 1996.  The unused  portion of the line of credit was
$79,000 at December 31, 1996.

The  combined  credit  arrangement   includes  various   restrictive   covenants
including,  a  prohibition  on  dividends  and minimum  adjusted  net worth.  At
December 31, 1996, the Company was in compliance  with all of the debt covenants
relating to this credit arrangement.

During the first  quarter of 1996,  the Company,  implemented  a downsizing  and
restructuring plan to reduce costs,  improve operating efficiency and cash flow,
and to restore profitability.  In September 1996, the Company began implementing
phase II of its profit  improvement plan. The phase II plan included  reductions
in corporate  and support  staff,  selected  fleet  downsizing,  operating  cost
reductions, redeployment of equipment and the restructuring of certain term debt
and lease  arrangements.  In the  opinion of  management,  provided  the plan is
successful and the Company's results of operation improve,  funds expected to be
generated from future operations,  proceeds from its credit arrangements and the
Company's ability to rely upon secured  borrowing/leases should provide adequate
liquidity.

To date the Company has not achieved  business volume  sufficient to effectively
utilize  its fleet  and as a  result,  the  profit  improvement  plan has yet to
restore the Company to a positive cash flow position. In the event the Company's
profit  improvement plan is not successful and its results of operations fail to
demonstrate  improvement,  (due to  unanticipated  expenses,  delays,  problems,
difficulties or otherwise)  available cash and credit  facilities will not prove
to be sufficient to fund operations.  The Company would then be required to seek
additional  debt or  equity  financing  or  obtain  relief  from its  creditors.
Although  the Company  obtained  an  additional  $250,000 in capital  during the
second  quarter  of 1996  and  restructured  many of its  term  debt  and  lease
obligations  in the fourth  quarter of 1996,  other than the  Company's  current
credit  arrangements,  the Company has no current  arrangements  with respect to
other  sources of additional  financing at this time.  There can be no assurance
that additional financing or accomodations from creditors,  if required, will be
available to the Company on commercially reasonable terms, or at all.

In January 1997, the Company entered a loan agreement ("the Agreement") with the
holder of the Company's preferred stock (the "Lender"). The Lender has agreed to
advance funds to the Company at the Company's request.  The principal balance of
all funds advanced by the Lender shall bear interest at the rate of 10%, and all
amounts loaned under the Agreement  (including interest) shall be payable within
ten days of written  demand by Lender.  The Company  borrowed  $100,000 from the
Lender in January 1997.

Contingencies

The Company is party to four potentially material actual or pending proceedings:

(a) The Washington  Department of Ecology ("Ecology") has named the Company as a
potentially responsible party and served an administrative  enforcement order on
the Company and 16 other  companies  associated  with the Yakima  Railroad  Area
("YRRA") in Yakima, Washington.  Ecology alleges in the order that all 17 of the
companies   have   some   connection   with  the   presence   of  the   chemical
Perchloroethylene  ("PCE") in the ground water  underlying the YRRA. The Company
used carbon filtration to treat wash water from its trucks.

The spent carbon was taken by an  independent  transporter to the Cameron Yakima
facility located within the YRRA. This transporter  directly contracted with the
Cameron-Yakima  recycling  facility.  Ecology  claims that  Cameron-Yakima  is a
source of PCE  contamination,  along with other  facilities  located  within the
YRRA. The principal  parties with respect to the enforcement  order are Ecology,
the Company and the 16 other  companies  that were served with the order.  There
are many other parties, not named on the order, who used Cameron- Yakima and are
potentially  liable  for  contamination  at the  site.  The  order  directs  the
respondent parties to develop and implement a remedial investigation/feasibility
study  ("RI/FS")  of  the  YRRA  to  identify  the  nature  and  extent  of  PCE
contamination  in the ground water. The order further directs the respondents to
provide bottled drinking water to certain  households within the YRRA, if PCE is
detected in sampled  domestic tap water. It is possible that, upon completion of
the RI/FS,  Ecology  could order the Company and other  parties to take  further
action, including remediation. Ecology has settled claims with a number of other
potentially  responsible  parties at this site, but thus far the Company has not
been able to settle  this claim on a basis  acceptable  to the  Company.  If the
Company is unable to reach a separate settlement, the Company may be potentially
liable for  remediation  costs that are not recovered from the settling  parties
and for contribution.

                                       17

<PAGE>
Given the current status and inherent  uncertainties  in this matter the Company
is  unable  to  determine  or  quantify  in any  meaningful  way  its  potential
liability,  and  therefore,  cannot  determine  whether  it will have a material
effect on the Company's  financial  condition,  results of  operations,  or cash
flows.  The  settlements  thus far  proposed by Ecology  would have had material
adverse effects on the Company's financial condition and cash flows.

(b) In 1991, the Company was added as a defendant to a case entitled  Department
of Labor &  Industries  vs.  Puget Sound  Trucklines,  et al.,  in King  County,
Washington Superior Court, that alleges the Company,  among others, has violated
the overtime pay  provisions  of Washington  state law.  Puget Sound Truck Lines
reached an out of court  settlement  with the Department of Labor and Industries
in 1995.  In May  1996,  the  case was  restyled  Rex W.  Allen et al vs.  Arrow
Transportation  Company.  The action, as to the Company, now involves 30 current
and former Company  employees.  Eight  plaintiffs  reached a settlement with the
Company  in 1996.  The  remaining  plaintiffs  seek  unspecified  overtime  pay,
interest and attorney's fees.

The  plaintiff  has  indicated  that it intends to amend its claim  against  the
Company to include the Company's  payment practices since 1991. If permitted and
proven,  this  expansion  would  have the  effect of  increasing  the  Company's
potential  liability to the  plaintiffs,  and might affect the Company's  future
employment  practices in the State of Washington.  The Company is unable at this
time,  however,  to determine what effect,  if any, this litigation will have on
the Company's financial condition, results of operations, or cash flows.

(c) The  Washington  Department  of Natural  Resources  ("DNR")  filed an action
against the Company and several  other  parties in November  1995.  It sought to
recover  cleanup costs totaling  $389,000 from Arrow and the other parties,  who
all at various  times leased a site in Seattle  which was later  acquired by the
Department.  Arrow leased a portion of the site for five years.  The Company has
reached an agreement  in principle  with DNR to settle this claim for a $47,500.
The Company  recognized  the cost of this  settlement  in the fourth  quarter of
1996.

(d) An action was filed  against the Company on May 7, 1996,  by Sal N. Cincotta
in the United States  District Court for the District of Oregon  alleging breach
of contract  and unpaid  wages.  Mr.  Cincotta  was  previously  employed by the
Company as its President and Chief Executive Officer,  and was a director of the
Company  prior to his  resignation  on May 3, 1996.  On October  18,  1996,  Mr.
Cincotta filed a motion for summary  judgement in this action,  seeking $458,139
in total  damages.  On February 11, 1997, a Magistrate  Judge entered a Proposed
Findings and Recommendation in favor of Mr. Cincotta, including an award of pre-
judgement  interest.  The Company strongly objected to the Proposed Findings and
Recommendation  and  appealed the issue to a District  Court Judge.  The Company
continues to vigorously defend the matter.  The Company cannot determine whether
costs of defense or the probable  result of this litigation will have a material
effect on the Company's  financial  condition,  results of  operations,  or cash
flows.  A ruling by the District  Court Judge in favor of Mr.  Cincotta,  unless
stayed  and  reversed  on appeal  would have a  material  adverse  effect on the
Company's financial condition and cash flows.

The Company is a defendant in various claims and other legal proceedings arising
in the ordinary course of business.  While resolution of these matters cannot be
predicted with certainty,  management believes that the ultimate outcome of such
litigation will not have a materially adverse effect on the Company's  financial
position,   results  of  operations   or  cash  flows.   In  addition  to  legal
contingencies,  management  estimates  the  Company's  liability  for  property,
freight and workers'  compensation  claims based upon prior claim experience and
records such liabilities in its financial statements.


Seasonality

Seasonality  causes  variations  in the  operations  of the  Company  as well as
industry-wide. Demand for the Company's services is generally highest during the
summer and fall months.  Historically,  expenses are greater as a percentage  of
revenues in the winter months as operating  efficiency is lower because of lower
utilization rates and weather related costs.

                                       18

<PAGE>
Inflation

The effect of inflation on the Company has not been significant  during the last
two years. However, an extended period of inflation could be expected to have an
impact on the  Company's  earnings  by causing  interest  rates,  fuel and other
operating costs to increase. Unless freight rates could be increased on a timely
basis, operating results would be adversely affected.

Deregulation

The  Company  has  historically  derived  significant  revenue  from  intrastate
shipments  in  the  states  of  Oregon  and  Washington  pursuant  to  operating
authorities  granted,  and tariff rates  approved,  by the regulatory  bodies in
those  states.  Effective  January 1, 1995,  the  authority  of those  states to
regulate  entry into those  markets and the rates  charged  for such  intrastate
shipments were terminated by federal  statute.  This termination has resulted in
increased  competition and downward  pressure on rates charged by the Company in
these markets. In 1995 and 1996,  deregulation negatively impacted the Company's
business in the Northwest as the Company lost business to new entrants into this
market.


Item 8.  Financial Statements and Supplementary Data

          (a)  Financial  statements  and  exhibits  filed  under  this item are
               listed in the index  appearing  on Page F-1 of this  report.  

          (b)  Quarterly  financial  information (in thousands  except per share
               data)(unaudited)
<TABLE>
<CAPTION>
1996                                     1st quarter   2nd quarter   3rd quarter   4th quarter
-----                                    -----------   -----------   -----------   -----------
<S>                                      <C>           <C>           <C>           <C>       
Operating revenues                       $    6,739    $    7,419    $    7,099    $    6,322
Income (loss) from operations                  (425)         (298)         (163)         (351)
Income (loss) before extraordinary item        (633)         (545)         (453)         (634)
Net income (loss)                              (390)         (332)         (281)         (784)
Net income (loss) per share
  before extraordinary item                    (.09)         (.08)         (.07)         (.15)

1995                                     1st quarter   2nd quarter   3rd quarter   4th quarter
-----                                    -----------   -----------   -----------   -----------
Operating revenues                       $    7,912    $    8,414    $    8,237    $    6,853
Income (loss) from operations                   (30)          354             6        (1,840)
Income (loss) before income taxes              (307)           65          (282)       (2,363)
Net income (loss)                              (185)           39          (169)       (1,505)
Net income (loss) per share                    (.04)          .01          (.04)         (.36)
</TABLE>

Item 9.  Changes in and Disagreements with Accountants on Accounting and 
         Financial Disclosure

The  Company has not  experienced  a change in  independent  auditors or had any
disagreements with its independent  auditors,  Deloitte & Touche LLP. Deloitte &
Touche LLP has served as the Company's  independent auditors since its inception
and served as independent auditors of its subsidiary Arrow Transportation Co. of
Delaware since 1988.









                                       19

<PAGE>
                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

The following table sets forth information regarding the directors and executive
officers of the Company:

          Name              Age             Position with the Company
------------------------    ---   ----------------------------------------------
Robert H. Cutler             77   Chairman, Chief Executive Officer
John D. Erwin                51   President, Chief Operating Officer
William J. Stanners, Jr.     42   Senior Vice President, Chief Financial Officer
William R. Blosser (1)       52   Director
James N. Cutler (1)          45   Director
Jerry A. Parsons (1)         61   Director
Thomas D. Taylor             80   Director

(1) member of Audit Committee

The directors hold office until the next annual meeting of shareholders or until
their  successors  have  been  elected  and  qualified.  Officers  serve  at the
discretion of the Board of Directors.

ROBERT H. CUTLER(1)  Chairman,  Chief Executive Officer,  has been a director of
the Company  since 1982.  Mr. Cutler was elected  Chairman in January 1996.  Mr.
Cutler has over 50 years experience in the transportation  industry.  Mr. Cutler
served as President of the American  Trucking  Association  from  1967-1968.  He
served as Assistant to the President of Consolidated Freightways from 1946-1949,
Executive  Vice  President  of Bekins Van Lines  from  1949-1952,  President  of
Texas-Arizona  Motor  Freight from  1952-1962  and Chairman and Chief  Executive
Officer of  Illinois-California  Express from 1962 until his retirement in 1988.
Mr. Cutler is Chairman of The Cutler  Corporation.  He also serves as a director
of R&K Industrial Products, Laurance David, Inc. and Jen-Cel-Lite Co.

JOHN D. ERWIN was elected  President,  Chief Operating Officer in November 1996.
He had served as Senior Vice  President  with  responsibility  for marketing and
operations since joining the Company in 1993. He has over 25 years experience in
the tank  truck  industry.  Prior to joining  Arrow,  Mr.  Erwin  served as Vice
President - Western Region of Matlack Systems, Inc., from 1984 to 1993.

WILLIAM J. STANNERS,  JR. Senior Vice President,  Chief Financial  Officer,  has
served as CFO and corporate  secretary since 1991.  Prior to joining Arrow,  Mr.
Stanners served for 15 years in the financial services  industry,  concentrating
in corporate finanace.

WILLIAM R. BLOSSER  became a Director of the Company in May 1993.  He is Manager
of Planning and Environmental  Sciences at CH2M Hill, one of the world's largest
environmental  engineering  and  consulting  firms,   headquartered  in  Denver,
Colorado. Mr. Blosser is also the founder and owner of Sokol Blosser Winery, one
of Oregon's largest  wineries.  He has served as Chairman of the State of Oregon
Water Resources  Commission,  Chairman of the State of Oregon Land  Conservation
and Development Commission, and as a member of the Western States Water Council.

JAMES N. CUTLER, JR.(1) has been a director of the Company since September 1982.
He is the President and a director of The Cutler Corporation,  a holding company
for two  manufacturing  firms.  Mr.  Cutler is also  chairman  of the Elk Island
Corporation,  a director and  President of R&K  Industrial  Products  Company of
California and Chairman of Jen-Cel-Lite Corporation in Seattle,  Washington.  He
also serves as President of Mid-Pacific Leasing Corporation and as a director of
Hollywood Entertainment Corporation.

--------
     (1) Mr. Robert Cutler is James Cutler, Jr.'s uncle.

                                       20

<PAGE>
JERRY A.  PARSONS  became a  Director  of the  Company  in May  1993.  He is the
Executive Vice President Chief Financial Officer of Willamette Industries, Inc.,
a Fortune 500, diversified,  integrated forest products company headquartered in
Portland, Oregon.

THOMAS D. TAYLOR,  was elected to the Board in June 1996. Mr. Taylor has over 50
years  experience  in the  transportation  industry.  He served as  President of
Freightliner   Corporation   from   1946-1959  and  Senior  Vice   Presdient  of
Consolidated  Freightways,  from 1956-1960. He was Owner and Chairman of Cummins
Diesel,  Cummins  Northwest and Cummins Hawaii from  1961-1992.  He is currently
Chairman of Palaau Corporation.


Committees

The members of the Audit Committee are William R. Blosser,  James N. Cutler, Jr.
and Jerry A. Parsons.  The Audit  Committee  represents the Board in discharging
its responsibilities relating to the accounting, reporting and financial control
practices   of  the  Company  and   subsidiary.   The   Committee   has  general
responsibility for surveillance of financial controls, as well as for accounting
and audit activities of the Company and subsidiary.

The Committee annually reviews the  qualifications of the independent  certified
public  accountants,  makes  recommendations to the Board as to their selection,
reviews the scope,  fees and results of their audit and approves their non-audit
services and related fees.

Item 11.          Management Remuneration and Transactions


Executive Compensation

The  following  table sets forth the total  compensation  paid or accrued by the
Company for  services  rendered  during the year ended  December 31, 1996 by the
Chief  Executive  Officer  of the  Company  and each of the  other  most  highly
compensated  executive officers of the Company whose total cash compensation for
the year ended December 31, 1996, exceeded $100,000.

Name of Individual                  Annual Compensation
    Position                     Year     Salary     Bonus
    --------                     ----    --------    -----
Robert H. Cutler                 1996    $  2,000     -0-
Chairman, CEO                    1995    $  2,000     -0-
                                 1994    $ 65,000     -0-

John D. Erwin                    1996    $109,633     -0-
President, COO                   1995    $109,093     -0-
                                 1994    $102,799     -0-

Sal N. Cincotta                  1996    $ 60,637     -0-
Former President, CEO            1995    $157,611     -0-
                                 1994    $142,921     -0-

In December 1995, in  conjunction  with the Company's  restructuring  and profit
improvement  plan, the board of directors  placed Mr.  Cincotta on an indefinite
leave of absence from the Company. In January 1996, Robert H. Cutler was elected
chairman and in February 1996 was elected  Interim Chief Executive  Officer.  On
April 3, 1996,  the board of directors  approved a resolution  to terminate  Mr.
Cincotta's  contract.  Mr.  Cincotta was provided  formal notice of the board of
directors  decision on that day and payments  under this contract  terminated on
May 3, 1996. Mr. Cincotta  resigned as an officer and director of the Company on
May 3, 1996.  Mr.  Cutler was elected Chief  Executive  Officer in June 1996 and
currently  receives no  compensation  other than Board of Directors fees for his
services as Chief Executive Officer.

                                       21

<PAGE>
Mr. Erwin joined the Company in August  1993.  The Company,  on August 30, 1993,
entered into a three-year  Employment agreement with Mr. John D. Erwin, pursuant
to which he served as Senior Vice President of the Company. Mr. Erwin's contract
was canceled in March 1996. In November  1996,  Mr. Erwin was elected  President
and Chief Operating Officer.
<TABLE>
<CAPTION>

                           Option Grants in Last Year

                                                                                Potential
                Number of     Percent of                                   Realizable Value at
               Securities    Total Options                                 Assumed Annual Rates
               Underlying     Granted to                               of Stock Price Appreciation
                 Options      Employees in    Exercise    Expiration   for Five Year Option Term (2)
Name           Granted (1)    Fiscal Year       Price        Date           5%             10%
----           -----------   -------------   ----------   ----------     --------       --------
<S>             <C>              <C>           <C>         <C>           <C>            <C>
John D. Erwin   100,000          35.7%         $0.50       11/20/02       63,814          80,525
</TABLE>
(1)      Each of the options  reflected  in this table was  granted  pursuant to
         Arrow  Transportation  Co.'s 1992 Non-Statutory  Stock Option Plan. The
         exercise  price of each option is equal to the fair market value of the
         Company's  Common Stock on the date of grant. The options have a 5-year
         term and vest over four years.

(2)      These  assumed  rates of  appreciation  are provided in order to comply
         with the  requirements  of the SEC and do not  represent  the Company's
         expectation as to the actual rate of  appreciation of the Common Stock.
         These gains are based on assumed rates of annual  compound  stock price
         appreciation  of 5% and 10% from the date the options were granted over
         the full option  term.  The actual  value of the options will depend on
         the performance of the Common Stock and may be greater or less than the
         amounts shown.


                            Year - End Options Values

                                                     Value of Unexercised
                   Number of Unexercised             In-the-Money Options
                 Options at Fiscal Year-End           at Fiscal Year End
Name             Exercisable   Unexercisable     Exercisable   Unexercisable
----             -----------   -------------     -----------   -------------
John D. Erwin       65,000           35,000               0               0


Compensation of Directors.

Each director who is not an employee of the Company is paid $500 per meeting for
their attendance at Board meetings in addition to their  out-of-pocket  expenses
for attendance.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

The following  table sets forth  certain  information  regarding the  beneficial
ownership  of the  Company's  Common  Stock as of December  31, 1996 by (i) each
person known by the Company to own beneficially  more than 5% of the outstanding
shares of the  Company's  Common Stock,  (ii) each of the  Company's  directors,
(iii) the Company's executive officers and (iv) directors and executive officers
as a group.




                                       22

<PAGE>
    Name of                    Amount and Nature of         Percent
Beneficial Owner               Beneficial Ownership         Of Class
----------------               ---------------------        --------
Robert H. Cutler                     516,760                 12.33%
James N. Cutler Jr.                  651,000(1)              15.53%
Jerry A. Parsons                      10,000(2)               0.24%
William R. Blosser                     2,000(3)               0.05%
Sal N. Cincotta                      518,000(4)              12.36%
William J. Stanners, Jr.              11,137(5)               0.27%
John D. Erwin                          1,767(6)               0.04%
All executive officers and
directors as a group (6 persons)    1,192,664                28.45%


ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Messrs.  Robert  Cutler,  James  Cutler,  Jr. and Sal  Cincotta  entered  into a
shareholders  agreement  to provide that (i) Mr.  Cincotta  will have a right of
first  refusal to  purchase  any shares  sold by either  Robert  Cutler of James
Cutler , Jr. and (ii) Mr.  Cincotta and Messrs.  Robert Cutler and James Cutler,
Jr.  will  each  have co- sale  rights  in the  event of a sale of shares by the
other, unless such sale is made pursuant to Rule 144.

In January 1997, the Company entered a loan agreement ("the Agreement") with the
holder of the Company's preferred stock (the "Lender"). The Lender has agreed to
advance funds to the Company at the Company's request.  The principal balance of
all funds advanced by the Lender shall bear interest at the rate of 10%, and all
amounts loaned under the Agreement  (including interest) shall be payable within
ten days of written  demand by Lender.  The Company  borrowed  $100,000 from the
Lender in January 1997.

In May 1996, the Company issued to Thomas D. Taylor 50,000  unregistered  shares
of Class A convertible preferred stock with a par value of $5.00 per share under
a Preferred Stock Purchase and Option Agreement ("the Agreement"). The Agreement
includes  an  option  to  purchase  an  additional  50,000  shares  of  Class  A
convertible  preferred stock at an exercise price of $5.00 per share. The option
expires on June 30, 2001.  Each share of preferred  stock is  convertible at any
time at the option of the holder, into ten shares of the Company's common stock.
The  preferred  stock  bears  a 7%  annual  dividend,  payable  each  May at the
Company's option either in cash or in additional  shares of preferred stock. The
preferred  stock will be entitled  to vote on an  as-converted  basis,  and to a
preference on any liquidation of the Company.

During the year ended  December 31, 1994, the Company paid Robert Cutler $60,000
as consultant  fees. The consulting  fees of $5,000 per month paid to Mr. Robert
Cutler was  discontinued in December 1994. There were no consulting fees paid to
any director or related party in 1995 and there are no  arrangements  to pay any
further consulting fees.

During the year ended December 31, 1994,  the Company  leased three  automobiles
used  by  officers  and  employees  of the  Company  from  Mid  Pacific  Leasing
Corporation  which is owned by James N. Cutler,  Jr.
-------- 

(1)  Includes  4,000 shares owned as trustee for the  Alexandra  Merrill  Cutler
Trust.

(2) Also owns options to purchase up to 10,000 shares under the  Company's  1992
Incentive and Non-Statutory Stock Option Plan which are currently exercisable.
   
(3) Also owns options to purchase up to 10,000 shares under the  Company's  1992
Incentive and Non-Statutory Stock Option Plan which are currently exercisable.

(4)  Includes  85,000  shares  owned by  Lottie  M.  Cincotta  spouse  of Sal N.
Cincotta.

(5) Also owns options to purchase up to 100,000  shares under the Company's 1992
Incentive  and  Non-Statutory  Stock Option Plan which are 60,000 are  currently
exercisable.

(6) Also owns options to purchase up to 100,000  shares under the Company's 1992
Incentive  and  Non-Statutory  Stock Option Plan of which  65,000 are  currently
exercisable.
                                       23

<PAGE>
All the leases  expired or were  terminated  in 1994.  No rent was paid in 1995.
Rent totaling  $22,921 was paid to Mid Pacific  Leasing  Corporation in 1994. In
addition,  the Company leased ten trailers from C&C Joint Venture, a partnership
consisting of Robert H. Cutler and James N. Cutler, Jr. The trailer lease, which
was dated July 10, 1990 and expired  June 13,  1995,  and provided for a monthly
rental of $10,813.  At the expiration of the lease the Company had the option to
purchase the trailers for an amount equal to nine months  additional  rental. In
1995,  the Company  exercised  its option and purchased the trailers for $97,317
from C&C Joint Venture.

During the year ended December 31, 1994, the Company held a note receivable from
The Cutler  Corporation  in the amount of $100,000.  This note was  non-interest
bearing  and was  unsecured.  The amount  outstanding  represented  the  balance
remaining on a note dated April 14, 1989 which  resulted from a loan made by the
company  to The  Cutler  Corporation.  This note was  repaid on March 7, 1994 by
offsetting  the balance of the note  against  the  conversion  of the  Company's
preferred stock owned by The Cutler Corporation.

During the year ended  December 31, 1994,  the Company had a note payable to Mr.
Robert  Cutler in the amount of  $80,000  as of  January 1, 1994.  The note bore
interest at 8%.  Principal  payments of $8,265 plus  interest  were paid monthly
directly to Sun West Bank on Mr. Cutler's behalf.  This note, which  represented
the balance  remaining on a loan made by Mr. Cutler to the Company in 1986,  was
repaid in 1994.

On  December  17,  1991,  The  Cutler  Corporation  acquired  500,000  shares of
preferred  stock  of  the  Company  for  $500,000.  The  preferred  shares  were
non-voting,  non-dividend  bearing,  nonparticipating and  non-convertible.  The
preferred  shares were exchanged at par for common stock of the Company on March
7, 1994. Since The Cutler  Corporation owed the Company  $100,000,  as discussed
above,  the Company  exchanged such preferred shares for 59,260 shares of common
shares on March 7, 1994 at a net par value of $400,000.

Stock Option Plan

Under the  Company's  1992  Incentive and  Non-Statutory  Stock Option Plan (the
"Plan"),  350,000 shares of Common Stock are reserved for issuance upon exercise
of stock  options.  The Plan is designed as a means to retain and  motivate  key
employees,   and  to  provide   incentives  or  compensation  to  certain  other
non-employees,  including the independent directors of the Company. The Board of
Directors administers and interprets the Plan and is authorized to grant options
thereunder  to all eligible  employees of the  Company,  including  officers and
non-employee directors.

The Plan provides for the granting of both  incentive  stock options (as defined
in Section 422 of the Internal  Revenue Code) and  non-statutory  stock options.
Options  are  granted  under  the  Plan on such  terms  and at  such  prices  as
determined by the Board of Directors,  except that the per share  exercise price
of  incentive  stock  options  cannot be less than the fair market  value of the
Common Stock on the date of grant.  Each option is exercisable  after the period
or periods specified in the option  agreement,  but no option may be exercisable
after the expiration of ten years from the date of grant.  Options granted under
the Plan are not  transferable  other than by will or by the laws of descent and
distribution.












                                       24

<PAGE>
ITEM 14. INDEX TO EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

3(i)     -  Articles  of  incorporation  Arrow  Transportation  Co.  dated as of
         February  10, 1992  (incorporated  by  reference  in Exhibit 3.1 to the
         Registration  Statement on Form SB-2,  Registration  Statement  No. 33-
         63712-S,  as filed with the Securities and Exchange  Commission on July
         16, 1993 [hereinafter the "1993 SB-2"]).

3(ii)  - Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 
         to the 1993 SB-2).

4.1   -  Incentive  Stock  Option  Plan  (incorporated  herein  by  reference to
         Exhibit 4.1 to the 1993 10-KSB).

4.2   -  Employee  Stock  Purchase  Plan  (incorporated  herein  by reference to
         Exhibit 4.2 to the 1993 10-KSB).

10.2  -  Lease  agreement  on  the  Houston  facility  (incorporated  herein  by
         reference to Exhibit 10.2 to the 1993 10-KSB).

10.5  -  Incentive  Stock  Option  Agreements  dated July 22, 1993 (incorporated
         herein by reference to Exhibit 10.5 to the 1993 10-KSB).

10.6  -  Incentive Stock Option Agreement  dated  August 26, 1993  (incorporated
         herein by reference to Exhibit 10.6 to the 1993 10-KSB).

10.7  -  Loan Agreement with Thomas D. Taylor.

21    -  A list of subsidiaries (incorporated by  reference to Exhibit 22 to the
         1993 SB-2).

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the last quarter of the period  covered
by this report.

                                       25

<PAGE>


                                   SIGNATURES



In  accordance  with  Section 13 or 15(d) of the Exchange  Act,  the  Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.



Arrow Transportation Co.

Dated April 11, 1997


By:  \s\  Robert H.Cutler
   ----------------------
  Robert H. Cutler, Chairman
  Chief Executive Officer

In  accordance  with the Exchange  Act, this report has been signed below by the
following  persons on behalf of the  Company  and in the  capacities  and on the
dates indicated.

         Signature                  Title                            Date
         ---------                  -----                            ----

 \s\  Robert H. Cutler         Director, Chairman,             April  11 , 1997
------------------------------ Chief Executive Officer               ----
Robert H. Cutler                               


 \s\  John D. Erwin            President                       April  11 , 1997
------------------------------ Chief Operating Officer               ----
John D. Erwin                               

 \s\  William J. Stanners, Jr. Senior Vice President           April  11 , 1997
------------------------------ Chief Financial Officer               ----
William J. Stanners, Jr.                             

 \s\  William R. Blosser       Director                        April  11 , 1997
------------------------------                                       ----
William R. Blosser

 \s\  James N. Cutler, Jr.     Director                        April  11 , 1997
------------------------------                                       ----
James N. Cutler, Jr.

 \s\  Jerry A. Parsons         Director                        April  11 , 1997
------------------------------                                       ----
Jerry A. Parsons

 \s\ Thomas D. Taylor          Director                        April  11 , 1997
------------------------------                                       ----
Thomas D. Taylor



                                       26

<PAGE>
                                                                    EXHIBIT 10.7

                                 LOAN AGREEMENT



         This Loan Agreement ("Agreement"),  effective January , 1997, is by and
between Arrow  Transportation  Company,  an Oregon corporation  ("Borrower") and
Thomas D. Taylor, a resident of the State of Oregon ("Lender").

                                    RECITALS

         Lender  has agreed to loan funds to  Borrower  pursuant  to one or more
advances upon the terms and conditions contained in this Agreement. Repayment of
the loan is unsecured.

         The parties agree as follows:

                                    AGREEMENT

         1.       Loan Terms.

                  1.1 Nature of Loan.  Subject to the terms and  conditions  set
forth in this Agreement,  Lender may, in its sole  discretion,  advance funds to
Borrower at Borrower's request.

                  1.2 Interest Rate. The principal balance of all funds advanced
by Lender under this  Agreement,  together with any interest  accrued but unpaid
after any due date, shall bear interest at a fixed rate of ten percent (10%) per
annum (the "Interest Rate").

                  1.3  Calculation of Interest.  Interest  accrued on any monies
advanced under this Agreement shall be calculated on the basis of a 360 days per
year factor applied to the actual days on which there exists an unpaid principal
balance.

                  1.4 Record of Advances.  All advances,  including interest and
cost accruals,  will not be memorialized by promissory notes, but rather will be
recorded  on a ledger  maintained  by Lender.  The  amounts so  recorded  may be
reviewed by Borrower at any time, but will be conclusively deemed to be accurate
45 days after the date of entry on Lender's ledger.

                  1.5 Repayment  Terms. All amounts loaned under this Agreement,
including all accrued and unpaid interest, shall be payable within ten (10) days
of written demand therefor by Lender.

         2. Borrower's Covenants. Borrower covenants and agrees, during the term
of the Agreement and while any obligations to Lender are outstanding and unpaid,
to perform all acts and promises set forth below.


Page 1 -                LOAN AGREEMENT


<PAGE>
                  2.1 Payment and  Performance.  Borrower  shall pay and perform
all  obligations  under  this  Agreement  in full  when and as due,  time  being
strictly of the essence.

                  2.2 Further Assurances.  Borrower agrees to execute such other
documents  as may from  time to time in the  reasonable  opinion  of  Lender  be
necessary to confirm the purposes and intentions of this Agreement.

                  2.3 Assignment. Borrower shall not assign or attempt to assign
this Agreement or any of its rights hereunder.

         3. Default.

                  3.1 Events of Default.  Any of the  following  events shall be
considered a default of this Agreement (an "Event of Default") and shall entitle
Lender to exercise the rights and remedies under Section 3.2 below.

                           3.1.1  Default in  Payment.  If at any time  Borrower
fails to make any payment when due under this  Agreement,  Borrower  shall be in
default of this Agreement.

                           3.1.2 Failure to Perform Covenants. If Borrower fails
to perform  any of the  covenants  provided in Article 2,  Borrower  shall be in
default of this Agreement.

                           3.1.3 False Statements.  If any financial  statement,
representation,  warranty or certificate made or furnished by Borrower to Lender
in  connection  with this  Agreement,  or as an  inducement  to enter  into this
Agreement,  or in any separate  statement or document to be delivered to Lender,
shall be materially false or incomplete when made,  Borrower shall be in default
of this Agreement.

                  3.2 Remedies. On the happening of any Event of Default, Lender
may: (a)  accelerate and call due the unpaid  principal  balance of all advances
and all accrued  interest  and other sums due  hereunder;  (b) file suit against
Borrower;  (c)  seek  specific  performance  or  injunctive  relief  to  enforce
performance  of  the  undertakings,  duties  and  agreements  provided  in  this
Agreement,  whether  or not a  remedy  exists  at law or is  adequate;  and  (d)
exercise all other rights and remedies provided by this Agreement.

                  3.3 Remedies  Cumulative.  The rights and remedies provided in
this Agreement or otherwise  under  applicable  laws shall be cumulative and the
exercise of any  particular  right or remedy  shall not preclude the exercise of
any other rights or remedies in addition to, or as an alternative of, such right
or remedy.



Page 2 -                LOAN AGREEMENT

<PAGE>
                  3.4 Notice of Default. Lender shall provide Borrower with five
business  days  notice and  opportunity  to cure any  default  arising  from the
failure of Borrower to satisfy an obligation of payment under this Agreement and
with fifteen (15) calendar days notice and  opportunity to cure any other act or
omission  constituting  an Event of  Default.  Notwithstanding  anything  to the
contrary stated herein,  Borrower shall not be entitled to notice or opportunity
to cure any of the Events of Default particularized in Section 3.1.3.

                  3.5  Obligations  of  Borrower  Hereunder  Unconditional.  The
payment and  performance of the  obligations  under this Agreement  shall be the
absolute and  unconditional  obligations of Borrower and shall be independent of
any defense or any rights of setoff,  recoupment or counterclaim  which Borrower
might otherwise have against Lender.  Borrower shall pay during the term of this
Agreement  the payments of  principal  and interest to be made on account of the
advances and all other payments required  hereunder,  free of any deductions and
without abatement, diminution or setoff.

         4.       Miscellaneous Provisions.

                  4.1  Interpretation.  This Agreement shall be interpreted
in a manner consistent with the following acknowledgements.

                           (a)  Ambiguities.  The parties  acknowledge that each
party and its  counsel  has  materially  participated  in the  drafting  of this
Agreement; consequently, the rule of contract interpretation,  that ambiguities,
if any, in a writing be construed against the drafter, shall not apply.

                           (b) Headings.  The section headings in this Agreement
are included for convenience  only; they do not give full notice of the terms of
any portion of this Agreement and are not relevant to the  interpretation of any
provision of this Agreement.

                           (c)  Relationship  of the Parties.  Neither  party to
this Agreement shall be deemed an employee,  agent, partner,  joint venturer, or
related entity of the other by reason of this Agreement.

                           (d)  Governing  Law.  The  parties  intend  that this
Agreement  shall be governed by and construed in accordance with the laws of the
State of Oregon  applicable to contracts made and wholly performed within Oregon
by persons domiciled in Oregon.

                  4.2  Integration;  Amendment.  This Agreement  constitutes the
entire  agreement  of  the  parties  relating  to the  subject  matter  of  this
Agreement. There are no promises, terms, conditions,  obligations, or warranties
other than those contained herein.


Page 3 -                LOAN AGREEMENT

<PAGE>
Specifically,  as of the date of this  Agreement,  Lender has not agreed to make
any advances and may, in its sole discretion, elect to not provide any advances.
This  Agreement  supersedes  all  prior  communications,   representations,   or
agreements,  verbal or written, among the parties relating to the subject matter
of this  Agreement  and may not be  amended  except in writing  executed  by the
parties.

                  4.3 Waiver.  No provision of this Agreement shall be deemed to
have been waived unless such waiver is in writing signed by the waiving party.

                  4.4  Attorney  Fees.  If any suit or action  arising out of or
related to this  Agreement  is brought by any  party,  the  prevailing  party or
parties  shall be  entitled  to recover  the costs and fees  (including  without
limitation  reasonable  attorneys'  fees,  the fees and  costs  of  experts  and
consultants,  copying, courier and telecommunication costs, and deposition costs
and all other costs of discovery) incurred by such party or parties in such suit
or action,  including without limitation any post-trial or appellate proceeding,
or in the  collection or enforcement of any judgment or award entered or made in
such suit or action.

                  4.5  Jurisdiction;  Service.  The parties  each consent to the
jurisdiction  of the state or federal  courts of Oregon.  Each party agrees that
service  of  process  may be  made  upon it  wherever  it can be  located  or by
certified mail directed to its address for notices under this Agreement.

                  4.6 Counterparts. This Agreement may be executed in any number
of counterparts, all of which when taken together shall constitute one agreement
binding on all parties,  notwithstanding that all parties are not signatories to
the same counterpart.

                  4.7 Notices. Any notice required under this Agreement shall be
in writing and shall be deemed received upon delivery, if delivered in person or
by any expedited delivery service which provides proof of delivery,  upon tested
telex, or on the fifth business day after mailing,  if mailed by certified mail,
return receipt requested,  postage prepaid mail, addressed to Lender or Borrower
at the  appropriate  addresses.  The  addresses  for notices are those set forth
below or such other  addresses  as may be  specified  by  written  notice by the
parties:

                  If to Lender:                   Thomas D. Taylor
                                                  1905 NW 169th Place, Suite 211
                                                  Beaverton, Oregon 97006
                                                  Telephone:  (503) 690-4600
                                                  Fax:  (503) 690-0545



Page 4 -                LOAN AGREEMENT

<PAGE>


                  If to Borrower:                 Arrow Transportation Company
                                                  Attn:  Chief Financial Officer
                                                  10145 N. Portland Road
                                                  Portland, Oregon 97203
                                                  Telephone:  (503) 286-3661
                                                  Fax:  (503) 240-4360

                  4.8 Severability.  If any provision of this Agreement shall be
held to be invalid,  illegal or  unenforceable,  such invalidity,  illegality or
unenforceability  shall not affect any other  provision of this  Agreement,  but
this Agreement shall be construed as if such invalid,  illegal or  unenforceable
provision never had been included in this Agreement.

                  4.9 Further  Assurances.  Each party agrees, at the request of
the other party, promptly to execute and deliver all such further documents, and
promptly  to take  and  forbear  from  all  such  action,  as may be  reasonably
necessary or appropriate  in order more  effectively to confirm or carry out the
provisions of this Agreement.

         THE PARTIES  ACKNOWLEDGE HAVING READ THIS AGREEMENT IN FULL AND CONSENT
TO ALL TERMS CONTAINED IN THIS AGREEMENT.


LENDER:                                            BORROWER:


                                                   ARROW TRANSPORTATION COMPANY



__________________________                         By:
THOMAS D. TAYLOR                                   Its:  Chief Financial Officer



Page 5 -                LOAN AGREEMENT

<PAGE>
                            ARROW TRANSPORTATION CO.
                                 AND SUBSIDIARY


                          Index to Financial Statements
              for the years ended December 31, 1996, 1995 and 1994


                                                                  PAGE

Independent Auditors' Report      - - - - - - - - - - - - - - -   F - 2

Consolidated Balance Sheets     - - - - - - - - - - - - - - - -   F - 3

Consolidated Statements of Operations     - - - - - - - - - - -   F - 4

Consolidated Statements of Shareholders' Equity     - - - - - -   F - 5

Consolidated Statements of Cash Flows     - - - - - - - - - - -   F - 6

Notes to Consolidated Financial Statements      - - - - - - - -   F - 7





















                                      F- 1

<PAGE>
INDEPENDENT AUDITORS' REPORT



Board of Directors and Shareholders
Arrow Transportation Co.
Portland, Oregon

We  have  audited  the  accompanying   consolidated   balance  sheets  of  Arrow
Transportation  Co. and  subsidiary  as of December  31, 1996 and 1995,  and the
related consolidated  statements of operations,  shareholders'  equity, and cash
flows for each of the three years in the period then ended.  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  generally   accepted  auditing
standards.  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,  such consolidated  financial  statements present fairly, in all
material  respects,  the  financial  position  of Arrow  Transportation  Co. and
subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their  cash flows for each of the three  years in the  period  then ended in
conformity with generally accepted accounting principles.

As  more  fully  described  in  Note  16  of  notes  to  consolidated  financial
statements,  the Company is  defending  itself  against  allegations  and claims
related to environmental violations,  overtime pay violations,  and breach of an
employment contract with a former Company officer.

The accompanying  consolidated  financial statements for the year ended December
31, 1996, have been prepared  assuming that the company will continue as a going
concern.  As discussed in Note 1, the Company's recurring losses from operations
resulting  in  an  accumulated  deficit  and  negative  working  capital,  raise
substantial doubt about its ability to continue as a going concern. Management's
plans  concerning  these  matters are also  described  in Note 1. The  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.





DELOITTE & TOUCHE LLP

Portland, Oregon
April 11, 1997


                                      F- 2

<PAGE>
                            ARROW TRANSPORTATION CO.
                                 AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                  (Dollars in thousands, except per share data)
<TABLE>
<CAPTION>

                                                                           December 31,
                                                                           ------------
ASSETS                                                                  1996          1995
                                                                      ---------     ---------
<S>                                                                   <C>           <C>
Current assets:
     Cash                                                             $     64      $     33
     Accounts receivables, net                                           2,758         2,976
     Other receivables                                                      52            69
     Repair parts and supplies                                             236           312
     Prepaid expenses and deposits                                         744           736
     Prepaid tires                                                         483           630
     Assets held for sale                                                    -           785
     Deferred income taxes                                                  58           367
                                                                      ---------     ---------
          Total current assets                                           4,395         5,908
Equipment and property, net                                             11,877        14,491
Assets held for sale                                                         -           317
Other assets                                                                60           131
Deferred income taxes                                                      307             -
                                                                      ---------     ---------
         Total Assets                                                 $ 16,639      $ 20,847
                                                                      =========     =========


LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Line of credit borrowings                                        $  1,915     $       -
     Accounts payable                                                    1,673         1,350
     Accrued expenses                                                    2,034         1,709
     Current portion of long-term debt and capital leases                2,140         3,338
                                                                      ---------     ---------
          Total current liabilities                                      7,762         6,397
Line of credit borrowings                                                    -         1,825
Long-term debt                                                           4,280         4,959
Obligations under capital leases                                         3,534         4,480
Deferred income taxes                                                        -           627
Claims and contingencies (Note 16)                                           -             -
Shareholders' equity:
     Preferred stock, $5.00 par value (authorized 500,000 shares;
          issued and outstanding 50,000 shares)                            250             -
     Common stock, no par value (authorized 10,000,000 shares; issued  
          and outstanding 4,191,366 in 1996 and 4,140,859 in 1995)       4,909         4,868
     Accumulated deficit                                                (4,096)       (2,309)
                                                                      ---------     ---------
          Total shareholders' equity                                     1,063         2,559
                                                                      ---------     ---------
          Total liabilities and shareholders' equity                  $ 16,639      $ 20,847
                                                                      =========     =========
</TABLE>






                 See notes to consolidated financial statements.




                                      F- 3

<PAGE>
                            ARROW TRANSPORTATION CO.
                                 AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                  Year ended December 31,
                                                                  -----------------------
                                                             1996          1995          1994
                                                          ---------     ---------     ---------
<S>                                                       <C>           <C>           <C>
Operating revenues:
  Linehaul                                                $ 25,157      $ 29,275      $ 30,717
  Transloading                                               1,040           908         1,764
  Intermodal                                                   549           608           804
  Tankwash                                                     518           478           461
  Equipment rentals and other                                  315           147           364
                                                          ---------     ---------     ---------
         Total operating revenues                           27,579        31,416        34,110
                                                          ---------     ---------     ---------

Operating expenses:
  Compensation                                              15,770        17,330        18,164
  Supplies and maintenance                                   3,302         4,002         3,806
  Fuel and fuel taxes                                        2,496         2,557         2,776
  Depreciation and amortization                              2,426         2,790         2,670
  Taxes and licenses                                         1,080         1,370         1,453
  Insurance and claims                                         847           886         1,099
  Selling and administration                                 1,264         1,475         1,516
  Rent and purchased transportation                          1,144         1,404           941
  Communication and utilities                                  520           609           551
  Restructuring charges                                         -            535             -
  Gain on disposition of revenue equipment                     (33)         ( 32)         (197)
                                                          ---------     ---------     ---------
         Total operating expenses, net                      28,816        32,926        32,779
                                                          ---------     ---------     ---------

Income (loss) from operations                               (1,237)       (1,510)        1,331
Interest expense                                               980         1,229         1,291
Non-operating expenses (income)                                (48)          148            22
                                                          ---------     ---------     ---------
Income (loss) before income taxes and extraordinary item    (2,169)       (2,887)           18
Income tax expense (benefit)                                  (532)       (1,067)            -
                                                          ---------     ---------     ---------
Net income (loss) before extraordinary item                 (1,637)       (1,820)           18
Extraordinary item (less applicable income taxes of $93)      (150)            -             -
                                                          ---------     ---------     ---------
Net income (loss)                                         $ (1,787)     $ (1,820)     $     18
                                                          =========     =========     =========

Earnings (loss) per share:
    Net income (loss) before extraordinary item           $   (.39)     $   (.43)     $    .00
    Extraordinary item                                        (.04)            -             -
                                                          ---------     ---------     ---------
    Net income (loss)                                     $   (.43)     $   (.43)     $    .00
                                                          =========     =========     =========

Shares used in per share calculation                         4,166         4,189         4,153
                                                          =========     =========     =========
</TABLE>


                 See notes to consolidated financial statements.




                                      F- 4

<PAGE>
                            ARROW TRANSPORTATION CO.
                                 AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                             Note
                                                                                           Receivable       Total
                                                  Preferred       Common     Accumulated      from       Shareholders'
                                                    Stock         Stock        Deficit     Shareholder      Equity
                                                 -----------   -----------   -----------   -----------   -----------    
<S>                                              <C>           <C>           <C>           <C>           <C>
Balance, January 1, 1994                            $   500       $ 4,296       $  (507)      $  (100)     $  4,189
     Issuance of stock for ESPP (1)                       -            75             -             -            75
     Conversion of Preferred to Common Stock           (500)          400             -           100             -
     Net income                                           -             -            18             -            18
                                                 -----------   -----------   -----------   -----------   -----------    
Balance, December 31, 1994                                -         4,771          (489)                      4,282
     Issuance of stock for ESPP (1)                       -            87             -             -            87
     Stock options exercised                              -            10             -             -            10
     Net loss                                             -             -        (1,820)            -        (1,820)
                                                 -----------   -----------   -----------   -----------   -----------    
Balance, December 31, 1995                                -         4,868        (2,309)            -         2,559
     Issuance of stock for ESPP (1)                       -            41             -             -            41
     Issuance of preferred stock                        250             -             -             -           250
     Net loss                                             -             -             -        (1,787)       (1,787)
                                                 -----------   -----------   -----------   -----------   -----------    
Balance, December 31, 1996                          $   250       $ 4,909       $(4,096)      $     -       $ 1,063
                                                 ===========   ===========   ===========   ===========   ===========    
</TABLE>
(1)    ESPP is the Employee Stock Purchase Plan























                 See notes to consolidated financial statements.



                                      F- 5

<PAGE>
                            ARROW TRANSPORTATION CO.
                                 AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                              Year ended December 31,
                                                                          1996          1995          1994
                                                                       ---------     ---------     ---------
<S>                                                                    <C>           <C>           <C>
Cash flows from operating activities:
  Net income (loss)                                                    $ (1,787)     $ (1,820)     $     18
  Adjustments to reconcile net income (loss) to net
    cash provided by operating activities:
      Depreciation and amortization                                       2,472         2,806         2,680
      Deferred income taxes                                                (625)       (1,045)          (44)
      Extraordinary item                                                    243             -             -
      Restructuring charges                                                               535             -
      Bad debts expense                                                       -           152             -
      (Gain)loss on sale of equipment and property, net                     131           (15)         (198)
 Changes in assets and liabilities:
       Receivables                                                          235           960        (1,149)
       Repair parts and supplies                                             76           152           (93)
       Prepaid expenses and deposits                                         (8)          346           (39)
       Prepaid tires                                                        147           176           143
       Accounts payable                                                     (17)          (82)          748
       Accrued expenses                                                     325           (98)          365
       Claims                                                                 -           (62)          (31)
       Other                                                                 71            14            10
                                                                       ---------     ---------     ---------
 Net cash provided by operating activities                                1,263         2,019         2,410
                                                                       ---------     ---------     ---------

Cash flows from investing activities:
  Capital expenditures                                                     (102)         (500)       (2,418)
  Proceeds from sale of property and equipment                            1,190           315         1,805
  Payments received on notes receivable                                       -           317             -
                                                                       ---------     ---------     ---------
  Net cash provided by (used in) investing activities                     1,088           132          (613)
                                                                       ---------     ---------     ---------

Cash flows from financing activities:
 Increase (decrease) in bank overdrafts                                     340          (253)           82
 Net borrowing (payments) on line of credit                                   -        (1,585)          881
 Line of credit borrowings                                               28,356         4,845             -
 Line of credit repayments                                              (28,266)       (3,080)            -
 Proceeds from issuance of long-term debt                                     -         3,052         1,463
 Proceeds from issuance of preferred stock                                  250             -             -
 Proceeds from exercise of stock options                                      -            10             -
 Proceeds from employee stock purchase plan                                  41            87            75
 Repayments:
   Notes payable to bank                                                      -        (1,149)       (2,095)
   Long-term debt                                                        (1,459        (2,546)       (1,105)
   Capital lease obligations                                             (1,582)       (1,531)       (1,294)
                                                                       ---------     ---------     ---------
       Net cash used in financing activities                             (2,320)       (2,150)       (1,993)
                                                                       ---------     ---------     ---------

Net increase (decrease) in cash                                              31             1          (196)
Cash at beginning of year                                                    33            32           228
                                                                       ---------     ---------     ---------
Cash at end of year                                                    $     64      $     33      $     32
                                                                       =========     =========     =========

Supplemental disclosures of cash flow information:
         - Cash paid during the year for interest                      $  1,003      $  1,236      $  1,260
         - Cash paid during the year for income taxes                         3             6           121
Supplemental schedule of non-cash investing and financing activities:
         - Increase in revenue equipment under capital lease and
             capital lease obligations                                 $    317      $    784      $  2,630
         - Increase in revenue equipment and long-term debt                   -           637         1,431
         - Loan fees applied to line of credit                                -            60             -
         - Conversion of preferred stock to common stock                      -             -           400
</TABLE>
                 See notes to consolidated financial statements.

                                                                F- 6

<PAGE>
                            ARROW TRANSPORTATION CO.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.  CURRENT OPERATING ENVIRONMENT

Arrow  Transportation  Co.  (the  "Company")  as a result of  overly  aggressive
geographic  and  fleet  expansion  in 1994 and  1995  combined  with  intrastate
deregulation,  soft freight  demand and industry  overcapacity  has incurred net
losses of $1,800,000 for each of the years ended December 31, 1996 and 1995. The
Company has a working capital deficiency of $3,400,000 as of December 31, 1996.

The   following   describes   management's   plans  to  return  the  Company  to
profitability:

Recognizing a need to improve  Arrow's  performance,  the Company  implemented a
business  plan  in  1996  designed  to  restructure   the  Company  and  restore
profitability.  During the first three quarters of 1996, the Company implemented
phase I of its business  plan.  This plan was designed to enhance the  Company's
overall  competitiveness,  productivity  and  efficiency  through a reduction in
operating  and  overhead  costs.   The  plan  downsized  and   restructured  the
organization  to better serve its  customers.  Terminals  were closed and excess
linehaul  carrying  capacity was  eliminated  as Arrow sold 43 power  units.  An
integral  part of the  business  plan was the  installation  of a  formal  Total
Quality Management ("TQM") program throughout the organization.  Installation of
the  Company's  TQM program  included the training of all corporate and terminal
staff and resulted in the empowerment of its front line managers and associates,
streamlined terminal operations and it strengthened customer service.

The Company made  significant  changes in 1996 and  continues to make changes to
its operations in order to achieve  reductions to its operating cost  structure.
During  the fourth  quarter of 1996,  the  Company  implemented  phase II of its
profit improvement plan, which included  additional  reductions in corporate and
support  staff,   selected   fleet   downsizing,   operating  cost   reductions,
redeployment of equipment and the  restructuring  of certain term debt and lease
arrangements.  The  changes the Company is making are meant to focus the Company
on its core competencies, to reduce waste and redundancies in its processes, and
improve cash flow.  Although  the changes the Company has made and  continues to
make are reducing its operating cost structure,  the Company's leverage position
requires business volume to improve before profitability will be achieved.

In 1996, the Company did not achieve  business volume  sufficient to effectively
utilize  its fleet and as a result,  the full  benefit of the  Company's  profit
improvement  plan has yet to be  realized.  In an  effort to fully  realize  the
benefit of its profit  improvement plan, the Company has recently  realigned its
marketing  staff and is focusing its efforts on building  business volume in the
Company's core western markets where it believe it has a competitive edge.


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION - Arrow  Transportation Co. through its wholly-owned
subsidiary, Arrow Transportation Co. of Delaware (collectively,  the "Company"),
is engaged  primarily in the  transportation of bulk liquid chemical products in
intrastate  and interstate  commerce and serves a wide variety of  manufacturing
and industrial  users in the United States and western Canada.  The consolidated
financial   statements  include  the  accounts  of  the  Company.  All  material
intercompany transactions have been eliminated in consolidation.

RECOGNITION OF REVENUE - Linehaul and intermodal  revenues were  recognized upon
the delivery of shipments to customers  through May 1995.  Beginning  June 1995,
revenues are allocated to reporting  periods  based on relative  transit time in
each reporting  period.  This change did not materially  affect the consolidated
financial statements.

ACCOUNTS  RECEIVABLE  consist  of  trade  receivables  net of an  allowance  for
doubtful accounts of $10,000 and $162,000 in 1996 and 1995 respectively,  and an
allowance for freight adjustments of $85,000 in both 1996 and 1995.


                                      F- 7

<PAGE>
OTHER  RECEIVABLES  include  $5,000 and $21,000 due from  employees  in 1996 and
1995, respectively.

REPAIR PARTS AND SUPPLIES  include parts and major components used in the repair
of revenue equipment,  tankwash chemicals,  fuel and oil which are valued at the
lower of cost (first-in,  first-out method) or market.  Included in repair parts
and  supplies is a reserve for parts and supplies not expected to be used within
the coming year.

PREPAID TIRES  include the  unamortized  cost of tires in the  Company's  fleet,
which are valued utilizing casing and recap costs less estimated tread wear.

EQUIPMENT  AND PROPERTY  are stated at cost,  net of  accumulated  depreciation.
Revenue equipment under capital leases is stated at the present value of minimum
lease payments at the inception of the lease,  net of accumulated  amortization.
Depreciation and amortization  are calculated on the  straight-line  method over
the  estimated  useful  lives  of the  related  assets.  The gain or loss on the
disposition of revenue  equipment is the  difference  between the sales proceeds
and the net book value of the revenue equipment and tires on the equipment.


ASSETS  HELD FOR SALE - The  Company  held  assets for sale  (primarily  revenue
equipment) at December 31, 1995. These assets were carried at the lower of cost,
net of accumulated depreciation, or net realizable value. The Company recorded a
charge of $28,000 to other expense in 1996 upon the sale of such assets.

ACCOUNTS PAYABLE include outstanding checks of $625,000 and $285,000 at December
31, 1996 and 1995, respectively.

INCOME  TAXES - The  Company  follows  Financial  Accounting  Standard  No. 109,
Accounting  for Income Taxes,  which  requires the provision of deferred  income
taxes  based  upon an  asset  and  liability  approach  and  consideration  of a
valuation  allowance.  The deferred tax expense or benefit represents the change
during the year in the Company's deferred tax liabilities and assets,  including
the effect of enacted tax rate changes.  Total income tax expense or benefit for
the  year is the sum of  deferred  tax  expense  or  benefit  and  income  taxes
currently payable or refundable.

RECLASSIFICATION  - Certain  items have been  reclassified  to conform  with the
current year's presentation with no effect on previously reported earnings.

EARNINGS  (LOSS) PER SHARE - Earnings  (loss)  per share is  computed  using the
weighted  average number of common shares  outstanding  during the year.  Common
stock equivalents and other  potentially  issuable shares have not been included
in the  calculations  because their  inclusion would be  anti-dilutive.  For the
years ended  December 31, 1996,  1995 and 1994,  weighted  average common shares
outstanding were 4,166,000, 4,189,000, and 4,153,000 respectively.

USE OF ESTIMATES - The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect  reported  amounts of assets and liabilities at the
date of the  financial  statements  and the  reported  amounts of  revenues  and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.

CASH FLOWS - For purposes of the statements of cash flows, the Company considers
all highly-liquid investments with a maturity of three months or less to be cash
equivalents.


3.  EXTRAORDINARY ITEM

During the fourth quarter of 1996, the Company  restructured  its debt and lease
arrangements  with its major  creditors to provide for temporary  moratoriums on
payments and extensions of maturity dates. The $150,000  extraordinary item, net
of income tax  benefit of  $93,000,  reported  in the  statement  of  operations
represents the net effect of  extinguishing  certain of the Company's  long-term
debt  obligations  and the  disposal  of capital  lease  assets and the  related
obligations  with its  creditors.  As a  result  of the  modifications,  certain
capital leases are now accounted for as operating leases.


                                      F- 8

<PAGE>
4.   RESTRUCTURING CHARGES

During the fourth quarter of 1995, the Company's  board of directors  approved a
profit  improvement  plan for 1996 to refocus the Company's  operations on those
markets  where  management  and the board  believe the Company has a competitive
edge. The  implementation  of the plan resulted in a downsizing of the company's
fleet, a reduction in its corporate  staff and the closure of terminals in Baton
Rouge, LA, Chattanooga, TN, Tulsa, OK, and Port Neches, TX. The Company recorded
a restructuring  charge of $535,000 in the fourth quarter of 1995 to reflect the
costs associated with implementing the profit improvement plan.

5.   REPAIR PARTS AND SUPPLIES
                                                1996           1995
                                             ----------     ----------
                                                   (in thousands)

     Parts and major components              $     223      $     279
     Other                                          47             67
                                             ----------     ----------
          Subtotal                                 270            346
     Less reserve                                  (34)           (34)
                                             ----------     ----------
     Total repair parts and supplies         $     236      $     312
                                             ==========     ==========


6.   PREPAID EXPENSES AND OTHER
                                                1996           1995
                                             ----------     ----------
                                                   (in thousands)

     Taxes and licenses                      $     302      $     340
     Insurance and deposits                        371            382
     Other                                          71             14
                                             ----------     ----------
     Total prepaid expenses and deposits     $     744      $     736
                                             ==========     ==========


7.   EQUIPMENT AND PROPERTY
<TABLE>
<CAPTION>
                                                         1996           1995        Useful lives
                                                      ----------     ----------     -------------
                                                            (in thousands)

<S>                                                   <C>            <C>            <C>
     Revenue equipment                                $  11,100      $  11,517      5 to 15 years
     Revenue equipment under capital leases               7,211          7,757      5 to 15 years
     Machinery and equipment                              1,564          1,705      3 to 10 years
     Furniture and fixtures                                 374            379         5 years
     Leasehold improvements                                 623            611      5 to 10 years
                                                      ----------     ---------- 
          Subtotal                                       20,872         21,969
     Less accumulated depreciation and amortization      (8,995)        (7,478)
                                                      ----------     ---------- 
     Total equipment and property                     $  11,877      $  14,491
                                                      ==========     ==========
</TABLE>
Accumulated  amortization  on equipment  under capital leases was $3,344,000 and
$2,532,000 at December 31, 1996 and 1995, respectively.


8.   LINE OF CREDIT

The Company's  combined credit  arrangement  provides for a line of credit at an
interest  rate of 1.5% over the lender's  reference  rate (8.25% at December 31,
1996).  Maximum  borrowing under the line is limited to the lesser of $4,000,000
or 85% of eligible  accounts  receivable  which were  $2,321,000 at December 31,
1996.  The line of credit  matures in November  1997.  The unused portion of the
line of credit was $79,000 at December 31, 1996.


                                      F- 9

<PAGE>
9.   ACCRUED EXPENSES
                                                         1995           1996
                                                      ----------     ---------- 
                                                            (in thousands)

         Payroll and related expenses                 $   1,414      $     756
         Taxes other than income and payroll taxes          177            280
         Other accrued liabilities                          443            673
                                                      ----------     ---------- 
         Total accrued expenses                       $   2,034      $   1,709
                                                      ==========     ==========


10.   LONG-TERM DEBT
<TABLE>
<CAPTION>
                                                                           1996           1995
                                                                        ---------      ---------
<S>                                                                     <C>            <C>
                                                                             (in thousands)
         Term note,  collateralized  principally by revenue equipment,
         monthly payments of $64,775 including interest at 9.5%
         due September 1998                                             $  1,606       $  2,195

         Note payables, collateralized by revenue equipment, monthly 
         payments of $82,267 including interest ranging from 7.99%
         to 10.75% due between April 2000 and January  2002                 3,876         4,548

         Other long-term debt                                                   5            32
                                                                        ---------      ---------
         Subtotal                                                          5,487          6,775
         Less current portion                                             (1,207)        (1,816)
                                                                        ---------      ---------

         Total long-term debt                                           $  4,280       $  4,959
                                                                        =========      =========
</TABLE>
The combined  credit  arrangement  includes a $2,000,000  revolving to term loan
facility  to allow  for the  purchase  of new and used  revenue  equipment  on a
revolving  basis,  converting  to term loans.  Any  outstanding  balance on this
facility  after six months from the initial  funding will be converted to a term
note with a  maturity  of three  years from the date of  conversion.  Borrowings
under the  revolving  to term loan will bear  interest at 1.5% over the lender's
reference  rate.  There was no balance  outstanding  under the revolving to term
loan facility at December 31, 1996.

The  combined  credit  arrangement   includes  various   restrictive   covenants
including,  a  prohibition  on  dividends  and minimum  adjusted  net worth.  At
December 31, 1996, the Company was in compliance  with all of the debt covenants
relating to this credit arrangement.


         Aggregate minimum principal payments on long-term debt are as follows:

                               Year Ending                   Principal
                               December 31,                  Payments
                               ------------                 ------------
                                                           (in thousands)
                                   1997                     $    1,207
                                   1998                          1,677
                                   1999                            763
                                   2000                          1,199
                                   2001                            589
                                 Thereafter                         52
                                                            -----------
                                   Total                    $    5,487
                                                            ===========




                                      F- 10

<PAGE>
11.   SHAREHOLDERS' EQUITY

In December 1991, the Company issued 500,000 shares of non-voting, non-dividend,
non-participating, non-convertible, non-cumulative preferred shares for $500,000
to The Cutler Corporation, an entity controlled by two directors of the Company.
The Company and The Cutler Corporation entered into an agreement in July 1993 to
redeem the  preferred  stock,  at par, on or before  April 1, 1994.  On March 7,
1994,  the  Company  redeemed  the  preferred  stock  net of the  $100,000  note
receivable by  exchanging  it for 59,260  shares of common stock.  The preferred
stock and note receivable were canceled.

Employee  Stock  Purchase Plan - The Company has an Employee Stock Purchase Plan
(the "Plan"). Most employees are eligible to participate in the Plan. Shares are
not available to employees  who already own 5% or more of the  Company's  stock.
Employees  can  withhold,  by  payroll  deductions,  up to 10% of their  regular
compensation to purchase shares.  There are 200,000 shares reserved for purchase
under the Plan.  There were 50,507,  28,920,  and 12,679  issued during the year
ended December  1996,  1995 and 1994,  respectively.  At December 31, 1996 there
were 107,894 available for future purchases under the plan.

Stock Options - The Company has an Incentive and Non-Statutory Stock Option Plan
(the "Plan")  which  provides for grants of incentive  and  non-statutory  stock
options to employees  and  directors  to purchase  shares of common stock of the
Company.  Under the Plan, the Board of Directors  determines the option price at
the time the option is granted;  however, the option price for incentive options
cannot  be less  than the  fair  value  of the  stock on the date of the  grant.
Options  granted under the Plan  generally vest within five years and expire ten
years  from  the  date  of  grant  or upon  termination  of  employment  and are
exercisable  over the period  stated in each  option.  The Company has  reserved
350,000 shares of common stock for issuance under the Plan. At December 31, 1996
there were 55,000 shares available for future grants under the plan.

In October 1995,  the Financial  Accounting  Standards  Board issued FAS No. 123
Accounting for Stock-Based Compensation,  which encouraged (but did not require)
that stock-based  compensation cost be recognized and measured by the fair value
of the  equity  instrument  awarded.  The  Company  did not change its method of
accounting  for its  stock-based  compensation  plan and will  continue to apply
Accounting  Principles  Board  Opinion No. 25,  Accounting  for Stock  Issued to
Employees, and related interpretations in accounting for these plans. The effect
on the  Company's  net loss and net loss per share for the years ended  December
31, 1996 and 1995 had the Company accounted for stock options in accordance with
FAS No. 123 is not material.








                                      F- 11

<PAGE>
A summary of the status of the  Company's  stock  option plan as of December 31,
1994,  1995 and 1996 and  changes  during  the years  ending  on those  dates is
presented below:

                                                  Outstanding  Options
                                                  --------------------
                                              Number                Price
                                             of Shares            Per Share
                                             ---------          -------------
         Outstanding, January 1, 1994         217,500           $1.00 - $6.00
            Granted                            42,500           $4.00 - $6.75
            Canceled                          (15,000)          $5.00
                                             ---------
         Outstanding, December 31, 1994       245,000           $1.00 - $6.75
            Granted                            65,000           $2.50 - $3.25
            Exercised                         (10,000)          $1.00
            Canceled                          (25,000)          $4.00 - $6.75
                                             ---------
         Outstanding, December 31, 1995       275,000           $1.00 - $6.75
            Granted                           260,000           $0.50 - $0.81
            Exercised                               -
            Canceled                         (280,000)          $0.81 - $6.75
                                             ---------
         Outstanding, December 31, 1996       255,000           $0.50
                                             =========

On November 20, 1996,  the Board  canceled  all options  previously  granted and
outstanding  under the Plan. The Board also approved the issuance of new options
vested on the same basis as the  options  which were  canceled.  The new options
were approved on January 3, 1997 effective as of November 20, 1996 (the date the
options were approved by the Board).

Options to purchase 160,500, 146,833, and 113,500 shares of the Company's common
stock were exercisable at December 31, 1996, 1995 and 1994, respectively.

Preferred Stock - In May 1996, the Company issued 50,000  unregistered shares of
Class A convertible  preferred stock with a par value of $5.00 per share under a
Preferred Stock Purchase and Option Agreement ("the  Agreement").  The Agreement
includes  an  option  to  purchase  an  additional  50,000  shares  of  Class  A
convertible  preferred stock at an exercise price of $5.00 per share. The option
expires on June 30, 2001.  Each share of preferred  stock is  convertible at any
time at the option of the holder, into ten shares of the Company's common stock.
The  preferred  stock  bears  a 7%  annual  dividend,  payable  each  May at the
Company's option either in cash or in additional  shares of preferred stock. The
preferred  stock will be entitled  to vote on an  as-converted  basis,  and to a
preference on any liquidation of the Company


12.   INCOME TAXES

         Income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
                                                          1996          1995          1994
                                                       ---------     ---------     ---------
                                                                   (in thousands)

              <S>                                      <C>           <C>           <C>
              Federal                                  $     -       $    (23)     $     39
              State                                          -              1             5
                                                       ---------     ---------     ---------
                   Current tax expense (benefit)             -            (22)           44
                                                       ---------     ---------     ---------

              Federal                                      (553)         (925)          (39)
              State                                         (72)         (120)           (5)
                                                       ---------     ---------     ---------
                   Deferred tax expense (benefit)           (625)      (1,045)          (44)
                                                       ---------     ---------     ---------
                   Total income tax expense (benefit)  $   (625)     $ (1,067)     $      -
                                                       =========     =========     =========
</TABLE>





                                                               F- 12

<PAGE>
A  reconciliation  between  the  statutory  federal  income tax  expense and the
effective federal income tax rate is as follows:
<TABLE>
<CAPTION>
                                                      1996          1995          1994
                                                   ---------     ---------     ---------
<S>                                                <C>           <C>           <C>     
              Federal statutory expense (benefit)  $   (823)     $   (982)     $      6
                 State income tax                      (107)          (79)            -
                 Valuation allowance                    305             -             -
                 Other - net                              -            (6)           (6)
                                                   ---------     ---------     ---------
              Income tax expense (benefit)         $   (625)     $ (1,067)     $      -
                                                   =========     =========     =========
</TABLE>
Deferred  income taxes reflect the net tax effects of (a) temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes,  and (b)  operating  loss
and tax credit carry  forwards.  Significant  components  of the  Company's  net
deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
                                                                      December 31,
                                                                  1996            1995
                                                               ----------      ----------
                                                                     (in thousands)

              <S>                                              <C>             <C>
              NOL carry forward                                $   2,259       $   1,330
              Book reserves not currently deductible for tax         282             376
              AMT credit carryforward                                158             159
              Other                                                   97              40
                                                               ----------      ----------
                   Gross deferred tax assets                       2,796           1,905
                   Less valuation allowance                         (305)              -
                                                               ----------      ----------
                   Deferred tax assets                             2,491           1,905
                                                               ----------      ----------

              Accumulated depreciation                             1,864           1,692
              Prepaid tires                                          185             277
              Lease financing                                         38             176
              Other                                                   39              20
                                                               ----------      ----------
                   Deferred tax liabilities                        2,126           2,165
                                                               ----------      ----------
                   Net deferred tax asset (liability)          $     365       $    (260)
                                                               ==========      ==========
</TABLE>
FAS No. 109  requires  that a valuation  allowance  be recorded  when it is more
likely  than not that  some  portion  of the  deferred  tax  assets  will not be
realized.  The Company has recorded a valuation  allowance  for a portion of the
NOL.  The Company has $5,900,000 of NOL carry forwards  which, if not used, will
expire between 2006 and 2011.



















                                                           F- 13

<PAGE>
13.   LEASES

The leases for the Company's  terminal  locations and certain revenue  equipment
are classified as operating leases.  The Company is also obligated under various
equipment  capital  leases  which  expire at various  dates during the next four
years.

Minimum future  payments  required under operating  leases having  noncancelable
terms in excess of one year and the  present  value of  future  minimum  capital
lease payments as of December 31, 1996 are summarized as follows:

              Year ending                             Operating      Capital
              December 31,                              Leases       Leases
              ------------                            ---------     ---------
                                                           (in thousands)

                   1997                                $ 1,252      $  1,196
                   1998                                  1,442         1,250
                   1999                                  1,224         1,552
                   2000                                     868        1,095
                   2001                                     814            -
                   Thereafter                               737            -
                                                      ---------     ---------
                   Total                              $  6,337      $  5,093
                                                      =========

                   Less amounts representing interest                   (626)
                   Less current portion                                 (933)
                                                                    ---------
                   Obligations under capital leases                 $  3,534
                                                                    =========

In  addition  to minimum  lease  payments,  some of the leases  provide  for the
payment of real  property  taxes and  insurance  premiums.  Rental  expense  was
$1,247,000,  $1,404,000 and $926,000 for the years ended December 31, 1996, 1995
and  1994,  respectively.   The  Company  rents  various  revenue  equipment  to
third-party users.  Rental income was $252,000 , $116,000,  and $298,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.


14.   RELATED-PARTY TRANSACTIONS

The  accompanying   financial   statements  include  certain  transactions  with
shareholders and entities  controlled by certain  principal  shareholders of the
Company.

Expenses consisting of operating lease payments on revenue equipment and company
vehicles,  interest expense on capital leases,  and fees for debt guarantees and
consulting  services  incurred as a result of transactions with shareholders and
other related parties totaled $2,000,  $34,000, and $121,000 for the years ended
December  31,  1996,  1995  and  1994,  respectively.  In  addition  a  $100,000
non-interest  bearing,  demand note  receivable  from  shareholder was cancelled
during 1994.

In January 1997, the Company entered a loan agreement ("the Agreement") with the
holder of the Company's preferred stock (the "Lender"). The Lender has agreed to
advance funds to the Company at the Company's request.  The principal balance of
all funds advanced by the Lender shall bear interest at the rate of 10%, and all
amounts loaned under the Agreement  (including interest) shall be payable within
ten days of written  demand by Lender.  The Company  borrowed  $100,000 from the
Lender in January 1997.







                                      F- 14

<PAGE>
15.   PENSION PLANS

The Company is obligated under collective bargaining agreements to contribute to
multi-employer  pension  trusts  based on the hours  worked  by  bargaining-unit
employees. The total payments were $828,000,  $1,128,000, and $1,076,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.  The actuarial value
of vested and  non-vested  accumulated  plan benefits and of plan net assets for
these plans are not separately  calculated for the Company as the Company is not
liable for any unfunded plan obligations.

The Company also  maintains a defined  contribution  profit sharing plan for the
non-union employees. No Company contribution is required under the terms of this
plan;  contributions are at the discretion of the Board. Employer  contributions
were $26,000,  $18,000,  and $38,000 for the years ended December 31, 1996, 1995
and 1994, respectively.


16. CLAIMS AND CONTINGENCIES

The Company is party to four potentially material actual or pending proceedings:

(a) The Washington  Department of Ecology ("Ecology") has named the Company as a
potentially responsible party and served an administrative  enforcement order on
the Company and 16 other  companies  associated  with the Yakima  Railroad  Area
("YRRA") in Yakima, Washington.  Ecology alleges in the order that all 17 of the
companies   have   some   connection   with  the   presence   of  the   chemical
Perchloroethylene ("PCE") in the ground water underlying the YRRA.
The Company used carbon filtration to treat wash water from its trucks.

The spent carbon was taken by an  independent  transporter to the Cameron Yakima
facility located within the YRRA. This transporter  directly contracted with the
Cameron-Yakima  recycling  facility.  Ecology  claims that Cameron-  Yakima is a
source of PCE  contamination,  along with other  facilities  located  within the
YRRA. The principal  parties with respect to the enforcement  order are Ecology,
the Company and the 16 other  companies  that were served with the order.  There
are many other parties,  not named on the order, who used Cameron-Yakima and are
potentially  liable  for  contamination  at the  site.  The  order  directs  the
respondent parties to develop and implement a remedial investigation/feasibility
study  ("RI/FS")  of  the  YRRA  to  identify  the  nature  and  extent  of  PCE
contamination  in the ground water. The order further directs the respondents to
provide bottled drinking water to certain  households within the YRRA, if PCE is
detected in sampled  domestic tap water. It is possible that, upon completion of
the RI/FS,  Ecology  could order the Company and other  parties to take  further
action, including remediation. Ecology has settled claims with a number of other
potentially  responsible  parties at this site, but thus far the Company has not
been able to settle  this claim on a basis  acceptable  to the  Company.  If the
Company is unable to reach a separate settlement, the Company may be potentially
liable for  remediation  costs that are not recovered from the settling  parties
and for  contribution.  Given the current status and inherent  uncertainties  in
this matter the Company is unable to determine or quantify in any meaningful way
its potential liability, and therefore,  cannot determine whether it will have a
material effect on the Company's financial condition,  results of operations, or
cash flows. The settlements thus far proposed by Ecology would have had material
adverse effects on the Company's financial condition and cash flows.

(b) In 1991 the Company was added as a defendant to a case  entitled  Department
of Labor &  Industries  vs.  Puget Sound  Trucklines,  et al.,  in King  County,
Washington Superior Court, that alleges the Company,  among others, has violated
the overtime pay  provisions  of Washington  state law.  Puget Sound Truck Lines
reached an out of court  settlement  with the Department of Labor and Industries
in  1995.  In May  1996  the case  was  restyled  Rex W.  Allen et al vs.  Arrow
Transportation  Company.  The action, as to the Company, now involves 30 current
and former Company  employees.  Eight  plaintiffs  reached a settlement with the
Company  in 1996.  The  remaining  plaintiffs  seek  unspecified  overtime  pay,
interest and attorney's fees.






                                      F- 15

<PAGE>
The  plaintiff  has  indicated  that it intends to amend its claim  against  the
Company to include the Company's  payment practices since 1991. If permitted and
proven,  this  expansion  would  have the  effect of  increasing  the  Company's
potential  liability to the  plaintiffs,  and might affect the Company's  future
employment  practices in the State of Washington.  The Company is unable at this
time,  however,  to determine what effect,  if any, this litigation will have on
the Company's financial condition, results of operations, or cash flows.

(c) The  Washington  Department  of Natural  Resources  ("DNR")  filed an action
against the Company and several  other  parties in November  1995.  It sought to
recover  cleanup costs totaling  $389,000 from Arrow and the other parties,  who
all at various  times leased a site in Seattle  which was later  acquired by the
Department.  Arrow leased a portion of the site for five years.  The Company has
reached an agreement  in principle  with DNR to settle this claim for a $47,500.
The Company  recognized  the cost of this  settlement  in the fourth  quarter of
1996.

(d) An action was filed  against the Company on May 7, 1996,  by Sal N. Cincotta
in the United States  District Court for the District of Oregon  alleging breach
of contract  and unpaid  wages.  Mr.  Cincotta  was  previously  employed by the
Company as its President and Chief Executive Officer,  and was a director of the
Company  prior to his  resignation  on May 3, 1996.  On October  18,  1996,  Mr.
Cincotta filed a motion for summary  judgement in this action,  seeking $458,139
in total  damages.  On February 11, 1997, a Magistrate  Judge entered a Proposed
Findings  and  Recommendation  in favor of Mr.  Cincotta,  including an award of
pre-judgement  interest.  The Company strongly objected to the Proposed Findings
and Recommendation and appealed the issue to a District Court Judge. The Company
continues to vigorously defend the matter.  The Company cannot determine whether
costs of defense or the probable  result of this litigation will have a material
effect on the Company's  financial  condition,  results of  operations,  or cash
flows.  A ruling by the District  Court Judge in favor of Mr.  Cincotta,  unless
stayed  and  reversed  on appeal  would have a  material  adverse  effect on the
Company's financial condition and cash flows.

The Company is a defendant in various other claims and legal proceedings arising
in the ordinary course of business.  While resolution of these matters cannot be
predicted with certainty,  management believes that the ultimate outcome of such
litigation will not have a materially adverse effect on the Company's  financial
position,   results  of  operations   or  cash  flows.   In  addition  to  legal
contingencies,  management  estimates  the  Company's  liability  for  property,
freight and workers'  compensation  claims based upon prior claim experience and
records such liabilities in its financial statements.


17.   NEW ACCOUNTING PRONOUNCEMENTS

In March 1997,  the  Financial  Accounting  Standards  Board issued FAS No. 128,
Earnings per Share , which simplifies EPS determination and brings U.S. practice
for earnings per share (EPS) in closer conformity with  international  practices
by replacing  primary EPS with basic EPS and fully diluted EPS with diluted EPS.
Basic  EPS is based  on  outstanding  stock,  without  regard  to  common  stock
equivalents  (which  currently must be considered in the  calculation of primary
EPS).  Diluted EPS is similar to fully  diluted EPS as currently  computed.  The
effective date is for financial  statements  ending after December 15, 1997. The
adoption  of this  standard  is not  expected  to have a material  effect on the
Company's 1997 financial  statements as the Company's  common stock  equivalents
are expected to have an anti-dilutive effect on EPS.




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                                      F- 16

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