**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM 10-K**

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

**OFTHE SECURITIES EXCHANGE ACT OF 1934**

**For thefiscal year ended December 31, 2006**

**Commissionfile number 0-15010**

**MARTEN TRANSPORT, LTD.**

(Exact name of registrant as specified in its charter)

| **DELAWARE**                              |   | ** ** |   | **39-1140809**                        |
|-------------------------------------------|--------|------------|--------|---------------------------------------|
| (State of  incorporation)                 |   |       |   | (I.R.S. employer  identification no.) |
|                                      |   |       |   |                                  |
| **129  MARTEN STREET**                    |   | ** ** |   | ** **                            |
| **MONDOVI,  WISCONSIN**                   |   | **54755**  |   | **(715)  926-4216**                   |
| (Address of  principal executive offices) |   | (Zip code) |   | (Registrant’s  telephone number) |

** **

**Securities registered pursuant to Section 12(b) of the 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)** |

** **

**Securitiesregistered pursuant to Section 12(g) of the Act:**

**NONE**

Indicateby check mark if the Registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act. Yes  o  No  x

Indicateby check mark if the Registrant is not required to file reports pursuant toSection 13 or 15(d) of the Exchange Act. Yes  o  No  x

Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  x  No  o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  Large accelerated filer  o  Accelerated filer  x  Non-accelerated filer  o

Indicate by check markwhether the Registrant is a shell company (as defined in Exchange ActRule 12b-2).  Yes  o  No  x

As of June 30, 2006 (thelast business day of the Registrant’s most recently completed second fiscalquarter), the aggregate market value of the Common Stock of the Registrant(based upon the closing price of the Common Stock at that date as reported bythe NASDAQ Global Select Market), excluding outstanding shares beneficiallyowned by directors and executive officers, was $331,976,000.

As of March 1, 2007,21,764,773 shares of Common Stock of the Registrant were outstanding.

Part III of this Annual Reporton Form 10-K incorporates by reference information (to the extent specificsections are referred to in this Report) from the Registrant’s Proxy Statementfor the annual meeting to be held May 1, 2007, or 2007 Proxy Statement.

 

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**Table of Contents**

 
|            | ** ** | ** **                                                                                                          | ** ** |   | ** ** | ** ** |
|------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|--------|------------|------------|
|            | ** ** | **PART I**                                                                                                          | ** ** |   | ** ** | ** ** |
| ** ** | ** ** | ** **                                                                                                          | ** ** |   | ** ** | ** ** |
| Item  1.   |       | Business                                                                                                            |       |   | 1          | ** ** |
| Item  1A.  |       | Risk  Factors                                                                                                       |       |   | 5          | ** ** |
| Item 1B.   |       | Unresolved Staff  Comments                                                                                          |       |   | 9          | ** ** |
| 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                                                                               |       |   | 11         | ** ** |
|       |       |                                                                                                                |       |   |       | ** ** |
| ** ** | ** ** | **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                                                         |       |   | 28         | ** ** |
| Item 8.    |       | Financial  Statements and Supplementary Data                                                                        |       |   | 29         | ** ** |
| Item 9.    |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                               |       |   | 50         | ** ** |
| Item 9A.   |       | Controls and  Procedures                                                                                            |       |   | 50         | ** ** |
| Item 9B.   |       | Other  Information                                                                                                  |       |   | 50         | ** ** |
|       |       |                                                                                                                |       |   |       | ** ** |
| ** ** | ** ** | **PART III**                                                                                                        | ** ** |   | ** ** | ** ** |
| ** ** | ** ** | ** **                                                                                                          | ** ** |   | ** ** | ** ** |
| Item 10.   |       | Directors,  Executive Officers and Corporate Governance                                                             |       |   | 51         | ** ** |
| Item 11.   |       | Executive  Compensation                                                                                             |       |   | 52         | ** ** |
| Item 12.   |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                     |       |   | 52         | ** ** |
| Item 13.   |       | Certain  Relationships and Related Transactions, and Director Independence                                          |       |   | 52         | ** ** |
| Item 14.   |       | Principal  Accountant Fees and Services                                                                             |       |   | 52         | ** ** |
|       |       |                                                                                                                |       |   |       | ** ** |
| ** ** | ** ** | **PART IV**                                                                                                         | ** ** |   | ** ** | ** ** |
| ** ** | ** ** | ** **                                                                                                          | ** ** |   | ** ** | ** ** |
| Item 15.   |       | Exhibits and  Financial Statement Schedules                                                                         |       |   | 53         | ** ** |
|       |       |                                                                                                                |       |   |       | ** ** |
| ** ** |       | **OTHER**                                                                                                           |       |   |       | ** ** |
| ** ** |       | ** **                                                                                                          |       |   |       | ** ** |
|       |       | Signature  Page                                                                                                     |       |   | 54         | ** ** |
|       |       |                                                                                                                |       |   |       | ** ** |
|       |       | Exhibit Index                                                                                                       |       |   | 56         | ** ** |

 

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**FORWARD-LOOKINGINFORMATION**

*This Annual Report on Form 10-K contains certainforward-looking statements.  Suchstatements are made pursuant to the safe harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. Any statements not of historical fact may be considered forward-lookingstatements.  Written words such as “may,”“expect,” “believe,” “anticipate,” “plan,” “goal,” or “estimate,” or othervariations of these or similar words, identify such statements.  These statements by their nature involvesubstantial risks and uncertainties, and actual results may differ materiallyfrom those expressed in such forward-looking statements.  Important factors known to us that couldcause such material differences are identified in this Annual Report on Form10-K under the heading “Risk Factors” beginning on page 5.** **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.*

*References in this Annual Reportto “we,” “us,” “our,” or the “Company” or similar terms refer to MartenTransport, Ltd. and its consolidated subsidiaries unless the context otherwiserequires.*

**PART I**

# **ITEM 1.  *BUSINESS***

**Overview**

We are one of theleading temperature-sensitive truckload carriers in the United States. Wespecialize in transporting food and other consumer packaged goods that requirea temperature-controlled or insulated environment.  In 2006, we generated $518.9 million inoperating revenue.  The primary source of our operating revenueis freight revenue, which we generate by transporting freight for ourcustomers.  Generally, we are paid by themile for our services.  We also derivefreight revenue from loading and unloading activities, equipment detention andother accessorial services.  Ouroperating revenue also includes revenue from fuel surcharges and non-freightrevenue, primarily logistics services. Approximately 80% of our freight revenue resulted from haulingtemperature-sensitive products and 20% from hauling dry freight. We operatethroughout the United States and in parts of Canada, with substantially all ofour revenue generated from within the United States. Our primary traffic lanesare between the Midwest and the West Coast, Southwest, Southeast, and the EastCoast, as well as from California to the Pacific Northwest. In 2006, ouraverage length of haul was 937 miles.

Our growthstrategy is to expand our business internally by offering shippers a high levelof service and significant freight capacity. We market primarily to largeshippers that offer consistent volumes of freight in the lanes we prefer andare willing to compensate us for a high level of service. With our fleet of2,602 company and independent contractor tractors, we are able to offer servicelevels that include up to 99% on-time performance and delivery within thenarrow time windows often required when shipping perishable commodities.

We currently haveone reportable segment — long-haul truckload carriage providing protectiveservice transportation of time- and temperature-sensitive materials and generalcommodities.  Financial informationregarding this segment can be found in the Notes to Consolidated FinancialStatements under Item 8 of this Form 10-K.

Organized underWisconsin law in 1970, we are a successor to a sole proprietorship Roger R.Marten founded in 1946.  In 1988, wereincorporated under Delaware law.  Ourexecutive offices are located at 129 Marten Street, Mondovi, Wisconsin54755.  Our telephone number is (715)926-4216.

We maintain awebsite 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 post onour 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 

 

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and proxy statements, assoon as reasonably practicable after we electronically file such material with,or furnish such material to, the Securities and Exchange Commission.  We also provide a link on our website toForms 3, 4 and 5 that our officers, directors and 10% stockholders file withthe Securities and Exchange Commission pursuant to Section 16(a) of theSecurities Exchange Act of 1934.

**Marketingand Operations**

We approach ourbusiness as an integrated effort of marketing and operations. Our emphasis inmarketing is directed to the temperature-sensitive truckload market, which isgenerally service-sensitive, as opposed to being solely price competitive. Wetarget large food and consumer packaged goods companies whose products requiretemperature-sensitive services and who ship multiple truckloads per week. Byemphasizing high-quality service, we seek to become a core carrier for ourcustomers. In 2006, our two largest customers were General Mills and Kraft.

Our marketingefforts are conducted by a staff of approximately 95 sales, customerservice and support personnel under the supervision of our senior managementteam. Marketing personnel travel within their regions to solicit new customersand maintain contact with existing customers. Customer service managersregularly contact customers to solicit additional business on a load-by-loadbasis.

Our operations andsales personnel strive to improve our asset productivity by seeking freightthat allows for rapid turnaround times, minimizes non-revenue miles betweenloads, and carries a favorable rate structure. Once we have established acustomer relationship, customer service managers work closely with our fleetmanagers to match customer needs with our capacity and the location of revenueequipment. Fleet managers use our optimization system to assign loads and meetthe routing needs of our drivers while satisfying customer and operationalrequirements. We attempt to route most of our trucks over selected operatinglanes, which we believe assists us in meeting customer requirements, balancingtraffic, reducing non-revenue miles, and improving the reliability of deliveryschedules.

We employtechnology in our operations when we believe that it will allow us to operatemore efficiently and the investment is cost-justified. Examples of thetechnologies we employ include:

·                  Satellite-basedtracking and messaging that allows us to communicate with our drivers, obtainload position updates, provide our customers with freight visibility, anddownload engine operating information such as fuel mileage and idling time.

·                  Freightoptimization software that assists us in selecting loads that match our overallcriteria, including profitability, repositioning, identifying capacity forexpedited loads, driver availability and home time, and other factors.

·                  Electronic datainterchange and internet communication with customers concerning freighttendering, invoices, shipment status, and other information.

·                  Fuel-routingsoftware that optimizes the fuel stops for each trip to take advantage ofvolume discounts available in our fuel network.

We believe thisintegrated approach to our marketing and operations, coupled with our use oftechnology, has allowed us to provide our customers with a high level ofservice and support our revenue growth in an efficient manner. For example, wehad a non-revenue mile percentage of 7.5% during 2006, and a tractor tonon-driver employee ratio of 5.6-to-1 as of December 31, 2006. Both ofthese statistics, which have remained steady over the last several years, pointto the efficiency of our operations and we believe compare favorably to othertemperature-sensitive and dry van trucking companies.

In addition to ourtraditional truckload services, we offer our customers additionaltransportation options through our logistics operations, which include thethird-party brokerage services of MW Logistics, LLC, or MWL, as well as our ownlogistics division with brokerage services we initiated in April 2005 and ourown intermodal services we initiated in October 2005.  Brokerage services involve arranging foranother 

 

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company to transportfreight for our customers while we retain the billing, collection and customermanagement responsibilities.  Intermodalservices involve the movement of our trailers on railroad flatcars for aportion of a trip.

**MajorCustomers**

An important partof our growth strategy is to increase our business with large customers.Accordingly, a significant amount of our business is concentrated with arelatively small number of customers. In 2006, our top 30 customers accountedfor approximately 77% of our revenue, and our top ten customers accounted for52% of our revenue.  Each of our top tencustomers has been a significant customer of ours for over ten years. Webelieve we are the largest or second largest temperature-sensitive carrier forsix of our top ten customers.  GeneralMills accounted for 17% of our revenue in 2006. We believe our relationship with this key customer is sound, but we aredependent upon them and the loss of some or all of their business could have amaterially adverse effect on our results.

**Driversand Other Personnel**

We believe thatmaintaining a safe and productive professional driver group is essential toproviding excellent customer service and achieving profitability. Approximately262 of our drivers as of December 31, 2006 have driven more than one millionmiles for us without a preventable accident. Our turnover for all drivers,including company-employed and independent contractor drivers, was 73% for2006, compared with an industry average that is estimated at approximately 120%by the American Trucking Associations.

We select drivers,including independent contractors, using our specific guidelines for safetyrecords, driving experience, and personal evaluations. We maintain stringentscreening, training, and testing procedures for our drivers to reduce thepotential for accidents and the corresponding costs of insurance and claims. Wetrain new drivers at our Wisconsin, Georgia, Oregon and Indiana terminals inall phases of our policies and operations, as well as in safety techniques andfuel-efficient operation of the equipment. All new drivers also must pass DOTrequired tests prior to assignment to a vehicle.

We primarily paycompany-employed drivers a fixed rate per mile. The rate increases based onlength of service. Drivers also are eligible for bonuses based upon safe,efficient driving. We pay independent contractors on a fixed rate per mile.Independent contractors pay for their own fuel, insurance, maintenance, andrepairs.

Competition in thetrucking industry for qualified drivers is intense. Our operations have beenimpacted, and from time-to-time we have experienced under-utilization andincreased expense, as a result of the shortage of qualified drivers. We place ahigh priority on the recruitment and retention of an adequate supply ofqualified drivers.

As of December 31,2006, we had approximately 2,727 employees. This total consists of approximately2,266 drivers, 162 mechanics and maintenance personnel, and 299 supportpersonnel, which includes management and administration. As of that date, wealso contracted with 365 independent contractors. None of our employees arerepresented by a collective bargaining unit. We consider relations with ouremployees to be good.

**RevenueEquipment**

Our revenueequipment programs are an important part of our overall goal of profitablegrowth. We evaluate our equipment decisions based on factors such as initialcost, useful life, warranty terms, expected maintenance costs, fuel economy,driver comfort, customer needs, manufacturer support, and resale value. Wegenerally operate newer, well-maintained equipment with uniform specificationsto minimize our spare parts inventory, streamline our maintenance program, andsimplify driver training.

As of December 31,2006, we operated a fleet of 2,602 tractors, including 2,237 company-ownedtractors and 365 tractors supplied by independent contractors.  The average age of our company-owned tractor 

 

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fleet at December 31,2006 was approximately 1.5 years. In 2006, we replaced most of our company-owned tractors withinapproximately 3.75 years after purchase. Based on our current operatingperformance, the market for used tractors, our liquidity and our expectationsconcerning tractors manufactured in 2007, we decided to accelerate our tractorfleet replacement during 2005 and 2006 to allow us greater flexibility in ourdecisions to purchase tractors in 2007 now that the current round of dieselemissions reduction directives of the Environmental Protection Agency, or EPA,has gone into effect.  This will allow usthe opportunity to evaluate the new engine technology before adopting it on alarger scale.

Freightliner andPeterbilt manufacture most of our company-owned tractors. Maintaining arelatively new and standardized fleet allows us to operate most miles while thetractors are under warranty to minimize repair and maintenance costs. It alsoenhances our ability to attract drivers, increases fuel economy, and improvescustomer acceptance by minimizing service interruptions caused by breakdowns.We adhere to a comprehensive maintenance program during the life of ourequipment. We perform most routine servicing and repairs at our terminalfacilities to reduce costly on-road repairs and out-of-route trips. We do nothave any agreements with tractor manufacturers pursuant to which they agree torepurchase the tractors or guarantee a residual value, and we therefore couldincur losses upon disposition if resale values of used tractors decline.

We historicallyhave contracted with independent contractors to provide and operate a portionof our tractor fleet. Independent contractors own their own tractors and areresponsible for all associated expenses, including financing costs, fuel,maintenance, insurance, and taxes. We believe that a combined fleet complementsour recruiting efforts and offers greater flexibility in responding tofluctuations in shipper demand. The percentage of our fleet provided byindependent contractors was 14% as of December 31, 2006.

As of December 31,2006, we operated a fleet of 3,774 trailers. Most of our trailers are equippedwith Thermo-King refrigeration units, air ride suspensions, and anti-lock brakes.Most of our single van trailers are refrigerated, 53 feet long, and 102 incheswide. The average age of our trailer fleet at December 31, 2006 wasapproximately 2.2 years. In 2006, we replaced most of our company-ownedtrailers within approximately seven years after purchase.

**Insuranceand Claims**

We self-insure fora portion of our claims exposure resulting from workers’ compensation, autoliability, general liability, cargo and property damage claims, as well asemployees’ health insurance. We are responsible for our proportionate share ofthe legal expenses relating to such claims as well. We reserve currently foranticipated losses and expenses. We periodically evaluate and adjust ourinsurance and claims reserves to reflect our experience.  We are responsible for the first $1.0 millionon each auto liability claim and also are responsible for up to $1.0 million inthe aggregate 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 $4.5 million in standby letters ofcredit to guarantee settlement of claims under agreements with our insurancecarriers and regulatory authorities.  Wemaintain insurance above the amounts for which we self-insure up to specifiedpolicy limits with licensed insurance carriers. Insurance carriers have raisedpremiums for many businesses, including trucking companies. As a result, ourinsurance and claims expense could increase, or we could raise our self-insuredretention when our policies are renewed. We believe that our policy ofself-insuring up to set limits, together with our safety and loss preventionprograms, are effective means of managing insurance costs.

**Fuel**

Our operations areheavily dependent upon the use of diesel fuel. The price and availability ofdiesel fuel can vary and are subject to political, economic, and market factorsthat are beyond our control.  Fuel prices fluctuateddramatically and quickly at various times during the last three years and theyremain high based on historical standards. We actively manage our fuel costs by purchasing fuel in bulk in Mondoviand at our other maintenance facilities throughout the country and have volumepurchasing arrangements with national fuel centers that allow our drivers topurchase fuel at a discount while in transit. During 2006, 98% of our fuel purchases were made at these designatedlocations.

 

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We further manage our exposure to changes in fuel prices through fuelsurcharge programs with our customers and other measures that we haveimplemented.  We have historicallybeen able to pass through most long-term increases in fuel prices and relatedtaxes to customers in the form of fuel surcharges.  These fuel surcharges, which adjust with thecost of fuel, enable us to recover a substantial portion of the higher cost offuel as prices increase, except for non-revenue miles, out-of-route miles orfuel used while the tractor is idling. As of December 31, 2006, we had noderivative financial instruments to reduce our exposure to fuel pricefluctuations.

**Competition**

We operateprimarily in the temperature-sensitive segment of the truckload market.  This market is highly competitive andfragmented. Wecompete with many other truckload carriers that provide temperature-sensitiveservice of varying sizes and, to a lesser extent, with less-than-truckloadcarriers, railroads, and other transportation companies, many of which havemore equipment, a wider range of services, and greater capital resources thanwe do or have other competitive advantages. In particular, several of thelargest truckload 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 motorcarriers for the services of drivers, independent contractors, and managementemployees.  We believe that the principalcompetitive factors in our business are service, freight rates, capacity, andfinancial stability.  As one of thelargest and best-capitalized carriers focused on the temperature-sensitivesegment, we believe we are well positioned to compete in that segment.

**Regulation**

The United StatesDepartment of Transportation, or DOT, and various state and local agenciesexercise broad powers over our business, generally governing such activities asauthorization to engage in motor carrier operations, safety and insurancerequirements.  Our company drivers andindependent contractors also must comply with the safety and fitnessregulations promulgated by the DOT, including those relating to drug andalcohol 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, 2005, did notsubstantially change the existing rules but created a moderate reduction in theamount of time available to drivers in longer lengths of haul, which reducedequipment productivity in those lanes.

We believe that we arewell equipped to minimize the economic impact of the current hours-of-servicerules on our business.  We havenegotiated delay time charges with the majority of our customers.  Prior to the effectiveness of the currentrules, we also initiated discussions with many of our customers regarding stepsthat they can take to assist us in managing our drivers’ non-drivingactivities, such as loading, unloading, or waiting, and we plan to continue toactively communicate with our customers regarding these matters in thefuture.  In situations where shippers areunable or unwilling to take these steps, we assess detention and other chargesto offset losses in productivity resulting from the current hours-of-serviceregulations.  The regulations did nothave a significant impact on our operations or financial results in 2004through 2006.

We are also subject to various environmental laws and regulationsdealing with the handling of hazardous materials, fuel storage tanks, airemissions from our vehicles and facilities, engine idling, and discharge andretention of storm water.  Theseregulations did not have a significant impact on our operations or financialresults in 2004 through 2006.

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

The followingfactors are important and should be considered carefully in connection with anyevaluation of our business, financial condition, results of operations,prospects, or an investment in our common stock.  The risks and uncertainties described beloware those that we currently believe may materially affect our company or ourfinancial results.  Additional risks anduncertainties not presently known to us or that we currently deem immaterialmay also impair our business operations or affect our financial results.

 

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*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 ofactual or 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 compete with many other truckload carriers that providetemperature-sensitive service of varying sizes and, to a lesser extent, withless-than-truckload carriers, railroads and other transportation companies,many of which have more equipment, a wider range of services and greatercapital resources than we do or have other competitive advantages. Inparticular, several of the largest truckload carriers that offer primarilydry-van service also offer temperature-sensitive service, and these carrierscould attempt to increase their business in the temperature-sensitive market.Many of our competitors periodically reduce their freight rates to gain business,especially during times of reduced growth rates in the economy, which may limitour ability to maintain or increase freight rates or maintain significantgrowth in our business. In addition, many customers reduce the number ofcarriers they use by selecting so-called “core carriers” as approved serviceproviders, or conduct bids from multiple carriers for their shipping needs, andin some instances we may not be selected as a core carrier or to provideservice under such bids.

In addition, the trend toward consolidation inthe trucking 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 aggregationproviders may improve such carriers’ ability to compete with us.

*We derive a significantportion of our revenue from our major customers, the loss of one or more ofwhich could have a materially adverse effect on our business.*A significant portion of our revenue isgenerated from our major customers. For 2006, our top 30 customers, based onrevenue, accounted for approximately 77% of our revenue; our top ten customersaccounted for approximately 52% of our revenue; our top five customersaccounted for approximately 40% of our revenue; and our top two customersaccounted for approximately 25% of our revenue. Generally, we enter intoone-year contracts with our major customers, the majority of which do notcontain any firm obligations to ship with us. We cannot assure you that, uponexpiration of existing contracts, these customers will continue to use ourservices 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 maydepress freight 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.

*Increased prices, reducedproductivity, and restricted availability of new revenue equipment could causeour financial condition, results of operations and cash flows to suffer. *We have experienced higher prices for new tractors over the past fewyears, primarily as a result of higher commodity prices, better pricing poweramong equipment manufacturers, and government regulations applicable to newlymanufactured tractors and diesel engines. We expect to continue to pay increased prices for revenue equipment andincur additional expenses and related financing costs for the foreseeablefuture.  Our business could be harmed ifwe are unable to continue to obtain an adequate supply of new tractors andtrailers or if we have to pay increased prices for new revenue equipment.

 

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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 significantongoing capital requirements that could harm our financial condition, resultsof operations and cash flows if we are unable to generate sufficient cash fromour 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 future insurance and claims expense might exceed historical levels,which could reduce our earnings. We self-insure for a portion of our claimsexposure resulting from workers’ compensation, auto liability, generalliability, cargo and property damage claims, as well as employees’ healthinsurance. We also are responsible for our legal expenses relating to suchclaims. We reserve currently for anticipated losses and expenses. Weperiodically evaluate and adjust our claims reserves to reflect our experience.However, ultimate results may differ from our estimates, which could result inlosses over our reserved amounts.

We maintain insurance above the amounts forwhich we self-insure with licensed insurance carriers. Although we believe theaggregate insurance limits should be sufficient to cover reasonably expectedclaims, it is possible that one or more claims could exceed our aggregatecoverage limits. Insurance carriers have raised premiums for many businesses,including trucking companies. As a result, our insurance and claims expensecould increase, or we could raise our self-insured retention when our policiesare renewed. If these expenses increase, or if we experience a claim in excessof our coverage limits, or we experience a claim for which coverage is notprovided, results of our operations and financial condition could be materiallyand adversely affected.

*Increases in compensation ordifficulty in attracting drivers could affect our profitability and ability togrow. *In recent years the transportationindustry has experienced substantial difficulty in attracting and retainingqualified drivers, including independent contractors, with competition fordrivers being increasingly intense.  Withthe increased competition for drivers, we have experienced greater difficultyin attracting sufficient numbers of qualified drivers.  In addition, due in part to current economicconditions, including the cost of fuel and insurance, the available pool ofindependent contractor drivers is smaller than it has been historically.Accordingly, we may face difficulty in attracting and retaining drivers for allof our current tractors and for those we may add.  Additionally, we may face difficulty inincreasing the number of our independent contractor drivers. In addition, ourindustry suffers from high turnover rates of drivers. Our turnover raterequires us to recruit a substantial number of drivers. Moreover, our turnoverrate could increase. If we are unable to continue to attract drivers andcontract 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.

 

7

 

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*Fluctuations in the price oravailability of fuel may increase our cost of operation, which could materiallyand adversely affect our profitability. *We require large amounts of diesel fuelto operate our tractors and to power the temperature-control units on ourtrailers. Fuel is one of our largest operating expenses. Fuel prices tend tofluctuate, and prices and availability of all petroleum products are subject topolitical, economic and market factors that are beyond our control. We dependprimarily on fuel surcharges, volume purchasing arrangements with truck stopchains and bulk purchases of fuel at our terminals to control our fuelexpenses. There can be no assurance that we will be able to collect fuelsurcharges, enter into volume purchase agreements, or execute successful hedgesin the future. The absence of meaningful fuel price protection through thesemeasures, fluctuations in fuel prices, or a shortage of diesel fuel, couldmaterially and adversely affect our results of operations.

*Seasonality and the impact ofweather can affect our profitability. *Our tractor productivity generallydecreases during the winter season because inclement weather impedes operationsand some shippers reduce their shipments. At the same time, operating expensesgenerally increase, with fuel efficiency declining because of engine idling andharsh weather creating higher accident frequency, increased claims and moreequipment repairs. We can also suffer short-term impacts from weather-relatedevents such as hurricanes, blizzards, ice-storms, and floods that could harmour results or make our results more volatile.

*We operate in a highlyregulated industry and increased costs of compliance with, or liability forviolation of, existing or future regulations could have a materially adverseeffect on our business. *The 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 company drivers and independent contractors alsomust comply with the safety and fitness regulations promulgated by the DOT,including those relating to drug and alcohol testing and hours-of-service.   We also may become subject to new or morerestrictive regulations relating to fuel emissions, drivers’ hours-of-service,ergonomics, or other matters affecting safety or operating methods. Otheragencies, such as the EPA and the Department of Homeland Security, or DHS, alsoregulate our equipment, operations, and drivers.  Future laws and regulations may be morestringent and require changes in our operating practices, influence the demandfor transportation services, or require us to incur significant additionalcosts. Higher costs incurred by us or by our suppliers who pass the costs ontous through higher prices could adversely affect our results of operations.

The DOT, through the Federal Motor CarrierSafety Administration, or FMCSA, imposes safety and fitness regulations on usand our drivers.  New rules that limitdriver hours-of-service were adopted effective January 4, 2004, and thenmodified effective October 1, 2005. The rules effective October 1, 2005, didnot substantially change the existing rules but created a moderate reduction inthe amount of time available to drivers in longer lengths of haul, whichreduced equipment productivity in those lanes. The FMCSA is studying rulesrelating to braking distance and on-board data recorders that could result innew rules being proposed. We are unable to predict the effect of any rules thatmight be proposed, but we expect that any such proposed rules would increasecosts in our industry, and the on-board recorders potentially could decreaseproductivity and the number of people interested in being drivers.

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 torestrict the locations and amount of time where diesel-powered tractors, suchas ours, may idle, in order to reduce exhaust emissions.  These restrictions could force us to alterour drivers’ behavior, purchase on-board power units that do not require theengine to idle, or face a decrease in productivity.

From time to time, various federal, state, orlocal taxes are increased, including taxes on fuels.  We cannot predict whether, or in what form,any such increase applicable to us will be enacted, but such an increase couldaversely affect our profitability.

 

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*Serviceinstability in the railroad industry could increase our operating costs andreduce our ability to offer intermodal services, which could adversely affectour revenue, results of operations, and customer relationships. *In the future, our dependence on railroads will increase if we continueto expand our intermodal services. In most markets, rail service is limited toa few railroads or even a single railroad. Any reduction in service by therailroads with which we have, or in the future may have, relationships islikely to increase the cost of the rail-based services we provide and reducethe reliability, timeliness, and overall attractiveness of our rail-basedservices. Furthermore, railroads are relatively free to adjust shipping ratesup or down as market conditions permit. Price increases could result in highercosts to our customers and reduce or eliminate our ability to offer intermodalservices. In addition, we cannot assure you that we will be able to negotiateadditional contracts with railroads to expand our capacity, add additionalroutes, or obtain multiple providers, which could limit our ability to providethis service.

*Our operations are subjectto various environmental laws and regulations, the violation of which couldresult in substantial fines or penalties. *We aresubject to various environmental laws and regulations dealing with the handlingof hazardous materials, fuel storage tanks, air emissions from our vehicles andfacilities, engine idling, and discharge and retention of storm water. Weoperate in industrial areas, where truck terminals and other industrialactivities are located, and where groundwater or other forms of environmentalcontamination have occurred. Our operations involve the risks of fuel spillageor seepage, environmental damage, and hazardous waste disposal, among others.Although we have instituted programs to monitor and control environmental risksand promote compliance with applicable environmental laws and regulations, ifwe are involved in a spill or other accident involving hazardous substances orif we are found to be in violation of applicable laws or regulations, we couldbe subject to liabilities, including substantial fines or penalties or civiland criminal liability, any of which could have a materially adverse effect onour business and operating results.

*Ourmanagement information systems may prove inadequate. *We depend upon our managementinformation systems for many aspects of our business.  Some of our key software has been developedinternally by our programmers or by adapting purchased software to our needsand this software may not be easily modified or integrated with other softwareand systems.  Our business will bematerially and adversely affected if our management information systems aredisrupted or if we are unable to improve, upgrade, integrate or expand oursystems as we continue to execute our growth strategy, including our logisticsand intermodal services.

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

None.

 

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*** ***

**ITEM 2.*****                            ******PROPERTIES***

Our executiveoffices and principal terminal are located on approximately seven acres inMondovi, Wisconsin. This facility consists of 39,000 square feet of officespace and 21,000 square feet of equipment repair and maintenance space. Inaddition to our executive offices and terminal located in Mondovi, Wisconsin,we own and operate facilities in or near the following cities at which weperform the following designated operating activities:
| **Company Locations ** | ** ** | **Fueling and  Maintenance ** | ** ** | **Driver  Recruitment ** | ** ** | **Driver  Training ** | ** ** | **Dispatch ** | ** ** | **Sales ** | ** ** |
|----------------------------------|------------|-----------------------------------------|------------|-------------------------------|------------|----------------------------|------------|--------------------|------------|-----------------|------------|
| Mondovi,  Wisconsin              |       | X                                       |       | X                             |       | X                          |       | X                  |       | X               |       |
| Ontario,  California             |       | X                                       |       |                          |       |                       |       |               |       |            |       |
| Atlanta, Georgia                 |       | X                                       |       | X                             |       | X                          |       | X                  |       |            |       |
| Portland, Oregon                 |       | X                                       |       | X                             |       | X                          |       |               |       |            |       |
| Indianapolis, Indiana            |       | X                                       |       | X                             |       | X                          |       | X                  |       | X               |       |

 

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

We are involved inlitigation incidental to our operations. These lawsuits primarily involveclaims for workers’ compensation, personal injury, or property damage incurredin the transportation of freight.

**ITEM 4.*****                            ******SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS***

No matters were submittedto a vote of security holders during the fourth quarter of the year endedDecember 31, 2006.

 

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

Our executive officers,with their ages and the offices held as of March 1, 2007, are as follows:

| Name                | ** ** | **Age** | ** ** | **Position**                                                            |
|---------------------|------------|---------|------------|-------------------------------------------------------------------------|
| Randolph L. Marten  |       | 54      |       | Chairman of the Board, President,  Chief Executive Officer and Director |
|                |       |    |       |                                                                    |
| Robert G. Smith     |       | 63      |       | Chief Operating Officer                                                 |
|                |       |    |       |                                                                    |
| Timothy P. Nash     |       | 55      |       | Executive Vice President of Sales and Marketing                         |
|                |       |    |       |                                                                    |
| James J. Hinnendael |       | 43      |       | Chief Financial Officer                                                 |
|                |       |    |       |                                                                    |
| Donald J. Hinson    |       | 47      |       | Vice President of Operations                                            |

**RandolphL. Marten** has been a full-time employee of ours since1974.  Mr. Marten has been a Directorsince October 1980, our President since June 1986, our Chairman of the Boardsince August 1993 and our Chief Executive Officer since January 2005.  Mr. Marten also served as our Chief OperatingOfficer from June 1986 until August 1998 and as a Vice President from October1980 to June 1986.

**RobertG. Smith** has been our Chief Operating Officer since August1998.  Mr. Smith also served as our VicePresident of Operations from June 1993 until May 1999 and as our Director ofOperations from September 1989 to June 1993. Mr. Smith served as director of operations for Transport Corporation ofAmerica, an irregular-route truckload carrier, from January 1985 to September1989.

**TimothyP. 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 sales managerfor Overland Express, Inc., a long-haul  truckload carrier, fromAugust 1986 to July 1987.

**James J. Hinnendael**has been our Chief Financial Officer since January 2006 and served as ourController from January 1992 to December 2005. Mr. Hinnendael served in various professional capacities with Ernst& Young LLP, a public accounting firm, from January 1987 toDecember 1991.  Mr. Hinnendaelis a certified public accountant.

**DonaldJ. Hinson** has been our Vice President of Operations sinceJune 1999 and an executive officer since November 2000.  Mr. Hinson also served as our Director ofOperations from November 1996 to May 1999 and in various professionalcapacities in our operations area from April 1988 to November 1996.  Previously, Mr. Hinson served in variousprofessional capacities in the operations area of Burlington Motor Carriers,Inc., a dry-van truckload carrier, from October 1984 to March 1988.

 

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**PART II**

**ITEM 5.****                                *MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ANDISSUER PURCHASES OF EQUITY SECURITIES***

 

Our common stock is listed on the NASDAQ Global SelectMarket under the symbol “MRTN.”  Thetable below shows the range of high and low bid prices for the quartersindicated on the NASDAQ Global Select Market beginning July 1, 2006, and on theNASDAQ National Market prior to such date. Such quotations reflect inter-dealer prices, without retail markups,markdowns or commissions and, therefore, may not necessarily represent actualtransactions.

|                                  | ** ** | **Common Stock Price** | ** ** |
|----------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **High**                         | ** ** | **Low** | ** ** |
| **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** |   |
| **Year ended December 31, 2005** | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Fourth Quarter                   |       | $                                | 19.56      |   | $ | 14.83 |   |
| Third Quarter                    |       | 17.15                            |       | 13.91 |   |
| Second Quarter                   |       | 14.51                            |       | 11.33 |   |
| First Quarter                    |       | 16.65                            |       | 13.24 |   |

 

The prices do notinclude adjustments for retail mark-ups, mark-downs or commissions.  On March 1, 2007, we had 259 recordstockholders, and approximately 1,579 beneficial stockholders of our commonstock.  On December 12, 2005, we effecteda three-for-two stock split in the form of a 50% stock dividend.  The foregoing stock prices have been adjustedto give retroactive effect to the stock split for all periods presented.

We have not paid a cashdividend 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 foreseeable future.  We currently intend to continue to retainearnings 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 no unregisteredsales of equity securities during the fourth quarter of the year ended December31, 2006.

 

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**Comparative Stock Performance**

The graph below comparesthe cumulative total stockholder return on our common stock with the NASDAQMarket index and the SIC code 4213 (trucking, except local) line-of-businessindex for the last five years.  Hemscott,Inc. prepared the line-of-business index. The graph assumes $100 is invested in our common stock, the NASDAQ StockMarket index and the line-of-business index on January 1, 2002, withreinvestment of dividends.  Thecomparisons in the graph below are based on historical data and are notintended to forecast the possible future performance of our common stock.  The information in the graph below shall bedeemed “furnished” and not “filed” for purposes of Section 18 of the ExchangeAct or otherwise subject to the liabilities of that section.

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# **ITEM 6.****                             *SELECTED FINANCIAL DATA***

The following selectedfinancial data should be read in conjunction with the consolidated financialstatements and notes under Item 8 of this Form 10-K.
| **(Dollars in thousands, except per share amounts)** | ** ** | **2006**    | ** **  | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|----------|------------|----------|------------|
| **FOR THE YEAR**                                                                   |       |        |        |     |       |     |       |     |       |     |       |
| Operating revenue                                                                  | ** ** | **$**       | **518,890** |     | $          | 460,202  |       | $        | 380,048    |     | $          | 334,667 |   | $ | 293,096 |   |
| Operating income                                                                   | ** ** | **41,169**  |        | 42,867   |       | 31,345   |       | 20,336   |       | 11,861   |       |
| Net income                                                                         | ** ** | **24,518**  |        | 25,061   |       | 17,536   |       | 11,842   |       | 5,973    |       |
| Operating ratio                                                                    | ** ** | **92.1**    | **%**       | 90.7     | %          | 91.8     | %          | 93.9     | %          | 96.0     | %          |
|                                                                               | ** ** | ** **  | ** **  |     |       |     |       |     |       |     |       |
| **PER-SHARE DATA (1)**                                                             |       |        |        |     |       |     |       |     |       |     |       |
| Basic earnings per  common share                                                   | ** ** | **$**       | **1.13**    |     | $          | 1.16     |       | $        | 0.83       |     | $          | 0.71 |   | $ | 0.42 |   |
| Diluted earnings per  common share                                                 | ** ** | **1.12**    |        | 1.14     |       | 0.81     |       | 0.68     |       | 0.41     |       |
| Book value                                                                         | ** ** | **10.15**   |        | 8.99     |       | 7.82     |       | 7.00     |       | 5.53     |       |
|                                                                               | ** ** | ** **  |        |     |       |     |       |     |       |     |       |
| **AT YEAR END**                                                                    |       |        |        |     |       |     |       |     |       |     |       |
| Total assets                                                                       | ** ** | **$**       | **410,822** |     | $          | 349,733  |       | $        | 288,929    |     | $          | 249,595 |   | $ | 216,018 |   |
| Long-term debt                                                                     | ** ** | **58,659**  |        | 48,300   |       | 30,257   |       | 27,857   |       | 63,629   |       |
| Stockholders’ equity                                                          | ** ** | **220,993** |        | 193,917  |       | 167,921  |       | 144,534  |       | 79,220   |       |

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(1)          Restated to reflect the three-for-two stock splits in the form of 50%stock dividends on December 12, 2005, December 5, 2003 and July 24, 2003.

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# **ITEM 7.****                                     *MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS***

*The following discussion and analysis of our financial condition andresults of operations should be read together with the selected consolidatedfinancial data and our consolidated financial statements and the related notesappearing elsewhere 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 5.  We do not assume, and specifically disclaim,any obligation to update any forward-looking statement contained in thisreport.*

**Overview**

Theprimary source of our operating revenue is freight revenue, which we generateby transporting freight for our customers. Generally, we are paid by the mile for our services.  We also derive freight revenue from loadingand unloading activities, equipment detention and other accessorial services.Our operating revenue also includes revenue from fuel surcharges andnon-freight revenue, which consists of logistics services provided by MWL, aswell as our own logistics division with brokerage services initiated in April2005 and our own intermodal services initiated in October 2005.  Brokerage services involve arranging foranother company to transport freight for our customers while we retain thebilling, collection and customer management responsibilities.  Intermodal services involve the movement ofour trailers on railroad flatcars for a portion of a trip.  The main factors that affect our freightrevenue are the rate per mile we receive from our customers, the percentage ofmiles for which we are compensated and the number of miles we generate with ourequipment. These factors relate, among other things, to the United Stateseconomy, inventory levels, the level of truck capacity in thetemperature-sensitive market and specific customer demand. We monitor ourrevenue production primarily through revenue per tractor per week. We also analyzeour rate per total mile, non-revenue miles percentage, the miles per tractor wegenerate, our accessorial revenue and our other sources of operating revenue.

In discussing ourresults of operations, we have included in certain instances a discussion offreight revenue, which excludes fuel surcharge and non-freight revenue.  We do this because we believe that freightrevenue provides a more consistent basis for comparing our results ofoperations from period to period.

In 2006, we increasedour operating revenue by $58.7 million, or 12.8%, including an increase in ourfreight revenue of $16.2 million, or 4.2%, compared with 2005.  Our average freight revenue per tractor perweek increased 1.4%, due to a 4.2% improvement in average freight revenue pertotal mile, partially offset by a 2.7% decrease in average miles pertractor.  The improvement in assetproductivity helped mitigate the continuing challenges of a tight drivermarket, which limited our fleet growth, and high fuel prices.  We were able to increase our freight revenueby increasing our freight rates, the size of our fleet and our business withexisting and new customers.  Thisincrease was partially offset by the impact of lower equipment utilization.  Our fuel surcharge revenue in 2006 increasedby $20.1 million, or 35.1%, compared with 2005, primarily due to significantlyhigher average fuel prices in 2006.  Ournon-freight revenue in 2006 increased by $22.4 million, or 132.9%, comparedwith 2005, due to increased logistics services provided by MWL, as well as ourformation of a logistics division with brokerage services in April 2005 andintermodal services in October 2005.  Weincreased our average operating revenue per tractor per week 9.7% in 2006.   Our weighted average number of tractors increased2.7% in 2006 over 2005.

Our profitability onthe expense side is impacted by variable costs of transporting freight for ourcustomers, fixed costs and expenses containing both fixed and variablecomponents.  The variable costs includefuel expense, driver-related expenses, such as wages, benefits, training, andrecruitment, and independent contractor costs, which are recorded underpurchased transportation.  Expenses thathave both fixed and variable components include maintenance and tire expense andour total cost of insurance and claims. These expenses generally vary with the miles we travel, but also have acontrollable component based on safety, fleet age, efficiency and otherfactors.  Our main fixed costs relate tothe acquisition and financing of long-term assets, such as revenue equipmentand operating terminals.  Althoughcertain factors affecting our expenses are beyond our control, we monitor themclosely and attempt to anticipate changes in these factors in managing ourbusiness.  For example, fuel pricesfluctuated dramatically and quickly at various times during 

 

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the past three years. We manage our exposure tochanges in fuel prices primarily through fuel surcharge programs with ourcustomers, as well as volume fuel purchasing arrangements with national fuelcenters and bulk purchases of fuel at our terminals.  The transportation industry has experiencedin the last several years substantial difficulty in attracting and retainingqualified drivers, and competition for drivers has intensified.  In 2005, we instituted two separate payincreases for our company drivers and increased the incentives paid toindependent contractors.  We continue tooffer driver compensation that we believe ranks near the top of theindustry.  In order to control increasesin insurance premiums, we have increased our self-insured retention levelsperiodically during the last several years. We are responsible for the first $1.0 million on each auto liabilityclaim and up to $1.0 million in the aggregate for all auto liability claimsbetween $1.0 million and $2.0 million. We are also responsible for the first $750,000 on each workers’compensation claim.

Ouroperating expenses as a percentage of operating revenue, or “operating ratio,”was 92.1% in 2006 compared with 90.7% in 2005. Our net income decreased $543,000, or 2.2%, from 2005.  Our earnings per diluted share decreased to$1.12 in 2006 from $1.14 in 2005.

Our business requiressubstantial, ongoing capital investments, particularly for new tractors and trailers.At December 31, 2006, we had approximately $58.7 million of long-term debt,including current maturities, and $221.0 million in stockholders’ equity.  In 2006, we spent approximately $97.3million, net of proceeds from dispositions, primarily for new revenueequipment, and recognized a gain of $7.0 million on the disposition of usedequipment.  These capital expenditureswere primarily funded with cash flows from operations and borrowings under ourrevolving credit facility.  We estimatethat capital expenditures, net of proceeds from dispositions, will beapproximately $45 million in 2007, primarily for new revenue equipment.  Assuming net capital expenditures in thatamount and operating margins similar to the margins in 2006, we expect togenerate cash flows to retire a substantial amount of our debt in 2007 orprovide flexibility for other purposes.  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 2005 and2006 to allow us greater flexibility in our decisions to purchase tractors in2007 now that the current round of diesel emissions reduction directives of theEPA 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.

**Share-based Payment ArrangementCompensation**

EffectiveJanuary 1, 2006, we adopted the fair value recognition provisions of Statementof Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”)using the modified prospective transition method, and therefore have notrestated prior periods’ results.  Allshare-based compensation expense is recorded in salaries, wages and benefitsexpense.  Total share-based compensationexpense recorded in 2006 was $447,000 ($318,000 net of income tax benefit),which entirely represents additional share-based compensation expense recordedas a result of adopting SFAS 123R.  Noshare-based compensation expense was recorded in 2005 or 2004, however suchexpense would have been $177,000 ($108,000 net of income tax benefit) and $258,000($157,000 net of income tax benefit), respectively, had we recognizedshare-based expense in net income under Statement of Financial AccountingStandards No. 123, “Accounting for Stock-Based Compensation.”  Unrecognized compensation expense fromunvested service-based stock option awards was $1.2 million as of December 31,2006 and is expected to be recorded over a weighted-average period of 3.3years.  Unrecognized compensation expensefrom unvested performance-based stock option awards was $767,000 as of December31, 2006 and will be recorded in the periods in which the performance conditionis probable of achievement through 2010.

**Stock Split**

On December 12, 2005,we effected a three-for-two stock split of our common stock, $.01 par value, inthe form of a 50% stock dividend.  Ourconsolidated financial statements, related notes, and other financial datacontained in this report have been adjusted to give retroactive effect to thestock split for all periods presented.

 

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**Results of Operations**

The following table sets forth for the years indicated certainoperating statistics regarding our revenue and operations:
| ** **                                                  | ** ** | **2006**    | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| Average operating  revenue per total mile                   | ** ** | **$**       | **1.905**  |     | $          | 1.689    |       | $ | 1.445 |   |
| Average freight revenue  per total mile (1)                 | ** ** | **$**       | **1.477**  |     | $          | 1.417    |       | $ | 1.316 |   |
| Average miles per  tractor(2)                               | ** ** | **108,781** |       | 111,823  |       | 116,668  |       |
| Average operating  revenue per tractor per week(2)          | ** ** | **$**       | **3,974**  |     | $          | 3,622    |       | $ | 3,232 |   |
| Average freight revenue  per tractor per week(1) (2)        | ** ** | **$**       | **3,081**  |     | $          | 3,039    |       | $ | 2,944 |   |
| Total miles —  company-employed drivers (in thousands) | ** ** | **222,579** |       | 206,205  |       | 185,019  |       |
| Total miles — independent contractors (in thousands)   | ** ** | **49,810**  |       | 66,293   |       | 78,054   |       |

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(1)          Excludes revenue from fuel surcharges andnon-freight revenue.

 

(2)          Includes tractors driven by bothcompany-employed drivers and independent contractors. Independent contractorsprovided 365, 423 and 557 tractors as of December 31, 2006, 2005, and 2004,respectively.

 

                    Note — The above operating statistics excludetractors and miles associated with non-freight revenue.

 

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

The following table sets forth for the years indicatedthe components of our operating revenue and the dollar and percentage changefor each component:
| ** **                           | ** ** | ** ** | ** **  | ** ** | ** ** | **Dollar  Change **    | ** ** | **Percentage**Change   | ** ** |
|--------------------------------------|------------|------------|-------------|------------|------------|-----------------------------|------------|-----------------------------|------------|
| **(Dollars in thousands)** | ** ** | **2006**   | ** **  | **2005**   | ** ** | **2006 vs. 2005** | ** ** | **2006 vs. 2005** | ** ** |
| Freight revenue                      | ** ** | **$**      | **402,327** |       | $          | 386,131                     |       | $                           | 16,196     |   | 4.2 | % |
| Fuel surcharge revenue               | ** ** | **77,265** |        | 57,198     |       | 20,067                      |       | 35.1                        |       |
| Non-freight revenue                  | ** ** | **39,298** |        | 16,873     |       | 22,425                      |       | 132.9                       |       |
| Operating revenue                    | ** ** | **$**      | **518,890** |       | $          | 460,202                     |       | $                           | 58,688     |   | 12.8 | % |

 

Fuel surcharge revenue for our intermodal operations,which was classified within non-freight revenue in the fourth quarter of 2005,has been reclassified to fuel surcharge revenue in the above table.

The following table sets forth for the years indicatedthe dollar and percentage increase or decrease of the items in our consolidatedstatements of operations, and those items as a percentage of operating revenue:
| ** **                              | ** ** | **Dollar  Change **    | ** ** | **Percentage  Change ** | ** ** | **Percentage of**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 ofrevenue 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 | % |

 

Our operating revenueincreased $58.7 million, or 12.8%, to $518.9 million in 2006 from $460.2million in 2005.  Freight revenueincreased $16.2 million, or 4.2%, to $402.3 million in 2006 from $386.1 millionin 2005.  We were able to increase ourfreight revenue by increasing our freight rates, the size of our fleet and ourbusiness with existing and new customers. This increase was partially offset by the impact of lower equipmentutilization.  Our fuel surcharge revenueincreased $20.1 million, or 35.1%, to $77.3 million in 2006 from $57.2 millionin 2005 primarily due to significantly higher average fuel prices in 2006 morefully discussed below under “fuel and fuel taxes.”  The increase in non-freight revenue in 2006resulted from increased logistics services provided by MWL, as well as ourformation of a logistics division with brokerage 

 

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services in April 2005 and intermodal servicesin October 2005.  Our revenue, beforefuel surcharges, increased $38.6 million, or 9.6%, in 2006 from 2005.  Our average operating revenue per tractor perweek increased 9.7% in 2006 from 2005. Our average freight revenue per tractor per week increased 1.4% in 2006 from2005, due to a 4.2% increase in average freight revenue per total milepartially offset by a 2.7% decrease in average miles per tractor.  Our weighted average number of tractorsincreased 2.7% in 2006 from 2005.  Ourability to recruit and retain a sufficient number of qualified drivers limitedour fleet growth in 2006.

Salaries, wages andbenefits consist of compensation for our employees, including both driver andnon-driver employees, employees’ health insurance, 401(k) plan contributionsand other fringe benefits.  Theseexpenses vary depending upon the ratio of company drivers to independentcontractors, our efficiency, our experience with employees’ health insuranceclaims, changes in health care premiums and other factors. The increase insalaries, wages and benefits resulted primarily from an increase in the size ofour company-owned fleet and the miles driven by company drivers, along with anincrease in the amount paid to company drivers of 2 cents per mile effectiveApril 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.

Purchasedtransportation consists of payments to independent contractor providers ofrevenue equipment and to carriers for transportation services we arrange inconnection with brokerage and intermodal activities.  This category will vary depending upon theratio of company drivers versus independent contractors, the amount of fuelsurcharges passed through to independent contractors and the amount and rateswe pay to third-party railroad and motor carriers.  Purchased transportation expense increased$2.5 million, or 3.1%, in 2006 from 2005. This expense, excluding fuel surcharges passed through to independentcontractors and brokerage and intermodal payments, decreased $14.6 million, or25.2%, in 2006, primarily due to a decrease in the number of independentcontractor-owned tractors in our fleet. Payments to carriers for transportation services we arranged in ourbrokerage and intermodal operations were $29.7 million in 2006 and $11.9 millionin 2005.  The amount of fuel surchargespassed through to independent contractors decreased $722,000 in 2006.

Fuel and fuel taxes,which we refer to as fuel expense, net of fuel surcharge revenue of $77.3million in 2006 and $57.2 million in 2005, increased $7.3 million, or 14.4%, to$57.8 million in 2006 from $50.5 million in 2005. The increase was primarilydue to a 7.9% increase in miles driven by our company-owned fleet, a higheraverage fuel price net of surcharges and lower fuel efficiencies associatedwith newer tractors.  Our fuel prices,which remain high based on historical standards, significantly increased to anaverage of $2.60 per gallon in 2006 from an average of $2.29 per gallon in2005.  We have fuel surcharge provisionsin substantially all of our transportation contracts and attempt to recover aportion of these increased expenses through fuel surcharges and higherrates.  We expect our fuel expense toincrease in the future because we believe that government mandated emissionsstandards, which became effective October 1, 2002, have resulted in lessfuel-efficient engines, and that more restrictive emissions standards that tookeffect in 2007 will result in further declines in engine efficiency.

Supplies andmaintenance consist of repairs, maintenance, tires, parts, oil and enginefluids, along with load-specific expenses including loading/unloading, tolls,pallets and trailer hostling.  Theincrease in supplies and maintenance in 2006 primarily resulted from our largerfleet and the higher percentage of company-owned tractors in our fleet, forwhich we bear all maintenance expenses. Our maintenance practices were consistent with 2005.

Depreciation relatesto owned tractors, trailers, communications units, terminal facilities andother assets. Gains or losses on dispositions of revenue equipment are setforth in a separate line item, rather than included in this category. Theincrease in depreciation was due to an increase in revenue equipment and in therelative percentage of company-owned tractors to independent contractor-ownedtractors in 2006.  We expect our annualcost of tractor and trailer ownership will increase in future periods as aresult of our accelerated tractor fleet replacement and higher prices of newequipment, which is expected to result in greater depreciation over the usefullife.

 

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Insurance and claimsconsist of the costs of insurance premiums and the accruals we make for claimswithin our self-insured retention amounts, primarily for personal injury,property damage, physical damage to our equipment, cargo claims and workers’compensation claims.  These expenses willvary primarily based upon the frequency and severity of our accidentexperience, our self-insured retention levels and the market for insurance.  The increase in insurance and claims in 2006was comprised of a $3.0 million increase in the cost of self-insured accidentclaims partially offset by a $735,000 decrease in insurance premiums.  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. Our significant self-insured retention and our risk on the first $1.0million of auto liability claims in the $1.0 million to $2.0 million corridorexpose us to the possibility of significant fluctuations in claims expensebetween periods depending on the frequency, severity and timing of claims andto adverse financial results if we incur large or numerous losses.  In the event of an uninsured claim above ourinsurance coverage, or an increase in the frequency or severity of claimswithin our self-insured retention, our financial condition and results of operationscould be materially and adversely affected.

In 2006, increases inthe market value for used revenue equipment along with additional plannedrevenue equipment dispositions caused our gain on disposition of revenueequipment to increase to $7.0 million from $3.9 million in 2005.  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 theforegoing factors, our operating expenses as a percentage of operating revenue,or “operating ratio,” was 92.1% in 2006 compared with 90.7% in 2005.

Interest expenseprimarily consists of interest on our unsecured committed credit facility andsenior unsecured notes.  The increase ininterest expense was primarily the result of higher average debt balancesoutstanding in 2006.

Our effective incometax rate decreased to 35.4% in 2006 compared with 39.6% in 2005 primarilybecause we decreased our deferred income tax liability by 3.3% of income beforeincome taxes.  Our effective income tax ratein 2006 included a revision to our previously recorded deferred income taxliability of 2.8% of income before income taxes, primarily due to a change inour income apportionment for several states, which produced a lower expectedeffective state income tax rate, net of federal impact.  We expect our effective income tax rate to bein the range of 37% to 39% in 2007.

As a result of thefactors described above, net income decreased 2.2%, to $24.5 million in 2006from $25.1 million in 2005. Net earnings per share decreased to $1.12 perdiluted share in 2006 from $1.14 per diluted share in 2005.

 

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*Comparison of YearEnded December 31, 2005 to Year Ended December 31, 2004*

The following table sets forth for the years indicatedthe components of our operating revenue and the dollar and percentage changefor each component:
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Dollar  Change **    | ** ** | **Percentage**Change   | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|-----------------------------|------------|-----------------------------|------------|
| **(Dollars in thousands)** | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2005 vs. 2004** | ** ** | **2005 vs. 2004** | ** ** |
| Freight revenue                      |       | $          | 386,131    |       | $          | 346,160                     |       | $                           | 39,971     |   | 11.5 | % |
| Fuel surcharge revenue               |       | 57,198     |       | 26,920     |       | 30,278                      |       | 112.5                       |       |
| Non-freight revenue                  |       | 16,873     |       | 6,968      |       | 9,905                       |       | 142.1                       |       |
| Operating revenue                    |       | $          | 460,202    |       | $          | 380,048                     |       | $                           | 80,154     |   | 21.1 | % |

 

Fuel surcharge revenue for our intermodal operations,which was classified within non-freight revenue in the fourth quarter of 2005,has been reclassified to fuel surcharge revenue in the above table.

The following table sets forth for the years indicatedthe dollar and percentage increase or decrease of the items in our consolidatedstatements of operations, and those items as a percentage of operating revenue:
| ** **                              | ** ** | **Dollar  Change **    | ** ** | **Percentage  Change ** | ** ** | **Percentage of**Operating Revenue  | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|------------------------------|------------|----------------------------------------------------|------------|
| **(Dollars in thousands)**    | ** ** | **2005 vs. 2004** | ** ** | **2005 vs. 2004**  | ** ** | **2005**                                           | ** ** | **2004** | ** ** |
| Operating revenue                       |       | $                           | 80,154     |                         | 21.1       | %                                                  | 100.0      | % | 100.0 | % |
| Operating expenses (income):            |       |                        |       |                         |       |                                               |       |   |   |
| Salaries, wages and benefits            |       | 19,270                      |       | 18.0                         |       | 27.5                                               |       | 28.2 |   |
| Purchased transportation                |       | 4,039                       |       | 5.2                          |       | 17.8                                               |       | 20.5 |   |
| Fuel and fuel taxes                     |       | 36,810                      |       | 51.9                         |       | 23.4                                               |       | 18.7 |   |
| Supplies and maintenance                |       | 3,090                       |       | 12.3                         |       | 6.1                                                |       | 6.6 |   |
| Depreciation                            |       | 5,472                       |       | 16.7                         |       | 8.3                                                |       | 8.6 |   |
| Operating taxes and licenses            |       | 748                         |       | 11.9                         |       | 1.5                                                |       | 1.7 |   |
| Insurance and claims                    |       | 310                         |       | 1.7                          |       | 4.1                                                |       | 4.9 |   |
| Communications and utilities            |       | 230                         |       | 7.3                          |       | 0.7                                                |       | 0.8 |   |
| Gain on disposition ofrevenue equipment |       | (1,722                      | )          | (77.5                        | )          | (0.9                                               | )          | (0.6 | ) |
| Other                                   |       | 385                         |       | 4.3                          |       | 2.0                                                |       | 2.3 |   |
| Total operating expenses                |       | 68,632                      |       | 19.7                         |       | 90.7                                               |       | 91.8 |   |
| Operating income                        |       | 11,522                      |       | 36.8                         |       | 9.3                                                |       | 8.2 |   |
| Other expenses (income):                |       |                        |       |                         |       |                                               |       |   |   |
| Interest expense                        |       | 287                         |       | 13.8                         |       | 0.5                                                |       | 0.5 |   |
| Interest income and other               |       | (229                        | )          | (15.3                        | )          | (0.4                                               | )          | (0.4 | ) |
| Minority interest                       |       | 690                         |       | 1,352.9                      |       | 0.2                                                |       | — |   |
|                                    |       | 748                         |       | 118.4                        |       | 0.3                                                |       | 0.2 |   |
| Income before income taxes              |       | 10,774                      |       | 35.1                         |       | 9.0                                                |       | 8.1 |   |
| Provision for income taxes              |       | 3,249                       |       | 24.7                         |       | 3.6                                                |       | 3.5 |   |
| Net income                              |       | $                           | 7,525      |                         | 42.9       | %                                                  | 5.4        | % | 4.6 | % |

 

Our operating revenue increased $80.2 million,or 21.1%, to $460.2 million in 2005 from $380.0 million in 2004.  Freight revenue increased $40.0 million, or11.5%, to $386.1 million in 2005 from $346.2 million in 2004.  We were able to increase our freight revenueby increasing our freight rates, the size of our fleet, our detention chargesand our business with existing and new customers.  Our fuel surcharge revenue increased $30.3million, or 112.5%, to $57.2 million in 2005 from $26.9 million in 2004primarily due to significantly higher average fuel prices in 2005 more fullydiscussed below under “fuel and fuel taxes.” The increase in non-freight revenue in 2005 resulted from increasedlogistics services provided by MWL, as well as our formation of a logisticsdivision with brokerage services in April 2005 and intermodal services in 

 

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October 2005.  Our averageoperating revenue per tractor per week increased 12.1% in 2005 from 2004.  Our average freight revenue per tractor perweek increased 3.2% in 2005 from 2004, due to a 7.7% increase in averagefreight revenue per total mile partially offset by a 4.2% decrease in averagemiles per tractor.  Our weighted averagenumber of tractors increased 8.1% in 2005 from 2004.

The increase in salaries, wages and benefitsresulted primarily from an increase in the size of our company-owned fleet andincreases in the amount paid to company drivers of 1 cent per mile effectiveJanuary 1, 2005 and 2 cents per mile effective April 1, 2005.  This increase was partially offset by a decreaseof $506,000 in compensation expensed for our non-driver employees under ourincentive compensation program in 2005, and a decrease of $222,000 in ouremployees’ health insurance expense due to favorable claims experience whichdecreased our estimated costs of our self-insured medical claims in 2005.

Purchased transportation expense increased $4.0million, or 5.2%, in 2005 from 2004. This expense, excluding fuel surcharges passed through to independentcontractors and carrier payments by the Company, decreased $8.7 million, or13.1%, in 2005 from 2004.  This decreasewas primarily due to a decrease in the number of independent contractor-ownedtractors in our fleet, partially offset by a 1 cent per mile increase in theamount paid to independent contractors effective April 1, 2004 and an increasein incentives paid to independent contractors effective January 1, 2005.  Payments to carriers for transportationservices arranged by the Company were $11.9 million in 2005 and $4.1 million in2004.  The amount of fuel surchargespassed through to independent contractors increased $5.0 million in 2005.

Fuel and fuel taxes, which we refer to as fuelexpense, net of fuel surcharge revenue of $57.2 million in 2005 and $26.9million in 2004, increased $6.5 million, or 14.8%, to $50.5 million in 2005from $44.0 million in 2004. The increase was primarily due to an 11.5% increasein miles, a higher average fuel price net of surcharges and lower fuelefficiencies associated with newer tractors. Our fuel prices, which remain high based on historical standards,significantly increased to an average of $2.29 per gallon in 2005 from anaverage of $1.71 per gallon in 2004.

The increase in depreciation was due to anincrease in revenue equipment and in the relative percentage of company-ownedtractors to independent contractor-owned tractors in 2005.

The increase in insurance and claims in 2005was primarily the result of an increase in the cost of self-insured accidentclaims.

In 2005, increases in the market value for usedrevenue equipment caused our gain on disposition of revenue equipment toincrease to $3.9 million from $2.2 million in 2004.

As a result of the foregoing factors, weimproved our operating expenses as a percentage of operating revenue, or “operatingratio,” to 90.7% in 2005 from 91.8% in 2004.

The increase in interest expense was primarilythe result of higher average debt balances outstanding in 2005.

The increase in minority interest expense wasthe result of increased earnings in 2005 by MWL, a 45% owned affiliate.

Our effective income tax rate was 39.6% in 2005compared with 42.9% in 2004.  Thisdecrease resulted primarily from increasing our deferred income tax liabilityin 2004 by 4.8% of income before income taxes as a result of an increase in ourstatutory federal and state income tax rates based upon projected futuretaxable income.

As a result of the factors described above, netincome increased 42.9%, to $25.1 million in 2005 from $17.5 million in 2004.Net earnings per share increased to $1.14 per diluted share in 2005 from $0.81per diluted share in 2004.

 

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**Liquidityand Capital Resources**

Our business requires substantial,ongoing capital investments, particularly for new tractors and trailers. Ourprimary sources of liquidity are funds provided by operations, our unsecuredsenior notes and our revolving credit facility. A portion of our tractor fleetis provided by independent contractors who own and operate their own equipment.We have no capital expenditure requirements relating to those drivers who owntheir tractors or obtain financing through third parties. However, to theextent we purchase tractors and extend financing to the independent contractorsthrough our tractor purchase program, we have an associated capital expenditurerequirement.

The table below reflects our net cash flowsprovided by operating activities, net cash flows used for investing activitiesand total long-term debt, including current maturities, for the yearsindicated.

| (In thousands)                                           | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Net cash flows provided by operating activities               | ** ** | **$**      | **77,070** |     | $          | 72,472   |       | $ | 50,890 |   |
| Net cash flows used for investing activities                  | ** ** | **86,848** |       | 88,557   |       | 58,829   |       |
| Long-term debt, including current  maturities, at December 31 | ** ** | **58,659** |       | 48,300   |       | 30,257   |       |
|                                                               |            |            |            |          |            |          |            |  |  |  |

 

In 2006, we spentapproximately $97.3 million, net of proceeds from dispositions, to purchase newrevenue equipment and also recognized a gain of $7.0 million on the dispositionof used equipment.  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 in 2007, to add capacity tomeet growing 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 has increasedas a result of the accelerated fleet replacement.  We believe our sources of liquidity areadequate to meet our current and anticipated needs for at least the next twelvemonths.  Based upon anticipated cash flows,current borrowing availability and sources of financing we expect to beavailable to us, we do not anticipate any significant liquidity constraints inthe foreseeable future.  We estimate thatcapital expenditures, net of proceeds from dispositions, will be approximately$45 million in 2007, primarily for new revenue equipment.  Assuming net capital expenditures in thatamount and operating margins similar to the margins in 2006, we expect togenerate cash flows to retire a substantial amount of our debt in 2007 orprovide flexibility for other purposes.

Wehave outstanding Series A Senior Unsecured Notes with an aggregate principalbalance of $7.1 million at December 31, 2006. These notes mature in October2008, require annual principal payments of $3.57 million and bear interest at afixed rate of 6.78%. We also have outstanding Series B Senior Unsecured Noteswith an aggregate principal balance of $5.7 million at December 31, 2006. Thesenotes mature in April 2010, require annual principal payments of $1.43 millionand bear interest at a fixed rate of 8.57%.

In August 2006, weentered into a credit agreement which provides for a five-year unsecuredcommitted credit facility in an aggregate principal amount of up to $75million.  The aggregate principal amountof the credit facility may be increased at our option up to a maximum aggregateprincipal amount of $100 million.  Thecredit agreement amends and restates in its entirety our prior creditagreement.  At December31, 2006, the credit facility had an outstanding principal balance of $45.8million, outstanding standby letters of credit of $4.5 million and remainingborrowing availability of $24.7 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 6.30% at December 31, 2006.

 

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Our creditfacility prohibits us from paying, in any fiscal year, dividends in excess of25% of our net income from the prior fiscal year. The debt agreements discussedabove also contain restrictive covenants which, among other matters, require usto maintain certain financial ratios, including debt-to-equity, cash flowleverage, interest coverage and fixed charge coverage. We were in compliancewith all of these covenants at December 31, 2006.

We had $6.1million in direct financing receivables from independent contractors under ourtractor purchase program as of December 31, 2006, compared with $9.1 million inreceivables as of December 31, 2005. These receivables, which arecollateralized by the tractors financed, are used to attract and retainqualified independent contractors. We deduct payments from the independentcontractors’ settlements weekly and, as a result, have experienced minimalcollection issues for these receivables.

The following is a summary of ourcontractual obligations as of December 31, 2006.
| ** **                                | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| **(In thousands)**                   | ** ** | **2007**                                  | ** ** | **2008  and  2009** | ** ** | **2010**and 2011 | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Long-term debt obligations                |       | $                                         | 5,000      |   | $ | 6,429 |   | $ | 47,230 |   | $ | — |   | $ | 58,659 |   |
| Purchase obligations forrevenue equipment |       | 29,262                                    |       | — |   | — |   | — |   | 29,262 |   |
| Operating lease obligations               |       | 308                                       |       | 392 |   | 179 |   | — |   | 879 |   |
| Total                                     |       | $                                         | 34,570     |   | $ | 6,821 |   | $ | 47,409 |   | $ | — |   | $ | 88,800 |   |

 

**Related Parties**

 

We purchase fuel andobtain tires and related services from Bauer Built, Incorporated, or BBI. JerryM. Bauer, one of our directors, is the president and a stockholder of BBI.  We paid BBI $1.3 million in 2006, $1.2million in 2005 and $924,000 in 2004 for fuel and tire services. In addition, wepaid $2.4 million in 2006, $2.0 million in 2005 and $1.4 million in 2004 totire manufacturers for tires that we purchased from the tire manufacturers butwere provided by BBI. BBI received commissions from the tire manufacturersrelated to these purchases.  Other thanany benefit received from his ownership interest, Mr. Bauer receives nocompensation or other benefits from our business with BBI.

During 2005 and 2004, we paid Durand Builders Service, Inc. $142,000and $493,000, respectively, for various construction projects.  Larry B. Hagness, one of our directors, isthe president and owner of Durand Builders Service, Inc.  Other than any benefit received from hisownership interest, Mr. Hagness receives no compensation or other benefits fromthese transactions.

MWL, our 45% ownedaffiliate, is a third-party provider of logistics services to thetransportation industry.  In 2006, 2005and 2004, we received $16.3 million, $21.1 million and $22.6 million,respectively, of our revenue from transportation services arranged by MWL.

****Off-balance Sheet Arrangements****

****Otherthan standby letters of credit maintained in connection with our self-insuranceprograms in the amount of $4.5 million and operating leases summarized above inour summary of contractual obligations, we did not have any other materialoff-balance sheet arrangements at December 31, 2006.****

****Inflation and Fuel Costs****

Most of our operatingexpenses are inflation-sensitive, with inflation generally producing increasedcosts of operations. During the past three years, the most significant effectsof inflation 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.

 

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Inaddition to inflation, fluctuations in fuel prices can affect ourprofitability. We require substantial amounts of fuel to operate our tractorsand power the temperature-control units on our trailers. Substantially all ofour contracts with customers contain fuel surcharge provisions. Although wehistorically have been able to pass through most long-term increases in fuelprices and related taxes to customers in the form of surcharges and higherrates, such increases usually are not fully recovered. Fuel prices were highthroughout the past three years, which has increased our cost of operating.

****Seasonality****

Our tractorproductivity generally decreases during the winter season because inclementweather impedes operations and some shippers reduce their shipments. At thesame time, operating expenses generally increase, with fuel efficiencydeclining because of engine idling and harsh weather creating higher accidentfrequency, increased claims and more equipment repairs.

**Critical Accounting Policies**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions about future events, and apply judgments that affect thereported amounts of assets, liabilities, revenue and expenses in ourconsolidated financial statements and related notes.  We base our estimates, assumptions andjudgments on historical experience, current trends and other factors believedto be relevant at the time our consolidated financial statements areprepared.  However, because future eventsand their effects cannot be determined with certainty, actual results coulddiffer from our estimates and assumptions, and such differences could bematerial.  We believe that the followingcritical accounting policies affect our more significant estimates, assumptionsand judgments used in the preparation of our consolidated financial statements.

*RevenueRecognition.*We recognize revenue, including fuelsurcharges, at the time shipmentof freight is completed.

*Accounts Receivable. *We are dependent on a limited number ofcustomers, and as a result, our trade accounts receivable are highlyconcentrated. Trade accountsreceivable are recorded at the invoiced amounts, net of an allowance fordoubtful accounts.  A considerable amountof judgment 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 quarterly.

*Propertyand Equipment.* The transportation industry requiressignificant capital investments. Our net property and equipment was $329.9million as of December 31, 2006 and $269.9 million as of December 31, 2005. Ourdepreciation expense was $44.4 million for 2006, $38.2 million for 2005 and$32.8 million for 2004. We compute depreciation of our property and equipmentfor financial reporting purposes based on the cost of each asset, reduced byits estimated salvage value, using the straight-line method over its estimateduseful life. We determine and periodically evaluate our estimate of theprojected salvage values and useful lives primarily by considering the marketfor used equipment, prior useful lives and changes in technology. We have notchanged our policy regarding salvage values as a percentage of initial cost oruseful lives of tractors and trailers within the last ten years. We believethat our policies and past estimates have been reasonable. Actual results coulddiffer from these estimates. A 5% decrease in estimated salvage values wouldhave decreased our net property and equipment as of December 31, 2006 byapproximately $5.7 million, or 1.7%.

In 2006, we replacedmost of our company-owned tractors within approximately 3.75 years and ourtrailers within approximately seven years after purchase.  Our useful lives for depreciating tractors isfive years 

 

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and trailers is seven years, with a 25% salvagevalue for tractors and a 35% salvage value for trailers.  These salvage values are based upon theexpected market values of the equipment after five years for tractors and sevenyears for trailers.  Depreciation expensecalculated in this manner approximates the continuing declining value of therevenue equipment, and, for tractors, continues at a consistent straight-linerate for units held beyond the normal replacement cycle.  Calculating tractor depreciation expense witha five-year useful life and a 25% salvage value results in the samedepreciation rate of 15% of cost per year and the same net book value of 43.75%of cost at the 3.75-year replacement date as using a 3.75-year useful life and43.75% salvage value.  As a result, thereis no difference in recorded depreciation expense on a quarterly or annualbasis with our five-year useful life and 25% salvage value compared with a3.75-year useful life and 43.75% salvage value.

*Impairmentof Assets.* Long-lived assets are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to future net undiscounted cashflows expected to be generated by the asset. If such assets are considered tobe impaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the fair value of the assets. Assetsto be disposed of are reported at the lower of the carrying amount or fairvalue less the costs to sell.

*Insuranceand Claims.* We self-insure, in part, for losses relating to workers’ compensation,auto liability, general liability, cargo and property damage claims, along withemployees’ health insurance with varying risk retention levels. We maintaininsurance coverage for per-incident and total losses in excess of these riskretention levels in amounts we consider adequate based upon historicalexperience and our ongoing review. However, we could suffer a series of losseswithin our self-insured retention limits or losses over our policy limits, whichcould negatively affect our financial condition and operating results. 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.  We have $4.5 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 $16.1 million as of December 31, 2006, and$13.1 million as of December 31, 2005. We reserve currently for the estimatedcost of the uninsured portion of pending claims. We periodically evaluate andadjust these reserves based on our evaluation of the nature and severity ofoutstanding individual claims and our estimate of future claims developmentbased on historical claims development factors. We believe that our claimsdevelopment factors have historically been reasonable, as indicated by theadequacy 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%, ourestimated outstanding loss reserves as of December 31, 2006 would have neededto increase by approximately $2.2 million.

*Share-basedPayment Arrangement Compensation. *We havegranted stock options to certain employees and non-employee directors.  We recognize compensation expense for allshare-based payment arrangements granted after December 31, 2005 and prior tobut not yet vested as of December 31, 2005, in accordance with SFAS 123R.  Under the fair value recognition provisionsof SFAS 123R, we record share-based compensation expense net of an estimatedforfeiture rate and only record compensation expense for those shares expectedto vest on a straight-line basis over the requisite service period forservice-based awards (normally the vesting period).  Compensation expense will be recorded forperformance-based awards in the periods in which the performance condition isprobable of achievement.  Prior to SFAS123R adoption, we accounted for share-based payment arrangements underAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees” and accordingly, did not reflect compensation expense in net incomeas all stock options granted had an exercise price equal to the market value ofthe underlying common stock on the date of grant.

Determining theappropriate fair value model and calculating the fair value of share-based paymentarrangements require the input of highly subjective assumptions, including theexpected life of the share-based payment arrangements and stock pricevolatility.  We use the Black-Scholesmodel to value our stock option awards. We believe that future volatility will not materially differ from ourhistorical volatility.  Thus, we use 

 

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the historical volatility of our common stockover the expected life of the award.  Theassumptions used in calculating the fair value of share-based payment awardsrepresent our best estimates, but these estimates involve inherentuncertainties and the application of judgment. As a result, if factors change and we use different assumptions,share-based compensation expense could be materially different in thefuture.  In addition, we are required toestimate the expected forfeiture rate and only recognize expense for thoseshares expected to vest.  If the actualforfeiture rate is materially different from the estimate, share-basedcompensation expense could be significantly different from what has beenrecorded in the current period.

*IncomeTaxes*.  We account for income taxes inaccordance with Statement of Financial Accounting Standards No. 109, “Accountingfor Income Taxes.”  As part of theprocess of preparing our consolidated financial statements, we are required toestimate our income taxes in each of the jurisdictions in which weoperate.  This process involvesestimating our current tax exposure together with assessing temporarydifferences resulting from differing treatment of items for tax and financialreporting purposes.  These temporarydifferences result in deferred tax assets and liabilities, which are includedin our accompanying consolidated balance sheets.  Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which the temporary differences are expected to be recovered orsettled.  To the extent it is determinedthat it is not likely that our deferred tax assets will be recovered from futuretaxable income, a valuation allowance must be established for the amount of thedeferred tax assets determined not to be realizable.  A valuation allowance for deferred tax assetshas not been deemed necessary due to our profitable operations.  However, if the facts or our financialresults were to change, thereby impacting the likelihood of realizing thedeferred tax assets, judgment would have to be applied to determine the amountof any valuation allowance required in any given period.

**Recent Accounting Pronouncements**

In July 2006, theFinancial Accounting Standards Board, or FASB, issued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.”  The Interpretation clarifies the accountingfor uncertainty in income taxes recognized in an enterprise’s financialstatements in accordance with FASB Statement No. 109, “Accounting for IncomeTaxes.”  The Interpretation prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return.  The Interpretation alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure, and transition.  The Interpretation is effective for fiscalyears beginning after December 15, 2006. We will adopt this Interpretation in the first quarter of 2007 and it isnot expected to have a significant impact on our results of operations orfinancial position.

In September 2006,the Securities and Exchange Commission issued Staff Accounting Bulletin No.108, “Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements” (SAB 108).  SAB 108 addresses how the effects of prioryear misstatements should be considered when quantifying misstatements incurrent year financial statements.  SAB108 requires registrants to apply the new guidance for the first time that itidentifies material errors in existence at the beginning of the first fiscalyear ending after November 15, 2006 by correcting those errors through aone-time cumulative effect adjustment to beginning-of-year retainedearnings.  The adoption of SAB 108 in 2006had no impact on our results of operations or financial position.

 

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**ITEM 7A.            *QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK***

We are exposed to a variety of marketrisks, most importantly the effects of the price and availability of dieselfuel and changes in interest rates.

**Commodity Price Risk**

Our operations are heavily dependent uponthe use of diesel fuel. The price and availability of diesel fuel can vary andare subject to political, economic and market factors that are beyond ourcontrol. Significant increases in diesel fuel costs could materially andadversely affect our results of operations and financial condition.Historically, we have been able to recover a portion of diesel fuel priceincreases from customers in the form of fuel surcharges.

We presently use fuel surcharges toaddress the risk of high fuel prices. Fuel surcharge programs are widelyaccepted among our customers, though they can vary somewhat fromcustomer-to-customer. We believe fuel surcharges are effective at mitigatingthe risk of high fuel prices, although we do not recover the full amount offuel price increases.

**Interest Rate Risk**

Our market risk is also affected by changes in interest rates. We havehistorically maintained a combination of fixed rate and variable rateobligations to manage our interest rate exposure. Fixed rate obligations exposeus to the risk that interest rates might fall. Variable rate obligations exposeus to the risk that interest rates might rise.

Our fixed rate obligations consist of amounts outstanding under ourunsecured senior notes. The $7.1 million outstanding at December 31, 2006,under our Series A Senior Notes, bears interest at a fixed annual rate of6.78%. The $5.7 million outstanding at December 31, 2006, under our Series BSenior Notes, bears interest at a fixed annual rate of 8.57%. Based on suchoutstanding amounts, a one percentage point decline in market interest rateswould have the effect of increasing the premium we pay over market interestrates by approximately $129,000 annually.

Our variable rate obligations consist of borrowings under our revolvingcredit facility. Our revolving credit facility carries a variable interest ratebased on the London Interbank Offered Rate or the agent bank’s Prime Rate, ineach case plus/minus applicable margins. The weighted average interest rate forthe facility was 6.30% at December 31, 2006. As of December 31, 2006, wehad borrowed $45.8 million under the credit facility. Based on such outstandingamount, a one percentage point increase in market interest rates would cost us$458,000 in additional gross interest cost on an annual basis.

 

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** **

**ITEM 8.  *FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA***

 

**Management’s Annual Report onInternal Control Over Financial Reporting**

The management of MartenTransport, Ltd. (the “Company”) is responsible for establishing and maintainingadequate internal control over financial reporting.  The Company’s internal control system wasdesigned to provide reasonable assurance to the Company’s management and boardof directors regarding the preparation and fair presentation of publishedfinancial statements.

All internal controlsystems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined tobe effective can provide only reasonable assurance with respect to financialstatement preparation and presentation.

The Company’s managementassessed the effectiveness of the Company’s internal control over financialreporting as of December 31, 2006. In making this assessment, management used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO) in *Internal Control—Integrated Framework*.  Based on our assessment the Company believesthat, as of December 31, 2006, the Company’s internal control overfinancial reporting is effective based on those criteria.

The Company’s independentregistered public accounting firm has issued an audit report on our assessmentof the Company’s internal control over financial reporting.  This report appears on page 30.

March 14, 2007

 

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**Report of****Independent Registered Public Accounting Firm**

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

*We have audited management’sassessment, included in the accompanying Management’s Annual Report on InternalControl Over Financial Reporting, that Marten Transport, Ltd. and subsidiary(the “Company”) maintained effective internal control over financial reportingas of December 31, 2006, based on the criteria established in*InternalControl—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.  Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

*We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan 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,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances.  We believe that our audit provides areasonable basis for our opinion.*

*A company’s internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles.  Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) 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 (3) 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.*

*Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.*

*In our opinion, management’sassessment that the Company maintained effective internal control overfinancial reporting as of December 31, 2006, is fairly stated, in allmaterial respects, based on the criteria established in*InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).  Also, in our opinion,the Company maintained, in all material respects, effective internal controlover financial reporting as of December 31, 2006, based on the criteriaestablished in Internal Control—Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO).

*We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of Marten Transport, Ltd. andsubsidiary as of December 31, 2006 and 2005, and the related consolidatedstatements of operations, stockholders’ equity, and cash flows for each of theyears in the three-year period ended December 31, 2006, and our reportdated March 14, 2007 expressed an unqualified opinion on those consolidatedfinancial statements.*

KPMG LLP

Minneapolis, Minnesota

March 14, 2007

 

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**Reportof Independent Registered Public Accounting Firm**

To the Board of Directorsand Stockholders of Marten Transport, Ltd.:

We have audited theaccompanying consolidated balance sheets of Marten Transport, Ltd. andsubsidiary (the “Company”) as of December 31, 2006 and 2005, and therelated consolidated statements of operations, stockholders’ equity, and cashflows for each of the years in the three-year period ended December 31,2006.  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 endedDecember 31, 2006, 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.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Marten Transport, Ltd. andsubsidiary as of December 31, 2006 and 2005, and the results of theiroperations and their cash flows for each of the years in the three-year periodended December 31, 2006, in conformity with U.S. generally acceptedaccounting principles. In addition, in our opinion, the 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.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Marten Transport Ltd.’s internal controlover financial reporting as of December 31, 2006, based on criteriaestablished in *Internal Control*—*Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), andour report dated March 14, 2007 expressed an unqualified opinion on management’sassessment of, and the effective operation of, internal control over financialreporting.

As discussed in Notes 1and 9 to the consolidated financial statements, the Company adopted Statementof Financial Accounting Standards No. 123R, “Share-Based Payment,” on January1, 2006.

KPMG LLP

Minneapolis, Minnesota

March 14, 2007

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**MARTEN TRANSPORT, LTD.**

 

**ConsolidatedBalance Sheets**
| ** **                                                                                                                                                                         | ** ** | **December 31,** | ** **  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                                                                                                                                         | ** ** | **2006**              | ** **  | **2005** | ** ** |
| **(In thousands, except share information)**                                                                                                                   | ** ** | ** **            | ** **  | ** ** | ** ** |
| **ASSETS**                                                                                                                                                                         |       |                  |        |   |   |
| **Current  assets:**                                                                                                                                                               |       |                  |        |   |   |
| Cash                                                                                                                                                                               | ** ** | **$**                 | **2,988**   |   | $ | 1,080 |   |
| Marketable securities                                                                                                                                                              | ** ** | **300**               |        | 494 |   |
| Receivables:                                                                                                                                                                       |       |                  |        |   |   |
| Trade, less allowances of $861 and $928,  respectively                                                                                                                             | ** ** | **48,005**            |        | 47,383 |   |
| Other                                                                                                                                                                              | ** ** | **6,458**             |        | 6,975 |   |
| Prepaid expenses and other                                                                                                                                                         | ** ** | **14,227**            |        | 13,264 |   |
| Deferred income taxes                                                                                                                                                              | ** ** | **4,532**             |        | 3,873 |   |
| Total current assets                                                                                                                                                               | ** ** | **76,510**            |        | 73,069 |   |
| **Property  and equipment:**                                                                                                                                                       |       |                  |        |   |   |
| Revenue equipment                                                                                                                                                                  | ** ** | **406,449**           |        | 339,606 |   |
| Buildings and land                                                                                                                                                                 | ** ** | **10,945**            |        | 10,877 |   |
| Office equipment and other                                                                                                                                                         | ** ** | **11,335**            |        | 11,797 |   |
| Less accumulated depreciation                                                                                                                                                      | ** ** | **(98,841**           | **)**       | (92,342 | ) |
| Net property and equipment                                                                                                                                                         | ** ** | **329,888**           | ** **  | 269,938 |   |
| **Other  assets**                                                                                                                                                                  | ** ** | **4,424**             |        | 6,726 |   |
| ** **                                                                                                                                                                         |       | **$**                 | **410,822** |   | $ | 349,733 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                     |       |                  |        |   |   |
| **Current  liabilities:**                                                                                                                                                          |       |                  |        |   |   |
| Checks issued in excess of cash balances                                                                                                                                           | ** ** | **$**                 | **804**     |   | $ | 1,446 |   |
| Accounts payable                                                                                                                                                                   | ** ** | **12,690**            |        | 7,646 |   |
| Insurance and claims accruals                                                                                                                                                      | ** ** | **16,073**            |        | 13,126 |   |
| Accrued liabilities                                                                                                                                                                | ** ** | **24,855**            |        | 18,557 |   |
| Current maturities of long-term debt                                                                                                                                               | ** ** | **5,000**             |        | 5,000 |   |
| Total current liabilities                                                                                                                                                          | ** ** | **59,422**            |        | 45,775 |   |
| **Long-term  debt**, less current maturities                                                                                                                                       | ** ** | **53,659**            |        | 43,300 |   |
| **Deferred  income taxes**                                                                                                                                                         | ** ** | **75,835**            |        | 66,310 |   |
| Total liabilities                                                                                                                                                                  | ** ** | **188,916**           |        | 155,385 |   |
| **Commitments  and contingencies**(Note 11)                                                                                                                                        |       |                  |        |   |   |
| **Minority  interest**                                                                                                                                                             | ** ** | **913**               |        | 431 |   |
| **Stockholders’  equity:**                                                                                                                                                    |       |                  |        |   |   |
| Preferred stock, $.01 par value per share; 2,000,000  shares authorized; no shares issued and outstanding                                                                          |       | **—**            |        | **—** |   |
| Common stock, $.01 par value per share; 48,000,000  shares authorized; 21,764,773 shares at December 31, 2006, and 21,573,220  shares at December 31, 2005, issued and outstanding |       | **218**               |        | 216 |   |
| Additional paid-in capital                                                                                                                                                         | ** ** | **73,601**            |        | 71,045 |   |
| Retained earnings                                                                                                                                                                  | ** ** | **147,174**           |        | 122,656 |   |
| Total stockholders’ equity                                                                                                                                                    | ** ** | **220,993**           |        | 193,917 |   |
| ** **                                                                                                                                                                         |       | **$**                 | **410,822** |   | $ | 349,733 |   |

 

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

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**MARTENTRANSPORT, LTD.**

 

**ConsolidatedStatements of Operations**
| ** **                                                                | ** ** | **For the years ended December 31,** | ** **  |
|---------------------------------------------------------------------------|------------|---------------------------------------------------------------|-------------|
| **(In thousands, except per share information)** | ** ** | **2006**                                                      | ** **  | **2005** | ** ** | **2004** | ** ** |
| **Operating  revenue**                                                    | ** ** | **$**                                                         | **518,890** |   | $ | 460,202 |   | $ | 380,048 |   |
| **Operating  expenses (income):**                                         |       |                                                          |        |   |   |   |   |
| Salaries, wages and benefits                                              | ** ** | **144,373**                                                   |        | 126,577 |   | 107,307 |   |
| Purchased transportation                                                  | ** ** | **84,409**                                                    |        | 81,897 |   | 77,858 |   |
| Fuel and fuel taxes                                                       | ** ** | **135,079**                                                   |        | 107,722 |   | 70,912 |   |
| Supplies and maintenance                                                  | ** ** | **33,155**                                                    |        | 28,192 |   | 25,102 |   |
| Depreciation                                                              | ** ** | **44,360**                                                    |        | 38,229 |   | 32,757 |   |
| Operating taxes and licenses                                              | ** ** | **7,514**                                                     |        | 7,051 |   | 6,303 |   |
| Insurance and claims                                                      | ** ** | **21,183**                                                    |        | 18,914 |   | 18,604 |   |
| Communications and utilities                                              | ** ** | **3,635**                                                     |        | 3,398 |   | 3,168 |   |
| Gain on disposition of revenue equipment                                  | ** ** | **(6,990**                                                    | **)**       | (3,943 | ) | (2,221 | ) |
| Other                                                                     | ** ** | **11,003**                                                    |        | 9,298 |   | 8,913 |   |
| ** **                                                                |       | **477,721**                                                   |        | 417,335 |   | 348,703 |   |
| **Operating  income**                                                     | ** ** | **41,169**                                                    |        | 42,867 |   | 31,345 |   |
| **Other  expenses (income):**                                             |       |                                                          |        |   |   |   |   |
| Interest expense                                                          | ** ** | **3,564**                                                     |        | 2,361 |   | 2,074 |   |
| Interest income and other                                                 | ** ** | **(1,106**                                                    | **)**       | (1,722 | ) | (1,493 | ) |
| Minority interest                                                         | ** ** | **768**                                                       |        | 741 |   | 51 |   |
| ** **                                                                |       | **3,226**                                                     |        | 1,380 |   | 632 |   |
| **Income  before income taxes**                                           | ** ** | **37,943**                                                    |        | 41,487 |   | 30,713 |   |
| **Provision  for income taxes**                                           | ** ** | **13,425**                                                    |        | 16,426 |   | 13,177 |   |
| **Net income**                                                            | ** ** | **$**                                                         | **24,518**  |   | $ | 25,061 |   | $ | 17,536 |   |
| **Basic  earnings per common share**                                      | ** ** | **$**                                                         | **1.13**    |   | $ | 1.16 |   | $ | 0.83 |   |
| **Diluted earnings per common  share**                                    | ** ** | **$**                                                         | **1.12**    |   | $ | 1.14 |   | $ | 0.81 |   |

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

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**MARTENTRANSPORT, LTD.**

 

**Consolidated Statements of Stockholders’ Equity**
| ** **                                                               | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|-------------------|------------|------------|------------|
| ** **                                                               | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Stock-** | ** ** |
| ** **                                                               | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **holders’** | ** ** |
| **(In thousands)**                                                  | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Equity** | ** ** |
| Balance at  December 31, 2003                                            |       | 20,640                |       | $           | 206        |           | $          | 64,265            |       | $          | 80,063     |   | $ | 144,534 |   |
| Net income                                                               |       | —                |       | —      |       | —         |       | 17,536            |       | 17,536     |       |
| Issuance of common stock from share-based payment  arrangement exercises |       | 821                   |       | 9           |       | 3,234          |       | (4                | )          | 3,239      |       |
| Tax benefits from share-based payment arrangement  exercises             |       | —                |       | —      |       | 2,612          |       | —            |       | 2,612      |       |
| 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 |   |

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

34

 

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**MARTENTRANSPORT, LTD.**

**ConsolidatedStatements of Cash Flows**
| ** **                                                                        | ** ** | **For the years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **(In thousands)**                                                           | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| **CASH  FLOWS PROVIDED BY OPERATING ACTIVITIES:**                                 |       | ** **                                                    | ** ** |   |   |   |   |
| Operations:                                                                       |       | ** **                                                    | ** ** |   |   |   |   |
| Net income                                                                        |       | **$**                                                         | **24,518** | ** ** | $ | 25,061 |   | $ | 17,536 |   |
| Adjustments to reconcile net income to net cash  flows from operating activities: |       | ** **                                                    | ** ** |   |   |   |   |
| Depreciation                                                                      |       | **44,360**                                                    | ** ** | 38,229 |   | 32,757 |   |
| Gain on disposition of revenue equipment                                          |       | **(6,990**                                                    | **)**      | (3,943 | ) | (2,221 | ) |
| Deferred tax provision                                                            |       | **8,866**                                                     | ** ** | 11,771 |   | 6,173 |   |
| Tax benefits from share-based payment arrangement  exercises                      |       | **1,298**                                                     | ** ** | 410 |   | 2,612 |   |
| Excess tax benefits from share-based payment  arrangement exercises               |       | **(1,156**                                                    | **)**      | — |   | — |   |
| Share-based payment arrangement compensation expense                              |       | **447**                                                       | ** ** | — |   | — |   |
| Minority interest in undistributed earnings of  affiliate                         |       | **482**                                                       | ** ** | 431 |   | — |   |
| Changes in other current operating items:                                         |       | ** **                                                    | ** ** |   |   |   |   |
| Receivables                                                                       |       | **(105**                                                      | **)**      | (6,896 | ) | (5,543 | ) |
| Prepaid expenses and other                                                        |       | **(963**                                                      | **)**      | (1,395 | ) | (1,835 | ) |
| Accounts payable                                                                  |       | **5,008**                                                     | ** ** | 3,067 |   | 896 |   |
| Other current liabilities                                                         |       | **1,305**                                                     | ** ** | 5,737 |   | 515 |   |
| Net cash provided by operating activities                                         |       | **77,070**                                                    | ** ** | 72,472 |   | 50,890 |   |
| **CASH  FLOWS USED FOR INVESTING ACTIVITIES:**                                    |       | ** **                                                    | ** ** |   |   |   |   |
| Revenue equipment additions                                                       |       | **(125,388**                                                  | **)**      | (117,722 | ) | (102,989 | ) |
| Proceeds from revenue equipment dispositions                                      |       | **37,301**                                                    | ** ** | 32,846 |   | 30,686 |   |
| Buildings and land, office equipment and other  additions                         |       | **(1,257**                                                    | **)**      | (3,718 | ) | (4,188 | ) |
| Proceeds from buildings and land, office equipment  and other dispositions        |       | **—**                                                    | ** ** | 68 |   | 75 |   |
| Net change in other assets                                                        |       | **2,302**                                                     | ** ** | 401 |   | (1,570 | ) |
| Purchases of marketable securities                                                |       | **(3,635**                                                    | **)**      | (32,527 | ) | (70,153 | ) |
| Sales of marketable securities                                                    |       | **3,829**                                                     | ** ** | 32,095 |   | 89,310 |   |
| Net cash used for investing activities                                            |       | **(86,848**                                                   | **)**      | (88,557 | ) | (58,829 | ) |
| **CASH  FLOWS PROVIDED BY FINANCING ACTIVITIES:**                                 |       | ** **                                                    | ** ** |   |   |   |   |
| Borrowings under credit facility and long-term debt                               |       | **131,023**                                                   | ** ** | 130,717 |   | 58,400 |   |
| Repayment of borrowings under credit facility and  long-term debt                 |       | **(120,664**                                                  | **)**      | (112,674 | ) | (56,000 | ) |
| Issuance of common stock from share-based payment  arrangement exercises          |       | **813**                                                       | ** ** | 525 |   | 3,239 |   |
| Excess tax benefits from share-based payment  arrangement exercises               |       | **1,156**                                                     | ** ** | — |   | — |   |
| Change in net checks issued in excess of cash  balances                           |       | **(642**                                                      | **)**      | (2,258 | ) | 3,155 |   |
| Net cash provided by financing activities                                         |       | **11,686**                                                    | ** ** | 16,310 |   | 8,794 |   |
| **NET  CHANGE IN CASH**                                                           |       | **1,908**                                                     | ** ** | 225 |   | 855 |   |
| **CASH:**                                                                         |       | ** **                                                    | ** ** |   |   |   |   |
| Beginning of year                                                                 |       | **1,080**                                                     | ** ** | 855 |   | — |   |
| End of year                                                                       |       | **$**                                                         | **2,988**  | ** ** | $ | 1,080 |   | $ | 855 |   |
| **SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:**                            |       | ** **                                                    | ** ** |   |   |   |   |
| Cash paid for:                                                                    |       | ** **                                                    | ** ** |   |   |   |   |
| Interest                                                                          |       | **$**                                                         | **3,620**  | ** ** | $ | 2,347 |   | $ | 2,131 |   |
| Income taxes                                                                      |       | **$**                                                         | **2,336**  | ** ** | $ | 2,966 |   | $ | 4,613 |   |
| Non-cash investing activities:                                                    |       | ** **                                                    | ** ** |   |   |   |   |
| Revenue  equipment not yet paid for                                               |       | **$**                                                         | **7,976**  | ** ** | $ | — |   | $ | — |   |

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

 

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**MARTEN TRANSPORT, LTD.**

**Notes to Consolidated Financial Statements**

 

**1.  Summary of Significant Accounting Policies**

**Nature ofbusiness:** Marten Transport, Ltd. is a long-haul truckloadcarrier providing protective service transportation of time- and temperature-sensitivematerials and general commodities to customers in the United States and Canada.

**Principlesof consolidation: **Theaccompanying consolidated financial statements include the accounts of MartenTransport, Ltd. and its 45% owned affiliate, MW Logistics, LLC (“MWL”).  MWL is a third-party provider of logisticsservices to the transportation industry. We have applied the provisions of FASB Interpretation No. 46, “Consolidationof Variable Interest Entities,” as revised, to our investment in MWL effectiveMarch 31, 2004.  As a result, theaccounts of MWL are included in our consolidated balance sheets as ofDecember 31, 2006 and December 31, 2005, and in our consolidatedstatements of operations beginning April 1, 2004.  All material intercompany accounts andtransactions have been eliminated in consolidation.  Prior to April 1, 2004, we accounted forour investment in MWL using the equity method of accounting.

**Marketablesecurities:**  We investavailable funds in short-term marketable securities.  This investment is in a mutual fund investingprimarily in repurchase agreements and other U.S. government-backed securitieshaving original maturities of three months or less, and is stated at marketvalue, which approximates cost.

**Tradeaccounts receivable:** Trade accounts receivable are recorded at the invoiced amounts, net ofan allowance for doubtful accounts.  Aconsiderable amount of judgment is required in assessing the realization ofthese receivables including the current creditworthiness of each customer andrelated aging of the 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 quarterly.  Invoicebalances over 30 days after the contractual due date are considered past dueper our policy and are reviewed individually for collectibility.  Initial payments by new customers aremonitored 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.

**Propertyand 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 iscomputed based on the cost of the asset, reduced by its estimated salvagevalue, using the straight-line method for financial reporting purposes.  Accelerated methods are used for income taxreporting purposes.  Following is asummary of estimated useful lives for financial reporting purposes:
|                             | ** ** | **Years**  |
|-----------------------------|------------|------------|
| Revenue equipment:          | ** ** | ** ** |
| Tractors                    |       | 5          |
| Trailers                    |       | 7          |
| Satellite tracking          |       | 7          |
| Buildings                   |       | 20         |
| Office equipment  and other |       | 3-15       |

36

 

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In 2006, we replaced most of our company-ownedtractors within approximately 3.75 years and our trailers within approximatelyseven years after purchase.  Our usefullives for depreciating tractors is five years and for trailers is seven 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.

Long-lived assetsare 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 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.

**Netinvestment in direct financing leases:**We have directfinancing tractor lease receivables from independent contractors, which expireover the next five years.

**Tires inservice:** The cost of original equipment and replacement tiresplaced in service is capitalized. Amortization is calculated based on cost,less estimated salvage value, using the straight-line method over 24 months.The current portion of capitalized tires in service is included in prepaidexpenses 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.

**Incometaxes: **Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial 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.

**Insuranceand claims:**  Weself-insure, in part, for losses relating to workers’ compensation, autoliability, general liability, cargo and property damage claims, along withemployees’ health insurance with varying risk retention levels.  We maintain insurance coverage forper-incident and total losses in excess of these risk retention levels inamounts we consider adequate based upon historical experience and our ongoingreview.  We reserve currently for theestimated cost of the uninsured portion of pending claims. These reserves 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 $4.5 million in standby letters of creditto guarantee settlement of claims.

**Revenuerecognition: **We recordrevenue and related expenses on the date shipment of freight is completed.  We earned 17% of our revenue in 2006 from asingle customer whose trade receivables represented 11% of our tradereceivables as of December 31, 2006. We earned 15% of our revenue in 2005 from a single customer whose tradereceivables represented 9% of our trade receivables as of December 31,2005.  We earned 11%, 11% and 10% of ourrevenue in 2004 from three single customers.

**Share-based payment arrangement compensation:** Under our stock incentive plans, all of our employees and any subsidiaryemployees, as well as all of our non-employee directors, consultants, advisorsand 

37

 

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independent contractors, may be granted stock-based awards, includingincentive and non-statutory stock options and restricted stock awards.  Effective January 1, 2006, we beganrecording compensation expense associated with share-based payment arrangementsin accordance with Statement of Financial Accounting Standards No. 123R, “Share-BasedPayment” (“SFAS 123R”) as interpreted by SEC Staff Accounting Bulletin No.107.  SFAS 123R requires all share-basedpayments to employees and non-employee directors, including grants of employeestock options, to be recognized in the income statement based on their fairvalues at the date of grant. Historically, we accounted for share-based compensation under therecognition and measurement principles of Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” and relatedinterpretations.  See Note 9 foradditional discussion.

**Earningsper common share:** Basic earnings per common share is computed by dividing net income bythe weighted average number of common shares outstanding during the year.  Diluted earnings per common share is computedby dividing net income by the sum of the weighted average number of commonshares outstanding plus all additional common shares that would have beenoutstanding if potentially dilutive common shares related to stock options andother dilutive securities had been issued using the treasury stock method.

**Segmentreporting: **We haveadopted the provisions of Statement of Financial Accounting Standards No. 131, “Disclosuresabout Segments of an Enterprise and Related Information.”  Statement No. 131 establishes accountingstandards for segment reporting.  Wecurrently operate in a single segment—long-haul truckload carriage providingprotective service transportation of time- and temperature-sensitive materialsand general commodities.

**Recent accounting pronouncements: **In July 2006, the Financial AccountingStandards Board, or FASB, issued Interpretation No. 48, “Accounting forUncertainty in Income Taxes — an interpretation of FASB Statement No. 109.”  The Interpretation clarifies the accountingfor uncertainty in income taxes recognized in an enterprise’s financialstatements in accordance with FASB Statement No. 109, “Accounting for IncomeTaxes.”  The Interpretation prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return.  The Interpretation alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure, and transition.  The Interpretation is effective for fiscalyears beginning after December 15, 2006. We will adopt this Interpretation in the first quarter of 2007 and it isnot expected to have a significant impact on our results of operations orfinancial position.

In September 2006, the Securities andExchange Commission issued Staff Accounting Bulletin No. 108, “Considering theEffects of Prior Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements” (SAB 108). SAB 108 addresses how the effects of prior year misstatements should beconsidered when quantifying misstatements in current year financialstatements.  SAB 108 requires registrantsto apply the new guidance for the first time that it identifies material errorsin existence at the beginning of the first fiscal year ending after November15, 2006 by correcting those errors through a one-time cumulative effectadjustment to beginning-of-year retained earnings.  The adoption of SAB 108 in 2006 had no impacton our results of operations or financial position.

**Use ofestimates:**  We mustmake estimates and assumptions to prepare the consolidated financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America.  These estimates andassumptions affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities in the consolidated financialstatements.  These estimates are primarilyrelated to insurance and claims accruals and depreciation.  Ultimate results could differ from theseestimates.

38

 

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**2.  Details of Consolidated Balance SheetAccounts**

**Prepaidexpenses and other:**  Asof December 31, prepaid expenses and other consisted of the following:

| (In thousands)        | ** ** | **2006**  | ** ** | **2005** | ** ** |
|----------------------------|------------|-----------|------------|----------|------------|
| Tires in service           | ** ** | **$**     | **4,545**  |     | $          | 3,981 |   |
| License fees               | ** ** | **4,530** |       | 4,447    |       |
| Parts and tires  inventory | ** ** | **2,113** |       | 1,946    |       |
| Insurance  premiums        | ** ** | **1,037** |       | 1,003    |       |
| Other                      | ** ** | **2,002** |       | 1,887    |       |
| ** **                 | ** ** | **$**     | **14,227** |     | $          | 13,264 |   |

** **

**Netinvestment in direct financing leases:**  As of December 31, the components of the netinvestment in direct financing lease receivables from independent contractorsconsisted of the following:

| (In thousands)                          | ** ** | **2006**   | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|------------|------------|----------|------------|
| Total minimum  lease payments to be received | ** ** | **$**      | **7,649**  |     | $          | 11,633 |   |
| Less: unearned  income                       | ** ** | **(1,511** | **)**      | (2,508   | )          |
| Net investment in  direct financing leases   | ** ** | **$**      | **6,138**  |     | $          | 9,125 |   |

 

The current portion ofour net investment in direct financing leases is included in other receivablesin 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 ofDecember 31, 2006, minimum lease payments to be received for each of thefive succeeding fiscal years are as follows: $2,938,000 in 2007, $2,362,000 in2008, $1,694,000 in 2009, $636,000 in 2010 and $19,000 in 2011.

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

| (In thousands)   | ** ** | **2006**  | ** ** | **2005** | ** ** |
|-----------------------|------------|-----------|------------|----------|------------|
| Accrued payables      | ** ** | **$**     | **17,323** |     | $          | 9,939 |   |
| Vacation              | ** ** | **3,548** |       | 3,087    |       |
| Salaries and  wages   | ** ** | **2,016** |       | 3,392    |       |
| Current income  taxes | ** ** | **861**   |       | 921      |       |
| Other                 | ** ** | **1,107** |       | 1,218    |       |
| ** **            | ** ** | **$**     | **24,855** |     | $          | 18,557 |   |

39

 

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**3.      Long-Term Debt**

                As of December 31, long-term debt consisted of thefollowing:
| **(In thousands)**                                                                                                                                                                                                                                                                                                                                     | ** ** | **2006**   | ** **                   | **2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------------------------|----------|------------|
| Unsecured  committed credit facility in the  amount of $75 million with banks maturing in  September 2011 and bearing variable interest  based upon either the London InterbankOffered Rate or the agent bank’s Prime  Rate,  in each case plus/minus applicable margins (6.30% weighted  average interest rate for the facility at December 31, 2006) |       | **$**      | **   45,802** |     | $          |    30,443 |   |
| Series A Senior  Unsecured Notes  maturing in October 2008 with annual  principal payments of $3.57 million  which began in October 2002 and bearing  fixed interest at 6.78%                                                                                                                                                                               |       | **7,143**  |                         | 10,714   |       |
| Series B Senior  Unsecured Notes  maturing in April 2010 with annual  principal payments of $1.43 million  which began in April 2004 and bearing  fixed interest at 8.57%                                                                                                                                                                                   |       | **5,714**  |                         | 7,143    |       |
| Total long-term  debt                                                                                                                                                                                                                                                                                                                                       | ** ** | **58,659** |                         | 48,300   |       |
| Less current  maturities of long-term debt                                                                                                                                                                                                                                                                                                                  |       | **5,000**  |                         | 5,000    |       |
| Long-term debt,  less current maturities                                                                                                                                                                                                                                                                                                                    | ** ** | **$**      | **53,659**                   |     | $          | 43,300 |   |

 

In August 2006, weentered into a credit agreement which provides for a five-year unsecuredcommitted credit facility (“credit facility”) in an aggregate principal amountof up to $75 million.  The aggregateprincipal amount of the credit facility may be increased at our option up to amaximum aggregate principal amount of $100 million.  The credit agreement amends and restates inits entirety our prior credit agreement. At December 31, 2006, our credit facility had an outstandingprincipal balance of $45.8 million, outstanding standby letters of credit of$4.5 million, and remaining borrowing availability of $24.7 million.

Our creditfacility prohibits us from paying, in any fiscal year, dividends in excess of25% of our net income from the prior fiscal year.  The debt agreements also contain restrictivecovenants which, among other matters, require us to maintain certain financialratios, including debt-to-equity, cash flow leverage, interest coverage andfixed charge coverage.  We were incompliance with all of these covenants at December 31, 2006.

Maturities of long-term debt at December 31, 2006, areas follows:

| **(In thousands)** | ** ** | **Amount** | ** ** |
|-------------------------|------------|------------|------------|
| 2007                    |       | $          | 5,000      |   |
| 2008                    |       | 5,000      |       |
| 2009                    |       | 1,429      |       |
| 2010                    |       | 1,428      |       |
| 2011                    |       | 45,802     |       |
|                    |       | $          | 58,659     |   |

 

 

40

 

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**4.     RelatedParty Transactions**

The following related party transactions occurredduring the three years ended December 31, 2006:

(a)****We purchasefuel and obtain tires and related services from a company in which one of our directorsis the president and a principal stockholder. We paid that company $1.3 million in 2006, $1.2 million in 2005 and$924,000 in 2004 for fuel and tire services. In addition, we paid $2.4 million in 2006, $2.0 million in 2005 and $1.4million in 2004 to tire manufacturers for tires that we purchased from the tiremanufacturers but were provided by the same company.  The same company received commissions fromthe tire manufacturers related to these purchases.  We also had accounts payable to the samecompany of $78,000 as of December 31, 2006 and $56,000 as of December 31,2005.

(b) We paid$142,000 in 2005 and $493,000 in 2004 for various construction projects to acompany in which one of our directors is the president and owner.

(c) We providetransportation services to MWL, a 45% owned affiliate.  MWL is a third-party provider of logisticsservices to the transportation industry. In 2006, 2005 and 2004, we received $16.3 million, $21.1 million and$22.6 million, respectively, of our revenue from transportation servicesarranged by MWL.

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**5.      Income Taxes**

The components ofthe provision for income taxes consisted of the following:
| **(In thousands)** | ** ** | **2006**  | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Current:                |       |      |       |     |       |     |       |
| Federal                 | ** ** | **$**     | **4,159**  |     | $          | 4,254    |       | $ | 5,443 |   |
| State                   | ** ** | **400**   |       | 401      |       | 1,561    |       |
| ** **              | ** ** | **4,559** |       | 4,655    |       | 7,004    |       |
| Deferred:               |       |      |       |     |       |     |       |
| Federal                 | ** ** | **9,088** |       | 9,413    |       | 5,028    |       |
| State                   | ** ** | **(222**  | **)**      | 2,358    |       | 1,145    |       |
|                    | ** ** | **8,866** |       | 11,771   |       | 6,173    |       |
| Total provision         | ** ** | **$**     | **13,425** |     | $          | 16,426   |       | $ | 13,177 |   |

 

The statutoryfederal income tax rate is reconciled to the effective income tax rate asfollows:
|                                                        | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Statutory federal****

income tax rate            | ** ** | **35**     | **%**      | 35         | %          | 35         | %          |
| Increase in  taxes arising from:                       |       |       |       |       |       |       |       |
| State income taxes, net of  federal income tax benefit |       | **—** |       | 4          |       | 6          |       |
| Federal deferred income tax rate increase              | ** ** | **—** | ** ** | **—** |       | 4          |       |
| Benefit of lower tax bracket                           | ** ** | **—** | ** ** | **—** |       | (1         | )          |
| Decrease in accrual for tax contingencies              | ** ** | **—** | ** ** | **—** |       | (1         | )          |
| Other, net                                             | ** ** | **—** |       | 1          |       | —     |       |
| Effective tax rate                                     | ** ** | **35**     | **%**      | 40         | %          | 43         | %          |

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 our income apportionment for severalstates, which produced a lower expected effective state income tax rate, net offederal impact.  Our effective income taxrate increased to 42.9% in 2004, because we increased our deferred income taxliability by a total of $1.5 million, or 4.8% of income before income taxes,during the fourth quarter of 2004 as a result of an increase in our statutoryfederal and state income tax rates based upon projected future taxable income.

42

 

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

* *

| (In thousands)                                                                            | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Deferred tax assets:                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Reserves and accrued liabilities for  financial reporting in excess of tax | ** ** | **$**      | **7,369**  |       | $          | 6,150 | ** ** |
| State income tax deduction for  financial reporting in excess of tax                           |       | **3,487**  |       | 3,565      |       |
| Other                                                                                          | ** ** | **473**    |       | 17         |       |
|                                                                                           | ** ** | **11,329** |       | 9,732      |       |
| Deferred tax  liabilities:                                                                     |       |       |       |       |       |
| Tax depreciation in excess of   depreciation for financial reporting                           |       | **80,034** |       | 70,113     |       |
| Prepaid expenses deducted for   income tax purposes and capitalized  for financial reporting   |       | **2,598**  |       | 2,056      |       |
|                                                                                           |       | **82,632** |       | 72,169     |       |
| Net deferred tax  liability                                                                    | ** ** | **$**      | **71,303** |       | $          | 62,437 |   |

 

We have not provided a valuation allowance againstdeferred tax assets at December 31, 2006 or 2005.  We believe the deferred tax assets will berealized principally through future reversals of existing taxable temporarydifferences (deferred tax liabilities) and future taxable income.

**6.      Earnings Per Common Share**

Basic and dilutedearnings per common share were computed as follows:

** **
| (In thousands, except per share amounts)                     | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Numerator:                                                                            |       |       |       |     |       |     |       |
| Net income                                                                            | ** ** | **$**      | **24,518** |     | $          | 25,061   |       | $ | 17,536 |   |
| Denominator:                                                                          |       |       |       |     |       |     |       |
| Basic earnings per common share -  weighted-average shares                            |       | **21,735** |       | 21,518   |       | 21,088   |       |
| Effect of dilutive stock options                                                      | ** ** | **220**    |       | 444      |       | 677      |       |
| Diluted earnings per common share -  weighted-average shares  and assumed conversions |       | **21,955** |       | 21,962   |       | 21,765   |       |
| Basic earnings  per common share                                                      | ** ** | **$**      | **1.13**   |     | $          | 1.16     |       | $ | 0.83 |   |
| Diluted earnings per common  share                                                    | ** ** | **$**      | **1.12**   |     | $          | 1.14     |       | $ | 0.81 |   |

 

Options totaling226,000 shares were outstanding but were not included in the calculation ofdiluted earnings per share for 2006 because their exercise prices were greaterthan the average market price of the common shares and, therefore, includingthe options in the denominator would be antidilutive, or decrease the number ofweighted-average shares.  All outstandingoptions were included in the calculation of diluted earnings per share for 2005and 2004.

**7.      Stock Split**

On December 12, 2005, we effected athree-for-two stock split of our common stock, $.01 par value, in the form of a50% stock dividend.  Our consolidatedfinancial statements, related notes, and other financial data contained in thisreport have been adjusted to give retroactive effect to the stock split for allperiods presented.

43

 

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**8.      Amendedand Restated Certificate of Incorporation**

In May 2005, our stockholders approved an amendment to our Amendedand Restated Certificate of Incorporation increasing the authorized number ofshares of common stock, $.01 par value, from 23 million shares to48 million shares.

**9.      Employee Benefits**

***Stock Incentive Plans -***Under our 2005 Stock Incentive Plan (the“2005 Plan”), all of our employees and any subsidiary employees, as well as allof our non-employee directors, consultants, advisors and independentcontractors, may be granted stock-based awards, including incentive andnon-statutory stock options and restricted stock awards.  Stock options expire within 10 years afterthe date of grant and the exercise price must be at least the fair market valueof our common stock on the date of grant. Stock options issued to non-employee directors upon their annualre-election to our Board of Directors are generally exercisable at the date ofgrant.  Service-based options issued toemployees are generally exercisable beginning one year from the date of grantin cumulative amounts of 20% per year. Performance-based options become exercisable upon achievement of certainperformance criteria established by the Compensation Committee of our Board ofDirectors.  Options exercised representnewly issued shares.  The maximum numberof shares of common stock available for issuance under the 2005 Plan is 2.85million shares.  As of December 31, 2006,there were 226,000 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 inMarch 2005.

Under our 1995 Plan, officers, directors and employees were grantedincentive and non-statutory stock options. Incentive stock option exercise prices were required to be at least thefair market value of our common stock on the date of grant.  Non-statutory stock option exercise priceswere required to be at least 85% of the fair market value of our common stockon the date of grant.  Stock optionsexpire within 10 years after the date of grant. Stock options issued to non-employee directors upon their annualre-election to our Board of Directors are generally exercisable at the date ofgrant.  Service-based options issued toemployees are generally exercisable beginning one year from the date of grantin cumulative amounts of 20% per year. Options exercised represent newly issued shares.  As of December 31, 2006, there were 415,686shares reserved for issuance under options outstanding under the 1995Plan.  No additional options will begranted under the 1995 Plan.

Effective January 1, 2006, we began recording compensation expenseassociated with share-based payment arrangements in accordance with Statementof Financial Accounting Standards No. 123R, “Share-Based Payment” (“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, “Statement ofCash Flows.”  Generally, the approach inSFAS 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.

Historically, we accounted for share-based compensation under therecognition and measurement principles of APB 25 and relatedinterpretations.  No compensation expenserelated to stock option plans was reflected in our net income as all optionshad an exercise price equal to the market value of the underlying common stockon the date of grant.  SFAS 123established accounting and disclosure requirements using a fair-value-basedmethod of accounting for share-based employee compensation plans.  As permitted by SFAS 123, we elected tocontinue to apply the intrinsic-value-based method of APB 25, described above,and adopted only the disclosure requirements of SFAS 123, as amended by Statementof Financial Accounting Standards No. 148, “Accounting For Stock-BasedCompensation — Transition and Disclosure.”

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We adopted the modified prospective transition method provided forunder SFAS 123R, and consequently have not retroactively adjusted results fromprior periods.  Under this transitionmethod, compensation cost associated with share-based awards recognized in 2006includes:  (a) compensation cost for allshare-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-based paymentsgranted subsequent to December 31, 2005, based on the grant-date fair valueestimated in accordance with the provisions of SFAS 123R.

We use the Black-Scholes option pricing model to calculate thegrant-date fair value of option awards. The fair value of option awards granted was estimated as of the date ofgrant using the following weighted average assumptions:

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

----

There were no options granted in 2005 or 2004.

(1)Expected option life — We use historical employee exercise and optionexpiration data to estimate the expected life assumption for the Black-Scholesgrant-date valuation.  We believe thatthis historical data is currently the best estimate of the expected term of anew option.  We use a weighted-averageexpected life for all awards.

(2)Expected stock price volatility — We use our stock’s historicalvolatility for the same period of time as the expected life.  We have no reason to believe that its futurevolatility will differ from the past.

(3)Risk-free interest rate — The rate is based on the U.S. Treasury yieldcurve in effect at the time of the grant for the same period of time as theexpected life.

(4)Expected dividend yield — We have not historically paid cash dividendson our common stock, and we do not expect to declare any cash dividends in theforeseeable future.

We use the straight-line attribution method to recognize expense forall 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 immediately exercisable in full inthe event of retirement, death or disability and upon a change in control withrespect to all options that have been outstanding for at least six months.  To be eligible for retirement, an employeemust reach age 65.  Performance-basedoption awards will remain exercisable to the extent previously exercisable fora period of one year after the employee’s employment is terminated due toretirement, death or disability. Performance-based option awards become 

45

 

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immediately exercisable in full in the event of a change in controlwith respect to all options that have been outstanding for at least six months.

SFAS 123R requires compensation costs associated with service-basedoption awards to be recognized over the requisite service period, which is theperiod between the grant date and the earlier of the award’s stated vestingterm 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 the retirementeligibility date.  Share-based compensationexpense for employees who are not retirement eligible is recognized on astraight-line basis over the stated vesting period of the award.

The amount of share-based compensation recognized during a period isbased on the value of the portion of the awards that are ultimately expected tovest.  SFAS 123R requires forfeitures tobe estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates.  The term “forfeitures” is distinct from “cancellations”or “expirations” and represents only the unvested portion of the surrenderedaward.  We currently expect, based on ananalysis of our historical forfeitures and known forfeitures on existingawards, that approximately 1.25% of unvested outstanding options will beforfeited each year.  This analysis willbe re-evaluated quarterly and the forfeiture rate will be adjusted asnecessary.  Ultimately, the actual expenserecognized over the vesting period will only be for those shares that vest.

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

Prior to the adoption of SFAS 123R, benefits of tax deductions inexcess of recognized compensation costs (excess tax benefits) were reported asoperating cash flows.  SFAS 123R requiresthat they be recorded as a financing cash inflow rather than a deduction oftaxes paid in operating cash flows.  In2006, there was $1.2 million of excess tax benefits recognized resulting fromexercises of options granted prior to December 31, 2005.

The following table details the effect on net income and earnings pershare had share-based compensation expense been recorded in 2005 and 2004 basedon the fair-value method under SFAS 123. The reported and pro forma net income and earnings per share in 2006 arethe same since share-based compensation expense was calculated under theprovisions of SFAS 123R.

|                                                                                                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income as reported                                                                                               |       | $        | 25,061     |     | $          | 17,536 |   |
| Deduct: Total share-based compensation expense determined under fair  value based method for all awards, net of related tax effects |       | (108     | )          | (157     | )          |
| Pro forma net income                                                                                                                |       | $        | 24,953     |     | $          | 17,379 |   |
| Basic income per share:                                                                                                             |       |     |       |     |       |
| As reported                                                                                                                         |       | $        | 1.16       |     | $          | 0.83 |   |
| Pro forma                                                                                                                           |       | $        | 1.16       |     | $          | 0.82 |   |
| Diluted income per share:                                                                                                           |       |     |       |     |       |
| As reported                                                                                                                         |       | $        | 1.14       |     | $          | 0.81 |   |
| Pro forma                                                                                                                           |       | $        | 1.14       |     | $          | 0.80 |   |

 

As of December 31, 2006, there was a total of $1.2 million ofunrecognized compensation expense related to unvested service-based optionawards, which is expected to be recognized over a weighted-average 

46

 

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period of 3.3 years, and $767,000 of unrecognized compensation expenserelated to unvested performance-based option awards, which will be recorded inthe periods in which our achievement of certain operating ratios is probablethrough 2010.  As of December 31, 2006,the performance condition was not considered probable of achievement.

Option activity in 2006 was as follows:

|                                  | ** ** | ** ** | ** ** | **Weighted**            | ** ** |
|----------------------------------|------------|------------|------------|-------------------------|------------|
| ** **                       | ** ** | ** ** | ** ** | **Average**             | ** ** |
| ** **                       | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** |
| Outstanding at December 31, 2005 |       | 607,239    |       | $                       | 5.36       |   |
| Granted                          |       | 226,000    |       | 23.18                   |       |
| Exercised                        |       | (191,553   | )          | 4.24                    |       |
| Outstanding at December 31, 2006 |       | 641,686    |       | $                       | 11.98      |   |
| Exercisable at December 31, 2006 |       | 380,123    |       | $                       | 5.84       |   |

 

The fair value of options granted in 2006 was $1.4 million forservice-based options and $767,000 for performance-based options.  There were no options granted in 2005 or2004.  The total intrinsic value ofoptions exercised in 2006, 2005 and 2004 was $3.4 million, $1.0 million and$6.9 million, respectively.  Intrinsicvalue is the difference between the fair value of the acquired shares at thedate of exercise and the exercise price, multiplied by the number of optionsexercised.  Proceeds received from optionexercises in 2006, 2005 and 2004 were $813,000, $525,000 and $3.2 million,respectively.

The following table summarizes information concerning outstanding andexercisable option awards as of December 31, 2006:
| ** **                                  | ** ** | **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                               |       | 327,059                      |       | 3.9                          |       | $ | 4.56 |   | $ | 4,599 |   | 321,996 |   | 3.8 |   | $ | 4.55 |   | $ | 4,530 |   |
| $10.76                                      |       | 88,627                       |       | 6.8                          |       | 10.76 |   | 697 |   | 48,127 |   | 6.8 |   | 10.76 |   | 378 |   |
| $21.94 - $23.59                             |       | 148,000                      |       | 9.2                          |       | 22.97 |   | — |   | 10,000 |   | 9.4 |   | 23.49 |   | — |   |
|                                        |       | 563,686                      |       | 5.7                          |       | $ | 10.37 |   | $ | 5,296 |   | 380,123 |   | 4.4 |   | $ | 5.84 |   | $ | 4,908 |   |
| Performance-based options:                  |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| $23.59                                      |       | 78,000                       |       | 9.2                          |       | $ | 23.59 |   | $ | — |   | — |   | — |   | $ | — |   | $ | — |   |

----

(1)            Represents the weighted-averageremaining contractual life in years.

(2)            Represents the weighted-average exerciseprice.

(3)            Represents the aggregate intrinsic valuebased on our closing stock price on December 29, 2006 for in-the-money options(in thousands).

 

47

 

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Nonvested option awards as of December 31, 2006 and changes during 2006were as follows:
| ** **                     | ** ** | ** ** | ** ** | ** **          | ** ** | **Weighted**        | ** ** |
|--------------------------------|------------|------------|------------|---------------------|------------|---------------------|------------|
| ** **                     | ** ** | ** ** | ** ** | ** **          | ** ** | **Average**         | ** ** |
| ** **                     | ** ** | ** ** | ** ** | **Weighted**        | ** ** | **Remaining**       | ** ** |
| ** **                     | ** ** | ** ** | ** ** | **Average**         | ** ** | **Contractual**     | ** ** |
| ** **                     | ** ** | ** ** | ** ** | **Grant Date** | ** ** | **Life**            | ** ** |
| ** **                     | ** ** | **Shares** | ** ** | **Fair Value** | ** ** | **(in Years)** | ** ** |
| Service-based options:         |       |       |       |                |       |                |       |
| Nonvested at December 31, 2005 |       | 86,066     |       | $                   | 3.53       |                | 7.3        |   |
| Granted                        |       | 148,000    |       | 9.55                |       | 9.2                 |       |
| Vested                         |       | (50,503    | )          | 4.49                |       | 6.5                 |       |
| Nonvested at December 31, 2006 |       | 183,563    |       | $                   | 8.12       |                | 8.5        |   |
| Performance-based options:     |       |       |       |                |       |                |       |
| Nonvested at December 31, 2005 |       | —     |       | $                   | —     |                | —     |   |
| Granted                        |       | 78,000     |       | 9.83                |       | 9.2                 |       |
| Vested                         |       | —     |       | —              |       | —              |       |
| Nonvested at December 31, 2006 |       | 78,000     |       | $                   | 9.83       |                | 9.2        |   |

The total fair value of options which vested during 2006, 2005 and 2004was $227,000, $254,000 and $258,000, respectively.

***RetirementSavings Plan****-*We sponsor adefined contribution retirement savings plan under Section 401(k) of theInternal Revenue Code.  Employees areeligible for the plan after one year of service.  Participants are able to contribute up to thelimit set by law, which in 2006 was $15,000 for participants less than age 50and $20,000 for participants age 50 and above. We contribute 35% of each participant’s contribution, up to a total of6% contributed.  Our contribution vestsat the rate of 20% per year for the second through sixth years of service.  In addition, we may make electivecontributions as determined by the board of directors.  Elective contributions were not made in 2006,2005 or 2004.  Total expense recorded forthe plan was $1.1 million in 2006, $702,000 in 2005 and $404,000 in 2004.

***StockPurchase Plans****-*An EmployeeStock Purchase Plan and an Independent Contractor Stock Purchase Plan aresponsored to encourage employee and independent contractor ownership of ourcommon stock. Eligible participants specify the amount of regular payroll orcontract payment deductions and voluntary cash contributions that are used topurchase shares of our common stock.  Thepurchases are made at the market price on the open market.  We pay the broker’s commissions andadministrative charges for purchases of common stock under the plans.

**10.   Fair Value of Financial Instruments**

The carryingamounts of marketable securities, accounts receivable, direct financing leasesreceivable and accounts payable approximate fair value because of the shortmaturity of these instruments.  The fairvalue of our total long-term debt is estimated to be $59.0 million at December31, 2006, and $49.0 million at December 31, 2005.  The fair value was estimated using discountedcash flow analysis.  Current borrowingrates for similar long-term debt were used in this analysis.

48

 

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**11.   Commitments and Contingencies**

We are committedto: (a) purchase $29.2 million of new revenue equipment in 2007; and(b) operating lease obligations totaling $879,000 through 2011.

We are involved inlegal actions that arise in the ordinary course of business.  Although the outcomes of any such legalactions cannot be predicted, in the opinion of management, the resolution ofany currently pending or threatened actions will not have a material adverseeffect upon our financial position or results of operations.

**12.   QuarterlyFinancial Data (Unaudited)**

The following is a summary of the quarterly results ofoperations for 2006 and 2005:
| **2006 Quarters (In thousands, except per share amounts)** | ** ** | **First** | ** **  | **Second** | ** ** | **Third**   | ** ** | **Fourth** | ** **  | **Total**  | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------|-------------|------------|------------|-------------|------------|------------|-------------|------------|------------|
| Operating  revenue                                                                            | ** ** | **$**     | **119,555** | ** ** | **$**      | **131,862** | ** ** | **$**      | **135,812** | ** ** | **$**      | **131,661** | ** ** | **$** | **518,890** | ** ** |
| Operating income                                                                              | ** ** | **8,989** | ** **  | **11,812** | ** ** | **11,713**  | ** ** | **8,655**  | ** **  | **41,169** | ** ** |
| Net income                                                                                    | ** ** | **5,053** | ** **  | **7,540**  | ** ** | **6,736**   | ** ** | **5,189**  | ** **  | **24,518** | ** ** |
| Basic earnings  per common share                                                              | ** ** | **0.23**  | ** **  | **0.35**   | ** ** | **0.31**    | ** ** | **0.24**   | ** **  | **1.13**   | ** ** |
| Diluted earnings per  common share                                                            | ** ** | **0.23**  | ** **  | **0.34**   | ** ** | **0.31**    | ** ** | **0.24**   | ** **  | **1.12**   | ** ** |
|                                                                                               |            |           |             |            |            |             |            |            |             |            |            |  |  |  |  |  |

** **
| **2005 Quarters (In thousands, except per share amounts)** | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|
| Operating  revenue                                                                            |       | $         | 102,906    |       | $          | 112,800   |       | $          | 119,081    |      | $          | 125,415 |   | $ | 460,202 |   |
| Operating income                                                                              |       | 8,276     |       | 11,556     |       | 11,046    |       | 11,989     |       | 42,867    |       |
| Net income                                                                                    |       | 4,815     |       | 6,763      |       | 6,374     |       | 7,109      |       | 25,061    |       |
| Basic earnings  per common share                                                              |       | 0.22      |       | 0.31       |       | 0.30      |       | 0.33       |       | 1.16      |       |
| Diluted earnings per  common share                                                            |       | 0.22      |       | 0.31       |       | 0.29      |       | 0.32       |       | 1.14      |       |
|                                                                                               |            |           |            |            |            |           |            |            |            |           |            |  |  |  |  |  |

# * *

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#  

**ITEM 9.****                        *CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE***

No reports on Form8-K have been required to be filed within the twenty-four months prior toDecember 31, 2006, involving a change of accountants or disagreements onaccounting and financial disclosure.

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

As required byRule 13a-15 under the Securities Exchange Act of 1934 (“Exchange Act”), we havecarried out an evaluation of the effectiveness of the design and operation ofour disclosure controls and procedures (as defined in Exchange Act Rule13a-15(e)) as of the end of the period covered by this report.  This evaluation was carried out under thesupervision and with the participation of our management, including ourPresident and Chief Executive Officer and our Chief Financial Officer.  Based upon that evaluation, our President andChief Executive Officer and our Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of December 31, 2006.  There were no changes in our internal controlover financial reporting that occurred during the period covered by this reportthat have materially affected, or that are reasonably likely to materiallyaffect, our internal control over financial reporting.  We intend to periodically evaluate ourdisclosure controls and procedures as required by the Exchange Act Rules.

We have includedManagement’s Annual Report on Internal Control Over Financial Reporting in Item8 above.

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

None.

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**PART III**

** **

# **ITEM****10.****                      *DIRECTORS, EXECUTIVEOFFICERS and corporate governance***

A.    Directors of the Registrant.

The information in the “Electionof Directors—Information About Nominees” and “Election of Directors—OtherInformation About Nominees” sections of our 2007 Proxy Statement isincorporated in this Report by reference.

B.    Executive Officers of the Registrant.

Information about ourexecutive officers is included in this Report under Item 4A, “ExecutiveOfficers of the Registrant.”

C.    Compliance with Section 16(a) of theExchange Act.

The information in the “Section16(a) Beneficial Ownership Reporting Compliance” section of our 2007 ProxyStatement is incorporated in this Report by reference.

D.    Procedure for Director Nominations bySecurity Holders.

There have been nomaterial changes to the procedures by which security holders may recommendnominees to our board of directors.

E.     Audit Committee Financial Expert.

The information in the “Electionof Directors—Board and Board Committees” section of our 2007 Proxy Statement isincorporated in this Report by reference.

F.     Identification of the Audit Committee.

The information in the “Electionof Directors—Board and Board Committees” section of our 2007 Proxy Statement isincorporated in this Report by reference.

G.    Code of Ethics for Senior FinancialManagement.

OurCode of Ethics for Senior Financial Management applies to all of our executiveofficers, including our principal executive officer, principal financialofficer and controller, and meets the requirements of the Securities andExchange Commission.  We haveposted our Code of Ethics for Senior Financial Management on our website at *www.marten.com*.  Weintend to disclose any amendments to and any waivers from a provision of ourCode of Ethics for Senior Financial Management on our website within fivebusiness days following such amendment or waiver.

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# **ITEM 11*.******                      EXECUTIVECOMPENSATION***

The information in the “Electionof Directors—Director Compensation” and “Compensation and Other Benefits”sections of our 2007 Proxy Statement is incorporated in this Report byreference.

# **ITEM 12.*****                      SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT and related stockholder matters***

The information in the “SecurityOwnership of Certain Beneficial Owners and Management” and “Compensation andOther Benefits—Equity Compensation Plan Information” sections of our 2007 ProxyStatement is incorporated in this Report by reference.

# **ITEM 13.*****                      CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, and director independence***

The information in the “Related Party Transactions”and “Election of Directors—Board and Board Committees” sections of our 2007Proxy Statement is incorporated in this Report by reference.

# **ITEM 14.*       principal accountant fees and services***

The information in the “Feesof Independent Auditors” section of our 2007 Proxy Statement is incorporated inthis Report by reference.

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**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                                                                                                                                                                                                                                                                         |   | 29     |
|       |       |     |       | Report of  Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                             |   | 30     |
|       |       |     |       | Report of  Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                             |   | 31     |
|       |       |     |       | Consolidated  Balance Sheets as of December 31, 2006 and 2005                                                                                                                                                                                                                                                        |   | 32     |
|       |       |     |       | Consolidated  Statements of Operations for the years ended December 31, 2006, 2005                                                                                                                                                                                                                                   |   |   |
|       |       |     |       |      and 2004                                                                                                                                                                                                                                                                                    |   | 33     |
|       |       |     |       | Consolidated  Statements of Stockholders’ Equity for the years ended December 31,                                                                                                                                                                                                                          |   |   |
|       |       |     |       |      2006, 2005 and 2004                                                                                                                                                                                                                                                                         |   | 34     |
|       |       |     |       | Consolidated  Statements of Cash Flows for the years ended December 31, 2006, 2005                                                                                                                                                                                                                                   |   |   |
|       |       |     |       |      and  2004                                                                                                                                                                                                                                                                                   |   | 35     |
|       |       |     |       | Notes to  Consolidated Financial Statements                                                                                                                                                                                                                                                                          |   | 36     |
| ** ** | ** ** | **2.**   |       | **Financial Statement Schedules  (Consolidated Financial Statement Schedule Included in Part IV of this  Report):**                                                                                                                                                                                                  |   |   |
|       |       |     |       | Schedule II—Valuation  and Qualifying Accounts and Reserves                                                                                                                                                                                                                                                     |   | 55     |
|       |       |     |       | 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.                                                                                                                               |   |   |
| ** ** | ** ** | **3.**   |       | **Exhibits:**                                                                                                                                                                                                                                                                                                        |   |   |
|       | * *   | * * | * *   | The exhibits to this  Report are listed in the Exhibit Index on pages 56 through 58. A copy of any  of the exhibits listed will be sent at a reasonable cost to any shareholder  as of March 14, 2007. 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)      |       | 2007 Non-employee  Director Compensation Summary                                                                                                                                                                                                                                                                     |
|       |       | (6)      |       | Form of Change in  Control Severance Agreement.                                                                                                                                                                                                                                                                      |
|       |       | (7)      |       | Executive Officer  Performance Incentive Bonus Plan.                                                                                                                                                                                                                                                                 |
|       |       | (8)      |       | Non-Driver Employee  Performance Incentive Bonus Plan.                                                                                                                                                                                                                                                               |
|       |       | (9)      |       | Form of Non-employee  Director Non-statutory Stock Option Agreement.                                                                                                                                                                                                                                                 |
|            |            |          |            |                                                                                                                                                                                                                                                                                                                      |        |        |  |  |

53

 

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**SIGNATURES**

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, MartenTransport, Ltd., the Registrant, has duly caused this Report to be signed onits behalf by the undersigned, thereunto duly authorized.
| Dated: March 15, 2007 | MARTEN TRANSPORT, LTD. |
|-----------------------|------------------------|
|                  | By                     |  /s/ Randolph L. Marten |
|                  |                   | Randolph L.  Marten |
|                  |                   | Chairman of the  Board, President and Chief |
|                  |                   | Executive  Officer |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Report has beensigned below on March 15, 2007, by the following persons on behalf of theRegistrant and in the capacities 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     |       |       |       |                                      |

** **

54

 

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**SCHEDULEII**

**MARTENTRANSPORT, LTD.**

**Valuationand Qualifying Accounts and Reserves**

**(Inthousands)**

 
| ** **                        | ** ** | **Balance at **   | ** ** | **Charged to** | ** ** | ** **     | ** ** | ** **                | ** ** |
|-----------------------------------|------------|-----------------------------|------------|---------------------|------------|----------------|------------|---------------------------|------------|
| ** **                        | ** ** | **Beginning of ** | ** ** | **Costs and**  | ** ** | ** **     | ** ** | **Balance at ** | ** ** |
| **Description**                   | ** ** | **Year**                    | ** ** | **Expenses**        | ** ** | **Deductions** | ** ** | **End of Year** | ** ** |
| Insurance and  claims accruals:   |       |                        |       |                |       |           |       |                      |       |
| 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                    |       |
| Year ended December 31, 2004      |       | 12,052                      |       | 22,884              |       | (21,282        | )(1)       | 13,654                    |       |
|                              |       |                        |       |                |       |           |       |                      |       |
| Allowance for  doubtful accounts: |       |                        |       |                |       |           |       |                      |       |
| Year ended December 31, 2006      |       | 928                         |       | —              |       | (67            | )(2)       | 861                       |       |
| Year ended December 31, 2005      |       | 909                         |       | 90                  |       | (71            | )(2)       | 928                       |       |
| Year ended  December 31, 2004     |       | 793                         |       | 120                 |       | (4             | )(2)       | 909                       |       |
|                                   |            |                             |            |                     |            |                |            |                           |            |  |  |  |  |

----

(1)             Claimspayments

(2)             Write-offof bad debts, net of recoveries

See report of independentregistered public accounting firm.

 

55

 

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**MARTEN TRANSPORT, LTD.**

**EXHIBIT INDEX TO ANNUAL REPORT**

**ON FORM 10-K**

**For theYear Ended December 31, 2006**
| 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                                                                                                                   |       | Incorporated by reference to Exhibit 3.2 of the  Company’s Current Report on Form 8-K, filed on January 25, 2002 (File No.  0-15010).                    |
|     |       |                                                                                                                                    |       |                                                                                                                                                          |
| 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). |
|     |       |                                                                                                                                    |       |                                                                                                                                                          |

 

56

 

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| 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.                                           |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                    |   |                                                                                                                                                          |
| 10.6   |   | Severance Agreement and Release, dated March 6,  2006, between the Company and Franklin J. Foster                                                                                                                                                  |   | Incorporated by reference to Exhibit 10.1 of the  Company’s Current Report on Form 8-K filed March 7, 2006.                                         |
|   |   |                                                                                                                                                                                                                                                    |   |                                                                                                                                                          |
| 10.7   |   | Form of Change in Control Severance Agreement  executed by Randolph L. Marten, Robert G. Smith, Timothy P. Nash, Donald J.  Hinson and James J. Hinnendael                                                                                              |   | Incorporated by reference to Exhibit 10.1 of the  Company’s Current Report on Form 8-K filed April 4, 2006.                                              |
|   |   |                                                                                                                                                                                                                                                    |   |                                                                                                                                                          |
| 10.8   |   | Executive Officer Performance Incentive Bonus Plan                                                                                                                                                                                                      |   | Incorporated by reference to Exhibit 10.2 of the  Company’s Current Report on Form 8-K filed April 4, 2006.                                         |
|   |   |                                                                                                                                                                                                                                                    |   |                                                                                                                                                          |
| 10.9   |   | 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.                                              |
|   |   |                                                                                                                                                                                                                                                    |   |                                                                                                                                                          |
| 10.10  |   | Named Executive Officers’ Compensation Summary                                                                                                                                                                                                     |   | Incorporated by reference to Exhibit 10.1 of the  Company’s Current Report on Form 8-K filed May 10, 2006.                                               |
|   |   |                                                                                                                                                                                                                                                    |   |                                                                                                                                                          |
| 10.11  |   | 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). |
|   |   |                                                                                                                                                                                                                                                    |   |                                                                                                                                                          |
| 10.12  |   | 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.                                     |
|   |   |                                                                                                                                                                                                                                                    |   |                                                                                                                                                          |
| 10.13  |   | 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.                                       |
|   |   |                                                                                                                                                                                                                                                    |   |                                                                                                                                                          |
| 10.14  |   | 2007 Non-employee Director Compensation Summary                                                                                                                                                                                                         |   | Filed with this Report.                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                    |   |                                                                                                                                                          |
| 23.1   |   | Consent of KPMG LLP                                                                                                                                                                                                                                     |   | Filed with this Report.                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                    |   |                                                                                                                                                          |
| 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.                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                    |   |                                                                                                                                                          |

 

57

 

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| 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. |

 

 

58

 

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