UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C.  20549
 
 FORM
10-Q
 (Mark
One)
 [X]
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended September 30, 2008or[  ]
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period
      from                                       to
 
 
 Commission
File Number: 0-24946
 
 KNIGHT
TRANSPORTATION, INC.
 (Exact
name of registrant as specified in its charter)
 
 Arizona
              86-0649974(State
      or other jurisdiction of
                incorporation
      or organization)
              (I.R.S.
      Employer
                Identification
      No.)5601
      West Buckeye Road
                Phoenix,
      Arizona
                85043
                (Address
      of Principal Executive Offices)
                (Zip
      Code)Registrant's
      telephone number, including area code:
              602-269-2000
 
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.      x Yes  o No
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definition of "large accelerated filer," "accelerated
filer," and "smaller reporting company" in Rule 12b-2 of the Exchange
Act:
 
 Large
      accelerated filer  x
              Accelerated
      filer  oNon-accelerated
      filer  o
              Smaller
      reporting company o
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).     o Yesx 
No
 
 The
number of shares outstanding of registrant's Common Stock, par value $0.01 per
share, as of October 31, 2008 was 84,043,656 shares.
  
  
 KNIGHT
TRANSPORTATION, INC.
 
 TABLE OF CONTENTS
 
 
 
 PART
      I – FINANCIAL INFORMATION
              Page
      NumberItem
      1.
              Financial
      StatementsCondensed
      Consolidated Unaudited Balance Sheets as of September 30, 2008 and
      December 31, 2007
              1Condensed
      Consolidated Unaudited Statements of Income for the three and nine months
      ended September 30, 2008 and 2007
              3Condensed
      Consolidated Unaudited Statements of Cash Flows for the nine months
      ended September 30, 2008 and 2007
              4Notes
      to Condensed Consolidated Unaudited Financial Statements
              6Item
      2.
              Management's
      Discussion and Analysis of Financial Conditionand
      Results of Operations
              12Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              20Item
      4.
              Controls
      and Procedures
              20Part
      II – OTHER INFORMATIONItem
      1.
              Legal
      Proceedings
              21Item
      1A.
              Risk
      Factors
              21Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              21Item
      3.
              Defaults
      Upon Senior Securities
              22Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              22Item
      5.
              Other
      Information
              22Item
      6.
              Exhibits
              22Signatures
 
  Table of Contents
  PART
I  -  FINANCIAL INFORMATION
 
 Item
1.                                Financial
Statements
 
 KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
                Condensed
      Consolidated Unaudited Balance Sheets
                As
      of September 30, 2008 and December 31, 2007
                (In
      thousands)September
      30,
                2008
              
              
              December
      31,
                2007ASSETSCurrent
      Assets:Cash and cash
      equivalents
              
              $
              39,434
              
              
              $
              23,688Short term
    investment
              
              
              28,026
              
              
              
              7,620Accounts receivable,
      net
              
              
              91,386
              
              
              
              88,535Notes receivable,
    net
              
              
              164
              
              
              
              19Prepaid expenses
              
              
              8,283
              
              
              
              8,776Other current
    assets
              
              
              11,340
              
              
              
              24,994Income tax
    receivable
              
              
              -
              
              
              
              3,558Deferred tax
asset
              
              
              11,824
              
              
              
              10,157Total current
    assets
              
              
              190,457
              
              
              
              167,347Property
      and Equipment:Land and
    improvements
              
              
              28,513
              
              
              
              26,878Buildings and
      improvements
              
              
              55,116
              
              
              
              46,685Furniture and
      fixtures
              
              
              7,311
              
              
              
              6,910Shop and service
      equipment
              
              
              4,951
              
              
              
              3,935Revenue equipment
              
              
              551,056
              
              
              
              521,085Leasehold
      improvements
              
              
              1,164
              
              
              
              776648,111
              
              
              
              606,269Less:  Accumulated
      depreciation and amortization
              
              
              (180,694
              )
              
              
              (146,721
              )Property
      and equipment, net
              
              
              467,417
              
              
              
              459,548Notes
      receivable – long-term
              
              
              410
              
              
              
              887Goodwill
              
              
              10,358
              
              
              
              10,372Intangible
      assets, net
              
              
              191
              
              
              
              238Other
      assets & restricted cash
              
              
              5,018
              
              
              
              4,972Total
      assets
              
              $
              673,851
              
              
              $
              643,364
 
 The
accompanying notes are an integral part of these condensed consolidated
unaudited financial statements.
  1
 Table of Contents
  
 
 KNIGHT
      TRANSPORTATION, INC. AND SUBSIDIARIES
                Condensed
      Consolidated Unaudited Balance Sheets (continued)
                As
      of September 30, 2008 and December 31, 2007
                (In
      thousands, except par values)September
      30,
                2008
              
              
              December
      31,
                2007LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      Liabilities:Accounts
    payable
              
              $
              16,746
              
              
              $
              17,744Accrued payroll and purchased
      transportation
              
              
              9,359
              
              
              
              7,992Accrued
      liabilities
              
              
              8,899
              
              
              
              8,048Claims accrual – current
      portion
              
              
              16,918
              
              
              
              28,662Total current
      liabilities
              
              
              51,922
              
              
              
              62,446Long-term
      Liabilities:Claims accrual – long-term
      portion
              
              
              14,667
              
              
              
              -Deferred tax
      liabilities
              
              
              105,088
              
              
              
              93,368Total long-term
      liabilities
              
              
              119,755
              
              
              
              93,368Total
    liabilities
              
              
              171,677
              
              
              
              155,814Commitments
      and ContingenciesShareholders'
      Equity:Preferred stock, $0.01 par
      value; 50,000 shares authorized;
                none issued and
      outstanding
              
              
              -
              
              
              
              -Common stock, $0.01 par value;
      300,000 shares authorized;
                85,538 and 86,697 shares issued
      and outstanding at
                September
      30, 2008 and December 31, 2007, respectively
              
              
              855
              
              
              
              867Additional paid-in
      capital
              
              
              107,922
              
              
              
              102,450Retained
    earnings
              
              
              393,397
              
              
              
              384,233Total shareholders'
      equity
              
              
              502,174
              
              
              
              487,550Total liabilities and
      shareholders' equity
              
              $
              673,851
              
              
              $
              643,364
 
 The
accompanying notes are an integral part of these condensed consolidated
unaudited financial statements.
  2
 Table of Contents
  
 
 KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
                Condensed
      Consolidated Statements of Income (unaudited)
                (In
      thousands, except per share data)Three
      Months Ended
                September
      30,
              
              
              Nine
      Months Ended
                September
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007REVENUE:Revenue, before fuel
      surcharge
              
              $
              155,851
              
              
              $
              151,661
              
              
              $
              451,987
              
              
              $
              449,498Fuel surcharge
              
              
              53,806
              
              
              
              28,664
              
              
              
              140,188
              
              
              
              77,547Total revenue
              
              
              209,657
              
              
              
              180,325
              
              
              
              592,175
              
              
              
              527,045OPERATING
      EXPENSES:Salaries, wages and
      benefits
              
              
              54,554
              
              
              
              51,642
              
              
              
              158,461
              
              
              
              151,973Fuel
              
              
              70,844
              
              
              
              48,601
              
              
              
              197,130
              
              
              
              134,756Operations and
      maintenance
              
              
              11,495
              
              
              
              10,390
              
              
              
              31,443
              
              
              
              29,722Insurance and
      claims
              
              
              6,170
              
              
              
              7,785
              
              
              
              20,948
              
              
              
              21,912Operating taxes and
      licenses
              
              
              3,799
              
              
              
              3,748
              
              
              
              11,303
              
              
              
              11,022Communications
              
              
              1,481
              
              
              
              1,416
              
              
              
              4,368
              
              
              
              3,986Depreciation and
      amortization
              
              
              17,663
              
              
              
              16,596
              
              
              
              51,734
              
              
              
              48,814Lease expense – revenue
      equipment
              
              
              -
              
              
              
              85
              
              
              
              90
              
              
              
              296Purchased
      transportation
              
              
              13,297
              
              
              
              13,948
              
              
              
              40,788
              
              
              
              37,985Miscellaneous operating
      expenses
              
              
              4,115
              
              
              
              2,591
              
              
              
              10,221
              
              
              
              6,484Total operating
      expenses
              
              
              183,418
              
              
              
              156,802
              
              
              
              526,486
              
              
              
              446,950Income from
      operations
              
              
              26,239
              
              
              
              23,523
              
              
              
              65,689
              
              
              
              80,095Interest
      income
              
              
              332
              
              
              
              436
              
              
              
              776
              
              
              
              959Other
      income/(expense)
              
              
              (19
              )
              
              
              -
              
              
              
              206
              
              
              
              668Income before income
      taxes
              
              
              26,552
              
              
              
              23,959
              
              
              
              66,671
              
              
              
              81,722Income
      taxes
              
              
              (10,539
              )
              
              
              (9,450
              )
              
              
              (26,549
              )
              
              
              (32,416
              )Net income
              
              $
              16,013
              
              
              $
              14,509
              
              
              $
              40,122
              
              
              $
              49,306Earnings
      per common share and common shareequivalent:Basic
              
              $
              0.19
              
              
              $
              0.17
              
              
              $
              0.47
              
              
              $
              0.57Diluted
              
              $
              0.19
              
              
              $
              0.17
              
              
              $
              0.46
              
              
              $
              0.57Weighted
      average number of common shares andcommon
      share equivalents outstanding:Basic
              
              
              85,633
              
              
              
              86,479
              
              
              
              85,759
              
              
              
              86,318Diluted
              
              
              86,268
              
              
              
              87,300
              
              
              
              86,332
              
              
              
              87,249
 
 
 The
accompanying notes are an integral part of these condensed consolidated
unaudited financial statements.
 
  3
 Table of Contents
 KNIGHT
      TRANSPORTATION, INC. AND SUBSIDIARIES
                  Condensed
      Consolidated Unaudited Statements of Cash Flows
                  (In
      thousands)Nine
      Months Ended
                  September
      30,2008
                
                
                2007Cash
      Flows From Operating Activities:Net
      income
                
                $
                40,122
                
                
                $
                49,306Adjustments
      to reconcile net income to net cash provided by operating
                  activities:Depreciation and
      amortization
                
                
                51,734
                
                
                
                48,814Gain on sales of
      equipment
                
                
                (1,512
                )
                
                
                (3,947
                )Building impairment due to
      fire
                
                
                -
                
                
                
                166Earn-out on sold
      investment
                
                
                (225
                )
                
                
                (188
                )Non-cash compensation expense
      for stock issuance to board of
                  directors
                
                
                135
                
                
                
                174Provision for allowance for
      doubtful accounts
                
                
                1,002
                
                
                
                66Excess tax benefits related to
      stock-based compensation
                
                
                (502
                )
                
                
                (1,293
                )Stock option
      expense
                
                
                2,480
                
                
                
                2,147Deferred income
      taxes
                
                
                10,053
                
                
                
                4,196Changes
      in assets and liabilities:Increase in short-term
      investments
                
                
                (20,406
                )
                
                
                (5,884
                )Increase in trade
      receivables
                
                
                (3,868
                )
                
                
                (3,178
                )Increase in other current
      assets
                
                
                (184
                )
                
                
                (363
                )Decrease in prepaid
      expenses
                
                
                493
                
                
                
                1,118Decrease (increase) in income
      tax receivable
                
                
                3,558
                
                
                
                (4,075
                )Increase in other assets and
      restricted cash
                
                
                (67
                )
                
                
                (531
                )Increase in accounts
      payable
                
                
                4,111
                
                
                
                4,154Increase (decrease) in accrued
      liabilities, claims accrual and other
                
                
                5,714
                
                
                
                (4,489
                )Net cash provided by operating
      activities
                
                
                92,638
                
                
                
                86,193Cash
      Flow From Investing Activities:Purchase of property and
      equipment
                
                
                (79,418
                )
                
                
                (89,641
                )Proceeds from sales of
      equipment
                
                
                30,102
                
                
                
                33,002Decrease in notes
      receivable
                
                
                348
                
                
                
                156Acquisition-related contingent
      payment
                
                
                -
                
                
                
                (156
                )Decrease in restricted
      cash
                
                
                25
                
                
                
                -Proceeds from investment
      earn-out
                
                
                225
                
                
                
                188Return of investment in
      Transportation Resource Partners
                
                
                10
                
                
                
                216Net cash used in investing
      activities
                
                
                (48,708
                )
                
                
                (56,235
                )
  The
accompanying notes are an integral part of these condensed consolidated
unaudited financial statements.
 
 
  4
 Table of Contents
  
 KNIGHT
      TRANSPORTATION, INC. AND SUBSIDIARIES
                Condensed
      Consolidated Unaudited Statements of Cash Flows (continued)
                (In
      thousands)Nine
      Months Ended
                September
      30,2008
              
              
              2007Cash
      Flow From Financing Activities:Dividends paid
              
              $
              (9,429
              )
              
              $
              (6,911
              )Payments to acquire treasury
      stock
              
              
              (21,543
              )
              
              
              -Excess tax benefits related to
      stock-based compensation
              
              
              502
              
              
              
              1,293Proceeds from exercise of
      stock options
              
              
              2,286
              
              
              
              3,104Net cash used in financing
      activities
              
              
              (28,184
              )
              
              
              (2,514
              )Net
      increase in cash and cash equivalents
              
              
              15,746
              
              
              
              27,444Cash
      and cash equivalents, beginning of period
              
              
              23,688
              
              
              
              1,582Cash
      and cash equivalents, end of period
              
              $
              39,434
              
              
              $
              29,026Supplemental
      Disclosures:Non-cash investing and
      financing transactions:Equipment acquired in accounts
      payable
              
              $
              5,315
              
              
              $
              89FIN 48 adoption tax
      liability
              
              
              -
              
              
              
              394Retirement of treasury
      stock
              
              
              21,543
              
              
              
              -Transfer from property and
      equipment to assets held forsale
              
              
              9,167
              
              
              
              10,064Cash Flow
      Information:Income taxes
    paid
              
              $
              12,077
              
              
              $
              35,555
 
 The
accompanying notes are an integral part of these condensed consolidated
unaudited financial statements.
  5
 Table of Contents
  KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
 
 Note
1.                                Financial
Information
 
 References
in this Report on Form 10-Q to "we," "us," "our," "Knight," or the "Company" or
similar terms refer to Knight Transportation, Inc. and its consolidated
subsidiaries. All material inter-company balances and transactions have been
eliminated in consolidation.
 
 The
accompanying condensed consolidated unaudited financial statements of Knight
Transportation, Inc. and its subsidiaries have been prepared in accordance with
accounting principles generally accepted in the United States of America and
Regulation S-X, instructions to Form 10-Q, and other relevant rules and
regulations of the Securities and Exchange Commission (the "SEC"), as applicable
to the preparation and presentation of interim financial information. Certain
information and footnote disclosures have been omitted or condensed pursuant to
such rules and regulations.  We believe all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation have
been included.  Results of operations in interim periods are not
necessarily indicative of results for a full year.  These condensed
consolidated unaudited financial statements and notes thereto should be read in
conjunction with our consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31,
2007.
 
 Note
2.                                Stock-Based
Compensation
 
 At
September 30, 2008, we had one stock-based employee compensation plan known as
the Knight Transportation, Inc. 2003 Stock Option Plan, dated June 1, 2003, as
amended from time to time (the "2003 Plan").  Total SFAS 123R
compensation cost for the three months and nine months ended September 30, 2008
and 2007, respectively, are as follows:
 
 Three
      Months Ended
                September
      30,
              
              
              Nine
      Months Ended
                September
      30,(in
      thousands)
              
              
              (in
      thousands)2008
              
              
              2007
              
              
              2008
              
              
              2007Gross
      stock compensation expense, net offorfeitures
              
              $
              926
              
              
              $
              676
              
              
              $
              2,480
              
              
              $
              2,147Income
      tax
              
              $
              (368
              )
              
              $
              (267
              )
              
              $
              (988
              )
              
              $
              (852
              )Net
      stock compensation expense after tax
              
              $
              558
              
              
              $
              409
              
              
              $
              1,492
              
              
              $
              1,295
 
 We
received approximately $1.0 million and $2.3 million in cash from the exercise
of stock options during the three months and nine months ended September 30,
2008, respectively, compared to $1.4 million and $3.1 million for the same
periods in 2007.
 
 As of
September 30, 2008, there was approximately $17.0 million of unrecognized
compensation cost related to unvested share-based compensation awards granted
under the 2003 Plan.  This cost is expected to be recognized over a
weighted-average period of 2.83 years, and a total period of seven
years.
  6
 Table of Contents
  The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option valuation model
that uses the assumptions noted in the following table:
  Three
      Months Ended
                  September
      30,2008
                
                2007Dividend
      yield (1)
                .85%
                
                .70%Expected
      volatility (2)
                34.36%
                
                32.24%Risk-free
      interest rate (3)
                3.60%
                
                4.33%Expected
      terms (4)
                5.99
      years
                
                7.17
      yearsWeighted
      average fair value of options granted
                $6.88
                
                $7.41
 (1)
              The
      dividend yield is based on our historical experience and future
      expectation of dividend payouts.(2)
              We
      analyzed the volatility of our stock using historical data from January 1,
      2003 through the end of the most recent stock option issuance period to
      estimate the expected volatility.(3)
              The
      risk-free interest rate assumption is based on U.S. Treasury securities at
      a constant maturity with a maturity period that most closely resembles the
      expected term of the stock option award.(4)
              The
      expected terms of employee stock options represents the weighted-average
      period the stock options are expected to remain outstanding and has been
      determined based on an analysis of historical exercise behavior from
      January 1, 2003 through the end of the most recent stock option issuance
      period.
 
 A summary
of the award activity under the 2003 Plan as of September 30, 2008, and changes
during the nine-month period is presented below:
 
 Option
      Totals
              
              
              Weighted
      Average Exercise
                Price
      Per Share ($)Outstanding
      12/31/2007
              
              
              4,182,780
              
              
              
              14.06Granted
              
              
              1,390,902
              
              
              
              15.64Exercised
              
              
              (256,930
              )
              
              
              8.90Forfeited
              
              
              (259,509
              )
              
              
              15.54Outstanding
      as of 09/30/2008
              
              
              5,057,243
              
              
              
              14.68
 
 Note
3.                                Earnings
Per Share (in thousands, except per share data)
 
 A
reconciliation of the basic and diluted earnings per share computations for the
three and nine months ended September 30, 2008 and 2007, respectively, is as
follows:
 
 Three
      Months Ended
                September
      30,
              
              
              Nine
      Months Ended
                September
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Weighted
      average common shares outstanding – basic
              
              
              85,633
              
              
              
              86,479
              
              
              
              85,759
              
              
              
              86,318Effect
      of stock options
              
              
              635
              
              
              
              821
              
              
              
              573
              
              
              
              931Weighted
      average common share and common shareequivalents
      outstanding – diluted
              
              
              86,268
              
              
              
              87,300
              
              
              
              86,332
              
              
              
              87,249Net
      income
              
              $
              16,013
              
              
              $
              14,509
              
              
              $
              40,122
              
              
              $
              49,306Earnings
      per common share and common share equivalentBasic
              
              $
              0.19
              
              
              $
              0.17
              
              
              $
              0.47
              
              
              $
              0.57Diluted
              
              $
              0.19
              
              
              $
              0.17
              
              
              $
              0.46
              
              
              $
              0.57
 
  7
 Table of Contents
  Certain
shares of common stock were excluded from the computation of diluted earnings
per share because the options' exercise prices were greater than the average
market price of the common shares, and therefore, the effect would be
anti-dilutive.  A summary of those options follows:
 
 Three
      Months Ended
                September
      30,
              
              Nine
      Months Ended
                September
      30,2008
              
              2007
              
              2008
              
              2007Number
      of anti-dilutive shares
              422,600
              
              738,350
              
              1,215,210
              
              512,000
 
 Note
4.                                Segment
Information
 
 We have
determined that we have two operating segments. Our operating segments consist
of (i) our truckload transportation (asset-based) segment and (ii) our brokerage
segment (non-asset-based).  Our asset-based, truckload transportation
segment includes our dry van and temperature controlled operations with service
centers located throughout the United States.  Each of the asset-based
service centers have similar economic characteristics, as they all provide
truckload carrier services of general commodities to a similar class of
customers. As a result, we have determined that it is appropriate to aggregate
these service centers into one reportable operating segment consistent with the
guidance in SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information."  Accordingly, we have not presented separate
financial information for each of these service centers.We have also determined
that our brokerage subsidiary qualifies as an operating segment under SFAS No.
131.  However, because its results of operations are not material to
our consolidated financial statements as a whole, we have not presented separate
financial information for this segment. For the three months ended September 30,
2008, our brokerage segment, including intercompany transactions and fuel
surcharge, accounted for 5.5% of our consolidated revenue, 1.2% of our
consolidated net income, and 0.9% of our consolidated assets. For the nine
months ended September 30, 2008, our brokerage segment accounted for 5.5% of our
consolidated revenue and 2.1% of our consolidated net income.
 
 Brokerage
revenue including fuel surcharge for the three-month and nine-month periods
ended September 30, 2008 was $11.5 million and $32.8 million, respectively,
compared to $8.0 million and $20.2 for the same periods a year ago. Brokerage
assets at September 30, 2008 was $6.1 million, compared to $5.5 million a year
ago.
 
 Note
5.                                Commitments and
Contingencies
 
 We are
involved in certain legal proceedings arising in the normal course of
business.  In the opinion of management, our potential exposure under
any currently pending or threatened legal proceedings will not have a material
adverse effect upon our financial position or results of
operations.
 
 Note
6.                                Dividends
 
 On August
22, 2008, we declared a cash dividend of $0.04 per share of our common
stock.  The dividend was payable to shareholders of record on
September 5, 2008, and was paid on September 26, 2008.  This is a
$0.01 increase per share from the prior year’s third quarter. We currently
expect to continue to pay quarterly cash dividends in the future. Future payment
of cash dividends, and the amount of any such dividends, will depend upon our
financial condition, results of operations, cash requirements, tax treatment,
and certain corporate law requirements, as well as other factors deemed relevant
by our Board of Directors.
 
  8
 Table of Contents
  Note
7.                      Goodwill
& Intangible Assets
 
 Goodwill
represents the excess of the purchase price of our acquisitions over the fair
value of the assets acquired. The tax benefit from the recognition on the tax
return of the amortization of the excess tax goodwill over book goodwill is
treated as a reduction in the book basis of goodwill.  The changes in
the carrying amount of goodwill and intangible assets for the nine months ended
September 30, 2008 follow:
  Goodwill:
                
                In
      ThousandsBalance
      at December 31, 2007
                
                $
                10,372Amortization
      relating to deferred excess tax goodwill
                
                
                (14
                )Balance
      at September 30, 2008
                
                $
                10,358
 
 Intangible
      Assets:
                
                In
      ThousandsBalance
      at December 31, 2007
                
                $
                238Amortization
                
                
                (47
                )Balance
      at September 30, 2008
                
                $
                191
 
 Intangible
assets are being amortized on a straight-line method over a five year
period.  Annual amortization expense is expected to be $62,000 for
fiscal years 2008 to 2010 and $52,000 for fiscal year 2011.
 
 Note
8.                      Cost
Method Investments
 
 In 2003,
we signed a partnership agreement with Transportation Resource Partners, LP
("TRP"), who makes privately negotiated equity investments.  Per the
original partnership agreement, we were committed to pledge $5.0 million out of
approximately $260.0 million total. In early 2006, we increased the commitment
amount to $5.5 million.  Our investment in TRP is accounted for using
the cost method as our level of influence over the operations of TRP is
minor.  At September 30, 2008, the carrying book balance of our
investment in TRP was $3.7 million, and our ownership interest was approximately
2.2%. Our outstanding commitment to TRP was approximately $1.0 million as of
September 30, 2008.
 
 Effective
October 1, 2008, we formed Knight Capital Growth, LLC and committed $15.0
million to invest in a new partnership managed and operated by the managers and
principals of TRP. The new partnership, Transportation Resource Partners III, LP
("TRP III"), is focused on the same investment opportunities as TRP. As of the
date of this filing we have not made any contributions to TRP III.
 
 Note
9.                      Assets
Held for Sale
 
 Included
in "Other current assets" on the Balance Sheet at September 30, 2008 and
December 31, 2007 is $7.4 million and $21.2 million, respectively, of revenue
equipment that will not be utilized in continuing operations and is being held
for sale. Assets held for sale are no longer subject to depreciation, and are
recorded at the lower of depreciated value or fair market value less selling
costs. We periodically review the carrying value of these assets for possible
impairment.  No impairments were recorded in the three months ended
September 30, 2008. We expect to sell these assets and replace them with new
assets within twelve months.
 
 9
 Table of Contents
  Note
10.                      Income
Taxes
 
 We
adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes
("FIN 48"), effective January 1, 2007. This interpretation was issued to clarify
accounting for income taxes recognized in financial statements by prescribing a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The cumulative effect, if any, of applying FIN 48 is to be reported
as an adjustment to the opening balance of retained earnings in the year of
adoption. As a result of FIN 48 implementation, we recorded a $394,000 net
decrease in retained earnings on January 1, 2007.  During 2007, we
resolved certain tax positions relating to the 2006 tax year, leaving
unrecognized tax benefits of approximately $195,000 as of September 30, 2008.
The total amount of unrecognized tax benefits that, if recognized, would
favorably affect the effective tax rate in future periods was approximately
$126,000 as of September 30, 2008.
 
 Potential
interest and penalties accrual related to unrecognized tax benefits are
recognized as a component of income tax expense. Interest of $3,891 was accrued
to income tax expense for the three-month periods ended September 30, 2008 and
2007 and interest of $11,674 was accrued to income tax expense for the
nine-month periods ended September 30, 2008 and 2007.Cumulative interest and
penalties accrued as of September 30, 2008, was $58,000 and $49,000,
respectively.
 
 We are
subject to U.S. Federal and state income tax examinations with various statues
of limitations. The 2005 through 2007 tax years generally remain subject to
examination by federal authority, and the 2004 through 2007 tax years generally
remain subject to examination by state tax authorities. We do not believe the
unrecognized tax benefits will change significantly within the next 12
months.
 
 Note
11.                      Company
Share Repurchase Program
 
 On
November 8, 2007, our Board of Directors unanimously authorized the repurchase
of up to 3.0 million shares of the Company's Common Stock.  The
repurchase authorization will remain in effect until the share limit is reached
or the program is terminated.  The repurchase authorization is
intended to afford the Company the flexibility to acquire shares
opportunistically in future periods and does not indicate an intention to
repurchase any particular number of shares within a definite
timeframe.  Any repurchases would be effected based upon share price
and market conditions.
 
 Under our
share repurchase program, repurchased shares are constructively retired and
returned to unissued status. We consider several factors in determining when to
execute the share repurchases, including among other things, our current cash
needs, our capacity for leverage, our cost of borrowings, and the market price
of our common stock.
 
 In the
third quarter of 2008, we purchased 205,000 shares of our common stock in the
open market for approximately $3.5 million. For the nine months ended September
30, 2008 we had purchased 1,423,500 shares of our common stock for approximately
$21.5 million. The shares acquired have been retired and are available for
future issuance. The purchases were made in accordance with Security and
Exchange Commission Rule 10b-18, which limits the amount and timing of
repurchases. As of September 30, 2008, there were 1,576,500 shares remaining for
future purchases under our repurchase program.
 
 Subsequent
to September 30, 2008, we purchased 1,576,500 shares of our common stock for
approximately $24.0 million. With these subsequent purchases, we have acquired
the maximum 3.0 million shares approved under our current stock repurchase
plan.
 
 10
 Table of Contents
  Note12.                      Fair
Value Measurements
 
 In
September 2006, the FASB issued SFAS No. 157,"Fair Value Measurements" ("SFAS
157"). SFAS 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about
fair value measurements. SFAS 157 emphasizes that fair value is a market-based
measurement, as opposed to a transaction-specific measurement. In February 2008,
the FASB issued Staff Position No. SFAS 157-1, "Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13" ("FSP 157-1"). FSP 157-1, which is effective
upon the initial adoption of SFAS 157, excludes SFAS Statement No. 13, as well
as other accounting pronouncements that address fair value measurements on lease
classification or measurement under SFAS 13, from the scope of SFAS 157. In
February 2008, the FASB issued Staff Position No. SFAS 157-2, "Effective Date of
FASB Statement No. 157" ("FSP 157-2"), which delays the effective date of SFAS
157 for all nonrecurring nonfinancial assets and liabilities until fiscal years
beginning after November 15, 2008. Accordingly, FSP 157-2 will be effective for
the Company beginning January 1, 2009, and all other aspects of SFAS 157 were
effective for the Company on January 1, 2008.  On October 10, 2008, the
Financial Accounting Standards Board (FASB or the Board) voted to issue FSP FAS
157-3, Determining the Fair Value of a Financial Asset When the Market for That
Asset Is Not Active (FSP).  The FSP clarifies the application of FASB
Statement No. 157, Fair Value Measurements (SFAS 157) in a market that is not
active.  The adoption of this guidance has not had a material impact on the
Company’s condensed consolidated unaudited financial statements.
 
 Fair
value is defined by SFAS 157 as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Depending on the nature of the asset or
liability, various techniques and assumptions can be used to estimate the fair
value. Financial assets and liabilities are measured using inputs from three
levels of the fair value hierarchy, as defined in SFAS 157. The three levels are
as follows:
 
 Level 1 –
Inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access at the measurement date.
An active market is defined as a market in which transactions for the assets or
liabilities occur with sufficient frequency and volume to provide pricing
information on an ongoing basis.
 
 Level 2 –
Inputs include quoted prices for similar assets and liabilities in active
markets, quoted prices for identical or similar assets or liabilities in markets
that are not active (markets with few transactions), inputs other than quoted
prices that are observable for the asset or liability (i.e., interest rates,
yield curves, etc.), and inputs that derived principally from or corroborated by
observable market data correlation or other means (market corroborated
inputs).
 
 Level 3 –
Unobservable inputs, only used to the extent that observable inputs are not
available, reflect the Company’s assumptions about the pricing of an asset or
liability.
 
 In
accordance with the fair value hierarchy described above, the following table
shows the fair value of the Company’s financial assets and liabilities that are
required to be measured at fair value as of September 30, 2008.
 Balance
      at
                September30,
      2008
              
              
              Level
      1
              
              
              Level
      2
              
              
              Level
      3Assets:Short
      Term Investments (see Note 13)
              
              $
              28,025,647
              
              $
              -
              
              $
              28,025,647
              
              $
              -
 
 11
 Table of Contents
  Note13.                      Cash & Cash Equivalents and Short-Term
Investments
 
 Our cash
and cash equivalents are comprised of short-term, highly liquid instruments with
insignificant interest rate risk and effective maturities of three months or
less.
  Our
short-term investments are comprised of trading marketable debt securities
and variable rate demand notes with effective maturities of greater than three
months and represent an investment of cash that is available for current
operations.  These debt securities consist of municipal securities and
are recorded at fair value with realized and unrealized gains and losses
included in interest income on our consolidated statements of income. Our short
term investments did not experience any significant unrealized gain or loss for
the period.
 
 Item
2.                    Management's
Discussion and Analysis of Financial Condition and Results of
Operations
 
 Cautionary
Note Regarding Forward-Looking Statements
 
 Except
for certain historical information contained herein, this report contains
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the
Securities Act of 1933, as amended, that involve risks, assumptions, and
uncertainties that are difficult to predict. All statements, other than
statements of historical fact, are statements that could be deemed
forward-looking statements, including without limitation: any projections of
revenues, earnings, cash flows, capital expenditures, or other financial items;
any statement of plans, strategies, and objectives of management for future
operations; any statements concerning proposed acquisition plans, new services,
or developments; any statements regarding future economic conditions or
performance; and any statements of belief and any statement of assumptions
underlying any of the foregoing.  Words such as "believe," "may,"
"could," "expects," "hopes," "anticipates," and "likely," and variations of
these words, or similar expressions, are intended to identify
such forward-looking statements. Actual events or results could differ
materially from those discussed in forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in the section entitled "Item 1A. Risk
Factors," set forth in our form 10-K for the year ended December 31,
2007, as supplemented in Part II below.
 
 All
such forward-looking statements speak only as of the date of this Form
10-Q.  You are cautioned not to place undue reliance on such
forward-looking statements.  The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in the events,
conditions, or circumstances on which any such statement is based.
 
 12
 Table of Contents
  Introduction
 
 Business
Overview
 
 Our
headquarters are located in Phoenix, Arizona. The transportation services we
provide are asset-based dry van truckload and temperature controlled truckload
carrier services, along with non-asset-based brokerage
services.  Through our asset-based and non-asset-based capabilities we
are able to transport, or arrange for the transportation of, general commodities
for customers throughout the United States.  We generally focus our
dry van and temperature controlled operations on regional short-to-medium
lengths of haul.  The results of our brokerage activities were
relatively insignificant for the third quarter of 2008 and therefore a detailed
discussion of the financial results of these operations will not be separately
presented.  As of September 30, 2008, we operated 35 asset-based
service centers (consisting of 29 dry van and six temperature controlled service
centers) and 12 non-asset-based brokerage branches.  The main factors
that affect our results of operation are the number of tractors we operate, our
revenue per tractor (which includes primarily our revenue per total mile and our
number of miles per tractor), and our ability to control our costs.
 
 On
October 8, 2008, we were named to Forbes Magazine’s list of the "200 Best Small
Companies in America" for the fourteenth consecutive year.  We are the
only company currently on the list that has been recognized every year during
this fourteen year period.
 
 Operating
and Growth Strategy
 
 Historically,
the primary source of our revenue growth has been our ability to open and
develop new regional service centers and brokerage branches in selected
geographic areas. Our brokerage business enables us to add customers and gain
market share without adding tractor capacity. In the third quarter of 2008, we
opened a new temperature controlled service center in Columbus, Ohio and a
brokerage branch in Houston, Texas. As part of our growth strategy, we also
evaluate acquisition opportunities that meet our financial and operating
criteria.
 
 During
2008, numerous industry competitors have closed down, and many that remained in
business have downsized their fleets in response to economic weakness, rising
costs, and tight credit conditions. The brief increase in freight demand during
May and June gave way to a downward trend in demand during the third quarter
that has continued into the fourth quarter.  Most indicators of
economic activity have fallen in recent weeks, indicating that weakness in
freight demand may persist in the next few months.
 
 We have
not been immune to the economic environment.  We have generally
constrained the size of our asset-based truckload fleet, used growth in our
brokerage operations to expand business with customers, and concentrated on cost
controls for much of 2008.  Our primary short-to-medium haul market
has experienced increased competition from traditionally long-haul carriers who
sought shorter loads to avoid price competition from intermodal
service.
 
 Looking
ahead, despite economic weakness, several factors have the potential to
favorably affect the relationship between supply and demand in future
periods.  First, new truck and trailer orders have been depressed,
which may indicate a lack of additional capacity buildup. Second, the rate of
trucking bankruptcies has been high and is expected continue, which may reduce
capacity from current levels.  Third, inventory-to-sales ratios remain
low, which may mean small increases in demand could have a quick impact on
truckload demand. Fourth, if fuel prices continue to fall, truck service may
become more competitive in longer haul markets.
 
 We plan
to continue to position ourselves to provide truckload service solutions to our
customers in light of the current economic conditions.  We believe we
are assembling a powerful and geographically diverse network that can support a
substantial increase in freight volumes and our ability to provide solutions to
our customers.  Based on our growing network, a history of low cost
operation and solid execution, and access to substantial capital resources, we
are very optimistic about our competitive position and our ability to execute
our model based on leading growth and profitability.
 
 13
 Table of Contents
  Revenue
and Expenses
 
 We
primarily generate revenue by transporting freight for our
customers.  Generally, we are paid a predetermined rate per mile or
per load for our services.  We enhance our revenue by charging for
tractor and trailer detention, loading and unloading activities, brokerage
operations, and other specialized services, as well as through the collection of
fuel surcharges to mitigate the impact of increases in the cost of
fuel.  The main factors that affect our revenue are the revenue per
mile we receive from our customers, the percentage of miles for which we are
compensated, and the number of miles we generate with our
equipment.  These factors relate to, among other things, the general
level of economic activity in the United States, inventory levels, specific
customer demand, the level of capacity in the trucking industry, and driver
availability.
 
 The main factors that impact our
profitability in terms of expenses are the variable costs of transporting
freight for our customers. These costs include fuel expense, driver-related
expenses, such as wages, benefits, training and recruitment, and independent
contractor and third party carrier costs, which are recorded on the "Purchased
Transportation" line of our consolidated statements of income. Expenses that
have both fixed and variable components include maintenance and tire expense and
our total cost of insurance and claims. These expenses generally vary with the
miles we travel, but also have a controllable component based on safety, fleet
age, efficiency, and other factors. Our main fixed costs are the acquisition and
financing of long-term assets, such as revenue equipment and service centers and
the compensation of non-driver personnel. Effectively controlling our expenses
and managing our net cost of revenue equipment acquisition and disposition,
including any related gains or losses, are important elements of assuring our
profitability. The primary measure we use to evaluate our profitability is
operating ratio, excluding the impact of fuel surcharge revenue (operating
expenses, net of fuel surcharge, expressed as a percentage of revenue, before
fuel surcharge).
 
 Recent
Results of Operations and Quarter-End Financial Condition
 
 For the
quarter ended September 30, 2008, our results of operations changed as follows
versus the same period in 2007:
 
 o
              Revenue,
      before fuel surcharge, increased 2.8%, to $155.9 million from $151.7
      million;o
              Net
      income increased 10.4% to $16.0 million, compared to $14.5 million;
      ando
              Net
      income per diluted share increased to $0.19, compared to
      $0.17.
 
 Over the
last few quarters we have experienced a very difficult operating environment. We
have made noticeable progress as we work to improve asset productivity in our
dry van and temperature controlled operations. In the third quarter our average
revenue per tractor (excluding fuel surcharges) improved 3.1%, to $38,990,
compared to $37,835 in the same quarter a year ago.  The increase is
primarily due to higher freight rates, which increased our average revenue per
total mile (excluding fuel surcharges) approximately 3.9%. For the third
quarter, a lower average length of haul and a 100 basis point reduction in our
non-paid empty miles percentage also contributed to our improvement in revenue.
Average length of haul decreased  by 4.2%, to 521 miles in the third
quarter of 2008, compared to 544 miles in the same quarter a year
ago.  During the third quarter of 2008 we added 32 tractors to our
fleet, although our tractor count at the end of the third quarter was still 63
fewer tractors compared to the end of the same period a year ago.
 
 Our
operating ratio, net of fuel surcharge (operating expenses, net of fuel
surcharge, expressed as a percentage of revenue, before fuel surcharge), was
83.2% for the quarter ended September 30, 2008, as compared to 84.5% for the
same period a year ago. We made significant improvements in the third quarter as
we worked to reduce our operating cost per mile. Our areas of focus included,
and will continue to include, managing more trucks with the same resources,
leveraging our Smith System training to improve insurance and claims cost,
reducing our overall fuel cost per mile, reducing our empty and out-of-route
miles, and proactively managing our drivers to reduce our maintenance cost, fuel
cost, and insurance and claims cost.
 
 Average
number of tractors operated was essentially constant, at 3,809 tractors in the
third quarter of 2008, compared to 3,813 for the same period a year ago. Tractor
count at September 30, 2008 decreased to 3,800, from 3,863 a year ago. For the
quarter, we spent $18.8 million in net capital expenditures.  At
September 30, 2008, our balance sheet remained debt free, our cash and cash
equivalents and short term investments totaled $67.5 million, and our
shareholders' equity was $502.2 million.
 
 
  14
 Table of Contents
  Results
of Operations
 
 The
following table sets forth the percentage relationships of our expense items to
total revenue, including fuel surcharge (Columns A and C), and revenue, before
fuel surcharge (Columns B and D), for the three-month and nine-month periods
ended September 30, 2008 and 2007, respectively.  Fuel expense as a
percentage of revenue, before fuel surcharge, is calculated using fuel expense,
net of fuel surcharge.  Management believes that eliminating the
impact of this sometimes volatile source of revenue affords a more consistent
basis for comparing our results of operations from period to
period.
  (A)
                  (Fuel
      surcharge included in revenue)
                  Three-Month
                  Period
      Ended
                  September
      30,
                
                
                (B)
                  (Fuel
      surcharge excluded from revenue and netted to fuel expense)
                  Three-MonthPeriod
      Ended
                  September
      30,
                
                
                (C)
                  (Fuel
      surcharge included in revenue)
                  Nine-Month
                  Period
      Ended
                  September
      30,
                
                
                (D)
                  (Fuel
      surcharge excluded from revenue and netted to fuel
      expense)
                  Nine-MonthPeriod
      Ended
                  September
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007
                
                
                2008
                
                
                2007
                
                
                2008
                
                
                2007Revenue
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %Operating
      expenses: *Salaries,
      wages and benefits
                
                
                26.0
                
                
                
                28.6
                
                
                
                35.0
                
                
                
                34.1
                
                
                
                26.8
                
                
                
                28.8
                
                
                
                35.1
                
                
                
                33.8Fuel
                
                
                33.8
                
                
                
                27.0
                
                
                
                10.9
                
                
                
                13.1
                
                
                
                33.3
                
                
                
                25.6
                
                
                
                12.6
                
                
                
                12.7Operations
      and maintenance
                
                
                5.5
                
                
                
                5.8
                
                
                
                7.4
                
                
                
                6.9
                
                
                
                5.3
                
                
                
                5.6
                
                
                
                7.0
                
                
                
                6.6Insurance
      and claims
                
                
                2.9
                
                
                
                4.3
                
                
                
                4.0
                
                
                
                5.1
                
                
                
                3.5
                
                
                
                4.2
                
                
                
                4.6
                
                
                
                4.9Operating
      taxes and licenses
                
                
                1.8
                
                
                
                2.1
                
                
                
                2.4
                
                
                
                2.5
                
                
                
                1.9
                
                
                
                2.1
                
                
                
                2.5
                
                
                
                2.5Communications
                
                
                0.7
                
                
                
                0.8
                
                
                
                1.0
                
                
                
                0.9
                
                
                
                0.7
                
                
                
                0.8
                
                
                
                1.0
                
                
                
                0.9Depreciation
      andamortization
                
                
                8.4
                
                
                
                9.2
                
                
                
                11.3
                
                
                
                10.9
                
                
                
                8.7
                
                
                
                9.3
                
                
                
                11.4
                
                
                
                10.9Lease
      expense – revenueequipment
                
                
                -
                
                
                
                0.1
                
                
                
                -
                
                
                
                0.1
                
                
                
                -
                
                
                
                0.1
                
                
                
                -
                
                
                
                0.1Purchased
      transportation
                
                
                6.3
                
                
                
                7.7
                
                
                
                8.5
                
                
                
                9.2
                
                
                
                6.9
                
                
                
                7.2
                
                
                
                9.0
                
                
                
                8.5Miscellaneous
      operatingexpenses
                
                
                2.1
                
                
                
                1.4
                
                
                
                2.7
                
                
                
                1.7
                
                
                
                1.8
                
                
                
                1.1
                
                
                
                2.3
                
                
                
                1.3Total
      operating expenses
                
                
                87.5
                
                
                
                87.0
                
                
                
                83.2
                
                
                
                84.5
                
                
                
                88.9
                
                
                
                84.8
                
                
                
                85.5
                
                
                
                82.2Income
      from operations
                
                
                12.5
                
                
                
                13.0
                
                
                
                16.8
                
                
                
                15.5
                
                
                
                11.1
                
                
                
                15.2
                
                
                
                14.5
                
                
                
                17.8Net
      interest income
                
                
                0.1
                
                
                
                0.2
                
                
                
                0.2
                
                
                
                0.3
                
                
                
                0.2
                
                
                
                0.2
                
                
                
                0.3
                
                
                
                0.3Other
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                0.1
                
                
                
                -
                
                
                
                0.1Income
      before income taxes
                
                
                12.6
                
                
                
                13.2
                
                
                
                17.0
                
                
                
                15.8
                
                
                
                11.3
                
                
                
                15.5
                
                
                
                14.8
                
                
                
                18.2Income
      taxes
                
                
                5.0
                
                
                
                5.2
                
                
                
                6.7
                
                
                
                6.2
                
                
                
                4.5
                
                
                
                6.1
                
                
                
                5.9
                
                
                
                7.2Net
      income
                
                
                7.6
                %
                
                
                8.0
                %
                
                
                10.3
                %
                
                
                9.6
                %
                
                
                6.8
                %
                
                
                9.4
                %
                
                
                8.9
                %
                
                
                11.0
                %
 *
      There
      are minor rounding differences in the
table.
 15
 Table of Contents
  A
discussion of our results of operations for the nine and three months ended
September 30, 2008 and September 30, 2007 is set forth below.
 
 Comparison
of Nine Months and Three Months Ended September 30, 2008 to Nine Months and
Three Months Ended September 30, 2007.
 
 Total
revenue for the nine months ended September 30, 2008 increased 12.4% to $592.2
million from $527.0 million for the same period in 2007. Total revenue included
$140.2 million of fuel surcharge revenue in the 2008 period compared to $77.5
million in the 2007 period.  Total revenue for the quarter ended
September 30, 2008 increased 16.3% to $209.7 million, from $180.3 million for
the same period in 2007. Total revenue for the quarter included $53.8 million of
fuel surcharge revenue in the 2008 period, compared to $28.7 million in the 2007
period. In discussing our results of operations, we use revenue, before fuel
surcharge, and fuel expense, net of fuel surcharge, because management believes
that eliminating the impact of this sometimes volatile source of revenue affords
a more consistent basis for comparing our results of operations from period to
period.  We also discuss the changes in our expenses as a percentage
of revenue, before fuel surcharge, rather than absolute dollar
changes.  We do this because we believe the high variable cost nature
of our business makes a comparison of changes in expenses as a percentage of
revenue, before fuel surcharge, more meaningful than absolute dollar
changes.
 
 Revenue,
before fuel surcharge, increased 0.6% to $452.0 million for the nine months
ended September 30, 2008 from $449.5 million for the same period in 2007.
Revenue, before fuel surcharge, increased 2.8% to $155.9 million for the quarter
ended September 30, 2008, from $151.7 million for the same period in 2007.
Demand for truckload freight started especially weak at the beginning of the
year but strengthened somewhat in the second and third quarters. Our load count
between our asset-based and non-asset-based operations increased 5.3% in the
third quarter of 2008 compared to the same quarter a year ago. Average revenue
(excluding fuel surcharge) per tractor increased 3.1% in the third quarter of
2008, as compared to the same period a year ago. This increase was driven by an
improvement in our revenue per total mile, with miles per tractor being slightly
down. We continued our year over year improvement of our non-revenue mile
percentage, from 12.9% a year ago to 11.9% for the third quarter of this
year.
 
 Salaries,
wages and benefits expense as a percentage of revenue, before fuel surcharge,
increased to 35.1% for the nine months ended September 30, 2008, compared to
33.8% for the same period in 2007. Salaries, wages and benefits expense as a
percentage of revenue, before fuel surcharge, increased to 35.0% for the quarter
ended September 30, 2008, from 34.1% for the same period in 2007. The increase
is primarily due to a higher percentage of our company fleet being operated by
company drivers, as opposed to independent contractors. At September 30, 2008,
96.2% of our fleet was operated by company drivers, compared to 94.0% at
September 30, 2007. For our employees, we record accruals for workers'
compensation benefits as a component of our claims reserve, and the related
expense is reflected in salaries, wages and benefits in our consolidated
statements of income. Our workers compensation costs have increased slightly
this year, contributing to the overall increase in salaries,wages and
benefits.
 
 Fuel
expense, net of fuel surcharge, as a percentage of revenue before fuel
surcharge, decreased slightly to 12.6% for the nine months ended September 30,
2008, from 12.7% for the same period in 2007. For the quarter ended September
30, 2008, fuel expense, net of fuel surcharge, as a percentage of revenue before
fuel surcharge, decreased to 10.9% from 13.1% for the same period in
2007.  The improvement in net fuel expense, as a percentage of revenue
before fuel surcharge, resulted primarily from a combination of reducing
non-revenue miles, reducing idle time, improving fuel purchasing, and
controlling out-of-route miles. We maintain a fuel surcharge program to assist
us in recovering a portion of our fuel expense. Fuel surcharge revenue was
$140.2 million for the nine months ended September 30, 2008, compared to $77.5
million for the same period in 2007. For the quarter ended September 30, 2008,
fuel surcharge revenue was $53.8 million compared to $28.7 million for the same
quarter in 2007. The decline in diesel fuel prices in the third quarter improved
our ability to more adequately recover a portion of our fuel expense through our
fuel surcharge program.
 
 16
 Table of Contents
  Operations
and maintenance expense, as a percentage of revenue, before fuel surcharge,
increased to 7.0% for the nine months ended September 30, 2008, compared to 6.6%
for the same period in 2007. For the quarter ended September 30, 2008,
operations and maintenance expense, as a percentage of revenue, before fuel
surcharge, increased to 7.4% compared to 6.9% for the same quarter in 2007.
 The increase is attributable to the fact that a higher percentage of our
fleet was operated by company drivers, as opposed to independent contractors,
during the 2008 period. Independent contractors pay for the maintenance of their
own vehicles.
 
 Insurance
and claims expense as a percentage of revenue, before fuel surcharge, decreased
to 4.6% for the nine months ended September 30, 2008, compared to 4.9% for the
same period in 2007. For the quarter ended September 30, 2008, insurance and
claims expense as a percentage of revenue, before fuel surcharge, decreased to
4.0% compared to 5.1% for the same quarter in 2007.  The improvement in
insurance and claims expense was achieved through a reduction in the frequency
and severity of accidents.  Over the past 18 months we have
implemented the Smith Systems training in most of our service
centers.  Smith Systems is the leader in professional driver training
with hands-on, behind-the-wheel, instructional training.  We expect to
have Smith Systems implemented in every service center by the end of the first
quarter of 2009.  We believe such training and other management
efforts were contributing factors to the reduction in our insurance and claims
expense. Due to our large self-insured retention for claims, however, our
insurance and claims expense can experience significant fluctuations from period
to period.
 
 Operating
taxes and licenses expense as a percentage of revenue, before fuel surcharge,
remained constant at 2.5% for the nine-month periods ended September 30, 2008
and 2007. Operating taxes and licenses expense as a percentage of revenue,
before fuel surcharge, decreased slightly to 2.4% for the three months ended
September 30, 2008, compared to 2.5% for the same period a year
ago.
 
 Communications
expense as a percentage of revenue, before fuel surcharge, increased slightly to
1.0% for the nine-month and three-month periods ended September 30, 2008,
compared to 0.9% for the same periods a year ago.
 
 Depreciation
and amortization expense as a percentage of revenue, before fuel surcharge,
increased to 11.4% for the nine-month period ended September 30, 2008, compared
to 10.9% for the same period in 2007.  For the quarter ended September 30,
2008, depreciation and amortization expense as a percentage of revenue, before
fuel surcharge, increased to 11.3% compared to 10.9% for the same quarter in
2007.
 
 Purchased
transportation represents the amount that independent contractors, as well as
contracted carriers for our brokerage division, are paid to haul freight for us
on a mutually agreed upon per-mile or per-shipment basis. Purchased
transportation expense as a percentage of revenue, before fuel surcharge,
increased to 9.0% for the nine months ended September 30, 2008, from 8.5% for
the same period in 2007. For the quarter ended September 30, 2008, purchased
transportation expense as a percentage of revenue, before fuel surcharge,
decreased to 8.5% compared to 9.2% for the same quarter in 2007.  The
year-to-date increase in this category is mainly due to payments to outside
carriers for transportation services arranged by our brokerage division, which
has experienced considerable growth over the last year. Excluding purchased
transportation activities from our brokerage division, this expense as a
percentage of revenue, before fuel surcharge, would have decreased to 2.2% for
the quarter ended September 30, 2008, compared to 4.9% for the same period in
2007. This decrease is attributable to a change in the ratio of our company
fleet to owner operated fleet. As of September 30, 2008, 3.8% of our fleet was
comprised of independent contractors, compared to 6.0% a year ago.
 
 17
 Table of Contents
  Miscellaneous
operating expenses as a percentage of revenue, before fuel surcharge, increased
to 2.3% for the nine-month period ended September 30, 2008, compared to 1.3% for
the same period in 2007.  For the quarter ended September 30, 2008,
miscellaneous operating expenses as a percentage of revenue, before fuel
surcharge, increased to 2.7% compared to 1.7% for the same quarter in 2007.
Gains from sale of used equipment are included in miscellaneous operating
expenses.  A softening market for used tractors and trailers lowered our
gains from sale of used equipment by more than 65%, to $367,000 in the third
quarter of 2008, compared to $1.1 million for the same period a year ago.
Excluding gains from sale of used equipment, miscellaneous operating expenses
increased to 2.6% and 2.9% for the nine-month and three-month period ended
September 30, 2008, respectively, compared to 2.3% and 2.4% for the same periods
in 2007.
  As a
result of the above factors, our operating ratio, net of fuel surcharge
(operating expenses, net of fuel surcharge, expressed as a percentage of
revenue, before fuel surcharge), was 85.5% for the nine months ended September
30, 2008, compared to 82.2% for the same period in 2007.  For the quarter
ended September 30, 2008, our operating ratio improved to 83.2% from 84.5% for
the same quarter in 2007.
 
 Net
interest income and other income as a percentage of revenue, before fuel
surcharge, was 0.3% and 0.2% for the nine-month and three-month periods ended
September 30, 2008, respectively, compared to 0.3% for the same periods in
2007.  We had no outstanding debt at September 30, 2008 or
2007.
 
 Income
taxes have been provided for at the statutory federal and state rates, adjusted
for certain permanent differences between financial statement income and income
for tax reporting.  Our effective income tax rates have remained relatively
constant and ranged between 39% to 40% for the 2008 and 2007
periods.
 
 As a
result of the preceding changes, our net income, as a percentage of revenue
before fuel surcharge, decreased to 8.9% for the nine months ended September 30,
2008, compared to 11.0% for the same period in 2007. For the quarter ended
September 30, 2008, our net income, as a percentage of revenue before fuel
surcharge, increased to 10.3% compared to 9.6% for the same period in
2007.
 
 Liquidity
and Capital Resources
 
 The
growth of our business has required, and will continue to require, a significant
investment in new revenue equipment.  Our primary source of liquidity
has been funds provided by operations.
 
 Net cash
provided by operating activities was $92.6 million for the nine months ended
September 30, 2008, compared to $86.2 million for the same period in 2007.
Year-to-date we have generated significant cash flow from operations. For the
nine months ended September 30, 2008, we increased our cash and short-term
investment balance by $36.2 million after using more than $21.5 million for
stock re-purchases.
 
 Net cash
used in investing activities was $48.7 million for the nine months ended
September 30, 2008, compared to $56.2 million for the 2007 period. The decrease
is mainly due to a reduction in capital expenditures for revenue equipment in
the 2008 period. Net capital expenditures for the purchase of revenue equipment,
office equipment, land and leasehold improvements, less equipment sales,
decreased $7.3 million, to $49.3 million for the nine months ended September 30,
2008, compared to $56.6 million for the 2007 period. We currently anticipate
total capital expenditures, net of equipment sales, of approximately $70.0 to
$80.0 million for the year. This will be used primarily to acquire new revenue
equipment.
 
 18
 Table of Contents
  Net cash
used in financing activities was approximately $28.2 million for the nine months
ended September 30, 2008, compared to $2.5 million for the same period in
2007.  The increase in cash used in financing activities is primarily
due to $21.5 million used to repurchase 1,423,500 shares of our common stock
during the first three quarters of 2008. Cash dividends paid in the current year
also increased approximately $2.5 million, due to an increase in dividends paid
to common stock shareholders.  We increased our quarterly cash
dividend from $0.03 per share to $0.04 per share for the second and third
quarters of 2008.
 
 We
currently maintain a line of credit that permits revolving borrowings and
letters of credit totaling $50.0 million. At September 30, 2008, the line of
credit consisted solely of issued but unused letters of credit totaling $37.7
million. These letters of credit are issued to various regulatory authorities in
connection with our self-insurance programs. We are obligated to comply with
certain financial covenants under our line of credit agreement, and we were in
compliance with these covenants at September 30, 2008.
 
 As of
September 30, 2008, our balance sheet continued to be debt-free while our cash
and short-term investment balance grew to $67.5 million. During encouraging
freight markets, we have historically self-funded our growth by purchasing
equipment with the cash generated from our operations.  Even during
this less-encouraging freight market, we continue to generate a significant
amount of cash which allows us to repurchase shares, return capital to
shareholders as a dividend, and be in a position to fund possible strategic
acquisitions.
 
 We
believe that we will be able to finance our near term needs for working capital
over the next twelve months, as well as acquisitions of revenue equipment during
such period, with cash balances, cash flows from operations, and borrowings, if
any, available under our existing line of credit. We will continue to have
significant capital requirements over the long-term, which may require us to
incur debt or seek additional equity capital. The availability of additional
capital will depend upon prevailing market conditions, the market price of our
common stock, and several other factors over which we have limited control, as
well as our financial condition and results of operations. Nevertheless, based
on our recent operating results, current cash position, anticipated future cash
flows, and sources of financing that we expect will be available to us, we do
not expect that we will experience any significant liquidity constraints in the
foreseeable future.
 
 Off-Balance
Sheet Transactions
 
 Our
liquidity is not materially affected by off-balance sheet transactions. Like
many other trucking companies, we have periodically utilized operating leases to
finance our revenue equipment purchases.  As of September 30, 2008, we
had zero tractors held under operating leases, compared to 13 tractors held
under operating leases at September 30, 2007.  Vehicles held under
operating leases were not carried on our balance sheet, and lease payments in
respect of such vehicles are reflected in our income statements in the line item
"Lease expense – revenue equipment".
 
 Critical
Accounting Policies and Estimates
 
 The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires that management make
a number of assumptions and estimates that affect the reported amounts of
assets, liabilities, revenue, and expenses in our consolidated financial
statements and accompanying notes.  Management bases its estimates on
historical experience and various other assumptions believed to be
reasonable.  Although these estimates are based on management's best
knowledge of current events and actions that may impact us in the future, actual
results may differ from these estimates and assumptions.  Our critical
accounting policies are those that affect, or could affect our financial
statements materially and involve a significant level of judgment by
management.The
accounting policies we deem most critical to us include, revenue recognition,
depreciation, claims accrual, accounting for income taxes and share based
payments. There have been no significant changes to our critical accounting
policies and estimates during the nine months ended September 30, 2008, compared
to those disclosed in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operation," included in our 2007 Annual Report on Form
10-K.
 
  19
 Table of Contents
  Item
3.                           Quantitative
and Qualitative Disclosures About Market Risk
 
 We are
exposed to market risk changes in interest rate on debt and from changes in
commodity prices.
 
 Under
Financial Accounting Reporting Release Number 48 and SEC rules and regulations,
we are required to disclose information concerning market risk with respect to
foreign exchange rates, interest rates, and commodity prices. We have elected to
make such disclosures, to the extent applicable, using a sensitivity analysis
approach, based on hypothetical changes in interest rates and commodity
prices.
 
 We
currently do not use derivative financial instruments for risk management
purposes and do not use them for either speculation or trading. Because our
operations are mostly confined to the United States, we are not subject to a
material amount of foreign currency risk.
 
 Interest
Rate Risk
 
 We are
subject to interest rate risk to the extent we borrow against our line of credit
or incur debt in the acquisition of revenue equipment or otherwise. We attempt
to manage our interest rate risk by managing the amount of debt we carry. We did
not have any debt outstanding at September 30, 2008, and therefore had no market
risk related to debt.
 
 Commodity
Price Risk
 
 We also
are subject to commodity price risk with respect to purchases of fuel. The price
and availability of diesel fuel can fluctuate due to market factors that are
beyond our control.  We believe fuel surcharges are effective at
mitigating most, but not all, of the risk of high fuel prices because we do not
recover the full amount of fuel price increases.  As of September 30,
2008, we did not have any derivative financial instruments to reduce our
exposure to fuel price fluctuations.
 
 Item
4.                               Controls
and Procedures
 
 We have
established disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended) to ensure
that material information relating to us, including our consolidated
subsidiaries, is made known to the officers who certify our financial reports
and to other members of senior management and the Board of
Directors.  Our management, with the participation of our principal
executive officer and principal financial officer, conducted an evaluation of
the effectiveness of our disclosure controls and procedures.  Based on
this evaluation, as of the end of the period covered by this Quarterly Report on
Form 10-Q, our principal executive officer and principal financial officer have
concluded that our disclosure controls and procedures are effective to ensure
that the information required to be disclosed by us in the reports that we file
or submit under the Exchange Act is (i) recorded, processed, summarized, and
reported within the time periods specified in the SEC rules and forms, and (ii)
accumulated and communicated to management, including our principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
 
 There was
no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended
September 30, 2008, that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
 
 We have
confidence in our disclosure controls and procedures and internal control over
financial reporting.  Nevertheless, our management, including our
principal executive officer and principal financial officer, does not expect
that our disclosure controls and procedures and internal control over financial
reporting will prevent all errors, misstatements, or fraud.  A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are
met.  Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs.  Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all of our control issues and instances of fraud, if
any, have been detected.
 
 20
 Table of Contents
  PART
II - OTHER INFORMATION
 
 Item
1.                     Legal
Proceedings
 
 We are a
party to ordinary, routine litigation and administrative proceedings incidental
to our business.  These proceedings primarily involve claims for
personal injury or property damage incurred in the transportation of freight and
for personnel matters.
 
 Item
1A.                   
Risk Factors
 
 While we
attempt to identify, manage, and mitigate risks and uncertainties associated
with our business, some level of risk and uncertainty will always be
present.  Our Annual Report on Form 10-K for the year ended December
31, 2007, in the section entitled "Item 1A.  Risk
Factors," describes some of the risks and uncertainties associated with
our business.  These risks and uncertainties have the potential to
materially affect our business, financial condition, results of operations, cash
flows, projected results, and future prospects.  In addition to the
risk factors set forth on our Form 10-K, we believe that the following
additional issues, uncertainties, and risks, should be considered in evaluating
our business and growth outlook:
 
 Our
business is subject to certain credit factors affecting the global economy that
are largely out of our control and that could have a material adverse effect on
our operating results.
 
 Recently,
there has been widespread concern over the instability of the credit markets and
the current credit market effects on the economy.  If the economy and
credit markets continue to weaken, our business, financial results, and results
of operations could be materially and adversely affected, especially if consumer
confidence declines and domestic spending decreases.  Although we think it
is unlikely given our current cash position, we may need to incur indebtedness
or issue debt or equity securities in the future to fund working capital
requirements, make investments, or for general corporate purposes. If the credit
and equity markets continue to erode, our ability to do so may be constrained.
Additionally, the stresses in the credit market have caused uncertainty in the
equity markets, which may result in volatility of the market price for our
securities.
 
 Item
2.                 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 Period
              
              Total
      Number of
                Shares
      Purchased
              
              AveragePrice
                Paidper
      Share
              
              Total
      Number of Shares
                Purchased
      as Part of Publicly
                Announced
      Program
              
              Maximum
      Number of Shares
                that
      May Yet Be Purchased
                Under
      the Program7/1/08
      - 7/31/08
              
              -
              
              -
              
              -
              
              1,781,5008/1/08
      - 8/31/08
              
              -
              
              -
              
              -
              
              1,781,5009/1/08
      - 9/30/08
              
              205,000
              
              $16.87
              
              205,000
              
              1,576,500Total
              
              205,000
              
              $16.87
              
              205,000
              
              1,576,500
 
 On
November 8, 2007, our Board of Directors unanimously authorized the repurchase
of up to 3.0 million shares of our Common Stock.  The repurchase
authorization will remain in effect until the share limit is reached or the
program is terminated.  See Note 11 for additional information with
respect to our share repurchase program.
  21
 Table of Contents
  Item
3.                    Defaults
Upon Senior Securities
 
 Not
Applicable
 
 Item
4.                     Submission
of Matters to a Vote of Security Holders
 
 Not
Applicable
 
 Item
5.                     Other
Information
 
 Not
Applicable
 
 Item
6.                        Exhibits
 
 Exhibits
required by Item 601 of Regulation S-K
 
 Exhibit No.
              
              DescriptionExhibit
      3
              
              Articles
      of Incorporation and Bylaws(3.1)
              Second
      Amended and Restated Articles of Incorporation of the Company.
      (Incorporated by reference to Appendix A to the Company's Definitive Proxy
      Statement on Schedule 14A filed April 20, 2007.)(3.2)
              Sixth
      Amended and Restated Bylaws of the Company. (Incorporated by reference to
      Exhibit 3 to the Company's Report on Form 8-K dated December 18, 2007 and
      filed on December 19, 2007.)Exhibit
      4
              
              Instruments
      defining the rights of security holders, including
    indentures(4.1)
              Articles
      4, 10, and 11 of the Second Amended and Restated Articles of Incorporation
      of the Company.  (Incorporated by reference to Exhibit 3.1 to
      this Report on Form 10-Q.)(4.2)
              Sections
      2 and 5 of the Sixth Amended and Restated Bylaws of the
      Company.  (Incorporated by reference to Exhibit 3.2 to this
      Report on Form 10-Q.)(4.3)
              Knight
      Transportation, Inc. Amended and Restated 2003 Stock Option Plan.
      (Incorporated by reference to the Company's Definitive Proxy Statement on
      Schedule 14A filed December 1, 2005.)Exhibit
      31
              
              Section
      302 Certifications(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 Kevin P. Knight, the
      Company's Chief Executive Officer.(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 David A. Jackson, the
      Company's Chief Financial Officer.Exhibit
      32
              
              Section
      906 Certifications(32.1)*
              Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002, by Kevin P. Knight, the Company's Chief
      Executive Officer.(32.2)*
              Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002, by David A. Jackson, the Company's Chief
      Financial Officer.*Filed
      herewith.
  22
 Table of Contents
  SIGNATURES
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 KNIGHT
      TRANSPORTATION, INC.Date:
      November 10, 2008
              By:
              /s/
      Kevin P. KnightKevin
      P. KnightChief
      Executive Officer, in his capacity as such and on behalf of the
      registrantDate:
      November 10, 2008
              By:
              /s/
      David A. JacksonDavid
      A. JacksonChief
      Financial Officer, in his capacity as such and on behalf of the
      registrant