**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

**FORM 10-K**

 

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**Forthe fiscal year ended December 31, 2007**

**Commissionfile number 0-15010**

 

**MARTEN TRANSPORT, LTD.**

(Exact name of registrant as specified in itscharter)

 

| **DELAWARE**

(State  of incorporation)                                                  | ** ** |                   |   | **39-1140809**

(I.R.S.  employer identification no.)     |
|------------------------------------------------------------------------------------------|------------|------------------------|--------|-----------------------------------------------------------|
| ** **                                                                               | ** ** |                   |   | ** **                                                |
| **129 MARTEN STREET**

**MONDOVI, WISCONSIN**

(Address  of principal executive offices) | ** ** | **54755**

(Zip  code) |   | **(715) 926-4216**

(Registrant’s  telephone number) |

 

Securities registered pursuant to Section 12(b) ofthe Act:

 

| **Title of each class:**               | ** ** | **Name of each exchange on which registered:** |
|----------------------------------------|------------|------------------------------------------------|
| COMMON STOCK, PAR VALUE $.01 PER SHARE |       | THE NASDAQ STOCK MARKET LLC                    |
|                                   |       | (NASDAQ GLOBAL SELECT MARKET)                  |

 

Securities registered pursuant to Section 12(g) ofthe Act:

NONE

 

Indicate by check mark ifthe Registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  Yes  o   No  x

 

Indicate by check mark ifthe Registrant is not required to file reports pursuant to Section 13 or15(d) of the Exchange Act.  Yes  o   No  x

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes  x   No  o

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  x

 

Indicate bycheck mark whether the Registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act.  Large acceleratedfiler  o  Accelerated filer  x  Non-accelerated filer (do not check if asmaller reporting company) o Smallerreporting company o

 

Indicate bycheck mark whether the Registrant is a shell company (as defined in ExchangeAct Rule 12b-2).  Yes  o   No  x

 

As of June 30,2007 (the last business day of the Registrant’s most recently completed secondfiscal quarter), the aggregate market value of the Common Stock of theRegistrant (based upon the closing price of the Common Stock at that date asreported by the NASDAQ Global Select Market), excluding outstanding sharesbeneficially owned by directors and executive officers, was $275,906,000.

 

As of February 29,2008, 21,816,719 shares of Common Stock of the Registrant were outstanding.

 

Part III ofthis Annual Report on Form 10-K incorporates by reference information (tothe extent specific sections are referred to in this Report) from theRegistrant’s Proxy Statement for the annual meeting to be held May 6,2008, or 2008 Proxy Statement.

 

 

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**Tableof Contents**

 

 

|       | **PART I**                                                                                                     |       | **Page**   |
|------------|---------------------------------------------------------------------------------------------------------------------|------------|------------|
|       |                                                                                                                |       |       |
| Item 1.    | Business                                                                                                            |       | 1          |
| Item 1A.   | Risk Factors                                                                                                        |       | 6          |
| Item 1B.   | Unresolved  Staff Comments                                                                                          |       | 10         |
| Item 2.    | Properties                                                                                                          |       | 10         |
| Item 3.    | Legal  Proceedings                                                                                                  |       | 10         |
| Item  4.   | Submission  of Matters to a Vote of Security Holders                                                                |       | 10         |
| Item  4A.  | Executive  Officers of the Registrant                                                                               |       | 10         |
|       |                                                                                                                |       |       |
| ** ** | **PART II**                                                                                                    | ** ** | ** ** |
| ** ** | ** **                                                                                                          | ** ** | ** ** |
| Item  5.   | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |       | 12         |
| Item 6.    | Selected  Financial Data                                                                                            |       | 14         |
| Item  7.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       | 15         |
| Item 7A.   | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       | 30         |
| Item  8.   | Financial  Statements and Supplementary Data                                                                        |       | 31         |
| Item  9.   | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                               |       | 53         |
| Item 9A.   | Controls  and Procedures                                                                                            |       | 53         |
| Item 9B.   | Other  Information                                                                                                  |       | 53         |
|       |                                                                                                                |       |       |
| ** ** | **PART III**                                                                                                   |       |       |
|       |                                                                                                                |       |       |
| Item  10.  | Directors,  Executive Officers and Corporate Governance                                                             |       | 54         |
| Item 11.   | Executive  Compensation                                                                                             |       | 55         |
| Item  12.  | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |       | 55         |
| Item  13.  | Certain  Relationships and Related Transactions, and Director Independence                                          |       | 55         |
| Item  14.  | Principal  Accountant Fees and Services                                                                             |       | 55         |
|       |                                                                                                                |       |       |
| ** ** | **PART IV**                                                                                                    | ** ** | ** ** |
| ** ** | ** **                                                                                                          | ** ** | ** ** |
| Item 15.   | Exhibits and  Financial Statement Schedules                                                                         |       | 55         |
|       |                                                                                                                |       |       |
|       | **OTHER**                                                                                                           |       |       |
|       |                                                                                                                |       |       |
|       | Signature  Page                                                                                                     |       | 57         |
|       |                                                                                                                |       |       |
|       | Exhibit Index                                                                                                  |       | 59         |

 

 

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**FORWARD-LOOKINGINFORMATION**

** **

*This Annual Report on Form 10-Kcontains certain forward-looking statements. Such statements are made pursuant to the safe harbor provisions of thePrivate Securities Litigation Reform Act of 1995.  Any statements not of historical fact may beconsidered forward-looking statements. Written words such as “may,” “expect,” “believe,” “anticipate,” “plan,” “goal,”or “estimate,” or other variations of these or similar words, identify suchstatements.  These statements by theirnature involve substantial risks and uncertainties, and actual results maydiffer materially from those expressed in such forward-looking statements.  Important factors known to us that couldcause such material differences are identified in this Annual Report on Form 10-Kunder the heading “Risk Factors” beginning on page 6.** **We undertake no obligation tocorrect or update any forward-looking statements, whether as a result of newinformation, future events, or otherwise. You are advised, however, to consult any future disclosures we make onrelated subjects in future filings with the Securities and Exchange Commission.*

 

*Referencesin this Annual Report to “we,” “us,” “our,” or the “Company” or similar termsrefer to Marten Transport, Ltd. and its consolidated subsidiaries unless thecontext otherwise requires.*

 

**PART I**

 

# ***ITEM 1. ***BUSINESS

# *** ***

**Overview**

 

We are one of the leading temperature-sensitivetruckload carriers in the United States. We specialize in transporting anddistributing food and other consumer packaged goods that require atemperature-controlled or insulated environment. In 2007, we generated$560.0 million in operating revenue, which consists of revenue from bothtruckload and logistics operations. Approximately 80% of our truckload revenueresulted from hauling temperature-sensitive products and 20% from hauling dryfreight.  We operate throughout theUnited States and in parts of Canada, with substantially all of our revenuegenerated from within the United States. Our primary traffic lanes are betweenthe Midwest and the West Coast, Southwest, Southeast, and the East Coast, aswell as from California to the Pacific Northwest. In 2007, our average lengthof haul was 911 miles.

 

Our growth strategy is to expand our businessinternally by offering shippers a high level of service and significant freightcapacity. We market primarily to large shippers that offer consistent volumesof freight in the lanes we prefer and are willing to compensate us for a highlevel of service. With our fleet of 2,416 company and independent contractortractors, we are able to offer service levels that include up to 99% on-timeperformance and delivery within the narrow time windows often required whenshipping perishable commodities.

 

We have two reportable segments — Truckload andLogistics.  Financial informationregarding these segments can be found in the Notes to Consolidated FinancialStatements under Item 8 of this Form 10-K. The primary source of our operating revenue is truckload revenue, whichwe generate by transporting freight for our customers and report within ourTruckload segment.  Generally, we arepaid by the mile for our services.  Wealso derive truckload revenue from fuel surcharges, loading and unloadingactivities, equipment detention and other ancillary services.  Our operating revenue also includes revenuereported within our Logistics segment, which consists of revenue from ourinternal brokerage and intermodal operations, both launched in 2005, andthrough our 45% interest in MW Logistics, LLC, or MWL, a third-party providerof logistics services to the transportation industry.  Brokerage services involve arranging for anothercompany to transport freight for our customers while we retain the billing,collection and customer management responsibilities.  Intermodal services involve the transport ofour trailers on railroad flatcars for a portion of a trip, with the balance ofthe trip using our tractors or, to a lesser extent, contracted carriers.

 

Organized under Wisconsin law in 1970, we are asuccessor to a sole proprietorship Roger R. Marten founded in 1946.  In 1988, we reincorporated under Delawarelaw.  Our executive offices are locatedat 129 Marten Street, Mondovi, Wisconsin 54755. Our telephone number is (715) 926-4216.

 

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We maintain a website at *www.marten.com.*  We are not including the information containedon our website as a part of, nor incorporating it by reference into, thisAnnual Report on Form 10-K.  We poston our website, free of charge, documents that we file with or furnish to theSecurities and Exchange Commission, including our Annual Reports on Form 10-K,Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and proxystatements, as soon as reasonably practicable after we electronically file suchmaterial with, or furnish such material to, the Securities and ExchangeCommission.  We also provide a link onour website to Forms 3, 4 and 5 that our officers, directors and 10% stockholdersfile with the Securities and Exchange Commission pursuant to Section 16(a) ofthe Securities Exchange Act of 1934.

 

**Marketing and Operations**

 

We approach our business as an integrated effort ofmarketing and operations. Our emphasis in marketing is directed to thetemperature-sensitive truckload market, which is generally service-sensitive,as opposed to being solely price competitive. We target large food and consumerpackaged goods companies whose products require temperature-sensitive servicesand who ship multiple truckloads per week. By emphasizing high-quality service,we seek to become a core carrier for our customers. In 2007, our two largestcustomers were General Mills and Kraft.

 

Our marketing efforts are conducted by a staff ofapproximately 95 sales, customer service and support personnel under thesupervision of our senior management team. Marketing personnel travel withintheir regions to solicit new customers and maintain contact with existingcustomers. Customer service managers regularly contact customers to solicitadditional business on a load-by-load basis.

 

Our operations and sales personnel strive to improveour asset productivity by seeking freight that allows for rapid turnaroundtimes, minimizes non-revenue miles between loads, and carries a favorable ratestructure. Once we have established a customer relationship, customer servicemanagers work closely with our fleet managers to match customer needs with ourcapacity and the location of revenue equipment. Fleet managers use our optimizationsystem to assign loads and meet the routing needs of our drivers whilesatisfying customer and operational requirements. We attempt to route most ofour trucks over selected operating lanes, which we believe assists us inmeeting customer requirements, balancing traffic, reducing non-revenue miles,and improving the reliability of delivery schedules.

 

We employ technology in our operations when we believethat it will allow us to operate more efficiently and the investment iscost-justified. Examples of the technologies we employ include:

 

·                  Satellite-based tracking and messaging that allows usto communicate with our drivers, obtain load position updates, provide ourcustomers with freight visibility, and download engine operating informationsuch as fuel mileage and idling time.

 

·                  Freight optimization software that assists us inselecting loads that match our overall criteria, including profitability,repositioning, identifying capacity for expedited loads, driver availabilityand home time, and other factors.

 

·                  Electronic data interchange and internet communicationwith customers concerning freight tendering, invoices, shipment status, andother information.

 

·                  Fuel-routing software that optimizes the fuel stopsfor each trip to take advantage of volume discounts available in our fuel network.

 

·                  Auxiliary power units installed on approximately 60%of our company-owned tractors as of December 31, 2007 that allow us todecrease fuel costs associated with idling our tractors.

 

We believe this integrated approach to our marketingand operations, coupled with our use of technology, has allowed us to provideour customers with a high level of service and support our revenue 

 

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growthin an efficient manner. For example, we had a non-revenue mile percentage of7.6% during 2007, and a tractor to non-driver employee ratio of 5.2-to-1 as of December 31,2007. Both of these statistics, which have remained relatively steady over thelast several years, point to the efficiency of our operations and we believecompare favorably to other temperature-sensitive and dry van truckingcompanies.

 

**Major Customers**

 

An important part of our growth strategy is toincrease our business with large customers. Accordingly, a significant amountof our business is concentrated with a relatively small number of customers. In2007, our top 30 customers accounted for approximately 75% of our revenue, andour top ten customers accounted for 53% of our revenue.  Each of our top ten customers has been asignificant customer of ours for over ten years. We believe we are the largestor second largest temperature-sensitive carrier for eight of our top tencustomers.  General Mills accounted for18% of our revenue in 2007.  We believeour relationship with this key customer is sound, but we are dependent uponthem and the loss of some or all of their business could have a materiallyadverse effect on our results.

 

**Drivers and Other Personnel**

 

We believe that maintaining a safe and productiveprofessional driver group is essential to providing excellent customer serviceand achieving profitability. Approximately 246 of our drivers as of December 31,2007 have driven more than one million miles for us without a preventableaccident, while approximately 60 of our drivers have driven more than twomillion miles for us without a preventable accident.  Our turnover for all drivers, includingcompany-employed and independent contractor drivers, was 83% for 2007, comparedwith industry averages reported by the American Trucking Associations ofapproximately 120% for 2006 and approximately 127% on an annualized basis forthe first three months of 2007.

 

We select drivers, including independent contractors,using our specific guidelines for safety records, driving experience, andpersonal evaluations. We maintain stringent screening, training, and testingprocedures for our drivers to reduce the potential for accidents and thecorresponding costs of insurance and claims. We train new drivers at ourWisconsin, California, Georgia, Oregon and Indiana terminals in all phases ofour policies and operations, as well as in safety techniques and fuel-efficientoperation of the equipment. All new drivers also must pass DOT required testsprior to assignment to a vehicle.

 

We primarily pay company-employed drivers a fixed rateper mile. The rate increases based on length of service. Drivers also areeligible for bonuses based upon safe, efficient driving. We pay independentcontractors on a fixed rate per mile. Independent contractors pay for their ownfuel, insurance, maintenance, and repairs.

 

Competition in the trucking industry for qualifieddrivers is intense. Our operations have been impacted, and from time-to-time wehave experienced under-utilization and increased expense, as a result of theshortage of qualified drivers. We place a high priority on the recruitment andretention of an adequate supply of qualified drivers.

 

As of December 31, 2007, we had approximately2,622 employees. This total consists of approximately 2,158 drivers, 159mechanics and maintenance personnel, and 305 support personnel, which includesmanagement and administration. As of that date, we also contracted with 339independent contractors. None of our employees are represented by a collectivebargaining unit. We consider relations with our employees to be good.

 

**Revenue Equipment**

 

Our revenue equipment programs are an important partof our overall goal of profitable growth. We evaluate our equipment decisionsbased on factors such as initial cost, useful life, warranty terms, expectedmaintenance costs, fuel economy, driver comfort, customer needs, manufacturersupport, and resale value. We generally operate newer, well-maintainedequipment with uniform specifications to minimize our spare parts inventory,streamline our maintenance program, and simplify driver training.

 

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As of December 31, 2007, we operated a fleet of2,416 tractors, including 2,077 company-owned tractors and 339 tractorssupplied by independent contractors.  Theaverage age of our company-owned tractor fleet at December 31, 2007 wasapproximately 2.0 years.  In 2007,we replaced most of our company-owned tractors within approximately 3.5 yearsafter purchase. Based on our current operating performance, the market for usedtractors, our liquidity and our expectations concerning tractors manufacturedin 2007, we decided to accelerate our tractor fleet replacement during the lasttwo years to allow us greater flexibility in our decisions to purchase tractorsmanufactured in 2007 now that the current round of diesel emissions reductiondirectives of the Environmental Protection Agency, or EPA, has gone intoeffect.  This will allow us theopportunity to evaluate the new engine technology before adopting it on a largerscale.

 

Freightliner and Peterbilt manufacture most of ourcompany-owned tractors. Maintaining a relatively new and standardized fleetallows us to operate most miles while the tractors are under warranty tominimize repair and maintenance costs. It also enhances our ability to attractdrivers, increases fuel economy, and improves customer acceptance by minimizingservice interruptions caused by breakdowns. We adhere to a comprehensivemaintenance program during the life of our equipment. We perform most routineservicing and repairs at our terminal facilities to reduce costly on-roadrepairs and out-of-route trips. We do not have any agreements with tractormanufacturers pursuant to which they agree to repurchase the tractors orguarantee a residual value, and we therefore could incur losses upondisposition if resale values of used tractors decline.

 

We historically have contracted with independentcontractors to provide and operate a portion of our tractor fleet. Independentcontractors own their own tractors and are responsible for all associatedexpenses, including financing costs, fuel, maintenance, insurance, and taxes.We believe that a combined fleet complements our recruiting efforts and offersgreater flexibility in responding to fluctuations in shipper demand. Thepercentage of our fleet provided by independent contractors was 14% as of December 31,2007.

 

As of December 31, 2007, we operated a fleet of3,989 trailers. Most of our trailers are equipped with Thermo-Kingrefrigeration units, air ride suspensions, and anti-lock brakes. Most of oursingle van trailers are refrigerated, 53 feet long, and 102 inches wide. Theaverage age of our trailer fleet at December 31, 2007 was approximately2.7 years. In 2007, we replaced most of our company-owned trailers withinapproximately seven years after purchase.

 

**Insurance and Claims**

 

We self-insure for a portion of our claims exposureresulting from workers’ compensation, auto liability, general liability, cargoand property damage claims, as well as employees’ health insurance. We areresponsible for our proportionate share of the legal expenses relating to suchclaims as well. We reserve currently for anticipated losses and expenses. Weperiodically evaluate and adjust our insurance and claims reserves to reflectour experience.  We are responsible forthe first $1.0 million on each auto liability claim and also are responsiblefor up to $1.0 million in the aggregate for all auto liability claims between$1.0 million and $2.0 million.  We arealso responsible for the first $750,000 on each workers’ compensationclaim.  We have $5.2 million in standbyletters of credit to guarantee settlement of claims under agreements with ourinsurance carriers and regulatory authorities. We maintain insurance above the amounts for which we self-insure up tospecified policy limits with licensed insurance carriers. Insurance carriershave raised premiums for many businesses, including trucking companies. As aresult, our insurance and claims expense could increase, or we could raise ourself-insured retention when our policies are renewed. We believe that ourpolicy of self-insuring up to set limits, together with our safety and lossprevention programs, are effective means of managing insurance costs.

 

**Fuel**

 

Our operations are heavily dependent upon the use ofdiesel fuel. The price and availability of diesel fuel can vary and are subjectto political, economic, and market factors that are beyond our control.  Fuel prices fluctuated dramatically andquickly at various times during the last three years and they remain high basedon historical standards.  We activelymanage our fuel costs by purchasing fuel in bulk in Mondovi and at our othermaintenance facilities throughout the country and have volume purchasingarrangements with 

 

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national fuel centers that allow our drivers topurchase fuel at a discount while in transit. During 2007, 99% of our fuel purchases were made at these designatedlocations.  To help further reduce fuelconsumption, we began installing auxiliary power units in our tractors during2007.  These units provide quiet climatecontrol and electrical power for our drivers without idling the tractor engine.  We expect these units to reduce idling fuelconsumption by approximately 80%, generating annual net savings of severalthousand dollars per tractor.  We hadinstalled these units in approximately 60% of our company-owned fleet as of December 31,2007.

 

We further manage ourexposure to changes in fuel prices through fuel surcharge programs with ourcustomers and other measures that we have implemented.  We have historically been able to pass through mostlong-term increases in fuel prices and related taxes to customers in the formof fuel surcharges.  These fuelsurcharges, which adjust with the cost of fuel, enable us to recover asubstantial portion of the higher cost of fuel as prices increase, except fornon-revenue miles, out-of-route miles or fuel used while the tractor is idling.As of December 31, 2007, we had no derivative financial instruments toreduce our exposure to fuel price fluctuations.

 

**Competition**

 

We operate primarily in the temperature-sensitivesegment of the truckload market.  Thismarket is highly competitive and fragmented. We competewith many other truckload carriers that provide temperature-sensitive serviceof varying sizes and, to a lesser extent, with less-than-truckload carriers,railroads, and other transportation companies, many of which have moreequipment, a wider range of services, and greater capital resources than we door have other competitive advantages. In particular, several of the largesttruckload carriers that offer primarily dry-van service also offertemperature-sensitive service, and these carriers could attempt to increasetheir business in the temperature-sensitive market.  We also compete with other motor carriers for theservices of drivers, independent contractors, and management employees.  We believe that the principal competitivefactors in our business are service, freight rates, capacity, and financialstability.  As one of the largest andbest-capitalized carriers focused on the temperature-sensitive segment, webelieve we are well positioned to compete in that segment.

 

**Regulation**

 

The UnitedStates Department of Transportation, or DOT, and various state and localagencies exercise broad powers over our business, generally governing suchactivities as authorization to engage in motor carrier operations, safety andinsurance requirements.  Our companydrivers and independent contractors also must comply with the safety andfitness regulations promulgated by the DOT, including those relating to drugand alcohol testing and hours-of-service. New rules that limit driver hours-of-service were adopted effectiveJanuary 4, 2004, and then modified effective October 1, 2005.  The rules effective October 1, 2005did not substantially change the existing rules but created a moderatereduction in the amount of time available to drivers in longer lengths of haul,which reduced equipment productivity in those lanes.  On July 24, 2007, a federal appealscourt vacated portions of the October 2005 Rules; however, interim rules issuedin December 2007 that retain the vacated portions are currently in effect.

 

We believethat we are well equipped to minimize the economic impact of the currenthours-of-service rules on our business. We have negotiated delay time charges with the majority of ourcustomers.  Prior to the effectiveness ofthe current rules, we also initiated discussions with many of our customersregarding steps that they can take to assist us in managing our drivers’non-driving activities, such as loading, unloading, or waiting, and we plan tocontinue to actively communicate with our customers regarding these matters inthe future.  In situations where shippersare unable or unwilling to take these steps, we assess detention and othercharges to offset losses in productivity resulting from the currenthours-of-service regulations.  Theregulations did not have a significant impact on our operations or financialresults in 2005 through 2007.

 

We are also subject to various environmental laws and regulations dealingwith the handling of hazardous materials, fuel storage tanks, air emissionsfrom our vehicles and facilities, engine idling, and discharge and retention ofstorm water.  These regulations did not have asignificant impact on our operations or financial results in 2005 through 2007.

 

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**ITEM 1A.****                   *****RISK FACTORS***

 

The following factors are important and should beconsidered carefully in connection with any evaluation of our business,financial condition, results of operations, prospects, or an investment in ourcommon stock.  The risks and uncertaintiesdescribed below are those that we currently believe may materially affect ourcompany or our financial results. Additional risks and uncertainties not presently known to us or that wecurrently deem immaterial may also impair our business operations or affect ourfinancial results.

 

*                Our business is subject togeneral economic and business factors that are largely out of our control, anyof which could have a materially adverse effect on our operating results.* Our business is dependent on a number ofgeneral economic and business factors that may have a materially adverse effecton our results of operations, many of which are beyond our control.  These factors include excess capacity in thetrucking industry, strikes or other work stoppages, and significant increasesor fluctuations in interest rates, fuel taxes, and license and registrationfees.  We are affected by recessionaryeconomic cycles and downturns in customers’ business cycles, particularly inmarket segments and industries where we have a significant concentration ofcustomers. Economic conditions may adversely affect our customers and theirability to pay for our services.

 

                It is not possible to predict the effects of actualor threatened armed conflicts or terrorist attacks, efforts to combatterrorism, military action against any foreign state, heightened securityrequirements, or other related events and the subsequent effects on the economyor on consumer confidence in the United States, or the impact, if any, on ourfuture results of operations.

 

*                We operate in a highlycompetitive and fragmented industry, and numerous competitive factors couldimpair our ability to maintain our current profitability. *We competewith many other truckload carriers that provide temperature-sensitive serviceof varying sizes and, to a lesser extent, with less-than-truckload carriers,railroads and other transportation companies, many of which have moreequipment, a wider range of services and greater capital resources than we door have other competitive advantages. In particular, several of the largesttruckload carriers that offer primarily dry-van service also offertemperature-sensitive service, and these carriers could attempt to increasetheir business in the temperature-sensitive market. Many of our competitorsperiodically reduce their freight rates to gain business, especially duringtimes of reduced growth rates in the economy, which may limit our ability tomaintain or increase freight rates or maintain significant growth in ourbusiness. In addition, many customers reduce the number of carriers they use byselecting so-called “core carriers” as approved service providers, or conductbids from multiple carriers for their shipping needs, and in some instances wemay not be selected as a core carrier or to provide service under such bids.

 

                In addition, the trend toward consolidation in thetrucking industry may create other large carriers with greater financialresources and other competitive advantages relating to their size.  Competition from freight logistics andbrokerage companies may negatively impact our customer relationships andfreight rates.  Furthermore, economies ofscale that may be passed on to smaller carriers by procurement aggregation providersmay improve such carriers’ ability to compete with us.

 

*                We derive a significant portionof our revenue from our major customers, the loss of one or more of which couldhave a materially adverse effect on our business. *A significantportion of our revenue is generated from our major customers.  For 2007, our top 30 customers, based onrevenue, accounted for approximately 75% of our revenue; our top ten customersaccounted for approximately 53% of our revenue; our top five customersaccounted for approximately 41% of our revenue; and our top two customersaccounted for approximately 28% of our revenue. Generally, we enter into one-year contracts with our major customers,the majority of which do not contain any firm obligations to ship with us.  We cannot assure you that, upon expiration ofexisting contracts, these customers will continue to use our services or that,if they do, they will continue at the same levels.  Many of our customers periodically solicitbids from multiple carriers for their shipping needs, and this process may depressfreight rates or result in loss of business to our competitors.  Some of our customers also operate their ownprivate trucking fleets, and they may decide to transport more of their ownfreight.  A reduction in or terminationof our services by one or more of our major customers could have a materiallyadverse effect on our business and operating results.

 

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*                Increased prices, reduced productivity, andrestricted availability of new revenue equipment could cause our financialcondition, results of operations and cash flows to suffer. *We haveexperienced higher prices for new tractors over the past few years, primarilyas a result of higher commodity prices, better pricing power among equipmentmanufacturers, and government regulations applicable to newly manufacturedtractors and diesel engines.  We expectto continue to pay increased prices for revenue equipment and incur additionalexpenses and related financing costs for the foreseeable future.  Our business could be harmed if we are unableto continue to obtain an adequate supply of new tractors and trailers or if wehave to pay increased prices for new revenue equipment.

 

                The EPA adopted revised emissions controlregulations, which require progressive reductions in exhaust emissions fromdiesel engines through 2010, for engines manufactured in October 2002, andthereafter. The revised regulations decrease the amount of emissions that canbe released by tractor engines and affect tractors produced after the effectivedate of the regulations. Compliance with these regulations has increased thecost of our new tractors, lowered fuel mileage and increased our operatingexpenses. Some manufacturers have significantly increased new equipment prices,in part to meet new engine design requirements imposed by the EPA, andeliminated or sharply reduced the price of repurchase commitments. Theseadverse effects combined with the uncertainty as to the reliability of thevehicles equipped with the newly designed diesel engines and the residualvalues that will be realized from the disposition of these vehicles couldincrease our costs or otherwise adversely affect our business or operations.The current round of restrictions took effect in 2007.  Compliance with the 2007 EPA standards isexpected to result in further declines in fuel economy, and may result infurther increases in the cost of new tractors.

 

*                We have significant ongoing capital requirements thatcould harm our financial condition, results of operations and cash flows if weare unable to generate sufficient cash from our operations.*Thetruckload industry is capital intensive, and our policy of operating newerequipment requires us to expend significant amounts annually. If we elect toexpand our fleet in future periods, our capital needs would increase. We expectto pay for projected capital expenditures with cash flows from operations andborrowings under our revolving credit facility. If we are unable to generatesufficient cash from operations and obtain financing on favorable terms in thefuture, we may have to limit our growth, enter into less favorable financingarrangements, or operate our revenue equipment for longer periods, any of whichcould have a materially adverse effect on our profitability.

 

*                Ongoing insurance and claimsexpenses could significantly affect our earnings. *Our futureinsurance and claims expense might exceed historical levels, which could reduceour earnings. We self-insure for a portion of our claims exposure resulting fromworkers’ compensation, auto liability, general liability, cargo and propertydamage claims, as well as employees’ health insurance. We also are responsiblefor our legal expenses relating to such claims. We reserve currently foranticipated losses and expenses. We periodically evaluate and adjust our claimsreserves to reflect our experience. However, ultimate results may differ fromour estimates, which could result in losses over our reserved amounts.

 

                We maintain insurance above the amounts for which weself-insure with licensed insurance carriers. Although we believe the aggregateinsurance limits should be sufficient to cover reasonably expected claims, itis possible that one or more claims could exceed our aggregate coverage limits.Insurance carriers have raised premiums for many businesses, including truckingcompanies. As a result, our insurance and claims expense could increase, or wecould raise our self-insured retention when our policies are renewed. If theseexpenses increase, or if we experience a claim in excess of our coveragelimits, or we experience a claim for which coverage is not provided, results ofour operations and financial condition could be materially and adverselyaffected.

 

*                Increases in compensation ordifficulty in attracting drivers could affect our profitability and ability togrow. *In recentyears the transportation industry has experienced substantial difficulty inattracting and retaining qualified drivers, including independent contractors,with competition for drivers being increasingly intense.  With the increased competition for drivers,we have experienced greater difficulty in attracting sufficient numbers ofqualified drivers.  In addition, due inpart to current economic conditions, including the cost of fuel and insurance,the available pool of independent contractor drivers is smaller than it hasbeen historically. Accordingly, we may face difficulty in attracting andretaining drivers for all of our current 

 

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tractors and for those wemay add.  Additionally, we may facedifficulty in increasing the number of our independent contractor drivers. Inaddition, our industry suffers from high turnover rates of drivers. Our turnoverrate requires us to recruit a substantial number of drivers. Moreover, ourturnover rate could increase. If we are unable to continue to attract driversand contract with independent contractors, we could be required to continueadjusting our driver compensation package beyond the norm or let trucks sitidle.  An increase in our expenses or inthe number of tractors without drivers could materially and adversely affectour growth and profitability.

 

*                Fluctuations in the price oravailability of fuel may increase our cost of operation, which could materiallyand adversely affect our profitability. *Werequire large amounts of diesel fuel to operate our tractors and to power thetemperature-control units on our trailers. Fuel is one of our largest operatingexpenses. Fuel prices tend to fluctuate, and prices and availability of allpetroleum products are subject to political, economic and market factors thatare beyond our control. We depend primarily on fuel surcharges, auxiliary powerunits for our tractors, volume purchasing arrangements with truck stop chainsand bulk purchases of fuel at our terminals to control our fuel expenses. Therecan be no assurance that we will be able to collect fuel surcharges, enter intovolume purchase agreements, or execute successful hedges in the future. Additionally,we may encounter decreases in productivity that may offset or eliminate savingsfrom auxiliary power units, or may incur unexpected maintenance or other costsassociated with such units. The absence of meaningful fuel price protectionthrough these measures, fluctuations in fuel prices, or a shortage of dieselfuel, could materially and adversely affect our results of operations.

 

*                Seasonality and the impact ofweather can affect our profitability. *Ourtractor productivity generally decreases during the winter season becauseinclement weather impedes operations and some shippers reduce their shipments.At the same time, operating expenses generally increase, with fuel efficiencydeclining because of engine idling and harsh weather creating higher accidentfrequency, increased claims and more equipment repairs. We can also suffershort-term impacts from weather-related events such as hurricanes, blizzards,ice-storms, and floods that could harm our results or make our results morevolatile.

 

*                We operate in a highly regulatedindustry and increased costs of compliance with, or liability for violation of,existing or future regulations could have a materially adverse effect on ourbusiness. *TheDOT and various state and local agencies exercise broad powers over ourbusiness, generally governing such activities as authorization to engage inmotor carrier operations, safety and insurance requirements. Our companydrivers and independent contractors also must comply with the safety andfitness regulations promulgated by the DOT, including those relating to drugand alcohol testing and hours-of-service. We also may become subject to new or more restrictive regulationsrelating to fuel emissions, drivers’ hours-of-service, ergonomics, or othermatters affecting safety or operating methods. Other agencies, such as the EPAand the Department of Homeland Security, or DHS, also regulate our equipment,operations, and drivers.  Future laws andregulations may be more stringent and require changes in our operating practices,influence the demand for transportation services, or require us to incursignificant additional costs. Higher costs incurred by us or by our supplierswho pass the costs onto us through higher prices could adversely affect ourresults of operations.

 

                The DOT, through the Federal Motor Carrier SafetyAdministration, or FMCSA, imposes safety and fitness regulations on us and ourdrivers.  New rules that limitdriver hours-of-service were adopted effective January 4, 2004, and thenmodified effective October 1, 2005 (the “2005 Rules”).  On July 24, 2007, a federal appealscourt vacated portions of the 2005 Rules. Two of the key portions that were vacated include the expansion of thedriving day from 10 hours to 11 hours, and the “34-hour restart,” which allowsdrivers to reset their maximum allowable hours in a week.  The court indicated that, in addition toother reasons, it vacated these two portions of the 2005 Rules becauseFMCSA failed to provide adequate data supporting its decision to increase thedriving day and provide for the 34-hour restart.  Following a request by FMCSA for a 12-monthextension of the vacated rules, the court, in an order filed on September 28,2007, granted a 90-day stay of the mandate and directed that issuance of its rulingbe withheld until December 27, 2007, to allow FMCSA time to prepare itsresponse.  On December 17, 2007,FMCSA submitted an interim final rule, which became effective December 27,2007 (the “Interim Rule”).  The Interim Rule retainsthe 11 hour driving day and the 34-hour restart, but provides greaterstatistical support and analysis regarding the increased driving time and the34-hour restart.  On January 23,2008, a federal court denied an advocacy group’s request that it prevent FMCSAfrom implementing the Interim Rule. Accordingly, the Interim Rule remains in effect; 

 

8

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though, challenges to theInterim Rule are still possible. FMCSA received comments on the Interim Rule through February 15,2008 and expects to publish a final rule later in 2008.  As advocacy groups may continue to challengethe Interim Rule, a court’s decision to strike down the Interim Rule couldhave varying effects, as reducing driving time to 10 hours daily may reduceproductivity in some lanes.  A court’sdecision to strike down the Interim Rule could decrease productivity andcause some loss of efficiency, as drivers and shippers may need to beretrained, computer programming may require modifications, additional driversmay need to be employed or engaged, additional equipment may need to beacquired, and some shipping lanes may need to be reconfigured.  We are also unable to predict the effect ofany new rules that might be proposed, but any such proposed rules couldincrease costs in our industry or decrease productivity.

 

                In the aftermath of the September 11, 2001terrorist attacks, federal, state, and municipal authorities have implementedand continue to implement various security measures, including checkpoints andtravel restrictions on large trucks. As a result, it is possible we may fail tomeet the needs of our customers or may incur increased expenses to do so. Thesesecurity measures could negatively impact our operating results.

 

                Some states and municipalities have begun to restrictthe locations and amount of time where diesel-powered tractors, such as ours,may idle, in order to reduce exhaust emissions. The State of California has recently enacted legislation which requirestractors weighing more than 10,000 pounds to use alternative sources, such asauxiliary power units, when powering their cabs at idle for more than fiveminutes.  The State of California hasalso enacted legislation requiring compliance with exhaust emissions standardsfor refrigeration units on trailers. Compliance is being phased in by the state, beginning with 2001 andearlier models.  Given our investment inauxiliary power units for our tractors and the average age of our trailerfleet, we do not expect these regulations will have a significant impact on ouroperations or financial results.

 

                From time to time, various federal, state, or localtaxes are increased, including taxes on fuels. We cannot predict whether, or in what form, any such increase applicableto us will be enacted, but such an increase could aversely affect ourprofitability.

 

*Service instability in the railroad industrycould increase our operating costs and reduce our ability to offer intermodalservices, which could adversely affect our revenue, results of operations, andcustomer relationships. *Inthe future, our dependence on railroads will increase if we continue to expandour intermodal services. In most markets, rail service is limited to a fewrailroads or even a single railroad. Any reduction in service by the railroadswith which we have, or in the future may have, relationships is likely toincrease the cost of the rail-based services we provide and reduce thereliability, timeliness, and overall attractiveness of our rail-based services.Furthermore, railroads are relatively free to adjust shipping rates up or downas market conditions permit. Price increases could result in higher costs toour customers and reduce or eliminate our ability to offer intermodal services.In addition, we cannot assure you that we will be able to negotiate additionalcontracts with railroads to expand our capacity, add additional routes, orobtain multiple providers, which could limit our ability to provide thisservice.

 

*                Our operations are subject to various environmentallaws and regulations, the violation of which could result in substantial finesor penalties. *Weare subject to various environmental laws and regulations dealing with thehandling of hazardous materials, fuel storage tanks, air emissions from ourvehicles and facilities, engine idling, and discharge and retention of stormwater. We operate in industrial areas, where truck terminals and otherindustrial activities are located, and where groundwater or other forms ofenvironmental contamination have occurred. Our operations involve the risks offuel spillage or seepage, environmental damage, and hazardous waste disposal,among others. Although we have instituted programs to monitor and controlenvironmental risks and promote compliance with applicable environmental lawsand regulations, if we are involved in a spill or other accident involvinghazardous substances or if we are found to be in violation of applicable lawsor regulations, we could be subject to liabilities, including substantial finesor penalties or civil and criminal liability, any of which could have amaterially adverse effect on our business and operating results.

 

                *Ourmanagement information systems may prove inadequate. *We depend upon our management information systems for many aspects of ourbusiness.  Some of our key software hasbeen developed internally by our programmers or by adapting purchased softwareto our needs and this software may not be 

 

9

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easilymodified or integrated with other software and systems.  Our business will be materially and adverselyaffected if our management information systems are disrupted or if we areunable to improve, upgrade, integrate or expand our systems as we continue toexecute our growth strategy, including our logistics services.

 

**ITEM 1B.****                   *****UNRESOLVED STAFF COMMENTS***

 

None.

 

# ***ITEM 2.***                             PROPERTIES

# *** ***

                Our executive offices andprincipal terminal are located on approximately seven acres in Mondovi,Wisconsin. This facility consists of 39,000 square feet of office space and21,000 square feet of equipment repair and maintenance space.  We added an additional facility in 2007 inMondovi, Wisconsin which consists of 15,000 square feet of equipment repair andmaintenance space located on approximately 11 acres.  In addition to our executive offices andterminal located in Mondovi, Wisconsin, we own and operate facilities in ornear the following cities at which we perform the following designatedoperating activities:

 
| ** **             | ** ** | **Fueling and** | ** ** | **Driver**      | ** ** | **Driver**   | ** ** | ** **   | ** ** | ** ** | ** ** |
|------------------------|------------|-----------------|------------|-----------------|------------|--------------|------------|--------------|------------|------------|------------|
| **Company Locations**  | ** ** | **Maintenance** | ** ** | **Recruitment** | ** ** | **Training** | ** ** | **Dispatch** | ** ** | **Sales**  | ** ** |
|                   |       |            |       |            |       |         |       |         |       |       |       |
| Mondovi,  Wisconsin    |       | X               |       | X               |       | X            |       | X            |       | X          |       |
| Ontario,  California   |       | X               |       |            |       | X            |       |         |       |       |       |
| Atlanta,  Georgia      |       | X               |       |            |       | X            |       | X            |       |       |       |
| Portland,  Oregon      |       | X               |       |            |       | X            |       | X            |       |       |       |
| Indianapolis,  Indiana |       | X               |       | X               |       | X            |       | X            |       |       |       |

 

# ***ITEM 3.***                             LEGAL PROCEEDINGS

# *** ***

We areinvolved in litigation incidental to our operations. These lawsuits primarilyinvolve claims for workers’ compensation, personal injury, or property damageincurred in the transportation of freight.

 

# ***ITEM 4.***                             SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

# *** ***

No matterswere submitted to a vote of security holders during the fourth quarter of theyear ended December 31, 2007.

 

**ITEM 4A.****                   *****EXECUTIVE OFFICERS OF THE REGISTRANT***

 

Our executive officers, with their agesand the offices held as of February 29, 2008, are as follows:

 
| **Name**             | ** ** | **Age**    | ** ** | **Position**                                                            | ** ** |
|----------------------|------------|------------|------------|-------------------------------------------------------------------------|------------|
| ** **           | ** ** | ** ** | ** ** | ** **                                                              | ** ** |
| Randolph L.  Marten  |       | 55         |       | Chairman of  the Board, President, Chief Executive Officer and Director |       |
|                 |       |       |       |                                                                    |       |
| Robert G.  Smith     |       | 64         |       | Chief  Operating Officer                                                |       |
|                 |       |       |       |                                                                    |       |
| Timothy P.  Nash     |       | 56         |       | Executive  Vice President of Sales and Marketing                        |       |
|                 |       |       |       |                                                                    |       |
| James J.  Hinnendael |       | 44         |       | Chief  Financial Officer                                                |       |
|                 |       |       |       |                                                                    |       |
| John H.  Turner      |       | 46         |       | Vice  President of Sales                                                |       |

 

**Randolph L. Marten** has been a full-time employee of ours since1974.  Mr. Marten has been aDirector since October 1980, our President since June 1986, ourChairman of the Board since August 1993 and 

 

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ourChief Executive Officer since January 2005.  Mr. Marten also served as our ChiefOperating Officer from June 1986 until August 1998 and as a VicePresident from October 1980 to June 1986.

 

**Robert G. Smith** has been our Chief Operating Officer since August 1998.  Mr. Smith also served as our VicePresident of Operations from June 1993 until May 1999 and as ourDirector of Operations from September 1989 to June 1993.  Mr. Smith served as director ofoperations for Transport Corporation of America, an irregular-route truckloadcarrier, from 1985 to 1989.

 

**Timothy P. Nash** has been our Executive Vice President of Sales andMarketing since November 2000.  Mr. Nashalso served as our Vice President of Sales from November 1990 to November 2000and as our Regional Sales Manager from July 1987 to November 1990.  Mr. Nash served as a regional salesmanager for Overland Express, Inc., a long-haul  truckload carrier, from1986 to 1987.

 

**James J. Hinnendael** has been our Chief FinancialOfficer since January 2006 and served as our Controller from January 1992to December 2005.  Mr. Hinnendaelserved in various professional capacities with Ernst & Young LLP, apublic accounting firm, from 1987 to 1991. Mr. Hinnendael is a certified public accountant.

 

**John H. Turner**has been our Vice Presidentof Sales since January 2007 and an executive officer since August 2007.  He also served as our Vice President of Salesfrom October 2000 to February 2005, and as an executive officer from January 2002to February 2005.  Mr. Turneralso served as our Director of Sales from July 1999 to October 2000and in various professional capacities in our sales and marketing area from August 1991to July 1999 and as our Operations Manager-West from October 1990 to August 1991.  Previously, Mr. Turner served as a vicepresident for Naterra Land, Inc., a recreational land developer, from 2005to 2006 and as the western fleet general manager and area sales manager forMunson Transportation, Inc., a long-haul truckload carrier, from 1986 to1990.

 

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**PART II**

 

# ***ITEM 5.***                             MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES

# *** ***

Our common stock is listed on the NASDAQGlobal Select Market under the symbol “MRTN.” The table below shows the range of high and low bid prices for thequarters indicated on the NASDAQ Global Select Market beginning July 1,2006, and on the NASDAQ National Market prior to such date.  Such quotations reflect inter-dealer prices,without retail markups, markdowns or commissions and, therefore, may notnecessarily represent actual transactions.

 
| ** **                             | ** ** | **Common Stock Price** | ** ** |
|----------------------------------------|------------|------------------------|------------|
| ** **                             | ** ** | **High**               | ** ** | **Low** | ** ** |
| **Year  ended December 31, 2007** | ** ** | ** **             | ** ** | ** ** | ** ** |
| Fourth Quarter                         | ** ** | **$**                  | **16.60**  | ** ** | **$** | **10.60** | ** ** |
| Third Quarter                          | ** ** | **18.46**              | ** ** | **13.54** | ** ** |
| Second Quarter                         | ** ** | **19.80**              | ** ** | **15.70** | ** ** |
| First Quarter                          | ** ** | **19.28**              | ** ** | **14.30** | ** ** |
| **Year  ended December 31, 2006** | ** ** | ** **             | ** ** | ** ** | ** ** |
| Fourth Quarter                         |       | $                      | 19.78      |   | $ | 15.92 |   |
| Third Quarter                          |       | 23.48                  |       | 14.51 |   |
| Second Quarter                         |       | 24.45                  |       | 18.00 |   |
| First Quarter                          |       | 24.71                  |       | 17.67 |   |

 

The prices donot include adjustments for retail mark-ups, mark-downs or commissions.  On February 29, 2008, we had 244 recordstockholders, and approximately 1,172 beneficial stockholders of our commonstock.

 

We have notpaid a cash dividend on our common stock since we became publicly traded in September 1986,and we do not expect to make or declare any cash dividends in the foreseeablefuture.  We currently intend to continueto retain earnings to finance the growth of our business and reduce ourindebtedness.  Our ability to pay cashdividends is currently  limited byrestrictions contained in our revolving credit facility.  Our revolving credit facility prohibits usfrom paying, in any fiscal year, dividends in excess of 25% of our net incomefrom the prior fiscal year.  Futurepayments of cash dividends will depend on our financial condition, results ofoperations, capital commitments, restrictions under then-existing agreements,and other factors our Board of Directors deems relevant.

 

We had nounregistered sales of equity securities during the fourth quarter of the yearended December 31, 2007.

 

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**ComparativeStock Performance**

 

The graph below compares the cumulative totalstockholder return on our common stock with the NASDAQ Market index and the SICcode 4213 (trucking, except local) line-of-business index for the last fiveyears.  Hemscott, Inc. prepared theline-of-business index.  The graphassumes $100 is invested in our common stock, the NASDAQ Stock Market index andthe line-of-business index on January 1, 2003, with reinvestment ofdividends.  The comparisons in the graphbelow are based on historical data and are not intended to forecast thepossible future performance of our common stock.  The information in the graph below shall bedeemed “furnished” and not “filed” for purposes of Section 18 of theExchange Act or otherwise subject to the liabilities of that section.

 

 

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# ***ITEM 6.***                             SELECTEDFINANCIAL DATA

# *** ***

Thefollowing selected financial data should be read in conjunction with theconsolidated financial statements and notes under Item 8 of this Form 10-K.

 
| **(Dollars in thousands, except per share amounts)** | ** ** | **2007**    | ** **  | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|----------|------------|----------|------------|
| **FOR THE  YEAR**                                    |       |        |        |     |       |     |       |     |       |     |       |
| Operating  revenue                                   | ** ** | **$**       | **560,017** |     | $          | 518,890  |       | $        | 460,202    |     | $          | 380,048 |   | $ | 334,667 |   |
| Operating  income                                    | ** ** | **27,801**  |        | 41,169   |       | 42,867   |       | 31,345   |       | 20,336   |       |
| Net income                                           | ** ** | **14,968**  |        | 24,518   |       | 25,061   |       | 17,536   |       | 11,842   |       |
| Operating  ratio                                     | ** ** | **95.0**    | **%**       | 92.1     | %          | 90.7     | %          | 91.8     | %          | 93.9     | %          |
|                                                 |       |        |        |     |       |     |       |     |       |     |       |
| **PER-SHARE  DATA**                                  |       |        |        |     |       |     |       |     |       |     |       |
| Basic  earnings per common share                     | ** ** | **$**       | **0.69**    |     | $          | 1.13     |       | $        | 1.16       |     | $          | 0.83 |   | $ | 0.71 |   |
| Diluted  earnings per common share                   | ** ** | **0.68**    |        | 1.12     |       | 1.14     |       | 0.81     |       | 0.68     |       |
| Book value                                           | ** ** | **10.86**   |        | 10.15    |       | 8.99     |       | 7.82     |       | 7.00     |       |
|                                                 |       |        |        |     |       |     |       |     |       |     |       |
| **AT YEAR  END**                                     |       |        |        |     |       |     |       |     |       |     |       |
| Total  assets                                        | ** ** | **$**       | **407,390** |     | $          | 410,822  |       | $        | 349,733    |     | $          | 288,929 |   | $ | 249,595 |   |
| Long-term  debt                                      | ** ** | **44,643**  |        | 58,659   |       | 48,300   |       | 30,257   |       | 27,857   |       |
| Stockholders’  equity                           | ** ** | **236,930** |        | 220,993  |       | 193,917  |       | 167,921  |       | 144,534  |       |

 

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# ***ITEM 7.***                             MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION ANDRESULTS OF OPERATIONS

 

*                Thefollowing discussion and analysis of our financial condition and results ofoperations should be read together with the selected consolidated financialdata and our consolidated financial statements and the related notes appearingelsewhere in this report. This discussion and analysis contains forward-lookingstatements that involve risks, uncertainties and assumptions. Our actualresults may differ materially from those anticipated in these forward-lookingstatements as a result of many factors, including but not limited to thoseunder the heading “Risk Factors” beginning on page 6.  We do not assume, and specifically disclaim,any obligation to update any forward-looking statement contained in thisreport.*

 

**Overview**

 

                The primary source of ouroperating revenue is truckload revenue, which we generate by transportingfreight for our customers and report within our Truckload segment.  Generally, we are paid by the mile for ourservices.  We also derive truckloadrevenue from fuel surcharges, loading and unloading activities, equipmentdetention and other ancillary services. The main factors that affect our truckload revenue are the rate per milewe receive from our customers, the percentage of miles for which we arecompensated and the number of miles we generate with our equipment.  These factors relate, among other things, tothe United States economy, inventory levels, the level of truck capacity in thetemperature-sensitive market and specific customer demand.  We monitor our revenue production primarilythrough average truckload revenue, net of fuel surcharges, per tractor perweek.  We also analyze our averagetruckload revenue, net of fuel surcharges, per total mile, non-revenue milespercentage, the miles per tractor we generate, our accessorial revenue and ourother sources of operating revenue.

 

                Our operating revenue alsoincludes revenue reported within our Logistics segment, which consists ofrevenue from our internal brokerage and intermodal operations, both launched in2005, and through our 45% interest in MWL, a third-party provider of logisticsservices to the transportation industry. Brokerage services involve arranging for another company to transportfreight for our customers while we retain the billing, collection and customermanagement responsibilities.  Intermodalservices involve the transport of our trailers on railroad flatcars for aportion of a trip, with the balance of the trip using our tractors or, to alesser extent, contracted carriers.  Themain factors that affect our logistics revenue are the rate per mile and othercharges we receive from our customers and the rates charged by third-partyproviders.  These factors relate, amongother things, to the United States economy, inventory levels, the level oftruck and rail capacity in the transportation market and specific customerdemand.  The Logistics segment wasidentified as a new reportable segment for our first quarter of 2007 since ourlogistics operations have become a more significant part of our business.

 

                In 2007, we increased ouroperating revenue by $41.1 million, or 7.9%. Our operating revenue, net of fuel surcharges, increased $31.3 million,or 7.1%, compared with 2006.  Our averagetruckload revenue, net of fuel surcharges, per tractor per week increased 0.6%,due to a 0.4% increase in average miles per tractor and a 0.2% increase inaverage truckload revenue, net of fuel surcharges, per total mile.  We were able to increase our truckloadrevenue by increasing the size of our fleet and our business with existing andnew customers.  The slight improvement intractor productivity was more than offset by an increase in our overall coststructure, which resulted in decreased profitability from 2006.  Due to a challenging freight environment, wewere not able to increase freight rates to cover higher costs.  The 7.1% increase in our operating revenue,net of fuel surcharges, was primarily driven by continued volume growth in eachof our internal brokerage and intermodal services and in the logistics servicesprovided by MWL.  Logistics revenue,which represented 12.4% of our operating revenue in 2007, increased $28.2million, or 68.5%, compared with 2006.

 

                Our profitability on the expenseside is impacted by variable costs of transporting freight for our customers,fixed costs and expenses containing both fixed and variable components.  The variable costs include fuel expense,driver-related expenses, such as wages, benefits, training, and recruitment,and independent contractor costs, which are recorded under purchased transportation.  Expenses that have both fixed and variablecomponents include maintenance and tire expense and our total cost of insuranceand claims.  These expenses generallyvary with the miles we travel, but also have a controllable component based 

 

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onsafety, fleet age, efficiency and other factors.  Our main fixed costs relate to theacquisition and financing of long-term assets, such as revenue equipment andoperating terminals.  Although certainfactors affecting our expenses are beyond our control, we monitor them closelyand attempt to anticipate changes in these factors in managing ourbusiness.  For example, fuel pricesfluctuated dramatically and quickly at various times during the last severalyears. We manage our exposure to changes in fuel prices primarily through fuelsurcharge programs with our customers, as well as through volume fuelpurchasing arrangements with national fuel centers and bulk purchases of fuelat our terminals.  To help further reducefuel expense, we began installing auxiliary power units in our tractors in 2007to provide climate control and electrical power for our drivers without idlingthe tractor engine.  In order to controlincreases in insurance premiums, we have increased our self-insured retentionlevels periodically during the last several years.  We are responsible for the first $1.0 millionon each auto liability claim and up to $1.0 million in the aggregate for allauto liability claims between $1.0 million and $2.0 million.  We are also responsible for the first$750,000 on each workers’ compensation claim. For our Logistics segment, our profitability on the expense side isimpacted by the percentage of logistics revenue we pay to providers for thetransportation services we arrange.

 

                Our operating expenses as apercentage of operating revenue, or “operating ratio,” was 95.0% in 2007compared with 92.1% in 2006.  Ourearnings per diluted share decreased to $0.68 in 2007 from $1.12 in 2006.

 

                Our business requiressubstantial, ongoing capital investments, particularly for new tractors andtrailers. At December 31, 2007, we had approximately $44.6 million oflong-term debt, including current maturities, and $236.9 million instockholders’ equity.  In 2007, we addedapproximately $36.6 million of new revenue equipment, net of proceeds fromdispositions, and recognized a gain of $3.4 million on the disposition of usedequipment.  We also decreased ouraccounts payable and accrued liabilities relating to revenue equipment by $10.2million in 2007.  These capitalexpenditures were primarily funded with cash flows from operations andborrowings under our revolving credit facility. We estimate that capital expenditures, net of proceeds fromdispositions, will be approximately $12 million in 2008, which would be significantlybelow the level of net capital expenditures during the last several years dueto nearly 325 tractors paid-for but not placed in service as of December 31,2007.  Assuming net capital expendituresin that amount and operating margins similar to the margins in 2007, we expectto generate cash flows to retire a substantial amount of our debt in 2008 orprovide flexibility for other purposes. Based on our current operating performance, the market for used tractors,our liquidity and our expectations concerning tractors manufactured in 2007, wedecided to accelerate our tractor fleet replacement during 2005 and 2006 toallow us greater flexibility in our decisions to purchase tractors manufacturedin 2007 now that the current round of diesel emissions reduction directives ofthe EPA has gone into effect.  Thisacceleration of our tractor fleet replacement has not impacted the useful livesof our tractors or caused impairment to the carrying amount reflected in ourconsolidated balance sheet.

 

                This Management’s Discussion andAnalysis of Financial Condition and Results of Operations includes discussionsof truckload and logistics revenue, net of fuel surcharges.  We provide this additional disclosure becausemanagement believes removing fuel surcharge revenue provides a more consistentbasis for comparing results of operations from period to period.  This financial measure in this report has notbeen determined in accordance with U.S. generally accepted accountingprinciples (GAAP).  Pursuant to Item 10(e) ofRegulation S-K, we have included a reconciliation of this non-GAAP financialmeasure to the most directly comparable GAAP financial measure, operatingrevenue.

 

**Share-basedPayment Arrangement Compensation**

 

                Effective January 1, 2006,we adopted the fair value recognition provisions of Statement of FinancialAccounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”) usingthe modified prospective transition method, and therefore have not restatedprior periods’ results.  All share-basedcompensation expense is recorded in salaries, wages and benefits expense.  Total share-based compensation expenserecorded in 2007 was $460,000 ($321,000 net of income tax benefit) and in 2006was $447,000 ($318,000 net of income tax benefit), which entirely representsadditional share-based compensation expense recorded as a result of adoptingSFAS 123R.  No share-based compensationexpense was recorded in 2005, however such expense would have been $177,000($108,000 net of income tax benefit) had we recognized share-based expense innet income under Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation.” Unrecognized compensation expense from unvested service-based stockoption awards 

 

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was$1.0 million as of December 31, 2007 and is expected to be recorded over aweighted-average period of 3.0 years. Unrecognized compensation expense from unvested performance-based stockoption awards was $741,000 as of December 31, 2007 and will be recorded inthe periods in which the performance condition is probable of achievementthrough 2010.

 

**Resultsof Operations**

 

        The following table sets forth for theyears indicated certain operating statistics regarding our revenue and operations:

 
| ** **                                                                  | ** ** | **2007**    | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------|------------|----------|------------|----------|------------|
|                                                                        |       |        |       |     |       |     |       |
| Truckload  Segment:                                                         |       |        |       |     |       |     |       |
| Average truckload revenue, net of fuel surcharges,  per total mile          | ** ** | **$**       | **1.480**  |     | $          | 1.477    |       | $ | 1.417 |   |
| Average miles per tractor(1)                                                | ** ** | **109,269** |       | 108,781  |       | 111,823  |       |
| Average truckload revenue, net of fuel surcharges,  per tractor per week(1) | ** ** | **$**       | **3,101**  |     | $          | 3,081    |       | $ | 3,039 |   |
| Average tractors(1)                                                         | ** ** | **2,516**   |       | 2,504    |       | 2,437    |       |
| Total miles — company-employed drivers (in  thousands)                 | ** ** | **228,776** |       | 222,579  |       | 206,205  |       |
| Total miles — independent contractors (in thousands)                   | ** ** | **46,096**  |       | 49,810   |       | 66,293   |       |
|                                                                        |       |        |       |     |       |     |       |
| Logistics  Segment:                                                         |       |        |       |     |       |     |       |
| Brokerage:                                                                  |       |        |       |     |       |     |       |
| Revenue (in thousands)                                                      | ** ** | **$**       | **48,640** |     | $          | 28,636   |       | $ | 16,540 |   |
| Loads                                                                       | ** ** | **25,246**  |       | 16,083   |       | 9,081    |       |
| Intermodal:                                                                 |       |        |       |     |       |     |       |
| Revenue (in thousands)                                                      | ** ** | **$**       | **20,837** |     | $          | 12,604   |       | $ | 404 |   |
| Loads                                                                       | ** ** | **6,793**   |       | 4,073    |       | 143      |       |
| Average tractors                                                            | ** ** | **31**      |       | 19       |       | 1        |       |

 

----

| (1) | Includes tractors driven by both  company-employed drivers and independent contractors.  Independent contractors provided 339, 365  and 423 tractors as of December 31, 2007, 2006 and 2005, respectively. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

17

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*Comparisonof Year Ended December 31, 2007 to Year Ended December 31, 2006*

 

                Thefollowing table sets forth for the years indicated our operating revenue,operating income and operating ratio by segment, along with the change for eachcomponent:

 
| ** **                                                      | ** ** | ** **  | ** **  | ** ** | ** ** | **Dollar**        | ** ** | **Percentage**    | ** ** |
|-----------------------------------------------------------------|------------|-------------|-------------|------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                      | ** ** | ** **  | ** **  | ** ** | ** ** | **Change**        | ** ** | **Change**        | ** ** |
| **(Dollars in thousands)**                                      | ** ** | **2007**    | ** **  | **2006**   | ** ** | **2007 vs. 2006** | ** ** | **2007 vs. 2006** | ** ** |
| Operating revenue:                                              |       |        |        |       |       |              |       |              |       |
| Truckload revenue, net  of fuel surcharge revenue               |       | **$**       | **406,754** |       | $          | 402,327           |       | $                 | 4,427      |   | 1.1 | % |
| Truckload fuel surcharge  revenue                               | ** ** | **83,786**  |        | 75,323     |       | 8,463             |       | 11.2              |       |
| Total Truckload revenue                                         | ** ** | **490,540** |        | 477,650    |       | 12,890            |       | 2.7               |       |
|                                                            | ** ** | ** **  |        |       |       |              |       |              |       |
| Logistics revenue, net  of intermodal fuel surcharge revenue(1) |       | **66,163**  |        | 39,298     |       | 26,865            |       | 68.4              |       |
| Intermodal fuel  surcharge revenue                              | ** ** | **3,314**   |        | 1,942      |       | 1,372             |       | 70.6              |       |
| Total Logistics revenue                                         | ** ** | **69,477**  |        | 41,240     |       | 28,237            |       | 68.5              |       |
|                                                            | ** ** | ** **  |        |       |       |              |       |              |       |
| Total operating revenue                                         | ** ** | **$**       | **560,017** |       | $          | 518,890           |       | $                 | 41,127     |   | 7.9 | % |
|                                                            |       |        |        |       |       |              |       |              |       |
| Operating income:                                               |       |        |        |       |       |              |       |              |       |
| Truckload                                                       | ** ** | **$**       | **22,689**  |       | $          | 37,500            |       | $                 | (14,811    | ) | (39.5 | )% |
| Logistics                                                       | ** ** | **5,112**   |        | 3,669      |       | 1,443             |       | 39.3              |       |
| Total operating income                                          | ** ** | **$**       | **27,801**  |       | $          | 41,169            |       | $                 | (13,368    | ) | (32.5 | )% |
|                                                            |       |        |        |       |       |              |       |              |       |
| Operating ratio(2):                                             | ** ** | ** **  |        |       |       |              |       |              |       |
| Truckload                                                       |       | **95.4**    | **%**       | 92.1       | %          |              |       | (3.6              | )%         |
| Logistics                                                       | ** ** | **92.6**    |        | 91.1       |       |              |       | (1.6              | )          |
| Consolidated operating  ratio                                   | ** ** | **95.0**    | **%**       | 92.1       | %          |              |       | (3.1              | )%         |

----

(1)    Logistics revenue is net of $17.1 millionand $16.5 million of inter-segment revenue in 2007 and 2006, respectively, forloads transported by our tractors and arranged by MWL that have been eliminatedin consolidation.

 

(2)    Operating expenses as a percentage ofoperating revenue.

 

                Ouroperating revenue increased $41.1 million, or 7.9%, to $560.0 million in 2007from $518.9 million in 2006.  Ouroperating revenue, net of fuel surcharges, increased $31.3 million, or 7.1%, to$472.9 million in 2007 from $441.6 million in 2006.

 

                Truckloadsegment revenue increased $12.9 million, or 2.7%, to $490.5 million in 2007from $477.7 million in 2006.  Truckloadsegment revenue, net of fuel surcharges, increased 1.1%.  We were able to increase our truckload revenueby increasing the size of our fleet and our business with existing and newcustomers.  Our average truckloadrevenue, net of fuel surcharges, per tractor per week increased 0.6% in 2007from 2006, due to a 0.4% increase in average miles per tractor and a 0.2%increase in average truckload revenue, net of fuel surcharges, per totalmile.  Our weighted average number oftractors increased 0.5% in 2007 from 2006. The slight improvement in tractor productivity was more than offset byan increase in our overall cost structure, which resulted in decreasedprofitability from 2006.  Due to achallenging freight environment, we were not able to increase freight rates tocover higher costs.  We expectindustry-wide capacity to exceed demand at least into the second quarter of2008.  Based on that outlook, our goal isto continue to maintain our rate structure by focusing on profitable freightand strong service performance, while aggressively controlling our costs.

 

                Logisticssegment revenue increased $28.2 million, or 68.5%, to $69.5 million in 2007from $41.2 million in 2006.  Logisticssegment revenue, net of intermodal fuel surcharges, increased 68.4%.  The increase 

 

18

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in logistics revenue primarily resulted fromcontinued volume growth in each of our internal brokerage and intermodalservices and in the logistics services provided by MWL.  The increase in the operating ratio for ourLogistics segment in 2007 was primarily due to an increase as a percentage oflogistics revenue of the payments to carriers for transportation services whichwe arranged.

 

                Thefollowing table sets forth for the years indicated the dollar and percentageincrease or decrease of the items in our consolidated statements of operations,and those items as a percentage of operating revenue:

 
| ** **                               | ** ** | **Dollar**        | ** ** | **Percentage**    | ** ** | **Percentage of**     | ** ** |
|------------------------------------------|------------|-------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **Change**        | ** ** | **Change**        | ** ** | **Operating Revenue** | ** ** |
| **(Dollars in thousands)**               | ** ** | **2007 vs. 2006** | ** ** | **2007 vs. 2006** | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Operating revenue                        |       | $                 | 41,127     |              | 7.9        | %                     | 100.0      | % | 100.0 | % |
| Operating expenses (income):             |       |              |       |              |       |                  |       |   |   |
| Salaries, wages and benefits             |       | 9,401             |       | 6.5               |       | 27.5                  |       | 27.8 |   |
| Purchased transportation                 |       | 19,367            |       | 22.9              |       | 18.5                  |       | 16.3 |   |
| Fuel and fuel taxes                      |       | 13,942            |       | 10.3              |       | 26.6                  |       | 26.0 |   |
| Supplies and maintenance                 |       | 5,466             |       | 16.5              |       | 6.9                   |       | 6.4 |   |
| Depreciation                             |       | 2,649             |       | 6.0               |       | 8.4                   |       | 8.5 |   |
| Operating taxes and licenses             |       | (691              | )          | (9.2              | )          | 1.2                   |       | 1.4 |   |
| Insurance and claims                     |       | 1,170             |       | 5.5               |       | 4.0                   |       | 4.1 |   |
| Communications and utilities             |       | 234               |       | 6.4               |       | 0.7                   |       | 0.7 |   |
| Gain on disposition of revenue equipment |       | 3,604             |       | 51.6              |       | (0.6                  | )          | (1.3 | ) |
| Other                                    |       | (647              | )          | (5.9              | )          | 1.8                   |       | 2.1 |   |
| Total operating expenses                 |       | 54,495            |       | 11.4              |       | 95.0                  |       | 92.1 |   |
| Operating income                         |       | (13,368           | )          | (32.5             | )          | 5.0                   |       | 7.9 |   |
| Other expenses (income):                 |       |              |       |              |       |                  |       |   |   |
| Interest expense                         |       | 259               |       | 7.3               |       | 0.7                   |       | 0.7 |   |
| Interest income and other                |       | 413               |       | 37.3              |       | (0.1                  | )          | (0.2 | ) |
| Minority interest                        |       | 34                |       | 4.4               |       | 0.1                   |       | 0.1 |   |
|                                     |       | 706               |       | 21.9              |       | 0.7                   |       | 0.6 |   |
| Income before income taxes               |       | (14,074           | )          | (37.1             | )          | 4.3                   |       | 7.3 |   |
| Provision for income taxes               |       | (4,524            | )          | (33.7             | )          | 1.6                   |       | 2.6 |   |
| Net income                               |       | $                 | (9,550     | )                 | (39.0      | )%                    | 2.7        | % | 4.7 | % |

 

                Salaries, wages and benefits consistof compensation for our employees, including both driver and non-driveremployees, employees’ health insurance, 401(k) plan contributions andother fringe benefits.  These expensesvary depending upon the ratio of company drivers to independent contractors,our efficiency, our experience with employees’ health insurance claims, changesin health care premiums and other factors. The increase in salaries, wages andbenefits resulted primarily from a 2.8% increase in the miles driven by companydrivers.  Additionally, higherself-insured medical claims increased our employees’ health insurance expenseby $1.8 million in 2007.

 

                Purchased transportationconsists of payments to independent contractor providers of revenue equipmentand to carriers for transportation services we arrange in connection withbrokerage and intermodal activities. This category will vary depending upon the ratio of company driversversus independent contractors, the amount of fuel surcharges passed through toindependent contractors and the amount and rates we pay to third-party railroadand motor carriers.  Purchasedtransportation expense increased $19.4 million in total, or 22.9%, in 2007 from2006.  Payments to carriers fortransportation services we arranged in our brokerage and intermodal operationsincreased $22.8 million to $52.5 million in 2007 from $29.7 million in 2006, asour Logistics operations significantly increased in size and scope comparedwith 2006.  The portion of purchased transportationexpense related to our independent contractors, including fuel surcharges,decreased $3.5 million in 2007, primarily due to a decrease in the number ofindependent contractor-owned tractors in our fleet.  We expect that purchased transportationexpense will continue to increase as we grow our Logistics segment.

 

19

----

 

                Fuel and fuel taxes, which werefer to as fuel expense, net of fuel surcharge revenue, increased $4.1million, or 7.1%, to $61.9 million in 2007 from $57.8 million in 2006. Theincrease was primarily due to a 2.8% increase in miles driven by ourcompany-owned fleet and an increase in the average cost of fuel during 2007 to$2.78 per gallon from $2.60 per gallon in 2006. These increases were partially offset by reduced idling fuel consumptionresulting from the installation of auxiliary power units for our tractors thatprovide climate control and electrical power for our drivers without idling thetractor engine.  Auxiliary power unitswere installed in approximately 60% of our company-owned tractors as of December 31,2007.  We have fuel surcharge provisionsin substantially all of our transportation contracts and attempt to recover aportion of increasing fuel prices through fuel surcharges and higher rates.  We expect our fuel expense to increase in thefuture because we believe that government-mandated emissions standards thattook effect in 2007 will result in further declines in engine efficiency.

 

                Supplies and maintenance consistof repairs, maintenance, tires, parts, oil and engine fluids, along withload-specific expenses including loading/unloading, tolls, pallets and trailerhostling.  The increase in supplies andmaintenance in 2007 primarily resulted from the higher percentage ofcompany-owned tractors in our fleet, for which we bear all maintenanceexpenses, an increase in the size of our trailer fleet associated with growthof our intermodal operations and an increase in the average age of our tractorand trailer fleets.  Our maintenancepractices in 2007 were consistent with 2006.

 

                Depreciation relates to ownedtractors, trailers, communications units, terminal facilities and other assets.Gains or losses on dispositions of revenue equipment are set forth in aseparate line item, rather than included in this category. The increase indepreciation was due to an increase in revenue equipment and in the relativepercentage of company-owned tractors to independent contractor-owned tractorsin 2007.  We expect our annual cost oftractor and trailer ownership will increase in future periods as a result ofhigher prices of new equipment, which is expected to result in greaterdepreciation over the useful life.

 

                Insurance and claims consist ofthe costs of insurance premiums and the accruals we make for claims within ourself-insured retention amounts, primarily for personal injury, property damage,physical damage to our equipment, cargo claims and workers’ compensationclaims.  These expenses will varyprimarily based upon the frequency and severity of our accident experience, ourself-insured retention levels and the market for insurance.  The increase in insurance and claims in 2007was primarily the result of an increase in physical damage claims with respectto our tractors and trailers.  We areresponsible for the first $1.0 million on each auto liability claim and up to$1.0 million in the aggregate for all auto liability claims between $1.0million and $2.0 million.  We are alsoresponsible for the first $750,000 on each workers’ compensation claim.  Our significant self-insured retention andour risk on the first $1.0 million of auto liability claims in the $1.0 millionto $2.0 million corridor expose us to the possibility of significantfluctuations in claims expense between periods depending on the frequency, severityand timing of claims and to adverse financial results if we incur large ornumerous losses.  In the event of anuninsured claim above our insurance coverage, or an increase in the frequencyor severity of claims within our self-insured retention, our financialcondition and results of operations could be materially and adversely affected.

 

                A decrease in the planned numberof revenue equipment dispositions and a decrease in the market value for usedrevenue equipment caused our gain on disposition of revenue equipment todecrease to $3.4 million in 2007 from $7.0 million in 2006.  Future gains or losses on disposition ofrevenue equipment will be impacted by the market for used revenue equipment,which is beyond our control.

 

                As a result of the foregoingfactors, our operating expenses as a percentage of operating revenue, or “operatingratio,” was 95.0% in 2007 compared with 92.1% in 2006.

 

                Our effective income tax rateincreased to 37.3% in 2007 from 35.4% in 2006, primarily because we decreased ourdeferred income tax liability in 2006 by 3.3% of income before incometaxes.  This decrease was primarily dueto a change in income apportionment for several states, which produced a lowereffective state income tax rate, net of federal impact.

 

20

----

 

                As a result of the factorsdescribed above, net income decreased to $15.0 million in 2007 from $24.5million in 2006. Net earnings per share decreased to $0.68 per diluted share in2007 from $1.12 per diluted share in 2006.

 

*Comparison of Year Ended December 31, 2006 to YearEnded December 31, 2005*

 

                Thefollowing table sets forth for the years indicated our operating revenue,operating income and operating ratio by segment, along with the change for eachcomponent:

 
| ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Dollar**        | ** ** | **Percentage**    | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Change**        | ** ** | **Change**        | ** ** |
| **(Dollars in thousands)**                                      | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2006 vs. 2005** | ** ** | **2006 vs. 2005** | ** ** |
| Operating revenue:                                              |       |       |       |       |       |              |       |              |       |
| Truckload revenue, net  of fuel surcharge revenue               |       | $          | 402,327    |       | $          | 386,131           |       | $                 | 16,196     |   | 4.2 | % |
| Truckload fuel surcharge  revenue                               |       | 75,323     |       | 57,127     |       | 18,196            |       | 31.9              |       |
| Total Truckload revenue                                         |       | 477,650    |       | 443,258    |       | 34,392            |       | 7.8               |       |
|                                                            |       |       |       |       |       |              |       |              |       |
| Logistics revenue, net  of intermodal fuel surcharge revenue(1) |       | 39,298     |       | 16,873     |       | 22,425            |       | 132.9             |       |
| Intermodal fuel surcharge  revenue                              |       | 1,942      |       | 71         |       | 1,871             |       | 2,635.2           |       |
| Total Logistics revenue                                         |       | 41,240     |       | 16,944     |       | 24,296            |       | 143.4             |       |
|                                                            |       |       |       |       |       |              |       |              |       |
| Total operating revenue                                         |       | $          | 518,890    |       | $          | 460,202           |       | $                 | 58,688     |   | 12.8 | % |
|                                                            |       |       |       |       |       |              |       |              |       |
| Operating income:                                               |       |       |       |       |       |              |       |              |       |
| Truckload                                                       |       | $          | 37,500     |       | $          | 41,277            |       | $                 | (3,777     | ) | (9.2 | )% |
| Logistics                                                       |       | 3,669      |       | 1,590      |       | 2,079             |       | 130.8             |       |
| Total operating income                                          |       | $          | 41,169     |       | $          | 42,867            |       | $                 | (1,698     | ) | (4.0 | )% |
|                                                            |       |       |       |       |       |              |       |              |       |
| Operating ratio(2):                                             |       |       |       |       |       |              |       |              |       |
| Truckload                                                       |       | 92.1       | %          | 90.7       | %          |              |       | (1.5              | )%         |
| Logistics                                                       |       | 91.1       |       | 90.6       |       |              |       | (0.6              | )          |
| Consolidated operating  ratio                                   |       | 92.1       | %          | 90.7       | %          |              |       | (1.5              | )%         |

----

(1)  Logistics revenue is net of $16.5 millionand $21.3 million of inter-segment revenue in 2006 and 2005, respectively, forloads transported by our tractors and arranged by MWL that have been eliminatedin consolidation.

 

(2)    Operating expenses as a percentage ofoperating revenue.

 

                Ouroperating revenue increased $58.7 million, or 12.8%, to $518.9 million in 2006from $460.2 million in 2005.  Ouroperating revenue, net of fuel surcharges, increased $38.6 million, or 9.6%, to$441.6 million in 2006 from $403.0 million in 2005.

 

                Truckloadsegment revenue increased $34.4 million, or 7.8%, to $477.7 million in 2006from $443.3 million in 2005.  Truckloadsegment revenue, net of fuel surcharges, increased 4.2%.  We were able to increase our truckloadrevenue by increasing our freight rates, the size of our fleet and our businesswith existing and new customers.  Thisincrease was partially offset by the impact of lower equipment utilization.  Our average truckload revenue, net of fuel surcharges,per tractor per week increased 1.4% in 2006 from 2005, due to a 4.2% increasein average truckload revenue, net of fuel surcharges, per total mile partiallyoffset by a 2.7% decrease in average miles per tractor.  Our weighted average number of tractorsincreased 2.7% in 2006 from 2005.  Theimprovement in tractor productivity was more than offset by an increase in ouroverall cost structure, which resulted in decreased profitability from 2005.  Our ability to recruit and retain asufficient number of qualified drivers limited our fleet growth in 2006.

 

21

----

 

                Logisticssegment revenue increased $24.3 million, or 143.4%, to $41.2 million in 2006from $16.9 million in 2005.  Logisticssegment revenue, net of intermodal fuel surcharges, increased 132.9%.  The increase in logistics revenue primarilyresulted from continued volume growth in each of our internal brokerage andintermodal services and in the logistics services provided by MWL.  The increase in the operating ratio for ourLogistics segment in 2006 was primarily due to an increase as a percentage oflogistics revenue of the payments to carriers for transportation services whichwe arranged.

 

                Thefollowing table sets forth for the years indicated the dollar and percentageincrease or decrease of the items in our consolidated statements of operations,and those items as a percentage of operating revenue:

 
| ** **                               | ** ** | **Dollar**        | ** ** | **Percentage**    | ** ** | **Percentage of**     | ** ** |
|------------------------------------------|------------|-------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **Change**        | ** ** | **Change**        | ** ** | **Operating Revenue** | ** ** |
| **(Dollars in thousands)**               | ** ** | **2006 vs. 2005** | ** ** | **2006 vs. 2005** | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Operating  revenue                       |       | $                 | 58,688     |              | 12.8       | %                     | 100.0      | % | 100.0 | % |
| Operating  expenses (income):            |       |              |       |              |       |                  |       |   |   |
| Salaries, wages and benefits             |       | 17,796            |       | 14.1              |       | 27.8                  |       | 27.5 |   |
| Purchased transportation                 |       | 2,512             |       | 3.1               |       | 16.3                  |       | 17.8 |   |
| Fuel and fuel taxes                      |       | 27,357            |       | 25.4              |       | 26.0                  |       | 23.4 |   |
| Supplies and maintenance                 |       | 4,963             |       | 17.6              |       | 6.4                   |       | 6.1 |   |
| Depreciation                             |       | 6,131             |       | 16.0              |       | 8.5                   |       | 8.3 |   |
| Operating taxes and licenses             |       | 463               |       | 6.6               |       | 1.4                   |       | 1.5 |   |
| Insurance and claims                     |       | 2,269             |       | 12.0              |       | 4.1                   |       | 4.1 |   |
| Communications and utilities             |       | 237               |       | 7.0               |       | 0.7                   |       | 0.7 |   |
| Gain on disposition of revenue equipment |       | (3,047            | )          | (77.3             | )          | (1.3                  | )          | (0.9 | ) |
| Other                                    |       | 1,705             |       | 18.3              |       | 2.1                   |       | 2.0 |   |
| Total operating expenses                 |       | 60,386            |       | 14.5              |       | 92.1                  |       | 90.7 |   |
| Operating  income                        |       | (1,698            | )          | (4.0              | )          | 7.9                   |       | 9.3 |   |
| Other  expenses (income):                |       |              |       |              |       |                  |       |   |   |
| Interest expense                         |       | 1,203             |       | 51.0              |       | 0.7                   |       | 0.5 |   |
| Interest income and other                |       | 616               |       | 35.8              |       | (0.2                  | )          | (0.4 | ) |
| Minority interest                        |       | 27                |       | 3.6               |       | 0.1                   |       | 0.2 |   |
|                                     |       | 1,846             |       | 133.8             |       | 0.6                   |       | 0.3 |   |
| Income  before income taxes              |       | (3,544            | )          | (8.5              | )          | 7.3                   |       | 9.0 |   |
| Provision  for income taxes              |       | (3,001            | )          | (18.3             | )          | 2.6                   |       | 3.6 |   |
| Net income                               |       | $                 | (543       | )                 | (2.2       | )%                    | 4.7        | % | 5.4 | % |

 

                The increase in salaries, wagesand benefits resulted primarily from an increase in the size of ourcompany-owned fleet and the miles driven by company drivers, along with anincrease in the amount paid to company drivers of 2 cents per mile effective April 1,2005.    Additionally, higherself-insured medical claims increased our employees’ health insurance expenseby $1.9 million in 2006.  These increaseswere partially offset by a decrease of $960,000 in compensation expensed forour non-driver employees under our incentive compensation program from 2005.

 

                Purchased transportation expenseincreased $2.5 million, or 3.1%, in 2006 from 2005.  The portion of purchased transportationexpense related to our independent contractors, including fuel surcharges,decreased $15.3 million, or 21.8%, in 2006, primarily due to a decrease in thenumber of independent contractor-owned tractors in our fleet.  Payments to carriers for transportationservices we arranged in our brokerage and intermodal operations increased $17.8million to $29.7 million in 2006 from $11.9 million in 2005, as our Logisticsoperations significantly increased in size compared with 2005.

 

                Fuel and fuel taxes, which werefer to as fuel expense, net of fuel surcharge revenue, increased $7.3million, or 14.4%, to $57.8 million in 2006 from $50.5 million in 2005. Theincrease was primarily due to a 7.9% increase in miles driven by ourcompany-owned fleet, a higher average fuel price net of surcharges and 

 

22

----

 

lowerfuel efficiencies associated with newer tractors.  Our fuel prices, which remain high based onhistorical standards, significantly increased to an average of $2.60 per gallonin 2006 from an average of $2.29 per gallon in 2005.

 

                The increase in supplies andmaintenance in 2006 primarily resulted from our larger fleet and the higherpercentage of company-owned tractors in our fleet, for which we bear allmaintenance expenses.  Our maintenancepractices were consistent with 2005.

 

                The increase in depreciation wasdue to an increase in revenue equipment and in the relative percentage ofcompany-owned tractors to independent contractor-owned tractors in 2006.

 

                The increase in insurance andclaims in 2006 was comprised of a $3.0 million increase in the cost ofself-insured accident claims partially offset by a $735,000 decrease ininsurance premiums.

 

                In 2006, increases in the marketvalue for used revenue equipment along with additional planned revenueequipment dispositions caused our gain on disposition of revenue equipment toincrease to $7.0 million from $3.9 million in 2005.

 

                As a result of the foregoingfactors, our operating expenses as a percentage of operating revenue, or “operatingratio,” was 92.1% in 2006 compared with 90.7% in 2005.

 

                The increase in interest expensewas primarily the result of higher average debt balances outstanding in 2006.

 

                Our effective income tax ratedecreased to 35.4% in 2006 compared with 39.6% in 2005 primarily because wedecreased our deferred income tax liability by 3.3% of income before incometaxes.  Our effective income tax rate in2006 included a revision to our previously recorded deferred income taxliability of 2.8% of income before income taxes, primarily due to a change inincome apportionment for several states, which produced a lower effective stateincome tax rate, net of federal impact.

 

                As a result of the factorsdescribed above, net income decreased to $24.5 million in 2006 from $25.1million in 2005. Net earnings per share decreased to $1.12 per diluted share in2006 from $1.14 per diluted share in 2005.

 

**Liquidityand Capital Resources**

 

                Our business requiressubstantial, ongoing capital investments, particularly for new tractors andtrailers. Our primary sources of liquidity are funds provided by operations,our unsecured senior notes and our revolving credit facility. A portion of ourtractor fleet is provided by independent contractors who own and operate theirown equipment. We have no capital expenditure requirements relating to thosedrivers who own their tractors or obtain financing through third parties.However, to the extent we purchase tractors and extend financing to theindependent contractors through our tractor purchase program, we have anassociated capital expenditure requirement.

 

                In December 2007, our Boardof Directors approved a share repurchase program to repurchase up to onemillion shares of our common stock.  Thisprogram is intended to be implemented through purchases made in either the openmarket or through private transactions. The timing and extent to which we will repurchase shares depends onmarket conditions and other corporate considerations.  We made no purchases in 2007.  Through March 14, 2008, we repurchased67,500 shares of our common stock for $810,000. The repurchase program does not have an expiration date.

 

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                Thetable below reflects our net cash flows provided by operating activities, netcash flows used for investing activities, net cash flows (used for) provided byfinancing activities and total long-term debt, including current maturities,for the years indicated.

 

| **(In thousands)**                                                 | ** ** | **2007**    | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------|------------|-------------|------------|----------|------------|----------|------------|
|                                                               |       |        |       |     |       |     |       |
| Net cash flows provided by  operating activities                   | ** ** | **$**       | **61,807** |     | $          | 77,070   |       | $ | 72,472 |   |
| Net cash flows (used  for) investing activities                    | ** ** | **(46,826** | **)**      | (86,848  | )          | (88,557  | )          |
| Net cash flows (used  for) provided by financing activities        | ** ** | **(14,351** | **)**      | 11,686   |       | 16,310   |       |
| Long-term debt,  including current maturities, at December 31 | ** ** | **44,643**  |       | 58,659   |       | 48,300   |       |
|                                                                    |            |             |            |          |            |          |            |  |  |  |

 

                In 2007, we added approximately$36.6 million of new revenue equipment, net of proceeds from dispositions, andalso recognized a gain of $3.4 million on the disposition of usedequipment.  We also decreased ouraccounts payable and accrued liabilities relating to revenue equipment by $10.2million in 2007.  Based on our currentoperating performance, the market for used tractors, our liquidity and ourexpectations concerning tractors manufactured in 2007, we decided to accelerateour tractor fleet replacement during 2005 and 2006 to allow us greaterflexibility in our decisions to purchase tractors manufactured in 2007, to addcapacity to meet demand, and to add tractors to our company fleet as more of ourdrivers become company drivers rather than independent contractors. Thisacceleration of our tractor fleet replacement has not impacted the useful livesof our tractors or caused impairment to the carrying amount reflected in ourconsolidated balance sheet.  Thesecapital expenditures were primarily funded with cash flows from operations andborrowings under our revolving credit facility. The outstanding principal balance of our credit facility increased as aresult of the accelerated fleet replacement. We believe our sources of liquidity are adequate to meet our current andanticipated needs for at least the next twelve months.  Based upon anticipated cash flows, currentborrowing availability and sources of financing we expect to be available tous, we do not anticipate any significant liquidity constraints in theforeseeable future.  We estimate thatcapital expenditures, net of proceeds from dispositions, will be approximately$12 million in 2008, which would be significantly below the level of capitalexpenditures during the last several years due to nearly 325 tractors paid-forbut not placed in service as of December 31, 2007.  Assuming net capital expenditures in thatamount and operating margins similar to the margins in 2007, we expect togenerate cash flows to retire a substantial amount of our debt in 2008 orprovide flexibility for other purposes.

 

                We have outstanding Series ASenior Unsecured Notes with an aggregate principal balance of $3.6 million at December 31,2007. These notes mature in October 2008, require annual principalpayments of $3.57 million and bear interest at a fixed annual rate of 6.78%. Wealso have outstanding Series B Senior Unsecured Notes with an aggregateprincipal balance of $4.3 million at December 31, 2007. These notes maturein April 2010, require annual principal payments of $1.43 million and bearinterest at a fixed annual rate of 8.57%.

 

                We maintain a credit agreementthat provides for a five-year unsecured committed credit facility maturing in September 2011in an aggregate principal amount of up to $75 million.  The aggregate principal amount of the creditfacility may be increased at our option up to a maximum aggregate principalamount of $100 million.  At December 31,2007, the credit facility had an outstanding principal balance of $36.8million, outstanding standby letters of credit of $5.2 million and remainingborrowing availability of $33.0 million. This facility bears interest at avariable rate based on the London Interbank Offered Rate or the agent bank’sPrime Rate, in each case plus/minus applicable margins.  The weighted average interest rate for thecredit facility was 5.82% per annum at December 31, 2007.

 

                Our credit facility prohibits usfrom paying, in any fiscal year, dividends in excess of 25% of our net incomefrom the prior fiscal year. The debt agreements discussed above also containrestrictive covenants which, among other matters, require us to maintaincertain financial ratios, including debt-to-equity, cash flow 

 

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leverage,interest coverage and fixed charge coverage. We were in compliance with all ofthese covenants at December 31, 2007.

 

                We had $3.0 million in directfinancing receivables from independent contractors under our tractor purchaseprogram as of December 31, 2007, compared with $6.1 million in receivablesas of December 31, 2006. These receivables, which are collateralized bythe financed tractors, are used to attract and retain qualified independentcontractors. We deduct payments from the independent contractors’ settlementsweekly and, as a result, have experienced minimal collection issues for thesereceivables.  The decrease in thereceivables balance is related to a new program to direct the leases to athird-party leasing vendor in 2007.

 

                The following is asummary of our contractual obligations as of December 31, 2007.

 
| **** ****                                                | **** **** | ****Payments Due by Period**** | ** **     |
|---------------------------------------------------------------|----------------|--------------------------------|----------------|
| **** ****                                                | **** **** | ** **                     | ** **     | ****2009**** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **** ****                                                | **** **** | ** **                     | ** **     | ****and**** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ****(In thousands)****                                        | **** **** | ****2008****                   | **** **** | ****2010**** | **** **** | ****2011**** | **** **** | ****Thereafter**** | **** **** | ****Total**** | **** **** |
| ****Long-term debt obligations****                            | **** **** | ****$****                      | ****5,000****  | **** **** | ****$**** | ****2,857**** | **** **** | ****$**** | ****36,786**** | **** **** | ****$**** | ****—**** | **** **** | ****$**** | ****44,643**** | **** **** |
| ****Purchase obligations for************revenue equipment**** | **** **** | ****1,949****                  | **** **** | ****—**** | **** **** | ****—**** | **** **** | ****—**** | **** **** | ****1,949**** | **** **** |
| ****Operating lease obligations****                           | **** **** | ****230****                    | **** **** | ****286**** | **** **** | ****71**** | **** **** | ****—**** | **** **** | ****587**** | **** **** |
| ****Total****                                                 | **** **** | ****$****                      | ****7,179****  | **** **** | ****$**** | ****3,143**** | **** **** | ****$**** | ****36,857**** | **** **** | ****$**** | ****—**** | **** **** | ****$**** | ****47,179**** | **** **** |

 

**RelatedParties**

 

                We purchase fuel and obtaintires and related services from Bauer Built, Inc., or BBI. Jerry M. Bauer,one of our directors, is the president and a stockholder of BBI.  We paid BBI $1.1 million in 2007, $1.3million in 2006 and $1.2 million in 2005 for fuel and tire services. In addition,we paid $2.4 million in 2007, $2.4 million in 2006 and $2.0 million in 2005 totire manufacturers for tires that we purchased from the tire manufacturerswhich were provided by BBI. BBI received commissions from the tiremanufacturers related to these purchases. Other than any benefit received from his ownership interest, Mr. Bauerreceives no compensation or other benefits from our business with BBI.

 

                We paid Durand Builders Service, Inc.$547,000 in 2007 and $142,000 in 2005, respectively, for various constructionprojects.  Larry B. Hagness, one of ourdirectors, is the president and owner of Durand Builders Service, Inc.  Other than any benefit received from hisownership interest, Mr. Hagness receives no compensation or other benefitsfrom these transactions.

 

****Off-balance SheetArrangements****

 

****                Other than standby letters ofcredit maintained in connection with our self-insurance programs in the amountof $5.2 million and operating leases summarized above in our summary ofcontractual obligations, we did not have any other material off-balance sheetarrangements at December 31, 2007.****

 

****Inflation andFuel Costs****

 

                Most of our operating expensesare inflation-sensitive, with inflation generally producing increased costs ofoperations. During the past three years, the most significant effects ofinflation have been on revenue equipment prices, accident claims, healthinsurance and employee compensation. We attempt to limit the effects ofinflation through increases in freight rates and cost control efforts.

 

                In addition to inflation,fluctuations in fuel prices can affect our profitability. We requiresubstantial amounts of fuel to operate our tractors and power thetemperature-control units on our trailers. Substantially all of our contractswith customers contain fuel surcharge provisions. Although we historically havebeen able to pass through most long-term increases in fuel prices and relatedtaxes to customers in the form of surcharges and higher rates, such increasesusually are not fully recovered. Fuel prices were high throughout the pastthree years, which has increased our cost of operating.

 

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****Seasonality****

 

                Our tractor productivitygenerally decreases during the winter season because inclement weather impedesoperations and some shippers reduce their shipments. At the same time,operating expenses generally increase, with harsh weather creating higheraccident frequency, increased claims and more equipment repairs.

 

**Critical Accounting Policies**

 

                The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsabout future events, and apply judgments that affect the reported amounts ofassets, liabilities, revenue and expenses in our consolidated financialstatements and related notes.  We baseour estimates, assumptions and judgments on historical experience, currenttrends and other factors believed to be relevant at the time our consolidatedfinancial statements are prepared. However, because future events and their effects cannot be determinedwith certainty, actual results could differ from our estimates and assumptions,and such differences could be material. We believe that the following critical accounting policies affect ourmore significant estimates, assumptions and judgments used in the preparationof our consolidated financial statements.

 

*                Revenue Recognition.*We recognize revenue, including fuel surcharges, atthe time shipment of freight is completed.

 

*                Accounts Receivable. *We are dependent on alimited number of customers, and as a result, our trade accounts receivable arehighly concentrated. Trade accounts receivableare recorded at the invoiced amounts, net of an allowance for doubtfulaccounts.  A considerable amount ofjudgment is required in assessing the realization of these receivablesincluding the current creditworthiness of each customer and related aging ofthe past-due balances, including any billing disputes.  In order to assess the collectibility ofthese receivables, we perform ongoing credit evaluations of our customers’financial condition.  Through theseevaluations, we may become aware of a situation where a customer may not beable to meet its financial obligations due to deterioration of its financialviability, credit ratings or bankruptcy. The allowance for doubtful accounts is based on the best informationavailable to us and is reevaluated and adjusted as additional information isreceived.  We evaluate the allowancebased on historical write-off experience, the size of the individual customerbalances, past-due amounts and the overall national economy.  We review the adequacy of our allowance fordoubtful accounts monthly.

 

*                Propertyand Equipment.*The transportation industry requires significant capital investments. Our netproperty and equipment was $325.2 million as of December 31, 2007 and$329.9 million as of December 31, 2006. Our depreciation expense was $47.0million for 2007, $44.4 million for 2006 and $38.2 million for 2005. We computedepreciation of our property and equipment for financial reporting purposesbased on the cost of each asset, reduced by its estimated salvage value, usingthe straight-line method over its estimated useful life. We determine andperiodically evaluate our estimate of the projected salvage values and usefullives primarily by considering the market for used equipment, prior usefullives and changes in technology. We have not changed our policy regarding salvagevalues as a percentage of initial cost or useful lives of tractors and trailerswithin the last ten years. We believe that our policies and past estimates havebeen reasonable. Actual results could differ from these estimates. A 5%decrease in estimated salvage values would have decreased our net property andequipment as of December 31, 2007 by approximately $7.2 million, or 2.2%.

 

                In 2007, we replaced most of ourcompany-owned tractors within approximately 3.5 years and our trailers withinapproximately seven years after purchase. Our useful lives for depreciating tractors is five years and trailers isseven years, with a 25% salvage value for tractors and a 35% salvage value fortrailers.  These salvage values are basedupon the expected market values of the equipment after five years for tractorsand seven years for trailers. Depreciation expense calculated in this manner approximates thecontinuing declining value of the revenue equipment, and, for tractors,continues at a consistent straight-line rate for units held beyond the normalreplacement cycle.  Calculating tractordepreciation expense with a five-year useful life and a 25% salvage valueresults in the same depreciation rate of 15% of cost per year and the same netbook value of 47.5% of cost at the 3.5-year replacement date as using a3.5-year useful life and 47.5% salvage value. As a 

 

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result,there is no difference in recorded depreciation expense on a quarterly orannual basis with our five-year useful life and 25% salvage value compared witha 3.5-year useful life and 47.5% salvage value.

 

*                Impairmentof Assets.* Long-livedassets are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable.Recoverability of assets to be held and used is measured by a comparison of thecarrying amount of an asset to future net undiscounted cash flows expected tobe generated by the asset. If such assets are considered to be impaired, theimpairment to be recognized is measured by the amount by which the carryingamount of the assets exceeds the fair value of the assets. Assets to bedisposed of are reported at the lower of the carrying amount or fair value lessthe costs to sell.

 

*                Insuranceand Claims.* We self-insure,in part, for losses relating to workers’ compensation, auto liability, generalliability, cargo and property damage claims, along with employees’ healthinsurance with varying risk retention levels. We maintain insurance coveragefor per-incident and total losses in excess of these risk retention levels inamounts we consider adequate based upon historical experience and our ongoingreview. However, we could suffer a series of losses within our self-insured retentionlimits or losses over our policy limits, which could negatively affect ourfinancial condition and operating results. We are responsible for the first$1.0 million on each auto liability claim and up to $1.0 million in theaggregate for all auto liability claims between $1.0 million and $2.0million.  We are also responsible for thefirst $750,000 on each workers’ compensation claim.  We have $5.2 million in standby letters ofcredit to guarantee settlement of claims under agreements with our insurancecarriers and regulatory authorities. The insurance and claims accruals in ourconsolidated balance sheets were $17.4 million as of December 31, 2007,and $16.1 million as of December 31, 2006. We reserve currently for theestimated cost of the uninsured portion of pending claims. We periodicallyevaluate and adjust these reserves based on our evaluation of the nature andseverity of outstanding individual claims and our estimate of future claimsdevelopment based on historical claims development factors. We believe that ourclaims development factors have historically been reasonable, as indicated bythe adequacy of our insurance and claims accruals compared to settled claims.Actual results could differ from these current estimates.  In addition, to the extent that claims arelitigated and not settled, jury awards are difficult to predict.  If our claims settlement experience worsenedcausing our historical claims development factors to increase by 5%, our estimatedoutstanding loss reserves as of December 31, 2007 would have needed toincrease by approximately $2.6 million.

 

*                Share-based Payment ArrangementCompensation. *We have granted stock options to certain employeesand non-employee directors.  We recognizecompensation expense for all share-based payment arrangements granted after December 31,2005 and prior to but not yet vested as of December 31, 2005, inaccordance with Statement of Financial Accounting Standards No. 123R, “Share-BasedPayment” (SFAS 123R).  Under the fairvalue recognition provisions of SFAS 123R, we record share-based compensationexpense net of an estimated forfeiture rate and only record compensationexpense for those shares expected to vest on a straight-line basis over therequisite service period for service-based awards (normally the vestingperiod).  Compensation expense will berecorded for performance-based awards in the periods in which the performancecondition is probable of achievement. Determining the appropriate fair value model and calculating the fairvalue of share-based payment arrangements require the input of highlysubjective assumptions, including the expected life of the share-based paymentarrangements and stock price volatility. We use the Black-Scholes model to value our stock option awards.  We believe that future volatility will notmaterially differ from our historical volatility.  Thus, we use the historical volatility of ourcommon stock over the expected life of the award.  The assumptions used in calculating the fairvalue of share-based payment awards represent our best estimates, but theseestimates involve inherent uncertainties and the application of judgment.  As a result, if factors change and we usedifferent assumptions, share-based compensation expense could be materiallydifferent in the future.  In addition, weare required to estimate the expected forfeiture rate and only recognizeexpense for those shares expected to vest. If the actual forfeiture rate is materially different from the estimate,share-based compensation expense could be significantly different from what hasbeen recorded in the current period.

 

*                Income Taxes*.  Weaccount for income taxes in accordance with Statement of Financial AccountingStandards No. 109, “Accounting for Income Taxes” and FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes — an interpretation of FASBStatement No. 109.”  As part of theprocess of 

 

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preparingour consolidated financial statements, we are required to estimate our incometaxes in each of the jurisdictions in which we operate.  This process involves estimating our currenttax exposure together with assessing temporary differences resulting fromdiffering treatment of items for tax and financial reporting purposes.  These temporary differences result indeferred tax assets and liabilities, which are included in our accompanyingconsolidated balance sheets.  Deferredtax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which the temporary differences areexpected to be recovered or settled.  Tothe extent it is determined that it is not likely that our deferred tax assetswill be recovered from future taxable income, a valuation allowance must beestablished for the amount of the deferred tax assets determined not to berealizable.  A valuation allowance fordeferred tax assets has not been deemed necessary due to our profitableoperations.  However, if the facts or ourfinancial results were to change, thereby impacting the likelihood of realizingthe deferred tax assets, judgment would have to be applied to determine theamount of any valuation allowance required in any given period.

 

**RecentAccounting Pronouncements**

 

                In September 2006, the Financial AccountingStandards Board, or FASB, issued Statement of Financial Accounting Standards No. 157,“Fair Value Measurements,” (SFAS 157). SFAS 157 provides enhanced guidance for using fair value to measureassets and liabilities.  The statementprovides a common definition of fair value and establishes a framework to makethe measurement of fair value in generally accepted accounting principles moreconsistent and comparable.  SFAS 157 alsorequires expanded disclosures to provide information about the extent to whichfair value is used to measure assets and liabilities, the methods andassumptions used to measure fair value, and the effect of fair value measureson earnings.  SFAS 157 is effective forfinancial statements issued for fiscal years beginning after November 15,2007.  However, SFAS 157 as it relates tofair value measurement requirements for non-financial assets and liabilitiesthat are not remeasured at fair value on a recurring basis is effective forfiscal years beginning after November 15, 2008.  The adoption of SFAS 157 is not expected tohave a significant impact on our financial condition, results of operations orcash flows.

 

                In February 2007, the FASB issued Statement ofFinancial Accounting Standards No. 159, “The Fair Value Option for FinancialAssets and Financial Liabilities — Including an amendment of FASB Statement No. 115”(SFAS 159).  SFAS 159 expands the use offair value accounting but does not affect existing standards that requireassets or liabilities to be carried at fair value.  Under SFAS 159, a company may elect to usefair value to measure accounts and loans receivable, available-for-sale andheld-to-maturity securities, equity method investments, accounts payable,guarantees and issued debt.  Othereligible items include firm commitments for financial instruments thatotherwise would not be recognized at inception and non-cash warrantyobligations where a warrantor is permitted to pay a third party to provide thewarranty goods or services.  If the useof fair value is elected, any upfront costs and fees related to the item mustbe recognized in earnings and cannot be deferred, e.g., debt issue costs.  The fair value election is irrevocable andgenerally made on an instrument-by-instrument basis, even if a company hassimilar instruments that it elects not to measure based on fair value.  At the adoption date, unrealized gains andlosses on existing items for which fair value has been elected are reported asa cumulative adjustment to beginning retained earnings.  Subsequent to the adoption of SFAS 159,changes in fair value are recognized in earnings.  SFAS 159 is effective as of the beginning ofan entity’s first fiscal year that begins after November 15, 2007.  The adoption of SFAS 159 is not expected tohave a significant impact on our financial condition, results of operations orcash flows.

 

                In December 2007, the FASB issued Statement ofFinancial Accounting Standards No. 160, “Noncontrolling Interests inConsolidated Financial Statements — an amendment of ARB No. 51” (SFAS 160).  SFAS 160 requires that accounting andreporting for minority interests will be recharacterized as noncontrollinginterests and classified as a component of equity.  SFAS 160 also establishes reportingrequirements that provide sufficient disclosures that clearly identify anddistinguish between the interests of the parent and the interests of thenoncontrolling owners.  SFAS 160 appliesto all entities that prepare consolidated financial statements, except not-for-profitorganizations, but will affect only those entities that have an outstandingnoncontrolling interest in one or more subsidiaries or that deconsolidate asubsidiary.  This statement is effectiveas of the beginning of an entity’s first fiscal year that begins after December 15,2008.  We continue to evaluate the impactof this new pronouncement, but currently believe the only impact of 

 

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adopting SFAS 160 would beto reclassify $1.3 million in minority interest to a separate component ofstockholders’ equity.

 

                In December 2007, the FASB issued Statement ofFinancial Accounting Standards No. 141 (revised 2007), “BusinessCombinations” (SFAS 141R), which replaces FASB Statement No. 141.  SFAS 141R establishes principles andrequirements for how an acquirer recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, anynon-controlling interest in the acquiree and the goodwill acquired.  The statement also establishes disclosurerequirements that will enable users to evaluate the nature and financialeffects of the business combination. SFAS 141R is effective as of the beginning of an entity’s first fiscalyear that begins after December 15, 2008. The adoption of SFAS 141R could have a significant impact on ourfinancial condition, results of operations and cash flows if we should enterinto a business combination after that date.

 

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

 

Weare exposed to a variety of market risks, most importantly the effects of theprice and availability of diesel fuel and changes in interest rates.

 

**Commodity Price Risk**

 

Ouroperations are heavily dependent upon the use of diesel fuel. The price andavailability of diesel fuel can vary and are subject to political, economic andmarket factors that are beyond our control. Significant increases in dieselfuel costs could materially and adversely affect our results of operations andfinancial condition. Historically, we have been able to recover a portion ofdiesel fuel price increases from customers in the form of fuel surcharges.

 

Wepresently use fuel surcharges to address the risk of high fuel prices. Fuelsurcharge programs are widely accepted among our customers, though they canvary somewhat from customer-to-customer. We believe fuel surcharges areeffective at mitigating the risk of high fuel prices, although we do notrecover the full amount of fuel price increases.

 

**InterestRate Risk**

 

Our market risk is alsoaffected by changes in interest rates. We have historically maintained acombination of fixed rate and variable rate obligations to manage our interestrate exposure. Fixed rate obligations expose us to the risk that interest ratesmight fall. Variable rate obligations expose us to the risk that interest ratesmight rise.

 

Our fixed rate obligationsconsist of amounts outstanding under our unsecured senior notes. The$3.6 million outstanding at December 31, 2007, under our Series ASenior Notes, bears interest at a fixed annual rate of 6.78%. The $4.3 millionoutstanding at December 31, 2007, under our Series B Senior Notes,bears interest at a fixed annual rate of 8.57%. Based on such outstandingamounts, a one percentage point decline in market interest rates would have theeffect of increasing the premium we pay over market interest rates byapproximately $79,000 annually.

 

Our variable rateobligations consist of borrowings under our revolving credit facility. Ourrevolving credit facility carries a variable interest rate based on the LondonInterbank Offered Rate or the agent bank’s Prime Rate, in each case plus/minusapplicable margins. The weighted average interest rate for the facility was5.82% per annum at December 31, 2007. As of December 31, 2007, we hadborrowed $36.8 million under the credit facility. Based on such outstandingamount, a one percentage point increase in market interest rates would cost us$368,000 in additional gross interest cost on an annual basis.

 

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# ***ITEM8.    ***                                         FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

# *** ***

**Management’s AnnualReport on Internal Control Over Financial Reporting**

 

Managementis responsible for establishing and maintaining an adequate system of internalcontrol over financial reporting as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934, as amended, forMarten Transport, Ltd. and subsidiary (the “Company”).  This system is designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with U.S. generallyaccepted accounting principles.

 

TheCompany’s internal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the Company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the Company are being madeonly in accordance with authorizations of management and directors of theCompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of theCompany’s assets that could have a material effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements and even when determined to be effective, canonly provide reasonable assurance with respect to financial statementpreparation and presentation.  Also,projection of any evaluation of the effectiveness of internal control overfinancial reporting to future periods is subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree orcompliance with the policies or procedures may deteriorate.

 

Management,with the participation of the Company’s Chairman of the Board, President, ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofthe Company’s internal control over financial reporting as of December 31,2007.  In making this evaluation,management used the criteria set forth by the Committee of SponsoringOrganizations of the Treadway Commission (COSO) in *InternalControl — Integrated Framework.* Based on this assessment, management concluded that the Company’sinternal control over financial reporting was effective as of December 31,2007.  Further, the Company’s registeredpublic accounting firm, KPMG LLP, has issued a report on the Company’s internalcontrols over financial reporting on page 32 of this Report.

 

March 14,2008

 

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**Report of****IndependentRegistered Public Accounting Firm**

 

*To the Board of Directors and Stockholdersof Marten Transport, Ltd.:*

* *

*We have audited Marten Transport, Ltd.’sinternal control over financial reporting as of December 31, 2007, basedon the criteria established in*Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).  The Company’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting included in the accompanying Management’sAnnual Report on Internal Control Over Financial Reporting.  Our responsibility is to express an opinionon the Company’s internal control over financial reporting based on our audit.

* *

*We conducted our audit in accordance withthe standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects.  Our audit includedobtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, and testing and evaluatingthe design and operating effectiveness of internal control based on theassessed risk.  Our audit also includedperforming such other procedures as we considered necessary in thecircumstances.  We believe that our auditprovides a reasonable basis for our opinion.*

* *

*A company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples.  A company’s internal controlover financial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.*

* *

*Because of its inherent limitations,internal control over financial reporting may not prevent or detectmisstatements.  Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.*

* *

*In our opinion, the Company maintained, inall material respects, effective internal control over financial reporting asof December 31, 2007, based on the criteria established in*Internal Control—IntegratedFramework issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO).

* *

*We also have audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets of Marten Transport, Ltd. and subsidiary as of December 31,2007 and 2006, and the related consolidated statements of operations,stockholders’ equity, and cash flows for each of the years in the three-yearperiod ended December 31, 2007, and our report dated March 14, 2008expressed an unqualified opinion on those consolidated financial statements.*

* *

/s/ KPMG LLP

Minneapolis, Minnesota

March 14, 2008

 

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**Report of Independent Registered PublicAccounting Firm**

** **

To theBoard of Directors and Stockholders of Marten Transport, Ltd.:

 

Wehave audited the accompanying consolidated balance sheets of Marten Transport,Ltd. and subsidiary (the “Company”) as of December 31, 2007 and 2006, andthe related consolidated statements of operations, stockholders’ equity, andcash flows for each of the years in the three-year period ended December 31,2007.  In connection with our audits ofthe consolidated financial statements, we have also audited the financialstatement schedule for each of the years in the three-year period ended December 31,2007, listed in Item 15(a)(2) of this Form 10-K.  These consolidated financial statements andfinancial statement schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements and financial statement schedule based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Marten Transport,Ltd. and subsidiary as of December 31, 2007 and 2006, and the results oftheir operations and their cash flows for each of the years in the three-yearperiod ended December 31, 2007, in conformity with U.S. generally acceptedaccounting principles. Also in our opinion, the related financial statementschedule referred to above, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), Marten Transport Ltd.’s internalcontrol over financial reporting as of December 31, 2007, based oncriteria established in *Internal Control*—*Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), andour report dated March 14, 2008 expressed an unqualified opinion on theeffectiveness of the Company’s internal control over financial reporting.

 

/s/ KPMG LLP

Minneapolis,Minnesota

March 14,2008

 

33

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**MARTENTRANSPORT, LTD.**

 

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                                                                                                   | ** ** | **December 31,** | ** **  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|
| **(In thousands, except share information)**                                                                                                                                                 | ** ** | **2007**              | ** **  | **2006** | ** ** |
| **ASSETS**                                                                                                                                                                                   | ** ** | ** **            | ** **  | ** ** | ** ** |
| **Current  assets:**                                                                                                                                                                         | ** ** | ** **            | ** **  | ** ** | ** ** |
| Cash                                                                                                                                                                                         | ** ** | **$**                 | **3,618**   |   | $ | 2,988 |   |
| Marketable securities                                                                                                                                                                        | ** ** | **350**               |        | 300 |   |
| Receivables:                                                                                                                                                                                 |       |                  |        |   |   |
| Trade, less allowances of $315 and $861,  respectively                                                                                                                                       | ** ** | **51,539**            |        | 48,005 |   |
| Other                                                                                                                                                                                        | ** ** | **6,175**             |        | 6,458 |   |
| Prepaid expenses and other                                                                                                                                                                   | ** ** | **13,823**            |        | 14,227 |   |
| Deferred income taxes                                                                                                                                                                        | ** ** | **4,653**             |        | 4,532 |   |
| Total current assets                                                                                                                                                                         | ** ** | **80,158**            |        | 76,510 |   |
| **Property  and equipment:**                                                                                                                                                                 | ** ** | ** **            | ** **  | ** ** | ** ** |
| Revenue equipment                                                                                                                                                                            | ** ** | **423,261**           |        | 406,449 |   |
| Buildings and land                                                                                                                                                                           | ** ** | **12,099**            |        | 10,945 |   |
| Office equipment and other                                                                                                                                                                   | ** ** | **12,070**            |        | 11,335 |   |
| Less accumulated depreciation                                                                                                                                                                | ** ** | **(122,246**          | **)**       | (98,841 | ) |
| Net property and equipment                                                                                                                                                                   | ** ** | **325,184**           |        | 329,888 |   |
| **Other  assets**                                                                                                                                                                            | ** ** | **2,048**             |        | 4,424 |   |
| ** **                                                                                                                                                                                   |       | **$**                 | **407,390** |   | $ | 410,822 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                               | ** ** | ** **            | ** **  | ** ** | ** ** |
| **Current  liabilities:**                                                                                                                                                                    | ** ** | ** **            | ** **  | ** ** | ** ** |
| Checks issued in excess of cash balances                                                                                                                                                     | ** ** | **$**                 | **—**  |   | $ | 804 |   |
| Accounts payable                                                                                                                                                                             | ** ** | **14,653**            |        | 12,690 |   |
| Insurance and claims accruals                                                                                                                                                                | ** ** | **17,431**            |        | 16,073 |   |
| Accrued liabilities                                                                                                                                                                          | ** ** | **17,731**            |        | 24,855 |   |
| Current maturities of long-term debt                                                                                                                                                         | ** ** | **5,000**             |        | 5,000 |   |
| Total current liabilities                                                                                                                                                                    | ** ** | **54,815**            |        | 59,422 |   |
| **Long-term  debt, less current maturities**                                                                                                                                                 | ** ** | **39,643**            |        | 53,659 |   |
| **Deferred  income taxes**                                                                                                                                                                   | ** ** | **74,719**            |        | 75,835 |   |
| Total liabilities                                                                                                                                                                            | ** ** | **169,177**           |        | 188,916 |   |
| **Commitments  and contingencies (Note 11)**                                                                                                                                                 | ** ** | ** **            | ** **  | ** ** | ** ** |
| **Minority  interest**                                                                                                                                                                       | ** ** | **1,283**             |        | 913 |   |
| **Stockholders’  equity:**                                                                                                                                                              | ** ** | ** **            | ** **  | ** ** | ** ** |
| Preferred stock, $.01 par value per share; 2,000,000  shares authorized; no shares issued and outstanding                                                                                    |       | **—**            |        | **—** |   |
| Common stock, $.01 par value per share; 48,000,000  shares authorized; 21,811,837 shares at December 31, 2007, and  21,764,773 shares at December 31, 2006, issued and outstanding |       | **218**               |        | 218 |   |
| Additional paid-in capital                                                                                                                                                                   | ** ** | **74,570**            |        | 73,601 |   |
| Retained earnings                                                                                                                                                                            | ** ** | **162,142**           |        | 147,174 |   |
| Total stockholders’ equity                                                                                                                                                              | ** ** | **236,930**           |        | 220,993 |   |
| ** **                                                                                                                                                                                   |       | **$**                 | **407,390** |   | $ | 410,822 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

34

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**MARTENTRANSPORT, LTD.**

 

**ConsolidatedStatements of Operations**

 
| ** **                                       | ** ** | **For the years ended December 31,** | ** **  |
|--------------------------------------------------|------------|-------------------------------------------|-------------|
| **(In thousands, except per share information)** | ** ** | **2007**                                  | ** **  | **2006** | ** ** | **2005** | ** ** |
| **Operating  revenue**                           | ** ** | **$**                                     | **560,017** |   | $ | 518,890 |   | $ | 460,202 |   |
| **Operating  expenses (income):**                |       |                                      |        |   |   |   |   |
| Salaries, wages and benefits                     | ** ** | **153,774**                               |        | 144,373 |   | 126,577 |   |
| Purchased transportation                         | ** ** | **103,776**                               |        | 84,409 |   | 81,897 |   |
| Fuel and fuel taxes                              | ** ** | **149,021**                               |        | 135,079 |   | 107,722 |   |
| Supplies and maintenance                         | ** ** | **38,621**                                |        | 33,155 |   | 28,192 |   |
| Depreciation                                     | ** ** | **47,009**                                |        | 44,360 |   | 38,229 |   |
| Operating taxes and licenses                     | ** ** | **6,823**                                 |        | 7,514 |   | 7,051 |   |
| Insurance and claims                             | ** ** | **22,353**                                |        | 21,183 |   | 18,914 |   |
| Communications and utilities                     | ** ** | **3,869**                                 |        | 3,635 |   | 3,398 |   |
| Gain on disposition of revenue equipment         | ** ** | **(3,386**                                | **)**       | (6,990 | ) | (3,943 | ) |
| Other                                            | ** ** | **10,356**                                |        | 11,003 |   | 9,298 |   |
|                                             | ** ** | **532,216**                               |        | 477,721 |   | 417,335 |   |
| **Operating  income**                            | ** ** | **27,801**                                |        | 41,169 |   | 42,867 |   |
| **Other  expenses (income):**                    |       |                                      |        |   |   |   |   |
| Interest expense                                 | ** ** | **3,823**                                 |        | 3,564 |   | 2,361 |   |
| Interest income and other                        | ** ** | **(693**                                  | **)**       | (1,106 | ) | (1,722 | ) |
| Minority interest                                | ** ** | **802**                                   |        | 768 |   | 741 |   |
|                                             | ** ** | **3,932**                                 |        | 3,226 |   | 1,380 |   |
| **Income  before income taxes**                  | ** ** | **23,869**                                |        | 37,943 |   | 41,487 |   |
| **Provision  for income taxes**                  | ** ** | **8,901**                                 |        | 13,425 |   | 16,426 |   |
| **Net income**                                   | ** ** | **$**                                     | **14,968**  |   | $ | 24,518 |   | $ | 25,061 |   |
| **Basic  earnings per common share**             | ** ** | **$**                                     | **0.69**    |   | $ | 1.13 |   | $ | 1.16 |   |
| **Diluted  earnings per common share**           | ** ** | **$**                                     | **0.68**    |   | $ | 1.12 |   | $ | 1.14 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

35

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**MARTEN TRANSPORT, LTD.**

 

**Consolidated Statements ofStockholders’ Equity**

 
| ** **                                                               | ** ** | ** **       | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|-------------------|------------|------------|------------|
| ** **                                                               | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Stock-** | ** ** |
| ** **                                                               | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **holders’** | ** ** |
| **(In thousands)**                                                       | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Equity** | ** ** |
| Balance at December 31, 2004                                        |       | 21,461           |       | $           | 215        |           | $          | 70,111            |       | $          | 97,595     |   | $ | 167,921 |   |
| Net income                                                               |       | —           |       | —      |       | —         |       | 25,061            |       | 25,061     |       |
| Issuance of common stock from share-based payment arrangement  exercises |       | 112              |       | 1           |       | 524            |       | —            |       | 525        |       |
| Tax benefits from share-based payment arrangement  exercises             |       | —           |       | —      |       | 410            |       | —            |       | 410        |       |
| Balance at December 31, 2005                                        |       | 21,573           |       | 216         |       | 71,045         |       | 122,656           |       | 193,917    |       |
| Net income                                                               |       | —           |       | —      |       | —         |       | 24,518            |       | 24,518     |       |
| Issuance of common stock from share-based payment arrangement  exercises |       | 192              |       | 2           |       | 811            |       | —            |       | 813        |       |
| Tax benefits from share-based payment arrangement  exercises             |       | —           |       | —      |       | 1,298          |       | —            |       | 1,298      |       |
| Share-based payment arrangement compensation expense                     |       | —           |       | —      |       | 447            |       | —            |       | 447        |       |
| Balance at December 31, 2006                                        |       | 21,765           |       | 218         |       | 73,601         |       | 147,174           |       | 220,993    |       |
| Net income                                                               |       | —           |       | —      |       | —         |       | 14,968            |       | 14,968     |       |
| Issuance of common stock from share-based payment arrangement  exercises |       | 47               |       | —      |       | 303            |       | —            |       | 303        |       |
| Tax benefits from share-based payment arrangement  exercises             |       | —           |       | —      |       | 206            |       | —            |       | 206        |       |
| Share-based payment arrangement compensation expense                     |       | —           |       | —      |       | 460            |       | —            |       | 460        |       |
| Balance at December 31, 2007                                        |       | 21,812           |       | $           | 218        |           | $          | 74,570            |       | $          | 162,142    |   | $ | 236,930 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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**MARTENTRANSPORT, LTD.**

 

**ConsolidatedStatements of Cash Flows**

 
| ** **                                                                        | ** ** | **For the years ended December 31,** | ** **  |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------|-------------|
| **(In thousands)**                                                                | ** ** | **2007**                                  | ** **  | **2006** | ** ** | **2005** | ** ** |
| **CASH FLOWS PROVIDED BY OPERATING  ACTIVITIES:**                                 |       |                                      |        |   |   |   |   |
| Operations:                                                                       |       |                                      |        |   |   |   |   |
| Net income                                                                        | ** ** | **$**                                     | **14,968**  |   | $ | 24,518 |   | $ | 25,061 |   |
| Adjustments to reconcile net income to net cash  flows from operating activities: |       |                                      |        |   |   |   |   |
| Depreciation                                                                      | ** ** | **47,009**                                |        | 44,360 |   | 38,229 |   |
| Gain on disposition of revenue equipment                                          | ** ** | **(3,386**                                | **)**       | (6,990 | ) | (3,943 | ) |
| Deferred income taxes                                                             | ** ** | **(1,237**                                | **)**       | 8,866 |   | 11,771 |   |
| Tax benefits from share-based payment arrangement  exercises                      | ** ** | **206**                                   |        | 1,298 |   | 410 |   |
| Excess tax benefits from share-based payment  arrangement exercises               | ** ** | **(166**                                  | **)**       | (1,156 | ) | — |   |
| Share-based payment arrangement compensation expense                              | ** ** | **460**                                   |        | 447 |   | — |   |
| Minority interest in undistributed earnings of  affiliate                         | ** ** | **370**                                   |        | 482 |   | 431 |   |
| Changes in other current operating items:                                         |       |                                      |        |   |   |   |   |
| Receivables                                                                       | ** ** | **(3,251**                                | **)**       | (105 | ) | (6,896 | ) |
| Prepaid expenses and other                                                        | ** ** | **404**                                   |        | (963 | ) | (1,395 | ) |
| Accounts payable                                                                  | ** ** | **1,999**                                 |        | 5,008 |   | 3,067 |   |
| Other current liabilities                                                         | ** ** | **4,431**                                 |        | 1,305 |   | 5,737 |   |
| Net cash provided by operating activities                                         | ** ** | **61,807**                                |        | 77,070 |   | 72,472 |   |
| **CASH FLOWS USED FOR INVESTING ACTIVITIES:**                                     |       |                                      |        |   |   |   |   |
| Revenue equipment additions                                                       | ** ** | **(74,732**                               | **)**       | (125,388 | ) | (117,722 | ) |
| Proceeds from revenue equipment dispositions                                      | ** ** | **27,939**                                |        | 37,301 |   | 32,846 |   |
| Buildings and land, office equipment and other  additions                         | ** ** | **(2,976**                                | **)**       | (1,257 | ) | (3,718 | ) |
| Proceeds from buildings and land, office equipment  and other dispositions        | ** ** | **617**                                   |        | — |   | 68 |   |
| Net change in other assets                                                        | ** ** | **2,376**                                 |        | 2,302 |   | 401 |   |
| Purchases of marketable securities                                                | ** ** | **(50**                                   | **)**       | (3,635 | ) | (32,527 | ) |
| Sales of marketable securities                                                    | ** ** | **—**                                |        | 3,829 |   | 32,095 |   |
| Net cash used for investing activities                                            | ** ** | **(46,826**                               | **)**       | (86,848 | ) | (88,557 | ) |
| **CASH FLOWS (USED FOR) PROVIDED BY FINANCING  ACTIVITIES:**                      |       |                                      |        |   |   |   |   |
| Borrowings under credit facility and long-term debt                               | ** ** | **139,105**                               |        | 131,023 |   | 130,717 |   |
| Repayment of borrowings under credit facility and  long-term debt                 | ** ** | **(153,121**                              | **)**       | (120,664 | ) | (112,674 | ) |
| Issuance of common stock from share-based payment  arrangement exercises          | ** ** | **303**                                   |        | 813 |   | 525 |   |
| Excess tax benefits from share-based payment  arrangement exercises               | ** ** | **166**                                   |        | 1,156 |   | — |   |
| Change in net checks issued in excess of cash  balances                           | ** ** | **(804**                                  | **)**       | (642 | ) | (2,258 | ) |
| Net cash (used for) provided by financing activities                              | ** ** | **(14,351**                               | **)**       | 11,686 |   | 16,310 |   |
| **NET CHANGE IN CASH**                                                            | ** ** | **630**                                   |        | 1,908 |   | 225 |   |
| **CASH:**                                                                         |       |                                      |        |   |   |   |   |
| Beginning of year                                                                 | ** ** | **2,988**                                 |        | 1,080 |   | 855 |   |
| End of year                                                                       | ** ** | **$**                                     | **3,618**   |   | $ | 2,988 |   | $ | 1,080 |   |
| ** **                                                                        | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| **SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:**                            |       |                                      |        |   |   |   |   |
| Cash paid for:                                                                    |       |                                      |        |   |   |   |   |
| Interest                                                                          | ** ** | **$**                                     | **3,966**   |   | $ | 3,620 |   | $ | 2,347 |   |
| Income taxes                                                                      | ** ** | **$**                                     | **6,629**   |   | $ | 2,336 |   | $ | 2,966 |   |
| Non-cash investing activities:                                                    |       |                                      |        |   |   |   |   |
| Change in revenue equipment not yet paid for                                      | ** ** | **$**                                     | **(10,233** | **)** | $ | 7,976 |   | $ | — |   |

 

Theaccompanying notes are an integral part of these consolidated financial statements.

 

37

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** **

**MARTEN TRANSPORT, LTD.**

** **

**Notesto Consolidated Financial Statements**

 

**1.  Summary of Significant Accounting Policies**

 

**Nature of business:**  Marten Transport, Ltd. is a long-haultruckload carrier providing protective service transportation and distributionof time- and temperature-sensitive materials and general commodities tocustomers in the United States and Canada.

 

**Principles of consolidation: **The accompanying consolidated financialstatements include the accounts of Marten Transport, Ltd. and its 45% ownedaffiliate, MW Logistics, LLC (“MWL”). MWL is a third-party provider of logistics services to thetransportation industry.  We have appliedthe provisions of FASB Interpretation No. 46, “Consolidation of VariableInterest Entities,” as revised, to our investment in MWL.  All material intercompany accounts andtransactions have been eliminated in consolidation.

 

**Marketable securities:**  We invest available funds in short-termmarketable securities.  This investmentis in a mutual fund investing primarily in repurchase agreements and other U.S.government-backed securities having original maturities of three months orless, and is stated at market value, which approximates cost.

 

**Trade accounts receivable:**  Trade accounts receivable are recorded at theinvoiced amounts, net of an allowance for doubtful accounts.  A considerable amount of judgment is requiredin assessing the realization of these receivables including the currentcreditworthiness of each customer and related aging of the past-due balances, includingany billing disputes.  In order to assessthe collectibility of these receivables, we perform ongoing credit evaluationsof our customers’ financial condition. Through these evaluations, we may become aware of a situation where acustomer may not be able to meet its financial obligations due to deteriorationof its financial viability, credit ratings or bankruptcy.  The allowance for doubtful accounts is basedon the best information available to us and is reevaluated and adjusted asadditional information is received.  Weevaluate the allowance based on historical write-off experience, the size ofthe individual customer balances, past-due amounts and the overall nationaleconomy.  We review the adequacy of ourallowance for doubtful accounts monthly. Invoice balances over 30 days after the contractual due date areconsidered past due per our policy and are reviewed individually forcollectibility.  Initial payments by newcustomers are monitored for compliance with contractual terms.  Account balances are charged off against theallowance after all means of collection have been exhausted and the potentialrecovery is considered remote.

 

**Property and equipment:**  Additions and improvements to property andequipment are capitalized at cost. Maintenance and repair expenditures are charged to operations.  Gains and losses on disposals of revenueequipment are included in operations as they are a normal, recurring componentof our operations.

 

Depreciation is computed based on the cost of theasset, reduced by its estimated salvage value, using the straight-line methodfor financial reporting purposes.  Webegin depreciating assets in the month that each asset is placed in serviceand, therefore, is ready for its intended use. Accelerated methods are used for income tax reporting purposes.  Following is a summary of estimated usefullives for financial reporting purposes:

 
| ** **                  | ** ** | **Years** | ** ** |
|-----------------------------|------------|-----------|------------|
| Revenue  equipment:         |       |      |       |
| Tractors                    |       | 5         |       |
| Trailers                    |       | 7         |       |
| Satellite tracking          |       | 7         |       |
| Auxiliary power units       |       | 5         |       |
| Buildings                   |       | 20        |       |
| Office  equipment and other |       | 3-15      |       |

 

In 2007, we replaced most of our company-ownedtractors within approximately 3.5 years and our trailers within approximatelyseven years after purchase.  Our usefullives for depreciating tractors is five years

 

38

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**MARTEN TRANSPORT, LTD.**

** **

**Notesto Consolidated Financial Statements (Continued)**

 

andfor trailers is seven years, with a 25% salvage value for tractors and a 35%salvage value for trailers.  Thesesalvage values are based upon the expected market values of the equipment afterfive years for tractors and seven years for trailers.  Depreciation expense calculated in thismanner approximates the continuing declining value of the revenue equipment,and, for tractors, continues at a consistent straight-line rate for units heldbeyond the normal replacement cycle.

 

Long-lived assets are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable.  Recoverability of assets to be held and usedis measured by a comparison of the carrying amount of an asset to future netundiscounted cash flows expected to be generated by the asset.  If such assets are considered to be impaired,the impairment to be recognized is measured by the amount by which the carryingamount of the assets exceed the fair value of the assets.  Assets to be disposed of are reported at thelower of the carrying amount or fair value less the costs to sell.

 

**Net investment in direct financing leases:  **We have direct financing tractor leasereceivables from independent contractors, which expire over the next fouryears.

 

**Tires in service:**  The cost of original equipment and replacementtires placed in service is capitalized. Amortization is calculated based oncost, less estimated salvage value, using the straight-line method over 24months. The current portion of capitalized tires in service is included inprepaid expenses and other in the accompanying consolidated balance sheets. Thelong-term portion of capitalized tires in service and the estimated salvagevalue are included in revenue equipment in the accompanying consolidatedbalance sheets. The cost of recapping tires is charged to operations.

 

**Income taxes: **Deferred tax assets and liabilities are recognizedfor the future tax consequences attributable to differences between thefinancial statement carrying amounts of existing assets and liabilities andtheir respective tax basis.  Deferred taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date.  We havereflected the necessary deferred tax assets and liabilities in the accompanyingconsolidated balance sheets.  We believethe future tax deductions will be realized principally through future reversalsof existing taxable temporary differences and future taxable income.

 

We adopted the provisions of Financial AccountingStandards Board, or FASB, Interpretation No. 48, “Accounting forUncertainty in Income Taxes — an Interpretation of FASB Statement No. 109”(FIN 48), on January 1, 2007.  Theimplementation of FIN 48 did not have a significant impact on our results ofoperations or financial position.  SeeNote 5 for additional discussion.

 

In the ordinary course of business there is inherentuncertainty in quantifying our income tax positions.  We assess our income tax positions and recordtax benefits for all years subject to examination based upon management’sevaluation of the facts, circumstances, and information available at thereporting dates.  For those tax positionswhere it is more-likely-than-not that a tax benefit will be sustained, we haverecorded the largest amount of tax benefit with a greater than 50% likelihoodof being realized upon ultimate settlement with a taxing authority that hasfull knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not thata tax benefit will be sustained, no tax benefit has been recognized in thefinancial statements.  Potential accruedinterest and penalties related to unrecognized tax benefits are recognized as acomponent of income tax expense.

 

**Insurance and claims:**  We self-insure, in part, for losses relatingto workers’ compensation, auto liability, general liability, cargo and propertydamage claims, along with employees’ health insurance with varying riskretention levels.  We maintain insurancecoverage for per-incident and total losses in excess of these risk retentionlevels in amounts we consider adequate based upon historical experience and ourongoing review.  We reserve currently forthe estimated cost of the uninsured portion of pending claims. These reserves

 

39

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**MARTEN TRANSPORT, LTD.**

** **

**Notesto Consolidated Financial Statements (Continued)**

 

areperiodically evaluated and adjusted based on our evaluation of the nature andseverity of outstanding individual claims and an estimate of future claimsdevelopment based on historical claims development factors.  Under agreements with our insurance carriersand regulatory authorities, we have $5.2 million in standby letters of creditto guarantee settlement of claims.

 

**Revenue recognition: **We record revenue and related expenses onthe date shipment of freight is completed. We earned 18% of our revenue in 2007 from a single customer whose tradereceivables represented 12% of our trade receivables as of December 31,2007.  We earned 17% of our revenue in2006 from a single customer whose trade receivables represented 11% of ourtrade receivables as of December 31, 2006. We earned 15% of our revenue in 2005 from a single customer.

 

**Share-based paymentarrangement compensation:**  Under our stock incentive plans, all of ouremployees and any subsidiary employees, as well as all of our non-employeedirectors, consultants, advisors and independent contractors, may be grantedstock-based awards, including incentive and non-statutory stock options andrestricted stock awards.  Effective January 1,2006, we began recording compensation expense associated with share-based paymentarrangements in accordance with Statement of Financial Accounting Standards No. 123R,“Share-Based Payment” (“SFAS 123R”) as interpreted by SEC Staff AccountingBulletin No. 107.  SFAS 123Rrequires all share-based payments to employees and non-employee directors,including grants of employee stock options, to be recognized in the incomestatement based on their fair values at the date of grant.  Historically, we accounted for share-basedcompensation under the recognition and measurement principles of AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees”and related interpretations.  See Note 9for additional discussion.

 

**Earnings per common share:**  Basic earnings per common share is computedby dividing net income by the weighted average number of common sharesoutstanding during the year.  Dilutedearnings per common share is computed by dividing net income by the sum of theweighted average number of common shares outstanding plus all additional commonshares that would have been outstanding if potentially dilutive common sharesrelated to stock options and other dilutive securities had been issued usingthe treasury stock method.

 

**Segment reporting: **We have adopted the provisions ofStatement of Financial Accounting Standards No. 131, “Disclosures aboutSegments of an Enterprise and Related Information.”  Statement No. 131 establishes accountingstandards for segment reporting. Beginning with fiscal 2007, we have two reportable segments — Truckloadand Logistics.  See Note 12 for moreinformation.

 

**Use of estimates:**  We must make estimates and assumptions toprepare the consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America.  These estimates and assumptions affect thereported amounts of assets and liabilities and the disclosure of contingentassets and liabilities in the consolidated financial statements.  These estimates are primarily related toinsurance and claims accruals and depreciation. Ultimate results could differ from these estimates.

 

40

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**MARTEN TRANSPORT, LTD.**

** **

**Notesto Consolidated Financial Statements (Continued)**

 

**2.  Details ofConsolidated Balance Sheet Accounts**

 

**Prepaid expenses and other:**  As of December 31, prepaid expenses andother consisted of the following:

 
| **(In thousands)**         | ** ** | **2007**  | ** ** | **2006** | ** ** |
|----------------------------|------------|-----------|------------|----------|------------|
| License  fees              | ** ** | **$**     | **4,416**  |     | $          | 4,530 |   |
| Tires in  service          | ** ** | **3,606** |       | 4,545    |       |
| Parts and  tires inventory | ** ** | **2,189** |       | 2,113    |       |
| Insurance  premiums        | ** ** | **1,349** |       | 1,037    |       |
| Other                      | ** ** | **2,263** |       | 2,002    |       |
|                       | ** ** | **$**     | **13,823** |     | $          | 14,227 |   |

 

**Net investment in direct financingleases:**  As of December 31, the components of thenet investment in direct financing lease receivables from independentcontractors consisted of the following:

 
| **(In thousands)**                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Total  minimum lease payments to be received | ** ** | **$**    | **3,567**  |     | $          | 7,649 |   |
| Less:  unearned income                       | ** ** | **(562** | **)**      | (1,511   | )          |
| Net  investment in direct financing leases   | ** ** | **$**    | **3,005**  |     | $          | 6,138 |   |

 

Thecurrent portion of our net investment in direct financing leases is included inother receivables in the accompanying consolidated balance sheets.  The long-term portion of our net investmentin direct financing leases is included in other assets in the accompanyingconsolidated balance sheets.  Theinterest method is used to amortize unearned income, which amortizes unearnedincome to income over the lease term so as to produce a constant periodic rateof return on the net investment in each lease. The amortization of unearned income is included in interest income andother in the accompanying consolidated statements of operations.

 

As of December 31, 2007, minimum lease paymentsto be received for each of the four succeeding fiscal years are as follows:$1,773,000 in 2008, $1,245,000 in 2009, $522,000 in 2010 and $27,000 in 2011.

 

**Accrued liabilities:**** **As of December 31,accrued liabilities consisted of the following:

 
| **(In thousands)**    | ** ** | **2007**  | ** ** | **2006** | ** ** |
|-----------------------|------------|-----------|------------|----------|------------|
| Accrued  payables     | ** ** | **$**     | **9,152**  |     | $          | 17,323 |   |
| Vacation              | ** ** | **3,456** |       | 3,548    |       |
| Current  income taxes | ** ** | **2,921** |       | 861      |       |
| Salaries  and wages   | ** ** | **1,529** |       | 2,016    |       |
| Other                 | ** ** | **673**   |       | 1,107    |       |
|                  | ** ** | **$**     | **17,731** |     | $          | 24,855 |   |

 

41

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**MARTEN TRANSPORT, LTD.**

** **

**Notesto Consolidated Financial Statements (Continued)**

 

**3.  Long-Term Debt**

 

As of December 31,long-term debt consisted of the following:

 
| **(In thousands)**                                                                                                                                                                                                                                                                                                                                                  | ** ** | **2007**   | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Unsecured committed credit facility in the amount of  $75 million with banks maturing in September 2011 and bearing variable  interest based upon either the London Interbank Offered Rate or the agent  bank’s Prime Rate, in each case plus/minus applicable margins (5.82% weighted  average interest rate for the facility at December 31, 2007) | ** ** | **$**      | **36,786** |     | $          | 45,802 |   |
| Series B Senior Unsecured Notes maturing in  April 2010 with annual principal payments of $1.43 million bearing  interest at 8.57%                                                                                                                                                                                                                        | ** ** | **4,286**  |       | 5,714    |       |
| Series A Senior Unsecured Notes maturing in  October 2008 with annual principal payments of $3.57 million bearing  interest at 6.78%                                                                                                                                                                                                                      | ** ** | **3,571**  |       | 7,143    |       |
| Total long-term debt                                                                                                                                                                                                                                                                                                                                                | ** ** | **44,643** |       | 58,659   |       |
| Less current maturities of long-term debt                                                                                                                                                                                                                                                                                                                           | ** ** | **5,000**  |       | 5,000    |       |
| Long-term debt, less current maturities                                                                                                                                                                                                                                                                                                                             | ** ** | **$**      | **39,643** |     | $          | 53,659 |   |

 

We maintain a credit agreement that provides for afive-year unsecured committed credit facility (“credit facility”) maturing in September 2011in an aggregate principal amount of up to $75 million.  The aggregate principal amount of the creditfacility may be increased at our option up to a maximum aggregate principalamount of $100 million.  At December 31,2007, the credit facility had an outstanding principal balance of $36.8 million,outstanding standby letters of credit of $5.2 million, and remaining borrowingavailability of $33.0 million.

 

Our credit facility prohibits us from paying, in anyfiscal year, dividends in excess of 25% of our net income from the prior fiscalyear.  The debt agreements also containrestrictive covenants which, among other matters, require us to maintaincertain financial ratios, including debt-to-equity, cash flow leverage,interest coverage and fixed charge coverage. We were in compliance with all of these covenants at December 31,2007.

 

Maturities of long-term debt at December 31, 2007, are as follows:

 
| **(In thousands)** | ** ** | **Amount** | ** ** |
|--------------------|------------|------------|------------|
| 2008               |       | $          | 5,000      |   |
| 2009               |       | 1,429      |       |
| 2010               |       | 1,428      |       |
| 2011               |       | 36,786     |       |
|               |       | $          | 44,643     |   |

 

42

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**MARTEN TRANSPORT, LTD.**

** **

**Notesto Consolidated Financial Statements (Continued)**

 

**4.  Related Party Transactions**

 

The following related party transactions occurred during the threeyears ended December 31, 2007:

 

(a) We purchase fuel and obtain tires and related services from acompany in which one of our directors is the president and a principalstockholder.  We paid that company $1.1million in 2007, $1.3 million in 2006 and $1.2 million in 2005 for fuel andtire services.  In addition, we paid $2.4million in 2007, $2.4 million in 2006 and $2.0 million in 2005 to tiremanufacturers for tires that we purchased from the tire manufacturers but wereprovided by the same company.  The samecompany received commissions from the tire manufacturers related to thesepurchases.  We had accounts payable tothat company of $25,000 as of December 31, 2007 and $78,000 as of December 31,2006.

 

(b) We paid $547,000 in 2007 and $142,000 in 2005for various construction projects to a company in which one of our directors isthe president and owner.  We had noaccounts payable to that company as of December 31, 2007 and 2006.

 

**5.  Income Taxes**

 

The components of the provision for income taxesconsisted of the following:

 
| **(In thousands)** | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------|------------|------------|------------|----------|------------|----------|------------|
| Current:           |       |       |       |     |       |     |       |
| Federal            | ** ** | **$**      | **8,922**  |     | $          | 4,159    |       | $ | 4,254 |   |
| State              | ** ** | **1,216**  |       | 400      |       | 401      |       |
|               | ** ** | **10,138** |       | 4,559    |       | 4,655    |       |
| Deferred:          |       |       |       |     |       |     |       |
| Federal            | ** ** | **(944**   | **)**      | 9,088    |       | 9,413    |       |
| State              | ** ** | **(293**   | **)**      | (222     | )          | 2,358    |       |
| ** **         | ** ** | **(1,237** | **)**      | 8,866    |       | 11,771   |       |
| Total provision    | ** ** | **$**      | **8,901**  |     | $          | 13,425   |       | $ | 16,426 |   |

 

The statutory federal income tax rate isreconciled to the effective income tax rate as follows:

 
| ** **                                                                            | ** **     | **2007**       | ** **     | **2006**       | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------|----------------|----------------|----------------|----------------|------------|----------|------------|
| Statutory federal income tax rate                                                     | ** **     | **35**         | **%**          | 35             | %          | 35       | %          |
| Increase in taxes arising from state income taxes,  net of federal income tax benefit | ** **     | **2**          | **** **** | ****—**** |       | 4        |       |
| Other, net                                                                            | **** **** | ****—**** | **** **** | ****—**** |       | 1        |       |
| Effective tax rate                                                                    | ** **     | **37**         | **%**          | 35             | %          | 40       | %          |

 

Our effective income tax rate decreased to 35.4% in2006, primarily because we decreased our deferred income tax liability by $1.3million, or 3.3% of income before income taxes. Our effective income tax rate in 2006 included a revision to ourpreviously recorded deferred income tax liability of 2.8% of income beforeincome taxes, primarily due to a change in income apportionment for severalstates, which produced a lower effective state income tax rate, net of federalimpact.

 

43

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** **

**MARTEN TRANSPORT, LTD.**

** **

**Notesto Consolidated Financial Statements (Continued)**

 

As of December 31, the net deferred tax liabilityconsisted of the following:

 
| **(In thousands)**               | ** ** | **2007**       | ** ** | **2006** | ** ** |
|----------------------------------|------------|----------------|------------|----------|------------|
| Deferred  tax assets:            |       |           |       |     |       |
| Reserves and accrued liabilities | ** ** | **$**          | **7,131**  |     | $          | 7,025 |   |
| Other                            | ** ** | **679**        |       | 451      |       |
|                             | ** ** | **7****,810**  |       | 7,476    |       |
| Deferred  tax liabilities:       |       |           |       |     |       |
| Depreciation                     | ** ** | **75,408**     |       | 76,302   |       |
| Prepaid expenses                 | ** ** | **2,468**      |       | 2,477    |       |
|                             | ** ** | **77****,876** |       | 78,779   |       |
| Net deferred tax liability       | ** ** | **$**          | **70,066** |     | $          | 71,303 |   |

 

We have notprovided a valuation allowance against deferred tax assets at December 31,2007 or 2006.  We believe the deferredtax assets will be realized principally through future reversals of existingtaxable temporary differences (deferred tax liabilities) and future taxableincome.

 

As disclosedin Note 1, we adopted the provisions of FIN 48 as of January 1, 2007.  Our reserves for unrecognized tax benefitswere $69,000 as of December 31, 2007 and $54,000 as of December 31,2006.  The amount reserved as of December 31,2006 was settled and paid in 2007.  Theamount reserved as of December 31, 2007 was added in 2007 for taxpositions related to 2007.  Ifrecognized, $45,000 of the unrecognized tax benefits as of December 31,2007 would impact our effective tax rate. No potential interest or penalties related to unrecognized tax benefitswere recognized in our financial statements as of December 31, 2007.  We do not expect the reserves forunrecognized tax benefits to change significantly within the next twelvemonths.

 

The federalstatute of limitations remains open for 2004 and forward.  We file tax returns in numerous statejurisdictions with varying statutes of limitations.

 

**6.  Earnings Per Common Share**

 

Basic and diluted earnings per common share werecomputed as follows:

 
| **(In thousands, except per share amounts)**                                         | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Numerator:                                                                           |       |       |       |     |       |     |       |
| Net income                                                                           | ** ** | **$**      | **14,968** |     | $          | 24,518   |       | $ | 25,061 |   |
| Denominator:                                                                         |       |       |       |     |       |     |       |
| Basic earnings per common share - weighted-average  shares                           | ** ** | **21,795** |       | 21,735   |       | 21,518   |       |
| Effect of dilutive stock options                                                     | ** ** | **166**    |       | 220      |       | 444      |       |
| Diluted earnings per common share - weighted-average  shares and assumed conversions | ** ** | **21,961** |       | 21,955   |       | 21,962   |       |
| Basic earnings per common share                                                      | ** ** | **$**      | **0.69**   |     | $          | 1.13     |       | $ | 1.16 |   |
| Diluted earnings per common share                                                    | ** ** | **$**      | **0.68**   |     | $          | 1.12     |       | $ | 1.14 |   |

 

Optionstotaling 280,000 and 226,000 shares were outstanding but were not included inthe calculation of diluted earnings per share for 2007 and 2006, respectively,because their exercise prices were greater than the average market price of thecommon shares and, therefore, including the options in the denominator would beantidilutive, or decrease the number of weighted-average shares.  All outstanding options were included in thecalculation of diluted earnings per share for 2005.  The 280,000 and 226,000 shares above include90,000 and 78,000 shares, respectively, of performance-based option awards forwhich the performance condition was not considered probable of achievement.

 

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**MARTEN TRANSPORT, LTD.**

** **

**Notesto Consolidated Financial Statements (Continued)**

 

**7.  Share Repurchase Program**

 

In December 2007, our Board of Directors approved a share repurchaseprogram to repurchase up to one million shares of our common stock.  This program is intended to be implementedthrough purchases made in either the open market or through privatetransactions.  The timing and extent towhich we will repurchase shares depends on market conditions and othercorporate considerations.  We made nopurchases in 2007.  Through March 14,2008, we repurchased 67,500 shares of our common stock for $810,000.  The repurchase program does not have anexpiration date.

 

**8.  Amended and Restated Certificate ofIncorporation**

 

In May 2005, ourstockholders approved an amendment to our Amended and Restated Certificate ofIncorporation increasing the authorized number of shares of common stock, $.01par value, from 23 million shares to 48 million shares.

 

**9. Employee Benefits**

 

***Stock Incentive Plans -***Underour 2005 Stock Incentive Plan (the “2005 Plan”), all of our employees and anysubsidiary employees, as well as all of our non-employee directors,consultants, advisors and independent contractors, may be granted stock-basedawards, including incentive and non-statutory stock options and restrictedstock awards.  Stock options expirewithin 10 years after the date of grant and the exercise price must be at leastthe fair market value of our common stock on the date of grant.  Stock options issued to non-employeedirectors upon their annual re-election to our Board of Directors are generallyexercisable at the date of grant. Service-based options issued to employees are generally exercisablebeginning one year from the date of grant in cumulative amounts of 20% peryear.  Performance-based options becomeexercisable upon achievement of certain performance criteria established by theCompensation Committee of our Board of Directors.  Options exercised represent newly issuedshares.  The maximum number of shares ofcommon stock available for issuance under the 2005 Plan is 2.85 millionshares.  As of December 31, 2007,there were 258,400 shares reserved for issuance under options outstanding underthe 2005 Plan.  The 2005 Plan replacesour 1995 Stock Incentive Plan (the “1995 Plan”), which expired by its terms in March 2005.

 

Under our 1995 Plan, officers, directors andemployees were granted incentive and non-statutory stock options.  Incentive stock option exercise prices wererequired to be at least the fair market value of our common stock on the dateof grant.  Non-statutory stock optionexercise prices were required to be at least 85% of the fair market value ofour common stock on the date of grant. Stock options expire within 10 years after the date of grant.  Stock options issued to non-employeedirectors upon their annual re-election to our Board of Directors are generallyexercisable at the date of grant.  Service-basedoptions issued to employees are generally exercisable beginning one year fromthe date of grant in cumulative amounts of 20% per year.  Options exercised represent newly issuedshares.  As of December 31, 2007,there were 358,497 shares reserved for issuance under options outstanding underthe 1995 Plan.  No additional optionswill be granted under the 1995 Plan.

 

Effective January 1, 2006, we began recordingcompensation expense associated with share-based payment arrangements inaccordance with Statement of Financial Accounting Standards No. 123R, “Share-BasedPayment” (“SFAS 123R”) as interpreted by SEC Staff Accounting Bulletin No. 107.  SFAS 123R supersedes Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”),and amends Statement of Financial Accounting Standards No. 95, “Statementof Cash Flows.”  Generally, the approachin SFAS 123R is similar to the approach described in Statement of FinancialAccounting Standards No. 123, “Accounting For Stock-Based Compensation” (“SFAS123”).  However, SFAS 123R requires allshare-based payments to employees and non-employee directors, including grantsof employee stock options, to be recognized in the income statement based ontheir fair values at the date of grant.

 

45

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**MARTEN TRANSPORT, LTD.**

 

**Notes to Consolidated Financial Statements(Continued)**

 

Historically, we accountedfor share-based compensation under the recognition and measurement principlesof APB 25 and related interpretations. No compensation expense related to stock option plans was reflected inour net income as all options had an exercise price equal to the market valueof the underlying common stock on the date of grant.  SFAS 123 established accounting and disclosurerequirements using a fair-value-based method of accounting for share-basedemployee compensation plans.  Aspermitted by SFAS 123, we elected to continue to apply theintrinsic-value-based method of APB 25, described above, and adopted only thedisclosure requirements of SFAS 123, as amended by Statement of FinancialAccounting Standards No. 148, “Accounting For Stock-Based Compensation —Transition and Disclosure.”

 

We adopted the modifiedprospective transition method provided for under SFAS 123R, and consequentlyhave not retroactively adjusted results from prior periods.  Under this transition method, compensationcost associated with share-based awards recognized in 2007 and 2006includes:  (a) compensation cost forall share-based payments granted prior to, but not yet vested as of December 31,2005, based on the grant-date fair value estimated in accordance with theprovisions of SFAS 123, and (b) compensation cost for all share-basedpayments granted subsequent to December 31, 2005, based on the grant-datefair value estimated in accordance with the provisions of SFAS 123R.

 

We use the Black-Scholes option pricingmodel to calculate the grant-date fair value of option awards.  The fair value of option awards granted wasestimated as of the date of grant using the following weighted averageassumptions:

 

| ** **                                      | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|
| Service-based options:                          |       |       |       |       |       |
| Expected option life in  years (1)              | ** ** | **7**      |       | 7          |       |
| Expected stock price  volatility percentage (2) | ** ** | **36**     | **%**      | 29         | %          |
| Risk-free interest rate  percentage (3)         | ** ** | **4.6**    | **%**      | 4.6        | %          |
| Expected dividend yield (4)                     | ** ** | **—** | ** ** | **—** | ** ** |
| Fair value as of the  date of grant             | ** ** | **$**      | **8.05**   |       | $          | 9.55 |   |
|                                            |       |       |       |       |       |
| Performance-based options:                      |       |       |       |       |       |
| Expected option life in  years (1)              | ** ** | **7**      |       | 7          |       |
| Expected stock price  volatility percentage (2) | ** ** | **36**     | **%**      | 29         | %          |
| Risk-free interest rate  percentage (3)         | ** ** | **4.6**    | **%**      | 4.6        | %          |
| Expected dividend yield (4)                     | ** ** | **—** | ** ** | **—** | ** ** |
| Fair value as of the  date of grant             | ** ** | **$**      | **7.72**   |       | $          | 9.83 |   |

----

 

There were no options granted in 2005.

 

(1)Expectedoption life — We use historical employee exercise and option expiration data toestimate the expected life assumption for the Black-Scholes grant-datevaluation.  We believe that thishistorical data is currently the best estimate of the expected term of a newoption.  We use a weighted-averageexpected life for all awards.

 

 

46

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**MARTEN TRANSPORT, LTD.**

 

**Notes to Consolidated Financial Statements(Continued)**

 

(2)Expectedstock price volatility — We use our stock’s historical volatility for the sameperiod of time as the expected life.  Wehave no reason to believe that its future volatility will differ from the past.

 

(3)Risk-freeinterest rate — The rate is based on the U.S. Treasury yield curve in effect atthe time of the grant for the same period of time as the expected life.

 

(4)Expecteddividend yield — We have not historically paid cash dividends on our commonstock, and we do not expect to declare any cash dividends in the foreseeablefuture.

 

We use the straight-line attribution method torecognize expense for all service-based option awards with graded vesting.  Compensation expense will be recorded forperformance-based option awards in the periods in which the performancecondition is probable of achievement.

 

Service-based option awards become immediatelyexercisable in full in the event of retirement, death or disability and upon achange in control with respect to all options that have been outstanding for atleast six months.  To be eligible forretirement, an employee must reach age 65. Performance-based option awards will remain exercisable to the extentpreviously exercisable for a period of one year after the employee’s employmentis terminated due to retirement, death or disability.  Performance-based option awards becomeimmediately exercisable in full in the event of a change in control withrespect to all options that have been outstanding for at least six months.

 

SFAS 123R requires compensation costs associatedwith service-based option awards to be recognized over the requisite serviceperiod, which is the period between the grant date and the earlier of the award’sstated vesting term or the date the employee is eligible for retirement.  We immediately recognize the entire amount ofshare-based compensation cost for employees that are eligible for retirement atthe date of grant.  For awards granted toemployees approaching retirement eligibility, we recognize compensation cost ona straight-line basis over the period from the grant date through theretirement eligibility date.  Share-basedcompensation expense for employees who are not retirement eligible is recognizedon a straight-line basis over the stated vesting period of the award.

 

The amount of share-based compensation recognizedduring a period is based on the value of the portion of the awards that areultimately expected to vest.  SFAS 123Rrequires forfeitures to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from thoseestimates.  The term “forfeitures” isdistinct from “cancellations” or “expirations” and represents only the unvestedportion of the surrendered award.  Wecurrently expect, based on an analysis of our historical forfeitures and knownforfeitures on existing awards, that approximately 1.25% of unvestedoutstanding options will be forfeited each year.  This analysis will be re-evaluated quarterlyand the forfeiture rate will be adjusted as necessary.  Ultimately, the actual expense recognizedover the vesting period will only be for those shares that vest.

 

Total share-based compensation expense recorded in2007 was $460,000 ($321,000 net of income tax benefit, $0.015 of earnings perbasic and diluted share) and in 2006 was $447,000 ($318,000 net of income taxbenefit, $0.015 of earnings per basic share and $0.014 of earnings per dilutedshare), respectively.  All share-basedcompensation expense was recorded in salaries, wages and benefits expense.

 

Prior to the adoption of SFAS 123R, benefits oftax deductions in excess of recognized compensation costs (excess tax benefits)were reported as operating cash flows. SFAS 123R requires that they be recorded as

 

47

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**MARTEN TRANSPORT, LTD.**

 

**Notes to Consolidated Financial Statements(Continued)**

 

a financing cash inflow rather than a deduction oftaxes paid in operating cash flows.  In2007 and 2006, there was $166,000 and $1.2 million, respectively, of excess taxbenefits recognized resulting from exercises of options granted prior to December 31,2005.

 

The following table details the effect on netincome and earnings per share had share-based compensation expense beenrecorded in 2005 based on the fair-value method under SFAS 123.  The reported and pro forma net income andearnings per share in 2007 and 2006 are the same since share-based compensationexpense was calculated under the provisions of SFAS 123R.

 
| ** **                                                                                                                           | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Net income as reported                                                                                                               |       | $        | 25,061     |   |
| Deduct: Total  share-based compensation expense determined under fair value based method for  all awards, net of related tax effects |       | (108     | )          |
| Pro forma net income                                                                                                                 |       | $        | 24,953     |   |
| Basic income per share:                                                                                                              |       |     |       |
| As reported                                                                                                                          |       | $        | 1.16       |   |
| Pro forma                                                                                                                            |       | $        | 1.16       |   |
| Diluted income per share:                                                                                                            |       |     |       |
| As reported                                                                                                                          |       | $        | 1.14       |   |
| Pro forma                                                                                                                            |       | $        | 1.14       |   |

 

As of December 31, 2007, there was a total of$1.0 million of unrecognized compensation expense related to unvested service-basedoption awards, which is expected to be recognized over a weighted-averageperiod of 3.0 years, and $741,000 of unrecognized compensation expense relatedto unvested performance-based option awards, which will be recorded in theperiods in which our achievement of certain operating ratios is probablethrough 2010.  As of December 31,2007, the performance condition was not considered probable of achievement.

 

Option activity in 2007 was as follows:

 
| ** **                            | ** ** | ** ** | ** ** | **Weighted**       | ** ** |
|---------------------------------------|------------|------------|------------|--------------------|------------|
| ** **                            | ** ** | ** ** | ** ** | **Average**        | ** ** |
| ** **                            | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** |
| Outstanding at December 31, 2006 |       | 641,686    |       | $                  | 11.98      |   |
| Granted                               |       | 54,000     |       | 17.15              |       |
| Exercised                             |       | (47,064    | )          | 6.44               |       |
| Forfeited                             |       | (31,725    | )          | 19.50              |       |
| Outstanding at December 31, 2007 |       | 616,897    |       | $                  | 12.46      |   |
| Exercisable at December 31, 2007 |       | 390,911    |       | $                  | 7.46       |   |

 

The fair value of options granted in 2007 was$338,000 for service-based options and $93,000 for performance-basedoptions.  The fair value of optionsgranted in 2006 was $1.4 million for service-based options and $767,000 for performance-basedoptions.  There were no options grantedin 2005.  The total intrinsic value ofoptions exercised in 2007, 2006 and 2005 was $564,000, $3.4 million and $1.0million, respectively.  Intrinsic valueis the difference between the fair value of the acquired shares at the date ofexercise and the exercise price, multiplied by the number of optionsexercised.  Proceeds received from optionexercises in 2007, 2006 and 2005 were $303,000, $813,000 and $525,000,respectively.

 

48

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**MARTEN TRANSPORT, LTD.**

 

**Notes to Consolidated Financial Statements(Continued)**

 

The following table summarizes informationconcerning outstanding and exercisable option awards as of December 31,2007:

 
| ** **                   | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **Range of Exercise Prices** | ** ** | **Shares**              | ** ** | **Life(****1)**         | ** ** | **Price(****2)** | ** ** | **Value(****3)** | ** ** | **Shares** | ** ** | **Life(****1)** | ** ** | **Price(****2)** | ** ** | **Value(****3)** | ** ** |
| Service-based options:       |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| $3.84 - $5.78                |       | 291,058                 |       | 2.8                     |       | $ | 4.49 |   | $ | 2,753 |   | 291,058 |   | 2.8 |   | $ | 4.49 |   | $ | 2,753 |   |
| $10.76                       |       | 67,439                  |       | 5.8                     |       | 10.76 |   | 215 |   | 52,253 |   | 5.8 |   | 10.76 |   | 167 |   |
| $16.56 - $23.59              |       | 180,400                 |       | 8.5                     |       | 21.62 |   | — |   | 47,600 |   | 8.5 |   | 22.01 |   | — |   |
|                         |       | 538,897                 |       | 5.1                     |       | $ | 11.00 |   | $ | 2,968 |   | 390,911 |   | 3.9 |   | $ | 7.46 |   | $ | 2,920 |   |
| Performance-based options:   |       |                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| $16.56 - $23.59              |       | 78,000                  |       | 8.4                     |       | $ | 22.51 |   | $ | — |   | — |   | — |   | $ | — |   | $ | — |   |

 

----

(1)          Represents theweighted-average remaining contractual life in years.

(2)          Represents theweighted-average exercise price.

(3)          Represents theaggregate intrinsic value based on our closing stock price on December 31,2007 for in-the-money options (in thousands).

 

Nonvested option awards as of December 31,2007 and changes during 2007 were as follows:

 
| ** **                           | ** ** | ** ** | ** ** | ** **     | ** ** | **Weighted**    | ** ** |
|--------------------------------------|------------|------------|------------|----------------|------------|-----------------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** **     | ** ** | **Average**     | ** ** |
| ** **                           | ** ** | ** ** | ** ** | **Weighted**   | ** ** | **Remaining**   | ** ** |
| ** **                           | ** ** | ** ** | ** ** | **Average**    | ** ** | **Contractual** | ** ** |
| ** **                           | ** ** | ** ** | ** ** | **Grant Date** | ** ** | **Life**        | ** ** |
| ** **                           | ** ** | **Shares** | ** ** | **Fair Value** | ** ** | **(in Years)**  | ** ** |
| Service-based options:               |       |       |       |           |       |            |       |
| Nonvested at  December 31, 2006 |       | 183,563    |       | $              | 8.12       |            | 8.5        |   |
| Granted                              |       | 42,000     |       | 8.05           |       | 9.5             |       |
| Vested                               |       | (57,852    | )          | 7.24           |       | 7.8             |       |
| Forfeited                            |       | (19,725    | )          | 6.92           |       | 7.0             |       |
| Nonvested at  December 31, 2007 |       | 147,986    |       | $              | 8.61       |            | 8.2        |   |
|                                 |       |       |       |           |       |            |       |
| Performance-based options:           |       |       |       |           |       |            |       |
| Nonvested at  December 31, 2006 |       | 78,000     |       | $              | 9.83       |            | 9.2        |   |
| Granted                              |       | 12,000     |       | 7.72           |       | 9.7             |       |
| Vested                               |       | —     |       | —         |       | —          |       |
| Forfeited                            |       | (12,000    | )          | 9.83           |       | 8.2             |       |
| Nonvested at  December 31, 2007 |       | 78,000     |       | $              | 9.51       |            | 8.4        |   |

 

The total fair value of options which vestedduring 2007, 2006 and 2005 was $419,000, $227,000 and $254,000, respectively.

 

***Retirement Savings Plan****-*We sponsor a definedcontribution retirement savings plan under Section 401(k) of theInternal Revenue Code.  Employees areeligible for the plan after one year of service. Participants are able tocontribute up to the limit set by law, which in 2007 was $15,500 forparticipants less than age 50 and $20,500 for participants age 50 andabove.  We contribute 35% of eachparticipant’s contribution, up to a total of 6% contributed.  Our contribution vests at the rate of 20% peryear for the second through sixth years of service.  In addition, we may make electivecontributions as determined by the board of directors.  Elective

 

49

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**MARTEN TRANSPORT, LTD.**

 

**Notes to Consolidated Financial Statements(Continued)**

 

contributionswere not made in 2007, 2006 or 2005. Total expense recorded for the plan was $1.3 million in 2007, $1.1million in 2006 and $702,000 in 2005.

 

***Stock Purchase Plans****-*An Employee Stock PurchasePlan and an Independent Contractor Stock Purchase Plan are sponsored toencourage employee and independent contractor ownership of our common stock.Eligible participants specify the amount of regular payroll or contract paymentdeductions and voluntary cash contributions that are used to purchase shares ofour common stock.  The purchases are madeat the market price on the open market. We pay the broker’s commissions and administrative charges for purchasesof common stock under the plans.

 

**10. Fair Value of Financial Instruments**

 

The carrying amounts of marketable securities,accounts receivable, direct financing leases receivable and accounts payableapproximate fair value because of the short maturity of these instruments.  The fair value of our total long-term debt isestimated to be $45.0 million at December 31, 2007, and $59.0 million at December 31,2006.  The fair value was estimated usingdiscounted cash flow analysis.  Currentborrowing rates for similar long-term debt were used in this analysis.

 

**11.  Commitments and Contingencies**

 

We are committed to: (a) purchase $1.9 million ofnew revenue equipment in 2008; and (b) operating lease obligationstotaling $587,000 through 2011.

 

We are involved in legal actions that arise in theordinary course of business.  Althoughthe outcomes of any such legal actions cannot be predicted, in the opinion ofmanagement, the resolution of any currently pending or threatened actions willnot have a material adverse effect upon our financial position or results ofoperations.

 

**12.  Business Segments**

 

Beginning with fiscal 2007, our presentation includes two reportablesegments — Truckload and Logistics. Information for prior periods has been shown in the same two segmentsfor comparison purposes.  The primarysource of our operating revenue is truckload revenue, which we generate bytransporting freight for our customers and report within our Truckloadsegment.  Generally, we are paid by themile for our services.  We also derivetruckload revenue from fuel surcharges, loading and unloading activities,equipment detention and other ancillary services.

 

Our operating revenue also includes revenue reported within ourLogistics segment, which consists of revenue from our internal brokerage andintermodal operations, both launched in 2005, and through our 45% interest inMWL, a third-party provider of logistics services to the transportationindustry.  Brokerage services involvearranging for another company to transport freight for our customers while weretain the billing, collection and customer management responsibilities.  Intermodal services involve the transport ofour trailers on railroad flatcars for a portion of a trip, with the balance ofthe trip using our tractors or, to a lesser extent, contracted carriers.

 

50

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**MARTEN TRANSPORT, LTD.**

 

**Notes to Consolidated Financial Statements(Continued)**

 

The following table sets forth the years indicated our operatingrevenue, operating income and operating ratio by segment.  The table below presents truckload andlogistics revenue, net of fuel surcharges. We provide this additional disclosure because management believes removingfuel surcharge revenue provides a more consistent basis for comparing resultsof operations from period to period. This financial measure in the table below has not been determined inaccordance with U.S. generally accepted accounting principles (GAAP).  Pursuant to Item 10(e) of RegulationS-K, we have included a reconciliation of this non-GAAP financial measure tothe most directly comparable GAAP financial measure, operating revenue.  We evaluate the performance of our businesssegments based on operating income and operating ratio.  We do not prepare separate balance sheets bysegment and, as a result, assets are not separately identifiable by segment.

 
| **(Dollars in thousands)**                                      | ** ** | **2007**    | ** **  | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|
| Operating  revenue:                                             |       |        |        |     |       |     |       |
| Truckload revenue, net of fuel surcharge revenue                | ** ** | **$**       | **406,754** |     | $          | 402,327  |       | $ | 386,131 |   |
| Truckload fuel surcharge revenue                                | ** ** | **83,786**  |        | 75,323   |       | 57,127   |       |
| Total Truckload revenue                                         | ** ** | **490,540** |        | 477,650  |       | 443,258  |       |
|                                                            |       |        |        |     |       |     |       |
| Logistics revenue, net of intermodal fuel surcharge  revenue(1) |       | **66,163**  |        | 39,298   |       | 16,873   |       |
| Intermodal fuel surcharge revenue                               | ** ** | **3,314**   |        | 1,942    |       | 71       |       |
| Total Logistics revenue                                         | ** ** | **69,477**  |        | 41,240   |       | 16,944   |       |
|                                                            |       |        |        |     |       |     |       |
| Total operating revenue                                         | ** ** | **$**       | **560,017** |     | $          | 518,890  |       | $ | 460,202 |   |
|                                                            |       |        |        |     |       |     |       |
| Operating  income:                                              |       |        |        |     |       |     |       |
| Truckload                                                       | ** ** | **$**       | **22,689**  |     | $          | 37,500   |       | $ | 41,277 |   |
| Logistics                                                       | ** ** | **5,112**   |        | 3,669    |       | 1,590    |       |
| Total operating income                                          | ** ** | **$**       | **27,801**  |     | $          | 41,169   |       | $ | 42,867 |   |
|                                                            |       |        |        |     |       |     |       |
| Operating  ratio(2)                                             |       |        |        |     |       |     |       |
| Truckload                                                       | ** ** | **95.4**    | **%**       | 92.1     | %          | 90.7     | %          |
| Logistics                                                       | ** ** | **92.6**    | **%**       | 91.1     | %          | 90.6     | %          |
| Consolidated operating ratio                                    | ** ** | **95.0**    | **%**       | 92.1     | %          | 90.7     | %          |

 

----

(1)        Logistics revenue is net of$17.1 million, $16.5 million and $21.3 million of inter-segment revenue in2007, 2006 and 2005, respectively, for loads transported by our tractors andarranged by MWL that have been eliminated in consolidation.

 

(2)        Operating expenses as apercentage of operating revenue.

 

Substantially all of our revenue is generated within the UnitedStates.  We earned 18% of our revenue in2007 from a single customer whose trade receivables represented 12% of ourtrade receivables as of December 31, 2007. We earned 17% of our revenue in 2006 from a single customer whose tradereceivables represented 11% of our trade receivables as of December 31,2006.  We earned 15% of our revenue in2005 from a single customer.

 

51

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**MARTEN TRANSPORT, LTD.**

 

**Notes to Consolidated Financial Statements(Continued)**

 

**13.  Quarterly Financial Data (Unaudited)**

 

The following is a summary of the quarterly results of operations for2007 and 2006:

 
| **2007 Quarters (In thousands, except per share amounts)**  | ** ** | **First** | ** **  | **Second** | ** ** | **Third**   | ** ** | **Fourth** | ** **  |
|-------------------------------------------------------------|------------|-----------|-------------|------------|------------|-------------|------------|------------|-------------|
| Operating  revenue                                          | ** ** | **$**     | **131,416** | ** ** | **$**      | **138,821** | ** ** | **$**      | **144,969** | ** ** | **$** | **144,811** | ** ** |
| Operating  income                                           | ** ** | **8,390** | ** **  | **8,041**  | ** ** | **5,696**   | ** ** | **5,674**  | ** **  |
| Net income                                                  | ** ** | **4,594** | ** **  | **4,344**  | ** ** | **3,065**   | ** ** | **2,965**  | ** **  |
| Basic  earnings per common share                            | ** ** | **0.21**  | ** **  | **0.20**   | ** ** | **0.14**    | ** ** | **0.14**   | ** **  |
| Diluted  earnings per common share                          | ** ** | **0.21**  | ** **  | **0.20**   | ** ** | **0.14**    | ** ** | **0.14**   | ** **  |
|                                                        |       |      |        |       |       |        |       |       |        |
| **2006  Quarters (In thousands, except per share amounts)** | ** ** | **First** | ** **  | **Second** | ** ** | **Third**   | ** ** | **Fourth** | ** **  |
| Operating  revenue                                          |       | $         | 119,555     |       | $          | 131,862     |       | $          | 135,812     |   | $ | 131,661 |   |
| Operating  income                                           |       | 8,989     |        | 11,812     |       | 11,713      |       | 8,655      |        |
| Net income                                                  |       | 5,053     |        | 7,540      |       | 6,736       |       | 5,189      |        |
| Basic  earnings per common share                            |       | 0.23      |        | 0.35       |       | 0.31        |       | 0.24       |        |
| Diluted  earnings per common share                          |       | 0.23      |        | 0.34       |       | 0.31        |       | 0.24       |        |

 

Thediluted earnings per common share for the 2007 quarters exceeds the dilutedearnings per common share for the year due to differences in rounding.

 

52

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**ITEM 9.****                            *****CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE***

# *** ***

No reports on Form 8-K have been required to befiled within the twenty-four months prior to December 31, 2007, involvinga change of accountants or disagreements on accounting and financialdisclosure.

 

**ITEM 9A.****                   *****CONTROLS AND PROCEDURES***

 

As required by Rule 13a-15 under the SecuritiesExchange Act of 1934 (“Exchange Act”), we have carried out an evaluation of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Exchange Act Rule 13a-15(e)) as of the end ofthe period covered by this report.  Thisevaluation was carried out under the supervision and with the participation ofour management, including our President and Chief Executive Officer and ourChief Financial Officer.  Based upon thatevaluation, our President and Chief Executive Officer and our Chief FinancialOfficer concluded that our disclosure controls and procedures were effective asof December 31, 2007.  There were nochanges in our internal control over financial reporting that occurred duringthe period covered by this report that have materially affected, or that arereasonably likely to materially affect, our internal control over financialreporting.  We intend to periodicallyevaluate our disclosure controls and procedures as required by the Exchange ActRules.

 

We have included Management’s Annual Report onInternal Control Over Financial Reporting in Item 8 above.

 

**ITEM 9B.****                   *****OTHER INFORMATION***

 

None.

 

53

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** **

**PART III**

** **

# ***ITEM 10.***                      DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

# *** ***

A.    Directorsof the Registrant.

 

Theinformation in the “Election of Directors—Information About Nominees” and “Electionof Directors—Other Information About Nominees” sections of our 2008 ProxyStatement is incorporated in this Report by reference.

 

B.    ExecutiveOfficers of the Registrant.

 

Informationabout our executive officers is included in this Report under Item 4A, “ExecutiveOfficers of the Registrant.”

 

C.    Compliancewith Section 16(a) of the Exchange Act.

 

Theinformation in the “Section 16(a) Beneficial Ownership ReportingCompliance” section of our 2008 Proxy Statement is incorporated in this Reportby reference.

 

D.    Procedurefor Director Nominations by Security Holders.

 

        Therehave been no material changes to the procedures by which security holders mayrecommend nominees to our board of directors.

 

E.     AuditCommittee Financial Expert.

 

Theinformation in the “Election of Directors—Board and Board Committees” section ofour 2008 Proxy Statement is incorporated in this Report by reference.

 

F.     Identification of the Audit Committee.

 

Theinformation in the “Election of Directors—Board and Board Committees” sectionof our 2008 Proxy Statement is incorporated in this Report by reference.

 

G.    Code of Ethics for Senior FinancialManagement.

 

Our Code of Ethics for Senior Financial Management applies to all of ourexecutive officers, including our principal executive officer, principalfinancial officer and controller, and meets the requirements of the Securitiesand Exchange Commission.  We have posted our Code ofEthics for Senior Financial Management on our website at *www.marten.com*.  We intend to disclose any amendmentsto and any waivers from a provision of our Code of Ethics for Senior FinancialManagement on our website within five business days following such amendment orwaiver.

 

54

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# ***ITEM 11.***                      EXECUTIVECOMPENSATION

# *** ***

Theinformation in the “Election of Directors—Director Compensation” and “Compensationand Other Benefits” sections of our 2008 Proxy Statement is incorporated inthis Report by reference.

 

# ***ITEM 12.***                      SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS

# *** ***

Theinformation in the “Security Ownership of Certain Beneficial Owners andManagement” and “Compensation and Other Benefits—Equity Compensation PlanInformation” sections of our 2008 Proxy Statement is incorporated in thisReport by reference.

 

# ***ITEM 13.***                      CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

# *** ***

The information in the “Related Party Transactions”and “Election of Directors—Board and Board Committees” sections of our 2008Proxy Statement is incorporated in this Report by reference.

 

# ***ITEM 14.      ***PRINCIPALACCOUNTANT FEES AND SERVICES

# *** ***

Theinformation in the “Fees of Independent Auditors” section of our 2008 ProxyStatement is incorporated in this Report by reference.

** **

**PART IV**

** **

# ***ITEM 15.***                      EXHIBITSAND FINANCIAL STATEMENT SCHEDULES

 
| **(a)**    | **1.**     | ** ** | **Financial Statements****(See  Part II, Item 8 of this Report):**                                                                                                               | Page   |   |
|------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| ** ** | ** ** | ** ** |                                                                                                                                                                                  |   |   |
| ** ** | ** ** | ** ** | Management’s Annual Report on Internal Control Over  Financial Reporting                                                                                                         | 31     |   |
|       |       |       |                                                                                                                                                                                  |   |   |
|       |       |       | Report of Independent Registered Public Accounting  Firm                                                                                                                              | 32     |   |
|       |       |       |                                                                                                                                                                                  |   |   |
|       |       |       | Report of Independent Registered Public Accounting  Firm                                                                                                                              | 33     |   |
|       |       |       |                                                                                                                                                                                  |   |   |
|       |       |       | Consolidated Balance Sheets as of December 31,  2007 and 2006                                                                                                                    | 34     |   |
|       |       |       |                                                                                                                                                                                  |   |   |
|       |       |       | Consolidated Statements of Operations for the years  ended December 31, 2007, 2006 and 2005                                                                                      | 35     |   |
|       |       |       |                                                                                                                                                                                  |   |   |
|       |       |       | Consolidated Statements of Stockholders’ Equity for  the years ended December 31, 2007, 2006 and 2005                                                                       | 36     |   |
|       |       |       |                                                                                                                                                                                  |   |   |
|       |       |       | Consolidated Statements of Cash Flows for the years  ended December 31, 2007, 2006 and 2005                                                                                      | 37     |   |
|       |       |       |                                                                                                                                                                                  |   |   |
|       |       |       | Notes to Consolidated Financial Statements                                                                                                                                            | 38     |   |
|       |       |       |                                                                                                                                                                                  |   |   |
| ** ** | **2.**     | ** ** | **Financial Statement Schedules****(Consolidated Financial Statement Schedule Included in Part IV of this  Report):**                                                            |
|       |       |       |                                                                                                                                                                                  |   |   |
|       |       |       | Schedule II — Valuation and Qualifying Accounts and  Reserves                                                                                                                    | 58     |   |
|       |       |       |                                                                                                                                                                                  |   |   |
|       |       |       | Schedules not listed above have been omitted as the  required information is inapplicable or the information is presented in the  consolidated financial statements or related notes. |

 

55

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| ** ** | **3.**   | ** ** | **Exhibits:**                                                                                                                                                                                                                                                                                                                  |   |   |
|------------|----------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|       |     |       |                                                                                                                                                                                                                                                                                                                           |   |   |
| * *   | * * | * *   | The  exhibits to this Report are listed in the Exhibit Index on pages 59  through 61. A copy of any of the exhibits listed will be sent at a reasonable  cost to any shareholder as of March 11, 2008. Requests should be sent to  James J. Hinnendael, Chief Financial Officer, at our corporate headquarters. |
|       |     |       |                                                                                                                                                                                                                                                                                                                           |
| * *   | * * | * *   | The following  is a list of each management contract or compensatory plan or arrangement  required to be filed as an exhibit to this Report under Item15(a)(3):                                                                                                                                                                |
| * *   | * * | * *   |                                                                                                                                                                                                                                                                                                                           |
| * *   | * * | * *   | (1)          Marten  Transport, Ltd. 1995 Stock Incentive Plan.                                                                                                                                                                                                              |
| * *   | * * | * *   |                                                                                                                                                                                                                                                                                                                           |
| * *   | * * | * *   | (2)          Marten  Transport, Ltd. 2005 Stock Incentive Plan.                                                                                                                                                                                                              |
| * *   | * * | * *   |                                                                                                                                                                                                                                                                                                                           |
| * *   | * * | * *   | (3)          Form of  Non-Statutory Stock Option Agreement for the 2005 Stock Incentive Plan.                                                                                                                                                                           |
| * *   | * * | * *   |                                                                                                                                                                                                                                                                                                                           |
| * *   | * * | * *   | (4)          Named  Executive Officers’ Compensation Summary.                                                                                                                                                                                                           |
| * *   | * * | * *   |                                                                                                                                                                                                                                                                                                                           |
| * *   | * * | * *   | (5)          2008  Non-employee Director Compensation Summary.                                                                                                                                                                                                               |
| * *   | * * | * *   |                                                                                                                                                                                                                                                                                                                           |
| * *   | * * | * *   | (6)          Non-Driver  Employee Performance Incentive Bonus Plan.                                                                                                                                                                                                          |
| * *   | * * | * *   |                                                                                                                                                                                                                                                                                                                           |
| * *   | * * | * *   | (7)          Form of  Non-employee Director Non-statutory Stock Option Agreement.                                                                                                                                                                                       |
| * *   | * * | * *   |                                                                                                                                                                                                                                                                                                                           |
| * *   | * * | * *   | (8)          Form of  Performance Based Non-Statutory Stock Option Agreement for 2005 Stock  Incentive Plan.                                                                                                                                                            |
| * *   | * * | * *   |                                                                                                                                                                                                                                                                                                                           |
| * *   | * * | * *   | (9)          Amended  and Restated 2006 Executive Officer Incentive Bonus Plan.                                                                                                                                                                                              |
| * *   | * * | * *   |                                                                                                                                                                                                                                                                                                                           |
| * *   | * * | * *   | (10)        Form of  Amended and Restated Change in Control Severance Agreement.                                                                                                                                                                                                  |

 

56

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**SIGNATURES**

** **

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, Marten Transport, Ltd.,the Registrant, has duly caused this Report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| Dated:  March 14, 2008 | MARTEN  TRANSPORT, LTD. |
|-----------------------------|-------------------------|
|                        |                    |

 
|   | By     | /s/  Randolph L. Marten                     |
|--------|--------|---------------------------------------------|
|   |   | Randolph  L. Marten                         |
|   |   | Chairman  of the Board, President and Chief |
|   |   | Executive  Officer                          |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this Report has been signed below on March 14,2008, by the following persons on behalf of the Registrant and in thecapacities indicated.

 
| **Signature**            | ** ** | **Title**                                                     |
|--------------------------|------------|---------------------------------------------------------------|
|                     |       |                                                          |
| /s/ Randolph L. Marten   |       | Chairman of the Board, President, Chief                       |
| Randolph L. Marten       |       | Executive Officer and Director (Principal Executive  Officer) |
|                     |       |                                                          |
| /s/  James J. Hinnendael |       | Chief  Financial Officer                                      |
| James  J. Hinnendael     |       | (Principal  Financial and Accounting Officer)                 |
|                     |       |                                                          |
|                     |       |                                                          |
| /s/  Larry B. Hagness    |       | Director                                                      |
| Larry  B. Hagness        |       |                                                          |
|                     |       |                                                          |
| /s/  Thomas J. Winkel    |       | Director                                                      |
| Thomas  J. Winkel        |       |                                                          |
|                     |       |                                                          |
| /s/  Jerry M. Bauer      |       | Director                                                      |
| Jerry M. Bauer           |       |                                                          |
|                     |       |                                                          |
| /s/  Christine K. Marten |       | Director                                                      |
| Christine  K. Marten     |       |                                                          |
|                     |       |                                                          |
| /s/  Robert L. Demorest  |       | Director                                                      |
| Robert  L. Demorest      |       |                                                          |
|                     |       |                                                          |
| /s/  G. Larry Owens      |       | Director                                                      |
| G.  Larry Owens          |       |                                                          |

 

57

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**SCHEDULE II**

 

**MARTENTRANSPORT, LTD.**

** **

**Valuation and Qualifying Accounts and Reserves**

**(In thousands)**
| **Description**                   | ** ** | **Balance at   Beginning of Year** | ** ** | **Charged to Costs   and Expenses** | ** ** | **Deductions** | ** ** | **Balance at   End of Year** | ** ** |
|-----------------------------------|------------|------------------------------------|------------|-------------------------------------|------------|----------------|------------|------------------------------|------------|
|                              |       |                               |       |                                |       |           |       |                         |       |
| Insurance and claims accruals:    |       |                               |       |                                |       |           |       |                         |       |
| Year ended December 31, 2007 |       | $                                  | 16,073     |                                | $          | 30,865         |       | $                            | (29,507    | )(1) | $ | 17,431 |   |
| Year ended December 31, 2006 |       | 13,126                             |       | 28,338                              |       | (25,391        | )(1)       | 16,073                       |       |
| Year ended December 31, 2005 |       | 13,654                             |       | 23,221                              |       | (23,749        | )(1)       | 13,126                       |       |
|                              |       |                               |       |                                |       |           |       |                         |       |
| Allowance for doubtful accounts:  |       |                               |       |                                |       |           |       |                         |       |
| Year ended December 31, 2007 |       | 861                                |       | (534                                | )(2)       | (12            | )(3)       | 315                          |       |
| Year ended December 31, 2006 |       | 928                                |       | —                              |       | (67            | )(3)       | 861                          |       |
| Year ended December 31, 2005 |       | 909                                |       | 90                                  |       | (71            | )(3)       | 928                          |       |
|                                   |            |                                    |            |                                     |            |                |            |                              |            |  |  |  |  |

----

(1) Claims payments

(2) Revision of estimate

(3) Write-off of bad debts, net of recoveries

 

Seereport of independent registered public accounting firm.

 

58

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**MARTEN TRANSPORT, LTD.**

**EXHIBIT INDEX TO ANNUAL REPORT**

**ON FORM 10-K**

**Forthe Year Ended December 31, 2007**

** **
| **Item No.** | ** ** | **Item**                                                                                                                                     | ** ** | **Filing Method**                                                                                                                                                                 |   |
|--------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 3.1          |       | Amended  and Restated Certificate of Incorporation effective August 11, 2003                                                            |       | Incorporated  by reference to Exhibit 4.1 of the Company’s Amendment No. 2 to  Registration Statement on Form S-2 (File No. 33-107367).                  |   |
|         |       |                                                                                                                                         |       |                                                                                                                                                                              |   |
| 3.2          |       | Amendment  to Amended and Restated Certificate of Incorporation effective May 25,  2005                                                 |       | Incorporated  by reference to Exhibit 3.3 of the Company’s Quarterly Report on  Form 10-Q for the quarter ended June 30, 2005 (File  No. 0-15010).       |   |
|         |       |                                                                                                                                         |       |                                                                                                                                                                              |   |
| 3.3          |       | Bylaws  of the Company, as amended                                                                                                           |       | Filed  with this Report.                                                                                                                                                          |   |
|         |       |                                                                                                                                         |       |                                                                                                                                                                              |   |
| 4.1          |       | Specimen  form of the Company’s Common Stock Certificate                                                                                |       | Incorporated  by reference to Exhibit 4.1 of the Company’s Registration Statement on  Form S-1 (File No. 33-8108).                                            |   |
|         |       |                                                                                                                                         |       |                                                                                                                                                                              |   |
| 4.2          |       | Amended  and Restated Certificate of Incorporation effective August 11, 2003                                                            |       | See  Exhibit 3.1 above.                                                                                                                                                      |   |
|         |       |                                                                                                                                         |       |                                                                                                                                                                              |   |
| 4.3          |       | Amendment  to Amended and Restated Certificate of Incorporation effective May 25,  2005                                                 |       | See  Exhibit 3.2 above.                                                                                                                                                      |   |
|         |       |                                                                                                                                         |       |                                                                                                                                                                              |   |
| 4.4          |       | Bylaws  of the Company                                                                                                                       |       | See  Exhibit 3.3 above.                                                                                                                                                      |   |
|         |       |                                                                                                                                         |       |                                                                                                                                                                              |   |
| 10.1         |       | Marten  Transport, Ltd. 1995 Stock Incentive Plan                                                                                            |       | Incorporated  by reference to Exhibit 10.18 of the Company’s Annual Report on  Form 10-K for the year ended December 31, 1994 (File  No. 0-15010).       |   |
|         |       |                                                                                                                                         |       |                                                                                                                                                                              |   |
| 10.2         |       | Note  Purchase and Private Shelf Agreement dated October 30, 1998, between the  Company and The Prudential Insurance Company of America |       | Incorporated  by reference to Exhibit 10.12 of the Company’s Quarterly Report on Form 10-Q  for the quarter ended September 30, 1998 (File No. 0-15010). |   |
|         |       |                                                                                                                                         |       |                                                                                                                                                                              |   |
| 10.3         |       | Note  Purchase Agreement, dated April 6, 2000, between the Company and The  Prudential Insurance Company of America                     |       | Incorporated  by reference to Exhibit 10.19 of the Company’s Quarterly Report on  Form 10-Q for the quarter ended March 31, 2000 (File  No. 0-15010).    |   |
|         |       |                                                                                                                                         |       |                                                                                                                                                                              |   |
| 10.4         |       | Marten  Transport, Ltd. 2005 Stock Incentive Plan                                                                                            |       | Incorporated  by reference to Exhibit 10.18 of the Company’s Quarterly Report on  Form 10-Q for the quarter ended June 30, 2005 (File  No. 0-15010).     |   |
|         |       |                                                                                                                                         |       |                                                                                                                                                                              |   |
| 10.5         |       | Form of  Non-Statutory Stock Option Agreement for the 2005 Stock Incentive Plan                                                         |       | Incorporated  by reference to Exhibit 10.1 of the Company’s Current Report on  Form 8-K filed January 31, 2006.                                               |   |

 

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| 10.6   |   | Non-Driver  Employee Performance Incentive Bonus Plan                                                                                                                                                                               |   | Incorporated  by reference to Exhibit 10.3 of the Company’s Current Report on  Form 8-K filed April 4, 2006.                                              |   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                                                                                                |   |                                                                                                                                                                          |   |
| 10.7   |   | Form of  Non-employee Director Non-statutory Stock Option Agreement                                                                                                                                                            |   | Incorporated  by reference to Exhibit 10.26 of the Company’s Quarterly Report on  Form 10-Q for the quarter ended June 30, 2006 (File  No. 0-15010). |   |
|   |   |                                                                                                                                                                                                                                |   |                                                                                                                                                                          |   |
| 10.8   |   | Credit  Agreement, dated as of August 31, 2006, by and among Marten Transport,  Ltd., as borrower, the banks party thereto as lenders, and U.S. Bank National  Association, as agent for the lenders                           |   | Incorporated  by reference to Exhibit 10.1 of the Company’s Current Report on  Form 8-K filed September 6, 2006.                                          |   |
|   |   |                                                                                                                                                                                                                                |   |                                                                                                                                                                          |   |
| 10.9   |   | First  Amendment to Credit Agreement, effective as of January 1, 2007, by and  among Marten Transport, Ltd., as borrower, the banks party thereto as  lenders, and U.S. Bank National Association, as agent for the lenders    |   | Incorporated  by reference to Exhibit 10.1 of the Company’s Current Report on  Form 8-K filed January 5, 2007.                                            |   |
|   |   |                                                                                                                                                                                                                                |   |                                                                                                                                                                          |   |
| 10.10  |   | Form of  Performance Based Non-Statutory Stock Option Agreement for 2005 Stock  Incentive Plan                                                                                                                                 |   | Incorporated  by reference to Exhibit 10.2 of the Company’s Current Report on  Form 8-K filed February 16, 2007.                                          |   |
|   |   |                                                                                                                                                                                                                                |   |                                                                                                                                                                          |   |
| 10.11  |   | Amended  and Restated 2006 Executive Officer Incentive Bonus Plan                                                                                                                                                                   |   | Incorporated  by reference to Exhibit 10.3 of the Company’s Current Report on  Form 8-K filed February 16, 2007.                                          |   |
|   |   |                                                                                                                                                                                                                                |   |                                                                                                                                                                          |   |
| 10.12  |   | Named  Executive Officers’ Compensation Summary                                                                                                                                                                                |   | Incorporated  by reference to Exhibit 10.1 of the Company’s Current Report on  Form 8-K filed May 7, 2007.                                                |   |
|   |   |                                                                                                                                                                                                                                |   |                                                                                                                                                                          |   |
| 10.13  |   | Form of  Amended and Restated Change in Control Severance Agreement                                                                                                                                                            |   | Incorporated  by reference to Exhibit 10.1 of the Company’s Current Report on  Form 8-K filed August 15, 2007.                                            |   |
|   |   |                                                                                                                                                                                                                                |   |                                                                                                                                                                          |   |
| 10.14  |   | Second  Amendment to Credit Agreement, effective as of November 30, 2007, by and  among Marten Transport, Ltd., as borrower, the banks party thereto as  lenders, and U.S. Bank National Association, as agent for the lenders |   | Filed  with this Report.                                                                                                                                                      |   |
|   |   |                                                                                                                                                                                                                                |   |                                                                                                                                                                          |   |
| 10.15  |   | Separation  Agreement and Release, dated December 28, 2007 between the Company and  Donald J. Hinson                                                                                                                           |   | Filed  with this Report.                                                                                                                                                      |   |
|   |   |                                                                                                                                                                                                                                |   |                                                                                                                                                                          |   |
| 10.16  |   | 2008  Non-employee Director Compensation Summary                                                                                                                                                                                    |   | Filed  with this Report.                                                                                                                                                      |   |
|   |   |                                                                                                                                                                                                                                |   |                                                                                                                                                                          |   |
| 23.1   |   | Consent  of KPMG LLP                                                                                                                                                                                                                |   | Filed  with this Report.                                                                                                                                                      |   |

 

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| 31.1   |   | Certification pursuant to Item 601(b)(31) of  Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002, by Randolph L. Marten, the Registrant’s President and Chief  Executive Officer (Principal Executive Officer) |   | Filed  with this Report. |   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|
|   |   |                                                                                                                                                                                                                                                        |   |                     |   |
| 31.2   |   | Certification pursuant to Item 601(b)(31) of  Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002, by James J. Hinnendael, the Registrant’s Chief Financial Officer  (Principal Financial Officer)              |   | Filed  with this Report. |   |
|   |   |                                                                                                                                                                                                                                                        |   |                     |   |
| 32.1   |   | Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                          |   | Filed  with this Report. |   |

 

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